BackText onlyPrint

You need the Flash plugin.

Download Macromedia Flash Player



  • 2004

    • 04-95 NASD Issues Reminder to Members Regarding the Municipal Securities Rulemaking Board's Implementation of Real-Time Reporting and Dissemination of Transactions in Municipal Securities

      View PDF File

      GUIDANCE

      Municipal Securities

      SUGGESTED ROUTING

      KEY TOPICS

      Corporate Finance
      Executive Representatives
      Legal and Compliance
      Municipal Securities
      Operations
      Registered Representatives
      Senior Management
      Technology
      Trading and Market Making
      Training
      MSRB Rules G-12(f) and G-14
      Municipal Securities
      Operations
      Supervision
      Training
      Transaction Reporting

      Executive Summary

      NASD is issuing this Notice to Members to remind firms to prepare for the implementation on January 31, 2005, of the reporting of municipal securities transactions within 15 minutes (real-time reporting), immediate dissemination of such transaction information (real-time dissemination), and automated comparison of inter-dealer transactions in such securities. The changes are set forth in amended Municipal Securities Rulemaking Board (MSRB) Rule G-14 and Rule G-12(f). Firms must review all areas of their business activities and determine the effect of the amended reporting and comparison rules and real-time dissemination of information on municipal securities transactions. Among other actions, firms should review and revise policies, practices, and procedures, as needed, of associated persons engaged in trading or selling municipal securities, the firm's investment banking operations, the back office, the business line supervisors of any business or operational area that is affected by the changes, and the firm's legal, compliance, and audit departments.

      Questions/Further Information

      Questions concerning this Notice should be directed to Jon Soderlund, Assistant Director, Market Regulation, Regulatory Policy and Oversight (RPO), at (240) 386-5111; Cindy Friedlander, Program Manager, Member Regulation, RPO, at (202) 728-8133; or Sharon K. Zackula, Associate General Counsel, Office of General Counsel, RPO, at (202) 728-8985.

      Discussion

      On August 31, 2004, the SEC approved a proposed rule change relating to the MSRB's implementation of real-time reporting of transactions in municipal securities, real-time dissemination of such transaction information, automated comparison of inter-dealer trades, and the development of the "Real-Time Transaction Reporting System" (RTRS) facility.1 As amended, Rule G-14 will require brokers, dealers and municipal securities dealers (collectively, dealers) to report transactions in municipal securities within 15 minutes of the time of trade execution instead of by midnight on trade date, as is currently required. Amended Rule G-12(f) will require dealers to submit inter-dealer transactions for comparison in a central comparison system within the same time frame. The changes to MSRB Rules G-14 and G-12(f) become effective on January 31, 2005. As dealers begin to enter trade information real-time on January 31, 2005, the MSRB will begin real-time dissemination of such transaction data.

      The purpose of the rule change is to increase price transparency in the municipal securities market and to enhance the surveillance database and audit trail used by NASD. Accurate and timely automated reporting of municipal securities transaction information is critical to the accurate dissemination of transaction data and resulting price transparency and the effective regulatory oversight of municipal securities trading and sales practices.

      The purpose of this Notice is to remind firms engaged in municipal securities business of their obligations under MSRB Rules G-14 and G-12(f), as amended. Firms' obligations include the following:

      • Firms must understand the terms of amended MSRB Rules G-14 and G-12(f) and be prepared to report all trades in municipal securities within 15 minutes of the time of trade execution, unless the trade is subject to an exception from 15 minute reporting, or there is an exemption from reporting.2 Similarly, firms must be prepared to submit inter-dealer transactions in municipal securities to the central comparison system within the same time frame.


      • All firms that engage in a municipal securities business must complete Form RTRS by the deadline set by the MSRB, even if they submit all transaction information through a clearing firm or service bureau, effect no transactions in municipal securities, or only effect transactions in municipal securities that are exempt from reporting (e.g., municipal fund securities, also known as "Section 529 plan" securities). By completing Form RTRS, these firms will confirm with the MSRB how they will be submitting transaction data or that they have no testing or certification requirement.


      • Firms must comply with all testing and certification requirements by the deadlines established by the MSRB. Certain firms are not required to "test" but all firms must be certified. For example, if all of a firm's transaction reports are submitted and updated by an agent (a clearing broker or service bureau), the firm will be certified when its agent is certified.3 If a firm's agent submits some data for a class of trades, but the firm also submits some data (e.g., the firm intends to submit corrections to a trade report previously submitted by the agent to RTRS directly using RTRS Web), then the firm must complete one of the test plans and then be certified.


      • A firm must make certain that associated persons and their supervisors across the firm have received adequate training to allow the firm to report all transactions in municipal securities timely and accurately upon implementation of amended MSRB Rules G-14 and G-12(f).


      • A firm must ensure that it has revised its written supervisory policies, practices and procedures to reflect changes both as to the reporting requirements and the availability of additional real-time transaction pricing information prior to implementation of amended MSRB Rules G-14 and G-12(f) and that its supervisory personnel are knowledgeable as to these revisions. Various business areas that may be affected include but are not limited to trading, sales, investment banking, and back office operations. In addition, a firm must ensure that supervisory personnel of affected business areas have implemented such changes.


      • A firm must enhance communications and back office systems as needed to ensure the firm's technological and systems readiness as of the date of implementation.


      • If a firm's transactions in municipal securities are being reported through a third party, a firm must ensure that the performance of the third party complies with the MSRB's reporting and related rules, including establishing procedures for the firm to review the performance of the third party and to modify or terminate the relationship if, as a result of the third party's performance, the firm is not in full compliance with the MSRB's reporting and related rules.


      • A firm must assess back office staffing capacity, and reallocate or supplement back office staff if necessary to allow the firm to report municipal securities transactions accurately and timely as of the date of implementation of real-time comparison, reporting, and dissemination of municipal securities transactions.


      • A firm must review the firm's legal, compliance, and internal audit policies, practices, and procedures, and amend them as necessary to perform legal, compliance, and audit functions relating to both the amended reporting requirements and the availability of additional real-time transaction pricing information prior to implementation of amended MSRB Rules G-14 and G-12(f).


      • A firm must review its other supervisory control functions to monitor, test and ensure that, with the changes relating to both the amended reporting requirements and the availability of additional real-time transaction pricing information, the firm is in compliance with the rules of the MSRB.

      Many of the obligations referred to above require that firms complete certain actions prior to the implementation of real-time reporting and dissemination, such as executing Form RTRS; testing; obtaining certification; providing adequate training of associated persons and other firm personnel; ensuring the firm's technological and systems readiness; adequately staffing back office operations; and revising policies, practices, and procedures used by business line supervisors and by legal, compliance, audit, and other supervisory control functions. However, it is crucial that firms continue to monitor their compliance with the reporting and dissemination rules and all other MSRB rules on an ongoing basis, and with particular scrutiny during the first months following the implementation of a major regulatory initiative. Upon implementation of real-time reporting and real-time dissemination, firms must monitor their compliance performance to determine if the firms' actions and plans prior to implementation have resulted in full compliance with the rule changes. If needed, firms must take additional steps in areas where compliance has not been achieved to address the issues identified. In addition, with substantial changes in reporting processes and procedures, the introduction of real-time dissemination, and the new availability of real-time pricing information, firms should review diligently affected business areas, and related amended policies, practices, and procedures, to ensure that the changes made in one area do not result in unintended consequences that create separate regulatory deficiencies or issues in another area.

      NASD will continue to review firms engaged in municipal securities business to ensure that, with respect to the new reporting requirements and the availability of real-time transaction pricing information, firms have adopted comprehensive policies, practices and procedures to ensure full compliance with amended MSRB Rules G-14 and G-12(f), and to ensure that current pricing information that is publicly available or otherwise available to the firm is considered appropriately in pricing municipal securities. In addition, NASD will review firms to determine if firms have amended their written supervisory policies, practices, and procedures to reflect the changes effected in various business areas (e.g., trading or selling municipal securities, the firms' investment banking operations, the back office) and have implemented such changes. Finally, NASD will review firms to determine if firms have reviewed and updated policies, practices, and procedures in firms' legal, compliance, and audit departments, and other supervisory control functions to monitor, test, and ensure that firms are in compliance with the rules of the MSRB.


      1 Securities Exchange Act Release No. 50294 (August 31, 2004), 69 FR 54170 (September 3, 2004) (SR-MSRB-2004-02) (SEC approval order).

      2 In certain situations, dealers will be allowed to report transactions in longer timeframes. See MSRB Rule G-14(a)(ii), as amended. In addition, certain transactions in municipal securities are exempt from reporting. These include transactions in municipal securities that are ineligible for CUSIP number assignment, municipal fund securities transactions, and inter-dealer transactions that are not eligible for comparison. See MSRB Rule G-14(b)(vi), as amended.

      3 "Real-Time Transaction Reporting: Revised RTRS Certification Test Plan (July 28, 2004)," at www.msrb.org/msrb1/whatsnew/RevCertificationtestplan.htm.

    • 04-94 Nominees for the District Committee for District 10

      View PDF File

      INFORMATIONAL

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registration
      Senior Management
      District Elections

      Executive Summary

      Article VIII, Section 8.32 of the NASD Regulation, Inc. By-Laws (the By-Laws) permits the Secretary of NASD Regulation, in extraordinary circumstances and with the approval of the NASD Executive Committee or the NASD Board of Governors, to adopt additional procedures for District Committee and District Nominating Committee elections.

      Pursuant to this provision, the purpose of this Special Notice to Members is to inform the members of District 10 of additional procedures adopted on December 13, 2004 by the NASD Executive Committee to address the situation where a nominee, Tracy E. Calder, withdrew from further consideration for the District Committee for District 10. Ms. Calder withdrew following the September 16, 2004 Special Notice announcing the nominees for the District Committee for District 10 and prior to distribution of the contested election ballot.

      The additional procedures for electing the members of the District Committee for District 10 include: (1) extending the timeframe for the Secretary of NASD Regulation to notify the Executive Representatives of NASD members and the District Committee of an amended slate of nominees when a candidate previously nominated by the District Nominating Committee has withdrawn from further consideration; (2) authorizing the District Nominating Committee to amend the slate of nominees to include an alternate nominee selected by the District Nominating Committee to replace a previously nominated candidate who has withdrawn from consideration; (3) requiring that the Secretary of NASD Regulation repeat the procedures as set forth in Article VIII of the By-Laws by giving notice to the Executive Representatives of NASD members and the District Committee, not later than December 20, 2004, of the amended slate of nominees and identifying the requirements that an additional candidate must satisfy in order to contest the election; and (4) requiring that the ballot for the contested election be distributed after the time period has expired for any additional candidates to come forward to contest the election, and include on the ballot the names of any such additional candidates as well as that of the nominee who successfully gathered petitions as a result of the September 16, 2004 Special Notice to Members.

      At its meeting on August 13, 2004, to select nominees for the District Committee for District 10, the District Nominating Committee for District 10 identified Vincent A. Buchanan as an alternate nominee in the event one of its nominees were to withdraw from further consideration. Identified in Attachment A is the amended slate of nominees, which includes Mr. Buchanan, who replaces Ms. Calder. Four of the individuals on the slate have been nominated for a three-year term on the District Committee for District 10, with terms commencing in January 2005. A fifth individual has been nominated to fill an existing vacancy on the District Committee for District 10 and will serve the remaining one-year term of this position, beginning in January 2005.1

      The members of District 10 are also notified that in connection with the initial slate of nominees that appeared in Special Notice 04-67, an individual, Howard Spindel, has come forward and satisfied the requirements of the By-Laws to contest the election for membership on the District Committee for District 10. The ballot for the contested election will be distributed after the time period has expired for any additional candidates to come forward to contest the election, as outlined below in the Contested Election Procedures.

      If any individuals who have not been nominated for election to the District Committee for District 10 are interested in being considered for election, they may contest the election by following the procedures in Sections 8.20 and 8.22 of the By-Laws, as summarized below.

      Contested Election Procedures

      If an officer, director, or employee of an NASD member is interested in being considered an additional candidate, he/she must indicate his/her interest to the District Director by January 3, 2005. If an additional candidate or candidates come forward by that date, the Secretary of NASD Regulation 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 for District 10 with signatures from at least 10 percent of the 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 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 e-mail at: barbara.sweeney@nasd.com.


      1 Margaret Caffrey has been nominated to serve the remaining one-year term of Vicki Holleman, who resigned from the District Committee.


      ATTACHMENT A

      District 10
      Hans Reich, Regional Director, New York Region
      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 Nominating Committee Chair

      Judith R. MacDonald Rothschild, Inc. New York, NY

      District 10 Committee Nominees

      Vincent A. Buchanan*   New York, NY
      Margaret M. Caffrey
      (1-Year Term)
      Schonfeld & Company, LLC Jericho, NY
      Clifford H. Goldman Marco Polo Securities Inc. New York, NY
      Jeffrey T. Letzler Instinet, LLC New York, NY
      Michael Santo Banc of America Investment Services, Inc. New York, NY

      * Mr. Buchanan is associated with nine broker-dealers within District 10 as a Financial and Operations Principal.

    • 04-93 Issues Relating to the SEC's Adoption of Regulation SHO

      View PDF File

      GUIDANCE

      Short Sale Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Training
      OATS
      Rule 3110
      Rule 3210
      Rule 3350
      Rule 3370
      Rule 11830
      Rules 6950–6957
      Short Sales

      Executive Summary

      On June 23, 2004, the Securities and Exchange Commission (SEC) adopted certain provisions of a new short sale regulation, designated Regulation SHO.1 Regulation SHO consists of new Rules 200 (definitional and order marking requirements), 202T (short sale price test pilot) and 203 (uniform locate and delivery requirements). Together with the Regulation SHO adopting release, the SEC issued an order establishing a one-year 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).2

      NASD, in conjunction with The Nasdaq Stock Market, Inc. (NASDAQ), is issuing this Notice to Members to advise member firms and other interested parties of several recent actions and related guidance surrounding the adoption of Regulation SHO. First, on November 30, 2004, NASD filed for immediate effectiveness a proposed rule change to repeal NASD Rule 3110(b)(1),3 Rule 3210,4 Rule 3370(b)5 and Rule 11830,6 which are duplicative of or overlap with the uniform requirements of Regulation SHO. The repeal of these rules will be operative on January 3, 2005, the compliance date of Regulation SHO. Second, NASD and NASDAQ staff are providing information and guidance on several issues relating to Regulation SHO. Questions and answers have been provided relating to the Order Audit Trail System (OATS) rules, the application of Rule 3350 (the Short Sale Rule), the publication and dissemination of the "threshold list" required by Regulation SHO and excused withdrawal status for market makers that cannot comply with the Regulation SHO pre-borrow requirements. Third, NASD is highlighting the recent questions and answers published by the SEC relating to Regulation SHO and is encouraging members to review this guidance prior to the January 3, 2005 Regulation SHO compliance date. Finally, NASD is emphasizing that it will be closely monitoring member activity for compliance with the Regulation SHO requirements and, in this regard, members must have supervisory procedures and systems in place designed to ensure compliance with these requirements.

      Questions/Further Information

      Questions regarding this Notice may be directed as follows: For questions regarding the repeal of NASD rules, contact 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; for questions regarding OATS Reporting, please contact the OATS Help Desk at (800) 321-NASD; for questions regarding Rule 3350 and market maker excused withdrawals, contact Office of General Counsel, The Nasdaq Stock Market, Inc., at (301) 978-8400; and for questions regarding Threshold List Securities, direct them to traderreports@nasdaq.com or Market Operations, NASD, at (866) 776-0800.

      Discussion

      Repeal of NASD Short Sale Rules in Light of Regulation SHO

      Several existing NASD rules are duplicative of or overlap with the new provisions of Regulation SHO, including: (1) SEC Rule 200(g) of Regulation SHO, which requires that sell orders in all equity securities be marked "long," "short," or "short exempt"; (2) SEC Rule 203(a) of Regulation SHO, which provides that, with certain limited exceptions, if a broker-dealer knows or should know that a sale of an equity security is marked long, the broker-dealer must make delivery when due and cannot use borrowed securities to do so; (3) SEC Rule 203(b)(1) of Regulation SHO, which applies a uniform rule, with certain limited exceptions, requiring all broker-dealers, prior to effecting short sales in equity securities, to "locate" securities available for borrowing; and (4) SEC Rule 203(b)(3) of Regulation SHO, which requires registered clearing agency participants to close out all failures to deliver 10 days after the normal settlement date for securities in which a substantial amount of failures to deliver have occurred, referred to as "threshold securities."

      As noted in the adopting release for Regulation SHO, as well as in discussions between SEC and NASD staff, the SEC has indicated that Regulation SHO provisions will replace existing overlapping self-regulatory organization (SRO) rules. As a result, on November 30, 2004, NASD filed for immediate effectiveness a proposed rule change to repeal NASD Rule 3110(b)(1), Rule 3210, Rule 3370(b) and Rule 11830 in light of the requirements of Regulation SHO. The repealed NASD rules will be supplanted by Rule 200(g) and Rule 203 of Regulation SHO, which will provide uniform order marking and locate and delivery requirements applicable to all equity securities. The compliance date of the repeal of these rules is January 3, 2005, the compliance date for Regulation SHO.

      Questions and Answers Relating to NASD Rules and Procedures

      To help members in the implementation of Regulation SHO and the Pilot, NASD and NASDAQ staff have published the following questions and answers relating to NASD rules and procedures that are affected by Regulation SHO:

      OATS Requirements

      1. What are our OATS reporting requirements relating to short sales in light of Regulation SHO?
      1. As noted in the OATS Technical Specifications, the buy/sell code for OATS reports should be populated to indicate whether an order is a long sale (SL), a short sale (SS) or a short sale exempt (SX).7 These codes should be populated and reported to OATS consistent with the order marking requirements under Regulation SHO and as is currently required under certain NASD rules, such as Rule 3350. For example, to the extent a short sale order is deemed exempt under Rule 202T of Regulation SHO or Rule 3350, the order should be marked as such for purposes of OATS reporting requirements. To the extent that the SEC permits members to mark orders that are exempt under Regulation SHO with a "short sale" indicator rather than a "short sale exempt" indicator, OATS information should be populated consistent with SEC guidance.

      Rule 3350

      1. Did the adoption of Regulation SHO have any impact on the application of NASD Rule 3350?
      1. Reg SHO suspends the application of the bid test under NASD Rule 3350 for those stocks that are subject to the short sale price test pilot under SEC Rule 202T. NASDAQ recently amended Rule 3350 to create an exemption for those pilot securities. View the rule filing at www.nasdaq.com/about/SR-NASD-2004-187_NASDAQ_Rule_ Filing.pdf.

      Regulation SHO Threshold at Securities

      1. What is a threshold security for purposes of Regulation SHO?
      1. As defined in Rule 203(c)(6) of Regulation SHO, a "threshold security" is any equity security of any issuer that is registered under Section 12 of the Exchange Act, or that is required to file reports under Section 15(d) of the Exchange Act (commonly referred to as reporting securities), where, for five consecutive settlement days:
      • there there are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security;


      • the the level of fails is equal to at least one-half of one percent of the issue's total shares outstanding; and


      • the the security is included on a list published by a self-regulatory organization (SRO).
        A security ceases to be a threshold security if it does not exceed the specified level of fails for five consecutive settlement days.
      1. What is the NASDAQ Threshold Securities List?
      1. The NASDAQ Threshold Securities List is the list of threshold securities published by NASDAQ to comply with Rule 203(c)(6) of Regulation SHO.
      1. What are the Market Categories of issues that the NASDAQ List will include?
      1. The NASDAQ list will include NASDAQ National Market and NASDAQ Small Cap securities as well as OTCBB issues and other OTC equity issues.
      1. How can I access the NASDAQ Threshold Securities List?
      1. The List will be posted on www.nasdaqtrader.com in three different ways.
      • Each night prior to 12:00 midnight ET, the List will appear on the NASDAQ Trader Web site in HTML format at www.nasdaqtrader.com/aspx/regsho.aspx.


      • A text file will published on the Web site at www.nasdaqtrader.com/dynamic/symdir/ regsho/Nasdaqthyyyymmdd.txt.


      • The same text file will be published on the www.nasdaqtrader.com FTP site at: ftp://ftp.nasdaqtrader.com/symboldirectory/regsho/Nasdaqthyyyymmdd.txt for those firms wishing to automate the extract.
      1. What will be the format of the file?
      1. The format of the file will be as follows: Symbol/Security Name/Market Category/Reg SHO Threshold Flag/Filler/Filler. The values for the Market Category will be as follows:
        Q NASDAQ National Market (NNM)

        S Small Cap NASDAQ

        U OTCBB

        u Other OTC
      1. What does the date in the filename mean?
      1. The date in the filename reflects the settlement date that the data is based on.

        For example, the filename for the file posted containing January 7, 2005 settlement date data will be Nasdaqth20050107.
      1. How can I tell what time the list was created?
      1. The end of the data file will contain a File Creation Timestamp, reflecting the date and time the file is complete. The Timestamp will be in the following format: yyyymmddhhmmss.
      1. How much history will NASDAQ maintain?
      1. NASDAQ will not delete any files. A full history of files will be available on the FTP site. The daily text file on the website can be obtained by manipulating the url in the browser address field (by manually changing the "mmdd" in the filename URL).
      1. What if the List is posted late (after 12:00 midnight ET) on the NASDAQ Trader Web site?
      1. According to guidance provided by staff of the SEC Division of Market Regulation, firms will be permitted to use the previous settlement day's List to comply with Regulation SHO, if the file is unavailable by 12:00 midnight ET. Firms are still obligated to analyze the current settlement day's data when it becomes available to determine compliance with Regulation SHO's close-out requirement.
      1. Starting on what date will the NASDAQ Threshold Securities List be posted?
      1. As stated above, Rule 203(c)(6) of Regulation SHO defines "threshold security" as one that exceeds a level of fails for five consecutive settlement days. Since the new rule takes effect on January 3, 2005, the first date a security can meet this definition will be five settlement days after the effective date. Accordingly, the first List will be posted before midnight on Friday, January 7, 2005, and will be available before the opening of trading on Monday, January 10, 2005.
      1. Where can I get more information relating to the NASDAQ Threshold List?
      1. A General News item was posted at the following Web site: www.nasdaqtrader.com/ Trader/News/2004/generalnews/20041209.stm.

      Excused Withdrawals Relating to Compliance with Regulation SHO's Pre-Borrow Requirements

      1. What impact will Regulation SHO's pre-borrow requirement have on a market maker's ability to make a market in a threshold security?
      1. Rule 203(b)(3)(iii) of Regulation SHO (pre-borrow requirement) states that a clearing agency participant that has a fail to deliver position in a threshold security for 13 consecutive settlement days may not accept a short sale in the security, or enter a short sale in the security for its own account, without borrowing, or entering into a bona fide arrangement to borrow, the security, until the participant closes out the fail to deliver position by purchasing securities. This pre-borrow requirement also applies to any broker-dealer for which a clearing agency participant clears, including market makers that otherwise would be entitled to rely on the bona-fide market making exception from Rule 203(b)(1)'s locate rule. Thus, if a threshold security is not borrowable, the SEC Division of Market Regulation staff has acknowledged that the application of the pre-borrow requirement may result in a market maker's failure to make markets in that security because of its inability to effect further short sales until the fail to deliver position is closed out. Nasdaq has concluded that a market maker's failure to make a market in the security under these circumstances can form the basis for an excused withdrawal under Rule 4619, which would allow the market maker to resume making markets once the fail to deliver position is closed out or the security becomes borrowable.

      SEC Guidance on Regulation SHO Implementation Issues

      To assist in the understanding and application of Regulation SHO and the Pilot, SEC staff has published questions and answers regarding Regulation SHO, which are available on the SEC's website at http://www.sec.gov/divisions/marketreg/mrfaqregsho 1204.htm. SEC staff notes that the responses in the questions and answers may vary depending on certain facts and circumstances of a particular transaction and that SEC staff may update the questions and answers periodically.

      Among other important issues, Question 4.1 of the SEC's guidance addresses satisfying the "reasonableness" standards of the locate rules. Specifically, Rule 203(b)(1)(ii) permits a broker or dealer to accept a short sale order in an equity security if the broker-dealer has reasonable grounds to believe that the security can be borrowed so that it can be delivered on settlement date. "Reasonableness" is determined based on the facts and circumstances of the particular transaction and the SEC provided examples of reasonableness in its Adopting Release. For example, footnote 58 of the Adopting Release notes that a broker-dealer may obtain an assurance from a customer that such party can obtain securities from another identified source in time to settle the trade. In this regard, members must be able to demonstrate that there are reasonable grounds to rely on such customer assurances that they can obtain securities, for example, through documentation noting the source of securities cited by the customer and demonstrating that previous borrowings arranged by the customer resulted in timely deliveries in settlement of the customer's transactions. As such, where a member knows, or has reason to know, that a customer's prior assurances resulted in failures to deliver, assurances from such customer would not satisfy the reasonableness determination of SEC Rule 203(b)(1)(ii) of Regulation SHO.

      The SEC's guidance also addresses several other important issues, including clarification on the marking requirements for OTC Bulletin Board Securities (Question 2.1), the use of Easy to Borrow Lists (Question 4.2), and reliance on customer representations to comply with the locate requirements (Question 4.3). NASD encourages members and other interested parties to review the SEC's published guidance.

      Surveillance and Examination of Regulation SHO Requirements

      NASD will be closely monitoring member activity for compliance with the Regulation SHO requirements and members will be expected to be in compliance with the Regulation SHO requirements as of the January 3, 2005 compliance date. Among other things, NASD is developing surveillance programs that will track the level and duration of CNS fails by members. To the extent such fails are not closed out within the requisite time period, NASD will be reviewing the actions taken by the member to close out the fails, which should be clearly documented by the member. Similarly, NASD will be reviewing member activities to ensure that members have complied with the marking, locate, and pre-borrow requirements, as applicable. Accordingly, NASD's member examination program will include reviews for compliance with each applicable rule in Regulation SHO.

      In addition, NASD Rule 3010 requires that members establish and maintain a supervisory system that is designed to ensure compliance with the NASD rules and the federal securities laws. Accordingly, NASD will be examining closely members' supervisory systems and written supervisory procedures relating to Regulation SHO and, where appropriate, will initiate disciplinary action against firms and their supervisory personnel for failure to adopt, implement, and enforce appropriate supervisory procedures.


      1 See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004) (Adopting Release).

      2 See Exchange Act Release No. 50104 (July 28, 2004), 69 FR 48032 (August 6, 2004) (Pilot Order). See also Exchange Act Release No. 50747 (November 29, 2004), 69 FR 70480 (December 6, 2004) (Second Pilot Order).

      3 Rule 3110(b)(1) requires that an associated person indicate on the order ticket whether an order is "long" or "short."

      4 Rule 3210 prohibits a member from selling a security for its own account or buying a security as a broker for a customer, if the member has a fail to deliver in that security that is 60 days old or older, or 90 days old or older for foreign securities.

      5 Rule 3370(b) requires, among other things, that (1) no member accept a long sale order from a customer unless the member has possession of the security, the customer is long in his account, the member makes an affirmative determination that the customer owns the security and will deliver it on settlement date or that it is in good deliverable form on deposit with a member or other permissible entity; and (2) no member effect a "short" sale order for a customer, nonmember broker-dealer or proprietary account in any security unless the member makes an affirmative determination that the member will receive delivery of the security or that the member can borrow the security for delivery by settlement date, subject to certain exemptions.

      6 Rule 11830 generally mandates delivery of a security within 10 days of the settlement date for short sales executed in NASDAQ securities that, on the trade date of the transaction, had a clearing short position equal to at least one-half of one percent of the issue's total shares outstanding.

      7 The OATS Technical Specifications are available at www.nasd.com/oatsspecifications.

    • 04-92 Amendments to Section 13 of Schedule A to the NASD By-Laws Governing the Review Charge for Advertisement, Sales Literature, and Other Such Material Filed with or Submitted to NASD

      View PDF File

      GUIDANCE

      Advertising Fees

      Implementation Date: January 1, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management
      Advertising Regulation Department
      Advertising Review Charges
      Rule 2210 and Interpretations
      Schedule A to the NASD By-Laws

      Executive Summary

      NASD has filed for immediate effectiveness amendments to Section 13 of Schedule A to the NASD By-Laws governing the review charge for advertisement, sales literature, and other such material filed with or submitted to NASD. The amendments raise the review charge for printed material and video or audio media from $75.00 to $100.00.1

      Included with this Notice is Attachment A, the text of amended Section 13.

      Questions/Further Information

      Questions concerning this Notice may be directed to Thomas A. Pappas, Associate Vice President, Advertising Regulation Department, at (240) 386-4500.

      Background and Discussion

      The Advertising Regulation Department (Department) is responsible for ensuring that all NASD member firms' communications with the public are fair, balanced, and not misleading. The mission of the Department, as provided in Rule 2210 and the Interpretations issued thereunder, is to ensure that all member communications with the public, including advertisements, sales literature, and correspondence, are based on principles of fair dealing and good faith, are fair and balanced, and provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service. Among other things, the Department reviews member communications with the public for false, exaggerated, unwarranted, misleading statements or claims, and exaggerated or unwarranted claims, opinions, or forecasts.

      The amendments to Section 13 raise the minimum fee that may be charged by the Department for reviewing each and every item of advertisement, sales literature, and other such material, whether in printed, video, or other form, filed with or submitted to NASD (except for items that are filed or submitted in response to a written request from the Department issued pursuant to the spot check procedures set forth in NASD's Rules) from $75 to $100.2 A recent analysis of the Department's operating and technology costs, which showed that NASD's costs have increased significantly due to increased responsibilities, economic conditions and the need for enhanced technology. The raise in the review charge from $75.00 to $100.00 is designed to offset these cost increases. This rate change will be implemented on January 1, 2005.


      1 SR-NASD-2004-187.

      2 The filing fee for expedited review remains $500 plus $25 for every page over 10 pages.


      ATTACHMENT A

      SCHEDULE A TO NASD BY-LAWS

      * * * * *

      Section 13 — Review Charge for Advertisement, Sales Literature, and Other Such Material Filed or Submitted

      There shall be a review charge for each and every item of advertisement, sales literature, and other such material, whether in printed, video or other form, filed with or submitted to NASD, except for items that are filed or submitted in response to a written request from NASD's Advertising Regulation Department issued pursuant to the spot check procedures set forth in NASD's Rules as follows: (1) for printed material reviewed, [$75.00] $100.00, plus $10.00 for each page reviewed in excess of 10 pages; and (2) for video or audio media, [$75.00] $100.00, plus $10.00 per minute for each minute of tape reviewed in excess of 10 minutes.
      Where a member requests expedited review of material submitted to the Advertising Regulation Department there shall be a review charge of $500.00 per item plus $25 for each page reviewed in excess of 10 pages. Expedited review shall be completed within three business days, not including the date the item is received by the Advertising Regulation Department, unless a shorter or longer period is agreed to by the Advertising Regulation Department. The Advertising Regulation Department may, in its sole discretion, refuse requests for expedited review.

      * * * * *

    • 04-91 NASD Has Filed for Immediate Effectiveness Amendments to Section 7 of Schedule A to the NASD By-Laws Governing Fees for Filing Documents Pursuant to the Corporate Financing Rule

      View PDF File

      GUIDANCE

      Fees for Filing Documents Pursuant to Rule 2710 (Corporate Financing Rule–Underwriting Terms and Arrangements)

      Implementation Date: January 1, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management
      Corporate Financing Department
      Corporate Financing Fees
      Rule 2710 (Corporate Financing
      Rule–Underwriting Terms and Arrangements)
      Schedule A to the NASD By-Laws

      Executive Summary

      NASD has filed for immediate effectiveness amendments to Section 7 of Schedule A to the NASD By-Laws (Section 7). The amendments to Section 7 raise the maximum fee for filing documents pursuant to the Corporate Financing Rule from $30,500 to $75,500 ($500 plus .01 percent of the proposed maximum aggregate offering price up to $750 million).1

      The amendments to Section 7 become operative on January 1, 2005. New filings received and accepted by the Department through its electronic filing system (COBRA) by 12:00 p.m., Eastern Time, on Thursday, December 30, 2004, will be processed under the current fee structure ($30,500 maximum fee). Any offering initially filed prior to December 30, 2004, will be subject to the current fee structure, notwithstanding that additional amendments to the filing may be made in 2005. New filings that have been rejected, however, must be corrected, re-submitted, and accepted by the Department prior to the December 30, 2004, deadline for the current fee structure to apply.

      Included with this Notice is Attachment A, the text of amended Section 7.

      Questions/Further Information

      Questions concerning this Notice may be directed to LaNita A. Tyler, Manager, Corporate Financing Department, at (240) 386-4647.

      Background and Discussion

      NASD's Corporate Financing Department (Department) is responsible for reviewing the proposed underwriting terms and arrangements of proposed public offerings of securities for compliance with the requirements of Rule 2710 (Corporate Financing Rule–Underwriting Terms and Arrangements). The purpose of the Department's review is to provide members with, among other things, regulatory guidance as to what constitutes fair and reasonable underwriting terms and arrangements. Pursuant to Rule 2710, members may not participate in the offering unless certain documentation is filed with the Department for review. The fee charged to members for this review is set forth in Section 7.

      Prior to this amendment, the maximum fee for filing documents pursuant to the Corporate Financing Rule was $500 plus .01 percent of the proposed maximum aggregate offering price of $300 million or other applicable value of all securities registered on a Securities and Exchange Commission (SEC) registration statement or included on any other type of offering document (where not filed with the SEC), with a cap of $30,500. This fee structure was implemented in 1989 and intended to capture the maximum $30,500 fee on 90 percent of the public offerings filed with the Department.

      A recent review of the corporate financing fees showed that in 2004, the maximum $30,500 fee was being charged on only 75 percent of the public offerings filed with the Department. The amendments to Section 7 will again enable NASD to capture the maximum fee on 90 percent of public offerings filed with the Department by raising the cap in Section 7 from $30,500 to $75,500 ($500 plus .01 percent of the proposed maximum aggregate offering price up to $750 million) as of January 1, 2005.

      Implementation of the Fee Change

      The fee change will be implemented on January 1, 2005. The staff plans to conduct an annual review of costs and adjust the corporate financing fee, if necessary, as of January 1 each year after appropriate consultation with the Board and rule filings with the Commission.

      New filings received and accepted by the Department through its electronic filing system (COBRA) by 12:00 p.m., Eastern Time, on Thursday, December 30, 2004, will be processed under the current fee structure ($30,500 maximum fee). Any offering initially filed prior to December 30, 2004, will be subject to the current fee structure, notwithstanding that additional amendments to the filing may be made in 2005. New filings that have been rejected, however, must be corrected, re-submitted, and accepted by the Department prior to the December 30, 2004, deadline for the current fee structure to apply.

      COBRADesk will be shut down and unavailable for filings on Thursday, December 30, 2004, at 12:00 p.m., Eastern Time, to update COBRA and COBRADesk to accept the proposed new filing fee. COBRA and COBRADesk will again be available to accept filings on Monday, January 3, 2005, at 8 a.m., Eastern Time. NASD will notify NASD users of system availability on the NASD Web site beginning on December 1, 2004.


      1 SR-NASD-2004-177.


      ATTACHMENT A

      Schedule A To NASD By-Laws

      * * * * *

      Section 7 — Fees for Filing Documents Pursuant to the Corporate Financing Rule

      (a) There shall be a fee imposed for the filing of initial documents relating to any offering filed with NASD pursuant to the Corporate Financing Rule equal to $500 plus .01% of the proposed maximum aggregate offering price or other applicable value of all securities registered on an SEC registration statement or included on any other type of offering document (where not filed with the SEC), but shall not exceed [$30,500] $75,500. The amount of filing fee may be rounded to the nearest dollar.
      (b) There shall be an additional fee imposed for the filing of any amendment or other change to the documents initially filed with NASD pursuant to the Corporate Financing Rule equal to .01% of the net increase in the maximum aggregate offering price or other applicable value of all securities registered on an SEC registration statement, or any related Rule 462(b) registration statement, or reflected on any Rule 430A prospectus, or included on any other type of offering document. However, the aggregate of all filing fees paid in connection with an SEC registration statement or other type of offering document shall not exceed [$30,500] $75,500.

      * * * * *

    • 04-90 NASD Issues Interpretive Guidance Regarding Various Trade Reporting and Compliance Engine (TRACE) Rules

      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
      Debt Securities
      Operations
      Rule 6200 Series
      TRACE Rules
      Transaction Reporting

      Executive Summary

      NASD provides interpretive guidance on the meaning of the terms "foreign private issuer" and "issue date" as set forth in Rule 6210, notification obligations under Rule 6260, and reporting the time of execution in seconds under Rule 6230.

      Questions/Further Information

      Questions concerning this Notice should be directed to tracefeedback@nasd.com; Elliot Levine, Chief Counsel, Market Operations, 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

      1. Foreign Private Issuer

      NASD recently made minor, clarifying amendments to the term "TRACE-eligible security." As amended, the term includes "debt securities that are . . .issued by United States and/or foreign private issuers." The amendments clarified that TRACE-eligible securities include the debt securities of all U.S. and foreign private issuers, regardless of the business model used by the issuer.1 For purposes of TRACE, NASD interprets the term "foreign private issuer" as a foreign issuer that is not eligible to use the SEC's Schedule B for registering a debt offering in the U.S.2

      Under Section 7 of the Securities Act, when a foreign government or a political subdivision of such foreign government is issuing a security and seeks registration in the U.S., it is required to file a registration statement containing the information and documents required in Schedule B.3 In addition, the SEC has interpreted Section 7 to allow certain supranational organizations, certain issuers of government-guaranteed securities, and certain other issuers closely aligned and identified with a sovereign, in addition to national, state, provincial, and municipal governments, to use Schedule B.4 For purposes of TRACE, NASD views such Schedule B-eligible issuers as issuers that are not "foreign private issuers," and their debt securities as outside the definition of "TRACE-eligible security." Conversely, foreign issuers that are not Schedule-B-eligible issuers are considered "foreign private issuers" as that term is used in the definition of "TRACE-eligible security."

      2. Issue Date

      Rule 6210(a) states, "For purposes of the Rule 6200 Series, the term ‘money market instrument' means a debt security that at issuance has a maturity of one year or less." NASD is responding to inquiries about how NASD determines the date of "issuance" in Rule 6210(a). For purposes of TRACE, the term "issuance" is the date that a security is issued or the issue date. It is often industry convention to use the term "dated date" as a substitute for the term "issue date," as the term "dated date" is commonly defined as the effective date of a new issuance. Accordingly, it is often the same date as the issue date. In certain circumstances, however, such as when a bond is issued with accrued interest, the dated date is prior to the issue date. When an issue date is not ascertainable from public sources, NASD will look to the dated date as the issue date to determine if a debt security is a money market instrument under Rule 6210(a). When both the dated date and the issue date are ascertainable from public sources and do not fall on the same date, NASD will look to the issue date for purposes of Rule 6210(a).5

      3. Rule 6260 Obligations—Early Closing of TRACE System

      Rule 6260, in part, requires firms involved in distributing new TRACE-eligible securities to provide information to NASD Market Operations. The deadlines for notification, which are set forth in Rule 6260(b), vary depending on the type of offering and the time it is priced or the effectiveness of the registration statement.

      On days when NASD decides that the TRACE System will close early, NASD will announce the early closing and specify when NASD Market Operations will cease accepting information pursuant to Rule 6260 (e.g., NASD may close the TRACE System early, such as at 4:00 p.m. Eastern Time, around major holidays, such as the day after Thanksgiving). When early closings in TRACE occur, NASD interprets Rule 6260 as requiring a firm to provide the information required under Rule 6260 by the early closing time, rather than by 5:00 p.m. Eastern Time. (A calendar noting early closings can be found at www.nasd.com/mkt_sys/trace_calendar.asp)

      4. Rule 6260 Obligations—"Underwriter"

      Rule 6260 requires that a managing underwriter, or if a managing underwriter is not appointed, the group of underwriters, of a new TRACE-eligible security must provide notice to NASD of the new TRACE-eligible security in the form and manner specified in the rule. For purposes of Rule 6260, the term "underwriter" has the same meaning as set forth in Section 2(a)(11) of the Securities Act. NASD reminds firms that the statutory definition of "underwriter" includes firms acting as agents for issuers of new TRACE-eligible securities.6

      5. Time of Execution

      Rule 6230 requires that firms provide the time of execution in their transaction reports to TRACE. Version 1.05 of the TRACE User Guide provides, in part, the following guidance on reporting the time of execution of a transaction:

      All reported times are Eastern Time, and must be entered in military time format, HHMMSS (except that seconds may be entered as "00" if your system is not capable of reporting seconds).

      As a result, some firms are reporting trades with time stamps in seconds and some are not (because they may not be capable of reporting in seconds). NASD believes that the actual reporting requirement should be uniform for all firms. Accordingly, at this time, NASD will not require TRACE trade reports to be entered in seconds. However, NASD encourages firms that are currently reporting in seconds, or are capable of reporting in seconds, to continue or begin to do so. NASD will provide advance notice when all trade reports must include seconds so that firms can take the steps necessary to provide the level of detail required in reporting the time of execution.


      1 See Notice to Members 04-39 (May 2004).

      2 The SEC has defined the term "foreign private issuer" in certain provisions of the federal securities laws primarily to determine whether an issuer is considered a U.S. or foreign private issuer for purposes of various filing and reporting requirements. See, e.g., Rule 405, 17 CFR §239.405, promulgated pursuant to the Securities Act of 1933, as amended (Securities Act), and Rule 3b-4(c), 17 CFR §240.3b-4(c), promulgated pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act). In both rules, the term "foreign private issuer" means any foreign issuer other than a foreign government, except an issuer having significant U.S. contacts that are specified in both rules (i.e., an issuer is not a "foreign private issuer" if more than 50 percent of the outstanding voting securities are directly or indirectly owned of record by U.S. citizens or residents; a majority of officers or executive directors are U.S. citizens or residents; more than 50 percent of the assets are located in the U.S.; or, the business of the issuer is administered principally in the U.S.). In Rule 3b-4(a) under the Exchange Act "foreign government" is defined as "the government of any foreign country or any political subdivision of a foreign country."

      Neither the definition of "foreign government" nor "foreign private issuer" directly addresses the status of foreign issuers that are governmentsponsored. Transactions in securities issued by governmental as well as government-sponsored issuers are not subject to TRACE reporting.

      3 Section 7 of the Securities Act provides in pertinent part: "The registration statement . . . when relating to a security issued by a foreign government, or political subdivision thereof, shall contain the information, and be accompanied by the documents, specified in Schedule B . . .." 15 U.S.C. § 77f. Schedule B is found at 15 U.S.C. § 77aa (Schedule B).

      4 See SEC No-Action Letter dated June 2, 1993 (Bank of Greece); and SEC No-Action Letter dated February 1, 1982 (Nordiska Investerings Banken).

      5 NASD does not expect a "dated date" to occur after an issue date. In addition, NASD will not look to the first settlement date or any other day after the issue date to establish the date of issuance.

      6 Section 2(a)(11) of the Securities Act provides: The term "underwriter" means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. As used in this paragraph the term "issuer" shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

    • 04-89 NASD Alerts Members to Concerns When Recommending or Facilitating Investments of Liquefied Home Equity

      View PDF File

      GUIDANCE

      Liquefied Home Equity

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Registered Representatives
      Senior Management
      Communications with the Public
      Home Equity Lines of Credit
      Leverage
      Liquefied Home Equity
      Margin
      Mortgages

      Executive Summary

      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. This Notice reminds members that recommending liquefying home equity to purchase securities may not be suitable for all investors and that members and their associated persons 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.

      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

      The escalation of home values has made many homeowners wealthier as the equity in their homes has risen. Many investors have sought to access this equity in connection with mortgage refinancing or home equity lines of credit. Moreover, given the recent historically low interest rates, the cost of accessing this capital has been relatively low. In many cases, lower interest rates have allowed investors refinancing their mortgages to liquefy equity and lower their monthly payments. However, the benefit of these trends has the potential to be undone by inappropriate speculation or investments in securities.

      NASD has observed increasing use of liquefied home equity for investments and recent studies corroborate these observations. According to the Federal Reserve Board, in the most recent period studied, the period 2001 through the first half of 2002 (2001–2002 period), 11 percent of the total funds liquefied in mortgage refinancings were used for stock market and other financial investments, up from less than two percent for the period 1998 through the first half of 1999 (1998–1999 period). The average amount of liquefied home equity being used for investments also has increased substantially. In the 1998-1999 period, the Federal Reserve Board found that "most homeowners who used the cash [from liquefied equity] to make stock market investments invested relatively small amounts."1 However, in the 2001–2002 period, the average spent on stock market and other financial investments was more then $24,000, greater than nearly all other categories, including home improvement.2

      Discussion

      NASD believes that a recommendation for a homeowner to liquefy home equity for investments poses significant and unique risks for investors.3 A home is a basic necessity and is often an individual's largest asset. Homeownership also provides stability and plays an important part in many social policies.

      One of the primary concerns of investing liquefied home equity is that an investor may lose his or her home. If a homeowner takes out a mortgage to invest in securities on the assumption that the return from the investments will be sufficient to cover the mortgage payments, and the investment fails to earn the necessary rate of return, the investor may be unable to meet his or her mortgage obligations and default on the mortgage.

      Another concern is that investors may misapprehend their risk tolerance for investments using liquefied home equity, particularly since liquefying home equity may often have an accompanying increase in mortgage obligations or create a new obligation in the case of a home equity line of credit. Thus, if the value of an investment decreases, as can happen with many investments, the investor may need to sell his or her investments to protect his or her home and limit further losses.

      When liquefying home equity for investments in securities, homeowners, in pursuit of lower interest rates, also may select a mortgage or home equity loan with a variable interest rate. In an environment of increasing interest rates, as exists today, homeowners could see a significant increase in their debt service payments potentially forcing a sale of investments to meet these higher obligations.

      In addition, investors may fail to recognize certain potential conflicts of interest, for example, a broker's interest to capture commissions or fees on investments from the proceeds of liquefied home equity. In addition, if the member or its affiliate is the lender, investors may not understand that they also will be paying compensation to the member or its affiliate for originating and/or servicing the loan. Conflicts also may exist even in the absence of an affiliate relationship if a member receives referral or other payments from a lender.

      Finally, liquefying home equity may undermine the asset diversification benefit of home ownership. While home values fluctuate, they may not be correlated with equity or securities markets. Moreover, homes are an illiquid investment, given the generally high transaction and other costs associated with moving. Because of this, many homeowners do not realize gains (or losses) in the appreciation (or depreciation) in their homes. However, once liquefied for investments in securities, a homeowner can much more easily and quickly lose the equity in his or her home.4

      In light of these concerns, NASD is reminding members of their obligations in connection with investments of liquefied home equity.

      Suitability

      Members are reminded that recommending liquefying home equity to purchase securities may not be suitable for all investors. Members should consider not only whether the recommended investments are suitable, but also whether the strategy of investing liquefied home equity in securities is suitable.5 In addition to the factors typically considered as part of a suitability analysis,6 a member and its associated persons also may wish to consider: (1) how much equity does the investor have in his or her home; (2) what is the level of equity being liquefied for investments; (3) how will the investor meet his or her increased mortgage obligations; (4) is the mortgage or home equity loan at a fixed or variable rate;7 (5) what is the investor's risk tolerance with respect to the funds being invested; (6) what is the investor's overall debt burden; and (7) what is the sustainability of the value of the investor's home.8

      In addition, members also are reminded that IM-2310-2 (Fair Dealing with Customers) prohibits recommending purchases beyond a customer's capability, stating that it is a violation of a member's responsibility of fair dealing to "recommend[] the purchase of securities or the continuing purchase of securities in amounts which are inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment."9

      Best Principles

      As noted above, investing liquefied home equity presents unique risks and also may present certain conflicts. NASD believes members should ensure that their supervisory systems address these risks and conflicts.

      Firms that recommend or facilitate investments of liquefied home equity should consider the extent to which customers are adequately informed of the risks and conflicts of such a strategy. NASD has previously developed risk disclosure statements for certain other trading strategies, such as margin10 and day trading accounts.11

      Although NASD is not proposing a specific, standardized risk disclosure document, NASD believes members recommending investments of liquefied home equity should pay particular attention to providing investors with adequate risk disclosure. Among the risks and conflicts of investing liquefied home equity are: (1) the potential loss of one's home; (2) the fact that unlike other potential lenders, the member has an interest in having the proceeds of the loan used for investments that may generate commissions, mark-ups or fees for the member; (3) the member or its affiliate may earn fees in connection with originating the loan; (4) the impact of liquefied home equity on the ability to refinance a home mortgage; and (5) depending on the amount of home equity liquefied and any change in home value, the homeowner may have negative equity in his or her home.

      Members also should pay particular attention to their sales materials and oral presentations concerning investments of liquefied home equity. NASD reminds its members that the promotion of liquefying home equity must be fair and balanced, and must address the associated risks. For example, if a member presents a scenario in which the investment returns from liquefied equity will be sufficient to pay the costs of accessing such capital, the member should highlight the risk that such returns may not be achieved and that the customer may have to access additional sources of funding to pay the mortgage or equity line of credit or risk foreclosure.

      Members also should consider the extent to which accounts investing liquefied home equity should require heightened supervision or specific account approval. Again, in other contexts where leverage is involved,12 such as options, or specific trading strategies, such as day trading, NASD has required specific account approval procedures.13 NASD recommends that firms consider whether similar procedures should be developed for accounts that invest liquefied home equity loaned by the member directly or arranged by the member through an affiliate or third party.

      The situation where a member or its affiliate simultaneously recommends the strategy of liquefying home equity and originates the mortgage or equity line of credit presents additional conflicts, as the member or its affiliate may earn compensation from originating the loan, and if applicable, servicing or selling the loan, in addition to commissions or other fees earned by the member in connection with investments of the proceeds of the loan. Members should ensure that customers are adequately informed of the nature of the compensation that the member or its affiliate may earn from extending a mortgage or home equity loan. Conflicts also may arise where a member has a referral or other relationship with an unaffiliated lender. Members should ensure that customers are adequately informed about the nature of any such relationships.

      Finally, NASD recommends that firms consider whether there should be any general standards for when a recommendation to invest liquefied home equity should be prohibited. While the circumstances surrounding an investment are fact-specific, there may be certain circumstances where recommending a strategy involving liquefied home equity is in all cases, or nearly all cases, inappropriate. For example, a firm may determine that it is inappropriate for a customer to use liquefied home equity to invest on margin, or withdraw home equity above a certain threshold (i.e., reducing their home equity to below a certain level).


      1. Peter J. Brady, Glenn B. Canner, and Dean M. Maki, "The Effects of Recent Mortgage Refinancing," Federal Reserve Bulletin, vol. 86 (July 2000), pp. 441, 446.

      2. Glenn Canner, Karen Dynan, and Wayne Passmore, "Mortgage Refinancing in 2001 and Early 2002," Federal Reserve Bulletin, vol. 88 (December 2002), pp. 469, 473.

      3. NASD has previously expressed concerns over liquefying home equity and 100% loan-to-value or pledged asset mortgages, including that many investors are not aware of the attendant risks. See Investor Alert Betting the Ranch: Risking Your Home to Buy Securities, at www.nasd.com/betting; and Investor Alert 100% Mortgages: The Low Down on No Money Down, at www.nasd.com/mortgages.

      4. See Report for Congress, U.S Housing Prices: Is There a Bubble?, May 16, 2003, page 18.

      5. See In re F.J. Kaufman and Company of Virginia, 50 S.E.C. 164 (1989).

      6. See generally Rule 2310.

      7. Inasmuch as investors with adjustable or hybrid mortgages may see their mortgage payment increase in the future, such factors must be taken into account in evaluating whether liquefying equity is a suitable strategy. Where, for example, an investor has an adjustable mortgage that, based on current or anticipated rates, is expected to increase, members should take such higher expected mortgage payments into account when considering whether liquefying equity to purchase securities is a suitable strategy.

      8. A member also should evaluate whether an increase in home value is reasonably sustainable. An investor who liquidates a portion of his or her home equity and then sees the value of the home fall may find that he or she has little or even negative equity in his or her home. The loss of equity in one's home may make it difficult or more expensive to refinance a mortgage. In addition, an investor that sells a home with negative equity will be required to pay funds at closing.

      9. IM-2310-2(b)(5) (emphasis added).

      10. Rule 2341 prohibits a member from opening a margin account for or on behalf of a non-institutional customer unless the member has furnished the customer with a specified margin disclosure statement.

      11. Rule 2361 prohibits a firm that is promoting a day-trading strategy from opening an account for or on behalf of a non-institutional customer unless the member has furnished the customer with a specified day-trading risk disclosure statement.

      12. Liquefied home equity is akin to leverage as both involve investments with borrowed funds. In the case of liquefied home equity, money is typically borrowed from a bank and secured by the home; in the case of investing on margin, the money is borrowed from a broker-dealer and secured by the securities in the investor's account.

      13. See Rule 2860(b)(16) (Options: Opening of Accounts); Rule 2360 (Approval Procedures for Day-Trading Accounts).

    • For Your Information

      View PDF file

      2004 – 2005 Filing Due Dates

      NASD would like to remind members of their obligation to file the appropriate FOCUS reports, Annual Audits, Customer Complaints, and Short Interest Reports 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.

      2005 FOCUS Due Dates

      Annual Schedule I for 2004 Year End Due Date
      2004 FOCUS Schedule January 26, 2005
      Annual Schedule I for 2005 Year End Due Date
      2005 FOCUS Schedule January 25, 2006

      2005 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, 2005 February 24, 2005
      February 28, 2005 March 23, 2005
      April 30, 2005 May 24, 2005
      May 31, 2005 June 23, 2005
      July 31, 2005 August 23, 2005
      August 31, 2005 September 26, 2005
      October 31, 2005 November 23, 2005
      November 30, 2005 December 23, 2005

      2005 Quarterly FOCUS Part II/IIA Filings

      Quarter Ending Due Date
      December 31, 2004 January 26, 2005
      March 31, 2005 April 25, 2005
      June 30, 2005 July 26, 2005
      September 30, 2005 October 25, 2005
      December 31, 2005 January 25, 2006

      2005 Annual Audit Filings Due Dates

      Period End Due Date
      January 31, 2005 April 1, 2005
      February 28, 2005 April 29, 2005
      March 31, 2005 May 31, 2005
      April 30, 2005 June 29, 2005
      May 31, 2005 August 1, 2005
      June 30, 2005 August 29, 2005
      July 31, 2005 September 29, 2005
      August 31, 2005 October 31, 2005
      September 30, 2005 November 29, 2005
      October 31, 2005 December 30, 2005
      November 31, 2005 January 30, 2006
      December 31, 2005 March 1, 2006

      2005 3070/Customer Complaints Due Dates

      4th quarter 2004: January 18, 2005
      1st quarter 2005: April 15, 2005
      2nd quarter 2005: July 15, 2005
      3rd quarter 2005: October 17, 2005
      4th quarter 2005: January 17, 2006

      Market Regulation Department 2005 Short Interest Reporting Deadlines

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

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

    • 04-88 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 January 4, 2005, at 11:00 am, at 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 November 29, 2004.

      It is important that all members be represented at the Annual Meeting. Members are urged to vote in the election of Board members using one of the methods described below.

      Board of Governors Election

      There are seven vacancies to be filled at this meeting: four Industry governorships and three Public governorships. The nominees for the vacancies are listed in Attachment A. The nominees elected will serve for terms specified in Attachment A.

      Attachment B includes the biographies of the nominees of the NASD National Nominating Committee (NNC). Attachment C contains the names of the current Board of Governors.


      Voting Methods

      Members will be able to vote using one of the following methods:

      • U.S. mail

      • Internet

      • Phone

      The enclosed proxy contains detailed instructions on the voting procedures.

      Questions/Further Information

      Questions regarding this Notice may be directed to:

      Barbara Z. Sweeney
      NASD
      Office of the Corporate Secretary
      1735 K Street, NW
      Washington, DC 20006-1500


      ATTACHMENT A

      NASD Board of Governors Nominees

      The following seven persons have been nominated by the NNC to serve on the Board of Governors of NASD for a term of three years or until their successors are duly elected or qualified. Terms of office run from January 4, 2005 to January 2008.

      Terms of Office 2005–2008

      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)
      William Heyman Executive Vice President and Chief Investment Officer, The St. Paul Travelers Companies, Inc. (Representative of an Insurance Company)
      Raymond A. Mason Chairman and CEO, Legg Mason, Inc. (Representative of a Regional Retail Firm)

      PUBLIC

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


      ATTACHMENT B

      NASD Profiles of Board Nominees for Industry Governor

      John W. Bachmann is Senior Partner of Edward Jones. Mr. Bachmann has been with Edward Jones in various positions since 1959. He became managing principal in 1980. Mr. Bachmann served as Chairman of the Securities Industry Association and on the Board of Governors of the Chicago Stock Exchange and on the Regional Firm's Advisory Board of the New York Stock Exchange. He has also served as Chairman of the NASD District 4 Committee. Mr. Bachmann is currently Chairman of the U. S. Chamber of Commerce and a Director of AMR American Airlines and the Monsanto Company. He holds a degree in economics from Wabash College and a Master's in finance from Northwestern University.

      Richard F. Brueckner is Chief Executive Officer of Pershing LLC, a wholly owned subsidiary of The Bank of New York (BNY). Mr. Brueckner joined BNY in May 2003 when BNY acquired Pershing from Credit Suisse First Boston. He served as CEO of Pershing and as a member of the CSFB Executive Board after CSFB's acquisition of Donaldson, Lufkin and Jenrette and Pershing in November 2000. Mr. Brueckner joined DLJ in 1978 and has served as Treasurer of DLJ Securities Corporation, Chief Financial Officer of Pershing, and has held a variety of senior management positions in administration, finance, marketing, and operations at Pershing. Prior to 1978, he was in the management group of the Investment Services Department of KPMG Peat Marwick. Mr. Brueckner served as Chairman of the Securities Industry Foundation for Economic Education and is a trustee of its successor organization, Foundation for Investor Education. He is a director of the Securities Industry Association and has served as the founding Chairman of the Clearing Firms Committee, Chairman of the Membership Committee and Chairman of the New York District. He has also served on various boards and committees for the NASD. Mr. Brueckner holds a B.A. in economics from Muhlenberg College, where he is Vice Chairman of the Board of Trustees. He is also a CPA.

      William Heyman is Executive Vice President and Chief Investment Officer of The St. Paul Travelers Companies, Inc. Until March 15, 2002, Mr. Heyman was Chairman of Citigroup Investments, a subsidiary of Citigroup that managed most of Citigroup's proprietary investments. His responsibilities included all public and private equity-related investments, real estate and alternative investments, as well as Citigroup's pension fund. He founded and was until his departure Chief Executive Officer of Tribeca Investments, a Citigroup subsidiary that conducts proprietary trading and investment activities, including merger arbitrage and convertible hedging. He was a Senior Vice President of various Citigroup insurance subsidiaries, including Travelers, and served as a Citigroup representative on several boards. Prior to joining Citigroup in 1995, he was, successively, a Managing Director and head of the private investment department of Soloman Brothers; Director of the Division of Market Regulation of the U.S. Securities and Exchange Commission in Washington, DC (1991–1993); and a Managing Director and head of the arbitrage department of Smith Barney. He began his career in the securities business in 1979, when he co-founded Mercury Securities, a broker-dealer specializing in merger arbitrage of which he was the Chief Operating Officer for nine years. Prior to that, he was a securities lawyer, principally with Cravath, Swaine & Moore. Mr. Heyman graduated magna cum laude from Princeton University, where he was elected to Phi Beta Kappa, and cum laude from Harvard Law School.

      Raymond A. Mason is Chairman of the Board, President and Chief Executive Officer of Legg Mason, Inc. and Chairman and CEO of Legg Mason Wood Walker, Inc. Mr. Mason founded Mason and Company in 1962, and in 1970 the company merged to form Legg Mason, Inc. He has been very active in the securities industry, serving as Chairman of the Securities Industry Association in 1986, Chairman of the Board of Governors of the NASD in 1974 and Chairman of the Regional Firms Committee of the New York Stock Exchange in 1978. He was appointed by the SEC to serve on a broker compensation practices committee in May 1994. Currently, he is Chairman of the Board of Trustees of Johns Hopkins University and a member of the executive committee of both the Johns Hopkins University and Johns Hopkins Medicine, and Chairman of the Maryland Business Roundtable for Education. Mr. Mason received a bachelor's degree in economics from the College of William and Mary.

      NASD Profiles of Board Nominees for Public Governor

      James E. Burton is the Chief Executive Officer of World Gold Council in London, England. Previously, he served as Chief Executive Officer of California Public Employees Retirement System (CalPERS) since 1994. Prior to joining CalPERS, Mr. Burton was Deputy State Controller, advising the State Controller on public pension, government borrowing and other state finance issues. He has also held various government positions, including Deputy Chief of Staff to Governor Jerry Brown. Mr. Burton is a past officer of the National Association of State Retirement Administrators and the Council of Institutional Investors. Mr. Burton holds a degree from the University of San Francisco.

      Sir Brian Corby served as Chairman of Prudential Corporation plc from 1990 until his retirement in 1995. Prior to this, he was Group Chief Executive. Sir Brian has also served as President of the Confederation of British Industry, President of the National Institute of Economic and Social Research, and President of the "Association de Geneve," an insurance industry "think tank." He was made a Knight Bachelor in the Queen's Birthday Honours in June 1989. Sir Brian graduated with an honours degree in mathematics from St. John's College Cambridge.

      John Rutherfurd, Jr. is Chairman and Chief Executive Officer of Moody's Corporation. He was elected Chairman in October 2003. Mr. Rutherfurd was named CEO when the firm became an independent public company in October 2000. Previously, Moody's was part of the Dun & Bradstreet Corporation. He joined the company in 1995 to develop new business activities with the title of Managing Director, Moody's Holdings. He was appointed Chief Administrative Officer in 1996 and President in 1998. Prior to joining Moody's, he was President of Interactive Data Corporation (IDC) from 1990 to 1995, Executive Vice President of Dun & Bradstreet Financial Information Services (North America) from 1989 to 1990, and Vice President and Chief of Staff from 1980 to 1985 of Chase Information Services Group, an affiliate of Chase Manhattan Bank. Mr. Rutherfurd received an AB from Princeton University and an LLB from Harvard Law School.



      ATTACHMENT C

      Current Board of Governors

      Governors with Terms Expiring in January 2005

      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)
      Barbara L. Weaver2 Vice President, Legal & Compliance, Howard Weil, Incorporated (Chair of the National Adjudicatory Council)

      NON-INDUSTRY

      Harry P. Kamen* Retired Chairman and Chief Executive Officer, Metropolitan Life Insurance Company (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, Moody's Corporation

      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, Westfield Bakerink Brozak, 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.

      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 Dean, Washington University School of Law
      Sharon P. Smith* Dean, College of Business Administration, Fordham University

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

    • 04-87 2005 Trade Date–Settlement Date Schedule

      View PDF File

      INFORMATIONAL

      Trade Date–Settlement Date

      This version corrects the Trade Dates and Settlement Dates for Columbus Day 2005.

      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 17, 2005, in observance of Martin Luther King, Jr., Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Jan. 11 Jan. 14 Jan. 19
      12 18 20
      13 19 21
      14 20 24
      17 Markets Closed
      18 21 25



      Presidents' Day:

      Trade Date–Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, February 21, 2005, in observance of Presidents' Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Feb. 15 Feb. 18 Feb. 23
      16 22 24
      17 23 25
      18 24 28
      21 Markets Closed
      22 25 March 1



      Good Friday:

      Trade Date–Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, March 25, 2005. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      March 21 March 24 March 29
      22 28 30
      23 29 31
      24 30 April 1
      25 Markets Closed
      28 31 4



      Memorial Day:

      Trade Date–Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 30, 2005, 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 24 May 27 June 1
      25 31 2
      26 June 1 3
      27 2 6
      30 Markets Closed
      31 3 7



      Independence Day:

      Trade Date–Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, July 4, 2005, 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 1 July 6
      29 5 7
      30 6 8
      July 1 7 11
      4 Markets Close
      5 8 12



      Labor Day:

      Trade Date–Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, September 5, 2005, 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. 30 Sept. 2 Sept. 7
      31 6 8
      Sept 1 7 9
      2 8 12
      5 Markets Closed
      6 9 13



      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, Tuesday, October 11, 2005. On this day, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.

      Trade Date Settlement Date Reg. T Date*
      Oct. 5 Oct. 10 Oct. 12
      6 12 13
      7 13 14
      10 14 17
      11 14 18
      12 17 19



      Note: October 11, 2005, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board. Transactions made on Tuesday, October 11, will be combined with transactions made on the previous business day, October 10, for settlement on October 14. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 11.




      Veterans' Day and Thanksgiving Day:

      Trade Date–Settlement Date Schedule

      The schedule of trade dates–settlement dates below reflects the observance of the financial community of Veterans' Day, Friday, November 11, 2005, and Thanksgiving Day, Thursday, November 24, 2005. On Friday, November 11, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed in observance of Veterans' Day. All securities markets will be closed on Thursday, November 24, 2005, in observance of Thanksgiving Day.

      Trade Date Settlement Date Reg. T Date*
      Nov. 7 Nov. 10 Nov. 14
      8 14 15
      9 15 16
      10 16 17
      11 16 18
      14 17 21
      18 23 28
      21 25 29
      22 28 30
      23 29 Dec 1
      24 Markets Closed
      25 30 2



      Note: November 11, 2004, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board. Transactions made on November 11 will be combined with transactions made on the previous business day, November 10, for settlement on November 16. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.




      Christmas Day:

      Trade Date–Settlement Date Schedule

      The Nasdaq Stock Market and the securities exchanges will be closed on Monday, December 26, 2005, in observance of Christmas Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:

      Trade Date Settlement Date Reg. T Date*
      Dec. 20 Dec. 23 Dec. 28
      21 27 29
      22 28 30
      23 29 Jan 3, 2006
      26 Markets Closed
      27 30 4


      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."

    • 04-86 SEC Approves NASD Interpretive Material to Rule 2210 Regarding Member Firms' Use of Investment Analysis Tools

      View PDF File

      GUIDANCE

      Investment Analysis Tools

      Effective Date: February 14, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Senior Management

      IM-2210-6
      Investment Analysis Tools
      Predictions or Projections

      Executive Summary

      On September 28, 2004, the Securities and Exchange Commission (SEC) approved an NASD Interpretative Material (IM) to Rule 2210, designated as IM-2210-6, regarding "investment analysis tools."1 IM-2210-6 will allow members to use and provide customers access to investment analysis tools if the members comply with certain disclosure and other requirements. The new rule text is contained in Attachment A and is effective on February 14, 2005.

      Questions/Further Information

      Questions regarding this Notice may be directed to Thomas M. Selman, Senior Vice President, Advertising Regulation Department (Advertising Department), Regulatory Policy and Oversight (RPO), at (240) 386-4533; Thomas A. Pappas, Associate Vice President, Advertising Department, RPO, at (240) 386-4553; or James S. Wrona, Associate General Counsel, Office of General Counsel, RPO, at (202) 728-8270.

      Background

      In recent years, the public increasingly has sought access to additional sources of investment information and tools to make investment decisions. Technology has been a key component of members' attempts to meet this investor demand. NASD Rule 2210(d)(1)(D), however, prohibits members from making predictions or projections regarding investments or investment strategies.2 This prohibition, in turn, precluded member firms from offering investors technological tools that used a mathematical formula to calculate the probability that investment outcomes (such as reaching a financial goal) would occur. As part of its rule modernization project, NASD proposed IM-2210-6 as a limited exception to the general prohibition on predictions and projections in Rule 2210(d)(1)(D) to allow members to offer such technological tools under certain circumstances.3 On September 28, 2004, the SEC approved the proposal.4 IM-2210-6 becomes effective on February 14, 2005.

      With this change, members that comply with the disclosure and other requirements of IM-2210-6 will be permitted to offer customers the use of investment analysis tools.5 IM-2210-6 defines an investment analysis tool as "an interactive technological tool that produces simulations and statistical analyses that present the likelihood of various investment outcomes if certain investments are made or certain investment strategies or styles are undertaken, thereby serving as an additional resource to investors in the evaluation of the potential risks and returns of investment choices." Members also will be permitted to provide customers with written reports generated by and sales material concerning investment analysis tools.

      Pursuant to IM-2210-6, a member may offer an investment analysis tool (whether customers use the member's investment analysis tool independently or with assistance from the member), written reports indicating the results generated by such tool and related sales material only if the member:

      • Describes the criteria and methodology used, including the investment analysis tool's limitations and key assumptions.


      • Explains that results may vary with each use and over time.


      • Describes, if applicable, the universe of investments considered in the analysis; explains how the tool determines which securities to select; discloses if the tool favors certain securities and, if so, explains the reason for the selectivity; and states that other investments not considered may have characteristics similar or superior to those being analyzed.


      • Displays the following additional disclosure: "IMPORTANT: The projections or other information generated by [name of investment analysis tool] regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results."

      These disclosures must be clear and prominent and must be in written (electronic or hard copy) narrative form.6 In addition, a member that offers or intends to offer an investment analysis tool, written report, or related sales material under IM-2210-6 must, within 10 days of first use, (1) provide the Advertising Department access to the investment analysis tool and (2) file with the Advertising Department any template for written reports produced by, and sales material concerning, the tool.7 Moreover, after the Advertising Department has reviewed the investment analysis tool, written-report template or sales material, a member must notify the Advertising Department and provide additional access to the tool and re-file any template and sales material if the member makes a material change to the presentation of information or disclosures.

      If a member is already using an investment analysis tool that falls within the rule's coverage, and the member has not previously filed this tool with the Advertising Department, the member must file the tool, any written-report template generated by the tool, and sales material for the tool within 10 days of the effectiveness of IM-2210-6. In addition, even if a member previously filed an investment analysis tool with the Advertising Department, the member must re-file the tool, written-report template and sales material within 10 days of the effectiveness of IM-2210-6, so that the Advertising Department can ensure that the member has met the rule's requirements.

      The filing requirement does not apply to hypothetical illustrations of mathematical principles that do not predict or project the performance of an investment or investment strategy, such as Web site calculators that compute future returns based upon assumed variables, since Rule 2210(d)(1)(D) does not prohibit (and IM-2210-6 thus does not cover) such illustrations.8 In addition, a member that offers an investment analysis tool exclusively to "institutional investors," as defined in Rule 2211(a)(3), is not subject to the filing requirements discussed above if the communications relating to or produced by the tool meet the criteria for "institutional sales material," as defined in Rule 2211(a)(2).9 Furthermore, sales material that contains only an incidental reference to an investment analysis tool (e.g., a brochure that merely mentions a member's tool as one of the services offered by the member) need not include the disclosures required by IM-2210-6 and would not need to be filed with the Advertising Department, unless otherwise required by the other provisions of Rule 2210. However, any description of the tool or its features will trigger application of the disclosure and filing requirements of IM-2210-6.

      Members must keep in mind that compliance with IM-2210-6 does not mean that the member is acting in conformity with other applicable laws and rules. A member that offers an investment analysis tool under IM-2210-6 (whether customers use the member's investment analysis tool independently or with assistance from the member) is responsible for ensuring that use of the tool and all recommendations based on the tool (whether made via the automated tool or a written report) comply with the federal securities laws, NASD rules and SEC rules, including, but not limited to, as applicable, the following:

      • NASD's suitability rule (Rule 2310).


      • The other provisions of Rule 2210 (including the principles of fair dealing and good faith; the prohibition on exaggerated, unwarranted or misleading statements or claims; and any other applicable filing requirements for advertisements and sales literature).


      • SEC rules (including SEC Rule 156 under the Securities Act of 1933).

      1 See SEC Order Approving NASD New Interpretive Material to Rule 2210 Regarding Investment Analysis Tools (SEC Order Regarding Investment Analysis Tools), Exchange Act Rel. No. 50463 (Sept. 28, 2004), 69 FR 60200 (Oct. 7, 2004) (SR-NASD-2003-13).

      2 Rule 2210(d)(1)(D) states:
      Communications with the public may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast. A hypothetical illustration of mathematical principles is permitted, provided that it does not predict or project the performance of an investment or investment strategy.
      3 Rule 2210(d)(1)(D), by its explicit language, does not prohibit (and IM-2210-6 thus does not cover) certain hypothetical illustrations of mathematical principles that do not predict or project the performance of an investment or investment strategy. The "hypothetical illustration" exception to the prohibition in Rule 2210(d)(1)(D) applies to tools that serve the function of a calculator that computes the mathematical outcome of certain assumed variables without predicting the likelihood of either the assumed variables or the outcome. For example, this exception would apply to a calculator that computes a net amount of savings that an investor would earn over an assumed period of time with assumed variables of rates of returns, frequency of compounding, and tax rates. On the other hand, this exception would not apply to a calculator that predicted the likelihood of achieving these assumed variables and outcomes.

      4 During the rulemaking process, NASD modified the original proposal to accommodate a number of commenters' concerns submitted in response to the public comment notification in the Federal Register. See SEC Order Regarding Investment Analysis Tools, Exchange Act Rel. No. 50463, 69 FR 60200, at 60203-60204 (discussing NASD's response to comments and modifications to original proposal).

      5 For guidance on whether a member must comply with IM-2210-6 regarding a hyperlink to an affiliated or unaffiliated Web site that offers an investment analysis tool, see NASD Interpretive Letter, Response to Recommendations of the Investment Company Institute Concerning Hyperlinks (Nov. 11, 1997) (discussing members' responsibilities for content and filing requirements for ongoing hyperlinks to Web sites created by independent parties). If a member is responsible for the information on the hyperlinked Web site under the analyses discussed in the November 1997 Interpretive Letter, the member must either comply with IM-2210-6 or discontinue the hyperlink.

      6 Although each required disclosure need not be displayed on every separate Web page and/or page of a written report generated by the tool, the disclosures must be "clear and prominent" in light of the content, context, and presentation of the tool and/or written report. In addition, if the member provides customers access to an investment analysis tool and written report generated by the tool, the disclosures must be clear and prominent on both the tool and the written report. A member may not provide clear and prominent disclosures on one but not the other. For instance, a member cannot simply refer in a written report to the disclosures made by the tool (and vice versa).

      7 The Advertising Department's review of investment analysis tools generally will focus on whether the member has made the proper disclosures. Members are cautioned that they may not imply that NASD endorses or approves the use of any investment analysis tool or any recommendation based on such a tool.

      8 See supra note 3 and accompanying discussion.

      9 If a member presents an investment analysis tool on its Web site and non-institutional customers can access and use the tool, the member must comply with the filing requirements. This would be true even if the member indicated on its Web site that only institutional customers should use the tool. Moreover, members should note that, even if the investment analysis tool were offered exclusively to institutional customers, the member still would have to adhere to the disclosure requirements and would retain suitability obligations to the extent they arise in connection with the use of the investment analysis tool by such institutional customers.


      ATTACHMENT A

      Text of Rule Change

      New language is underlined.

      * * * * * * * * * *

      IM-2210-6. Requirements for the Use of Investment Analysis Tools

      (a) General Considerations
      This Interpretive Material provides a limited exception to NASD Rule 2210(d)(1)(D).1 No member may imply that NASD endorses or approves the use of any investment analysis tool or any recommendation based on such a tool. A member that offers or intends to offer an investment analysis tool under this Interpretive Material (whether customers use the member's tool independently or with assistance from the member) must, within 10 days of first use, (1) provide NASD's Advertising Regulation Department (Department) access to the investment analysis tool and (2) file with the Department any template for written reports produced by, or sales material concerning, the tool.2 The member also must provide any supplemental information requested by the Department. The Department may require that the member modify the investment analysis tool, written-report template or sales material. The Department also may require that the member not offer or continue to offer or use the tool, written-report template or sales material until all changes specified by the Department have been made by the member.
      A member that offers an investment analysis tool exclusively to "institutional investors," as defined in Rule 2211(a)(3), is not subject to the post-use access and filing requirement in this paragraph if the communications relating to or produced by the tool meet the criteria for "institutional sales material," as defined in Rule 2211(a)(2). A member that intends to make the tool available to, or that intends to use the tool with, any person other than an institutional investor (such as an employee benefit plan participant or a retail broker-dealer customer) will be subject to the filing and access requirements, however.
      As in all cases, a member's compliance with this Interpretive Material does not mean that the member is acting in conformity with other applicable laws and rules. A member that offers an investment analysis tool under this Interpretive Material (whether customers use the member's tool independently or with assistance from the member) is responsible for ensuring that use of the investment analysis tool and all recommendations based on the investment analysis tool (whether made via the automated tool or a written report) comply, as applicable, with NASD's suitability rule (Rule 2310), the other provisions of Rule 2210 (including, but not limited to, the principles of fair dealing and good faith, the prohibition on exaggerated, unwarranted or misleading statements or claims, and any other applicable filing requirements for advertisements and sales literature), the federal securities laws (including, but not limited to, the antifraud provisions), the Securities and Exchange Commission rules (including, but not limited to, SEC Rule 156 under the Securities Act of 1933) and other NASD rules.
      (b) Definition
      For purposes of this Interpretive Material and any interpretation thereof, an "investment analysis tool" is an interactive technological tool that produces simulations and statistical analyses that present the likelihood of various investment outcomes if certain investments are made or certain investment strategies or styles are undertaken, thereby serving as an additional resource to investors in the evaluation of the potential risks and returns of investment choices.
      (c) Use of Investment Analysis Tools and Related Written Reports and Sales Material
      A member may provide an investment analysis tool (whether customers use the member's tool independently or with assistance from the member), written reports indicating the results generated by such tool and related sales material3 only if:
      (1) the member describes the criteria and methodology used, including the investment analysis tool's limitations and key assumptions;
      (2) the member explains that results may vary with each use and over time;
      (3) if applicable, the member describes the universe of investments considered in the analysis, explains how the tool determines which securities to select, discloses if the tool favors certain securities and, if so, explains the reason for the selectivity,4 and states that other investments not considered may have characteristics similar or superior to those being analyzed; and
      (4) the member displays the following additional disclosure: "IMPORTANT: The projections or other information generated by [name of investment analysis tool] regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results."
      (d) Disclosures
      The disclosures and other required information discussed in paragraph (c) must be clear and prominent and must be in written or electronic narrative form.
      * * * * * * * * * *

      1 NASD Rule 2210(d)(1)(D) states that "[c]ommunications with the public may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast." This Interpretive Material allows member firms to offer investment analysis tools (whether customers use the member's tool independently or with assistance from the member), written reports indicating the results generated by such tools and related sales material in certain circumstances.

      Rule 2210(d)(1)(D) does not prohibit, and this Interpretive Material does not apply to, hypothetical illustrations of mathematical principles that do not predict or project the performance of an investment or investment strategy.

      2 After the Department has reviewed the investment analysis tool, written-report template or sales material, a member must notify the Department and provide additional access to the tool and re-file any template or sales material if it makes a material change to the presentation of information or disclosures as required by paragraphs (c) and (d).

      3 Sales material that contains only an incidental reference to an investment analysis tool (e.g., a brochure that merely mentions a member's tool as one of the services offered by the member) need not include the disclosures required by this Interpretive Material and would not need to be filed with the Department, unless otherwise required by the other provisions of Rule 2210.

      4 This disclosure must indicate, among other things, whether the investment analysis tool searches, analyzes or in any way favors certain securities within the universe of securities considered based on revenue received by the member in connection with the sale of those securities or based on relationships or understandings between the member and the entity that created the investment analysis tool. The disclosure also must indicate whether the investment analysis tool is limited to searching, analyzing or in any way favoring securities in which the member makes a market or has any other direct or indirect interest. Members are not required to provide a "negative" disclosure (i.e., a disclosure indicating that the tool does not favor certain securities).

    • 04-85 SEC Approves Amendments to Rule 6954(c) Requiring ECNs to Capture and Report Routed Order Identifier Information to OATS

      View PDF File

      GUIDANCE

      OATS Reporting Requirements

      Effective Date: February 14, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Systems
      Trading

      OATS
      Rule 6954(c)

      Executive Summary

      On September 17, 2004, the Securities and Exchange Commission (SEC) approved amendments to Rule 6954(c) to require that electronic communication networks (ECNs) that electronically receive routed orders capture and report the transmitting member's unique identifier (routed order identifier) to the Order Audit Trail System (OATS).1 Rule 6954(c), as amended, is set forth in Attachment A. The amendments become effective on February 14, 2005.

      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. For technical questions regarding OATS Reporting, please contact the OATS Help Desk at (800) 321-NASD.

      Background and Discussion

      On March 6, 1998, the SEC approved NASD Rules 6950 through 6957 (the OATS Rules).2 OATS provides comprehensive information regarding orders and transactions that is critical to NASD staff in conducting surveillance and investigations of member firms for potential violations of NASD rules and the federal securities laws.

      The use of a routed order identifier reported through OATS permits NASD to track the history of orders routed between firms on an automated basis. If the order does not contain a routed order identifier, the order cannot be linked on an automated basis to subsequent actions, such as further routing or execution by other firms or NASDAQ systems. OATS Rules previously did not require that ECNs capture routed order identifier information for orders routed electronically to them. Given the current level of participation of ECNs in the trading of NASDAQ securities, the lack of a routed order identifier for these electronic orders results in NASD staff having to recreate manually the lifecycle history for a substantial number of orders.

      Accordingly, the new amendments require that ECNs that electronically receive routed orders capture and report the routed order identifier to OATS. The amendments will be effective on February 14, 2005. As such, OATS will reject any OATS Order Reports submitted after February 14, 2005 without the required information. More detailed information on these new requirements, including the technical requirements for submission of the new fields, will be provided in the OATS Reporting Technical Specifications, which are available on NASD's Web site at Regulatory Systems > OATS > Technical Specifications.


      1 See Securities Exchange Act Release No. 50409 (September 17,2004), 69 FR 184 (September 23, 2004) (File No. SR-NASD-2004-137) (SEC Approval Order).

      2 See Notice to Members 98-33 (March 1998) for a complete description of the OATS Rules.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      6954. Recording of Order Information

      (a) and (b) No Change.
      (c) Order Transmittal
      Order information required to be recorded under this Rule when an order is transmitted includes the following.
      (1) and (2) No Change.
      (3) When a member electronically transmits an order for execution on an Electronic Communications Network:
      (A) No Change.
      (B) the receiving Reporting Member operating the Electronic Communications Network shall record:
      (i) the fact that the order was received by an Electronic Communications Network,
      (ii) the order identifier assigned to the order by the member that transmits the order,
      (iii) [(ii)] the market participant symbol assigned by the Association to the transmitting Reporting Member, and
      (iv) [(iii)] other information items in Rule 6954(b) that apply with respect to such order, which must include information items (1), (2), (3), (6), (7), (8), (10), (11), (12), (13), (15), and (16).
      (4) through (6) No Change.
      (d) No Change.

    • 04-84 SEC Approves Adjustments to the Trading Activity Fee

      View PDF File

      GUIDANCE

      Guidance on the Trading Activity Fee

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations Managers
      Senior Management

      Section 1 of Schedule A to NASD By- Laws
      Trading Activity Fee

      Executive Summary

      On October 1, 2004, the Securities and Exchange Commission (SEC or Commission) approved an NASD rule filing amending the Trading Activity Fee (TAF) to reduce the TAF rate for covered equity securities, reduce the maximum per trade charge on covered equity securities, and assess the TAF on corporate debt securities that, under the Trade Reporting and Compliance Engine (TRACE) rules, are defined as "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to Municipal Securities Rulemaking Board (MSRB) reporting requirements.1 NASD will implement these changes as follows: (1) the TAF rate reduction and the reduction on the maximum per trade charge on covered equity securities will be effective November 1, 2004; and (2) the TAF will be assessed on "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to MSRB reporting requirements effective April 1, 2005. NASD is delaying the effective date for debt securities until April 1 to allow member firms sufficient time to make programming changes to reflect the addition of two new categories of covered securities.

      In this Notice, NASD is providing additional guidance with respect to certain equity security transactions and is seeking information from member firms concerning interpretive issues with respect to the operational aspects of applying the TAF to debt securities. NASD requests that members' interpretive questions be submitted in writing to NASD by no later than January 1, 2005 so that NASD can provide the necessary guidance to ensure members are able to program their systems for debt securities by the April 1, 2005 effective date.

      Included with the Notice is Attachment A, the text of the amendments to Schedule A to the NASD By-Laws and Attachment B, the revised form indicating the new equity rates.

      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 (240) 728-8071.

      Background and Discussion

      On December 29, 2003, NASD filed with the Commission a proposed rule change to adjust the TAF rate for covered equity securities, reduce the maximum per trade charge on covered equity securities, and assess the TAF on corporate debt securities that, under the TRACE rules, are defined as "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and on municipal securities subject to MSRB reporting requirements. The proposed rule change was published for notice and comment in the Federal Register on January 28, 2004.2 On May 19, 2004, NASD filed with the Commission Amendment No. 1 and, at the same time, responded to comments submitted on the proposal. On September 30, 2004, NASD responded to further comments. The SEC approved the proposed rule change on October 1, 2004.

      NASD is proceeding with its commitment to ensure that its new member regulatory structure, as approved by the SEC,3 remains revenue neutral to NASD and better aligns NASD's regulatory fees with its functions, efforts, and costs. As stated in the NASD By-Laws, NASD will analyze rates, volumes, and regulatory responsibilities periodically to sustain adequate funding levels for its member regulatory programs.4 Further, as part of a three-year phase-in plan included in the originally proposed pricing structure, NASD intends to reduce the revenue from the collection of the TAF by approximately 50 percent over the three-year period, offset by an increase in the Personnel Assessment. Thus, with this rule change, NASD is reducing the TAF rate on covered equity securities from the current rate of $0.10 per 1,000 shares to $0.075 per 1,000 shares.5 In addition, the maximum charge per trade under the TAF is being reduced from the current cap of $10 per trade (based on 100,000 shares) to $3.75 per trade (based on 50,000 shares).

      Further, in response to previous comments from a number of members and other self-regulatory organizations about the scope of the TAF, NASD committed to analyzing whether debt transactions should be included under the TAF. NASD has reviewed reported volumes for TRACE-eligible securities and municipal securities in conjunction with NASD's current regulatory costs associated with the oversight of these securities. Based upon this review, NASD is assessing the TAF on TRACE-eligible securities and municipal securities at a rate of $0.00075 per bond, with a maximum assessment of $0.75 per trade (based on 1,000 bonds).

      Implementation Date

      NASD implemented the TAF rate reduction and the reduction on the maximum per trade charge on covered equity securities on November 1, 2004. In addition, NASD will begin assessing the TAF on "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to MSRB reporting beginning on April 1, 2005. NASD is designating an effective date six months after SEC approval to allow member firms sufficient time to make programming changes to reflect the addition of two new categories of covered securities.

      Guidance Regarding Certain Equity Transactions

      NASD assesses the TAF on its members through clearing and self-clearing firms. As NASD stated in Notice to Members 02-75, the TAF is not assessed on transactions for non-member broker-dealers that clear through an NASD member unless that NASD member clearing firm is acting as executing broker in the transaction. NASD further stated in Notice to Members 03-30 that NASD would consider a clearing firm to be acting as an executing broker if its correspondents utilized the clearing firm's order delivery system to send and execute orders under the clearing firm's MPID. NASD has received numerous questions concerning the application of this interpretation, particularly when the non-member broker-dealer does not use the clearing firm's system to route the order to another market center for execution. To further clarify, NASD considers the NASD member clearing firm to be the executing broker in any transaction where its non-member broker-dealer correspondent is only able to effect the trade by virtue of its clearing firm's membership with the applicable market center. For example, trades reported to ACT generally must be submitted to ACT by an NASD member. Therefore, the non-member correspondent would not be able to effect trades required to be reported to ACT without the use of the clearing firm's MPID that is granted to the clearing firm based on its NASD membership. Further, because the TAF is assessed on all covered securities transactions wherever executed, this interpretation also applies to similarly structured transactions effected on a national securities exchange.

      Solicitation of Interpretive Questions Relating to Assessing the TAF on Debt

      NASD encourages all interested parties to submit interpretive questions relating to the operational aspects of assessing the TAF on debt securities. Members have stated that there are certain operational issues that must be addressed with respect to assessing the TAF on debt securities prior to programming. While the TAF will be applied to debt in generally the same manner as covered equity securities, NASD recognizes that there may be certain issues unique to debt. To ensure all potential questions regarding differences in the application of the TAF between debt and equity securities are adequately addressed, NASD is seeking to receive a comprehensive list of all such issues from industry participants. Questions must be received by NASD by January 1, 2005. Members and other interested parties can submit their questions using the following methods:

      • Mailing the questions in hard copy to the address below; or


      • E-mailing the questions to pubcom@nasd.com.
      To help NASD process and review the questions more efficiently, persons submitting questions should use only one method. Questions sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, DC 20006-1500

      NASD staff will compile a list of those questions it believes will assist industry participants in complying with the amendments and publish these questions and answers in a subsequent Notice to Members.


      1 Securities Exchange Act Rel. No. 50485 (Oct. 1, 2004), 69 FR 60445 (Oct. 8, 2004) (File No. SR-NASD-2003-201) (Order of Approval).

      2 Securities Exchange Act Rel. No. 49114 (Jan. 22, 2004), 69 FR 4194 (Jan. 28, 2004) (Notice of Filing of Proposed Rule Change).

      3 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).

      4 Specifically, NASD stated in the text of the TAF rule that it will "periodically review these revenues in conjunction with these costs to determine the applicable rate." NASD By-Laws, Schedule A, Section 1(a).

      5 NASD also will seek to reduce the TAF rate in 2005, if appropriate, after analyzing all relevant factors.

      6 See question 6 in Notice to Members 02-75.

      7 See question 3 in Notice to Members 03-30.


      ATTACHMENT A

      Text of Rule Change

      New language is underlined; deleted language is in brackets.

      * * * * * * * * * *


      Schedule A to NASD By-Laws

      * * * * * * * * * *

      Section 1 — Member Regulatory Fees

      (a) No Change.
      (b) Each member shall be assessed a Trading Activity Fee for the sale of covered securities.
      (1) Covered Securities. For purposes of the rule, covered securities shall mean:

      (A) All exchange registered securities wherever executed ([other than bonds, debentures, and other evidence of indebtedness]except debt securities that are not TRACE-eligible securities);
      (B) All other equity securities traded otherwise than on an exchange; [and]
      (C) All security futures wherever executed[.];
      (D) All "TRACE-eligible securities" wherever executed, provided that the transaction also is a "reportable TRACE transaction," as these terms are defined in Rule 6210; and
      (E) All municipal securities subject to MSRB reporting requirements.
      (2) Transactions exempt from the fee. The following shall be exempt from the Trading Activity Fee:

      (A) No Change.
      (B) Transactions by an issuer not involving any public offering within the meaning of Section 4(2) of the Securities Act of 1933 (except any "reportable TRACE transaction").
      (C) through (I) No Change.
      (J) Transactions in security futures held in futures accounts; [and]
      (K) Transactions in exchange listed options effected by a member when NASD is not the designated options examining authority for that member[.]; and
      (L) Proprietary transactions in TRACE-eligible securities by a firm that is a member of both NASD and a national securities exchange and that are effected in the firm's capacity as an exchange specialist or exchange market maker.
      NASD may exempt other securities and transactions as it deems appropriate.
      (3) Fee Rates*

      (A) through (C) No Change.
      (D) Each member shall pay to NASD a fee per bond for each sale of a covered TRACE-eligible security and/or municipal security.
      * Trading Activity Fee rates are as follows: Each member shall pay to NASD [$0.0001]$0.000075 per share for each sale of a covered equity security, with a maximum charge of [$10]$3.75 per trade; $0.002 per contract for each sale of an option; [and] $0.04 per contract for each round turn transaction of a security future; and $.00075 per bond for each sale of a covered TRACE-eligible and/or municipal security, with a maximum charge of $0.75 per trade. In addition, if the execution price for a covered security is less than the Trading Activity Fee rate ([$0.0001]$0.000075 for covered equity securities, $0.002 for covered option contracts, or $0.04 for a security future) on a per share, per contract, or round turn transaction basis, then no fee will be assessed.
      (4) Reporting of Transactions. Members shall report to NASD the aggregate share, bond, contract, and/or round turn volume of sales of covered securities in a manner as prescribed by NASD from time to time.
      (c) through (d) No Change.


    • 04-83 NASD Requests Comment on Whether to Propose New Rule That Would Address Conflicts of Interest When Members Provide Fairness Opinions in Corporate Control Transactions (Comment Period Expired January 10, 2005)

      View PDF File

      REQUEST FOR COMMENT

      Fairness Opinions Issued by Members

      Comment Period Expires: January 10, 2005

      Note: The comment period was extended to February 1, 2005.

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management

      Fairness Opinions
      Investment Banks
      Mergers and Acquisitions
      Proxy Statements

      Executive Summary

      NASD is requesting comment on whether it should propose a new rule that would address procedures, disclosure requirements, and conflicts of interest when members provide fairness opinions in corporate control transactions. A fairness opinion addresses the fairness, from a financial point of view, of the consideration involved in a transaction. Investment banks typically provide fairness opinions in corporate control transactions, including mergers and acquisitions, the disposition or divestiture of material assets, divisions or subsidiaries, and buybacks of outstanding securities ("transactions"). The scope of the investment bank's involvement typically is set out in an engagement letter between the bank and the company.

      Investment banks that render fairness opinions may be influenced by whether the company's management supports the transaction. In other words, the investment bank may find that the transaction is fair from a financial viewpoint if the transaction is favored by the company's management, and, alternatively, opine that the financial terms are not fair if management opposes the transaction. This conflict may be especially strong when a transaction that is supported by management is also one in which the investment bank acted as the financial advisor to the company in recommending or structuring the transaction and/or where the investment bank will receive financial advisory fees upon successful completion of the transaction.

      NASD is considering whether to propose a new rule that would require members to: (1) disclose in any fairness opinion appearing in any proxy statement any significant conflicts of interest, including, if applicable, that the member has served as an advisor on the transaction in question, and the nature of compensation that the member will receive upon the successful completion of the transaction; and (2) require specific procedures that members must follow to identify and disclose potential conflicts of interest in rendering fairness opinions.

      Questions/Further Information

      Questions concerning this Notice should be directed to Joseph E. Price, Vice President, Corporate Financing, at (240) 386-4623; or Gary L. Goldsholle, Associate Vice President and Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8104.

      Action Requested

      NASD encourages all interested parties to comment on the proposed rule. Comments must be received by January 10, 2004. Members and other interested parties can submit their comments using the following methods:

      • mailing in written comments; or


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

      Comments sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, DC 20006-1500

      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) and by the NASD Board, and then must be approved by the SEC, following publication for public comment in the Federal Register.2

      Background and Discussion

      Although fairness opinions are not required by any statute or regulation, they have become a regular feature of corporate control transactions since 1985, when the Delaware Supreme Court found that a corporate board breached its fiduciary duty of care by approving a merger without adequate information on the transaction, including information on the value of the company and the fairness of the offering price.3

      Fairness opinions assist directors in fulfilling their fiduciary obligations. Under the business judgment rule, a corporate board of directors is protected from liability to a company's shareholders for decisions made in good faith, in an informed manner and on a rational basis. A number of courts have held that directors can fulfill their fiduciary duty of care by relying in good faith on fairness opinions.4 Fairness opinions typically provide that the opinion is for the use and benefit of the board of directors, but the opinions are disclosed in various SEC forms and investors often refer to them.5

      The SEC's proxy rules require that when a company's board of directors obtains a fairness opinion that is referred to in the proxy statement, the opinion must be fairly summarized and describe:

      • the procedures followed;


      • findings and recommendations;


      • bases for and methods of arriving at such findings and recommendations;


      • any instruction received from the subject company concerning the investigation; and


      • any limitation imposed by the subject company on the scope of the investigation.6

      Fairness opinions typically disclose that in preparing the opinion, the investment bank has assumed and relied on the accuracy and completeness of all information made available to the investment bank by the company and the investment bank has not assumed any responsibility to independently verify such information or undertaken an independent appraisal of the assets or liabilities of the company.

      Notwithstanding the proxy statement disclosure requirements, NASD is concerned that these disclosures may not sufficiently inform investors about the subjective nature of some opinions and their potential biases.

      In addition, the multiplicity of valuation methodologies employed, the sensitivity of results to small changes in the underlying assumptions, and a perceived tendency to make judgment calls that support the company managers' preferred outcome have been the subject of criticism.7

      Finally, when the transaction will result in one group of shareholders, a Board member, or employee receiving a benefit or payout that is materially different than that received by the unaffiliated shareholders, this result may create biases in favor of the transaction if the people receiving the benefit were involved in hiring the investment bank or are in the position to direct future business to the investment bank.

      NASD requests comment on the best way to improve the processes by which investment banks render fairness opinions and manage the inherent conflicts.

      In particular, NASD requests comment on whether it should propose a new rule to regulate the identification and disclosure of conflicts by members that provide fairness opinions in corporate control transactions. Such a rule could require a member to provide in any fairness opinion that will be included in a proxy statement a clear and complete description of any significant conflict of interest by the member, including, if applicable, that the member has served as an advisor on the transaction in question and the nature of compensation that the member will receive upon the successful completion of the transaction (including any variance or contingency in the fee charged for the fairness opinion). Such a rule also could require a member to disclose the extent to which the firm relied on key information supplied by a company or its management, or whether it independently verified certain information.

      In addition, the new rule could set forth specific procedures that members must follow to guard against conflicts of interest in rendering fairness opinions. Such procedures also could address the substantive factors used by members in reaching a fairness opinion. These procedures could address:

      • the process by which fairness opinions are approved by a firm, including whether the firm uses a fairness committee, and, if so, the selection of personnel for the fairness committee, the level of experience of such persons, procedures designed to provide balanced review, and whether steps have been taken to require review by persons whose compensation is not directly related to the underlying transaction of the fairness opinion;


      • the process to determine whether the valuation analyses used are appropriate for the type of transaction and the type of companies that propose to participate in the transaction; and


      • the process to evaluate the degree to which the amount and nature of the compensation from the transaction underlying the fairness opinion benefits any individual officers, directors or employees, or class of such persons, relative to the benefits to shareholders of the company, is a factor in reaching a fairness determination.

      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. 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 See Smith v. Van Gorkum, 488 A. 2d 858 (Del. 1985). However, neither the Van Gorkum court nor subsequent Delaware case law requires a corporation's board to procure a fairness opinion in connection with its duty to consider necessary information, including valuation, pertaining to a corporate control transaction.

      4 See, e.g., Treadway Cos. v. Care Corp., 638 F.2d 357 (2d Cir. 1980).

      5 SEC Rule 13e-3 requires the issuer or affiliate engaging in the going-private transactions to state whether it believes the transaction is fair to the unaffiliated security holders and to disclose any fairness opinion prepared by an investment bank. See also Item 14(b)(6) of SEC Schedule 14A , Item 4(b) of SEC Form S-4, and Item 1015 of SEC Regulation M-A.

      6 Item 1015(b)(6) of SEC Regulation M-A.

      7 See, e.g., David Henry, A Fair Deal — But For Whom?, Business Week Online, Nov. 24, 2003; Elson, Rosenbloom and Chapman, Fairness Opinions — Can They be Made Useful?, 35 Securities Regulation & Law 46, Nov. 24, 2003, at p. 1984.

    • 04-82 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 Districts 2 through 9, and in District 11. 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 2008,1 and the newly elected District Nominating Committee members will serve until January 2006.

      In District 1 (San Francisco) and District 10 (New York), an additional candidate has satisfied the requirements of Article VIII of the By-Laws of NASD Regulation to contest the District Committee election. The outcome of these contested elections will be announced in a Notice to Members issued in January 2005.

      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 e-mail 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 — 2005 Incoming Members

      District 1

      Elisabeth P. Owens, Regional Director, West Region

      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

      To Be Announced

      District 1 Nominating Committee Incoming Members

      Robert S. Basso National Financial Services, LLC San Francisco, CA
      L. Robert McKulla Wachovia Securities, Inc. 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

      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

      Kenneth R. Hyman Partnervest Securities, Inc. Santa Barbara, CA
      Ismael Manzanares, Jr.
      (1-Year Term)
      Foresters Equity Securities, Inc. San Diego, CA
      Bryan R. Plank Merrill Lynch San Diego, CA
      Valorie Seyfert CUSO Financial Services, L.P. San Diego, CA

      District 2 Nominating Committee Incoming Members

      James E. Biddle The Securities Center Incorporated Chula Vista, CA
      Terry L. Chase Wachovia Securities, Inc. Pasadena, CA
      Richard B. Gunter Wedbush Morgan Securities Los Angeles, CA
      Steven K. McGinnis
      Irvine, CA
      Joel H. Ravitz Quincy Cass Associates Los Angeles, CA

      District 3

      Joseph M. McCarthy, District Director James G. Dawson, District Director
      370 17th Street, Suite 2900 Two Union Square, 601 Union Street
      Denver, CO 80202-5629 Suite 1616, Seattle, WA 98101-2327
      (303) 446-3100 (206) 624-0790



      Arizona, Colorado, New Mexico, Utah, and Wyoming Alaska, Idaho, Montana, Oregon, and Washington

      District 3 Committee Incoming Members

      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 Incoming Members

      Gregory R. Anderson TIAA-CREF Individual & Institutional Services, LLC 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 RBC Dain Rauscher Bellevue, WA
      Kathryn A. Supko Northwestern Mutual Investment Services, LLC Boise, ID

      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

      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 Incoming Members

      Frank H. Kirk Wachovia Securities LLC Kansas City, MO
      Timothy J. Lyle Cambridge Investment Research Fairfield, IA
      Jeffrey A. Schuh Residential Funding Securities Corp. Minneapolis, MN
      James H. Warner The Warner Group Sioux City, IA
      Pamela R. Ziermann Dougherty & Company LLC Minneapolis, MN

      District 5

      Warren A. Butler, Jr., Regional Director, South Region

      1100 Poydras Street, Energy Centre, Suite 850, New Orleans, LA 70163-0802

      (504) 522-6527


      Alabama, Arkansas, Louisiana, Mississippi, Oklahoma, and Tennessee


      District 5 Committee Incoming Members

      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 Incoming Members

      John J. Dardis Jack Dardis & Associates, Ltd. Metairie, LA
      David A. Knight Stephens, Inc. Little Rock, AR
      LeRoy H. Paris, II Invest Linc Securities, Inc. Jackson, MS
      Tom R. Steele Equitable Advisors, Inc. Nashville, TN
      David W. Wiley, III Wiley Bros., Aintree Capital, LLC Nashville, TN

      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

      Bryan T. Emerson Starlight Investments, LLC Houston, TX
      Michael A. Pagano 1st Global Capital Corporation Dallas, TX
      William H. Lowell Lowell & Co., Inc. Lubbock, TX

      District 6 Nominating Committee Incoming Members

      Christopher R. Allison M.E. Allison & Co., Inc. San Antonio, TX
      Sennett Kirk, III Kirk Securities Corporation Denton, 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

      District 7

      Daniel J. Stefak, District Director

      One Securities Centre, Suite 500, 3490 Piedmont Road, NE, Atlanta, GA 30305

      (404) 239-6100


      Florida, Georgia, North Carolina, South Carolina, Puerto Rico, the Canal Zone, and the Virgin Islands


      District 7 Committee Incoming Members

      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 Incoming Members

      Jeffrey P. Adams Balentine & Company Atlanta, GA
      Richard G. Averitt, III Raymond James Financial Services, Inc. St. Petersburg, FL
      Richard V. McGalliard Wachovia Securities, Inc. Atlanta, GA
      Kenneth W. McGrath Popular Securities, Inc. Hato Rey, Puerto Rico
      Robert A. Young Young, Stovall & Company Miami, FL

      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


      District 8 Committee Incoming Members

      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 Incoming Members

      Bernard A. Breton Carillon Investments, Inc. Cincinnati, OH
      William K. Curtis M & I Brokerage Service, Inc. Milwaukee, WI
      Carol P. Foley Podesta & Company Chicago, IL
      Gregory Goelzer Goelzer Investment Management Indianapolis, IN
      Bruce J. Young Mesirow Financial, Inc. Chicago, IL

      District 9

      Gary K. Liebowitz, District Director
      581 Main Street, 7th Floor
      Woodbridge, NJ 07095
      (732) 596-2000
      John P. Nocella, District Director
      Eleven Penn Center, 1835 Market Street
      19th Floor, Philadelphia, PA 19103
      (215) 665-1180



      New Jersey and New York (except for the counties of Nassau and Suffolk, and the five boroughs of New York City) Delaware, the District of Columbia, Maryland, Pennsylvania, Virginia, and West Virginia

      District 9 Committee Incoming Members

      Scott L. Fagin The Jeffrey Matthews Financial Group, L.L.C. Millburn, NJ
      Rebecca L. Kohler American Express Financial Advisors Inc. Roanoke, VA
      Jerome J. Murphy
      (1-Year Term)
      Janney Montgomery Scott LLC Philadelphia, PA
      Harold N. Peremel
      (2-Year Term)
      Peremel & Co., Inc. Baltimore, MD
      Dorothy G. Sanders Fred Alger & Company, Incorporated Jersey City, NJ

      District 9 Nominating Committee Incoming 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

      Hans Reich, Regional Director, New York Region

      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

      To Be Announced

      District 10 Nominating Committee Incoming Members

      William Behrens Northeast Securities, Inc. New York, NY
      Jennifer A. Connors ITG Inc. New York, NY
      Ruth S. Goodstein UBS Financial Services, Inc. New York, NY
      Mark Ronda Oppenheimer & Co., Inc. New York, NY
      Charles V. Senatore Fidelity Brokerage Services, LLC 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

      Frank L. Chandler Boston Capital Services, Inc. Boston, MA
      Joseph Gritzer USI Securities, Inc. Glastonbury, CT
      Moira Lowe Tower Square Securities, Inc. Hartford, CT
      Wilson G. Saville
      (1-Year Term)
      Barrett & Company Providence, RI

      District 11 Nominating Committee Incoming 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
      Thomas J. Horack John Hancock Life Insurance Company Boston, MA
      Gregory D. Teese Equity Services, Inc. Montpelier, VT

    • 04-81 SEC Approves New NASD Qualification Requirements for Supervisors of Research Analysts

      View PDF File

      GUIDANCE

      Research Analysts and Research Reports

      Compliance Date: No Later Than August 2, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Executive Representatives
      Legal & Compliance
      Registered Representatives
      Registration
      Research
      Senior Management
      Training

      Qualification Examinations
      Registration
      Research Reports
      Rule 1050
      Supervision

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved a new NASD rule that requires supervisors of equity research analysts to pass either the Series 87 or the New York Stock Exchange (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. Members may apply for registration Research Principal (RP) through Web CRD beginning on April 4, 2005, and individuals must satisfy the qualification requirements by August 2, 2005. While the Series 16 and Series 87 are currently available, due to system constraints, the Research Principal (RP) registration category will not be available until April 4, 2005. The new rule language is attached as Attachment A.

      Questions/Further Information

      Questions concerning this Notice may be directed to Philip Shaikun, Associate General Counsel, Regulatory Policy and Oversight, at (202) 728-8451; Joe McDonald, Associate Director, NASD Testing and Continuing Education Department, at (240) 386-5065; or Carole Hartzog, Senior Analyst, NASD Testing and Continuing Education Department, at (240) 386-4678.

      Background and Discussion

      NASD Rule 1050 requires all persons associated with a member who function as research analysts to be registered as such with NASD and pass a qualification examination. Those individuals required to be registered as research analysts must pass the Research Analyst Qualification Examination (Series 86/87) or qualify for an exemption. That examination consists of two parts: Analysis (Series 86) tests fundamental analysis and valuation of equity securities; and Regulatory Administration and Best Practices (Series 87) tests knowledge of applicable rules and regulations, including NASD Rule 2711, NYSE Rule 344, and SEC Regulation AC.

      For dual NASD/NYSE members, NASD currently permits either a Series 16 Supervisory Analyst or a Series 24 General Securities Principal to approve the content of research reports under the advertising rule (Rule 2210) and to review research reports for the applicable conflict of interest disclosures required by Rule 2711(h). If a dual member elects to have a Series 16 Supervisory Analyst approve the content of a research report, NASD requires a Series 24 General Securities Principal to supervise all other conduct of an individual who functions as a research analyst. NASD-only members are currently required to have a Series 24 General Securities Principal to both approve the content of research reports and supervise the conduct of research analysts. The General Securities Principal Qualification Examination Sales Supervisor Module (Series 23) is an acceptable alternative to the General Securities Principal Examination (Series 24).

      The SEC has now approved amendments to NASD Rule 1022 to require supervisors of equity research analysts to pass the Series 87 or the Series 16.

      Under the new rule NASD will permit dual NASD/NYSE members or NASD-only members to have the content of research approved by someone who has passed either (1) the Series 24 and the Series 87 or (2) the Series 16. If the member elects to have a Series 16 approve the content of research, then a Series 24 principal who has also passed either the Series 87 or the Series 16 must supervise the conduct of both the Series 16 Supervisory Analyst and the research analyst. Thus, the rule provides members with some flexibility in their supervisory structure for research analysts.

      NASD believes this rule will promote investor protection by ensuring that persons responsible for approving research reports and for providing general supervision of the conduct of research analysts have demonstrable knowledge of Rule 2711 and related analyst conflict of interest laws, rules and regulations. At the same time, the rule preserves the longstanding NASD requirement that a General Securities Principal be responsible for the general conduct of a registered person.

      All persons who supervise research analysts must satisfy these qualification requirements—there is no "grandfather" provision. However, NASD believes the compliance date of no later than August 2, 2005 provides adequate time for research supervisors to prepare for the examination and will avoid any disruption of the research desk.

      NASD does not intend to grant waivers of the Series 87.

      Registration Filing Requirements and Exam Fees

      Beginning April 4, 2005, members may submit through Web CRD© a Uniform Application for Securities Industry Registration or Transfer Form (Form U4) to register as a Research Principal (RP) any person who functions in such capacity. Those individuals will then have until August 2, 2005 to pass the requisite examinations—the Supervisory Analyst (Series 16) or the Regulatory Administration and Best Practices part of the Research Analyst Exam (Series 87) in addition to the Series 23 or 24. The exam fees for the Series 87 and Series 16 are $1001 and $200, respectively.

      Currently, the Series 87 can only be scheduled when requesting registration as a Research Analyst and an exam window opens for both the Series 86 and Series 87. Due to system constraints, refunds of the Series 86 exam fee will not be provided to research principals who request the Series before April 4, 2005. Due to system constraints, the Research Principal registration category will be available on Web CRD effective April 4, 2005, at which time:

      • Web CRD will accept requests for the Research Principal registration via page one of Form U4.

      • The Series 87 will be a stand-alone examination only for purposes of the Research Principal registration.

      • An NASD Supervisory Analyst registration category will be added to Web CRD (NASD-SA) for candidates who have passed the Series 16.

      Research Principals who have passed the General Securities Principal exam and Series 16 or Series 87 before April 4, 2005 and whose registrations are current will have to request the registration category RP on or after April 4, 2005, and before August 2, 2005, by submitting a page 1 to the Form U4 on Web CRD.

      Exam Content

      The Series 87 qualification exam—Regulatory Administration and Best Practices— consists of 50 multiple-choice questions that cover relevant federal and industry rules and regulations. Candidates are allowed 90 minutes to complete the examination. Since multiple forms of the examination will be administered, the passing score for the Series 87 will fluctuate moderately from examination to examination.

      The Series 16 consists of two parts: Regulatory Administration (Part I) and Securities Analysis (Part II). Part I consists of 50 multiple-choice questions that cover relevant NYSE rules, as well as the applicable provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. Candidates are allowed 90 minutes to complete this part. Part II consists of 50 multiple-choice questions that cover various topics pertaining to securities analysis, including accounting, economics, and fundamental and technical analysis, among others. Candidates are allowed 120 minutes to complete this part.

      With respect to both the Series 87 and Series 16 examinations, candidates will be given an informational breakdown of their performance on each of the sections, along with their overall score and grade at the completion of each exam session.

      A study outline has been prepared to assist member firms in preparing candidates for the Series 87 examination and is available at www.nasdr.com/analyst_guide.asp. The content outline for the Series 16 is available at www.nyse.com/pdfs/series16.pdf. Members may wish to use the study outline to structure or prepare training material, or develop lecture notes and seminar programs, and as a training aide for the candidates.

      The questions used in these examinations will be updated to reflect the most current interpretations of the rules and regulations on which they are based. Questions on new rules will be added to the pool of questions for these examinations within a reasonable time period of the effective dates of those rules. Questions on rescinded rules will be promptly deleted from the pool of questions. Candidates only will be asked questions pertaining to rules that are effective at the time they take the exam.

      These tests are administered as closed-book exams. Severe penalties, up to and including expulsion from the industry, are imposed on candidates who cheat on NASD administered examinations. The proctor will provide scratch paper and a basic electronic calculator to candidates. These items must be returned to the proctor at the end of the session.

      The Series 87 examination and Series 16 Supervisory Analyst examination are administered at conveniently located test centers operated by Pearson Vue and Prometric professional testing center networks. Appointments to take the examinations can be scheduled through either network:

      • Pearson Professional Centers: contact Pearson VUE's National Registration Center at 1-866-396-6273 (toll free) or 1-952-681-3873 (toll number), or go to www.pearsonvue.com/nasd for Web-based scheduling.

      • Prometric Testing Centers: contact Prometric's National Call Center at 1-800-578- 6273 (toll free), or go to www.prometric.com/nasd for Web-based scheduling.

      Compliance Date

      The registration and qualification requirements for supervisors of research analysts become effective on August 2, 2005. Any member firm whose Research Principal is not properly registered by that date will be in violation of NASD IM-1000-3 and Rule 1022(a)(5).


      Frequently Asked Questions

      1. I am currently registered as a General Securities Principal. To qualify as a Research Principal (RP), will I be able to request the Series 16 exam in lieu of the Series 87 exam even if I am employed by an NASD-only member firm?

      Yes. Because Web CRD will recognize the Series 16 as a valid examination effective April 4, 2005, you should wait until then to request both the Series 16 exam and the RP registration.
      2. Since the Series 87 is currently being administered, can I sit for it now and receive the RP approval on April 4, 2005?

      Yes. However, if you open a window to take the Series 87 before April 4, 2005, you will be charged exam fees for both the Series 86 and 87 (due to system constraints that will be resolved effective April 4, 2005) and cannot obtain approval as a Research Principal because this registration category will not be available on Web CRD until April 4, 2005. If you choose to take the Series 87 before April 4, 2005, you will have to submit a page one of the Form U4 on Web CRD to request the "RP" registration after that date. Note that refunds of the Series 86 exam fee will not be provided. Effective April 4, 2005, you may open a window to take the Series 87 only.
      3. If a General Securities Principal fails the Series 16 or the Series 87, will there be a waiting period before the test can be retaken?

      The usual policy regarding waiting periods for candidates retaking a failed exam will apply to the Series 16 and Series 87 as well as the Series 23 and 24. Typically, a candidate must wait 30 days before retaking a failed exam and 180 days after the third and all subsequent failures.
      4. What happens if I do not pass the Series 16 or Series 87 by August 2, 2005?

      Since there is no grace period to satisfy this requirement, you will have to cease functioning as a Research Principal. If your firm has no other registered Research Principal, it will have to cease issuing research reports.
      5. If an individual supervises fixed income or municipal securities research analysts, do these new qualification requirements apply?

      No. All supervisors of research analysts must be registered as principals in the category appropriate for their function. The new qualification requirements apply only to supervisors of equity research reports. Individuals who supervise fixed income analysts and approve fixed income research reports must have the Series 23 or 24 exam. Individuals who supervise municipal securities analysts and approve municipal securities research reports must have the Series 53 exam.

      1 The fee for the Series 87 examination will increase to $105 beginning January 1, 2005. See Notice to Members 04-73 (October 8, 2004).


      ATTACHMENT A

      1022. Categories of Principal Registration

      (a) General Securities Principal
      (1) through (4) No change.
      (5) A person registered solely as a General Securities Principal shall not be qualified to supervise the conduct of a "research analyst" as defined in Rule 1050, or a supervisory analyst qualified pursuant to Rule 344 of the New York Stock Exchange who approves research reports on equity securities as permitted by Rule 2210(b)(1), unless such principal has passed a Qualification Examination as specified by the Board of Governors.

    • 04-80 NASD Seeks Comment on Proposed Changes to the OATS Rules (Comment Period Expired January 20, 2005)

      View PDF File

      REQUEST FOR COMMENT

      Order Audit Trail System (OATS)

      Comment Period Expires: January 20, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading

      OATS

      Executive Summary

      NASD is issuing this Notice to Members to solicit comments from members and other interested parties on proposed changes to the OATS Rules (Rules 6950 through 6957). The OATS Rules 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 and traded on The Nasdaq Stock Market, Inc. (NASDAQ). NASD staff is seeking comment on three proposed changes to the OATS Rules, which would require members to record and report to OATS:

      • Order information relating to exchange-listed and OTC equity securities (OTC Bulletin Board (OTCBB) and Pink Sheets);

      • Enhanced information, including execution data, relating to orders routed to non-members or exchanges; and

      • Order information relating to proprietary orders generated during the course of market-making activities.

      NASD believes this additional information will enable NASD to create a more comprehensive and accurate order and transaction audit trail and significantly improve the effectiveness of NASD's automated surveillance for potential violations of NASD rules and the federal securities laws.

      Action Requested

      NASD encourages all interested parties to comment on these three proposals. Comments must be received by January 20, 2005. Members and interested persons can submit their comments using the following methods:

      • Mailing in Attachment A — Request for Comment Form — along with written comments;

      • Mailing comments in hard copy to the address below;

      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 the Request for Comment Form and one of the other methods listed above, he or she should indicate that in the submissions. The Request for Comment Form 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. 20006-1500

      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 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

      The OATS Rules 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 and traded on NASDAQ. OATS captures this order information reported by NASD members 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.

      Given a number of factors, including the fragmentation in the trading of securities over the past several years and the need to enhance NASD's automated surveillance program, NASD staff has identified several enhancements to the current OATS information that would enable it to create a more comprehensive and accurate order and transaction audit trail. These proposed changes would significantly enhance NASD's ability to surveil for potential violations of NASD rules and the federal securities laws. NASD staff believes that continued effective automated surveillance will be difficult to achieve without the proposed expansion of order information captured by OATS, as described herein.

      Therefore, NASD is soliciting comment on three proposed changes to the OATS Rules. The proposed changes would require members to record and report to OATS (1) order information relating to orders and transactions in exchange-listed and OTC equity securities; (2) enhanced information, including execution data, relating to orders routed to non-members or exchanges; and (3) order information relating to proprietary orders generated during the course of market-making.

      1. Proposed Changes to Expand OATS Requirements to Apply to Orders and Transactions in Exchange-Listed and OTC Equity Securities.

      Because OATS requirements do not apply to exchange-listed or OTC equity securities, NASD staff currently is unable to recreate on an automated basis an order and transaction audit trail for these securities and is therefore unable to conduct certain automated surveillance for exchange-listed and OTC equity securities comparable to the current automated surveillance program it has established for trading in Nasdaq securities. For example, expansion of the OATS requirements to exchange-listed and OTC equity securities would enhance NASD staff's ability to review and examine, on a more automated basis, for compliance with Limit Order Protection (IM-2110-2), the duty of best execution (Rule 2320), Short Sales (SEC Rule 10a-1), and the Limit Order Display Rule (SEC Rule 11Ac1-4), among others. As a result, NASD is soliciting comment on a proposal to extend the OATS requirements to order activity and transactions in these securities.

      Under the proposal, NASD members would be required to report to OATS order-related activities for exchange-listed securities, irrespective of whether the order is ultimately executed over-the-counter or on or through an exchange. Because it is sometimes unlikely that a member knows upon receipt of an order where the order will be executed, NASD members would need to report such information to OATS regardless of how the order is ultimately handled or where it is executed. As described in more detail below, if NASD does not have a complete picture of the trading by an NASD member, including executions on or through an exchange, potential violations may be missed. However, given that the NYSE has established its own Order Tracking System (OTS), NASD staff will work to coordinate any proposed requirements relating to NYSE securities with the OTS requirements to minimize the potential for duplicative reporting of order information. To the extent that other exchanges have established comparable order audit trail systems, NASD would endeavor to coordinate its proposed requirements with those exchanges as well.
      2. Proposed Changes to Enhance the OATS Information Reported for Orders Routed to Exchanges or Non-Members.

      Currently, members that route orders to non-members or exchanges for execution are not required to provide OATS information beyond the route to that non-member or exchange.3 As a result, NASD does not receive automated data for the portion of a member's trading activities that occurs on or through a non-member or exchange. NASD staff has determined that gaps can exist in its automated surveillance of member activities when NASD does not receive a complete picture of the member's order and trading activity. Accordingly, NASD is soliciting comment on a proposal to require members to record and report to OATS order events relating to orders routed to non-members or exchanges.

      In particular, NASD is soliciting comment on the scope of order-related information that members have access to with respect to orders they have routed to non-members and exchanges. To ensure that NASD can link and recreate the entire lifecycle of the order, NASD members would need to report to OATS order events relating to orders routed to non-members or exchanges, including, but not limited to, new order, subsequent routing and execution information. Such information would be necessary in conducting automated surveillance for member compliance with NASD rules and the federal securities laws, including Limit Order Protection. NASD seeks input on what information relating to the handling of a member's order by a non-member or exchange currently is accessible to the member and, as applicable, the burdens associated with obtaining and reporting additional information to OATS. In this context, NASD is sensitive to self-regulatory organization (SRO) jurisdictional issues and is not seeking information about conduct that is clearly outside its jurisdiction and within the jurisdiction of the routed exchange, such as specialist or floor broker activity.

      As permitted today under Rule 6955(c), members would be able to enter into reporting agent agreements with a non-member or exchange to report OATS information on the member's behalf. However, the member remains liable for the proper reporting and accuracy of data reported on the member's behalf by a reporting agent.
      3. Proposed Changes to Eliminate Current Exceptions for Market Makers.

      Members currently are not required to report to OATS proprietary orders generated during the course of market-making. Although certain information such as trade report information may be available for market making trades, NASD does not receive automated information on the entire lifecycle of a market-making proprietary order. For example, market-making proprietary orders that do not result in executions or are executed on exchanges or through non-members currently are not captured by or provided to NASD on an automated basis. This information can be particularly important where a proprietary order is routed in place of a pending customer order. Because members currently are not required to report this information to OATS, NASD staff does not always have a complete picture of a member's order and trading activities. NASD believes that this information pertaining to proprietary orders of market makers is critical for surveillance purposes, including reviews for compliance with the Limit Order Protection Rule, the Limit Order Display Rule, and Firm Quote Requirements (NASD Rule 3320 and SEC Rule 11Ac1-1(c)). NASD therefore is soliciting comment on a proposal that would require members to report to OATS information relating to proprietary orders generated during the course of market-making.

      1.   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.

      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.   NASD does receive OATS information for certain orders that are executed on an exchange, but it depends on whether the order is routed to the exchange for handling and execution or if the order is executed by the member and only trade reported to the exchange. Under the first scenario, the member would provide OATS information relating to the new order and the route of the order to an exchange, but would not provide OATS information regarding the ultimate execution of the order. With respect to an order that is executed by a member and then reported to an exchange, the member would be required to record and report to OATS new order and execution information. See The OATS Report December 2002 (OATS Reporting Responsibilities for Orders Routed to, or Executions Reported on, Other Securities Exchanges), available at www.nasd.com.


      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 January 20, 2005. Members and interested persons can submit their comments using the following methods:

      • Mailing in Attachment A — Request for Comment Form — along with written comments;

      • Mailing comments in hard copy to the address below;

      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 the Request for Comment Form and one of the other methods listed above, he or she should indicate that in the submissions. The Request for Comment Form 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. 20006-1500

      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.

      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.

      Proposed Changes to OATS Rules

      The staff requests input from members and other interested parties on any or all of the three proposed changes to the OATS Rules described in this Notice. In particular, the staff seeks comment on the technological implications and burdens of each of the proposals.

      Expansion of OATS to Exchange-Listed and OTC Equity Securities

      1.   Do you support the proposal that would require that members record and report OATS information for exchange-listed and OTC equity securities?

       Yes  No  See my attached written comments.
      2.   What are the technological implications and burdens associated with this proposal?
      3.   Is the data you record and maintain to comply with the NYSE's OTS requirements in a similar form as the data you maintain for NASD OATS purposes? What additional changes would be necessary to enable members to submit the NYSE OTS data to NASD OATS?

      Expansion of OATS to Orders Routed to Non-Members or Exchanges

      4.   Do you support the proposal that would require that members record and report OATS order events relating to orders routed to non-members or exchanges?

       Yes  No  See my attached written comments.
      5.   Describe the scope and type of order-related information that a member currently has access to when it has routed an order to a non-member or exchange. For example, if an order is routed to and then executed by a non-member, what execution information is provided to the member that routed the order? Does the member typically have knowledge of whether the order was further routed by the non-member or exchange, and if so, what level of detail is provided to the member?
      6.   What are the technological implications and burdens associated with this proposal, including requirements that potentially could expand the scope of information provided by non-members and exchanges to members that have routed orders to them?

      Expansion of OATS to Market Making Proprietary Orders

      7.   Do you support the proposal that would require that members record and report OATS information for OATS proprietary orders generated during the course of market-making?

       Yes  No  See my attached written comments.
      8.   What are the technological implications and burdens associated with this proposal?

      Implementation

      9.   NASD anticipates proposing a "phase-in" period for implementation of any of the proposals described herein to provide members with adequate time for necessary system and procedural modifications. What amount of time do you believe is adequate for implementation of the proposals?

      Contact Information

      Name:  ___________________________________________________________________________________________________________________________

      Firm:  ____________________________________________________________________________________________________________________________

      Address:  _________________________________________________________________________________________________________________________

      City/State/Zip:  _____________________________________________________________________________________________________________________

      Phone:  ___________________________________________________________________________________________________________________________

      E-mail:  ___________________________________________________________________________________________________________________________

      Are you:

       An NASD Member     
       An Investor    
       A Registered Representative.     
       Other:  _______________________________________________________________________________________________________________________

    • 04-79 SEC Approves New Chief Executive Officer Compliance Certification and Chief Compliance Officer Designation Requirements

      View PDF File

      INFORMATIONAL

      Annual Compliance Certification and Designation of Chief Compliance Officer

      Compliance Date: December 1, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Continuing Education
      Executive Representatives
      Legal & Compliance
      Registered Representatives
      Senior Management
      Training

      CCO
      CEO
      Certification
      Compliance
      Rule 3013
      Supervision

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved new NASD Rule 3013 and an 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 places 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 must 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 new rule language and interpretive material can be found in Attachment A.

      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

      NASD Rule 3013 is intended to bolster attention to members' compliance programs by requiring substantial and purposeful interaction between business and compliance officers throughout the firm. To that end, the rule requires each member to designate a CCO and further requires that the CEO certify annually that the member has in place processes to establish, maintain, review, modify, and test policies and procedures reasonably designed to achieve compliance with applicable NASD rules, MSRB rules, and federal securities laws and regulations.

      The certification language and additional guidance are set forth in Interpretive Material (IM) 3013. The certification includes not only a statement that the member has in place certain compliance processes, but also that the CEO has conducted one or more meetings with the CCO in the preceding 12 months to discuss the processes. The interpretive material explains that the mandated meetings between the CEO and CCO must include a discussion of the member's compliance efforts to date and identify and address significant compliance problems and plans for emerging business areas. NASD notes that for certain members, the size, nature, and complexity of their business may warrant more than one annual meeting between the CEO and CCO.

      The certification also includes a declaration that the CEO has consulted with the CCO and such other officers, employees, outside consultants, lawyers, and accountants, to the extent necessary to attest to the statements in the certification.

      The processes must be evidenced in a report that is provided to the member's board of directors and audit committee. The report must be produced prior to execution of the certification and be reviewed by the CEO, CCO, and any other officers the member deems necessary to make the certification. It should include the manner and frequency in which the processes are administered, as well as the identification of officers and supervisors who have responsibility for such administration. The report need not contain any conclusions resulting from the processes set forth therein. The report may be combined with any other compliance report or other similar report required by any other self-regulatory organization provided it meets certain requirements set forth in the interpretive material.

      The designated CCO may hold another position within the member, so long as that person can discharge the duties of the CCO in light of his or her other additional responsibilities. The interpretive material describes the obligations of the CCO with respect to a member's compliance scheme and the indispensable role the CCO must play to enable the CEO to make the certification.

      Finally, the interpretive material notes that supervisors with business line responsibility remain accountable for the discharge of a member's compliance policies and written supervisory procedures. The signatory to the certification is certifying only as to having processes in place to establish, maintain, review, test, and modify the member's written compliance and supervisory policies and procedures. It further states that the execution of the certification and any consultation rendered in connection with such certification does not by itself establish business line responsibility.

      Members must maintain the certification and report in their files for inspection, but do not need to send them to NASD.

      Compliance Date

      The rule becomes effective on December 1, 2004. Members therefore will be required to designate and identify to NASD on Schedule A of Form BD a principal to serve as CCO by that effective date. The CEO certification must be executed within one year after the effective date and annually thereafter.


      ATTACHMENT A

      3013. Annual Certification of Compliance and Supervisory Processes

      (a) Designation of Chief Compliance Officer

      Each member shall designate and specifically identify to NASD on Schedule A of Form BD a principal to serve as chief compliance officer.
      (b) Annual Certification

      Each member shall have its chief executive officer (or equivalent officer) certify annually, 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.

      IM-3013. Annual Compliance and Supervision Certification

      The NASD Board of Governors is issuing this interpretation to the requirement under Rule 3013(b), which requires that the member's chief executive officer (or equivalent officer) execute annually1 certification 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. The certification shall state the following:

      * * * * * * * * * *

      Annual Compliance and Supervision Certification

      The undersigned is the chief executive officer (or equivalent officer) of [name of member corporation/partnership/sole proprietorship] (the "Member"). As required by NASD Rule 3013(b), the undersigned makes the following certification:

      1. The Member has in place processes to:

      (a) establish, maintain and review policies and procedures reasonably designed to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws and regulations;
      (b) modify such policies and procedures as business, regulatory and legislative changes and events dictate; and
      (c) test the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with NASD rules, MSRB rules and federal securities laws and regulations.
      2. The undersigned chief executive officer (or equivalent officer) has conducted one or more meetings with the chief compliance officer in the preceding 12 months, the subject of which satisfy the obligations set forth in IM-3013.
      3. The Member's processes, with respect to paragraph 1 above, are evidenced in a report reviewed by the chief executive officer (or equivalent officer), chief compliance officer, and such other officers as the Member may deem necessary to make this certification, and submitted to the Member's board of directors and audit committee.
      4. The undersigned chief executive officer (or equivalent officer) has consulted with the chief compliance officer and other officers as applicable (referenced in paragraph 2 above) and such other employees, outside consultants, lawyers and accountants, to the extent deemed appropriate, in order to attest to the statements made in this certification.2
      * * * * * * * * * *

      It is critical that each NASD member understand the importance of employing comprehensive and effective compliance policies and written supervisory procedures. Compliance with applicable NASD rules, MSRB rules and federal securities laws and regulations is the foundation of ensuring investor protection and market integrity and is essential to the efficacy of self-regulation. Consequently, the certification requirement is intended to require processes by each member to establish, maintain, review, test and modify its compliance policies and written supervisory procedures in light of the nature of its businesses and the laws and rules that are applicable thereto, and to evidence such processes in a report reviewed by the chief executive officer (or equivalent officer) executing the certification.

      Included in this processes requirement is an obligation on the part of the member to conduct one or more meetings annually between the chief executive officer (or equivalent officer) and the chief compliance officer to: (1) discuss and review the matters that are the subject of the certification; (2) discuss and review the member's compliance efforts as of the date of such meetings; and (3) identify and address significant compliance problems and plans for emerging business areas.

      The periodic and content requirements for meetings between the chief executive officer (or equivalent officer) and the chief compliance officer, as well as the pertinent requirements of paragraphs 3 and 4 of the certification, are intended to indicate the unique and integral role of the chief compliance officer both in the discharge of certain compliance processes and reporting requirements that are the subject matter of the certification and in providing a reliable basis upon which the chief executive officer can execute the certification. The chief compliance officer is the primary advisor to the member on its overall compliance scheme and the particularized rules, policies and procedures that the member adopts. This is because the chief compliance officer should have an expertise in the process of (1) gaining an understanding of the products, services or line functions that need to be the subject of written compliance policies and written supervisory procedures; (2) identifying the relevant rules, regulations, laws and standards of conduct pertaining to such products, services or line functions based on experience and/or consultation with those persons who have a technical expertise in such areas of the member's business; (3) developing, or advising other business persons charged with the obligation to develop, policies and procedures that are reasonably designed to achieve compliance with those relevant rules, regulations, laws and standards of conduct; (4) evidencing the supervision by the line managers who are responsible for the execution of compliance policies; and (5) developing programs to test compliance with the member's policies and procedures.

      It is that expertise in the process of compliance that makes the chief compliance officer an indispensable party to enable the chief executive officer to reach the conclusions stated in the certification. Consequently, any certification made by a chief executive officer under circumstances where the chief compliance officer has concluded, after consultation, that there is an inadequate basis for making such certification would be, without limitation, conduct inconsistent with the observance of the high standards of commercial honor and the just and equitable principles of trade — a violation of Rule 2110. Beyond the certification requirement, it is the intention of both Rule 3013 and this Interpretive Material to foster regular and significant interaction between senior management and the chief compliance officer regarding the member's comprehensive compliance program.

      The chief compliance officer and other compliance officers that report to the chief compliance officer (as described in the sentence that immediately follows) shall perform the compliance functions contemplated by this Interpretive Material and paragraphs 3 and 4 of the certification. Nothing in this Interpretive Material is intended to limit or discourage the participation of other employees both within and without the member's compliance department in any aspect of the member's compliance programs or processes, including those matters discussed in this Interpretive Material. However, it is understood that the chief compliance officer and, where applicable, the most senior compliance officers having primary compliance department responsibility for each of the member's business segments, will retain responsibility for the compliance functions contemplated by this Interpretive Material and paragraphs 3 and 4 of the certification.

      As may be necessary to render their views and advice, the chief compliance officer and the other officers referenced in paragraph 3 of the certification who consult with the chief executive officer (or equivalent officer) pursuant to paragraph 4, shall, in turn, consult with other employees, officers, outside consultants, lawyers and accountants.

      The NASD Board of Governors recognizes that supervisors with business line responsibility are accountable for the discharge of a member's compliance policies and written supervisory procedures. The signatory to the certification is certifying only as to having processes in place to establish, maintain, review, test and modify the member's written compliance and supervisory policies and procedures and the execution of this certification and any consultation rendered in connection with such certification does not by itself establish business line responsibility.

      The requirement to designate a chief compliance officer does not preclude such person from holding any other position within the member, including the position of chief executive officer, provided that such person can discharge the duties of a chief compliance officer in light of his or her other additional responsibilities. The requirement that a member's processes include providing the report to the board of directors and audit committee (required by paragraph 3 of the certification) does not apply to members that do not utilize these types of governing bodies and committees in the conduct of their business.3

      The report required in paragraph 3 of the certification must document the member's processes for establishing, maintaining, reviewing, testing and modifying compliance policies, that are reasonably designed to achieve compliance with applicable NASD rules, MSRB rules and federal securities laws and regulations, and any principal designated by the member may prepare the report. The report must be produced prior to execution of the certification and be reviewed by the chief executive officer (or equivalent officer), chief compliance officer and any other officers the member deems necessary to make the certification and must be provided to the member's board of directors and audit committee. The report should include the manner and frequency in which the processes are administered, as well as the identification of officers and supervisors who have responsibility for such administration. The report need not contain any conclusions produced as a result of following the processes set forth therein. The report may be combined with any other compliance report or other similar report required by any other self-regulatory organization provided that (1) such report is clearly titled in a manner indicating that it is responsive to the requirements of the certification and this Interpretive Material; (2) a member that submits a report for review in response to an NASD request must submit the report in its entirety; and (3) the member makes such report in a timely manner, i.e., annually.


      1 Members must ensure that each ensuing annual certification is effected no later than on the anniversary date of the previous year's certification.

      2 Members should understand that the requirements of Rule 3013 and this Interpretive Material represent, in part, a principle-based requirement to certify 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. Consequently, compliance with the periodic and content requirements in this Interpretive Material pertaining to meetings between the chief executive officer (or equivalent officer) and the chief compliance officer does not satisfy the full extent of these principle-based obligations that will vary with the facts and circumstances of a member's business activities and organizational structure. Moreover, NASD emphasizes the testing aspect of this principle-based requirement; an integral purpose of NASD rules pertaining to supervision is that members adopt policies and procedures that are effective as to both the scope of, and the achievement of compliance with, applicable NASD rules, MSRB rules and federal securities laws and regulations.

      3 As a part of their process, members must have the report reviewed by their governing bodies and committees that serve similar functions in lieu of a board of directors and audit committee.

    • 04-78 SEC Approves Amendments to Rule 1120 to Eliminate Exemptions from the Continuing Education Regulatory Element Requirements

      View PDF File

      GUIDANCE

      Guidance on the Trading Activity Fee

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations Managers
      Senior Management

      Section 1 of Schedule A to NASD By- Laws
      Trading Activity Fee



      Executive Summary

      On October 1, 2004, the Securities and Exchange Commission (SEC or Commission) approved an NASD rule filing amending the Trading Activity Fee (TAF) to reduce the TAF rate for covered equity securities, reduce the maximum per trade charge on covered equity securities, and assess the TAF on corporate debt securities that, under the Trade Reporting and Compliance Engine (TRACE) rules, are defined as "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to Municipal Securities Rulemaking Board (MSRB) reporting requirements.1 NASD will implement these changes as follows: (1) the TAF rate reduction and the reduction on the maximum per trade charge on covered equity securities will be effective November 1, 2004; and (2) the TAF will be assessed on "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to MSRB reporting requirements effective April 1, 2005. NASD is delaying the effective date for debt securities until April 1 to allow member firms sufficient time to make programming changes to reflect the addition of two new categories of covered securities.

      In this Notice, NASD is providing additional guidance with respect to certain equity security transactions and is seeking information from member firms concerning interpretive issues with respect to the operational aspects of applying the TAF to debt securities. NASD requests that members' interpretive questions be submitted in writing to NASD by no later than January 1, 2005 so that NASD can provide the necessary guidance to ensure members are able to program their systems for debt securities by the April 1, 2005 effective date.

      Included with the Notice is Attachment A, the text of the amendments to Schedule A to the NASD By-Laws and Attachment B, the revised form indicating the new equity rates.

      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 (240) 728-8071.

      Background and Discussion

      On December 29, 2003, NASD filed with the Commission a proposed rule change to adjust the TAF rate for covered equity securities, reduce the maximum per trade charge on covered equity securities, and assess the TAF on corporate debt securities that, under the TRACE rules, are defined as "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and on municipal securities subject to MSRB reporting requirements. The proposed rule change was published for notice and comment in the Federal Register on January 28, 2004.2 On May 19, 2004, NASD filed with the Commission Amendment No. 1 and, at the same time, responded to comments submitted on the proposal. On September 30, 2004, NASD responded to further comments. The SEC approved the proposed rule change on October 1, 2004.

      NASD is proceeding with its commitment to ensure that its new member regulatory structure, as approved by the SEC,3 remains revenue neutral to NASD and better aligns NASD's regulatory fees with its functions, efforts, and costs. As stated in the NASD By- Laws, NASD will analyze rates, volumes, and regulatory responsibilities periodically to sustain adequate funding levels for its member regulatory programs.4 Further, as part of a three-year phase-in plan included in the originally proposed pricing structure, NASD intends to reduce the revenue from the collection of the TAF by approximately 50 percent over the three-year period, offset by an increase in the Personnel Assessment. Thus, with this rule change, NASD is reducing the TAF rate on covered equity securities from the current rate of $0.10 per 1,000 shares to $0.075 per 1,000 shares.5 In addition, the maximum charge per trade under the TAF is being reduced from the current cap of $10 per trade (based on 100,000 shares) to $3.75 per trade (based on 50,000 shares).

      Further, in response to previous comments from a number of members and other selfregulatory organizations about the scope of the TAF, NASD committed to analyzing whether debt transactions should be included under the TAF. NASD has reviewed reported volumes for TRACE-eligible securities and municipal securities in conjunction with NASD's current regulatory costs associated with the oversight of these securities. Based upon this review, NASD is assessing the TAF on TRACE-eligible securities and municipal securities at a rate of $0.00075 per bond, with a maximum assessment of $0.75 per trade (based on 1,000 bonds).

      Implementation Date

      NASD implemented the TAF rate reduction and the reduction on the maximum per trade charge on covered equity securities on November 1, 2004. In addition, NASD will begin assessing the TAF on "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to MSRB reporting beginning on April 1, 2005. NASD is designating an effective date six months after SEC approval to allow member firms sufficient time to make programming changes to reflect the addition of two new categories of covered securities.

      Guidance Regarding Certain Equity Transactions

      NASD assesses the TAF on its members through clearing and self-clearing firms. As NASD stated in Notice to Members 02-75, the TAF is not assessed on transactions for non-member broker-dealers that clear through an NASD member unless that NASD member clearing firm is acting as executing broker in the transaction. NASD further stated in Notice to Members 03-30 that NASD would consider a clearing firm to be acting as an executing broker if its correspondents utilized the clearing firm's order delivery system to send and execute orders under the clearing firm's MPID. NASD has received numerous questions concerning the application of this interpretation, particularly when the non-member broker-dealer does not use the clearing firm's system to route the order to another market center for execution. To further clarify, NASD considers the NASD member clearing firm to be the executing broker in any transaction where its non-member broker-dealer correspondent is only able to effect the trade by virtue of its clearing firm's membership with the applicable market center. For example, trades reported to ACT generally must be submitted to ACT by an NASD member. Therefore, the non-member correspondent would not be able to effect trades required to be reported to ACT without the use of the clearing firm's MPID that is granted to the clearing firm based on its NASD membership. Further, because the TAF is assessed on all covered securities transactions wherever executed, this interpretation also applies to similarly structured transactions effected on a national securities exchange.

      Solicitation of Interpretive Questions Relating to Assessing the TAF on Debt

      NASD encourages all interested parties to submit interpretive questions relating to the operational aspects of assessing the TAF on debt securities. Members have stated that there are certain operational issues that must be addressed with respect to assessing the TAF on debt securities prior to programming. While the TAF will be applied to debt in generally the same manner as covered equity securities, NASD recognizes that there may be certain issues unique to debt. To ensure all potential questions regarding differences in the application of the TAF between debt and equity securities are adequately addressed, NASD is seeking to receive a comprehensive list of all such issues from industry participants. Questions must be received by NASD by January 1, 2005. Members and other interested parties can submit their questions using the following methods:

      • Mailing the questions in hard copy to the address below; or


      • E-mailing the questions to pubcom@nasd.com.
      To help NASD process and review the questions more efficiently, persons submitting questions should use only one method. Questions sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, DC 20006-1500

      NASD staff will compile a list of those questions it believes will assist industry participants in complying with the amendments and publish these questions and answers in a subsequent Notice to Members.



      1 Securities Exchange Act Rel. No. 50485 (Oct. 1, 2004), 69 FR 60445 (Oct. 8, 2004) (File No. SR-NASD-2003-201) (Order of Approval).

      2 Securities Exchange Act Rel. No. 49114 (Jan. 22, 2004), 69 FR 4194 (Jan. 28, 2004) (Notice of Filing of Proposed Rule Change).

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

      4 Specifically, NASD stated in the text of the TAF rule that it will "periodically review these revenues in conjunction with these costs to determine the applicable rate." NASD By-Laws, Schedule A, Section 1(a).

      5 NASD also will seek to reduce the TAF rate in 2005, if appropriate, after analyzing all relevant factors.

      6 See question 6 in Notice to Members 02-75.

      7 See question 3 in Notice to Members 03-30.


      ATTACHMENT A

      Text of Rule Change

      New language is underlined; deleted language is in brackets.

      * * * * *


      Schedule A to NASD By-Laws

      * * * * *


      Section 1-- Member Regulatory Fees

      (a) No Change.


      (b) Each member shall be assessed a Trading Activity Fee for the sale of covered securities.


      (1) Covered Securities. For purposes of the rule, covered securities shall mean:

      (A) All exchange registered securities wherever executed ([other than bonds, debentures, and other evidence of indebtedness] except debt securities that are not TRACE-eligible securities);
      (B) All other equity securities traded otherwise than on an exchange; [and]
      (C) All security futures wherever executed[.];
      (D) All "TRACE-eligible securities" wherever executed, provided that the transaction also is a "reportable TRACE transaction," as these terms are defined in Rule 6210; and
      (E) All municipal securities subject to MSRB reporting requirements.
      (2) Transactions exempt from the fee. The following shall be exempt from the Trading Activity Fee:
      (A) No Change.
      (B) Transactions by an issuer not involving any public offering within the meaning of Section 4(2) of the Securities Act of 1933 (except any "reportable TRACE transaction").
      (C) through (I) No Change.
      (J) Transactions in security futures held in futures accounts; [and]
      (K) Transactions in exchange listed options effected by a member when NASD is not the designated options examining authority for that member[.]; and
      (L) Proprietary transactions in TRACE-eligible securities by a firm that is a member of both NASD and a national securities exchange and that are effected in the firm's capacity as an exchange specialist or exchange market maker.
      NASD may exempt other securities and transactions as it deems appropriate.
      (3) Fee Rates* (A) through (C) No Change. (D) Each member shall pay to NASD a fee per bond for each sale of a covered TRACE-eligible security and/or municipal security. * Trading Activity Fee rates are as follows: Each member shall pay to NASD [$0.0001]$0.000075 per share for each sale of a covered equity security, with a maximum charge of [$10]$3.75 per trade; $0.002 per contract for each sale of an option; [and] $0.04 per contract for each round turn transaction of a security future; and $.00075 per bond for each sale of a covered TRACE-eligible and/or municipal security, with a maximum charge of $0.75 per trade. In addition, if the execution price for a covered security is less than the Trading Activity Fee rate ([$0.0001]$0.000075 for covered equity securities, $0.002 for covered option contracts, or $0.04 for a security future) on a per share, per contract, or round turn transaction basis, then no fee will be assessed.
      (4) Reporting of Transactions. Members shall report to NASD the aggregate share, bond, contract, and/or round turn volume of sales of covered securities in a manner as prescribed by NASD from time to time.
      (c) through (d) No Change.

    • 04-77 SEC Announces Approval of Amendment to NASD's Minor Rule Violation Plan (MRVP) to Include Failure to Timely Submit Amendments to Form U5

      View PDF file

      GUIDANCE

      Failure to Timely Submit Amendments to Form U5

      Effective Date: November 22, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management

      Article V, Section 3(a) of the NASD By-Laws

      Form U5 (Uniform Termination Notice for Securities Industry Registration)

      Interpretive Material 9216 (IM-9216)

      Minor Rule Violation Plan MRVP

      Executive Summary

      On September 24, 2004, the Securities and Exchange Commission (SEC) approved an amendment to IM-9216 (NASD's MRVP) to include the failure to timely submit amendments to Forms U5 (Uniform Termination Notices for Securities Industry Registration).1

      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 SEC 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.2 In 1993, pursuant to SEC Rule 19d-1(c), NASD established an MRVP, as set forth in NASD Rule 9216(b).3 In 2001, the SEC approved significant amendments to NASD's MRVP. 4 On September 24, 2004, the SEC approved an amendment to include in NASD's MRVP the failure to timely submit amendments to Forms U5, which is the subject of this Notice.5

      The purpose of the MRVP is to provide for a meaningful sanction for a 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, it means that a minor or technical violation of the rule may be appropriate for disposition under the MRVP. NASD retains the discretion to bring full disciplinary proceedings for the violation of any rule listed in the MRVP.

      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. 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. 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.6

      Failure to Timely Submit Amendments to Forms U5

      In July 2002, an NASD task force (the Public Information Review or PIR Task Force) initiated a comprehensive review of disciplinary and other information that NASD makes public. In Notice to Members 04-23 (March 2004), NASD requested comment from its members and other interested parties on two of the PIR Task Force's recommendations. One of these recommendations was to expand the coverage of NASD's MRVP to include the failure to amend the Form U5 in a timely manner. The recommendation was part of a multi-pronged effort to help ensure that members make required disclosures on all uniform registration forms in a timely manner.7

      Including the failure to timely submit amendments to the Form U5 in NASD's MRVP gives NASD the additional flexibility to resolve these violations as it has regarding the failure to timely submit amendments to the Form U4 (Uniform Application for Securities Industry Registration or Transfer) and Form BD (Uniform Application for Broker-Dealer Registration),8 and it gives NASD staff the ability to impose a meaningful sanction for violations that warrant more than a Letter of Caution but do not necessarily rise to a level meriting a full disciplinary proceeding. As with all violations included in NASD's MRVP, NASD staff will continue to determine on a case-by-case basis whether a particular violation merits disposition under its MRVP or warrants formal disciplinary action.


      1 See Exchange Act Rel. No. 50446 (Sept. 24, 2004), 69 F.R. 58568 (Sept. 30, 2004) (SR-NASD-2004-121).
      2 See Exchange Act Rel. No. 21013 (June 1, 1984), 49 F.R. 23828 (June 8, 1984).
      3 See Exchange Act Rel. No. 32076 (Mar. 31, 1993), 58 F.R. 18291 (Apr. 8, 1993); see also Notice to Members 93-42 (July 1993).
      4 See Exchange Act Rel. No. 44512 (July 3, 2001), 68 F.R. 36812 (July 13, 2001).
      5 See Exchange Act Rel. No. 50446 (Sept. 24, 2004), 69 F.R. 58568 (Sept. 30, 2004) (SR-NASD-2004-121). NASD also has proposed to add six additional rule violations to its MRVP. See SR-NASD-2004-025. Specifically, that proposal, which remains pending at the SEC, would add: (1) violation of the Intermarket Trading System (ITS) trade-through rule; (2) violation of the locked and crossed markets rule; (3) violation of the Trade Reporting and Compliance Engine (TRACE) system transaction reporting requirement; (4) violation of the Alternate Display Facility (ADF) transaction reporting requirement; (5) violation of the standards applicable to communications with the public; and (6) failure to provide or update firm contact information as required by NASD rules.
      6 See Notice to Members 04-19 (March 2004) (NASD Releases Minor Rule Violation Plan (MRVP) Guidelines), which provides interested parties with guidance concerning the application of NASD's MRVP to each of the rules under the Plan, as specified in NASD IM-9216. This guidance includes identifying the factors to be considered in determining whether to dispose of an action under the MRVP and discussing the appropriate levels for fines. NASD will update this guidance to reflect the addition to its MRVP of the failure to timely submit amendments to Forms U5.
      7 This effort includes the newly established late disclosure fee, which was another recommendation of the PIR Task Force. See Exchange Act Rel. No. 49224 (Feb. 11, 2004), 69 F.R. 7833 (Feb. 19, 2004) (File No. SR-NASD-2003-192). See also Notice to Members 04-09 (March 2004).
      8 More specifically, NASD's MRVP also includes: (1) failure to timely submit amendments to Form U4 (as required by Article V, Section 2(c) of the NASD By-Laws); and (2) failure to timely submit amendments to Form BD (as required by Article IV, Section 1(c) of the NASD By-Laws).

      ATTACHMENT A

      Below is the text of the proposed rule change. Additions are 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 the Association within the required time limits.

      —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 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 [U-4] 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, 6240, 6420, 6550, 6620, and 6720—Transaction reporting in equity, convertible debt, and high yield securities.

      —Rules 6130 and 6170—Transaction reporting to the Automated 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.

      —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.

      * * * * * * * * * *

    • 04-76 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 recommends 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. New rules or regulations, such as the Do-Not-Call Registry; major regulatory examination findings, such as those relating to day trading; ethics and professional conduct; and any new products or services the firm plans to offer should be considered as topics for Firm Element training.

      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 Ann M. Griffith, Associate Vice President, Testing and Continuing Education, at (240) 386-5051; or 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 (CE 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 organization (SRO) publications issued since the last Firm Element Advisory of September 2003.

      The Council recommends that firms use the Firm Element Advisory as part of their Firm Element Needs Analysis to identify training topics that are relevant to the firm, including training for supervisors. New rules or regulations, such as the Research Analyst Rules; major regulatory examination findings, such as those relating to bond sales practices; ethics and professional conduct; and any new products or services the firm plans to offer should be among the subjects considered as topics for Firm Element training.

      The CE Council provides a convenient way for firms to access the training resources listed next to each topic in the Firm Element Advisory via the CE Council Web site at www.securitiescep.com. By using the Search function on the site and entering the referenced document, it will be possible to review the content on the CE Web site. In addition to the Firm Element Advisory material, there are also two additional resources to 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 will assist in developing a Firm Element training plan. A tutorial on the CE Council Web site demonstrates how to use the Firm Element Organizer. The second potential Firm Element resource is the Regulatory Element Scenario Library, available at www.securitiescep.com>CEP Training Material. The Scenario Library is comprised of scenarios that were taken from the Regulatory Element Supervisor (S201) and General (S101) programs, and may be suitable for Firm Element training.

      For more information, log on to www.securitiescep.com, or call Ann M. Griffith, Associate Vice President, NASD Testing & Continuing Education, at (240) 386-5051; or Joe McDonald, Associate Director, NASD Testing & Continuing Education, at (240) 386-5065; or Roni Meikle, Director, Continuing Education, New York Stock Exchange, at (212) 656-2156.


      Alternative Investments

      Non-Conventional Investments

      Some alternative investments, such as asset-backed securities, distressed debt, and derivative products (collectively termed "non-conventional investments" (NCI)), often have complex terms and features that are not easily understood by investors. In selling NCIs, firms have obligations to: (1) conduct adequate due diligence to understand the features of the product; (2) perform a reasonable-basis suitability analysis; (3) perform a customer-specific suitability analysis in connection with any recommended transactions; (4) provide a balanced disclosure of both the risks and rewards associated with the particular product, especially when selling to retail investors; (5) implement appropriate internal controls; and (6) train registered persons regarding the features, risks, and suitability of these products. See NASD Notice to Members 03-71: NASD Reminds Members of Obligations When Selling Non-Conventional Investments (November 2003).


      Anti-Money Laundering

      Broker-Dealer Customer Identification Rule

      Anti-money laundering is an evolving topic, as regulators adopt new rules and regulations to carry out the mandates of the USA PATRIOT Act. On April 29, 2003, the Securities and Exchange Commission (SEC or Commission) and Department of the Treasury jointly issued the broker-dealer customer identification rule (CIP Rule). The rule requires broker-dealers to implement customer identification programs that contain the following elements: (1) procedures for verifying the identities of customers, (2) procedures for maintaining records of the verification process, (3) procedures for comparing customers with lists of known or suspected terrorists or terrorist organizations, and (4) procedures for 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 12, 2004, the SEC Division of Market Regulation staff issued a No-Action letter to the Securities Industry Association stating that the Division staff will not recommend enforcement action to the Commission under Rule 17a-8 if a broker-dealer relies on an investment adviser to perform customer identification procedures, prior to such adviser becoming subject to an Anti-Money Laundering Rule (AML Rule). Certain additional requirements and conditions in the CIP Rule must also be met, including that: (1) such reliance is reasonable under the circumstances; (2) the investment adviser is regulated by a Federal functional regulator (as defined in the CIP Rule); and (3) the investment adviser enters into a contract requiring it to certify annually to the broker-dealer 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. This letter will be withdrawn without further action on the earlier of: (1) the date upon which an AML Rule for advisers becomes effective, or (2) February 12, 2005. See SEC Division of Market Regulation: No-Action Letter to the Securities Industry Association, February 12, 2004. See also NASD's Anti-Money Laundering Web page at www.nasdr.com/money.asp; and the SEC's Spotlight On: Anti-Money Laundering Rules at www.sec.gov/spotlight/moneylaundering.htm. See also NYSE Information Memos 03-48, Rule 445 — Initial Anti-Money Laundering Audit, October 23, 2003, and 03-32, Customer Identification Programs for Broker-Dealers, July 14, 2003 at www.nyse.com>regulation>information memos.


      Bond Sales

      Sales Practice Obligations

      As the number of retail customers investing in bonds and bond funds grows, regulators are concerned that many investors may not fully appreciate the risks and costs associated with such products. It is the responsibility of firms to take appropriate steps to ensure that their registered representatives understand and inform their customers about the characteristics and risks as well as the rewards of the products they offer and recommend. Firms have the following obligations in connection with the sale of bonds and bonds funds:

      1. Understanding the terms, conditions, risks, and rewards of the bonds and bond funds they sell (performing a reasonable-basis suitability analysis);
      2. Making certain that a particular bond or bond fund is appropriate for a particular customer before recommending it to that customer (performing a customer-specific suitability analysis);
      3. Providing a balanced disclosure of the risks, costs, and rewards associated with a particular bond or bond fund, especially when selling to retail investors;
      4. Adequately training and supervising employees who sell bonds and bond funds; and
      5. Implementing adequate supervisory controls to reasonably ensure compliance with NASD and SEC sales practice rules in connection with bonds and bond funds.

      See NASD Notice to Members 04-30: NASD Reminds Firms of Sales Practice Obligations In The Sale of Bonds and Bond Funds (April 2004).

      Mark-Ups

      NASD recently levied $15 million in total fines against four firms for rule violations relating to trading in corporate high-yield bonds. All four firms were cited for charging excessive markups or markdowns, inadequate record keeping and supervision violations. Firms are reminded that they must sell all securities, including corporate high-yield debt, at fair prices. Markups and markdowns generally should not exceed five percent and, for most debt transactions, that figure should be lower.


      Business Continuity Plans

      On April 7, 2004, the SEC approved new rules pertaining to firms' emergency preparedness and business continuity planning. The rules require firms to, among other things, establish and maintain business continuity plans and, upon request, to provide summaries of such plans to their customers. The rules also require firms to designate two emergency contact persons and to provide this information to NASD or NYSE. NASD Rule 3510 became effective for clearing firms on August 11, 2004, and on September 10, 2004 for introducing firms. NASD Rule 3520 became effective for all firms on June 14, 2004. NYSE Rule 446 became effective August 5, 2004 for all members and member organizations. See NASD Notice to Members 04-37: SEC Approves Rules Requiring Members to Create Business Continuity Plans and Provide Emergency Contact Information (May 2004). See also NASD's Business Continuity Plan Web page at www.nasdr.com/business_continuity_planning.asp. See also NYSE Information Memo 04-24, Rule 446 — Business Continuity and Contingency Plans, May 3, 2004.


      Continuing Education

      NASD Rule 1120 and NYSE Rule 345A set forth the CE requirements for registered persons. The CE requirements consist of a Regulatory Element and a Firm Element. NASD provides members with e-mail notifications through the Web Central Registration Depository® (Web CRD®) when a person is both 90 days and 30 days away from the end of his or her period to complete the Regulatory Element program before going inactive. Web CRD also notifies members when a registered person at the firm becomes CE inactive. Receipt of the e-mail notifications had been optional, and some firms chose not to receive the notifications. On February 13, 2004, the SEC approved amendments to NASD Rule 1120 to require that each member designate and identify to NASD the individual(s) who will receive the Web CRD Continuing Education Regulatory Element e-mails. See NASD Notice to Members 04-22: SEC Approves Amendments to Rule 1120 (Continuing Education Requirements) Regarding Regulatory Element Contact Person (March 2004).

      The SEC has approved NASD and NYSE rule filings to eliminate all exemptions from the requirement to complete the Regulatory Element of the Continuing Education Program. The Securities Industry/Regulatory Council on Continuing Education unanimously agreed at its December 2003 meeting to recommend to the self-regulatory organizations (SROs) that they repeal the current exemption for industry members who, when the Continuing Education Program was adopted in 1995, had been registered for at least 10 years and who did not have a significant disciplinary action during that time ("grandfathered" persons) and registered persons who had "graduated" from the Regulatory Element by satisfying their tenth anniversary requirement before July 1998. The rule changes will become effective no later than April 4, 2005. The other SROs are also seeking approval of the same rule change from the SEC. See Securities Exchange Act Release Nos. 34-50404 (September 16, 2004) (NYSE Approval Order) and 50456 (September 27, 2004) (NASD Approval Order).


      Customer Account Transfers

      On March 12, 2004, the SEC approved amendments to NYSE Rule 412 (Customer Account Transfer Contracts) and its interpretation. An effective date of September 12, 2004 was established for full compliance with the amendments to allow member organizations sufficient time to develop and implement any necessary systems changes.

      Rule 412 prescribes procedures for transferring customer accounts between member organizations. The rule also generally requires use of the Automated Customer Account Transfer Service (ACATS) system for full account transfers, when both the delivering and receiving organizations are members of the National Securities Clearing Corporation (NSCC) which administers the ACATS system.

      The amendments:

      (1) Mandate use of the ACATS system for "partial" transfers, unless otherwise specifically requested and authorized by a customer;
      (2) Require the utilization of all automated functionalities available through the ACATS system in connection with both standard and partial transfers and
      (3) Clarify that electronic signatures are a potential means of customer authorization and clarify certain designated exceptions to transfer instructions.

      See NYSE Information Memo 04-20, Amendments to Rule 412 ("Customer Account Transfer Contracts") and Its Interpretation, April 8, 2004; and NYSE Interpretation Memo, 04-02, April 20, 2004. See also NASD Notice to Members 04-58: SEC Grants Accelerated Approval of Rule Change Relating to Transfers of Specifically Designated Customer Account Assets through the Automated Customer Account Transfer Service (ACATS) (August 2004).


      Data Retention

      On April 29, 2004, the SEC approved amendments to NASD rules to require members to record and report execution price and firm capacity as part of their Order Audit Trail SystemSM (OATSSM) Execution Reports. See NASD Notice to Members 04-48: SEC Approves Amendments to Rule 6954 Requiring Members to Record and Report Execution Price and Firm Capacity in OATS Execution Reports (June 2004). See also NYSE Information Memos 03-37, Order Tracking System Technical Specifications; Exchange Rules 132A, 132B and 132C, September 10, 2003 and 03-51, Clarification to Information Memo No. 03-18 re: Books and Records Requirements for Floor Brokers Who Conduct a Public Business – Exchange Rules 36, 123 and 440, November 10, 2003.


      Day Trading

      Day trading is the buying and selling of, or selling short and buying to cover, the same security on the same day. NASD recently levied $10 million in total fines against three firms for improperly extending credit in violation of Federal Reserve Board Regulation T, and, in numerous instances, allowing trades that avoided industry day trading margin requirements.

      Regulation T Section 220.8(a)(1) states that a broker-dealer may use a cash account to buy a security for a customer if: (1) there are sufficient funds in the account; or (2) the creditors accept in good faith the customer's agreement that the customer will promptly make full cash payment for the security or asset before selling it and does not contemplate selling it prior to making such payment.

      Federal Reserve Board interpretations make clear that a customer who sells a security in a cash account on trade date to pay for another security purchased on that day does not have "sufficient funds in the account" on trade date for purposes of Regulation T Section 220.8(a)(1)(i). Rather, a customer must make full payment for each separate purchase transaction in a cash account without regard to the unsettled proceeds of securities sold. If a member firm plans to accept the unsettled proceeds of a securities sale as payment for securities purchased, the transaction must be conducted in a margin account and is subject to the regulations affording protection to customers who trade in margin accounts. See NASD Notice to Members 04-38: NASD Reminds Member Firms of Their Obligations to Adhere to Credit Extension Requirements and Day Trading Margin Rules (May 2004). See also NASD Rule 3520 and NYSE Rule 431.


      Do-Not-Call Registry

      On January 12, 2004, the SEC approved amendments to NASD Rule 2212 (Telemarketing) and Rule 3110 (Books and Records). These amendments set forth NASD's requirement that member firms participate in the Federal Trade Commission's national do-not-call registry. See NASD Notice to Members 04-15: SEC Approves Amendments to NASD Rules Concerning Member Participation in the National Do-Not-Call Registry (March 2004). See also NYSE Rule 440A.


      Ethics

      The CE Council will introduce an ethics module as part of the Regulatory Element of the CE Program in early 2005; nonetheless, firms should address 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.

      The firm's annual needs assessment should seek to identify ethical dilemmas that employees face (or see their colleagues facing), as well as pressures that may keep employees from acting properly or reporting their ethical concerns. The assessment process might include obtaining feedback from business units, staff functions (human resources, employee relations, legal, compliance, audit, security), as well as employees themselves. Assessments can be based on direct interviews, document review, employee questionnaires, or a combination of techniques including the use of confidential surveys or third parties that often encourage employees to respond candidly.

      Depending on the firm's business and structure, the needs assessment may reveal ethics issues such as (A) conflicts of interest (e.g., personal trading, outside activities, gifts/gratuities/entertainment, political contributions), (B) relationships with other employees (e.g., dignity and respect, sexual harassment, discrimination), (C) relationships with customers (e.g., putting the client's best interests first, dealing with improper requests from customers), and (D) representing the firm's interests (e.g., using firm property, accuracy of records, responding to regulatory inquiries). The assessment may also indicate that ethical conduct is especially challenging in an organization due to such influences as peer pressure, lack of information, rationalizations (e.g., believing that one can hold the line after making only one exception, or that one's supervisor would never make an improper request), or "bottom line" pressures.

      The ethics curriculum should include ethical situations (cases), approaches to resolving such dilemmas and strategies and resources for dealing with organizational influences (e.g., focusing on long-term success instead of short-term expediency, using confidential help lines). Rather than providing ethical content in isolation, firms should have employees apply ethical principles to realistic fact patterns, hear stories of people who have made the wrong ethical decision and those who have had the courage to make the right choice, 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 stimulating ethics training, including provision of instruction in person (utilizing outside experts, train-the-trainer methodologies, or in-house personnel), and electronic means. Group interaction is particularly useful in ethics training. Instead of merely providing reading material or lectures, firms should 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.


      Fee-Based Compensation

      Fee-based compensation programs typically charge a customer a fixed fee or percentage of assets under management in lieu of transaction-based commissions. Broker-dealers are reminded that they must have reasonable grounds for believing that a fee-based program is appropriate for a particular customer, taking into account the services provided, cost, and customer preferences. It is generally inconsistent with just and equitable principles of trade—and therefore a violation of SRO Rules—to place a customer in an account with a fee structure that reasonably can be expected to result in a greater cost than an alternative account offered by the member that provides the same services and benefits to the customer. See NASD Notice to Members 03-68: NASD Reminds Members That Fee-Based Compensation Programs Must Be Appropriate (November 2003), and related Questions and Answers on NASD's Web site. See also proposed NYSE Rule 405A, SR-NYSE-2004-13.


      Floor Communications

      Members and member organizations of the NYSE are required to adhere to various requirements when conducting a public business from the NYSE trading floor. Such requirements include supervision, registration, employment, financial, operations, sales practices, and record retention. See NYSE Information Memos 03-54: Reminder Regarding Requirements for Conducting a Public Business on the Trading Floor; Floor Communications, November 25, 2003, and 01-41: Requirements for Conducting a Public Business on the Trading Floor; Floor Communications, November 21, 2001.


      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. Hedge funds are not currently registered with the SEC.

      The SEC has proposed for comment a new rule and rule amendments under the Investment Advisers Act of 1940 (Advisers Act). The proposed new rule and amendments would require advisers to certain hedge funds to register with the SEC under the Advisers Act. 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. See SEC Release No. IA-2266, Registration Under the Advisers Act of Certain Hedge Fund Advisers, July 20, 2004; and SEC Investor Tips: Hedging Your Bets. See also the SEC's Hedge Fund Web site at www.sec.gov/spotlight/hedgefunds.htm and NASD Notice to Members 03-07: NASD Reminds Members of Obligations When Selling Hedge Funds (February 2003).


      Internal Controls

      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. To allow sufficient time for adoption and establishment of necessary systems changes, an effective date of December 17, 2004 has been set for compliance with the amendments. However, good business practice suggests compliance as soon as possible.

      The amendments prescribe general standards with respect to internal 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. Effective date December 17, 2004. See also NYSE Disciplinary Actions 04-128, dated August 2, 2004, and 02-227, 02-226, 02-225, 02-224, 02-223, all dated November 15, 2002, regarding e-mail retention.

      On June 17, 2004, the SEC 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. On September 30, 2004, the SEC granted accelerated approval to proposed rule changes to the Supervisory Control Amendments to conform certain parts of the new rule requirements to the NYSE's recently approved internal control amendments. See NASD Notice to Members 04-71: SEC Approves New Rules and Rule Amendments Concerning Supervision and Supervisory Controls; Effective date January 31, 2005 (October 2004).

      The SEC has also adopted new rules under the Investment Company Act of 1940, and the Advisers Act, that require each investment company and investment adviser registered with the SEC to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws. Firms must review these policies and procedures annually for their adequacy and designate a chief compliance officer to be responsible for administering the policies and procedures. In the case of an investment company, the chief compliance officer reports directly to the fund board. These rules are designed to protect investors by ensuring that all funds and advisers have internal programs to enhance compliance with the federal securities laws. See SEC Release No. IA-2204, Compliance Programs of Investment Companies and Investment Advisers, December 17, 2003. Effective Date: February 5, 2004.


      Margin

      The SEC approved revisions to NYSE Rule 431 and NASD Rule 2520. These amendments provide for margin requirements on non-equity securities commensurate with the economic risks associated with positions in such securities held by customers. The reduced margin requirements recognize both the quality of the securities and the creditworthiness of the customer and therefore preserve reasonable safety and soundness standards. The types of non-equity securities eligible for exempt account treatment have been expanded. See NYSE Information Memos 03-42, Amendments to Rule 431 ("Margin Requirements") Regarding "Good Faith" Securities, September 29, 2003, and 03-46, Correction to Information Memo No. 03-42, October 10, 2003. See also NASD Notice to Members 03-66: Amendments to NASD Rules Regarding Margin Requirements (October 2003).


      Municipal Securities

      Consultants

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

      See MSRB Rule G-38 in the MSRB Rule Book and online at www.msrb.org.

      Municipal Fund Securities

      Municipal fund securities, including 529 college savings plans, are municipal securities regulated by the MSRB. Municipal fund securities represent investments in pools of securities, such as securities issued by registered investment companies. Therefore, certain sales materials for municipal fund securities 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 qualified and hold either a Series 51 (Municipal Fund Securities Limited Principal) or Series 53 (Municipal Securities Principal) license. 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 Notice to Members 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.nasdr.com/news/pr2004/release_04_059.html, a news release regarding expenses and tax incentives associated with investments in 529 college savings plans.

      Political Contributions and Prohibitions on Municipal Securities Business

      Dealers are prohibited from engaging in municipal securities business with a municipal securities issuer within two years after any contribution to an official of such issuer made by the dealer, any municipal finance professional (MFP), or any political action committee (PAC) controlled by the dealer or any of its MFPs. A dealer that has triggered the ban and desires to do municipal securities business with the issuer must obtain an exemption from the appropriate regulatory agency, or, in certain limited circumstances, use an automatic exemption. MSRB Rule G-37 describes the relevant factors to be considered by the appropriate regulatory agency in determining whether to grant an exemption.

      The MSRB published a notice indicating its concern with increasing signs that individuals subject to Rule G-37 may be using indirect political contributions in an attempt to get around the rule. This would be accomplished through: (1) payments to political parties or non-dealer controlled PACs that find their way to issuer officials, (2) significant political contributions by dealer affiliates to both issuer officials and political parties, (3) contributions by associated persons of the dealer who are not MFPs, (4) contributions by the spouses and family members of MFPs to issuer officials, and (5) the use of consultants who make or bundle political contributions. The MSRB reminded dealers that Rule G-37, as currently in effect, covers indirect as well as direct contributions to issuer officials, and the MSRB alerted dealers that it has expressed its concern to the entities that enforce the MSRB's rules that some of the increased political giving may indicate a rise in Rule G-37 violations from "indirect" contributions. See Notice Concerning Indirect Rule Violations: Rules G-37 and G-38 (August 6, 2003), MSRB Rule Book.

      Municipal Securities Transaction Reporting

      Broker-dealers have an obligation to report their municipal securities transactions to the MSRB accurately and on time. Transaction information is made available to the public, and to regulators for market surveillance and enforcement activities.

      Firms may need to adapt their procedures and systems for processing municipal securities transactions in order to report their trades in real time by January 2005. The MSRB has filed a proposed rule change with the SEC regarding Rule G-14 on transaction reporting, Rule G-12(f) on automated comparison of inter-dealer transactions, and the implementation of a system for real-time transaction reporting and price dissemination (the Real-Time Transaction Reporting System or RTRS). The proposed changes would require broker-dealers to report nearly all transactions in municipal securities within 15 minutes of the time of trade execution instead of by midnight on trade date, as is currently required. Broker-dealers would also be required to submit inter-dealer transactions to the central comparison system within the same time frame. The proposed rule change is planned to become effective in January 2005, at which time the MSRB would begin to disseminate transaction data electronically in real-time immediately after receipt.

      Adapting to real-time reporting will require that a firm's traders provide several more data items for transaction processing than what currently is provided. An example of a new data item is the firm's capacity in an inter-dealer trade, whether as principal or as agent for a customer. All information must be provided accurately and within a short time frame. The MSRB will publish a user manual for real-time trade reporting in the second half of 2004 to assist in identifying necessary changes and to aid in staff training.

      See the Transaction Reporting System section of the MSRB Web site, www.msrb.org. In particular, see MSRB Notice 2004-13, Notice of Filing of Proposed Rule Change to Rules G-14 and G-12(f) (June 1, 2004); MSRB Notice 2004-20, Summary of Certification Test Plan (June 24, 2004); MSRB Notice 2004-21, MSRB Will Make Form RTRS Available On-Line (June 24, 2004); and MSRB Notice 2004-29, Approval by the SEC of Real-Time Transaction Reporting and Price Dissemination (September 2, 2004).

      Dealer Pricing Responsibilities

      The MSRB published a notice reviewing the fair pricing requirements of MSRB Rules G-18 and G-30, including a review of the responsibility of broker's brokers to use a "reasonable effort" to find a price that is fair and reasonable in light of the prevailing market. The MSRB notice reviews the Rule G-18 and G-30 application in light of the MSRB's review of certain transaction patterns that have appeared in the MSRB's Transaction Reporting System. The patterns, which show abnormally large price variance in a relatively small number of issues each day, suggest that brokers, dealers, and municipal securities dealers may not always be making the requisite efforts to ensure that transaction prices are reasonably related to market value. See MSRB Notice 2004-3, Review of Dealer Pricing Responsibilities (January 26, 2004)


      Mutual Funds

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

      Breakpoint Discounts

      Breakpoint discounts are volume discounts applicable to front-end sales charges on Class A mutual fund shares (front-end loads). The SEC and SROs determined that many investors were not receiving correct breakpoint discounts on their mutual fund purchases. It was estimated that at least $86 million was owed to investors for 2001 and 2002 alone. Firms must disclose applicable breakpoint discount information to their customers and must have procedures reasonably designed to ascertain information necessary to determine the availability and appropriate level of breakpoints. Failure to provide customers with appropriate breakpoint discounts is conduct in violation of Section 17(a)(2) of the Securities Act of 1933, NASD Rule 2110 and NYSE Rule 401. See NASD's Mutual Fund Breakpoints Web page at www.nasdr.com/breakpoints_members.asp; NASD Investor Alert Net Asset Value Transfers: Look Before You Leap Into Another Mutual Fund, February 26, 2004; NASD's Mutual Fund Sales Practices Web page at www.nasdr.com/mutual_funds.asp; and the SEC's Breakpoints Web site at www.sec.gov/spotlight/breakpoints.htm.

      The Joint NASD/Industry Breakpoint Task Force developed recommendations to facilitate the complete and accurate delivery of breakpoint discounts in the future. The Task Force Report, which is available at www.nasdr.com/breakpoints _report.asp, made recommendations that will impact virtually every level of the mutual fund distribution chain. See also www.nasdr.com/breakpoints_members. asp (which reports the implementation status of Task Force recommendations).

      Late Trading Transactions

      Late trading is the practice of placing mutual fund orders received after the time at which point the fund calculates its daily net asset value (NAV)—usually 4 p.m. ET—at the previous day's NAV price. Late trading also includes the afterclose cancellations of orders that were placed prior to the time a fund calculates the NAV. Firms that permit late trading provide customers with an unfair information advantage, allowing them to trade based on news that breaks after the close of the market. NASD Rules 2110 and 2120 and SEC rules prohibit late trading.

      There are situations where firms legitimately receive orders prior to the close of trading, but enter such orders after the market's close. Firms should take great care to ensure that these trades are executed at the appropriate price. Firms must have in place policies and procedures that are reasonably designed to detect and prevent the occurrence of late trading. See NASD Notice to Members 03-50: NASD Reminds Member Firms of their Obligations Regarding Mutual Fund Transactions and Directs Review of Policies and Procedures (September 2003). See also the following NASD news release: NASD Fines Five Firms $625,000 For Supervisory System Failures Relating to Late Trading of Mutual Funds (June 24, 2004).

      Market Timing Transactions

      Market timing is the rapid buying and selling of mutual funds (funds). In some cases, market timers pace their orders to profit from short-term inaccuracies in the NAV of the fund. Many funds have implemented procedures to counteract the efforts of market timers, and have represented in their prospectuses that they are utilizing these procedures to prevent market timing of the fund.

      When a fund has made these representations, a member firm and its associated persons may not knowingly or recklessly act in conjunction with the fund, or its affiliated persons, to facilitate a market timing transaction. In addition, member firms must have in place policies and procedures that are reasonably designed to prevent this collusion with funds and their affiliated persons to circumvent the funds' stated procedures. See NASD Notice to Members 03-50: NASD Reminds Member Firms of their Obligations Regarding Mutual Fund Transactions and Directs Review of Policies and Procedures (September 2003). See also the following NASD news release: NASD Fines State Street Research Investment Services $1 Million For Market Timing Supervision Violations; Firm Ordered to Pay More than $500,000 in Restitution (February 19, 2004).


      New and Secondary Offerings

      The SEC has approved a number of new NASD rules and amendments to remedy inequities in public offerings.

      Restrictions on the sale of new issues

      Rule 2790 generally prohibits a member from selling a "new issue" to any account in which a "restricted person" has a beneficial interest. The term "restricted person" includes most associated persons of a member, most owners and affiliates of a broker-dealer, and certain other classes of persons. The rule requires that a member, before selling a new issue to any account, meet certain "preconditions for sale." These generally require the member to obtain a representation from the beneficial owner of the account that the account is eligible to purchase new issues in accordance with the rule. See NASD Notice to Members 03-79: SEC Approves New Rule 2790 (Restrictions on the Purchase and Sale of IPOs of Equity Securities); Replaces Free-Riding and Withholding Interpretation (December 2003).

      Restrictions on Underwriting Compensation

      On December 23, 2003, the SEC approved amendments to Rule 2710 (Corporate Financing Rule). The Corporate Financing Rule regulates underwriting compensation and prohibits unfair arrangements in connection with the public offerings of securities. The rule requires members to file information about initial public offerings and certain secondary offerings with NASD. The NASD Corporate Financing Department reviews this information prior to commencement of the offering to determine whether the underwriting compensation and other terms and arrangements meet the requirements of applicable NASD rules. As amended, Rule 2710(c)(3)(A) sets forth a non-exclusive list of specific types of "items of value" that will be included for purposes of determining the amount of underwriting compensation received or to be received. Rule 2710(c)(3)(B), in turn, provides a list of items that will not be considered "items of value" for purposes of the rule. See NASD Notice to Members 04-13: SEC Approves Amendments to Rule 2710 (Corporate Financing Rule) and Rule 2720 (Distribution of Securities of Members and Affiliates-Conflicts of Interest) (February 2004).

      NASD Rule 2810 (Direct Participation Programs), among other things, establishes limits on the level of underwriting compensation for public offerings of direct participation programs. In a change of policy, NASD staff will consider all trail commissions paid in connection with commodity pool direct participation programs in calculating whether the level of underwriting compensation meets the requirements of Rule 2810. See NASD Notice to Members 04-50: Treatment of Commodity Pool Trail Commissions under Rule 2810 (Direct Participation Programs Rule) (July 2004).


      Registered Representative Regulations

      Lending Restrictions

      On August 29, 2003, the SEC approved the adoption of NASD Rule 2370, prohibiting registered persons from borrowing money from, or lending money to, a customer unless: (1) the member has written procedures allowing such lending arrangements consistent with the rule; (2) the loan falls within one of five prescribed permissible types of lending arrangements set forth in the rule; and (3) the member pre-approves the loan in writing. On February 18, 2004, the SEC approved amendments to NASD Rule 2370 exempting from the rule's notice and approval requirements lending arrangements involving a registered person and a customer that is: (1) a member of his or her immediate family (as defined in the rule); or (2) a financial institution regularly engaged in the business of providing credit, financing, or loans (or other entity or person that regularly arranges or extends credit in the ordinary course of business), provided the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose, and creditworthiness. The amendments to Rule 2370 also limit the scope of the rule to lending arrangements between registered persons and their customers, rather than any customer of the firm. See NASD Notice to Members 04-14: SEC Approves Amendments to Rule Governing Lending Between Registered Persons and Customers (March 2004). See also proposed amendment to NYSE Rule 350 (SR-NYSE-2004-47).


      Reporting and Disclosure Requirements

      On June 14, 2004, the SEC approved amendments to NASD Rule 6230(a) of the Trade Reporting and Compliance Engine (TRACE) Rules (the Rule 6200 Series), reducing the period for reporting a transaction to NASD. In the first stage, which began on October 1, 2004, the period to report a transaction in a TRACE-eligible security was reduced from 45 minutes to 30 minutes. In the second stage, set to begin July 1, 2005, the reporting period will be reduced to 15 minutes. See NASD Notice to Members 04-51: SEC Approves Amendments to TRACE Rule 6230 to Reduce the Reporting Period to 30 Minutes on October 1, 2004, and to 15 Minutes on July 1, 2005 (July 2004).

      On September 3, 2004, the SEC approved amendments to NASD Rules 6210, 6250, and 6260 of the TRACE Rules. The most significant amendments, which are set forth in NASD Rule 6250, effect a fundamental change in the corporate bond markets by requiring that information on all transactions in TRACE-eligible securities de disseminated, except those transactions in TRACE-eligible securities that are issued pursuant to Section 4(2) of the Securities Act of 1933 (Securities Act) and purchased or sold pursuant to Rule 144A under the Securities Act. See NASD Notice to Members 04-65: SEC Approves Amendments to TRACE Rules to Disseminate Transaction Information on All TRACE-Eligible Securities, Modify and Supplement Defined Terms, and Enhance Notification Requirements (September 2004).


      Research Analyst

      New Qualification Requirements for Research Analysts

      Effective March 30, 2004, the SEC approved amendments to NASD and NYSE rules to implement the research analyst registration requirements and examination program. Any associated person who functions as a research analyst must pass the new Research Analyst Qualification Examination (Series 86/87) or qualify for an exemption or waiver. There is no grandfathering provision for this new qualification requirement. Research analysts will be subject to Regulatory Element and Firm Element training. Firm Element training for research analysts and their immediate supervisors will be required to include ethics, professional responsibility, and the requirements of the new research analyst rules. See NASD Notice to Members 04-25: SEC Approves New NASD Research Analyst Qualification and Examination Requirements (Series 86/87) (March 2004). See also NYSE Information Memos 04-16, Research Analyst Qualification Examination ("Series 86/87") and Registration Requirements, March 31, 2004; 04-05, Study Outline for Research Analyst Qualification Examination ("Series 86/87"), February 3, 2004; and 03-61, Rule 344 – Research Analyst Qualification Examination Requirement ("Series 86/87"), December 31, 2003.

      Conflicts of Interest

      In March of 2004, NASD and the NYSE issued a joint memorandum providing interpretation of rules governing research analysts and research reports. The memorandum defines the terms "research report" and "public appearance," and clarifies required research analyst disclosures, trading restrictions, and the applicability of the "significant news or event" exception to blackout period publishing restrictions. The memorandum is available in NASD Notice to Members 04-18: NASD and NYSE Provide Further Guidance on Rules Governing Research Analysts' Conflicts of Interest (March 2004). See also NYSE Information Memos 04-11, April 1st Reporting Requirement – Attestations – Rules 351 and 472, March 9, 2004; 04-10, Amendments to Disclosure and Reporting Requirements, March 9, 2004; 04-03, Extension of Effective Dates for Certain Provisions of Rule 472 ("Communications with the Public") and Rule 344 ("Research Analysts and Supervisory Analysts"), January 20, 2004; and 03-36, Rule 472 – Amendments to Disclosure and Reporting Requirements, August 25, 2003.


      Short Sales

      On July 28, 2004, the SEC adopted new Regulation SHO, under the Securities Exchange Act of 1934. Regulation SHO will 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 rule that suspends 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;
      4. Imposes additional delivery requirements on broker-dealers for securities in which a substantial number of failures to deliver have occurred.

      Within Regulation SHO, the SEC is also: (1) adopting an amendment that removes the shelf offering exception in Rule 105 of Regulation M; (2) issuing interpretive guidance addressing sham transactions designed to evade Regulation M; (3) deferring consideration of the proposal to replace the current "tick" test with a new uniform bid test restricting short sales to a price above the consolidated best bid; and (4) deferring consideration of the proposed exceptions to the uniform bid test.

      The SEC is deferring further action on the proposals mentioned in (3) and (4) of the preceding paragraph until after the completion of the pilot program established by Regulation SHO. There is no set end date for the pilot program, which will need a separate SEC order to be terminated, and will last "only as long as [is] absolutely necessary to allow the [SEC] to gather sufficient data."

      See SEC Release No. 34-50103, Short Sales, July 28, 2004. See also the SEC's Short Sale Web site at www.sec.gov/spotlight/shortsales.htm. The effective and compliance dates for Regulation SHO vary. For example, certain interpretive material under Regulation M went into effect on August 6, 2004. Rule 105 of Regulation M became effective on September 7, 2004. The compliance date for the suspension of the tick test and locate and delivery requirements is January 3, 2005.

      Industry rules require that no member or associated person shall effect a short sale order for any customer in any security unless the member or associated person makes an affirmative determination that the member will receive delivery of the security from the customer, or that the member can borrow the security on behalf of the customer by the settlement date. The SEC has approved amendments to Rule 3370 that expand the scope of the affirmative determination requirement to include orders received from non-member broker-dealers. See NASD Notice to Members 04-03: SEC Approves NASD Rule Proposal Requiring Members to Make Affirmative Determinations for Short Sale Orders Received from Non-Member Broker-Dealers (January 2004). See also NASD Notice to Members 04-08: Effective Date of Amendments to NASD Rule 3370 (Affirmative Determination Requirements) Extended to April 11, 2004 (February 2004), and NASD Notice to Members 04-21: NASD Provides Further Guidance on Amendments to NASD Rule 3370 — Affirmative Determination Requirements (March 2004). See also NYSE Rules 440B, Short Sales and 440C, Deliveries Against Short Sales, and NYSE Information Memo 04-39, Expiration of Short Exemption (Exchange Rule 440B/SEC Rule 10a-1), August 2, 2004.

      NASD clarified that under Rule 6130, a "short sale" or "short sale exempt" indicator is required in all short-sale transactions reported to the Automated Confirmation Transaction Service (ACT), including transactions in: (1) NASDAQ National Market securities; (2) NASDAQ SmallCap securities; (3) over-the-counter (OTC) transactions in exchange listed securities; (4) OTC Bulletin Board; and (5) OTC equity securities. See NASD Notice to Members 04-40: NASD Clarifies ACT Short Sale Reporting Requirements (May 2004).


      Unit Investment Trusts

      Unit Investment Trusts (UITs) are investment companies that offer redeemable shares, each of which represents an undivided interest in a unit of specified securities. Most UITs terminate on a specified date. In addition, many UITs offer sales charge discounts based on the amount invested. Accordingly, firms have the same duty to understand, inform customers about, and correctly apply price breaks in the sale of UITs that they have with regard to breakpoint discounts in the sale of Class A mutual fund shares. They should develop and implement the same type of procedures for ensuring the proper application of such discounts in connection with the sale of mutual funds. See NASD Notice to Members 04-26: NASD Reminds Members of Their Duty to Ensure Proper Application of Discounts in Sales Charges to Sales of Unit Investment Trusts (UITs) (March 2004).


      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) 843-2263
      E-mail: 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

    • 04-75 NASD Seeks Comment on Enhanced Disclosure for Subordination Agreements

      View PDF file

      REQUEST FOR COMMENT

      Subordination Agreements

      Comment Period Expires November 26, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management

      Appendix D to the Net Capital Rule
      Net Capital
      SEC Rule 15c3-1
      Subordination Agreements
      Subordinated Loans

      Executive Summary

      In 2002, NASD adopted a requirement that firms submitting subordination agreements to NASD staff for approval provide each investor with a Subordination Agreement Investor Disclosure Document (Disclosure Document), a signed copy of which must be provided to NASD staff before the agreement will be approved.1 The purpose of the Disclosure Document is to help investors understand what a subordination agreement is and what risks investors assume when they enter into such agreements.

      While NASD continues to believe that the disclosures contained in the Disclosure Document help investors assess the general risks of subordination agreements, NASD is concerned that investors may still be entering into subordination agreements with firms without fully appreciating the specific risks that may be involved. Accordingly, NASD is seeking comment on a proposal to require firms to provide investors with detailed, specific disclosure focused on the firm and the particular loan before entering into a subordination agreement with an investor. These disclosures would augment the existing risk disclosures currently required to be provided by the firm to investors.

      Action Requested

      NASD encourages all interested parties to comment on the proposal. Comments must be received by November 26, 2004. Members and other interested persons can submit their comments using the following methods:

      • Mailing comments in hard copy to the address below; or

      To help NASD process and review comments more efficiently, persons commenting on this proposal should use only one method. Comments sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      Office of the Corporate Secretary
      NASD
      1735 K Street, NW
      Washington, DC 20006-1500

      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.2

      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.3

      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, Regulatory Policy and Oversight (RPO), at (202) 728-8104; or Brant K. Brown, Counsel, Office of General Counsel, RPO, at (202) 728-6927.

      Background and Discussion

      At times, a broker-dealer may borrow funds or securities from investors to enhance the firm's net capital position. To receive benefit under the SEC's net capital rule (Rule 15c3-1), funds or securities loaned by an investor to a broker-dealer must be the subject of a satisfactory subordination agreement. The subordination agreement sets forth the rights and obligations of the lender (i.e., the investor) and the borrower (i.e., the broker-dealer), and it provides that any claims by the lender must be subordinate to claims by other parties, including customers and employees of the firm. Before a subordination agreement becomes effective for net capital purposes, it must be reviewed and approved by the broker-dealer's designated examining authority (DEA).4

      SEC Rule 15c3-1d(a)(1) provides that NASD, as a DEA, may require that subordination agreements "include such other provisions as deemed necessary or appropriate to the extent such provisions do not cause the subordination agreement to fail to meet the requirements of [Appendix D to Rule 15c3-1]." In 2002, the SEC approved an NASD rule change that requires firms, before entering into any subordination agreement with an investor, to deliver the Disclosure Document to the investor and receive a signed copy affirming that the investor has read it.5 This rule became effective on July 15, 2002.

      The Disclosure Document is intended to help investors understand what a subordination agreement is and what risks they assume when they enter into a subordination agreement. The Disclosure Document covers such topics as:

      (1) the two types of subordination agreements (subordinated loan agreements and secured demand note agreements);
      (2) the lack of SIPC protection;
      (3) the lack of private insurance protection;
      (4) the fact that any claim is subordinate or has no priority in payment over other lenders;
      (5) the lack of restrictions on the broker-dealer's use of a lender's funds or securities; and
      (6) the ability of a broker-dealer to force the sale of securities pledged as collateral. The Disclosure Document is a standard document that does not vary from firm to firm or from loan to loan; consequently, the disclosure is general and provides investors only with generic risk factors.

      NASD is concerned that the general disclosures in the Disclosure Document alone may be insufficient to convey the specific risks of a particular subordination agreement and that, without some degree of detail about the specific subordination agreement and the broker-dealer firm, an investor is not able to assess accurately the appropriateness of the investment. Consequently, NASD is proposing that, in addition to the Disclosure Document, firms be required to provide an investor entering into a subordination agreement with specific, written disclosure concerning the proposed investment. Specifically, NASD is proposing to require firms to:

      • provide the investor with a detailed statement concerning the intended use of proceeds;

      • provide the investor with a detailed statement concerning the intended plan of financing;

      • disclose the amounts, types, interest rates, and scheduled maturity dates of debt to which the intended loan will be subordinate;

      • for any subordinated loans6 with outstanding balances, disclose the outstanding balances, interest rates, and scheduled maturity dates of such loans and the number of investors involved; and

      • provide the investor with a copy of the broker-dealer's most recent audited financial statement.

      Firms would be required to provide these disclosures to the investor in writing before entering into any subordination agreement.7 To the extent that the information does not appear in the subordination agreement itself, the firm would be required to provide the investor with a separate, stand-alone document containing the required information. NASD believes that these firm-specific and loan-specific disclosures will provide investors with useful information that will aid them in determining whether subordination agreements are appropriate investments.8

      1. Detailed Statement Concerning the Intended Use of Proceeds

      NASD proposes to require each firm to include in its disclosure a detailed statement concerning the firm's intended use of the proceeds from the subordinated loans. NASD recognizes that lenders are precluded from placing restrictions on how the brokerdealer may use the proceeds from a subordinated loan, and the Disclosure Document includes disclosure to this effect. Nevertheless, at the time a firm solicits or receives a subordination agreement, it is likely to have an intended use for those proceeds, and that use should be disclosed. For example, the broker-dealer would be required to disclose whether it is pursuing the funds to satisfy an arbitration award (and, if so, a description of such award) or to pay salaries (and, if so, a description of the persons receiving the salaries and the amounts). In short, the firm would be required to disclose the reason it is pursuing the loan.
      2. Detailed Statement Concerning the Intended Plan of Financing

      NASD also proposes to require firms to include in its disclosure a detailed plan of financing. This plan would include
      (1) the amount of the subordinated loan sought from the individual investor and its interest rate and scheduled maturity date (i.e., the date that repayment by the firm to the lender is required);
      (2) the total amount of subordinated loans sought from other investors for the same purpose and their interest rates and scheduled maturity dates;
      (3) the number of investors from which the firm intends to borrow funds; and
      (4) the approximate percentage of the total loan expected from each investor. NASD recognizes that the intended number of investors may change over time. Accordingly, the firm would be required to disclose the intended number of investors as of the time the disclosure is made to the investor. For example, assume a firm initially intends to borrow $1 million by borrowing $100,000 from ten separate investors; however, after borrowing the intended $100,000 from one investor, the second investor decides to loan the firm $500,000. Under this scenario, the firm would be required to disclose to the first and second investors its original intention to borrow $1 million from ten investors equally; however, the firm would be required to disclose to subsequent investors its revised intention to borrow a total of $1 million from six investors, with one investor lending $500,000 and five investors lending $100,000.
      3. Amounts, Types, Interest Rates, and Scheduled Maturity Dates of Debt to Which the Intended Loan Will be Subordinate

      NASD also proposes to require firms to disclose the amounts, types, interest rates, and scheduled maturity dates of debt to which the intended loan will be subordinate. NASD believes that this information is important for investors in determining whether a subordination agreement is an appropriate investment and that without this information it is difficult for investors to assess the merits and risks of the investment.
      4. For Any Subordinated Loans With Outstanding Balances, the Outstanding Balances, Interest Rates, and Scheduled Maturity Dates of Such Loans and the Number of Investors Involved

      NASD also proposes to require firms to disclose, with respect to any subordinated loans with outstanding balances, the outstanding balances, interest rates, and scheduled maturity dates of those loans and the number of investors involved. NASD believes that it is important for investors to know about the broker-dealer's other outstanding subordinated loans and the current status of those loans to aid the investor in its determination of whether to loan funds or securities to the firm. Firms would be required to include only subordinated loans with outstanding balances at the time the investor enters into the subordination agreement.
      5. Most Recent Audited Financial Statement

      NASD believes that firms should be required to provide an investor with a copy of the firm's most recent audited financial statement before entering into a subordination agreement with that investor.9 Because a subordination agreement is an investment in the broker-dealer firm, this requirement would provide the investor with a minimum amount of financial information about the firm before deciding whether to invest.

      Request for Comment

      NASD requests comment on the following questions:

      (1) Is there additional information NASD should require firms to disclose to help an investor understand the risks of a subordinated loan and whether the loan is an appropriate investment? Are any of the items NASD proposes to require firms to disclose unnecessary?
      (2) For those items requiring firms to disclose intentions (i.e., intended use of proceeds and intended number of investors), should firms have an obligation to inform investors that have already invested of any change?
      (3) Should certain classes of persons be prohibited from entering into subordination agreements with firms? Should firms be obligated to ensure that investors entering into subordination agreements have a certain minimum level of sophistication or net worth? If so, what level would be appropriate?
      (4) The current proposal would not require firms to make the disclosures if the investor were an "institutional account." Is this exclusion appropriate? Are there other classes of persons that should also be excluded?
      (5) Should NASD require firms to receive a signed acknowledgement from the investor that it has received, read, and understands the disclosures similar to the requirement for the Disclosure Document?
      (6) The current proposal would require firms to disclose only previously provided subordinated loans if those loans have outstanding balances. Should firms be required to disclose all previously provided subordinated loans within a certain timeframe, including loans that have been paid off? If so, what would be an appropriate timeframe?

      In addition to the questions listed above, NASD is interested in any other issues that commenters may wish to address relating to the proposal.


      1  See Notice to Members (NtM) 02-32 (June 2002).
      2  See NtM 03-73 (Nov. 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  For firms for which NASD is the DEA, the local District Office reviews and approves subordination agreements. NASD approval of subordination agreements is a regulatory function. It does not include an opinion regarding the viability or suitability of the investment.
      5  67 Fed. Reg. 36281 (May 23, 2002); see also NtM 02-32 (June 2002).
      6  References to "subordinated loans" in this Notice include arrangements under both subordinated loan agreements and secured demand note agreements.
      7  This proposal would only apply to those firms for which NASD is the DEA. Firms would not be required to file these additional disclosures with NASD as part of the subordination agreement review process. Rather, NASD would require firms to maintain copies of these disclosures and make them promptly available to NASD staff in the ordinary course of examinations or upon request.
      8  NASD proposes to exempt institutional accounts from this requirement. Thus, firms would not be required to provide these disclosures to investors that meet the definition of "institutional account" in NASD Rule 3110(c)(4).
      9  This requirement would be separate from existing requirements under other rules addressing the disclosure of financial information. See, e.g., SEC Rule 17a-5(c); NASD Rule 2270.

    • 04-74 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative Renewals for 2005

      View PDF file

      ACTION REQUIRED

      Broker-Dealer and Investment Adviser Renewals

      Payment Deadline: December 6, 2004

      SUGGESTED ROUTING

      KEY TOPICS

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

      IARDSM
      Maintenance Fees
      Registration
      Renewals
      Web CRD®

      Executive Summary

      The 2005 NASD Broker/Dealer and Investment Adviser Registration Renewal Program will begin on November 8, 2004, 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 26,000 Broker/Dealer (BD) and Investment Adviser (IA) firms and over 800,000 registered representatives and investment adviser representatives with the payment of one amount to NASD by the published deadline. On November 1, 2004, firms may start submitting post-dated Forms U5, BDW, Schedule E, and ADV-W via Web CRD/IARD. Post-dated filings that are submitted by 11 p.m., Eastern Time (ET), November 5, 2004, will not appear on the firm's Preliminary Renewal Statement.

      Renewal Statements will include the following fees: NASD Web CRD/IARD 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.

      Please Note: If you have not logged onto one of the following systems, Web CRD, IARD, Regulation Filing Applications, or the NASD Contact System since August 30, 2004, you may wish to do so prior to November 8, 2004, when Preliminary Renewal Statements become available. Web CRD and IARD were migrated to a new security platform on August 30, 2004, and you will have to complete a one-time, online, self-migration process to migrate your user account to the new NASD Entitlement security platform before being able to access those systems. You will need to provide your legacy User ID and Password, set a new password and select a security challenge question. The process should take less than five minutes. You can find out more information about the new NASD Entitlement Program at www.nasdr.com/entitlement.asp, including a user's selfmigration job aide. Remember to note your new User ID and Password as they are what you will use after you have completed the self-migration.

      Members should read this Notice to Members and any instructions posted to the NASD Web site under the Renewals button at www.nasdr.com/3400_renewals_intro.asp, especially the CRD Fall Bulletin, which will be a special Renewal Program edition, 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, 2005. Any Renewal processing changes, subsequent to the publishing of this Notice to Members, will be provided to you in a Special Notice to Members.

      Questions/Further Information

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

      Preliminary Renewal Statements

      Beginning November 8, 2004, Preliminary Renewal Statements will be available for viewing and printing on Web CRD for all entitled users. The statements will include the following fees: Web CRD/IARD System Processing Fees, NASD Branch Office Fees, NYSE, Amex, CBOE, ISE, PCX and PHLX Maintenance Fees, state Agent Renewal Fees, state Broker/Dealer, and, if applicable, Investment Adviser Firm and Representative Renewal Fees. NASD must receive full payment of the November Preliminary Renewal Statement amount no later than December 6, 2004.

      If payment is not received by the December 6, 2004, Payment Due Date, the firm will be assessed a Renewal Payment Late Fee. This Renewal Payment 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 02-48 for details.

      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 the firm will be assessed by requesting the Renewals-Firm Renewal Roster.

      The RA Renewal System Processing Fee of $45 will be assessed for every Investment Adviser Representative who renews through the IARD Program.

      The IARD Firm System Fee of $100 will be 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, 2004, 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 2005. 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.

      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 2005 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 2005 Renewal Fees:

      1. Web CRD/IARD E-Pay
      2. Check
      3. Wire payment, or
      4. Request a transfer of the entire amount from the firm's Daily Account to its 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 either the NASD (www.nasdr.com/3400.asp) 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. In order for funds to be posted to the firm's Renewal Account by DECEMBER 6, 2004, payment must be submitted electronically, no later than 8:30 p.m., Eastern Time (ET) on December 2, 2004.

      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 7777-W8705

      Philadelphia, PA 19175-8705

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

      Express/Overnight Delivery

      NASD, CRD-IARD

      W8705

      c/o Mellon Bank, Rm 3490

      701 Market Street

      Philadelphia, PA 19106

      Telephone No: (301) 869-6699

      Member firms should use the blue, pre-addressed Renewal Payment envelope that they are scheduled to receive the second week of November or, if using their own envelope, should use the full address, as noted above, including the "W8705" number shown in each address above to ensure prompt processing.

      Please note: The addresses for Renewal Payments are different from the addresses for funding your firm's CRD or IARD Daily Account.

      To ensure prompt processing of your Renewal Payment check:

      • Include a print-out 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 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 payment:

      • 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 payment provided by the bank.

      Transfer of Funds Instructions:

      Firms may also call the Gateway Call Center at (301) 869-6699 and request that a transfer of the full Renewal payment 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 Renewals Statement to NASD by the December 6, 2004, deadline could cause a member to become ineligible to do business in the jurisdiction effective January 1, 2005.

      Renewal Reports

      Beginning November 8, 2004, 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 2005 Renewal Program processing and includes Billing Codes (if they have been supplied by the firm).

      • Branches Renewal Report – applicable to NASD Members. This report lists each branch registered with NASD 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 8, 2004. Any post-dated termination filings submitted by 11:00 p.m., ET on November 5, 2004 will not appear on the firm's Preliminary Renewal Statement.

      Filing Form U5

      Firms may begin submitting post-dated U5 filings on November 1, 2004. If Forms U5 (either Full or Partial) are filed electronically via Web CRD by 11:00 p.m., ET November 5, 2004, for agents (AGs) and/or 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 2004 is 6:00 p.m., ET, on December 18, 2004. Firms may file both Partial and Full Forms U5 with a post-dated termination date of December 31, 2004. (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 18, 2004.

      Post-Dated Form Filings

      Firms can begin electronically filing post-dated Forms U5, BDW, Schedule E and ADV-W via Web CRD/IARD on November 1, 2004. This functionality allows firms to file a termination form on, or after, November 1, 2004, with a termination date of December 31, 2004. Firms that submit post-dated termination filings by 11:00 p.m., ET on November 5, 2004, will not be assessed Renewal Fees for the terminated jurisdictions on their Preliminary Renewal Statement.

      Firms that submit post-dated termination filings on, or after, November 8, 2004, will not be assessed Renewal Fees for the terminated jurisdictions on the Final Renewal Statement in January 2005. Those firms will see a credit balance on their Final Renewal Statement if the firm has not requested additional registrations to offset the credit balance.

      Between November 1, 2004, and December 18, 2004, firms may process Forms U5, BDW, Schedule E, and ADV-W (both partial and full terminations) with a post-dated termination date of December 31, 2004. (This is the only date that can be used for a post-dated form filing.) If a Form U5, BDW, Schedule E, or ADV-W indicates a termination date of December 31, 2004, 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 2005 Renewal Fees. Firms should access individual and/or firm registrations after a termination filing is submitted to ensure that electronic Forms U5, BDW, Schedule E, and ADV-W are filed by the Renewal filing deadline date of 6:00 p.m., ET on December 18, 2004.

      Members should exercise care when submitting post-dated Forms U5, BDW, Schedule E, 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 member that files a post-dated termination in error would have to file, electronically, a new Form U4, BD Amendment, or ADV when Web CRD/IARD resumes filing processing on January 3, 2005. New registration fees would be assessed as a result.

      Firms should also review individual and firm registrations via Web CRD/IARD to ensure post-dated filings were submitted.

      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 11:00 p.m., ET, November 5, 2004, 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 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 2004 is 6:00 p.m., ET, December 18, 2004. 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, 2004, 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 11:00 p.m., ET, November 5, 2004, 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 2004 is 6:00 p.m., ET, December 18, 2004. For information regarding post-dating Form ADV-W with the termination date of December 31, 2004, 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 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 5, 2004, 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, 2005, 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, 2004. 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.

      • 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 Notice Filed at year-end than it did when the Preliminary Renewal Statement was generated, a credit/refund will be issued. As of January 3, 2005, overpayments will be systemically transferred to a firm's Daily Account. A firm that has a credit (sufficient) balance in its Daily Account may request a refund by faxing or mailing a written request signed by the designated signatory to the User Support Unit at (240) 386-4849. The request should include a printout of the firm's credit balance as reflected on Web CRD.

      Beginning January 3, 2005, 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. Member firms will also be able to request the Branches Renewal Report that lists all NASD branches for which they have been assessed. Downloaded versions of these reports will also be available.

      Firms have until February 4, 2005, 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 2005 Notices to Members. Firms may also refer to the Fall CRD Bulletin, which is devoted entirely to the 2005 NASD Renewal Program, and is available on the NASD Web site at www.nasdr.com/3400_publications.asp.

    • 04-73 Amendments to Section 4 of Schedule A to the NASD By-Laws Governing Qualification Examination Fees

      View PDF file

      GUIDANCE

      Examination Fees

      Implemention Date: January 1, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management

      Examination Fees
      Qualification Examinations
      Registration
      Schedule A to the NASD By-Laws

      Executive Summary

      NASD has filed for immediate effectiveness amendments to Section 4 of Schedule A to the NASD By-Laws.1 The amendments increase certain examination fees, as described below, and also list the fees for all qualification examinations that may be required by NASD for its members, regardless of whether the current examination fee has been increased.

      The amendments to Section 4 become operative on January 1, 2005. The published fee schedule represents the fee that will be charged at the time the individual registers for the examination, starting on January 1, 2005. The individual then has 120 days in which to take the examination.

      Included with this Notice is Attachment A, the text of amended Section 4.

      Questions/Further Information

      Questions concerning this Notice may be directed to Ann Griffith, Associate Vice President and Director, Testing and Continuing Education, at (240) 386-5051.

      Background and Discussion

      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 the areas in which they intend to work. NASD sponsors (i.e., develops) some of these examinations while others are sponsored by NASAA, NYSE, MSRB, and other selfregulatory organizations (SROs).

      NASD administers these qualification examinations on behalf of the securities industry. NASD owns a proprietary system (the PROCTOR® system) to administer qualification examinations to securities industry professionals via computer. The examinations are delivered to candidates at test centers operated by vendors under contract with NASD.2

      NASD has not adjusted examination fees for NASD-sponsored examinations since 1989, nor has NASD increased the fees charged to its clients for administration and delivery of their examinations during that same time period. NASD recently conducted an analysis of the costs of developing, administering, and delivering qualification examinations. The analysis showed that NASD's costs, particularly technology3 and delivery costs, are rising. After consulting with several NASD committees and the clients for whom NASD administers and delivers examinations, NASD staff received approval from the NASD Finance Committee to adjust examination and delivery fees beginning in January 2005.

      The amendments to Schedule A eliminate existing provisions relating to specific examinations and, instead, list all qualification examinations that may be required by NASD for its members. The fees for these examinations represent the fees to be charged persons who register for any of these examinations beginning on January 1, 2005.4 NASD plans to conduct an annual review of its costs and adjust examination and delivery fees, if necessary, as of January 1 each year after making the appropriate rule filings.

      Fee Changes

      As a result of the cost increases explained above, examination fees for the following examinations that are delivered by NASD and that may be required by NASD for its members5 will be adjusted as follows:

      Series 4

      Registered Options Principal
      (Sponsored jointly by AMEX, CBOE,
      NASD, NYSE, PCX, and PHLX)

      From $75 to $80

      Series 24

      General Securities Principal
      (NASD-sponsored)

      From $75 to $85

      Series 6

      Investment Company Products/
      Variable Contracts Representative

      (NASD-sponsored)

      From $60 to $70

      Series 27

      Financial and Operations Principal
      (NASD-sponsored)

      From $75 to $85

      Series 7

      General Securities Representative
      (NYSE-sponsored)

      From $200 to $225

      Series 55

      Limited Representative – Equity Trader
      Examination

      (NASD-sponsored)

      From $60 to $80

      Series 9

      General Securities Sales
      Supervisor – Options Module

      (Sponsored jointly by AMEX, CBOE,
      MSRB, NASD, NYSE, PCX, and PHLX)

      From $50 to $60

      Series 62

      Corporate Securities Limited
      Representative

      (NASD-sponsored)

      From $60 to $70

      Series 10

      General Securities Sales
      Supervisor – General Module

      (Sponsored jointly by AMEX, CBOE,
      MSRB, NASD, NYSE, PCX, and PHLX)

      From $60 to $95

      Series 72

      Government Securities Representative
      (NASD-sponsored)

      From $60 to $80

      Series 22

      Direct Participation Programs
      Representative

      (NASD-sponsored)

      From $60 to $70

      Series 87

      Research Analyst – Regulatory
      (sponsored jointly by NASD and NYSE)

      From $100 to $105

      Publication of Fee Schedule in Schedule A

      NASD will publish the following schedule of qualification examination fees in Schedule A.

      Series 4

      Registered Options Principal

      $80

      Series 6

      Investment Company Products/Variable Contracts Representative

      $70

      Series 7

      General Securities Representative

      $225

      Series 9

      General Securities Sales Supervisor – Options Module

      $60

      Series 10

      General Securities Sales Supervisor – General Module

      $95

      Series 11

      Assistant Representative-Order Processing

      $60

      Series 17

      Limited Registered Representative

      $65

      Series 22

      Direct Participation Programs Representative

      $70

      Series 23

      General Securities Principal Sales Supervisor Module

      $75

      Series 24

      General Securities Principal

      $85

      Series 26

      Investment Company Products/Variable Contracts Principal

      $75

      Series 27

      Financial and Operations Principal

      $85

      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 38

      Canada Module of S7 (No Options Required)

      Series 39

      Direct Participation Programs Principal

      $75

      Series 42

      Registered Options Representative

      $60

      Series 55

      Limited Representative – Equity Trader

      $80

      Series 62

      Corporate Securities Limited Representative

      $70

      Series 72

      Government Securities Representative

      $80

      Series 82

      Limited Representative – Private Securities Offering

      $75

      Series 86

      Research Analyst – Analysis

      $150

      Series 87

      Research Analyst – Regulatory

      $105




      1  Under Section 19(b) of the Securities Exchange Act of 1934, the SEC has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2  The vendors are Pearson Professional Centers (contact Pearson VUE's National Registration Center toll-free at 1-866-396-6273 or 952-681- 3873 (toll number)) and Prometric Testing Centers (contact Prometric's National Call Center toll-free at 1-800-578-6273 or go to www.prometric.com/nasd for Web-based scheduling).

      NASD's contract with Pearson in January 2004 added more than 200 test centers to the existing network. With this addition, candidates may choose from more than 400 test delivery centers located throughout the United States and overseas.

      3  A substantial proportion of the cost increase is attributable to the need to redesign and rebuild the current PROCTOR® system, which is more than 10 years old. The new system, expected to be deployed in 2006, will incorporate up-to-date technology and will include many new features such as additional item (question) formats (short answer, matching, drag/drop), on-line exhibits, and advanced biometrics for greater security.

      4  The published fee represents the fee that will be charged at the time the individual registers for the examination. The individual then has 120 days to take the examination.

      5  NASD also administers and delivers examinations sponsored by NYSE, MSRB, NASAA, PHLX, and NFA that, while not required by NASD rules, are taken by persons associated with NASD members to obtain certain licenses. Fees for the following examinations developed by these sponsors will be adjusted as follows effective January 1, 2005: NYSE—Series 12 (Branch Manager), from $75 to $80. MSRB—Series 52 (Municipal Securities Representative), from $60 to $80; Series 53 (Municipal Securities Principal), from $75 to $80. NASAA—Series 63 (Uniform Securities Agent State Law), from $70 to $82; Series 65 (Uniform Investment Advisor Law), from $110 to $120. NFA—Series 3 (National Commodity Futures), from $75 to $90.


      Attachment A

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


      SCHEDULE A TO THE NASD BY-LAWS

      * * * * *
      (a) and (b) No change
      (c) [There shall be an examination fee of $60.00 assessed as to each individual who is required to take an examination for registration as a registered representative pursuant to the provisions of the Rule 1030 Series, except that the examination fee for general securities representatives shall be $110.00.] The following fees shall be assessed to each individual who registers to take an examination as described below as of January 1, 2005. [This] These fees [is] are in addition to the registration fee described in [Item] paragraph (b). [Persons for whom an examination is waived pursuant to Rule 1070 shall pay a fee as set forth in paragraph (l) of this Section.]

      Series 4 Registered Options Principal $80
      Series 6 Investment Company Products/Variable Contracts Representative $70
      Series 7 General Securities Representative $225
      Series 9 General Securities Sales Supervisor-Options Module $60
      Series 10 General Securities Sales Supervisor-General Module $95
      Series 11 Assistant Representative-Order Processing $60
      Series 17 Limited Registered Representative $65
      Series 22 Direct Participation Programs Representative $70
      Series 23 General Securities Principal Sales Supervisor Module $75
      Series 24 General Securities Principal $85
      Series 26 Investment Company Products/Variable Contracts Principal $75
      Series 27 Financial and Operations Principal $85
      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
      Series 62 Corporate Securities Limited Representative $70
      Series 72 Government Securities Representative $80
      Series 82 Limited Representative-Private Securities Offering $75
      Series 86 Research Analyst – Analysis $150
      Series 87 Research Analyst – Regulatory $105
      (1) Persons for whom any qualification examination is waived pursuant to Rule 1070 shall be assessed as an application fee the examination fee for each qualification examination so waived.
      (2) There shall be a service charge equal to the examination fee assessed as to each individual who, having made an appointment for a specific time and place for computer-based administration of an examination, fails to timely appear for such examination or timely cancel such appointment.
      (3) There shall be a service charge fee of $15.00 in addition to those fees specified above for any examination taken in a foreign test center located outside the territorial limits of the United States.
      [(d) There shall be a New York Stock Exchange examination development fee of $90.00 assessed as to each individual who takes a Series 7 examination for registration as a general securities representative. This fee is in addition to the registration and examination fees described in paragraphs (b) and (c) respectively.]
      [(e) There shall be an examination fee of $105.00 assessed as to each individual who takes a Series 86 examination for registration as a research analyst pursuant to Rule 1050. There shall be an examination fee of $55.00 assessed as to each individual who takes a Series 87 examination for registration as a research analyst pursuant to Rule 1050. This fee is in addition to the registration fee described in paragraph (b). Persons for whom an examination is waived pursuant to Rule 1070 shall pay a fee as set forth in paragraph (l) of this Section.]
      [(f) There shall be a New York Stock Exchange examination development fee of $45.00 assessed as to each individual who takes a Series 86 or Series 87 examination for registration as a research analyst pursuant to Rule 1050. This fee is in addition to the registration and examination fees described in paragraphs (b) and (e) respectively.]
      [(g) There shall be an examination fee of $110.00 assessed as to each individual taking the General Securities- Sales Supervisor Examination. There shall be an examination fee of $75.00 assessed as to each individual who is required to take any other examination for principals pursuant to the provisions of the Rule 1020 Series. Persons for whom an examination is waived pursuant to Rule 1070 shall pay a fee as set forth in paragraph (l) of this Section.]
      [(h) There shall be a service charge fee of $15.00 in addition to those fees specified in (b), (c), (d), (e) and (f) above for any examination taken in a foreign test center located outside the territorial limits of the United States.]
      [(i) There shall be a service charge equal to the examination fee assessed as to each individual who, having made an appointment for a specific time and place for computer-based administration of an examination, fails to timely appear for such examination or timely cancel such appointment.]
      (j) and (k) are renumbered (d) and (e).
      [(l) Each individual who is granted a waiver(s) for any qualification examination specified in paragraphs (c), (e), or (g) of this section shall be assessed as an application fee the examination fee as set forth in paragraph (c), (e), (f), or (g) for each qualification examination so waived.]
      (m) through (o) are renumbered (f) through (h).
      * * * * *

    • 04-72 Impermissible Use of Negative Response Letters for the Transfer of Mutual Funds and Variable Annuities (Changes in Broker-Dealer of Record)

      View PDF file

      GUIDANCE

      Transfers of Mutual Funds and Variable Annuities

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management

      Broker-Dealer of Record
      Customer Account Transfers
      Mutual Funds
      Negative Response Letters
      Rule 2110
      Variable Annuities

      Executive Summary

      In September 2002, NASD issued Notice to Members (NtM) 02-57 addressing when a member firm can use "negative response letters" for the bulk transfer of customer accounts, consistent with NASD rules. Since the publication of NtM 02-57, the staff has received a number of inquiries from the membership for guidance on the use of negative response letters to change the "broker-dealer of record" (hereinafter, BD of record) on a mutual fund or variable insurance product account held directly with the issuer. As indicated in NtM 02-57, changes in BD of record under these circumstances fall outside the scope of NtM 02-57. Accordingly, a member must obtain affirmative consent from a customer to direct a change in the BD of record in either a mutual fund or variable annuity account.

      Questions/Further Information

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

      Background and Discussion

      In September 2002, NASD issued NtM 02-57 concerning the use of negative response letters1 for the bulk transfer of customer accounts. In NtM 02-57, NASD staff expressed its general view that a customer should affirmatively consent to the transfer of his or her account to another firm. The staff explained that when a firm initiates the transfer of a customer's account via a negative response letter, there is no assurance that the customer has had sufficient time or information with which to decide whether to object to the transfer. The staff further observed that members may be inclined to use negative response letters because of the convenience these letters provide, without giving due consideration to whether soliciting affirmative customer consent is a viable alternative. The staff concluded that transfers of customer accounts by a member using negative response letters may, under certain circumstances, conflict with a member's obligation to observe high standards of commercial honor and just and equitable principles of trade under NASD Rule 2110.2

      The staff, however, identified five specific situations in which it believed negative response letters could be appropriate to transfer customer accounts. These situations involve:

      • A member experiencing financial or operational difficulties;

      • An introducing firm no longer in business;

      • Changes in a networking arrangement with a financial institution;

      • An acquisition or merger of a member firm; and

      • A change in a clearing firm by an introducing firm.

      The staff specifically indicated in NtM 02-57 that the guidance in the Notice did not apply to transfers of special product accounts such as mutual fund or variable annuity accounts, nor did it apply to the transfer of specific securities.3 This statement reflected the staff's belief that such situations did not merit an exception from the general principle that firms should obtain affirmative consent from a customer prior to transferring such accounts (including changing the BD of record) or specific securities.

      Since the issuance of NtM 02-57, however, NASD staff has received a number of inquiries regarding the potential application of the principles in the Notice to changes in BD of record, specifically whether members can use negative response letters to change the BD of record in mutual fund or variable insurance product accounts held directly with the issuer. The BD of record refers to the broker-dealer identified on a customer's account application for accounts held directly at a mutual fund or variable insurance product issuer. Accounts held in this manner are sometimes referred to as "check and application," "application way," or "direct application" (for consistency, this Notice uses the term "direct application") business. The BD of record generally receives fees or commissions resulting from the customer's transactions in the account.

      NASD staff is issuing this Notice to reaffirm that the guidance provided in NtM 02-57 regarding the use of negative response letters does not apply to changes of BD of record for mutual fund and variable insurance product accounts where the account is held directly with the issuer. As explained in NtM 02-57, the use of negative response letters to facilitate a bulk transfer of customer accounts is generally appropriate in the five specified situations primarily because the bulk transfer of accounts helps minimize interruptions to customers' access to their accounts and the trading markets. However, because a change in the BD of record does not affect the owner's access to his or her account, changing the BD of record on a "direct application" account does not present such concerns. Nor does a change in the BD of record materially alter any of the account features, such as account holders, assets, investment objectives, etc. Rather, the change predominantly affects who will receive any fees and commissions the mutual fund or variable insurance product issuer may pay.

      Given that the considerations that make the use of negative response letters appropriate in the five situations outlined in NtM 02-57 are not present when a "direct application" account's BD of record is changed, a member should seek a customer's affirmative consent prior to changing the BD of record on the customer's "direct application" account. The staff understands that the member may incur some cost and encounter some inconvenience when seeking affirmative consent to change a BD of record. However, a customer should be given sufficient time and information with which to decide whether a new BD of record should be named on the customer's account.


      1 A negative response letter generally informs the recipient of the letter of an impending action and requires the recipient to respond or act within a specified time frame if the recipient objects to the action. If the recipient does not respond, he or she is deemed to have consented to the action.

      2 See also Letter to Merit Capital Associates, Inc., from Office of General Counsel, NASD Regulation, Inc. (predecessor to NASD Regulatory Policy and Oversight) dated October 16, 2000.

      3 See NtM 02-57 (September 2002) n.1 ("This Notice to Members does not apply to transfers of special product accounts such as mutual fund or variable annuity accounts, nor does it apply to the transfer of specific securities. Further, certain account transfers may require NASD approval under Rule 1017.").

    • 04-71 SEC Approves New Rules and Rule Amendments Concerning Supervision and Supervisory Controls

      View PDF file

      GUIDANCE

      Supervisory Controls

      Effective Date: January 31, 2005

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Trading

      Account Name/Designation Changes
      CEO Certification
      Holding Customer Mail
      IM-3110 (Customer Account Information)
      Rule 2510 (Discretionary Accounts)
      Rule 3010
      Rule 3012 (Supervision)
      Rule 3013 (Annual Certification of Compliance and Supervisory Processes)
      Rule 3110 (Books and Records)
      Supervision
      Supervisory Control Procedures
      Time and Price Discretion

      Executive Summary

      On June 17, 2004, the Securities and Exchange Commission (SEC) 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.1 On September 30, 2004, the SEC granted accelerated approval to proposed rule changes to the Supervisory Control Amendments to conform certain parts of the new rule requirements to the New York Stock Exchange's (NYSE's) recently approved internal control amendments.2 In their entirety, the approved rule changes:

      • Eliminate Rule 3010(a)(8), which required a member to identify one or more principals who will review the member's supervisory system, procedures, and inspections and take or recommend action to achieve the member's compliance with applicable securities laws and regulations and with NASD rules;
      • Create Rule 3012 to require a member to designate one or more principals who will establish, maintain, and enforce a system of supervisory control policies and procedures that test and verify that the member's supervisory procedures are reasonably designed to comply with applicable securities laws and NASD rules and amend those supervisory procedures where necessary. Rule 3012 also requires that a person senior or "otherwise independent" to a producing manager perform the day-to-day supervisory reviews of the producing manager's account activity. However, if a member is so limited in size and resources that it cannot comply with this general supervisory requirement, the member may have a knowledgeable principal perform the supervisory reviews. In addition, a member must have in place heightened supervisory procedures for the supervision of a producing manager who is responsible for 20 percent or more of the revenue generated by the business units supervised by the producing manager's supervisor.
      • Amend Rule 3010(c) to codify the minimum inspection cycles for a member's offices and to require that office inspections include, without limitation, the testing and verification of the member's policies and procedures, including supervisory policies and procedures in certain specified areas. There is a general requirement that an office inspection may not be conducted by the branch office manager for that office, any person within that office who has supervisory responsibilities, or any individual who is directly or indirectly supervised by such persons. However, if a member is so limited in size and resources that it cannot comply with this limitation, the member may have a knowledgeable principal perform the inspections. Depending upon the position of the person within the member who conducts the inspection, a member must have in place heightened inspection procedures for the inspection of an office where the producing manager is responsible for 20 percent or more of the revenue generated by the business units supervised by the producing manager's supervisor.
      • Amend Rule 3110 to require that before any customer order is executed, the account name/designation must be placed upon the memorandum for each transaction. Additionally, no changes to the account name/designation can be made unless previously authorized by a member or a person designated under NASD rules (who must pass a qualifying principal exam). Such person, prior to giving such approval, must be informed of the essential facts and indicate his/her approval in writing on the order or similar record. The facts relied upon by the person in approving the change must be documented in writing and preserved for a period of not less than three years, with the documentation preserved for the first two years in an easily accessible place, as the term "easily accessible place" is used in SEC Rule 17a-4.
      • Amend Rule 2510(d)(1) to require that time and price discretionary authority is limited to the day it is granted, absent a specific, written indication signed and dated by the customer. The limitation does not apply to time and price discretion exercised for orders in an institutional account pursuant to valid Good-Till-Cancelled instructions issued on a "not held" basis. Any exercise of time and price discretion must be reflected on the order ticket.

      This Notice provides interpretive guidance on these rule changes. The Notice also explains the relationship between recently approved (but not yet effective) Rule 3013 and Rules 3012 and 3010. The text of the amendments is set forth in Attachment A and becomes effective on January 31, 2005.3 A table of contents has been provided for readers' convenience.

      Questions/Further Information

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

      SUPERVISORY CONTROL AMENDMENTS

      Table of Contents

      Background 826
      Relationship between Rules 3010, 3012, and 3013 826
      Rule 3012 (Supervisory Controls System) 827
          Testing and Verification of a Member's Supervisory Procedures 827
          Senior or "Otherwise Independent" Person to Review Producing Manager 827
          Heightened Supervision Requirements 828
          "Limited Size and Resources" Exception 829
          Future Notice Requirement for Exception Users 831
          Activities that Require Individualized Policies and Procedures 831
          Dual Members' Compliance with Substantially Similar NYSE Requirements 832
          Elimination of Rule 3010(a)(8) 832
      Rule 3010 (Supervision) 832
          Mandatory Inspection Cycles 832
          Required Content and Recordkeeping Requirements for Inspection Reports 834
          "Limited Size and Resources" Exception 834
          Heightened Inspection Requirements 835
      Rule 3110 (Books and Records) 836
      Approval and Documentation Procedures for Changes in Account Name/Designation 836
      IM-3110 (Customer Account Information) 837
      Time Limits for Holding Customer Mail 837
      Rule 2510 (Discretionary Accounts) 838
          One-Day Limit on Time/Price Discretionary Authority 838

      Background

      Adequate supervisory systems play an important role in assuring investor protection and the integrity of the markets. Operational and sales practice abuses can stem from ineffective supervisory and supervisory control procedures. The 2002 Gruttadauria case, which involved a branch office manager's misappropriation of approximately $40 million of customer funds,4 brought tremendous attention to the ongoing problem of operational and sales practice abuses at firms and the importance of ensuring that firms effectively monitor the activities of their employees.

      In light of the concerns raised by the Gruttadauria case with respect to inadequate supervisory systems, NASD has amended certain rules and interpretive materials and has created new Rule 3012 (Supervisory Controls System). This Notice explains and describes those amendments and the provisions of Rule 3012. This Notice also explains how recently approved Rule 3013 (Annual Certification of Compliance and Supervisory Processes) and IM-3013 (Annual Compliance and Supervision Certification) interact with Rule 3012 and amended Rule 3010 (Supervision).

      Relationship between Rules 3010, 3012, and 3013

      New Rule 3013 requires each member firm's chief executive officer (CEO) to certify annually that senior executive management has in place processes to: (1) establish, maintain, and review policies and procedures reasonably designed to achieve compliance with applicable NASD rules, Municipal Securities Rulemaking Board (MSRB) rules, and federal securities laws and regulations; (2) modify such policies and procedures as business, regulatory, and legislative changes and events dictate; and (3) test the effectiveness of such policies and procedures on a periodic basis, the timing of which is reasonably designed to ensure continuing compliance with NASD rules, MSRB rules, and federal securities laws and regulations. IM-3013 sets forth the language of the CEO certification and gives further guidance as to the requirements and limitations of Rule 3013.

      Because Rules 3010 and 3012 also address a member firm's supervisory policies and procedures, firms have questioned whether these rules impose duplicative requirements regarding the establishment of a firm's supervisory policies and procedures. Although Rules 3010, 3012, and 3013 are closely related, their obligations are complementary, not duplicative, in nature. The three rules essentially come together to form an overarching regulatory scheme for the supervision of member firms. First, Rule 3013 requires the CEO of each member to certify that they have a process to adopt compliance policies and supervisory procedures reasonably designed to achieve compliance with applicable securities laws and regulations and NASD rules. Rule 3010 requires the establishment of a supervisory system for the firm's business activities, including the adoption of polices and procedures reasonably designed to achieve compliance with applicable securities laws and regulations and NASD rules. The establishment of the supervisory system required to be adopted in Rule 3010 should result from the processes that are the subject of the certification of Rule 3013. Finally, Rule 3012 requires firms to (i) have supervisory control procedures that test and verify that the members' supervisory procedures are reasonably designed to achieve compliance with applicable securities laws and regulations and NASD rules, and (ii) where necessary, amend or create additional supervisory procedures. In sum, NASD's new regulatory supervisory scheme consists of process, supervision, and adoption of policies and procedures,5 and testing and amendment of such policies and procedures.

      Rule 3012 – Supervisory Control System

      Testing and Verification of a Member's Supervisory Procedures

      New Rule 3012 requires that a member designate and specifically identify one or more principals who will establish, maintain, and enforce supervisory control procedures that will test and verify that the member's supervisory procedures are sufficient and amend or create additional supervisory procedures where the need is identified by such testing and verification.6 Of course, NASD expects that the designated principals will test and verify the adequacy of the supervisory control procedures in a manner that is independent of any business considerations that are countervailing to full compliance with applicable securities laws and regulations and NASD rules.

      Senior or "Otherwise Independent" Person to Review Producing Manager

      Rule 3012's supervisory control policies and procedures must include procedures that are reasonably designed to review and supervise on a day-to-day basis the customer account activity conducted by the member's branch office managers, sales managers, regional or district sales managers, or any person performing a similar supervisory function.7 A person who is senior to or "otherwise independent" of the producing manager must perform these day-to-day supervisory reviews.8 An associated person is considered a producing manager regardless of the amount of customer account activity the producing manager conducts. Accordingly, if the president of a member firm manages only a few accounts on behalf of the president's family and friends, that person is considered a producing manager for purposes of Rule 3012.

      NASD understands that the determination of seniority for the purpose of deciding who should conduct a producing manager's supervisory reviews is a facts and circumstances test. A person who does not report to the producing manager, whose compensation is not determined in whole or part by the producing manager, and who is not in the same chain of authority may be considered senior to the producing manager if that person has the authority to oversee, direct, and correct the activities of the producing manager and take all necessary remedial actions, including termination, if and when necessary.

      Similarly, a member must consider certain factors in determining whether a person is an "otherwise independent" person for purposes of conducting a producing manager's day-to-day supervisory reviews. An "otherwise independent" person who may conduct supervisory reviews may not report either directly or indirectly to the producing manager under review. In addition, the otherwise independent person must be situated in an office other than the office of the producing manager, must not otherwise have supervisory responsibility over the activity being reviewed (including not being directly compensated based in whole or in part on the revenues accruing from those activities), and must alternate such review responsibility with another qualified person every two years or less.9

      The ability of member firms to use individuals who are either senior to or "otherwise independent" of the producing manager to conduct the producing manager's day-to-day supervisory reviews allows member firms the flexibility to structure their supervisory review policies and procedures in a manner that both accords with their various business models and achieves the best customer protection practices. For example, if a member firm has a person who is senior to the producing manager assigned as the producing manager's supervisor but determines that, for customer protection purposes, the producing manager's supervisor should not conduct the day-to-day supervisory reviews of the producing manager's customer account activity because the supervisor is located in the producing manager's office, the member firm may have a person who meets the definition of an "otherwise independent" person conduct the day-to-day supervisory reviews of the producing manager's customer account activity.

      Heightened Supervision Requirements

      In addition, Rule 3012's supervisory control policies and procedures require a member to have procedures that are reasonably designed to provide heightened supervision over the activities of the producing manager if the producing manager is responsible for generating 20 percent or more of the revenue of the business units supervised by the producing manager's supervisor over the course of a rolling, twelve-month period.10 NASD views this 20 percent threshold as a trigger for determining when a member must put in place heightened supervisory procedures. For purposes of determining the 20 percent threshold, a member must look at all revenue generated by or credited to the producing manager or the producing manager's office, and that amount shall be included as part of the overall revenues of the business units supervised by the producing manager's supervisor irrespective of a member's internal allocation of such revenue. Rule 3012 requires the 20 percent threshold to be calculated on a rolling, twelve-month basis. The standard for heightened supervision in Rule 3012 does not create a negative safe harbor, i.e., the inspection of offices falling below the 20 percent threshold does not create a presumption that heightened supervision is not required. A member may need to employ heightened supervision in connection with reviews based on other facts and circumstances.

      For purposes of Rule 3012, the term "heightened supervision" means those supervisory procedures that are designed to avoid conflicts of interest that serve to undermine complete and effective supervision because of the economic, commercial, or financial interests that the supervisor holds in the associated persons and businesses being supervised.11 Heightened supervisory procedures may include such elements as unannounced supervisory reviews, an increased number of supervisory reviews by different reviewers within a certain period, a broader scope of activities reviewed, and/or having one or more principals approve the supervisory review of such producing managers. These examples are meant to illustrate the type of procedures a member may want to include in its heightened supervisory procedures and are not meant to be an exclusive or exhaustive list of heightened supervisory procedures a member may need to put in place.

      Member firms should note that an "otherwise independent" person is not considered to be the producing manager's supervisor for purposes of determining whether a producing manager is responsible for generating 20 percent or more of the revenue of the business units supervised by the producing manager's supervisor, such that the member firm must put in place heightened supervisory procedures. Accordingly, if an "otherwise independent" person conducts a producing manager's supervisory reviews, the firm will not be required to put in place heightened supervisory procedures. The heightened supervision requirement is designed to avoid any conflicts of interest that may undermine an objective and comprehensive review of the producing manager's customer activity. The factors that define an "otherwise independent" person already protect against the possibility that any conflicts of interest may exist that might adversely affect the producing manager's supervisory reviews, especially the restriction that an "otherwise independent" person not be directly compensated based in whole or in part on the revenues accruing from the activities being reviewed.

      "Limited Size and Resources" Exception

      Rule 3012 provides a limited exception for any member firm that is so limited in size and resources (the "limited size and resources" exception) that the member does not have associated persons who can conduct supervisions and are senior or "otherwise independent" from the producing managers. In such situations, a member may have the reviews conducted by a principal who is sufficiently knowledgeable of the member's supervisory control procedures.12 Whether a member firm may use the "limited size and resources" exception depends on the facts and circumstances surrounding each member firm. In some instances, the size of a member firm will generally determine that the member firm does not have the ability to conduct the supervisory reviews for any of its producing managers. For example, a sole proprietor or a member with only one small office will be eligible to use the "limited size and resources" exception.

      In other instances, a member may be able to use the "limited size and resources exception for part, but not all, of its supervisory obligations. For example, a member firm may have the size and resources to have a person senior or "otherwise independent" conduct the reviews of the branch manager of each office but may need to use the exception in connection with the supervision of the customer account activity of producing supervisors up the chain of command up to and including the CEO. Nevertheless, members should be mindful that they can avail themselves of the "limited size and resources" exception only where a person senior or "otherwise independent" of the producing manager is not available to conduct supervision of the producing manager's customer account activity. Having someone available but who may find it difficult to conduct the supervisory reviews is not sufficient to use the "limited size and resources" exception. Members that do qualify to use the exception may, nevertheless, want to consider whether it would be in the best interests of the firm to prohibit its senior persons from servicing accounts.

      Because the "limited size and resources" exception is designed for those firms that genuinely need relief from the general supervisory requirement applicable to producing managers, NASD expects the "limited size and resources" exception to be narrowly construed. Moreover, there is no initial allowance (as discussed below in the context of Rule 3010) for any particular business model to be permitted to be deemed of "limited size and resources" solely because of its business model. As noted further below, each firm using the exception, regardless of business model, will need to evidence its being of such "limited size and resources" that it cannot comply with the general requirement. Firms that either construct their business models specifically to take advantage of the "limited size and resources" exception or that have the size and resources to comply with the general requirement and yet fail to comply with the general requirement will be in violation of Rule 3012.

      Any supervisory reviews conducted using the "limited size and resources" exception must still comply, to the extent possible with the general requirement, that someone who is either senior or "otherwise independent" conduct the reviews.13 For example, if a firm does not have someone who is senior to a producing manager but does have persons who would be considered "otherwise independent" except for the fact that there is an insufficient number to meet the requirement that they conduct the supervisory reviews on a two-year rotation, the member firm must use these qualified persons to conduct the producing manager's supervisory reviews rather than using a principal who is sufficiently knowledgeable of the member firm's supervisory control procedures but who does not meet the factors of the "otherwise independent" definition.

      A member using the "limited size and resources" exception must also document in its supervisory control procedures the factors used to determine that complete compliance with all of the provisions of the general supervisory requirement is not possible and that the required supervisory system and procedures in place with respect to any producing manager comply, to the extent practicable, with the general supervisory requirement.14 For instance, a member firm using the "limited size and resources" exception to conduct the day-to-day supervisory reviews of its most senior personnel who are also considered producing managers but that has the resources to use the general supervisory requirement to conduct the day-to-day supervisory reviews of the rest of its producing managers, must document factors, such as the lack of sufficiently qualified personnel to conduct supervisory reviews of its senior persons, and how, to the extent practicable, the persons who are conducting the senior persons' supervisory reviews meet some, if not all, of the provisions of the "otherwise independent" definition.

      Future Notice Requirement for Exception Users

      The SEC has specified in the Approval Order that NASD must notify the SEC of those members that elect to use Rule 3012's "limited size and resources" exception to the general supervisory requirement applicable to producing managers. Accordingly, member firms should be aware that NASD plans to file a rule change to require in the future that firms using the "limited size and resources" exception notify NASD of their use of the exception. NASD believes it is essential to collect this information from members using a Web-based reporting system or other automated electronic platform. Accordingly, it is intended that the reporting requirement effective date will coincide with the completion of an electronic reporting process and system designed for that purpose. Initial technology estimates indicate that it should take no more than one year from the date of the Approval Order to construct this Web-based system (or other electronic platform) and bring it on-line; however, members should be aware that NASD will need to bring such system on-line as soon as practicable.

      Activities that Require Individualized Policies and Procedures

      Rule 3012 also requires that a firm's supervisory control policies and procedures include procedures that are reasonably designed to review and monitor the following activities:

      • All transmittals of funds (e.g., wires or checks, etc.) or securities—

        • From customers and third-party accounts (e.g., a transmittal that would result in a change of beneficial ownership);

        • From customer accounts to outside entities (e.g., banks, investment companies, etc.);

        • From customer accounts to locations other than a customer's primary residence (e.g., post office box, "in care of" accounts, alternate address, etc.); and

        • Between customers and registered representatives, including the handdelivery of checks.

      • Customer changes of address and the validation of such changes of address; and

      • Customer changes of investment objectives and the validation of such changes of investment objectives.15

      Members should note that the policies and procedures for monitoring these activities must include a means or method of customer confirmation, notification, or follow-up that can be documented.16 NASD does not expect a member to have in place supervisory policies and procedures for activities in which it does not engage. However, a member must identify those activities in which it does not engage in its written supervisory control policies and procedures and document that additional supervisory policies and procedures for such activities must be in place before a member can engage in them.17

      Dual Members' Compliance with Substantially Similar NYSE Requirements

      Rule 3012 also provides that any member in compliance with substantially similar requirements of the NYSE shall be deemed to be in compliance with Rule 3012.18 NASD believes that this provision helps promote consistency between NASD's and the NYSE's supervisory control requirements.

      Elimination of Rule 3010(a)(8)

      Finally, NASD has eliminated Rule 3010(a)(8), which required a member to identify one or more principals who will review the member's supervisory system, procedures, and inspections and take or recommend action to achieve the member's compliance with the applicable securities laws and regulations and with NASD rules. In light of Rule 3012's requirements, NASD believes that retaining Rule 3010(a)(8) could result in members having to engage in duplicative efforts to meet both rules' provisions.

      Rule 3010 – Supervision

      Mandatory Inspection Cycles

      Amended Rule 3010(c)(1) details mandatory inspection cycles that each member must have in place for its supervisory branch offices, non-supervisory branch offices, and unregistered locations. NASD believes that codifying these mandatory inspection schedules will enhance oversight and supervision of branch and non-branch locations.

      Specifically, Rule 3010(c)(1) requires each member to inspect, at least annually, each supervisory branch office.19 Any location that is responsible for supervising the activities of persons associated with a member at one or more of a member's non-branch office locations is considered to be a branch office.20 This codifies previous NASD guidance that branch offices that supervise one or more locations must be inspected at least annually.21

      Also, Rule 3010(c)(1) requires a member to inspect all non-supervisory branch offices, at a minimum, every three years.22 When establishing how often to inspect its nonsupervisory branch offices, the member must consider whether the nature and complexity of a branch office's securities activities, the branch office's volume of business, and the number of associated persons assigned to the branch office require inspections more frequently than every three years. Also, a member must set forth in its written supervisory and inspection procedures the examination cycle and an explanation of the factors the member used in determining the frequency of the cycle.23 These requirements are consistent with previous NASD guidance advising that, in determining the inspection cycle for a non-supervisory branch office, a member should consider the nature and complexity of the securities activity for which the branch office is responsible, as well as the volume of business conducted at the office and the number of associated persons assigned to the office and that, after determining the inspection cycle, a member should document the cycle in its written supervisory and inspection procedures.24

      NASD understands that a general practice exists where a member may inspect nonsupervisory branch offices on a more frequent cycle than once every three years but target only certain areas of the offices' activities during a particular examination. Accordingly, Rule 3010(c)(1) requires that a member following this practice must inspect all of the required areas listed in Rule 3010(c)(2), which are discussed below, within the three-year cycle, regardless of the number of times within that cycle a non-supervisory branch office is inspected. Also, a member must set forth in its written supervisory and inspection procedures the manner in which it will inspect those areas within the threeyear cycle.25

      Additionally, Rule 3010(c)(1) requires a member to inspect every non-branch location on a regular periodic schedule.26 In establishing the inspection schedule, a member must consider the nature and complexity of the location's securities activities and the nature and extent of contact with customers and set forth in its written supervisory and inspection procedures an explanation regarding how the member determined the frequency of the examination schedule.27 These requirements are consistent with previous NASD guidance stating that non-branch locations should be inspected according to a regular schedule and that the frequency and scope of inspections should be determined based on factors such as the nature and volume of business conducted at the office and the nature and extent of contact with customers.28

      Members are advised to look carefully at the activities of their non-branch locations to ensure that they are not considered by Rule 3010 to be a branch office. As previously noted, Rule 3010 considers a non-branch location to be a branch office if it is responsible for supervising the activities of persons associated with a member at one or more of the member's non-branch locations.29

      Members should be advised that "locations of convenience" are, by definition, excluded from being a branch office and, consequently, fall under the category of a non-branch location.30 A location of convenience is any location where a person conducts business on behalf of the member occasionally and exclusively by appointment for the customer's convenience.31 Often, but not always, a location of convenience will be a branch office of a bank affiliated with the member firm. Sometimes, because the meeting is being arranged for the customer's convenience, the meeting place could be a hotel conference center or other public area that is close to the customer. No records of the business conducted are usually kept at this site because it is not considered a place within the member firm's purview. However, Rule 3010 would require that locations of convenience still be examined on a regular periodic schedule. If locations of convenience were excluded from the inspection requirement, it could be possible for an associated person to clandestinely conduct business at that location on a more routine basis, and perhaps to arrange to keep records of any business conducted at the location that the associated person would not want revealed to the member firm. As an aid in determining when to conduct such inspections, a member firm may want to require each associated person to record when a customer requests to meet at a location of convenience, where the location of convenience is situated, how often the associated person uses any location of convenience, and what kind of business is conducted at these locations of convenience.

      Required Content and Recordkeeping Requirements for Inspection Reports

      Rule 3010(c)(2) mandates that a member must reduce each office inspection to a written report and keep it on file for a minimum of three years, unless the inspection is being conducted pursuant to a regular periodic cycle for non-branch office locations and the regular periodic schedule is longer than a three-year cycle, in which case the member must keep the report on file at least until the next inspection report has been written. The written inspection report must also include, without limitation, the testing and verification of the member's policies and procedures, including supervisory policies and procedures, in the areas of:

      • Safeguarding customer funds and securities;

      • Maintaining books and records;

      • Supervising customer accounts serviced by branch office managers;

      • Transmitting funds between customers and registered representatives and between customers and third parties;

      • Validating customer address changes; and

      • Validating changes in customer account information.32

      NASD does not expect a member to have in place procedures for activities in which it does not engage. However, the member must identify those activities in which it does not engage in the written inspection report and document in the report that supervisory policies and procedures for such activities must be in place before the member can engage in them.33

      "Limited Size and Resources" Exception

      Rule 3010(c)(3) prohibits a branch office manager or any person within that office who has supervisory responsibilities or any individual who is supervised by such persons from conducting office inspections. NASD understands, however, that members have different business models and/or are limited in size and resources such that they are not able to comply fully with those restrictions regarding who can conduct an office inspection.

      Accordingly, Rule 3010(c)(3) also provides a "limited size and resources" exception for members that cannot comply with the general inspection requirement's restrictions on who may conduct an office inspection. Under the exception, a member firm may continue to use the persons they have previously used to conduct the office inspections provided they are principals and have the requisite knowledge to conduct such inspections.34 Members, however, must be able to document in the office inspection reports that their size and resources are such that they have no other alternative.35

      Whether a firm is so limited in its size and resources that it cannot comply with the general requirement is a facts and circumstances test and, similar to the "limited size and resources" exception in Rule 3012, should be narrowly construed. For instance, although Rule 3010 provides as an example of limited size and resources, a member with only one office, this does not mean that any member with one physical location may use the "limited size and resources" exception. The example in the rule text is meant to illustrate a small member, such as a member with a single, three-person office. A member that has one physical location that includes a single production office, yet is so big that there are other departments, such as corporate offices, technology offices, etc., would be of sufficient size and resources such that there would be someone within the firm outside the production office that could conduct the inspection. However, in the case of Rule 3010 only, a member firm may use the exception regardless of its size and resources if the firm has a business model where small or single-person offices report directly to an OSJ manager who is also considered the offices' branch office manager (also referred to as the "independent dealer or independent contractor model").36 Members with such business models should note that the exception does not apply on a business model basis to the inspection of the OSJ; whether an OSJ qualifies for the exception is based solely on a limitation of size and resources exclusive of business model considerations.

      With the exception of those firms using the exception in Rule 3010 as a result of their business model (i.e., those firms with the independent dealer model described above), members should be aware that the "limited size and resources" exception is designed for those firms that genuinely need relief from the general inspection requirement. Firms that either construct their business models specifically to take advantage of the "limited size and resources" exception or that have the size and resources to comply with the general inspection requirement and yet fail to comply with the general requirement will be in violation of Rule 3010.

      Heightened Inspection Requirements

      Rule 3010(c)(3) also requires a member to have in place procedures that are reasonably designed to provide heightened office inspections if two conditions are met: (1) the person conducting the inspection reports to the branch office manager's supervisor or works in an office supervised by the branch manager's supervisor; and (2) the branch office manager generates 20 percent or more of the revenue of the business units supervised by the branch office manager's supervisor. NASD views this 20 percent threshold as a trigger for determining when a member must put in place heightened inspection procedures. For purposes of determining the 20 percent threshold, a member must look at all revenue generated by or credited to the producing manager or the producing manager's office, and that amount shall be included as part of the overall revenues of the business units supervised by the producing manager's supervisor irrespective of a member's internal allocation of revenues.37 If a producing manager does not have an individual assigned to supervise him but, rather, is supervised directly by the member's compliance department, then the revenue produced would be attributable to a business unit supervised by the compliance department. If such revenue constitutes 20 percent or more of all of the supervised revenue attributable to the compliance department, then the member must have in place heightened inspection procedures. Rule 3010 requires the 20 percent threshold to be calculated on a rolling, twelve-month basis.38 As stated above in the discussion of Rule 3012, a member may need to employ heightened office inspection procedures based on other facts and circumstances.

      Rule 3010's term "heightened inspection" means those inspection procedures that are designed to avoid conflicts of interest that serve to undermine complete and effective inspection because of the economic, commercial, or financial interests that the branch manger's supervisor holds in the associated persons and businesses being inspected.39 Heightened inspection procedures may include such elements as unannounced office inspections, increased frequency of inspections, a broader scope of activates inspected, and/or having one or more principals review and approve the office inspections. These examples are meant to illustrate the type of procedures a member may want to include in its heightened inspection procedures and are not meant to be an exclusive or exhaustive list of heightened inspection procedures a member may need to put in place.

      Rule 3110 – Books and Records

      Approval and Documentation Procedures for Changes in Account Name/Designation

      Amended Rule 3110(d) requires that, before a customer order is executed, the account name or designation must be placed upon the memorandum for each transaction. In addition, only a designated person who has passed a qualifying principal examination appropriate to the business of the firm may approve any changes in account names or designations. The designated person also must document the essential facts relied upon in approving the changes and maintain the record in a central location. A member must preserve any account designation change documentation for a period of not less than three years, with the documentation preserved for the first two years in an easily accessible place, as the term "easily accessible place" is used in SEC Rule 17a-4.40 This preservation requirement will not only allow members to use existing recordkeeping systems to meet this requirement, but it will enable members to make the account designation change documentation promptly available if requested by NASD examination staff. It also coincides with Rule 3110's existing mandate that members' recordkeeping format, medium, and retention periods comply with SEC Rule 17a-4 requirements.41

      Because changes in account names or designations in connection with order executions can be subject to abuse, NASD believes that a qualified person should approve such changes and a member should adequately document them. NASD understands that some members, especially those that use clerical staff to make these changes, may incur additional costs by requiring that a principal be informed of the surrounding facts of the change and authorize it. However, NASD believes that account names and designations are material, sensitive information that must be protected from possible fraudulent activity. Requiring a principal to authorize the change and be aware of the surrounding facts for the change is a relatively low-cost method of protecting this information.

      NASD also believes that Rule 3110's new requirement that a name or account designation be placed on "each transaction" promotes consistency with members' NASD and SEC books and records requirements. Specifically, SEC Rule 17a-3(a)(6) requires that a memorandum of each brokerage order identify, among other things, the account for which the order was entered. NASD expects that members, regardless of the type of securities business they engage in, will comply with this requirement in the same manner that they comply with the SEC's books and records requirements.

      IM-3110 – Customer Account Information

      Time Limits for Holding Customer Mail

      Under revised IM-3110(i), a member, upon a customer's written instructions, may hold mail for a customer who will not be at his or her usual address for no longer than two months if the customer is on vacation or traveling, or three months if the customer is going abroad.

      NASD understands that if a member provides a mail holding service to its customers, the member may have to put in place additional procedures to comply with the limitations set forth in IM-3110. However, the interpretive material helps to ensure that members that do hold mail for customers who are away from their usual addresses, do so only pursuant to the customers' written instructions and for a specified, relatively short period of time. Thus, there is a reduced likelihood of risk that customers would not receive account statements or other account documentation at their usual addresses. In addition, the interpretive material will help to ensure that customers provide members with which they do business current address information, insofar as a member will not be permitted to hold mail indefinitely.

      Rule 2510 – Discretionary Accounts

      One-Day Limit on Time/Price Discretionary Authority

      Rule 2510(d)(1) allows members to exercise time and price discretion on orders for the purchase or sale of a definite amount of a specified security without prior written authorization from the customer or prior written approval by the member. However, the duration of this discretionary authority is limited to the day it is granted, absent written authorization to the contrary. In addition, any exercise of time and price discretion must be reflected on the customer order ticket.42

      NASD believes that investors will receive greater protection by clarifying the time such an order remains pending. Customers who wish to grant more extensive discretionary authority to their registered representatives may do so pursuant to a fully executed trading authorization.

      NASD does not believe that a general institutional exemption from the one-day time and price limit would be appropriate. However, Rule 2510's one-day limitation does not apply to time and price discretion exercised for orders effected with or for an institutional account, as that term is defined in Rule 3110(c)(4),43 pursuant to valid Good-Till-Cancelled instructions issued on a "not held" basis.44


      1   Exchange Act Rel. No. 49883 (June 17, 2004), 69 F.R. 35092 (June 23, 2004) (SR-NASD-2002-162).

      2   Exchange Act Rel. No. 50477 (September 30, 2004), 69 F.R. ____ (October __, 2004) (SR-NASD- 2004-116).

      3   The approved rule text in Attachment A also shows some minor changes to Rule 9610 (Application) – specifically, the replacement of "Association" and "NASD Regulation" with "NASD."

      4   See Frank Gruttadauria, NYSE Disc. Action 2002- 59 (March 19, 2002); SEC Litigation Rel. No. 17590 (June 27, 2002).

      5   IM-3013 provides that the responsibility for discharging compliance policies and written supervisory procedures rests with the firm's business line supervisors. These supervisors are the persons responsible for executing the supervisory policies and procedures Rule 3010 requires firms to establish and adopt.

      6   Rule 3012(a)(1)(A) & (B).

      7   Rule 3012(a)(2)(A).

      8   Rule 3012(a)(2)(A)(i). NASD expects that supervision of the customer account activity of any supervisor will be performed in the same manner and on the same periodic basis as the member executes the supervision of the customer account activity of non-supervising registered representatives, assuming such manner and frequency of supervision is reasonably designed to comply with applicable securities laws and regulations and NASD rules.

      9   Rule 3012(a)(2)(A)(i).

      10   Rule 3012(a)(2)(C).

      11   Id.

      12   Rule 3012(a)(2)(A)(ii). Under the general supervisory review requirement, a senior or "otherwise independent" person is not required to be a principal. The requirement that a principal conduct the supervisory reviews performed under the "limited size and resources" exception is designed, in absence of the other controls provided in the general supervisory review requirement, to ensure that a suitably qualified person conducts the supervisory reviews and assumes responsibility for the reviews and the reviews' findings.

      13   Rule 3012(a)(2)(A)(ii).

      14   Rule 3012(a)(2)(A)(iii).

      15  Rule 3012(a)(2)(B)(i) through (iii).

      16   Rule 3012(a)(2)(B).

      17  Id.

      18   Rule 3012(b). This provision references the NYSE's recent similar amendments to enhance its members' supervisory and supervisory control systems. Exchange Act Release No. 49882 (June 17, 2004), 69 F.R. 35108 (June 23, 2004).

      19   Rule 3010(c)(1)(A). The approved rule changes have not altered Rule 3010's existing requirement that members inspect at least annually their offices of supervisory jurisdiction (OSJ). See id.

      20   Rule 3010(g)(2)(B). NASD has filed with the SEC a separate proposed rule change to Rule 3010(g)(2) that addresses other situations where a location of a member may be considered a "branch office" and affects only the content of what is now being renumbered as paragraph (2)(A) of Rule 3010(g). See Exchange Act Rel. No. 48897 (December 9, 2003), 68 F.R. 70059 (December 16, 2003) (SR-NASD-2003-104).

      21   Notice to Members (NtM) 99-45 (June 1999); see also NtM 98-38 (May 1998).

      22   Rule 3010(c)(1)(B).

      23   Rule 3010(c)(1)(B); see NtM 99-45 (June 1999).

      24  NtM 99-45 (June 1999).

      25  Rule 3010(c)(1)(B).

      26   Rule 3010(c)(1)(C).

      27  Rule 3010(c)(1)(C); see NtM 99-45 (June 1999); see also NtM 98-38 (May 1998).

      28 NtM 99-45 (June 1999); see also NtM 98-38 (May 1998).

      29   Rule 3010(g)(2)(B).

      30   Rule 3010(g)(2)(A)(iv).

      31  Id.

      32   Rule 3010(c)(2)(A) through (F).

      33   Finally, NASD expects a member to furnish its office inspection reports produced pursuant to Rule 3010 during any examination by a government entity or self-regulatory organization (SRO) if the information contained in the reports is relevant to the subject matter of the examination or if it is requested for production by the government entity or SRO. See SR-NASD-2002-162 – Amendment No. 3, at 11 (December 16, 2003).

      34   The requirement that a principal conduct the office inspections under the "limited size and resources" exception is designed to ensure that, absent a firm's ability to meet the general restrictions on who may conduct office inspections, a suitably qualified person will conduct the office inspections and assume responsibility for the inspections and the reports generated by those inspections. If a member firm is not using the "limited size and resources" exception, the firm is not required to use principals to conduct its office inspections.

      35   Rule 3010(c)(3). One method of complying with this requirement would be to include in the inspection report a precise listing of the firm's size and resources and how the firm's size and resources cannot be configured to comply with the general inspection requirement.

      36   During the rulemaking process, NASD received comments from its member firms that if firms with an independent dealer model could not use their usual practice of having the branch office manager/OSJ manager conduct inspections of satellite offices, it would impose a considerable strain on the firms' existing compliance resources. In response to these comments, NASD specifically recognized that the independent dealer model would fit within the "limited size and resources" exception to the prohibitions on who may conduct office inspections. SR-NASD- 2002-162 – Amendment No. 3, at 15-16 (December 16, 2003).

      37   Rule 3010(c)(3).

      38   Id.

      39   Id.

      40   Rule 3110(d).

      41   See Rule 3110(a).

      42   Rule 2510(d)(1).

      43   Rule 3110(c)(4) provides that the term "institutional account" means the account of:

      (A) a bank, savings and loan association, insurance company, or registered investment company;

      (B) an investment adviser registered either with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or

      (C) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.

      44   Rule 2510(d)(1).


      Attachment A

      2510.   Discretionary Accounts

      (a) through (c) No change.
      (d) Exceptions

      This Rule shall not apply to:

      (1) discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a security shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled instructions issued on a "not-held" basis. Any exercise of time and price discretion must be reflected on the order ticket;
      (2) No Change.

      * * * * *

      3010. Supervision

      (a) Supervisory System

      Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD Rules [the Rules of this Association]. 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 (7) No change.
      [(8) Each member shall designate and specifically identify to the Association one or more principals who shall review the supervisory system, procedures, and inspections implemented by the member as required by this Rule and take or recommend to senior management appropriate action reasonably designed to achieve the member's compliance with applicable securities laws and regulations, and with the Rules of this Association.]
      (b) No change.
      (c) Internal Inspections
      (1) Each member shall conduct a review, at least annually, of the businesses in which it engages, which review shall be reasonably designed to assist in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations, and with applicable NASD rules [the Rules of this Association]. Each member shall review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses [and at least an annual inspection of each office of supervisory jurisdiction. Each branch office of the member shall be inspected according to a cycle which shall be set forth in the firm's written supervisory and inspection procedures. In establishing such cycle, the firm shall give consideration to the nature and complexity of the securities activities for which the location is responsible, the volume of business done, and the number of associated persons assigned to the location.]
      (A) Each member shall inspect at least annually every office of supervisory jurisdiction and any branch office that supervises one or more non-branch locations.
      (B) Each member shall inspect at least every three years every branch office that does not supervise one or more non-branch locations. In establishing how often to inspect each non-supervisory branch office, the firm shall consider whether the nature and complexity of the securities activities for which the location is responsible, the volume of business done, and the number of associated persons assigned to the location require the non-supervisory branch office to be inspected more frequently than every three years. If a member establishes a more frequent inspection cycle, the member must ensure that at least every three years, the inspection requirements enumerated in paragraph (c)(2) have been met. The non-supervisory branch office examination cycle, an explanation of the factors the member used in determining the frequency of the examinations in the cycle, and the manner in which a member will comply with paragraph (c)(2) if using more frequent inspections than every three years shall be set forth in the member's written supervisory and inspection procedures.
      (C) Each member shall inspect on a regular periodic schedule every non-branch location. In establishing such schedule, the firm shall consider the nature and complexity of the securities activities for which the location is responsible and the nature and extent of contact with customers. The schedule and an explanation regarding how the member determined the frequency of the examination schedule shall be set forth in the member's written supervisory and inspection procedures.
      Each member shall retain a written record of the dates upon which each review and inspection is conducted.
      (2) An office inspection and review by a member pursuant to paragraph (c)(1) must be reduced to a written report and kept on file by the member for a minimum of three years, unless the inspection is being conducted pursuant to paragraph (c)(1)(C) and the regular periodic schedule is longer than a three-year cycle, in which case the report must be kept on file at least until the next inspection report has been written. The written inspection report must also include, without limitation, the testing and verification of the member's policies and procedures, including supervisory policies and procedures in the following areas:

      (A) Safeguarding of customer funds and securities;

      (B) Maintaining books and records;

      (C) Supervision of customer accounts serviced by branch office managers;

      (D) Transmittal of funds between customers and registered representatives and between customers and third parties;

      (E) Validation of customer address changes; and

      (F) Validation of changes in customer account information.

      If a member does not engage in all of the activities enumerated above, the member must identify those activities in which it does not engage in the written inspection report and document in the report that supervisory policies and procedures for such activities must be in place before the member can engage in them.
      (3) An office inspection by a member pursuant to paragraph (c)(1) may not be conducted by the branch office manager or any person within that office who has supervisory responsibilities or by any individual who is directly or indirectly supervised by such person(s). However, if a member is so limited in size and resources that it cannot comply with this limitation (e.g., a member with only one office or a member [with] has a business model where small or single-person offices report directly to an office of supervisory jurisdiction manager who is also considered the offices' branch office manager), the member may have a principal who has the requisite knowledge to conduct an office inspection perform the inspections. The member, however, must document in the office inspection reports the factors it has relied upon in determining that it is so limited in size and resources that it has no other alternative than to comply in this manner.

      A member must have in place procedures that are reasonably designed to provide heightened office inspections if the person conducting the inspection reports to the branch office manager's supervisor or works in an office supervised by the branch manager's supervisor and the branch office manager generates 20% or more of the revenue of the business units supervised by the branch office manager's supervisor. For the purposes of this subsection only, the term "heightened inspection" shall mean those inspection procedures that are designed to avoid conflicts of interest that serve to undermine complete and effective inspection because of the economic, commercial, or financial interests that the branch manager's supervisor holds in the associated persons and businesses being inspected. In addition, for the purpose of this section only, when calculating the 20% threshold, all of the revenue generated by or credited to the branch office or the branch office manager shall be attributed as revenue generated by the business units supervised by the branch office manager's supervisor irrespective of a member's internal allocation of such revenue. A member must calculate the 20% threshold on a rolling, twelve-month basis.
      * * * * *
      (g) Definitions
      (1) No change.
      (2)(A) "Branch Office" means 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, excluding:

      (A) through (D) renumbered as (i) through (iv).

      (2)(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 nonbranch locations of the member is considered to be a branch office.
      (3) No change.

      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 report 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) The establishment, maintenance, and enforcement of written supervisory control policies and procedures pursuant to paragraph (a) shall include:

      (A) procedures that are reasonably designed to review and supervise the customer account activity conducted by the member's branch office managers, sales managers, regional or district sales managers, or any person performing a similar supervisory function.
      (i) A person who is either senior to ,or otherwise independent of, the producing manager must perform such supervisory reviews. For purposes of this Rule, an "otherwise independent" person: may not report either directly or indirectly to the producing manager under review; must be situated in an office other than the office of the producing manager; must not otherwise have supervisory responsibility over the activity being reviewed (including not being directly compensated based in whole or in part on the revenues accruing for those activities); and must alternate such review responsibility with another qualified person every two years or less.
      (ii) If a member is so limited in size and resources that there is no qualified person senior to, or otherwise independent of, the producing manager to conduct the reviews pursuant to (i) above (e.g., a member has only one office or an insufficient number of qualified personnel who can conduct reviews on a two-year rotation), the reviews may be conducted by a principal who is sufficiently knowledgeable of the member's supervisory control procedures, provided that the reviews are in compliance with (i) to the extent practicable.
      (iii) A member relying on (ii) above must document in its supervisory control procedures the factors used to determine that complete compliance with all of the provisions of (i) is not possible and that the required supervisory systems and procedures in place with respect to any producing manager comply with the provisions of (i) above to the extent practicable.
      (B) procedures that are reasonably designed to review and monitor the following activities:
      (i) all transmittals of funds (e.g., wires or checks, etc.) or securities from customers to third party accounts (i.e., a transmittal that would result in a change of beneficial ownership); from customer accounts to outside entities (e.g., banks, investment companies, etc.); from customer accounts to locations other than a customer's primary residence (e.g., post office box, "in care of" accounts, alternate address, etc.); and between customers and registered representatives, including the hand-delivery of checks;
      (ii) customer changes of address and the validation of such changes of address; and
      (iii) customer changes of investment objectives and the validation of such changes of investment objectives.
      The policies and procedures established pursuant to paragraph (a)(2)(B) must include a means or method of customer confirmation, notification, or follow-up that can be documented. If a member does not engage in all of the activities enumerated above, the member must identify those activities in which it does not engage in its written supervisory control policies and procedures and document in those policies and procedures that additional supervisory policies and procedures for such activities must be in place before the member can engage in them; and
      (C) procedures that are reasonably designed to provide heightened supervision over the activities of each producing manager who is responsible for generating 20% or more of the revenue of the business units supervised by the producing manager's supervisor. For the purposes of this subsection only, the term "heightened supervision" shall mean those supervisory procedures that evidence supervisory activities that are designed to avoid conflicts of interest that serve to undermine complete and effective supervision because of the economic, commercial, or financial interests that the supervisor holds in the associated persons and businesses being supervised. In addition, for the purpose of this section only, when calculating the 20% threshold, all of the revenue generated by or credited to the producing manager or the producing manager's office shall be attributed as revenue generated by the business units supervised by the producing manager's supervisor irrespective of a member's internal allocation of such revenue. A member must calculate the 20% threshold on a rolling, twelve-month basis.
      (b) Dual Member

      Any member in compliance with substantially similar requirements of the New York Stock Exchange, Inc. shall be deemed to be in compliance with the provisions of this Rule.
      * * * * *

      3110.   Books and Records

      (a) through (b) No change.
      (c) Customer Account Information
      (1) through (3) No change.
      (4) For purposes of this Rule, [and] Rule 2310, and Rule 2510 the term "institutional account" shall mean the account of:

      (A) through (C) No change.
      (d) Changes in Account Name or Designation

      Before any customer order is executed, there must be placed upon the memorandum for each transaction, the name or designation of the account (or accounts) for which such order is to be executed. No change in such account name(s) (including related accounts) or designation(s) (including error accounts) shall be made unless the change has been authorized by a member or a person(s) designated under the provisions of NASD rules. Such person must, prior to giving his or her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate his or her approval of such change in writing on the order or other similar record of the member. The essential facts relied upon by the person approving the change must be documented in writing and preserved for a period of not less than three years, the first two years in an easily accessible place, as the term "easily accessible place" is used in SEC Rule 17a-4.

      For purposes of this paragraph (d), a person(s) designated under the provisions of NASD rules to approve account name or designation changes must pass a qualifying principal examination appropriate to the business of the firm.
      * * * * *

      IM-3110.   Customer Account Information

      (a) through (h) No Change.
      (i) Holding of Customer Mail

      Upon the written instructions of a customer, a member may hold mail for a customer who will not be at his or her usual address for the period of his or her absence, but (A) not to exceed two months if the member is advised that such customer will be on vacation or traveling or (B) not to exceed three months if the customer is going abroad.
      * * * * *

      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, 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 [the Association] and provide a copy of the application to the Office of General Counsel of NASD [Regulation].
      (b) through (c) No Change.

    • 04-70 Nominees for NASD Board of Governors

      View PDF file

      INFORMATIONAL

      Nominees for NASD Board of Governors

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Senior Management

      NASD Board of Governors

      Executive Summary

      The Annual Meeting of NASD members will be held on January 4, 2005.

      The formal notice of the meeting, including the precise date, time, and location of the Annual Meeting, will be mailed on or about November 29, 2004.

      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 Board of Governors 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 3 percent of the members of NASD. As of the date of this Special Notice, NASD has 5,271 voting members; therefore, the applicable 3 percent threshold is 158 members. If, however, a candidate's name appears on a slate of nominees, the slate must be endorsed by 10 percent of NASD's voting members. The applicable 10 percent threshold is 527 members; and
      (b) the Secretary certifies that such petitions have been duly executed by the Executive Representatives of the requisite number of members of NASD, 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 17 and no more than 27 Governors. The number of Governors within this range is set by the NASD Board. The Board is currently composed of 21 Governors.

      On January 4, 2005, members will elect seven Governors, four of whom will occupy Industry positions on the Board, and three of whom will occupy Public positions on the Board.

      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 seven persons (see attached profiles) have been nominated by the NNC to serve on the Board of Governors of NASD for a term of three years or until their successors are duly elected or qualified. Terms of office run from January 4, 2005, to January 2008.

      Terms of Office 2005-2008

      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)
      William Heyman Executive Vice President and Chief Investment Officer, The St. Paul Travelers Companies, Inc. (Representative of an Insurance Company)
      Raymond A. Mason Chairman and CEO, Legg Mason, Inc. (Representative of a Regional Retail Firm)

      PUBLIC

      James E. Burton

      Chief Executive Officer, World Gold Council

      Sir Brian Corby

      Chairman (retired), Prudential Assurance Company

      John Rutherfurd, Jr.

      Chairman and CEO, Moody's Corporation

      NASD Profiles of Board Nominees for Industry Governors

      INDUSTRY

      John W. Bachmann is senior partner of Edward Jones. Mr. Bachmann has been with Edward Jones in various positions since 1959. He became managing principal in 1980. Mr. Bachmann served as Chairman of the Securities Industry Association and on the Board of Governors of the Chicago Stock Exchange and on the Regional Firm's Advisory Board of the New York Stock Exchange. He has also served as Chairman of the NASD District 4 Committee. Mr. Bachmann is currently Chairman of the U. S. Chamber of Monsanto Company. He holds a degree in economics from Wabash College and a Master's in finance from Northwestern University. Commerce and a Director of AMR American Airlines and the
      Richard F. Brueckner is Chief Executive Officer of Pershing LLC, a wholly owned subsidiary of The Bank of New York (BNY). Mr. Brueckner joined BNY in May 2003 when BNY acquired Pershing from Credit Suisse First Boston. He served as CEO of Pershing and as a member of the CSFB Executive Board after CSFB's acquisition of Donaldson, Lufkin and Jenrette and Pershing in November 2000. Mr. Brueckner joined DLJ in 1978 and has served as Treasurer of DLJ Securities Corporation, Chief Financial Officer of Pershing, and has held a variety of senior management positions in administration, finance, marketing, and operations at Pershing. Prior to 1978, he was in the management group of the Investment Services Department of KPMG Peat Marwick. Mr. Brueckner served as Chairman of the Securities Industry Foundation for Economic Education and is a trustee of its successor organization, Foundation for Investor Education. He is a director of the Securities Industry Association and has served as the founding Chairman of the Clearing Firms Committee, Chairman of the Membership Committee, and Chairman of the New York District. He has also served on various boards and committees for NASD. Mr. Brueckner holds a B.A. in economics from Muhlenberg College, where he is Vice Chairman of the Board of Trustees. He is also a CPA.
      William Heyman is Executive Vice President and Chief Investment Officer of The St. Paul Travelers Companies, Inc. Until March 15, 2002, Mr. Heyman was Chairman of Citigroup Investments, a subsidiary of Citigroup that managed most of Citigroup's proprietary investments. His responsibilities included all public and private equity-related investments, real estate and alternative investments, as well as Citigroup's pension fund. He founded and was, until his departure, Chief Executive Officer of Tribeca Investments, a Citigroup subsidiary that conducts proprietary trading and investment activities including merger arbitrage and convertible hedging. He was a Senior Vice President of various Citigroup insurance subsidiaries, including Travelers, and served as a Citigroup representative on several boards. Prior to joining Citigroup in 1995, he was, successively, a managing director and head of the private investment department of Soloman Brothers; director of the Division of Market Regulation of the U.S. Securities and Exchange Commission in Washington, DC (1991-1993); and a managing director and head of the arbitrage department of Smith Barney. He began his career in the securities business in 1979, when he co-founded Mercury Securities, a broker-dealer specializing in merger arbitrage of which he was the Chief Operating Officer for nine years. Prior to that, he was a securities lawyer, principally with Cravath, Swaine & Moore. Mr. Heyman graduated magna cum laude from Princeton University, where he was elected to Phi Beta Kappa, and cum laude from Harvard Law School.
      Raymond A. Mason is Chairman of the Board, President, and Chief Executive Officer of Legg Mason, Inc., and Chairman and CEO of Legg Mason Wood Walker, Inc. Mr. Mason founded Mason and Company in 1962, and in 1970 the company merged to form Legg Mason, Inc. He has been very active in the securities industry, serving as Chairman of the Securities Industry Association in 1986, Chairman of the Board of Governors of NASD in 1974, and Chairman of the Regional Firms Committee of the New York Stock Exchange in 1978. He was appointed by the SEC to serve on a broker compensation practices committee in May 1994. Currently, he is Chairman of the Board of Trustees of Johns Hopkins University and a member of the executive committee of both Johns Hopkins University and Johns Hopkins Medicine, and Chairman of the Maryland Business Roundtable for Education. Mr. Mason received a bachelor's degree in Economics from the College of William and Mary.

      NASD Profiles of Board Nominees for Public Governors

      PUBLIC

      James E. Burton is the Chief Executive Officer of World Gold Council in London, England. Previously, he served as Chief Executive Officer of California Public Employees Retirement System (CalPERS) since 1994. Prior to joining CalPERS, Mr. Burton was Deputy State Controller, advising the State Controller on public pension, government borrowing and other state finance issues. He has also held various government positions, including Deputy Chief of Staff to Governor Jerry Brown. Currently, Mr. Burton is Second Vice President and a member of the Executive Committee of the National Association of State Retirement Administrators, and Co-Chair of the Council of Institutional Investors. Mr. Burton holds a degree from the University of San Francisco.
      Sir Brian Corby served as Chairman of Prudential Corporation from 1990 until his retirement in 1995. Prior to this, he was Group Chief Executive. Sir Brian has also served as President of the Confederation of British Industry, President of the National Institute of Economic and Social Research, and President of the "Association de Geneve," an insurance industry "think tank." He was made a Knight Bachelor in the Queen's Birthday Honours in June 1989. Sir Brian graduated with an honours degree in mathematics from St. John's College Cambridge.
      John Rutherfurd, Jr. is Chairman and Chief Executive Officer of Moody's Corporation. He was elected Chairman in October 2003. Mr. Rutherford was named CEO when the firm became an independent public company in October 2000. Previously, Moody's was part of the Dun & Bradstreet Corporation. He joined the company in 1995 to develop new business activities with the title of Managing Director, Moody's Holdings. He was appointed Chief Administrative Officer in 1996 and President in 1998. Prior to joining Moody's, he was President of Interactive Data Corporation (IDC) from 1990 to 1995, Executive Vice President of Dun & Bradstreet Financial Information Services (North America) from 1989 to 1990, and Vice President and Chief of Staff from 1980 to 1985 of Chase Information Services Group, an affiliate of Chase Manhattan Bank. Mr. Rutherfurd received an AB from Princeton University and an LLB from Harvard Law School.

      Governors with Terms Expiring in January 2005

      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)
      Barbara L. Weaver1 Vice President, Legal & Compliance, Howard Weil, Incorporated (Chair of the National Adjudicatory Council)

      NON-INDUSTRY

      Harry P. Kamen* Retired Chairman and Chief Executive Officer, Metropolitan Life Insurance Company (Representative of an Insurance Company)

      PUBLIC

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

      * Not eligible for re-election

      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, Westfield Bakerink Brozak, 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 Dean, Washington University School of Law
      Sharon P. Smith* Dean, College of Business Administration, Fordham University

      * Not eligible for re-election


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

    • 04-69 Mandatory Use of Combined New Order/Route and Combined New Order/Execution Reports Delayed until April 4, 2005; Clarification of Combined Reporting Format Requirements for Related Order Information Submitted by Multiple Order Sending Organizations

      View PDF file

      GUIDANCE

      OATS Reporting Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management

      OATS
      Rule 6950 Series

      Executive Summary

      In Notice to Members (NtM) 04-46 (June 2004), NASD announced that, beginning December 1, 2004, members would be required to use the Combined New Order/Route and Combined New Order/ Execution Reports (Combined Reports) for all orders that are fully routed or executed on the same business day they are received. Based on feedback from firms, NASD is delaying the effective date of this requirement until April 4, 2005, to allow firms additional time to make necessary program and code changes. This delay applies only to the use of the Combined Reports and does not affect any of the other reporting changes and related implementation dates outlined in NtM 04-46.

      In addition, NASD is clarifying that the Combined Reports format will not be mandatory in the limited circumstance where a firm uses multiple Order Sending Organizations (OSOs) to report order events relating to the same order (e.g., OSO A submits a New Order Report and OSO B submits a Route Report).

      Questions/Further Information

      Questions concerning this Notice may be directed to:

      • OATS Helpdesk   (800) 321-NASD

      • NASD Market Regulation   (240) 386-5126

      Background and Discussion

      Mandatory Use of Combined Reports Delayed Until April 4, 2005

      Based on feedback from members and reporting agents relating to the significant programming changes necessary to implement the Combined Reports format, NASD is delaying the implementation date of the mandatory use of these reports for orders that are fully routed or executed on the same business day they are received until April 4, 2005. Specifically, members noted that use of the Combined Reports requires additional programming efforts because some firms use different systems to capture and report the various events in the lifecycle of the order. Therefore, additional time was needed to ensure that the data from each of these systems could be accurately combined and reported to OATS in a single report format. Accordingly, NASD is delaying the implementation date of this requirement until April 4, 2005.

      Related Order Information Reported by Multiple OSOs

      Based on discussions with members and reporting agents, NASD also is clarifying that the Combined Reports format will not be mandatory in the limited circumstance where a firm uses multiple OSOs to report order events relating to the same order. Specifically, in those situations in which one OSO will report a new order event and a second OSO will report the related subsequent route or execution events, the Combined Reports will not be required. For example, a firm receives an order through one OSO's system but uses a second OSO's system to route the order. If the New Order and related Route Report are generated and reported to OATS by two separate OSOs, the Combined Reports format would not be required. Similarly, a firm receives an order through its own internal system but uses a third-party OSO's system to route the order. If the New Order Report is generated and reported by the firm, while the Route Report is generated and reported by the third-party OSO, the Combined Reports format would not be required. In these limited circumstances, it would be unduly burdensome for each OSO to build the necessary interfaces to allow one OSO to capture, combine and report all required information to OATS. Accordingly, the Combined Reports are not mandatory under these circumstances, and firms may continue to use the separate New Order and Route and Execution Reports, as applicable.

      NASD will be monitoring the source of each order event submission to identify when one OSO submits all related order events for an order and does not use the Combined Reports. Orders where all related order events are submitted by the same OSO must use the Combined Reports beginning April 4, 2005. As a result, a member that uses multiple internal systems to generate and report order events for the same order must use the Combined Reports, as applicable, because only one OSO (i.e., the firm itself) is creating and submitting all order events. Likewise, NASD will monitor the submission of related order reports by different OSOs to ensure that the reporting arrangements fall within the limited circumstances delineated above. In this respect, firms should be able to provide documentation upon NASD request to confirm the existence of such reporting arrangements.

      Questions and Answers

      Q1.   What are the phase-in dates for the new requirements?

      A1.

      Requirement Phase-in Date
      Addition of Cancel Timestamp and Canceled By Flag Fields to New Order and Combined New Order/Route Reports October 4, 2004
      Required population of Cancel information on New Order and Combined New Order/Route Reports for any order canceled within 60 seconds of order receipt November 1, 2004
      Required use of cancel fields on New Order and Combined New Order/Route Reports for any order fully canceled on the same day it was received December 1, 2004
      Required use of Combined New Order/Route and Combined New Order/Execution Reports for any order fully routed or executed on the same day it was received April 4, 2005

      Q2.   My firm has two separate OSOs submitting data on my behalf. One submits my New Order Reports and one submits my Route Reports. Is my firm required to use the Combined New Order/Route Report as of April 4, 2005?

      A2.   No. Since your firm is using two separate entities to submit the New Order and Route Reports respectively, the Combined New Order/Route Report is not mandatory and your firm may continue to use the separate New Order and Route Reports in these circumstances.

      Q3.   My firm uses two internal systems. We receive the order through one system and execute the order through the second system. Since we are using two separate systems, is my firm required to use the Combined New Order/Execution Report as of April 4, 2005?

      A3.   Yes. Since these systems are internal to your firm and your firm reports both events to OATS, you are required to use the Combined New Order/Execution Report by April 4, 2005.

      Q4.   My firm receives orders through an internal system and routes them out through a service bureau's system. We generate and report New Order Reports to OATS while the service bureau reports the firm's Route Reports. Are we required to use the Combined New Order/Route Report by April 4, 2005?

      A4. No. Your firm would not be required to use the Combined New Order/Route Report for those new order and route order events generated and reported separately by the firm and the service bureau.

      Q5. My firm both receives and routes orders via a single service bureau's system that reports to OATS on my behalf. Is my firm required to use the Combined Reports by April 4, 2005?

      A5. Yes. Since the receipt and route of the order is reported by the same entity, your firm would be required to use the Combined New Order/Route Report by April 4, 2005.

      Q6. If my firm receives an order for 20,000 shares in an internal system and then routes it out 1,000 shares at a time via the same system, is my firm required to use the Combined New Order/Route Report for these orders by April 4, 2005?

      A6.   No. Since the order is not routed in its entirety, you must use the New Order Report to show receipt of the order and separate Route Reports for each partial route.

    • 04-68 SEC Approves Rule Amendment Requiring That ADF Market Participant Provide Advance Written Notice When Denying Access

      View PDF file

      GUIDANCE

      Alternative Display Facility (ADF)

      Effective Date: October 20, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management
      Trading

      Alternative Display System (ADF)
      Electronic Communications Network (ECN)
      Rule 4300A
      Trade Reporting and Comparison Service
      (TRACS)

      Executive Summary

      On August 18, 2004, the Securities and Exchange Commission (SEC) approved amendments to Rule 4300A to require Alternative Display Facility (ADF) Market Participants to provide written notice, via facsimile, personal delivery, courier, or overnight mail, at least 14 calendar days in advance to NASD's ADF Market Operations before denying direct electronic access to an NASD member firm.1 Upon receipt of the notice, ADF Market Operations will post the required notice on the ADF Web page to ensure that member firms have adequate time to make other routing or access arrangements, as necessary. Amended Rule 4300A also provides that only a Market Participant that is an electronic communications network (ECN) may lawfully deny access to its quotes, and may only do so in the limited circumstance where a broker-dealer fails to pay contractually obligated costs for access to the ECN's quotes.

      The text of the amendments is set forth in Attachment A and becomes effective on October 20,2004.

      Questions/Further Information

      Questions concerning this Notice may be directed to Patricia Albrecht, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight (202) 728-8026; or Elliot Levine, Chief Counsel, Markets, Services, and Information, at (202) 728-8405.

      Background

      The ADF is a quotation collection, trade comparison, and trade reporting facility developed by NASD in accordance with the SEC's SuperMontage Approval Order.2 The ADF currently is operating as a pilot until October 26, 2004,3 and it is anticipated that the ADF will continue to operate on a pilot basis until the SEC approves the operation of the ADF on a permanent basis.

      ADF provides Market Participants (e.g., ADF-registered market makers or ECNs) the ability to post quotations in NASDAQ securities and provides all member firms that participate in the ADF the ability to view quotations and report transactions in NASDAQ securities to the Securities Information Processor (SIP) for NASDAQ-listed issues for consolidation and dissemination of data to vendors and ADF Market Participants. The facility also provides for trade comparison through the Trade Reporting and Comparison Service (TRACS). The facility further provides for real-time data delivery to NASD for regulatory purposes, including enforcement of firm quote and related rules.

      The ADF does not provide an order-routing capability. Instead, Rule 4300A requires Market Participants to provide direct electronic access to other Market Participants and to provide to all other NASD member firms direct electronic access or allow for indirect electronic access to the individual market participant's quote. This rule provides the means for Market Participants and other broker/dealers to access ADF quotes and, among other things, meet the firm quote and locked and crossed quotation requirements. Rule 4300A prohibits Market Participants from in any way discouraging or discriminating against member firms that wish to reach their quotes.

      Last year, NASD became aware that a Market Participant denied access, with no prior notice, to a second ADF Market Participant for allegedly failing to pay contractually obligated costs. This action caused disruption not only for the Market Participant denied access, but also other NASD member firms that typically accessed the first Market Participant's quote through the second ADF Market Participant's routing system. Although there were other means in place by which an NASD member firm could access the first Market Participant's quotes, the absence of any advance notice of the denial of access caused confusion in the marketplace as member firms considered alternative means to access the first Market Participant's quotes.

      Accordingly, to maintain market efficiency and prevent such confusion in the future, NASD has amended Rule 4300A to require that Market Participants provide written notice, via facsimile, personal delivery, courier, or overnight mail, at least 14 calendar days in advance to ADF Market Operations before denying access to an NASD member firm. The 14-day period begins on the first business day that ADF Market Operations has receipt of the notice. Upon receipt of the notice, ADF Market Operations will post the notice on the ADF Web page to ensure that member firms have adequate time to make other routing or access arrangements, as necessary. To ensure proper documentation of compliance with Rule 4300A, member firms should maintain evidence of receipt of the notice (i.e., dated facsimile confirmation, receipt from a courier, etc.).

      Rule 4300A also codifies existing NASD guidance that a Market Participant may deny access to its quotes only in the limited circumstances where a broker-dealer fails to pay contractually obligated costs for access to its quotes.4 Because the SEC has determined that only ECNs may charge a post-transaction fee for execution against their displayed quotation (i.e., access fee),5 Rule 4300A clarifies that only Market Participants that are ECNs may deny access to an NASD member firm for failure to pay contractually obligated access fees.

      Additionally, any denial of access must be based on a good faith belief that the denial of access is appropriate and does not violate any NASD rules or the securities laws. Amended Rule 4300A further clarifies that the publication of an ADF Market Participant's intent to deny access will have no bearing on the merits of any claim between the Market Participant and any affected broker-dealer, nor will it insulate the Market Participant from liability from violations of NASD rules or the federal securities laws, such as SEC Rule 11Ac1-1. If NASD believes that a Market Participant has improperly denied a broker-dealer access to its quotes, the Market Participant will not have met the terms of Rule 4300A. In that instance, NASD will consider the ADF Market Participant to be in violation of that provision and will not permit the ADF Market Participant to continue quoting on the ADF.


      1 Exchange Act Rel. No. 50218 (August 18, 2004), 69 F.R. 52055 (August 24, 2004) (File No. SRNASD- 2004-002).

      2 Exchange Act Rel. No. 43863 (January 19, 2001), 66 F.R. 8020 (January 26, 2001) (File No. SRNASD- 99-53).

      3 See Exchange Act Rel. No. 49131 (January 27, 2004), 69 F.R. 5229 (February 3, 2004) (File No. SR-NASD-2004-12).

      4 See Exchange Act Rel. No. 46249 (July 24, 2002), 67 F.R. 49822 (July 31, 2002) (File No. SR-NASD- 2002-97).

      5 See Letter from Robert L.D. Colby, Deputy Director, Division of Market Regulation, SEC, to Louis B. Todd, Jr., Head of Equity Trading, J.C. Bradford & Co. (August 6, 1998).


      Attachment A

      4000A. NASD ALTERNATIVE DISPLAY FACILITY
      * * * * *
      4300A. Quote and Order Access Requirements
      (a) To ensure that NASD Market Participants comply with their quote and order access obligations as defined below, for each security in which they elect to display a bid and offer (for Registered Reporting ADF Market Makers), or a bid and/or offer (for Registered Reporting ADF ECNs), in the Alternative Display Facility, NASD Market Participants must:
      (1) through (2) No change.
      (3) Provide at least 14 calendar days advance written notice, via facsimile, personal delivery, courier or overnight mail, to NASD Alternative Display Facility Operations before denying any NASD member direct electronic access as defined below. An ECN is the only Market Participant that may lawfully deny access to its quotes, and an ECN may only do so in the limited circumstance where a broker-dealer fails to pay contractually obligated costs for access to the ECN's quotes. The notice provided hereunder must be based on the good faith belief of a Market Participant that such denial of access is appropriate and does not violate any of the Market Participant's obligations under NASD rules or the federal securities laws. Further, any notification or publication of a Market Participant's intent to deny access will have no bearing on the merits of any claim between the Market Participant and any affected broker-dealer, nor will it insulate the Market Participant from liability for violations of NASD rules or the federal securities laws, such as SEC Rule 11Ac1-1. The 14-day period begins on the first business day that NASD Alternative Display Facility Operations has receipt of the notice.
      (4) [(3)] [Market Participants shall s]Share equally the costs of providing to each other the direct electronic access required pursuant to paragraph (a)(1), unless those Market Participants agree upon another cost-sharing arrangement.
      (b) through (f) No change.

      * * * * *

    • 04-67 Nominees for District Committee and District Nominating Committee

      View PDF file

      INFORMATIONAL

      District Elections

      SUGGESTED ROUTING KEY TOPICS
      Legal & Compliance
      Operations
      Registration
      Senior Management
      District Elections

      Executive Summary

      The purpose of this Special Notice to Members is to announce the nominees for the District Committees and the District Nominating Committees. The individuals identified in this Special Notice (see Attachment A) have been nominated for three-year terms1 on the District Committees and for one-year terms on the District Nominating Committees starting in January 2005. These nominees will be considered duly elected on October 1, 2004, unless an election is contested in accordance with the procedures set forth in Article VIII of the By-Laws of NASD Regulation, as 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 consider revisiting this process next year.

      Contested Election Procedures

      If an officer, director, or employee of an NASD member who meets the qualifications set forth in Article VIII of the By-Laws of NASD Regulation is interested in being considered as an additional candidate, he/she must indicate his/her interest in writing to the District Director by September 30, 2004. If an additional candidate or candidates come forward by that date, the Corporate Secretary will provide each additional candidate with a list of members that are eligible to vote in the District, their mailing addresses, and their Executive Representatives. In order to be considered for nomination, within 30 calendar days after the date the Corporate Secretary mails the list of members eligible to vote, an additional candidate must submit a petition to the District Nominating Committee containing signatures from at least 10 percent of the Executive Representatives of members eligible to vote in the District.

      If no additional candidates submit petitions by November 1, 2004, then the candidates nominated by the District Nominating Committee shall be considered elected as of October 1, 2004, and the Corporate Secretary will announce the election results to the Executive Representatives of NASD members.

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

      Questions/Further Information

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


      1 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, West Region

      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

      2004 District Nominating Committee Chair

      James D. Klein    UBS PaineWebber, Inc.    San Francisco, CA

      District 1 Nominees

      Howard Bernstein     Pacific Growth Equities, LLC     San Francisco, CA

      Kevin T. Kitchin    Wachovia Securities, Inc.    San Francisco, CA

      Bruce Nollenberger     Nollenberger Capital Partners, Inc.     San Francisco, CA

      District 1 Nominating Committee Nominees

      Robert S. Basso    National Financial Services, LLC    San Francisco, CA

      L. Robert McKulla    Wachovia Securities, Inc.    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 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 the counties of Esmeralda and Nye), and the former U.S. Trust Territories

      2004 District Nominating Committee Chair

      Margaret M. Black    Morgan Stanley    Century City, CA

      District 2 Nominees

      Kenneth R. Hyman   Partnervest Securities, Inc.   Santa Barbara, CA

      Ismael Manzanares, Jr.1 (1-Year Term)   Foresters Equity Securities, Inc.   San Diego, CA

      Bryan R. Plank    Merrill Lynch    San Diego, CA

      Valorie Seyfert     CUSO Financial Services, L.P.     San Diego, CA

      District 2 Nominating Committee Nominees

      James E. Biddle     The Securities Center Incorporated     Chula Vista, CA

      Terry L. Chase     Wachovia Securities, Inc.     Pasadena, CA

      Richard B. Gunter     Wedbush Morgan Securities     Los Angeles, CA

      Steven K. McGinnis

      Joel H. Ravitz     Quincy Cass Associates     Los Angeles, CA

      District Committee and District Nominating Committee Nominees

      District 3

      Joseph M. McCarthy, District Director James G. Dawson, District Director
      370 17th Street, Suite 2900
      Denver, CO 80202-5629
      (303) 446-3100
      Two Union Square, 601 Union Street
      Suite 1616, Seattle, WA 98101-2327
      (206) 624-0790
      Arizona, Colorado, New Mexico,
      Utah, and Wyoming
      Alaska, Idaho, Montana, Oregon, and
      Washington

      2004 District Nominating Committee Chair

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

      District 3 Nominees

      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 Nominees

      Gregory R. Anderson     TIAA-CREF Individual & Institutional Services, LLC     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     RBC Dain Rauscher     Bellevue, WA

      Kathryn A. Supko     Northwestern Mutual Investment Services, LLC     Boise, ID

      District Committee and District Nominating Committee Nominees

      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

      2004 District Nominating Committee Chair

      L.C. (Jack) Petersen     Kirkpatrick, Pettis, Smith, Polian, Inc.     Omaha, NE

      District 4 Nominees

      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 Nominees

      Frank H. Kirk     Wachovia Securities LLC     Kansas City, MO

      Timothy J. Lyle     Cambridge Investment Research     Fairfield, IA

      Jeffrey A. Schuh     Residential Funding Securities Corp.     Minneapolis, MN

      James H. Warner     The Warner Group     Sioux City, IA

      Pamela R. Ziermann     Dougherty & Company LLC     Minneapolis, MN

      District Committee and District Nominating Committee Nominees

      District 5

      Warren A. Butler, Jr., Regional Director, South Region

      1100 Poydras Street, Energy Centre, Suite 850, New Orleans, LA 70163-0802
      (504) 522-6527

      Alabama, Arkansas, Louisiana, Mississippi, Oklahoma, and Tennessee

      2004 District Nominating Committee Chair

      Duncan F. Williams     Duncan-Williams, Inc.     Memphis, TN

      District 5 Nominees

      Philip J. Dorsey2    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 Nominees

      John J. Dardis     Jack Dardis & Associates, Ltd.     Metairie, LA

      David A. Knight     Stephens, Inc.     Little Rock, AR

      LeRoy H. Paris, II     Invest Linc Securities, Inc.     Jackson, MS

      Tom R. Steele     Equitable Advisors, Inc.     Nashville, TN

      David W. Wiley, III     Wiley Bros., Aintree Capital, LLC     Nashville, 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

      2004 District Nominating Committee Chair

      Edward M. Milkie     Milkie/Ferguson Investments, Inc.     Dallas, TX

      District 6 Nominees

      Bryan T. Emerson     Starlight Investments, LLC     Houston, TX

      Michael A. Pagano     1st Global Capital Corporation     Dallas, TX

      William H. Lowell     Lowell & Co., Inc.     Lubbock, TX

      District 6 Nominating Committee Nominees

      Christopher R. Allison     M.E. Allison & Company, Inc.     San Antonio, TX

      Sennett Kirk, III     Kirk Securities Corporation     Denton, 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

      District Committee and District Nominating Committee Nominees

      District 7

      David Paulukaitis, Associate Director

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

      Florida, Georgia, North Carolina, South Carolina, Puerto Rico, the Canal Zone, and the Virgin Islands

      2004 District Nominating Committee Chair

      Michael D. Hearn, Esq. Banc of America Investment Services, Inc. Charlotte, NC

      District 7 Nominees

      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 Nominees

      Jeffrey P. Adams     Balentine & Company     Atlanta, GA

      Richard G. Averitt, III     Raymond James Financial Services, Inc.     St. Petersburg, FL

      Richard V. McGalliard     Wachovia Securities, Inc.     Atlanta, GA

      Kenneth W. McGrath     Popular Securities, Inc.     Hato Rey, Puerto Rico

      Roark A. Young     Young, Stovall & Company     Miami, FL

      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

      2004 District Nominating Committee Chair

      Mary D. Esser     Cressman Esser Securities, Inc.     Naperville, IL

      District 8 Nominees

      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 Nominees

      Bernard A. Breton     Carillon Investments, Inc.     Cincinnati, OH

      William K Curtis     M & I Brokerage Service, Inc.     Milwaukee, WI

      Carol P. Foley     Podesta & Company     Chicago,IL

      Gregory Goelzer     Goelzer Investment Management     Indianapolis, IN

      Bruce J. Young     Mesirow Financial, Inc.     Chicago, IL

      District Committee and District Nominating Committee Nominees

      District 9

      Gary K. Liebowitz, District Director
      581 Main Street, 7th Floor
      Woodbridge, NJ 07095
      (732) 596-2000
      John P. Nocella, District Director
      Eleven Penn Center, 1835 Market Street
      19th Floor, Philadelphia, PA 19103
      (215) 665-1180

      New Jersey and New York (except for the counties of Nassau and Suffolk, and the five boroughs of New York City)

      Delaware, the District of Columbia, Maryland, Pennsylvania, Virginia, and West Virginia

      2004 District Nominating Committee Chair

      Lenda P. Washington     GRW Capital Corporation     Washington, DC

      District 9 Nominees

      Scott L. Fagin     The Jeffrey Matthews Financial Group, L.L.C.     Millburn, NJ

      Rebecca L. Kohler     American Express Financial Advisors, Inc.     Roanoke, VA

      Jerome J. Murphy (1-Year Term) 3     Janney Montgomery Scott LLC     Philadelphia, PA

      Harold N. Peremel (2-Year Term) 4     Peremel & Co., Inc.     Baltimore, MD (2-Year Term)

      Dorothy G. Sanders     Fred Alger & Company, Incorporated     Jersey City, NJ

      District 9 Nominating Committee Nominees

      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 Committee and District Nominating Committee Nominees

      District 10

      Hans Reich, Regional Director, New York Region

      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)

      2004 District Nominating Committee Chair

      Judith R. MacDonald     Rothschild, Inc.     New York, NY

      District 10 Nominees

      Margaret M. Caffrey5 (1-Year Term)     Schonfeld & Company, LLC     New York, NY (1-Year Term)

      Tracy E. Calder     UBS Financial Services, Inc.     Weehawken, NJ

      Clifford H. Goldman     Marco Polo Securities, Inc.     New York, NY

      Jeffrey T. Letzler     Instinet, LLC     New York, NY

      Michael Santo     Banc of America Securities LLC     New York, NY

      District 10 Nominating Committee Nominees

      William Behrens     Northeast Securities, Inc.     New York, NY

      Jennifer A. Connors     ITG, Inc.     New York, NY

      Ruth S. Goodstein     UBS Financial Services, Inc.     New York, NY

      Mark Ronda     Oppenheimer & Co., Inc.     New York, NY

      Charles V. Senatore     Fidelity Brokerage Services, LLC     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

      2004 District Nominating Committee Chair

      John D. Lane     Lane Capital Markets, LLC     Fairfield, CT

      District 11 Nominees

      Frank L. Chandler     Boston Capital Services, Inc.     Boston, MA

      Joseph Gritzer     USI Securities, Inc.     Glastonbury, CT

      Moira Lowe     Tower Square Securities, Inc.     Hartford, CT

      Wilson G. Saville6 (1-Year Term)     Barrett & Company     Providence, RI

      District 11 Nominating Committee Nominees

      Michael C. Braun     Moors & Cabot, Inc.     Boston, MA

      Andrew F. Detwiler     Vandham Securities Corp.     Boston, MA

      John I. Fitzgerald     Leerink Swann & Company     Boston, MA

      Thomas J. Horack     John Hancock Life Insurance Company     Boston, MA

      Gregory D. Teese     Equity Services, Inc.     Montpelier, VT


      1 Mr. Manzanares has been nominated to serve the remaining one-year term of James E. Biddle, who will resign from the District Committee in January 2005.

      2 Mr. Dorsey was appointed to serve the remaining one-year term of J. Timothy Rice, who resigned from the District Committee in November 2003. Mr. Dorsey's term expires in January 2005. Mr. Dorsey has been nominated to serve a three-year term on the District Committee commencing in January 2005.

      3 Mr. Murphy has been nominated to serve the remaining one-year term of Robert M. Berson, who has resigned from the District Committee.

      4 Mr. Peremel has been nominated to serve the remaining two-year term of John Bluher, who has resigned from the District Committee.

      5 Ms. Caffrey has been nominated to serve the remaining one-year term of Vicki Holleman, who has resigned from the District Committee.

      6 Mr. Saville has been nominated to serve the remaining one-year term of Gregg A. Kidd, who has resigned from the District Committee.

    • 04-66 NASD Reminds Member Firms of Their Obligations to Ensure the Accuracy and Integrity of Information Entered into Order-Routing and Execution Systems

      View PDF file

      GUIDANCE

      Order-Routing and Execution Systems

      SUGGESTED ROUTING

      KEY TOPICS

      Institutional
      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Syndicate
      Systems
      Trading
      Operations
      Order-Routing and Execution Systems
      Rule 3010
      Rule 3310 and IM-3310
      Supervision
      Trading and Market Making Systems

      Executive Summary

      In recent months, there have been several instances where member firms inadvertently have entered, or permitted customers or nonmembers to enter, the incorrect quantity of shares or prices into the handling, routing, and execution services of a vendor, automated trading system, electronic communications network, or other market center (collectively, "trading systems"). NASD is issuing this Notice to remind firms of their obligations under Rule 3010 (Supervision) to have in place a supervisory system and written supervisory procedures reasonably designed to ensure that such orders placed into trading systems are not entered in error or in a manner inconsistent with NASD rules, including Rule 3310 (Publication of Transactions and Quotations) and IM-3310 (Manipulative and Deceptive Quotations). NASD is also reminding firms that their supervisory systems should promote compliance with the subscriber agreements of such trading systems to the extent necessary to ensure compliance with NASD rules.

      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.

      Discussion

      NASD is reminding firms that enter, or permit customers or non-members to enter, orders into trading systems to take steps to ensure that such orders are free of errors and representative of bona fide transaction and quotation activity. NASD notes that there have been several instances where firms inadvertently have entered the incorrect quantity of shares or price into a trading system for execution, primarily as a result of mistakes in data entry or defective or malfunctioning software operated by either a firm or its vendor. An NASD firm is ultimately responsible for all orders entered, whether entered by the firm or by a sponsored customer or non-member, even if such firm is using the services of a vendor to facilitate the entry of such orders.1

      Firms have an obligation to act in accordance with NASD rules and to ensure that all trading systems are used properly and in accordance with the terms and conditions specific to those systems to the extent necessary to ensure compliance with NASD rules. These rules include, but are not limited to, Rule 3310 and IM-3310, concerning bona fide transaction and quotation activity. Consequently, firms must have in place a supervisory system and written supervisory procedures reasonably designed to ensure that orders are not entered in error or in a manner inconsistent with NASD rules. Such supervisory systems and procedures should comply with the subscriber and operating agreements of such trading systems for the purpose of avoiding erroneous orders and transactions.2

      NASD recognizes that trading systems enhance the ability to route and execute orders and enable firms to execute multiple orders as quickly and efficiently as possible. However, speed and efficiency must be balanced against the safeguards needed to protect against errors or mistakes that can result in increased market volatility and confusion, as well as significant financial risk and exposure to firms and the investing public.

      When developing supervisory systems and written supervisory procedures in this area, firms should consult NASD's supervision rule, Rule 3010, and guidance provided in Notices to Members 88-84 (November 1988), 89-34 (April 1989), 98-96 (December 1998), and 99-45 (June 1999). Additionally, firms should consider the following factors when developing a supervisory system and written supervisory procedures:

      1. Firm trading systems should include controls that limit the use of such systems to authorized persons, check for order accuracy, prevent orders that exceed preset credit- and order-size parameters from being transmitted to a trading system, and prevent the unwanted generation, cancellation, repricing, resizing, duplication, or re-transmission of orders.
      2. Safeguards should be in place to ensure that the operation, testing, or maintenance of a firm's trading system does not result in the inadvertent disabling of the applicable trading system, mistaken executions, errors, or other trading problems.
      3. Firms should ensure that they do not test their systems' connectivity to the applicable trading system by sending orders that are not executable, such as by sending orders during normal market hours that are priced far outside a security's current price. Firms must test pursuant to established protocols and test messages should be clearly denoted as such.
      4. Before permitting or sponsoring customer or non-member access to a firm's trading system, a firm must have a supervisory system and written supervisory procedures in place reasonably designed to ensure that such orders are not entered in error or in a manner inconsistent with NASD rules (including, but not limited to, Rule 3310 and IM-3310) or with the subscriber agreements of such trading systems to the extent necessary to ensure compliance with NASD rules. See Notice to Members 98-66.
      5. Procedures that are available to adjudicate clearly erroneous transactions are to be used only in cases of clear or obvious errors and should not be used as a proxy for proper system use or trading procedures. Other errors, whether as a result of a system problem or human error, will not be dealt with through the rules applicable to clearly erroneous transactions.

      Firms are reminded that NASD will examine closely firms' supervisory systems and written supervisory procedures with respect to the review and detection of potential order-entry errors, and, where appropriate, initiate disciplinary action against firms and their supervisory personnel for failure to adopt, implement, and enforce appropriate supervisory procedures. NASD also may impose more significant sanctions if it finds that a firm has inadequate supervisory systems and procedures in place and such deficiencies have resulted in a pattern or practice of erroneous information being distributed to the marketplace.


      1 See Notice to Members 98-66 (August 1998).

      2 See NASD Rules 2110 and 3010.

    • 04-65 SEC Approves Amendments to TRACE Rules to Disseminate Transaction Information on All TRACE-Eligible Securities, Modify and Supplement Defined Terms, and Enhance Notification Requirements

      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

      Debt Securities
      Dissemination of Transaction Information
      Operations
      Rule 6200 Series
      TRACE Rules
      Transaction Reporting

      Executive Summary

      On September 3, 2004, the Securities and Exchange Commission (SEC or Commission) approved amendments to Rule 6250, Rule 6210, and Rule 6260 of the Trade Reporting and Compliance Engine (TRACE) rules, the Rule 6200 Series.1 The most significant amendments, which are set forth in Rule 6250, effect a fundamental change in the corporate bond markets by requiring that information on all transactions in TRACE-eligible securities be disseminated, except those transactions in TRACE-eligible securities that are issued pursuant to Section 4(2) of the Securities Act of 1933 (Securities Act) and purchased or sold pursuant to Rule 144A under the Securities Act (Section 4(2)/Rule 144A TRACE-eligible securities).

      In addition, NASD, amended two defined terms, "Investment Grade" and "Non-Investment Grade," and added a new defined term, "Split-rated," in Rule 6210; deleted provisions in Rule 6250 regarding market aggregate and last sale data and the treatment of certain transaction reports; and amended the notification provisions in Rule 6260 to require firms to provide information needed to implement various dissemination schedules. Rule 6250, Rule 6210, and Rule 6260, as amended, are set forth in Attachment A.

      The amendments to the TRACE Rules will become effective in two stages (Stage One and Stage Two), on, respectively, October 1, 2004 and February 1, 2005. All of the amendments to Rules 6210 and 6260, and part of the amendments to Rule 6250, will become effective on October 1, 2004, as Stage One. The remainder of the amendments to Rule 6250 will become effective on February 1, 2005, as Stage Two. (A more detailed statement of the effective dates of various provisions of Rule 6250, as amended, is set forth below.)2

      Questions/Further Information

      Questions concerning this Notice should be directed to tracefeedback@nasd.com; Elliot Levine, Chief Counsel, Market Operations, 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

      I. Dissemination of Corporate Bond Transaction Information

      Currently, under Rule 6250(a), NASD disseminates transaction information on four categories of TRACE-eligible securities: (1) any Investment Grade TRACE-eligible security having an initial issuance size of $1 billion or greater; (2) approximately 50 Non- Investment Grade TRACE-eligible securities; (3) any TRACE-eligible security that is Investment Grade, is rated A or higher and has an original issue size of $100 million or greater, unless downgraded below BBB; and (4) approximately 120 TRACE-eligible securities rated BBB.3 All dissemination required under current Rule 6250(a) is "immediate"; NASD disseminates the transaction information as soon as it is reported to NASD.

      Amended Rule 6250 will effect a fundamental change in the corporate bond markets as it is implemented by making publicly available for the first time pricing information on all transactions in publicly traded TRACE-eligible securities. Under Rule 6250, as amended, NASD will disseminate publicly transaction information for secondary market transactions in all TRACE-eligible securities, except transactions in Section 4(2)/Rule 144A TRACE-eligible securities. Pursuant to amended Rule 6250(b)(1), NASD will disseminate information immediately on approximately 99 percent of all transactions in TRACE-eligible securities and 95 percent of the par value traded in such securities.

      The amended TRACE dissemination provisions are set forth in Rule 6250(a) through (c). Rule 6250(a) relates solely to delayed dissemination during the new issue aftermarket for TRACE-eligible securities rated BBB or lower. Rule 6250(b) sets forth the dissemination requirements for all other secondary market transactions in TRACEeligible securities—those occurring in the new issue aftermarket that are not subject to delayed dissemination, and all transactions occurring after the new issue aftermarket, whether subject to immediate or delayed dissemination. Finally, Rule 6250(c) codifies a staff interpretation that NASD will not disseminate information on transactions in Section 4(2)/Rule 144A TRACE-eligible securities.

      The full text of the amendments providing for dissemination of transaction information on all TRACE-eligible securities (except Section 4(2)/Rule 144A TRACE-eligible securities) is set forth in Attachment A. The discussion below highlights, in Section A, only those provisions requiring delayed dissemination, which will apply to only one percent of all transactions in TRACE-eligible securities, and, in Section B, the single provision under which NASD will not disseminate transaction information.
      A. Delayed Dissemination Provisions

      NASD will disseminate information on the following transactions in TRACE-eligible securities subject to certain delays as set forth below.4
      • Transactions in newly issued BBB-rated TRACE-eligible securities that are executed during the first two business days after pricing will be disseminated beginning on the third business day.5 (The period of the first two business days after pricing is referred to as the New Issue Aftermarket-2.) Rule 6250(a)(1).
      • Transactions in newly issued TRACE-eligible securities rated BB or lower that are executed during the first ten business days after pricing will be disseminated beginning on the eleventh business day.6 (The period of the first ten business days after pricing is referred to as the New Issue Aftermarket-10.) Rule 6250(a)(2).
      • Transactions that are greater than $1 million (par value) in BB-rated TRACEeligible securities that trade an average of less than one time per day7 will be disseminated two business days from the time of execution.8 Rule 6250(b)(2)(A).
      • Transactions that are greater than $1 million (par value) in TRACE-eligible securities rated B or lower that trade an average of less than one time per day will be disseminated four business days from the time of execution.9 Rule 6250(b)(2)(B).
      All other TRACE-eligible securities transactions except those in Section 4(2)/Rule 144A TRACE-eligible securities will be disseminated immediately upon receipt of the transaction report.
      B. Section 4(2)/Rule 144A TRACE-Eligible Securities

      Under amended Rule 6250(c), NASD will not disseminate information on secondary market transactions in Section 4(2)/Rule 144A TRACE-eligible securities. Rule 6250(c) codifies the staff's prior interpretive position that such securities would not be disseminated publicly because the securities transactions are not registered under Section 5 of the Securities Act and the securities cannot be freely traded. (A firm's obligation to report such transactions to TRACE remains in effect.)
      II. Investment Grade, Non-Investment Grade, and Split-Rated TRACE-Eligible Securities

      Rule 6210(h) currently defines an "Investment Grade" security as a TRACE-eligible security rated by an NRSRO "in one of its four highest generic rating categories." In addition, under the current TRACE Rules, "split-rated," although not set forth as a defined term, is interpreted as a security that is classified as Investment Grade by one NRSRO and Non-Investment Grade by a second NRSRO. Rule 6210(i) currently defines "Non-Investment Grade" as a TRACE-eligible security "that is unrated, non-rated, split-rated (where one rating falls below Investment Grade), or otherwise does not meet the definition of Investment Grade" as defined in Rule 6210(h).

      NASD amended the terms, "Investment Grade" and "Non-Investment Grade" in, respectively, Rule 6210(h) and Rule 6210(i), and added a new defined term, "splitrated," as Rule 6210(j) to properly classify a TRACE-eligible security and determine if any of the provisions in amended Rule 6250 that require delayed dissemination apply to such security.

      The amendments provide a method to categorize TRACE-eligible securities more specifically than Investment Grade or Non-Investment Grade. This is required when, for example, a security is assigned two Non-Investment Grade ratings, but the Non- Investment Grade ratings are not in the same generic rating category (e.g., a security is rated "Ba" by Moody's, which is a rating in the fifth-highest generic rating category, and "B" by S&P, which is a rating in the sixth-highest generic rating category).10

      In addition, under Rule 6210(h) and Rule 6210(i) as amended, if a TRACE-eligible security is unrated, for purposes of TRACE, NASD may otherwise classify the security. When TRACE-eligible securities are not rated, NASD will classify such securities as Investment Grade or Non-Investment Grade, then more specifically in a generic rating category for purposes of determining the appropriate TRACE dissemination provision that applies to such securities and for any other provision of TRACE, if applicable. A determination is necessary because the rating (or, otherwise, the classification) of a TRACE-eligible security is a key dissemination criterion under amended Rule 6250. The classification of a TRACE-eligible security is an internal, administrative process of NASD. The staff will classify TRACE-eligible securities as necessary and appropriate and solely for the purpose of administering TRACE.

      NASD will classify an unrated TRACE-eligible security by attributing a certain credit quality—i.e., considering the security as if it were assigned ratings reflecting a specific generic rating category—when there is evidence of the issuer's credit quality available in the bond markets. For example, if an unrated TRACE-eligible security is newly issued and the issuer of the security has other, similar debt securities outstanding that are rated, NASD may classify the unrated TRACE-eligible security by attributing to the security the same credit quality that is indicated by the one or more ratings assigned by the NRSROs to the issuer's rated, similar debt securities. In most cases, NASD will look to the generic rating(s) that one or more NRSROs assigned to the issuer's most recently issued and outstanding, similar debt security as the most important factor in determining the classification.

      However, there may be instances when a TRACE-eligible security is unrated and there is not sufficient information available to NASD to make a determination, whether the security is newly issued or has been outstanding for some time. In such cases, NASD will classify the TRACE-eligible security as a "Non-Investment Grade" security that is rated B for purposes of dissemination. By treating the TRACE-eligible security as a B-rated security, it will be disseminated according to the most conservative dissemination provisions. NASD believes that this is a reasonable approach because such unrated securities often are considered distressed debt.

      See Attachment A for the full text of such changes.
      III. Amendments to Rule 6260; Other Amendments NASD amended the notification provisions in Rule 6260(b) and made other minor technical revisions to Rule 6260. Amended Rule 6260(b) provides NASD the necessary flexibility to obtain information on a timely basis about new TRACE-eligible securities and incorporate such securities into the TRACE System. Under amended Rule 6260(b), NASD may require a firm to provide any information needed, as determined by NASD, to implement the New Issue Aftermarket dissemination criteria in Rule 6250(a)(1) and (2), in addition to the CUSIP and other basic identifying information previously required. NASD anticipates that, in many cases, the information that NASD will request firms to provide will be the date and time that a new TRACE-eligible security is priced and its rating(s). The full text of the amendments is set forth in Attachment A.

      NASD also deleted paragraphs (b) through (d) of Rule 6250 relating to the administration, calculation, and dissemination of "market aggregate" and "last sale" data for disseminated securities, and the treatment of TRACE-eligible securities traded after the TRACE System has closed or on a non-business day. NASD will establish policies regarding the calculation and dissemination of "market aggregate" and "last sale" data, which will be published in Notices to Members and various other media (e.g., TRACE User's Guide and NASD's Web site).

      NASD will continue to treat transactions executed after the TRACE System closes and on weekends and holidays that were described in Rule 6250(c) and (d), in the same manner as set forth in the Rule, provided the treatment is consistent with the delayed dissemination provisions in amended Rule 6250 and continues to meet the needs of the marketplace. Information regarding the treatment of such transactions also will be published by NASD.

      Effective Dates

      As noted previously, NASD will implement the amendments to the TRACE Rules in two stages. The following amendments to the TRACE Rules will become effective on October 1, 2004, as Stage One.

      • Certain provisions in amended Rule 6250 listed below:

        New Rule 6250(b)(1)(A) and (B)

        A portion of new Rule 6250(b)(1)(C)(i)

        Amended Rule 6250(b)(1)(C)(i) requires all transactions in TRACE-eligible securities rated BB or lower to be disseminated immediately upon receipt of the report if the size of the transaction is $1 million or less (par value). All such transactions in a TRACE-eligible security that meet or exceed the frequency standard set forth in Rule 6250(b)(1)(C)(ii) (i.e., the security trades an average of one or more times per day) will be disseminated as of October 1, 2004.11

        New Rule 6250(b)(1)(C)(ii)

        New Rule 6250(c)

        Deletion of paragraphs (a) through (d) of current Rule 6250

      The following provisions of amended Rule 6250 will become effective on February 1, 2005, as Stage Two.

      • The portion of new Rule 6250(b)(1)(C)(i) not fully implemented in Stage One

        The portion of Rule 6250(b)(1)(C)(i) that was not fully implemented— transactions of $1 million or less (par value) in any TRACE-eligible security described in Rule 6250(b)(1)(C)(i)—that did not meet or exceed the frequency standard in Rule 6250(b)(1)(C)(ii) will be implemented in Stage Two with the dissemination of all such transactions.

      1 See Securities Exchange Act Release No. 50317 (September 3, 2004), ___ Fed. Reg. __________ (September ___ , 2004) (File No. SR-NASD-2004- 094).

      2 In the SEC's order approving the rule filing, the SEC noted "that the two studies commissioned by the NASD to address the relationship between transparency and liquidity found no conclusive evidence that TRACE transparency has adversely affected liquidity. Accordingly, the Commission expects that, not later than November 1, 2005 (nine months after the effective date of Stage Two), the NASD will submit a proposed rule change eliminating the delays in TRACE information dissemination." Securities Exchange Act Release No. 50317 (September 3, 2004), p. 8.

      3 A and BBB are ratings of Standard and Poor's, a division of the McGraw-Hill Companies, Inc. (S&P). S&P is a nationally recognized statistical rating organization (NRSRO). S&P's ratings are proprietary to S&P and are protected by copyright and other intellectual property laws. S&P licenses ratings to NASD. Ratings may not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any such purposes, in whole or in part, in any form or manner or by any means whatsoever, by any person without S&P's prior written consent.

      For purposes of the TRACE rules, any rating of S&P used means the S&P rating and the equivalent ratings of Moody's Investors Service, Inc. (Moody's), an NRSRO, and any other NRSRO whose ratings may be used for purposes of TRACE. Currently, NASD administers the TRACE provisions based on the ratings of S&P and Moody's. The use of a single rating is for the convenience of readers only.

      The ratings of the NRSRO, Moody's, are proprietary to Moody's and are protected by copyright and other intellectual property laws. Moody's licenses ratings to NASD. Ratings may not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any such purposes, in whole or in part, in any form or manner or by any means whatsoever, by any person without Moody's prior written consent.

      4 The amended TRACE Rules do not allow a member to delay the reporting of any transaction. Reports on all TRACE-eligible securities transactions must be filed within 45 minutes of the time of execution. (The period to report such transactions will be reduced, effective October 1, 2004, to 30 minutes, and, effective July 1, 2005, to 15 minutes.)

      5 Under Rule 6250(a)(1), when such transaction information is disseminated on the third business day, it will be disseminated in the order of the date and time of execution.

      6 Similarly, under Rule 6250(a)(2), the previously withheld transaction information will be disseminated in the order of the date and time of execution.

      7 To calculate the average daily trading of a security, which is required to administer Rule 6250(b)(1)(C) and (b)(2), NASD, where applicable, will review a security's trading during its New Issue Aftermarket-10 to determine the appropriate dissemination protocol. That dissemination protocol will remain in effect for the security until the next established calculation timeframe occurs. That calculation timeframe will be based on the trading activity during the last 20 business days of a 90-day period determined by NASD (20/90 period). Unlike a New Issue Aftermarket-10, where the timing is specific to the security, the 20/90 period will be established quarterly and will apply to all Non- Investment Grade TRACE-eligible securities.

      8 For example, if a transaction meeting the three criteria (i.e., the transaction is greater than $1 million (par value), the subject security is BB-rated, and such security trades an average of less than one time per day) is executed on Monday, November 15, 2004, at 10:00 a.m. Eastern Time, the transaction will be disseminated on Wednesday, November 17, 2004, at approximately 10:01 a.m. Eastern Time.

      9 For example, if a transaction in such a security is executed on Monday, November 15, 2004, at 10:30 a.m. Eastern Time, the transaction will be disseminated on Friday, November 19, 2004, at approximately 10:31 a.m. Eastern Time.

      10 As noted above, NASD currently administers the TRACE dissemination provisions based on the ratings of two NRSROs, S&P and Moody's. The amendments to Rule 6210(h) and Rule 6210(i) and new Rule 6210(j) were drafted to allow NASD to consider additional NRSRO rating information, if appropriate. NASD is also incorporating the ratings of Fitch Inc. (Fitch) into the TRACE System, which also will be used to administer TRACE beginning in Stage Two.

      11 Rule 6250(b)(1)(C)(i) provides for the immediate dissemination of transactions in TRACE-eligible securities that are rated BB or lower and are executed other than during the New Issue Aftermarket-10, if the size of the transaction is $1 million or less. NASD will partially implement this provision in Stage One. In Stage One, NASD will disseminate immediately such transactions in any security for which the larger transactions (i.e., "$1 million plus" transactions) are also disseminated in Stage One (i.e., securities that are traded an average of one or more times per day, as more fully set forth in Rule 6250(b)(1)(C)(ii)). Securities transactions described in Rule 6250(b)(1)(C)(i) that would otherwise be subject to immediate dissemination, but occur in a security that is traded an average of less than one time per day and in which "$1 million plus" transactions are subject to dissemination delays under Rule 6250(b)(2)(A) or Rule 6250(b)(2)(B), will be disseminated in Stage Two, when delayed dissemination has been implemented and all transactions in the security will be disseminated. For example, XYZ Security is rated BB and trades an average of less than one time per day. Under Rule 6250(b)(1)(C)(i), a transaction in XYZ Security for $100,000 would be disseminated immediately if not for the above approach to implementation, but a $2 million transaction on the same day in XYZ Security would not be disseminated at any time during Stage One. NASD will withhold dissemination of the $100,000 XYZ transaction during Stage One because it believes that all market participants will be best served and get a more complete and accurate indication of price when, in a particular security, transactions of all sizes are subject to an operative TRACE dissemination requirement.


      Attachment A

      Rule 6200. TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)

      Rule 6210. Definitions

      (a) through (g) No Change
      (h) The term "Investment Grade" shall mean a TRACE-eligible security that, if rated by only one nationally recognized statistical rating organization ("NRSRO"), is rated in one of the four highest generic rating categories; or if rated by more than one NRSRO, is rated in one of the four highest generic rating categories by all or a majority of such NRSROs; provided that if the NRSROs assign ratings that are evenly divided between (i) the four highest generic ratings and (ii) ratings lower than the four highest generic ratings, NASD will classify the TRACE-eligible security as Non- Investment Grade for purposes of TRACE. If a TRACE-eligible security is unrated, for purposes of TRACE, NASD may otherwise classify the TRACE-eligible security as an Investment Grade security and further classify it as being in one of the four highest generic rating categories.[any TRACE-eligible security rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.]
      (i) The term "Non-Investment Grade" shall mean a TRACE-eligible security that, if rated by only one NRSRO, is rated lower than one of the four highest generic rating categories; or if rated by more than one NRSRO, is rated lower than one of the four highest generic rating categories by all or a majority of such NRSROs. If a TRACE-eligible security is unrated, for purposes of TRACE, NASD may otherwise classify the TRACE-eligible security as a Non-Investment Grade security and further classify it as being in one of the generic rating categories below the four highest such categories. If NASD does not have sufficient information to make a judgment regarding the classification of an unrated TRACE-eligible security, for purposes of TRACE, NASD will classify the TRACE-eligible security as having been rated B (or the equivalent rating of one or more NRSROs).1[any TRACE-eligible security that is unrated, non-rated, split-rated (where one rating falls below Investment Grade), or otherwise does not meet the definition of Investment Grade in paragraph (h) above.]
      (j) The term, "split-rated," shall mean an Investment Grade or a Non-Investment Grade security that is assigned ratings by multiple NRSROs that, for an Investment Grade security, are not in the same generic Investment Grade rating category, or, for a Non-Investment Grade security, are not in the same generic Non-Investment Grade rating category. After determining if a security is Investment Grade or Non-Investment Grade, NASD will disregard any rating, if the security is Investment Grade, that is Non-Investment Grade, or, if the security is Non-Investment Grade, that is Investment Grade. With respect to an Investment Grade security, if multiple NRSROs assign ratings that are not in the same generic Investment Grade rating category, or, with respect to a Non-Investment Grade security, if multiple NRSROs assign ratings that are not in the same generic Non-Investment Grade rating category, NASD will classify the TRACE-eligible security for purposes of TRACE by the generic rating that a majority or, if no majority, a plurality of the NRSROs assigns the security, provided that (i) if the NRSROs assign ratings that are evenly divided between two generic rating categories, NASD will classify the TRACE-eligible security for purposes of TRACE by the lower of the ratings; or (ii) if each NRSRO assigns a different generic rating, NASD will classify the TRACE-eligible security for purposes of TRACE by the lower or lowest of the ratings.
      * * * * *

      6250. Dissemination of [Corporate Bond Trade]Transaction Information

      (a) Dissemination of New Issue Aftermarket Transactions
      (1) Transaction information for TRACE-eligible securities rated by an NRSRO or classified by NASD for purposes of TRACE as BBB (or the equivalent rating of one or more NRSROs) executed during the period beginning the day a newly issued security is priced and lasting two business days ("New Issue Aftermarket-2") will not be disseminated during the New Issue Aftermarket-2. NASD will disseminate transaction information for transactions executed during the New Issue Aftermarket-2 starting on the next (third) business day, according to dissemination protocols established by NASD.
      (2) Transaction information for TRACE-eligible securities rated by an NRSRO or classified by NASD for purposes of TRACE as BB (or the equivalent rating of one or more NRSROs) or lower executed during the period beginning the day a newly issued security is priced and lasting 10 business days ("New Issue Aftermarket- 10") will not be disseminated during the New Issue Aftermarket-10. NASD will disseminate transaction information for transactions executed during the New Issue Aftermarket-10 starting on the next (eleventh) business day, according to dissemination protocols established by NASD.
      (b) Dissemination of Secondary Market Transactions
      (1) Immediate Dissemination. NASD will disseminate transaction information immediately upon receipt of a transaction report, if the report is for a transaction:
      (A) In a TRACE-eligible security rated by an NRSRO or classified by NASD for purposes of TRACE above BBB (or the equivalent rating of one or more NRSROs); or
      (B) In a TRACE-eligible security rated by an NRSRO or classified by NASD for purposes of TRACE as BBB (or the equivalent rating of one or more NRSROs) executed other than during the New Issue Aftermarket-2; or,
      (C) In a TRACE-eligible security rated by an NRSRO or classified by NASD for purposes of TRACE as BB (or the equivalent rating of one or more NRSROs) or lower executed other than during the New Issue Aftermarket-10 if:
      (i) the size of the transaction is $1 million or less (par value); or
      (ii) the size of the transaction is greater than $1 million (par value), and the TRACE-eligible security is traded (a) an average of one or more times per day, during the New Issue Aftermarket-10; and (b) thereafter, an average of one or more times per day over the last 20 business days of a 90-day period determined each quarter by NASD. Such security shall remain subject to immediate dissemination until such 90-day period in which the security fails to meet the condition set forth in this subparagraph (C)(ii)(b), in which case it shall be subject to a two- or four-business day delayed dissemination, as applicable.
      (2) Two- or Four-Business-Day Delayed Dissemination. For transactions in a TRACE-eligible security rated by an NRSRO or classified by NASD for purposes of TRACE as BB (or the equivalent rating of one or more NRSROs) or lower executed other than during the New Issue Aftermarket-10, NASD will disseminate transaction information on a two- or four-business-day delayed basis from the time of execution as follows:
      (A) Two-Business-Day Delay. In a TRACE-eligible security rated by an NRSRO or classified by NASD for purposes of TRACE as BB (or the equivalent rating of one or more NRSROs) if:
      (i) the size of the transaction is greater than $1 million (par value); and
      (ii) the security is traded (a) an average of less than one time per day, during the New Issue Aftermarket-10; and (b) thereafter, an average of less than one time per day over the last 20 business days of a 90-day period determined each quarter by NASD. Such security shall remain subject to a two-business day delayed dissemination until such 90-day period in which the security fails to meet the condition set forth in this subparagraph (A)(ii)(b), in which case it shall be subject to immediate dissemination.
      (B) Four-Business-Day Delay. In a TRACE-eligible security rated by an NRSRO or classified by NASD for purposes of TRACE as B (or the equivalent rating of one or more NRSROs) or lower if:
      (i) the size of the transaction is greater than $1 million (par value) and;
      (ii) the security is traded (a) an average of less than one time per day, during the New Issue Aftermarket-10; and (b) thereafter, an average of less than one time per day over the last 20 business days of a 90-day period determined each quarter by NASD. Such security shall remain subject to a four-business day delayed dissemination until such 90-day period in which the security fails to meet the condition set forth in this subparagraph (B)(ii)(b), in which case it shall be subject to immediate dissemination.
      (c) Rule 144A

      NASD will not disseminate information on a transaction in a TRACE-eligible security that is issued pursuant to Section 4(2) of the Securities Act of 1933 and resold pursuant to Rule 144A under the Securities Act of 1933.
      [(a) General Dissemination Standard

      Immediately upon receipt of transaction reports received at or after 8:00 a.m. through 6:29:59 p.m. Eastern Time, NASD will disseminate transaction information (except that market aggregate information and last sale information will not be updated after 5:15 p.m. Eastern Time) in the securities described below.
      (1) A TRACE-eligible security that is Investment Grade at the time of receipt of the transaction report and has an initial issuance size of $1 billion or greater.
      (2) A TRACE-eligible security that is Non-Investment Grade at the time of receipt of the transaction report and is designated by NASD for dissemination according to the following criteria.
      (A) The staff of NASD will designate fifty of the most actively traded Non-Investment Grade securities that are TRACE-eligible securities for dissemination under this rule, based on (i) the security's volume; (ii) the security's price; (iii) the security's name recognition; (iv) the research following of the security; (v) the security having a minimum number of bonds outstanding; (vi) the security being traded routinely by at least two dealers; and (vii) the security contributing to a representation of diverse industry groups in the group of securities designated for dissemination.
      (B) A Non-Investment Grade security will not be designated, and may be immediately withdrawn from designation, for dissemination under this rule if the security: (i) has matured; (ii) has been called; (iii) has been upgraded to Investment Grade; or (iv) has been downgraded to an extent that the security's trading characteristics do not warrant designation for dissemination.
      (3) A TRACE-eligible security that is Investment Grade, is rated by Moody's Investors Service, Inc. as "A3"1 or higher, and by Standard & Poor's, a division of McGraw Hill Co., Inc., as "A-"2 or higher, and has an original issue size of $100 million or greater. If a security is rated under this provision to qualify for dissemination at any time on or after the effective date of the rule, dissemination of transaction information on the security will continue under this paragraph unless the security is downgraded below "Baa3/BBB-."
      (4) Ninety to 120 TRACE-eligible securities designated by NASD that are rated "Baa/BBB" at the time of designation, according to the following standards.
      (A) Three groups, each composed of up to 50 TRACE-eligible securities (Group 1, Group 2, and Group 3), but collectively not exceeding 120, shall be designated by NASD. At the time of designation, each TRACE-eligible security in Group 1 must be rated "Baa1/BBB+" and each TRACE-eligible security in Group 2 and Group 3, must be rated, respectively, "Baa2/BBB" and "Baa3/BBB-." If a TRACE-eligible security is rated one of the "Baa" ratings by Moody's and one of the "BBB" ratings by S&P and the ratings indicate two different levels of credit quality, the lower of the two ratings will be used to determine the group to which a debt security will be assigned under this paragraph (a)(4).
      (B) A TRACE-eligible security that has a rating from only one rating agency will not be designated under paragraph (a)(4).
      (C) Dissemination of transaction information on a TRACE-eligible security that is designated under paragraph (a)(4) will not be discontinued if one rating is, or both ratings, are downgraded or upgraded.]
      [(b) Transactions Excluded From Market Aggregate, Last Sale

      All trade reports in TRACE-eligible securities that are approved for dissemination and submitted to TRACE at or after 8:00 a.m. Eastern Time and prior to 5:15 p.m. Eastern Time will be included in the calculation of market aggregates and last sale except:
      (1) trades reported on an "as of" basis;
      (2) "when issued" trades executed on a yield basis;
      (3) trades in baby bonds with a par value of less than $1,000;
      (4) trades in which the price is determined by a weighted average price; and
      (5) trades in which the price is a "special price," as indicated by the use of the special price modifier.]
      [(c) Dissemination of Certain Trades Executed on A Business Day
      (1) Reports of transactions in TRACE-eligible securities that are subject to dissemination, are executed on a business day at or after 6:30 p.m. Eastern Time through 11:59:59 p.m. Eastern Time, and are reported pursuant to Rule 6230(a)(2) on the next business day and designated "as/of" will be disseminated beginning at 8:00 a.m. Eastern Time on the day of receipt. The reported information will not be included in the calculation of the day's market aggregates.
      (2) Reports of transactions in TRACE-eligible securities that are subject to dissemination, are executed on a business day at or after 12:00 a.m. Eastern Time through 7:59:59 a.m. Eastern Time, and are reported pursuant to Rule 6230(a)(3) on the same day beginning at 8:00 a.m. Eastern Time will be disseminated upon receipt. The reported information will be included in the calculation of the day's market aggregates, except as otherwise provided in Rule 6250(b)(1) through (5).]
      [(d) Dissemination of Trades Executed on Non-Business Days
      Reports of transactions in TRACE-eligible securities that are subject to dissemination, are executed on a non-business day at any time during the day, and are reported pursuant to Rule 6230(a)(4) on the next business day will be disseminated upon receipt. The reported information will not be included in the calculation of the day's market aggregates.]
      * * * * *

      Rule 6260. Managing Underwriter or Group of Underwriters Obligation To Obtain CUSIP and Provide Notice

      (a) Members Required to Provide Information and Notice
      (1) In order to facilitate trade reporting and dissemination of secondary transactions in TRACEeligible securities, the member that is the managing underwriter or the members that are the group of underwriters of a distribution or offering, excluding a secondary distribution or offering, of a debt security that, upon issuance will be a TRACE-eligible security ("new issue"),[of any newly issued TRACE-eligible security] must obtain and provide information [by email or facsimile]to the TRACE Operations Center as required below.[under paragraph (b).] If a managing underwriter is not appointed, the group of underwriters must provide the information required under this rule.[comply with paragraph (b).]
      (2) The information must be provided by facsimile or e-mail.
      (b) Notices

      For such [TRACE-eligible securities]new issues, the managing underwriter or group of underwriters must provide to the TRACE Operations Center[, by email or facsimile]: (1) the CUSIP number; (2) the issuer name; (3) the coupon rate; (4) the maturity; (5) whether Rule 144A applies; (6) a brief description of the issue (e.g., senior subordinated note, senior note); and, (7) information, as determined by NASD, [that is required to determine ]to implement the provisions of Rule 6250(a) and such other information NASD deems necessary to properly implement the reporting and dissemination of a TRACE-eligible security[if a TRACE-eligible security must be disseminated under Rule 6250 (e.g., size of issue and rating)], or if any of items (2) through (7) has not been determined, such other information as NASD deems necessary. The managing underwriter or group of underwriters must obtain the CUSIP number and provide it and the information listed as (2) through (7) not later than 5:00 p.m. Eastern Time on the business day preceding the day that the registration statement becomes effective, or, if registration is not required, the day before the securities will be priced. If an issuer notifies a managing underwriter or group of underwriters, or the issuer and the managing underwriter or group of underwriters determine, that the TRACE-eligible securities of the issuer shall be priced, offered and sold the same business day in an intra-day offering under Rule 415 of the Securities Act of 1933 or Section 4(2) and Rule 144A of the Securities Act of 1933, the managing underwriter or group of underwriters shall provide the information not later than 5:00 p.m. Eastern Time on the day that the securities are priced and offered, provided that if such securities are priced and offered on or after 5:00 p.m. Eastern Time, the managing underwriter or group of underwriters shall provide the information not later than 5:00 p.m. Eastern Time on the next business day. The managing underwriter or group of underwriters must make a good faith determination that the security is a TRACE-eligible security before submitting the information to the TRACE Operations Center.

    • 04-64 SEC Announces Immediate Effectiveness of the Deletion of IM-2210-4(b) and Rule Series 3400 as Obsolete

      View PDF file

      GUIDANCE

      Deletion of Obsolete Rules

      Effective Date: August 10, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management

      Obsolete Rules
      Rule 3400 Series

      Executive Summary

      The Securities and Exchange Commission (SEC) has announced the immediate effectiveness of an amendment to delete as obsolete IM-2210-4(b) (Certification of Membership) and Rule Series 3400 (Computer Systems). The rule change is immediately effective on its August 10, 2004 filing date.

      The text of the amendment 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.

      Discussion

      NASD recently repealed IM-2210-4(b) and the Rule 3400 Series as obsolete rules. Specifically, IM-2210-4(b) provides that, upon request to NASD, a member may receive an appropriate certification of membership. However, because NASD no longer issues Membership Certifications, IM-2210-4(b) is no longer necessary.

      Additionally, Rule 3420 (Mandatory Decimal Pricing Testing), the sole remaining rule in the Rule 3400 Series,1 is also unnecessary. Rule 3420 was enacted to require clearing firms and market makers that are NASD members to conduct or participate in the securities industry's decimalization pricing tests. Such testing was required by NASD in compliance with the SEC's order for certain securities industry participants to develop plans for the initial, and now completed, conversion to decimal pricing.2

      On August 10, 2003, NASD filed with the SEC a rule filing that became immediately effective deleting these obsolete rules from the NASD Manual.


      1 The only other rule in the series, Rule 3410 (Mandatory Year 2000 Testing), automatically expired by its own terms on January 1, 2001, and has already been deleted from the Rule 3400 Series.

      2 Order Directing the Exchanges and NASD to Submit a Decimalization Implementation Plan, Securities Exchange Act Rel. No. 42360 (Jan. 28, 2000).


      Attachment A

      * * * * *

      IM-2210-4. Limitations on Use of NASD's Name

      [(a) Statements of Membership]

      Members may indicate NASD membership in conformity with Article XV, Section 2 of the NASD By-Laws in one or more of the following ways:
      (1) in any communication with the public, provided that the communication complies with the applicable standards of Rule 2210 and neither states nor implies that NASD or any other regulatory organization endorses, indemnifies, or guarantees the member's business practices, selling methods, the class or type of securities offered, or any specific security;
      (2) in a confirmation statement for an over-the-counter transaction that states: "This transaction has been executed in conformity with the NASD Uniform Practice Code."
      [(b) Certification of Membership

      Upon request to NASD, a member will be entitled to receive an appropriate certification of membership, which may be displayed in the principal office or a registered branch office of the member. The certification shall remain the property of NASD and must be returned by the member upon request of the NASD Board or its Chief Executive Officer.]

      * * * * *

      [3400. COMPUTER SYSTEMS]

      [3420. Mandatory Decimal Pricing Testing]

      [(a) Clearing firms and market makers of the Association must conduct or participate in the testing of their computer systems to ascertain decimal pricing conversion compatibility of such systems in such manner and frequency as the Association may prescribe.]
      [(b) Every clearing firm and market maker required by the Association to conduct or participate in testing of computer systems shall provide to the Association such reports relating to the testing as the Association may prescribe.]
      [(c) Clearing firms and market makers shall maintain adequate documentation of tests required pursuant to this Rule and the results of such testing for examination by the Association.]

    • 04-63 New SEC Procedures Relating to Section 31 of the Securities Exchange Act of 1934

      View PDF file
      View Interim Self-Reporting Form PDF file
      View Permanent Self-Reporting Form PDF file

      INFORMATIONAL

      Transaction Fees

      SUGGESTED ROUTING

      KEY TOPICS

      Finance
      Legal & Compliance
      Operations
      Senior Management

      Section 31 of the Exchange Act
      Section 3 of Schedule A to the NASD
      By-Laws
      Transaction Fees

      Executive Summary

      Pursuant to Section 31 of the Securities Exchange Act of 1934 (Exchange Act), NASD, as a national securities association, and the national securities exchanges are required to pay transaction fees and assessments to the Securities and Exchange Commission (SEC) that are designed to recover the costs related to the government's supervision and regulation of the securities markets and securities professionals. On June 28, 2004, the SEC established new procedures governing the calculation, payment, and collection of fees and assessments on securities transactions owed by national securities exchanges and associations to the SEC pursuant to Section 31.1

      In accordance with the new procedures, NASD must now provide the SEC with trade data, which the SEC will use to calculate the amount of fees and assessments due by NASD. NASD is issuing this Notice to inform member firms of the new SEC procedures relating to Section 31 of the Exchange Act. While the requirements of Section 31, including the new procedures established by the SEC, apply directly to NASD and the national securities exchanges and not their membership, NASD members also should be aware of these requirements. In accordance with Section 3 of Schedule A to the NASD By-Laws, NASD obtains the funds to pay its Section 31 fees and assessments from its membership. Accordingly, as discussed in this Notice, the new procedures adopted by the SEC will have an effect on the obligations of member firms under Section 3 of Schedule A.

      Questions/Further Information

      Questions concerning this Notice may be directed to Rob Renner, Director of Accounting Operations, NASD Finance, at (240) 386-5303; Kathleen O'Mara, Associate General Counsel, Office of General Counsel (OGC), Regulatory Policy and Oversight (RPO), at (202) 728-8071; or Afshin Atabaki, Attorney, OGC, RPO, at (202) 728-8902.

      Background and Discussion

      Since 1997, NASD has been required to pay the SEC a fee based on the aggregate dollar amount of sales of securities transacted by or through any member otherwise than on a national securities exchange.2 Prior to the adoption of the new procedures described below, the SEC had allowed NASD and the national securities exchanges to adopt their own procedures for the calculation of the Section 31 fees and assessments owed to the SEC. Based on the requirements of the Accountability of Tax Dollars Act of 2002, however, the SEC has determined to centralize the calculation and collection of the fees and assessments owed to it by NASD and the national securities exchanges in accordance with Section 31. Consequently, in January 2004, the SEC proposed new Rule 31 and temporary Rule 31T under the Exchange Act3 as well as Form R31 to establish procedures by which it could calculate and collect the Section 31 fees and assessments.4 The new procedures were adopted on June 28, 2004 and became effective on August 6, 2004.

      Based on the new procedures, NASD is required to provide to the SEC the aggregate dollar amount of all "covered sales"5 and the total number of "covered round turn transactions"6 occurring by or through a member firm otherwise than on a national securities exchange.7 The SEC will then calculate the amount of Section 31 fees due from NASD for "covered sales" by multiplying the aggregate dollar amount of NASD's covered sales by the fee rate set forth in Section 31(c) of the Exchange Act, which the SEC adjusts from time to time pursuant to Section 31(j) of the Exchange Act.8 In addition, the SEC will calculate the amount of assessment due from NASD for "covered round turn transactions" by multiplying the total number of covered round turn transactions by the assessment charge set forth in Section 31(d) of the Exchange Act.9 Section 31 fees and assessments are due to the SEC twice per year—on March 15 and September 30. Before the due dates, the SEC will send a bill to NASD showing the total amount due from NASD for the billing period.

      As adopted, the new procedures require NASD to tabulate aggregate sales volume based on information reported to its trade reporting systems and to submit this data to the SEC on SEC Form R31 on a monthly basis. Pursuant to SEC Rule 31(b)(1), NASD is required to submit to the SEC a completed Form R31 within ten business days after the end of each month. NASD currently has two trade reporting systems for purposes of Rule 31 under the Exchange Act—the Automated Confirmation Transaction Service (ACT) and the Trade Reporting and Confirmation Service (TRACS). In addition, NASD is required to compile and submit, through Form R31, similar trading activity information on trades that are not captured by ACT or TRACS.

      Specifically, NASD is required to submit the aggregate dollar amount of covered sales that: (1) occurred by or through a member otherwise than on a national securities exchange; (2) had a "charge date"10 in the month of the report; and (3) NASD captured in its trade reporting systems. NASD also is required to submit trade data to the SEC on covered sales that are not captured on either ACT or TRACS, which would include covered sales in odd lots, covered sales resulting from the exercise of options settled by physical delivery and not listed or traded on a national securities exchange, and covered sales where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security (hereinafter referred to as away from the market sales).11

      Currently, NASD obtains trade data on covered sales in odd lots and covered sales resulting from the exercise of options settled by physical delivery and not listed or traded on a national securities exchange through a self-reporting mechanism, but trade data on away from the market sales is not captured in NASD's trade reporting systems or through a self-reporting mechanism. Moreover, NASD previously had not included away from the market sales in its calculation of the transaction fees owed to the SEC under Section 31 based upon SEC guidance that such transactions were not subject to Section 31 fees.12 In the Adopting Release, however, the SEC stated that it now believes that such transactions are subject to Section 31 fees where consideration is given for the securities. Therefore, as explained in greater detail below, NASD will begin seeking trade information on these transactions from members through self reporting so that it can satisfy its reporting obligation under the new SEC procedures.

      SEC Rule 31T authorizes the SEC to collect trade data on all covered sales retroactively for each of the months September 2003 to June 2004, inclusive. Accordingly, the Rule as written requires NASD to submit trade data on away from the market sales for each of the months in the September 2003 to June 2004 period. Such an approach would require members to retroactively self report such transactions to NASD. NASD believes that requesting historical information from member firms on away from the market sales for the period from September 2003 to June 2004 is unduly burdensome on members. Therefore, NASD has sought an exemption from the SEC with respect to NASD's retroactive reporting obligation. Consequently, in light of NASD's pending exemption request, members will not have to review transactions between September 2003 and June 2004 to identify away from the market sales for that period.13 However, NASD will begin reporting away from the market sales effective July 2004 and for each month thereafter. To allow members more time to review their July 2004 transactions to identify away from the market sales for that month, NASD also has sought an exemption from the SEC so that NASD can report away from the market sales for July 2004 in the Form R31 that is due on September 15, 2004. The exemptions sought by NASD are intended to give member firms more time to make the necessary changes to their systems to facilitate the self reporting of away from the market sales.

      Obligations of Member Firms

      To recover the costs of NASD's Section 31 obligation, NASD assesses a transaction fee on its member firms under Section 3 of Schedule A to the NASD By-Laws, the amount of which is set in accordance with Section 31 of the Exchange Act.14 As noted above, the new SEC procedures relating to Section 31 do not directly affect the obligation of member firms to pay the transaction fees assessed by NASD. NASD anticipates that the impact of SEC's new procedures on its members will be minimal. NASD will continue to bill members for covered securities transactions that are reported through ACT on a monthly basis, as it does today. In addition, NASD will bill members for transactions reported through TRACS. Nonetheless, members should be aware that the new procedures adopted by the SEC will affect NASD practices and, pursuant to such practices, member's reporting obligations. Specifically, member firms now are required to self report away from the market sales15—this is in addition to the currently selfreported covered sales in odd-lot transactions and covered sales resulting from the exercise of over-the-counter (OTC) options that settle by physical delivery.

      In accordance with guidance provided in the SEC's Adopting Release, NASD has revised its existing self-reporting form so that members can report, in addition to odd-lot transactions and exercises of OTC options that settle by physical delivery, away from the market sales. In addition, NASD has created an Interim Self-Reporting Form to facilitate members' reporting of certain away from the market sales. NASD also will now require that trade data and applicable payments be received by NASD by the seventh calendar day of each month subsequent to the trade period covered on the report.16 Currently, members have until the tenth calendar day of each month to submit the trade data and payments to NASD. However, given NASD's obligation to process the trade data in a shorter timeframe (NASD is required to submit the trade data to the SEC within ten business days after the end of each month), NASD is requiring members to provide the trade data and payments by the seventh calendar day of each month, beginning in September 2004.

      Members must use the Interim Self-Reporting Form that is attached to this Notice to self report covered sales of odd-lots and OTC exercised options as well as away from the market sales for the August 2004 trade-reporting period. In addition, members must use the Interim Self-Reporting Form to report away from the market sales for the July 2004 trade-reporting period.17 The Interim Self-Reporting Form and applicable payments must be received by NASD by September 7, 2004. The Interim Self-Reporting Form will be used once only in September 2004.

      To self report covered sales, including away from the market sales, for the September 2004 trade-reporting period and for each month thereafter, members must use the Permanent Self-Reporting Form, which also is attached to this Notice. The Permanent Self-Reporting Form becomes effective on October 1, 2004. The first Permanent Self- Reporting Form and applicable payments must be received by NASD by October 7, 2004. NASD reminds firms to print and retain blank copies of the Permanent Self- Reporting Form for future use.

      NASD also reminds firms of their continuing obligation to ensure the accuracy and timeliness of information reported to NASD, including real-time trade information reported to ACT and TRACS and self-reported trade information. Moreover, because NASD will rely on self-reported data from member firms to complete Part III of SEC Form R31, it is imperative that firms submit accurate trade data to NASD on a timely basis on covered sales of odd-lot transactions and exercises of OTC options that settle by physical delivery, as well as away from the market sales.

      Rounding and Disclosure of Transaction Fees

      Currently, members calculate the transaction fees on self-reported trades by: (1) multiplying the aggregate dollar amount of self-reported covered sales by the fee rate; (2) truncating the resulting amount at the fifth place after the decimal point; and (3) rounding up to the next cent, if there is any remainder. While firms need not pass transaction fees on to their customer, it is NASD's understanding that such fees are frequently passed by broker-dealers on to their customers on a trade-by-trade basis.18 In addition, NASD understands that reconciling the amounts billed by NASD and the amounts collected by member firms has been difficult from a member firm perspective, resulting in overages at some broker-dealer firms, in part due to the practice of routinely rounding up to the next cent. To more accurately reconcile the amount that NASD bills its members and the amount collected by members from their customers, members should no longer solely round up when there is a remainder after truncating the resulting amount. Rather, if there is any remainder, members should alternate between rounding up and rounding down to the next cent.

      With respect to the disclosure of the transaction fees that members pass on to their customers, the SEC does not believe that it is appropriate for members to refer to the fee assessed by NASD as "Section 31 Fees" or "SEC Fees."19 Therefore, as noted by the SEC, members should refrain from labeling the fees as such to avoid any confusion by their customers.20


      1 See Final Rule Regarding Collection Practices Under Section 31, Securities Exchange Act Release No. 49928 (June 28, 2004), 69 FR 41059 (July 7, 2004) (Adopting Release).

      2 See Section 31(c) of the Exchange Act.

      3 Temporary Rule 31T enables the SEC to calculate Section 31 fees and assessments using the new procedures for the whole of its fiscal year 2004.

      4 See Securities Exchange Act Release No. 49014 (January 20, 2004), 69 FR 4018 (January 27, 2004).

      5 Section 31 applies only to sales of securities. SEC Rule 31(a)(6) defines a "covered sale" as "a sale of a security, other than an exempt sale or a sale of a security future, occurring on a national securities exchange or by or through any member of a national securities association otherwise than on a national securities exchange."

      6 SEC Rule 31(a)(7) defines a "covered round turn transaction" as "a round turn transaction in a security future, other than a round turn transaction in a future on a narrow-based security index, occurring on a national securities exchange or by or through a member of a national securities association otherwise than on a national securities exchange."

      7 Certain sales are exempt from the application of Section 31. The following are considered exempt sales: (1) any sale of a security offered pursuant to an effective registration statement under the Securities Act of 1933 (Securities Act) (except a sale of a put or call option issued by the Options Clearing Corporation) or offered in accordance with an exemption from registration afforded by Section 3(a) or 3(b) of the Securities Act, or a rule thereunder; (2) any sale of a security by an issuer not involving any public offering within the meaning of Section 4(2) of the Securities Act; (3) any sale of a security pursuant to and in consummation of a tender or exchange offer; (4) any sale of a security upon the exercise of a warrant or right (except a put or call), or upon the conversion of a convertible security; (5) any sale of a security that is executed outside the U.S. and is not reported, or required to be reported, to a transaction-reporting association as defined in SEC Rule 11Aa3-1 and any approved plan filed thereunder; (6) any sale of an option on a security index (including both a narrow-based security index and a non-narrowbased security index); (7) any sale of a bond, debenture, or other evidence of indebtedness; and (8) any recognized riskless principal sale. See SEC Rule 31(a)(11). The exemption for any "recognized riskless principal sale" is new. SEC Rule 31(a)(14) defines a "recognized riskless principal sale" as a sale of a security where: (1) a broker-dealer receives from a customer an order to buy (sell) a security; (2) the broker-dealer engages in two contemporaneous offsetting transactions as principal, one in which the broker-dealer buys (sells) the security from (to) a third party and the other in which the brokerdealer sells (buys) the security to (from) the customer; and (3) the SEC, pursuant to Section 19(b)(2) of the Exchange Act, has approved a rule change submitted by the self-regulatory organization on which the second of the two contemporaneous offsetting transactions occurs that permits the transaction to be reported as riskless.

      8 The fee rate currently is set at $23.40 per million. However, effective October 1, 2004, or 30 days after the date on which the SEC receives its fiscal year 2005 regular appropriation, whichever date comes later, the Section 31 fee rate will increase to $32.90 per million from the current rate. See SEC Fee Rate Advisory #1 for Fiscal Year 2005 at www.sec.gov/news/press/2004-59.htm. In the past, NASD has notified members, through Member Alerts or other means, of any periodic adjustments to the fee rate. NASD will continue to notify members of any such adjustments in the future.

      9 The assessment charge currently is set at $0.009 for each round turn transaction (treated as including one purchase and one sale of a contract of sale for future delivery). See Section 31(d) of the Exchange Act.

      10 The charge date for trades reported in Parts II and III of Form R31 is the trade date, with one exception. The charge date for covered sales resulting from the exercise of over-the-counter options that settle by physical delivery is the exercise date. In addition, NASD has sought an exemption from the SEC to permit the charge date for "as-of" trades reported by NASD in Form R31 to be the trade report date.

      11 See Securities Exchange Act Release No. 49928, 69 FR 41059, 41063.

      12 See Final Rule Regarding Securities Transactions Exempt From Transaction Fees, Securities Exchange Act Release No. 38073 (December 23, 1996), 61 FR 68590, 68592 n.27 (December 30, 1996).

      13 In the event the SEC does not grant the requested exemption to NASD, NASD will require its members to report such information to it and will promptly inform its members of such fact and of the manner in which to report the information. At this time, however, NASD is proceeding under the assumption that such exemption will be granted.

      14 Pursuant to the Investor and Capital Markets Fee Relief Act, the SEC is required to make periodic adjustments to the Section 31 fee rates. As noted above, the current fee rate is set at $23.40 per million.

      15 As stated in the Adopting Release, a gift of a security without consideration is not a "sale" for purpose of Sections 31(c) of the Exchange Act, and is not subject to Section 31 fees. Therefore, member firms are not required to self report transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security if no consideration is given for the securities.

      16 If the seventh calendar day falls on a weekend or a public holiday, the report must be received by NASD on the first business day following the weekend or holiday.

      17 The Interim Self-Reporting Form includes two tables for purposes of reporting away from the market sales for the July and August 2004 tradereporting periods. Members must use the first table in the form to report away from the market sales for transactions occurring in August 2004. Members must use the second table in the form to report only away from the market sales and only for the month of July 2004.

      18 See Letter from Ernest A. Pittarelli, Chairman, Securities Industry Association Operations Committee, to Jonathan G. Katz, Secretary, SEC, dated March 5, 2004.

      19 Securities Exchange Act Release No. 49928, 69 FR 41059, 41072.

      20 NASD is filing a proposed rule change with the SEC to amend, among other things, the title of Section 3 of Schedule A to the NASD By-Laws from "SEC Transaction Fee" to "Regulatory Transaction Fee."

      NASD
      Interim Self-Reporting Form for Odd-Lot,
      OTC Exercised Option, and Away from the Market Sales
      that Are not Reported through ACT or TRACS

      P.O. Box 7777-W4230
      Philadelphia, PA 19175-4230

      *** Effective September 1, 2004 ***

      *** Expires September 30,2004 ***

      Important Note: This Interim Self-Reporting Form is to be used to report odd-lot, OTC exercised options, and away from the market sales for the August 2004 trade-reporting period. In addition, this Interim Self- Reporting Form is to be used to report away from the market sales for the July 2004 trade-reporting period.

      Only NASD members that are clearing firms (including self-clearing firms) should be submitting this form to NASD. All clearing firms are expected to collect any applicable trading information from their respective correspondent firms to be included in the aggregate totals. The trade date must be used when determining aggregate odd-lot and away from the market sales transactions for the preceding calendar month. The exercise date must be used when reporting aggregate OTC exercised option sales for the preceding calendar month.

      General Instructions

      The purpose of this form is to facilitate the collection of transaction fees under Section 3 of Schedule A to the NASD By- Laws with respect to transactions in odd-lots, transactions effected pursuant to the exercise of OTC options, and certain transactions that occur away from the market.

      Please retain a copy of this blank form for your firm's monthly reporting. Additional copies of this form may be obtained by contacting the NASD Finance Department at (240) 386-5354.

      If your firm does not process odd-lot transactions or if all odd-lot trades are submitted to the Automated Confirmation Transaction Service (ACT) or Trade Reporting and Comparison Service (TRACS) for trade reporting purposes, please submit the form with an "N/A" for the aggregate sales amount.

      If your firm does not process any of the types of transactions identified on this form, please submit the blank form signed by an authorized representative, along with a letter of explanation detailing the reason your firm does not process any of the identified transactions. Future filings of this blank form for inactivity will not be necessary. If applicable transactions are processed in the future, your firm will be expected to file this form along with payment in a timely manner.

      Odd-Lot Transactions

      NASD members that are clearing firms, including self-clearing firms, must report aggregate dollar amount of covered odd-lot sales transacted by or through such member, including all such sales by the member's correspondent firm(s). Firms must report odd-lot sales under the same general rules and guidelines applicable to round lot transactions as detailed in Special Notice to Members 96-81 dated December 3, 1996 and the SEC Billing Document from NASD in December 1996. Member firms should consider the following when accumulating odd-lot data for each reporting period:

      • Odd-lot transactions are those sides for less than the normal trading unit, e.g., 100 shares. Do not include "mixed lots" as part of your odd-lot reporting.

      • Include all transactions where you or your correspondent firms represent the sell side of the odd-lot transaction.

      • Include all transactions where you or your correspondent firms represent the buy side of a transaction with or between public customers or non-NASD member firms.

      • Include all odd-lot transactions in Nasdaq securities, excluding convertible debt listed on Nasdaq.

      • Include all odd-lot transactions in all non-Nasdaq OTC Equity Securities as defined in NASD Rule 6610.

      • Do include, in this form, odd-lot transactions in exchange registered securities traded off the exchange ("third market trades").

      • Do not include odd-lot transactions that are trade reported to either ACT or TRACS. This form must only be used for odd lots that are not trade reported to ACT or TRACS.

      OTC Options Exercise

      Use this section of the form to report all transactions in a covered security effected pursuant to the exercise of an OTC option by or through a member that is a clearing firm (including self-clearing firm) or its correspondent firm(s). Covered securities are those securities that are subject to prompt last-sale-reporting and exchange-registered securities. Member firms should determine the following when accumulating options exercise data for each calendar reporting period:

      • This form is only used to report transactions in covered securities that arise pursuant to the exercise of an OTC option by or through an NASD member that settle by physical delivery.

      • Include all transactions where you or your correspondent firms represent the sell side of the transaction.

      • Include all transactions where you or your correspondent firms represent the buy side of a transaction with or between public customers or non-NASD member firms.

      • Do not include any transactions in a covered security effected pursuant to the exercise of an exchange-registered option, e.g., a purchase or sale of a Nasdaq or OTC Equity Security upon the exercise of an exchange-registered option. The Options Clearing Corporation will be collecting the fee for these types of transactions.

      • Do not include any exercise of an option not involving the purchase or sale of the underlying covered security, e.g., a cash settled exercise.

      • Report the aggregate dollar amount of the transactions determined on the basis of the exercise price.

      Sales Away from the Market That Are Not Required to Be Reported by NASD Rules

      NASD members that are clearing firms (including self-clearing firms) must report aggregate dollar amount of covered sales where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security and where these sales were not required to be reported pursuant to NASD Rules. Firms should not report trade data that already has been reported to ACT or TRACS. In addition, members are not required to include transactions involving a gift of a security without consideration because such a transaction is not considered a "sale" for purposes of this form.

      This self-reporting form includes two tables for purposes of reporting sales away from the market for the July and August trade-reporting periods. Members must use the first table in the form to report sales away from the market (in addition to odd lots and OTC exercised options) as part of their regular reporting obligation for transactions occurring in August 2004. Members must use the second table in the form to report only sales away from the market and only for the month of July 2004. Please use this interim form only for the July and August 2004 trade-reporting periods and use the Permanent Self-Reporting Form (effective October 1, 2004) to report covered sales for the September 2004 tradereporting period and going forward.

      NASD
      Permanent Self-Reporting Form for Odd-Lot,
      OTC Exercised Option, and Away from the Market Sales
      that Are not Reported through ACT or TRACS

      P.O. Box 7777-W4230
      Philadelphia, PA 19175-4230

      ***Effective October 1, 2004***

      Important Note: Only NASD members that are clearing firms (including self-clearing firms) should be submitting this form on a monthly basis to NASD. All clearing firms are expected to collect any applicable trading information from their respective correspondent firms to be included in the aggregate totals. The trade date must be used when determining aggregate odd-lot and away from the market sales transactions for the preceding calendar month. The exercise date must be used when reporting aggregate OTC exercised option sales for the preceding calendar month.

      General Instructions

      The purpose of this form is to facilitate the collection of transaction fees under Section 3 of Schedule A to the NASD By- Laws with respect to transactions in odd-lots, transactions effected pursuant to the exercise of OTC options, and certain transactions that occur away from the market.

      Please retain a copy of this blank form for your firm's monthly reporting. Additional copies of this form may be obtained by contacting the NASD Finance Department at (240) 386-5354.

      If your firm does not process odd-lot transactions or if all odd-lot trades are submitted to the Automated Confirmation Transaction Service (ACT) or Trade Reporting and Comparison Service (TRACS) for trade reporting purposes, please submit the form with an "N/A" for the aggregate sales amount.

      If your firm does not process any of the types of transactions identified on this form, please submit the blank form signed by an authorized representative, along with a letter of explanation detailing the reason your firm does not process any of the identified transactions. Future filings of this blank form for inactivity will not be necessary. If applicable transactions are processed in the future, your firm will be expected to file this form along with payment in a timely manner.

      Odd-Lot Transactions

      NASD members that are clearing firms, including self-clearing firms, must report aggregate dollar amount of covered odd-lot sales transacted by or through such member, including all such sales by the member's correspondent firm(s). Firms must report odd-lot sales under the same general rules and guidelines applicable to round lot transactions as detailed in Special Notice to Members 96-81 dated December 3, 1996 and the SEC Billing Document from NASD in December 1996. Member firms should consider the following when accumulating odd-lot data for each reporting period:

      • Odd-lot transactions are those sides for less than the normal trading unit, e.g., 100 shares. Do not include "mixed lots" as part of your odd-lot reporting.

      • Include all transactions where you or your correspondent firms represent the sell side of the odd-lot transaction.

      • Include all transactions where you or your correspondent firms represent the buy side of a transaction with or between public customers or non-NASD member firms.

      • Include all odd-lot transactions in Nasdaq securities, excluding convertible debt listed on Nasdaq.

      • Include all odd-lot transactions in all non-Nasdaq OTC Equity Securities as defined in NASD Rule 6610.

      • Include all odd-lot transactions in all non-Nasdaq OTC Equity Securities that are ADRs or Canadian foreign securities but exclude all non-Nasdaq non-Canadian foreign securities. Consolidate all odd-lot transactions with that of your correspondents, if any.

      • Do include, in this form, odd-lot transactions in exchange registered securities traded off the exchange ("third market trades").

      • Do not include odd-lot transactions that are trade reported to either ACT or TRACS. This form must only be used for odd lots that are not trade reported to ACT or TRACS.

      OTC Options Exercise

      Use this section of the form to report all transactions in a covered security effected pursuant to the exercise of an OTC option by or through a member that is a clearing firm (including self-clearing firm) or its correspondent firm(s). Covered securities are those securities that are subject to prompt last-sale-reporting and exchange-registered securities. Member firms should determine the following when accumulating options exercise data for each calendar reporting period:

      • This form is only used to report transactions in covered securities that arise pursuant to the exercise of an OTC option by or through an NASD member that settle by physical delivery.

      • Include all transactions where you or your correspondent firms represent the sell side of the transaction.

      • Include all transactions where you or your correspondent firms represent the buy side of a transaction with or between public customers or non-NASD member firms.

      • Do not include any transactions in a covered security effected pursuant to the exercise of an exchange-registered option, e.g., a purchase or sale of a Nasdaq or OTC Equity Security upon the exercise of an exchange-registered option. The Options Clearing Corporation will be collecting the fee for these types of transactions.

      • Do not include any exercise of an option not involving the purchase or sale of the underlying covered security, e.g., a cash settled exercise.

      • Report the aggregate dollar amount of the transactions determined on the basis of the exercise price.

      Sales Away from the Market That Are Not Required to be Reported By NASD Rules

      NASD members that are clearing firms (including self-clearing firms) must report aggregate dollar amount of covered sales where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security and where these sales were not required to be reported pursuant to NASD Rules. Firms should not report trade data that already has been reported to ACT or TRACS. In addition, members are not required to include transactions involving a gift of a security without consideration because such a transaction is not considered a "sale" for purposes of this form.

    • 04-62 SEC Approves New Rule 10334 To Allow Direct Communication Between Parties and Arbitrators

      View PDF file

      GUIDANCE

      Direct Communication

      Effective Date: September 30, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance

      Arbitration
      Arbitrators
      Dispute Resolution

      Executive Summary

      The Securities and Exchange Commission has approved new Rule 10334 of the NASD Code of Arbitration Procedure to permit direct communication among arbitrators and the parties to the arbitration (through their counsel) where all parties and arbitrators agree, and to establish guidelines for such direct communication.1 Included with this Notice is Attachment A, the text of the new rule. The rule will be effective on September 30, 2004.

      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.

      Background and Discussion

      Under current procedures, parties must address all communications intended for the arbitrators to NASD Dispute Resolution staff, who then forward the communications to the arbitrators. If the communication includes a motion or similar request, staff members customarily solicit a response from the other parties before forwarding the motion or request to the arbitrators. Similarly, the arbitrators transmit their orders and any other communications through the staff.

      In response to a recommendation of the NASD National Arbitration and Mediation Committee, the Chicago Office of NASD Dispute Resolution began a pilot project in June 2001 to determine whether direct communication between parties (through their counsel) and arbitrators would enhance the arbitration process. The Chicago Office developed the parameters governing whether a case would be eligible for inclusion in the pilot and changed the script used by the panel chairperson at the Initial Prehearing Conference (IPHC) on those cases. A modified IPHC Order also was given to the panel chairperson to memorialize all direct communication matters agreed to by the parties and the arbitrators.

      In total, 839 cases were eligible for inclusion in the project. Parties (all represented by counsel) and arbitrators in 255 of these cases participated in the program. At the end of the one-year pilot period, staff formulated a survey for those arbitrators and party representatives who participated in the pilot. NASD received responses from about one-third of those surveyed: 193 came from arbitrators and 75 from party representatives. Overall, 73 percent of party representatives and 69 percent of the arbitrators who responded to the survey favored continuing direct communication with the arbitrators. Favorable comments reflected the opinion that direct communication expedited the arbitration process and was more convenient than the normal method of communicating through staff.

      In light of the success of the Chicago pilot, NASD developed a nationwide rule that would permit direct communication with the arbitrators where all parties and arbitrators agree. The rule also establishes guidelines for direct communication.

      New Rule 10334

      The new rule is based largely on procedures used in the Chicago pilot, with a few changes to reflect NASD's experience with the pilot and to provide for possible issues that might occur in a larger-scale application of the rule. Only parties that are represented by counsel may use direct communication under the new rule. If, during the proceeding, a party chooses to appear pro se (without counsel), the rule no longer will apply. All arbitrators and all parties must agree to the use of direct communication before it can be used. The scope of direct communication will be set forth in an arbitrator order, and parties may send the arbitrators only the types of items that are listed in the order. All the arbitrators and parties must have facsimile or e-mail capability before such a delivery method may be used.

      Materials must be sent at the same time and in the same manner to all parties, all arbitrators, and the Director of Arbitration (through the assigned staff member), and staff must receive copies of any orders and decisions made as a result of direct communications among the parties and the arbitrators. To avoid tying up busy fax machines and printers, however, the rule contains a provision stating that materials more than 15 pages long shall be sent to the Director only by mail or courier. Arbitrators (or parties) with similar concerns could include a similar provision as to themselves in the direct communication order. NASD has prepared a template for direct communication orders to guide the arbitrators and parties in considering these issues.

      Normally, the decision to use direct communication will be made at the IPHC; however, parties and arbitrators also may agree to use direct communication later in the course of an arbitration proceeding, so long as the agreement is contained in a written order of the arbitrators as provided in Rule 10334. The new rule provides that either an arbitrator or a party may rescind his or her agreement at any time, with notice to all arbitrators and parties, if direct communication is no longer working well.

      One-sided (ex parte) communications outside the scope of the new rule are still prohibited; parties must not communicate orally with the arbitrators outside the presence of all parties.

      Effective Date

      The new rule will be effective on September 30, 2004.


      1 Securities Exchange Act Release No. 49950 (June 30, 2004), 69 FR 41321 (July 8, 2004) (File No. SR-NASD-2003-163).


      Attachment A

      New language is underlined; deletions are in brackets.

      Code of Arbitration Procedure

      * * * * * * * * * *

      10334. Direct Communication Between Parties and Arbitrators

      (a) This rule provides procedures under which parties and arbitrators may communicate directly.
      (b) Only parties that are represented by counsel may use direct communication under this Rule. If, during the proceeding, a party chooses to appear pro se (without counsel), this Rule shall no longer apply.
      (c) All arbitrators and all parties must agree to the use of direct communication during the Initial Prehearing Conference or a later conference or hearing before it can be used.
      (d) Parties may send the arbitrators only items that are listed in an order.
      (e) Parties may send items by regular mail, overnight courier, facsimile, or email. All the arbitrators and parties must have facsimile or email capability before such a delivery method may be used.
      (f) Copies of all materials sent to arbitrators must also be sent at the same time and in the same manner to all parties and the Director. Materials that exceed 15 pages, however, shall be sent to the Director only by regular mail or overnight courier.
      (g) The Director must receive copies of any orders and decisions made as a result of direct communications among the parties and the arbitrators.
      (h) Parties may not communicate orally with any of the arbitrators outside the presence of all parties.
      (i) Any party or arbitrator may terminate the direct communication order at any time, after giving written notice to the other arbitrators and the parties.

      * * * * * * * * * *

    • 04-61 SEC Approves Amendments to Rule 10308 Regarding the Time for Chairperson Selection

      View PDF file

      GUIDANCE

      Arbitration Chairperson Selection

      Effective Date: September 17, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance

      Arbitration
      Arbitrators
      Dispute Resolution

      Executive Summary

      The Securities and Exchange Commission has approved amendments to Rule 10308 of the NASD Code of Arbitration Procedure to reduce the time allotted for the selection of a chairperson in an arbitration proceeding.1

      The text of the amendments is set forth in Attachment A. The amendments will be effective on September 17, 2004.

      Questions/Further Information

      Questions regarding this Notice may be directed to Richard Berry, Associate Vice President and Director of Case Administration, at (212) 858-4307 or richard.berry@nasd.com; or John D. Nachmann, Counsel, NASD Dispute Resolution, at (202) 728-8273 or john.nachmann@nasd.com.

      Discussion

      Rule 10308 sets forth the procedures for the selection of arbitrators and chairpersons for an arbitration panel. First, the parties receive a list of potential arbitrators to serve on the arbitration panel, then they may strike the names of one or more arbitrators for any reason and rank the remaining names. Once the parties' lists are consolidated, Dispute Resolution staff sends a notice to the parties of the arbitrators who have been selected for the panel, and the parties then have 15 days to select one of these arbitrators to be the chairperson. 2 If the parties are unable to agree on the selection of the chairperson, Dispute Resolution staff will select the chairperson of the arbitration panel based on the criteria enumerated in Rule 10308(c)(5).3

      Since parties are unable to agree on a chairperson in nearly 80 percent of the cases, NASD has decreased the time period for parties to select the chairperson from 15 days to seven days. This reduction in the time period will expedite the arbitration process while at the same time generally providing parties with sufficient time to reach an agreement on a chairperson if they are so inclined. However, if the parties need more time in which to reach agreement on a chairperson, they can notify Dispute Resolution staff of this fact prior to expiration of the seven-day deadline and Dispute Resolution staff will extend the time to select a chairperson for an additional eight days.4 If the parties are unable to agree on the selection of the chairperson within either of these timeframes, Dispute Resolution staff will continue to select the chairperson of the arbitration panel as described above.

      Effective Date

      The amendments will be effective on September 17, 2004 and will apply to any cases in which an arbitration panel is selected on or after September 17, 2004.


      1 Securities Exchange Act Release No. 50036 (July 19, 2004), 69 FR 44071 (July 23, 2004) (File No. SR-NASD-2004-039).

      2 In cases where the parties must respond to Dispute Resolution by mail, the computer system that tracks the parties' responses adds two days to the 15-day response deadline to account for mailing time and this adjusted response time is set forth in the letter sent to the parties.

      3 Subject to certain exclusions listed in Rule 10308(c)(5), the public arbitrator who is the most highly ranked by the parties generally will be selected as the chairperson

      4 The request for an extension of the seven-day deadline must be in writing and must indicate that all parties have agreed to the extension.


      Attachment A

      New language is underlined; deletions are in brackets.

      Code of Arbitration Procedure

      * * * * * * * * * *

      Rule 10308. Selection of Arbitrators

      This Rule specifies how parties may select or reject arbitrators, and who can be a public arbitrator.

      (a)–(b) No change

      (c) Striking, Ranking, and Appointing Arbitrators to Lists
      (1)–(4) No change
      (5) Selecting a Chairperson for the Panel

      The parties shall have [15] 7 days from the date the Director sends notice of the names of the arbitrators to select a chairperson. If the parties notify Dispute Resolution staff prior to the expiration of the original deadline that they need more time in which to reach an agreement, Dispute Resolution staff will extend the time to select a chairperson for an additional 8 days. If the parties cannot agree within the allotted time, the Director shall appoint a chairperson from the panel as follows:
      (A) The Director shall appoint as the chairperson the public arbitrator who is the most highly ranked by the parties as long as the person is not an attorney, accountant, or other professional who has devoted 50% or more of his or her professional or business activities, within the last two years, to representing or advising public customers in matters relating to disputed securities or commodities transactions or similar matters.
      (B) If the most highly ranked public arbitrator is subject to the exclusion set forth in subparagraph (A), the Director shall appoint as the chairperson the other public arbitrator, as long as the person also is not subject to the exclusion set forth in subparagraph (A).
      (C) If both public arbitrators are subject to the exclusion set forth in subparagraph (A), the Director shall appoint as the chairperson the public arbitrator who is the most highly ranked by the parties.
      (6) No change
      (d)–(e) No change

      * * * * * * * * * *

    • 04-60 SEC Approves Increase to the Arbitrator Panel Training Fee

      View PDF file

      GUIDANCE

      Arbitrator Panel Training Fee

      Effective Date: September 16, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance

      Arbitrators
      Arbitration
      Fees

      Executive Summary

      On June 16, 2004, the Securities and Exchange Commission (SEC) approved an NASD proposal to increase the fee for arbitrator panel training from $100 to $125.1 The fee change is effective on September 16, 2004.

      Questions/Further Information

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

      Discussion

      As part of the process of applying to NASD's Roster of Arbitrators, it is mandatory that individuals complete successfully the forum's basic panel training course. The course consists of four parts: completion of a self-study, self-paced training manual prior to the training session; a live, on-site training session; completion of a final exam with a minimum score of 80%; and a positive evaluation of the trainee by the trainer(s).2 Arbitrator candidates are presently required to pay a $100 fee to cover the cost of the four-part training course.

      NASD Dispute Resolution is extending the length of the current four-hour training program to include viewing a new videotape titled "Civility in Arbitration." Trainees will also be provided with a study guide that accompanies the videotape. To help offset the costs associated with the enhancement of this training program, the training fee will be increased to $125. This is the first increase in this fee that the SEC has approved since March 2, 1998.

      Effective Date

      The fee change is effective on September 16, 2004.


      1 Securities Exchange Act Release No. 49875 (June 16, 2004), 69 FR 35090 (June 23, 2004) (File No. SR-NASD-2004-001).

      2 For further information regarding arbitrator panel training, see http://www.nasdadr.com/training.asp.

    • 04-59 SEC Announces Immediate Effectiveness of Amendments to the Rule 9600 Series Establishing Waiver Subcommittee of the National Adjudicatory Council

      View PDF file

      GUIDANCE

      Appeals of Qualification Examination Waiver Requests

      Effective Date: September 1, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management

      National Adjudicatory Council
      Qualifications Examinations
      Rule 1070
      Rule 9600 Series

      Executive Summary

      On July 27, 2004, the Securities and Exchange Commission (SEC) announced the immediate effectiveness of amendments to the Rule 9600 Series (Procedures for Exemptions) establishing a Waiver Subcommittee of the National Adjudicatory Council (NAC). Effective September 1, 2004, the Waiver Subcommittee, rather than the full NAC, will have the authority to affirm, modify, or reverse a decision of NASD's Department of Member Regulation (Member Regulation) denying a request for a waiver from a required qualifications examination pursuant to NASD Rule 1070.1

      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.

      Discussion

      NASD's Rule 9600 Series sets forth the procedures under which NASD members and their associated persons may seek exemptive relief from the NASD rules enumerated in Rule 9610(a). Among those rules is Rule 1070, which governs qualification examinations and waiver of requirements. As a result of this rule change, a subcommittee of the National Adjudicatory Council (NAC), consisting of one industry NAC member and one non-industry NAC member, will have the authority to affirm, modify, or reverse a Member Regulation decision denying a request for a waiver from an applicable qualification examination requirement and issue decisions in such matters that will constitute final NASD action. The subcommittee will be appointed by the NAC annually and will be known as the "Waiver Subcommittee."

      Under the Rule 9600 Series, an initial application for relief under any NASD rule for which exemptive relief may be granted, including Rule 1070, is filed with the appropriate NASD department or staff. NASD staff examines the merits of the application, determines whether to grant or deny the application for relief, and communicates its decision to the applicant. If NASD staff denies the application, the applicant may appeal the adverse decision to the NAC, which may affirm, modify, or reverse the decision.

      Persons seeking a waiver of a required qualification examination under Rule 1070 must file a written application with Member Regulation, including a detailed statement of the grounds for the waiver. Member Regulation staff examines the merits of the waiver request based on the NASD Qualification Examination Waiver Guidelines (Guidelines) and communicates its decision to the applicant in a letter that grants or denies the waiver.2 Prior to these amendments, an applicant who chose to appeal a Member Regulation decision denying a request for an exam waiver was required to appeal the decision to the NAC, which would consider the decision, determine whether to affirm, modify, or reverse the decision, and issue a decision that would constitute final NASD action.

      After reviewing the qualifications examination waiver process, the NAC determined that a subcommittee of the NAC, rather than the full NAC, should have authority to consider appeals of adverse Member Regulation decisions with respect to Rule 1070 and issue final NASD decisions in such matters. In reaching this determination, the NAC recognized that a subcommittee would have the flexibility to review such decisions on a timelier basis than the full NAC, which generally meets only five times each year. The NAC considered that any delay arising from the NAC's schedule may harm the associated person on whose behalf the NASD member is appealing, as well as the member, because the associated person is unable to function in the requested registered capacity while his or her firm's appeal is pending. The NAC also considered that its specialized expertise in reviewing disciplinary matters and policy issues is not required in the examination waiver process because appellate review of examination waivers is based on application of the Guidelines to the specific facts of the case.

      The Rule 9600 Series, as amended, will permit the Waiver Subcommittee to review appeals of Department denials of requests to waive an applicable qualification examination requirement and issue decisions that affirm, modify, or reverse such Department decisions. The Waiver Subcommittee will also have the authority, where appropriate, to provide expedited review, order oral argument, and consider new evidence. The Waiver Subcommittee will retain discretion to refer an appeal to the full NAC when, for example, there is a split vote or the subcommittee believes that the issues in the appeal warrant consideration by the full NAC.


      1 See SEC Release No. 34-50099 (July 27, 2004), 69 FR 46607 (Aug. 3, 2004) (File No. SR-NASD-2004-100).

      2 The Guidelines, last updated on April 22, 2003, are available on NASD's Web site at http://www.nasdr.com/5200_waiver.asp.


      Attachment A

      Below is the text of the proposed rule change. Additions are underlined; deletions are in brackets.

      * * * * * * * * * *

      9600. PROCEDURES FOR EXEMPTIONS

      9610. Application

      (a) Where to File

      A member seeking exemptive relief as permitted under Rules 1021, 1070, 2210, 2315, 2320, 2340, 2520, 2710, 2720, 2810, 2850, 2851, 2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3150, 3210, 3230, 3350, 8211, 8212, 8213, 11870, or 11900, or Municipal Securities Rulemaking Board Rule G-37, shall file a written application with the appropriate department or staff of [the Association] NASD and provide a copy of the application to the Office of General Counsel of NASD Regulation.
      (b) and (c) No change

      9620. Decision

      After considering an application, NASD [Regulation] staff shall issue a written decision setting forth its findings and conclusions. The decision shall be served on the Applicant pursuant to Rules 9132 and 9134. After the decision is served on the Applicant, the application and decision shall be publicly available unless NASD [Regulation] staff determines that the Applicant has shown good cause for treating the application or decision as confidential in whole or in part.

      9630. Appeal

      (a) Notice

      An Applicant may file a written notice of appeal within 15 calendar days after service of a decision issued under Rule 9620. The notice of appeal shall be filed with the Office of General Counsel of NASD Regulation, with a copy of the notice also provided to the appropriate department or staff of [the Association] NASD. The notice of appeal shall contain a brief statement of the findings and conclusions as to which exception is taken. Appeals of decisions issued by NASD staff pursuant to Rule 9620 shall be decided by the National Adjudicatory Council, except with respect to exemptive relief under Rule 1070 (Qualification Examinations and Waiver of Requirements), which shall be decided by the Waiver Subcommittee of the National Adjudicatory Council. [The National Adjudicatory Council may order oral argument.] If the Applicant does not want the [National Adjudicatory Council's] decision on the appeal to be publicly available in whole or in part, the Applicant also shall include in its notice of appeal a detailed statement, including supporting facts, showing good cause for treating the decision as confidential in whole or in part. The notice of appeal shall be signed by the Applicant.
      (b) Expedited Review

      Where the failure to promptly review a decision to deny a request for exemption would unduly or unfairly harm the applicant, the National Adjudicatory Council or the Waiver Subcommittee of the National Adjudicatory Council, as the case may be, shall provide expedited review.
      (c) No change
      (d) [Appointment of Subcommittee] Oral Argument
      (1) Subject to paragraph (2) below, [F]following the filing of a notice of appeal, the National Adjudicatory Council or Review Subcommittee may order oral argument and may designate a Subcommittee to hear [an] such oral argument[, if ordered]. The Subcommittee may consider any new evidence [that] if the Applicant can show good cause for not including it in its application, and the Subcommittee will recommend to the National Adjudicatory Council a disposition of all matters on appeal.
      (2) With respect to exemptive relief requested under Rule 1070, the Waiver Subcommittee of the National Adjudicatory Council may order oral argument and consider any new evidence if the Applicant can show good cause for not including it in its application.
      (e) Decision
      (1) Subject to paragraph (2) below, [A]after considering all matters on appeal, and, as applicable, the Subcommittee's recommendation, the National Adjudicatory Council shall affirm, modify, or reverse the decision issued under Rule 9620. The National Adjudicatory Council shall issue a written decision setting forth its findings and conclusions and serve the decision on the Applicant. The decision shall be served pursuant to Rules 9132 and 9134. The decision shall be effective upon service and shall constitute final action of [the Association] NASD.
      (2) With respect to exemptive relief requested under Rule 1070, after considering all matters on appeal, the Waiver Subcommittee of the National Adjudicatory Council shall affirm, modify, or reverse the decision issued under Rule 9620. The Waiver Subcommittee shall issue a written decision setting forth its findings and conclusions and serve the decision on the Applicant. The decision shall be served pursuant to Rules 9132 and 9134. The decision shall be effective upon service and shall constitute final action of NASD. The Waiver Subcommittee shall retain the discretion to refer the appeal to the National Adjudicatory Council, in which case the National Adjudicatory Council shall act on such appeal pursuant to its authority under this 9600 Series.

      * * * * * * * * * *

    • 04-58 SEC Grants Accelerated Approval of Rule Change Relating to Transfers of Specifically Designated Customer Account Assets through the Automated Customer Account Transfer Service (ACATS) (This version was updated on 8/19/04)

      View PDF file

      GUIDANCE

      Partial Customer Account Transfers

      Effective Date: September 13, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Senior Management

      Automated Customer Account Transfer
      Service (ACATS)

      Rule 11870

      Executive Summary

      On July 14, 2004, the Securities and Exchange Commission (SEC) granted accelerated approval of amendments to Rule 11870 making the procedures for transferring specifically designated customer account assets through the ACATS system consistent with the procedures for transferring securities account assets in their entirety through the ACATS system unless the customer authorizes a partial transfer of assets to be facilitated outside of ACATS.1 The amendments also permit customers to authorize an account transfer, in whole or in part, via electronic signature in a format recognized as valid under federal law to conduct interstate commerce. These changes conform to recent amendments to New York Stock Exchange Rule 412 and the Interpretation of Rule 412. The amendments become effective on September 13, 2004, to allow firms sufficient time to develop and implement any necessary systems changes. The text of the amendments is provided in Attachment A.

      Questions/Further Information

      Questions concerning this Notice may be directed to the Financial Operations Department at (202) 728-8211.

      Discussion

      ACATS is a system administered by the National Securities Clearing Corporation (NSCC) that automates and standardizes procedures for the transfer of assets in a customer account from one firm to another. Rule 11870 mandates the use of ACATS when both the carrying member and the receiving member are participants in a registered clearing agency having automated customer securities account transfer capabilities and are eligible to use such capabilities, and sets forth the procedures for members to use when transferring customer assets between members.

      The amendments to Rule 11870 clarify that the procedures for transferring specific assets in a customer account through ACATS are consistent with the procedures for transferring the entire account through ACATS, unless the customer specifically requests and authorizes a transfer of assets outside of ACATS. Under Rule 11870, as amended, customers continue to have the option of submitting alternate authorized instructions (e.g., Letters of Authorization or LOAs) to a carrying firm in order to effect the transfer of "specifically designated assets," i.e., partial transfers from one broker-dealer to another outside of the ACATS system. The transfers of such assets outside of the ACATS system continue to be subject to the requirement that members process such transfers expeditiously.2

      Because customer and broker-dealer obligations resulting from the transfer of an entire account differ from the obligations arising from the transfer of specified assets within an account that will remain active at the delivering firm, the amendments to Rule 11870 distinguish between the transfer of security account assets "in whole" (i.e., transfer of entire accounts) and security account assets "in specifically designated part" (i.e., partial transfers). For example, it would not be necessary for a customer to instruct the delivering firm as to the disposition of his or her non-transferable mutual fund holdings if the customer is not transferring the account in whole.

      Previously, Rule 11870 specified that a customer who wishes to transfer his or her account to another member must give "written notice of that fact to the receiving member" and must "sign" a broker-to-broker transfer instruction form. The amendments to Rule 11870 permit customers to authorize an account transfer, in whole or in part, via electronic signature "in a format recognized as valid under federal law to conduct interstate commerce."3 Thus, under amended Rule 11870, customer authorization of a transfer instruction can be either the customer's actual signature or a valid electronic signature. Further, Rule 11870, as amended, no longer requires specific formats with respect to transfer instructions or reports, since the NSCC no longer requires specific formats with respect to transfer instructions or reports for use with the ACATS system.


      1 See Release No. 34-50018 (July 14, 2004), 69 FR 43873 (July 22, 2004) (File No. SR-NASD-2004-058).

      2 See Rule 11870(a).

      3 See "Electronic Signatures in Global and National Commerce Act" 15 U.S.C. §§ 7001 et seq. (2004).


      Attachment A

      Below is the text of the proposed rule change. Additions are underlined; deletions are in brackets.

      * * * * * * * * * *

      11870. Customer Account Transfer Contracts

      (a) Responsibility to Expedite Customer's Request
      (1) When a customer whose securities account[(s)] is carried by a member (the "carrying member") wishes to transfer [the entire] securities account[(s)] assets, in whole or in specifically designated part, to another member (the "receiving member") and gives [written notice of that fact] authorized instructions to the receiving member, both members must expedite and coordinate activities with respect to the transfer.
      (2) If a customer desires to transfer a portion of [an] his or her account outside of ACATS, [a letter of authorization] authorized alternate instructions should be transmitted to the carrying member indicating such intent and specifying the [portion of the account] designated assets to be transferred. Although such transfers are not subject to the provisions of this [r]Rule, members must expedite all authorized [partial transfers of customer securities accounts] account asset transfers, whether through ACATS or via other means permissible under this Rule, and coordinate their activities with respect thereto. Unless otherwise indicated, [T]the automated customer account transfer capabilities referred to in paragraph (m)(1) of this Rule shall be utilized for partial transfers.
      (3) For purposes of this Rule, customer authorization pursuant to a transfer instruction could be the customer's actual signature, or an electronic signature in a format recognized as valid under federal law to conduct interstate commerce.
      (b) Transfer Procedures
      (1) Upon receipt from the customer of [a signed] an authorized broker-to-broker transfer instruction form ("TIF") to receive such customer's securities account[(s)] assets in whole or in specifically designated part, from the carrying member, the receiving member must immediately submit such instruction to the carrying member. The carrying member must, within three business days following receipt of such instruction, or receipt of a TIF received directly from the customer authorizing the transfer of assets in specifically designated part: (A) validate [and return] the transfer instruction to the receiving member (with an attachment reflecting all positions and money balances to be transferred as shown on its books); or (B) take exception to the transfer instruction for reasons other than securities positions or money balance discrepancies and advise the receiving member of the exception taken.
      (2) The carrying member and the receiving member must promptly resolve any exceptions taken to the transfer instruction.
      (c) Transfer Instructions
      (1) Securities [A]account asset transfers accomplished pursuant to this Rule are subject to the following conditions, which the customer must be informed of, affirm, or authorize (as the case may be) through their inclusion in the transfer instruction [form] the customer is required to [be completed and signed] authorize to initiate the account asset transfer:
      (A) To the extent any account assets [in the account] are not readily transferable, with or without penalties, such assets may not be transferred within the time frames required by [the] this Rule.
      (B) The customer will be contacted in writing by the carrying member, and/or by the receiving member, with respect to the disposition of [any] nontransferable assets [in the account that are nontransferable.] other than proprietary money market fund assets (if any), indicated in an instruction to transfer specifically designated account assets. (See subparagraph (c)(D)(3) below for customer notification requirements pertaining to transfers of securities account assets in whole.)
      (C) If [With respect to transfers of] securities accounts assets in whole other than retirement plan [securities] account[s] assets are being transferred, the customer must affirm[s] that he or she has destroyed or returned to the carrying member any credit/debit cards and/or unused checks issued in connection with the account.
      (D) For purposes of this Rule, a "nontransferable asset" shall mean an asset that is incapable of being transferred from the carrying member to the receiving member because it is:
      (i) an asset that is a proprietary product of the carrying member;
      (ii) an asset that is a product of a third party (e.g., mutual fund/money market fund) with which the receiving member does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account;
      (iii) an asset that may not be received due to regulatory limitations on the scope of the receiving member's business;
      (iv) an asset that is a bankrupt issue for which the carrying member does not possess the proper denominations to effect delivery and no transfer agent is available to re-register the shares;
      (v) an asset that is an issue for which the proper denominations cannot be obtained pursuant to governmental regulation or the issuance terms of the product (e.g., foreign securities, baby bonds, etc.);
      (vi) limited partnership interests in retail accounts.
      (E) The carrying member and the receiving member must promptly resolve and reverse any nontransferable assets [which] that were not properly identified during validation. In all cases, each member shall promptly update its records and bookkeeping systems and notify the customer of the action taken.
      (2) A proprietary product of the carrying member shall be deemed nontransferable unless the receiving member has agreed to accept transfer of the product. Upon receipt of the asset validation report, the receiving member shall designate any assets that are a product of a third party (e.g., mutual fund/money market fund) with which the receiving member does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account. The carrying member, upon receipt of such designation, may treat such designated assets as nontransferable and refrain from transferring the designated assets.
      (3) If [an] securities account assets to be transferred in whole include[s] any nontransferable assets that are proprietary products of the carrying member, the carrying member must provide the customer with a list of the specific assets and request, in writing and prior to or at the time of validation of the transfer instruction, further instructions from the customer with respect to the disposition of such assets. In particular, such request should provide, where applicable, the customer with the following alternative methods of disposition for nontransferable assets:
      (A) Liquidation, with a specific indication of any redemption or other liquidation-related fees that may result from such liquidation and that those fees may be deducted from the money balance due the customer.
      (B) Retention by the carrying member for the customer's benefit.
      (C) Transfer, physically and directly, in the customer's name to the customer.
      (4) If [an] securities account assets to be transferred in whole include[s] any nontransferable assets that the receiving member has designated as assets that are a product of a third party (e.g., mutual fund/money market fund) with which the receiving member does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account, the receiving member must provide the customer with a list of the specific assets and request, in writing and prior to the time it makes such designation, further instructions from the customer with respect to the disposition of such assets. In particular, such request should, where applicable, provide the customer with the following alternative methods of disposition for nontransferable assets:
      (A) Liquidation, with a specific indication of any redemption or other liquidation-related fees that may result from such liquidation and that those fees may be deducted from the money balance due the customer. The indication must also refer the customer to the fund prospectus or to their registered representative at the carrying firm for specific details regarding any such fees.
      (B) Retention by the carrying member for the customer's benefit.
      (C) Shipment, physically and directly, in the customer's name to the customer.
      (D) Transfer to the third party that is the original source of the product, for credit to an account opened by the customer with that third party.
      (5) If the customer has authorized liquidation or transfer of assets deemed to be nontransferable, the carrying member must distribute the resulting money balance to the customer or initiate the transfer within five (5) business days following receipt of the customer's disposition instructions.
      (6) With respect to transfers of retirement plan securities account[s] assets, the customer authorizes the custodian/trustee for the account:
      (A) to deduct any outstanding fees due the custodian/trustee from the credit balance in the account, or
      (B) if the account does not contain a credit balance, or if the credit balance in the account is insufficient to satisfy any outstanding fees due the custodian/trustee, to liquidate assets in the account to the extent necessary to satisfy any outstanding fees due the custodian/trustee.
      (d) Validation of Transfer Instructions
      (1) Upon validation of an [transfer] instruction to transfer securities account assets in whole, a carrying member must "freeze" the account to be transferred, i.e., all open orders, with the exception of option positions [which] that expire within seven (7) business days, must be canceled and no new orders may be taken.
      (2) A carrying member may not take exception to a transfer instruction, and therefore deny validation of the transfer instruction, because of a dispute over securities positions or the money balance in the account to be transferred. Such alleged discrepancies notwithstanding, the carrying member must transfer the securities positions and/or money balance reflected on its books for the account.
      (3) A carrying member may take exception to a transfer instruction only if:
      (A) additional documentation is required (additional legal documents such as death or marriage needed);
      (B) the account is "flat" and reflects no transferable assets;
      (C) the account number is invalid (account number is not on carrying member's books); however, if the carrying member has changed the account number for purposes of internally reassigning the account to another broker or account executive, it is the responsibility of the carrying firm to track the changed account number, and such reassigned account number shall not be considered invalid for purposes of fulfilling a transfer instruction.
      (D) it is a duplicate request;
      (E) violates member's credit policy;
      (F) unrecognized residual credit asset (receiving member cannot identify client);
      (G) client rescinds instruction (client submitted written request to cancel transfer);
      (H) S.S. number/Tax ID mismatch (number does not correspond to carrying member's);
      (I) account title mismatch (receiving member's account title does not correspond to carrying member's);
      (J) account type mismatches (receiving member's account type does not correspond to carrying member's);
      (K) missing or improper [A]authorization [Signature] (TIF requires an additional client [signature] authorization or successor custodian's acceptance [signature] authorization or custodial approval); or
      (L) Client takes possession (account assets in question [(entire account is] are in transfer to deliver direct to customer).
      (4) If a carrying member takes exception to a transfer instruction because the account is "flat", as provided in subparagraph (3)(B) above, the receiving member may re-submit the transfer instruction only if the most recent customer statement is attached.
      (5)
      (A) Upon validation of [a] an [transfer] instruction[,] to transfer securities account assets in whole or in specifically designated part, the carrying member must return the transfer instruction to the receiving member with an attachment indicating all securities positions, [any] safekeeping positions, and [any] money balances to be transferred [in the account] as shown on the books of the carrying member. Except as hereinafter provided, the attachment must include a then-current market value for all assets [in the account] so indicated. If a then-current market value for an asset cannot be determined (e.g., a limited partnership interest), the asset must be valued at original cost. However, delayed delivery assets, nontransferable assets, and assets in transfer to the customer, i.e., in possession of the transfer agent at the time of receipt of the transfer instruction by the carrying member for shipment, physically and directly to the customer, need not be valued, although the "delayed delivery," "nontransferable," or "in-transfer" status, respectively, of such assets must be indicated on the attachment.
      (B) For purposes of this Rule, a "safekeeping position" shall mean any security held by a carrying member in the name of the customer.
      (6) Upon validation of [a] an [transfer] instruction to transfer securities account assets in whole or in specifically designated part, the carrying member must indicate on the instruction, or by attachment, any Regulation T calls outstanding as of the date of validation with respect to the account assets to be transferred.
      (7) A carrying member must provide the following description, at a minimum, as asset data with respect to any municipal securities positions to be transferred that have not been assigned a CUSIP number: [in an account it is to transfer:]
      (A) name of the issuer;
      (B) interest rate and dated date;
      (C) maturity date and put date, if applicable, and if the securities are limited tax, subject to redemption prior to maturity (callable), or revenue bonds; an indication to such effect, including in the case of revenue bonds, the type of revenue, if necessary for a materially complete description of the securities; and
      (D) if necessary for a materially complete description of the securities, the name of any company or other person in addition to the issuer obligated, directly or indirectly, with respect to debt service, or if there is more than one such obligor, the statement "multiple obligors" may be shown.
      (8) After validation of the transfer instruction by the carrying member, a receiving member may reject a[n account]transfer of account assets in whole only if the account is not in compliance with the receiving member's credit policies or minimum asset requirements. (A receiving member may deem an account not in compliance with Regulation T requirements as not in compliance with its credit policies.) A receiving member, however, may only reject [an] the entire account for such reasons; it may not reject only a portion of the account assets (e.g., the particular assets not in compliance with the member's credit policies or minimum asset requirement) while accepting the remainder.
      (e) Completion of the Transfer

      Within three business days following the validation of a transfer instruction, the carrying member must complete the transfer of the customer's security account[(s)] assets to the receiving member. The receiving member and the carrying member must immediately establish fail-to-receive and fail-to-deliver contracts at then-current market values upon their respective books of account against the long/short positions [in the customer's account[(s)] that have not been [physically] delivered/received and the receiving/carrying member must debit/credit the related money amount. The customer's security account[(s)] assets shall thereupon be deemed transferred.
      (f) Fail Contracts Established
      (1) Any fail contracts resulting from this securities account asset transfer procedure shall be included in a member's fail file and, not later than 10 business days following the date delivery was due, the member shall take steps to obtain physical possession or control of securities so failed to receive by initiating a buy-in procedure or otherwise; provided, that with respect to the following types of securities or instruments, not later than 30 business days following the date delivery was due, the member shall take steps to obtain physical possession or control of securities so failed to receive by initiating a buy-in procedure or otherwise:
      (A) banker's acceptances;
      (B) bond anticipation notes;
      (C) certificates of deposit;
      (D) commercial paper;
      (E) FMAC certificates;
      (F) FNMA certificates;
      (G) foreign securities;
      (H) GNMA certificates;
      (I) limited partnership interests;
      (J) municipal bonds;
      (K) mutual fund shares (transferable);
      (L) revenue anticipation notes;
      (M) SBA certificates; and
      (N) tax anticipation notes.
      (2) A carrying member may not reject ("DK") a fail contract, including a Receive/Deliver Instruction generated by an automated customer account transfer system, in connection with assets in an account transferred that have not been delivered to the receiving member.
      (3) All fail contracts established pursuant to the requirements of this Rule should be clearly marked or captioned as such. This paragraph will not apply if a fail contract participates in a repricing and reconfirmation service offered by a registered clearing agency.
      (4) All fail contracts required to be established on safekeeping positions must be so indicated.
      (5) Open fail contracts established pursuant to the requirements of this Rule should be marked-to-market regularly.
      (6) Nontransferable assets and assets in transfer to the customer are exempt from the requirement in paragraph (e) of this Rule that fail-to-receive and fail-to-deliver contracts must be established for positions in a customer's securities account that have not been [physically] delivered.
      (7) Members may agree to close out fail contracts established pursuant to the requirements of this [r]Rule through the delivery of securities that are substantially comparable to those owed with prior consent of the customer.
      (8) A receiving member should reject a delivery of a security that cannot be deemed a safekeeping position against a fail contract as such.
      (9) A receiving member must deem receipt of a duly executed limited partnership change of trustee form with respect to limited partnership interests or a mutual fund re-registration form with respect to mutual fund shares as adequate delivery for purposes of transferring such assets pursuant to the Rule.
      (g) Prompt Resolution of Discrepancies
      (1) Any discrepancies relating to positions or money balances that exist or occur after transfer of a customer's securities account assets must be resolved promptly.
      (2) The carrying member must promptly distribute to the receiving member any transferable assets [which] that accrue to the account after the transfer of a customer's securities account.
      (3) When a member receives a [written] claim [letter] notice relating to a[n] securities account asset transfer, the member must resolve the claim within five (5) business days from receipt of such [letter] claim or [respond in writing] take exception to the claiming member by setting forth specific reasons for denying the claim.
      (h) and (i) No change
      (j) Exemptions
      (1) Pursuant to the Rule 9600 Series, [the Association] NASD may exempt from the provisions of this Rule, either unconditionally or on specified terms and conditions, (A) any member or (B) any type of account, security or financial instrument.
      (2) The following assets are deemed subject to delayed delivery and are exempt from paragraph (e) of this Rule that valued fail-to-receive and fail-to-deliver contracts must be established for positions in a customer's securities account that have not been [physically] delivered:
      (A) insurance policies (annuities);
      (B) stripped coupons;
      (C) when-issued or when-distributed securities.
      (3) Zero value fail-to-receive and fail-to-deliver instructions shall be generated for the assets specified in paragraph (j)(2) hereof.
      (k) Retirement Plan Securities Accounts
      (1) It is the responsibility of the receiving member to obtain the approval of its custodian/trustee accepting a customer's retirement plan securities account before submitting a transfer instruction for such [an] account assets to the carrying member or its custodian/trustee to facilitate transfer of the account assets.
      (2) If, with respect to the transfer of a retirement plan securities account assets, outstanding fees are due the custodian/trustee for the account, such fees must be deducted from the credit balance in the account or, if the account does not contain a credit balance or if the credit balance is insufficient to satisfy such fees, assets in the account must be liquidated to the extent necessary to satisfy such fees. If liquidation of assets in the account is not practicable, such fees must then be transferred to and accepted by the receiving member as a debit item with the account.
      (l) Securities Account[s]

      For the purposes of this Rule, the term "securities account[(s)]" shall be deemed to include any and all of the account's[(s')] money market fund positions or the redemption value thereof.
      (m) Participant in a Registered Clearing Agency
      (1) When both the carrying member and the receiving member are participants in a registered clearing agency having automated customer securities account asset transfer capabilities and are eligible to use such capabilities, the securities account asset transfer procedure, including the establishing and closing out of fail contracts, must be accomplished in accordance with the provisions of this [r]Rule and pursuant to the rules of and through such registered clearing agency[.] with the exception of specifically designated assets transferred pursuant to the submittal of a customer's authorized alternate instructions to the carrying member.
      (2) When such registered clearing agency has the capability to transfer mutual fund positions or to employ functionalities including Partial Transfer Receive (PTR), Partial Transfer Delivery (PTD), Fail Reversal, Mutual Fund Fail Cleanup, or Reclaim Processing, such capability must be utilized with the exception of specifically designated assets transferred pursuant to the submittal of a customer's authorized alternate instructions to the carrying member. [both the carrying member and the receiving member are participants in a registered clearing agency having automated customer securities account transfer capabilities with an automated facility for transferring mutual fund positions such facilities must be utilized for transferring mutual fund positions.]
      (3) When securities account assets are transferred in whole and [both the carrying member and the receiving member are participants in a] such registered clearing agency [having automated customer securities account transfer capabilities with a facility for] has the capability to transfer[ring] residual credit positions (both cash and securities) [which] that have accrued to an account after the account has been transferred (residual credit processing), such [facilities] capability must be utilized for transferring residual credit positions from the carrying member to the receiving member.
      (4) When both the carrying member and the receiving member are participants in a registered clearing agency having automated customer securities account asset transfer capabilities with a facility permitting electronic transmittal of customer account asset transfer instructions, such facilities shall be used in accordance with the following:
      (A) members using such facilities shall execute an agreement designated by the Committee specifying the rights, obligations and liabilities of all participants in or users of such facilities;
      (B) customer account transfer instructions shall be transmitted in accordance with the procedures prescribed by the registered clearing agency;
      (C) the transmittal of a transfer request through such electronic facilities shall constitute a representation by the receiving member that it has received a properly executed [Transfer Instruction Form] TIF or other actual authority to receive the customer's securities and funds[; and]
      (D) transfer instructions transmitted through such facilities shall contain the information necessary for the clearing agency and the carrying member to respond to the transfer instruction as may be specified by this Rule and the clearing agency[.] and;
      (E) non-standard ACAT processing, such as Partial Transfer Receives (PTR), Partial Transfer Deliver (PTD) Fail Reversal, and reclaim processing shall be transmitted through such facilities, if the facility permits.
      (5) For purposes of this Rule, the term "registered clearing agency" shall be deemed to be a clearing agency as defined in the Act and registered in accordance with that Act.
      (n) Transfers Accomplished Ex-Clearing
      (1) If one or both of the members processing a customer account transfer pursuant to this Rule is not a member of a registered clearing agency, the fail-to-receive and fail-to-deliver contracts required to be established in paragraph (e) of this Rule must be established outside a clearing corporation on an "ex-clearing house" basis. Similarly, settlement of the fail contracts and any close-out executions must be made "ex-clearing house."
      (2) Each member (including members that do not utilize automated customer securities account asset transfer facilities) is required, [to transfer,] for a minimum period of six (6) months after [an account] the transfer of securities account assets in whole is completed, to transfer credit balances (both cash and securities) that occur is such transferred account assets within (10) ten business days after the credit balances accrue to the account.
      (3) A copy of each customer account transfer instruction issued pursuant to paragraph (b) on an "ex-clearing house" basis shall be forwarded to the local District Office of [the Association] NASD having jurisdiction over the carrying member.
      [(4) Members must use the transfer instructions and provide the reports prescribed by the Association when accomplishing account transfers pursuant to this Rule. The Association deems the transfer instruction and reports required by the National Securities Clearing Corporation ("NSCC") in connection with its automated customer account transfer system, and transfer instructions and reports that are substantially similar to those required by the NSCC as acceptable for the purpose of accomplishing transfers of accounts under this Rule; except that members must use the standard transfer forms required under Rule 11580 to transfer limited partnership securities unless exempted from the requirements of that Rule.]

      * * * * * * * * * *

    • 04-57 NASD Extends Jurisdiction to Suspend Formerly Associated Persons Who Fail to Pay Arbitration Awards

      View PDF file

      GUIDANCE

      Non-Payment of Arbitration Awards

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal and Compliance
      Senior Management

      NASD By-Laws
      Non-Payment of Arbitration Awards

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved two amendments to the NASD By-Laws that further strengthen NASD's ability to prevent formerly associated persons from re-entering the securities industry if they have failed to pay awards or settlements relating to arbitrations or mediations submitted under NASD Rules.

      Specifically, the amendments allow NASD to institute suspension proceedings against a formerly associated person for failing to pay an award or settlement for a period of two years after the award was rendered or the settlement agreement was entered into. In addition, the amendments provide that NASD's authority to suspend an associated or formerly associated person for failure to comply with an award or settlement relating to a arbitration or mediation under NASD rules is not limited to suspending his or her NASD registration, but now also includes the authority to suspend his or her ability to associate with a member in any capacity until the award or settlement is paid.

      Included with this Notice is Attachment A, the text of the amendments to the NASD By-Laws.

      NASD will implement these amendments on September 9, 2004.

      Questions/Further Information

      Questions concerning this Notice should be directed to Laura Gansler, Assistant General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8275; or Jean I. Feeney, Vice President and Chief Counsel, Dispute Resolution, at (202) 728-6959.

      Background and Discussion

      NASD Jurisdiction for Failure to Pay Awards While Person is Associated with a Member

      Currently, NASD may suspend or bar an associated person from further associating with a member firm based on a range of conduct that commences while the person is associated with a member, including failing to comply with an award or settlement agreement relating to an arbitration or mediation filed under NASD Rules.2 Pursuant to Article V, Section 4 of the NASD By-Laws, NASD may also institute such proceedings for a period of two years after a person terminates his or her association with a member based on conduct that occurred while the person was associated with the member.3 Suspending a formerly associated person prevents him or her from re-entering the industry for the duration of the suspension.

      Prior to the amendments that are the subject of this Notice, however, NASD did not have jurisdiction over formerly associated persons for conduct that commenced after an associated person terminated his or her association. Because associated persons remain subject to arbitration or mediation claims for conduct that occurred during their association even after they terminate their association with a member, a claim may not be resolved, or even filed, until after that time. In such cases, NASD lacked the ability to bring suspension proceedings for failure to pay such awards.4 In addition, NASD was concerned that a person associated with a member might deliberately terminate his or her association with the member once aware that an arbitration award was about to be entered against him or her in order to avoid sanction by NASD for failure to pay any award or settlement agreement resulting from the proceeding.

      Expansion of NASD Jurisdiction for Failure to Pay Awards after Association is Terminated

      To address this concern, NASD has amended Article V to add a new Section 4(b), which provides that NASD retains jurisdiction to institute suspension proceedings against formerly associated persons for failing to pay an award or settlement in a matter submitted for arbitration or mediation pursuant to the NASD Rules for a period of two years after the entry of the award or settlement. This is true regardless of when the arbitration or mediation claim was filed, as long as the failure to pay the award or settlement occurred after termination. Formerly associated persons who failed to pay an award or settlement while associated remain subject to suspension proceedings for that failure to pay for two years from the date of termination, pursuant to Article V, Section 4(a).5

      In addition, NASD has amended Article VI, Section 3 of its By-Laws to clarify that its authority is not limited to suspending the registration of an associated person, but also includes the authority to suspend the ability of an associated or formerly associated person to associate with a member—meaning that a person cannot be employed even in a non-registered capacity if he or she is suspended for failing to pay an arbitration award or settlement.

      NASD believes that, collectively, these two amendments will significantly enhance its ability to prevent formerly associated persons who fail to pay awards or settlements relating to arbitrations or mediations under NASD Rules from re-entering the industry until the award or settlement is paid.

      Implementation Date

      NASD will implement these amendments beginning on September 9, 2004.


      1 Securities Exchange Act Rel. No. 49845 (June 10, 2004), 69 FR 33968 (June 17, 2004) (File No. SR-NASD-2003-069) (Order of Approval).

      2 Article VI, Section 3 of the NASD By-Laws; NASD Rule 9554(a).

      3 As a result of these amendments, Article V, Section 4 of the NASD By-Laws is now Article V, Section 4(a). The word "termination" as used in Article V, Section 4 means the following: (1) when applied to associated persons who are registered with NASD, that time when a Form U5 with respect to such person is filed with NASD; or (2) when applied to associated persons who are not registered with NASD, that time when such person ceases to be associated with a member; regardless of whether, in the case of (1) or (2), such termination is voluntary or involuntary, or with or without cause.

      4 For example, in at least one case, the NASD Board of Governors directed the Office of Hearing Officers to dismiss, for lack of jurisdiction, a proceeding alleging failure to pay an arbitration award against a person who terminated his association after the arbitration proceeding commenced but before an arbitration award was entered against him. The Board reasoned that, because the conduct underlying the proceeding (i.e., the failure to pay an arbitration award) did not begin until after the person's association terminated, NASD did not retain jurisdiction over the person under Article V, Section 4 of the NASD By-Laws. See Department of Enforcement v. Jonathan Winston, Non-Summary Proceeding No. ARB980006 (Office of Hearing Officers, December 15, 1998).

      5 As NASD stated in the rule filing, the new provision does not in any way limit the authority of NASD to act pursuant to what was Section 4, and is now Section 4(a).


      Attachment A — Text of Rule Change

      New language is underlined; deletions are in brackets.

      * * * * * * * * * *

      Article V

      REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS

      * * * * * * * * * *

      Retention of Jurisdiction

      Sec. 4. (a) A person whose association with a member has been terminated and is no longer associated with any member of [the] NASD or a person whose registration has been revoked or canceled shall continue to be subject to the filing of a complaint under the NASD Rules [of the Association] based upon conduct [which] that commenced prior to the termination, revocation, or cancellation or upon such person's failure, while subject to [the] NASD's jurisdiction as provided herein, to provide information requested by [the] NASD pursuant to the NASD Rules [of the Association], but any such complaint shall be filed within:

      [(a)] (i) two years after the effective date of termination of registration pursuant to Section 3, provided, however that any amendment to a notice of termination filed pursuant to Section 3(b) that is filed within two years of the original notice [which] that discloses that such person may have engaged in conduct actionable under any applicable statute, rule, or regulation shall operate to recommence the running of the two-year period under this subsection;

      [(b)] (ii) two years after the effective date of revocation or cancellation of registration pursuant to the NASD Rules [of the Association]; or

      [(c)] (iii) in the case of an unregistered person, [within] two years after the date upon which such person ceased to be associated with the member.

      (b) A person whose association with a member has been terminated and is no longer associated with any member of NASD shall continue to be subject to a proceeding to suspend, consistent with Article VI, Section 3 of the By-Laws, his or her ability to associate with a member based on such person's failure to comply with an arbitration award or a written and executed settlement agreement obtained in connection with an arbitration or mediation submitted for disposition pursuant to the NASD Rules, provided that such proceeding is instituted within two years after the date of entry of such award or settlement.

      * * * * * * * * * *

      Article VI

      DUES, ASSESSMENTS, AND OTHER CHARGES

      * * * * * * * * * *

      Suspension or Cancellation [of Membership or Registration]

      Sec. 3. (a) [The] NASD after 15 days notice in writing, may suspend or cancel the membership of any member or the registration of any person in arrears in the payment of any fees, dues, assessments, or other charges or for failure to furnish any information or reports requested pursuant to Section 2 [, or for failure to comply with an award of arbitrators properly rendered pursuant to the Rules of the Association, where a timely motion to vacate or modify such award has not been made pursuant to applicable law or where such a motion has been denied, or for failure to comply with a written and executed settlement agreement obtained in connection with an arbitration or mediation submitted for disposition pursuant to the Rules of the Association].

      (b) NASD after 15 days notice in writing, may suspend or cancel the membership of any member or suspend from association with any member any person, for failure to comply with an award of arbitrators properly rendered pursuant to the NASD Rules, where a timely motion to vacate or modify such award has not been made pursuant to applicable law or where such a motion has been denied, or for failure to comply with a written and executed settlement agreement obtained in connection with an arbitration or mediation submitted for disposition pursuant to the NASD Rules.

      * * * * * * * * * *

    • 04-56 SEC Approves Amendments to Rule 10314 to Implement the Online Arbitration Claim Filing System

      View PDF file

      GUIDANCE

      Online Arbitration Claim Filing System

      Effective Date: August 5, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance

      Arbitration
      Arbitrators
      Dispute Resolution

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved amendments to Rule 10314 of the NASD Code of Arbitration Procedure (Code) to allow parties to complete part of the arbitration claim filing process through the Internet.1

      The text of the amendments is set forth in Attachment A. The amendments will be effective on August 5, 2004 and will apply to any arbitration claims commenced using the system on or after August 5, 2004.

      Questions/Further Information

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

      Discussion

      NASD has amended Rule 10314 of the Code to allow parties to complete part of the arbitration claim filing process through the Internet.

      Background

      NASD Dispute Resolution is upgrading its computer system, in what is known as the MATRICS2 Computer Project, which will replace its two case management systems: CRAFTIS and NLSS (Neutral List Selection System). Once the upgrade is complete, MATRICS will be an interactive, automated system that will allow parties and arbitrators to monitor and provide updates for those arbitration cases in which they are participating.

      Online Claim Filing System

      A significant component of this upgrade includes the development of an online, Internet-based arbitration claim notification and filing system (online filing system). This component of MATRICS will allow parties to complete part of the arbitration claim filing process through the Internet by submitting certain information to NASD electronically.

      Under the current rule, if a claimant wants to file an arbitration claim, the claimant must complete a package of materials and return them to NASD Dispute Resolution through the mail. The Claimant also must supply copies of the Statement of Claim and supporting documents for the other parties and the arbitrators. Once the intake staff receives the claimant's materials, the staff must open a new case file and manually enter the new claim information into CRAFTIS. The process of opening a case file, analyzing claim documents, and manually entering data is time-consuming and can be subject to delay as errors (resulting from illegible handwriting to incomplete answers) are corrected. With the implementation of the online filing system, the process will begin to become more streamlined, and ultimately, more efficient.

      The online filing system will allow a Claimant to commence the arbitration claim filing process by completing a Claim Information Form online. The Claim Information Form is an electronic version of the Claim Information Sheet, which is included in the materials sent to claimants seeking to file an arbitration claim. This document gathers key information about the claim, such as background information on all of the parties, the actions giving rise to the claim, and the type of relief sought. When completed, the Claim Information Sheet serves as a reliable source of background information for intake staff. Thus, NASD Dispute Resolution decided to use it as a template in designing the online filing system.

      While use of the online filing system is voluntary, the benefits that the system provides will make filing an arbitration claim online more attractive than using the mail. Once the Claimant has completed the Claim Information Form online, the online filing system will allow the Claimant to attach an electronic version of the Statement of Claim to the form, provided it does not exceed 50 pages. Once this online form has been completed, the Claimant will be able to send all of this information to NASD Dispute Resolution electronically.3 Other benefits provided by the system include a link to the fee calculators, which will calculate the amount that should be remitted with the Statement of Claim, and a "look up" tool that helps the user find the exact name of a respondent to insert in the appropriate fields. The system will also allow a user to print a receipt of the submission; print instructions for completing the filing; save partially completed claims as "templates" to be used as the basis for subsequent claims; and save multiple partially completed claims that can be accessed and completed at a later date.

      Effective Date

      The amendments will be effective on August 5, 2004 and will apply to any arbitration claims commenced using the system on or after August 5, 2004.


      1 Exchange Act Release No. 49673 (May 10, 2004) (File No. SR-NASD-2004-016), 69 Federal Register 26910 (May 14, 2004).

      2MATRICS stands for Mediation and Arbitration Tracking and Retrieval Interactive Case System.

      3The Claimant would then complete the claim filing process by filing a copy of the Tracking Form receipt, an executed Uniform Submission Agreement, sufficient copies of the Statement of Claim (if it has not been submitted electronically), sufficient copies of any exhibits or other supporting documents, and the filing fee and hearing session deposit through the mail, as is current practice. NASD staff will make the necessary copies of the electronically submitted Statement of Claim for the other parties and the arbitrators.


      Attachment A

      New language is underlined; deletions are in brackets.

      Code of Arbitration Procedure

      * * * * * * * * * *

      10314. Initiation of Proceedings

      Except as otherwise provided herein, an arbitration proceeding under this Code shall be instituted as follows:

      (a) Statement of Claim

      (1) The Claimant shall file with the Director of Arbitration an executed Submission Agreement, a Statement of Claim of the controversy in dispute, together with the documents in support of the Claim, and the required deposit. Sufficient additional copies of the Submission Agreement and the Statement of Claim and supporting documents shall be provided to the Director of Arbitration for each party and each arbitrator. The Statement of Claim shall specify the relevant facts and the remedies sought. The Director of Arbitration shall endeavor to serve promptly by mail or otherwise on the Respondent(s) one (1) copy of the Submission Agreement and one (1) copy of the Statement of Claim.
      (2) A Claimant or counsel (referred to herein collectively as "Claimant") may use the online claim notification and filing procedure to complete part of the arbitration claim filing process through the Internet. To commence this process, a Claimant may complete a Claim Information Form that can be accessed through an NASD Web site. In completing the Claim Information Form, the Claimant may attach an electronic version of the Statement of Claim to the form, provided it does not exceed 50 pages. Once this online form has been completed, an NASD Dispute Resolution Tracking Form will be generated and displayed for the Claimant to reproduce as necessary. The Claimant shall then file with the Director of Arbitration the rest of the materials required in subparagraph (1), above, along with a hard copy of the NASD Dispute Resolution Tracking Form.

      (Remainder of rule unchanged.)

    • 04-55 NASD Requests Comment on a Proposed Uniform Branch Office Registration Form

      View PDF file

      REQUEST FOR COMMENT

      Branch Office Registration

      Comment Period Expired September 3, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Registered Representatives
      Registration
      Senior Management

      Branch Office Registration
      Central Registration Depository (CRD?)

      Executive Summary

      NASD requests comment on a proposed uniform branch office registration form (Form BR) that will enable firms to register branch offices electronically with NASD, the New York Stock Exchange, Inc. (NYSE), and states through the Central Registration Depository (CRD? or CRD system). As proposed, the Form BR is intended to replace Schedule E of the Form BD, the current NYSE Branch Office Application form, and certain state branch office forms. Enhancements to the CRD system that are scheduled to be deployed with the proposed Form BR also will enable firms to identify the branch offices to which their registered representatives are assigned. NASD notes that the NYSE is soliciting comments from its members on Form BR and the North American Securities Administrators Association (NASAA) also is separately soliciting comment on the proposed form (please visit www.nyse.com and www.nasaa.org for more detailed information on the NYSE and NASAA communications).

      The proposed Form BR is included as Attachment A.

      Questions/Further Information

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

      Request for Comment

      NASD encourages all interested parties to comment on the proposed form. Comments must be received by September 3, 2004. Members and other interested parties can submit their comments using the following methods:

      • mailing comments in hard copy to the address below; or

      • e-mailing comments to pubcom@nasd.com

      Comments sent by hard copy should be mailed to:

      Barbara Z. Sweeney
      NASD
      Office of the Corporate Secretary
      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 for public comment in the Federal Register.2

      Background

      A working group composed of NASD and NYSE staff, and representatives of NASAA and states, has developed the Form BR, a form for registering branch offices. The proposed Form BR will be a "Uniform" registration form, similar to the Form U4 (Uniform Application for Securities Industry Registration or Transfer) and the Form U5 (Uniform Termination Notice for Securities Industry Registration). Like the Forms U4 and U5, Form BR will enable NASD member firms to register branch offices electronically with NASD, the NYSE, and states that require branch registration, through a single filing through the CRD system.3 The proposed Form BR will reconcile inconsistencies among existing branch office forms, eliminate duplicative questions, and elicit information that will facilitate the branch office registration process. Form BR is intended to replace the current NYSE Branch Office Application form, the existing state branch office forms, and Schedule E of Form BD (Uniform Application for Broker-Dealer Registration).4

      Some highlights of the proposed Form BR are noted below:

      Filing Types: The proposed Form BR will permit firms to 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 self-regulatory organization).

      Explanation of Terms: The proposed Form BR adopts, to the extent possible, the "Explained Terms" used on the existing uniform forms. The proposed Form BR also includes definitions of additional terms used in the context of branch office registration and reporting, including "closing," "person-in-charge," "regular branch," "small branch," "supervisor," and "withdrawal." < 5

      Type of Entity: Consistent with the uniform form concept, the proposed Form BR will provide entities with the opportunity to designate whether the branch office filing is being made on behalf of a broker-dealer (BD) or an investment adviser (IA). This feature will enable member firms to register or report IA branches in states that require such registration and reporting.

      NYSE Component: The proposed Form BR will elicit certain information required for branch office registration for firms that are NYSE members. Accordingly, the proposed form incorporates the information elicited on both the NYSE's current Branch Office Application and Office Space-Sharing forms. The CRD system will interact with the NYSE's branch office system on NYSE branch office registration filings. The NYSE's current protocol for requesting approval for new branch offices would continue with proposed Form BR. Under the proposed approach, NYSE members would use proposed Form BR to request such approvals, and the information provided by NYSE members would be transmitted to the NYSE, which, in turn, would communicate its determinations (e.g., approvals) back through the CRD system.

      Other Business (DBA) Names/Types of Activities/Web Sites: This section of the proposed Form BR will elicit the financial industry activities conducted at the branch office, names under which the branch office is conducting business, and Web Site addresses used by the branch office.

      Office Sharing Arrangements: The proposed Form BR will elicit information on office sharing arrangements of the branch office, consistent with information currently elicited on Schedule E of the Form BD.

      Integration with the CRD System

      Form BR represents one component of a broader project to register branch offices through the CRD system.6 The integration of branch office registration into the CRD system through proposed Form BR will create efficiencies for member firms by, among other things, making it easier to register branch offices with NASD, the NYSE, and the states and manage their ongoing responsibilities with regard to those branch office registrations. 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, member firms also will benefit from the centralized fee collection, on-line work queues, electronic notifications, and other features available through the CRD system.

      Furthermore, with the proposed deployment of the Form BR, NASD is planning enhancements to the CRD system that will enable firms to designate, and users to identify, the branch office or office(s) to which a particular registered representative is assigned. Firms would continue to report changes to an individual registered person's branch office assignment by amending the Form U4. With the planned CRD enhancements, firms also would be able to report a new office of employment address for multiple registered persons assigned to a particular branch office if that branch office has moved to a new location by filing an amended Form BR (rather than filing multiple Form U4 amendments for the registered persons affected).

      Request for Comment

      NASD seeks comment on the proposed Form BR and the ability to electronically file Form BR through the CRD system to fulfill member firms·registration and reporting requirements relating to branch offices. NASD is interested in whether commenters support the use of the CRD system to register branch offices with NASD, the NYSE, and states. NASD also is interested in commenters·views on the scope of information collected on the proposed Form BR and the clarity of the instructions on the proposed form.


      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. Persons 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. See Exchange Act Section 19 and rules thereunder.

      3 Currently, Connecticut, Florida, Nevada and Vermont have separate forms that firms must submit to register a branch office in each of those states.

      4 States that currently require branch office registration or reporting have indicated that they would use the proposed Form BR for those purposes. SEC staff has indicated that it would consider endorsing the proposed Form BR as a replacement for Schedule E of Form BD.

      5 NASD notes that some of these terms are used on the current NYSE Branch Office Application form.

      6 Both NASD and the NYSE have submitted rule filings to the SEC proposing to adopt a definition of branch office that is either identical or the same in all material respects. See SRNASD- 2003-104 (July 1, 2003) and SR-NYSE- 2002-34 (as amended April 19, 2004). NASD will work with other regulators to coordinate implementation of all components of the project.


      Uniform Branch Office Form

      GENERAL INSTRUCTIONS

      The Uniform Branch Office Form (Form BR) is the form used for branch office registration, notification, closing or withdrawal. Broker-dealers and investment advisers must use this form to register or notice file their branch offices in the appropriate jurisdictions and/or with SROs. These instructions apply to the filing of Form BR electronically with the Central Registration Depository ("CRD®"). Filers submitting paper filings should read the Special Instructions For Paper Filers (Jurisdictions Only) in conjunction with the other instructions to the form. In addition, paper filers should contact the appropriate jurisdiction for specific filing instructions or requirements.

      Filers must answer all questions and submit all requested information, unless otherwise directed in the Specific Instructions.

      Upon request, you may be required to provide documents to clarify or support responses to the form.

      An applicant is under a continuing obligation to promptly update Form BR whenever the information becomes inaccurate or incomplete. Amendments must be filed electronically (unless the filer is an approved paper filer) by promptly updating the appropriate section of Form BR. Note: The SROs and most jurisdictions require that an amendment be filed not later than 30 days after the applicant learns of the facts and circumstances giving rise to the amendment.

      The New York Stock Exchange (NYSE) and some jurisdictions require approval of a branch office before business can be conducted at a branch location.

      Contact the appropriate SRO or jurisdiction, if you have questions about Form BR.

      Electronic Filing Instructions

      A complete Form BR is required when the applicant is registering or notice filing a branch office with the CRD system for the first time. All questions must be answered and all sections/fields requiring a response must be completed before the filing will be accepted. The applicant must complete Section 9. Signature to certify that Form BR and amendments thereto have been executed properly and that the information contained therein is accurate and complete. To amend information, the applicant must update the appropriate Form BR sections. A signed copy, with original signatures, of the initial Form BR filing and amendments thereto must be retained by the applicant and be made available for inspection upon a regulatory request.

      Special Instructions For Paper Filers (Jurisdictions Only)

      Some jurisdictions may require a separate paper filing of Form BR. The applicant should contact the appropriate jurisdiction(s) for specific filing requirements. Attach Section 9. Signature with original manual signatures to an initial Form BR filing. Type all information. Provide the name of the applicant and the date on each page. Use only the current version of Form BR, or a reproduction of the form. For an amendment to Form BR, circle the number of any item for which you are changing your response. Complete Section 9. Signature for all amendment filings.

      The Sections of Form BR are as follows:

      1. GENERAL INFORMATION
      2. REGISTRATION/NOTICE FILING/TYPE OF OFFICE
      3. OTHER BUSINESS (DBA) NAMES/TYPES OF ACTIVITIES/WEBSITES
      4. OFFICE SHARING ARRANGEMENTS
      5. ASSOCIATED INDIVIDUALS
      6. NYSE BRANCH INFORMATION
      7. BRANCH CLOSING
      8. BRANCH WITHDRAWAL (PENDING APPLICATION)
      9. SIGNATURE

      SPECIFIC INSTRUCTIONS

      Completing the Form BR

      1. GENERAL INFORMATION

      Applicant CRD Number Enter the applicant? CRD Number.

      Applicant Name

      Enter the applicant? complete name as listed on the Form BD or the Form ADV. Do not abbreviate, shorten, or modify the applicant name in any way.

      Address Street 1/Street 2

      Enter the address where the applicant? principal place of business is physically located. A complete address must be furnished. Post office boxes are not acceptable. You may enter additional identifying information in Address Street 2, if necessary.

      City

      Enter the name of the city where the applicant? principal place of business is physically located.

      State

      Enter the name of the state where the applicant? principal place of business is physically located.

      Country

      Enter the country where the applicant? principal place of business is physically located.

      Postal Code

      Enter the postal code where the applicant? principal place of business is physically located.

      Firm Billing Code

      Enter an optional firm branch designation established by the applicant. A firm billing code consists of up to eight alpha/numeric characters. If the applicant does not use billing codes, leave this field blank.

      NYSE Branch Code Number

      A mandatory number selected by the applicant, unique to each of its locations, to identify an applicant? branch office. The NYSE Branch Code Number can be up to fifteen alpha/numeric characters, and may be the same as the Firm Billing Code.

      CRD Branch Number

      The CRD branch number is assigned by the CRD system to identify an applicant? branch office. If your branch office or office of employment does not have a CRD branch number, leave this field blank.

      Branch Address Street 1/Street 2

      Enter the address where the branch office is physically located. A complete address must be furnished. Post office boxes are not acceptable. You may enter additional identifying information in Branch Address Street 2, if necessary.

      City

      Enter the name of the city where the branch office is physically located.

      State

      Enter the state where the branch office is physically located.

      Country

      Enter the name of the country where the branch office is physically located.

      Postal Code

      Enter the postal code where the branch office is physically located.

      Branch Telephone Number

      Enter the telephone number of the branch office.

      Branch Facsimile Number

      Enter the facsimile number of the branch office.

      Private Residence Check Box

      Check this box if the Branch Address is a private residence.

      2. REGISTRATION/NOTICE FILING/TYPE OF OFFICE

      Register/Notice File Branch with SRO/Jurisdiction

      The CRD system will populate the applicable SRO and/or jurisdiction with which you are required to register or notice file the branch office. If applicant is not required to register or notice file the branch office with an SRO and/or jurisdiction, you may remove the registration request. If you remove the NYSE registration request, you must select the box to acknowledge there is no registration requirement under NYSE rules.

      Type of Branch Office Registration

      If you are registering this branch with a jurisdiction select the type of registration you are seeking: Broker-dealer and/or Investment Adviser.

      NASD Office of Supervisory Jurisdiction

      Answer yes if this branch office is an NASD Office of Supervisory Jurisdiction (OSJ). If no, indicate which OSJ has supervisory responsibility over this branch.

      NYSE Type of Office

      Select the type of office as required by NYSE Rule 342. If small branch is selected, indicate the CRD branch number, NYSE branch code number or Firm billing code of the supervising location.

      Supervisor/Person-in-Charge

      Enter all supervisors/persons-in-charge of the branch office.

      3. OTHER BUSINESS (DBA) NAMES/TYPES OF ACTIVITIES/WEBSITES

      Financial Industry Activities

      Indicate the type(s) of financial industry activities conducted by the applicant at this office. Indicate any other types of financial industry activities, business, or services conducted by any associated person of the applicant at this branch.

      Other Business Names

      Enter all other names under which financial industry activities will be conducted by associated persons at this branch, other than those names disclosed on applicant? Form BD and/or Form ADV.

      Website Addresses

      Enter all website addresses for this branch other than that of the applicant.

      4. OFFICE SHARING ARRANGEMENTS

      Indicate whether the branch office will have an office sharing arrangement by answering the questions and providing any details if necessary in this section.

      5. ASSOCIATED INDIVIDUALS

      This section will only be completed for initial filings.

      List all registered individuals, other than the supervisors/persons-in-charge listed in Section 2. Registration/Notice Filing/Type of Office, that will be associated with the branch office upon the branch office's opening.

      6. NYSE BRANCH INFORMATION

      THIS SECTION SHOULD BE COMPLETED ONLY FOR NYSE BRANCH REGISTRATION

      Anticipated Date of Opening

      Enter the month, day, and year the branch office is anticipated to open and provide an explanation if the date is prior to the date of application for registration.

      Estimated Cost of Opening and Equipping Office

      Enter the estimated cost for opening the office and provide an explanation if the amount is $0.00.

      Estimated Number of Active Accounts

      Enter the estimated number of active accounts.

      Branch Office Acquired from another Broker-dealer or Other Financial Institution

      Indicate whether this branch office was acquired from another broker-dealer or other financial institution. If yes, enter the name of the organization and date of the transaction.

      Location of Books and Records if maintained elsewhere

      Enter the location of the books and records for the branch office if they are maintained at a location other than the branch office.

      Name of Person Responsible for Annual Inspection

      Enter the name of the partner or officer responsible for at least an annual inspection of the branch office if the individual is not a registered representative. Enter the CRD Number of the partner or officer responsible for at least an annual inspection of the branch office if the individual is a registered representative.

      NYSE Bulletin

      Indicate whether the branch office should be listed in the NYSE Bulletin.

      Address Street 1/Street 2 where NYSE Certificate should be sent

      Enter the name and address where the certificate for the branch office should be sent. You may enter additional identifying information in Office of Employment Address Street 2, if necessary.

      City

      Enter the name of the city where the certificate for the branch office should be sent.

      State

      Enter the state where the certificate for the branch office should be sent.

      Country

      Enter the country where the certificate for the branch office should be sent.

      Postal Code

      Enter the postal code where the certificate for the branch office should be sent.

      NYSE OFFICE SHARING FORM

      Complete this section pursuant to NYSE Rule 343 if the branch office will be shared with any other person.

      7. BRANCH CLOSING

      If you are closing a branch office registered with a jurisdiction, complete the following information.

      Select the type of registration you are terminating: Broker-dealer and/or Investment Adviser.

      Date operations ceased, or will cease, at the branch office

      Enter the month, day, and year the branch closed or intends to close.

      Location of Books and Records

      Business Address Street 1/Street 2

      Enter the address of the individual that can be contacted regarding information on the books and records for the branch office. You may enter additional identifying information in Business Address Street 2, if necessary.

      City

      Enter the name of the city of the individual that can be contacted regarding information on the books and records for the branch office.

      State

      Enter the state of the individual that can be contacted regarding information on the books and records for the branch office.

      Country

      Enter the country of the individual that can be contacted regarding information on the books and records for the branch office.

      Postal Code

      Enter the postal code of the individual that can be contacted regarding information on the books and records for the branch office.

      Contact Name and Telephone Number

      Name

      Enter the name of the natural person that can be contacted regarding information on the books and records for the branch office.

      Daytime Telephone Number

      Enter the daytime telephone number of the individual that can be contacted regarding information on the books and records for the branch office.

      NYSE Bulletin

      Indicate whether the branch office closing should be listed in the NYSE Bulletin.

      8. BRANCH WITHDRAWAL

      If you are withdrawing a pending application, complete the following information:

      Date of Withdrawal

      Enter the month, day, and year of withdrawal.

      Reason for Withdrawal

      Enter the reason for withdrawal.

      Contact Name and Telephone Number

      Name

      Enter the name of the natural person that can be contacted regarding information on the withdrawal of this branch office.

      Daytime Telephone Number

      Enter the daytime telephone number of the individual that can be contacted regarding information on the withdrawal of this branch office.

      9. SIGNATURE

      Please Read Carefully

      All signatures required on this Form BR filing must be made in this section. A ?ignature·includes a manual signature or an electronically transmitted equivalent. For purposes of an electronic form filing, a signature is effected by typing a name in the designated signature field. By typing a name in this field, the signatory acknowledges and represents that the entry constitutes in every way, use, or aspect, his or her legally binding signature.

      Date. Enter the date that the application or amendment is being filed. Entries must be numeric (MM/DD/YYYY). Future dates may not be entered in this section.

      Signature of Appropriate Signatory. Enter the name of the Appropriate Signatory. The name must be typed or printed (if paper filing) as it appears in signature form. By typing a name in this field, the signatory acknowledges that this entry constitutes in every way, use, or aspect, his or her legally binding signature.

      Name/Title/Telephone Number of Person Filing the Form. Enter the name, title, and telephone number of the person filing the form. The name must be typed or printed as it appears in signature form.


      EXPLANATION OF TERMS

      The following definitions apply to terms that are italicized in Form BR.

      APPLICANT •The broker-dealer or state registered investment adviser filing or amending this form.

      APPROPRIATE SIGNATORY •The individual the applicant authorizes to execute the applicant? Form BR on the applicant? behalf. The appropriate signatory must meet the criteria established, if any, by the appropriate self-regulatory organization and/or jurisdiction.

      CLOSING •An applicant? request to terminate a branch office registration when an applicant intends to cease, or has ceased, operations at a branch office.

      JURISDICTION •A state, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, or any subdivision or regulatory body thereof.

      OFFICE OF SUPERVISORY JURISDICTION (OSJ) •A location as defined by NASD Rule 3010.

      PERSON •An individual, partnership, corporation, trust, or other organization.

      PERSON-IN-CHARGE •A natural person registered with an SRO who is physically located at the branch office and who has been designated by the applicant to supervise the activities of the individuals working at the branch office. The person-in- charge is not required to be registered in a principal capacity.

      REGULAR BRANCH ·For purposes of registering with the New York Stock Exchange (NYSE) as a branch office, a location that employs four or more individuals that are registered with the NYSE, and has an NYSE approved branch office manager at that location.

      SELF-REGULATORY ORGANIZATION (SRO) •Any national securities or commodities exchange or registered securities association, or registered clearing agency.

      SMALL BRANCH •For purposes of registering with the NYSE as a branch office, a location that employs no more than three individuals that are registered with the NYSE.

      SUPERVISOR ·A natural person registered in a principal capacity with an SRO who is physically located at an OSJ or who, for purposes of registering with the NYSE as a branch office, meets the requirements in NYSE Rule 342.

      WITHDRAWAL ·An applicant? request to withdraw an initial Form BR filing prior to approval of the branch office identified in that filing. Withdrawal applies only for jurisdictions/SROs that register branches.


      Form






















    • 04-54 Operative Date of Short Sale ACT Reporting Requirements for OTCBB and Other Non-NASDAQ OTC Equity Securities Extended to September 24, 2004

      View PDF file

      GUIDANCE

      ACT Short Sale Reporting Requirements

      Operative Date: September 24, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance
      Operations
      Registered Representatives
      Systems
      Trading

      ACT Short Sale Reporting Requirements
      IM-6130
      Rule 6130(d)(6)
      Short Sales

      Executive Summary

      NASD is delaying the operative date of IM-6130 (Trade Reporting of Short Sales) for Over-the-Counter Bulletin Board (OTCBB) and other non-NASDAQ over-the-counter (OTC) equity securities until September 24, 2004. IM-6130 was filed for immediate effectiveness with the SEC in May 2004 with an operative date of July 26, 2004.1 New IM-6130 clarifies that, as currently required by Rule 6130 (Trade Report Input), a "short sale" or "short sale exempt" indicator, as applicable, is required in all short sale transactions reported to the Automated Confirmation Transaction Service (ACT), including (1) NASDAQ National Market (NNM) securities; (2) NASDAQ SmallCap Market (SmallCap) securities; (3) other OTC transactions in exchange-listed securities; (4) OTCBB securities; and (5) other non-NASDAQ OTC equity securities. NASD understands that some members and their vendors need to make significant technological changes to their systems for OTCBB and other non-NASDAQ OTC equity securities to comply with these requirements; therefore, in consultation with SEC staff, NASD is extending the operative date for OTCBB and other non-NASDAQ OTC equity securities to provide members with additional time to make such changes.

      Questions/Further Information

      Questions regarding this Notice to Members may be directed to Jeffrey S. Davis, Office of General Counsel, NASDAQ, at (202) 912-3035; the Legal Section, Market Regulation, NASD, at (240) 386-5126; or Office of General Counsel, Regulatory Policy and Oversight, NASD, at (202) 728-8071.

      Discussion

      As further detailed in Notice to Members 04-40, NASD, through its subsidiary, The Nasdaq Stock Market, Inc. (NASDAQ), filed for immediate effectiveness with the SEC proposed interpretive material to Rule 6130 clarifying that a "short sale" or "short sale exempt" indicator, as applicable, is required in all short sale transactions reported to ACT, including transactions in NNM, SmallCap, exchange-listed, OTCBB, and other non-NASDAQ OTC equity securities.

      Although IM-6130 became effective immediately upon filing, the operative date of these requirements was July 26, 2004 to provide members with additional time to educate staff and re-program their systems, if necessary. NASD understands that some members and their vendors need to make significant technological changes to their systems with respect to OTCBB and other non-NASDAQ OTC equity securities to comply with the requirements and therefore, in consultation with SEC staff, NASD is delaying the operative date of these provisions until September 24, 2004. NASD believes that delaying the operative date of these requirements will provide members the additional time necessary to make changes to their systems regarding OTCBB and other non- NASDAQ OTC equity securities.


      1 See Securities Exchange Act Release No. 49833 (June 8, 2004), 69 FR 116 (June 17, 2004); see also Notice to Members 04-40 (May 2004).

    • 04-53 SEC Approves Amendments to IM-10104 and Rules 10306 and 10319 Regarding "Last Minute" Adjournments of Arbitration Hearings

      View PDF file

      GUIDANCE

      Arbitration Hearing Adjournments

      Effective Date: August 16, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal and Compliance

      Arbitration
      Arbitrators
      Dispute Resolution

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved amendments to IM-10104 and Rules 10306 and 10319 of the NASD Code of Arbitration Procedure (Code) to impose a fee and provide an arbitrators' honorarium when hearings are postponed, canceled, or settled on short notice.1

      The text of the amendments is set forth in Attachment A. The amendments will be effective on August 16, 2004, and will apply to any adjournment request or notification of final settlement received by NASD on or after August 16, 2004.

      Questions/Further Information

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

      Discussion

      NASD has amended IM-10104 and Rules 10306 and 10319 of the Code to charge parties a fee of $100 per arbitrator and to compensate arbitrators by that amount in the event that a hearing is adjourned within three business days before a scheduled hearing session.

      Background

      Over the past 13 years, NASD has taken several steps to address the delays caused by adjournments, including both postponements and cancellations of hearings. In 1990, NASD increased the adjournment fee and established a timeframe within which an arbitration case could be settled or withdrawn without parties' forfeiting their hearing session deposit. In 2001, NASD increased the cap for second or subsequent adjournments from $1,000 to $1,500 in an attempt to make these adjournment fees operate as a deterrent to repeated adjournment requests. These changes have helped reduce delays in the arbitration process, but they have not had the expected impact on curbing last-minute adjournment requests.

      NASD has found that parties often seek to adjourn scheduled hearing sessions at the last minute for various reasons, which may include scheduling conflicts of parties or their counsel, ongoing settlement discussions, or other personal matters unrelated to the arbitration process. Regardless of the reasons for the requests, last-minute adjournments result in inconvenience and lost income to the arbitrators. NASD has, therefore, amended several Code provisions to discourage these types of requests and encourage the parties, when appropriate, to begin settlement discussions as soon as reasonably possible.

      Last-Minute Adjournments

      Rule 10319 authorizes arbitrators to adjourn hearings under certain circumstances, and establishes fees the parties could incur, depending on the timing of the adjournment request. This rule has been amended to address last-minute adjournment requests and establish an honorarium for arbitrators in the event that such a request is granted. Specifically, Rule 10319 has been amended to add subparagraph (d), which requires that an additional $100 fee per arbitrator be paid if a request for an adjournment is made and granted within three business days before a scheduled hearing session or before the first in a number of consecutively scheduled hearing sessions.2

      The following example illustrates how the rule will work. An arbitrator schedules five consecutive hearing sessions to begin on a Monday. If a party's adjournment request is made and granted no later than the preceding Tuesday, the party would not be assessed the $100 per-arbitrator fee, because the request was made and granted more than three business days before the first scheduled day of the hearing session.3 If, however, a party's request is made and granted on the preceding Wednesday or later in that week, then the party would be assessed the $100 per-arbitrator fee for the adjournment of the first day in a group of consecutively scheduled hearing sessions, or, in the example, Monday.4 The party would not be assessed a $100 per-arbitrator fee for each of the four remaining scheduled hearing sessions that also have been canceled.

      In all last-minute adjournment cases, arbitrators will be instructed to assess the $100 per-arbitrator fee, regardless of the reason for the request. The only exception will be in cases where extraordinary circumstances exist. NASD Dispute Resolution recognizes that there are some extraordinary circumstances that could prevent a party from making an adjournment request in time to avoid the additional fee assessment (e.g., a serious accident or a sudden severe illness). In these cases, arbitrators will have the discretion to waive the fee, provided they receive verification of such circumstances.

      Arbitrators' Honorarium

      The Interpretative Material concerning Arbitrators' Honorarium (IM-10104) has been amended to reference the $100 per-arbitrator fee if a hearing session is adjourned pursuant to Rule 10319(d). Generally, arbitrators will assess the $100 per-arbitrator fee against the requesting party, after the request is granted. There may be instances, however, in which the arbitrators determine that a non-requesting party caused or contributed to the need for the adjournment. In these instances, the requesting party can ask for a reallocation of the fees to the non-requesting party or a sharing of the fees.

      Settlements

      Rule 10306 has been amended to clarify that, if parties to an arbitration settle their dispute, they will be responsible for any fees incurred, including fees incurred as a result of a last-minute adjournment. Thus, if the parties notify staff of a final settlement within three business days before a scheduled hearing session, and the hearing session must be canceled, this notification will be treated as an adjournment request that is "made and granted" for purposes of Rule 10319(d), and will result in the assessment of the $100 per-arbitrator fee.

      Effective Date

      The amendments described in this Notice are effective on August 16, 2004, and will apply to any adjournment request or notification of final settlement received by NASD on or after August 16, 2004.


      1 Exchange Act Release No. 49716 (May 17, 2004) (File No. SR-NASD-2003-164), 69 Federal Register 29342 (May 21, 2004).

      2 For purposes of this rule, a scheduled hearing session refers to a hearing on the merits, and not to a prehearing conference or a hearing on request for permanent injunctive relief under Rule 10335(b).

      3 The party could be subject to other fees and costs as a result of adjourning the hearing in this timeframe, however. See Rules 10319(b) and 10332(f).

      4 Id. The analysis would be the same if, in the example, Monday was a holiday (or other day on which NASD was closed) and the hearing sessions were scheduled to begin on the Tuesday after the holiday.


      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[, $50 for travel to a canceled hearing,] 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.

      10306. Settlements

      (a) Parties to an arbitration may agree to settle their dispute at any time.
      (b) If the parties agree to settle their dispute, they will remain responsible for payment of fees incurred, including fees for previously scheduled hearing sessions and fees incurred as a result of adjournments, pursuant to Rule 10319.
      [(b)] (c) The terms of a settlement agreement do not need to be disclosed to the Association. However, [the parties will remain responsible for payment of fees incurred, including fees for previously scheduled hearing sessions. If] if the parties fail to agree on the allocation of outstanding fees, the fees shall be divided equally among all parties.

      10319. Adjournments

      (a) The arbitrator(s) may, in their discretion, adjourn any hearing(s) either upon their own initiative or upon the request of any party to the arbitration.
      (b) If an adjournment requested by a party is granted after arbitrators have been appointed, the party requesting the adjournment shall pay a fee equal to the initial deposit of hearing session fees for the first adjournment and twice the initial deposit of hearing session fees, not to exceed $1,500, for a second or subsequent adjournment requested by that party. The arbitrators may waive these fees in their discretion. If more than one party requests the adjournment, the arbitrators shall allocate the fees among the requesting parties.
      (c) Upon receiving a third request consented to by all parties for an adjournment, the arbitrator(s) may dismiss the arbitration without prejudice to the Claimant filing a new arbitration.
      (d) If an adjournment request is made by one or more parties and granted within three business days before a scheduled hearing session, the party or parties making the request shall pay an additional fee of $100 per arbitrator. If more than one party requests the adjournment, the arbitrators shall allocate the $100 per arbitrator fee among the requesting parties. The arbitrators may allocate all or portion of the $100 per arbitrator fee to the non-requesting party or parties, if the arbitrators determine that the non-requesting party or parties caused or contributed to the need for the adjournment. In the event that a request results in the adjournment of consecutively scheduled hearing sessions, the additional fee will be assessed only for the first of the consecutively scheduled hearing sessions. In the event that an extraordinary circumstance prevents a party or parties from making a timely adjournment request, arbitrators may use their discretion to waive the fee, provided verification of such circumstance is received.

    • 04-52 Guidance on the Requirements for Availability of the Bona Fide Fully Arbitraged Exemption

      View PDF file

      GUIDANCE

      Short Sales

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Trading

      Affirmative Determination
      Rule 3370(b)(2)(B)
      Rule 3370(b)(5)(B)
      Short Sales

      Executive Summary

      There has been discussion in the financial press about the listing of securities on foreign markets without a company's knowledge or authorization. Some reports have suggested that the purpose behind such listings is to avoid the requirements of Rule 3370 (affirmative determination requirements) through the use of the arbitrage exemption available under subparagraphs (b)(2)(B) and (b)(5)(B) of Rule 3370. Without commenting on listing activity occurring in non-U.S. markets, NASD is taking this opportunity to remind member firms of their affirmative determination obligations for both member and non-member proprietary short sale transactions and under what circumstances the bona fide fully arbitraged exemption is available.

      Questions/Further Information

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

      Discussion

      NASD Rule 3370(b)(2)(B) requires that, prior to effecting a short sale order for its own account (proprietary short sale), a member (or associated person) must make an affirmative determination that the member can borrow the security or otherwise provide for delivery by the settlement date. The affirmative determination requirements also apply to orders from non-member broker-dealers other than those orders executed by a member as an arm's length transaction.1 In addition, where orders are executed by a non-member broker-dealer on or through electronic communications networks (ECNs) or alternative trading systems (ATSs), a member that operates the ECN or ATS is responsible for ensuring compliance with the affirmative determination requirements with respect to such orders.

      NASD Rule 3370(b)(2)(B) provides an exemption for, among others, proprietary orders of member firms that result in bona fide, fully arbitraged positions. Accordingly, proprietary orders of a member firm are exempt from the affirmative determination requirements if they meet the conditions for the bona fide fully arbitraged exemption. Likewise, proprietary orders of a non-member broker-dealer that is registered with the Securities and Exchange Commission (SEC) are also exempt from the affirmative determination requirements if the member that receives the order is able to verify and document that the non-member order meets the conditions for the bona fide fully arbitraged exemption applicable to proprietary orders of member firms. It is important to note, however, that the uniform locate requirements that are part of Regulation SHO, which become effective January 3, 2005, will not provide for a similar exemption for short sales that are part of arbitrage transactions.

      NASD Rule 3370(b)(5)(B) provides guidelines in determining the availability of the bona fide fully arbitraged exemption. With respect to arbitrage positions taken when the same security trades on two markets, the guidelines provide that a short sale transaction would be exempt from the affirmative determination requirements if a long position is taken in a security purchased in one market, together with an offsetting short sale of the same security in a different market, at as nearly the same time as practicable for the purpose of taking advantage of a difference in price in the two markets. Members must be in a position to demonstrate that they are in fact hedged at the time of the short sale and have executed such transactions in a manner consistent with the purpose of the exemption before applying such exemption to the locate requirements of Rule 3370.

      The bona fide fully arbitraged exemption was established to recognize those shortselling transactions engaged in for risk reduction and market liquidity. Bona fide arbitrage exists where essentially contemporaneous short sales and purchases are effected to capture the spread resulting from a current differential in pricing. To claim the bona fide fully arbitrage exemption, there must be an offsetting transaction that occurs at as nearly the same time as practicable. The mere speculative listing of prices or offers to deal on another market would not constitute bona fide arbitrage; rather, an actual offsetting arbitrage transaction must be effected on another market at as nearly the same time as practicable for the purpose of taking advantage of a difference in price in the two markets. Accordingly, uncovered short positions that are not hedged at a time that is virtually identical to the time of the execution of the short sale are not entitled to the exemption. Any time difference should only be the time necessary to execute the transaction in two different markets.

      NASD also reminds members that intend to rely on the bona fide fully arbitraged exemption that they will be required to demonstrate, upon request, how every applicable short sale transaction meets the bona fide fully arbitraged exemption. Members must be able to establish and document that a proprietary order, whether a member proprietary order or a non-member broker-dealer proprietary order, satisfies the terms of the exemption. As with all exemptions to the affirmative determination requirements, NASD reminds members that the bona fide fully arbitraged exemption is narrowly applied and may only be used for legitimate arbitrage purposes and may not be used in an effort to circumvent the requirements of Rule 3370, facilitate speculative short selling, or otherwise engage in manipulative behavior. Members also are reminded that, as with the bona fide market making exemption, proprietary positions taken to facilitate a short sale or short sale equivalent position for a customer will not be deemed to fall within the bona fide fully arbitraged exemption.


      1 See Notice to Members 04-21 (March 17, 2004).

    • 04-51 SEC Approves Amendments to TRACE Rule 6230 to Reduce the Reporting Period to 30 Minutes on October 1, 2004, and to 15 Minutes on July 1, 2005

      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

      Debt Securities
      Operations
      Rule 6200 Series
      Transaction Reporting
      TRACE

      Executive Summary

      On June 14, 2004, the Securities and Exchange Commission (SEC or Commission) approved amendments to Rule 6230(a) of the Trade Reporting and Compliance Engine (TRACE) rules, the Rule 6200 Series, reducing the reporting period.1 The reductions to the reporting period will occur in two stages. In the first stage (Stage One), the period to report a transaction in a TRACE-eligible security will be reduced from 45 minutes to 30 minutes. In the second stage (Stage Two), that period will be reduced to 15 minutes.

      Stage One amendments to Rule 6230(a), requiring 30-minute reporting, will become effective on October 1, 2004. Stage Two amendments to Rule 6230(a), reducing the reporting period to 15 minutes, will become effective on July 1, 2005. Rule 6230, as amended by Stage One rule changes only, is set forth in Attachment A. (In 2005, NASD will issue a second Notice to Members (NtM) reminding firms of the effective date of Stage Two and incorporating the Stage Two amendments to Rule 6230(a) that will require 15-minute reporting.)

      Questions/Further Information

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

      Background and Discussion

      Since 1999, when the first formal proposal to establish TRACE was filed with the SEC, NASD and SEC stated that the TRACE reporting period would be reduced after firms obtained experience reporting corporate bond transactions to TRACE. On October 1, 2003, NASD reduced the period to report a transaction in a TRACE-eligible security from 75 minutes to 45 minutes. At that time, NASD indicated that it planned to reduce the reporting period further in the future. Reducing the reporting period results in a qualitative increase in transparency in the debt markets because market participants and investors receive actual transaction prices and other information more quickly.

      Since October 1, 2003, when 45-minute reporting began, firms have developed the technical and operational capabilities to report transactions within a much shorter period than the current 45-minute period. For example, during the first two months of 2004, approximately 84 percent of all transactions were reported within 30 minutes of the time of execution, and approximately 73 percent were reported within 15 minutes of the time of execution. By October 1, 2004, NASD expects that the membership as a whole will be able to report TRACE-eligible securities transactions within 30 minutes.

      Stage One 30-Minute Reporting

      The SEC approved the Stage One 30-minute reporting requirement, together with the Stage Two 15-minute reporting requirement, on June 14, 2004. The impact that the Stage One changes will have on reporting is discussed below.

      The amendments to Rule 6230(a) that are set forth in Stage One require a firm to report a transaction in a TRACE-eligible security within 30 minutes of the time of execution. In addition, NASD reduced other 45-minute reporting periods to 30 minutes in related provisions in paragraphs (1) through (4) of Rule 6230(a). Specifically, under Rule 6230(a)(1), as amended, if a firm executes a transaction within 30 minutes of the time the TRACE System closes, which, on a normal day is 6:30:00 p.m. Eastern Time (ET), a firm is permitted to report the transaction the next business day that the TRACE System opens, but must do so within 30 minutes after the TRACE System opens for the report to be timely (i.e., on or before 8:29:59 a.m. ET).2 Under Rule 6230(a)(2), and (a)(4), as amended, a firm is required to report a transaction that occurs on or after the closing of the TRACE System (i.e., on or after 6:30:00 p.m. ET through 11:59:59 p.m. ET, or during a weekend or holiday) the next business day that the TRACE System opens, and must do so within 30 minutes after the TRACE System opens (i.e., on or before 8:29:59 a.m. ET). Under Rule 6230(a)(3), as amended, a firm is required to report any transaction in a TRACE-eligible security that occurs on a business day on or after 12:00 a.m. (midnight) through 7:59:59 a.m. ET, within 30 minutes of the opening of the TRACE System (i.e., on or before 8:29:59 a.m. ET).

      Effective Date

      The amendments to Rule 6230(a) designated as Stage One, which require a firm to report a transaction in a TRACE-eligible security within 30 minutes of the time of execution, will become effective on October 1, 2004.

      15-Minute Reporting Takes Effect in 2005

      As noted previously, the SEC also approved amendments to Rule 6230(a), designated as Stage Two, that will require firms to report a transaction in a TRACE-eligible security within 15 minutes of the time of execution, except as otherwise provided. The Stage Two amendments will become effective on July 1, 2005. NASD will remind firms in an NtM to be published in 2005 that Stage Two 15-minute reporting will become effective on July 1, 2005.

      Interpretive Guidance

      1. When the new TRACE 30-minute reporting requirement becomes effective, how much time does a firm have to resubmit a trade report that was rejected?

      Under both the prior 75-minute and current 45-minute reporting regimes, NASD staff issued interpretive guidance regarding the time to re-submit a rejected trade report.3 NASD staff is issuing revised guidance regarding the time to re-submit a rejected trade report that is similar to the interpretive guidance provided in NtM 03-58, Q & A No. 6 regarding this issue. The revised guidance, as described in greater detail below, is based on the 30-minute reporting requirement, with the result that a 45-minute extension provided in NtM 03-58 is reduced to a 30-minute extension, and a 15-minute extension in NtM 03-58 is reduced to 10 minutes.

      This interpretive guidance will become effective on October 1, 2004, when the requirement to report in 30 minutes becomes effective. In addition, as of October 1, 2004, the interpretive guidance in NtM 03-58, Q & A No. 6, relating to the same issue, is rescinded and superseded by the interpretive guidance set forth below. Accordingly, as of October 1, 2004, a firm may no longer rely on the guidance in NtM 03-58, Q & A No. 6.4

      As noted in prior interpretive guidance regarding the resubmission of rejected trade reports, NASD recognizes that some firms may be using a reporting technology that does not immediately relay a message to the firm that a transaction report has been rejected. Thus, firms may be unaware for a substantial part of the 30-minute reporting period that they must resubmit the trade report.5 Accordingly, in these circumstances, as a general rule, NASD staff expects that firms will correct and resubmit rejected trade reports as soon as practicable, but not later than 60 minutes from the time of execution. (This generally applicable interpretive guidance is referred to hereinafter as the "30-Minute Extension.")

      However, there are three scenarios set forth below when a firm may not rely on the 30-Minute Extension.
      a. Rule 6230(a)(1): 30-Minute Extension is Inapplicable. If a firm executes a trade less than 30 minutes before the closing of the TRACE System (on or after 6:00:01 p.m. ET through 6:29:59 p.m. ET)6 under Rule 6230(a)(1), the firm has the option to report the transaction to TRACE the same day, or the next day that the TRACE System is open, within 30 minutes of the opening. In both of these scenarios, a firm is not entitled to rely on the 30-Minute Extension to comply with the obligation to timely report.
      i. No Extension of Time. If the firm reports the transaction to TRACE before the TRACE System closes and the transaction report is rejected, the firm must report the transaction the next day the TRACE System is open, within the first 30 minutes that the System is open in order for the report to be timely. The 30-Minute Extension does not apply in these circumstances. For example, a firm executes a transaction at 6:10:00 p.m. ET on Thursday, the firm reports the transaction at 6:29:00 p.m. ET, and the transaction report is rejected. On Friday morning, the firm must resubmit the correct transaction report within the first 30 minutes that the TRACE System is open for the report to be timely.
      ii. 10-Minute Extension. If the firm opts to first file the transaction report on the next business day that the TRACE System is open, and the transaction report is rejected, the firm must correct and resubmit the transaction report as soon as possible and not later than forty minutes after the TRACE System opens, because the firm is granted a 10-minute extension ("10-Minute Extension") in these circumstances. The 30-Minute Extension does not apply. The 10-Minute Extension is an appropriate extension of time because firms have had time to prepare the transaction report, and should attempt to report outstanding transactions promptly after the TRACE System opens. For example, a firm executes a trade at 6:10:00 p.m. ET on Thursday, the firm first reports the trade on Friday at 8:05:00 a.m. ET, and the report is rejected. The firm must correct and resubmit the transaction report not later that 8:39:59 a.m. ET in order for the report to be considered timely filed.
      b. Rule 6230(a)(2) through (4): 30 Minute Extension is Inapplicable and 10-Minute Extension Applies. If a firm executes a trade when the TRACE System is closed (on or after 6:30:00 p.m. ET on a business day that the TRACE System was open, during a weekend or a holiday, or before 8:00:00 a.m. ET on a business day that the TRACE System will open), the firm is required under Rule 6230(a)(2) through (4) to report the transaction the first day that the TRACE System is open, within 30 minutes. If the transaction report is rejected, the firm must correct and resubmit a transaction report as soon as possible, but not later than forty minutes after the TRACE System opens. Again, in these circumstances, the 10-Minute Extension applies, for the reasons set forth in the preceding paragraph, and the 30-Minute Extension is inapplicable. For example, a firm executes a trade at 7:00:00 p.m. ET on Thursday. The TRACE System is closed until Friday at 8:00:00 a.m. ET. The firm first reports the trade on Friday at 8:05:00 a.m. ET, and the report is rejected. The firm must correct and resubmit the trade report not later than 8:39:59 a.m. ET to report on time.
      <

      Regardless of the reporting mechanism used by the firm (e.g., batch submission, CTCI, Web browser, third-party intermediary reporting system), any rejected trade reports should be corrected and resubmitted to TRACE as soon as possible by the reporting firm. NASD will continue to monitor firms' reporting to ensure that firms have procedures in place that are reasonably designed to ensure that rejected trade reports are identified, corrected, and resubmitted in a timely manner. Patterns and practices of late submissions due to rejections may be considered a violation of the TRACE Rules and Rule 2110 (Standards of Commercial Honor and Principles of Trade).


      1 See Securities Exchange Act Release No. 49854 (June 14, 2004), 69 Fed. Reg. 35088 (June 23, 2004) (File No. SR-NASD-2004-057).

      2 Generally, the TRACE System is open to receive reports Monday through Friday, from 8:00 a.m. through 6:29:59 p.m. and closes at 6:30 p.m. Eastern Time (ET). On days when NASD announces that the TRACE System will close early (e.g., at 2:00 p.m. ET on the day after Thanksgiving), NASD will announce the early closing and specify when the TRACE System will cease accepting reports. When early closings in TRACE occur, NASD staff interprets Rule 6230(a)(1) as allowing a firm (for a transaction that occurs just before the end of the TRACE System closing) to report the transaction on the day of execution before the system closes or the next business day, to provide the firm the same flexibility that is provided when the TRACE System closes at 6:30 p.m. ET. Assume, for example, that NASD announces that the TRACE System will close at 2:00 p.m. ET, in which case the TRACE System will not accept reports at or after the 2:00 p.m. closing. If a 30-minute reporting period is in effect, and a firm executes a transaction at 1:40 p.m. ET, the firm may report the transaction on the day of execution (up to 2:00 p.m. ET) or may report the transaction the next business day that the TRACE System is open within 30 minutes of the opening.

      3 NASD staff previously issued interpretive guidance on this topic in NtM 02-76, Q & A No. 1 (in the context of 75-minute reporting) and NtM 03-58, Q & A No. 6 (in the context of 45-minute reporting). When the guidance in NtM 3-58, Q & A No. 6 was published, NASD staff rescinded the guidance in NtM 02-76, Q & A No. 1.

      4 NASD staff notes that a firm may continue to rely on the guidance in NtM 03-58, Q & A No. 6 for transactions executed and reported prior to October 1, 2004.

      5 Certain firms are using technology that reports transactions to and receives verification of accepted reports back from TRACE via a "batch" process. This batch process may add time to the identification and correction of trade reports initially rejected by the TRACE System.

      6 As noted previously, the normal schedule for TRACE System operations is 8:00 a.m. ET through 6:29:59 p.m. ET. The times are provided as an example. The actual times may vary if the TRACE System is not operating on a normal schedule.


      Attachment A

      New language is underlined; deletions in brackets.

      6200. TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)

      6230. Transaction Reporting

      (a) When and How Transactions are Reported

      A member that is required to report transaction information pursuant to paragraph (b) below must report such transaction information within 30[45] minutes of the time of execution, except as otherwise provided below, or the transaction report will be "late." The member must transmit the report to TRACE during the hours the TRACE system is open ("TRACE system hours"), which are 8:00 a.m. Eastern Time through 6:29:59 p.m. Eastern Time. Specific trade reporting obligations during a 24-hour cycle are set forth below.
      (1) Transactions Executed During TRACE System Hours

      Transactions in TRACE-eligible securities executed on a business day at or after 8:00 a.m. Eastern Time through 6:29:59 p.m. Eastern Time must be reported within 30[45] minutes of the time of execution. If a transaction is executed on a business day less than 30[45] minutes before 6:30 p.m. Eastern Time, a member may report the transaction the next business day within 30[45] minutes after the TRACE system opens. If reporting the next business day, the member must indicate "as/of" and provide the actual transaction date.
      (2) Transactions Executed At or After 6:30 P.M. Through 11:59:59 P.M. Eastern Time

      Transactions in TRACE-eligible securities executed on a business day at or after 6:30 p.m. Eastern Time through 11:59:59 p.m. Eastern Time must be reported the next business day within 30[45] minutes after the TRACE system opens. The member must indicate "as/of" and provide the actual transaction date.
      (3) Transactions Executed At or After 12:00 A.M. Through 7:59:59 A.M. Eastern Time

      Transactions in TRACE-eligible securities executed on a business day at or after 12:00 a.m. Eastern Time through 7:59:59 a.m. Eastern Time must be reported the same day within 30[45] minutes after the TRACE system opens.
      (4) Transactions Executed on a Non-Business Day

      Transactions in TRACE-eligible securities executed on a Saturday, Sunday, or a federal or religious holiday on which the TRACE system is closed, at any time during that day (determined using Eastern Time), must be reported the next business day within 30[45] minutes after the TRACE system opens. The transaction must be reported as follows: the date of execution must be the first business day (the same day the report must be made); the execution time must be "12:01:00 a.m. Eastern Time" (stated in military time as "00:01:00"); and the modifier, "special price," must be selected. In addition, the transaction must not be designated "as/of". When the reporting method chosen provides a "special price" memo field, the member must enter the actual date and time of the transaction in the field.
      (5) and (6) No Change
      (b) through (f) No Change

    • 04-50 Treatment of Commodity Pool Trail Commissions under Rule 2810 (Direct Participation Programs Rule) (The effective date has been delayed until 10/12/04)

      View PDF file

      GUIDANCE

      Commodity Pools

      Effective Date: July 13, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Senior Management

      Commodity Pools
      Direct Participation Programs
      Trail Commissions
      Rule 2810

      Executive Summary

      NASD Rule 2810 (Direct Participation Programs Rule or DPP Rule) governs public offerings of direct participation programs (DPPs), including establishing limits on the level of underwriting compensation. Historically, in reviewing the level of underwriting compensation in commodity pool DPPs, NASD staff has excluded certain trail commissions. This Notice serves to advise members that effective immediately, NASD staff will consider all trail commissions paid in connection with commodity pool DPPs in calculating whether the level of underwriting compensation meets the requirements of Rule 2810.

      Questions/Further Information

      Questions concerning this Notice may be directed to Joseph E. Price, Vice President and Director, Corporate Financing Department, at (240) 386-4642; or Gary L. Goldsholle, Associate Vice President and Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8104.

      Discussion

      The DPP Rule requires that, prior to participating in a public offering of securities, a member (or another member on its behalf) must file information regarding the DPP offering with NASD's Corporate Financing Department (Department) and receive a "no objections" opinion. The "no objections" opinion takes into account the proposed terms and arrangements of the DPP offering, including the level of underwriting compensation, which may not exceed 10 percent of the gross proceeds of the offering.

      Historically, in calculating the level of underwriting compensation for commodity pool DPPs, NASD staff has excluded certain trail commissions. In particular, NASD staff excluded trail commissions paid to an associated person of a member if:

      (1) the member was registered with the Commodity Futures Trading Commission as a Futures Commission Merchant;
      (2) the associated person receiving the trail commissions had passed the National Commodity Futures Examination (Series 3) or the Futures Managed Funds Examination (Series 31); and
      (3) the associated person receiving the trail commissions provided ongoing investor relations services to the investors.

      The staff's position was predicated on the provision of a higher level of services by persons selling commodity pool DPPs and a certain level of proficiency as demonstrated by passing either the Series 3 or Series 31. In reconsidering this position, NASD sought comment from members and other interested parties in Notice to Members 04-07 (Regulation of Compensation, Fees, and Expenses in Public Offerings of Real Estate Investment Trusts; Direct Participation Programs, Including Commodity Pools; and Closed-End Funds).

      Most commenters opposed changing this position, noting differences between commodity pools and other DPPs, and the services generally provided to persons investing in commodity pool DPPs. Many commenters cited the benefits to investors of diversification by investing in commodities in general and in commodity pool DPPs in particular, but also warned that if the level of underwriting compensation was capped, then they may no longer be in a position to recommend commodity pool DPPs to investors. Several commenters believed that establishing compensation limits for selling commodity pool DPPs was appropriate, but urged limits higher than those currently in place for other DPPs.

      Based upon NASD staff's review and analysis, including the comments received, NASD staff continues to believe the reasons underlying the exclusion of certain trail commissions of commodity pool DPPs no longer apply today. NASD staff has seen no evidence that, presently, commodity pool DPP investors receive a significantly higher level of service than investors in other DPPs, including real estate, oil and gas, and equipment leasing partnerships. Moreover, commenters failed to adequately explain the differences in service provided by persons who have passed the Series 3 or Series 31 (and thus met the exclusion) and those who have not (and thus remained subject to the compensation limits of the DPP Rule). Finally, NASD staff believes that notwithstanding a limit on the level of underwriting compensation, firms and registered representatives will continue to offer and recommend commodity pool DPPs where there are benefits to investors in terms of diversification and where such products meet investors' financial status and investment objectives. Accordingly, NASD staff will no longer exclude the payment of any trail commissions for commodity pool DPPs from the underwriting compensation limits in the DPP Rule, regardless of whether such payments meet the three conditions discussed above. Effective immediately, in determining whether to issue a "no objections" opinion in connection with a commodity pool DPP filed with the Department under Rule 2810, NASD staff will consider, among other things, whether the level of underwriting compensation, including the types of trail commissions previously excluded, exceeds the 10 percent limitation in the DPP Rule.1


      1 This interpretation does not alter the compensation that may be paid in offerings of commodity pool DPPs that have already been approved by the Department. However, future offerings of commodity pool DPPs, even additional offerings of securities by commodity pool DPPs previously approved by the Department, must adhere to the compensation limits of the DPP Rule.

    • 04-49 SEC Approves Amendments to Rules 10308 and 10312 Regarding Arbitrator Classification, Disclosures, and Challenges

      View PDF file

      INFORMATIONAL

      Arbitrator Classification

      Effective Date: July 19, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance

      Arbitration
      Arbitrators
      Dispute Resolution

      Executive Summary

      The Securities and Exchange Commission (SEC or Commission) has approved amendments to Rules 10308 and 10312 of the NASD Code of Arbitration Procedure (Code) relating to arbitrator classification, disclosures, and challenges.1

      The text of the amendments is set forth in Attachment A. The amendments will be effective on July 19, 2004. Amendments relating to arbitrator classification will apply to arbitrator lists sent out according to Rule 10308(b)(5) on or after July 19, 2004, and to arbitrators appointed on or after July 19, 2004 by the Director of Arbitration under Rules 10308(c)(4)(B), 10308(d)(3), and 10313 when an insufficient number of names remain on the consolidated list. The amendments to the standard for deciding challenges for cause under Rule 10308(d) and Rule 10312(d) will apply to challenges for cause made on or after July 19, 2004.

      Questions/Further Information

      Questions regarding this Notice may be directed to Jean I. Feeney, Vice President and Chief Counsel, NASD Dispute Resolution, at (202) 728-6959, or e-mail jean.feeney@nasd.com.

      Discussion

      NASD has amended Rules 10308 and 10312 of the Code to:

      (1) modify the definitions of public and non-public arbitrators to further ensure that individuals with significant ties to the securities industry are not able to serve as public arbitrators;
      (2) provide specific standards for deciding challenges to arbitrators for cause; and
      (3) clarify that compliance with arbitrator disclosure requirements is mandatory.

      Background

      In July 2002, the SEC retained Professor Michael Perino to assess the adequacy of NASD and New York Stock Exchange arbitrator disclosure requirements, and to evaluate the impact of the California Ethics Standards2 on the current conflict disclosure rules of the self-regulatory organizations (SROs). The SEC released Professor Perino's report, Report to the Securities and Exchange Commission Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities Arbitrations (Perino Report), on November 4, 2002.3

      The Perino Report observed that, "Current SRO conflict standards are consistent with model disclosure standards and judicial opinions analyzing arbitrator disclosure requirements," and concluded that undisclosed conflicts of interest were not a significant problem in SRO-sponsored arbitrations. Specifically, the Report concluded that adoption of the California Ethics Standards by SROs would yield very few benefits to parties, but would impose significant costs and could have significant unintended consequences that might reduce investors' perception of the fairness of SRO arbitrations. However, the Perino Report recommended several amendments to SRO arbitrator classification and disclosure rules that, according to the Report, might "provide additional assurance to investors that arbitrations are in fact neutral and fair."

      These amendments implement the Perino Report recommendations, as well as several other related changes to the definition of public and non-public arbitrators that are consistent with the Perino Report recommendations.

      Definition of Public and Non-Public Arbitrators

      The Code classifies arbitrators as public or non-public ("industry"). When investors have a dispute with member firms or associated persons in NASD arbitration, they are entitled to have their cases heard by a panel consisting of either a single public arbitrator, or a majority public panel consisting of two public arbitrators and one non-public arbitrator, depending on the amount of the claim.4

      Rule 10308(a)(5) defines public arbitrators as persons who are qualified to serve as arbitrators and who are not either personally engaged in certain activities that would make them non-public, or the immediate family member of a person engaged in such activities.

      The amendments change these definitions in several ways to further ensure that individuals with significant ties to the securities industry are not able to serve as public arbitrators. Specifically, the definition of non-public arbitrator in Rule 10308(a)(4) has been amended to:

      • Increase from three years to five years the period for transitioning from a non-public to a public arbitrator; and


      • Clarify that the term "retired" from the industry includes anyone who spent a substantial part of his or her career in the industry.

      In addition, the definition of "public arbitrator" in Rule 10308(a)(5)(A) has been amended to:

      • Prohibit anyone who has been associated with the industry for at least 20 years from ever becoming a public arbitrator, regardless of how many years ago the association ended;


      • Exclude from the definition of public arbitrator those attorneys, accountants, and other professionals whose firms have derived 10 percent or more of their annual revenue, in the last two years, from clients involved in the activities defined in the definition of non-public arbitrator; and


      • Provide that investment advisers may not serve as public arbitrators, and may only serve as non-public arbitrators if they otherwise qualify under Rule 10308(a)(4).

      The amendments also change significantly the definition of "immediate family member" in Rule 10308(a)(5)(B) to further ensure that individuals with significant, albeit indirect, ties to the securities industry may not serve as public arbitrators. The Perino Report recommended that NASD expand the definition of "immediate family member" to include parents and children, even if the parent or child does not share a home with, or receive substantial support from, a non-public arbitrator. Although the Perino Report referred only to parents and children, NASD believes that the same rationale applies to stepparents and stepchildren, and therefore has included such relationships in the definition as well. In addition, although the Perino Report did not address the issue, NASD believes that it is consistent with the Perino Report recommendations to include in the definition of the term "immediate family member" anyone, related or not, who is a member of the household of a non-public arbitrator.

      Standard for Deciding Challenges for Cause

      Rules 10308(d) and 10312(d) of the Code provide that, under certain circumstances, the Director of Dispute Resolution may remove an arbitrator upon request of a party or under the Director's own initiative. Rule 10308(d)(1) provides that, before the first hearing session, if a party objects to the continued service of an arbitrator, the Director may disqualify an arbitrator if the Director determines that the arbitrator should be disqualified. Rule 10312(d)(1) provides that the Director may remove an arbitrator from a panel based on information that must be disclosed pursuant to the rule. Under both rules, once the first hearing session has begun, the Director may only remove an arbitrator based on information that was required to be disclosed under Rule 10312 but was not previously disclosed.

      The Code does not provide a specific standard for deciding whether an arbitrator should be removed under these provisions. However, the NASD Arbitrator's Manual states:

      A challenge for cause to a particular arbitrator will be granted where it is reasonable to infer an absence of impartiality, the presence of bias, or the existence of some interest on the part of the arbitrator in the outcome of the arbitration as it affects one of the parties. The interest or bias must be direct, definite, and capable of reasonable demonstration, rather than remote or speculative.5

      The Perino Report noted that including this standard in the Code would provide greater transparency with respect to challenges for cause, and would enhance the parties' confidence that all challenges for cause will be granted or denied on the same basis. Therefore, NASD has amended Rule 10308(d) and Rule 10312(d) to provide that, in deciding challenges for cause, the Director will apply the standard described above.

      In addition, based on the recommendation of the Perino Report, NASD has amended Rule 10308 to add a new paragraph (f) providing that, consistent with both NASD current practice and the New York Stock Exchange's Guidelines for Classifying Arbitrators, close questions regarding arbitrator classification or challenges for cause brought by a public customer will be resolved in favor of the customer.

      Arbitrator Duty to Disclose and Update Conflict Information

      Rule 10312(a) of the Code provides that arbitrators "shall be required to disclose" any circumstances which might preclude an arbitrator from rendering an objective and impartial determination, and enumerates specific personal, professional and financial information that "should" be disclosed under the rule. Rule 10312(b) provides that arbitrators "should" make a reasonable effort to inform themselves of any such conflicts. Rule 10312(c) provides that the duties imposed by paragraphs (a) and (b) are ongoing, and that arbitrators must disclose at any stage of the proceeding any such information that arises, is recalled or discovered.

      While NASD has always interpreted Rule 10312 to impose a mandatory duty on arbitrators to disclose the required information, and to update their disclosure, the Perino Report noted that the use of the term "should" in paragraphs (a) and (b) of the rule may create the misimpression that disclosing and updating the information are merely recommended, but not required. Therefore, to eliminate any possible misunderstanding or confusion, NASD has amended Rule 10312(a) and (b) to clarify that arbitrators "must" disclose the required information and "must" make reasonable efforts to inform themselves of potential conflicts and update their disclosures as necessary.

      Updating of Arbitrator Disclosures

      NASD has distributed a survey to all arbitrators on the active roster, asking them to update their disclosures in light of the above amendments to the arbitrator classification rules. Arbitrators who do not respond by the deadline will be made inactive until they have responded, and those who do not respond within a reasonable period thereafter may be removed permanently. After the surveys are returned and reviewed, arbitrators' disclosure records will be updated to reflect their proper classification under the amendments. Parties should be aware that in open arbitration cases the arbitrator classification amendments will not apply to arbitrators on lists already sent to the parties prior to the effective date, or to arbitrators who are already serving on panels prior to the effective date. These arbitrators will retain their former classification for purposes of these ongoing cases. This will avoid disruption and allow parties to continue with the arbitrators they have selected to hear their cases. Therefore, challenges for cause based solely on an arbitrator's reclassification will not be granted.

      Effective Date

      The amendments described in this Notice are effective on July 19, 2004. Amendments relating to arbitrator classification will apply to arbitrator lists sent out pursuant to Rule 10308(b)(5) on or after July 19, 2004, and to arbitrators appointed on or after July 19, 2004 by the Director of Arbitration under Rules 10308(c)(4)(B), 10308(d)(3), and 10313 when an insufficient number of names remain on the consolidated list. The amendments to the standard for deciding challenges for cause under Rule 10308(d) and Rule 10312(d) will apply to challenges for cause made on or after July 19, 2004.


      1 Exchange Act Release No. 49573 (April 16, 2004) (File No. SR-NASD-2003-095), 69 Federal Register 21871 (April 22, 2004). An additional, technical amendment to Rule 10308 was filed for immediate effectiveness on June 7, 2004 (File No. SR-NASD-2004-087).

      2 California Rules of Court, Division VI of the Appendix, entitled, "Ethics Standards for Neutral Arbitrators in Contractual Arbitration." See more information on the NASD Web Site at: www.nasdadr.com/ca_arb_notice.asp.

      3 The Perino Report may be found on the SEC Division of Market Regulation Web Site at: www.sec.gov/divisions/marketreg.shtml.

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

      5 As the Perino Report noted, this is essentially the same standard followed by the New York Stock Exchange.


      Attachment A

      New language is underlined; deletions in brackets.

      * * * * * * * * * *

      Code of Arbitration Procedure

      * * * * * * * * * *

      Rule 10308. Selection of Arbitrators

      This Rule specifies how parties may select or reject arbitrators, and who can be a public arbitrator.

      (a) Definitions
      (1)–(3) Unchanged
      (4) "non-public arbitrator"

      The term "non-public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and:
      (A) is, or within the past [three] 5 years, was:
      (i) associated with a broker or a dealer (including a government securities broker or dealer or a municipal securities dealer);
      (ii) registered under the Commodity Exchange Act;
      (iii) a member of a commodities exchange or a registered futures association; or
      (iv) associated with a person or firm registered under the Commodity Exchange Act;
      (B) is retired from, or spent a substantial part of a career, engaging in any of the business activities listed in subparagraph (4)(A);
      (C) is an attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last 2 years, to clients who are engaged in any of the business activities listed in subparagraph (4)(A); or
      (D) is an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.
      (5) "public arbitrator"
      (A) The term "public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and [is not]:
      (i) is not engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D); [or]
      (ii) was not engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D) for a total of 20 years or more;
      (iii) is not an investment adviser;
      (iv) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past 2 years from any persons or entities listed in paragraph (a)(4)(A); and
      (v) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D).
      (B) For the purpose of this Rule, the term "immediate family member" means:
      (i) the parent, stepparent, child, or stepchild, of a person engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D);
      [(i)] (ii) a [family member who shares a home with] member of the household of a person engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D);
      [(ii)] (iii) a person who receives financial support of more than 50 percent of his or her annual income from a person engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D); or
      [(iii)] (iv) a person who is claimed as a dependent for federal income tax purposes by a person engaged in the conduct or activities described in paragraphs (a)(4)(A) through (D).
      (6)–(7) Unchanged
      (b)–(c) unchanged.
      (d) Disqualification and Removal of Arbitrator Due to Conflict of Interest or Bias
      (1) Disqualification By Director

      After the appointment of an arbitrator and prior to the commencement of the earlier of (A) the first pre-hearing conference or (B) the first hearing, if the Director or a party objects to the continued service of the arbitrator, the Director shall determine if the arbitrator should be disqualified. If the Director sends a notice to the parties that the arbitrator shall be disqualified, the arbitrator will be disqualified unless the parties unanimously agree otherwise in writing and notify the Director not later than 15 days after the Director sent the notice.
      (2) Removal by Director

      After the commencement of the earlier of (A) the first pre-hearing conference or (B) the first hearing, the Director may remove an arbitrator based only on information that is required to be disclosed pursuant to Rule 10312 and that was not previously disclosed.
      (3) Standards for Deciding Challenges for Cause

      The Director will grant a party's request to disqualify an arbitrator if it is reasonable to infer, based on information known at the time of the request, that the arbitrator is biased, lacks impartiality, or has an interest in the outcome of the arbitration. The interest or bias must be direct, definite, and capable of reasonable demonstration, rather than remote or speculative.
      [(3)] (4) Vacancies Created by Disqualification or Resignation

      Prior to the commencement of the earlier of (A) the first pre-hearing conference or (B) the first hearing, if an arbitrator appointed to an arbitration panel is disqualified or is otherwise unable or unwilling to serve, the Director shall appoint from the consolidated list of arbitrators the arbitrator who is the most highly ranked available arbitrator of the proper classification remaining on the list. If there are no available arbitrators of the proper classification on the consolidated list, the Director shall appoint an arbitrator of the proper classification subject to the limitation set forth in paragraph (c)(4)(B). The Director shall provide the parties information about the arbitrator as provided in paragraph (b)(6), and the parties shall have the right to object to the arbitrator as provided in paragraph (d)(1).
      (e) Discretionary Authority

      The Director may exercise discretionary authority and make any decision that is consistent with the purposes of this Rule and the Rule 10000 Series to facilitate the appointment of arbitration panels and the resolution of arbitration disputes.
      (f) Challenges by Customers

      In cases involving public customers, any close questions regarding arbitrator classification or challenges for cause brought by a customer will be resolved in favor of the customer.

      * * * * * * * * * *

      Rule 10312. Disclosures Required of Arbitrators and Director's Authority to Disqualify

      (a) Each arbitrator shall be required to disclose to the Director of Arbitration any circumstances which might preclude such arbitrator from rendering an objective and impartial determination. Each arbitrator shall disclose:
      (1) Any direct or indirect financial or personal interest in the outcome of the arbitration;
      (2) Any existing or past financial, business, professional, family, social, or other relationships or circumstances that are likely to affect impartiality or might reasonably create an appearance of partiality or bias. Persons requested to serve as arbitrators [should] must disclose any such relationships or circumstances that they have with any party or its counsel, or with any individual whom they have been told will be a witness. They [should] must also disclose any such relationship or circumstances involving members of their families or their current employers, partners, or business associates.
      (b) Persons who are requested to accept appointment as arbitrators [should] must make a reasonable effort to inform themselves of any interests, relationships or circumstances described in paragraph (a) above.
      (c) The obligation to disclose interests, relationships, or circumstances that might preclude an arbitrator from rendering an objective and impartial determination described in paragraph (a) is a continuing duty that requires a person who accepts appointment as an arbitrator to disclose, at any stage of the arbitration, any such interests, relationships, or circumstances that arise, or are recalled or discovered.
      (d) Removal by Director
      (1) The Director may remove an arbitrator based on information that is required to be disclosed pursuant to this Rule.
      (2) After the commencement of the earlier of (A) the first pre-hearing conference or (B) the first hearing, the Director may remove an arbitrator based only on information not known to the parties when the arbitrator was selected. The Director's authority under this subparagraph (2) may be exercised only by the Director or the President of NASD Dispute Resolution.
      (3) The Director will grant a party's request to disqualify an arbitrator if it is reasonable to infer, based on information known at the time of the request, that the arbitrator is biased, lacks impartiality, or has an interest in the outcome of the arbitration. The interest or bias must be direct, definite, and capable of reasonable demonstration, rather than remote or speculative.
      (e) Unchanged.

      * * * * * * * * * *

    • 04-48 SEC Approves Amendments to Rule 6954 Requiring Members to Record and Report Execution Price and Firm Capacity in OATS Execution Reports

      View PDF file

      GUIDANCE

      OATS Execution Reporting Obligations

      Effective Date: October 4, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Internal Audit
      Legal & Compliance
      Operations
      Senior Management
      Systems
      Trading

      OATS
      Rule 6954(d)

      Executive Summary

      On April 29, 2004, the Securities and Exchange Commission (SEC) approved amendments to Rule 6954(d) to require members to record and report execution price and firm capacity as part of their Order Audit Trail System (OATS) Execution Reports.1 Rule 6954(d), as amended, is set forth in Attachment A. The amendments become effective on October 4, 2004.

      Questions/Further Information

      Questions regarding this Notice to Members 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 and Discussion

      On March 6, 1998, the SEC approved NASD Rules 6950 through 6957 (the OATS Rules).2 OATS provides comprehensive information regarding orders and transactions that strengthens NASD's ability to conduct surveillance and investigations of member firms for potential violations of NASD rules and the federal securities laws.

      When the OATS Rules initially were adopted, it was determined that NASD would obtain execution price and firm capacity information (i.e., the capacity in which the member acted for purposes of the transaction, for example, on an agency, principal or riskless principal basis) from trading information rather than via OATS reports. At that time, the vast majority of trading in NASDAQ securities was reported through NASDAQ's Automated Confirmation Transaction Service (ACT).3 Members are required to input order identifier information into ACT trade reports, and NASD systematically matches the ACT trade reports with corresponding OATS reports to obtain certain trade-related information including, among other things, execution price and firm capacity. Similarly, members using the NASD Alternative Display Facility (ADF) Trade Reporting and Comparison Service (TRACS) are required to record OATS order identifier information in TRACS trade reports, which is then matched with OATS information to obtain execution price and firm capacity.

      Recently, however, this "ACT/TRACS matching" process has become less effective, in part because a percentage of trades in NASDAQ securities are no longer reported to ACT or TRACS. Further, if there are any errors in the linking information provided to ACT, TRACS or OATS, the ACT/TRACS matching process is hindered.

      Accordingly, the new amendments require that members record and report two additional fields, execution price and firm capacity, as part of their OATS Execution Reports. These fields will be required on all OATS Execution Reports, regardless of where the trade was reported or whether any Reporting Exception Code is included with the Execution Report. To allow members adequate time to program their systems to submit the two additional fields and to coincide with the OATS third quarter 2004 release, these amendments will become effective on October 4, 2004. Any OATS Execution Reports submitted after October 4, 2004 without the execution price and capacity fields populated will be rejected by OATS. More detailed information on these new requirements, including the technical requirements for submission of these two additional data elements, will be provided in the OATS Reporting Technical Specifications, which are available on the NASD Web Site at www.nasdr.com/3310.asp.


      1 See Securities Exchange Act Release No. 49628 (April 29,2004), 69 FR 89 (May 7, 2004) (File No. SR-NASD-2004-023) (SEC Approval Order). See also File No. SR-NASD-2004-093, extending the implementation date of SR-NASD-2004-023 to October 4, 2004.

      2 See Notice to Members 98-33 for a complete description of the OATS Rules.

      3 ACT is an automated system owned and operated by NASDAQ that captures transaction information on a real-time basis.


      Attachment A

      New language is underlined; deletions are in brackets.

      6954. Recording of Order Information

      (a) through (c) No Change.
      (d) Order Modifications, Cancellations, and Executions

      Order information required to be recorded under this Rule when an order is modified, canceled, or executed includes the following.
      (1) and (2) No Change.
      (3) When a Reporting Member executes an order, in whole or in part, the Reporting Member shall record:
      (A) through (G) No Change.
      (H) the date and time of execution,[ and]
      (I) the execution price,
      (J) the capacity in which the member executed the transaction (e.g., agency, principal or riskless principal), and
      (K) the national securities exchange or facility operated by a registered securities association where the trade was reported.

    • 04-47 Members' Obligations with Respect to the Transfer of Cost Basis Information

      View PDF file

      GUIDANCE

      Cost Basis Information

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Operations
      Registered Representatives
      Senior Management

      Cost Basis Information
      Rule 2110

      Executive Summary

      It has come to NASD's attention that some members may be purposely interfering with the transfer of cost basis information for customers who transfer their accounts to another firm and ask for their cost basis information to be transferred to the new firm. The purpose of this Notice is to remind members that impeding the transfer of cost basis information upon customer request violates NASD Rule 2110, which requires members, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade.

      Questions/Further Information

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

      Discussion

      Customers need cost basis information to compute gains and losses for tax purposes. Although this information is reported on customer confirmations and account statements, customers who have not kept their confirmations and statements may be unable to gather this information themselves. Thus, some customers may rely on their firms to recreate this information as needed. Customers may have problems in accessing cost basis information when they move their accounts to another firm. Although the customer's assets may be electronically moved to his or her new firm through the National Securities Clearing Corporation's (NSCC) Automated Customer Account Transfer Service (ACATS), ACATS does not transfer cost basis information.

      Some firms participate in the Cost Basis Reporting Service (CBRS), another NSCC service. CBRS is an automated system that gives brokerage firms the ability to transfer customer cost basis information from one firm to another on any asset transferred through ACATS. If a firm participates in CBRS, or has otherwise retained cost basis information electronically and is able to transfer it to another firm "tape-to-tape," it should do so as part of the account transfer process. For any reason other than that a firm does not retain cost basis information in an electronic format that may be transferred, refusing to deliver or impeding the delivery of cost basis information harms the customer and constitutes conduct inconsistent with just and equitable principles of trade.1 If electronically available in the delivering firm, the transfer of cost basis information to the receiving firm should occur as a matter of course as part of the account transfer process.

      This Notice is not imposing a requirement on delivering firms to create this information upon customer request if the firm does not already maintain cost basis information in an electronically transferable form. This Notice serves only to remind members that if cost basis information is electronically available for transfer, and the customer has decided to change firms, it is a violation of Rule 2110 for a member to refuse to transfer the information upon request or take any steps to interfere with its transfer to the customer's new firm.


      1 A firm that retains cost basis information in an accessible format electronically or otherwise is also expected to furnish such information to a customer upon request.

    • 04-46 Mandatory Changes to OATS New Order, Combined New Order/Route, and Combined New Order/Execution Reports

      View PDF file

      GUIDANCE

      OATS Reporting Requirements

      SUGGESTED ROUTING

      KEY TOPICS

      Executive Representatives
      Legal & Compliance
      Operations
      Senior Management

      OATS
      Rule 6950 Series

      Executive Summary

      Given the recent significant increase in Order Audit Trail System (OATS) volume, NASD is implementing several changes to the OATS reporting requirements for orders received and subsequently routed, executed, or canceled in full on the same business day. Specifically, pursuant to the phase-in schedule described below, members will be required to populate two additional fields that are being appended to the New Order and Combined New Order/Route Reports to provide for the reporting of cancellation information within these reports when an order is canceled in full on the same day it was received. These additional fields will eliminate the need to create and submit a separate Cancel Report when an order is canceled in full on the same day it was received. Further, the current optional use of Combined New Order/Route and Combined New Order/Execution reports will become mandatory for orders that are fully routed or executed on the same business day they are received. This will eliminate the need to create and submit separate Route and Execution Reports for these orders. NASD believes these changes will result in more efficient recording, reporting, and processing of OATS information.

      To allow firms adequate time to program for these changes, NASD is implementing these new requirements with a phase-in approach. Addition of the new fields relating to cancellation information on the New Order and Combined New Order/Route Reports will be required beginning with the OATS third quarter 2004 release, currently scheduled for October 4, 2004. After October 4, 2004, OATS will reject any New Order Report or Combined New Order/Route Report submitted without the additional cancellation fields. Members, however, will not be required to populate these fields until November 1, 2004, at which time the cancellation of any order within 60 seconds of receipt must be reported on the New Order Report or Combined New Order/Route Report using the new fields. Beginning December 1, 2004, the cancellation of any order in full on the same day as receipt must be reported using the new fields on the New Order Report or Combined New Order/Route Report. Finally, also beginning on December 1, 2004, all orders routed or executed in full on the same day the order was received must be reported using a Combined New Order/Route Report or Combined New Order/Execution Report.

      In addition, as previously announced, NASD is reminding firms that, also beginning with the OATS third-quarter 2004 release, price and capacity will be required on all OATS Execution and Combined New Order/Execution Reports.1 A separate Notice to Members (Notice or NtM) will be issued shortly detailing the required changes to the OATS Execution Report formats.

      Questions/Further Information

      Questions concerning this Notice may be directed to:

      • OATS Helpdesk (800) 321-NASD


      • NASD Market Regulation (240) 386-5126

      Background and Discussion

      New Formats for New Order and Combined New Order/Route Reports

      Under the new reporting requirements, two additional fields are being added to the New Order and Combined New Order/Route Reports. These new fields will be used to report the cancellation of an order in full on the same day it was received.2 The two new fields are the Cancel Timestamp and the Canceled By Flag. Use of these new fields will result in the submission of only one Reportable Order Event ("ROE") when reporting a new order and subsequent full cancellation on the same day, rather than two ROEs as currently required.3 The addition of these two fields does not represent any new information being reported to OATS; rather it reduces the overall amount of information reported to OATS since certain information currently contained in Cancel Reports already is being captured in other OATS reports.4 It also is changing the format in which the data is required to be reported to NASD.5

      Under the phase-in plan, the new fields must be added to all New Order and Combined New Order/Route Reports beginning on October 4, 2004, when the OATS third quarter 2004 release goes into production, although the fields need not be populated until November 1, 2004. The new report formats will be available in the OATS testing environment beginning September 20, 2004, so that firms may test their systems prior to submitting data in the new format to the OATS production environment. During the phase-in period of October 4, 2004 to November 1, 2004, members that choose not to populate these fields must continue to report separate Cancel Reports, as applicable. Beginning November 1, 2004, the cancellation of any order within 60 seconds of receipt must be reported using the new fields rather than through the submission of a separate Cancel Report. NASD Market Regulation will be monitoring firms' submissions to ensure firms are complying with this requirement. Finally, beginning December 1, 2004, the cancellation of any order in full on the same day as receipt must be reported using the new fields. After December 1, 2004, only partially canceled orders or orders canceled after the date of receipt will be permitted to be reported using a separate Cancel Report.

      Mandatory Use of Combined New Order/Route and Combined New Order/Execution Reports

      Currently, the Combined New Order/Route and Combined New Order/Execution Reports are available for members to report the same day route or same day full execution of an order. The use of these reports currently is optional. To reduce the number of ROEs firms must submit to OATS each day, beginning December 1, 2004, NASD is mandating use of these combined reports for any order routed or fully executed on the same day the order is received. NASD Market Regulation will be monitoring compliance with the requirement. A firm's failure to comply may result in disciplinary action.

      Changes to Execution and Combined New Order/Execution Reports

      As previously announced, on April 29, 2004, the SEC approved NASD's proposed rule change SR-NASD-2004-023 regarding OATS Execution Reports. The rule change requires firms to add to their OATS Execution Reports the execution price and the capacity in which the member executed the transaction (e.g., agency, principal, riskless principal). These additional fields will be required on all Execution and Combined New Order/Execution Reports beginning with the OATS third quarter 2004 release, currently scheduled for October 4, 2004. Any Execution or Combined New Order/Execution Report submitted to OATS without the new fields on or after October 4, 2004, will be rejected by OATS.

      Technical Specifications and Requirements

      The OATS Subscriber Manual and OATS Reporting Technical Specifications provide members with the technical and operational requirements for submitting order reports to OATS. The purpose of OATS Reporting Technical Specifications is, among other things, to describe the requirements for order data reporting to OATS, including detailed information on the required data elements. These documents will be updated as appropriate to reflect the new requirements relating to the addition of cancellation information on the New Order and Combined New Order/Route Reports. Members should refer to these documents to obtain the detailed technical specifications for the new reporting requirements.

      Question and Answer

      Q1.   What are the phase-in dates for the new requirements?

      A1. Requirement Phase-in Date
      Addition of Cancel Timestamp and Canceled By Flag Fields to New Order and Combined New Order/Route Reports October 4, 2004
      Required population of Cancel information on New Order and Combined New Order/Route Reports for any order canceled within 60 seconds of order receipt November 1, 2004
      Required use of Combined New Order/Route and Combined New Order/Execution Reports for any order fully routed or executed on the same day it was received December 1, 2004
      Required use of cancel fields on New Order and Combined New Order/Route Reports for any order fully canceled on the same day it was received December 1, 2004

      Q2.   My firm received an order at 10:02:00 and routed it immediately to an electronic communications network (ECN). The order was canceled in full at 10:02:10. How should we report this order to OATS?

      A2.   Until November 1, 2004, the firm may continue to report these events as it does today using a separate Cancel Report as applicable. Between November 1, 2004 and December 1, 2004, the firm must either report the cancellation on the New Order Report and submit a separate Route Report or report the cancellation on the Combined New Order/Route Report. Beginning December 1, 2004, this order must be reported using the Combined New Order/Route Report with the additional cancellation fields populated.

      Q3.   My firm is an ECN that received an order from another firm at 11:30:05. The order was canceled in full at 11:30:35. How should we report this order to OATS?

      A3.   This order was canceled within 60 seconds of receipt and was not routed. Beginning November 1, 2004, the ECN must report the order and cancellation information using the new fields on the New Order Report.

      Q4.   My firm is a market maker that received an order from another firm at 11:30:05 and did not route the order. The order was canceled in full at 11:30:35. How should we report this order to OATS?

      A4.   This order was canceled within 60 seconds of receipt and was not routed. Beginning November 1, 2004, the firm must report the order and cancellation information using the new fields on the New Order Report.

      Q5.   My firm received an order at 9:32:00 and routed it to a market maker. The order was canceled in full at 10:02:10. How should we report this order to OATS?

      A5.   This order was canceled in full later than 60 seconds from the time of receipt, but within the same day. Until December 1, 2004, the firm may continue to report these events as it does today. Beginning December 1, 2004, the firm must report all three events, the new order, route and cancellation on the Combined New Order/Route Report.

      Q6.   My firm received an order for 100 shares at 11:32:00 and routed it to an ECN. The customer canceled 50 shares at 11:32:10. How should we report this order to OATS?

      A6.   Although part of the order was canceled within the same day of receipt of the order, because the order was not canceled in full, the firm may not use the new cancellation information fields on the New Order Report. The cancel information must be reported by using the separate Cancel Report. However, it is important to note that beginning October 4, 2004, the two new cancellation fields must be appended to all New Order Reports, irrespective of whether the order is ultimately canceled in part or in full.

      Q7.   My firm received a limit order for 100 shares on Monday at 14:32:00. The customer canceled the order in full on Tuesday at 9:32:10. How should we report this order to OATS?

      A7.   Because the order was not canceled in full on the same day as the order was received, the firm may not use the new fields on the New Order Report to report the cancellation information. The cancellation information must be reported by using a separate Cancel Report. However, as noted above, as of October 4, 2004, the two new cancellation fields must be appended to the New Order Report.

      Q8.   My firm is an ECN that received an order from another firm at 11:30:05. The order was canceled in full at 11:30:35. Can we use the separate Cancel Report to submit this information to OATS?

      A8.   No. Since this order was canceled in full within 60 seconds of receipt, as of November 1, 2004, the order must be reported by providing the cancel information in the New Order Report.

      Q9.   My firm received an order at 10:02:00 and routed it to an ECN. The order was modified at 10:02:10 and canceled in full at 10:02:45. How should we report this order to OATS?

      A9.   Because this order was modified prior to cancellation, as of December 1, 2004, the firm must report a Combined New Order/Route Report, to reflect original receipt of the order at 10:02:00 and routing of the order. A Cancel/Replace Report must be submitted to reflect modification of the order at 10:02:10. This must be followed by a separate Cancel Report to show the order was ultimately canceled at 10:02:45.

      Q10.   My firm is an ECN. On December 2, 2004, we receive an order and execute it in full. How should this be reported to OATS?

      A10.   Because this order was received and executed in full within the same day, as of December 1, 2004, the order must be reported using a Combined New Order/Execution Report.

      Q11.   My firm is a market maker. How do we report an order executed within the same day via multiple partial executions?

      A11.   Since this order is not executed in its entirety at one time, these executions must be reported using separate Execution Reports for each partial execution.


      1 See Securities Exchange Act Release No. 49628 (April 29,2004), 69 FR 89 (May 7, 2004) (File No. SR NASD-2004-023) and related OATS announcement www.nasdr.com/3350.asp.

      2 Partial cancellations, previously modified orders, and cancellations occurring on days subsequent to the order receipt date still will require the submission of a separate Cancel Report.

      3 Today, members are required to report the cancellation of an order, either in whole or part, using a Cancel Report. See the OATS Subscriber Manual and OATS Reporting Technical Specifications.

      4 NASD Rule 6954(d)(2) states that when a "Reporting Member," as defined in Rule 6951(n), cancels or receives a cancellation of an order, in whole or part, such member shall record the following information:

      • the order identifier assigned to the order by the Reporting Member;


      • the market participant symbol (MPID) assigned by NASD to the Reporting Member;


      • the date the order was first originated or received by the Reporting Member;


      • the date and time the cancellation was originated or received;


      • if the open balance of an order is canceled after a partial execution, the number of shares canceled; and


      • whether the order was canceled on the instruction of a customer or the Reporting Member.

      5 NASD Rule 6954(a)(3) requires that a member record each item of information required to be reported under Rule 6954 is such electronic format as prescribed by NASD from time to time.

    • 04-45 NASD Seeks Comment on Proposed Rule to Impose Specific Sales Practice Standards and Supervisory Requirements on Members for Transactions in Deferred Variable Annuities

      View PDF file

      REQUEST FOR COMMENT

      Proposed Rule Governing the Purchase, Sale, or Exchange of Deferred Variable Annuities

      Comment Period Expired: August 9, 2004

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management

      Affidavits
      Arbitration
      Central Registration Depository System (CRD® or CRD system)
      Confidentiality Provisions
      Dispute Resolution
      Rule 2110
      Settlement Agreements

      Executive Summary

      Deferred variable annuities are complex investment instruments that have both insurance and securities features.1 On various occasions in the past, NASD has highlighted the unique features of these products for both members and potential investors. With the help of industry participants, for instance, NASD previously issued "best practices" guidelines in Notice to Members (Notice or NtM) 99-35 (May 1999). Notwithstanding these efforts, some members continue to engage in problematic sales practices in this area, and some investors continue to be confused by certain features of these products.2 As a result, NASD seeks comment on a proposed rule (Attachment A) relating to transactions in deferred variable annuities.

      In general, NtM 99-35 served as the basis for the proposed rule. The proposed rule includes suitability, disclosure, principal review, supervisory and training requirements tailored specifically to transactions in deferred variable annuities.

      Action Requested

      NASD encourages all interested parties to comment on the proposed rule. Comments must be received by August 9, 2004. Members and interested persons can submit their comments using the following methods:

      • mailing in written comments; or


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

      Written comments submitted via hard copy should be mailed to:

      Barbara Z. Sweeney
      NASD
      Office of the Corporate Secretary
      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.3

      Before becoming effective, any 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.4

      Questions/Further Information

      As noted above, hard-copy comments should be mailed to Barbara Z. Sweeney. Questions concerning this Notice may be directed to Thomas M. Selman, Senior Vice President, Investment Companies/Corporate Financing, Regulatory Policy and Oversight (RPO), at (240) 386-4533; or James S. Wrona, Associate General Counsel, Office of General Counsel, RPO, at (202) 728-8270.

      Background

      NASD has become increasingly concerned about some members' unsuitable recommendations and inadequate supervision of transactions in deferred variable annuities. Based on recent discussions, examinations, and enforcement cases, NASD believes that a rule specifically addressing transactions in deferred variable annuities is needed to ensure that investors are adequately protected.5

      Deferred variable annuities have many unique features that make them complex investments. In addition to the hybrid nature of deferred variable annuities (i.e., they contain both securities and insurance features), most deferred variable annuities offer numerous choices among a number of complex contract features.6 Moreover, the amount that will accumulate and be paid to the investor pursuant to a deferred variable annuity will fluctuate depending on the investment options that the investor chooses.

      Investors also can be subject to the following fees or charges: surrender charges, which the investor owes if he or she withdraws money from the annuity before a specified period; mortality and expense risk charges, which the insurance company charges for the insurance risk it takes under the contract; administrative fees, which are used for recordkeeping and other administrative expenses; underlying fund expenses, which relate to the investment options; and charges for special features and riders, which may include provisions such as a stepped-up death benefit or a guaranteed minimum income benefit. Various sources estimate that average annual expenses of a variable annuity range from 1.3 percent to 2.2 percent of the underlying assets in the account.7

      In addition, an investor's withdrawal of earnings before he or she reaches age 59½ is generally subject to a 10 percent penalty under the Internal Revenue Code. Furthermore, while the earnings accumulate on a tax-deferred basis in the variable annuity, when variable annuity earnings are paid out they are taxed as ordinary income, not as capital gains (which may be taxed at a lower rate).

      Because of the complex features of these products, NASD has issued a number of Notices, Investor Alerts, and Member Alerts that address deferred variable annuities. In particular, in May 1999, NASD issued NtM 99-35, which provided guidance to assist members in developing appropriate procedures relating to the purchase, sale or exchange of deferred variable annuities.8

      Although many members offer deferred variable annuities in a manner consistent with NASD's existing rules (and a large segment adhere to the guidance provided in NtM 99-35), certain firms continue to engage in unacceptable sales and supervision practices regarding these products. For instance, variable annuity sales have been the subject of more than 80 NASD disciplinary actions in the past two years. These disciplinary actions involved a wide array of misconduct regarding the sales of variable annuity products, including excessive switching, misleading marketing, failure to disclose material facts, unsuitable sales, inadequate training and supervision of salespeople and deficient written supervisory procedures.9 Recent NASD and SEC examinations of variable product sales revealed similar deficiencies.10 NASD and the SEC, moreover, have received numerous customer complaints indicating that the customers did not understand the unique features of the products and raising suitability concerns based on the customers' investment objectives and liquidity needs.11 NASD's proposed rule would address these continuing deficiencies and provide more comprehensive and targeted protection to investors in deferred variable annuities.

      In general, the proposed rule would codify and make mandatory the guidelines issued by NASD in NtM 99-35, mentioned above. These requirements represent the industry's best practices with respect to transactions in deferred variable annuities.12 The proposed rule also would create certain written disclosure and principal review requirements. The proposed rule's key provisions include:

      • Appropriateness/Suitability. The proposed rule would require members and persons associated with members to make the following determinations when recommending a deferred variable annuity transaction: (1) the customer has been informed of the unique features of the deferred variable annuity, (2) the customer has a long-term investment objective, and (3) the deferred variable annuity as a whole and the underlying subaccounts are suitable for the particular customer. These determinations would have to be documented and signed by the associated person who makes the recommendation and performs the required analysis.


      • Disclosure and Prospectus Delivery. The proposed rule would require members and associated persons to provide the customer a current prospectus and a separate, brief, and easy-to-read (written in "plain English") risk disclosure document that highlights the main features of the particular variable annuity transaction, including, but not limited to, (1) liquidity issues, such as potential surrender charges and the IRS penalty; (2) sales charges; (3) fees, such as mortality and expense charges, administrative fees, charges for riders or special features and investment advisory fees; (4) federal tax treatment of variable annuities; (5) any applicable state and local government premium taxes; and (6) market risk. The risk disclosure document also would have to inform the customer whether a "free look" period applies to the variable annuity contract, during which the customer can terminate the contract without paying any surrender charges and receive a refund of his or her purchase payments.13 In addition, the risk disclosure document would require the member or associated person to inform the customer that all applications to purchase or exchange a deferred variable annuity contract are accepted subject to review and approval by a designated registered principal. The member would be required to provide the prospectus and risk disclosure document regardless of whether the transaction had been recommended.14


      • Principal Review. No later than one business day following the date of execution of the deferred variable annuity application, a registered principal would be required to review and approve the transaction, regardless of whether the transaction had been recommended. In reviewing the transaction, the registered principal would need to take into account whether (1) the customer's age or liquidity needs make a long-term investment inappropriate, such as a customer over a specific age or with a short-term investment objective; (2) the amount of money invested exceeds a stated percentage of the customer's net worth or is more than a stated dollar amount; (3) the transaction involves an exchange or replacement of a deferred variable annuity contract; (4) the customer's account has a particularly high rate of deferred variable annuity exchanges or replacements; (5) the associated person effecting the transaction has a particularly high rate of effecting deferred variable annuity exchanges or replacements; and (6) the purchase of the deferred variable annuity is for a tax-qualified retirement account (e.g., a 401(k) plan, IRA).15


      • In addition, when the member or an associated person has recommended the transaction, a registered principal would be required to review and approve the suitability analysis document no later than one business day following the date of execution of the deferred variable annuity application. Finally, when the transaction involves an exchange or replacement of a deferred variable annuity, regardless of whether the transaction has been recommended, a registered principal would need to review and approve a separate exchange or replacement document (which would cover issues specific to exchanges or replacements) no later than one business day following the date of execution of the deferred variable annuity application. The proposed rule would allow a member to use an existing exchange or replacement form authorized by a state insurance commission or other regulatory agency to satisfy the exchange or replacement disclosure provision to the extent that the regulatory agency's form requires disclosure of the information required by NASD's proposed rule. These principal review requirements would permit a customer to review, complete and execute an application for a deferred variable annuity in a one-step process, subject to a designated principal's subsequent review and approval no later than one business day following the date of execution of the deferred variable annuity application.

      • Supervisory Procedures. Members would be required to establish and maintain specific written supervisory procedures reasonably designed to achieve and evidence compliance with the standards set forth in the proposed rule.


      • Training. Members would need to develop and document specific training policies or programs designed to ensure that associated persons who effect and registered principals who review transactions in deferred variable annuities comply with the requirements of the proposed rule and that they understand the unique features of deferred variable annuities, including liquidity issues, sales charges, fees, tax treatment, and market risks.

      Request for Comment

      NASD is soliciting comment on its proposed rule covering the purchase, sale, or exchange of deferred variable annuities. NASD requests comment on whether the rule, in general, should be modeled after the "best practices" guidelines discussed in NtM 99-35, the current approach, or whether some alternative approach would be more appropriate. For instance, NASD considered, but decided against, modeling the proposal after certain provisions of the options and futures rules. See, e.g., NASD Rules 2860(16) and (19); 2865(16) and (19). Another approach might be to limit the sale of deferred variable annuities to certain categories of investors. Moreover, members could be required to provide a comparison that would indicate the results that comparable products might provide the investor. NASD also seeks feedback on whether the proposed rule should cover all variable annuity transactions, not just deferred variable annuity transactions. In responding to this issue, NASD requests that commenters discuss whether and to what extent certain requirements in the proposed rule would need to be modified.

      In addition to seeking comment on NASD's general approach, NASD requests comment on the proposed rule's specific provisions. In this regard, NASD encourages comment on the proposed risk disclosure provision. The proposed rule would require members to provide a customer with a risk disclosure document regarding certain features of the specific deferred variable annuity that is the subject of the transaction. As currently drafted, the proposed rule would require, among other items, disclosure of product-specific fees and charges (such as mortality and expense charges, administrative fees, charges for riders or special features, and investment advisory fees), federal and state tax treatment for the deferred variable annuity, and potential market risks. NASD seeks comment in particular on whether the risk disclosure document should focus on information applicable to all deferred variable annuity products sold by the firm rather than product-specific information. If so, commenters should discuss the rationale for this alternative approach and the types of general information that the proposed rule should require members to disclose in order to effectively educate potential investors in deferred variable annuities. Commenters, moreover, should consider whether a combination of some product-specific and some general information would be an appropriate third option for the risk disclosure provision.

      NASD also recognizes that the SEC has proposed a rule that would require point of sale disclosure of certain fee information regarding, among other products, variable annuities. See SEC Proposed Rule Regarding Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, Rel. Nos. 33-8358, 34-49148, IC-26341 (Jan. 29, 2004), 69 Fed. Reg. 6438 (Feb. 10, 2004). NASD is interested in commenters' views of the potential interplay of NASD's proposal and the SEC's proposal.

      Finally, NASD requests comment on certain standards discussed in the proposed rule's principal review and supervisory procedures provisions. Those provisions state, in part, that principals should analyze—and supervisory procedures should be established to screen for—among other things, transactions involving (1) a customer whose age or liquidity needs may make a long-term investment inappropriate, such as any customer over a specific age or with a short-term investment objective, and (2) an amount of money that exceeds a stated percentage of the customer's net worth or is more than a stated dollar amount. NASD considered imposing bright-line measures for these requirements, for example, a specific percentage of the customer's net worth or specific dollar amount, a specific age ceiling. NASD believes, however, that members are in a better position to determine appropriate standards based on their particular business models, salespeople and customers. As currently drafted, the proposed rule would require that the standards a member adopts be reasonably designed to ensure that transactions in deferred variable annuities are appropriately supervised. Nonetheless, NASD seeks comment on whether NASD should revise the proposed rule so that the rule lists explicit, fixed standards developed by NASD. If so, NASD requests suggestions on the explicit standards that would be appropriate for each category.

      NASD has found comments from member firms and the public, as well as state and federal regulators, to be a valuable resource in the decision-making process. NASD encourages all interested parties to comment on the concepts discussed above regarding the proposed rule. NASD will consider the comments it receives in determining whether to submit the proposed rule as a formal rule change to the SEC and, if so, the form that the rule change will take. As noted above, comments must be submitted by August 9, 2004.


      1 Generally speaking, a deferred variable annuity is a contract between an investor and an insurance company. The insurance company promises to make periodic payments to the contract owner or beneficiary at some future time and, should the contract owner die during the accumulation phase, to pay a death benefit to the beneficiary. Deferred variable annuities offer choices among a number of complex contract features. See Joint SEC and NASD Staff Report on Broker-Dealer Sales of Variable Insurance Products (June 2004) (Joint SEC/NASD Staff Report), available at www.nasdr.com/white_paper_0600804.asp ("For example, [variable annuity] contracts may offer various types of death benefits, rebalancing features, dollar cost averaging options, assorted payout structures, and optional riders such as a guaranteed minimum income benefit, estate protection enhancements, or long-term care insurance, in addition to a range of choices among investment options."). Deferred variable annuities, although issued by insurance companies, are securities under the federal securities laws and are sold through broker-dealers. Id.

      2 See Joint SEC/NASD Staff Report, supra note 1 (discussing deficiencies found during examinations of and enforcement actions involving variable products, including suitability, marketing, supervision, disclosure, and maintenance of books and records).

      3 See NtM 03-73 (Nov. 2003) (NASD Announces Online Availability of Comments). Personal identifying information, such as names or e-mail addresses, will not be edited from submissions. Submit only information that you wish to make publicly available.

      4 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 Section 19 of the Exchange Act and rules thereunder.

      5 See supra note 2 and accompanying discussion.

      6 See supra note 1 and accompanying discussion.

      7 Joint SEC/NASD Staff Report, supra note 1 (citing Andrea Coombes, Perfect Tool—For a Select Few: Variable Annuities Have Limited Use, Schwab Study Finds, CBS MarketWatch.com, Nov. 8, 2002; John P. Huggard, Investing with Variable Annuities §703, at 27 (Parker-Thompson Pub. 2002)).

      8 In addition to NtM 99-35, NASD issued NtM 96-86 (Dec. 1996), which reminded members that sales of variable annuities are subject to NASD suitability requirements. NASD, moreover, has issued a number of Investor Alerts covering the unique features and potential risks of variable annuities. Recently, NASD also issued a Member Alert reminding members of their responsibilities regarding hypothetical tax-deferral illustrations in variable annuity communications.

      9 See Joint SEC/NASD Staff Report, supra note 1 (discussing various NASD and SEC disciplinary actions involving variable annuity products).

      10 Id. (explaining results of recent NASD and SEC examinations of broker-dealer sales of variable annuity products).

      11 Id. (discussing customer complaints regarding variable annuity products).

      12 A number of members helped create the guidelines discussed in NtM 99-35, and many have adopted them based on NASD's issuance of the NtM. The guidelines in NtM 99-35, however, are not mandatory, and some members have not adopted them. As a result, because of continued sales practice and supervision problems related to deferred variable annuities, NASD is proposing the rule described herein.

      13 The member or its associated persons would be responsible for providing the prospectus and separate, brief, and easy-to-read (written in "plain English") risk disclosure document to the investor. NASD does not regulate insurance companies, and the proposed rule applies to member firms. Nonetheless, members would be allowed to use a separate, brief and easy-to-read risk disclosure document prepared by the issuing insurance company if such document conformed to the requirements of the proposed rule. Again, however, it would be the responsibility of the member firm and its associated persons to ensure compliance with all aspects of the proposed rule, including the risk disclosure document.

      14 Non-recommended transactions would include those for which the member acts only as an order taker. For instance, the proposed rule's requirements that apply to any transaction, regardless of whether the transaction had been recommended, would include a situation where a customer contacts the member and, without any input from the member, places an order on his or her own for XYZ deferred variable annuity.

      15 A deferred variable annuity purchased for a taxqualified retirement account does not provide any additional tax deferred treatment of earnings beyond the treatment provided by the tax-qualified plan itself. Such transactions are of particular concern to NASD, especially in light of certain fees and charges associated with many deferred variable annuities. Thus, principals must ensure that the deferred variable annuity's other features make the purchase of the deferred variable annuity for the tax-qualified retirement account appropriate.


      Attachment A

      Text of Rule Change

      New language is underlined.

      Members' Responsibilities Regarding Deferred Variable Annuities

      (a) Appropriateness/Suitability
      (1) No member or person associated with a member shall recommend to any customer the purchase, sale or exchange of a deferred variable annuity unless such member or person associated with a member has a reasonable basis to believe that (A) the customer has been informed of the material features of the deferred variable annuity; (B) the customer has a long-term investment objective; and (C) the deferred variable annuity as a whole and the underlying subaccounts are suitable for the particular customer based on the information set forth in paragraph (a)(2) of this rule. These determinations shall be documented and signed by the associated person recommending the transaction, in addition to being approved by a registered principal, as required by paragraph (c) of this Rule.
      (2) Prior to recommending a deferred variable annuity, a member or person associated with a member shall make reasonable efforts to obtain, at a minimum, information concerning the customer's age, annual income, financial situation and needs, investment experience, investment objectives, liquidity needs, liquid net worth, marital status, number and age of dependents, occupation, risk tolerance, savings, tax status and such other information used or considered to be reasonable by the member or person associated with the member in making recommendations to customers.
      (b) Disclosure and Prospectus Delivery
      (1) Prior to effecting any purchase, sale or exchange of a deferred variable annuity, regardless of whether the transaction has been recommended, a member or person associated with a member must provide the customer:
      (A) A current prospectus; and
      (B) A separate, brief and easy-to-read (written in "plain English") risk disclosure document that highlights the main features of the particular variable annuity transaction, including (i) liquidity issues, such as potential surrender charges and tax penalties; (ii) sales charges; (iii) fees, such as mortality and expense charges, administrative fees, charges for riders or special features, and investment advisory fees; (iv) federal and state tax treatment for variable annuities; and (v) potential market risks. The risk disclosure document also must inform the customer whether a "free look" period applies to the deferred variable annuity contract, during which the customer can terminate the contract without paying any surrender charges and receive a refund of his or her purchase payments. In addition, the risk disclosure document must inform the customer that all applications to purchase or exchange a deferred variable annuity are accepted subject to review and approval by a designated registered principal.
      (2) Prior to effecting any exchange or replacement of a deferred variable annuity, a member or person associated with a member must, in addition to the information required by paragraph (b)(1) and regardless of whether the transaction has been recommended, provide the customer with the following information in writing:
      (A) A summary of all significant differences, if any, between the existing and proposed deferred variable annuities' contractual provisions, guarantees, death benefits, withdrawal provisions and/or tax treatment;
      (B) Surrender charges, including both those that may be assessed on the surrender of the existing contract and those applicable to the proposed contract;
      (C) Costs that are associated with purchasing a new contract, including new sales loads and other start-up expenses; and
      (D) The possibility, if any, of modifying or adjusting the existing contract to meet the customer's objectives rather than exchanging or replacing the contract.

      A member or person associated with a member may use an existing exchange or replacement form authorized by a state insurance commission or other regulatory agency to satisfy the disclosure requirements of this paragraph to the extent that the regulatory agency's form requires disclosure of the information required by this Rule. If the regulatory agency does not require disclosure of all of the information required by this Rule, a member or person associated with a member may create and use an addendum to the regulatory agency's form.
      (c) Principal Review
      (1) No later than one business day following the date of execution of the deferred variable annuity application, a registered principal shall review and approve the ransaction, regardless of whether the transaction has been recommended. In reviewing the transaction, the registered principal shall consider whether (A) the customer's age or liquidity needs make a long-term investment inappropriate, such as a customer over a specific age (standard established by the member) or with a short-term investment objective; (B) the amount of money invested exceeds a stated percentage of the customer's net worth or is more than a stated dollar amount (standards established by the member); (C) the transaction involves an exchange or replacement of a deferred variable annuity contract; (D) the deferred variable annuity transaction involves a customer whose account has a particularly high rate of deferred variable annuity exchanges or replacements; (E) the associated person effecting the transaction has a particularly high rate of effecting deferred variable annuity exchanges or replacements; and (F) the purchase of the deferred variable annuity is for a tax-qualified retirement account (e.g., 401(k) plan, IRA). Standards established by the member must be reasonably designed to ensure that transactions in deferred variable annuities are appropriately supervised.
      (2) When a member or a person associated with a member has recommended the transaction, a registered principal, taking into account the underlying supporting documentation described in paragraph (a)(2) of this Rule, shall review, approve and sign the appropriateness/suitability determination document required by paragraph (a)(1) of this Rule no later than one business day following the date of execution of the deferred variable annuity application. This principal review and approval requirement is in addition to the requirements of paragraph (c)(1) and, if applicable, paragraph (c)(3) of this Rule.
      (3) When the transaction involves an exchange or replacement of a deferred variable annuity, regardless of whether the transaction has been recommended, a registered principal must review, approve and sign the exchange or replacement analysis form or addendum described in paragraph (b)(2) of this Rule no later than one business day following the date of execution of the deferred variable annuity application. This principal review and approval requirement is in addition to the requirements of paragraph (c)(1) and, if applicable, paragraph (c)(2) of this Rule.
      (d) Supervisory Procedures

      In addition to the general supervisory and recordkeeping requirements of Rules 3010 and 3110, a member must establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the standards set forth in this Rule. In particular, the member must implement procedures to screen for and require a registered principal's review of the following:
      (1) A deferred variable annuity investment for a customer whose age or liquidity needs may make a long-term investment inappropriate, such as any customer over a specific age (standard established by the member) or with a short-term investment objective;
      (2) A deferred variable annuity investment that exceeds a stated percentage of the customer's net worth or is more than a stated dollar amount (standards established by the member);
      (3) A deferred variable annuity exchange or replacement;
      (4) A deferred variable annuity investment for a customer whose account has a particularly high rate of deferred variable annuity exchanges or replacements;
      (5) A deferred variable annuity transaction where the associated person effecting the transaction has a particularly high rate of effecting deferred variable annuity exchanges or replacements; or
      (6) A deferred variable annuity investment for any tax-qualified retirement account (e.g., 401(k) plan, IRA).

      Standards established by the member must be reasonably designed to ensure that transactions in deferred variable annuities are appropriately supervised.
      (e) Training

      Members shall develop and document specific training policies or programs designed to ensure that associated persons who effect and registered principals who review transactions in deferred variable annuities comply with the requirements of this Rule and that they understand the material features of deferred variable annuities, including liquidity issues, sales charges, fees, tax treatment, and market risks.

    • 04-44 Impermissible Confidentiality Provisions and Complaint Withdrawal Provisions in Settlement Agreements

      View PDF file

      GUIDANCE

      Settlement Agreements

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management

      Affidavits
      Arbitration
      Central Registration Depository System (CRD® or CRD system)
      Confidentiality Provisions
      Dispute Resolution
      Rule 2110
      Settlement Agreements

      Executive Summary

      The purpose of this Notice is to remind members that the use of certain provisions in settlement agreements with customers or other persons that impede, or have the potential to impede, NASD investigations and the prosecution of NASD enforcement actions violates NASD Rule 2110, which requires members to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business. Specifically, some member firms continue to use confidentiality provisions that prohibit or restrict the customer or other person from disclosing the settlement terms and the underlying facts of the dispute upon inquiry to NASD or other securities regulators, despite repeated NASD communications cautioning members against this practice.1 In addition, some member firms require customers to withdraw complaints filed with NASD or other securities regulators as a condition to settlement, or require customers to provide false or misleading affidavits that repudiate or otherwise contradict earlier factual claims made by such customers, in contravention of NASD rules. Accordingly, members and their associated persons are reminded that the use of such confidentiality provisions or complaint withdrawal provisions, or compelling customers or other persons to provide false or misleading affidavits, violates Rule 2110.

      Questions/Further Information

      Questions concerning this Notice generally may be directed to Shirley H. Weiss, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8844. Questions concerning appropriate language for settlement agreements may be directed to a member firm's local NASD District Office.

      Background

      Recent NASD examinations have revealed that, despite repeated cautioning, some members continue to use settlement agreements with customers and other persons that impede NASD investigations and the prosecution of NASD enforcement actions. In this regard, some members require customers and other settling parties to agree to overly broad confidentiality provisions in settlement agreements as a condition of settlement. In addition, some firms require customers and other persons to withdraw pending complaints with NASD or other regulators as a condition to settlement, or require customers or other persons, as a condition to settlement, to submit affidavits or other statements that falsely or misleadingly repudiate or otherwise contradict prior claims or complaints. Member firms and their associated persons are reminded that these practices constitute conduct inconsistent with just and equitable principles of trade in violation of Rule 2110.2

      Impermissible Confidentiality Provisions

      Although the exact wording of the overly broad confidentiality or nondisclosure provisions may differ, the intended effect of these impermissible provisions is to prohibit, limit, or discourage customers or other persons from disclosing the settlement terms or the underlying facts of the dispute in question to NASD or other securities regulators upon inquiry.

      In many instances, the settlement agreements contain confidentiality provisions that require regulatory authorities to obtain a court order or subpoena, or pursue some other legal process, before the parties are permitted to disclose the terms of the settlement or the underlying facts of the dispute to the regulator. Such restrictive language is especially problematic for self-regulatory organizations (SROs), such as NASD, that do not have the legal authority to compel cooperation by customers or other persons not subject to the SROs' jurisdiction.

      In other cases, the settlement agreements contain language prohibiting customers or other parties from testifying about the settlement terms or the facts underlying the settlement. Since NASD and other securities regulators rely upon testimony to conduct investigations and prosecute enforcement actions, settlement terms that prevent customers from testifying on a matter also may significantly impede SROs' ability to regulate the securities industry.

      Other problematic settlement agreements contain language requiring customers or other settling parties to provide notice to the member firm before providing information to NASD or any other regulatory authority upon inquiry or before testifying about the settlement terms before NASD or other regulators. Again, such language has the potential to discourage customers or other settling parties from cooperating with NASD and other regulators.

      Impermissible Complaint Withdrawal Provisions

      Although the exact wording of the complaint withdrawal provisions may vary, the intended effect is to make withdrawal of a pending complaint filed with NASD or other regulatory agency a condition of settlement. Like the impermissible confidentiality provisions, such complaint withdrawal provisions have the potential to hamper NASD and other regulators from carrying out their regulatory mandates.

      Procuring False or Misleading Affidavits as a Condition to Settlement

      It is impermissible, as a condition to settling a customer complaint, for a member to require a settling customer or other person to provide an affidavit or other statement that contains false or otherwise misleading or inaccurate information concerning the facts underlying the customer's complaint. In addition to violating the firm's responsibility under Rule 2110 to observe high standards of commercial honor and just and equitable principles of trade, as well as applicable state and federal criminal laws, such statements have the effect of frustrating or otherwise impeding the ability of NASD and other securities industry regulators to investigate and prosecute violations of NASD rules and the securities laws.3

      Acceptable Confidentiality Provisions

      It is not NASD's intent to preclude members from entering into settlement agreements that include acceptable confidentiality provisions. As discussed in Notice to Members 95-87, confidentiality provisions in settlement agreements should be written to expressly authorize the customer or other person to respond, without restriction or condition, to any inquiry regarding the settlement or its underlying facts by any regulator, including NASD. The following is an example of an acceptable confidentiality provision:

      Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from responding to any inquiry, or providing testimony, about this settlement or its underlying facts and circumstances by, or before, the Securities and Exchange Commission (SEC), NASD, any other self-regulatory organization, or any other federal or state regulatory authority.

      Further, a settlement may not be conditioned on the withdrawal of a complaint pending with NASD or any other regulatory authority nor may a settlement be conditioned upon the customer submitting a statement, whether or not under oath, that falsely or misleadingly repudiates or contradicts the factual allegations underlying the original complaint.

      Suggested Notice to Parties to a Past Settlement Agreement to Clarify that the Agreement Does Not Prohibit Disclosure to Regulatory Authorities

      Members are strongly encouraged to promptly review and correct those settlement agreements that contain confidentiality provisions that prohibit or discourage customers or other persons from disclosing the settlement terms or the underlying facts of the dispute to NASD or any other securities regulator upon inquiry or that require withdrawal of a pending complaint filed with NASD or any other regulatory authority. The following is an example of a notice to customers or other parties to correct past settlement agreements containing impermissible confidentiality or complaint withdrawal provisions:

      You are hereby notified that the Settlement Agreement you executed with this firm on [insert date], should not be construed to prohibit or restrict you (or your attorney) from responding to any inquiry, or providing testimony, about this settlement or its underlying facts and circumstances by, or before, the Securities and Exchange Commission (SEC), NASD, any other self-regulatory organization, or any other federal or state regulatory authority, or to require you to withdraw any complaint previously filed with any such regulatory authority.

      Conclusion

      Members are reminded that the use of overly broad confidentiality provisions or complaint withdrawal provisions in settlement agreements, or compelling customers or other persons to provide false or misleading affidavits, as further described in this Notice, constitutes conduct inconsistent with just and equitable principles of trade, which may result in NASD disciplinary proceedings for violation of Rule 2110. Members should immediately review any standard form of settlement agreement to ensure that it does not in any way prohibit or discourage the parties to the agreement from disclosing, or testifying about, the settlement terms and/or the underlying facts of the dispute to, or before, NASD or any other regulator upon inquiry, require withdrawal of pending complaints with any regulatory authority as a condition of settlement, or compel the submission of a false or misleading statement or affidavit concerning the facts underlying the customer's complaint.

      Members also should immediately review any past settlement agreements to ensure that they do not contain any such impermissible provisions and are otherwise consistent with this Notice. In the event a member identifies any such provisions, the member is encouraged to send a notice to the parties advising them that they are not restricted under the terms of the settlement from speaking with, or otherwise disclosing information regarding the settlement to, any regulatory authority upon inquiry.


      1 See Notice to Members 95-87 (October 1995), Notice to Members 86-36 (May 1986), and NASD Regulatory and Compliance Alerts (June 1994 and July 1995).

      2 Examples of enforcement actions taken by NASD against members concerning impermissible confidentiality and complaint withdrawal provisions include:

      • In the Matter of Stratton Oakmont, Inc., 1997 SEC LEXIS 562, 52 S.E.C 1170 (Mar. 12, 1997). The SEC sustained NASD's finding of violations of Article III, Section 1 of the NASD Rules of Fair Practice (the predecessor to NASD Rule 2110) based on unacceptable confidentiality provisions requiring that, prior to cooperating with NASD, a customer provide: (1) ten days advance notice to counsel for Stratton and its account executives; and/or (2) a statement or testimony to Stratton and/or its attorneys and attorneys for the account executives.


      • In the Matter of William Edward Daniel, Exch. Act Rel. No. 28408, 50 S.E.C. 332, 335-36 (1990). The SEC upheld NASD's finding that registered representative violated Rule 2110 where he conditioned payment of restitution on customer's withdrawal of a complaint filed with NASD. The SEC noted, "an integral aspect of the statutory scheme for regulating broker-dealers and protecting investors is the responsibility of SROs such as NASD to investigate allegations that members and their associated persons have engaged in misconduct and to impose sanctions when appropriate."

      3 While we understand that members and associated persons may procure affidavits and other statements in connection with applications for expungement under NASD Rule 2130, it is impermissible to submit affidavits, the content of which is the product of bargained-for consideration as opposed to the truth. Members are advised to review Notice to Members 04-43 in this regard.

    • 04-43 Members' Use of Affidavits in Connection with Stipulated Awards and Settlements to Obtain Expungement of Customer Dispute Information under Rule 2130

      View PDF file

      GUIDANCE

      Expungement

      SUGGESTED ROUTING

      KEY TOPICS

      Legal & Compliance
      Registered Representatives
      Senior Management

      Affidavits
      Arbitration
      Central Registration Depository System (CRD® or CRD system)
      Customer Dispute Information
      Dispute Resolution
      Expungement
      Rule 2110
      Rule 2130

      Executive Summary

      On December 16, 2003, the Securities and Exchange Commission (SEC) approved Rule 2130 governing the expungement of customer dispute information from the Central Registration Depository System (CRD® or the CRD system).1 As described in further detail below, Rule 2130 applies to any request made to a court of competent jurisdiction to expunge customer dispute information from the CRD system that has its basis in an arbitration or civil lawsuit filed on or after April 12, 2004.2

      This Notice addresses members' obligations under Rule 2130 regarding the use of affidavits in connection with settlements that are incorporated into stipulated awards to obtain expungement of customer dispute information from the CRD system under Rule 2130. For a more detailed discussion of Rule 2130's requirements, members and other interested parties should review Notice to Members (NtM) 04-16 (March 2004) (Expungement). NASD also has published questions and answers about Rule 2130 on its Web site at www.nasd.com.

      Questions/Further Information

      Questions concerning this Notice may be directed to Richard E. Pullano, Associate Vice President/Chief Counsel, Registration and Disclosure, at (240) 386-4821; Jean I. Feeney, Vice President and Chief Counsel, NASD Dispute Resolution, at (202) 728-6959; or Shirley H. Weiss, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8844.

      Background

      Rule 2130 reflects NASD's commitment to maintaining a CRD system that provides public investors and regulators access to accurate information about firms and brokers and maintains the integrity of the arbitration process. Rule 2130 recognizes the interests of: (1) NASD, the states, and other regulators in retaining broad access to customer dispute information to fulfill their regulatory responsibilities and investor protection obligations; (2) the brokerage community and others in a fair process that recognizes their stake in protecting their reputations and permits expungement from the CRD system when appropriate; and (3) investors in having access to accurate and meaningful information about firms and brokers with which they conduct, or may conduct, business.3 All of these groups have a common interest in a CRD system that contains accurate and meaningful information.

      Rule 2130 protects the ability of all CRD users to obtain meaningful data about members and registered persons by permitting customer dispute information to be expunged from the CRD system only when arbitrators and a court have affirmatively found that: (1) the information, claim, or allegation is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or (3) the claim, allegation, or information is false.

      Stipulated Awards and Settlements

      NASD has recently become aware of instances in which claimants and respondents appear to be settling customer claims for monetary compensation to the claimant in return (at least in part) for a customer affidavit that absolves one or more of the respondents of responsibility for any alleged wrongdoing.4 These affidavits, attested to in connection with settlements that often are incorporated into stipulated awards, appear to be inconsistent on their face with the initial claim and terms of the settlement.

      NASD cautions its members and their associated persons that when they submit affidavits in which the content is the product of a bargained-for consideration as opposed to the truth, members and/or their associated persons subject themselves to a panoply of applicable sanctions, including possible disciplinary action for violation of NASD Rules, including Rule 2110, and other penalties, including possible criminal sanctions.5

      NASD is taking the following actions in response to this issue. First, arbitrators will be receiving training that alerts them to this concern. As further described in NtM 04-16, with respect to cases filed on or after April 12, 2004, arbitrators must make affirmative findings based on one (or more) of the standards in Rule 2130 in order for NASD to waive participation in the court confirmation process. The training required of arbitrators who consider expungement relief will make clear that arbitrators are expected to consider whether a financial settlement indicates some culpability on the part of the respondent, thereby precluding them from making an affirmative finding that one or more of the standards for expungement in Rule 2130 have been met. The training also will advise arbitrators to consider the original claim, any other evidence presented, and the settlement terms in assessing the credibility of a supporting affidavit.

      Second, when advised by the parties of a request for court confirmation of an arbitration award containing expungement relief, NASD will require the party requesting a waiver under Rule 2130 to provide, in addition to the arbitration award, a copy of the claim and all settlement documents and affidavits. Under Rule 2130, parties are required to name NASD and serve NASD with all appropriate documents. Upon request, NASD may waive the parties' obligation to name NASD as a party. NASD will not, however, waive its participation in the court confirmation proceeding unless and until NASD staff has reviewed all appropriate documents and determined that the expungement relief is based on one or more of the standards in Rule 2130. Thus, parties will be required to submit these documents notwithstanding any confidentiality provision in the settlement documents. NASD staff will review these documents to determine if granting a waiver is appropriate under the specific circumstances of the case. If NASD decides not to waive the requirement to be named as a party in the court confirmation process, the party seeking expungement would then name NASD as a party, NASD would appear in court to oppose the expungement, and the court would decide whether or not to order expungement.

      Third, as stated above, NASD believes that abusing NASD's dispute resolution system by negotiating settlements with customers in return for exculpatory affidavits that the member or associated person knows or should know are false or misleading contravenes Rule 2110, which requires members and their associated persons, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade.6 Accordingly, members and associated persons who engage in this conduct may be subject to disciplinary action by NASD's Department of Enforcement.


      1 SEC Order Granting Approval of Proposed Rule Change and Amendment No. 1, Thereto, and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2, Thereto, Relating to Proposed NASD Rule 2130 Concerning the Expungement of Customer Dispute Information From the Central Registration Depository System, 68 Fed. Reg. 74667 (Dec. 24, 2003) Exchange Act Release No. 48933 (File No. SR-NASD-2000-168 (Dec. 16, 2003), 68 Fed. Reg. 74667 (Dec. 24, 2003).

      2 All requests to expunge customer dispute information from the CRD system arising from arbitrations or civil lawsuits filed before April 12, 2004, including any settlements arising therefrom, will continue to be subject to the terms of the moratorium in effect as of January 19, 1999, as discussed in Notice to Members 99-09 (February 1999).

      3 Although public investors do not have access to the CRD system, the information in that system is available to investors through NASD BrokerCheck and individual state disclosure programs.

      4 Because these cases were filed before April 12, 2004, they are not subject to the requirements of Rule 2130, including the notice requirements contained therein. As further discussed in NtM 04-16, under Rule 2130, members and associated persons seeking a court order to expunge information must name NASD as an additional party and serve NASD with all appropriate documents unless NASD waives that requirement.

      5 NASD further cautions that individuals not subject to NASD jurisdiction who submit false affidavits also are subject to significant sanctions from the arbitration panel or court, law enforcement agencies, state bar association or other attorney disciplinary bodies (in the case of attorneys), or others.

      6 As a general matter, in connection with settling arbitration claims and/or other complaints, members may not engage in any conduct that impedes the ability of NASD or any other securities industry regulator to investigate potential violations of NASD rules or the securities laws. Such conduct would include the use of impermissible confidentiality provisions in settlement agreements, the imposition of a requirement that customers withdraw complaints to NASD or other securities regulators as a condition to settlement, and procuring, as a condition to settlement, affidavits or other statements from customers that falsely or misleadingly repudiate or otherwise contradict prior claims or complaints made by such customers. Members are advised to review Notice to Members 04-44 for further discussion of these issues.

    • 04-42 NASD Informs Members of Upcoming District Committee and District Nominating Committee Elections

      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 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 2005, 2006, and 2007 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).

      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. 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. Members are requested to submit candidates' names to the appropriate District Director by submitting a cover letter and completed candidate profile sheet (Attachment C) by July 26, 2004.

      To serve as a member of a District Committee or District Nominating Committee, an individual must: (1) be employed by an NASD member eligible to vote in the District for District Committee elections; and (2) work primarily from such NASD member's principal office or a branch office that is located within the District where the individual will serve on a Committee. NASD believes this will ensure that local interests are represented on Committees. Also, please note that individuals who have served two consecutive terms are no longer eligible to be re-elected; however, NASD encourages current and former committee members to assist NASD by soliciting candidates for both committees.

      Completed forms will be provided to all members of the appropriate District Nominating Committee for review. It is anticipated that on or before September 3, 2004, 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 position to which the candidate is nominated.

      Members are reminded of the importance to accurately maintain their Executive Representative name and e-mail address information, as well as their firm's main postal address.1 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 e-mail address, firms should access the NASD Contact System, located on NASD's Web site at www.nasdr.com/ncs.asp

      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 e-mail at barbara.sweeney@nasd.com.


      1 See also Notice to Members 04-32 (SEC Approves Amendments to Require Quarterly Review and Update of Executive Representative Contact Information).


      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

      District 1 Committee — Chair: Robert A. Muh

      Members to be elected to terms expiring January 2008: 3

      Committee members to serve until January 2005
      Gerard P. Gloisten GBS Financial Corporation Santa Rosa, CA
      Allan L. Herzog Prudential Securities, Inc. San Francisco, CA
      Robert A. Muh Sutter Securities, Inc. San Francisco, CA
      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
      District 1 Nominating Committee — Chair: James D. Klein
      Committee members to be elected to terms expiring January 2005: 5
      Committee Members
      Stephen R. Adams Wells Fargo Investments, LLC San Francisco, CA
      Sally G. Aelion