BackText onlyPrint

You need the Flash plugin.

Download Macromedia Flash Player



  • 1985

    • 85-89 Adoption of New Rule of Fair Practice Relating to Permission for Members to Alter Their Methods of Operation Under SEC Rule 15c3-3 (the "Customer Protection Rule")

      TO: All NASD Members

      The Securities and Exchange Commission has adopted amendments to the NASD Rules of Fair Practice and Code of Procedure which were approved by a membership vote pursuant to Notice to Members 85-43, dated June 12, 1985.

      The new rules provide the NASD with an additional regulatory tool in monitoring the financial and operational condition of members that are not designated to another self-regulatory organization for financial responsibility purposes. The new rule provides the NASD with the authority to evaluate, in advance and on a case-by-case basis, a firm's capacity to alter the nature of its business by changing its exempt status under SEC Rule 15c3-3 so as to increase customer financial exposure. The rule is designed to ensure that a member has the necessary capabilities, including adequate net capital and qualified personnel, to conduct the type of business it plans.

      The rule requires an existing member to obtain the NASD's prior written approval before altering its method of operations by changing its exempt status under the Customer Protection Rule. This approval is obtained by submitting a written request to the district office in which the firm is located describing the procedures the member has established to effect an orderly transition of its business. Requirements for approval are contained in new Section 39 of Article III of the Rules of Fair Practice.

      Amendments to Article V of the NASD Code of Procedure set forth the time frames for action and the appellate rights of members. In general, the district staff is required to notify a member in writing of its decision to approve or disapprove the change within 15 business days of receipt of the application. If approval is denied by the district staff or if approval is granted with modifications, procedures are provided for a member to appeal that decision to the District Business Conduct Committee, the NASD Board of Governors and, ultimately, to the Securities and Exchange Commission. A copy of the text of the new rules, which are effective immediately, is enclosed with this notice.

      Any comments or questions regarding this notice or the application of the rule should be directed to Thomas R. Cassella, Director, NASD Financial Responsibility, at (202) 728-8237.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      PROPOSED RULE OF FAIR PRACTICE

      Proposed Article III, Section 39 of the Rules of Fair Practice

      (a) Application - For the purposes of Article III, Section 39 of the Rules of Fair Practice, the term "member" shall be limited to any member of the Association who is not designated to another self-regulatory organization by the Securities and Exchange Commission for financial responsibility pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17d-l promulgated thereunder.
      (b) A member operating pursuant to any exemptive provision as contained in subparagraph (k) of SEC Rule 15c 3-3 shall not change its method of doing business in a manner that will change its exemptive status from that governed by subparagraph (k)(l) or (k)(2)(b) to that governed by subparagraph (k)(2)(a); or from subparagraph (k)(l), (k)(2)(a) or (k)(2)(b) to a fully computing firm that is subject to all provisions of SEC Rule 15c3-3; or commence operations that will disqualify it for continued exemption under the SEC Rule 15c3-3 without first having obtained the prior written approval of the Association.
      (c) In making the determination to approve, deny or amend an application made pursuant to subsection (b), the Association staff shall consider, among other things, the type of business in which the member is engaged, the training, experience and qualifications of persons associated with the member, the member's procedures for safeguarding customer funds and securities, the member's overall financial and operational condition, and any other information deemed relevant in the particular circumstances for the time these measures would remain in effect.

      PROPOSED ADDITION TO THE CODE OF PROCEDURE

      Procedures Under Article III, Section 39 of the Rules of Fair Practice

      (a) District Staff Procedures
      Applications for approval of a change in exemptive status under SEC Rule 15c3-3, required pursuant to Article III, Section 39 of the Rules of Fair Practice, shall be made by filing a written request with the District Office in which the member's principal place of business is located. Such request shall address the criteria set forth in Section 39(c) of Article III of the Rules of Fair Practice. Within fifteen (15) business days of the receipt of such application, the District staff shall make a determination and inform the member, in writing, of its decision to approve, deny or amend the member's request as submitted. If the decision is to deny or amend the member's request in any way, the written decision shall set forth the reasons for such action.
      (b) District Business Conduct Committee Review
      Whenever a request under subparagraph (b) of Article III, Section 39 of the Rules of Fair Practice is denied in whole or in part by the District staff, the member may, within five (5) business days of receipt of the District's determination letter, petition the District Business Conduct Committee ("DBCC" or "District Committee") for review of such decision. The member will have the opportunity to be heard and to present the reasons why it believes that the decision by the staff should be set aside or modified. Such hearing shall be held before the DBCC or a designated subcommittee thereof within seven (7) business days of receipt of the petition for review. The member shall be entitled to be represented by counsel and a record shall be kept of the proceeding. Thereafter, the District Committee shall, within five (5) business days of the hearing or within five (5) business days of receipt of the member's petition for review if the member waives a hearing and elects to proceed by written petition, issue a written decision affirming, modifying or setting aside the District staff decision and setting forth the reasons for such action. This written decision shall also provide for an appropriate sanction to be immediately imposed for failure to comply with the Committee's determination.
      (c) Review by the Board
      The written decision issued by the District Committee pursuant to subsection (b) shall be subject to review by the Board of Governors upon application by the member filed within five (5) business days of the date of the decision, or the matter may be called for review by the Board on its own motion within thirty (30) calendar days of the District Committee's decision. In the case of an appeal, the member shall be entitled to a hearing before a subcommittee of the Board within fifteen (15) business days. If called for review by the Board on its own motion, the member shall be entitled to a hearing within thirty (30) business days of such call for review. The member shall be entitled to be represented by counsel. Instituting a review, whether by application or on the action of the Board, shall not act as a stay of the action taken by the DBCC unless otherwise ordered by the Board.
      (d) Decision of the Board
      Upon consideration of the record, the Board of Governors shall, in writing, affirm, modify, reverse or dismiss the decision of the DBCC or remand the matter to the District for further proceedings consistent with its instructions. If a hearing is held, a decision, which shall be the final action of the Board, shall be issued within five (5) business days of the hearing. If no hearing is requested, the matter shall be considered based on the record and a decision shall be issued promptly. In its decision, the Board shall set forth the specific grounds upon which its determination is based and shall provide for an appropriate sanction to be immediately imposed for failure to comply with its directives. Board action restricting the member's activity shall become effective immediately upon issuance of its decision and shall remain in effect until the limitation is removed or modified by the DBCC.
      (e) Application to Commission for Review
      In any case where a member is aggrieved by an action taken or approved by the Board of Governors, such member may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.

    • 85-88 NASDAQ National Market System Grows to 2,214 Securities With 29 Voluntary Additions on January 7, 1986

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, January 7, 1986, 29 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,214. These 29 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 29 issues scheduled to join NASDAQ/NMS on Tuesday, January 7, 1986, are:

      Symbol*

      Company Name

      Location

      BNHB

      BNH Baneshares, Inc.

      New Haven, CT

      BISC

      Barrister Information Systems Corporation

      Buffalo, NY

      BSTL

      Birmingham Steel Corporation

      Birmingham, AL

      BRAN

      Brand Insulations, Inc.

      Park Ridge, IL

      CPFD

      Capital Federal Savings & Loan Association

      Sacramento, CA

      CWLD

      Child World, Inc.

      Avon, MA

      CEXX

      Circle Express, Inc.

      Indianapolis, IN

      CNVLZ

      City Investing Company Liquidating Trust

      New York, NY

      CFUR

      Cochrane Furniture Company, Inc.

      Lincolnton, NC

      CFFS

      Columbia First Federal Savings & Loan Association

      Washington, D.C.

      CNCO

      Conseco, Inc.

      Carmel, IN

      DEST

      DEST Corporation

      Milpitas, CA

      DEFI

      Defiance Precision Products, Inc.

      Defiance, OH

      EBMI

      E & B Marine, Inc.

      Edison, NJ

      EAVN

      Eaton Vance Corporation

      Boston, MA

      GNTX

      Gentex Corporation

      Zeeland, MI

      GWSH

      George Washington Corporation

      Jacksonville, FL

      HACH

      Hach Company

      Loveland, CO

      MRCY

      Mercury General Corporation

      Los Angeles, CA

      NYMG

      New York Marine and General Insurance Company

      New York, NY

      PECN

      Publishers Equipment Corporation

      Carrollton, TX

      RWPIV

      Ridge wood Properties, Inc., WI

      Atlanta, GA

      SWMC

      Stan West Mining Corp.

      Scottsdale, AZ

      STTX

      Steel Technologies, Inc.

      Louisville, KY

      STKN

      Stockton Savings & Loan Association

      Stockton, CA

      SCAPY

      Svenska Cellulosa Aktiebolaget

      Sundsvall, Sweden

      REGI

      Regina Company, Inc. (The)

      Rahway, NJ

      USBPP

      USBANCORP, Inc. (Pfd)

      Johnstown, PA

      WSTF

      Western Financial Corporation

      Emporia, KS

      NASDAQ/NMS Interim Additions

      Symbol*

      Name

      Date of Entry

      AMSB

      American Savings Bank, F.S.B.

      12/11/85

      ARKR

      Ark Restaurants Corporation

      12/12/85

      HLCO

      Healthco International, Inc.

      12/13/85

      METS

      Met-Coil Systems Corporation

      12/13/85

      COGRA

      The Colonial Group, Inc. (Cl A)

      12/17/85

      SITVY

      Southbrook International Television Company, plc

      12/19/85

      The following changes to the list of NASDAQ/NMS securities occurred since December 9, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol*

      New/Old Security Name

      Date of Change

      REID/REID

      Reid-Rowell, Inc./Reid-Provident Laboratories, Inc.

      12/11/85

      ABXFF/BRCFF

      American Barrick Resources Corp./Barrick Resources Corp.

      12/13/85

      ERLY/ERLY

      Erly Industries, Inc./Early California Industries, Inc.

      12/13/85

      DKLBB/DKLBB

      DEKALB Corporation, (Cl B)/DEKALB AgResearch, Inc. (Cl B)

      12/18/85

      LAFCA/LAFCI

      Loan America Financial Corporation (Cl A)/Loan America Financial Corporation

      12/19/85

      OJAY/CCSI

      Orange Julius International, Inc./ Custom Creamery Systems, Inc.

      12/19/85

      ALCCV/ALNT

      ALC Communications Corporation WI/Allnet Communication Services, Inc.

      12/20/85

      NASDAQ/NMS Deletions

      Symbol*

      Security Name

      Date

      FISI

      Financial Institution Services, Inc.

      12/10/85

      FGLFS

      Florida Gulf Realty Trust, SBI

      12/11/85

      CMPQ

      Compaq Computer Corporation

      12/12/85

      ABUG

      Spectrum Group, Inc. (The)

      12/12/85

      ITCP

      International Technology Corporation

      12/13/85

      PTMFQ

      PetroMae Energy, Inc.

      12/13/85

      ITCPW

      International Technology Corporation (Wts)

      12/17/85

      MNAC

      Maine National Corporation

      12/18/85

      SNCO

      Second National Corporation

      12/18/85

      MCFV

      McFaddin Ventures, Inc.

      12/19/85

      NUTR

      Nutri-Foods International, Inc.

      12/19/85

      GOTT

      GOTT Corporation

      12/23/85

      DENLQ

      Denelcor, Inc.

      12/26/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Sharon Belanger, Market Surveillance, at (202)728-8206.

      Sincerely,

      Gordon S. Macklin
      President


      * NASDAQ symbols are proprietary to the National Association of Securities Dealers, Inc.


    • 85-87 Request for Comments on Amendments Concerning Short Sales

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: JANUARY 30, 1986

      The National Association of Securities Dealers, Inc. (NASD), is requesting comment on two proposed amendments to the NASD Rules of Fair Practice. The proposed amendments would require members to (a) mark all customer order tickets "long" or "short" and (b) make an affirmative determination, before accepting a customer's order to sell a security "short," that the security will be either delivered or borrowed prior to settlement date.

      The text of the proposed amendments is attached.

      Background

      At its November 1985 meeting, the Board of Governors discussed the possible need for additional regulation of short selling practices in the over-the-counter market. In the first of a series of actions taken at the November meeting, the Board retained Irving M. Pollack, former SEC commissioner, to conduct a comprehensive study of current short selling practices in the over-the-counter market and to formulate findings and recommendations to serve as the basis for further policy decisions on this issue.

      To provide supplemental data for the Pollack study, the Board adopted a new Article III, Section 41 of the NASD Rules of Fair Practice, which will require members to report aggregate "short" positions in NASDAQ securities in all customer and proprietary accounts to the NASD on a monthly basis commencing in early 1986.

      The Board also determined to publish for comment amendments to two existing Rules of Fair Practice. The first proposal would amend Article III, Section 21 of the NASD Rules of Fair Practice to require customer order tickets to be marked "long" or "short." Under the proposal, an order may be marked "long" only if (1) the customer's account is "long" the security; or (2) the member is informed that the customer owns the security and will deliver it within five business days after execution of the order.

      The marking of order tickets will assist in the effective surveillance of members' compliance with the second proposal to be published for comment. That proposal is an amendment to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities (Interpretation).

      The Interpretation currently prohibits members from accepting a customer's sell order, whether "long" or "short," unless (1) the member has possession of the security; (2) the customer's account with the member is "long" the security; (3) the member receives reasonable assurance from the customer that the security will be delivered to it in good deliverable form within five business days after execution of the order; or (4) the security is on deposit in good deliverable form with a member of the NASD, a member of a national securities exchange or any organization subject to state or federal banking regulations, and that instructions have been forwarded to the depository to deliver the securities against payment.

      The Board is considering amending the Interpretation to distinguish between "long" and "short" customer sell orders and to adopt different requirements for members accepting "short" customer sell orders. Under the proposed amendment, a member would be prohibited from accepting a "short" sale order from a customer unless the member makes an affirmative determination that it will receive delivery of the security from the customer or that it can borrow the security on behalf of the customer for delivery by settlement date.

      All members and other interested persons are invited to submit comments on the proposed rule. Comments should be received no later than January 30, 1986, and should be directed to:

      Mr. James M. Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Questions concerning this notice may be directed to Mary S. Head, Office of General Counsel, at (202) 728-8284.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      1. PROPOSED AMENDMENT TO ARTICLE III, SECTION 21 OF THE RULES OF FAIR PRACTICE

      Add a new subsection (b) and renumber existing subsections:

      Information on orders

      (b) A person associated with each member shall indicate on the memorandum for each customer order for the sale of any security whether the order is "long" or "short." An order shall be marked "long" only if (1) the customer's account is "long" the security involved or (2) the member is informed that the customer owns the security and will deliver it within five (5) business days after execution of the order.

      2. AMENDMENT TO THE BOARD OF GOVERNORS' INTERPRETATION ON PROMPT RECEIPT AND DELIVERY OF SECURITIES

      (New language is underscored; language to be deleted is bracketed.)

      It shall be deemed a violation of Article III, Section 1 of the Rules of Fair Practice of the Association for a member to violate the provisions of the following interpretation thereof:

      (a) Purchases: No member may accept a customer's purchase order for any security unless it has first ascertained that the customer placing the order or its agent agrees to receive securities against payment in an amount equal to any execution, even though such an execution may represent the purchase of only a part of a larger order.
      (b) Sales:
      (1) Long Sales
      No member or persons associated with a member shall accept [execute] a long sale [sell] order for any customer in any security unless:
      (a) The member has possession of the security;
      (b) The customer is long in his account with the member;
      (c) Reasonable assurance is received by the member, or person associated with a member, from the customer that the security will be delivered to it in good deliverable form within five (5) business days of the execution of the order; or
      (d) The security is on deposit in good deliverable form with a member of the Association, a member of a national securities exchange, a broker/dealer registered with the Securities and Exchange Commission, or any organization subject to state or federal banking regulations and that instructions have been forwarded to that depository to deliver the securities against payment.
      (2) "Short" Sales
      No member or person associated with a member shall accept a "short" sale order for any customer in any security unless the member makes an affirmative determination that it will receive delivery of the security from the customer or that it can borrow the security on behalf of the customer for delivery by settlement date.

    • 85-86 Request for Further Comments on a Proposed New Rule Governing the Prompt Payment for Investment Company Shares Sold to Customers by NASD Members

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: JANUARY 24, 1986

      BACKGROUND

      In Notice to Members 85-58, dated August 30, 1985, the NASD solicited comments from members and other interested persons on a proposed new rule (new paragraph (m) Article III, Section 26, NASD Rules of Fair Practice) that would govern the prompt payment by NASD members for investment company shares.

      The new rule would require NASD members to transmit payments for investment company shares, which such members have sold to customers, to underwriters by the end of the fifth business day after receiving a purchase order from a customer (trade date +5). The rule would also require members who are underwriters to transmit payments for investment company shares, which they have received from customers or other members, to investment company issuers within one business day after receiving such payments (day of receipt +1).

      The new rule would replace the NASD Board of Governors interpretation governing the prompt payment by members for shares of investment companies which appears at paragraph 5265 of the NASD Manual.

      Forty comment letters were received from members and other interested persons in response to the notice. They contained a variety of comments and suggestions, which were reviewed and discussed by the NASD Investment Companies Committee, a standing committee of the NASD Board of Governors.

      The Committee made the following recommendations in response to the major issues raised by commentators. Because one such recommendation involves a major change in the rule as originally proposed, the Committee requested, and the Board of Governors agreed, that the proposed amended rule should be distributed for a further comment period.

      Clarification of the term "transmit" in the proposed rule

      The proposed rule will require members to transmit payments by the end of the time periods specified in the rule. Several commentators asked for clarification of the term "transmit." Would it mean, for example, placing a check in the mail by the end of the last day of the time period specified? It is the intent of the Committee that the term shall mean "payment of funds, by any means, by the end of the specific time periods delineated in the rule."

      Adoption of the rule should be delayed until the proposed NSCC centralized and automated system for the clearance and settlement of investment company transactions is operating

      The proposed centralized system being developed by NSCC will provide for automatic settlement in a participant's account with NSCC on trade date +5 business days. Thus, participants processing transactions through NSCC will be in compliance with the provisions of the proposed rule.

      The proposed rule, as revised, will primarily affect those members who will not process transactions through the NSCC system since the rule contemplates a somewhat more liberal settlement procedure.

      Thus, the Committee believes that there is no reason to delay adoption of the rule.

      The rule should require similar prompt payment by investment companies to dealers when investment company shares are liquidated

      Section 22(e) of the Investment Company Act of 1940 governs prompt payment by mutual funds or their agents when shares are liquidated. This section requires a mutual fund to pay liquidation proceeds within seven days after the tender of the security to the fund or its agent.

      The Board of Governors prompt payment interpretation has never been applied to the liquidation of fund shares. The Committee believes that delays being experienced in the payment of liquidation proceeds are mainly due to the lack of uniform procedures and the large increase in the number of transactions in recent years. The Committee believes that the introduction of the NSCC automated system will provide the solution to most of the problems that are being experienced in this area of mutual fund activity.

      A period of six business days from the order date to the transmittal date is too short

      Many commentators stated that, for members who use the U.S. mail in their investment company activities and who habitually receive checks from customers in payment for their purchases of mutual fund shares, a period of six business days (T +5) from receipt of the order to the transmittal date is too short. They claim that this time period does not take into account the fact that confirmations sometimes are not received by customers until several days after the trade date, customers' checks are often not received promptly and, even if they are, they often take several days to clear.

      Imposing a T +5 standard, they claim, would mean that such members, particularly those who are small, would often not have received payment and would not have the necessary capital or the availability of such to enable them to transmit funds by the end of the fifth business day following the trade date.

      The result would be that they would either have to make expensive correspondent arrangements, terminate their wire order activities or discontinue mutual fund activities entirely since they would be at a competitive disadvantage with larger well-capitalized members.

      The Investment Companies Committee believes the views of these commentators have considerable merit. Hence, it is proposing a major change in the rule that it believes will be responsive to the needs of the members who will not participate in the NSCC system.

      The Committee considers that paragraph (1) of the proposed rule should be amended to permit an alternative transmittal date related to the time a member receives payment from a customer.

      The Committee recommends that the time a member has to transmit payments be one of the following, whichever is later: (1) the end of the fifth business day after the trade date; or (2) the end of the first business day following receipt of a customer's payment, provided, however, that members will be required to transmit payments by the end of trade date plus seven business days whether or not they have received payment from a customer [Exhibit I, paragraph (m)(l)].

      Prompt payment by underwriters to investment companies

      Several members commented that the requirement in paragraph (2) of the proposed rule, which will require members who are underwriters to transmit payments received to issuers by the end of one business day following receipt of such payments, does not provide sufficient time for underwriters engaged in direct retail transactions with customers to ensure that they are in possession of "good funds" because of the time it takes for checks to clear. The Committee believes this should not present a problem to most underwriters and resolved not to amend this section of the proposed rule.

      It was also agreed that paragraph (2) of the proposed rule should be amended to reflect the fact that payments are sometimes made by underwriters to the designated agents of issuers and not to the issuing mutual fund [Exhibit I, paragraph (m)(2B.

      * * * * *

      All members and other interested persons are invited to submit written comments on the proposed amended new rule and the proposed rescission of the prompt payment interpretation. Comments must be received no later than January 24, 1986, and should be directed to Mr. James M. Cangiano, Secretary, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, D.C. 20006.

      Comments received by the indicated date will be considered by the Investment Companies Committee and the NASD Board of Governors. If the proposed rule is approved by the Board, it must then be submitted to the membership for a vote. If approved by the membership, it must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions relating to this notice should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202) 728-8328.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

      PROPOSED AMENDMENT TO ARTICLE III, SECTION 26 OF THE NASD RULES OF FAIR PRACTICE*

      Prompt Payment for Investment Company Shares

      (m)
      (1) Members shall transmit payments for investment company shares, which such members have sold to customers, to underwriters or their designated agents by [(1)] the end of the fifth" business day following receipt of a customer order to purchase such shares [or by (2) the end of one business day following receipt of a customer's payment for such shares, whichever is the later date, provided, however, that members shall transmit payments to underwriters or their designated agents by the end of the seventh business day following receipt of a customer order to purchase such shares whether or not payment has been received from the customer].
      (2) Members who are underwriters shall transmit payments for investment company shares, which such members have received from other members or customers, to investment company issuers [or their designated agents] by the end of the one business day following receipt of such payments.

      * New language underlined; additional new language amending original proposed rule bracketed.


    • 85-85 Martin Luther King, Jr.'s Day; Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      The schedule of trade dates/settlement dates below reflects the observance by the financial community of Martin Luther King, Jr.'s Day, Monday, January 20, 1986. On Monday, January 20, 1986, the NASDAQ System and the exchange markets will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      January 10

      January 17

      January 21

      13

      21

      22

      14

      22

      23

      15

      23

      24

      16

      24

      27

      17

      27

      28

      20

      27

      29

      It should be noted that January 20, 1986, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Securities will not be quoted ex-dividend, and settlements, marks-to-the-market, reclamations, buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on January 20.

      The foregoing settlement dates should be used by broker-dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rule-making Board Rule G-12 on Uniform Practice.

      Questions concerning this notice should be directed to the Uniform Practice Department at (212) 839-6256.

      * * * * *


      * Pursuant to Sections 220.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l) make application to extend the time period specified. The date by which members must take action is shown in the column entitled "Regulation T Date."


    • 85-84 New Rule of Fair Practice Relating to Private Securities Transactions

      TO: All NASD Members and Other Interested Persons

      On November 12, 1985, the Securities and Exchange Commission approved a new Article III, Section 40 of the NASD Rules of Fair Practice (SEC Release No. 34-22617). The rule establishes new requirements for the private securities transactions of persons associated with members, and entirely replaces the Private Securities Transactions Interpretation under Article III, Section 27 of the rules. The new rule became effective upon approval by the SEC.

      The text of the new rule is attached.

      BACKGROUND

      The NASD has long been concerned about private securities transactions of persons associated with broker-dealers. These transactions can generally be grouped into two categories:

      1. Transactions in which an associated person sells securities to public investors on behalf of another party (e.g., as part of a private offering of limited partnership interests, without the participation of the individual's employer firm); or
      2. Transactions in securities owned by an associated person.

      The first category of transactions presents serious, regulatory concerns because securities may be sold to public investors without the benefit of supervision or oversight by a member firm and, perhaps, without adequate attention to such regulatory protections as due-diligence investigations and suitability determinations. In some cases, investors may be misled into believing that the associated person's firm has analyzed the security being offered and "stands behind" the product and transaction. The firm, in fact, may be unaware of the associated person's participation in the transaction. Under some circumstances, the firm may be liable for the actions of the associated person even though the firm was not aware of his or her participation in the transaction.

      In view of these concerns, the NASD promulgated the Private Securities Transactions Interpretation several years ago. The Interpretation required associated persons to notify their employer firms before participating in private securities transactions. A significant number of associated persons have been disciplined by the NASD for violation of this Interpretation in recent years. The Interpretation enabled firms to exercise better supervision over their associated persons.

      At the same time, the Interpretation was a source of substantial confusion, because it addressed only the responsibility of associated persons to notify their member firms of these transactions and did not specifically address the supervisory and oversight responsibilities of the firms. The Board of Governors' Advisory Council and several District Business Conduct Committees requested that the Interpretation be amended to clarify the firms' responsibilities in this area. After careful study, the Board adopted a new rule of fair practice to replace the Interpretation.

      The NASD published the proposed rule on private securities transactions for comment in Notice to Members 85-21 (March 29, 1985). In response to the comments received, and following further consideration of the proposed rule by the Board of Governors, the NASD published a slightly revised version for membership vote in Notice to Members 85-54 (August 13, 1985). The new rule was approved by the membership and filed with the SEC, which approved the new rule on November 12, 1985.

      Based on an analysis of regulatory problems regarding the handling of private securities transactions, the rule distinguishes between transactions in which the associated person will receive compensation for selling the securities and those for which no compensation will be received. The most serious regulatory concerns relate to situations in which associated persons receive selling compensation and, therefore, have an incentive to execute sales, perhaps without adequate supervision or adequate attention to suitability and due-diligence responsibilities. Some transactions in which associated persons participate without compensation need not be subjected to the same level of scrutiny as other transactions — for example, a salesperson owning stock in a closely held family corporation may wish to transfer that stock to another family member. Whether or not compensation is involved, the new rule specifies the recordkeeping and supervisory responsibilities of member firms.

      ANALYSIS OF NEW RULE

      Applicability — The new rule, which is attached, applies to any situation in which an associated person of a member proposes to participate in any manner in a private securities transaction.

      "Private securities transaction" is defined broadly and generally parallels the concept in the now-deleted Interpretation. Transactions subject to Article III, Section 28 of the NASD Rules of Fair Practice 1/and personal transactions in investment company and variable annuity securities are excluded, as are transactions among immediate family members (as defined in the Interpretation of the Board of Governors on Free-Riding and Withholding 2/) for which no associated person receives any selling compensation. Because regulatory problems most frequently occur in connection with private placements of new offerings, those transactions are specifically included within the definition of "private securities transaction."

      Written Notice — The rule requires associated persons to provide written notice to the employer member before participating in any private securities transaction. The notice must include a detailed description of the proposed transaction and the associated person's proposed role. As the rule treats compensatory and noncompensatory transactions differently, the notice also must state whether the associated person will receive compensation for selling the securities.

      Transactions for Compensation — For transactions in which an associated person has or may receive selling compensation, the rule requires that a member firm that receives written notice from an associated person of his or her intent to participate in a private securities transaction must indicate in writing whether the firm approves or disapproves of the associated person's participation in the proposed transaction. If participation is approved, the firm must supervise the associated person's participation to the same extent as if the transaction were executed on behalf of the member firm itself, and record the transaction on the firm's books and records.

      If participation is not approved, the associated person is prohibited from participating in the transaction in any manner.

      Transactions Not For Compensation — The rule requires that a member receiving notice that an associated person proposes to participate in a transaction, or a series of related transactions, without compensation, provide that associated person with written acknowledgment of the submitted notice.

      The rule also gives the employer firm the right to impose conditions on each associated person's participation in noncompensatory transactions. The intention is to give a member firm full discretionary authority to restrict its associated persons' private securities activities, including activities performed on a noncompensatory basis, and to require the associated person to adhere to any condition imposed.

      Definition of Selling Compensation — The definition of "selling compensation" plays a key role in the rule. Because the treatment of transactions varies significantly depending upon whether selling compensation is to be received, the definition of "selling compensation" is deliberately broad in its scope.

      The definition includes "any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security." Certain examples are provided, including: commissions; finder's fees; securities; and rights of participation in profits, tax benefits, or dissolution proceeds as a general partner or otherwise. While these examples include some of the most common forms of compensation, the definition is not restricted to these examples. It includes any item of value received or to be received directly or indirectly.

      It is important to note that the definition of "selling compensation" includes compensation received or to be received by anyone acting as a salesperson or in some other capacity, specifically including the capacity of a general partner. The definition is intended to address a practice in which associated persons function as general partners in the formation of limited partnerships and then sell limited-partnership interests to the public through private securities transactions. Any involvement in a securities transaction by an associated person of an NASD member firm may be subject to the panoply of regulatory requirements applicable to persons associated with a broker-dealer. Participation in transactions as a general partner, therefore, carries with it significant regulatory responsibilities.

      * * * *

      Questions concerning this notice may be directed to Dennis C. Hensley or Phillip A. Rosen, NASD Office of the General Counsel, at (202) 728-8446.

      Sincerely,

      Frank J.Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

      NEW RULE OF FAIR PRACTICE*

      Section 40: Private Securities Transactions

      (a) Applicability — No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this section.
      (b) Written Notice — Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.
      (c) Transactions for Compensation
      (1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to Subsection (b) shall advise the associated person in writing stating whether the member:
      (A) approves the person's participation in the proposed transaction; or
      (B) disapproves the person's participation in the proposed transaction.
      (2) If the member approves a person's participation in a transaction pursuant to Subsection (c)(l), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.
      (3) If the member disapproves a person's participation pursuant to Subsection (c)(l), the person shall not participate in the transaction in any manner, directly or indirectly.
      (d) Transactions Not For Compensation — In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to Subsection (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.
      (e) Definitions — For purposes of this section, the following terms shall have the stated meanings:
      (1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Article III, Section 28 of the Rules of Fair Practice, transactions among immediate family members (as defined in the Interpretation of the Board of Governors on Free-Riding and Withholding) for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.
      (2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

      1/ Section 28 requires associated persons who handle personal securities transactions through a member other than their employer (the "executing member") to notify the executing member of their employment with another member of the NASD. The executing member is then required to notify the employer member of activity in the associated person's account. See NASD Manual (CCH) ¶2178

      2/ NASD Manual (CCH) p. 2045.

      * All language is new. This rule replaces the Private Securities Transactions Interpretation under Article III, Section 27 of the NASD Rules of Fair Practice.


    • 85-83 NASDAQ National Market System Grows to 2,194 Securities With 16 Voluntary Additions on December 17, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, December 17, 1985, 16 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,194. These 16 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 16 issues scheduled to join NASDAQ/NMS on Tuesday, December 17, 1985, are:

      Symbol*

      Company

      Location

      BNBGV

      Bull & Bear Group, Inc. (Cl A) WI

      New York, NY

      COBK

      Co-operative Bank of Concord (The)

      Concord, MA

      ETCIA

      Electronic Tele-Communications Inc. (Cl A)

      Waukesha, WI

      HRLN

      Harlyn Products, Inc.

      Los Angeles, CA

      HRES

      Horizons Research, Inc.

      Cleveland, OH

      MAGAF

      Magna International, Inc.

      Markham, Ontario

      MFTN

      Metropolitan Federal Savings and Loan Association

      Nashville, TN

      MBSB

      Mt. Baker Bank, A Savings Bank

      Bellingham, WA

      NATG

      National Guardian Corporation (The)

      Greenwich, CT

      POSS

      Possis Corporation

      Minneapolis, MN

      PKPS

      Poughkeepsie Savings Bank, F.S.B. (The)

      Poughkeepsie, NY

      QEDXD

      Q E D Exploration, Inc.

      Denver, CO

      SWPA

      Southwest National Corporation

      Greensburg, PA

      STAN

      Stanline, Inc.

      Norwalk, CA

      WFPR

      Western Federal Savings Bank

      Mayaguez, PR

      WBRO

      Wood Brothers Homes, Inc.

      Denver, CO

      The following issues may be included in NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Additions

      Symbol*

      Company

      Location

      AMSB

      American Savings Bank, F.S.B.

      Tacoma, WA

      ARKR

      Ark Restaurants, Inc.

      New York, NY

      FUNDA

      Colonial Group, Inc. (The) (Cl A)

      Boston, MA

      DAYS

      Days Inns Corporation

      Atlanta, GA

      FIGIA

      Figgie International Holdings, Inc. (CIA)

      Richmond, VA

      METS

      Met-Coil Systems Corporation

      Cedar Rapids, IA

      SITVY

      Southbrook International Television Company, plc (ADRs)

      London, England

      NASDAQ/NMS Interim Additions

      Symbol*

      Company

      Date of Entry

      ROTC

      Rotech Medical Corporation

      12/03/85

      GWCC

      GWC Corporation

      12/06/85

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      AMRF

      Amerford International Corporation

      11/27/85

      TOPSA

      Topsy's International, Inc. (Cl A)

      11/27/85

      BESIE

      Besicorp Group, Inc.

      11/29/85

      EGLC

      Eagle Computer, Inc.

      11/29/85

      HTIG

      Hungry Tiger, Inc.

      11/29/85

      HACH

      Hach Company

      12/02/85

      NWFN

      Northwest Financial Corporation

      12/02/85

      CSLA

      Columbia Savings and Loan Association

      12/03/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Sharon Bellanger, Market Surveillance, at (202) 728-8206.

      Sincerely,

      Gordon S. Macklin
      President


      * NASDAQ symbols are proprietary to the National Association of Securities Dealers, Inc.


    • 85-82 Christmas Day - New Year's Day: Trade Date-Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Wednesday, December 25, 1985, Christmas Day, and Wednesday, January 1, 1986, New Year's Day. "Regular-way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      December 17

      December 24

      December 27

      18

      26

      30

      19

      27

      31

      20

      30

      January 2 1986

      23

      31

      3

      24

      January 2 1986

      --

      25

      MARKETS CLOSED

      6

      26

      3

      7

      27

      6

      8

      30

      7

      9

      31

      8

      10

      January 1 1986

      MARKETS CLOSED

      --

      The foregoing settlement dates should be used by brokers, dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.

      * * * * *


      * Pursuant to Sections 220.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Sections 220.8(d)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 85-81 Request for Comments on Proposed Exemption from Free-Riding Interpretation for Conversions of Savings and Loan Associations

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: JANUARY 2, 1986

      The National Association of Securities Dealers, Inc., (NASD) is requesting comments on a proposed amendment that would exempt certain persons purchasing securities in connection with the conversion of a savings and loan association or other organization from mutual to stock ownership from the restrictions of the Interpretation of the Board of Governors, Free-Riding and Withholding (the "Free-Riding Interpretation") under Article III, Section 1 of the NASD Rules of Fair Practice. The proposed amendment, and the history and background leading to its proposal, are discussed in this notice. The text of the amendment is attached.

      HISTORY AND BACKGROUND

      The Free-Riding Interpretation restricts certain persons from purchasing securities in a public offering if those securities trade at a premium in the immediate aftermarket. The Interpretation prohibits member firms, persons associated with members, immediate family members of such associated persons and other specified persons from purchasing or retaining securities that are part of a "hot" issue. It also requires members to make a bona fide public offering of such securities. To assure compliance with the Interpretation, most firms establish procedures to monitor purchases of new issues. As a practical matter, application of the Interpretation generally restricts the ability of members and their associated persons to purchase new issues.

      In recent years, a growing number of savings and loan associations have converted from the mutual form of ownership to stock ownership, issuing securities in the process. Under the rules of the Federal Home Loan Bank Board (FHLBB), federally chartered institutions usually offer their depositors, borrowers and community residents the opportunity to subscribe to their securities prior to any under-written public offering. In some cases, an association's entire offering will be sold through this subscription process, without participation by a broker-dealer. More commonly, the issuing institution will sell a portion of the offering during the subscription period, with the remaining securities being underwritten and distributed by a broker-dealer. The point at which the broker-dealer becomes involved, and the role performed, varies.

      With the proliferation of savings and loan conversions, numerous questions have arisen concerning the ability of persons subject to the Free-Riding Interpretation to purchase securities directly from a savings and loan association during its subscription period. These questions involve several complex issues, especially when a restricted person is entitled under FHLBB rules to purchase securities in the capacity of a depositor or borrower, or when it is unclear whether a broker-dealer will be involved in the offering.

      PROPOSED AMENDMENT

      In view of these numerous issues, the National Business Conduct Committee (NBCC) of the NASD Board of Governors has reviewed the FHLBB rules, the practices involved in savings and loan conversions and the policy considerations behind the restrictions of the Free-Riding Interpretation. On the basis of this analysis, the NBCC concluded that it is appropriate to exempt certain persons from the Free-Riding Interpretation under specified conditions. In doing so, the NBCC also concluded that it is appropriate to make a distinction between member firms, their associated persons and immediate family members on the one hand and all other restricted persons covered under the Interpretation on the other hand.

      Definitions

      The proposed amendment would define "conversion offering" as an offering that is part of a plan whereby a savings and loan association or other organization converts from the mutual form to the stock form of ownership. The definition includes offerings by other organizations and would make the language applicable, for example, to conversions by mutual insurance companies.

      The amendment would define "eligible purchaser" to mean a person who is eligible to purchase securities directly from the issuer in a savings and loan conversion offering under FHLBB rules and who has a direct relationship with the issuer as a depositor, borrower, officer, director or employee, or serves in a similar capacity.

      The terms of savings and loan conversions specify those persons eligible to purchase directly from the issuer in transactions that are not handled by the underwriter. Often, persons eligible to make such purchases can do so prior to the public, underwritten offering. In some cases, the entire offering is distributed to such purchasers. Under FHLBB rules, eligibility to purchase may be extended to residents of the community in which the converting association is located. After careful consideration, the NBCC concluded that it is appropriate to extend the proposed exemption from the Free-Riding Interpretation only to those purchasers who have a direct relationship with the issuer. Thus, depositors, borrowers, officers, directors or employees could claim the exemption (assuming they meet all other criteria), but persons who are eligible under FHLBB rules solely due to their residence could not.

      Sales by the Issuer

      The proposed amendment provides an exemption from the Free-Riding Interpretation in two different situations:

      1. Sales directly by the issuer.
      2. Sales by members.

      In the first situation, the amendment must address sales by the issuer because the Interpretation otherwise would indirectly prohibit some such sales. When a member or associated person participates in an offering, all transactions that are part of the offering are scrutinized for compliance with the Interpretation. In a typical savings and loan conversion, therefore, sales made directly by the issuer to restricted persons may constitute violations of the Interpretation by NASD members participating in the offering.

      The amendment would permit members and associated persons to participate in a conversion offering notwithstanding the fact that the issuer may have sold, or may sell, securities of the offering to persons restricted by the Interpretation. For the exemption to be available, however, any such sales by the issuer must be made only to eligible purchasers as defined. Those purchasers may not be members, their associated persons or immediate family members of associated persons, and the sales must be effected without any direct or indirect participation by a member or associated person. In a savings and loan conversion, therefore, a member could participate in the offering even though the issuer has directly sold shares to restricted persons as long as no sales were made to a member, associated person or immediate family member.

      Sales to Members, Associated Persons and Their Immediate Families

      The proposed amendment would deal separately with sales to member firms, their associated persons and members of their immediate families and would impose more stringent conditions on the exemption. The NBCC believes there are inherent conflicts of interest between participation in the securities industry and the purchase of "hot" issues, even in the context of the conversion of a savings and loan association. The NBCC concluded that it is necessary to require persons in this category to satisfy additional conditions beyond those previously mentioned for non-securities industry persons.

      Subsection (c) would permit members and associated persons to sell securities as part of a conversion offering to members and associated persons and their immediate families if seven conditions are met:

      1. Any purchaser must be an eligible purchaser as defined.
      2. If a member firm has agreed to serve for compensation as the managing underwriter, appraiser or financial advisor to the issuer in connection with the conversion, neither that member, its associated persons nor their immediate family members can take advantage of the exemption. This restriction becomes applicable when the firm has reached an understanding with the issuer. Persons may claim the exemption prior to the point when such an understanding is reached.
      3. Any purchaser claiming the exemption under this category would be required to provide written notice to the issuer of his restricted status under the Free-Riding Interpretation. This condition will enable the issuer and any broker- dealer that may participate in the offering to identify those persons who are subject to the Free-Riding Interpretation to determine whether they have properly satisfied the conditions of this exemption.
      4. As a further means of assuring compliance with the conditions of the exemption, associated persons and their immediate family members would be required to provide the person's employer firm with written notice of the subscription.
      5. The amount of securities purchased by a person claiming this exemption would be required to be consistent with his or her normal investment history. This limitation is intended to assure that members of the securities industry do not abuse the privilege of purchasing securities in converting institutions to the exclusion of public investors.
      6. Securities purchased under this subsection would be restricted from sale, transfer or hypothecation for 90 days following the conclusion of the public offering. This condition is intended to assure that members, their associated persons and immediate families are purchasing the securities for at least a short-term investment and not with the intent of immediately reselling those securities at a premium. The 90-day "lock up" will assure that those persons bear market risk for a reasonable period of time. Such persons thereby would have less incentive to influence prices in the immediate aftermarket to realize profit and would have an incentive to establish a fair public offering price.
      7. No member firm, associated person or immediate family member would be permitted to collect solicitation fees from the issuer in connection with purchases made under this subsection. The NBCC concluded that it would be unfair to permit those parties to obtain the potential benefit of an investment under the exemption as well as the payment of a solicitation fee from the issuer.

      * * * *

      All members and other interested persons are invited to submit comments on the proposed rule. Comments should be received no later than January 2, 1986, and should be directed to:

      Mr. James M. Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Comments received by the indicated date will be considered by the NBCC and the NASD Board of Governors. Any rule change approved by the Board must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to Dennis C. Hensley, Vice President and Deputy General Counsel, at (202) 728-8245.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      TEXT OF PROPOSED AMENDMENT

      Amend the Interpretation of the Board of Governors, Free-Riding and Withholding under Article III, Section 1 of the Rules of Fair Practice by adding at the end thereof the following language:

      Conversion Offerings

      (a) Definitions — For purposes of this subsection, the following terms shall have the meanings stated.
      (i) "Conversion offering" shall mean an offering of securities made as part of a plan by which a savings and loan association or other organization converts from the mutual form to the stock form of ownership.
      (ii) "Eligible purchaser" shall mean a person who is eligible to purchase securities pursuant to the rules of the Federal Home Loan Bank Board or similar agency governing conversion offerings and who has a direct relationship with the issuer as a depositor, borrower, officer, director or employee, or serves in a similar capacity.
      (b) Sales by Issuer — This Interpretation shall not prohibit a member or person associated with a member from participating in a conversion offering notwithstanding the fact that the issuer may have sold or may sell securities of the offering to persons otherwise restricted by this Interpretation, provided that any such sale is made in compliance with all of the following conditions:
      (i) the purchaser is an eligible purchaser;
      (ii) the purchaser is not a member, a person associated with a member or a member of the immediate family of a person associated with a member; and
      (iii) the sale is effected without the participation directly or indirectly of a member or person associated with a member.
      (c) Sales to Members, Associated Persons and Immediate Family Members — This Interpretation shall not prohibit a member or person associated with a member from selling securities as a part of a conversion offering to a member, a person associated with a member or a member of the immediate family of a person associated with a member, provided that such sale is made in compliance with all of the following conditions:
      (i) the purchaser shall be an eligible purchaser;
      (ii) the purchaser shall not be, nor be associated with, nor be a member of the immediate family of a person associated with, a broker-dealer that has agreed to receive compensation for acting as managing underwriter, appraiser or financial advisor to the issuer in connection with the conversion, or for providing any other service to the issuer;
      (iii) the purchaser shall provide written notice to the issuer, on the subscription form or otherwise, of his or her restricted status under this Interpretation;
      (iv) a person associated with a member shall provide that member with written notice of a purchase by the associated person or a member of his or her immediate family;
      (v) the amount of securities purchased shall be consistent with the purchaser's normal investment history;
      (vi) the securities purchased shall be restricted from sale, transfer or hypothecation for 90 days following the conclusion of the public offering; and
      (vii) neither the purchaser nor the broker-dealer with which he or she or a member of his or her immediate family is associated shall receive any solicitation fees or similar compensation for sales to the broker-dealer, associated person or immediate family member.

    • 85-80 Final Rules Regarding the Securities and Exchange Commission's Direct Shareholder Communication Program

      TO: All NASD Members

      The Securities and Exchange Commission has adopted the amendments proposed in March to its shareholder communications rules. The amendments, which specify the obligations of brokerage firms and issuers, stipulate:

      • That issuers who request a list of nonobjecting security holders from one broker must request it from all brokers with customers who beneficially own the issuer's securities.

      • That brokerage firms must provide the beneficial-owner lists to issuers as often as they request the information.

      • That issuers may send their annual reports directly to beneficial owners if they notify the broker at the time they submit their search cards.

      These amendments were proposed after the SEC postponed the effective date of its direct shareholder communications program from January 1, 1985 to January 1, 1986. The postponement, requested by representatives of the securities industry and issuer community, was intended to give the industry time to determine the reasonable costs of compiling the required information and to implement a system that would provide issuers with the beneficial-owner information in an efficient, timely and effective manner.

      To cover the start-up costs of providing issuers with the information, the NASD permitted members to assess a $.20 per proxy surcharge for the 1985 annual meeting proxy solicitation. If needed, a second surcharge may be permitted for the 1986 proxy season to finance any remaining start-up costs.

      When it authorized the deferral, the Commission agreed to clarify the functions of brokerage firms and issuers to ensure the effective implementation of a system of direct communication. In March 1985, the SEC issued a release on its proposals in this area, which the NASD reprinted in Notice to Members 85-30, dated April 22, 1985. The majority of commentators, who represented the legal and issuer communities and the securities industry, supported the proposals. Accordingly, the Commission adopted the amendments substantially as proposed.

      In the release, the SEC recognized the importance of an intermediary to effectively implement its shareholder communications program but did not formally endorse such an intermediary in its rules. Responding to comments on this issue, the Commission has modified the rules to recognize that a brokerage firm may employ an intermediary to act as its designated agent in performing the obligations imposed under the shareholder communications rules.

      In addition, the SEC adopted a specified response time in which brokerage firms or their designated intermediary must forward to issuers the list of nonobjecting beneficial owners. The Commission will monitor the program to ensure that it functions properly.

      For your convenience, a copy of the SEC's release is enclosed with this notice. The release includes background on the shareholder communications rules and revisions, as well as an overview on implementation.

      Any comments or questions regarding this notice should be directed to Thomas P. Mathers of the NASD Communications Group at (202) 728-8267.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-22533; IC-14755; File No. S7-13-85]

      Facilitating Shareholder Communications

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rules.

      SUMMARY: The Securities and Exchange Commission ("Commission") today announced the adoption of amendments to its shareholder communications rules which govern the process by which registrants communicate with the beneficial owners of securities registered in the name of a broker, dealer or other nominee. The amendments are intended to allow for the most advantageous implementation of the system of direct communication provided under those rules.

      EFFECTIVE DATE: New Rule 14a-13 and amended Rules 14b-1 and 14c-7 are effective January 1, 1986.

      FOR FURTHER INFORMATION CONTACT:

      Prior to the effective date, contact Sarah A. Miller, (202) 272-2589, Office of Disclosure Policy, Division of Corporation Finance, Securities and Exchange Commission 450 Fifth Street, NW., Washington, DC 20549. After the effective date, contact Cecilia D. Blye, (202) 272-2573, Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

      SUPPLEMENTARY INFORMATION: The Commission today announced the adoption of certain rule amendments to Rule 14b-1 1 and 14o-7 2 and the adoption of Rule 14a-13.3

      I. Executive Summary

      In March 1985, the Commission proposed certain amendments to refine its shareholder communications rules.4

      These amendments delineated, in two separate rules, the respective obligations of brokers and registrants. In addition, the proposed amendments provided, among other things, that: (1) If a registrant requests the list of non-objecting security holders, it must request the list from all brokers having customers who are beneficial owners of the registrant's securities; (2) a broker must provide the beneficial owner lists to registrants as often as they request the information, rather than only once a year, and (3) a registrant may mail its annual report to security holders directly to its beneficial owners so long as the registrant notifies the broker at the time it submits a search card or requests beneficial owner information by some other means.5 These amendments resulted from the one-year deferral of the effective date (from January 1, 1985 to January 1, 1986) of Rule 14b-l(c) which was agreed to by representatives of the securities industry and registrant community and authorized by the Commission in August 1984.6The deferral was intended to provide more time for the determination of reasonable costs and the implementation of a system to provide registrants with security holder information in an efficient, timely, and effective manner. At the time it authorized the deferral, the Commission agreed to undertake certain steps to clarify the respective functions of brokers and dealers 7 (hereinafter collectively referred to as "brokers") and registrants to ensure the effective implementation of the system of direct communication.

      These proposals generated 41 comment letters.8 Commentators, representing the legal and registrant communities and the securities industry, generally supported the proposals to improve the system of direct communications between registrants and beneficial owners. Accordingly, the Commission is adopting the amendments substantially as proposed.

      The proposing release recognized the importance of an intermediary to the effective implementation of the shareholder communications rules. Commentators urged the Commission to recognize explicitly in the rules the role of an intermediary in the shareholder communications system. Also commentators suggested, in response to an inquiry in the proposing release, that the Commission provide for a specified response time in which brokers are to provide registrants with lists of beneficial owners who do not object to disclosure of their names, addresses, and securities positions. In light of these comments, the Commission modified the rules to recognize that a broker may employ an intermediary to act as its designated agent in performing the obligations imposed under the shareholder communications rules and to provide a specified response time in which brokers are to forward to registrants non-objecting beneficial owner lists. Certain other technical clarifying revisions also have been made. The Commission will monitor the workability of its shareholder communications rules to determine whether any further refinements to the rules are necessary and appropriate.

      This release discusses the background to the shareholder communications rules and the revisions to those rules. The release also provides an overview regarding implementation of these rules. Persons interested in further information are directed to the text of the amendments and the proposing release.

      II. Background

      Rule 14b-l was revised substantially in 1983 pursuant to recommendations of the Advisory Committee on Shareholder Communications, contained in its report, Improving Communications Between Issuers and Beneficial Owners of Nominee Held Securities. Paragraph (c) of the rule was adopted to provide a means of direct communication between registrants and their beneficial owners by requiring brokers to provide requesting registrants with the names, addresses, and securities positions of their customers who are beneficial owners of the registrant's securities and who have not objected to such disclosure.9 In August 1984, the Commission deferred the original effective date of paragraph (c) from January 1, 1985 to January 1, 1986. The deferral provided additional time to ensure the most effective implementation of the shareholder communications system.10 Representatives of the securities industry and the registrant community agreed that during this deferral period they would develop and establish both an efficient means of furnishing beneficial owner information to registrants and an appropriate schedule of reimbursement.

      In September 1984, the New York Stock Exchange ("the NYSE") appointed the Ad Hoc Committee on Identification of Beneficial Owners. The Ad Hoc Committee, composed of members of both the securities industry and registrant community, was formed to resolve the cost issues and to develop a workable and effective system that would be of maximum use to registrants and not burdensome to brokers. The Ad Hoc Committee now largely has resolved the problems which initially led to the deferral of the effective date of Rule 14b-l(c). The reimbursement of start-up costs issue has been resolved through self-regulatory organization ("SRO") rule changes that permit brokers to assess a $.20 per proxy surcharge for the 1985 annual meeting proxy solicitation. This surcharge, together with an additional surcharge for the next annual meeting proxy solicitation, will fund the start-up costs associated with furnishing the beneficial owner information to registrants. The second surcharge will fund the balance of the costs not funded by the first $.20 surcharge and will be the subject of separate SRO rule changes.11 The other cost issue—determination of reasonable costs for maintaining beneficial owner lists—is being addressed by the Ad Hoc Committee and also will be the subject of a separate SRO rule change.

      In August 1985, the Ad Hoc Committee drafted a model letter to aid brokers, in communicating with their customers in order to ascertain whether or not they object to disclosure of their names, addresses, and securities positions. The NYSE forwarded that letter to brokers and to the American Stock Exchange and the National Association of Securities Dealers.

      To make the system work and to ensure that registrants find the beneficial owner lists useful and meaningful, the Ad Hoc Committee also determined that an intermediary was necessary. By employing an intermediary to compile and to supply beneficial owner lists, registrants will be assured that the lists are compiled in a standardized manner. Moreover, brokers will be assured that the source of the lists will be kept confidential. In addition, economies of scale will be realized by permitting them to delegate this function to an intermediary which will maximize cost savings while minimizing burdens on brokers. The Ad Hoc Committee requested proposals and selected Independent Election Corporation of America ("IECA") to serve as the intermediary between registrants and brokers in supplying lists of beneficial owners. In this function, IECA will be governed by a user board consisting of registrants, brokers, and other industry representatives.

      At the time of the deferral of the effective date of Rule 14b-l(c), the Commission agreed to clarify certain aspects of the shareholder communications rules and to take certain additional steps which are the subject of this release.

      While the amendments pertain to brokers, the Commission believes that enactment of legislation authorizing the Commission to regulate the proxy processing activities of banks, associations, and other fiduciary entities will realize the full potential of the shareholder communications rules. On July 22, 1985, the House of Representatives passed, by voice vote, legislation entitled the Shareholder Communications Act of 1985 (H.R. 1603). That legislation has been referred to the Securities Subcommittee of the Senate Committee on Banking, Housing, and Urban Affairs. A companion bill (S. 918) was introduced in the Senate on April 16, 1985.

      III. Overview of Shareholder Communications Rules

      New Rule 14a-13 sets forth two different procedures relating to registrants' obligations in communicating with their beneficial owners, while amended Rule 14b-l pertains to brokers' obligations in connection with communicating corporate information to beneficial owners. Under the first procedure, registrants are required, pursuant to new Rule 14a-13(a) (formerly Rule 14a-3(d)) to inquire, by means of a search card or otherwise, of their record holders the number of proxies and other proxy soliciting material or annual reports to security holders needed by record holders to forward the material to beneficial owners. The registrant must request this information at least 20 calendar days prior to the record date of the annual meeting and the broker is required, under Rule 14b-l(a), to respond to this request within seven business days of receipt of the request. Upon receipt of the proxy, proxy soliciting material or annual report, the broker is required under Rule 14b-l(b), to forward these materials within five business days of receipt to its customers who are beneficial owners.

      Rule 14a-13(b) sets forth the requirements for those registrants who wish to communicate directly with their beneficial owners. If a registrant requests a list of beneficial owners who do not object to disclosure of their names, addresses, and securities positions, it must make that request of all brokers having customers who are beneficial owners of the registrant's securities. Further, a registrant is permitted to request a list of non-objecting beneficial owners more often than once a year and the broker will be required to comply with any such request. These lists would be compiled as of the record date for the registrant's latest annual or special meeting. If no meeting is scheduled and the registrant requests a list of its beneficial owners, that list is to be compiled as of a date to be selected by the registrant that is no less than five business days after the broker receives the request. The broker must forward the beneficial owner information to the registrant no later than five business days after the compilation date of the list, e.g., the record date or other date. For example, if no annual or special meeting is scheduled and the broker receives a registrant's request for the list of beneficial owners on October 15, 1985, the list would be compiled as of a date selected by the registrant that is no earlier than October 22, 1985. The broker, in turn, would be required to forward the beneficial owner list to the registrant by October 29, 1985.

      The amendments further provide that, if it chooses, the registrant may mail annual reports directly to non-objecting beneficial owners so long as the registrant notifies the broker when making its initial request for beneficial owner information that the registrant intends to mail the annual report directly to its non-objecting beneficial owners. The registrant would notify the broker of its intention at the time it submits a search card requesting the beneficial owner information. If so notified by the registrant, a broker would have no obligation in connection with that mailing to forward the annual report to non-objecting beneficial owners but would have, of course, the obligation to forward reports to those beneficial owners who objected to the disclosure of their identities.

      The amendments also would provide that, without assurances of reimbursement of reasonable expenses associated with satisfying its obligations with respect to communications with beneficial owners, a broker has no obligation to perform its obligations under Rule 14b-l(b) and (c). The registrant has a corresponding obligation to pay a broker's reasonable expenses associated with providing beneficial owner information.

      If a broker has designated an agent or intermediary to act on its behalf in performing its obligations under Rule 14b-l(c), the registrant must make its request for a list of non-objecting beneficial owners to that designated agent. If the broker has designated such an agent, the registrant will learn the agent's identity when it submits, pursuant to Rule 14a-13(a), the search card requesting the number of proxy cards, proxy soliciting material, and annual reports needed by the broker to forward to beneficial owners. The broker, in turn, is required, under Rule 14b-l(a), to identify its agent, if one has been designated. After receiving the registrant's request for beneficial owner information, the agent will notify all brokers of the registrant's request. Brokers will supply the intermediary with the information who then will compile the information in a standardized delivery format and forward it to the registrant. Using the above example, the registrant will make its request to the designated agent for a list of non-objecting beneficial owners. If no annual or special meeting is scheduled and the designated agent receives the registrant's request for the list on October 15, 1985, the list would be compiled as of the date selected by the registrant that is no earlier than October 22, 1985. The designated agent would make the request for a list of non-objecting beneficial owners from all brokers. Brokers, in turn/would forward the requested information to the designated agent who would then compile the list and deliver it to the registrant by October 29, 1985.

      IV. Discussion

      A Use of Intermediary
      1. Overall Role
      Both the Commission and the Ad Hoc Committee believe that an intermediary is necessary to the effective implementation of the shareholder communications system. The intermediary would receive registrants' requests for beneficial owner information and deliver the beneficial owner information supplied by all brokers to the registrants. The proposing release recognized the intermediary's importance in stating that an intermediary will be employed to compile and to supply beneficial owner lists in order to assure standardized delivery format and client confidentiality of brokers.12 The Commission further noted that economies of scale will be realized by maximizing cost savings while minimizing burdens on brokers by permitting them to delegate this function to an intermediary.13
      The intermediary would serve as a central processing agent between brokers and registrants in the transmission of lists of non-objecting beneficial owners.14 In addition, the intermediary would act, on behalf of brokers, in performing all administrative functions required in providing beneficial owner information, including: receiving requests for beneficial owner information from registrants; advising brokers of the record date for a registrant's request; receiving customer lists from brokers; preparing, in a standardized format, lists of non-objecting beneficial owners and billing registrants for fees associated with providing the beneficial owner information.15
      Commentators generally endorsed the use of an intermediary. Several commentators, representing registrants as well as the legal and brokerage communities, suggested, however, that the shareholder communications rules be amended to reflect specifically the intermediary's role in the system of direct communications. Because the Commission believes that the use of an intermediary is necessary for the system to work efficiently, particularly to assure both client confidentiality and standardized delivery format, the Commission has revised the rules to reflect that (1) brokers may employ an intermediary to act as agent on their behalf in fulfilling the broker's obligations under the shareholder communications rules, and (2) registrants must make their requests to such intermediary. Obviously, registrants will make the request for a non-objecting beneficial owner list to the intermediary only after, the brokers' response to the search card identifying the intermediary is received. Should a broker later designate a new intermediary to act on its behalf, it would be to the benefit of all concerned parties for the broker to notify the registrant of this fact.
      While the Commission envisions that brokers generally will choose to employ an agent to assist them in performing their obligations under these rules, and that the agent employed generally will be the intermediary selected by the Ad Hoc Committee, employing an intermediary is not a condition to complying with the shareholder communications rules. Accordingly, the revised rules recognize that a broker may not wish to employ an intermediary to act on its behalf and that, in such cases, the registrant must make the request directly to the broker. The specific amendments reflecting the intermediary's role are discussed below.
      2. Client Confidentiality
      Of those commentators who addressed the assurance of the client confidentiality function of the intermediary, securities industry commentators endorsed the concept while three registrant and legal commentators opposed it. By employing an intermediary to excise all information identifying specific brokers, brokers will be assured that registrants will obtain only the names, addresses, and securities positions of its beneficial owners". The two registrant commentators who opposed the broker anonymity function of the intermediary maintained that broker confidentiality might limit the usefulness of the beneficial owner information. The Commission believes, however, that disclosure of the broker's identity would not enhance the system of direct communications and, accordingly, has amended Rule 14b-l(c) by adding a note stating, among other things, that a broker or its agent need only supply the registrant with the names, addresses, and securities positions of non-objecting beneficial owners.
      3. Standardized Delivery Format
      The proposing release stated that by employing the intermediary to compile and to supply beneficial owner lists, registrants will be assured that the lists are compiled in a standardized manner. Commentators generally endorsed the use of the intermediary to achieve this. Certain commentators, however, suggested that the Commission condition the implementation of the shareholder communications system on specifying a common delivery format. The Commission believes that establishing a mutually acceptable delivery format is best left to the determination of the participants in the shareholder communications system. The Commission would anticipate, however, that any delivery format established would allow registrants flexibility and facilitate corporate communications.
      B. 14a-13 Obligations of Registrants in Communicating With Beneficial Owners
      1. General.
      Proposed Rule 14a-13 consolidated all registrant-related provisions associated with direct shareholder communications, by placing together provisions of Rule 14a-3(d) and the registrant-related provisions of Rule 14b-l(c). As adopted, Rule 14a-13 deals explicitly with solicitations of written consents or authorizations when circumstances warrant separate treatment and to provide that if a special meeting is convened to elect directors in lieu of an annual meeting, an annual report must be furnished to security holders in connection with such meeting. In addition, Rule 14a-13 makes clear that the annual report to security holders is required whether the registrant is soliciting proxies or consents in connection with the annual election of directors and that if it is impracticable for a registrant to make the inquiry for beneficial owner information of the record holder 20 calendar days before the record date of a special meeting then the request must be made as soon as practicable before the record date of such meeting.16
      2. Rule 14a-13(a)
      Consistent with commentators' suggestions, Rule 14a-13(a)(l) was revised to clarify that the registrant would only need inquire of brokers as to the specific number of copies of the annual report to security holders that ultimately will be distributed by the brokers to beneficial owners pursuant to Rule 14b-l(b). This information would be in addition to the number of copies of the proxy and proxy soliciting material needed to forward to all beneficial owners. To ensure that a registrant knows to whom the request for beneficial owner information is to be made—the broker or its agent—Rule 14a-13(a)(l) was changed to require a registrant to inquire specifically of a broker whether it has designated an agent to act on its behalf and, if so, to ascertain the name and address of that agent. As discussed below, a corresponding change has been made to Rule 14b-l(a). Rule 14a-13(a}(l) also has been changed to clarify that, if it wishes to mail its annual report directly to non-objecting beneficial owners, a registrant has an obligation under Rule 14a-13(c) to notify the broker at the time it makes its inquiry, pursuant to Rule 14a-13(a), that it intends to send copies of its annual report to security holders to non-objecting beneficial owners.
      Rule 14a-13(a)(3) has been changed in two respects. First, Rule 14a-13(a)(3} has been revised to clarify that supplying record holders with copies of the proxy, proxy soliciting material, and annual report to security holders and not just the annual report to security holders must be done in a timely manner. Second, commentators expressed concern that Rule 14a-13(a)(3) may be interpreted to require registrants to supply brokers with sufficient copies of the annual report to security holders to mail to all beneficial owners even if the registrant intended to mail the annual reports to security holders directly to its non-objecting beneficial owners. To prevent any such misunderstandings, Rule 14a-13(a)(3) and companion Note 2 have been revised to reflect the possibility that a registrant may mail the annual report to security holders to non-objecting beneficial owners and to " require registrants, in those cases, to supply record holders with only the requisite number of copies for distribution by the broker to objecting beneficial owners.
      3. Rule 14a-13(b)
      As proposed, Rule 14a-13(b) would have required that a registrant request the list from all brokers having customers who are beneficial owners of the registrant's securities. This requirement was intended to ensure that registrants do not request the security holder lists only from the largest brokers thereby leaving the smaller brokers with no means of recouping expenses associated with maintaining the required information. Commentators generally endorsed the proposal. Of the three commentators who opposed the provision, one commentator suggested that registrants involved in a takeover primarily are interested in holders of large blocks of its securities and should not be required to request non-objecting beneficial owner lists from all brokers.17 The Commission continues to believe that this provision is necessary for the rule to be fair and effective and has adopted the provision as proposed.
      With regard to security holder confidentiality, Rule 14a-13(b)(2) states explicitly that a registrant must use the beneficial owner lists exclusively for purposes of corporate communications. The Commission believes that the inclusion of this provision in the rule adequately addresses concerns regarding security holder confidentiality.
      The proposing release also addressed the issue of voluntary communications such as quarterly reports.18 Due to the importance of this issue the Commission again encourages registrants in connection with their use of beneficial owner lists voluntarily to forward corporate communications to all beneficial owners either directly or through brokers. Accordingly, the Commission believes it is desirable where registrants use the non-objecting beneficial owner lists to mail such communications directly to non-objecting beneficial owners, that they also deliver to brokers for forwarding a sufficient number of copies of the corporate communication in order not to disadvantage those security holders who object to disclosure of their identities to registrants.19 Further, the Commission believes that even in the case of voluntary communications, the rapid turnover of securities and accompanying non-objecting beneficial owners should be considered in order to avoid the use of outdated non-objecting beneficial owner lists.
      Next, consistent with commentators' suggestions, both Rule 14a-13 (b) and (c] were revised to recognize that an intermediary can act as the brokers' agent. Accordingly, when a broker indicates that it has designated an agent, the registrant shall request the beneficial owner list from the agent and reimburse the designated agent for the reasonable expenses 20 associated with providing the beneficial owner information. Thus, the Commission anticipates that, if all brokers have designated the intermediary selected by the Ad Hoc Committee, a registrant will need to make only one request for the non-objecting beneficial owner list to that intermediary to satisfy its obligations under Rule 14a-13(b).
      4. Rule 14a-13(c)
      Proposed Rule 14a-13(c) would have permitted a registrant21 to mail the annual reports to security holders directly to those non-objecting beneficial owners that have been identified to them. 22 Any registrant choosing to do its own annual report mailing, however, is required, pursuant to paragraph (a), to so inform the broker at the time it made its inquiry for beneficial owner information under paragraph [a]. Commentators overwhelmingly supported the proposal and, accordingly, the Commission adopted this provision substantially as proposed.
      The proposing release stated that for reasons of economy, registrants may wish to engage in split mailing, i.e, forwarding the annual report by bulk mail and mailing the proxies and other proxy soliciting material by first class mail. In connection with the use of split mailings, certain registrant commentators addressed the requirement in Rule 14a-3(b) that annual reports must accompany or precede the proxy statement Commentators requested the Commission to provide specific guidance in this area. Due to the variety of geographic source locations for mailing annual reports and proxy soliciting materials of public reporting companies as well as intended destinations of the materials, however, the Commission is unable to specify exact time periods. Registrants who take steps reasonably calculated to guarantee that the annual reports to security holders accompany or precede the proxy statements will be deemed to have complied with Rule 14a-3(b).23
      The proposing release also solicited comment as to whether Rule 14a-5 24 should be amended to provide that when annual reports to security holders are mailed separately from proxy material, all proxy statements should disclose the date the mailing of the annual report to security holders was commenced and should contain instructions on how to obtain a copy of that annual report. The majority of those commentators addressing this issue were registrants who overwhelmingly opposed such an amendment to Rule 14a-5. These commentators based their opposition on the grounds that either no useful purpose would be served or that changes in schedule would prevent accurate disclosure of the date of mailing of the annual report. The Commission agrees and, accordingly, has determined not to amend Rule 14a-5 in this manner.
      C. 14b-l Obligation of Registered Brokers in Connection With the Prompt Forwarding of Certain Communications to Beneficial Owners
      1. General
      In response to commentators' suggestions, Rule I4b-1 was revised to allow a broker to employ an intermediary to act on its behalf in performing the broker's obligations under the shareholder communications rules. The provision in Rule 14b-l{a) corresponds to that in Rule 14a-13(a)(l) which requires a broker to respond to a registrant's inquiry as to whether the broker has designated an agent to act on its behalf and, if so, to provide the name and address of that designated agent.
      2. Rule 14b-l{c)
      Under proposed Rule 14b-l(c), a registrant could request the beneficial owner list whenever it wants such a list and the broker, in response to that request, would provide the list. Specifically, the registrant could request the list to be compiled either as of the registrant's record date for its latest annual or special meeting of security holders or, if the request is not made in connection with a meeting, a date no earlier that ten business days after receipt of the registrant's request. Commentators generally supported the proposal to permit registrants to request the lists as often as they wished. One commentator, however, proposed that a maximum number of requests per registrant per year be established. Because these rules are intended to provide for maximum communication between registrants and their beneficial owners, the Commission is of the view that, at this time, registrants should not have limits imposed on the. number of requests for beneficial owner lists and, accordingly, has not adopted any such limits.
      Proposed Rule 14b-l[c] also provided that non-meeting lists of non-objecting beneficial owners would be compiled as of a date no earlier than ten business days after receipt by the broker of the registrant's request. The proposed ten business day time period was based on the Commission's understanding that broker's back office Systems generally do not permit retroactive establishment of beneficial owner lists but, rather, only allow those lists to be established prospectively. Because the securities industry has indicated that this time period should be shortened, the Commission has adopted a five business day time period 25 for non-meeting beneficial owner lists. Such an amendment will facilitate communication between registrants and security holders especially involving those corporate actions when time factors are critical.
      Proposed Rule 14b-l(c) was structured to provide that a registrant may designate the compilation date for non-meeting lists. Registrant and legal commentators expressed concern, however, that Rule 14b-1(e) was not sufficiently explicit in empowering the registrant rather than the broker, to designate the compilation date for non-meeting lists. The Commission believes that registrants should be permitted to select the date as of which die non-meeting list Is to speak and, accordingly, has clarified that that is the case. Thus, under the rules a registrant may specify the compilation date for a non-meeting list. That date, however, cannot be any earlier than five business days after the broker receives the registrant's request.
      In connection with a broker's obligation to provide beneficial owner lists to a registrant, the Commission requested comment on whether a time limit should be specified within which a broker is to provide the registrant with the requested list. An overwhelming majority of the commentators who responded supported imposing a specified tarn around response time period. These commentators reasoned that a specific time limit was essential to the operation of the shareholder -communication rules and made suggestions for a sufficient time period ranging from five to twenty business days. The Commission agrees that a specified time period is appropriate to ensure that registrants do not receive stale beneficial owner lists that are of little or no value. Accordingly, the Commission has adopted a five business day time period in which brokers are to respond to a registrant's request for non-objecting beneficial owner lists.26 In recognition of the likelihood that a broker may designate an agent to act on its behalf, a note specifying that the time period commences upon receipt by the broker or its designated agent of the registrant's request has been adopted.27
      Commentators indicated that generally a broker will need three business days to compile and to transmit the beneficial owner information to the intermediary and the intermediary will require two business days to forward the requested beneficial owner information to the registrant.
      3. Rule 14b-l(d)
      In addition to recognizing that a broker may designate an agent "to act on its behalf, Rule 14b-l(d), as adopted makes clear that, without assurance by the registrant, or reimbursement of reasonable expenses, both direct and indirect, incurred in connection with performing its obligations under the rule, a broker need not satisfy its obligations under paragraph (b) and (c) of Rule 14b-l. A broker is obligated, under paragraph (a), however, to supply the information requested by the registrant without regard to reimbursement.
      D. Rule 14c-7
      The Commission received several comments to its proposed amendments to Rule 14c-7 suggesting that Rule 14c-7, governing the distribution of information statements and annual reports to security holders, be amended to conform with Rule 14a-13. The Commission agrees that such amendments would be useful and, accordingly, has amended Rule 14c-7 to conform, to the extent appropriate, with Rule 14a-13.

      V. Statutory Basis and Text of Amendments

      These amendments are being adopted pursuant to sections 12,14,17 and 23(a) of the Securities Exchange Act of 1934.

      List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements, Securities.

      VI. Text of Amendments

      In accordance with the foregoing Title 17, Chapter II of the Code of Federal Regulations is amended as follows:

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

      1. The authority citation for Part 240 is amended by adding the following citation (Citations before * * * indicate general rulemaking authority).
      Authority: Sec. 23,48 Stat. 901, as amended; 15 U.S.C. 78w. * * * §§240.14a-3, 14a-13,14b-l and 14c-7 also issued under sections 12,14 and 17,15 U.S.C. 781, 78n and 78g.
      §240.14a-3 [Amended]
      2 By removing paragraph (d) including Notes 1 and 2 and redesignating paragraphs [e] and (f) as paragraphs (d) and (e) of § 240.14a-3.
      3 By adding § 240.14a-13 to read as follows:

      § 240. 14a-13 Obligation of registrants in communicating with beneficial owners.

      (a) If the registrant knows that securities of any class entitled to vote at a meeting (or by written consents or authorizations if no meeting is held) with respect to which the registrant intends to solicit proxies, consents or authorizations are held of record by a broker, dealer, bank or voting trustee, or their nominees, the registrant shall:
      (1) By first class mail or other equally prompt means: (i) inquire of such record holders: (A) whether other persons are the beneficial owners of such securities and if so, the number of copies of the proxy and other soliciting material necessary to supply such material to beneficial owners: and, in the case of an annual (or special in lieu of the annual) meeting, or written consents in lieu of such meeting, at which directors are to be elected, the number of copies of the annual report to security holders necessary to supply such material to beneficial owners to whom such reports are to be distributed by the broker, dealer, bank, voting trustee or their nominees and not by the registrant; and (B) if the record holder has an obligation under § 240.14b-l(c), whether an agent has been designated to act on its behalf in fulfilling such obligation and, if so, the name and address of such agent; and (ii) indicate to such record holders which are brokers or dealers whether the registrant, pursuant to paragraph (c) of this section, intends to distribute the annual report to security holders to beneficial owners of its securities who have not objected to disclosure of their names, addresses and securities positions,
      (2) Make the inquiry at least 20 calendar days prior to the record date of the meeting of security holders, or (i) if such inquiry is impracticable 20 calendar days prior to the record date of a special meeting, as many days before the record date of such meeting as is practicable or (ii) if, consents or authorizations are solicited, and such inquiry is impracticable 20 calendar days before the earliest date on which they may be used to effect corporate action, as many days as is practicable, or (iii) at such later time as the rules of a national securities exchange on which the class of securities in question is listed may permit for good cause shown; and
      (3) Shall supply, in a timely manner, the record holders of whom the inquiry is made with additional copies of the proxy, other proxy soliciting material and/or the annual report to security holders, in such quantities, assembled in such form and at such a place, as the record holder may reasonably request in order to address and send one copy of each to each beneficial owner of securities who is to be furnished with such material by the broker, dealer, bank, voting trustee or their nominees. The number of annual reports supplied shall be sufficient to supply those beneficial owners to whom the report is to be distributed by the broker, dealer, bank, voting trustee or their nominees. The registrant shall upon the request of such record holder, pay its reasonable expenses for completing the mailing of such material to record holders to whom the material is sent.
      Note 1.—If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to section 17A of the Act [e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency who may hold on behalf of a beneficial owner, and shall comply with the above paragraph with respect to any such participant.
      Note 2.—The attention of registrant is called to the fact that brokers and dealers have an obligation pursuant to § 240.14b-l(b) and applicable self-regulatory organization requirements to obtain and forward, within the time periods prescribed therein, (a) proxy soliciting materials to all beneficial owners, and (b) annual reports to security holders, to all beneficial owners unless the registrant has notified the broker or dealer that it has assumed responsibility to mail such material to non-objecting beneficial owners in which case the broker or dealer shall mail such material to objecting beneficial owners.
      (b) Any registrant requesting pursuant to § 240.14b-l(c) a list of names, addresses and securities positions of beneficial owners of its securities who have not objected to disclosure of such information shall:
      (1) Request such list from all brokers and dealers (through their agents) having customers who are beneficial owners of the registrant's securities;
      (2) Use the information so furnished exclusively for purposes of corporate communications; and
      (3) Upon the request of such brokers and dealers, through their agents, pay the reasonable expenses, both direct and indirect, of providing beneficial owner information.
      Note.—A registrant will be deemed to have satisfied its obligations under paragraph (b) of this section by requesting non-objecting beneficial owner lists from a designated agent acting on behalf of the broker or dealer and paying to that designated agent the reasonable expenses of providing the beneficial owner information.
      (c) A registrant, at its option, may mail its annual report to security holders to the beneficial owners whose identifying information is provided by brokers and dealers, through their agents, pursuant to 1240.14b-l(c), provided that such registrant notifies the brokers and dealers, at the time a search card requesting die beneficial owner information in accordance with paragraph (a) of this section is sent that the registrant will mail the annual report to security holders to the beneficial owners so identified.
      4 By revising § 24Q.14b-l to read as follows:

      § 240.14b-1 Obligation of registered brokers and dealers in connection with the prompt forwarding of certain communications to beneficial owners.

      A broker or dealer registered under section 15 of the Act shall:

      (a) Respond no later than seven business days after receipt of an inquiry made in accordance with § 240.14a-13(a) by or on behalf of a registrant soliciting proxies, consents or authorizations by indicating, by means of a search card or otherwise: (1) The approximate number of its customers who are beneficial owners of the registrant's securities that are held off record by the broker, dealer or its nominees;
      (2) The number of its customers who are beneficial owners of the registrant's securities who have objected to disclosure of their names, addresses and securities positions if the registrant has indicated, pursuant to % 240.14a-13(a)(1)(ii), that it will distribute the annual report to security holders to beneficial owners of its securities who have not objected to disclosure of their names, addresses and securities positions; and (3) the identity of its designated agent, if any, acting on behalf of the broker or dealer in fulfilling its obligations under paragraph (c) of this section;
      (b) Upon receipt of the proxy, other proxy soliciting material, and/or annual reports to security holders, forward such materials to its customers who are beneficial owners of the registrant's securities no later than five business days after the receipt of the proxy material or annual reports; and
      (c) Through its agent or directly, provide the registrant, upon the registrant's request, with the names, addresses and securities positions, compiled as of a date specified in the registrants request which may be the registrant's record date for its latest annual or special meeting of security fodders, or, if not in connection with a meeting, another date which is no earlier than five business days after receipt of the registrant's request, of its customers who are beneficial owners of the registrant's securities and who have not objected to disclosure of such information. A broker or dealer, through its agent or directly, will be required to transmit the data to the registrant no later than five business days after the record date or other date specified by the registrant
      Note.—Where a broker or dealer employs a designated agent to act on its behalf in performing the obligations imposed on the broker or dealer by paragraph (c) of this section, the five business day time period for forwarding beneficial owner information is calculated from the date the designated agent receives the registrant's request. In complying with the registrant's request for beneficial owner information under paragraph (c) of this section, a broker or dealer need only supply the registrant with the names, addresses and securities positions of non-objecting beneficial owners.
      (d) A broker or dealer need not satisfy (1) its obligations under paragraphs (b) and (c) of this section if a registrant does not provide assurance of reimbursement of the broker's or dealer's reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by this section; or (2) its obligation under paragraph (b) of this section to forward annual reports to non-objecting beneficial owners identified by the broker or dealer, through its agent or directly, pursuant to paragraph (c) of this section if the registrant notifies the broker or dealer pursuant to § 24O.14a-13(c) that the registrant will mail the annual report to such non-objecting beneficial owners, identified by the broker or dealer and delivered in a list to the registrant pursuant to paragraph (c) of this section.
      5. By revising § 24O.14C-7 to read as follows:

      § 240.14c-7 Providing copies of material for certain beneficial owners.

      (a) If the registrant knows that securities of any class entitled to vote at a meeting, or by written authorizations or consents if no meeting is held, are held of record by a broker, dealer, bank or voting trustee, or their nominees, the registrant shall:
      (1) By first class mail or other equally prompt means, (i) inquire of such record holders whether other persons are the beneficial owners of such securities and, if so, the number of copies of the information statement necessary to supply such material to beneficial owners and, in the case of an annual {or special in lieu of the annual) meeting, or written consents in lieu of such meeting, at which directors are to be elected, the number of copies of the annual report to security holders, necessary to supply such material to such beneficial owners for whom proxy material has not been and is not to be made available and to whom such reports are to be distributed by the brokers, dealer, bank, voting trustee or their nominees and not by the registrant; and
      (2) Indicate to such record holders which are brokers or dealers whether the registrant pursuant to paragraph (c) of this section, intends to distribute the annual report to security holders to beneficial owners of its securities who have not objected to disclosure of their names, addresses and securities positions; and
      (3) Supply, in a timely manner, such record holder of whom the inquiry is made with additional copies of the information statement and the annual report to security holders, in such quantities, assembled in such form and at such a place, as the record holder may reasonably request in order to address and send one copy of each to each beneficial owner of securities who is to be furnished with such material by the broker, dealer, bank, voting trustee or their nominees. The number of annual reports supplied shall be sufficient to supply those beneficial owners to whom the report is to be distributed by the broker, dealer, bank, voting trustee or their nominees. The registrant shall, upon the request of such record holder, pay its reasonable expenses for completing the mailing of such material to security holders to whom the material is sent.
      Note 1.—If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to section 17A of the Act [e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in * such a clearing agency who may hold on behalf of a beneficial owner, and shall comply with the above rule with respect to any such participant.
      Note 2.—The requirement for sending an annual report to security holders of record having the same address will be satisfied by sending at least one report to a holder of record at that address* provided that those holders of record to whom a report is not sent agree thereto in writing. This procedure is not available to registrants, however, where banks, brokers and dealers and other persons hold securities in nominee accounts or "street names" on behalf of beneficial owners, and such persons are not relieved of any obligation to obtain or send such annual report to the beneficial owners.
      Note 3.—The attention of registrants is called to the fact that brokers and dealers have an obligation pursuant to applicable self-regulatory organization requirements to obtain and forward, in a timely manner, (a) information statements to all beneficial owners, and (b) when requested by the registrant annual reports to security holders to beneficial owners for whom such brokers and dealers hold securities.
      (b) Any registrant requesting a list of names, addresses and securities , positions of beneficial owners of its securities who have not objected to disclosure of such information shall.
      (1) Request such list from all brokers and dealers (through their agents) having customers who are beneficial owners of the registrant's securities;
      (2) Use the information so furnished exclusively for purposes of corporate communications; and
      (3) Upon the request of such brokers and dealers, through their agents, pay the reasonable expenses, both direct and indirect, of providing beneficial owner information.
      Note.—A registrant will be deemed to have satisfied its obligations under paragraph (b) of this section by requesting non-objecting beneficial owner lists from a designated agent acting on behalf of the broker or dealer and paying to that designated agent the reasonable expenses of providing the beneficial owner information.
      (c) A registrant, at its option, rriay mail its annual report to security holders to the beneficial owners whose identifying information is provided by brokers and dealers, through their agents, provided that such registrant notifies the brokers and dealers in accordance with paragaph (a) of this section that the registrant will mail the annual report to security holders to the beneficial owners so identified.
      By the Commission.
      October 15, 1985.
      Shirley E. Hollis,
      Assistant Secretary.
      [FR Doc. 85-25107 Filed 10-21-85; 8:45 am]

      1 17 CFR 240.14b-l.

      2 17 CFR 240.14C-7.

      3 17 CFR 240.14a-13.

      4 Release No. 34-21901 (March 28, 1985) [50 FR 13612].

      5 In addition to the specific rule amendments, the narrative portion of the proposing release addressed, in connection with the discussion on employment of an intermediary (see discussion infra pp. 8,13,15), a fourth issue, namely the confidentiality of the source of the beneficial owner lists. See Release No. 34-21901, supra note 4, 50 FR at 13613.

      6 Release No. 34-21339 (September 21, 1984) [49 FR 38096).

      7 In its proposing release, the Commission clearly intended to require all record holders within its jurisdiction to come within the direct communication system. Accordingly, the term "broker," which as used in the industry usually includes the term "dealer," was used to denote those securities industry personnel who hold securities in nominee name. Because the terms "broker" and "dealer" are separately defined under the Securities Exchange Act, see sections 3(a) (4) and (5) thereof, the Commission believes it is appropriate to revise the rules to clarify that they apply to both brokers and dealers.

      8 The letters of comment, as well as a copy of the summary of the comment letters prepared by the staff, are available for public inspection and copying at the Commission's Public Reference Room (See File No. S7-13-85).

      9 Release No. 34-20021 (July 28, 1983) [48 FR 35082].

      10 Release No. 34-21339 (September 21, 1984) [49 FR 38098].

      11 The $.20 surcharge rule change to the NYSE rules was approved by the Commission on March 28, 1985. Release No. 34-21900 (March 28, 1985) [50 FR 13297]. The Commission approved similar surcharges as part of the rules of the American Stock Exchange and National Association of Securities Dealers. Release No. 34-21915 (April 1, 1985) [50 FR 14069].

      12 Release No. 34-21901 supra note 4, at p. 13613.

      13 Id

      14 It should be noted that a beneficial owner's election to disclose its name, address, and securities position is an election with respect to all registrant's securities in a beneficial owner's account(s) with that broker.

      15 See Ad Hoc Committee letter of June 18, 1986 at pages 3-4 Of Exhibit I therein.

      16 When the Commission proposed these amendments in Release No. 33-6592 duly 1, 1985) [50 FR 29409], it indicated that these amendments would be adopted at the same time as the shareholder communications proposals were adopted. The comment period for the July proposals closed on September 17, 1985 and, 39 comment letters were received, only one of which addressed these amendments. That comment letter did not oppose the amendments but, rather, suggested clarifications that will be considered as part of the comprehensive review of the proxy rules.

      17 In tender offers or proxy contests, there is no current requirement under Rules 14a-7,17 CFR 240.14a-7, and 14d-5,17 CFR 240.14d-5, for a registrant to turn over a non-objecting beneficial owner list to a reguesting security holder. Those rules apply only to lists of record holders and securities position listings of clearing agents. The Commission will consider whether to propose for comment amendments to Rules 14a-7 and 14d-5 which would provide security holders access to lists of non-objecting beneficial owners. Such amendments would provide equal access to these lists and avoid tipping the balance of regulation either in favor of management or in favor of tender offerers or proxy contestants. In the context of tender offers, this change may be consistent with and necessary to effectuate the purposes of the Williams Act. See S. Rep. No. 550, 90th Cong., 1st Sess. 3 (1967), "[t]he bill is designated to require full and fair disclosure for the benefit of investors while at the same time providing the offeror and management equal opportunity to fairly present their case." See also Release No. 33-6022 (February 5, 1979) 44 FR 9956.

      18 Release No. 34-21901 supra note 4, at 13614.

      19 Two commentators suggested that the rules require registrants who choose to communicate voluntarily with their non-objecting beneficial owners to deliver sufficient copies of the specific communication to brokers for forwarding to objecting beneficial owners. The Commission does not believe such a change is necessary at this time.

      20 Determination of the fee received from the registrant for the non-objecting beneficial owner list will be the subject of proposed SRO rules.

      21 The shareholder communications rules only apply to those registrants who are subject to the Commission's proxy rules.

      22 A few commentators suggested that registrants be permitted to mail proxy cards and proxy soliciting material directly to non-objecting beneficial owners. Consideration of whether to permit registrants to mail proxy soliciting material to non-objecting beneficial owners was not a subject of the Commission's proposal to amend the shareholder communications rules. Further, the Advisory Committee on Shareholder Communications determined not to disrupt the existing system of proxy distribution and voting. See Report on Improving Communications Between Issuers and Beneficial Owners of Nominee Held Securities at pp 54-71.

      23 In Ash v. GAFGorp., 723 R2d 1090,1094 [3d Cir. 1983), the Third Circuit held that sending the annual report by third class mail four to five days prior to matting the proxy statement by first class mail "did not reasonably guarantee that shareholders would recieve the annual report at the same time or before the proxy materials. In fact, fte procedures made it Mghy probable that shareholders would receive annual report after they had received the proxy materials."

      24 17 CFR 240. 14a-5.

      25 Under the shareholder coiranonicBfions rnfes, business day is defined as it is in Rule 14d-lM6). 17 CFR 240.14d-l(b)t6).

      26 In its comment letter, fte Ad Hoc Conmrittee, representing members of both the registrant community and securities industry, suggested thai a five business day time period wae feasible.

      27 If a broker designates an agent to act on its behalf, the broker will still be under the obligation to comply with Rule I4b-1(c) and. accordingly, receipt by the intermediary of the registrant's request will be deemed to be receipt by the broker.


    • 85-79 1986 Schedule of Holidays

      TO: All NASD Members and Interested Persons

      Listed below is the NASD's 1986 schedule of holidays.

      January 1 (Wednesday)

      New Year's Day

      February 17 (Monday)

      Washington's Birthday Observed

      March 28 (Friday)

      Good Friday

      May 26 (Monday)

      Memorial Day Observed

      July 4 (Friday)

      Independence Day

      September 1 (Monday)

      Labor Day

      November 27 (Thursday)

      Thanksgiving Day

      December 25 (Thursday)

      Christmas Day

      Sincerely,

      Gordon S. Macklin
      President

    • 85-78 NASDAQ National Market System Grows to 2,183 Securities With 23 Voluntary Additions on December 3, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, December 3, 1985, 23 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,183. These 23 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 23 issues scheduled to join NASDAQ/NMS on Tuesday, December 3, 1985, are:

      Symbol*

      Company

      Location

      ATNG

      AlaTenn Resources, Inc.

      Florence, AL

      ABNY

      American Savings Bank, FSB

      New York, NY

      ANTC

      Anitec Image Technology Corp.

      Binghamton, NY

      BLOCA

      Block Drug Company, Inc. (Cl A)

      Jersey City, NJ

      CKDN

      Cireadian, Inc.

      San Jose, CA

      CODN

      Codenoll Technology Corporation

      Yonkers, NY

      CRLD

      CrossLand Savings, FSB

      Brooklyn, NY

      DUAL

      Dual-Lite, Inc.

      Newtown, CT

      EASI

      Engineered Support Systems, Inc.

      St. Louis, MO

      FITC

      Financial Trust Corp.

      Carlisle, PA

      GTWY

      Gateway Bank

      South Norwalk, CT

      GRST

      Grist Mill Company

      Lakeville, MN

      HFGA

      Home Federal Savings Bank of Georgia

      Gainesville, GA

      JALC

      John Adams Life Corporation

      Los Angeles, CA

      LDCO

      Leader Development Corporation

      Columbus, OH

      MVIC

      Machine Vision International Corporation

      Ann Arbor, MI

      MXTR

      Maxtor Corporation

      San Jose, CA

      MSLA

      Metropolitan Savings & Loan Association

      Dallas, TX

      NTRS

      Northern Trust Corporation

      Chicago, IL

      PHOT

      Photronics Corporation

      Hauppauge, NY

      ROTC**

      Rotech Medical Corporation

      Orlando, FL

      STKY

      Stokely USA, Inc.

      Oconomowoc, WI

      SUNA

      Sunworld International Airways, Inc.

      Las Vegas, NV

      The following issue may be included in the NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Addition

      Symbol*

      Company

      Location

      GWCC

      GWC Corporation

      Claymont, DE

      NASDAQ/NMS Interim Additions

      Symbol*

      Company

      Date of Entry

      JAGRY

      Jaguar Pic

      11/19/85

      SKII

      S-K-I Ltd.

      11/19/85

      HIRE

      Diversified Human Resources Group, Inc.

      11/21/85

      The following changes to the list of NASDAQ/NMS securities occurred since November 8, 1985:

      NASDAQ/NMS Symbol* And/Or Name Changes

      New/Old Symbol*

      New/Old Security Name

      Date of Change

      NBCT/NBAN

      National Bancshares Corporation Corporation of Texas/National Bancshares Corporation of Texas

      11/11/85

      ACET/ACET

      Aceto Corporation/Aceto Chemical Company, Inc.

      11/22/85

      GKSRA/GKSR

      G&K Services, Inc., Class A/G&K Services, Inc.

      11/22/85

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      MCAP

      Midland Capital Corporation

      11/08/85

      AZIN

      Aztech International, Ltd.

      11/13/85

      HSYS

      Hale Systems, Inc.

      11/13/85

      PANS

      Pansophic Systems, Inc.

      11/13/85

      SMLI

      Space Microwave Laboratories, Inc.

      11/13/85

      TDSC

      Tesdata Systems Corporation

      11/13/85

      VCTR

      Vector Graphic, Inc.

      11/13/85

      RIHT

      RIHT Financial Corporation

      11/15/85

      ABAN

      Atlantic Bancorporation

      11/18/85

      MFED

      Metropolitan Financial Corporation

      11/18/85

      HOOV

      The Hoover Company

      11/21/85

      PLMX

      PLM Financial Services, Inc.

      11/22/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Sharon Bellanger, Market Surveillance, at (202) 728-8206.

      Sincerely,

      Gordon S. Macklin
      President


      * NASDAQ symbols are proprietary to the National Association of Securities Dealers, Inc.

      ** This issue is scheduled to commence trading in the NASDAQ System concurrent with its designation as a NASDAQ/NMS security on December 3, 1985.


    • 85-77 NASD Actions in the Area of Short Sale Regulation

      IMPORTANT

      TO: All NASD Members and Other Interested Persons

      At its November meeting, the NASD's Board of Governors determined to take several actions in the area of short sale regulation in the over-the-counter securities market. This notice summarizes these actions.

      Reporting of Open Short Interest Positions

      The first such action will require members to report to the NASD, for purposes of surveillance and study, the aggregate over-the-counter short interest positions of their customer and proprietary accounts on a monthly basis. This information will be used for internal NASD purposes only and will not be distributed to the public.

      In view of the NASD's need for over-the-counter short interest information for a study now underway (see below) and surveillance purposes, the NASD Board has determined to adopt this monthly reporting requirement on an expedited basis, with actual reporting expected to begin in early 1986.

      Proposed Rules to be Published for Comment

      The Board also determined to issue for public comment rules to require (l) that customer order tickets for each sale transaction in an over-the-counter security include a notation that the order is either a long sale or a short sale, and (2) that NASD members make an affirmative determination, before accepting a customer's order to sell an over-the-counter stock short, that delivery of the shares can be made within five business days. Both of these proposals parallel existing requirements in exchange markets.

      Expert Selected to Conduct Study of Current Short Selling Practices

      The NASD Board also determined to retain Irving M. Pollack, a recognized expert in the field of securities regulation and surveillance, to conduct a comprehensive study of current short selling practices, complete with findings and recommendations. Mr. Pollack formerly served as an SEG Commissioner following nearly three decades on the SEC staff, including several years as Director of the Division of Enforcement and its predecessor, the Division of Trading and Markets.

      This study is being undertaken in light of the profound changes that have taken place in the composition, structure and surveillance of our nation's securities markets since today's system of short sale regulation in exchange markets was adopted in the 1930's. Because of this, Mr. Pollack's study will produce recommendations that take into account (l) the fundamental differences between the over-the-counter market and exchange market in terms of structure and mechanics; (2) the evolution of markets; and (3) the 1980's environment in which markets now operate where the use of technology abounds, where quote and transaction information flows are virtually instantaneous, and where a multitude of derivative products facilitating programmed strategies now exist.

      * * * * *

      More detailed information concerning each of the above items will be sent to members shortly. In the meantime, questions regarding this notice may be directed to S. William Broka at (202) 728-8050.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-76 NASDAQ National Market System Grows to 2,172 Securities With 18 Voluntary Additions on November 19, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, November 19, 1985, 18 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,172. These 18 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 18 issues scheduled to join NASDAQ/NMS on Tuesday, November 19, 1985, are:

      Symbol

      Company

      Location

      ATCC

      American Technical Ceramics Corp.

      Huntington Station, NY

      BRIX

      BRIntee Corporation

      Willimantie, CT

      BING

      Binghamton Savings Bank

      Binghamton, NY

      CNSP

      Central Sprinkler Corporation

      Lansdale, PA

      CEFT

      Concord Computing Corporation

      Bedford, MA

      FCAP

      First Capital Corporation

      Jackson, MS

      FULT

      Fulton Financial Corporation

      Lancaster, PA

      HCLB

      HomeClub, Inc.

      Fullerton, CA

      INTW

      IntraWest Financial Corporation

      Denver, CO

      JMBRS

      JMB Realty Trust

      Chicago, IL

      JAGRY*

      Jaguar, PLC

      Coventry, England

      NDCO

      Noble Drilling Corporation

      Tulsa, OK

      RPICA

      Republic Pictures Corporation (CI A)

      Los Angeles, CA

      ROTO

      Roto-Rooter, Inc.

      Cincinnati, OH

      SPRH

      Spearhead Industries, Inc.

      Eden Prairie, MN

      SQAI

      Square Industries, Inc.

      Jersey City, NJ

      STVL

      Stereo Village, Inc.

      Decatur, GA

      VFSB

      Virginia First Savings, F.S.B.

      Petersburg, VA

      The following issue may be included in NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Additions

      Symbol

      Company

      Location

      HIRE

      Diversified Human Resources Group, Inc.

      Dallas, TX

      NASDAQ/NMS Interim Additions

      Symbol

      Name

      Date of Entry

      MGAN

      Morgan Products, Ltd.

      10/30/85

      GDMK

      Good Mark Foods, Inc.

      11/07/85

      The following changes to the list of NASDAQ/NMS securities occurred since October 25, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      TNDS/TIND

      TS Industries, Inc./TS Industries, Inc.

      10/31/85

      TIRE/TIRE

      One Liberty Properties, Inc./One Liberty Firestone Properties, Inc.

      11/01/85

      DMCVB/DMCV

      Dairy Mart Convenience Stores, Inc. - Cl. B./Dairy Mart Convenience Stores, Inc

      11/04/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      PULLW

      Pullman-Peabody Company Wts.

      10/28/85

      FDRI

      First Data Resources

      10/29/85

      MGNT

      Magnet Bank, F.S.B.

      10/30/85

      TOFU

      Tofu Time, Inc.

      10/30/85

      NICO

      NICO, Inc.

      11/01/85

      SDUN

      Standun,Inc.

      11/04/85

      FCAH

      First Capital Holdings Corp.

      11/05/85

      MOKE

      Morgan Keegan, Inc.

      11/05/85

      CHYC

      Chyron Corporation

      11/06/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202)728-8202.

      Sincerely,

      Gordon S. Macklin
      President


      * This issue is scheduled to commence trading in the NASDAQ System concurrent with its designation as a NASDAQ/NMS security on November 19, 1985.


    • 85-75 Amendments to SEC Rule 15c3-3, Customer Protection Rule

      TO: All NASD Members and Other Interested Persons

      The Securities and Exchange Commission has amended Rule 15c3-3 under the Securities Exchange Act of 1934. These amendments, which for the most part, become effective on November 22, 1985, are designed to assure that customer funds and securities held by broker-dealers are protected against misuse or insolvency. It is anticipated that the net effect of these amendments will not materially affect most members, but could require greater deposits to be made in the Reserve Bank Account of some broker-dealers.

      The salient points of the amendments to Rule 15c3-3 are set forth below, and will for purposes of the debit items in the reserve formula:

      (1) Exclude from the reserve formula the debit balances of household members and other persons related to principals of a broker-dealer or affiliated in a certain way with a broker-dealer, unless the member can demonstrate that such debit balances are directly related to formula credit items for those same persons;
      (2) Depending upon the extent of non-customer ownership, exclude from the reserve formula, some or all of the debit balances of accounts in which "principals" of a broker-dealer have an ownership interest, e.g. joint account, custodian account, participation in a hedge fund, unless it can be demonstrated that such debit balances are directly related to credit items in the formula; and,
      (3) Reduce debit balances in margin accounts in the reserve formula (other than omnibus accounts) by the amount of which any single customer's debit balance exceeds 25% (to the extent such amount is greater than $50,000) of the net

      The above settlement dates should be used by brokers, dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.

      * * * * *

      capital of the broker-dealer prior to securities haircuts ("tentative net capital"), unless the member can demonstrate that the debit balance is related to credit items in the formula. The designated examining authority may grant partial or total exemption from this provision if circumstances so warrant.

      The amendments become effective on November 22, 1985, except for the concentration provision under Item (3) above which becomes effective on April 1, 1986.

      A copy of the SEC's release is attached. Questions concerning this notice may be directed to I. William Fishkind, Assistant Director, Financial Responsibility, at(202)728-8405.

      Sincerely,

      John E. Pinto, Jr.
      Senior Vice President
      Compliance Department

      Attachment

      SECURITIES AND EXCHANGE COMMISSION

      [17 CFR Part 240]

      [Release No. 34-22499; File No. S7-8-84]

      Customer Protection Rule

      AGENCY: Securities and Exchange Commission.

      ACTION: Rule Amendment.

      SUMMARY: The Securities and Exchange Commission ("Commission") is adopting amendments to Rule 15c3-3 under the Securities Exchange Act of 1934 ("Act"). Under the rule, the broker-dealer is required to make a weekly computation (or in certain cases a monthly computation), as of the close of business Friday, to determine how much money it is holding which is either customer money or money obtained from use of customer securities (i.e., formula credits). From that amount the broker-dealer subtracts the amount of money it is owed by its cash or margin customers or by other broker-dealers because of customer transactions (i.e., formula debits). If the credits exceed the debits, the broker-dealer must deposit the excess by Tuesday morning in a Reserve Bank Account. If the debits exceed the credits, no deposit is necessary. This process is commonly referred to as the Reserve Formula Computation.

      The amendments will, for purposes of the debit items of the Reserve Formula: 1) exclude the debit balances of household members and other persons related to broker-dealer principals or affiliated in a certain way with a broker-dealer; 2) exclude, under certain circumstances, the debit balances of accounts in which "principals" of a broker-dealer have ownership interests; and 3) exclude, under certain circumstances, the amount by which a broker-dealer's margin accounts receivable (a debit item) with a single customer exceeds twenty-five percent of the net capital of the broker-dealer prior to securities haircuts ("tentative net capital").

      The amendments are designed to assure that customers' funds and securities held by broker-dealers are protected against misuse or insolvency. The net effect of the proposed amendments may be to require that greater deposits be made in the Reserve Bank Accounts of some broker-dealers.

      EFFECTIVE DATE: November 22, 1985 except the concentration provision which will be effective on April 1, 1986. FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Division of Market Regulation, 450 5th Street, N.W., Washington, D.C. 20549 (202) 272-2904.

      SUPPLEMENTARY INFORMATION

      I. INTRODUCTION

      Rule 15c3-3 is designed to assure that customers' funds (as well as securtities) "held by broker-dealers are protected against broker-dealer misuse or insolvency. The rule requires, among other things, that a broker-dealer maintain with a bank or banks a "Special Reserve Bank Account for the Exclusive Benefit of Customers" ("Reserve Bank Account") and deposit in this account its reserve requirement as computed in accordance with the Formula for Determination of Reserve Requirement For Brokers and Dealers ("Reserve Formula"), Exhibit A of Rule 15c3-3. In addition, before making a withdrawal from the Reserve Bank Account, a broker-dealer must make a computation which shows that after the withdrawal there is an amount remaining in the Reserve Bank Account at least equal to that required to be on deposit.

      Under the Rule, a broker-dealer is required to make a weekly computation (or in certain cases a monthly computation), as of close of business Friday, to determine how much money it is holding which is either customer money or money obtained from use of customer securities (i.e., formula credits). From that amount the brokar-dealer subtracts the amount of money it is owed by its cash or margin customers or by other broker-dealers and certain other entities because of customer transactions (i.e., formula debits). If the credits exceed the debits, the broker-dealer must deposit the excess by Tuesday morning in a Reserve Bank Account. If the debits exceed the credits, no deposit is necessary.

      One of the purposes of the Reserve Formula is to ensure that customers' funds held by a broker-dealer are deployed only in areas of the broker-dealer's business related to servicing its customers (i.e., debit items in the Reserve Formula) or, to the extent that the funds are not deployed in these limited areas, that they be deposited in a Reserve Bank Account. Thus, the Reserve Bank Account includes all funds held by a broker-dealer that have as their source customer assets and which have not been utilized to finance the broker-dealer's customer related transactions. The rule makes it unlawful for a broker-dealer to accept or use customer funds to finance any part of its proprietary business activities. This prohibition applies as well to transactions of principal officers, directors, and general partners ("principals") of a broker-dealer and thereby prevents the broker-dealer from using customer funds to finance the insiders' own personal investment activities.

      Recent events, particularly the financial failures of two broker-dealers, caused renewed concern in the area of misuse of customer free credit balances. Proposed revisions to Rule 15c3-3 were recommended by a Committee of the Securities Industry Association ("SIA") in response to the problem of protecting customer free credit balances. Based on these recommendations the Commission proposed remedial revisions to Rule 15c3-3 in Securities Exchange Act Release No. 20655 (February 15, 1984). In response to comments received on that proposal, the Commission modified its proposal and reproposed the amendments for public comment in Securities Exchange Act Release No. 21865 (March 26, 1985).

      The Commission received fifteen comment letters on the proposed amendments. Most of the commentators supported the stated objective of the proposed amendments: to protect customers' funds held by broker-dealers from misuse or insolvency, and to ensure that those funds are used only to service bona fide customer accounts. Some of the commentators however, still believed that the costs of compliance (e.g., computer programming and financing costs) would be unduly burdensome on smaller and medium sized broker-dealers. Others believed that the mechanism of allowing the Designated Examining Authority ("DEA") to grant exceptions to the concentration provision would be unworkable absent uniform guidelines for granting exceptions. In light of the specific comments received and, with the view towards minimizing the compliance burden on broker-dealers, the Commission has determined to adopt the proposed amendments in modified form.

      II. DISCUSSION

      The Commission proposed three amendments to Rule 15c3-3. Each of these amendments is described below along with a summary of the comments received and any modifications made in adopting the amendments.

      A. Household Members, Related Persons and Affiliates

      As stated in its prior releases, the Commission is concerned that certain broker-dealer principals have been able to utilize the securities accounts of family members (or persons under their control) or affiliates to circumvent the prohibition against the use of customer funds held by their firms (i.e., credit items in the Reserve Formula) to finance their own securities activities. The Commission is concerned that this financing activity can lead to a reduction or total elimination of the broker-dealer's reserve deposit requirements to the possible detriment of bona fide public customers.

      The Commission thus proposed to add a paragraph to Note E of the Reserve Formula which would provide that:

      the debit balances in the accounts of household members and other persons related to principals of a broker-dealer or affiliated with a broker-dealer are not "customer" debit balances, and therefore should not be included in the Reserve Formula, unless it can be shown that such debit balances are directly related to formula credit items for those same persons.

      The Commission proposed to define the terms "household members and other persons related to..." to include parents, mothers-in-law or fathers-in-law, husbands or wives, brothers or sisters, brothers-in-law or sisters-in-law, children or any relative to whose support the broker-dealer principal contributes directly or indirectly.

      Commentators on the original proposal suggested that the proposed definition was too broad. In response to those comments, the Commission reproposed the definition and asked commentators to suggest alternative definitions. Although none of the latest round of commentators suggested alternative definitions, two of the commentators suggested establishing a de minimis threshold of $50,000 below which the debit balances of household members and other persons related to principals of a broker-dealer would not be affected by the amendment.

      The Commission is not incorporating the threshold concept into the amendment it is adopting because, with respect to the debit balances of close relatives such as spouses and children, there is no basis for distinguishing those debit balances from the debit balances of principals of a broker-dealer. The Commission believes it is fair to assume that the principals may be exerting control over the accounts of close relatives, or that these will be favored accounts. In contrast, the Commission believes, that the accounts of parents, siblings and inlaws, absent some financial dependence, would not necessarily be controlled by the principals.

      Based on the above, and in the interest of reducing any recordkeeping burden on broker-dealers, the Commission is adopting a narrower definition. For purposes of the Reserve Formula, the term "household members and other persons related to ..." will include only husbands or wives, children, sons-in-law or daughters-in-law and any other relative or household member to whose support the broker-dealer principal contributes directly or indirectly. The Commission recognizes that narrowing the definition might make it possible for principals to use the accounts of certain relatives. However, on balance, the Commission believes that the revised household member restriction combined with the concentration provision described below will adequately address the most egregious cases which pose the greatest threat to the public customers of broker-dealers

      B. Joint Accounts, Etc.

      In Securities Exchange Act Release No. 20655 the Commission proposed a revision of an earlier interpretation (issued in Securities Exchange Act Release No. 9922) regarding the definition of the term "customer" for purposes of Rule 15c3-3. In that earlier release, a joint account, custodian account, participation in a hedge fund or limited partnership, or a similar type account or arrangement by a person who would be excluded from the definition of customer (i.e., a general partner, director or principal officer of a broker-dealer) with persons includible in the definition of customer, was considered a customer's account. The proposal would have treated those accounts as non-customer accounts insofar as the debit items in the Reserve Formula were concerned, unless the broker-dealer demonstrated that the debits were directly related to formula credit items.

      Based on comments that this proposal was too broad, the Commission modified its proposed note E(6) to the Reserve Formula as follows: if the non-customer has less than a five percent ownership interest in the subject account, then the entire debit balance will be included in the formula; if such percentage ownership is between five percent and fifty percent, then the portion of the debit balance attributable to the non-customer will be excluded from the formula and the remainder of the debit balance will be included in the formula, unless the broker-dealer can demonstrate that such debit balances are directly related to credit items in the formula; if such percentage ownership by a non-customer is greater than fifty percent, then the entire debit balance shall be excluded from the formula unless the broker-dealer can demonstrate that such debit balances are directly related to credit items in the formula.

      The commentators were uniformly supportive of the proposal, as modified. Accordingly, the Commission is adopting the amendment in its modified form.

      C. Concentration Provision

      Finally, the Commission's original proposal would have provided that debit balances in margin accounts must be reduced by the amount by which a single customer's margin debit balance exceeds ten percent of the aggregate of all debit balances in customers' margin accounts included in Item 10 of the Reserve Formula.

      Based on the comments received on that proposal, the Commission modified the proposed concentration provision to provide for a more flexible approach to the treatment of concentrated margin debits. The modified proposal tied the concentration charge to the broker-dealers tentative net capital rather than its overall margin debt, provided for an exception mechanism through the broker-dealers Designated Examining Authority ("DEA") and, made it clear that a concentrated debit balance may be included in the formula to the extent that it is directly related to credit items in the formula.

      In general, the comments received on the modified concentration provision indicated that the changes made alleviated some of the concerns raised by the original proposal. Three of the commentators stated their general support for the provision, as modified. Some of the commentators expressed their concern that the concentration provision might have a disproportionate impact on small and medium-sized broker-dealers. Other commentators were fearful that, unless industry wide criteria were established, the DEA exception procedures would present administrative difficulties. Still other commentators were uncertain as to how to demonstrate the required relationship between debits and credits, in order to avoid the impact of the concentration charge. The last comment also applies to the "household members and other persons related to . . ." amendment.

      This concentration provision effectively restricts a broker-dealer from lending a large percentage of other customers' money to any one customer except under certain conditions intended to alleviate the risks of such a concentrated position. The Commission believes that this is an appropriate limitation on the use of other customers' money and consistent with the purposes of Rule 15c3-3. The amendments have been designed to minimize any concomitant burdens. Indeed, the impact on broker-dealers is expected to be minimal. While the amendments will not absolutely prevent fraud or abuse, they will reduce the financial exposure of broker-dealers and perhaps lead to more investor confidence in broker-dealers who hold customer monies.

      With regard to establishing industry guidelines for granting requests for exceptions from the concentration provision, the Commission is delaying the effective date of this amendment until April 1, 1986. The DEAs, with the aid of the Commission's staff, will be able to formulate objective criteria for granting exceptions during this time period. Such criteria will enable the DEAs to review the exception requests expeditiously and should provide guidance to broker-dealers in seeking an exception. In addition, the amendment adopted by the Commission will make it clear that during any review period, the concentrated debit may be included in the reserve formula computation for five business days after a request for DEA exception is made.

      With regard to demonstrating the relationship between particular debit balances with credit items in the formula, broker-dealers are free to choose any method of allocating debits and credits. The Commission believes that many broker-dealers will use the allocation systems that they use in making other determinations required by Rule 15c3-3. However, broker-dealers are not limited to such systems. In fact, because the principal objective of the amendments is to ensure that customer free credit balances are not being misused by principals of a broker-dealer, it would be sufficient for a broker-dealer to demonstrate the requisite relationship indirectly by showing that it did not carry any customer free credit balances.

      In sum, the Commission believes that establishing objective criteria for granting exceptions, allowing concentrated debit balances to be included in the formula during any review period and, allowing broker-dealers flexibility in demonstrating that a particular debit balance is related to a formula credit item will ensure that the amendments will not be unduly burdensome on broker-dealers. At the same time, the Commission believes the amendments it is adopting are necessary and appropriate in the public interest to ensure that customer funds and securities are not placed at undue risk because of fraudulent practices by broker-dealers or large extensions of credit to individual accounts financed with free credit balances.

      III. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS

      The Commission has prepared a Final Regulatory Flexibility Analysis in accordance with 5 U.S.C. §604 regarding the amendments to Rule 15c3-3. The Analysis notes that the amendments are necessary in order to ensure that broker-dealers do not circumvent the prohibition against broker-dealer principals using customer funds to finance their own personal/proprietary investment activities and toward unnecessary concentrations in broker-dealers margin lending. The analysis states that the Commission did not receive any comments concerning the Initial Regulatory Flexibility Analysis. The Analysis points out that in response to commentators concern about the costs involved in compliance with the amendments to Rule 15c3-3, the Commission modified the amendments to lessen any compliance burden.

      A copy of the Final Regulatory Flexibility Analysis may be obtained by contacting Julio Mojica, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, (202) 272-2372.

      IV. STATUTORY BASIS

      Pursuant to the Securities Exchange Act of 1934 and particularly Sections 15(c)(3), 17 and 23(a) thereof, 15 U.S.C. §§78o(c)(3), 78q and 78w(a), the Commission is adoptting amendments to §240.15c3-3 in Part 240 of Chapter II of Title 17 of the Code of Federal Regulations in the manner set forth below.

      Lists of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements, Securities.

      V. TEXT OF THE PROPOSED AMENDMENTS

      In accordance with the foregoing, 17 CFR Part 240 is amended as follows:

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

      1. The authority citation for Part 240 continues to read as follows:
      Authority: Sec. 23, 98 Stat. 901, as amended, 15 U.S.C. 78W * * *.
      §240.15c3-3 also issued under Sees. 15(c)(2), 15(c)(3) and 17(a), 48 Stat. 895, 897, as amended; 15 U.S.C 78o(c), 78q(a) * * *.
      §240.15c3-3a also issued under Sees. 15(c)(2), 15(c)(3) and 17(a), 48 Stat. 895, 897, as amended; 15 U.S.C., 78o(c), 78q(a) * * *.
      2. Section 240.15c3-3 is amended by revising paragraph (a)(l), and by adding paragraphs (a) (11), (a)(12) and (a)(13) as follows: §240.15c3-3 Customer protection - reserves and custody of securities.
      (a) * * *
      (1) The term "customer" shall mean any person from whom or on whose behalf a broker or dealer has received or acquired or holds funds or securities for the account of that person. The term shall not include a broker or dealer or a registered municipal securities dealer. The term shall not include general partners or directors or principal officers of the broker or dealer or any other person to the extent that that person has a claim for property or funds which by contract, agreement or understanding, or by operation of law, is part of the capital of the broker or dealer or is subordinated to the claims of creditors of the broker or dealer. The term customer shall, however, include another broker or dealer to the extent that that broker or dealer maintains an omnibus account for the account of customers with the broker or dealer in compliance with Regulation T under the Securities Exchange Act of 1934.

      * * * * *

      (11) The term "principal officer" shall mean the president, executive vice president, treasurer, secretary or any other person performing a similar function with the broker or dealer.
      (12) The term "household members and other persons related to principals" includes husbands or wives, children, sons-in-law or daughters-in-law and any household relative to whose support a principal contributes directly or indirectly. For purposes of this paragraph (a)(12), a principal shall be deemed to be a director, general partner, or principal officer of the broker or dealer.
      (13) The term "affiliated person" includes any person who directly or indirectly controls a broker or dealer or any person who is directly or indirectly controlled by or under common control with the broker or dealer. Ownership of 10% or more of the common stock of the relevant entity will be deemed prima facie control of that entity for purposes of this paragraph.

      * * * * *

      3. Section 240.15c3-3a is amended by adding paragraphs 4,5 and 6 to Note E as follows: §240.15c3-3a Exhibit A - formula for determination of reserve requirement for brokers and dealers under §240.15c3-3.

      * * * * *

      NOTE E. * * *

      (4) Debit balances in cash and margin accounts of household members and other persons related to principals of a broker or dealer and debit balances in cash and margin accounts of affiliated persons of a broker or dealer shall be excluded from the Reserve Formula, unless the broker or dealer can demonstrate that such debit balances are directly related to credit items in the formula.
      (5) Debit balances in margin accounts (other than omnibus accounts) shall be reduced by the amount by which any single customer's debit balance exceeds 25% (to the extent such amount is greater than $50,000) of the broker-dealer's tentative net capital (i.e., net capital prior to securities haircuts) unless the broker or dealer can demonstrate that the debit balance is directly related to credit items in the Reserve Formula. Related accounts (e.g., the separate accounts of an individual, accounts under common control or subject to cross guarantees) shall be deemed to be a single customer's accounts for purposes of this provision.
      If the registered national securities exchange or the registered national securities association having responsibility for examining the broker or dealer ("designated examining authority") is satisfied, after taking into account the circumstances of the concentrated account including the quality, diversity, and marketability of the collateral securing the debit balances of margin accounts subject to this provision, that the concentration of debit balances is appropriate, then such designated examining authority may grant a partial or plenary exception from this provision.
      The debit balance may be included in the reserve formula computation for five business days from the day the request is made.
      (6) Debit balances of joint accounts, custodian accounts, participations in hedge funds or limited partnerships or similar type accounts or arrangements of a person who would be excluded from the definition of customer ("non-customer") with persons includible in the definition of customer shall be included in the Reserve Formula in the following manner: if the percentage ownership of the non-customer is less than 5 percent then the entire debit balance shall be included in the formula; if such percentage ownership is between 5 percent and 50 percent then the portion of the debit balance attributable to the non-customer shall be excluded from the formula unless the broker or dealer can demonstrate that the debit balance is directly related to credit items in the formula; if such percentage ownership is greater than 50 percent, then the entire debit balance shall be excluded from the formula unless the broker or dealer can demonstrate that the debit balance is directly related to credit items in the formula.

      * * * * *

      By the Commission.

      John Wheeler
      Secretary.

      Dated: October 3, 1985.

    • 85-74 Thanksgiving Day: Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Thursday, November 28, 1985, in observance of Thanksgiving Day. "Regular-way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      November 20

      November 27

      December 2

      21

      29

      3

      22

      December 2

      4

      25

      3

      5

      26

      4

      6

      27

      5

      December 9

      28

      Markets Closed

      29

      6

      10


      * Pursuant to Sections 220.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 85-73 Beacon Securities, Inc. P.O. Box 5969 Hilton Head Island, South Carolina 29938

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On October 30, 1985, the United States District Court of South Carolina, Charleston Division, appointed a Temporary Receiver for the above-captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12(h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      Temporary Receiver

      Norman W. Stevenson, Esquire
      Barnwell & Stevenson
      P.O. Box 1429
      Charleston, South Carolina 29402
      Telephone: (803) 577-2960

    • 85-72 Trade Reporting Rule Changes for NASDAQ Equity Audit Trail — Phase II

      TO: All NASD Members and Other Interested Persons

      ATTN: Trading and Operations Personnel

      The Securities and Exchange Commission recently approved amendments to Schedules D and G of the NASD By-Laws that will require real-time trade reports in NASDAQ National Market System securities and listed securities traded off-board to include a buy, sell or cross indicator. To report this information, firms will use an additional keystroke in the trade reporting sequence. The text of the amendments is attached.

      Background

      At its July 1984 meeting, the NASD Board of Governors approved the development of a NASDAQ equity audit trail, which will be implemented in seven stages. Phase I became effective July 1, 1985. It requires clearing corporations to collect and provide to the NASD information pertaining to the time of the trade and the capacity of the executing broker-dealer (as principal or agent). If your firm does not currently comply with Phase I, you should take immediate steps to do so.

      Phase II, which will be implemented on November 29, 1985, will require members to indicate in trade reports for transactions in NASDAQ/NMS securities and off-board trades in listed securities whether the transaction is a buy, sell or cross trade. A purchase by a reporting member should be indicated as a buy (B); a sale by a reporting member should be indicated as a sell (S). A riskless principal transaction or a dual agency transaction should be indicated as a cross (X).

      Reporting Instructions

      Include the buy/sell/cross indicator in trade reports for NASDAQ/NMS securities and listed securities traded off-board immediately following the T in the trade reporting sequence. The indicator should precede the number of~shares reported, as demonstrated.

      Current Method

      New Method

      For a buy execution:

       

      T 400 ABCD 24 1/4

      T B 400 ABCD 24 1/4

      For a sell execution:

       

      T 400 ABCD 24 1/4

      T S 400 ABCD 24 1/4

      For a cross execution:

       

      T 400 ABCD 24 1/4

      T X 400 ABCD 24 1/4

      Errors, cancellations and "No/Was" corrections should similarly include the buy/sell/cross indicator. The following examples demonstrate corrective entries to a trade report of security ABCD executed at 24 1/4 and reported to the NASDAQ System at 10:40 a.m. E.T.

      Current Method

      New Method

      Error report:

       

      T E 10.40. 400 ABCD 24 1/4

      T E 10.40. B 400 ABCD 24 1/4

      Cancel report:

       

      T C 10.40. 400 ABCD 24 1/4

      T C 10.40. B 400 ABCD 24 1/4

      "No/Was" report:

       

      T N 10.40. 400 ABCD 24 1/4

      T N 10.40. B 400 ABCD 24 1/4

      W 400 ABCD 24 1/8

      W B 400 ABCD 24 1/8

      Firms using a computer-to-computer interface (CTCI) for reporting trades should refer to their computer interface specification for the proper formatting of the buy/sell/cross indicator. Executions through the Small Order Execution System (SOES) and the Computer Assisted Execution System (CAES) already include the buy/sell/cross indicator.

      You are encouraged to utilize the buy/sell/cross indicator voluntarily until November 27, 1985. After November 27, 1985, use of the buy/sell/cross indicator will be mandatory and trade reports that do not include the indicator will be rejected by the system. The NASD will review members' compliance with these Phase II requirements through its automated Market Surveillance program as well as on-site examinations.

      Questions concerning reporting requirements should be directed to Christopher R. Franke, Director, Market Surveillance, at (202) 728-8186. Questions concerning the computer-to-computer interface should be directed to Jack Donlon, Systems Development, at (212) 839-6375.

      Sincerely,

      John E. Pinto, Jr.
      Senior Vice President
      Compliance

      Attachment

      AMENDMENTS TO SCHEDULES D AND G*

      NASD BY-LAWS

      Effective November 29, 1985

      Schedule D, Part X, Section 2(c):

      (c) Information To Be Reported
      Each last sale report shall contain the following information:
      (1) NASDAQ symbol of the designated security;
      (2) Number of shares (odd lots shall not be reported);
      (3) Price of the transaction as required by paragraph (d) below;
      (4) A symbol indicating whether the transaction is a buy, sell, or cross.

      Schedule G, Section 2(c):

      (c) Information To Be Reported
      Each last sale report shall contain the following information:
      (1) Stock symbol of the eligible security;
      (2) Number of shares (odd lots shall not be reported);
      (3) Price of the transaction as required by paragraph (d) below;
      (4) A symbol indicating whether the transaction is a buy, sell, or cross.

      * New language is underlined.


    • 85-71 NASDAQ National Market System Grows to 2,163 Securities With 19 Voluntary Additions on November 5, 1985, and 1 Mandatory Inclusion on November 12, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, November 5, 1985, 19 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,162. These 19 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 19 issues scheduled to join NASDAQ/NMS on Tuesday, November 5, 1985, are:

      Symbol

      Company

      Location

      AIMAZ

      American Insured Mortgage Investors

      New York, NY

      AIND

      Arnold Industries, Inc.

      Lebanon, PA

      CMCO

      C.O.M.B. Company

      Plymouth, MN

      CCSI

      Custom Creamery Systems, Inc.

      New York, NY

      HSAI

      Healthcare Services of America, Inc.

      Birmingham, AL

      MDCH

      Med-Chem Products, Inc.

      Woburn, MA

      OSWI

      Old Spaghetti Warehouse, Inc.

      Dallas, TX

      OPTO

      Opto Mechanik, Inc.

      Melbourne, FL

      PANC

      Pasta & Cheese, Inc.

      Long Island City, NY

      PFSL

      Prudential Financial Services Corporation

      Salt Lake City, UT

      RECT

      Reetisel Corporation

      Yonkers, NY

      SHKIF

      SHL Systemhouse, Inc.

      Ottawa, Canada

      SHCI

      Salick Health Care, Inc.

      Beverly Hills, CA

      SETC

      Sierra Real Estate Equity Trust '84

      San Francisco, CA

      SETBS

      Sierra Real Estate Equity Trust '83

      San Francisco, CA

      SVRL

      Silvar-Lisco

      Menlo Park, CA

      SNAT

      Southern National Corporation

      Lumberton, NC

      SUSQ

      Susquehanna Bancshares, Inc.

      Lititz, PA

      TAVI

      Thorn Apple Valley, Inc.

      Southfield, MI

      The following issue may be included in the NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Additions

      Symbol

      Company

      Location

      MGAN

      Morgan Products, Ltd.

      Oshkosh, WI

      Additionally, the following security will enter NASDAQ/NMS under the mandatory Tier 1 criteria on November 12, 1985:

      Symbol

      Company

      Location

      ROST

      Ross Stores, Inc.

      Newark, CA

      NASDAQ/NMS Interim Additions

      Symbol

      Company

      Date of Entry

      NREC

      NAC RE Corporation

      10/11/85

      The following changes to the list of NASDAQ/NMS securities occurred since October 4, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      NUME/NUME

      Numerica Financial Corporation/Numerica Savings Bank, F.S.B.

      10/07/85

      DCOR/DCOR

      Decor Corporation/Decor Corp

      10/10/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      HLMI

      Robert Halmi, Inc.

      10/07/85

      CLBR

      Calibre Corporation

      10/08/85

      NOGCQ

      Nicklos Oil and Gas Company

      10/08/85

      WINNS

      Winn Enterprises, Inc.

      10/08/85

      EDCC

      Educational Computer Corporation

      10/11/85

      LORI

      The Lori Corporation

      10/22/85

      PULL

      Pullman Company

      10/25/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Sharon Bellanger, Market Surveillance, at (202) 728-8206.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-70 REVISED Trade Date — Settlement Date Schedule for Early November

      TO: All NASD Members and Municipal Securities Bank Dealers

      In Notice to Members 85-63, dated September 23, 1985, members were advised that Tuesday, November 5, Election Day, and Monday, November 11, Veterans Day, would not be considered business days since many banking institutions would be closed.

      The NASD has been advised that most banking institutions will be open on Election Day but will remain closed on Veterans Day. Therefore, November 5, 1985, will be considered a business day for determining settlement of trades, ex-dividends, marks to the market, reclamations and close-outs.

      REVISED Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date1/

      October 28

      November 4

      November 6

      29

      * 5

      7

      30

      * 6

      8

      31

      * 7

      11

      November 1

      * 8

      12

      4

      * 12

      13

      5

      13

      14

      6

      14

      15

      7

      15

      18

      8

      18

      19

      11

      18

      20

      *Revised Dates

      November 11 will not be considered a business day for determining the settlement of trades. Securities will not be quoted ex-dividend and marks to the market, reclamations and close-outs will not be made on these days.

      It should be noted that November 11 will be considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD's Uniform Practice Code and Municipal Securities Rule-making Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212)839-6256.

      * * * * *


      1/ Pursuant to Sections 220.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 85-69 Request for Comments on Proposed Amendment to Article III, Section 35 of the NASD's Rules of Fair Practice Concerning Advertising and Sales Literature for Direct Participation Programs

      TO: All NASD Members and Other Interested Persons

      ATTN: Direct Participation Programs Department

      LAST DATE FOR COMMENT: NOVEMBER 21, 1985

      The NASD's Direct Participation Programs and Real Estate Committees are concerned that abuses exist in the content of advertising and sales literature used for public direct participation programs. The Committees and the NASD's Board of Governors have approved a proposed amendment to Article III, Section 35 of the Rules of Fair Practice that would require advertising and sales literature concerning publicly offered direct participation programs to be filed with and reviewed by the NASD's Advertising Department within 10 days of first use or publication by an NASD member.

      The NASD requests comments on the proposed amendment prior to final consideration by the Board of Governors. The text of the proposed amendment is attached.

      Background and Explanation of Proposed Amendment

      Article III, Section 35 of the Rules of Fair Practice regulates members' communications with the public. It requires that all such communications be based on principles of fair dealing and good faith, and that they provide a sound basis for evaluating the facts regarding any securities offered by members. Material facts and qualifications may not be omitted if, in the context of the material presented, the omission would make the advertising or sales literature misleading. Exaggerated or misleading statements are prohibited, and members may not publish or distribute any public communication that the member knows or has reason to know contains any untrue statements of material facts or is otherwise false or misleading.

      Article III, Section 35 currently requires a member to file all advertisements with the Advertising Department for review prior to use for one year commencing with the member's initial advertisement. In addition, an NASD District Business Conduct Committee may, under certain circumstances, require a member to file advertising and/or sales literature with the Advertising Department at least 10 days prior to use. All members are also subject to routine spot-checks of their advertising and sales literature.

      The NASD believes that abuses exist in the content of advertising and sales literature used in connection with public direct participation programs. The abuses involve misleading illustrations of past performance, the inclusion of information on projected performance, and the unbalanced presentation of programs by not including a statement of significant risks. The NASD considered whether specific guidelines should be developed and applied to sales literature and advertising used in connection with public direct participation program offerings but concluded that current guidelines contained in Article III, Section 35 are adequate to regulate the content of member communications with the public. However, the NASD preliminarily believes that a filing requirement for public direct participation program advertising and sales literature is necessary.

      Therefore, the proposed amendment would require that advertising and sales literature utilized in connection with public direct participation programs be filed with the NASD's Advertising Department within 10 days of first use or publication by an NASD member. The responsibility of members to comply with the filing requirement would apply regardless of whether the advertising and sales literature is prepared by a sponsor, general partner or member. However, the member need not file advertising and/or sales literature that was previously filed by the sponsor, general partner or underwriter.

      Request for Comments

      All comments on the proposed amendment received by November 21, 1985 will be reviewed by the Direct Participation Programs and Real Estate Committees and the Board of Governors. If the Board of Governors approves the proposal, or an amended version resulting from comments received, it must be filed with and approved by the Securities and Exchange Commission. All comments received will be available for public inspection.

      Written comments should be addressed to:

      James M. Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D. C. 20006

      Questions regarding this notice should be directed to R. Clark Hooper, NASD Advertising Department, at (202) 728-8330, or Richard J. Fortwengler, NASD Corporate Financing Department, at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

      PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE

      New language underscored.

      Section 35. Communications with the Public

      (c) Filing Requirements and Review Procedures
      (3)* Advertisements and sales literature concerning public direct participation programs as defined in Article III, Section 34 of the Rules of Fair Practice shall be filed with the Association's Advertising Department for review within 10 days of first use or publication. Filing in advance of use is optional. Members need not file for review advertising and sales literature which has been filed by the sponsor, general partner or underwriter of the program.

      * Current subsections (3) through (7) will be renumbered as (4) through (8), respectively.


    • 85-68 NASDAQ National Market System Grows to 2,149 Securities With 14 Voluntary Additions on October 15, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, October 15, 1985, 14 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/ NMS to 2,149. These 14 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 14 issues scheduled to join NASDAQ/NMS on Tuesday, October 15, 1985, are:

      Symbol

      Company

      Location

      BBUY

      Best Buy Co,, Inc.

      Bloomington, MN

      CTYFP

      CityFed Financial Corporation (Cl B) (Pfd)

      Palm Beach, FL

      CTYFN

      CityFed Financial Corporation (Cl A) (Pfd)

      Palm Beach, FL

      CTYFO

      CityFed Financial Corporation (Cl C) (Pfd)

      Palm Beach, FL

      GOOD

      Goody Products, Inc.

      Kearny, NJ

      IOCS

      IDC Services, Inc.

      Chicago, IL

      INFC

      Infotech Management, Inc.

      Long Island City, NY

      IVAC

      Inland Vacuum Industries, Inc.

      Churchville, NY

      LACR

      Lancer Corporation

      San Antonio, TX

      MAGN

      Magnetics International, Inc.

      Maple Heights, OH

      MBVT

      Merchants Baneshares, Inc.

      Burlington, VT

      OTRKB

      Oshkosh Truck Corporation (Cl B)

      Oshkosh, WI

      WNSI

      WNS, Inc.

      Houston, TX

      WING

      Wings West Airlines, Inc.

      Santa Monica, CA

      The following issues may be included in the NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Additions

      Symbol

      Company

      Location

      HLCO

      Healtheo International, Inc.

      Boston, MA

      NREC

      NAC RE Corp.

      New York, NY

      The following changes to the list of NASDAQ/NMS securities occurred since September 20, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      CNET/CNET

      COMNET Corporation/Computer Network Corporation

      9/23/85

      SBPS/SBPS

      Savings Bank of Puget Sound, FSB/Savings Bank of Puget Sound

      9/24/85

      OLSN/OLSN

      Olson Industries, Inc./Olson Farms, Inc.

      9/25/85

      OEQU/ATBL

      Omni Equities, Inc./A.T. Bliss & Co., Inc.

      10/01/85

      CSTIF/CSTIF

      Challenger International, Ltd./Coastal International, Ltd.

      10/01/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      TBCM

      Triboro Communications, Inc.

      9/20/85

      IDYNC

      Interdyne Company

      9/25/85

      SYKEQ

      Sykes Datronics, Inc.

      9/25/85

      EMTH

      EMCOR Petroleum, Inc.

      9/26/85

      DUCK

      Duckwall-Alco Stores, Inc.

      10/01/85

      SYSG

      Systematics General Corp.

      10/01/85

      WEDGS

      Wedgestone Realty Investors Trust — SBI

      10/01/85

      AQASC

      American Quasar Petroleum Company

      10/02/85

      PLEY

      Pauley Petroleum, Inc.

      10/02/85

      PHSI

      Pearle Health Services, Inc.

      10/04/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-67 TK Securities, Inc. 1450 North Dixie Highway Fort Lauderdale, Florida 33304

      TO: All NASD Members

      ATTN: Operations Officer, Cashier Fail-Control Department

      On October 4, 1985, the United States District Court for the Southern District of Florida, Miami Division, appointed a SIPC Trustee for the above-captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12(h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Samuel A. Brodnax, Jr., Esquire
      Smathers & Thompson
      Alfred I. DuPont Building
      169 E. Flagler Street
      Miami, Florida 33131
      Telephone: (305) 379-6523

    • 85-66 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      The following is a list of NASD Notices to Members issued during the second and third quarters of 1985. Requests for copies of any notice should be accompanied by a self-addressed mailing label and directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D. C. 20006.

      Notice Number

      Date

      Topic

      85-22

      April 8, 1985

      NASDAQ National Market System Grows to 1,861 Securities With 100 Voluntary Additions on April 16, 1985

      85-23

      April 10, 1985

      Quarterly Checklist of Notices to Members

      85-24

      April 12, 1985

      NASDAQ Equity Audit Trail

      85-25

      April 11, 1985

      Temporary Receiver Appointed Bevill, Bresler & Schulman, Incorporated Bevill, Bresler & Schulman Securities, Inc. Austin Investment Planning, Inc. 301 South Livingston Avenue Livingston, New Jersey

      85-26

      April 15, 1985

      Adoption of an Amendment to the Interpretation of the Board of Governors on "Forwarding of Proxy and Other Materials"

      85-27

      April 15, 1985

      Approval of Recodified By-Laws and New Code of Procedure

      85-28

      April 18, 1985

      Temporary Receiver Appointed
      Collins Securities Corporation
      400 Tower Building
      Fourth & Center Streets
      Little Rock, Arkansas

      85-29

      April 19, 1985

      Compensation Received in Connection With Direct Participation Programs

      85-30

      April 22, 1985

      Securities and Exchange Commission Release Announcing Shareholder Communication Proposals

      85-31

      April 29, 1985

      NASDAQ National Market System Grows to 1,940 Securities With 82 Voluntary Additions on May 7, 1985, and Six Mandatory Inclusions on May 14, 1985

      85-32

      April 30, 1985

      Payment for Order Flow

      85-33

      May 7, 1985

      SIPC Trustee Appointed
      Coastal Securities Corporation
      1888 Century Park E., Suite 1606
      Los Angeles, California 90067

      85-34

      May 8, 1985

      Memorial Day: Trade Date-Settlement Date Schedule

      85-35

      May 10, 1985

      SIPC Trustee Appointed
      Bevill, Bresler & Schulman
      Incorporated
      301 South Livingston Avenue
      Livingston, New Jersey 07039

      85-36

      May 10, 1985

      NASDAQ National Market System Grows to 1,976 Securities With 42 Voluntary Additions on May 21, 1985

      85-37

      May 15, 1985

      Temporary Receiver Appointed
      Parr Securities Corp.
      68 William Street
      New York, New York 10005

      85-38

      May 20, 1985

      SIPC Trustee Appointed
      Parr Securities Corp.
      68 William Street
      New York, New York 10005

      85-39

      May 28, 1985

      NASDAQ National Market System Grows to 1,998 Securities With 23 Voluntary Additions on June 4, 1985

      85-40

      June 3, 1985

      Implementation of Revised Forms U-4 and U-5

      85-41

      June 10, 1985

      Request for Comments on Amendment Concerning Associated Persons' Accounts With Investment Advisers, Banks, and Other Financial Institutions

      85-42

      June 10, 1985

      Independence Day Trade Date-Settlement Date Schedule

      85-43

      June 12, 1985

      Proposed New Rule of Fair Practice Relating to Permission for Members to Alter Their Methods of Operation Under SEC Rule 15c3-2j (the "Customer Protection Rule")

      85-44

      June 11, 1985

      NASDAQ National Market System Grows to 2,012 Securities With 22 Voluntary Additions on June 18, 1985

      85-45

      June 24, 1985

      NASDAQ National Market System Grows to 2,045 Securities With 40 Voluntary Additions on July 2, 1985

      85-46

      June 27, 1985

      Offshore Shell Bank Licenses Registered in Majuro, Marshall Islands — Update

      85-47

      July 8, 1985

      NASDAQ National Market System Grows to 2,057 Securities With 21 Voluntary Additions on July 16, 1985

      85-48

      July 17, 1985

      Qualification and Registration Requirements of Schedule C

      85-49

      July 19, 1985

      Request for Comment on Shareholder Voting Rights for NASDAQ National Market System Companies

      85-50

      July 29, 1985

      NASDAQ National Market System Grows to 2,077 Securities With 32 Voluntary Additions on August 6, 1985

      85-51

      August 2, 1985

      Temporary Receiver Appointed
      Donald E. Sheldon & Co., Inc.
      One Wall Street
      New York, New York 10005

      85-52

      August 5, 1985

      SEC Request for Comment on Issues Relating to the Designation of NASDAQ/NMS Securities

      85-53

      August 12, 1985

      NASDAQ National Market System Grows to 2,091 Securities With 22 Voluntary Additions on August 20, 1985

      85-54

      August 13, 1985

      Proposed New Rule of Fair Practice Relating to Private Securities Transactions

      85-55

      August 16, 1985

      Labor Day: Trade Date-Settle-ment Date Schedule

      85-56

      August 19, 1985

      SIPC Trustee Appointed
      Donald E. Sheldon & Co.,Inc.
      One Wall Street
      New York, New York 10005

      85-57

      August 28, 1985

      NASDAQ National Market System Grows to 2,111 Securities With 24 Voluntary Additions on September 3, 1985

      85-58

      August 30, 1985

      Request for Comments on a Proposed New Rule Governing the Prompt Payment for Investment Company Shares Sold to Customers by NASD Members

      85-59

      September 4, 1985

      Effectiveness of Amendment to the Uniform Practice Code to Require Prompt Settlement of Syndicate Accounts

      85-60

      September 9, 1985

      SIPC Trustee Appointed
      Collins Securities Corporation
      400 Tower Building
      Fourth & Center Streets
      Little Rock, Arkansas 72201

      85-61

      September 9, 1985

      Cross-Lien Agreements With Clearing Entities

      85-62

      September 9, 1985

      NASDAQ National Market System Grows to 2,118 Securities With 21 Voluntary Additions on September 17, 1985

      85-63

      September23, 1985

      Trade Date - Settlement Date Schedule for October and Early November

      85-64

      September 24, 1985

      NASDAQ National Market System Grows to 2,143 Securities With 31 Voluntary Additions on October 1, 1985

    • 85-65 R. H. Stewart & Co., Inc. 1975 E. Sunrise Blvd., #817 Fort Lauderdale, Florida 33304

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On September 30, 1985, the United States District Court for the Southern District of Florida, Miami Division, appointed a SIPC Trustee for the above-captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(1) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12 (h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      John R. Camp, Jr., Esquire
      Blackwell Walker Gray Powers
      Flick and Hoehl
      2400 Amerifirst Building
      One Southeast Third Avenue
      Miami, Florida 33131
      Telephone: (305) 358-8880

    • 85-64 NASDAQ National Market System Grows to 2,143 Securities With 31 Voluntary Additions on October 1, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, October 1, 1985, 31 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,143. These 31 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 31 issues scheduled to join NASDAQ/NMS on Tuesday, October 1, 1985, are:

      Symbol

      Company

      Location

      AMBJ

      American City Business Journals, Inc.

      Kansas City, MO

      ALCRW

      American Land Cruisers, Inc. (Wts)

      Miami, FL

      AMRS

      American Restaurants Corporation

      Ventura, CA

      BTFC

      BT Financial Corporation

      Johnstown, PA

      BBAHF

      Basic Resources International (Bahamas) (Ltd)

      Nassau, Bahamas

      BEBA

      Beeba's Creations, Inc.

      San Diego, CA

      BNKF

      Bankers First Corporation

      Augusta, GA

      CBIO

      California Biotechnology, Inc.

      Mountain View, CA

      COMX

      Comtrex Systems Corporation

      Mt. Laurel, NJ

      CCOTW

      Consolidated Capital Opportunity Trust (Wts)

      Emeryville, CA

      CRIX

      Control Resource Industries, Inc.

      Michigan City, IN

      DCOR

      Decor Corporation

      Columbus, OH

      DSIIW

      Deeom Systems, Inc. (Wts)

      San Marcos, CA

      DIVWF

      Divi Hotels, N.V. (Wts)

      Ithaca, NY

      EPICW

      Environmental Processing, Inc. (Wts)

      Richardson, TX

      EXPDW

      Expeditors International of Washington, Inc. (Wts)

      Seattle, WA

      EXPO

      Exposaic Industries, Inc.

      Mount Airy, NC

      JCOR

      Jacor Communications, Inc.

      Cincinnati, OH

      KHGI

      Keystone Heritage Group, Inc.

      Lebanon, PA

      LXBK

      LSB Bancshares, Inc.

      Lexington, NC

      MHFS

      Mutual Home Federal Savings Bank

      Grand Rapids, MI

      NUMR

      Numerex Corporation

      Minneapolis, MN

      TIRE

      One Liberty Firestone Properties, Inc.

      New York, NY

      PNFC

      Pennsylvania National Finance Corp.

      Harrisburg, PA

      PHNX

      Phoenix Medical Technology, Inc.

      Andrews, SC

      PAMC

      Provident American Corporation

      Norristown, PA

      RGEQ

      Regency Equities Corp.

      New York, NY

      STGA

      Saratoga Standardbreds, Inc.

      North Salem, NY

      TFLX

      Termiflex Corporation

      Merrimack, NH

      MORW

      II Morrow, Inc.

      Salem, OR

      VISC

      Visual Electronics Corporation

      Newark, NJ

      The following changes to the list of NASDAQ/NMS securities occurred since September 6, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      MCBK/MCBK

      Merchants Bank of Boston, A Co-Operative Bank/Merchants Co-Operative Bank

      9/20/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      AVEC

      Advanced Energy Corporation

      9/09/85

      CDTX

      Chad Therapeutics, Inc.

      9/09/85

      FHSY

      Family Health Systems, Inc.

      9/09/85

      PEPLQ

      Peoples Restaurants, Inc.

      9/09/85

      SPER

      Sperti Drug Products, Inc.

      9/09/85

      DFDI

      Diversifoods, Inc.

      9/12/85

      FOOD

      First National Supermarkets, Inc.

      9/16/85

      FSTW

      Firstar Corporation

      9/17/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-63 Trade Date — Settlement Date Schedule for October and Early November

      TO: All NASD Members and Municipal Securities Bank Dealers

      FROM: All Operations Personnel

      Transactions made on Monday, October 14, Columbus Day; Tuesday, November 5, Election Day; and Monday, November 11, Veterans Day, and the days immediately preceding these days, will be subject to the schedule below. The purpose of this schedule is to provide uniformity since, while the NASDAQ System and other securities markets will be open on these days, many banking institutions will be closed.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      October 4

      October 11

      October 15

      7

      15

      16

      8

      16

      17

      9

      17

      18

      10

      18

      21

      11

      21

      22

      14

      21

      23

      October 28

      November 4

      November 6

      29

      6

      7

      30

      7

      8

      31

      8

      11

      November 1

      12

      12

      4

      13

      13

      5

      13

      14

      6

      14

      15

      7

      15

      18

      8

      18

      19

      11

      18

      20

      October 14, November 5, and November 11 will not be considered business days for determining the day for settlement of a trade. Securities will not be quoted ex-dividend and, marks-to-the-market, reclamations, and close-outs will not be made on these days.

      It should be noted that October 14, November 5, and November 11 will be considered business days for receiving customers' payments under Regulation T of the Federal Reserve Board.

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.

      * * * *


      * Pursuant to Sections 220.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 85-62 NASDAQ National Market System Grows to 2,118 Securities With 21 Voluntary Additions on September 17, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, September 17, 1985, 21 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/ NMS to 2,118. These 21 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 21 issues scheduled to join NASDAQ/NMS on Tuesday, September 17, 1985, are:

      Symbol

      Company

      Location

      APPL

      Apple Bank for Savings

      New York, NY

      BECR

      Bercor, Inc.

      La Mirada, CA

      BOHM

      Bohemia, Inc.

      Eugene, OR

      CFIP

      CF&I Steel Corporation

      Pueblo, CO

      CHFS

      Chief Automotive Systems, Inc.

      Grand Island, NE

      DKJC

      DICKEY-john Corporation

      Auburn, IL El

      UNTD

      First United Bancshares, Inc.

      Dorado, AR

      ICSI

      International Container Systems, Inc.

      Tampa, FL

      KNAP

      Knape & Vogt Manufacturing Company

      Grand Rapids, MI

      LDGX

      Lodgistix, Inc.

      Wichita, KS

      METHA

      Methode Electronics, Inc. (Cl A)

      Chicago, IL

      METHB

      Methode Electronics, Inc. (Cl B)

      Chicago, IL

      QTNT

      QT&T, Inc.

      Brent wood, NY

      SPILF

      S.P.I.-Suspension and Parts Industries Limited

      Carmiel, Israel

      JSCC

      Scott Cable Communications, Inc

      Irving TX

      SWHI

      Sound Warehouse, Inc.

      Dallas TX

      SOME

      State-O-Maine, Inc.

      New York NY

      STGM

      Status Game Corporation

      West Hartford CT

      STRM

      Sturm, Ruger & Company, Inc.

      Southport CT

      TRVMF

      T.R.V. Minerals Corporation

      Vancouver, Canada

      WCOM

      Warner Computer Systems, Inc.

      Teaneck, NJ

      The following issue may be included in NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Additions

      Symbol

      Company

      Location

      NDOCV

      Noble Drilling Corporation

      Ardmore, OK

      The following changes to the list of NASDAQ/NMS securities occurred since August 22, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      PTMEF/ NFEXF

      Petro Mac Energy, Inc./New Frontier Petroleum Corporation

      8/29/85

      PEXP/ PEXP

      People Express, Inc./People Express Airlines, Inc.

      8/29/85

      PEXPP/ PEXPP

      People Express, Inc. (Ser A, Pfd)/ People Express Airlines, Inc. (Ser A, Pfd)

      8/29/85

      PEXPO/ PEXPO

      People Express, Inc. (Ser B, Pfd)/ People Express Airlines, Inc. (Ser B, Pfd)

      8/29/85

      EWAT/ EWAT

      E'Town Corporation/Elizabethtown Water Company

      9/03/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      BIEN

      Billings Corporation

      8/22/85

      FSAW

      First Savings of Wisconsin

      8/23/85

      MCOR

      Moncor, Inc.

      8/26/85

      KIDS

      LJN Toys, Inc.

      8/27/85

      NYAL

      New York Airlines, Inc.

      8/29/85

      NYALW

      New York Airlines, Inc. (Wts)

      8/29/85

      LBKF

      Landmark Banking Corporation of Florida

      8/30/85

      CENB

      Centran Corporation

      9/03/85

      CMTLC

      Comtech, Inc.

      9/03/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-61 Cross-Lien Agreements with Clearing Entities

      TO: All NASD Members and Other Interested Persons

      In a recent letter to the NASD (see the enclosure), the Securities and Exchange Commission's Division of Market Regulation expressed concern that certain brokers and dealers may have entered into agreements with their clearing entities that violate the provisions of the Commission's hypothecation rules (8c-l and 15c2-l). These rules are designed, among other things, to prevent brokers or dealers from commingling customers' and firm securities to collateralize the same loan.

      The relevant portions of these rules prohibit "the direct or indirect hypothecation by a broker or dealer, or his arranging for or permitting, directly or indirectly, the continued hypothecation of any securities carried for the account of any customer under circumstances...that will permit such securities to be commingled with securities carried for the account of any person other than a bona fide customer of such broker or dealer under a lien for a loan made to such broker or dealer...."

      Members that do business with clearing banks or other entities frequently maintain two separate borrowings with the same lender, one for the firm and the other for customers. A customer loan is used to finance the extension of credit to its customers by the broker-dealer with customers' securities pledged under said loan. A firm bank loan is collateralized by firm securities used to finance firm activities.

      However, some broker-dealers apparently have entered into clearing agreements that give the clearing organization recourse to all securities and other property within that clearing firm's possession or control. This "cross-lien" language makes customers' securities susceptible to the clearing entity if the broker-dealer defaults on the firm loan. This constitutes a violation of the hypothecation rules.

      Consequently, where a broker-dealer has several loans that are collateralized by customers' securities and firm inventory with a single lender, the lender may not have a lien on customers' securities for any loan except other loans also made against securities carried for the account of customers of the same broker-dealer. Members should review existing agreements with their clearing entities and take immediate steps to amend them where appropriate.

      When a "cross-lien" agreement does exist between customers' and firm securities that are utilized as collateral for loans between broker-dealers and their clearing banks or other entities, the Reserve Formula Computation under SEC Rule 15c3-3 is impacted. In those instances, Item 2 of the Reserve Formula must include in the credits the lesser of the total amount of all monies borrowed (including any other borrowing from the same entity not collateralized by securities) or the market value of customer collateral, provided however, that if the market value of the collateral in the customer loan is insufficient to adequately collateralize said loan, the dollar amount of the loan should be used.

      Questions concerning this notice should be directed to your local NASD District Office or to I. William Fishkind, Assistant Director, Financial Responsibility, at (202) 728-8405.

      Sincerely,

      John E. Pinto, Jr.
      Senior Vice President
      Compliance

      Enclosure

    • 85-60 Collins Securities Corporation 400 Tower Building Fourth & Center Streets Little Rock, Arkansas 72201

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On September 4, 1985, the Federal District Court for the Eastern District of Arkansas appointed a SIPC Trustee for the above captioned firm.

      Please refer to Notice to Members 85-28 regarding the previous appointment of a Temporary Receiver.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Harvey L. Bell, Esquire
      Bell, Bilheimer & Associates, P. A.
      902 West Second Street
      Little Rock, Arkansas 72201
      Telephone: (501) 376-1600

    • 85-59 Effectiveness of Amendment to the Uniform Practice Code to Require Prompt Settlement of Syndicate Accounts

      TO: All NASD Members and Other Interested Persons

      ATTN: Syndicate Department

      The NASD has adopted an amendment to its Uniform Practice Code to require syndicate managers to settle syndicate accounts within 120 days of the syndicate settlement date. The text of the amendment, which will be effective October 1, 1985, is attached.

      Explanation Of Proposed Amendment

      As a result of industry concerns about delays in settling syndicate accounts, the NASD's Corporate Financing Committee considered the need for more prompt settlement of syndicate accounts in the distribution of corporate securities. Syndicate accounts are ordinarily established by underwriting groups to process the income and expenses of the syndicate. Delays in settling these accounts can result in unnecessary outlays of time and money by syndicate participants.

      After consideration of the matter, the NASD concluded that the problem of delays in the settlement of syndicate accounts which the industry has been experiencing should be addressed by establishing a period within which syndicate accounts must be settled.

      The NASD has, therefore, amended the Uniform Practice Code to add new Section 66, which requires the final settlement of syndicate accounts by the syndicate manager within 120 days of the date securities are delivered by the issuer to or for the account of syndicate members.

      After one year, the NASD will review the experience under the 120-day requirement with a view to reducing the time period to 90 days.

      Effective Date

      New Section 66 will become effective October 1, 1985 but will not apply to offerings which became effective before that date. Therefore, syndicate accounts are required to be settled within 120 days with respect to all corporate securities offerings effective on or after October 1, 1985.

      * * * * * *

      All comments or questions pertaining to these new requirements may be directed to the NASD's Corporate Financing Department, at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

      NEW SECTION 66

      UNIFORM PRACTICE CODE

      Section 66

      Settlement of Syndicate Accounts

      (a) Definitions:
      (1) "selling syndicate" means any syndicate formed in connection with a public offering to distribute all or part of an issue of corporate securities by sales made directly to the public by or through participants in such syndicate.
      (2) "syndicate account" means an account formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of a public offering.
      (3) "syndicate manager" means the member of the selling syndicate that is responsible for maintenance of syndicate account records.
      (4) "syndicate settlement date" means the date upon which corporate securities of a public offering are delivered by the issuer to or for the account of the syndicate members.
      (b) Final settlement of syndicate accounts shall be effected by the syndicate manager within 120 days following the syndicate settlement date.

    • 85-58 Request for Comments on a Proposed New Rule Governing the Prompt Payment for Investment Company Shares Sold to Customers by NASD Members

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: SEPTEMBER 30, 1985

      The National Association of Securities Dealers, Inc. (NASD), is soliciting comments from members and other interested persons on a proposed new rule (new paragraph (m), Article III, Section 26, NASD Rules of Fair Practice) that would govern the prompt payment by NASD members for investment company shares.

      The new rule would require NASD members to transmit payments for investment company shares, which such members have sold to customers, to underwriters by the end of the fifth business day after receiving a purchase order from a customer (trade date + 5). The rule would also require members who are underwriters to transmit payment for investment company shares, which they have received from customers or other members, to investment company issuers within one business day after receiving such payments (day of receipt + l).

      The new rule would replace the NASD Board of Governors' interpretation governing the prompt payment by members for shares of investment companies, which appears at ¶5265 of the NASD Manual and is attached as Exhibit 2.

      The text of the proposed rule is attached to this notice as Exhibit 1.

      PROPOSED PROMPT PAYMENT RULE: BACKGROUND AND EXPLANATION

      During the past several years, the investment company industry has experienced unprecedented growth. For the first five months of 1985, sales of mutual funds (excluding short-term funds) totaled $37.1 billion. Total annual sales were $45.9 billion in 1984 and $40.4 billion in 1983. Both totals set new records at the time.

      As of December 31, 1983, total net assets of all mutual funds were $293 billion, compared with the end of May 1985 when they were $424 billion.

      In 1984, 57 percent ($38 billion) of investors' purchases and redemptions of mutual funds (excluding short-term funds) were processed by NASD member firms using multifarious procedures that included the telephone, mail deliveries, express mail, messengers and some automation facilities. These procedures are often inefficient, costly and non-uniform. The ever-increasing number of transactions magnified the adverse effect of these inefficiencies and led to the formation of a joint NASD/Investment Company Institute Task Force, which was charged with the responsibility of finding a solution to the problem.

      After lengthy discussions of a variety of options, the Task Force reached an agreement with the National Securities Clearing Corporation (NSCC) in January 1985. The NSCC began developing a system that will automate, standardize and centralize the processing of transactions in mutual funds. It is anticipated that a substantial volume of members' transactions in mutual fund shares will be processed through the system when it begins operating in 1986.

      The new system will provide for automatic net settlement in a participating member's account with the NSCC on the fifth business day following the trade date. It will also provide for net settlement with mutual fund issuers on the same day.

      For the past 28 years, prompt payment by members for mutual fund shares, which they have sold to customers, has been governed by the NASD Board of Governors' Prompt Payment Interpretation. This interpretation was adopted when the mutual fund industry was in its infancy in terms of the volume of transactions, (in 1957, there were 143 mutual funds with $8.7 billion in net assets and annual sales of $1.4 billion.)

      The interpretation does not include a definition of the term "prompt payment." Under its provisions, if an underwriter does not receive payment from a member within 10 business days of the trade date, it is required to notify the local NASD District Office where the originating dealer's office is located. Currently, this results in a blizzard of paper flowing into NASD District Offices. Upon investigation of the reason for such late payments, the NASD staff invariably finds that the cause is the inefficiencies of the various settlement systems currently used which have often been overwhelmed by the sheer volume of transactions.

      The NASD believes that the adoption of a centralized settlement system will solve most of the settlement problems that participants in the proposed system are experiencing, and it will do so at a lower unit cost.

      The NASD also believes that the trade date + 5 settlement requirement that is to be incorporated into the new system should become the universal standard for all mutual fund sales processed by NASD members. It considers that all members who are underwriters should be governed by a similar standard for settlement with mutual fund issuers. That is, payments for mutual fund shares received directly from customers or from other members should be transmitted within one business day of the receipt of such payments.

      RESCISSION OF THE PROMPT PAYMENT INTERPRETATION

      Several of the provisions that are included in the current Prompt Payment Interpretation, the rescission of which is being proposed, are not included in the proposed new rule for the following reasons:

      Recordkeeping

      Since the provisions of Rule 17(a)(3) under the Securities Exchange Act of 1934 and Article III, Section 21 of the NASD Rules of Fair Practice, govern the recordkeeping requirements to which all members are subject, there is no reason to repeat such requirements in the proposed rule.

      Ten-Day Notification Requirement

      For the reasons discussed above, the NASD does not believe it is necessary to retain this requirement. Although there may have been rationale for such a requirement in the absence of a definition of the term "prompt payment," such will no longer be valid when a rule is in place that defines prompt payment in specific terms and which will subject members to disciplinary action for violation of its provisions.

      Reference to Regulation T

      The NASD considers that the negative reference to Regulation T in the interpretation serves no useful purpose, and is therefore superfluous.

      * * * * *

      All members and other interested persons are invited to submit written comments on the proposed new rule and the proposed rescission of the Prompt Payment Interpretation. Comments must be received no later than September 30, 1985, and should be directed to:

      Mr. James M. Cangiano
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Comments received by the indicated date will be considered by the Investment Companies Committee and the NASD Board of Governors. If the proposals are approved by the Board, they must then be submitted to the membership for a vote. Any rule approved by the Board and the membership must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions regarding this notice should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202) 728-8328.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel
      Legal and Compliance

      Attachment

      Exhibit 1

      Proposed Amendment to Article III, Section 26 of the NASD Rules of Fair Practice*

      Prompt Payment for Investment Company Shares

      (m)
      (1) Members shall transmit payments for investment company shares, which such members have sold to customers, to underwriters or their designated agents by the end of the fifth business day following receipt of a customer order to purchase such shares.
      (2) Members who are underwriters shall transmit payments for investment company shares, which such members have received from other members or customers, to investment company issuers by the end of one business day following receipt of such payments.

      Exhibit 2

      ¶15265

      Prompt Payment by Members for Shares of Investment Companies*

      Failure by members to pay underwriters (who are also members) promptly, and failure by underwriters to insist upon such prompt payment by members, for investment company shares which members have sold to customers is contrary to the accepted standards of the business.

      Members are required to transmit payment to underwriters (or custodians) promptly after the date of the transaction. Underwriters must pay issuers for shares acquired to fill dealers' orders promptly after the date of the transaction.

      Members must maintain records, showing date of transaction, date upon which payment is received from customer, and date of payment to underwriter, as to all transactions in investment company shares.

      In the event an underwriter does not receive payment from a member within ten (10) business days following the date of any transaction involving more than $100, or if any check received from a dealer for payment of an open transaction is returned by a bank as uncollectable, regardless of when the check was originally received, the underwriter must immediately notify the district office of the Association in the district where the dealer's office is located. The notice to the Association shall state that the underwriter has communicated with the member and shall contain any explanation furnished by the member for the failure to make prompt payment. A copy of this notice must be furnished to the member involved.

      Failure to comply with the procedures set forth herein may be considered a violation of Section 1 of Article III of the Rules of Fair Practice.

      Transactions in investment company shares between customers and members are subject to Regulation T of the Federal Reserve Board. However, the Interpretation above is in no way related to Regulation T.

      [As amended effective August 3, 1978.]


      * New language is underlined.

      * This interpretation is proposed to be deleted in its entirety.


    • 85-57 NASDAQ National Market System Grows to 2,111 Securities With 24 Voluntary Additions on September 3, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, September 3, 1985, 24 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,111. These 24 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 24 issues scheduled to join NASDAQ/NMS on Tuesday, September 3, 1985, are:

      Symbol

      Company Name

      Location

      AEAGF

      Agnico-Eagle Mines Limited

      Ontario, Canada

      AAHS

      Alco Health Services Corporation

      Valley Forge, PA

      AMERZ

      America First Federally Guaranteed Mortgage Fund Limited Partnership

      Omaha, NE

      ATLFP

      Atlantic Financial Federal (Pfd)

      Bala Cynwyd, PA

      CFNVF

      Centrafarm Group, N.V.

      The Netherlands

      DTSI

      Datron Systems, Inc.

      Simi Valley, CA

      ESNE

      Edgcomb Steel of New England, Inc.

      Nashua, NH

      EMCC

      Emett & Chandler Companies, Inc.

      Los Angeles, CA

      FCOLA

      First Colonial Bankshares Corporation (Cl A)

      Chicago, IL

      FEXCO

      First Executive Corporation (Ser F) (Depositary Preferred)

      Los Angeles, CA

      FNET

      FundsNet, Inc.

      Englewood, NJ

      GALCF

      Galactic Resources Ltd.

      Vancouver, Canada

      HERE

      Heritage Entertainment, Inc.

      Los Angeles, CA

      INMT

      Intermet Corporation

      Atlanta, GA

      MODX

      Modulaire Industries, Inc.

      San Francisco, CA

      NANO

      Nanometrics Incorporated

      Sunnyvale, CA

      GOSHA

      Oshkosh B'Gosh, Inc. (Cl A)

      Oshkosh, WI

      GOSHB

      Oshkosh B'Gosh, Inc. (Cl B)

      Oshkosh, WI

      PASBP

      Perpetual American Bank, F.S.B. (Ser A) (Pfd)

      Alexandria, VA

      RESC

      Roanoke Electric Steel Corporation

      Roanoke, VA

      SCNC

      South Carolina National Corporation

      Columbia, SC

      USMA

      Union Special Corporation

      Chicago, IL

      UNIH

      United Healthcare Corporation

      Minnetonka, MN

      VMLPZ

      VMS Mortgage Investors Limited Partnership

      Chicago, IL

      The following changes to the list of NASDAQ/NMS securities occurred since August 12, 1985:

      NASDAQ/NMS Symbol and/or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      LORI/APEC

      The Lori Corporation/Apeco Corporation

      8/12/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      ERESE

      Energy Reserve, Inc.

      8/12/85

      HFAX

      Halifax Engineering, Inc.

      8/16/85

      TTSC

      TSC, Inc.

      8/19/85

      TCTYC

      Twin City Barge, Inc.

      8/19/85

      DCTL

      Docutel/Olivetti Corporation

      8/21/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-56 Donald E. Sheldon & Co., Inc. One Wall Street New York, New York 10005

      TO: All NASD Members and Other Interested Persons

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On August 13, 1985, the United States District Court for the Southern District of New York appointed a SIPC Trustee for the above-captioned firm.

      Please refer to Notice to Members 85-51 regarding the previous appointment of a Temporary Receiver.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Stanley T. Lesser, Esquire
      Kaye, Scholer, Fierman,
      Hays & Handler
      425 Park Avenue
      New York, New York 10022
      Telephone: (212) 407-8000

    • 85-55 Labor Day: Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Monday, September 2, 1985, in observance of Labor Day. "Regular-Way" transactions made on the business days immediately preceding that day will be subject to the following schedule.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      *Regulation TDate

      August 23

      August 30

      September 4

      26

      September 3

      5

      27

      4

      6

      28

      5

      9

      29

      6

      10

      30

      9

      11

      September 2

      Markets Closed

      3

      10

      12

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purpose of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Muncipal Securities Rulemaking Board Rule G-12 on Uniform Practice. Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Sections 220.8(b)(l) and (4) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l), make application to extend the time period specified. The date members must take such action is shown in the column entitled "Regulation T Date."


    • 85-54 Proposed New Rule of Fair Practice Relating to Private Securities Transactions

      IMPORTANT MAIL VOTE

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: ALL NASD Members

      LAST VOTING DATE IS SEPTEMBER 13, 1985

      Enclosed is a proposed addition to Article III of the NASD's Rules of Fair Practice. The proposed new rule has been approved by the Board of Governors and now requires the membership's approval,

      The rule would establish new requirements for the private securities transactions of persons associated with members, and would entirely replace the private Securities Transactions Interpretation under Article III, Section 27 of the Rules of Fair Practice.

      If approved, the rule must then be filed with and approved by the Securities and Exchange Commission. As discussed below, the proposed rule was published for membership comment on March 29, 1985 (Notice to Members 85-21).

      The text of the new rule is attached as Exhibit 1. The text of the Private Securities Transactions Interpretation is attached as Exhibit 2,

      BACKGROUND

      The NASD has long been concerned about the private securities transactions of persons associated with broker-dealers. These transactions can generally be grouped into two categories.

      1. Transactions in which an associated person sells securities to public investors on behalf of another party, e.g., as part of a private offering of limited partnership interests, without the participation of the individual's employer firm.
      2. Transactions in securities owned by an associated person.

      The first category of transactions presents serious regulatory concerns because securities may be sold to public investors without the benefit of supervision or oversight by a member firm and perhaps without adequate attention to such regulatory protections as due diligence investigations and suitability determinations. In some cases, investors may be misled into believing that the associated person's firm has analyzed the security being offered and "stands behind" the product and transaction. The firm in fact may be unaware of the associated person's participation in the transaction. Under some circumstances, the firm may be liable for the actions of the associated person even though the firm was not aware of his or her participation in the transaction. 1/

      In view of these concerns, the NASD promulgated the Private Securities Transactions Interpretation several years ago. The Interpretation requires associated persons to notify their employer firms prior to participating in private securities transactions. A significant number of associated persons have been disciplined by the NASD for violation of this Interpretation in recent years. It is believed that the existence of the Interpretation has allowed firms to exercise better supervision over their associated persons.

      The Interpretation has been a source of substantial confusion, however, because it addresses only the responsibility of associated persons to notify their member firms of such transactions. It does not specifically address the supervisory and oversight responsibilities of the firms. The Board of Governors' Advisory Council and several District Business Conduct Committees have requested that the Interpretation be amended to clarify firms' responsibilities in this area. After careful study, the Board has decided to adopt a new rule of fair practice to replace the Interpretation.

      The rule is designed to set forth specific responsibilities for associated persons and member firms regarding the handling of associated persons' private securities transactions. Based on an analysis of regulatory problems regarding private securities transactions, the rule would treat transactions differently depending upon whether the associated person receives selling compensation. In either case, the rule specifies the responsibilities of member firms.

      COMMENTS RECEIVED

      As previously noted, the NASD published the proposed rule on private securities transactions for comment in Notice to Members 85-21 (March 29, 1985). Twenty-five comments were received. Two writers opposed the proposed rule as an abridgment of the rights of registered representatives to engage in legitimate private transactions. Seven encouraged the adoption of the rule as drafted. Five urged that the rule be strengthened by, for example, requiring the member firm to confirm private securities transactions similar to the way it confirms its own transactions, or by expanding the rule's application beyond securities transactions to all private transactions for compensation. Eleven commentators concurred generally with the proposal but suggested some change.

      In response to the comments received, and following further consideration of the proposed rule, the Board of Governors made two amendments to the rule. These changes are noted in the following analysis.

      ANALYSIS OF THE PROPOSED RULE

      Applicability — The new rule, the text of which is attached as Exhibit 1, would apply to any situation in which an associated person of a member proposes to participate in any manner in a private securities transaction.

      "Private securities transaction" is defined broadly, and generally parallels the concept in the present Interpretation. (See Exhibit 2.) Transactions subject to Article III, Section 28 of the NASD Rules of Fair Practice 2/ and personal transactions in investment company and variable annuity securities are excluded. Upon further consideration, the Board amended the rule as originally proposed to exclude also those transactions among immediate family members (as defined in the Interpretation of the Board of Governors on Free-Riding and Withholding 3/) for which no associated person receives any selling compensation. Because regulatory problems most frequently occur in connection with private placements of new offerings, those transactions are specifically included within the definition of "private securities transaction."

      Written Notice — The present Interpretation requires associated persons to provide written notice of such transactions to their employers. The new rule also would require written notice to the employer member by the associated person prior to participating in any private securities transaction; however, under the new rule, the notice would be required to include a detailed description of the proposed transaction and the individual's proposed role therein. Because the rule would treat compensatory and noncompensatory transactions differently, it would also be necessary for the associated person to state whether he or she will receive selling compensation in connection with the transaction.

      Transactions for Compensation — As noted above, the Board of Governors has concluded that it is important to draw a distinction between transactions in which persons receive selling compensation and those handled as an accommodation or under another noncompensatory arrangement. The most serious regulatory concerns relate to situations in which associated persons receive selling compensation and therefore have an incentive to execute sales, perhaps without adequate supervision or adequate attention to suitability and due diligence responsibilities.

      For transactions in which an associated person has or may receive selling compensation, the rule would require that a member receiving written notice from its associated person respond to him or her in writing, indicating whether the firm approves or disapproves of his or her participation in the proposed transaction. If the firm approves of the associated person's participation, the firm would then be required to treat the transaction as its own, to record the transaction on the firm's books and records, and to supervise the associated person's participation in the transaction to the same extent as if the transaction were executed on behalf of the firm.

      If the firm disapproves of the associated person's participation, he or she would be prohibited from participating in the transaction in any manner.

      Transactions Not For Compensation — The Board of Governors believes that there may be some transactions in which associated persons participate without compensation that should not be subjected to the same level of scrutiny as other transactions. For example, a salesperson may own stock in a closely held family corporation and wish to transfer that stock to another family member. While the firm should be made aware of such a transaction, it appears unnecessary to treat that type of transaction as a transaction of the employer firm.

      Accordingly, the new rule would require a member receiving notice that an associated person proposes to participate in a transaction or a series of related transactions 4/ without compensation to provide the associated person with written acknowledgment of the submitted notice.

      The NASD has consistently taken the position that firms must be able to supervise and regulate effectively each associated person's securities activities. The rule would therefore give the employer firm the right to impose conditions upon each associated person's participation in noncompensatory transactions and would require that he or she adhere to such conditions. It is intended that a firm would have full discretion to utilize this authority to restrict its associated persons' private securities activities, including activities performed on a non-compensatory basis.

      Definition of Selling Compensation — The definition of "selling compensation" plays a key role in the proposed rule. Because the treatment of transactions varies significantly depending upon whether selling compensation is to be received, the definition of "selling compensation" is deliberately broad in its scope.

      The definition includes "any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security." Certain examples are provided, including commissions, finder's fees, securities, and rights of participation in profits, tax benefits, or dissolution proceeds as a general partner or otherwise. While these examples are intended to include some of the most common forms of compensation, the definition is not intended to be restricted to those examples but rather to include any item of value received or to be received directly or indirectly.

      It is important to note that the definition of "selling compensation" includes compensation received or to be received by anyone acting in the capacity of either a salesperson or in some other capacity, specifically including the capacity of a general partner. The definition is intended to address a practice in which associated persons function as general partners in forming limited partnerships and then sell limited partnership interests in private securities transactions. Any involvement in a securities transaction by an associated person of an NASD member firm may be subject to the panoply of regulatory requirements applicable to persons associated with a broker-dealer. Participation in transactions as a general partner, therefore, carries with it significant regulatory responsibilities.

      * * * *

      The Board of Governors believes this proposed new rule of fair practice is necessary and appropriate. It recommends that members vote their approval.

      Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than September 13, 1985.

      Questions concerning this notice may be directed to Dennis C. Hensley or Phillip A. Rosen, NASD Office of the General Counsel, at (202) 728-8446.

      Sincerely,

      Gordon S. Macklin
      President

      Attachments

      PROPOSED NEW RULE OF FAIR PRACTICE *

      Section _: Private Securities Transactions

      (a) Applicability — No person associated with a member shall parti cipate in any manner in a private securities transaction except in accordance with the requirements of this section.
      (b) Written Notice — Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.
      (C) Transactions for Compensation
      (1) In the case of a transaction in which an associated person has received or may receive selling compen sation, a member that has received notice pursuant to Subsection (b) shall advise the associated person in writing stating whether the member:
      (A) approves the person's participation in the proposed transaction; or
      (B) disapproves the person's participation in the proposed transaction.
      (2) If the member approves a person's participation in a transaction pursuant to Subsection (c)(l), the transaction shall be recorded on the books and records of the member, and the member shall super vise the person's participation in the transaction as if the transaction were executed on behalf of the member.
      (3) If the member disapproves a person's participation pursuant to Subsection (c)(l), the person shall not participate in the transaction in any manner, directly or indirectly.
      (d) Transactions Not For Compensation — In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member that has received notice pursuant to Subsection (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.
      (e) Definitions — For purposes of this section, the following terms shall have the stated meanings:
      (1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including though not limited to new offerings of securities that are not registered with the Commission; provided however that transactions subject to the notification requirements of Article III, Section 28 of the Rules of Fair Practice, trans actions among immediate family members (as defined in the Interpretation of the Board of Governors on Free-Riding and Withholding) for which no associated person receives any selling compensation, and personal transactions in invest ment company and variable annuity securities shall be excluded.
      (2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including though not limited to commissions; finder's fees; securities or rights to acquire securities; expense reimbursements; and rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise.

      INTERPRETATION OF THE NASD BOARD OF GOVERNORS ON PRIVATE SECURITIES TRANSACTIONS *

      Introduction

      The Board of Governors, under its obligation to "prevent fraudulent and manipulative acts [and] practices and to promote just and equitable principles of trade," believes it should again emphasize to members their continuing responsibility to exercise appropriate supervision over associated personnel and, in particular, to emphasize to such personnel their responsibilities of good faith to the member and its customers. For purposes of this Interpretation, private securities transactions shall include securities transactions which involve a limited number of purchases or sales (as contrasted, for example, with transactions involving public offerings registered with the SEC) and other investment transactions involving associated personnel which may mislead customers or participants into believing the transactions are sponsored by the member.

      Depending upon all the facts and circumstances, private securities transactions effected outside the usual or normal course or scope of employment and nowhere reflected on broker-dealer books and records may expose the participants to charges of serious violations of federal securities laws, as well as industry rules and regulations, and to civil liability. In some instances, severe sanctions have been imposed on registered and associated personnel for engaging in private securities transactions effected outside the scope of their association and nowhere reflected on broker-dealer books and records.

      Persons associated with a member should also be aware that their involvement in private securities transactions outside the scope of their association with a member may raise serious questions regarding their need to register as broker-dealers and/or investment advisers under state and federal securities laws. In addition, effecting private securities transactions without disclosure to the member deprives the member of an ability to supervise the securities transactions of persons associated with it thereby making it difficult for the member to exercise its obligation of good faith in its dealings with its customers.

      Accordingly, the Board of Governors has determined that no person may be involved in any way with a private securities transaction outside the regular course or scope of his association or employment without prior notice to the member with whom he is associated. To insure compliance with this determination, the member may, at its option, request duplicate copies of all documents and statements related to such transactions. It shall be the duty of any person associated with a member to promptly comply with such a request.

      Personal securities transactions with another member of the Association, which transactions are properly recorded on the books of the executing member and which are subject to the notification requirements of Article III, Section 28 of the Rules of Fair Practice, are not considered to be private securities transactions for the purposes of this Interpretation. Purchases or redemptions of variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, for the personal account of the person associated with a member, are also not considered to be private securities transactions for purposes of this Interpretation.

      * * * *

      The following Interpretation of Article III, Sections 1, 27, and 28 of the Association's Rules of Fair Practice is adopted by the Board of Governors of the Association pursuant to the provisions of Article VII, Section 3(a) of the Association's By-Laws and Article I, Section 3 of the Rules of Fair Practice.

      Interpretation

      It shall be deemed conduct inconsistent with just and equitable principles of trade for any person associated with a member to engage in a private securities transaction outside the regular course or scope of his association or employment with a member, for himself, or with or for any other person without prior written notification to the member. In order for that member to exercise supervision over such transactions, it may request duplicate copies of all confirmations and other documents or other information related to such transactions from the person notifying the member, and it shall be deemed conduct inconsistent with just and equitable principles of trade for this person to fail to promptly comply with such request.


      1/ This concern has been addressed in earlier NASD notices. See Notices to Members 82-39 (June 15, 1982) and 80-62 (December 1, 1980).

      2/ Section 28 requires associated persons who handle personal securities
      transactions through a member other than their employer (the "executing member") to notify the executing member of their employment with another member of the NASD. The executing member is then required to notify the employer member of all of the associated person's activity. See NASD Manual (CCH) 112178.

      3/ NASD Manual (CCH) p. 2045.

      4/ The Board of Governors added the phrase "or a series of related transactions" to the rule as originally proposed to allow associated persons to report a series of related transactions without compensation in a single notice.

      * All language is new. This rule would replace the Private Securities Transactions Interpretation under Article III, Section 27 of the NASD Rules of Fair Practice. See Exhibit 2.

      * This Interpretation is proposed to be deleted in its entirety.


    • 85-53 NASDAQ National Market System Grows to 2,091 Securities With 22 Voluntary Additions on August 20, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, August 20, 1985, 22 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 2,091. These 22 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 22 issues scheduled to join NASDAQ/NMS on Tuesday, August 20, 1985, are:

      Symbol

      Company

      Location

      CFSC

      CFS Financial Corporation, Inc.

      Fairfax, VA

      CARG

      Carriage Industries, Inc.

      Calhoun, GA

      CEDC

      Catalyst Energy Development Corporation

      New York, NY

      CARX

      Certified Collateral Corporation

      Chicago, IL

      CNHC

      Commonwealth National Financial Corporation

      Harrisburg, PA

      CELC

      Corporation for Entertainment and Learning, Inc. (The)

      New York, NY

      EMET

      East met Corporation

      Baltimore, MD

      EVAN

      Evans, Inc.

      Chicago, IL

      FABKO

      First of America Bank Corporation (Ser. D) (Pfd.)

      Kalamazoo, MI

      KEII

      Keithley Instruments, Inc.

      Solon, OH

      LCNAF

      Lacana Mining Corporation

      Ontario, Canada

      MKTAY

      Makita Electric Works, Ltd.

      Aichi, Japan

      NCIS

      National Controls, Inc.

      Santa Rosa, CA

      PWNE

      Pawnee Industries, Inc.

      Wichita, KS

      PHCC

      Preferred Health Care Corp.

      Katonah, NY

      PBNK

      Progress Federal Savings Bank

      Norristown, PA

      SCFC

      Scientific Communications, Inc.

      Garland, TX

      SOMB

      Somerset Bancorp, Inc.

      Somerville, NJ

      SWWC

      Southwest Water Company

      La Puente, CA

      TRRO

      Triton Group Ltd.

      Los Angeles, CA

      TRROO

      Triton Group Ltd. (Ser. C) (Pfd.)

      Los Angeles, CA

      VLAB

      Vipont Laboratories, Inc.

      Fort Collins, CO

      The following changes to the list of NASDAQ/NMS securities occurred since July 26, 1985:

      NASDAQ/NMS Symbol and/or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      TCBY/TCBY

      TCBY Enterprises, Inc./This Can't Be Yogurt

      7/31/85

      BDEP/BDEP

      BanPonce Corporation/Banco de Ponce

      8/01/85

      FAMS/GMEX

      Famous Restaurants, Inc./ Garcia's of Scottsdale, Inc.

      8/01/85

      FIBK/FIBK

      First Interstate Corporation of Alaska/First Interstate Bank of Alaska

      8/01/85

      DAHL/DESI

      Dahlberg, Inc./Dahlberg, Inc.

      8/06/85

      SCORZ/SCORZ

      Nuclear Pharmacy, Inc. (Wts)/ Syncor International Corp. (Wts)

      8/06/85

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      ONIX

      ONYX & IMI, Inc.

      7/31/85

      VGCIE

      Veta Grande Companies, Inc.

      7/31/85

      GTCM

      Guaranty Commerce Corporation

      8/01/85

      GULL

      Gull, Inc.

      8/01/85

      FFIC

      Fairmont Financial, Inc.

      8/05/85

      SPDC

      S-P Drug Company, Inc.

      8/05/85

      SCOR

      Syncor International Corporation

      8/06/85

      FTEC

      FilmTec Corporation

      8/08/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202)728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-52 SEC Request for Comment on Issues Relating to the Designation of NASDAQ/NMS Securities

      IMPORTANT

      TO: All NASD Members and Other Interested Persons

      In November 1984, the SEC approved, by a split vote, the NASD's longstanding petition that the Commission amend its rule governing the qualifications for companies seeking inclusion in the NASDAQ National Market System.

      This landmark decision which, in essence, substitutes qualitative standards for market activity criteria, made an additional 1,500 National Newspaper List companies eligible for admission to the NASDAQ National Market System. In the opinion of the NASD Board, it has been one of the most important developments to have occurred in the continuing development of our nation's securities markets, and a decision that has resulted in substantial benefits for investors, NASDAQ companies and the securities industry. NASDAQ/NMS combines up-to-the-minute last-sale reporting characteristics of the major stock exchanges with the unique strength of the NASDAQ market — its highly competitive network of competing dealers.

      Notwithstanding the benefits that are directly attributable to this decision, the SEC has determined to revisit this very issue less than eight months later. It is doing so mainly in response to complaints from competing markets during the rulemaking proceeding, particularly the American Stock Exchange, which claimed that the NASD was using "NMS designation" as a marketing device in competing with the exchanges for "listings."

      Among the questions being raised by the SEC at this time are:

      • Is the NMS Securities Rule still necessary in its present form to maintain last-sale reporting in the NASDAQ market?
      • If the NMS Securities Rule is no longer essential for that purpose, should the entire group of NASDAQ stocks that have last-sale reporting continue to be designated as NASDAQ/NMS securities?
      • Is last-sale reporting sufficiently developed in the NASDAQ market that issuer choice should be removed from the Tier 2 designation criteria? In other words, should some or all of the securities that satisfy the Tier 2 criteria now be designated automatically in the same manner as securities qualified for Tier 1?
      • If the NMS Securities Rule retains its current focus, is there a danger of misperception of the significance of NMS designation with respect to the investment quality of a stock? Would such possible misperceptions be ameliorated if NMS designation were not limited to NASDAQ stocks?
      • To the extent the rule is deemed either to be no longer necessary to encourage NASDAQ last-sale reporting or to confer an unfair advantage on NASDAQ stocks designated as NMS securities, should the rule be refocused to desig nate other types of securities as NMS securities, i.e., securities listed on national securities exchanges, securi ties that essentially meet New York or American Stock Exchange listing criteria, securities traded in two or more markets, and securities traded through the Intermarket Trading System of the exchanges and the NASD?

      NASDAQ companies have found that inclusion in NASDAQ/NMS has substantially improved the visibility of their stocks and the amount of market data that is available regarding their trading. Many have found, too, that they have attracted additional institutional investors, overseas interest and other investors who use market data and technical analyses. NASD members have confirmed the companies' findings.

      As the foregoing list of questions suggests, the SEC is still responding to complaints from competing markets about issues that were thought to be settled less than one year ago. It is essential, therefore, that NASD members make their views known. At stake is the future visibility and credibility of the NASDAQ National Market System which paradoxically is an innovation of the SEC and one of its most successful efforts.

      In commenting to the SEC, it is suggested that you convey your enthusiastic support for NASDAQ/NMS to the SEC by addressing the following:

      • What designation as a NASDAQ/NMS security has meant to your customers.
      • Why the NMS Securities Rule should be continued.
      • Why the SEC should ignore the complaints of competing markets.

      The NASD Board strongly believes that there is considerable danger in changing the NMS designation rule after it has been approved. It is baffling to think that something so successful, something that has produced substantial benefits for so many — investors, NASDAQ companies, the securities industry — and something that was decided only recently with extensive input from many NASD member firms, NASDAQ company CEO's and others could now be questioned by the same entity that created it, the SEC.

      It is important to note that the NASD has never claimed an exclusive right to the term "National Market System." The NASD has repeatedly stated that NASDAQ/NMS is but a subsystem or component of a broader national market system. The NASD has never said that NASDAQ constitutes the national market system. There is no restriction on the use of the term National Market System by the exchanges for securities that were, in fact, NMS designated. The Amex's claim that the NASD has attempted to mislead investors and issuers through use of the "NMS" term is without foundation in fact. To the degree NASDAQ/NMS is successful in retaining companies, it is doing so on merit and not on unfair competition.

      Further, the NASD, like the SEC, has not represented, nor would it, that designation as a "National Market System" security warrants the quality of the issuer of any security so designated. It does represent that at the time of inclusion in NASDAQ/NMS, certain threshold standards were met. NMS designation does not substitute, nor has it ever been intended to substitute, for the quality judgments of investors.

      The SEC's release also raises the question of issuer choice in electing NMS designation. The thinking of the NASD Board has been that as issuers are free to select the market in which their shares are traded, so too they should be free to elect the segment of NASDAQ in which their shares are to be traded. As a practical matter, the overwhelming majority of eligible companies have sought inclusion in NASDAQ/NMS.

      In its release, the SEC is also asking a number of collateral questions:

      • If the SEC were to grant unlisted trading privileges to the exchanges, whether trading in NASDAQ/NMS securities should be integrated with exchange trading via existing or other possible linkages.
      • Whether the NASD's best-execution rule provides displayed NASDAQ/NMS quotations with sufficient price protection.
      • Whether short-sale rules should be applied to NASDAQ/ NMS securities.

      These questions are presently under discussion and study by several NASD committees, including the Market Surveillance Committee and the National Business Conduct Committee, prior to their formal consideration by the NASD Board of Governors. The NASD Board believes that this deliberative process should run its course. It would be much appreciated if NASD members would send their comments and suggestions on these issues to the Board.

      * * *

      All NASD members are urged to express their views on this release to the SEC on or before the comment period ending date of September 30, 1985. Your ideas and opinions are extremely important and the nature of your comments will substantially affect the final SEC decision on this matter.

      Your comments to the SEC should reference File No. S7-737 and be directed to:

      Mr. John Wheeler, Secretary Securities and Exchange Commission
      450 Fifth Street, N.W.
      Washington, D.C. 20549

      If you have questions concerning the release that you would like answered before writing to the SEC, please feel free to call either John H. Hodges, Jr., Senior Vice President, Market Services, at (212) 839-6326, or S. William Broka, Vice President, NASDAQ Operations—Companies, at (202) 728-8050.

      Finally, it would be very helpful to the NASD if you would send us a copy of your comment letter to the SEC. It may be sent to:

      Mr. S. William Broka, Vice President
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W. Washington, D.C. 20006

      Once again, it is important for your voice to be heard on these issues. The SEC's November 1984 decision on NMS was the right decision and under no circumstances should it now be dismantled.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-22127; File No. S7-737]

      National Market System Securities

      AGENCY: Securities and Exchange Commission.

      ACTION: Solicitation of public comments.

      SUMMARY: The Commission solicits comments on issues relating to the designation of securities as National Market System Securities, In connection with the recent expansion of the criteria for designation as a National Market System Security, the Commission believes that it would be useful to obtain comments on a broader range of issues regarding National Market System designation.

      DATES: Comments to be received by September 30, 1985.

      ADDRESSES: All comments should be submitted in triplicate to John Wheeler, Secretary, Securities and Exchange Commission, 450 Fifth Street NW., Washington, D.C. 20549. All comments should refer to File No. S7-737, and will be available for inspection at the Commission's Public Reference Room 450 Fifth Street NW., Washington, D.C.

      FOR FURTHER INFORMATION CONTACT:

      Andrew E. Feldman, Esq., (202) 272-2414, Room 5205, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street NW., Washington, D.C. 20549.

      SUPPLEMENTARY INFORMATION:

      I. Summary

      Rule llAa2-l ("NMS Securities Rule" or "Rule")1 under the Securities Exchange Act of 1934 ("Act")2 establishes procedures by which certain securities traded in the over-the-counter ("OTC") market are designated as qualified for trading in a national market system ("OTC/NMS Securities"). On December 18, 1984, the Commission adopted amendments to the Rule that increased the number of OTC securities eligible for designation as NMS Securities from approximately 1350 to approximately 2500.3 The Commission believes it is appropriate to solicit comment on the direction which the designation process for National Market System ("NMS") Securities should take and the manner in which these securities should participate in the NMS. Accordingly, the Commission requests comment on the manner in which current OTC/NMS Securities should be integrated into additional NMS facilities and initiatives, and whether the Rule should be amended to focus on other groups of securities or to achieve different purposes.

      II. Background

      In the 1975 Amendments, Congress directed the Commission "to facilitate the establishment of a national market system for securities." 4 In giving the Commission this broad mandate, Congress neither defined the term "national market system" nor specified the minimum components of such a system. Instead, Congress vested in the Commission "broad discretionary powers to oversee the development of a national market system" and "maximum flexibility" in working out its specific details in a manner consistent with the findings and goals of the 1975 Amendments.5

      As part of the general mandate to facilitate the establishment of an NMS. Congress specifically directed the Commission, by rule, to "designate the securities or classes of securities qualified for trading in the national market system." 6The 1975 Amendments, however, were silent as to the particular standards the Commission should employ in designating NMS Securities, Similarly, the legislative history did not mandate the use of any particular standard in the designation process. Instead, Congress provided the Commission with the flexibility and discretion to base NMS designation standards upon the Commission's experience in facilitating the development of a national market system. Given the Congressional desire that the system develop primarily through the interplay of market forces, such flexibility appears essential.7

      On February 17, 1981, the Commission adopted the NMS Securities Rule. The Rule provides criteria and procedures by which certain securities traded exclusively OTC are designated as NMS Securities.

      The primary effect of designating OTC stocks as NMS Securities at the present time is that transactions in such securities must be reported in a realtime system in accordance with the Commission's last sale reporting rule,8 and quotations for such securities must be firm as to the quoted price and size in accordance with the Commission's firm quotation rule.9 In adopting the Rule, the Commission determined, among other things, that real-time transaction reporting and firm quotations would increase market efficiency and enhance opportunities for public investors to obtain execution of their orders in the best possible market.10

      The Rule employe a two-tiered approach for designation.11 Tier 1, which became effective April 1, 1982, requires that the most actively traded OTC securities be designated as NMS Securities.12 Tier 2, which became effective on February 1, 1983, permits certain additional OTC securities to become NMS designated at the election of the issuer.13

      Based on the early trading experience of OTC/NMS Securities, the Commission and most industry participants concluded that last sale reporting and firm quotations have improved the markets for OTC/NMS Securities and benefited investors without imposing undue burdens on market makers.14 In February 1984, the NASD petitioned the Commission to expand the Tier 2 designation criteria to allow more issuers of OTC securities to elect NMS status.15 On December 18, 1984, the Commission amended the Tier 2 designation criteria to incorporate the standards used by the NASD in determining its National List (i.e., the list of NASDAQ securities that the NASD supplies to the national news media), thereby increasing the number of OTC securities eligible for NMS designation from 1350 to approximately 2500.16

      III. Discussion and Request for Comment

      In adopting the Rule, the Commission stated that designating "OTC securities as NMS Securities and thereby including these Securities for the first time in a real-time transaction reporting system, is only one in a series of steps ... toward the development of an NMS."17 In the nearly three years since the first OTC securities were designated as NMS Securities, the Commission believes that last sale reporting has become an established part of the OTC market. Accordingly, the Commission finds that the designation of OTC/NMS Securities has progressed sufficiently that it is now appropriate to consider the relative costs and benefits of taking additional steps in the development of an NMS.18

      The Commission today solicits, comment on several issues regarding NMS Securities. These issues include whether and how OTC/NMS Securities should be integrated into other NMS facilities and initiatives,19 and in particular the extent to which these securities should be made subject to trade-through and short sale rules.20 A further issue is whether the Rule should be amended to include exchange-traded securities or be revised to eliminate any unnecessary competitive burden on competing exchange markets.

      A, Inclusion of OTC/NMS Securities in Additional Facilities and Initiatives

      1. Linkages
      The Commission has requested comment on whether exchanges should be granted unlisted trading privileges ("UTP") in OTC/NMS Securities.21 If the Commission determines to grant such requests,22an important issue that must be addressed is the integration of OTC and exchange trading in these securities. In this regard, a fundamental finding of the 1975 Amendments was that "[tjhe linking of all markets for [NMS] securities through communications and data processing facilities" would benefit investors and the securities markets.23
      Accordingly, the Commission solicits comment on whether OTC/NMS Securities should be integrated into existing or other possible linkages, and the manner in which this could be accomplished. In this regard, the Commission notes that the NASD has developed a Computer Assisted Execution System ("CAES") to link OTC market makers and to provide, among other things, an automated order routing and execution system. CAES also is linked to the Intermarket Trading System ("ITS").24 The Commission requests comment on whether OTC/ NMS Securities should be included in CAES25 and the ITS/CAES linkages.26 In this connection, commentators should address whether inclusion should be accompanied with any changes in the present operation of these linkages.27 The Commission requests commentators to consider whether any other linkage facilities would be appropriate for OTC/ NMS Securities.
      2. Price Protection
      As early as 1973, the Commission indicated that the facilities of an NMS should provide a broker-dealer with the ability to insure that "his customer's order is executed in the best market available." 28 Similarly, the 1975 Amendments declared that "[i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . the practicability of brokers executing investor's orders in the best market. . . ." 29 In accord with these principles, the Commission has stated that " 'trade-throughs' are inconsistent with the goals of a national market system." 30In response to these concerns, the ITS Plan participants submitted, and the Commission approved, amendments to the ITS Plan that provide "trade-through" protection for displayed bids and offers for securities traded through ITS.31
      In adopting the NMS Securities Rule, the Commission stated that it "may be appropriate to reexamine a broker-dealer's responsibilities with respect to the execution of a customer's order in an NMS Security" once OTC securities are designated as NMS Securities.32 Noting that OTC/NMS Securities would be traded "in an environment characterized by real-time transaction reporting and firm quotations," the Commission further stated "that it may be appropriate to expect that... a broker-dealer either will route his customer's order to the best displayed bid or offer (in size) or will provide his customer with a price equal to the best displayed bid or offer (in size)."33
      Because last sale reporting and firm quotations are now present for OTC/ NMS Securities, the Commission solicits comments on whether price protection should be provided for displayed bids or offers for these securities.34 Specifically, the Commission requests comment on whether an OTC "trade-through" rule should apply to OTC/NMS Securities, and whether some or all OTC/NMS Securities should be subject to these requirements.35 The Commission also requests comment on how an OTC "trade-through" rule should be structured. The Commission urges commentators to focus on the degree to which the present regulation of "trade-throughs" for ITS (including ITS/CAES) securities can, or should, be applied to the OTC markets.36
      In discussing this questions, commentators should address the practical effect of such a rule on the OTC market. The Commission recognizes that virtually all OTC market makers currently display quotes with a size of 100 shares (the minimum that can be displayed in NASDAQ),37 even though they generally are willing to effect larger trades at their quoted price.38The Commission requests comment on how a trade-through rule would affect the display of quote-size by OTC market makers and by exchanges receiving UTP in OTC/NMS Securities.39
      3. Short Sales
      The Commission's short sale rule, Rule 10a-l under the Act,40generally does not apply to the OTC market.41 However, with the implementation in 1975 of a consolidated reporting system 42for transactions in listed securities both on the exchanges and in the "third market," 43 the Commission extended Rule 10a-l to OTC transactions in reported securities.44
      In adopting the NMS Securities Rule, and thereby extending last sale reporting to OTC/NMS securities, the Commission specifically sought comment on whether short sale limitations should be extended to OTC/ NMS Securities.45 Now that over 1900 OTC securities have been designated as NMS Securities, with prospects that additional securities will soon be designated, the Commission again solicits comment on whether and how short sales in OTC securities designated as NMS Securities should be regulated. In particular, The Commission asks that commentators discuss whether Rule 10a-l should be amended to cover all, or a portion of, OTC/NMS Securities.46
      In assessing the feasibility of existing short-sale regulations to OTC/NMS Securities, it would be beneficial if commentators discuss the operation of Rule 10a-l in the listed market.47
      Accordingly, the Commission solicits comment on the costs and benefits of Rule 10a-l to the listed markets, e.g., to what extent has the Rule been successful in preventing manipulative short sales and to what extent has the Rule inhibited legitimate short-selling activities? Additonally, the Commission requests comment on the harms, if any, attributable to the absence of short sale rules for OTC/NMS Securities. In this connection, the Commission requests commentators to discuss whether the absence of short sale rules for OTC/ NMS securities has contributed to manipulative or fraudulant activity.48 Alternatively, has the absence of such rules benefited investors, issuers, or the markets in these stocks?

      B. NMS Securities

      Commentators in the rulemaking proceeding that adopted the NASD's proposals raised certain fundamental concerns about NMS Securities. These commentators questioned whether the Rule continued to be necessary to bring last sale reporting to the OTC market, arid whether the Rule should be redirected to encompass listed securities that have been included in other NMS facilities.49 Accordingly, the Commission believes that it is appropriate to consider whether the Rule should be refocused.

      At present, the only practical effect of designation as an NMS Security is to require last sale trade reporting in that security. When the NMS Securities Rule was adopted in 1981, this narrow focus was considered appropriate because the Rule was seen initially as a mechanism for gradually introducing last sale reporting to the OTC market. The Commission intended the mandatory Tier 1 standards to automatically include those OTC securities which clearly belonged in NMS disclosure facilities. The lower Tier 2 designation criteria, which rely on issuer choice, were intended to insure that, in the early stages of last sale reporting in the OTC market, only those other securities whose markets would benefit from NMS designation would be designated.50 As a practical matter, including exchange-listed securities within the scope of the NMS Securities Rule would have had no effect at that time because most exchange-listed securities already were included in NMS last sale and quotation disclosure facilities.51

      The Commission believes that last sale reporting has become an established part of the OTC market. There are over 1900 OTC/NMS Securities today. In addition, the NASD and many OTC issuers and market makers strongly endorsed the recent amendments to the Rule that increased the number of qualified securities from approximately 1350 to around 2500.52 On the other hand, opponents of the NASD's petition to expand the number of securities eligible for NMS designation argued that the NASD was using the fact of NMS designation as a marketing device in competing with exchanges for "listings."53

      In view of the foregoing, the Commission requests public comment on the following questions:

      (i) Is the NMS Securities Rule still necessary in its present form to maintain last sale reporting in the OTC market?
      (ii) If the NMS Securities Rule is no longer essential for that purpose, should the entire group of OTC stocks that have last sale reporting continue to be designated OTC/NMS Securities?
      (iii) Is last sale reporting sufficiently developed in" the OTC market that issuer choice should be removed from the Tier 2 designation criteria? In other words, should some or all of the securities that satisfy the Tier 2 criteria now be designated automatically in the same manner as securities qualified for Tier 1?
      (iv) If the NMS Securities Rule retains its current focus, is thers a danger of niispercoption of the significance of NMS designation with respect to the investment quality of a stock? Would such possible misperceptions be ameliorated if NMS designation were not limited to OTC stocks?
      (v) To the extent the Rule is deemed either to be no longer necessary to encourage OTC last sale reporting or to confer an unfair advantage on OTC stocks designated as NMS Securities, should the Rule be refocused to designate other types of securities as NMS Securities? These types could include:
      (a) securities with last sale reporting. The main consequence of OTC/NMS security designation, last sale reporting, also is present for securities listed on national securities exchanges. In discussing whether all securities with last sale reporting should be designated as NMS Securities, commentators should consider the costs and benefits of NMS designation fpr these securities.
      (b) "reported securities". Listed securities substantially meeting NYSE or Amex listing criteria are eligible to be reported through the consolidated transaction reporting system and as such are deemed "reported securities " under rule 11Aa3-1 and other rulses.
      (C) multiply traded securities. This group of securities could include securities traded through the ITS or ITS/CAES linkages, and current OTC/NMS Securities if, for example, the Commission were to grant exchanges UTP in these securities and such securities were included in an intermarket linkage.
      (d) Securities subject to trade â€"through rules. At present ITS and ITS/CAES securities are subject such a rule. In the future, other securities such as OTC/NMS Securities also could be provided with trade-through protuction.

      IV. Conclution

      By publishing this release soliciting public comment, the commission seeks to elicit suggestions on possible direction in which the NMS Securities Rule should evolve. Commens should be addressed To Jhon Weeler, Secretary, Securities and Exchange commission, 450 Fifth street NW., Washington, DC. 20549. Comments should be received by September 30, 1985.

      By the commission

      Shirly E. Hollis,
      Assistant secretary.
      June 21, 1985.

      [FR Doc. 85-15401 Filed 6-26-85; 8:45 am]

      BILLING CODE 8010-01-M


      1 17 CFR 240.11Aa2-l. See Securities Exchange Act No. 17549 (February 17, 1981), 46 FR 13992 ("Adoption Release").

      2 15 U.S.C. 78a el seq., as amended by the Securities Acts Amendments of 1975 ("1975 Amendments"), Pub. L. 94-29 (June 4, 1975), 89 Stat. 97, [1975] U.S. Code Cong. & Ad. News 97.

      3 Securities Exchange Act Release No. 21583 (December 18, 1984), 50 FR 730 ("Amendments Release"). At that time 1104 OTC securities had actually been designated as NMS Securities.

      4 Section 11A(a)(2) of the Act.

      5 Senate Comm. on Banking, Housing, and Urban Affairs, Report to Accompany S. 249: Securities Acts Amendments of 1975. S. Rep. No. 94-75.94th Cong., 1st Sess. 7-9 [Comm. Print 1975], reprint in [1975] U.S. Code Cong. & Ad News 179,185-87 ("Senate Report"). See also Securities Exchange Act Release No. 14416 (January 28, 1978, 43 FR 4354 ("January Statement"): Securities Exchange Act Release No. 15671 (March 22, 1979), 44 FR 20360 ("Status Report").
      The 1975 Amendments establish that "[t]he securities markets are an important national asset which must be preserved and strengthened" through the application of "new data processing techniques." Section HA(a)(l) of the Act. Congress found that these techniques should be used to foster intermarket linkages, enhance investor protection, and maintain fair and orderly markets. Congress stated as goals of an NMS the availability of quotation and transaction information, the efficient execution of transactions, fair competition between the markets, the execution of customer orders in the best possible market, and, where consistent with other goals, the execution of orders without the participation of a dealer. Section llA(a)(2) of the Act.

      6 Section HA(a)(2) of the Act.

      7 Amendments Release, supra note 3, at 737.

      8 17 CFR 240.1lAa3-l.

      9 17 CFR 204.11Acl-l.

      10 See Adoption Release, supra note 1. at 13996.

      11 OTC securities for which quotation information is disseminated in the National Association of Securities Dealers, Inc.'s ("NASD") electronic interdealer quotation system ("NASDAQ") are eligible for designation. The Rule provides for the removal of the NMS designation "li]f such security becomes listed and registered, or admitted to unlisted trading privileges, on an exchange." 17 CFR 240.11Aa2-l(a), (b). In this regard, the Commission recently published for public comment a rule proposal that would allow certain NMS Securities also to be listed on a regional securities exchange. See Securities Exchange Act Release No. 21703 (February 1, 1985), 50 FR 7065.
      In adopting the NMS Securities Rule, the Commission,concluded that imposing NMS qualification criteria upon listed securities was unnecessary at that time because most listed securities already were included in NMS last sale and quotation disclosure facilities, and selection of less than all reported securities as NMS Securities couid create unwarranted distinctions among these securities. Nonetheless, the Commission specifically left open whether exchange traded securities should be designated as NMS Securities in the future. See Adoption Release, supra note 1, at 13995.

      12 17 CFR 240.11 Aa2-l(b) (4)(i).

      13 17 CFR 240.11 Aa2-l(b) (4)(ii)

      14 See Amendments Release, supra note 3, at 735.

      15 For a discussion of the NASD's petition, see Securities Exchange Act Release No. 20902 (April 30, 1984). 49 FR 19314. For a discussion of the views of OTC market makers and issuers, see Amendments Release, supra note 3. at 733.

      16 Amendments Release, supra note 3. As of June 4, 1985. there were 1.997 OTC/NMS Securities.

      17 Adoption Release, supra note 1. at 14000.

      18 The Commission believes that the concerns expressed by certain commentators in 1979 regarding the "premature incorporation" of NMS Securities into additional NMS facilities and initiatives may not be applicable today. For those concerns, see Status Report, supra note 5. at 20367.

      19 The Commission's directive to facilitate the development of a national market system includes specific recognition that there could be subsystems of an NMS. Section HA(a)(2) of the Act. The Commission requests commentators to address the possible inclusion of some NMS Securities in one or more other subsystems of an NMS.

      20 In addition to these NMS initiatives, the Commission has issued releases requesting comment on granting exchanges unlisted trading privileges in OTC securities (Securities Exchange Act Release No. 21498 (November 16, 1984), 49 FR 46156) {"UTP Release"), and proposing amendments to its confirmation rule. Rule 10b-10 under the Act. requiring broker-dealers executing trades in reported securities as principal with customers to disclose the trjde price and mark-up in the trade (Securities Exchange Act Release No. 21708 (February 4, 1985). 50 FR 5786.

      21 The Commission emphasizes that the question whether exchanges should be granted UTP in OTC securities is under consideration and no determination has been made.

      22 UTP Release, supra note 20. at 46160.

      23 Section llA(a)(l)(D) of the Act.

      24 The ITS is an intermarket linkage and order routing facility operated jointly pursuant to an NMS Plan by certain national securities exchanges and the NASD. The current ITS Plan participants are the New York ("NYSE"), American ("Amex"), Boston ("BSE"), Cincinnati ("CSE"), Midwest "(MSE"). Pacific ("PSE"), and Philadelphia ("Phlx") Stock Exchanges, and the NASD.
      At present, the ITS/CAES interface links exchange and OTC markets in Rule 19c-3 securities. See Securities Exchange Act Release Nos. 17744 (April 21, 1981), 46 FR 23856; 18713 (May 9, 1982), 47 FR 20413; and 19372 (December 23, 1982), 47 FR 58287.
      Rule 19c-3 under the Act eliminates exchange off-board trading restrictions for reported securities which were listed after April 26, 1979, or were listed on April 26, 1979 but ceased to be traded on an exchange for any period of time thereafter. Securities Exchange Act Release Nos. 16888 (June 11, 1980). 45 FR 41125; 17744 (April 21, 1981), 46 FR 23656; and 20074 (August 12, 1983), 48 FR 38250.

      25 NMS Securities can now be traded in CAES at the election of one market maker; however, there is no requirement that all market makers in securities traded in CAES be participants in CAES. The Commission understands that trading activity in CAES continues to be very light. The Commission requests comments regarding whether all market makers trading in a CAES linked stock should be required to participate in CAES.

      26 If OTC/NMS«ecurities were traded on an exchange pursuant to UTP, they would become Rule 19c-3 securities and thus eligible for inclusion in the ITS/CAES interface.

      27 The Commission notes that orders entered into the ITS/CAES interface by exchange specialists are executed automatically, but that orders entered into ITS by CAES market makers are not. CAES market makers have complained that this disparity puts them at a competitive disadvantage in making markets in Rule 19c-3 securities. The exchange in return, have argued that this disparity was introduced by the NASD in designing CAES.

      28 SEC, Policy Statement on the Structure of a Central Market System, at 17 (March 29, 1973) ("Policy Statement"), reprinted in [1973) Sec. Reg. & L. Rep. (BNA) No. 196 at D-l, D-4.

      29 See Section llA(a)(l)(C)(iv) of the Act.

      30 Securities Exchange Act Release No. 17314 (November 20, 1980), 45 FR 79018, 79020 n.22. The term trade-through generally refers to the execution of an order in one market center at a price inferior to that being displayed in another market center. Id at 79019 n.12.

      31 Securities Exchange Act Release No. 17703 (April 9, 1981); Securities Exchange Act Release No. 19249 (November 17, 1982), 47 FR 53552.

      32 Adoption Release, supra note 1. at 14003.

      33 ID

      34 The Commission also notes that, under the NASD's rules, a broker has an obligation to use reasonable diligence to both "ascertain the best interdealer market" for a security and execute his customer's order "so that ihe resultant price to the customer is as favorable as possible under prevailing market conditions." NASD, Interpretation of the Board of Governors—Review of Corporate Financing, Rules of Fair Practice, Art. III. section 1, NASD Manual (CCH) •] 2151.03(A), at 2035. The Commission requests comment on whether this NASD rule interpretation provides displayed OTC/ NMS quotations with sufficient price protection.

      35 If OTC/UTP is not requested by an exchange or granted by the Commission, these requirements would apply only to the OTC market. If such UTP were to be requested and granted, these requirements would apply to all markets.

      36 The current ITS "trade-through" rule includes an exception for quotes of 100 shares, reflecting the use of automatic quotation-generation devices by regional exchanges to generate 100 share quotes in certain stocks. Because automatic quotation generating devices are not used in the OTC market, this exception need not necessarily be carried over to the OTC market if a trade-through rule were applied to that market.

      37 The Commission continues to believe that the display of quotes with size would be of benefit to the OTC market, and encourages OTC market makers to reflect accurately the size at which they are willing to trade in their quotations.

      38 In particular, market maker participants in the NASD's Small Order Execution System ("SOES") stand willing to accept trades of 500 Shares or less in SOES stocks at the best NASDAQ quote. Therefore, these market makers could be considered to be quoting 500 share markets at the best NASDAQ price in these stocks. In addition, some market makers are willing to accept orders of up to 1000 shares at the best NASDAQ bid or offer in other OTC automatic execution systems.

      39 In this regard, it is noted that, unlike OTC market-makers, exchanges typically compete both on the basis of price and by displaying quote size in stocks in which they make an active market.

      40 17CFR240.10a-l.

      41 Rule 10a-l currently applies to securities as to which last sale information is disseminated in the consolidated transaction reporting system. It relies on a tick test which is not easily workable without current last sale reporting. Securities Exchange Act Release No. 11468 (June 12, M75), 40 FR 25442. 25443 ("1975 Rule 10a-l Adoption Release"). The tick' test compares the price of a proposed short sale to immediately preceding transactions to determine its permissibility. Under this rule, short sales may be t effected only on a plus tick [i.e.. at a price above the price at which the immediately preceding last sale was effected) or a zero-plus tick (i.e., at a price equal to the last sale if the last preceding transaction at a different price was at a lower price), established by reference to the last sale either in the consolidated transaction report system or in a particular marketplace. Securities Exchange Act Release No. 17347 (November 28, 1980). 45 FR 80834. 80834 n.2.

      42 The Consolidated Tape Association ("CTA") collects and disseminates transaction reports for listed securities from all markets. The CTA members are the NYSE, Amex. BSE, CSE. MSE. PSE. Phlx, and NASD. See Securities Exchange Act Release Nos. 10787 (May 10, 1974). 39 FR 17799; and 11255 (February 18, 1975). 40 FR 9397.

      43 The third market is a term used to describe OTC transactions in listed securities.

      44 1975 Rule 10a-l Adoption Release, supra note 41. The Commission stated that its original short sale rules did not apply to [OTC] transactions since, in the absence of publicity concerning [OTC] short sales (such as that afforded by the CTA], there appeared to be little reason to fear that such sales would have a manipulative or destabilizing impact on the market." Id. at 25443.

      45 Adoption Release, supra note 1. at 14001-02. In response to that solicitation, the NASD stated that "short selling regulations prior to and during a distribution of NMS securities would be appropriate but that it is not necessary, at this time, to impose across-the-board short sale regulations on transactions in NMS Securities." Letter from S. William Broka, Secretary. NASD, to George A. - Fitzsimmons, Secretary, SEC (July 31, 1981) ("1981 NASD Short Sale Comment"), at 1. The NASD asserted that short sale limitations comparable to those imposed on the market for listed securities were unnecessary for the market for OTC/NMS securities because NMS issues will have volume and market maker requirements which will ensure an active competitive market." Id. at 1-2.
      The Commission notes that under the amended NMS Securities Rule, a minimum trading volume standard is retained only in the Tier 1 designation criteria. See Amendments Release, supra note 3, at 737. The Commission also notes that the revised maintenance criteria for NMS Securities, which it has approved on a temporary basis, do not contain a trading volume requirement. See Securities Exchange Act Release No. 21670 (January 17, 1985), 50 FR 3610. Accordingly, the Commission solicits comment on the question whether the elimination of trading volume requirements from the Tier 2 designation criteria and the NMS maintenance criteria affects the need to extend Rule 10a-l to OTC/NMS Securities.

      46 If the short sale rule were to be extended to cover all, or a portion of, OTC/NMS securities, should it operate in the same manner as Rule 10a-l currently operates with respect to listed securities (i.e.. relying on the tick test)? The Commission also solicits comments on the question of whether there are unique issues associated with OTC/NMS Securities generally that would make another approach preferable.
      In considering this question, commentators may wish to consider the two alternative versions of proposed Rule 10b—21 under the Exchange Act, which would restrict short sales of securities, including OTC securities, prior to and during underwritten offerings of securities of the same ciass as outstanding securities. The first version of proposed Rule 10b-21 would deter manipulative short selling prior to underwritten offerings by limiting the ability of short sellers to make covering purchases from certain persons within certain periods during an underwriting. Securities Exchange Act Release No. 11328 (April 12, 1975), 40 FR 16090. The second version, which focused on short selling itself rather ihan on covering purchases, would regulate short sales from the preoffering period until the end of post-offering stabilization arrangements through the use a "tick test." Securities Exchange Act Release No. 13092 (December 21, 1976). FR 56542. Neither version of proposed Rule 10b-21 has been adopted.

      47 In 1976, the Commission instituted a public rulemaking proceeding to determine whether Rule lOa-l's regulation of short sales of securities registered, or admitted to unlisted trading privileges, on national securities exchanges was still necessary. See Securities Exchange Act Release No. 13091 (December 21, 1976), 41 FR 56530. Stating that commentators generally indicated that the operative provisions of Rule 10a-l worked wall and should not be modified, the Commission withdrew proposed rules which would have suspended in part the operation of the "tick test". See Securities Exchange Act Release No. 17347 (November 28, 1980), 45 FR 80834.

      48 See. e.g.. Serving Readersor Sources? OTC Review, January, 1985 at 16.

      49 See Amendments Release, supra note 3, at 734-35.

      50 Adoption Release, supra note 1, at 13998-99.

      51 Adoption Release, supra note 1, at 13994-95.

      52 Amendments Release, supra note 3, at 732.

      53 Id. at 734. In approving the proposed Hmer.dments to the Rule, the Commission stated that it "has never suggested that NMS designation warrants the quality of these securities," and that "there was no intent on the Commission's part to use this initiative as a vehicle to contrast the relative merits of OTC and listed securities". Id at 737 n.89.


    • 85-51 Donald E. Sheldon & Co., Inc. One Wall Street New York, New York 10005

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On July 30, 1985, the United States District Court for the Southern District of New York appointed a Temporary Receiver for the above-captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12(h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      Temporary Receiver

      Stanley T. Lesser, Esquire
      Kaye, Scholer, Fierman,
      Hays & Handler
      425 Park Avenue
      New York, New York 10022
      Telephone: (212) 407-8000

    • 85-50 NASDAQ National Market System Grows to 2,077 Securities With 32 Voluntary Additions on August 6, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, August 6, 1985, 32 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 2,077. These 32 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 32 issues scheduled to join NASDAQ/NMS on Tuesday, August 6, 1985, are:

      Symbol

      Company Name

      Location

      ABSI

      ABS Industries, Inc.

      Willoughby, OH

      ACAJ

      ACA JOE

      San Francisco, CA

      AMLE

      Amcole Energy Corporation

      DaUas, TX

      AFSB

      Athens Federal Savings Bank

      Athens, GA

      BARD

      Barden Corporation (The)

      Danbury, CT

      BFTV

      Birdfinder Corp.

      Sarasota, FL

      BLAN

      Bridge Communications, Inc.

      Mountain View, CA

      BUTL

      Butler National Corporation

      Lenexa, KS

      CAPB

      Capitol Bancorporation

      Boston, MA

      CBCF

      Citizens Banking Corporation

      Flint, MI

      CITI

      Citizens Cable Communications, Inc.

      Fort Wayne, IN

      RAGS

      Coated Sales, Inc.

      Laurence Harbor, NJ

      CFGI

      Commonwealth Savings Association

      Houston, TX

      CSLH

      Cotton States Life and Health Insurance Company

      Atlanta, GA

      ENCC

      Encore Computer Corporation

      WeUesley Hills, MA

      FCAH

      First Capital Holdings Corporation

      Los Angeles, CA

      HOOP

      Hooper Holmes, Inc.

      Basking Ridge, NJ

      IGLSF

      Insituform Group Limited

      United Kingdom

      IGLWF

      Insituform Group Limited (Wts)

      United Kingdom

      MDXR

      Medar, Inc.

      Farmington Hills, MI

      MTRO

      Metro-Tel Corporation

      Syosset, NY

      MAHI

      Monarch Avalon, Inc.

      Baltimore, MD

      MORL

      Morlan International, Inc.

      Philadelphia, PA

      NUVI

      NuVision, Inc.

      Flint, MI

      RBOK

      Reebok International Ltd.

      Avon, MA

      RIHL

      Richton International Corporation

      New York, NY

      SBCFA

      Seacoast Banking Corporation of Florida (Cl A)

      Stuart, FL

      TIND

      TS Industries, Inc.

      Salt Lake City, UT

      TRGL

      Toreador Royalty Corporation

      Dallas, TX

      TTOR

      Transtector Systems, Inc.

      Post Falls, ID

      TRHS

      Travelers Realty Income Investors

      Boston, MA

      UHLI

      United Home Life Insurance Company

      Greenwood, IN

      The following changes to the list of NASDAQ/NMS securities occurred since July 8, 1985:

      NASDAQ/NMS Symbol and/or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      OILC/OILCA

      Oil Dri Corporation of America/Oil Dri Corporation of America (Cl A)

      7/19/85

      GNUC/GNUC

      GNI, Inc./Gulf Nuclear, Inc.

      7/24/85

      REDI/URGE

      Readi Care, Inc./Urgent Care Centers of America, Inc.

      7/24/85

      GWSB/GWSB

      Great Western Savings Bank/Great Western Federal Savings Bank

      7/25/85

      Interim Additions

      Symbol

      Company Name

      Date of Entry

      BMGCV

      Battle Mountain Gold Company (Cl A)

      7/15/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      SOLRW

      Applied Solar Energy, Inc. (Wts)

      7/10/85

      BNHNW

      Benihana National Corporation (Wts)

      7/10/85

      ENDLW

      Endo-Lase, Inc. (Wts)

      7/10/85

      KEJOQ

      Kelly-Johnson Enterprises, Inc.

      7/10/85

      TXTN

      Textone, Inc.

      7/10/85

      MONC

      Monarch Capital Corporation

      7/11/85

      DRLH

      Duralith Corporation

      7/12/85

      CMSV

      Comserv Corporation

      7/15/85

      GROM

      Groman Corporation

      7/17/85

      EOIL

      Energy Oil, Inc.

      7/18/85

      HGIS

      Healthgroup International

      7/18/85

      SNRSA

      Sunrise Savings and Loan Association of Florida (Cl A)

      7/19/85

      CHOM

      Chomerics, Inc.

      7/25/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202)728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-49 Request for Comment on Shareholder Voting Rights for NASDAQ National Market System Companies

      TO: All NASD Members, NASDAQ Companies and Other Interested Persons

      LAST DATE FOR COMMENT: AUGUST 30, 1985.

      The National Association of Securities Dealers, Inc., is requesting comment from NASD members, NASDAQ issuers and other interested persons on certain concepts related to voting rights of the shareholders of companies whose securities are included in the NASDAQ National Market System (NASDAQ/NMS). The NASD Board of Governors is considering various approaches to the regulation of voting rights and has not yet determined which approach to pursue. Accordingly, it is seeking comments to assist it in reaching a determination on this important issue.

      HISTORY AND BACKGROUND

      This solicitation of comment is part of an overall study of corporate governance standards for NASDAQ/NMS first undertaken in the fall of 1984. This study was conducted primarily through the NASD Corporate Advisory Board, a body consisting of chief executive officers of NASDAQ companies that reports to the NASD Board of Governors. The Advisory Board has played an important role in the evolution of NASDAQ as the fastest-growing and the second-largest securities market in the United States and in the continued development of NASDAQ/NMS.

      Since its inception in 1982, NASDAQ/NMS has grown steadily in size and stature. In November 1984, the Securities and Exchange Commission approved a change to NASDAQ/NMS inclusion criteria that has resulted in a further enhancement in the quality of NASDAQ/NMS companies, The new standards shifted the emphasis from transactional volume to financial considerations. As of the end of 1984, the average NASDAQ/NMS company had assets of over $570 million and equity in excess of $84 million. Revenues averaged $181 million with net income of over $8 million. The average price per share for NASDAQ/NMS issues was in excess of $15, and the average issue had almost 8 million shares outstanding and a market value in excess of $120 million. NASDAQ/NMS had an average of 11.5 broker-dealer firms making a market per security.

      As NASDAQ/NMS matured, the Corporate Advisory Board believed it was appropriate to consider the quality of corporate governance of NASDAQ/NMS companies. This concern was heightened by numerous state securities administrators who had noted the differences in approach to corporate governance by NASDAQ/NMS and certain of the exchanges. Thus, the Corporate Advisory Board developed rule proposals relating to a number of corporate governance issues which, upon authorization by the Board of Governors, were published for comment in March of this year 1/. These proposals were the subject of generally favorable comments and were approved with minor amendments by the NASD Board of Governors on July 12, 1985. They were thereafter filed with the Securities and Exchange Commission and final approval is expected shortly 2/. Upon effectiveness they will govern the future activities of NASDAQ/NMS companies.

      In their study of corporate governance issues, the Corporate Advisory Board and the Board of Governors both determined that the issue of shareholder voting rights should be considered separately. It was therefore considered appropriate to survey NASDAQ issuers to obtain additional information on the number of NASDAQ issuers having multiple classes of common stock with different voting rights and the nature of such voting .rights provisions. The survey, which was mailed to issuers on May 13, 1985, 3/ was undertaken in an environment where several Congressional committees, the New York Stock Exchange and the California Corporations Department were conducting reviews of existing policies with respect to voting rights.

      Completed surveys were returned by 1,005 NASDAQ companies, including 588 NASDAQ/NMS companies. At their July 1985 meetings, both the Corporate Advisory Board and the NASD Board of Governors reviewed the results of the survey and discussed the possible imposition of common stock voting rights requirements on NASDAQ/NMS issuers. During the time between the mailing of the survey and the July meetings, bills had been introduced in both the United States Senate and the House of Representatives that would impose voting rights requirements on all securities quoted in the NASDAQ System or traded on any registered securities exchange.

      PROPOSALS CONSIDERED

      The Corporate Advisory Board and Board of Governors have carefully considered the overall issue of shareholder voting rights and have reached certain preliminary conclusions. However, they determined it would be inappropriate to adopt a final resolution of this important issue without soliciting comment on possible alternative approaches.

      Preliminarily, both Boards have concluded that any restrictions on voting rights adopted by the NASD should apply only to securities included in NASDAQ/ NMS and should not apply to non-NMS NASDAQ securities. They have also concluded that it would be unfair to deprive shareholders of existing rights or to require issuers to engage in potentially impossible attempts to obtain shareholder approval of changes in capital structure. Therefore, it has been preliminarily determined that any restrictions on voting rights should not apply to issues of securities presently outstanding, that is, existing NASDAQ/NMS issues with disparate voting rights would be "grandfathered" under any new rule.

      Given these preliminary conclusions, two different approaches to voting rights restrictions are being considered without any determination as to which approach is preferable. Comments are therefore being solicited on both approaches as well as other approaches that may be suggested by commentators. Such alternative suggestions will be welcomed and are encouraged. The approaches presently being considered by the Board are as follows:

      Proposal 1.

      The first proposal would impose a one-share, one-vote standard for the common stock of all NASDAQ/NMS companies. Existing NASDAQ/NMS issues of securities would be grandfathered to avoid the unfairness which would result from the prohibition of voting rights provisions that were permissible at the time they were adopted by the issuer. No company would subsequently be included in NASDAQ/NMS under this proposal unless all classes of its common stock had equal voting rights. A grandfathered NASDAQ/NMS company would not be permitted to issue a new class of stock with other than equal voting rights.

      Proposal 2.

      The second proposal would set a general requirement of one vote per share, but would allow the creation of different classes of common stock with disparate voting rights if such provisions were approved by the holders of at least two-thirds of the shares outstanding. The differential in voting rights could not exceed ten votes to one and a "sunset" provision on the voting rights differential of a period not to exceed ten years would be imposed. In order to continue the voting rights differential upon the expiration of the ten-year period, the issuer would be required to obtain a favorable vote from the holders of two-thirds of all common stock outstanding. Thus, in the "sunset" vote, all shares including the lesser voting shares would vote equally. Failure to obtain an affirmative vote of two thirds of all shares to continue the two classes of stock with unequal voting rights would result in all shares of each class having an equal vote. As with the first proposal, existing issues of NASDAQ/NMS securities having voting rights other than one vote per share would be grand-fathered and there would be no "sunset" provision as to those shares. Subsequent issues of common stock would have to conform to the requirements of this proposal.

      REQUEST FOR COMMENTS

      The NASD is requesting comments on the foregoing proposals as well as other constructive alternatives and suggestions which commentators may offer. In particular, commentators may desire to comment on the portability of disparate voting rights from other marketplaces and on enabling the lessor voting shareholders to elect a portion of the Board.

      All comments received during this period will be reviewed by the Corporate Advisory Board and the Association's Board of Governors. All written comments should be addressed to:

      James Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      All comments must be received by August 30, 1985. Any questions regarding this notice should be directed to either Frank J. Wilson at (202) 728-8319 or Dennis C. Hensley or T. Grant Callery at (202) 728-8294.

      Sincerely,

      Gordon S. Macklin
      President


      1/ See NASD Notice to Members 85-20 (March 28, 1985).

      2/ See SEC File No. SR-NASD-85-20.

      3/ See Notice to All NASDAQ Companies, "Survey on Certain Corporate Governance Issues," May 13, 1985.


    • 85-48 Qualification and Registration Requirements of Schedule C

      TO: All NASD Members and Interested Persons

      ATTN: Compliance and Registration Personel

      This notice reviews the application of certain qualification and registration requirements of Schedule C of the NASD By-Laws for persons who solicit new accounts on behalf of members. It also announces the Securities and Exchange Commission's approval of an amendment to Schedule C, which expands the products that may be sold by Limited Representatives—Investment Company and Variable Contracts Products.

      Registration of Persons Soliciting Accounts on Behalf of Members

      The Qualifications Committee of the NASD Board of Governors recently reviewed some members' use of unregistered personnel to solicit new accounts by telephone. The content of these solicitations may include representations regarding the general products and services of the member, an interview format designed to prequalify potential customers, or a specific description of a security offered by the member. The Qualifications Committee concluded that these and similar activities require registration pursuant to Schedule C of the NASD By-Laws.

      Section (l)(b), Part III of Schedule C of the By-Laws defines "representatives" as:

      "Persons associated with a member ... who are engaged in the investment banking or securities business for the member including the functions of supervision, solicitation or conduct of business in securities...."

      This definition has been consistently interpreted by the NASD to require registration of persons who engage in activities that only constitute a portion of registered representatives' traditional dealings with public customers. Thus, for example, members are required to register persons who are hired to accept orders from public customers, even if these orders are unsolicited; persons who share in the commissions generated from customer accounts; and persons who solicit accounts on behalf of members, notwithstanding any limitation of such solicitations to prepared scripts discussing generic products and services offered by the member.

      Part V of Schedule C provides an exemption from the registration requirement for persons performing clerical or ministerial functions for the member. Historically, this exemption has been applied to salaried clerical and administrative staff whose jobs are oriented to the internal operations of sales offices. The Qualifications Committee has long recognized that, on occasion and in the absence of appropriately registered personnel, these exempted employees may transcribe an order from a customer for submission to registered personnel or provide customers with approved market quotations. The occasional nature of these activities contrasts with those described above for account solicitors who are assigned the specific function of interacting with public customers on a regular basis, and for persons who are assigned to accept orders from the public on a regular basis.

      The NASD's position with respect to account solicitors is substantially the same as that taken by the Municipal Securities Rulemaking Board (MSRB) in its Interpretative Notice on Professional Qualification, MSRB Manual (CCH), paragraph 3511, pages 3514-15, dated December 21, 1984.

      The activities of account solicitors may also come within the definition of "offers to sell" pursuant to various state securities laws and regulations and may, therefore, require agent licensing of persons performing these functions in certain state jurisdictions.

      Members are advised to review the activities of unregistered personnel having contact with existing or potential public customers to assure that their functions do not require registration pursuant to NASD rules, qualification pursuant to MSRB rules, or agent licensing pursuant to various state laws and regulations.

      Expansion Of Products That May Be Sold By Limited Principals And Limited Representatives — Investment Company And Variable Contracts Products

      The SEC has approved an amendment to Part n, Section 2 of Schedule C of the NASD By-Laws. The amendment, which is reprinted at the end of this notice, permits persons registered as Limited Principals and Limited Representatives—Investment Company and Variable Contracts Products to sell contracts that are issued by the general accounts of life insurance companies and registered under the Securities Act of 1933 (1933 Act). The amendment became effective upon approval.

      Contracts issued by the general accounts of life insurance companies, which transfer part of the investment risk to the purchaser, may be required to be registered under the 1933 Act. Because such registered contracts do not fit the definition of variable contracts, which are securities issued by the separate accounts of life insurance companies, persons selling them have been required to register as General Securities Principals or General Securities Representatives.

      The depth of knowledge required to market these contracts, their product features and the marketing methods used in their distribution do not differ substantially from those involved in the sale of variable contracts. Consequently, the limited qualification requirements that apply to registered principals and registered representatives for investment companies and variable contracts products are appropriate for persons who engage in the marketing of registered securities issued by the general accounts of life insurance companies.

      Questions regarding this notice may be directed to Frank J. McAuliffe, Vice President, Qualifications, at (202) 728-8136.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

      AMENDMENT TO SCHEDULE C NASD BY-LAWS

      The following is the full text of the amendment to Part n, Section 2(c) of Schedule C of the NASD By-Laws. New language is underlined; deleted language is bracketed.

      (c) Limited Principal—Investment Company and Variable Contracts Products —
      (i) Each person associated with a member who is included within the definition of principal in Part n, Section (l) hereof, may register with the Corporation as a Limited Principal—Investment Company and Variable Contracts Products if:
      a. his activities in the investment banking and securities business are limited to the solicitation, purchase and/or sale of:...
      3. variable contracts and insurance premium funding programs [registered pursuant to] and other contracts issued by an insurance company except contracts which are exempt securities pursuant to Section 3(a)(8) of the Securities Act of 1933; and...

      Remainder of text is unchanged.

    • 85-47 NASDAQ National Market System Grows to 2,057 Securities With 21 Voluntary Additions on July 16, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, July 16, 1985, 21 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 2,057. These 21 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 21 issues scheduled to join NASDAQ/NMS on Tuesday, July 16, 1985, are:

      Symbol

      Company

      Location

      ATKN

      Guy F. Atkinson Company of California

      San Francisco, CA

      CHIR

      Chiron Corporation

      Emeryville, CA

      CITN

      Citizen's Financial Group, Inc.

      Providence, RI

      CSFCA

      Citizens Savings Financial Corporation (Cl A)

      Miami, FL

      FDGC

      Federated Guaranty Corporation

      Montgomery, AL

      FEMP

      First Empire State Corporation

      Buffalo, NY

      FFSA

      First Federal Savings, F.A.

      Madison, CT

      GRIT

      Grubb & Ellis Realty Income Trust

      San Francisco, CA

      INVX

      Innovex, Inc.

      Hopkins, MN

      ITCPW

      International Technology Corporation (Wts)

      Torrance, CA

      LVTNY

      Louis Vuitton S.A.

      Paris, France

      MPMTS

      Mellon Participating Mortgage Trust

      New York, NY

      NVBC

      Napa Valley Bancorp

      Napa, CA

      NBAK

      National Bancorp of Alaska, Inc.

      Anchorage, AK

      PERLF

      Perle Systems Limited

      Ontario, Canada

      RFBC

      River Forest Bancorp

      River Forest, IL

      SMCR

      Summcorp

      Fort Wayne, IN

      SCTC

      Systems & Computer Technology Corporation

      Malvern, PA

      TRATS

      Travelers Real Estate Investment Trust

      Boston, MA

      WTWS

      Wall to Wall Sound and Video, Inc.

      Cinnaminson, NJ

      WILLA

      John Wiley & Sons, Inc., (Cl A)

      New York, NY

      The following changes to the list of NASDAQ/N MS securities occurred since June 21, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      OILCA/OILC

      Oil Dri Corporation of America, Class A/Oil Dri Corporation of America

      6/25/85

      ECLIF/ECLIF

      ECI Telecom, Ltd/Electronics Corporation of Israel, Ltd.

      6/28/85

      FCRES/CFGRS

      First Continental Real Estate Investment Trust SBI/Commonwealth Financial Group Real Estate Investment Trust SBI

      7/01/85

      APIO/APIO

      American Pioneer Savings Bank/ First Fidelity Savings & Loan Association

      7/01/85

      HRCLY/HRCLY

      Huntington International Holdings PLC ADR/Huntington Research Centre PLC ADR

      7/01/85

      PFFS/PFFS

      Pacific First Financial Corporation/Pacific First Federal Savings Bank

      7/01/85

      MBOX/MBOX

      MBI Business Centers, Inc./ The Math Box, Inc.

      7/02/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      ZTXQE

      Zytrex Corporation

      6/26/85

      TACO

      The Good Taco Corporation

      6/26/85

      STEL

      Satelco, Incorporated

      6/26/85

      GTAC

      Green Tree Acceptance, Inc.

      6/28/85

      TRGA

      Trust Company of Georgia

      7/01/85

      ABPC

      Alaska Pacific Bancorporation

      7/02/85

      AASS

      Aid Auto Stores, Inc.

      7/05/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-46 Offshore Shell Bank Licenses Registered in Majuro, Marshall Islands — update

      IMPORTANT

      PLEASE DIRECT THIS NOTICE TO ALL SALES, COMPLIANCE AND CREDIT

      TO: All NASD Members and Other Interested Persons

      In Notice to Members 84-69, dated December 18, 1984, the NASD apprised the membership that the Comptroller of the Currency had issued notices concerning certain direct obligations that either may be worthless or have not been honored by a number of offshore bank licenses registered in Majuro, Marshall Islands.

      This notice updates the list of names of the above referenced offshore shell bank licenses as reflected in the attached circulars.

      Questions concerning this notice may be directed to I. William Fishkind, Assistant Director, Surveillance Department at (202) 728-8405.

      Sincerely,

      John E. Pinto, Ji.
      Senior Vice President
      Compliance

      Attachments

      BC- 171

      SUPPLEMENT #24

      Comptroller of the Currency

      Administrator of National Banks

      Type: Banking Circular

      Subject: Offshore Shell Banks

      TO: Chief Executive Officers of National Banks; all State Banking Authorities; Chairman, Board of Governors of the Federal Reserve System; Chairman, Federal Deposit Insurance Corporation; Conference of State Bank Supervisors; District Deputy Comptrollers; Examining Personnel

      RE: EUROPEAN OVERSEAS BANK LIMITED
      P.O. Box 726
      MAJURO, MARSHALL ISLANDS 96960
      and
      1901 Avenue of the Stars, Suite 1774
      Los Angeles, California 90067

      This Office has received information that the subject entity may be operating illegally in the United States. Any information which you have regarding the subject should be brought to the attention of:

      Enforcement and Compliance Division (202-447-1818) Office of the Comptroller of the Currency Washington, D.C. 20219

      C.T. Conover
      Comptroller of the Currency

      BC- 171

      SUPPLEMENT #24

      Comptroller of the Currency

      Administrator of National Banks

      Type: Banking Circular

      Subject: Offshore Shell Banks

      TO: Chief Executive Officers of National Banks; all State Banking Authorities; Chairman, Board of Governors of the Federal Reserve System; Chairman, Federal Deposit Insurance Corporation; Conference of State Bank Supervisors; District Deputy Comptrollers; Examining Personnel

      RE: EUROPEAN OVERSEAS BANK LIMITED
      P.O. Box 726
      MAJURO, MARSHALL ISLANDS 96960
      and
      1901 Avenue of the Stars, Suite 1774
      Los Angeles, California 90067

      This Office has received information that the subject entity may be operating illegally in the United States. Any information which you have regarding the subject should be brought to the attention of:

      Enforcement and Compliance Division (202-447-1818) Office of the Comptroller of the Currency Washington, D.C. 20219

      C.T. Conover
      Comptroller of the Currency

      BC- 171

      Supplement #24

      Comptroller of the Currency

      Administrator of National Banks

      Type: Banking Circular

      Subject: Offshore Shell Banks

      TO: Chief Executive Officers of National Banks; all State Banking Authorities; Chairman, Board of Governors of the Federal Reserve System; Chairman, Federal Deposit Insurance Corporation; Conference of State Bank Supervisors; District Deputy Comptrollers; Examining Personnel

      RE: First Colonial Bank, Ltd.
      Majuro, Marshall Islands 96960

      This Office has received information that certain direct obligations on the subject entity have not been honored and that this entity may be operating illegally in the United States. Any information which you may have regarding the subject should be brought to the attention of:

      Enforcement and Compliance Division Office of the Comptroller of the Currency Washington, D.C. 20219

      H. Joe Selby
      Acting Comptroller of the Currency

    • 85-45 NASDAQ National Market System Grows to 2,045 Securities With 40 Voluntary Additions on July 2, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, July 2, 1985, 40 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,045. These 40 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 40 issues scheduled to join NASDAQ/NMS on Tuesday, July 2, 1985, are:

      Symbol

      Company

      Location

      ALCR

      American Land Cruisers, Inc

      Miami, FL

      ACCMA

      Associated Communications Corporation (Cl A)

      Pittsburgh, PA

      ACCMB

      Associated Communications Corporation (Cl B)

      Pittsburgh, PA

      ACLV

      Autoclave Engineers, Inc.

      Erie, PA

      BTRI

      BTR Realty, Inc.

      Baltimore, MD

      BVSC

      Birdview Satellite Communications, Inc.

      Olathe, KS

      CBCO

      Cobanco, Inc.

      Santa Cruz, CA

      DHTK

      DH Technology, Inc.

      Sunnyvale, CA

      DAXR

      Daxor Corporation

      New York, NY

      DRWI

      Drew Industries Incorporated

      White Plains, NY

      DRKN

      Durakon Industries, Inc.

      Lapeer, MI

      EMCI

      EMC Insurance Group, Inc.

      Des Moines, IA

      EPIC

      Environmental Processing, Inc.

      Richardson, TX

      EXPD

      Expediters International of Washington, Inc.

      Seattle, WA

      FFED

      Fidelity Federal Savings & Loan Association

      Philadelphia, PA

      HGIS

      Healthgroup International, Inc.

      Los Angeles, CA

      HEMO

      HemoTec, Inc.

      Englewood, CO

      HLNI

      Highlands-National, Inc.

      Jackson, MS

      IHBI

      Indian Head Banks, Inc.

      Nashua, NH

      IGLSF

      Insituform Group Limited

      United Kingdom

      IGLWF

      Insituform Group Limited (Wts)

      United Kingdom

      INSUW

      Insituform of North America, Inc. (Wts)

      Memphis, TN

      INTCW

      Intel Corporation (Wts)

      Santa Clara, CA

      INAI

      IntelliCorp, Inc.

      Menlo Park, CA

      INVG

      Investors GNMA Mortgage- Backed Securities Trust, Inc.

      New York, NY

      MALRA

      Malrite Communications Group, Inc. (Cl A)

      Cleveland, OH

      MTLI

      Marine Transport Lines, Inc.

      Secaucus, NJ

      MAVR

      Maverick Restaurant Corporation

      Wichita, KS

      MGCC

      Medical Graphics Corporation

      St. Paul, MN

      NOVL

      Novell, Inc.

      Orem, UT

      PDAS

      PDA Engineering

      Santa Ana, CA

      PMWI

      Pace Membership Warehouse, Inc.

      Aurora, CO

      PSBK

      Pawling Savings Bank

      Pawling, NY

      PHOG

      Phone-A-Gram System, Inc.

      Reno, NV

      STBY

      Stansbury Mining Corporation

      Alpine, UT

      SYMK

      Sym-Tek Systems, Inc.

      San Deigo, CA

      TOYS

      Toys Plus, Inc.

      St. Charles, MO

      UPCI

      USPCI, Inc.

      Oklahoma City, OK

      USEC

      Universal Security Instruments, Inc.

      Owings Mills, MD

      XLDC

      XL/Datacomp, Inc.

      Hinsdale, IL

      The following changes to the list of NASDAQ/NMS securities occurred since June 7, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      INET/INET

      Instinet Corporation/ Institutional Networks Corporation

      6/12/85

      VETS/VETS

      Animed, Inc./Cardio Pet, Inc.

      6/13/85

      FIIA/UCBI

      First Interstate of Iowa, Inc./ United Central Bancshares, Inc.

      6/24/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      ITHM

      Inter therm, Inc.

      06/11/85

      ROCK

      Rockcor, Inc.

      06/11/85

      PLMN

      The Plasmine Corporation

      06/12/85

      SMFG

      Stearns Manufacturing Co.

      06/13/85

      ACME

      Acme General Corporation

      06/17/85

      CBCT

      CBT Corporation

      06/17/85

      PAYN

      Pay 'N Save Corporation

      06/18/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-44 NASDAQ National Market System Grows to 2,012 Securities With 22 Voluntary Additions on June 18, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, June 18, 1985, 22 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 2,012. These 22 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 22 issues scheduled to join NASDAQ/NMS on Tuesday, June 18, 1985, are:

      Symbol

      Company Name

      Location

      AMTA

      Amistar Corporation

      Torranee, CA

      APEC

      Apeco Corporation

      Northfield, IL

      CRVI

      Coast R.V. Inc.

      San Jose, CA

      CDII

      Concept Development, Inc.

      Omaha, NE

      DRCH

      Data Architects, Inc.

      Waltham, MA

      DNSF

      Detroit & Northern Savings, F.A.

      Hancock, MI

      ERBL

      Erb Lumber Co.

      Birmingham, MI

      FPUT

      Florida Public Utilities Company

      West Palm Beach, FL

      GAPRZ

      Great American Partners

      San Diego, CA

      ITRN

      Intertrans Corporation

      Irving, TX

      LSSTV

      Lone Star Steel Company

      Dallas, TX

      MGLL

      McGill Manufacturing Company, Inc.

      Valparaiso, IN

      MNCO

      Michigan National Corporation

      Bloomfield Hills, MI

      MTRM

      Moniterm Corporation

      Minnetonka, MN

      MLAB

      Monitor Labs Incorporated

      San Diego, CA

      RPSAS

      Resources Pension Shares 1

      New York, NY

      RPSBS

      Resources Pension Shares 2

      New York, NY

      RPSCS

      Resources Pension Shares 3

      New York, NY

      SIAL

      Sigma-Aldrich Corporation

      St. Louis, MO

      TECU

      Tecumseh Products Company

      Tecumseh, MI

      USPMF

      U.S. Precious Metals, Inc.

      Vancouver, BC

      ZIGO

      Zygo Corporation

      Middlefield, CT

      The following issue may be included in the NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Addition

      Symbol

      Company

      Location

      ZAPSV

      Cooper LaserSonics, Inc.

      Santa Clara, CA

      The following changes to the list of NASDAQ/NMS securities occurred since May 24, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      ROPK/ROPK

      Ropak Corporation/Ropak West, Inc.

      05/29/85

      CJER/CJER

      Central Jersey Bancorp/Central Jersey Bank & Trust Co.

      06/03/85

      FUFSV/MPSB

      First United Financial Services, Inc./MPS Bancorp Inc.

      06/03/85

      PACEF/PACEF

      Pasadena Technology Corporation/ Pasadena Energy Corporation

      06/03/85

      PRAT/DRWN

      Pratt Hotel Corporation/Drew National Corporation

      06/03/85

      ORSI/ORSI

      ORS Automation, Inc./Object Recognition Systems, Inc.

      06/04/85

      DOYL/DOYL

      Doyle Dane Bernbach Group, Inc./ Doyle Dane Bernbach International, Inc.

      06/05/85

      PSBF/PSBF

      Pioneer Savings Bank/Pioneer Savings Bank, FSB

      06/05/85

      CNFG/CNFG

      Conifer Group, Inc. (The)/ Conifer/Essex Group, Inc.

      06/06/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      ELLM

      Ellman's Inc.

      05/28/85

      HOOK

      Hook Drugs, Inc.

      05/29/85

      BELLE

      Bell National Corporation

      06/03/85

      CLRS

      Claire's Stores, Inc.

      06/03/85

      CMPC

      Compucare, Inc.

      06/03/85

      KONX

      Eikonix Corporation

      06/03/85

      RYBF

      Royal Business Group, Inc.

      06/03/85

      CSHP

      CompuShop, Inc.

      06/04/85

      WILN

      H. J. Wilson Company, Inc.

      06/04/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-43 Proposed New Rule of Fair Practice Relating to Permission for Members to Alter Their Methods of Operation Under SEC Rule 15C3-3 (the "Customer Protection Rule")

      IMPORTANT MAIL VOTE

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members

      LAST VOTING DATE IS JULY 12, 1985

      Enclosed is a proposed new rule under Article III of the NASD Rules of Fair Practice. Proposed Section 39 was approved by the NASD'S Board of Governors and now requires the membership's approval. If approved, it must then be filed with and approved by the Securities and Exchange Commission. As discussed below, the proposed rule was published for member comment on August 22, 1983 (Notice to Members 83-48).

      BACKGROUND AND EXPLANATION OF THE PROPOSED RULE

      The proposed rule provides the NASD with an additional regulatory tool in monitoring the financial and operational condition of members that are not designated to another self-regulatory organization for financial responsibility pursuant to SEC Rule 17d-l. The proposed rule is intended to provide the NASD with the authority to evaluate, in advance and on a case-by-case basis, a firm's capacity to alter the nature of its business by virtue of a change in its exempt status under SEC Rule 15c3-3 (the "Customer Protection Rule") in such a manner that increases customer financial exposure. Such a change could involve, for example, a member converting its business operation from clearing on a fully disclosed basis through another member to processing and clearing its own transactions and/or holding customers' funds or securities. The proposed rule is designed to ensure that a member has the necessary capabilities, including adequate net capital and qualified personnel, to conduct the type of business it plans.

      The proposed rule would require an existing member to obtain the NASD's prior written approval before altering its method of operation by changing its exempt status under SEC Rule 15c3-3. Currently, a member could alter its status under SEC Rule 15c3-3 at any time without prior approval, provided it has the minimum amount of net capital prescribed by SEC Rule 15c3-l (the "Net Capital Rule") and complies with other minimum qualifications standards. It is the Board's view that the requirements put forth in this proposed rule are necessary to provide appropriate regulatory oversight for an orderly transition of a member's business at a time when there would be an increase in overall financial exposure, thereby providing further protection for the public and other members.

      NATURE OF EXEMPTIONS PROVIDED BY SEC RULE 15c3-3

      All broker-dealers, regardless of the nature of their businesses, are obligated to comply with SEC Rule 15c3-3. However, depending on their types of business and methods of operation, broker-dealers may avail themselves of various exemptions contained in this Customer Protection Rule.

      The exemptions provided in subparagraph (k)(2)(b) of the Customer Protection Rule are self-operative and, heretofore, no formal notification was required of a broker-dealer operating pursuant to such an exemption that determined to alter its status under the rule. For instance, currently a broker-dealer that introduces transactions for customers on a fully disclosed basis as provided for in paragraph k(2)(b) of the rule, could begin clearing for itself, carrying customer accounts, and holding customer funds and securities without any prior notification to the NASD even though the NASD has responsibility for monitoring the financial and operational condition of that member. The Board believes that such major changes to the method in which a member conducts its business are substantial events which should be subject to notification and prior approval by the NASD through its local District Offices, given the potential risks involved for the public and other members. The Board further believes that the NASD needs this authority if it is to continue to carry out its regulatory responsibilities in an effective and efficient manner.

      Under the proposed rule, any member planning to change its exemptive status under subparagraph (k) of SEC Rule 15c3-3 to enable it to begin carrying customer accounts and/or to maintain customer free-credit balances or hold customer securities, or to operate in some other manner so that the member no longer qualifies for continued exemptive status under the Customer Protection Rule must obtain the prior written approval of the District in which the member's main office is located before effectuating such change. This would be accomplished by submitting a written request to the District, which, among other things, fully describes the procedures the member has established to effect an orderly transition of its business. In turn, under an amendment to the NASD's Code of Procedure, the District staff is required to notify the member in writing of its decision to approve or disapprove the change within 15 business days.

      The proposed rule also cites several factors to be considered by a District in determining whether to approve or disapprove any proposed change in a member's operations. Finally, if approval is denied by the District staff, or approval is granted with modifications, procedures are provided for a member to appeal that decision to the District Business Conduct Committee and thereafter to the NASD Board of Governors.

      In conjunction with adoption of the proposed rule, the Board has also adopted amendments to the NASD's Code of Procedure which provide a special procedure to implement the provisions of the proposed rule. The procedures provide the member with an opportunity for an impartial hearing, an independent review by the Board of Governors and an appeal to the Securities and Exchange Commission.

      COMMENTS RECEIVED

      The NASD received 19 comment letters on the proposed rule. Each letter was reviewed by the NASD's Capital and Margin Committee and the Board of Governors. Five letters were in favor of adopting the proposed rule, eight expressed opposition and six asked for further explanation or clarification of the proposed rule's provisions or applicability. The general concerns expressed in these letters and the Board's decisions regarding such are described below.

      Opposition to the Proposed Rule

      While each letter was reviewed individually, the letters that were opposed to the adoption of the proposed rule generally expressed the belief that the proposed rule was unwarranted and represented an additional regulatory burden on members. The commentators also believed that ample requirements already exist for broker-dealers who decide to change their mode of business, and pointed to the protections offered by the Customer Protection Rule, the Net Capital Rule and the applicable qualification standards for financial and operations principals.

      The Board concluded, however, and the NASD's experience has shown, that the proposed rule is necessary to ensure that members adequately demonstrate, in advance of start-up, their ability and capacity to clear their own transactions and/or carry customer accounts. The Board further believes that if any added regulatory burden is attached to this new rule, it is far outweighed by the additional protections afforded customers and other members.

      Applicability of the Proposed Rule

      Certain commentators believed that, in order to avoid duplicative regulation, the proposed rule should be clarified to limit its applicability to members that are not designated for financial responsibility to another self-regulatory organization by the Securities and Exchange Commission, pursuant to SEC Rule 17d-l (the regulatory allocation rule for financial responsibility matters).

      The Board concurred with these comments and approved the recommendation to limit the applicability of the new rule to such firms.

      Clarification of the Term "Carrying Customer Accounts"

      When originally published for comment, the proposed rule dealt solely with members requesting permission to "carry customer accounts." Some commentators felt that clarification of the proposed rule's language was needed to define what was meant by "carrying customer accounts" since it was unclear as to exactly what situations would trigger the provisions of this new rule.

      The Board therefore determined to clarify the proposed rule by applying it only in those instances where a member was changing its status from exempt under subparagraph (k)(l) or (k)(2)(b) to exempt under subparagraph (k)(2)(a); or from exempt under subparagraph (k)(l), (k)(2)(a) or (k)(2)(b) to a fully computing firm that is subject to all provisions of SEC Rule 15c3-3; or to commence operation in some other manner so that the member no longer qualifies for continued exemptive status under SEC Rule 15c3-3. Not only does this define the proposed rule's applicability, but it also provides the regulatory coverage desired by the Board and certainty as to when the proposed rule's provisions will be applicable.

      Expansion of the Review Period

      Finally, one commentator suggested that the originally proposed five-business day review period within which a District Office must advise a member of its decision to approve or disapprove the member's change in exemptive status be expanded to give the NASD staff sufficient time to evaluate the member's plan of operation and to conduct an on-site inspection of the firm, if it was deemed necessary.

      The Board concurred with this recommendation, and the proposed rule now provides for a period of 15 business days within which the District Office must inform a member of its decision to approve, deny or modify the member's request.

      * * * *

      The text of the proposed rule is attached and merits your immediate attention. Also attached are amendments to the NASD Code of Procedure, which do not require a membership vote and are included for informational purposes only. Please mark the ballot and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than July 12, 1985.

      The Board of Governors believes that the proposed rule is necessary and appropriate and recommends that members vote their approval.

      Questions concerning this notice may be directed to Thomas R. Cassella, Director, Financial Responsibility, at (202) 728-8237.

      Sincerely,

      James M. Cangiano
      Secretary

      Attachments

      PROPOSED RULE OF FAIR PRACTICE

      Proposed Article III, Section 39 of the Rules of Fair Practice

      (a) Application - For the purposes of Article III, Section 39 of the Rules of Fair Practice, the term "member" shall be limited to any member of the Association who is not designated to another self-regulatory organization by the Securities and Exchange Commission for financial responsibility pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17d-l promulgated thereunder.
      (b) A member operating pursuant to any exemptive provision as contained in subparagraph (k) of SEC Rule 15c3-3 shall not change its method of doing business in a manner that will change its exemptive status from that governed by subparagraph (k)(l) or (k)(2)(b) to that governed by subparagraph (k)(2)(a); or from subparagraph (k)(l), (k)(2)(a) or (k)(2)(b) to a fully computing firm that is subject to all provisions of SEC Rule 15c3-3; or commence operations that will disqualify it for continued exemption under the SEC Rule 15c3-3 without first having obtained the prior written approval of the Association.
      (c) In making the determination to approve, deny or amend an applica tion made pursuant to subsection (b), the Association staff shall consider, among other things, the type of business in which the member is engaged, the training, experience and qualifications of persons associated with'the member, the member's procedures for safeguarding customer funds and securities, the member's overall financial and operational condition, and any other information deemed relevant in the particular circumstances for the time these measures would remain in effect.

      PROPOSED ADDITION TO THE CODE OF PROCEDURE

      Procedures Under Article III, Section 39 of the Rules of Fair Practice

      (a) District Staff Procedures
      Applications for approval of a change in exemptive status under SEC Rule 15c3-3, required pursuant to Article III, Section 39 of the Rules of Fair Practice, shall be made by filing a written request with the District Office in which the member's principal place of business is located. Such request shall address the criteria set forth in Section 39(c) of Article III of the Rules of Fair Practice. Within fifteen (15) business days of the receipt of such application, the District staff shall make a determination and inform the member, in writing, of its decision to approve, deny or amend the member's request as submitted. If the decision is to deny or amend the member's request in any way, the written decision shall set forth the reasons for such action.
      (b) District Business Conduct Committee Review
      Whenever a request under subparagraph (b) of Article III, Section 39 of the Rules of Fair Practice is denied in whole or in part by the District staff, the member may, within five (5) business days of receipt of the District's determination letter, petition the District Business Conduct Committee ("DBCC" or "District Committee") for review of such decision. The member will have the opportunity to be heard and to present the reasons why it believes that the decision by the staff should be set aside or modified. Such hearing shall be held before the DBCC or a designated subcommittee thereof within seven (7) business days of receipt of the petition for review. The member shall be entitled to be represented by counsel and a record shall be kept of the proceeding. Thereafter, the District Committee shall, within five (5) business days of the hearing or within five (5) business days of receipt of the member's petition for review if the member waives a hearing and elects to proceed by written petition, issue a written decision affirming, modifying or setting aside the District staff decision and setting forth the reasons for such action. This written decision shall also provide for an appropriate sanction to be immediately imposed for failure to comply with the Committee's determination.
      (c) Review by the Board
      The written decision issued by the District Committee pursuant to subsection (b) shall be subject to review by the Board of Governors upon application by the member filed within five (5) business days of the date of the decision, or the matter may be called for review by the Board on its own motion within thirty (30) calendar days of the District Committee's decision. In the case of an appeal, the member shall be entitled to a hearing before a subcommittee of the Board within fifteen (15) business days. If called for review by the Board on its own motion, the member shall be entitled to a hearing within thirty (30) business days of such call for review. The member shall be entitled to be represented by counsel. Instituting a review, whether by application or on the action of the Board, shall not act as a stay of the action taken by the DBCC unless otherwise ordered by the Board.
      (d) Decision of the Board
      Upon consideration of the record, the Board of Governors shall, in writing, affirm, modify, reverse or dismiss the decision of the DBCC or remand the matter to the District for further proceedings consistent with its instructions. If a hearing is held, a decision, which shall be the final action of the Board, shall be issued within five (5) business days of the hearing. If no hearing is requested, the matter shall be considered based on the record and a decision shall be issued promptly. In its decision, the Board shall set forth the specific grounds upon which its determination is based and shall provide for an appropriate sanction to be immediately imposed for failure to comply with its directives. Board action restricting the member's activity shall become effective immediately upon issuance of its decision and shall remain in effect until the limitation is removed or modified by the DBCC.
      (e) Application to Commission for Review
      In any case where a member is aggrieved by an action taken or approved by the Board of Governors, such member may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.

    • 85-42 Independence Day Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Thursday, July 4, 1985, 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 Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date *

      June 26

      July 3

      July 8

      27

      5

      9

      28

      8

      10

      July 1

      9

      11

      2

      10

      12

      3

      11

      15

      4

      Markets Closed

      5

      12

      16

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD's Uniform Practice Code and Municipal Securities Rule-making Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Sections 22.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 85-41 Request for Comments on Amendment Concerning Associated Persons' Accounts with Investment Advisers, Banks, and Other Financial Institutions

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT IS JULY 10, 1985

      The National Association of Securities Dealers, Inc. is soliciting comments from members and other interested persons on a proposed amendment to Article III, Section 28 of the NASD's Rules of Fair Practice ("Section 28"), 1/ which would impose certain requirements on associated persons of members in connection with their securities accounts with investment advisers, banks, and other financial institutions. The text of the proposed amendment is attached to this notice.

      Section 28 presently provides that an associated person who opens an account or places an order with a member other than the person's employer member is required to notify the executing member of his or her association with the employer member if the associated person has a financial interest in or discretionary authority over the account or order. The provision also requires that the member with which such an associated person opens the account or places the order must notify the person's employer member and provide the member with duplicate confirmations and statements upon request. Section 28 is intended to assure that each associated person's employer member is provided with the necessary information to properly supervise all of the person's securities transactions. A member firm's ability to enforce compliance by its associated persons with certain important NASD rules, (e.g., the Free-Riding Interpretation) is significantly hampered unless the member is provided information on each associated person's securities transactions.

      As banks and other financial institutions have come to offer a broader range of securities-related services, there is a greater likelihood that associated persons will establish securities accounts with such institutions. Banks are not required to become registered as broker-dealers with the Securities and Exchange Commission and are not eligible for membership in the NASD. Therefore, they are not subject to Section 28. Investment advisers and certain other financial institutions are likewise not members of the NASD and therefore are not subject to Section 28.

      The National Business Conduct Committee and Board of Governors have become concerned that the inapplicability of Section 28 to securities accounts of associated persons with non-members may undermine members' ability to supervise their associated persons and possibly lead to abuses. Accordingly, the NASD is proposing to amend Section 28 to require any associated person to notify the person's employer member when opening a securities account with an investment adviser, bank, or other financial institution or before placing an order to buy or sell securities with such an organization. The amendment would apply to any account or transaction in which the person has a financial interest or discretionary authority. The amendment would also require associated persons to arrange for the employer member to receive duplicate confirmations and account statements upon request.

      • All members and other interested persons are invited to submit comments on the proposed amendment. Comments should be received no later than July 10, 1985, and should be directed to:

      James M. Cangiano
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Comments received by the indicated date will be considered by the National Business Conduct Committee and the Board of Governors. If the amendment is approved by the Board of Governors, it must thereafter be submitted to the membership for a vote. Any rule change approved by the Board and the membership must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to Dennis C. Hensley or John F. Mylod at (202) 728-8245 or (202) 728-8288.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      PROPOSED AMENDMENT TO ARTICLE III, SECTION 28 OF THE NASD RULES OF FAIR PRACTICE*

      Sec. 28

      Transactions for [Personnel of Another Member] or by Associated Persons

      Determine Adverse Interest

      (a) A member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.

      Obligations of Executing Member

      (b) Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
      (1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
      (2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
      (3) notify the person associated with the employer member of the executing member's intention to [transmit] provide the notice and [the] information required by paragraphs (1) and (2) of this subsection (b).

      Obligations of Associated Persons [Associated] Concerning an Account with a Member

      [(d)]
      (c) A person associated with a member who opens an account or places an order for the purchase or sale of securities with [any other] another member, shall[, where such associated person has a financial interest in such transaction and/or any discretionary authority over such account! notify the executing member of his or her association with [an] the employer member [regardless of any other function, capacity, employment or affiliation of such associated person. If]; provided, however, that if the account [is] was established prior to the association of [such] the person with [an] the employer member, the associated person shall notify the executing member promptly after becoming so associated.

      Obligations of Associated Persons Concerning an Account with an Investment Adviser, Bank, or Other Financial Institution

      (d) A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall;
      (1) notify his or her employer member in writing, prior to the execution of any transaction, of the intention to open the account or place the order; and
      (2) upon written request by the employer member, request in writing that the investment adviser, bank, or other financial institution provide the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
      provided, however, that if an account subject to this subsection (d) was established prior to a person's association with a member, the person shall comply with this subsection promptly after becoming so associated.
      (e) Subsections (c) and (d) of this section shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.

      Exemption for Transactions in Investment Company Shares

      [(c)]
      (f) The provisions [of subsection (b)] of this section shall not be applicable to transactions in variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities. entered here. The billing number will assist the firm in identifying, by office, charges which may be associated with the individual's termination.

      Multiple Terminations (Item 8)

      The Form U-5 (4/85) has been revised to incorporate a new item to facilitate a multiple termination with one or more firms under common ownership or control on a single form submission. This should be used when the individual is terminating registrations in the same self-regulatory organizations (SROs) and states with all the affiliated firms entered on the form.

      Full/Partial Terminations (Item 9 & Item 10)

      The new U-5 has been expanded to require terminations to be specifically identified as a full or partial termination and the complete date of termination is required for each category. To accomplish a full termination (NASD), check the appropriate box under Item 9 and do not complete Item 10. If the form is being filed as a partial termination, (selected state(s) or SROs other than NASD), check the appropriate box under Item 9 and identify only the states/SROs under Item 10 in which the individual is terminating.

      Reason For Termination (Item 12)

      This category has been changed to address the reason and, in certain cases, require an explanation for an individual's termination. If a box with an asterisk to its left is checked, a brief explanation for the reason must be provided on the adjacent line. Remember, this information must be provided for both full and partial terminations. Answers to Item 12 will no longer have an effect on an individual's disciplinary status in the CRD.

      Items 13,14 and 15

      The disciplinary questions have been reworked to correspond to Form U-4. An affirmative response to any of these questions will require a special review of the record. Details to "yes" answers must be provided on the reverse of the form, after identifying the item number in question.

      Amendments to Form U-5 Disciplinary Questions

      Amendments to Form U-5 disciplinary questions should be filed to report the disposition of items pending at the time of initial submission of the form. To amend, complete Items 1 through 4 for identification purposes and amend Items 13 through 15 as appropriate. Include relevant details on the reverse side of the form. Remember, when submitting a U-5 amendment, ONLY Items 13 through 15 may be amended. The CRD will not effect changes to any other item on the form. The form must be manually signed by the appropriate signatory.

      IMPLEMENTATION DATES OF FORMS U-4 AND U-5

      Form U-4

      Beginning on July 1, 1985, and throughout the month of July, the CRD System will accept both Form U-4 (1/81) (the old form) as well as the revised Form U-4 (4/85). Each version of the form is identified by the effective date found in the lower left-hand corner of each page. This dual processing period has been arranged to ensure a smooth transition to the revised form. However, old (1/81) forms received by the CRD after July 31, 1985, will be returned without being processed.

      Form U-5

      The revised Form U-5 (4/85) will be processed by the CRD effective July 1, 1985. Unlike the Form U-4, the CRD will not accept the Uniform Termination Notice for Securities Industry Registration, the old Form U-5 (2/81), after June 28, 1985. Any old (1/81) forms received after this date will be returned to the firm without being processed. The forms can be identified by the effective date in the lower left-hand corner of the form.

      Copies of the revised Forms U-4 and U-5 are enclosed for your information and use. Mechanical reproductions of these forms which are clear, legible and of identical type and size will be accepted. Also, additional supplies of Forms U-4 and U-5 can be ordered through CRD Information Services at (202) 728-8800.

      GUIDE FOR CRD FORM FILINGS

      The Guide For CRD Form Filings has been revised to incorporate the revisions to Forms U-4 and U-5 and can be ordered for a fee through the CRD Information Services (202) 728-8800.

      Questions regarding this notice should be directed to Raymond Heffron at(202) 728-8367.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachments


      1/ NASD Manual (CCH) ¶2178.

      * Deleted language is bracketed; new language is underlined.

    • 85-40 Implementation of Revised Forms U-4 and U-5

      TO: All NASD Members

      ATTN: Compliance and Registration Personnel

      Effective July 1, 1985, the revised Form U-4 (Uniform Application for Securities Industry Registration or Transfer) and Form U-5 (Uniform Termination Notice for Securities Industry Registration) will be used to register and terminate individuals with the NASD through the Central Registration Depository (CRD). The revised forms are the result of considerable time and effort by the North American Securities Administrators Association Forms Revision Committee, which included representatives from NASD, SEC, NYSE, AMEX and various industry groups. The Committee has been working since February of 1984 on the revisions, and the results will significantly reduce the time and paperwork involved in preparing these documents. It is our belief that these changes will benefit the securities industry by eliminating unnecessary paperwork, speed the filing process and reduce attendant costs. Further, the Securities and Exchange Commission is proposing to amend Rule 17a-3, "Records to be Made by Certain Exchange Members, Brokers and Dealers," in an effort to conform the rule to the information required in the revised Form U-4.

      This notice details the major revisions to these forms and further describes the methods of filing the revised documents with CRD.

      REVISED FORM U-4

      Initial Registration Filings

      All initial registration filings must be made on a complete four-page Form U-4 with fingerprints (unless exempt). Individuals who have been previously registered but not within the last 120 days must also file a complete Form U-4.

      Partial Filings

      All transfers of registration occurring within 120 days from the last registration should be made as a partial filing by submitting only pages 1, 3 and 4, including fingerprints (unless exempt), provided that Item 12 is answered completely. Page 2 should not be submitted unless changes which are not detailed in Item 12 have occurred since the previous filing.

      Temporary Agent Transfer (TAT)

      Temporary agent transfer filings should be made via a partial filing with Item 12 completed and the appropriate box (TAT) checked on page 1. Temporary agent transfers are only available to applicants who have terminated their employment and registration, with a member within the preceding seven calendar days. Transfer applications filed to make permanent a temporary transfer must be made within the 21 days stipulated in the TAT program guidelines.

      Branch LD. #/Office of Employment Address (Item 7)

      While the entry of the office of employment address is required, the Branch I.D. # is voluntary, should the member wish to identify the applicant's office of employment by its own branch, or billing, designation. The number or code must not exceed eight characters. The entry of the branch numbers will provide the NASD with the basis for a new billing concept, which will display the numbers or codes in the firm's monthly accounting report and will assist the firm in allocating fees to specific branches. If used, this designation will also be displayed in the individual's employment record and may be viewed by FAQS subscribers.

      Multiple Registrations (Item 9)

      The new U-4 has been expanded to accommodate multiple registrations with one or more firms under common ownership or control. The primary or sponsoring BD shown under Item 4 must indicate under Item 9 its affiliates and their respective firm CRD numbers with which the applicant desires registration. If the firm(s) wishes to register the applicant with self-regulatory organizations and/or states different from those shown for the primary firm, separate and distinct page 1 filings must be completed on behalf of each affiliate firm and attached to the common, complete U-4 filing. Remember, this one-form, one-registration fee concept is applicable only to firms under common ownership and control as evidenced on Form BD as submitted to the NASD and the SEC. For more details on this concept, call Raymond Heffron at (202) 728-8367.

      Type of Examination/Registration (Item 11)

      This section has been expanded to show the series number and name of each NASD-administered examination. You will note there is no longer an exam request box on the form (formerly in the state registration area). This means all state or Series 63 exams must be requested under Item 11 by checking the applicable box. There is a new box titled, "Reschedule Exam Series_______." This box should be checked and completed to reschedule exams that have expired, have been failed and for exams which have been passed but a higher score is required by a self-regulatory organization or state. Remember, all exams or registrations must be requested under Item 11 by checking the applicable box.

      Please note that the S-42 (Options Representative) and S-62 (Corporate Securities Representative) boxes, although included in the revised form, are reserved for future use. The CRD System will disregard these items until such time as these examinations become available.

      Page 2 of Form U-4

      This page has been revised to eliminate the following items:

      • Marital Status
      • Mother's Name
      • Identifying Marks
      • Entire Educational History Section
      • Father's Name
      • Spouse's Name
      • Maiden Name
      • Residential History has been revised to require five years of information rather than ten years. The applicant's current address should be the first entry in this item, (formerly located under Personal History category).
      • Employment and Personal History have been revised to eliminate street address, zip codes, full or part-time (employment) and reason for leaving.

      Page 3 of Form U-4

      The disciplinary questions have been revised and condensed to make the questions easier to understand and answer. Item 22 begins with basic definitions relative to disciplinary questions 22 A through N. The numbers 1 through 31 on the right margin exist solely for the benefit of operator entry and should not be used to identify items.

      Photographs

      Photographs are no longer required.

      Page 4 of Form U-4

      The requirements for notarization of the applicant's signature have been deleted and the certification requirements have been revised and expanded to include Items 8 and 9, relating to the requirement to file timely amendments to Form U-4 and facilitating language for the TAT program.

      Signature Requirement for Complete/Partial Filings

      Signatures of the applicant and appropriate signatory must be original and are required only on page 4 of complete or partial form filings. Pages 1, 2 and 3 need not be signed. The signature requirement relative to amendments is outlined under Amendments to Form U-4.

      Attachment Sheet

      The attachment sheet to Form U-4 should be used to continue items from the form, e.g., Item 18, Residential History, Item 19, Business History, and to provide details to affirmative answers on page 3. The item number must be identified in the left column next to the answer, and the sheet must be attached to the relevant Form U-4. Attachment sheets received by the CRD which are not attached to a Form U-4, or to a page 2 or 3 amendment will be returned to the firm.

      Amendments to Form U-4

      Pagel

      When filing a page 1 amendment, Items 1, 2, 3 and 4 must be completed to identify the individual and firm submitting the form, and the page must be manually signed by the appropriate signatory.

      Page 2

      Items 13 and 14 must be completed to establish identity. When reporting changes or new data, you need only complete the relevant items; do not complete the entire page (unless it is necessary). Page 2 must be manually signed by the appropriate signatory.

      Page 3

      Item 21 must be completed to establish identity. When reporting changes, complete the relevant item(s) only; you need not complete the entire page. A page 3 amendment requires both the signature of the applicant and appropriate signatory.

      Page 4

      Item 23 must be completed to establish identity. The only time an amendment to page 4 would be necessary is to correct signature and/or verification deficiencies from a previous filing.

      Note: All amendments to pages 1, 2, 3 and 4 must be manually signed. Page 3 must be manually signed by both the applicant and appropriate signatory. Page 4 must be manually signed by both parties if the signatures were missing or not manually signed on the original U-4 submission. If the verification of employment section was missing or deficient on the original U-4 filing, the corrective page 4 amendment would have to be manually signed by the appropriate signatory.

      REVISED FORM U-5

      Form U-5 (4/85) has been revised to include filing instructions, to accommodate certain amendments to the form, to permit multiple terminations and to distinguish between full and partial terminations. In addition, a revised set of disciplinary questions has been approved for Form U-5.

      Branch I.D. # (Item 6)

      As in the case of the Form U-4, if the firm has assigned or identified its branches, a branch or billing code (not to exceed eight characters) should be

      PDF TO BE INCLUDED

    • 85-39 NASDAQ National Market System Grows to 1,998 Securities With 23 Voluntary Additions on June 4, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, June 4, 1985, 23 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,998. These issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The issues scheduled to join NASDAQ/NMS on Tuesday, June 4, 1985, are:

      Symbol

      Company

      Location

      ABPI

      American Businessphones, Inc.

      Irvine, CA

      BPHC

      Bay Pacific Health Corporation

      San Bruno, CA

      BRLYS

      Bradley Real Estate Trust

      Boston, MA

      CHAR

      Chaparral Resources, Inc.

      Denver, CO

      CSTP

      Congress Street Properties, Inc.

      Jackson, MS

      CSCS

      Continental Steel Corp.

      Kokomo, IN

      DIVHF

      Divi Hotels, N.V.

      Netherlands Antilles

      ETCC

      Environmental Testing and Certification Corporation

      Edison, NJ

      AJGC

      Gallagher (Arthur J.) & Co.

      Rolling Meadows, IL

      HHHC

      Hanover Companies, Incorporated

      Glen Oaks, NY

      MKCO

      Kamenstein (M.), Inc.

      White Plains, NY

      KING

      King World Productions, Inc.

      Summit, NJ

      LIBAV

      Liberty Homes, Inc. Class A

      Goshen, IN

      LIBBV

      Liberty Homes, Inc. Class B

      Goshen, IN

      MMIM

      MMI Medical, Inc.

      Pomona, CA

      MCCS

      Medco Containment Services, Inc.

      Elm wood Park, NJ

      MCRS

      Micros Systems, Inc.

      Beltsville, MD

      MILT

      Miltope Group, Inc.

      New York, NY

      OLGR

      Oilgear Company (The)

      Milwaukee, WI

      RANG

      Rangaire Corporation

      Cleburne, TX

      RESM

      Restaurant Management Services, Inc.

      Macon, GA

      USBP

      USABANCORP, Inc.

      Johnstown, PA

      UNNB

      University National Bank & Trust Company

      Palo Alto, CA

      The following issues may be included in the NASDAQ/NMS prior to the next regularly scheduled phase-in date:

      Pending Additions

      Symbol

      Company

      Location

      CYPMV

      Cyprus Minerals Company

      Englewood, CO

      MDIN

      Medalist Industries, Inc.

      Mequon, WI

      The following changes to the list of NASDAQ/NMS securities occurred since May 10, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      ALGI/AVMC

      American Locker Group, Inc./ AVM Corporation

      5/15/85

      OGIL/OGIL

      The Ogilvey Group, Inc./ Ogilvey & Mather International, Inc.

      5/15/85

      VUBN/UTBN

      Valley Utah Bancorporation/ Utah Bancorporation

      5/17/85

      CNRD/CNRD

      Canrad, Inc./Canrad-Hanover, Inc.

      5/20/85

      JIFY/AVEC

      Jiffy Industries, Inc./ Advanced Energy Corporation

      5/24/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      CCUPC

      Compucorp

      5/16/85

      CSYN

      Computer Synergy

      5/20/85

      MECCQ

      Miller Technology & Communications Corporation

      5/22/85

      UDCO

      Universal Development Corporation

      5/23/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at(202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

      Division of Market Regulation

      UNITED STATES

      SECURITIES AND EXCHANGE COMMISSION

      Washington. D.C. 20549

      May 3, 1985

      Mr. David Marcus
      Executive Vice President
      Mew York Stock Exchange, Inc.
      55 Water Street
      New York, MY 10041

      Mr. John E. Pinto, Jr.
      Senior Vice President
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Dear Messrs. Marcus and Pinto:

      It has cone to our attention that certain broker-dealers have entered into agreements with their clearing entities that nay be in violation of the Commission's hypothecation rules. Securities Exchange Act Rules 8c-l and 15c2-l (17 CFR §§240.8c-l and 15c2-1).

      Paragraph (a) (2) of each rule prohibits "...the direct or indirect hypothecation by a broker or dealer, or his arranging for or permitting, directly, or indirectly, the continued hypothecation of any securities carried for the account of any customer under circumstances... that will permit such securities to be commingled with securities carried for the account of any person other than a bona fide customer of such broker or dealer under a lien for a loan made to such broker or dealer...." This provision is, of course, primarily designed to prevent a broker-dealer from pledging his customers' securities and his own securities to secure the same loan.

      Broker-dealers that do business with clearing banks or other entities normally maintain two borrowings with the same lender. The customer loan is used to finance the extension of credit by the broker-dealer to its customers. Customer securities are pledged under the customer bank loan. The firm bank loan is used to finance firm activities and is collateralized by firm securities.

      While most broker-dealers provide separate collateral for each loan, we understand that some broker-dealers have entered into clearing agreements whereby the clearing organization has recourse to all securities and other property within that organization's possession or control. This "cross-lien" language wakes customer securities available to the clearing entity if the broker-dealer defaults on the firm loan and thus constitutes a violation of the hypothecation rules.

      The Commission specifically prohibited this practice when it adopted the hypothecation rules. In Securities Exchange Act Release No. 2690 the Commission noted that in order to avoid such violations of Rules 8c-l and 15c2-l, "brokers who pledge customers' securities with any pledgee from whom they are also borrowing on their own securities must see to it that the pledgee, whether it be a bank, another broker or any other lender, does not obtain a general or so-called "cross-lien" on customers' securities as additional collateral for other loans which it has made to the broker on his own securities or those of his partners or other broker-dealers. In other words, where a broker pledges customers' securities as well as his own securities with a single pledgee to secure several loans, one or more of which are made against the broker's own securities, it will be necessary that the pledgee does not have a lien upon customers' securities for any loan except other loans also made against securities carried for the account of customers of the same broker."

      Any lien of a clearing corporation or other department of a national securities exchange or a registered national securities association for a loan made and to be repaid on the same calendar day which is incidental to the clearing of transactions in securities or loans through the entity is not subject to these restrictions. See, paragraph (e) of the Rule relating to so-called one-way liens.

      Furthermore, the lender, unless he is a broker-dealer subject to these Rules, does not have a right to rehypothecate customers' securities.

      It should also be noted that where a bank has access to securities carried for the account of customers, the broker-dealer must ensure that the bank may assert no lien against these securities by virtue of a loan to the broker-dealer which is purportedly unsecured or is secured by firm assets other than firm securities.

      Please bring these matters to the attention of your members and your examination staff. If you have any questions, please feel free to call.

      Sincerely,

      Michael A. Macchiaroli
      Assistant Director

    • 85-38 Parr Securities Corp., 68 William Street New York, New York 10005

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On May 17, 1985, the United States District Court for the Southern District of New York appointed a SIPC Trustee for the above-captioned firm. Previously, a Temporary Receiver had been appointed for the firm on May 7, 1985.

      Members may use the "immediate close-out" procedures as provided in Section 59(i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12(h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Edwin B. Mishkin, Esquire
      Cleary, Gottlieb, Steen & Hamilton
      One State Street Plaza
      New York, New York 10004
      Telephone: (212) 344-0600

    • 85-37 Parr Securities Corp., 68 William Street New York, New York 10005

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On May 7, 1985, the United States District Court for the Southern District of New York appointed a Temporary Receiver for the above-captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12(h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      Temporary Receiver

      Mitchell A. Lowenthal, Esquire
      Cleary, Gottlieb, Steen & Hamilton
      One State Street Plaza
      New York, New York 10004
      Telephone: (212) 344-0600

    • 85-36 NASDAQ National Market System Grows to 1,976 Securities With 42 Voluntary Additions on May 21, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, May 21, 1985, 42 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,976. These 42 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 42 issues scheduled to join NASDAQ/NMS on Tuesday, May 21, 1985, are:

      Symbol

      Company Name

      Location

      ACTP

      Advanced Computer Techniques Corporation

      New York, NY

      ARCE

      Air Cargo Equipment Corporation

      Rancho Dominguez, CA

      ARAI

      Allied Research Associates, Inc.

      Severna Park, MD

      AIIC

      American Integrity Corporation

      Philadelphia, PA

      APER

      Atlantic Permanent Federal Savings & Loan Association

      Norfolk, VA

      BYOU

      Bayou Resources, Inc.

      Houston, TX

      CCOA

      Comcoa, Inc.

      Wichita, KS

      CFCN

      Commercial Federal Corporation

      Omaha, NE

      CRST

      Crestek, Inc.

      Trenton, NJ

      DION

      Dionics, Inc.

      Westbury, NY

      ELSE

      Electro-Sensors, Inc.

      Minneapolis, MN

      FAMF

      First American Federal Savings& Loan Association

      Huntsville, AL

      FFBN

      First Federal Bank, FSB

      Nashua, NH

      FFBV

      First Federal Savings & Loan Association of Brooksville

      Brooksville, FL

      FEXP

      Frozen Food Express Industries, Inc.

      Dallas, TX

      GNIC

      Guaranty National Corporation

      Englewood, CO

      HPOC

      High Plains Oil Corporation

      Denver, CO

      NMED

      Inmed Corporation

      Nor cross, GA

      IPIPF

      Interprovincial Pipe Line Limited

      Ontario, Canada

      JNSV

      Jones & Vining, Incorporated

      Braintree, MA

      KAPA

      Kappa Networks, Inc.

      Rahway, NJ

      LYTS

      LSI Lighting Systems Inc.

      Cincinnati, OH

      LAFC

      Loan America Financial Corporation

      St. Petersburg, FL

      MIKE

      Michaels Stores, Inc.

      Irving, TX

      NATH

      Nathan's Famous, Inc.

      New York, NY

      NFEXF

      New Frontier Petroleum Corporation

      Vancouver, BC

      NEWE

      Newport Electronics, Inc.

      Santa Ana, CA

      NICO

      NICO, Inc.

      New York, NY

      NBIC

      Northeast Bancorp, Inc.

      New Haven, CT

      PACEF

      Pasadena Energy Corporation

      Dallas, TX

      PEXPO

      People Express Airlines, Inc.

      Newark, NJ

      PEOP

      Peoples Ban Corporation

      Seattle, WA

      PMAN

      Piedmont Management Company Inc.

      New York, NY

      PRCLS

      Property Investors of Colorado

      Englewood, CO

      REITS

      Real Estate Investment Trust of California

      Santa Monica, CA

      ROPK

      Ropak West Inc.

      Fullerton, CA

      SVRS

      Saver's Bancorp, Inc.

      Littleton, NH

      SSMC

      Silver State Mining Corporation

      Denver, CO

      USTB

      UST Corp.

      Boston, MA

      UMSB

      United Missouri Bancshares Inc.

      Kansas City, MO

      VBAN

      V Band Systems, Inc.

      Yonkers, NY

      VIDE

      Video Display Corporation

      Stone Mountain, GA

      Interim Additions

      Symbol

      Company Name

      Date of Entry

      HIGH

      Highland Superstores, Inc.

      5/09/85

      The following changes to the list of NASDAQ/NMS securities occurred since April 29, 1985:

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      CANLZ/CANZV

      Canal-Randolph Limited Partnership - Units/ Canal-Randolph Limited Partnership â€" WI

      5/03/85

      PROT/PROT

      Protective Life Corporation/Protective Corporation

      5/07/85

      PBSB/PBSB

      Prudential Bancorporation/ Prudential Bank, FSB

      5/10/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      HRTG

      Heritage Bancorporation of New Jersey

      5/01/85

      BHSL

      Beverly Hills Savings & Loan

      5/02/85

      GLEN

      Glendale Federal Savings & Loan Association

      5/07/85

      IHPI

      Independence Health Plan, Inc.

      5/08/85

      PABT

      Pabst Brewing Company

      5/09/85

      FOXM

      Foxmeyer Corporation

      5/10/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at(202)728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-35 Bevill, Bresler & Sehulman Incorporated 301 South Livingston Avenue Livingston, New Jersey 07039

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On May 8, 1985, the United States District Court for the District of New Jersey appointed a SIPC Trustee for the above-captioned firm.

      Please refer to Notice to Members 85-25 regarding the previous appointment of a Temporary Receiver.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Richard W. Hill, Esquire
      McCarter & English
      550 Broad Street
      Newark, New Jersey 07102
      Telephone: (201) 622-4444

    • 85-34 Memorial Day Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Monday, May 27, 1985, 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 Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      May 17

      May 24

      May 29

      20

      28

      30

      21

      29

      31

      22

      30

      June 3

      23

      31

      4

      24

      June 3

      5

      27

      Markets Closed

      28

      June 4

      6

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Sections 22.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 85-33 Coastal Securities Corporation 1888 Century Park E., Suite 1606 Los Angeles, California 90067

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On May 3, 1985, the United States District Court for the Central District of California appointed a SIPC Trustee for the above-captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12 (h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Gavin Miller, Esquire
      Hufstedler, Miller, Carlson & Beardsley
      Sixteenth Floor, 700 South Flower Street
      Los Angeles, California 90017
      Telephone: (213) 629-4200

    • 85-32 Payment for Order Flow

      TO: All NASD Members and Other Interested Persons

      It has come to the NASD's attention that some members are engaging in a practice whereby market making or wholesale dealers pay retail firms to direct those firms' customer orders to the market maker. The Board of Governors has established a special subcommittee of the National Business Conduct Committee to study potential problems related to these arrangements. That subcommittee is continuing its study, but on the basis of the analysis thus far, the Board of Governors has concluded that members should be alerted to two important areas: the requirement for firms to disclose fully all compensation received in connection with payment arrangements, and the requirement for firms to assure best execution of trades processed under these arrangements. These issues are discussed below.

      Disclosure of Compensation

      Rule 10b-10 1/ under the Securities Exchange Act of 1934 prescribes information that a broker or dealer must disclose to its customer on the customer's confirmation. The rule requires that the broker-dealer disclose to the customer, among other things:

      ... the amount of any remuneration received or to be received by him from [his] customer in connection with the transaction ... and . . . the source and amount of any other remuneration received or to be received by him in connection with the transaction . . . 2/

      The rule provides, however, that in the case of ordinary secondary market trades, the confirmation can simply state whether other remuneration has been or will be received and that the source and amount of this remuneration will be furnished upon written request. In the context of payments for order flow, therefore, firms receiving compensation from market makers should disclose that they are receiving "other remuneration" in connection with the transaction. It appears Rule 10b-10 does not require disclosure on the confirmation of the source and amount of this remuneration, but permits that information to be furnished upon request. 3/

      Under Rule 10b-10 therefore, payments received by a retail firm from a market maker in return for their directing order flow to the market maker should be considered additional compensation received in connection with each transaction. Any firm receiving such compensation should disclose information on the source and amount of the compensation in an appropriate manner. Firms may wish to consult with their counsel to determine the manner in which this disclosure requirement should be satisfied.

      Best Execution

      The Interpretation of the Board of Governors on Execution of Retail Transactions, 4/ the "Best Execution Interpretation," requires that:

      [i]n any transaction for or with a customer, a member and persons associated with a member shall... buy or sell ... so that the resultant price to the customer is as favorable as possible under prevailing market conditions.

      This requirement is clearly applicable to situations in which firms direct all of their order flow to a particular dealer. Although examinations by the NASD indicate that firms that have entered into agreements for the payment for order flow are obtaining the best execution of their customers' transactions, it is important for all firms to assure that they continue to obtain the best execution of trades subject to these arrangements. This area will continue to be reviewed by NASD examiners during on-site examinations to ensure ongoing compliance.

      As noted earlier, the NASD subcommittee reviewing arrangements for the payment for order flow has not yet concluded its study and may issue additional recommendations with respect to these arrangements.

      Questions or comments regarding this notice may be directed to John E. Pinto, NASD Surveillance Department, (202) 728-8233 or Dennis C. Hensley, NASD General Counsel's Office, (202) 728-8245.

      Sincerely
      Frank J.Wilson
      Executive Vice President and General Counsel


      1/ 17 CFR §240.10b-10.

      2/ Rule 10b-10(a)(7), 17 CFR § 240.10b-10(a)(7).

      3/ Article III, Section 12 of the NASD Rules of Fair Practice contains requirements that are basically similar to those in Rule 10b-10. Section 12 specifically states that a member:

      . . . shall give or send to [its] customer written notification disclosing . . . the source and amount of any commissions or other remuneration received or to be received by such member in connection with the transaction.

      The NASD Ad Hoc Committee on Rule and By-Law Amendments has recommended that Section 12 be rescinded as redundant to Rule 10b-10, and that recommendation will be published for comment shortly.

      4/ NASD Manual (CCH) p. 2035.


    • 85-31 NASDAQ National Market System Grows to 1,940 Securities With 82 Voluntary Additions on May 7, 1985, and Six Mandatory Inclusions on May 14, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, May 7, 1985, 82 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,934. These 82 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 82 issues scheduled to join NASDAQ/NMS on Tuesday, May 7, 1985, are:

      Symbol

      Company Name

      Location

      ACMT

      ACM AT Corporation

      East Hartford, CT

      ADIA

      ADIA Services, Inc.

      Menlo Park, CA

      AVSN

      Activision, Inc.

      Mountain View, CA

      ASMIF

      Advanced SemiconductorMaterials International NV

      Bilthoven, Netherlands

      ALGA

      Alpine Group, Inc. (The)

      New York, NY

      ECOL

      American Ecology Corporation

      Agoura Hills, CA

      ANHC

      American National Holding Company

      Kalamazoo, MI

      AUML

      Automated Medical Laboratories, Inc.

      Hialeah, FL

      AUTR

      Autotrol Corporation

      Milwaukee, WI

      BIOW

      Banks of Iowa, Inc.

      Des Moines, IA

      BERK

      Berkline Corporation (The)

      Morristown, TN

      BIRT

      Birtcher Corporation (The)

      El Monte, CA

      BOOL

      Boole & Babbage, Inc.

      Sunnyvale, CA

      BANQ

      Burritt InterFinancial Baneorporation

      New Britain, CT

      CASC

      Cascade Corporation

      Portland, OR

      CJER

      Central Jersey Bank & Trust Company

      Freehold Township, NJ

      CAKE

      Charlotte Charles, Inc.

      Chicago, IL

      CNCL

      Commercial National Corporation

      Shreveport, LA

      COMW

      Commonwealth Savings & Loan Association F.A.

      Fort Lauderdale, FL

      CGIC

      Continental General Insurance Company

      Omaha, NE

      DNNR

      Danners, Inc.

      Indianapolis, IN

      DMGIF

      Dumagami Mines Limited

      Ontario, Canada

      EPSC

      EPSCO, Incorporated

      Westwood, MA

      ENDLZ

      Endo-Lase Inc., Warrants

      New York, NY

      EBNC

      Equitable Bancorporation

      Baltimore, MD

      FIAMA

      First American Bank and Trust, Class A

      North Palm Beach, FL

      FFKZ

      First Federal Savings & Loan Association of Kalamazoo

      Kalamazoo, MI

      FTSC

      First Federal Savings & Loan Association of South Carolina

      Greenville, SC

      FMBC

      First Michigan Bank Corporation

      Zeeland, MI

      FMSA

      First Mutual Savings Association of Florida

      Pensaeola, FL

      FIIF

      Flora fax International, Inc.

      Tulsa, OK

      FRDM

      Freedom Savings and Loan Association

      Tampa, FL

      GMFD

      Germania, F.A.

      Alton, IL

      GTAM

      Great American Corporation

      Baton Rouge, LA

      GPCK

      Guardian Packaging Corporation

      Newark, CA

      HHOT

      H & H Oil Tool, Inc.

      Santa Paula, CA

      IFII

      Indiana Financial Investors, Inc.

      Indianapolis, IN

      IWTR

      Indianapolis Water Company

      Indianapolis, IN

      IINT

      Information International, Inc.

      Culver City, CA

      INEI

      Insituform East, Incorporated

      Landover, MD

      INSUA

      Insituform of North America, Inc., Class A

      Memphis, TN

      INRD

      Interactive Radiation, Inc.

      North vale, NJ

      JUDY

      Judy's Inc.

      Van Nuys, CA

      KENN

      Kennington Ltd., Inc.

      Los Angeles, CA

      KLOS

      Kloss Video Corporation

      Cambridge, MA

      LCSI

      LCS Industries, Inc.

      Clifton, NJ

      LSCO

      LESCO, Inc.

      Rocky River, OH

      LMAN

      Lieberman Enterprises Incorporated

      Minneapolis, MN

      MARC

      M/A/R/C Inc.

      Dallas, TX

      MPSB

      MPS Bancorp, Inc.

      Mount Prospect, IL

      MFCO

      Microwave Filter Company, Inc.

      East Syracuse, NY

      MSEX

      Middlesex Water Company

      Iselin, NJ

      MCAP

      Midland Capital Corporation

      New York, NY

      NHMO

      National HMO Corporation

      Melbourne, FL

      OGLE

      Oglebay Norton Company

      Cleveland, OH

      PTCS

      PT Components, Inc.

      Indianapolis, IN

      PEXPP

      People Express Airlines, Inc., Series A Preferred

      Newark, NJ

      PTCO

      Petroleum Equipment Tools Co.

      Houston, TX

      PSBF

      Pioneer Savings Bank, F.S.B.

      Clearwater, FL

      PBAN

      Popular Bancshares Corporation

      Miami, FL

      PFCO

      Preferred Financial Corporation

      Denver, CO

      PSLA

      Preferred Savings and Loan Association, Inc.

      High Point, NC

      PULLW

      Pullman Company (The), Warrants

      Princeton, NJ

      QTEC

      QuesTech, Inc.

      McLean, VA

      RIHT

      RIHT Financial Corporation

      Providence, RI

      RMPO

      Ramapo Financial Corporation

      Wayne, NJ

      STJO

      St. Joseph Bancorporation, Inc.

      South Bend,IN

      SAXO

      Saxon Oil Company

      Dallas, TX

      SNEL

      Snelling and Snelling, Inc.

      Sarasota, FL

      STBN

      Southern Bancorporation, Inc.

      Greenville, SC

      SWEL

      Southwestern Electric Service Company

      Dallas, TX

      SMFG

      Stearns Manufacturing Company

      St. Cloud, MN

      SCAF

      Surgical Care Affiliates, Inc.

      Nashville, TN

      TWBC

      TransWorld Bancorp

      Sherman Oaks, CA

      TRILF

      Trilogy Limited

      Cupertino, CA

      UBKR

      United Bankers, Inc.

      Waco, TX

      WGHT

      Weigh-Tronix, Inc.

      Fairmont, MN

      WCCC

      Western Commercial

      Fresno, CA

      WOLA

      Wolverine Technologies Inc.

      Lincoln Park, MI

      WRIT

      William E. Wright Company

      West Warren, MA

      ZNAT

      Zenith National Insurance Corp.

      Encino, CA

      ZCAD

      Zycad Corporation

      Arden Hills, MN

      Additionally, the following six securities will enter the NASDAQ/NMS under the mandatory Tier 1 criteria on May 14, 1985:

      Symbol

      Company Name

      Location

      ASTA

      AST Research, Inc.

      Irvine, CA

      BLII

      Britton Lee, Inc.

      Los Gatos, CA

      CANNY

      Canon, Inc.

      Tokyo, Japan

      NIPNY

      NEC Corporation

      Tokyo, Japan

      SPCO

      Software Publishing Corporation

      Mountain View, CA

      SMBX

      Symbolics, Inc.

      Cambridge, MA

      The following changes to the list of NASDAQ/NMS securities occurred since April 3, 1985.

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      TLMTB/TLMT

      Tele mat ion, Inc., Class B/Telemation, Inc.

      4/04/85

      ADCT/MGNE

      ADC Telecommunications, Inc./Magnetic Controls Company

      4/08/85

      CMRK/CMRK

      Caremark, Mc./Home Health Care of America, Inc.

      4/12/85

      DIGI/DIGI

      DSC Communications Corporation/Digital Switch Corporation

      4/23/85

      FTNC/BGBT

      First National Corporation (Ohio)/Big Bite, Inc.

      4/24/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      LFSL

      Liberty Federal Savings & Loan Association

      4/03/85

      KOSSQ

      Koss Corporation

      4/08/85

      GHOM

      General Homes Corporation

      4/09/85

      MACG

      MacGregor Sporting Goods, Inc

      4/16/85

      AMLT

      Armel, Inc.

      4/16/85

      WC AS

      Western Casualty & Surety Co.

      4/17/85

      HMOH

      HealthAmerica Corporation

      4/17/85

      GBAYA

      Greate Bay Casino Corporation, Class A

      4/18/85

      BFXCE

      BFI Communications, toe.

      4/29/85

      GENA

      General Automation, Inc.

      4/29/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hick man, Market Surveillance, at(202)728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-30 Securities and Exchange Commission Release Announcing Shareholder Communication Proposals

      TO: All NASD Members

      The Securities and Exchange Commission recently issued proposals designed to clarify the obligations of brokers and issuers under its previously adopted direct communications program. The SEC had earlier mandated a program for issuers' direct communications with beneficial shareowners to go into effect on January 1, 1985.

      However, on August 17, 1984, with the full support of its Advisory Committee on Shareholder Communications, the American Society of Corporate Secretaries, the American Bankers Association and the Securities Industry Association, the SEC postponed a startup of the direct communications program until January 1, 1986.

      The delayed program would require brokerage firms maintaining nominee accounts to provide issuers with lists of the names, addresses and positions of the beneficial owners of their securities in those accounts. However, only those customers not objecting to disclosure would be on the lists. Issuers would have to request lists from brokers and agree to cover the firms' reasonable costs in providing these lists. The lists may only be used for mailing interim reports and incidental information to beneficial owners.

      Under the rule adopted by the SEC, issuers could not use the lists for proxy solicitations.

      When it authorized the program delay, the SEC agreed to propose rules clarifying the functions of brokers and issuers and ensuring effective implementation of the program. Among other things, the proposals contained in the attached release would:

      • Require that brokers provide the list to issuers as often as requested rather than only once a year.
      • Require that issuers request the lists from all brokers with customers who are beneficial owners of the issuer's securi ties.
      • Allow issuers to send their annual reports to beneficial owners if they apprise brokers of that fact when sub mitting a search card for beneficial-owner information.

      Broker Obligations

      The proposals would require brokers to compile the list of beneficial owners whenever an issuer requests it. The rule currently requires brokers to compile the list as of the issuer's record date. If an issuer requests the list without scheduling a meeting, brokers would have to provide the list no later than 10 days after receiving the issuer's request.

      Other proposals would excuse brokers from their obligation to provide the list if they do not receive assurances from the issuer of reimbursement for all reasonable expenses incurred in providing the lists. Brokers would also be excused from sending the annual report to beneficial owners if the issuer has notified the brokers that it was sending the annual report to the beneficial owners on the list.

      Issuer Obligations

      Under the proposals, issuers would have to request the lists from all brokers holding the issuers' securities in nominee accounts. This would prevent issuers from "cherry picking" the large firms, thereby leaving the smaller brokers with no way to recoup the costs of maintaining the required information.

      Issuers may, at their option, send their annual report to the beneficial owners identified on the lists they receive from brokers. However, in such instances, the issuers are obligated to notify the brokers at the time a search card is submitted that they will mail the annual report to the beneficial owners on the list.

      Reasons for Delay

      In delaying its program, the SEC cited three reasons for its action:

      • Costs of implementing the program. The securities industry esti mated that the startup of the direct communications program alone would cost about $26 million. This includes the initial survey to determine which shareholders are willing to allow their positions to be disclosed to issuers. In addition, brokers must, of course, maintain the current system for proxy distribution.
      • Possible breaches of confidentiality. The SEC program requires that nominees furnish information on beneficial owners' positions unless those owners object to such disclosure. Because they feel that broker-dealer nominees might disclose such information by mistake, beneficial owners have suggested that they might move their accounts to banks, which are not subject to the SEC program. Broker-dealers, on the other hand, have suggested that the lists of beneficial shareholders would probably not remain confidential, and thus they would be involuntarily disclosing their customer lists.
      • Limited potential effectiveness. A major problem with the SEC rule is that it does not affect banks. At the beginning of 1985, the shares held by bank nominees accounted for 74.7 percent of the market value of all the equity securities held by the Depository Trust Company. Thus, the SEC program would reach less than a quarter of the beneficial shareholders, and of that quarter, it affects only the holdings of the beneficial owners who did not object to disclosure. According to a limited survey, it appears that the SEC program, if implemented, would not reach more than 15 percent of all beneficial shareowners.

      Resolution of Delay

      The NYSE's Ad Hoc Committee on Identification of Beneficial Owners, formed in September 1984, has largely resolved the issues of cost and confidentiality. A recent SEC-approved NYSE-rule change recommended by the Ad Hoc Committee permits brokers to assess a $.20 per proxy surcharge for this year's annual meeting proxy solicitation to fund the program's startup costs. A second surcharge to be proposed for next year's proxy solicitation will fund the balance of the costs not covered by the first surcharge. The NASD has likewise adopted similar charges as part of its proxy rules. The Ad Hoc Committee is also addressing the issue of determining the reasonable costs for maintaining beneficial-owner lists. Rule changes in this area will be forthcoming.

      To ensure standardization and confidentiality of the resulting lists of beneficial owners, the Ad Hoc Committee has selected the Independent Election Corporation of America (IECA) to serve as the intermediary between issuers and brokers in supplying lists of beneficial owners. A user board consisting of issuers, brokers and other industry representatives will govern the IECA's activities in this area.

      Resolving the final reason for delay requires that Congress enact legislation allowing the SEC to regulate the proxy-processing activities of banks, associations and other entities. Legislation designed to accomplish this died in the 98th Congress. On March 20, 1985, Representatives Wirth and Rinaldo introduced in the House of Representatives the Shareholder Communications Act of 1985 (H.R. 1603). Supporters expect to reintroduce similar legislation in the Senate.

      Request for Comments on These Proposals

      Those of you wishing to comment on these proposals should send your comments, by May 15, 1985, to:

      Mr. John Wheeler
      Secretary
      Securities and Exchange Commission
      450 Fifth Street, N.W.
      Washington, D.C. 20549

      All comment letters should refer to File Number S7-13-85.

      For your convenience, a copy of the SEC's release is enclosed with this notice. Any comments or questions regarding this notice should be directed to Thomas P. Mathers of the NASD's Communications Group at (202) 728-8267.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-21901; 40-14438; File No. S7-13-85]

      Facilitating Shareholder Communications

      AGENCY: Securities and Exchange Commission.

      ACTION: Proposed rules.

      SUMMARY: The Securities and Exchange Commission ("Commission"} is publishing for comment proposed amendments to its shareholder communications rules which govern the process by which registrants communicate with the beneficial owners of securities registered in the name of a broker or other nominee. The proposed amendments are intended to allow for the most advantageous implementation of the system of direct communication provided under those rules

      DATE: Comments should be received on or before May 15, 1985.

      ADDRESS: Comments should be submitted in triplicate to John Wheeler, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549. Comment letters should refer to File No. S7-13-85. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, D.C. 20549.

      FQR FURTHER INFORMATION CONTACT: Sarah A. Miller or JoAnn L. Zuercher, (202) 272-2589, Office of Disclosure Policy, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549.

      SUPPLEMENTARY INFORMATION: The Commission is publishing for comment proposed revisions to Rules 14b-l 1 and 14c-7 2 and a new proposed Rule 14a-13. These proposals are a direct result of the one-year deferral of the effective date (from January 1, 1985 to January 1, 1986) of Rule 14b-l(c) agreed to by industry representatives and authorized by the Commission in August 1984.3 The deferral was intended to provide more time for the determination of reasonable costs and the implementation of a system to provide registrants with security holder information in an efficient, timely and effective manner. At the time it authorized the deferral, the Commission agreed to undertake certain steps to clarify the respective functions of brokers and registrants and to ensure the effective implementation of the system of direct communication. Accordingly, these proposed amendments delineate, in two separate rules, the respective obligations of brokers and registrants. In addition, the proposed amendments would provide, among other things, that: (1) If a registrant requests the list of non-objecting security holders, it must request the list from all brokers having customers who are beneficial owners of the registrant's securities; (2) a broker must provide the beneficial owner lists to registrants as often as they request the information, rather than only once a yean and (3) a registrant may mail its annual report to security holders to its beneficial owners so long as the registrant notifies the broker at the time it submits a search card requesting beneficial owner information.

      I. Background

      Rule 14b-l was revised substantially in 1983 pursuant to recommendations of the Advisory Committee on Shareholder Communications, contained in its report, Improving Communications Between Issuers and Beneficial Owners of Nominee Held Securities. Paragraph (c) was adopted to provide a means of direct communication between registrants and their beneficial owners by requiring brokers to provide registrants upon request with the names, addresses and securities positions of its customers who are beneficial owners of the registrant's securities and who have not objected to such disclosure.4 In August 1984, the Commission deferred the effective date of paragraph (c) until January 1, 1986.5 Representatives from the securities industry and the registrant community agreed that during this deferral period they would develop and establish both an efficient means of furnishing beneficial owner information to registrants and an appropriate schedule of reimbursement.

      In September 1984, the Ad Hoc Committee on Identification of Beneficial Owners was appointed by the New York Stock Exchange (NYSE). The Committee, composed of members of both the securities industry and registrant community, was formed to resolve the cost issues and to develop a workable and effective system that would be of maximum use to registrants and not burdensome to brokers. The Committee has now largely resolved the problems which initially led to the deferral of the effective date of Rule 14br-l(c). First, the reimbursement of start-up costs issue has been resolved through NYSE rule changes that permit brokers to assess a $.20 per proxy surcharge for the first annual meeting proxy solicitation occurring subsequent to adoption of the NYSE's rule changes. This surcharge, together with an additional surcharge for the next annual meeting proxy solicitation, will fund the start-up costs associated with furnishing the beneficial owner information to registrants. The second surcharge will fund the balance of the costs not funded by the first, $.20, surcharge and will be the subject ot a separate NYSE rule change. The $.20 rule change was filed with the Commission in January 1985, published in the Federal Register on February 8, 1985,6 and approved by the Commission on March 28, 1985.7 It is anticipated that other self-regulatory organizations soon will adopt the surcharge as part of their proxy rules. The other cost issue—determination of reasonable costs for maintaining beneficial owner lists—is being addressed by the Ad Hoc Committee and also will be the subject of a separate NYSE rule change.

      To make the system work and to ensure that registrants find the beneficial owner lists useful and meaningful, the Ad Hoc Committee also determined that an intermediary was necessary. By employing an intermediary to compile and to supply beneficial owner lists, registrants will be assured that the lists are compiled in a standardized manner. Moreover, brokers will be assured that the source of the lists will be kept confidential. In addition, economies of scale will be realized by maximizing cost savings while minimizing burdens on brokers by permitting them to delegate this function to an intermediary . The Ad Hoc Committee requested proposals and selected Independent Election Corporation of America (IECA) to serve as the intermediary between registrants and brokers in supplying lists of beneficial owners. IECA will be governed by a user board consisting of registrants, brokers and other industry representatives.

      At the time of the deferral of the effective date of Rule 14b-l(c), the Commission agreed to clarify certain aspects of the shareholder communication rules and take certain additional steps which are the subject of this release.

      Ultimate effectiveness and utility of the shareholder communications rules will require enactment of legislation authorizing the Commission to regulate the proxy processing activities of banks, associations and other entities. During the 98th Congress, legislation, entitled the Shareholder Communications Act of 1984, was introduced in both houses of Congress. The legislation was reported out of the House Energy and Commerce Committee on August 2, 1984. No other action was taken in either the House or Senate with respect to the legislation. On March 20, 1985, Representatives Wirth and Rinaldo introduced in the House of Representatives the Shareholder Communications Act of 1985 (H.R. 1603). It is anticipated that the legislation shortly will be reintroduced in the Senate.

      II. Overview of Proposals

      Currently, Rule 14a-3(d) requires registrants whose securities are held by beneficial owners to take certain steps to ensure proxy solicitation material is forwarded by brokers to beneficial owners. These steps include requesting, by the use of search cards, the number of proxies and otherproxy soliciting material needed by record holders to forward the material to beneficial owners. The registrant must request this information 20 calendar days prior to the record date of the annual meeting.8 The broker is required to respond to this request within seven business days of receipt of the request.9 Upon receipt of the proxy, proxy soliciting material or annual reports, the broker is required to forward these materials to its customers who are beneficial owners within five business days of receipt.10 Further, brokers are required to provide a requesting registrant with a list of its customers who are non-objecting beneficial owners of the registrant's securities. That list, which is to be compiled as of the registrant's record date for its latest annual meeting, must be provided to registrants only one time per year.

      For simplicity, the Commission has set forth the registrant's obligations in proposed Rule 14a-13, and the proposed revisions to Rule 14b-l would pertain only to brokers' obligations in connection with communicating information to beneficial owners. The system, as proposed to be changed, would require that, if the registrant requests a list of beneficial owners who do not object to the disclosure of their identity, it must make the request of all brokers having customers who are beneficial owners of the registrant's securities. Further, a registrant could request the beneficial owner information more often than once a year and the broker would be required to comply with any such request. The lists would be compiled at least as often as the record date for the registrant's latest annual or special meeting. If no meeting is scheduled and the registrant requests a list of beneficial owners from record holders, that list would be compiled as of a date not earlier than ten business days after the broker receives the registrant's request. For example, if no annual or special meeting is scheduled and the broker receives a registrant's request for the list of beneficial owners on April 10, 1983, the list would be compiled as of a date no earlier than ten business days later or April 24, 1985. This last requirement is necessitated by the fact that brokers' back office systems do not permit the retroactive establishment of beneficial owner lists, but rather, allow those lists to be established prospectively.

      The proposed amendments further provide that, if it chooses, the registrant may mail annual reports directly to beneficial owners so long as the registrant notifies the broker when making its initial request for beneficial owner information that the registrant intends to mail the annual report directly to its non-objecting beneficial owners. The registrant would notify the broker of its intention at the time it submits a search card requesting the beneficial owner information. If so notified by the registrant, a broker would have no obligation in connection with that mailing to forward the annual report to non-objecting beneficial owners but would have, of course, the obligation to forward reports to those beneficial owners who objected to the disclosure of their identities.

      Finally, the proposed amendments would provide that, without assurances of reimbursement of reasonable expenses associated with satisfying its obligations with respect to communications with the beneficial owners, a broker has no obligation to perform its obligations under Rule 14b-1. The registrant would have a corresponding obligation to pay a broker's reasonable expenses associated with providing beneficial owner information.

      III. Discussion of Proposals

      A. Obligation of registrants in communicating with beneficial owners. Proposed Rule 14a-13, a registrant-related corollary to Rule 14b-l, delineates a registrant's obligations in communicating with its beneficial owners and would work in tandem with present Rule 14b-l.

      First, provisions of present Rule 14a-3(d) would be moved to new Rule 14a-13(a) in order to place all of the registrant-related provisions together. Paragraph (d) of Rule 14a-3(d) would become paragraph (a) of proposed Rule 14a-13 and would be amended to require registrants to request and to provide record holders with the number of copies of proxy, proxy soliciting material and annual reports to security holders necessary to supply beneficial owners. These proposed amendments recognize that record holders need not forward the annual report to those non-objecting beneficial owners with whom the registrant intends to communicate directly. Thus, if a registrant has indicated to the record holder that it wishes to communicate directly with non-objecting beneficial owners, then the record holder need only inform the registrant how many copies of the proxy soliciting material and annual reports are needed for forwarding to objecting beneficial owners. Similarly, if a registrant does not indicate that it intends to communicate directly with beneficial owners, the record holder then will inform the registrant of the number of copies needed for all beneficial owners.

      Proposed paragraph (b)(l) would require a registrant to request the list of non-objecting beneficial owners from all brokers having customers who are beneficial owners of the registrant's securities. This requirement would ensure that registrants do not request the security holder lists only from the largest brokers thereby leaving the smaller brokers with no means of recouping expenses associated with maintaining the required information.

      Proposed Rule 14a-13(b)(2) would continue unchanged the statement in present Rule 14b-l(c) regarding a registrant's exclusive use of the beneficial ownership lists for purposes of corporate communications. The Commission believes that this provision adequately addresses the securities industry's concerns regarding the issue of confidentiality. Moreover, the Commission notes that the identity of the individual brokers who provide the information to be compiled in the beneficial owner lists will be kept confidential by the intermediary's excision of all information identifying specific brokers.

      In connection with registrants' use of beneficial owner lists for purposes of forwarding to security holders certain other corporate communications such as quarterly reports, the Commission wishes to encourage voluntary communication with security holders. In this regard, the Commission believes it would be desirable that, where registrants use the non-objecting beneficial owner lists to mail such communications directly to non-objecting beneficial owners, they also deliver to brokers for forwarding a sufficient number of copies of the corporate communication in order not to disadvantage those security holders who object to disclosure of their identities to registrants.

      Finally, proposed paragraph (b)(3) would place on the registrant the obligation to pay the reasonable expenses of brokers associated with providing beneficial owner information.

      Proposed paragraph (c) would allow registrants to mail directly the annual reports to security holders to those beneficial owners that have been identified to them. Any registrant choosing to do its own annual report mailing, however, would be required to so inform the broker at the time it submitted, pursuant to paragraph (a), a search card to the broker requesting the beneficial owner information, and, further, would have the responsibility of ensuring that the annual report precede the proxy statement.

      The Commission is aware that, for reasons of economy, registrants may wish to engage in split mailing, i.e., forwarding the annual report by bulk mail and mailing the proxies and other proxy soliciting material by first class mail. In this connection, questions have arisen concerning compliance with Rule 14a-3(b) which requires annual reports to accompany or precede the proxy statement.11 The Commission does not wish to discourage the practice of split mailing which will result in savings to the registrant and ultimately redound to the benefit of security holders. Accordingly, compliance with the rule depends upon whether registrants take steps reasonably calculated 12 to guarantee that the annual report to security holders accompanies or precedes the proxy statement.13 In this connection, the Commission solicits specific comment as to whether Rule 14a-5 14 should be amended to provide that when annual reports to security holders are mailed separately from proxy material, all proxy statements shall disclose the date the mailing of the annual report to security holders was commended and shall contain instructions on how to obtain a copy of that annual report.

      B. 14b-l Obligation of registered brokers in connection with the prompt forwarding of certain communications to beneficial owners. The Commission proposes to amend Rule 14b-l in several respects. First, as noted above, registrant-related provisions have been moved to proposed Rule 14a-13. Second, proposed revisions to paragraph (c) relate to how often the broker's obligation to provide beneficial owner information to registrants arises. Under the present rule, a broker will be obligated to provide registrants only once a year a list of beneficial owners compiled as of the registrant's record date for its latest annual meeting of security holders.15 As proposed, a registrant could request the beneficial owner list whenever it wants and the broker, in response to that request, would respond to the request. In light of this change, paragraph (c) also would provide, in addition to stating that the list of beneficial owners is to be compiled as of the registrant's record date for its latest annual or special meeting of security holders, that if the request is not made in connection with a meeting, the list is to be compiled as of a date no earlier than ten days after receipt of the registrant's request. In connection with a broker's obligation to provide beneficial owner lists to a registrant, the Commission solicits specific comment on whether a time limit should be specified within which a broker is to provide the registrant with the requested list.

      Proposed paragraph (d) contains provisions relieving a broker of his obligations in two instances. The first instance relates to reimbursement. As the rule presently stands, brokers, are neither obligated to forward proxy soliciting material and annual reports to beneficial owners nor to provide registrants with beneficial owner lists without assurances of reimbursement of reasonable expenses. At present, the reimbursement provisions are placed separately in paragraphs (b) and (c). Because all obligations pursuant to the Rule relate to brokers' obligations to aid registrants to communicate with beneficial owners of their securities, the Commission proposes to place the separate reimbursement provisions in one paragraph.16 Accordingly, under proposed paragraph (d)(l). a broker's obligations under this Rule are contingent on assurances of reimbursement from the registrant of all reasonable expenses incurred in connection with the performance of those obligations.

      The second instance in which a broker would be relieved of his obligation relates to a broker's duty to deliver annual reports to security holders to beneficial owners. Proposed paragraph (d)(2) would relieve a broker of his obligation to mail the annual report to security holders identified by the broker and delivered in a list to the registrant so long as the registrant notifies the broker at the time it submits a search card, in accordance with Rule 14a-13(a), that it-intends to mail the annual report directly to those beneficial owners whose identity is disclosed.

      C. 14c-7 Providing copies of material for certain beneficial owners. The Commission also proposes to amend, in several respects, Rule 14c-7, which governs the forwarding of information statements to security holders. First, obligations imposed by the Rule on the registrant would be separated into separate paragraphs similar to those contained in proposed Rule 14a-13(a). Paragraph (a) involves the registrant's obligation to inquire of record holders the number of copies of the information statement and annual report to security holders needed to forward the material to beneficial owners. Paragraph (b) concerns the registrant's obligation to supply sufficient quantities of the information statement and annual report to security holders. Paragraphs (a) and (b) and note 3 would be amended further to recognize that record holders need not forward material to those non-objecting beneficial owners with whom the registrant intends to communicate directly.

      IV. Request for Comments

      Any interested persons wishing to submit written comments on the proposed revisions to the shareholder communication rules, as well as on other matters that might have an impact on the proposals contained herein, are requested to do so.

      The Commission also requests comment on whether the proposed revisions, if adopted, would have an adverse effect on competition or would impose a burden on competition that is neither necessary nor appropriate in furthering the purposes of the Exchange Act. Comments on this inquiry will be considered by the Commission in complying with its responsibilities under section 23(a)(2) of the Exchange Act.17

      V. Statutory Basis and Text of Proposed Amendments

      These amendments are being proposed pursuant to section 12,14,17 and 23(a) of the Securities Exchange Act of 1934.l8

      List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements Securities.

      VI. Text of Proposals

      In accordance with the foregoing Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:

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

      § 240.14a-3(d) [Amended]

      (1) By removing paragraph (d) including Notes 1 and 2 and redesignating paragraphs (e) and (f) as paragraphs (d) and (e) of § 240.14a-3(d).
      (2) By adding § 240.14a-13 to read as follows:

      § 240.14a-13 Obligation of registrants in communicating with beneficial owners.

      (a) If the registrant knows that securities of any class entitled to vote at a meeting with respect to which the registrant intends to solicit proxies, consents or authorization are held of record by a broker, dealer, bank or voting trustee, or their nominees, the registrant shall:
      (1) By first class mail or other equally prompt means, inquire of such record' holder whether other persons are the beneficial owners of such securities and, if so, the number of copies of the proxy and other soliciting material necessary to supply such material to beneficial owners; and, in the case of an annual meeting at which directors are to be elected, the number of copies of the annual report to security holders necessary to supply such material to beneficial owners if such reports are to be distributed by the broker, dealer, bank, voting trustee or their nominees;
      (2) Make the inquiry at least 20 calendar days prior to the record date of the meeting of security holders, or (i) if such inquiry is impracticable 20 calendar days prior to the record date of a special meeting, as many days before such meeting as is practicable or (ii) at such later time as the rules of a national securities exchange on which the class of securities in question is listed may permit for good cause shown; and
      (3) Shall supply the record holders of whom the inquiry is made with additional copies of the proxy, other proxy soliciting material, and/or the annual report to security holders if such report is to be distributed by the broker, dealer, bank, voting trustee or their nominees, in a timely manner, in such quantities, assembled in such form and at such a place, as the record holder may reasonably request in order to address and send one copy of each to each beneficial owner of securities so held and shall upon the request of such record holder, pay its reasonable expenses for completing the mailing of such material to record holders to whom the material is sent.

      Note 1.— If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to section 17A of the Act, the registrant shall make appropriate inquiry of the agency and thereafter of the participants in such agency who may hold on behalf of a beneficial owner, and shall comply with the above paragraph with respect to any such participant.

      Note 2.— The attention of registrants is called to the fact that broker-dealers have an obligation pursuant to § 240.14b-l and applicable self-regulatory requirements to obtain and forward (a) proxy soliciting materials, and (b) when requested by the registrant, annual reports to record holders, to beneficial owners to whom, such brokers hold securities.

      (b) Any registrant requesting pursuant to § 240.14b-l(c) a list of names, addresses and securities positions of beneficial owners of its securities who have not objected to disclosure of such information shall:
      (1) Request such list from all brokers having customers who are beneficial owners of the registrant's securities;
      (2) Use the information so furnished exclusively for purposes of corporate communications; and
      (3) Upon the request of such brokers, pay the reasonable expenses, both direct and indirect, of providing beneficial owner information.
      (c) A registrant, at its option, may mail its annual report to security holders to the beneficial owners whose identifying information is provided by brokers holders pursuant to § 240.14b-l(c), provided that such registrant notifies the brokers, at the time a search card requesting the beneficial owner information in compliance with paragraph (a) of this section is sent that the registrant will mail the annual report to security holders to the beneficial owners so identified.
      3. By revising § 240.14b-l to read as follows:

      § 240.14b-1 Obligation of registered brokers in connection with the prompt forwarding of certain communications to beneficial owners.

      A broker registered under section 15 of the Act shall:

      (a) Respond no later than seven business days after receipt of an inquiry made in accordance with § 240.14a- 13(a) by or on behalf of a registrant soliciting proxies, consents or authorization by indicating, by means of a search card or otherwise, the approximate number of its customers who are beneficial owners of the registrant's securities that are held of record by the broker or its nominees;
      (b) Upon receipt of the proxy, other proxy soliciting material, and/or annual reports to security holders, forward such materials to its customers who are beneficial owners of the registrant's securities no later than five business days after the receipt of the proxy material or annual reports; and
      (c) Provide the registrant, upon its request, with the names, addresses and securities positions, compiled at least as often as of the registrant's record date for its latest annual or special meeting of security holders, or, if not in connection with a meeting, no earlier than ten business days after receipt of the registrant's request of its customers who are beneficial owners of the registrant's securities and who have not objected to disclosure of such information.
      (d) A broker need not satisfy (1) its obligations under this section if a registrant does not provide assurance of reimbursement of the broker's reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by this section section; or (2) its obligation under paragraph (b) of this section to forward annual reports to beneficial owners if a registrant notifies the broker pursuant to § 240.14a-13(c) that the registrant will mail the annual report to non-objecting beneficial owners, identified by the broker and delivered in a list to the registrant pursuant to paragraph (c) of this section.
      4. By revising § 240.14c-7 to read as follows:

      § 240.14C-7 Providing copies of material for certain beneficial owners.

      If the registrant knows that securities of any class entitled to vote at a meeting are held of record by a broker, dealer, bank or voting trustee, or their nominees, the registrant shall:

      (a) Inquire of such record holder whether other persons are the beneficial owners of such securities and, if so, the number of copies of the information statement necessary to supply such material to beneficial owners and, in the case of an annual meeting at which directors are to be elected, the number of copies of the annual report to security holders, necessary to supply such material to such beneficial owners for whom proxy material has not been and is not to be made available if such reports are to be distributed by the brokers, dealer, bank, voting trustee or their nominees; and
      (b) Supply such record holder with additional copies of the information statement and the annual report to security holders, if such report is to be distributed by the broker, dealer, bank, voting trustee or their nominees, in such quantities, assembled in such form and at such a place, as the record holder may reasonably request in order to address and send one copy of each to each beneficial owner of securities so held and shall, upon the request of such record holder, pay its reasonable expenses for completing the mailing of such material to security holders to whom the material is sent.

      Note 1.—If the registrant's list of security holders indicates that some of its securities are registered in the name of "Cede & Co.", a nominee for the Depository Trust Company, or in the name of a nominee for any central certificate depository system, a registrant shall make appropriate inquiry of the central depository system and thereafter of the participants in such a system whom may hold on behalf of a beneficial owner, and to comply with the above rule with respect to any such participant.

      Note 2.—The requirement for sending and annual report to security holders of record having the same address will be satisfied by sending a least one report to a holder of record at that address provided that those holders of record to whom a report is not sent agree thereto in writing. This procedure is not available to registrants, however, where banks, broker-dealers and other persons hold securities in nominee accounts or "street names" on behalf of beneficial owners, and such persons are not relieved of any obligation to obtain or send such annual report to the beneficial owners.

      Note 3.— The attention of registrants is called to the fact that brokers have an obligation pursuant to § 240.14b-l and applicable self-regulatory requirements to obtain and forward, in a timely manner, (a) information statements, and (b) when requested by the registrant, annual reports to security holders to beneficial owners for whom such brokers hold securities.
      (Secs. 3,12,14,15(d), 17, 23(a), 48 Stat. 882, 892, 894, 895, 897, 901; secs. 6, 7, 8,10,19a, 48 Stat. 906, 908; sec. 203(a), 49 Stat. 704; secs. 5, 52 Stat. 1076; sec. 301, 54 Stat. 857; secs. 8, 202, 68 Stat. 685, 686; secs. 3, 4, 5, 6,10, 78 Stat. 565-68, 569, 570-74, 580; sec. 1, 79 Stat. 1051; sees. 1, 2, 3, 82 Stat. 454, 455; sees. 1, 2, 3-5, 28c, 84 Stat. 1435,1497; sec 105(b), 88 Stat. 1503; sees. 8, 9, 10, 11, 14, 18, 89 Stat. 117, 118,119,121,137,155; 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 78c, 787, 78l, 78n, 78g, 78w(al)

      By the Commission.

      Shirley E. Hollis,
      Assistant Secretary.

      March 28, 1985.

      Securities and Exchange Commission

      Regulatory Flexibility Act Certification

      I, John S.R. Shad, Chairman of the Securities and Exchange Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that proposed Rules 14a-13 and proposed amendments to Rule 14b-l and 14c-7, if promulgated, will not have a significant impact on a substantial number of small entities. The reasons for this certification are as follows: Proposed Rule 14a-13 provides guidance to, and establishes obligations of, registrants who wish to communicate directly with beneficial owners. Proposed Rule 14a-13(a), (present Rule 14a-13(d)), and Rule 14c-7 require a registrant to inquire of its record holders the number of proxies, other proxy soliciting material, or information statements necessary to forward to beneficial owners and to supply its record holders with the appropriate number of copies. This amendment neither increases nor decreases the cost or burden on a small entity registrant associated with complying with these obligations. Compliance with Rule 14a-13 (b) and (c) is voluntary in the sense that only registrants who choose to communicate directly with beneficial owners need comply with the Rule's requirements to request security holder lists from all brokers and to pay the reasonable expenses of brokers associated with providing beneficial owner lists. Accordingly, only those small entities who wish to communicate directly with their beneficial owners need incur the direct costs associated with Rule 14a-13 (b) and (c). Small entity registrants will be required, however, to reimburse brokers for startup costs associated with furnishing the beneficial owner informaiton, at the rate of $.20 per proxy for this year's annual proxy solicitation and at a rate sufficient to cover the remaining start-up costs for next year's annual meeting proxy solicitation.

      Rule 14b-l establishes the obligations of brokers in connection with forwarding communications to beneficial owners. Proposed amendments to paragraph (c) would require a broker, at the registrant's request, to compile the list of beneficial owners more often than one time per year. This amendment will impose no additional cost on small entities. Proposed paragraph (d) provides that a broker's performance of obligations imposed by the Rule is contingent on assurances of reimbursement from the registrant of all reasonable expenses incurred in connection with performing the obligations imposed by the Rule. Proposed paragraph (d) which also specifies that a broker has no obligation to mail the annual report to security holders if the registrant notifies the broker that it intends to mail the annual report directly to those beneficial owners whose identity is disclosed to the registrant, will impose no additional cost on small brokers subject to the Rule.

      Dated: March 28, 1985.
      John S.R. Shad.
      Chairman.

      [FR Doc. 85-7954 Filed 4-4-85; 8:45 am]

      BILLING CODE 8010-01-M


      1 17 CFP 240.14b-l

      2 17 CFR 240.14c-7.

      3 Release No. 34-21339 (September 21, 1984) |49 FR 38096)].

      4 Release No. 34-20021 (July 28, 1983) [48 FR 35082).

      5 Release No. 34-21339 (September 21, 1984) {49 FR 38096).

      6 Release No. 34-21702 (February 1, 1985) (50 FR 5460].

      7 Release No. 34-21900 (March 28, 1985).

      8 17 CFR 240.14a-3(d)

      9 17 CFR 240.14b-l(a)

      10 17 CFR 240.14b-l(b).

      11 In Ash v. GAF Corp., 723 F.2d 1090, 1094 (3d Cir. 1983), the Third Circuit held that sending the annual report by third class mail 4 to 5 days prior to mailing the proxy statement by first class mail "did not reasonably guarantee that shareholders would receive the annual report at the same time or before the proxy materials. In fact, the procedure made it highly probable that shareholders would receive the annual report after they had received the proxy materials."

      12 The Commission is aware that, depending on the geographic location of specific post offices, the length of time in which it takes bulk mail to reach its intended destination may vary greatly.

      13 Registrants who request record holders to engage in split mailing retain responsibility for ensuring compliance with Rule 14a-3(b).

      14 17CFR240.14a-5.

      15 Release No. 34-20021 duly 23.19831148 FR 35082].

      16 In this regard, see discussion on pp. 4-5. supra. concerning the NYSE proposed rule change permitting brokers to fund start-up costs by assessing a surcharge per proxy solicitation.

      17 15 U.S.C. 78w(a)(2).

      18 15 U.S.C. 79l, 78n. 78g. and 78w(a).


    • 85-29 Compensation Received in Connection with Direct Participation Programs

      TO: All NASD Members and Other Interested Persons

      ATTN: Direct Participation Programs Department

      The NASD's Direct Participation Programs and Real Estate Committees have reviewed certain information received from members and their affiliates through the review process carried out by the NASD Corporate Financing Department. The Committees reviewed the costs associated with issuing and distributing direct participation program securities, specifically, the allocation of offering costs between underwriting compensation and the issuer's organization and offering expenses. The purpose of this notice is to inform the membership and sponsors of direct participation programs of the Committees' findings and to clarify the application of NASD compensation guidelines in certain areas.

      Background

      On October 19, 1982, the NASD published Notice to Members 82-50, which announced the adoption of Appendix F to Article III, Section 34 of the NASD's Rules of Fair Practice. Appendix F applies to public offerings of direct participation programs and, among other things, provides that underwriting compensation from any source may not exceed Association guidelines. In addition, where a program sponsor is affiliated with an NASD member distributing the program, the issuer's organization and offering expenses payable from offering proceeds or program distributions may not exceed Association guidelines. Simultaneously, the Association published Notice to Members 82-51, which announced the Association's guidelines on underwriting compensation and organization and offering expenses referenced in Appendix F. Underwriting compensation may not exceed 10 percent of the gross proceeds of the offering, regardless of the source, with the exception that up to an additional 0.5 percent may be reimbursed to underwriters for bona fide due diligence expenses. Where a sponsor is affiliated with a distributing NASD member, the issuer's organization and offering expenses may not exceed 15 percent of the proceeds of the offering, which includes the 10 percent underwriting compensation. Organization and offering expenses in excess of 15 percent may be paid from sources other than the program or its offering proceeds. While the 10 percent limitation on underwriting compensation is applied to all public direct participation programs, the 15 percent limitation on organization and offering expenses is only applied to sponsors that are affiliated with NASD members. Organization and offering expenses ordinarily include legal, printing, accounting and other fees of the issuer attributable to the preparation of a program for registration and subsequently offering interests to the public.

      Discussion

      Compensation arrangements reviewed by the Department are for the most part properly allocated between underwriting compensation and organization and offering expenses. There are four areas, however, in which the Committees believe clarification of the Association's application of Appendix F and, in some instances, the federal securities laws is required. These areas are wholesaling, due diligence reimbursement, advertising and sales literature, and retail seminars.

      Wholesaling

      The issues surrounding wholesaling are long-standing and have frequently arisen in the Association's review of direct participation program offerings. Where contacts with the broker-dealer community are made by bona fide employees of the issuer who do not perform wholesaling activities on a regular basis, without transaction-based compensation and incidental to their other duties and responsibilities, such persons generally are not required to register as broker-dealers. A problem arises, however, when the sponsor assigns the responsibility for contact between the issuer and the retail brokerage community to full-time specialists. The sponsor often assigns these persons geographic areas of responsibility and provides compensation in the form of salary or commissions based on the sales levels that occur within their areas of responsibility.

      The information gathered by the Department has been useful in identifying when this occurs. The Department has found such wholesaling activities within both the sponsor and the general partner. In addition, a number of programs have been reviewed where a sponsor that maintains internal wholesaling capabilities has an NASD member affiliate as well. In this event, the Department found that the wholesaling expenses of the sponsor are not properly allocated by the sponsor to underwriting compensation, but are attributed solely to the sponsor's organization and offering expenses.

      When the Department determines that such a wholesaling function exists within the sponsor or general partner, the Department will request that the Securities and Exchange Commission be contacted to determine whether the individuals are required to be registered as broker-dealers under the Securities Exchange Act of 1934. If the sponsor has an NASD member affiliate, the individuals will be requested to register with the member. In any event, the Department will include all salaries, expense reimbursements, bonuses and other forms of compensation associated with the wholesaling function in the 10 percent guideline on underwriting compensation.

      Due Diligence

      A second area needing clarification involves the proper allocation of due diligence expenses. Appendix F permits an additional 0.5 percent due diligence expense reimbursement above the 10 percent maximum on underwriting compensation. Many sponsors appear to misunderstand the activities that are properly included within the due diligence expense reimbursement. The Department observed, for example, that sales incentive vacations awarded to top producers at the close of the offering were allocated to due diligence. If this occurs, the Department will exclude such expenses from the additional 0.5 percent allowed for bona fide due diligence and reallocate such payments as incentive compensation subject to Sections 5(e) and (f) of Appendix F and the 10 percent underwriting compensation guideline.

      The proper characterization of due diligence expenditures that may exceed the 10 percent limitation by 0.5 percent includes reimbursable expenses incurred by a member in affirmatively discharging its responsibility pursuant to Section 4 of Appendix F to ensure that all material facts pertaining to the program are adequately and accurately disclosed in the prospectus. If travel is necessary to discharge this obligation, it would ordinarily be undertaken by the responsible officials of the member to the partnership offices to verify the information provided to the member. Expenses associated with travel by the issuer's officials to due diligence meetings are, on the other hand, allocated to the issuer's organization and offering expenses.

      Advertising and Sales Literature

      A third area involves the proper characterization of the expenses of advertising materials generated to promote the sale of the sponsor's securities. Generally, sponsors wish to maintain control over the accuracy and the consistency with the prospectus of their advertising disseminated to the public. In most programs, the costs associated with creating advertising and sales promotion literature are borne by the sponsor. Therefore, the sponsor's advertising and promotional material expenses are allocated to the issuer's organization and offering expenses. However, supplemental sales literature generated by the broker-dealer with the associated costs reimbursed by the sponsor are required to be allocated to underwriting compensation and are subject to the 10 percent guideline.

      Retail Seminars

      The last issue involves the proper allocation of expenses for retail seminars. Generally, a sponsor's expenses for retail seminars are not included in underwriting compensation. Sponsor's expenses in this regard are normally related to officials of the sponsor appearing at seminars for the purpose of explaining the details of the program. However, any reimbursement by the sponsor of the expenses of broker-dealers for their activities at such seminars is allocated to the broker-dealer as underwriting compensation and included in the 10 percent guideline.

      * * * *

      The NASD hopes that this notice will aid the membership and sponsors by providing clarification of the policies of the Corporate Financing Department in its review of underwriting arrangements in direct participation program offerings. Any comments or questions regarding this notice should be directed to Richard J. Fortwengler or Larry M. Worrell of the NASD's Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

    • 85-28 Collins Securities Corporation 400 Tower Building Fourth & Center Streets Little Rock, Arkansas

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On April 16, 1985, the Federal District Court for the Eastern District of Arkansas appointed a Temporary Receiver for the above-captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59 (i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12 (h)(iii) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      Temporary Receiver

      Harvey L. Bell, Esquire
      Bell, Bilheimer & Associates, P. A.
      902 West Second Street
      Little Rock, Arkansas 72201
      Telephone: (501) 376-1600

    • 85-27 Approval of Recodified By-Laws and New Code of Procedure

      IMPORTANT

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members and Other Interested Persons

      The Securities and Exchange Commission has approved a recodification of the NASD By-Laws 1/ and a revised Code of Procedure. 2/ The text of these amendments, which were effective upon approval by the Commission, 3/ is attached.

      Over the past several years, the Association's Ad Hoc Committee on Rules and By-Law Amendments has been working to revise the NASD By-Laws, Code of Procedure and Rules of Fair Practice to clarify language, delete obsolete passages, codify new procedures, and incorporate changes necessitated by amendments to the Securities Exchange Act of 1934. The intention of these revisions has not been to make major substantive changes but to clarify all NASD regulations and make the NASD Manual easier to understand and use. There are, however, several key changes that merit attention.

      The amended Code of Procedure provides for the establishment of a new Market Surveillance Committee to review examinations conducted by the NASD Market Surveillance Section 4/ The Committee will have many of the same functions as a District Business. Conduct Committee and will conduct hearings, render decisions, and impose appropriate disciplinary actions. The NASD established this Committee for two principal reasons:

      • to ensure that cases involving market-type violations are reviewed by members of a committee with expertise and experience in handling such matters; and
      • to ensure that all investigations, including those that do not uncover any apparent rule violations, are presented to a member-controlled committee for disposition.

      The Market Surveillance Committee will review alleged violations involving such things as market manipulation, improper trade reporting, and insider trading irrespective of where the alleged violation occurs throughout the country.

      The Code of Procedure has also been expanded to cover most of the proceedings conducted by the Association. Part XI of Schedule C and Parts VI, VII, VIII, IX, and X of Schedule D have been deleted and the substance of these provisions has been included in the Code of Procedure. 5/ The Code therefore now deals with not only disciplinary proceedings but also proceedings related to the NASDAQ System and NASD membership and qualification requirements. Hearings under the Interpretation of the Board of Governors—Review of Corporate Financing, Schedule E to the By-Laws, and Article III, Section 34 of the Rules of Fair Practice are not included, however. The latter group of hearings are dealt with in the new corporate financing rule which is awaiting SEC approval-Proceedings under the Uniform Practice Code and the Code of Arbitration Procedure also remain intact.

      All of these changes will be reflected in the April 1985 supplement to the NASD Manual to be published by Commerce Clearing House during the last week of April. The attached text of these changes is effective immediately and should be retained until the manual is updated. Additional copies of this notice to members may be obtained by sending a self-addressed mailing label to;

      Office of Administrative Services
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006.

      Comments or questions concerning these changes may be directed to Dennis C. Hensley, Vice President and Deputy General Counsel, or Edward R. Venit, Senior Attorney, Office of General Counsel at (202) 728-8294.

      Very truly yours,

      Frank J.Wilson
      Executive Vice President and General Counsel

      Attachments

      TABLE OF CONTENTS

      BY-LAWS

         

      Page

      ARTICLE I

      DEFINITIONS

      1

      ARTICLE II

      QUALIFICATIONS OF MEMBERS AND ASSOCIATED PERSONS

      Section

         

      1.

      Persons Eligible to Become Members and Associated Persons of Members

      3

      2.

      Authority of Board to Adopt Qualification Requirements

      3

      3.

      Ineligibility of Certain Persons for Membership or Association

      3

      4.

      Definition of Disqualification

      5

      ARTICLE III

      MEMBERSHIP

      Section

         

      1.

      Application for Membership

      6

      2.

      Similarity of Membership Names

      7

      3.

      Executive Representative

      7

      4.

      Membership Roll

      8

      5.

      Resignation of Members

      8

      6.

      Transfer and Termination of Membership

      8

      7.

      Registration of Branch Offices

      9

      8.

      Vote of Branch Offices

      9

      9.

      District Committees' Right to Classify Branches Branches

      9

      ARTICLE IV

      REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS

      Section

         

      1.

      Qualification Requirements

      9

      2.

      Application for Registration

      9

      3.

      Notification by Member to Corporation of Termination

      10

      4.

      Retention of Jurisdiction

      10

      ARTICLE V

      AFFILIATES

      Section

         

      1.

      Qualifications for Affiliation

      11

      2.

      Application for Admission as Affiliate

      11

      3.

      Agreement of Affiliate

      11

      4.

      Conditions of Affiliation

      12

      5.

      Approval of Admission as an Affiliate

      12

      6.

      Suspension or Cancellation of Affiliation

      12

      7.

      Exclusion of Territory Covered by Affiliated Association

      12

      ARTICLE VI

      DUES, ASSESSMENTS AND OTHER CHARGES

      Section

         

      1.

      Power of Board to Fix and Levy Assessments

      13

      2.

      Reports of Members

      13

      3.

      Suspension or Cancellation of Membership for Non-Payment of Dues

      13

      4.

      Reinstatement of Membership

      13

      ARTICLE VII

      BOARD OF GOVERNORS

      Section

         

      1.

      Powers and Authority of Board of Governors

      14

      2.

      Authority to Suspend for Failure to Submit Required Information

      15

      3.

      Composition of Board

      15

      4.

      Term of Office of Governors

      16

      5.

      Succession to Office

      16

      6.

      Election of Board Members

      16

      7.

      Filling of Vacancies on Board

      18

      8.

      Meetings of Board

      18

      9.

      Offices of Corporation

      18

      ARTICLE VIII

      DISTRICT COMMITTEES

      Section

         

      1.

      Administrative Districts

      18

      2.

      District Committees and District Business Conduct Committees

      19

      3.

      Term of Office of District Committee Members

      19

      4.

      Election of District Committee Members

      19

      5.

      Filling of Vacancies on District Committees

      20

      6.

      Meetings of District Committees

      21

      7.

      Election of Chairmen and Other District officers

      21

      8.

      Advisory Council

      21

      9.

      Expenses of District Committees

      21

      10.

      District Committees Agencies of Corporation

      21

      11.

      Certain Functions of District Committees

      22

      ARTICLE IX

      NOMINATING COMMITTEES

      Section

         

      1.

      Composition of Nominating Committees

      22

      2.

      Term of Office of Nominating Committee Members

      22

      3.

      Election of Nominating Committees

      22

      4.

      Filling of Vacancies for Nominating Committees

      24

      5.

      Meetings of Nominating Committees

      24

      6.

      Election of Chairman and Other Nominating Committee Officers

      24

      ARTICLE X

      OFFICERS AND EMPLOYEES

      Section

         

      1.

      Election of Officers of the Board

      24

      2.

      Officers of the Corporation

      25

      3.

      Absence of President

      25

      4.

      Employment of Counsel

      25

      5.

      Administrative Staff

      25

      6.

      Restrictions on Compensation of Board and Committee Members

      25

      ARTICLE XI

      COMMITTEES

      Section

         

      1.

      National Standing Committees

      26

      2.

      District Standing Committees

      26

      3.

      Removal of Committee Member

      26

      4.

      Executive Committee

      26

      ARTICLE XII

      RULES OF FAIR PRACTICE

      26

      ARTICLE XIII

      DISCIPLINARY PROCEEDINGS

      27

      ARTICLE XIV

      POWER OF BOARD TO PRESCRIBE SANCTIONS

      28

      ARTICLE XV

      UNIFORM PRACTICE CODE

      Section

         

      1.

      Authority to Adopt Code

      29

      2.

      Administration of Code

      29

      3.

      Transactions Subject to Code

      29

      ARTICLE XVI

      LIMITATION OF POWERS

      Section

         

      1.

      Prohibitions

      29

      2.

      Use of Name of Corporation by Members

      30

      3.

      Unauthorized Expenditures

      30

      4.

      Conflicts of Interest

      30

      5.

      Municipal Securities

      30

      ARTICLE XVII

      PROCEDURE FOR ADOPTING AMENDMENTS TO BY-LAWS

      30

      ARTICLE XVIII

      CORPORATE SEAL

      31

      ARTICLE XIX

      CHECKS

      31

      ARTICLE XX

      ANNUAL FINANCIAL STATEMENT

      31

      BY-LAWS *

      ARTICLE I

      DEFINITIONS

      When used in these By-Laws, and any rules of the Corporation, unless the context otherwise requires, the term:

      (a) "Act" means the Securities Exchange Act of 1934, as amended;
      (b) "bank" means (1) a banking institution organized under the laws of the United States, (2) a member bank of the Federal Reserve System, (3) any other banking institution, whether incorporated or not, doing business under the laws of any state or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those per mitted to national banks and which is supervised and examined by a State or Federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of the Act, and (4) a receiver, conservator, or other liquidating agent of any institution or firm included in clauses (1), (2) or (3) of this subsection;
      (c) "branch office" means an office located in the United States which is owned or controlled by a member, and which is engaged in the investment banking or securities business;
      (d) "broker" means any individual, corporation, partnership, asso ciation, joint stock company, business trust, unincorporated organization or other legal entity engaged in the business of effecting transactions in securities for the account of others, but does not include a bank;
      (e) "Commission" means the Securities and Exchange Commission;
      (f) "Corporation" means the National Association of Securities Dealers, Inc.;
      (g) "dealer" means any individual, corporation, partnership, associ ation, joint stock company, business trust, unincorporated organization or other legal entity engaged in the business of buying and selling securities for his own account, through a broker or otherwise, but does not include a bank, or any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary capacity, but not as part of a regular business;
      (h) "investment banking or securities business" means the business, carried on by a broker, dealer, or municipal securities dealer (other than a bank or department or division of a bank) of underwriting or distributing issues of securities, or of purchasing securities and offering the same for sale as a dealer, or of purchasing and selling securities upon the order and for the account of others;
      (i) "member" means any broker or dealer admitted to membership in the Corporation;
      (j) "municipal securities" means securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond as defined by Section 3(a)(29) of the Act;
      (k) "municipal securities broker" means a broker, except a bank or department or division of a bank, engaged in the business of effecting transactions in municipal securities for the account of others;
      (l) "municipal securities dealer" means any person, except a bank or department or division of a bank, engaged in the business of buying and selling municipal securities for his own account, through a broker or otherwise, but does not include any person insofar as he buys or sells securities for his own account either individually or in some fiduciary capacity but not as a part of a regular business;
      (m) "person associated with a member" or "associated person of a member" means every sole proprietor, partner, officer, director, or branch manager of any member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member, whether or not any such person is registered or exempt from registration with the Corporation pursuant to these By-Laws;
      (n) "registered broker or dealer" or "municipal securities broker or dealer" means any broker, dealer or municipal securities broker or dealer which is registered with the Commission under the Act;
      (o) "rules of the Corporation" means all rules of the Corporation including the Certificate of Incorporation, By-Laws, Rules of Fair Practice, Code of Procedure, Uniform Practice Code, and any Interpretations thereunder.

      ARTICLE II

      QUALIFICATIONS OF MEMBERS AND ASSOCIATED PERSONS

      Persons Eligible to Become Members and Associated Persons of Members

      Sec. 1. (a) Any registered broker, dealer or municipal securities broker or dealer authorized to transact, and whose regular course of business consists in actually transacting, any branch of the investment banking or securities business in the United States, under the laws of the United States, shall be eligible for membership in the Corporation, except such registered brokers, dealers or municipal securities brokers or dealers which are excluded under the provisions of Sections 3(a) or (b) of this Article.

      (b) Any person shall be eligible to become an associated person of a member, except such persons who are excluded under the provisions of Section 3(b) of this Article.

      Authority of Board to Adopt Qualification Requirements

      Sec. 2. (a) The Board of Governors shall have authority to adopt rules and regulations applicable to applicants for membership, members and persons associated with applicants or members establishing specified and appropriate standards with respect to the training, experience, competence and such other qualifications as the Board of Governors finds necessary or desirable, and in the case of an applicant for membership or a member, standards of financial responsibility or operational capability.

      (b) In establishing and applying such standards, the Board of Go vernors may classify members and persons associated with such members, taking into account relevant matters, including the nature, extent and type of business being conducted and of securities sold, dealt in, or otherwise handled. The Board of Governors may specify that all or any portion of such standards shall be applicable to any such class and may require the persons in any such class to be registered with the Corporation.
      (c) The Board of Governors may from time to time make changes in such rules, regulations and standards as it deems necessary or appropriate. Neither the adoption nor any change in such standards needs be submitted to the member ship for approval and such rules, regulations and standards as adopted or amended shall become effective at such time as the Board of Governors may prescribe.

      Ineligibility of Certain Persons for Membership or Association

      Sec. 3. (a) No registered broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if such broker, dealer,or municipal securities broker or dealer or member fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such broker, dealer, municipal securities broker or dealer or member is or becomes subject to a disqualification under Section 4 of this Article.

      (b) No person shall become associated with a member, or continue to be associated with a member, or transfer association to another member, if such person fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such person is or becomes subject to a disqualification under Section 4 of this Article; and no broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership if any person associated with it is ineligible to be an associated person under this subsection.
      (c) If it deems it appropriate, the Board of Governors, upon notice and opportunity for a hearing, may cancel the membership of a member if it be comes ineligible for continuance in membership under subsection (a) hereof, may suspend or bar a person from continuing to be associated with any member if such person is or becomes ineligible for association under subsection (b) hereof, and may cancel the membership of any member who continues to be associated with any such ineligible person.
      (d) Any broker, dealer or municipal securities dealer which is ineli gible for admission into membership, or any member which is ineligible for con tinuance in membership, may file with the Board of Governors an application requesting relief from the ineligibility, pursuant to procedures adopted by the Board of Governors and contained in the Corporation's Code of Procedure. The Board of Governors may, in its discretion, approve the admission or continuance of an appli cant or member, or the association of any person, if the Board determines that such . approval is consistent with the public interest and the protection of investors. Any approval hereunder may be granted unconditionally or on such terms and conditions as the Board considers necessary or appropriate. In the exercise of the authority granted hereunder, the Board of Governors may:
      (1) conduct such inquiry or investigation into the relevant facts and circumstances as it, in its discretion, considers necessary to its determination, which, in addition to the background and circumstances giving rise to the failure to qualify or disqualification may include the proposed or present business of an appli cant for membership or of a member and the conditions of association of any pro spective or presently associated person, among other matters;
      (2) permit, in limited types of situations, a membership or association with a member pending completion of its inquiry or investigation, and its final determination, based upon a consideration of relevant factors, and may classify situations taking into account the status of brokers, dealers and municipal securities brokers and dealers as applicants or existing members and of persons as prospective or presently associated persons of members; the type of disqualification or failure to qualify; whether a member or associated person has been the subject of a previous approval and the terms and conditions thereof; and any other relevant factors; and
      (3) delegate any of its functions and authority under this sub section (d) to appropriate committees of the Corporation or to Corporation staff members.
      (e) An application filed under subsection (d) hereof shall not fore close any action which the Board of Governors is authorized to take under subsec tion (c) hereof until approval has been granted.
      (f) Approval by the Board of Governors of an application made under subsection (d) shall be subject to whatever further action the Commission may take pursuant to authority granted to the Commission under the Act.

      Definition of Disqualification

      Sec. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person:

      Commission and Self-Regulatory Organization Disciplinary Sanctions

      (a) has been and is expelled or suspended from membership or participation in, or barred or suspended from being associated with a member of, any self-regulatory organization;
      (b) is subject to an order of the Commission denying, suspending or revoking its registration as a broker, dealer, or municipal securities dealer (in cluding a bank or department or division of a bank) or barring or suspending him from being associated with a broker, dealer, or municipal securities dealer (in cluding a bank or department or division of a bank);
      (c) by his conduct while associated with a broker, dealer, or muni cipal securities dealer (including a bank or department or division of a bank) has been found to be a cause of any effective suspension, expulsion or order of the character described in subsections (a) or (b) of this Section; or
      (d) has associated with him any person who is known, or in the exer cise of reasonable care should be known, to him to be a person described in subsec tions (a), (b), or (c) of this Section.

      Misstatements

      (e) has willfully made or caused to be made in any application for membership in the Corporation, or to become associated with a member of the Corporation, or in any report required to be filed with the Corporation, or in any proceeding before the Corporation, any statement which was at the time, and in light of the circumstances under which it was made, false, or misleading with respect to any material fact, or has omitted to state in any such application, report or proceeding any material fact which is required to be stated therein;

      Convictions

      (f) has been convicted within ten years preceding the filing of any application for membership in the Corporation, or to become associated with a member of the Corporation, or at any time thereafter of any felony or misde meanor which;
      (1) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, or conspiracy to commit any such offense;
      (2) arises out of the conduct of the business of a broker, dealer, municipal securities dealer, investment adviser, bank insurance company or fidu ciary;
      (3) involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities; or
      (4) involves the violation of Sections 152, 1341, 1342, or 1343 or Chapters 25 or 47 of Title 18, United States Code; or

      Injunctions

      (g) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, dealer, or municipal securities dealer (including a bank or department or division of a bank), or as an affiliated person or employee of any investment company, bank, or insurance company, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security.

      ARTICLE III

      MEMBERSHIP

      Application for Membership

      Sec. 1. (a) Application for membership in the Corporation, properly signed by the applicant, shall be made to the Corporation, on the form to be prescribed by the Corporation, and shall contain:

      (1) an acceptance of and an agreement to abide by, comply with, and adhere to, all the provisions, conditions, and covenants of the Certificate of Incorporation, the By-Laws, the rules and regulations of the Corporation as they are or may from time to time be adopted, changed or amended, and all rulings, orders, directions and decisions of, and sanctions imposed by, the Board of Gover nors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board, provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as pro vided in the Act;
      (2) an agreement to pay such dues, assessments, and other charges in the manner and amount as shall from time to time be fixed by the Board of Governors pursuant to these By-Laws;
      (3) an agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any district or other committee, shall be liable, except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer or member of the Board of Governors or of any district or other committee, in his official capacity, or by any employee of the Corporation while acting within the scope of his employment or under instruction of any officer, board, or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the rules of the Corporation as they are or may from time to time be adopted, or amended, or any ruling, order, directive, decision of, or penalty imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rule-making Board; and
      (4) such other reasonable information with respect to the applicant as the Board of Governors may require.
      (b) Any application received by the Corporation shall be referred to the District Committee of the district in which the applicant has his principal place of business, and if a majority of the members of such District Committee deter mine that the applicant has satisfied all of the admission requirements of the By- Laws, it shall recommend the applicant's admission to membership and promptly notify the Secretary of the Corporation of such recommendation.
      (c) If a majority of the members of such District Committee deter mine that the applicant fails to satisfy all of the admission requirements of the By- Laws, it shall promptly notify the Secretary of the Corporation who shall thereafter take appropriate action as of the date when posted to the membership roll.
      (d) Each member shall ensure that its membership application with the Corporation is kept current at all times by supplementary amendments to the original application.

      Similarity of Membership Names

      Sec. 2. (a) No person or firm shall be admitted to or continued in membership in the Corporation having a name which is identical to the name of another member appearing on the membership roll of the Corporation or a name so similar to any such name as to tend to confuse or mislead;

      (b) No member may change its name without the prior approval of the Corporation.

      Executive Representative

      Sec. 3. Each member shall appoint and certify to the Secretary of the Corporation one "executive representative" who shall represent, vote and act for the member in all the affairs of the Corporation, except that other executives of a member may also hold office in the Corporation, serve on the Board of Governors or committees of the Corporation, or otherwise take part in the affairs of the Corporation. A member may change its executive representative upon giving written notice thereof to the Secretary, or may, when necessary, appoint, by written notice to the Secretary, a substitute for its executive representative. An executive representative of a member or a substitute shall preferably be an executive officer of the member, if a corporation, a partner in case of a partnership, and the member himself if an individual, but he may be an employee of the member, if given authority to act for the member in the course of the Corporation's activities.

      Membership Roll

      Sec. 4. The Secretary of the Corporation shall keep a currently accurate and complete membership roll, containing the name and address of each member, and the name and address of the executive representative of each member. In any case where a membership has been terminated, such fact shall be recorded, together with the date on which the membership ceased. The membership roll of the Corporation shall at all times be available to all members of the Corporation, to all governmental authorities, and to the general public.

      Resignation of Members

      Sec. 5. (a) Membership in the Association may be voluntarily terminated only by formal resignation. Resignations of members must be in writing and addressed to the Corporation which shall immediately notify the appropriate District Committee. Any member may resign from the Corporation at any time. Such resignation shall not take effect until thirty (30) days after receipt thereof by the Corporation and until all indebtedness due the Corporation from such member shall have been paid in full and so long as any complaint or action is pending against the member and so long as any examination of such member is in process. The Corporation, however, may in its discretion declare a resignation effective at any time.

      (b) A resigned member shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior, to the effective date of the member's resignation from the Corporation. Any such" complaint, however, shall be filed within one year after the effective date of the resignation.

      Transfer and Termination of Membership

      Sec. 6. (a) Except as provided hereinafter, no member of the Corporation may transfer its membership or any right arising therefrom and the membership of a corporation, partnership or any other business organization which is a member of the Corporation shall terminate upon its liquidation, dissolution or winding up, and the membership of a sole proprietor which is a member shall terminate at death, provided that all obligations of membership under the By-Laws and Rules of Fair Practice have been fulfilled.

      (b) The consolidation, reorganization, merger, change of name, or similar change in any corporate member shall not terminate the membership of such corporate member provided that the member or surviving organization, if any, shall be deemed a successor to the business of the corporate member, and the member or the surviving organization shall continue in the investment banking and securities business, and shall possess the qualifications for membership in the Corporation. The death, change of name, withdrawal of any partner, the addition of any new partner, reorganization, consolidation or any change in the legal structure of a partnership member shall not terminate the membership of such partnership member provided that the member or surviving organization, if any, shall be deemed a successor to the business of the partnership member, and the member or surviving organization shall continue in the investment banking and securities business and shall possess the qualifications for membership in the Corporation. If the business of any predecessor member is to be carried on by an organization deemed to be a successor organization by the Corporation, the membership of such predecessor member shall be extended to the successor organization; otherwise any surviving organization shall be required to satisfy all of the requirements of the By-Laws.

      Registration of Branch Offices

      Sec. 7. (a) Each branch office of a member of the Corporation shall be registered with and listed upon the membership roll of the Corporation, and shall pay such dues, assessments and other charges as shall be fixed from time to time by the Board of Governors pursuant to Article VI of the By-Laws.

      (b) Each member of the Corporation shall promptly advise the Corporation of the opening or closing of any branch office of such member.

      Vote of Branch Offices

      Sec. 8. Each member of the Corporation having a registered branch office shall be entitled to one vote on all matters pertaining solely to the district in which such registered branch office is located (including the election of members to the Board of Governors from such district); provided, however, that if any member of the Corporation shall have more than one registered branch office in a district, or its principal office and one or more registered branch offices in a district, such member shall be entitled to only one vote in such district.

      District Committees' Right to Classify Branches

      Sec. 9. A District Committee may classify any branch of a member not meeting the definition of Article I(c) of the By-Laws as a "branch office" if such Committee is satisfied that the definition of Article I(c) of the By-Laws is substantially met and that the business of said branch in the district is of sufficient importance to justify such a classification.

      ARTICLE IV

      REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS

      Qualification Requirements

      Sec. 1. No member shall permit any person associated with such member to engage in the investment banking or securities business unless the member determines that such person has complied with the applicable provisions under Article II of the By-Laws.

      Application for Registration

      Sec. 2. (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Corporation, on the form to be prescribed by the Board of Governors and shall contain:

      (1) an acceptance of and an agreement to comply with all the provisions of the rules of the Corporation as they are or may from time to time be adopted or amended, all rulings, orders, directions and decisions of, and penalties imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board; provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as provided in the Act;
      (2) an agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any District or other Committee, shall be liable except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer, member of the Board of Governors or of any District or other Committee in his official capacity, or by any employee of the Corporation while acting within the scope of his employment, or under instruction of any officer, board or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the By-Laws, any rules of the Corporation as they are or may from time to time be adopted or amended, any ruling, order, direction, decision of, or penalty imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, or the rules of the Municipal Securities Rulemaking Board; and
      (3) such other reasonable information with respect to the applicant as the Corporation may require.
      (b) The Corporation shall not approve an application for registration"' of any person who is not eligible to be an associated person of a member under the provisions of Section 3(b) of Article II of these By-Laws.
      (c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments to the original application.

      Notification by Member to Corporation of Termination

      Sec. 3. Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than (30) calendar days after such termination, give written notice to the Association on a form designated by the Board of Governors of the termination of such association. A member who does not submit such notification in writing within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors. Termination of registration of such person associated with a member shall not take effect so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Corporation, however, may in its discretion declare the termination effective at any time.

      Retention of Jurisdiction

      Sec. 4. A person whose association with a member has been terminated and is no longer associated with any member of the Corporation shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the termination, but any such complaint shall be filed within one (1) year after the effective date of termination of registration pursuant to Section 3 above or, in the case of an unregistered person, within one (1) year after the date upon which such person ceased to be associated with the member.

      ARTICLE V

      AFFILIATES

      Qualifications for Affiliation

      Sec. 1. Any association of brokers or dealers, registered with the Commission as an affiliated securities association under the provisions of Section 15A of the Act, may become an affiliate of the Corporation as hereinafter provided in this Article.

      Application for Admission as Affiliate

      Sec. 2. Application for admission as an affiliate shall be made to the Board of Governors in writing, in such form as the Board of Governors may prescribe, and shall contain a certified copy of the application to the Commission for registration as an affiliated securities association, a certified copy of the order of the Commission granting such registration, and such other reasonable information as the Board of Governors may require.

      Agreement of Affiliate

      Sec. 3. No applicant may become an affiliate of the Corporation unless it agrees:

      (a) That it will classify its members, for purposes of levying dues and assessments, on the same basis as that applicable to members of the Corporation and that the amount of dues or assessments payable by each of its members for any given period, based on such classification, shall not be lower than that payable by a member of the Corporation in the same class for the comparable period; provided, however, that if by reason of the special type of business conducted by members of an applicant, the foregoing agreement is impracticable of application to such applicant, such applicant shall agree that it will fix and levy dues or assessments payable by its members on some other basis to be agreed upon by the applicant and the Board of Governors of the Corporation, which shall be fair and equitable in view of the dues and assessments payable by members of the Corporation;
      (b) That it will pay the Corporation annually, in the form of dues or otherwise, for services to be rendered by the Corporation to the applicant, the amount to be agreed upon by the applicant and the Board of Governors of the Corporation annually in advance, and that should the applicant and the Corporation be unable to reach an agreement as to an appropriate amount, the applicant will consent to the submission of the controversy to the Commission for arbitration, and that if submitted, it will abide by the Commission's decision thereon;
      (c) That, after affiliation, it will at all times keep its charter, by laws, rules of fair practice and code of procedure so integrated with the corres ponding Charter, By-Laws, Rules of Fair Practice and Code of Procedure of the Corporation as not to conflict in any way therewith; and
      (d) That the Board of Governors, in accordance with the provisions of Section 6 of this Article, may at any time suspend or cancel its affiliation with the Corporation.

      Conditions of Affiliation

      Sec. 4. No applicant may become an affiliate of the Corporation unless it appears to the Board of Governors:

      (a) That such applicant is so organized and is of such a character as to comply with and carry out its purposes, and those of the Corporation and of the Act; and
      (b) That the charter, by-laws, rules of fair practice and code of procedure of the applicant are so integrated with the corresponding Charter, By- Laws, Rules of Fair Practice and Code of Procedure of the Corporation as not to conflict in any way therewith.

      Approval of Admission as an Affiliate

      Sec. 5. If it appears to the Board of Governors that the foregoing requirements of this Article are met by the applicant, it shall approve such applicant's admission as an affiliate; otherwise, after appropriate notice and opportunity for hearing, it shall disapprove such applicant in writing and shall set forth therein the specific grounds upon which such disapproval is based.

      Suspension or Cancellation of Affiliation

      Sec. 6. The Board of Governors may at any time suspend or cancel the affiliation of an affiliate with the Corporation if the Board of Governors finds that the affiliate has ceased to be of such a character as to be able to or has failed to carry out its purposes or the purposes of the Act, or has failed to carry out any of the conditions of affiliation. In any proceeding, however, under this Section to determine whether the affiliation of an affiliate should be suspended or canceled, specific charges shall be brought; such affiliate shall be notified of, and be given an opportunity to defend against, such charges; a record shall be kept; and any determination that the affiliation of an affiliate shall be suspended or canceled shall be in writing and shall set forth therein the specific grounds upon which such determination is based. Such suspension or expulsion shall take effect upon the 60th day after the filing with the Commission of notice thereof and a copy of the record of the proceedings before the Board of Governors, unless within thirty days after such filing such suspension or cancellation is disapproved by the Commission.

      Exclusion of Territory Covered by Affiliated Association

      Sec. 7. The Board of Governors shall, if it deems such action to be in the interest of efficient and economical administration and desirable in carrying out the purposes of the Act, recommend appropriate changes in the By-Laws to exclude the territory covered by an affiliate association from the geographical area covered by the Corporation.

      ARTICLE VI

      DUES, ASSESSMENTS AND OTHER CHARGES

      Power of Board to Fix and Levy Assessments

      Sec. 1. The Board of Governors shall prepare an estimate of the funds necessary to defray reasonable expenses of administration in carrying on the work of the Corporation each fiscal year, and on the basis of such estimate, shall fix and levy the amount of admission fees, dues, assessments and other charges to be paid by members of the Corporation and issuers and any other persons using any facility or system which the Corporation operates or controls. Fees, dues, assessments and other charges shall be called and payable as determined by the Board of Governors from time to time, provided, however, that such admission fees, dues, assessments and other charges shall be equitably allocated among members and issuers and other persons using any facility or system which the Corporation operates or controls. The Board of Governors may from time to time make such changes in such fees, dues, assessments and other charges as it deems necessary or appropriate to assure equitable allocation of dues among members. Neither the adoption nor any change in such fees, dues, assessments and other charges need be submitted to the membership for approval and such fees, dues, assessments and other charges as adopted or amended shall become effective at such time as the Board of Governors may prescribe. In the event of termination of membership or the extension of any membership to a successor organization during any fiscal year for which an assessment has been levied and become payable, the Board of Governors may make such adjustment in the fees, dues, assessments or other charges payable by any such member or successor organization or organizations during such fiscal years as it deems fair and appropriate in the circumstances.

      Reports of Members

      Sec. 2. Each member, issuer or other person shall promptly furnish all information or reports requested by the Corporation in connection with the determination of the amount of admission fees, dues, assessments or other charges.

      Suspension or Cancellation of Membership for Non-Payment of Dues

      Sec. 3. The Corporation, after fifteen (15) days notice in writing, may suspend or cancel the membership of any member 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 of this Article.

      Reinstatement of Membership

      Sec. 4. Any membership suspended or canceled under this Article may be reinstated by the Corporation upon such terms and conditions as it shall deem just; provided, however, that any applicant for reinstatement shall possess the qualifications required for membership in the Corporation.

      ARTICLE VII

      BOARD OF GOVERNORS

      Powers and Authority of Board of Governors

      Sec. 1. (a) The Board of Governors shall be the governing body of the Corporation and, except as otherwise provided by these By-Laws, shall be vested with all powers necessary for the management and administration of the affairs of the Corporation and the promotion of the Corporation's welfare, objects and purposes. In the exercise of such powers, the Board of Governors shall have the authority to:

      (1) adopt for submission to the membership, as hereinafter provided, such By-Laws, Rules of Fair Practice and changes or additions thereto as it deems necessary or appropriate;
      (2) make such regulations, issue such orders, resolutions, inter pretations, including interpretations of the Rules of Fair Practice, and directions, and make such decisions as it deems necessary or appropriate;
      (3) prescribe a code of arbitration procedure providing for the required or voluntary arbitration of controversies between members and between members and customers or others as it shall deem necessary or appropriate and neither the adoption nor any amendments to the code need be submitted to tha. membership for approval and the code and any amendments thereto shall become effective as the Board of Governors may prescribe;
      (4) establish rules and procedures to be followed by members in connection with the distribution of securities issued by members and affiliates thereof, and neither the adoption nor any amendments to such rules and procedures need be submitted to the membership for approval and such rules and procedures and any amendments thereto shall become effective as the Board of Governors may prescribe;
      (5) require all over-the-counter transactions in securities between members to be cleared and settled through the facilities of a clearing agency registered with the Commission pursuant to the Act, which clears and settles such over-the-counter transactions in securities;
      (6) organize and operate automated systems to provide quali fied subscribers with securities information and automated services. The systems may be organized and operated by a division or subsidiary company of the Corpora tion or by one or more independent firms under contract with the Corporation as the Board of Governors may deem necessary or appropriate. The Board of Governors may adopt rules of such automated systems, establish reasonable qualifi cations and classifications for members and other subscribers, provide qualification standards for securities included in such systems, require members to report promptly information in connection with securities included in such systems, and establish charges to be collected from subscribers and others. The Board of Governors shall have power to adopt, amend, supplement or modify such rules, qualifications, classifications, standards and charges from time to time without recourse to the membership for approval, and such rules, qualifications, classifications, standards and charges shall become effective as the Board of Governors may prescribe; and
      (7) engage in any activities or conduct necessary or appropriate to carry out the Corporation's purposes under its Certificate of Incorporation and the federal securities laws.
      (b) In the event of the refusal, failure, neglect or inability of any member of the Board of Governors to discharge his duties, or for any cause affecting the best interests of the Corporation the sufficiency of which the Board of Governors shall be the sole judge, the Board shall have the power, by the affirmative vote of two-thirds of the Governors then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 6 of this Article.

      Authority to Suspend for Failure to Submit Required Information

      Sec. 2. (a) The Board of Governors shall have authority, upon notice and opportunity for a hearing, to cancel or suspend the membership of any member or suspend the association of any person associated with a member for failure to file, or to submit on request, any report, document or other information required to be filed with or requested by the Corporation.

      (b) The Board of Governors is authorized to delegate the authority hereinabove granted to the President of the Corporation; provided, however, that the Executive Committee of the Board of Governors shall be notified in writing of any such contemplated action by the President.

      Composition of Board

      Sec. 3. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of thirty-one members, twenty-one to be elected by the members of the various districts in accordance with the provisions of subsection (b)(l) through (5) hereof, nine to be elected by the Board of Governors in accordance with the provisions of subsections (b)(6),(7) and (8) hereof, and the President of the Corporation to be selected by the Board of Governors in accordance with the provisions of Article X, Section 2 of the By-Laws.

      (b) The several districts shall be presented on the Board of Governors. The elected members of the Board of Governors shall be chosen as follows:
      (1) Three members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 2;
      (2) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 8;
      (3) Five members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 12;
      (4) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 13;
      (5) One member of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in each of the remaining districts not referred to in Subsections (1), (2), (3) and (4) of this Section;
      (6) One member of the Board of Governors shall be elected by the Board of Governors from among the principal underwriter members of investment company shares, and he shall be designated a Governor-at-Large;
      (7) One member of the Board of Governors shall be elected by the Board of Governors from among insurance company members or insurance company affiliated members of the Corporation, and he shall be designated a Governor-at-Large;
      (8) Seven members of the Board of Governors shall be elected by the Board of Governors, and they shall be designated Governors-at-Large. Any Governor-at-Large initially filling a Governor-at-Large office shall be elected at such time as the Board of Governors in its discretion deems appropriate;
      (9) At least one member of the Board of Governors shall be representative of issuers and not be associated with a member, broker or dealer and at least one member of the Board of Governors shall be representative of investors and not be associated with a member, broker or dealer;
      (10) The Board of Governors shall, from time to time, consider the fairness of the representation of the various districts on the Board of Governors, and whenever it finds any unfairness in such representation to exist, it shall recommend appropriate changes in these By-Laws to assure fair represen tation of all districts.

      Term of Office of Governors

      Sec. 4. Each elected member of the Board of Governors, including the Governors-at-Large, except as otherwise herein provided, shall hold office for a term of three years, and until his successor is elected and qualified, or until his death, resignation or rernovaL The President of the Corporation shall serve as a member of the Board of Governors until his successor is selected and qualified, or until his death, resignation or removal.

      Succession to Office

      Sec. 5. The office of a retiring member of the Board of Governors elected under subsections (1) through (5) of Section 3(b) of this Article shall be filled by the election of a member from the same district as that of the retiring member. The office of a retiring Governor-at-Large shall be filled by election by the Board of Governors as provided in subsections (6), (7) and/or (8) of Section 3(b) of this Article, as the case may be.

      Election of Board Members

      Sec. 6. The elected members of the Board of Governors shall be chosen as follows:

      Procedure for Nominations by Nominating Committees

      (a) Before June 1 of each year, the Secretary of the Corporation shall notify in writing the Chairman of the respective District Committees of the expiration of the term of office of any member of the Board of Governors elected under subsections (1) through (5) of Section 3(b) of this Article which will expire during the next calendar year. The said Chairman shall thereupon notify the Nominating Committee elected for such District pursuant to the provisions of Section 3 of Article IX of the By-Laws and such Nominating Committee shall proceed to nominate a candidate from such District for the office of each such member of the Board of Governors whose term is to expire. Nominating Committees in nominating candidates for the office of member of the Board of Governors shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the Board of Governors of all classes and types of members engaged in the investment banking and securities business. No Nominating Committee shall nominate an incumbent member of the Board of Governors to succeed himself unless it first takes appropriate action by a written ballot sent to the entire membership within the District to ascertain that such nomination is acceptable to a majority of the members voting on such ballot in the District except where the incumbent member of the Board of Governors is serving pursuant to the provisions of Section 7(a) of this Article. Each candidate nominated by the Nominating Committee shall be certified to the District Committee by September 1 and within five (5) days thereafter a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the district. Such candidate shall be designated the "regular candidate."

      Nomination of Additional Candidates

      (b) An additional candidate or candidates may be nominated for the office of any member elected under subsections (1) through (5) of Section 3(b) of this Article, and whose term is to expire, if written notice of the nomination, signed by at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Committee within thirty (30) days from the date of the notice of the action taken by the Nominating Committee. If no addi tional candidate or candidates are nominated within such thirty-day period, the candidate or candidates nominated by the Nominating Committee shall be con sidered duly elected, and the District Committee shall certify the election to the Board of Governors.

      Contested Elections

      (c) If any additional candidate or candidates are nominated, as pro vided in subsection (b) of this Section, the District Committee shall forthwith cause the names of the regular candidate and of all other duly nominated candidates for each office to be placed upon a ballot, which shall be sent to all members of the Corporation eligible to vote in the district. Each member of the Corporation having its principal place of business in the district shall be entitled to one vote, and each member having one or more registered branch offices in the district shall be entitled to vote as provided in Section 8 of Article III. The District Committee shall fix a date before which ballots must be returned to be counted. All ballots shall be opened and counted by such officer or employee of the Corporation as the Chairman of the District Committee may designate and in the presence of a repre sentative of each of the candidates if such representation is requested in writing by any candidate named on the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Board of Governors, and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this subsection voting shall be made by secret ballot, the procedure for which shall be prescribed by the Board of Governors.

      Filling of Vacancies on Board

      Sec. 7. All vacancies in the Board of Governors other than those caused by the expiration of a Governor's term of office, shall be filled as follows:

      (a) If the unexpired term of a Governor elected under subsections (b)(l) through (b)(5) of Section 3 of this Article, is for less than twelve months, such vacancy shall be filled by appointment by the District Committee of a represen tative of a member of the Corporation eligible to vote in the same district.
      (b) If the unexpired term of a Governor, elected under subsections (b)(l) through (b)(5) of Section 3 of this Article, is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as prac ticable in accordance with the provisions of Section 6 of this Article.
      (c) If the unexpired term is that of a Governor-at-Large, such vacancy shall be filled in accordance with the provisions of subsections (b)(6), (b)(7), and/or (b)(8) of Section 3 of this Article, as the case may be.

      Meetings of Board

      Sec. 8. Meetings of the Board of Governors shall be held at such times and places, upon such notice, and in accordance with such procedure as the Board of Governors in its discretion may determine. A quorum of the Board of Governors shall consist of a majority of the members, and any action taken by a majority vote at any meeting at which a quorum is present, except as otherwise provided in these By-Laws, shall constitute the action of the Board. Meetings of the Board of Governors may be held by mail, telephone or telegraph, in which case any action taken by a majority vote of the Board of Governors shall constitute the action of the Board. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Board of Governors.

      Offices of Corporation

      Sec. 9. The Corporation shall maintain such offices as the Board of Governors may from time to time deem necessary or appropriate.

      ARTICLE VIII

      DISTRICT COMMITTEES

      Administrative Districts

      Sec. 1. For the purpose of administration, the United States is hereby divided into districts, the boundaries of which shall be established by the Board of Governors. The Board of Governors may from time to time make such changes in the boundaries as it deems necessary or appropriate. Neither the establishment nor any change in the boundaries need be submitted to the membership for approval and the boundaries, as established or changed, shall become effective at such time as the Board of Governors may prescribe.

      District Committees and District Business Conduct Committees

      Sec. 2. (a) For the purpose of effectuating a maximum degree of local administration of the affairs of the Corporation, each of the districts created under Section 1 of this Article shall elect a District Committee, as hereinafter provided. Each such District Committee shall determine the number of its members so to be elected, but in no event shall any District Committee consist of more than twelve members; provided, however, that the Board of Governors by resolution may increase, upon request, any such District Committee to a larger number.

      (b) In the event of the refusal, failure, neglect or inability of any member of any District Committee to discharge his duties, or for any cause affecting the best interests of the Corporation the sufficiency of which shall be decided by the District Committee, the District Committee shall have the power by the affirmative vote of two-thirds of the members of the District Committee then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 5 of this Article; provided, however, that any member of any District Committee who has had his position declared vacant in the manner provided herein shall have the right to appeal the determination of the District Committee to the Board of Governors within 30 days after the date he is notified of the action of the District Committee. The Board of Governors shall thereafter have the authority to affirm, reverse or modify the determination of the District Committee. Any such action by the Board shall be by the affirmative vote of at least two-thirds of the governors then in office.
      (c) The District Committees shall also serve as the District Business Conduct Committees for their respective districts.

      Term of Office of District Committee Members

      Sec. 3. Each regularly elected member of a District Committee shall hold office for a term of three (3) years, and until his successor is elected and qualified, or until his death, resignation or removal.

      Election of District Committee Members

      Sec. 4. Members of the District Committees shall be elected as follows:

      Procedure for Nominations by Nominating Committees

      (a) Before June 1 of each year, the Secretary of the Corporation shall notify in writing the Chairman of each respective District Committee of the expiration of the term of office of any member of that District Committee which shall expire during the next calendar year. The said Chairman shall thereafter, but not later than July 1, advise the Nominating Committee, which shall proceed to nominate a candidate from their District for the office of each member of the District Committee whose term is to expire. Nominating Committees in nominating candidates for the office of member of the District Committee shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the District Committee of the various sections of the District and of all classes and types of members engaged in the investment banking or securities business within such District. No Nominating Committee shall nominate an incumbent member of the District Committee to succeed himself unless it first takes appropriate action by a written ballot of the entire membership within the District to ascertain that such nomination is acceptable to a majority of the members in the District except where the incumbent member of the District Committee is serving pursuant to the provisions of Section 5(a) of this Article. Each candidate nominated by the Nominating Committee shall be certified to the District Committee by September 1, and within five (5) days thereafter a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the District. Such candidate shall be designated the "regular candidate."

      Nomination of Additional Candidates

      (b) An additional candidate or candidates may be nominated for the office of any member whose term is to expire or for any new office created by the District Committee pursuant to Section 2 of this Article, if written notice of the nomination, signed by at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Committee within thirty (30) days from the date of the notice of the action taken by the Nominating Com mittee. If no additional candidate or candidates are nominated within such thirty- day period, then the candidate or candidates nominated by the Nominating Com mittee shall be considered duly elected and the District Committee shall certify the election to the Board of Governors.

      Contested Elections

      (c) If an additional candidate or candidates are nominated, as provided in paragraph (b) of this Section, the District Committee shall forthwith cause the names of the regular candidate for any contested office and of all other candi dates for such office to be placed upon a ballot, which shall be sent to all members of the Corporation eligible to vote in the district. Each member of the Corporation having its principal place of business in the district shall be entitled to one vote, and each member having one or more registered branch offices in the district shall be entitled to vote as provided in Section 8 of Article III. The District Committee shall fix the date before which ballots must be returned to be counted. All ballots shall be opened by such officer or employee of the Corporation as the Chairman of the District Committee may designate, and in the presence of a representative of each of the candidates if such representation is requested in writing by any candi date named in the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Dis trict Committee, and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this Section, voting shall be by secret mail ballot, the procedure for which shall be prescribed by the Board of Governors.

      Filling of Vacancies on District Committees

      Sec. 5. All vacancies on any District Committee other than those caused by the expiration of a member's term of office, shall be filled as follows:

      (a) If the unexpired term of the member causing the vacancy is for less than twelve months, such vacancy shall be filled by appointment by the remaining members of the District Committee of some member of the Corporation having a place of business in the same district.
      (b) If the unexpired term of the member causing the vacancy is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 4 of this Article.

      Meetings of District Committees

      Sec. 6. Meetings of each District Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each District Committee in its discretion may determine. A quorum of a District Committee shall consist of a majority of its members, and any action taken by a majority at any meeting at which a quorum is present, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a District Committee may be taken by mail, telephonic and telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the District Committee.

      Election of Chairmen and Other District Officers

      Sec. 7. Following the annual election of members of the District Committees pursuant to Section 4 of this Article, each District Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws, and shall prescribe their powers and duties.

      Advisory Council

      Sec. 8. (a) The Chairmen of the District Committees, elected pursuant to Section 7 of this Article, shall constitute an Advisory Council to the Board of Governors.

      (b) Such Advisory Council shall be advised of and entitled to attend such meetings of the Board of Governors as the Board may designate and the Board shall designate at least one such meeting annually. The Advisory Council shall not be entitled to vote at meetings of the Board of Governors.

      Expenses of District Committees

      Sec. 9. Funds to meet the regular expenses of each District Committee, elected pursuant to Section 4 of this Article, shall be provided by the Board of Governors out of funds collected by it under the provisions of Article VI hereof, and all such expenses shall be subject to the approval of the Board of Governors.

      District Committees Agencies of Corporation

      Sec. 10. The District Committees shall act as the agencies of the Corporation for the administration of its affairs in their respective districts and as such shall have such powers and duties as are provided in the By-Laws or from time to time delegated by the Board of Governors.

      Certain Functions of District Committees

      Sec. 11. The District Committees shall endeavor, in such manner as they deem appropriate, to educate members and other brokers and dealers in their respective districts as to the objects, purposes and work of the Corporation in order to foster their interest and cooperation. District Committees shall consider the practical operation of all provisions of the rules of the Corporation and shall report to the Secretary any which the District Committees believe do not work satisfactorily in their respective districts.

      ARTICLE IX

      NOMINATING COMMITTEES

      Composition of Nominating Committees

      Sec. 1. (a) Each of the Districts created under Section 1 of Article VIII of the By-Laws shall elect a Nominating Committee, as provided in Section 3 of this Article. Each such Nominating Committee shall consist of five members; provided, however, that the Board of Governors by resolution may increase any such Nominating Committee to a larger number. Members of the Nominating Committee in each District shall be members of the Corporation having places of business in the respective District, but shall not be members of the District Committee. All Nominating Committees shall include a majority of persons who have previously served on the District Committee and/or on the Board of Governors anQ" shall, insofar as practicable, include at least one former member of the Board of Governors.

      (b) In the event of the refusal, failure, neglect or inability of any member of any Nominatng Committee to discharge his duties, or for any cause affecting the best interest of the Corporation, the sufficiency of which shall be decided by the Nominating Committee, the Nominating Committee shall have the power, by the affirmative vote of three-fifths of the members of the Nominating Committee then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 3 of this Article; provided, however, that any member of any Nominating Committee who has had his position declared vacant in the manner provided herein shall have the right to submit a written appeal in respect to the determination of the Nominating Committee to the Board of Governors within thirty (30) days after the date he is notified in writing of the action of the Nominating Committee. The Board of Governors shall thereafter have the authority to affirm, reverse or modify the determination of the Nominating Committee. A vote of two-thirds of the Governors then in office shall be required to reverse or modify the action of the Nominating Committee.

      Term of Office of Nominating Committee Members

      Sec. 2. Each regularly elected member of a Nominating Committee shall hold office for a term of one (1) calendar year, and until his successor is elected and qualified, or until his death, resignation or removal.

      Election of Nominating Committees

      Sec. 3.Members of the Nominating Committee shall be elected as follows:

      Procedures for Nominations by Nominating Committees

      (a) Before June 1 of each year the Secretary of the Corporation shall notify in writing the Chairmen of the respective District Committees as to those members of the District Nominating Committee who were elected for the present year and as to the offices of that Committee that are to be filled by the next election. The said Chairman shall thereupon notify the Nominating Committee elected for such District and the Nominating Committee shall proceed to nominate a candidate from such District for the offices of that Committee which are to be filled by the next election. The Nominating Committee in nominating candidates for the office of member of the Nominating Committee shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the Nominating Committee of the various sections of the District and of all classes and types of mem bers engaged in the investment banking or securities business within such District and shall assure that the composition of the Nominating Committee meets the standards contained in Section l(a) of this Article. No Nominating Committee shall nominate more than two incumbent members of the Nominating Committee to succeed themselves. No member of any Nominating Committee may serve more than two consecutive terms. Each candidate nominated by the Nominating Com mittee shall be certified to the District Committee, by September 1, and within five (5) days thereafter a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the District. Such candidate shall be designated the "regular candidate."

      Nomination of Additional Candidates

      (b) Additional candidates may be nominated for the office of any member whose term is to expire or for any new office created by the Board of Governors pursuant to Section l(a) of this Article, provided that election of such candidates would be consistent with the requirements of Section l(a) of this Article, if written notice of the nomination, signed by at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Com mittee within thirty (30) days from the date of the notice to the members of the action taken by the Nominating Committee. If no additional candidate or candi dates are nominated within such thirty-day period, then the candidate or candidates nominated by the Nominating Committee shall be considered duly elected and the District Committee shall certify the election to the Board of Governors.

      Contested Elections

      (c) If additional candidates are nominated, as provided in paragraph (b) of this section, the District Committee shall forthwith cause the names of the regular candidate and all other candidates for any contested office to be placed upon a ballot, which shall be sent to all members of the Corporation eligible to vote in the District. Each member of the Corporation having its principal place of business in the District shall be entitled to one vote, and each member having one or more registered branch offices in the District shall be entitled to vote as pro vided in Section 8 of Article III. The District Committee shall fix the date before which ballots must be returned to be counted. All ballots shall be opened by such officer or employee of the Corporation as the Chairman of the District Committee may designate, and in the presence of a representative of each of the candidates, if such representation is requested in writing by any candidate named in the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Nominating Committee and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this Section, voting shall be by secret mail ballot, the procedure for which shall be prescribed by the Board of Governors.

      Filling of Vacancies for Nominating Committees

      Sec. 4. All vacancies in any Nominating Committee other than those caused by the expiration of a member's term of office shall be filled as follows:

      (a) If the unexpired term of the member causing the vacancy is for less than six months, such vacancy shall be filled by appointment by the remaining members of the Nominating Committee of a representative of a member of the Corporation eligible to vote in the same District.
      (b) If the unexpired term of the member causing the vacancy is for six months or more, such vacancy shall be filled by election, which shall be con ducted as nearly as practicable in accordance with the provisions of Section 3 of this Article.

      Meetings of Nominating Committees

      Sec. 5. Meetings of each Nominating Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each Nominating Committee in its discretion may determine. A quorum of a Nominating Committee shall consist of a majority of its members, and any action taken by a majority of the entire Committee at any meeting, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a Nominating Committee may be taken by mail, telephonic or telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Nominating Committee.

      Election of Chairman and Other Nominating Committee Officers

      Sec. 6. Following the annual election of members of the Nominating Committees pursuant to Section 3 of this Article, each Nominating Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws.

      ARTICLE X

      OFFICERS AND EMPLOYEES

      Election of Officers of the Board

      Sec. 1. As soon as practicable, following the annual election of members to the Board of Governors, the Board of Governors shall elect from its members a Chairman, one or more Vice Chairmen, and such other officers as it shall deem necessary or advisable, to serve until the next annual election or until their successors are chosen and qualify. The officers so elected shall have such powers and duties as may be determined from time to time by the Board of Governors. The Board of Governors, by affirmative vote of a majority of its members, may remove any such officer at any time.

      Officers of the Corporation

      Sec. 2. The Board of Governors shall select a chief executive officer, to be designated President of the Corporation, who shall be responsible for the management and administration of its affairs and shall be the official representative of the Corporation in all public matters and shall be ex officio a member of any committee authorized by the Board of Governors. The Board may provide for other executive or administrative officers as it shall deem necessary or advisable, including, but not limited to, Executive Vice President, Senior Vice President, Vice President, General Counsel, Secretary and Treasurer of the Corporation. All such officers shall have such titles, such powers and duties and shall be entitled to such compensation as shall be determined from time to time by the Board of Governors. The terms of office of such officers shall be at the pleasure of the Board of Governors, which by affirmative vote of a majority of the members, may remove any such officer at any time.

      Absence of President

      Sec. 3. In the case of the absence or inabiliy to act of the President of the Corporation, or in case of a vacancy in such office, the Board of Governors may appoint its Chairman or such other person as it may designate to act as such officer pro tern, who shall assume all the functions and discharge all the duties of the President.

      Employment of Counsel

      Sec. 4. The Board of Governors may retain or authorize the employment of counsel, with such powers, titles, duties and authority as it shall deem necessary or advisable.

      Administrative Staff

      Sec. 5. The Board of Governors may employ or authorize the employment and prescribe the powers and duties of such an administrative staff as it deems necessary or advisable. The employment and compensation of such administrative staff of the Corporation shall be at the pleasure of the Board of Governors.

      Restrictions on Compensation of Board and Committee Members

      Sec. 6. No member of the Board of Governors (except the President of the Corporation or the President pro tem), no member of any District Committee and no member of any other Committee, shall be entitled to receive any compensation from the Corporation for any work done in connection with his duties as a member of the Board of Governors, any District Committee or any other committee. However, such persons shall be entitled to reimbursement for reasonable expenses incurred in connection with the business of the Corporation.

      ARTICLE XI

      COMMITTEES

      National Standing Committees

      Sec. 1. The Board of Governors may appoint such standing and other committees as it deems necessary or desirable, and it shall fix their powers, duties and terms of office.

      District Standing Committees

      Sec. 2. Each District Committee, in the exercise of its powers and performance of its duties as provided in the By-Laws, may, except as otherwise herein provided, appoint such standing or other committees or subcommittees as it deems necessary or desirable, and shall fix their powers, duties and terms of office.

      Removal of Committee Member

      Sec. 3. Any member of any committee appointed pursuant to Sections 1 or 2 of this Article may be removed from office, after appropriate notice from the District Committee appointing such member, or from the Board of Governors, if it is the appointing authority, for refusal, failure, neglect or inability to discharge his duties, or for any cause the sufficiency of which shall be decided by the District Committee or the Board of Governors, whichever is the appointing authority.

      Executive Committee

      Sec. 4. By resolution passed not less than annually by a majority of the entire Board of Governors, there may be created an Executive Committee, consisting of five or more members of the Board which shall exercise such of the powers of the Board in the management of the Corporation between meetings of the Board of Governors as may be delegated to it from time to time by the Board. The Executive Committee created hereunder shall keep minutes of its meetings and shall report its proceedings to the Board of Governors at the next meeting thereof.

      ARTICLE XII

      RULES OF FAIR PRACTICE

      To promote and enforce just and equitable principles of trade and business, to maintain high standards of commercial honor and integrity among members of the Corporation, to prevent fraudulent and manipulative acts and practices, to provide safeguards against unreasonable profits or unreasonable rates of commissions or other charges, to protect investors and the public interest, to collaborate with governmental and other agencies in the promotion of fair practices and the elimination of fraud, and in general to carry out the purposes of the Corporation and of the Act, the Board of Governors is hereby authorized to adopt for submission to the members of the Corporation such Rules of Fair Practice for the members and persons associated with members, and such amendments thereto as it may, from time to time, deem necessary or appropriate. The Board of Governors, upon the adoption of any such Rules of Fair Practice or amendments thereto, shall forthwith cause copies thereof to be sent to each member of the Corporation to be voted upon. If any such Rules of Fair Practice or amendments thereto are approved by a majority of the members voting, within thirty (30) days after the date of submission to the membership, and are approved by the Commission as provided in the Act, they shall become effective Rules of Fair Practice of the Corporation as of such date as the Board of Governors may prescribe. In any case, however, where a particular provision of a Rule of Fair Practice provides that membership approval is not required, the Board may amend that provision without submission to the membership for a vote as hereinbefore required. In addition, where the Board of Governors by resolution finds an emergency to exist, such Rules of Fair Practice or amendments thereto, if adopted by a two-thirds vote of the Board of Governors, may become effective as of such time as the Board of Governors may prescribe, without submission to the members for a vote as hereinbefore required. An emergency which is found by the Board of Governors to exist shall continue until the Board of Governors by resolution terminates such but in no event shall an emergency continue for a period in excess of six months. The Board of Governors shall have the authority, however, after, in each instance, reassessing the facts and circumstances which gave rise to the emergency, by resolution to declare, if it deems such appropriate under the facts and circumstances then existing, the emergency to continue to exist for successive six-month periods as required. All emergency rules adopted during the period of the emergency shall cease to be effective upon the termination of the emergency as hereinbefore provided. The Board of Governors is hereby authorized, subject to the provisions of the By-Laws and the Act, to administer, enforce, suspend, or cancel any Rules of Fair Practice adopted hereunder.

      ARTICLE XIII

      DISCIPLINARY PROCEEDINGS

      Sec. 1. The Board of Governors shall have authority to establish procedures relating to disciplinary proceedings involving members and their associated persons, and neither the adoption nor any amendment to such procedures need be submitted to the membership for approval and such procedures and any amendments thereto shall become effective as the Board of Governors may prescribe.

      Sec. 2. Except as otherwise permitted under these By-Laws or the Act, in any disciplinary proceeding before the Corporation, any member or person associated with a member shall be given the opportunity to have a hearing at which he shall be entitled to be heard in person and/or by counsel. Such persons may present any relevant material. In any such proceeding against a member or against a person associated with a member to determine whether the member and/or the person associated with a member shall be disciplined:

      (a) specific charges shall be brought;
      (b) such member or person associated with a member shall be noti fied of and be given an opportunity to defend against such charges;
      (c) a record shall be kept; and
      (d) any determination shall include a statement setting forth:
      (1) any act or practice, in which such member or person associated with a member may be found to have engaged or which such member or person associated with a member may be found to have omitted;
      (2) the rule, regulation or statutory provision of which any such act or practice, or omission to act, is deemed to be in violation;
      (3) the basis upon which any findings are made; and
      (4) the penalty imposed.

      ARTICLE XIV

      POWER OF BOARD TO PRESCRIBE SANCTIONS

      The Board of Governors is hereby authorized to prescribe appropriate sanctions applicable to members, including censure, fine, suspension or expulsion from membership, suspension or barring from being associated with all members, limitation of activities, functions and operations of a member, or any other fitting sanction, and to prescribe appropriate sanctions applicable to persons associated with members, including censure, fine, suspension or revocation of registration, if any, suspension or barring a person associated with a member from being associated with all members, limitation of activities, functions and operations of a person associated with a member, or any other fitting sanction, for:

      (a) breach by a member or a person associated with a member of any covenant with the Corporation or its members;
      (b) violation by a member or a person associated with a member of any of the terms, conditions, covenants, and provisions of the rules of the Corpora tion, the federal securities laws, including the rules and regulations adopted there under, and the rules of the Municipal Securities Rulemaking Board;
      (c) failure by a member or person associated with a member to submit a dispute for arbitration under the Code of Arbitration Procedure ("Code") as required by the Code, or to fail to appear or to produce any document in their possession or control as directed pursuant to provisions of the Code, or to fail to honor an award of arbitrators properly rendered pursuant to the Code where a timely motion has not been made to vacate or modify such award pursuant to applicable law;
      (d) refusal by a member or person associated with a member to abide by an official ruling of the Board of Governors or Uniform Practice Committee acting within its appropriate authority, with respect to any transaction which is subject to the Uniform Practice Code; or
      (e) failure by a member or a person associated with a member to adhere to any ruling, order, direction or decision of, or to pay any penalty, fine or costs, imposed by, the Board of Governors or any District Business Conduct Com mittee.

      ARTICLE XV

      UNIFORM PRACTICE CODE

      Authority to Adopt Code

      Sec. 1. The Board of Governors is hereby authorized to adopt a Uniform Practice Code and amendments, interpretations and explanations thereto, designed to make uniform, where practicable, custom, practice, usage, and trading technique in the investment banking and securities business with respect to such matters as trade terms, deliveries, payments, dividends, rights, interest, reclamations, exchange of confirmations, stamp taxes, claims, assignments, powers of substitution, computation of interest and basis prices, due-bills, transfer fees, "when, as and if issued" trading, "when, as and if distributed" trading, marking to the market and close-out procedure, all to the end that the transaction of day-to-day business by members may be simplified and facilitated, that business disputes and misunderstandings, which arise from uncertainty and lack of uniformity in such matters, may be eliminated, and that the mechanisms of a free and open market may be improved and impediments thereto removed. Neither the adoption nor any change in the Uniform Practice Code need be submitted to the membership for approval and the Code as adopted or amended shall become effective at such time as the Board of Governors may prescribe.

      Administration of Code

      Sec. 2. The administration of any Uniform Practice Code, or any amendment thereto, adopted by the Board of Governors pursuant to Section 1 of this Article, shall be vested in the Board of Governors, and the Board is hereby granted such powers as are reasonably necessary to achieve its effective operation. In the exercise of such powers, the Board may issue explanations and interpretations and make binding rulings with respect to the applicability of the provisions of this Code to situations in which there is no substantial disagreement as to the facts involved. The Board may delegate to appropriate committees such of its powers, hereunder as it deems necessary and appropriate to achieve effective administration and operation of the Code.

      Transactions Subject to Code

      Sec. 3. All over-the-counter transactions in securities by members, except transactions in securities which are exempted under Section 3(a)(12) of the Act, or are municipal securities as defined in Section 3(a)(29) of the Act, are subject to the provisions of the Uniform Practice Code and to the provisions of Section 2 of this Article unless exempted therefrom by the terms of the Code.

      ARTICLE XVI

      LIMITATION OF POWERS

      Prohibitions

      Sec. 1. Under no circumstances shall the Board of Governors or any officer, employee or member of the Corporation have power to:

      (a) make any donation or contribution from the funds of the Corporation or to commit the Corporation for the payment of any donations or contributions for political or charitable purposes; or
      (b) use the name or facilities of the Corporation in aid of any political party or candidate for any public office.

      Use of Name of Corporation by Members

      Sec. 2. No member shall use the name of the Corporation except to the extent that may be authorized by the Board of Governors.

      Unauthorized Expenditures

      Sec. 3. No officer, employee, member of the Board of Governors or of any District or other Committee, shall have any power to incur or contract any liability on behalf of the Corporation not authorized by the Board of Governors. The Board may delegate to the President of the Corporation, or his delegate, such authority as it deems necessary to contract on behalf of the Corporation or to satisfy unanticipated liabilities during the period between Board meetings.

      Conflicts of Interest

      Sec. 4. No member of the Board of Governors or of any committee of the-Corporation shall directly or indirectly participate in any adjudication of the interests of any party which would at the same time substantially affect his interest or the interests of any person in whom he is directly or indirectly interested. In any such case, the member shall disqualify himself or shall be disqualified by the Chairman of the Board or Committee.

      Municipal Securities

      Sec. 5 The provisions of the By-Laws conferring rulemaking authority upon the Board of Governors shall not be applicable to the municipal securities activities of members or persons associated with members to the extent that the application of such authority would be inconsistent with Section 15B of the Act.

      ARTICLE XVII

      PROCEDURE FOR ADOPTING AMENDMENTS TO BY-LAWS

      Any member of the Board of Governors by resolution, any District Committee by resolution, or any twenty-five members of the Corporation by petition signed by such members, may propose amendments to these By-Laws. Every proposed amendment shall be presented in writing to the Board of Governors and a record shall be kept thereof. The Board of Governors may adopt any proposed amendment to these By-Laws by affirmative vote of a majority of the members of the Board of Governors then in office. The Board of Governors, upon adoption of any such amendment to these By-Laws, except as otherwise provided in these By-Laws shall forthwith cause a copy to be sent to and voted upon by each member of the Corporation. If such amendment to these By-Laws is approved by a majority of the members voting within thirty (30) days after the date of submission to the membership, and is approved by the Commission as provided in the Act, it shall become effective as of such date as the Board of Governors may prescribe.

      ARTICLE XVIII

      CORPORATE SEAL

      The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile thereof to be imposed or affixed or reproduced or otherwise.

      ARTICLE XIX

      CHECKS

      All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Governors may from time to time designate.

      ARTICLE XX

      ANNUAL FINANCIAL STATEMENT

      As soon as practicable from the end of each fiscal year, the Board of* Governors shall send to each member of the Corporation a reasonably itemized statement of receipts and expenditures of the Corporation for such preceding fiscal year.

      TABLE OF CONTENTS

      CODE OF PROCEDURE

         

      Page

      ARTICLE I

      APPLICATION AND PURPOSE OF CODE

      Section

         

      1.

      Purpose

      1

      2.

      Definitions

      1

      3.

      Interpretation

      2

      4.

      Communications Relating to Grievances

      2

      ARTICLE II

      DISCIPLINARY ACTIONS BY DISTRICT BUSINESS CONDUCT COMMITTEES, THE MARKET SURVEILLANCE COMMITTEE AND OTHERS

      Section

         

      1.

      Issuance of Complaints by Committees

      2

      2.

      Form, Content, Notice and Withdrawal of Complaints

      2

      3.

      Answers to Complaints

      2

      4.

      Request for Hearing

      3

      5.

      Venue

      3

      6.

      Hearing Panels

      4

      7.

      Evidence and Procedure in Committee Hearings

      4

      8.

      Decision of the Committee

      5

      9.

      Consolidation of Complaints

      5

      10.

      Acceptance, Waiver and Consent and Summary Complaint Procedures

      6

      11.

      Settlement Procedure

      8

      12.

      Complaints Directed by Board of Governors

      9

      13.

      Complaint Docket

      9

      ARTICLE III

      REVIEW OF DISCIPLINARY ACTIONS AND HEARINGS BEFORE THE BOARD OF GOVERNORS

      Section

         

      1.

      Review by the Board of Governors

      9

      2.

      Hearings Before the Board

      10

      3.

      Evidence and Procedure in Board Hearings

      10

      4.

      Powers of Board on Review

      11

      5.

      Decision of Board

      11

      6.

      Notification of Decision

      11

      7.

      Application to SEC for Review

      11

      ARTICLE IV

      IMPOSITION OF SANCTIONS AND COSTS

      Section

         

      1.

      Sanctions

      11

      2.

      Costs of Proceedings

      12

      ARTICLE V

      LIMITATION PROCEDURES UNDER ARTICLE III, SECTION 38 OF THE RULES OF FAIR PRACTICE

      Section

         

      1.

      Board of Governors' Surveillance Committee

      12

      2.

      District Surveillance Committee

      12

      3.

      Written Notification

      12

      4.

      Hearing

      12

      5.

      Decision and Effective Date

      12

      6.

      Review by Board

      13

      7.

      Composition of Board of Governors' Hearing Panel

      13

      8.

      Decision

      13

      9.

      Application to Commission for Review

      13

      10.

      Successive Notices

      14

      11.

      Complaint by the Committee

      14

      ARTICLE VI

      REVOCATION PROCEEDINGS

      Section

         

      1.

      Purpose

      14

      2.

      Commencement of Revocation Proceedings

      14

      3.

      Hearings

      14

      4.

      Decisions

      15

      5.

      Other Action Not Foreclosed

      15

      ARTICLE VII

      ELIGIBILITY PROCEEDINGS

      Section

         

      1.

      Purpose

      15

      2.

      Eligibility Proceedings

      15

      ARTICLE VIII

      SUMMARY SUSPENSION

      Section

         

      1.

      Summary Action

      16

      2.

      Written Notification

      16

      3.

      Request for Hearing

      16

      4.

      Hearing

      16

      5.

      Decision

      17

      6.

      Review by Board

      17

      7.

      Findings of Board on Review

      17

      8.

      Application to Commission for Review

      17

      9.

      Application to Commission for Stay of Summary Action

      17

      10.

      Other Action Not Foreclosed

      18

      ARTICLE IX

      PROCEDURES ON GRIEVANCES CONCERNING THE NASDAQ SYSTEM

      Section

         

      1.

      Purpose

      18

      2.

      Form of Application

      18

      3.

      Request for Hearing

      18

      4.

      Consideration of Applications

      18

      5.

      Decision

      18

      6.

      Review by Board

      18

      7.

      Findings of Board on Review

      19

      8.

      Application to Commission for Review

      19

      ARTICLE X

      MISCELLANEOUS

      Section

         

      1.

      Grounds of Disqualification to Participate in Proceedings

      19

      2.

      Reports and Examination of Books and Records

      19

      3.

      Rulings on Procedural Matters

      19

      4.

      Service of Complaints, Decisions and Other Notices

      19

      5.

      Amendments to Code of Procedure

      20

      CODE OF PROCEDURE *

      ARTICLE I

      APPLICATION AND PURPOSE OF CODE

      Purpose

      Sec. 1. (a) This Code of Procedure shall apply to proceedings relating to disciplinary actions involving members and associated persons; to proceedings relating to eligibility requirements; to proceedings relating to limitation or denial of access to services; and to any other proceeding when the Corporation deems it appropriate.

      (b) Unless otherwise specified, persons associated with a member ("associated persons") shall have the same rights as members and shall be subject to the same duties and obligations under the Code of Procedure.

      Definitions

      Sec. 2. (a) Unless otherwise provided, terms used in the Code of Procedure shall have the meaning as defined in Article I of the By-Laws and Article n, Section 1 of the Rules of Fair Practice.

      (b) The term "Committee" used in the Code of Procedure shall mean either a District Business Conduct Committee or the Market Surveillance Committee.
      (c) The "Market Surveillance Committee" is a standing committee of the Board of Governors which is responsible for handling alleged violations of applicable rules of the Corporation concerning trading of securities, including applicable rules involving quotations, transaction execution and reporting, trading practices and insider trading as well as other such matters delegated to it by the Board of Governors.
      (d) The "National Business Conduct Committee" is a standing committee of the Board of Governors which is authorized to exercise powers dele gated to it by the Board in connection with disciplinary and other matters.

      Interpretation

      Sec. 3. The provisions of the Code of Procedure shall not be construed to limit the By-Laws or Rules of the Corporation.

      Communications Relating to Grievances

      Sec. 4. Communications received by the Corporation from any person regarding any grievance against a member or person associated with a member need not be considered privileged communications and may be dealt with by the Corporation as it considers to be fair and proper under the circumstances.

      ARTICLE II

      DISCIPLINARY ACTIONS BY DISTRICT BUSINESS CONDUCT COMMITTEES, THE MARKET SURVEILLANCE COMMITTEE AND OTHERS

      Issuance of Complaints by Committees

      Sec. 1. If a Committee believes that the nature and extent of the probable violations require disciplinary action, the Committee may issue a complaint as set forth in Section 2 of this Article. The issuance of any complaint by any other person shall also be in accordance with Section 2 of this Article.

      Form, Content, Notice and Withdrawal of Complaints

      Sec. 2. (a) All complaints shall be made in writing, on the form to be supplied by the Board of Governors, and shall specify in reasonable detail the nature of the charges and the rule, regulation or statutory provision allegedly violated. The party making the complaint shall be termed the complainant and the party against whom the complaint is made shall be termed the respondent. If the complaint consists of several allegations, each such allegation shall be stated separately. All complaints must be signed by the complainant and should be directed to any Committee. A copy of the complaint shall be sent to all respondents and to the member of the Corporation with whom any respondent is presently an associated person.

      (b) After prior approval by the National Business Conduct Committee, a complaint may be withdrawn by a Committee at any time prior to the issuance of a written decision. Withdrawal of a complaint shall not preclude a Committee from filing a complaint at a future date involving the same allegations.

      Answers to Complaints

      Sec. 3. (a) All answers to complaints shall be in writing on the form to be supplied by the Board of Governors, and shall be submitted to the Committee within 20 calendar days from the date of the complaint sent to the respondent. The Committee may extend the 20 calendar day period for good cause. The Committee, upon the receipt of the answer of the respondent, shall forthwith, on the form to be supplied by the Board of Governors, send notice in writing of the receipt of such answer, together with a copy of such answer, to the complainant, if other than a Committee.

      (b) If a complaint is amended, the time period for filing an answer or amended answer shall be extended for 10 calendar days from the date of the amended complaint. If an answer has already been filed, a respondent shall have 10 calendar days from the date of the amended complaint within which to file an amended answer.
      (c) If no answer is received by the Committee within the time required, the Committee shall send a second notice, on the form to be supplied by the Board of Governors, to the respondent by certified mail, return receipt re quested, requiring an answer within ten calendar days from the date of the second notice, or within such longer period as the Committee in its discretion may deter mine, stating that failure of the respondent to reply within the period specified may be treated by the Committee as an admission of the allegations of the complaint. If no answer is received by the Committee within the time required by the second notice, the Committee may consider the allegations of the complaint as admitted by the respondent.
      (d) In complaints involving multiple respondents, copies of the answers submitted by each respondent shall be mailed promptly by the Corporation to all other respondents.

      Request for Hearing

      Sec. 4. Upon the filing of an answer and due notice thereof to the complainant, either the complainant, if other than a Committee, or the respondent may request a hearing before the Committee having jurisdiction to hear the complaint. If a request is made, a hearing shall be granted complainant and respondent. In the absence of a request for a hearing, the Committee may order any complaint set down for hearing. A notice stating the date, time and place of the hearing shall be mailed to both complainant and respondent at least 10 calendar days before the hearing, unless extraordinary circumstances require a shorter notice period, or unless the notice period is waived.

      Venue

      Sec. 5. (a) Normally, complaints before a District Business Conduct Committee shall be considered by the District Business Conduct Committee of the district in which the principal office of the member is located. If the act or omission which is the subject of the complaint occurred entirely or largely in a branch office of a member, the complaint shall be considered by the District Business Conduct Committee of the district in which the branch office is located. Complaints before the Market Surveillance Committee shall be considered at the time and place established by that Committee or its hearing panel established pursuant to Section 6(b), below.

      (b) The Committee considering the matter may be changed, if:
      (1) the respondents, in writing, consent to having the complaint considered by some other Committee and such action is approved by the Committee having jurisdiction; or
      (2) the National Business Conduct Committee determines that the circumstances make it appropriate to transfer the matter to another Committee; or
      (3) a respondent has requested, in writing, a change in the Committee considering the matter, specifying the basis for the request, and the National Business Conduct Committee grants the request.
      (c) In the event the Committee considering a complaint is changed, the complaint shall be processed to completion by the Committee to which the complaint was transferred. In the event the boundaries of one or more districts should be changed any complaint pending in a district shall be processed to completion by the District Business Conduct Committee for the newly constituted district which would have had jurisdiction had the complaint been filed subsequent to the effective date of the boundary changes.
      (d) For the purpose of proceedings under this Code, the principal office of the member shall be the office so designated in the member's application for membership.

      Hearing Panels

      Sec. 6. (a) The entire District Business Conduct Committee may sit as a hearing panel, or it may appoint a hearing panel of three or more persons, all of whom are associated with members of the Corporation, at least two of whom shall also be members of the District Business Conduct Committee unless otherwise directed by the National Business Conduct Committee.

      (b) The entire Market Surveillance Committee may sit as a hearing panel or that committee may appoint a hearing panel consisting of three or more persons, all of whom are persons associated with members of the Corporation or with issuers whose securities are included in an automated quotation system of the Corporation, at least one of whom shall be a member of the Market Surveillance Committee.
      (c) The requirements regarding composition of the hearing panel contained in Sections 6 (a) and 6 (b), above, may be waived by mutual consent of respondent and complainant.
      (d) If respondents waive a hearing, and the Committee does not order a hearing on its own motion, the panel shall consider the matter on the record, which shall include all evidence submitted by the respondents and the complainant, all of which shall have been previously tendered by each party to the other.
      (e) If a hearing panel is appointed, as provided in Sections 6(a) and 6(b) above, the hearing panel shall, after the hearing or upon its consideration of the record, present its recommended findings and sanctions to the full Committee, which shall make the final determination by a majority vote of those present and voting at a duly constituted meeting thereof.

      Evidence and Procedure in Committee Hearings

      Sec. 7. (a) The Committee staff, or the complainant, if other than a Committee, shall upon request make available to respondents and their counsel any documentary evidence the staff intends to present at the hearing within a reasonable time before the hearing.

      (b) Respondents shall submit to the Committee staff or the com plainant, any documentary evidence respondents intend to present at the hearing within a reasonable time before the hearing.
      (c) If a hearing is held, both the complainant and the respondent shall be entitled to be heard in person and by counsel. Formal rules of evidence shall not be applicable. Notwithstanding paragraphs (a) or (b), the parties may submit any additional documentary evidence at the hearing as the hearing panel, in its discretion, determines may be relevant and necessary for a complete record. A record of the hearing shall be kept in all cases.

      Decision of the Committee

      Sec. 8. (a) If the Committee determines that a violation alleged in the complaint has occurred, it shall issue a written decision which shall set forth:

      (1) the act or practice which the respondent has been found to have engaged in or omitted;
      (2) the rule, regulation or statutory provision which such act, practice or omission to act is deemed to violate;
      (3) the basis upon which the findings are made; and
      (4) the sanction imposed and the reason therefore.
      (b) If the Committee determines that no violation charged in the complaint has occurred, it shall dismiss the complaint in writing.
      (c) The decision of the Committee shall become final on the next business day following the expiration of a 45 calendar day period from the date of the decision, unless appealed or called for review under Article III, Section 1 of this Code.
      (d) A copy of any written decision shall be sent to all respondents and the complainant named in the complaint and to each member of the Corporation with whom a respondent is presently an associated person.

      Consolidation of Complaints

      Sec. 9. (a) A Committee may consolidate proceedings involving two or more complaints where common questions of law or fact are involved, the evidence offered with respect to each proceeding may have a bearing on the other, and the consolidation will result in savings of time and expense. The Committee shall send written notice of the proposed consolidation to all respondents, together with copies of the complaints to be consolidated and answers of the respondents, and allow respondents 10 calendar days from the date of notification in which to submit any written objections. If objections are received, a determination shall be made by the Committee whether, in view of such, the consolidation should be effected.

      (b) If the complaints sought to be consolidated were issued by more than one Committee, the Committee that proposes to take jurisdiction of the consolidated proceeding shall submit a written proposal for consolidation to the respondents and the National Business Conduct Committee. The proposal shall include copies of the relevant complaints and the answers of respondents. The respondents shall be allowed 10 calendar days from the date of notification in which to submit any written objections to the National Business Conduct Committee. If objections are received, a determination shall be made by the National Business Conduct Committee whether in view of such, the consolidation shall be effected. If the request for consolidation is granted, the Committee given jurisdiction shall send written notice of the consolidation to respondents. Respondents may submit an answer, or amend a previous answer, 10 calendar days from the date of such notice of consolidation.

      Acceptance, Waiver and Consent and Summary Complaint Procedures

      Sec. 10. A Committee may, prior to issuance of a complaint under Section 1 of this Article, impose disciplinary penalties pursuant to the procedures set forth under this Section 10.

      Acceptance, Waiver and Consent of the Respondent

      (a) If the Committee has reason to believe a violation has occurred and the member or associated person does not dispute the violation, the Committee may suggest that the member or associated person submit a letter containing an* acceptance of a finding of violations, a waiver of all rights of appeal to the Board of Governors, the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the letter is accepted, and a consent to the imposition of sanctions. The letter shall describe the act or practice engaged in or omitted; the rule, regulation or statutory pro vision violated; and the sanction to be imposed therefor. If the Committee then concludes that the Letter of Acceptance, Waiver and Consent is appropriate and should be accepted, it shall be submitted to the National Business Conduct Com mittee. If the letter is accepted by the National Business Conduct Committee, it shall become final and shall constitute the complaint, answer and decision in the matter. If the letter is rejected by either Committee, any acceptances, waivers and consents contained therein shall not be considered in any further complaint action which may be taken against the member or associated person.

      Summary Complaint Procedure

      (b)
      (1) In any case in which a Committee is of the opinion that the facts are not in dispute, that the acts, practices and conduct involved constitute a violation or violations of a rule, regulation, or statutory provision and that following the complaint procedure contained in Article n, Section 1 of this Code does not appear to be appropriate, the Committee may offer the respondent an opportunity to waive a hearing and accept Summary Complaint Procedure as here inafter set forth.
      (2) Summary Complaints shall be in writing on a form to be approved by the Board of Governors and shall specify in reasonable detail the nature of the charges, the rule, regulation, or statutory provision which such act, practice or omission to act is alleged to have been violated and the sanction deemed appropriate in the circumstances; provided, however, the sanction for all violations alleged shall not exceed censure and/or a fine of $2,500 as to each respondent.
      (3) An offer by a Committee to follow the Summary Complaint Procedure outlined in paragraphs (1) and (2) above shall include notice to the respondent:
      (i) that the respondent may reject the Summary Complaint Procedure, in which case the regular complaint procedure will be followed;
      (ii) that unless an acceptance of the offer is received by the Committee within 10 business days after the date of receipt of the complaint by the respondent, and unless this period is extended by the Committee, the offer will be considered as rejected by the respondent and the Committee will follow the regular complaint procedure; and
      (iii) that the respondent may accept the offer by executing and returning to the Committee the number of copies of the complaint and other related documents as specified in the form together with a remittance in the amount of any fine proposed to be imposed.
      (4) Acceptance by a respondent of an offer as described above shall constitute the respondent's admission of the violations, acceptance of thl' sanction and a waiver of all rights of appeal to the Board of Governors, the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the decision, and the complaint and related documents shall constitute the Committee's decision and the record in the case. Receipt of re spondent's acceptance by the Committee shall conclude the proceedings as of the date the acceptance is received, without further notice to the respondent, under the conditions stated in the offer, subject to paragraphs (5) and (6).
      (5) Where there is more than one respondent, and upon the rejection of such an offer by any respondent, the Committee, at its option, may terminate the proceedings as to any or all of the remaining respondents and, in the event of such termination, the Committee with jurisdiction shall file a complaint under Article n, Section 1 of this Code as to those respondents rejecting the offer and such others as are deemed necessary.
      (6) The National Business Conduct Committee may institute review proceedings within 45 calendar days after receipt of respondent's acceptance by the Committee and such review shall operate as a stay of any such action. The National Business Conduct Committee may thereafter dismiss one or more charges and/or reduce the sanction or remand the matter to the Committee with instructions to institute complaint procedure under Article n, Section 1 of this Code.
      (7) If it becomes necessary for the Committee having jurisdiction to file a complaint against the respondent under Article II of this Code, the respondent shall not be prejudiced in any way by the prior offer of Summary Complaint Procedure and the complaint and acceptance thereof based upon the Summary Complaint Procedure shall be of no effect and be given no consideration in any determination of the issues involved in any such complaint.

      Settlement Procedure

      Sec. 11. (a) A respondent in a proceeding before a Committee may at any time propose in writing an Offer of Settlement of the complaint to the Committee.

      (b) Offers of Settlement must be made in conformity with the provisions of this Section and they should not be made frivolously or propose a sanction inconsistent with the seriousness of the violations to be found.
      (c) Every Offer of Settlement shall be in writing and shall contain in reasonable detail:
      (1) the act or practice which the member or person associated with a member is alleged to have engaged in or omitted;
      (2) the rule, regulation, or statutory provision which such act, practice or omission to act is alleged to have been violated;
      (3) a statement that the respondent consents to findings of fact and violations consistent with the statements contained in the Offer required by paragraphs (c)(l) and (c)(2);
      (4) a proposed sanction to be imposed; and
      (5) a waiver of all rights of appeal to the Board of Governors, the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the Offer of Settlement is accepted.
      (d) If an Offer of Settlement is accepted by a Committee, it shall propose an Order of Acceptance of Offer of Settlement. The proposed Order shall make findings of fact, including a statement of the rule, regulation or statutory provision violated, and impose sanctions consistent with the terms of the Offer of Settlement.
      (e) Before any such Order of Acceptance of Offer of Settlement shall become effective it must be submitted to and approved by the National Business Conduct Committee, which is hereby delegated authority to accept or to reject an Offer of Settlement. If the National Business Conduct Committee by a majority vote approves the Committee's Order, it shall communicate its conclusion to the Committee which shall thereafter issue such Order.
      (f) The Order of Acceptance of Offer of Settlement shall constitute the Committee's decision and shall conclude the proceeding as of the date the Order is issued. If the Order includes a penalty of suspension, the suspension shall become effective on a date to be set by the President of the Association. Any other sanctions imposed shall become effective immediately.
      (g) If the Offer of Settlement is rejected by a Committee or by the National Business Conduct Committee, the Offer of Settlement shall be deemed withdrawn.
      (h) Where there is more than one respondent in a proceeding and one or more of the respondents submit an Offer of Settlement, the Offer may be accepted or rejected as to any one or all of the respondents submitting Offers. The proeeedings will thereafter be terminated as to those respondents whose Offers of Settlement have been accepted, but their participation may be required at any hearing. The Committee shall thereafter proceed pursuant to the regular disciplinary procedures provided for by this Code as to those respondents which did not submit Offers of Settlement.
      (i) If an Offer of Settlement is not accepted and it becomes necessary for the Committee to follow the regular disciplinary procedures against the respondent, the respondent shall not be prejudiced by the prior Offer of Settlement and it shall not be given consideration in the determination of the issues involved in the pending or any other proceeding.

      Complaints Directed by Board of Governors

      Sec. 12. The Board of Governors shall have authority when on the basis of information and belief it is of the opinion that any act, practice or omission of any member of the Corporation or of any person associated with a member is in violation of any rule regulation or statutory provision, to file a complaint with a Committee against such member or such person associated with a member or to instruct any Committee to do so, and any such complaint shall be handled in accordance with this Article.

      Complaint Docket

      Sec. 13. Each Committee shall promptly notify the Surveillance Department of the Corporation of all complaints issued, and the Surveillance Department shall record all complaints so reported in the Complaint Docket. Committees shall also promptly notify the Surveillance Department of changes in the status of every complaint filed including respondents' answers, respondents' requests for or waiver of hearings, and the decision of the Committee, which notification shall also be entered in the Complaint Docket.

      ARTICLE III

      REVIEW OF DISCIPLINARY ACTIONS AND HEARINGS BEFORE THE BOARD OF GOVERNORS

      Review by the Board of Governors

      Sec. 1. (a) If a Committee shall take any disciplinary action against any member, or shall dismiss any complaint, as herein provided, such action or dismissal shall be subject to review by the Board of Governors on its own motion within 45 calendar days after the date of the decision. Any such action or dismissal shall also be subject to review upon application by any person aggrieved thereby, filed within 15 calendar days after the date of the decision. Application to the Board of Governors for review, or the institution of review by the Board of Governors on its own motion, shall operate as a stay of any such action or dismissal, until a decision is rendered by the Board of Governors upon such review as hereinafter provided.

      (b) If a respondent or any aggrieved person who has made application to the Board of Governors for a review shall withdraw the appeal without a determination by the Board of Governors on the merits thereof, the Board of Governors shall have an additional period of 45 calendar days subsequent to the withdrawl in which to determine whether it shall review the matter on its own motion.

      Hearings Before the Board

      Sec. 2. (a) In the case of an appeal or call for review, the complainant, if other than the Committee, or the respondent may request a hearing before a hearing panel of the Board of Governors. If a request is made, a hearing shall be granted. In the absence of a request for a hearing, the Board of Governors may have any matter set down for a hearing. A notice stating the date, time and place of the hearing shall be mailed to the complainant, if other than the Committee and respondent at least 10 calendar days before the hearing. The notice period may be waived in writing by the respondent or a shorter notice given where extraordinary circumstances require.

      (b) Unless otherwise consented to by the parties, all hearings shall be held before a hearing panel appointed by the National Business Conduct Committee consisting of two or more persons, all of whom are associated with members of the Corporation, at least one of whom shall also be a current member of the Board of Governors.
      (c) If a hearing is held, the hearing panel shall consider the record before the Committee and any new material submitted by the complainant and the. respondent. If respondent has waived a hearing and the Board does not order a hearing on its own motion, the panel shall consider the matter on the record, which may include new evidence as long as all parties have previously been tendered the new evidence.
      (d) The hearing panel shall present its recommended findings and sanctions to the National Business Conduct Committee. The National Business Conduct Committee shall make its recommended findings and sanctions to the Board of Governors which shall make the final determination.

      Evidence and Procedure in Board Hearings

      Sec. 3. (a) Upon request, the Corporation staff or the complainant, if other than a Committee, shall make available to respondents and their counsel any documentary evidence which was not part of the record before the Committee, within a reasonable time before the hearing.

      (b) Respondents shall also make available to the Corporation staff or the complainant, any documentary evidence, which was not part of the record before the Committee, within a reasonable time before the hearing.
      (c) If a hearing is held both the complainant and respondent shall be entitled to be heard in person and by counsel. Formal rules of evidence shall not be applicable. Notwithstanding paragraphs (a) or (b), the parties may submit any additional documentary evidence at the hearing as the hearing panel, in its dis cretion, determines may be relevant and necessary for a complete record. A record of the hearing shall be kept in all cases.

      Powers of Board on Review

      See. 4. In any proceeding to review any disciplinary action taken or dismissed by a Committee, the Board of Governors may affirm, dismiss, modify or reverse dismissals with respect to each of the Committee findings or remand the matter with appropriate instructions to the Committee. The Board of Governors may affirm, increase, or reduce any sanction, or impose any other fitting sanction.

      Decision of Board

      Sec. 5. (a) In any proceeding to review any disciplinary action taken by a Committee or a dismissal by a Committee if the Board of Governors determines that a violation alleged in the complaint has occurred, it shall issue a written decision which shall set forth:

      (1) the act or practice which the respondent has been found to have engaged in or omitted;
      (2) the rule, regulation, or statutory provision which such act or omission to act is deemed to violate;
      (3) the basis upon which the findings are made; and
      (4) the sanction imposed and the reason therefor.

      Notification of Decision

      Sec. 6. The complainant, the respondent and the member of the Corporation with whom the respondent is presently an associated person shall be promptly notified and sent a copy of any written decision rendered by the Board of Governors.

      Application to SEC for Review

      Sec. 7. In any case where either the complainant or the respondent feels aggrieved by any disciplinary action taken by the Board of Governors, such person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended. The member of the Corporation with whom the respondent is presently an associated person shall be notified promptly of any application for review to the Securities and Exchange Commission.

      ARTICLE IV

      IMPOSITION OF SANCTIONS AND COSTS

      Sanctions

      Sec. 1. In any proceeding relating to disciplinary actions involving members and associated persons, a Committee or the Board of Governors may impose any sanction it deems appropriate as set forth in Article V, Section 1, of the Rules of Fair Practice or in the applicable By-Law or Rule of the Corporation which was the subject of the complaint.

      Costs of Proceedings

      Sec. 2. In any disciplinary action, the member or associated person shall bear such part of the costs of the proceedings as the Committee or Board of Governors deems fair and appropriate under the circumstances.

      ARTICLE V

      LIMITATION PROCEDURES UNDER ARTICLE III, SECTION 38 OF THE RULES OF FAIR PRACTICE

      Board of Governors' Surveillance Committee

      Sec. 1. The Board of Governors shall appoint a standing Committee of the Board to be known as the Board of Governors' Surveillance Committee which is composed of such members as are from time to time determined by the Board.

      District Surveillance Committee

      Sec. 2. As required to implement the provisions of this rule, each District Committee shall create a District Surveillance Committee composed of two current or former District Business Conduct Committee members; two members of the Board of Governors' Surveillance Committee, and one former member of the Board of Governors.

      Written Notification

      Sec. 3. If the District Surveillance Committee has reason to believe that any of the conditions specified in subsections (b) or (c) of Section 38 exist, it may exercise the authority conferred by Section 38 by issuing a notice directing the member to limit its business. Such notice shall contain a statement of the specific grounds on which such action is being taken, specify in reasonable detail the nature of the limitations being imposed and inform the member that he has an opportunity to be heard, if such request is made within three business days of receipt of the notice. The District Surveillance Committee shall also provide a similar notice in writing to a member of any revision or modification of restrictions or limitations previously imposed.

      Hearing

      Sec. 4. If an opportunity to be heard is requested, it shall be provided by the District Surveillance Committee within five business days of the receipt of the notice. A member requesting the opportunity to be heard shall present its reasons why the notice should be withdrawn or modified and shall be entitled to be represented by counsel. A record shall be kept of the proceeding before the District Surveillance Committee.

      Decision and Effective Date

      Sec. 5. (a) The District Surveillance Committee shall within five business days of a hearing issue a written decision approving or modifying the limitations specified in the notice. The decision shall also provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed.

      (b) When an opportunity to be heard is not requested, the limitations contained in the notice shall become effective three days following receipt of the notice without any written decision unless the District Surveillance Committee decides upon a later effective date or unless the matter is reviewed by the Board of Governors, subject to the provisions of subsections (6), (7) and (8) hereof, and they shall remain in effect until such time as they are removed, revised or modified by the District Surveillance Committee.

      Review by Board

      Sec. 6. The written decision issued pursuant to subsection (5) shall be subject to review by the Board of Governors upon application by the member aggrieved thereby filed within five business days of the date of the decision. The decision, or the notice where no opportunity to be heard was requested before the District Surveillance Committee, shall also be subject to review by the Board of Governors on its own motion within 30 calendar days of the decision or notice. Where two members of the District Surveillance Committee disagree with the determination of the Committee, the matter will automatically be reviewed by the Board of Governors. In the case of an appeal, the member shall be given an opportunity to be heard before a hearing panel of the Board within 10 business days of the written decision. If called for review, the matter shall be heard within 30 days of such action. In any hearing before the Board, a member shall be entitled to be represented by counsel. The institution of review, whether by application or on the initiative of the Board, shall operate as a stay of the action by the District Sur-. veillance Committee unless otherwise ordered by the Board.

      Composition of Board of Governors' Hearing Panel

      Sec. 7. The Board of Governors' hearing panel shall be composed of two members of the Board of Governors' Surveillance Committee and one current member of the Board.

      Decision

      Sec. 8. Upon consideration of the record, the Board of Governors shall in writing affirm, modify, reverse or dismiss the decision of the District Surveillance Committee or remand the matter for further proceedings consistent with its instructions. The Board shall set forth specific grounds upon which its determination is based and shall provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed. If a hearing is held, a decision shall issue within five business days of the hearing and the decision shall be the final action of the Board. If no hearing is requested, the matter shall be considered on the record and a decision shall be issued promptly. Any limitation imposed as a result of Board action shall become effective immediately upon issuance of its decision and shall remain in effect until such time as removed or modified by the District Surveillance Committee.

      Application to Commission for Review

      Sec. 9. In any case where a member feels aggrieved by any action taken or approved by the Board of Governors, such member may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.

      Successive Notices

      Sec. 10. If it appears at any time to the District Surveillance Committee that, notwithstanding an effective notice or decision under subsections (3), (5) and (8) hereof, the member is still approaching financial or operational difficulty, the District Surveillance Committee may prescribe additional limitations of a member's business in which case all of the procedures specified above shall be followed prior to the implementation thereof.

      Complaint by the Committee

      Sec. 11. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code where a violation of the Rules of the Corporation may be involved.

      ARTICLE VI

      REVOCATION PROCEEDINGS

      Purpose

      Sec. 1. This Article provides procedures, in addition to those contained for summary suspension pursuant to Article VIII of this Code of Procedure, for the Corporation to cancel or suspend the membership of a member or to bar or suspend a person from being associated with a member pursuant to Article II, Section 3, Article VI, Section 3 or Article VII, Section 2 of the By-Laws. Such actions are hereinafter referred to as "revocation proceedings."

      Commencement of Revocation Proceedings

      Sec. 2. (a) Should the Corporation determine to commence a revocation proceeding, it shall send notice thereof to the member or person associated with a member at least five (5) business days prior to the effective date of any action under Article II, Section 3 of the By-Laws and at least fifteen (15) days prior to the effective date of any action under Article VI, Section 3 or Article VII, Section 2 of the By-Laws.

      (b) Upon written request of the member or persons associated with the member received by the Corporation prior to the expiration of the applicable notice period provided in subsection 2(a), the matter shall be presented to a hearing panel designated by the Board of Governors.
      (c) A decision rendered by a hearing panel designated pursuant to subsection 2(b) shall constitute final action by the Corporation. Any cancellation, bar or suspension shall become effective on a date established by the hearing panel.

      Hearings

      Sec. 3. At any hearing held under this Article, a record shall be kept and the member or person associated with a member and the Corporation shall be entitled to be heard in person and be represented by counsel and to submit any relevant matter.

      Decisions

      Sec. 4. Following any hearing held under this Article, a written decision shall be issued setting forth the findings made and the grounds upon which that determination is based.

      Other Action Not Foreclosed

      Sec. 5. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code where a violation of the Rules of the Corporation may be involved.

      ARTICLE VII

      ELIGIBILITY PROCEEDINGS

      Purpose

      Sec. 1. This Article provides procedures for a person to become associated with a member notwithstanding the existence of a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934, as amended, for reinstatement after a revocation proceeding pursuant to Article VI of this Code, and to obtain relief in cases of failure to meet the eligibility or qualification requirements of the Corporation's Rules and By-Laws.

      Eligibility Proceedings

      Sec. 2. (a) If the Corporation has reason to believe a statutory disqualification exists or there is otherwise a failure to meet the eligibility requirements of the Corporation's By-Laws, the member or broker or dealer or person shall be notified in writing of the specific eligibility deficiencies. No such notice shall be required, however, in the case of a cancellation or suspension of membership or suspension or bar of a person associated with a member pursuant to Article VI of this Code.

      (b) The member or broker or dealer or person may make application to the Corporation requesting relief and shall demonstrate why the application should be granted. Should the Corporation decline to grant such request, then if requested in writing by any party, or if directed by the Corporation, a hearing shall be held before a hearing panel designated by the Board of Governors, and a record shall be kept. At the hearing the parties shall be entitled to be heard in person and be represented by counsel and to submit any relevant matter. The hearing panel shall make a recommendation as to the application which shall be forwarded to the Board of Governors together with the record.
      (c) The Board of Governors shall make a written determination upon the record before it, setting forth therein the specific grounds upon which such determination is based and the conditions, if any, as to the continuance in or ad mission to membership it considers appropriate.
      (d) The Board of Governors shall promptly notify the applicant of any action taken. When required, a notification shall be filed with the Commission. Any applicant or person who is aggrieved by the action of the Board of Governors may make application for review of such action to the Commission.

      ARTICLE VIII

      SUMMARY SUSPENSION

      Summary Action

      Sec. 1. The Corporation may summarily:

      (a) suspend a member or person associated with a member who has been and is expelled or is currently subject to a suspension from any self-regulatory organization or barred or suspended from being associated with a member of any self-regulatory organization;
      (b) suspend a member who is in such financial or operating difficulty that the Corporation determines and so notifies the Securities and Exchange Commission that the member cannot be permitted to continue to do business as a member with safety to investors, creditors, other members, or the Corporation; and
      (c) limit or prohibit any person with respect to access to the NASDAQ System or other services offered by the Corporation if, in the case of a member or person associated with a member, subsection (a) or (b) applies; or, in the case of another person, if the Corporation determines that such person does not meet the qualification requirements or other prerequisites for such access and cannot be permitted to have or to continue to have such access with safety to investors, creditors, members, or the Corporation.

      Written Notification

      Sec. 2. Any party against whom the Corporation takes summary action pursuant to Section 1 above shall be notified promptly in writing or otherwise of such action. In the case of a person associated with a member, the member of the Corporation with which the person is presently associated shall also be notified. Such notification shall issue only after prior approval of the Executive Committee of the Board of Governors and shall contain a statement of the specific grounds on which such action is taken and provide notice that an opportunity for a hearing is afforded pursuant to the provisions of Sections 3 and 4 hereof. Such summary action shall not be conditioned upon notification but shall be effective upon the date of the written notification.

      Request for Hearing

      Sec. 3. Any party against whom the Corporation has taken summary action may request an opportunity for a hearing within 10 calendar days of the date of notification pursuant to Section 2 above. Such hearing shall be held within 5 calendar days of such request. A request for a hearing shall not operate as a stay of the summary action.

      Hearing

      Sec. 4. If a hearing is requested pursuant to Section 3 above, it shall be held before a hearing panel designated by the Board of Governors. The party against whom the Corporation has taken summary action shall be entitled to be heard in person, to be represented by counsel and to submit any relevant matter. Counsel for the Corporation and other designated Corporation personnel may participate in the hearing and be entitled to submit any relevant matter. In any such proceeding, a record shall be kept.

      Decision

      Sec. 5. A written decision shall be issued by the hearing panel within 5 calendar days of the date of the hearing, and a copy shall be sent to the party against whom the Corporation has taken summary action and, in the case of a person associated with a member, the member with whom the party is presently an associated person. The decision shall contain the reasons supporting the action taken.

      Review by Board

      Sec. 6. (a) If the party against whom the Corporation has taken summary action does not request a hearing pursuant to Section 3, the notification of summary action shall be subject to review by the Board of Governors on its own motion within 30 calendar days of the date of the notification.

      (b) If a hearing is held, the written decision issued pursuant to Section 5 shall be subject to review by the Board of Governors upon application of the party against whom the Corporation has taken summary action filed within 15 calendar days after issuance. Any such decision shall also be subject to review by the Board of Governors on its own motion within 30 calendar days after issuance.
      (c) The institution of review, whether by application to, or on the initiative of, the Board shall not operate as a stay of the summary action.

      Findings of Board on Review

      Sec. 7. Upon consideration of the record and after further hearings as the Board of Governors shall order, the Board shall in writing affirm, modify, reverse or dismiss the decision, or remand the matter for further proceedings consistent with its instructions. The Board shall set forth specific grounds upon which its determination is based.

      Application to Commission for Review

      Sec. 8. Any party against whom summary action has been taken by the Board of Governors may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended.

      Application to Commission for Stay of Summary Action

      Sec. 9. Any party against whom summary action has been taken by the Board of Governors may apply to the Securities and Exchange Commission for a stay of such summary action as permitted by the Securities Exchange Act of 1934, as amended.

      Other Action Not Foreclosed

      Sec. 10. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code where a violation of the Rules of the Corporation may be involved.

      ARTICLE IX

      PROCEDURES ON GRIEVANCES CONCERNING THE NASDAQ SYSTEM

      Purpose

      Sec. 1. The purpose of this Article is to provide, where justified, redress for persons aggrieved by operations of the NASDAQ System and to provide procedures for the handling of qualification matters pursuant to NASDAQ rules.

      Form of Application

      Sec. 2. All applications shall be in writing, and shall specify in reasonable detail the nature of and basis for the redress requested. If the application consists of several allegations, each allegation shall be stated separately. All applications must be signed and shall be directed to the Corporation.

      Request for Hearing

      Sec. 3. Upon request, the applicant shall be granted a hearing after reasonable notice. In the absence of such request for a hearing, the Corporation may, in its discretion, have any application set down for hearing or consider the matter on the basis of the application and supporting documents.

      Consideration of Applications

      Sec. 4. All applications shall be considered by a hearing panel designated by the Board of Governors. The applicant shall be entitled to be heard in person and by counsel and to submit any relevant matter. In any such proceeding a record shall be kept.

      Decision

      Sec. 5. Decisions on applications shall be in writing and a copy sent by mail to the applicant. The hearing panel may communicate its determination to the applicant prior to the issuance of a written decision, which shall be effective as of the time of such communication. The written decision shall contain the reasons supporting the hearing panel's conclusions.

      Review by Board

      Sec. 6. The decision shall be subject to review by the Board of Governors on its own motion within 45 calendar days after issuance of the written decision. Any such decision shall also be subject to review upon application of any person aggrieved thereby, filed within 15 calendar days after issuance. The institution of a review, whether on application or on the initiative of the Board, shall not operate as a stay of the decision.

      Findings of Board on Review

      Sec. 7. Upon consideration of the record, and after such further hearings as it shall order, the Board shall affirm, modify, reverse, dismiss, or remand the decision. The Board shall set forth specific grounds upon which its determination is based.

      Application to Commission for Review

      Sec. 8. In any case where a person feels aggrieved by any decision of the Board of Governors taken pursuant to Section 7, the person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended.

      ARTICLE X

      MISCELLANEOUS

      Grounds of Disqualification to Participate in Proceedings

      Sec. 1. No member of the Board of Governors, any Committee or any other committee or subcommittee governed by this Code shall in any manner, directly or indirectly, participate in the determination of any matter substantially affecting his interest or the interests of any person in whom he is directly or indirectly interested. In any such case the particular member shall disqualify himself, or shall* be disqualified by the Chairman of any such Board or Committee.

      Reports and Examination of Books and Records

      Sec. 2. For the purpose of any examination, or determination as to any proceeding pursuant to this Code, any hearing panel, Committee, or the Board of Governors, or any duly authorized agent or agents of any such hearing panel, Committee or Board shall have the right to require any member or person associated with a member to report orally or in writing with regard to any examination, determination or hearing, and to examine the books and records of any member or person associated with a member.

      Rulings on Procedural Matters

      Sec. 3. Except as otherwise provided by this Code, the hearing panel, Committee or Board shall have discretion to make rulings on all motions and other matters arising during the course of its proceedings (including without limitation, the presence of witnesses after completion of their testimony and of other persons not parties to the proceeding) which require resolution during the proceeding.

      Service of Complaints, Decisions and Other Notices

      Sec. 4. Any person shall be deemed to have received notice to which he is entitled under any section of this Code by the mailing of the notice to that person at his last known address as reflected on the Corporation's records. For purposes of computing the time for any such person to take required action under this Code, 3 calendar days shall be added to the prescribed period if service is effected by mail.

      Amendments to Code of Procedure

      Sec. 5. This Code of Procedure may be amended by a majority vote of the Board of Governors, subject to approval by the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended.


      1/ See, Securities Exchange Act Release No. 21843 (March 12, 1985).

      2/ See, Securities Exchange Act Release No. 21838 (March 12, 1985).

      3/ As noted in the attached text, certain minor portions of the By-laws and Code are expected to become effective upon Commission approval in the near future.

      4/ See, Securities Exchange Act Release No. 21842 (March 12, 1985).

      5/ See, Securities Exchange Act Release No. 21840 (March 12, 1985).

      * The text herein reflects amendments to Articles VI, VII, and X which have been filed with the Securities and Exchange Commission in File No. SR-NASD-85-2 but which are not yet effective. See, Securities Exchange Act Release No. 21839 (March 12, 1985). These amendments codify existing Association practice. The Association anticipates that, absent significant adverse comment, the Commission will approve these amendments in the near future. Pending Commission approval, the Association will nevertheless act in accordance with the amended text.

      * The text herein reflects amendments to Articles II, VII, and XVI which have been filed with the Securities and Exchange Commission in File No. SR-NASD-85-2 but which are not yet effective. See, Securities Exchange Act Release No. 21839 (March 12, 1985). These amendments codify existing Association practice. The Association anticipates that, absent significant adverse comment, the Commission will approve these amendments in the near future. Pending Commission approval, the Assocation will nevertheless act in accordance with the amended text.


    • 85-26 Adoption of an Amendment to the Interpretation of the Board of Governors on "Forwarding of Proxy and Other Materials"

      TO: All NASD Members and Other Interested Persons

      The Securities and Exchange Commission has recently approved an amendment to the Interpretation of the Board of Governors, "Forwarding of Proxy and Other Materials," under Article III, Section 1 of the NASD Rules of Fair Practice.1/ This amendment, which became effective on April 1, 1985, establishes a surcharge which may be charged by NASD members to issuers in connection with proxy solicitations.

      The Interpretation requires member firms to forward proxy materials to their customers promptly upon receipt of sufficient copies of the materials and satisfactory assurance that the issuer will reimburse the member for expenses incurred. The Appendix to the Interpretation sets out suggested rates of reimbursement.

      The recently approved amendment permits a member firm to charge an issuer an additional $.20 for each set of proxy material handled by the member. The amendment is temporary and, unless extended, the surcharge can be applied only until March 31, 1986.

      The purpose of this amendment is to assist member firms in recouping the direct and indirect start-up costs incurred to comply with SEC Rules 14b-l(c) and 17a-3(a)(9)(ii) under the Securities Exchange Act of 1934. These SEC rules were adopted to improve the ability of issuers to identify and communicate with their shareholders whose securities are held in "street name" accounts with broker-dealers. Rule 17a-3(a)(9)(ii) requires that broker-dealers determine and maintain a record as to whether or not a customer objects to disclosure of his name, address and securities positions to issuers. Rule 14b-l(c) requires firms to provide issuers, upon request and assurance of reimbursement of reasonable expenses, with names, addresses and securities positions of non-objecting beneficial shareholders of the issuer's securities.

      The text of the amendment is attached to this notice.

      Questions regarding this notice should be directed to Craig L. Landauer, Office of General Counsel, at (202) 728-8291.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      AMENDMENT TO INTERPRETATION OF THE BOARD OF GOVERNORS "FORWARDING OF PROXY AND OTHER MATERIALS" UNDER ARTICLE III, SECTION 1 OF THE RULES OF FAIR PRACTICE*

      FORWARDING OF PROXY AND OTHER MATERIALS

      APPENDIX

      The Board of Governors has determined that the following suggested rates of reimbursement for expenses incurred in forwarding proxy material, annual reports, information statements and other material are to be as a guide by members:

      * * * *

      Surcharge for Proxy Solicitation

      Twenty cents for each set of proxy material, i.e., proxy statement, form of proxy and annual report when mailed as a unit, for the period from April 1, 1985 to March 31, 1986 as a surcharge in addition to the appropriate charges specified in this Appendix.


      1/ NASD Manual (CCH) p. 2037-3.

      * New language is underlined.


    • 85-25 Bevill, Bresler & Schulman, Incorporated Bevill, Bresler & Schulman Securities, Inc. Austin Investment Planning, Inc. 301 South Livingston Avenue Livingston, New Jersey

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On April 10, 1985, the United States District Court for the District of New Jersey appointed a Temporary Receiver for the above captioned firms.

      Members may use the "immediate close-out" procedures as provided in Section 59 (i)(2) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12 (h)(iii) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      Temporary Receiver

      Richard W. Hill, Esquire
      McCarter & English
      550 Broad Street
      Newark, New Jersey 07102
      Telephone: (201) 622-4444

    • 85-24 NASDAQ Equity Audit Trail

      IMPORTANT

      Officers * Partners * Proprietors Operations and P&S Department Managers

      TO: ALL NASD Members

      In its Notice to Members 84-55 dated October 15, 1984, the Association announced plans to implement a NASDAQ Equity Audit Trail and detailed the seven phases to be followed for completion of the plan. As described in that notice, Phase I involves the collection of additional information from members through the facilities of the clearing corporations to include:

      • time of trade (military time, eastern zone)
      • capacity of executing broker-dealer (principal or agent)

      This notice is intended to advise members that the implementation of Phase I is now underway. If your firm has not already begun to provide the above information on all NASDAQ securities to the clearing corporations of which you are a member, you should begin to do so promptly.

      The Association has coordinated the planning and implementation of Phase I with the various clearing corporations involved in OTC comparison systems. On November 13, 1984 and again on December 18, 1984, the National Securities Clearing Corporation (NSCC) provided its members with instructions on the manner in which the above described audit trail information is to be included with other clearing data currently submitted to the NSCC's OTC Comparison System. On January 10, 1985, NSCC implemented the capability to receive audit trail data from its participants and began providing an audit trail compliance report to the NASD. Enclosed with this notice is the Trade Date + 1 Stock Detail Input Format to be used by NSCC members in complying with the Phase I audit requirements. Comparable format changes have been made by the Midwest Clearing Corporation, Pacific Clearing Corporation and Stock Clearing Corporation of Philadelphia to their OTC comparison systems and copies have been provided directly to their respective members.

      Since complete and accurate audit trail information from members is required to achieve a valid NASDAQ Equity Audit Trail, all information on NASDAQ securities submitted to the clearing corporations for OTC comparison will be carefully monitored during a transition period that will end on July 1, 1985. Thus, members should review the accuracy of their clearing input not only in terms of time of trade and capacity, but also in terms of price, size, executing broker and clearing broker. Operational systems or procedural changes that may be necessary to achieve accurate audit trail input to clearing should also be complete by July 1, 1985. Should your firm need assistance or have questions during the transition, please feel free to contact the NASD or clearing corporation representative noted below.

      Phase II of the NASDAQ Equity Audit Trail will involve the real-time reporting of a buy/sell indicator with all transaction reports in NASDAQ/NMS securities as well as off-board trade reports in listed securities. It is currently anticipated that trade reporting procedure changes for the NASDAQ Level III terminals will not be implemented before July 1985. A specific timetable and instructions on new reporting procedures will be provided well in advance of any such change.

      For members utilizing the Small Order Execution System (SOES) and/or Computer Assisted Execution System (CAES), you should be aware that audit trail data is automatically generated by both systems and, therefore, no additional information is required of members for transactions executed through these systems under Phase I or Phase II.

      Any questions concerning OTC clearing input format changes or other Phase I Equity Audit Trail requirements should be directed to Jack Donlon at (212) 839-6375 or NSCC's Ed O'Shaughnessy at (212) 510-0507 who is coordinating the efforts of the clearing corporations.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Enclosure

      Input Identification:

      T+1 INPUT - OTC STOCK
      TRADE DATE: MM-DD-YY
      SUBMISSION DATE: MM-DD-YY
      FIRM NAME AND CLEARING NUMBER

      Tape Label:

      NON-LABEL

      Record Length:

      80 CHARACTERS PER RECORD

      Blocking Factor:

      43 RECORDS PER BLOCK

      Header Record:

      DATATRAK

      Detail Records:

       

      OTC T+1 STOCK DETAIL INPUT AND DELETE FORMAT

      Data

      Length

      Columns

      Description

      System Code

      1

      1-1

      1 = Clearance

      Subsystem Code

      1

      2-2

      2 = OTC

      Buy-Sell Code

      1

      3-3

      2 = Buy, 4 = Sell

      Activity Code

      1

      4-4

      1 = T+1 Input D = T+1 Delete

      Settlement Code

      1

      5-5

      0 = Normal Settlement

      Major Clearing Broker

      4

      6-9

      Alpha/Numeric

      Major Executed By Broker Symbol

      4

      10-13

      Alpha/Numeric

      Minor Clearing Broker (Contra)

      4

      14-17

      Alpha/Numeric

      Minor Executed By Broker Symbol

      4

      18-21

      Alpha/Numeric

      Trade Date

      6

      22-27

      MMDDYY

      Security Symbol (or)

      12

      28-39

       

      Cusip Number

      9

      28-36

       

      When Issued Indicator

      1

      37-37

      0 = Regular Way 1 = When Issued

      Not Applicable

      1

      38-38

      Blank (Constant)

      Exchange

      1

      39-39

      2 = OTC

      Quantity

      8

      40-47

      99,999,999

      Unit Price (or)

      10

      48-57

      $$$$NNNDDD, EX. 15 1/2 = 0015001002,1.05 = 00010500

      Contract Amount

      12

      48-59

      9,999,999,999.99

      Unit Price-Contract Amount Indicator

      1

      60-60

      0 = Unit Price 1 = Contract Amount Blank Defaults to Zero

      Special Trade Indicator

      1

      61-61

      Blank = Regular Way X = Special Trade

      Time of Execution

      4

      62-65

      HHMM - Military Time, Eastern Zone

      Major Executed By Broker Capacity (from position 10-13)

      1

      66-66

      P = Principal A = Agent

      Format ID

      1

      67-67

      A = Audit Trail

      Open

      13

      68-80

       

    • 85-23 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      Following is a list of NASD Notices to Members issued during the first quarter of 1985. Requests for copies of any notice should be accompanied by a self-addressed mailing label and should be directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D. C. 20006.

      Notice Number

      Date

      Topic

      85-1

      January 8, 1985

      Martin Luther King, Jr.'s Day: Trade Date-Settlement Schedule

      85-2

      January 8, 1985

      NASDAQ National Market System Grows to 1,276 Securities With 100 Voluntary Additions on January 22, 1985

      85-3

      January 14, 1985

      Membership Vote on Proposed Amendments to Association's By-La ws and Solicitation of Comments on Proposed Amendments to the Code of Procedure

      85-4

      January 16, 1985

      Quarterly Checklist of Notices to Members

      85-5

      January 18, 1985

      Follow-up to NASD Notice to Members 84-48 Dealing With Concessions Receivable and Related Commissions Payable

      85-6

      January 18, 1985

      Amendment to Corporate Financing Filing Requirements Effective March 1, 1985

      85-7

      January 22, 1985

      Changes to Georgia Blue Sky Registration Requirements for NASDAQ Companies

      85-8

      January 23, 1985

      NASDAQ National Market System Grows to 1,378 Securities With 100 Voluntary Additions on February 5, 1985 and Four Mandatory Inclusions on February 12, 1985

      85-9

      January 30, 1985

      Holiday Settlement Schedule-February, 1985

      85-10

      February 7, 1985

      NASDAQ National Market System Grows to 1,472 Securities With 100 Voluntary Additions on February 19, 1985

      85-11

      February 7, 1985

      Expansion of the Small Order Execution System (SOES)

      85-12

      February 15, 1985

      Fiduciary Obligations of Members When Handling Customer Limit Orders

      85-13

      February 21, 1985

      NASDAQ National Market System Grows to 1,569 Securities With 100 Voluntary Additions on March 5, 1985

      85-14

      February 21, 1985

      SIPC Trustee Appointed Brentwood Securities, Inc. 11487 Wilshire Boulevard, 3rd Floor Los Angeles, California 90025

      85-15

      February 28, 1985

      Questionnaire Concerning An Information Service for Direct Participation Program Securities

      85-16

      March 7, 1985

      NASDAQ National Market System Grows to 1,666 Securities With 100 Voluntary Additions on March 19, 1985

      85-16

      March 11, 1985

      Holiday Settlement Schedule

      85-17

      March 15, 1985

      Request for Comments on Proposed Amendment to Appendix F Concerning Sales Incentives for Direct Participation Programs

      85-18

      March 15, 1985

      Proposed Amendment to Article III, Section 33 of the Rules of Fair Practice - "Options"

      85-19

      March 21, 1985

      NASDAQ National Market System Grows to 1,766 Securities With 100 Voluntary Additions on April 2, 1985

      85-20

      March 28, 1985

      Request for Comment on Proposed Corporate Governance Requirements for NASDAQ National Market System Companies

      85-21

      March 29, 1985

      Request for Comment on Proposed Rule on Private Securities Transactions

      * * * *

    • 85-22 NASDAQ National Market System Grows to 1,861 Securities With 100 Voluntary Additions on April 16, 1985

      TO; All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, April 16, 1985, 100 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,861. These 100 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 100 issues scheduled to join NASDAQ/NMS on Tuesday, April 16, 1985, are

      Symbol

      Company Name

      Location

      ATEC

      A. T. & E. Corporation

      San Francisco, CA

      ALAR

      Acapulco Restaurants

      Pasadena, CA

      ACME

      Acme General Corporation

      San Dimas, CA

      ASKA

      Alaska Baneorporation

      Anchorage, AK

      ALRN

      Altron Incorporated

      Wilmington, MA

      ADCC

      Applied Data Communications, Inc.

      Tustin, CA

      AVDO

      Audio/Video Affiliates, Inc.

      Dayton, OH

      BPOP

      Banco Popular De Puerto Rico

      San Juan, PR

      BDEL

      Bank of Delaware Corporation

      Wilmington, DE

      BRCFF

      Barrick Resources Corporation

      Ontario, Canada

      BKHT

      Berkshire Hathaway Inc.

      Omaha, NE

      BLAK

      Black Industries, Inc.

      Durham, NC

      BLRGZ

      Blue Ridge Real Estate Company/Big Boulder Corporation

      Blakeslee, PA

      BCMP

      Boothe Financial Corporation

      San Francisco, CA

      BRID

      Bridgf ord Foods Corporation

      Anaheim, CA

      RCBI

      Robert C. Brown & Co., Inc.

      San Francisco, CA

      CCXN

      CCX Network, Inc.

      Conway, AR

      CDMS

      Cadmus Communications Corporation

      Richmond, VA

      CJOCZ

      California Jockey Club

      San Mateo, CA

      CRDS

      Cardis Corporation

      Beverly Hills, CA

      CPSA

      Central Pennsylvania Savings Association

      Shamokin, PA

      CRLC

      Central Reserve Life Corporation

      Berea, OH

      CHKE

      Cherokee Group (The)

      North Hollywood, CA

      COBB

      Cobb Resources Corporation

      Albuquerque, NM

      COBAP

      Commerce Bancorp, Inc. Preferred

      Marlton, NJ

      CBKS

      Commonwealth Bancshares Corporation

      Williamsport, PA

      CLIX

      Compression Labs, Incorporated

      San Jose, CA

      CSYN

      Computer Synergy, Inc.

      Oakland, CA

      CCOTS

      Consolidated Capital Income Opportunity Trust

      Emeryville, CA

      CFIN

      Consumers Financial Corporation

      Camp Hill, PA

      CDGI

      Courier Dispatch Group, Inc.

      Atlanta, GA

      DESI

      Dahlberg, Inc.

      Minneapolis, MN

      DAPN

      Dauphin Deposit Corporation

      Harrisburg, PA

      DSLT

      Diamond Crystal Salt Company

      St. Clair, MI

      DIXY

      Dixon Ticonderoga Company

      Vero Beach, FL

      DUQN

      Duquesne Systems, Inc.

      Pittsburgh, PA

      DRCO

      Dynamics Research Corporation

      Wilmington, MA

      FFSL

      First Federal Savings & Loan Association of Roanoke

      Roanoke, VA

      APIO

      First Fidelity Savings and Loan Association

      Orlando, FL

      FRFE

      Freedom Federal Savings Bank

      Oak Brook, IL

      GATO

      Lewis Galoob Toys, Inc.

      South San Francisco, CA

      GSFB

      Great Southern Federal Savings Bank

      Savannah, GA

      HOBC

      Howard Bancorp

      Burlington, VT

      IBISA

      IBI Security Service, Inc. Class A

      Long Island City, NY

      IECE

      IEC Electronics Corporation

      Newark, NY

      IBSI

      Independent Bankshares, Inc.

      Abilene, TX

      INATZ

      Indiana National Corporation

      Indianapolis, IN

      ISOL

      Information Solutions, Inc.

      Englewood, CO

      IRDV

      International Research and Development Corporation

      Mattawan, MI

      INPH

      Interphase Corporation

      DaUas, TX

      ITELW

      Itel Corporation Warrants

      San Francisco, CA

      JPII

      J. P. Industries, Inc.

      Ann Arbor, MI

      KPRO

      Kaypro Corporation

      Solana Beach, CA

      KEAN

      Keane, Inc.

      Boston, MA

      KVLM

      Kevlin Microwave Corporation

      Woburn, MA

      KSTN

      Keystone Financial, Inc.

      State College, PA

      LDMFB

      Laidlaw Transportation Limited Class B

      Ontario, Canada

      LTLE

      Arthur D. Little, Inc.

      Cambridge, MA

      MNAC

      Maine National Corporation

      Portland, ME

      MCRP

      Marine Corporation (The)

      Milwaukee, WI

      MSCP

      Massachusetts Computer Corporation

      Westford, MA

      MGRC

      McGrath RentCorp

      San Leandro, CA

      MCHT

      Mechtron International Corporation

      Orlando, FL

      MSII

      Medicine Shoppe International, Inc.

      St. Louis, MO

      MABC

      Mid America Bancorp

      LouisviUe, KY

      MFGC

      Midwest Financial Group, Inc.

      Peoria, IL

      NWLIA

      National Western Life Insurance Company Class A

      Austin, TX

      NPWR

      Nationwide Power Corporation

      Pompano Beach, FL

      NENB

      Nevada National Bancorporation

      Reno, NV

      OS MO

      Osmonics, Inc.

      Minnetonka, MN

      PAWB

      Pacific Western Bancshares

      San Jose, CA

      PAKS

      Packaging Systems Corporation

      Pearl River, NY

      PWST

      Pacwest Bancorp

      Portland, OR

      PAGE

      Page America Group, Inc.

      New York, NY

      PHABY

      Pharmacia AB

      Uppsala, Sweden

      PICOA

      Physicians Insurance Company of Ohio

      Pickerington, OH

      PION

      Pioneer Federal Savings and Loan Association

      Hopewell, VA

      PDGY

      Prodigy Systems, Inc.

      Edison, NJ

      PLFC

      Pulaski Furniture Corporation

      Pulaski, VA

      REID

      Reid-Provident Laboratories, Inc.

      Atlanta, GA

      ROIL

      Reserve Oil and Minerals Corporation

      Albuquerque, NM

      STVI

      STV Engineers, Inc.

      Pottstown, PA

      SIGR

      Sigma Research, Inc

      Richland, WA

      SKYX

      Sky Express, Inc.

      Valley Stream, NY

      ABUG

      Spectrum Group Inc.

      Jacksonville, FL

      STOB

      Standard Commercial Tobacco Company, Inc. (The)

      Wilson, NC

      STUS

      Stuarts Department Stores, Inc.

      Needham Heights, MA

      SUMI

      Sumitomo Bank of California (The)

      San Francisco, CA

      SUST

      Sunstates Corporation

      Jacksonville, FL

      TRRA

      Tera Corporation

      Berkeley, CA

      TCBY

      This Can't Be Yogurt, Inc.

      Little Rock, AR

      MTWN

      Mark Twain Bancshares, Inc.

      St. Louis, MO

      UFSL

      Union Federal Savings & Loan Association

      Los Angeles, CA

      UNBC

      Union National Corporation

      Pittsburgh, PA

      UCAR

      United Carolina Bancshares Corporation

      Whiteville, NC

      UOBI

      United Oklahoma Bankshares, Inc.

      Oklahoma City, OK

      VYBN

      Valley Bancorporation

      Appleton, WI

      VNBP

      Valley National Bancorp

      Clifton, NJ

      WECA

      Western Capital Investment Corporation

      Denver, CO

      WYSE

      Wyse Technology

      San Jose, CA

      The following changes to the list of NASDAQ/NMS securities occurred since March 21, 1985.

      NASDAQ/NMS Symbol And/Or Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      PULL/PTCI

      Pullman Company/Pullman company

      3/22/85

      VOIT/RELT

      Voit Corporation/Reltron Corporation

      3/26/85

      HURC/HURC

      Hurco Companies, Inc./Huro Manufacturing Co Inc

      3/28/85

      PROF/PROF

      Professional Investors Insurance Group,Inc./Professional Investors Corporation

      3/28/85

      DDIX/DIAG

      DDI Pharmaceuticals, Inc./Diagnostic Data, Inc.

      4/01/85

      NUME/MBAK

      Numerica Savings Bank, FSB/Merchants Savings Bank (Manchester, NH)

      4/01/85

      BLH/BLH

      International Holding Capital Corporation/International Savings & Loan Associaton Ltd.

      4/01/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      CDPI

      Columbia Data Products, Inc.

      4/01/85

      EMOD

      Electronic Modules Corporation

      4/03/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon s. Macklin
      President

    • 85-21 Request for Comments on Proposed Rule on Private Securities Transactions

      TO: All NASD Members and Other Interested Persons

      The National Association of Securities Dealers ("Association" or "NASD") is publishing for comment by members and all other interested persons a proposed rule which would establish new requirements for the private securities transactions of persons associated with member firms. The rule would replace in its entirety the Private Securities Transactions Interpretation under Article III, Section 27 of the NASD Rules of fair practice. 1/

      The text of the new rule and the present interpretation are attached. A discussion of the background of the rule and its proposed provisions follows below.

      BACKGROUND

      The Association has long been concerned about private securities transactions of persons associated with broker-dealers. These transactions can be generally grouped into two categories: first, transactions in which an associated persion is selling securities to public investors on behalf of another party, e.g., as part of a private offering of limited partnership interests, without the participation of the person's employer firm; and second, transactions in securities owned by the associated person. The first category of transactions presents serious regulatory concerns because securities may be sold to public investors without the benefits of any supervision or oversight by a member firm and perhaps without adequate attention to various regulatory protections such as due diligence investigations and suitability determinations. In some cases,investors may be misled into believing that the associated person's firm has analyzed the security being offered and "stands behind" the product and transaction when in fact the firm may be totally unaware of the person's participation in the transaction. Under some circumstances, a firm may be held civilly liable for the actions of their associated person even though the firm was not aware of such person's participation in the transaction. 2/

      In view of these concerns, the NASD promulgated the Private Securities Transactions Interpretation several years ago. The Interpretation requires associated persons to notify their employer firms prior to participating in private securities transactions. A significant number of associated persons have been disciplined by the NASD for violation of the Interpretation over recent years. It is believed that the existence of the Interpretation has resulted in greater protection as firms have been able to exercise better supervision over their associated persons.

      The Interpretation has been a source of substantial confusion, however, because it speaks only to associated persons' responsibilities in notifying member firms and does not specifically address responsibilities of those firms. The Board of Governors' Advisory Council and several District Business Conduct Committees have requested that the Interpretation be amended to clarify firms' responsibilities. After careful study and analysis, the Board has decided to propose a new rule of fair practice to replace the Interpretation.

      ANALYSIS OF PROPOSED RULE

      The proposed rule, the text of which is attached, would replace in its entirety the Private Securities Transactions Interpretation and would set forth specific responsibilities for associated persons and member firms regarding the handling of such persons' private securities transactions. On the basis of an analysis of regulatory problems regarding private securities transactions, the rule will treat transactions differently depending upon whether the associated person receives selling compensation. In either case, the rule specifies a member firm's responsibilities.

      Applicability — The new rule would apply to any situation in which an associated person of a member proposes to participate in any manner in a private securities transaction. "Private securities transaction" is defined broadly and generally parallels the concept in the present Interpretation. Transactions subject to Article III, Section 28 of the Rules of Fair Practice 3/ and personal transactions in investment company and variable annuity securities are excluded. Because the most frequent regulatory problems occur in connection with private placements of new offerings, those transactions are specifically identified as included within the definition of "private securities transaction."

      Written Notice — The rule requires an associated person to provide written notice to the member with which he is associated prior to participating in any private securities transaction. The notice would be required to include a detailed description of the proposed transaction and the individual's proposed role therein. Because the rule treats compensatory transactions differently, it would also be necessary for an associated person to state whether he will receive selling compensation in connection with the transaction.

      The present Interpretation requires associated persons to provide written notice to their employers. The new rule, however, would require more detail concerning the transaction and the person's involvement in it.

      Transactions for Compensation — As noted above, the Board of Governors has concluded that it is important to draw a distinction between transactions in which persons receive selling compensation and those handled as an accommodation or under some other non-compensatory arrangement. The most serious regulatory concerns relate to situations in which associated persons are receiving selling compensation and therefore have an incentive to execute sales, perhaps without adequate supervision and without adequate attention to suitability and due diligence responsibilities. The rule would require that, in the case of transactions in which an associated person has or may receive selling compensation, a member receiving written notice from one of its associated persons shall respond to the person in writing indicating whether the firm approves or disapproves of the person's participation in the proposed transaction. If the firm approves of the person's participation, the firm is then required to treat the transaction as a transaction of the firm, to record the transaction on the firm's books and records, and to supervise the person's participation in the transaction to the same extent as if the transaction were executed on behalf of the firm.

      If the firm disapproves of a person's participation, the associated person is prohibited from participating in the transaction in any manner.

      Transactions Not For Compensation — The Board believes that there may be some transactions in which associated persons participate without compensation which should not be subjected to the same level of scrutiny as other transactions. For example, a salesperson may own stock in a closely held family corporation and wish to transfer that stock to another family member. While his or her firm should be made aware of such a transaction, it appears unnecessary to treat that type of transaction as a transaction of the employer firm.

      Accordingly, the new rule would require a member receiving notice that a person proposes to participate in a transaction without compensation to provide that person with written acknowledgment of said notice. The NASD has consistently taken the position that firms must be able to supervise and regulate effectively each associated person's securities activities. The rule would therefore provide the employer firm with the right to impose conditions upon each person's participation in non-compensatory transactions and would require that any person adhere to such conditions. It is intended that a firm would have full discretion to utilize this authority to restrict its associated persons' private securities activities, including activities performed on a non-compensatory basis.

      Definition of Selling Compensation — The definition of "selling compensation" plays a key role in the proposed rule. Because the treatment of transactions varies significantly depending upon whether selling compensation is to be received, the definition of "selling compensation" is deliberately broad in its scope. The definition includes "any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security." Certain examples are provided, including commissions, finder's fees, securities, and rights of participation in profits, tax benefits or dissolution proceeds as a general partner or otherwise. While these examples are intended to include some of the most common forms of compensation, the definition is not intended to be restricted to those examples but rather to include any item of value received or to be received directly or indirectly.

      It is important to note that the definition of "selling compensation" includes compensation received or to be received by one acting in the capacity of either a salesperson or in some other capacity, specifically including the capacity of a general partner. The definition is intended specifically to address a practice in which associated persons function as general partners in forming limited partnerships and then sell limited partnership interests in private securities transactions. Any involvement in a securities transaction by an associated person of an NASD member firm may be subject to the panoply of regulatory requirements to which one subjects himself upon becoming associated with a broker-dealer. Participation in transactions as a general partner therefore carries with it significant regulatory responsibilities.

      * * * *

      The Association encourages all members and other interested persons to comment on the rule proposal. Comments should be directed to:

      James M. Cangiano
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Comments must be received no later than April 29, 1985. All comments will be made available for public inspection.

      Questions concerning this notice may be directed to Dennis C. Hensley, Vice President and Deputy General Counsel, at (202) 728-8245.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      PROPOSED NEW RULE OF FAIR PRACTICE

      Sec. ____ Private Securities Transactions

      (a) Applicability — No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this section.
      (b) Written Notice — Prior to participating in any private securi ties transaction, an associated person shall provide written notice to the member with which he is associated, describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction.
      (C) Transactions for Compensation
      (1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to Subsection (b) shall advise the associated person in writing stating whether the member:
      (A) approves the person's participation in the proposed transaction; or
      (B) disapproves the person's participation in the proposed transaction.
      (2) If the member approves a person's participation in a transaction pursuant to Subsection (e)(l), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.
      (3) If the member disapproves a person's participation pursuant to Subsection (c)(l), the person shall not participate in the transaction in any manner, directly or indirectly.
      (d) Transactions Not for Compensation — In the case of a transaction in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to Subsection (b) shall provide the associated person written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.
      (e) Definitions — For purposes of this section, the following terms shall have the stated meanings:
      (1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission; provided however, that transactions subject to the notification requirements of Article III, Section 28 of the Rules of Fair Practice and personal transactions in investment company and variable annuity securities shall be excluded.
      (2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

      National Association of Securities Dealers, Inc.,
      1735 K Street, N.W.
      Washington, D.C. 2006
      (202) 728-8000

      March 28, 1985

      TO: All NASDAQ Companies

      RE: Request for comment on Proposed Corporate Governance Requirements for NASDAQ National Market System Companies

      LAST DATE FOR COMMENT: APRIL 28, 1985

      The National Association of Securities Dealers, Inc., is requesting comment on proposed rule amendments which would require that companies with securities included in the NASDAQ National Market System (NASDAQ/NMS) adhere to certain standards of corporate governance. This notice contains a discussion of the background of these rules and a section-by-section analysis. The text of the proposed rules is attached.

      HISTORY AND BACKGROUND

      The publication of the proposed rules is a result of an effort of several months by the NASD Corporate Advisory Board. The Corporate Advisory Board is a body consisting principally of the chief executive officers of NASDAQ companies, chaired by Wilson C. Wearn, Chairman and Chief Executive Officer of Multimedia, Inc., which reports to the NASD Board of Governors. The Advisory Board has played an important role in the evolution of NASDAQ as the fastest-growing and second-largest securities market in the United States, and in the development of NASDAQ/NMS.

      Since its inception in 1982, NASDAQ/NMS has grown steadily in size and stature. In November 1984, the Securities and Exchange Commission approved a change to NASDAQ/NMS inclusion criteria which has resulted in a further enhancement in the quality of NASDAQ/NMS companies. As of the end of 1984, the average NASDAQ/NMS company had assets of over $570 million and equity in excess of $84 million. Their revenues averaged $181 million with net income of over $8 million. The average price per share for NASDAQ/NMS issues was in excess of $15 and the average issue had almost 8 million shares outstanding with a public float of 5.8 million shares and a market value in excess of $120 million. NASDAQ/NMS issues had an average of 11.5 market makers in the system.

      As NASDAQ/NMS has matured, the Corporate Advisory Board has come to believe that it is appropriate to consider the quality of corporate governance of NASDAQ/NMS companies. This concern has been heightened by numerous state securities administrators who have noted the differences in approach to corporate governance by NASDAQ/NMS and certain of the exchanges. The Corporate Advisory Board believes that the likelihood of achieving a "blue-sky" exemption for NASDAQ/NMS companies in all 50 states will be greatly improved by the implementation of corporate governance criteria.

      A special subcommittee of the Corporate Advisory Board chaired by B. Lee Karns, President and Chief Executive Officer of Comprehensive Care Corporation, devoted considerable time during the fall of 1984 to an analysis of corporate governance principles and the propriety of adopting corporate governance standards for NASDAQ/NMS. In January, the subcommittee reported its conclusions to the Corporate Advisory Board and recommended that numerous corporate governance rules be proposed for NASDAQ/NMS and that a survey be conducted of NASDAQ companies concerning additional aspects of corporate governance.

      After careful consideration, the Corporate Advisory Board accepted the subcommittee's recommendations and in turn recommended to the NASD Board of Governors that the following corporate governance rules be proposed and that a survey on other possible rules be conducted. The NASD Board of Governors concurred in these recommendations.

      SUMMARY OF PROPOSED RULES

      The proposed rules, as drafted, would be added to Schedule D to the NASD By-Laws and would become additional criteria for eligibility in NASDAQ/NMS. The rules contain requirements generally similar to those of the New York Stock Exchange and the American Stock Exchange. The proposed rules are summarized below. The text of the rules appears as Exhibit A.

      Applicability — The rules would apply to any issuer with a security traded in the NASDAQ/NMS market.

      Eligibility — The Corporate Advisory Board contemplates that compliance with the corporate governance rules would be a requirement for a company to be eligible for continued inclusion in NASDAQ/NMS. 1/

      Distribution of Annual and Interim Reports — The rules would require issuers to distribute both annual and interim reports to shareholders. Annual reports will be required to be distributed within "a reasonable period of time prior to the company's annual meeting," whereas interim reports would be distributed "within a reasonable time" following filing of required interim financial reports with the SEC or other regulatory authority. For companies required to file Form 10-Q with the SEC, quarterly reports to shareholders (on Form 10-Q or otherwise) would be required. Other companies would be required to provide shareholders with reports reflecting information contained in interim financial reports filed with the appropriate regulatory body.

      Independent Directors — The rules would require issuers to maintain a minimum of two independent directors on each company's board. "Independent director" is defined so as to exclude officers or employees of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The determination of independence of any particular director would therefore be left to the judgment of each company's board.

      Audit Committees — The rules require an issuer to establish and maintain an audit committee, a majority of the members of which shall be independent directors.

      Shareholder Meetings — Companies will be required to hold an annual meeting of shareholders.

      Quorum — The rules would require companies to establish a quorum requirement of at least 50% of the outstanding shares for any meeting of the holders of common stock.

      Solicitation of Proxies — Issuers would be required to solicit proxies and distribute proxy statements for all meetings of shareholders and file copies of proxy solicitations with the NASD.

      Conflicts of Interest — The rules would address situations in which companies may have a conflict of interest in transactions with persons related to the company. The rules would require that companies conduct "an appropriate review" of all related party transactions on an ongoing basis and that the audit committee be utilized for the review of potential conflicts where appropriate.

      Listing Agreement — As drafted, the rules would require each NASDAQ/ NMS issuer to execute a listing agreement as prescribed by the NASD. A listing agreement would establish a contractual relationship between each issuer and the NASD.

      Effective Date — The rules provide a 12-month "grandfather" period for any NASDAQ/NMS issuer in the system at the time the rules are approved. They would immediately apply to all companies entering the system after they became effective. In addition, the effectiveness of the rules could be delayed for securities entering the system until some reasonable period following approval of the rules.

      In view of the fact that some companies may be required to change their corporate charters, comments are specifically requested with respect to the issues of grandfathering and an appropriate phase-in period for the rules.

      SANCTIONS FOR NON-COMPLIANCE

      The Corporate Advisory Board believes that the appropriate sanction for a NASDAQ/NMS company which fails to meet corporate governance criteria should be deleted from NASDAQ/NMS. Under such an approach, companies deleted from NASDAQ/NMS would remain in NASDAQ. Under present SEC rules, however, any NASDAQ security meeting Tier 1 criteria is mandated to be included in NASDAQ/ NMS and cannot be deleted from NASDAQ/NMS while remaining in NASDAQ. The NASD is submitting Section 2 of the proposed rules for comment with the expectation that these rules will be amended.

      SURVEY ON VOTING RIGHTS AND CHANGE OF CORPORATE CONTROL

      As noted above, the NASD Board of Governors has also approved a survey of NASDAQ companies on two other aspects of corporate governance. That survey will be sent to all NASDAQ companies in the near future.

      The first topic addressed by the survey concerns voting rights. The NASD is not proposing at this time to restrict the voting rights assigned to various classes of stock issued by NASDAQ/NMS companies. As the question of voting rights has assumed greater importance in recent years, the New York Stock Exchange has undertaken a review of its policies in this area. The California Corporations Department is also conducting a review of that state's policies on voting rights. In this environment, it was concluded that the Association should survey NASDAQ companies to determine their views on this important issue.

      The second matter included in the survey concerns possible restrictions on a corporation's issuance of stock in connection with a change of control. Certain exchanges restrict the percentage of new shares which a company may issue without shareholder approval. In view of the multiplicity of issues related to such restrictions and the continuing evolution of practices concerning mergers and acquisitions, it was concluded that the Association should obtain more information with respect to NASDAQ companies' views prior to developing specific rule proposals on this question.

      NASDAQ companies are urged to review the survey carefully when it is received and return it to the Association with a complete expression of their views.

      REQUEST FOR COMMENTS

      The Association is requesting comments on the proposed rules prior to final Board consideration. All comments received during this comment period will be reviewed by the Corporate Advisory Board and changes will be recommended as deemed appropriate. The Board of Governors will then reconsider the proposal. If the Board approves the rules or an amended version, they must be filed with, and approved by, the Securities and Exchange Commission before becoming effective.

      All written comments should be addressed to:

      James M. Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      All comments must be received by April 28, 1985. Any questions regarding this notice should be directed to either Dennis C. Hensley or T. Grant Callery at (202) 728-8294.

      Sincerely,

      Gordon S.Macklin
      President

      Attachment

      DRAFT CORPORATE GOVERNANCE PROVISIONS AS APPROVED BY THE CORPORATE ADVISORY BOARD

      Add new Part II D to Schedule D to the NASD By-Laws as follows; existing sections D and E to be redesignated as E and F respectively.

      D. Rules for Issuers of NASDAQ National Market System Securities

      1. Applicability
      a. This Part II D shall apply to any NASD/NMS issuer.
      b. For purposes of this Part II D, "NASDAQ/NMS issuer" shall mean the issuer of a security included in the NASDAQ System which has been designated as a national market system security pursuant to Rule HAa2-l under the Securites Exchange Act of 1934.
      2. Eligibility
      No security shall be eligible for inclusion in the NASDAQ National Market System unless the issuer of said security is in compliance with this Part II D.
      3. Distribution of Annual and Interim Reports
      a. Each NASDAQ/NMS issuer shall distribute to shareholders copies of an annual report containing audited financial statements of the company and its subsidiaries. The report shall be distributed to shareholders a reasonable period of time prior to the company's annual meeting of shareholders and shall be filed with the Corpora tion at the time it is distributed to shareholders.
      b.
      (i) Each NASDAQ/NMS issuer which is subject to SEC Rule 13a-13 shall distribute copies of quarterly reports including statements of operating results and financial position to shareholders within a reasonable time following the company's filing of Form 10-Q with the Securities and Exchange Commission. If the form of such quarterly report differs from Form 10-Q, copies of the report shall also be provided to the Corporation. The financial statements contained in quarterly reports shall be prepared in a manner consistent with generally accepted accounting principles but are not required to be audited.
      (ii) Each NASDAQ/NMS issuer which is not subject to SEC Rule 13a-13 and which is required to file on a periodic basis with the Securities and Exchange Commission, or another federal or state regulatory authority reports relating primarily to operations and financial position shall distribute to shareholders reports which reflect the information contained in such interim reports. Such reports shall be distributed to shareholders within a reasonable period of time following filing with the appropriate regulatory authority. If the form of the interim report provided to shareholders from that filed with the regulatory authority, copies of such report shall also be provided to the Corporation.^/div>
      4. Independent Directors
      Each NASDAQ/NMS issuer shall maintain a minimum of two independent directors on its board of directors. For purposes of this section,'"- dependent director" shall mean a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
      5. Audit Committee
      Each NASDAQ/NMS issuer shall establish and maintain an Audit Committee, a majority of the members of which shall be independent directors.
      6. Shareholders Meetings
      Each NASDAQ/NMS issuer shall hold an annual meeting of shareholders and shall provide notice of such meeting to the Corporation.
      7. Quorum
      Each NASDAQ/NMS issuer shall provide in its by-laws for a quorum for any meeting of the holders of common stock of at least 50% of the outstanding shares of the company's common voting stock.
      8. Solicitation of Proxies
      Each NASDAQ/NMS issuer shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of such proxy solicitation to the Corporation.
      9. Conflicts of Interest
      Each NASDAQ/NMS issuer shall conduct an appropriate review of all related party transactions on an ongoing basis and shall utilize the company's Audit Committee as a forum for the review of potential conflict of interest situations where appropriate.
      10. Listing Agreement
      Each NASDAQ/NMS issuer shall execute a Listing Agreement in the form designated by the Corporation.
      11. Effective Date
      This Part n D shall apply to any issuer which first has a security desig nated as a national market system security after______, and shall become effective as to any other NASDAQ/NMS issuer on [twelve months after approval].

      1/ NASD Manual (CCH), p, 2109-2,

      2/ This concern has been addressed in earlier NASD notices. See Notices to Members 82-39 (June 15, 1982), and 80-62 (December 1, 1980).

      3/ Section 28 requires associated persons who handle personal securities transactions through a member (the "executing member") other than their employer to notify the executing member of their regulated status. That member is then required to notify the employer member of each person's activity. See NASD Manual (CCH), paragraph 2178.

      1/ This approach is discussed further on in connection with sanctions.


    • 85-20 Request for Comment on Proposed Corporate Governance Requirements for NASDAQ National Market System Companies

      TO: All NASD Members

      LAST DATE FOR COMMENT: APRIL 28, 1985

      The National Association of Securities Dealers, Inc., is requesting comment on proposed rule amendments which would require that companies with securities included in the NASDAQ National Market System (NASDAQ/NMS) adhere to certain standards of corporate governance. This notice contains a discussion of the background of these rules and a section-by-section analysis. The text of the proposed rules is attached.

      HISTORY AND BACKGROUND

      The publication of the proposed rules is a result of an effort of several months by the NASD Corporate Advisory Board. The Corporate Advisory Board is a body consisting principally of the chief executive officers of NASDAQ companies, chaired by Wilson C. Wearn, Chairman and Chief Executive Officer of Multimedia, Inc., which reports to the NASD Board of Governors. The Advisory Board has played an important role in the evolution of NASDAQ as the fastest-growing and second-largest securities market in the United States, and in the development of NASDAQ/NMS.

      Since its inception in 1982, NASDAQ/NMS has grown steadily in size and stature. In November 1984, the Securities and Exchange Commission approved a change to NASDAQ/NMS inclusion criteria which has resulted in a further enhancement in the quality of NASDAQ/NMS companies. As of the end of 1984, the average NASDAQ/NMS company had assets of over $570 million and equity in excess of $84 million. Their revenues averaged $181 million with net income of over $8 million. The average price per share for NASDAQ/NMS issues was in excess of $15 and the average issue had almost 8 million shares outstanding with a public float of 5.8 million shares and a market value in excess of $120 million. NASDAQ/NMS issues had an average of 11.5 market makers in the system.

      As NASDAQ/NMS has matured, the Corporate Advisory Board has come to believe that it is appropriate to consider the quality of corporate governance of NASDAQ/NMS companies. This concern has been heightened by numerous state securities administrators who have noted the differences in approach to corporate governance by NASDAQ/NMS and certain of the exchanges. The Corporate Advisory Board believes that the likelihood of achieving a "blue-sky" exemption for NASDAQ/NMS companies in all 50 states will be greatly improved by the implementation of corporate governance criteria.

      A special subcommittee of the Corporate Advisory Board chaired by B. Lee Karns, President and Chief Executive Officer of Comprehensive Care Corporation, devoted considerable time during the fall of 1984 to an analysis of corporate governance principles and the propriety of adopting corporate governance standards for NASDAQ/NMS. In January, the subcommittee reported its conclusions to the Corporate Advisory Board and recommended that numerous corporate governance rules be proposed for NASDAQ/NMS and that a survey be conducted of NASDAQ companies concerning additional aspects of corporate governance.

      After careful consideration, the Corporate Advisory Board accepted the subcommittee's recommendations and in turn recommended to the NASD Board of Governors that the following corporate governance rules be proposed and that a survey on other possible rules be conducted. The NASD Board of Governors concurred in these recommendations.

      SUMMARY OF PROPOSED RULES

      The proposed rules, as drafted, would be added to Schedule D to the NASD By-Laws and would become additional criteria for eligibility in NASDAQ/NMS. The rules contain requirements generally similar to those of the New York Stock Exchange and the American Stock Exchange. The proposed rules are summarized below. The text of the rules appears as Exhibit A.

      Applicability — The rules would apply to any issuer with a security traded in the NASDAQ/NMS market.

      Eligibility — The Corporate Advisory Board contemplates that compliance with the corporate governance rules would be a requirement for a company to be eligible for continued inclusion in NASDAQ/NMS. 1/

      Distribution of Annual and Interim Reports — The rules would require issuers to distribute both annual and interim reports to shareholders. Annual reports will be required to be distributed within "a reasonable period of time prior to the company's annual meeting," whereas interim reports would be distributed "within a reasonable time" following filing of required interim financial reports with the SEC or other regulatory authority. For companies required to file Form 10-Q with the SEC, quarterly reports to shareholders (on Form 10-Q or otherwise) would be required. Other companies would be required to provide shareholders with reports reflecting information contained in interim financial reports filed with the appropriate regulatory body.

      Independent Directors — The rules would require issuers to maintain a minimum of two independent directors on each company's board. "Independent director" is defined so as to exclude officers or employees of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The determination of independence of any particular director would therefore be left to the judgment of each company's board.

      Audit Committees — The rules require an issuer to establish and maintain an audit committee, a majority of the members of which shall be independent directors.

      Shareholder Meetings — Companies will be required to hold an annual meeting of shareholders.

      Quorum — The rules would require companies to establish a quorum requirement of at least 50% of the outstanding shares for any meeting of the holders of common stock.

      Solicitation of Proxies — Issuers would be required to solicit proxies and distribute proxy statements for all meetings of shareholders and file copies of proxy solicitations with the NASD.

      Conflicts of Interest — The rules would address situations in which companies may have a conflict of interest in transactions with persons related to the company. The rules would require that companies conduct "an appropriate review" of all related party transactions on an ongoing basis and that the audit committee be utilized for the review of potential conflicts where appropriate.

      Listing Agreement — As drafted, the rules would require each NASDAQ/NMS issuer to execute a listing agreement as prescribed by the NASD. A listing agreement would establish a contractual relationship between each issuer and the NASD.

      Effective Date — The rules provide a 12-month "grandfather" period for any NASDAQ/NMS issuer in the system at the time the rules are approved. They would immediately apply to all companies entering the system after they became effective. In addition, the effectiveness of the rules could be delayed for securities entering the system until some reasonable period following approval of the rules.

      In view of the fact that some companies may be required to change their corporate charters, comments are specifically requested with respect to the issues of grandfathering and an appropriate phase-in period for the rules.

      SANCTIONS FOR NON-COMPLIANCE

      The Corporate Advisory Board believes that the appropriate sanction for a NASDAQ/NMS company which fails to meet corporate governance criteria should be deleted from NASDAQ/NMS. Under such an approach, companies deleted from NASDAQ/NMS would remain in NASDAQ. Under present SEC rules, however, any NASDAQ security meeting Tier 1 criteria is mandated to be included in NASDAQ/NMS and cannot be deleted from NASDAQ/NMS while remaining in NASDAQ. The NASD is submitting Section 2 of the proposed rules for comment with the expectation that these rules will be amended.

      SURVEY ON VOTING RIGHTS AND CHANGE OF CORPORATE CONTROL

      As noted above, the NASD Board of Governors has also approved a survey of NASDAQ companies on two other aspects of corporate governance. That survey will be sent to all NASDAQ companies in the near future.

      The first topic addressed by the survey concerns voting rights. The NASD is not proposing at this time to restrict the voting rights assigned to various classes of stock issued by NASDAQ/NMS companies. As the question of voting rights has assumed greater importance in recent years, the New York Stock Exchange has undertaken a review of its policies in this area. The California Corporations Department is also conducting a review of that state's policies on voting rights. In this environment, it was concluded that the Association should survey NASDAQ companies to determine their views on this important issue.

      The second matter included in the survey concerns possible restrictions on a corporation's issuance of stock in connection with a change of control. Certain exchanges restrict the percentage of new shares which a company may issue without shareholder approval. In view of the multiplicity of issues related to such restrictions and the continuing evolution of practices concerning mergers and acquisitions, it was concluded that the Association should obtain more information with respect to NASDAQ companies' views prior to developing specific rule proposals on this question.

      NASDAQ companies are urged to review the survey carefully when it is received and return it to the Association with a complete expression of their views.

      REQUEST FOR COMMENTS

      The Association is requesting comments on the proposed rules prior to final Board consideration. All comments received during this comment period will be reviewed by the Corporate Advisory Board and changes will be recommended as deemed appropriate. The Board of Governors will then reconsider the proposal. If the Board approves the rules or an amended version, they must be filed with, and approved by, the Securities and Exchange Commission before becoming effective.

      All written comments should be addressed to:

      James M. Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      All comments must be received by April 28, 1985. Any questions regarding this notice should be directed to either Dennis C. Hensley or T. Grant Callery at (202) 728-8294.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      Exhibit A

      DRAFT CORPORATE GOVERNANCE PROVISIONS AS APPROVED BY THE CORPORATE ADVISORY BOARD

      Add new Part II D to Schedule D to the NASD By-Laws as follows; existing sections D and E to be redesignated as E and F respectively.

      D. Rules for Issuers of NASDAQ National Market System Securities

      1. Applicability
      a. This Part II D shall apply to any NASD/NMS issuer.
      b. For purposes of this Part II D, "NASDAQ/NMS issuer" shall mean the issuer of a security included in the NASDAQ System which has been designated as a national market system security pursuant to Rule HAa2-l under the Securites Exchange Act of 1934.
      2. Eligibility
      No security shall be eligible for inclusion in the NASDAQ National Market System unless the issuer of said security is in compliance with this Part II D.
      3. Distribution of Annual and Interim Reports
      a. Each NASDAQ/NMS issuer shall distribute to shareholders copies of an annual report containing audited financial statements of the company and its subsidiaries. The report shall be distributed to shareholders a reasonable period of time prior to the company's annual meeting of shareholders and shall be filed with the Corpora tion at the time it is distributed to shareholders.
      b.
      (i) Each NASDAQ/NMS issuer which is subject to SEC Rule 13a-13 shall distribute copies of quarterly reports including statements of operating results and financial position to shareholders within a reasonable time following the company's filing of Form 10-Q with the Securities and Exchange Commission. If the form of such quarterly report differs from Form 10-Q, copies of the report shall also be provided to the Corporation. The financial statements contained in quarterly reports shall be prepared in a manner consistent with generally accepted accounting principles but are not required to be audited.
      (ii) Each NASDAQ/NMS issuer which is not subject to SEC Rule 13a-13 and which is required to file on a periodic basis with the Securities and Exchange Commission, or another federal or state regulatory authority reports relating primarily to operations and financial position shall distribute to shareholders reports which reflect the information contained in such interim reports. Such reports shall be distributed to shareholders within a reasonable period of time following filing with the appropriate regulatory authority. If the form of the interim report provided to shareholders differs from that filed with the regulatory authority, copies of such report shall also be provided to the Corporation.
      4. Independent Directors
      Each NASDAQ/NMS issuer shall maintain a minimum of two independent directors on its board of directors. For purposes of this section, "independent director" shall mean a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
      5. Audit Committee
      Each NASDAQ/NMS issuer shall establish and maintain an Audit Committee, a majority of the members of which shall be independent directors.
      6. Shareholders Meetings
      Each NASDAQ/NMS issuer shall hold an annual meeting of shareholders and shall provide notice of such meeting to the Corporation.
      7. Quorum
      Each NASDAQ/NMS issuer shall provide in its by-laws for a quorum for any meeting of the holders of common stock of at least 50% of the outstanding shares of the company's common voting stock.
      8. Solicitation of Proxies
      Each NASDAQ/NMS issuer shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of such proxy solicitation to the Corporation.
      9. Conflicts of Interest
      Each NASDAQ/NMS issuer shall conduct an appropriate review of all related party transactions on an ongoing basis and shall utilize the company's Audit Committee as a forum for the review of potential conflict of interest situations where appropriate.
      10. Listing Agreement
      Each NASDAQ/NMS issuer shall execute a Listing Agreement in the form designated by the Corporation.
      11. Effective Date
      This Part II D shall apply to any issuer which first has a security desig nated as a national market system security after_______, and shall become effective as to any other NASDAQ/NMS issuer on [twelve months after approval].

      1/ This approach is discussed further on in connection with sanctions.


    • 85-19 NASDAQ National Market System Grows to 1,766 Securities With 100 Voluntary Additions on April 2, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, April 2, 1985, 100 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,766. These 100 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 100 issues scheduled to join NASDAQ/NMS on Tuesday, April 2,

      1985, are:

      Symbol

      Company Name

      Location

      ABWY

      Affiliated Bank Corporation of Wyoming

      Casper, WY

      ALTN

      AlternaCare Corp.

      Los Angeles, CA

      ARSD

      Arabian Shield Development Company

      Dallas, TX

      ASBC

      Associated Banc-Corp

      Green Bay, WI

      ATFC

      Atico Financial Corporation

      Miami, FL

      BRRS

      Barris Industries, Inc.

      Beverly Hills, CA

      BSIM

      Burnup & Sims, Inc.

      Ft. Lauderdale, FL

      CCNC

      CCNB Corporation

      New Cumberland, PA

      CVBF

      CVB Financial Corp.

      Chino, CA

      CHFD

      Charter Federal Savings and Loan Association

      Bristol, VA

      CNDN

      Chittenden Corporation

      Burlington, VT

      CNMW

      Cincinnati Microwave, Inc.

      Cincinnati, OH

      WBED

      Classic Corporation

      Jessup, MD

      CSTIF

      Coastal International, Ltd.

      Hamilton, Bermuda

      COMD

      Command Airways, Inc.

      Wappingers Falls, NY

      CBSH

      Commerce Bancshares, Inc.

      Kansas City, MO

      CCLR

      Commerce Clearing House, Inc

      Chicago, IL

      CSTL

      Constellation Bancorp

      Elizabeth, NJ

      CWED

      Conwed Corporation

      St. Paul, MN

      COVT

      Covington Technologies

      Fullerton, CA

      CDCK

      Craddock-Terry Shoe Corporation

      Lynchburg, VA

      DOCO

      D.O.C. Optics Corporation

      South field, MI

      DSII

      Decom Systems, Inc.

      San Marcos, CA

      DEPS

      Deposit Guaranty Corp.

      Jackson, MS

      DOUG

      Douglas & Lomason Company

      Farmington Hills, ft

      DYCO

      Dycom Industries, Inc.

      West Palm Beach, 1

      ESIO

      Electro Scientific Industries, Inc.

      Portland, OR

      ENVT

      Environmental Tectonics Corporation

      Southampton, PA

      EQUI

      Equion Corporation (The)

      Harrodsburg, KY

      ESEX

      Essex Corporation

      Alexandria, VA

      EXCG

      Exchange International Corporation

      Chicago, IL

      FMNT

      F & M National Corporation

      Winchester, VA

      FFIC

      Fairmont Financial, Inc.

      Burbank, CA

      FARM

      Farmer Brothers Company

      Torrance, CA

      FAMA

      First Amarillo Bancorporation, Inc.

      Amarillo, TX

      FFSM

      First Federal Savings Bank of Montana

      Kalispell, MT

      FFBC

      First Financial Bancorp

      Monroe, OH

      FSKY

      First Security Corporation of Kentucky

      Lexington, KY

      FSNR

      Forschner Group, Inc. (The)

      Shelton, CT

      FKLN

      Franklin Corporation (The)

      New York, NY

      FRRI

      Franklin Resources, Inc.

      San Mateo, CA

      FNTM

      Funtime, Inc.

      Aurora, OH

      GBND

      General Binding Corporation

      Northbrook, IL

      GMED

      Graphic Media, Inc.

      Fairfield, NJ

      HEIC

      HEI Corporation

      Houston, TX

      HFLA

      Heritage Federal Savings and Loan Association

      Daytona Beach, FL

      HOMA

      Home Federal Savings and Loan Association of Atlanta

      Atlanta, GA

      HROK

      Home Federal Savings and Loan Association of the Rockies

      Fort collins, CO

      IMAT

      Imatron Inc.

      San Francisco, CA

      IMATW

      Imatron Inc. Warrants

      San Francisco, CA

      INHO

      Independence Holding Company

      Stamford, CT

      IACI

      Industrial Acoustics Company, Inc.

      Bronx, NY

      INSI

      Information Science Incorporated

      Montvale, NJ

      INTE

      Intech Incorporated

      Santa Clara, CA

      ITHM

      Intertherm Inc.

      St. Louis, MO

      JEFG

      Jefferies Group, Inc.

      Los Angeles, CA

      LNCE

      Lance, Inc.

      Charlotte, NC

      LOLS

      Land of Lincoln Savings and Loan

      Berwyn, IL

      LANA

      Liquid Air Corporation

      San Francisco, CA

      LABS

      Louisiana Bancshares, Inc.

      Baton Rouge, LA

      MARS

      Marsh Supermarkets, Inc.

      Yorktown, IN

      MRBA

      Merchants Bancorp, Inc.

      Allentown, PA

      MINL

      Minnetonka,Inc.

      Chaska, MN

      MITSY

      Mitsui & Co., Ltd.

      Tokyo, Japan

      MBLE

      Mobile Gas Service Corporation

      Mobile, AL

      MFGI

      Moore Financial Group Incorporated

      Boise, ID

      NCETS

      National Capital Real Estate Trust

      San Francisco, CA

      NOHL

      North Hills Electronics, Inc.

      Glen cove, NY

      NOVC

      Northview Corporation

      San Diego, CA

      OILC

      Oil-Dri Corporation of America

      Chicago, IL

      OFFI

      Old Fashion Foods, Inc.

      Austell, GA

      OSTN

      Old Stone Corporation

      Providence, RI

      OSTNO

      Old Stone Corporation Preferred Series B

      Providence, RI

      OLSN

      Olson Farms, Inc.

      Sherman Oaks, CA

      OPTKF

      Optrotech Ltd.

      New Ziona, Israel

      PARP

      Par Pharmaceutical, Inc.

      Upper Saddle River, NJ

      PASQA

      Pasquale Food Company, Inc. Class A

      Birmingham, AL

      PASQB

      Pasquale Food Company, Inc. Class B

      Birmingham, AL

      PTRL

      Petrol Industries, Inc.

      Shreveport, LA

      PTRO

      Petrominerals Corporation

      Stanton, CA

      PFBS

      Ponce Federal Bank, F.S.B.

      Ponce, PR

      PLFE

      Presidential Life Corporation

      Nyack, NY

      PBSB

      Prudential Bank, FSB

      Seattle, WA

      PUBO

      Pubco Corporation

      Cleveland, OH

      RJFN

      R. J. Financial Corporation

      St. Petersburg, FL

      REAS

      Reid-Ashman, Inc.

      Santa Clara, CA

      RIGS

      Riggs National Corporation

      Washington, D.C.

      ROBN

      Robbins & Myers, Inc.

      Dayton, OH

      RMUC

      Rocky Mount Undergarment Co., Inc.

      Rocky Mount, NC

      SCHL

      Scholastic Inc.

      New York, NY

      SWTR

      Southern California Water Company

      Los Angeles, CA

      SUPE

      Superior Electric Company(The)

      Bristol, CT

      SURV

      Survival Technology, Inc.

      Bethesda, MD

      TSIC

      Transducer Systems, Inc.

      Kulpsville, PA

      UMED

      Unimed, Inc.

      Somerville, NJ

      UBAN

      Union Bancorp Inc.

      Grand Rapids, MI

      UWSB

      Union Warren Savings Bank

      Boston, MA

      USHI

      U. S. Health, Inc.

      Towson, MD

      TOTE

      United Tote, Inc.

      Shepherd, MT

      WEYS

      Weyenberg Shoe Manufacturing Company

      Milwaukee, WI

      Interim Additions

      Symbol

      Company Name

      Date of Entry

      CANLZ

      Canal-Randolph Limited

      3/06/85

      SNRU

      Partnerships Sunair Electronics, Inc.

      3/11/85

      ZNTLV

      Zehntel, Inc. (When Issued)

      3/18/85

      The following changes to the list of NASDAQ/NMS securities occurred since March 7, 1985.

      NASDAQ/NMS Symbol AND/OR NAME CHANGES

      New/Old Symbol

      New/Old Security Name

      Date of Change

      CMRK/HHCA

      Home Health Care of America, Inc./Home Health Care of America, Inc.

      3/13/85

      WDHD/WDHD

      Woodhead Industries, Inc./ Daniel Woodhead, Inc.

      3/14/85

      PTCI/PTCI

      Pullman Company/Pullman Transportation Company

      3/18/85

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      MKIV

      Mark IV Industries

      3/07/85

      RIOC

      Royal International Optical

      3/20/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-18 Proposed Amendment to Article III, Section 33 of the Rules of Fair Practice — "Options"

      IMPORTANT MAIL VOTE

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members

      LAST VOTING DATE IS APRIL 15, 1985

      Enclosed herewith is a proposed amendment to Article III, Section 33 of the Rules of Fair Practice. This amendment has been approved by the Association's Board of Governors for submission to the membership for a vote. If approved, the amendment must then be filed with, and approved by, the Securities and Exchange Commission.

      BACKGROUND OF THE PROPOSED AMENDMENT

      Article III, Section 33 of the Rules of Fair Practice (the "Rule") authorizes the Board of Governors to adopt rules, regulations and procedures relating to members' transactions in options contracts, including transactions in options displayed on the NASDAQ System ("NASDAQ Options").

      In 1977, when the Rule was adopted, only stock options were commonly traded or proposed for display in NASDAQ. Therefore, the language of the Rule did not contemplate trading in index options and other options where the underlying vehicle is not technically a security.

      The amendment to the Rule proposed herein is intended to broaden the definition of the term "option" contained in the Rule to encompass the various new options products trading in today's marketplace, and to provide for the effective regulation of index options products which may be introduced in the future, including NASDAQ index options. Thus, the changes proposed by the Board are more technical rather than substantive in nature and reflect similar actions by other self-regulatory organizations.

      In view of the above, the Board has determined that this proposal should be circulated to the membership for approval.

      DISCUSSION OF THE PROPOSED RULE AMENDMENT

      Paragraph (d) of the Rule defines the term "option" for purposes of the Rule as a put, call, straddle or other option or privilege to buy or sell a security. Therefore, the definition of an option contained in the Rule would exclude an index option, which is an option to receive or deliver a cash amount based on the value of an index of securities.

      To expand the definition of the term "option" contained in the Rule, the proposed amendment will reference Section 2(1) of the Securities Act of 1933 which was recently amended to specifically define index options as securities.

      By relying on this 1933 Act definition, the amendments to Article III, Section 33 will make clear the Board's authority to adopt rules relating to members' transactions in all options which are securities as defined in the 1933 Act.

      * * *

      The text of the proposed rule is attached and merits your immediate attention. Please mark the enclosed ballot according to your convictions and return it in the enclosed stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than April 15, 1985.

      The Board of Governors believes the proposed amendment is necessary and appropriate and recommends that members vote their approval.

      Questions concerning this notice may be directed to Peter T. Canada, Assistant Director, NASDAQ Operations, at (202) 728-8479, or to your District Director.

      Sincerely,

      Gordons. Macklin
      President

      Enclosure

      TEXT OF PROPOSED REVISIONS

      Sec. 33

      Options

      (a) A member or a person associated with a member shall not effect any transaction in an option contract, including an option displayed on the NASDAQ System, except in accordance with the provisions of rules, regulations and procedures adopted by the Board of Governors pursuant to the authorization granted in subsection (b) hereof.
      (b) The Board of Governors is authorized, for the purpose of preventing fraudulent and manipulative acts and practices, promoting just and equitable principles of trade, providing safeguards against unreasonable profits or unreasonable rates of commission or other charges, and for the protection of investors and the public interest, to adopt rules, regulations and procedures for transactions in options relating to:
      (1) transactions in option contracts, including options displayed on the NASDAQ System, by members for their own account or the accounts of public customers;
      (2) the comparison-clearance and settlement of transactions in options;
      (3) the reporting of transactions in options;
      (4) the qualifications and standards for registered market makers in options;
      (5) the standards for authorization of underlying securi ties eligible to be subject to options displayed on the NASDAQ System;
      (6) the endorsement and guarantee of performance options; and,
      (7) such other areas of options activity and trading as may be required to achieve the above-stated purposes.
      (c) The rules, regulations and procedures authorized by subsection (b) hereof shall be incorporated into Appendix E to be attached to and made a part of these Rules of Fair Practice. The Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of Appendix E from time to time without recourse to the membership for approval, as would otherwise be required by Article VII of the By-Laws, and Appendix E shall become effective as the Board of Governors may prescribe unless disapproved by the Securities and Exchange Commission.
      (d) For the purposes of this section, the term "option" shall mean any put, call, straddle or other option or privilege of buying a security from or selling a security to another without being bound to do so which is a "security" as defined in Section 2(1) of the Securities Act of 1933, as amended, but shall not include any tender offer, registered warrant, right, convertible security or any other option in respect to which the writer is the issuer of the security which may be purchased or sold upon the exercise of the option.

      * * *


      New language underlined; deleted language stricken.


    • 85-17 Request for Comments on Proposed Amendment to Appendix F Concerning Sales Incentives for Direct Participation Programs

      TO: All NASD Members and Other Interested Persons

      Attention: Direct Participation Programs Department

      The Association's Board of Governors has approved a proposed amendment to Appendix F to Article III, Section 34 of the Rules of Fair Practice which would prohibit sponsors of direct participation programs from offering non-cash sales incentives to NASD members and their associated persons. The purpose of this notice is to solicit public comment on the proposed amendment. The proposed amendment is the result of a long-standing Association concern relating to such incentive programs and a number of complaints the Association has received from members and sponsors of direct participation programs.

      Background

      Subsection 5(e) of Appendix F regulates direct payments of non-cash items to individual associated persons of members by limiting the value of those incentives to $50 per person per year, and requiring that the incentive item be counted as underwriting compensation and information regarding its receipt be disclosed in the offering materials. Subsection 5(f) of Appendix F, as amended on April 11, 1984, permits sales incentives in excess of $50 to be provided by program sponsors to members only if certain criteria are met. In summary, all sales incentives and bonuses must be paid directly to the member in cash, distribution (if any) of incentives to associated persons must be controlled solely by the member, the incentives must be reflected on the books and records of the recipient member and included as compensation received in connection with an offering, and the arrangements relating to the proposed payment of incentives or bonuses must be disclosed in the prospectus or similar document.

      The April, 1984 amendment to Section 5(f) was intended to ensure that members retain control over the amount and form of compensation received by their registered representatives and, it was believed, would tend to discourage the non-cash sales incentive form of compensation. Notwithstanding the amendment, non-cash sales incentive programs appear to have become more prevalent and more aggressive, involving trips to exotic locations and selections of luxury merchandise. In light of this and the fact that many sponsors utilize direct appeals to registered representatives, the Association has become concerned that supervisory control of registered representatives has become a serious problem. Because sponsors often utilize direct appeals to registered representatives, it is often difficult for members to adequately control the participation of its registered representatives in non-cash sales incentive programs.

      The Association believes that the ability of members to supervise their registered representatives is severely impacted when an outside entity offers and provides exotic trips and luxury merchandise to the member's retail sales force. The Association, therefore, has concluded that any further modifications to the existing rule which attempted to control sales incentives, short of a prohibition, would not be effective.

      The Association also considered whether a prohibition on non-cash sales incentives in connection with the sale of direct participation programs should be extended to in-house sales incentive programs of member firms. Concern was expressed that it would be inequitable to prohibit incentive programs involving sponsors' non-cash incentives to members without also prohibiting members' internal non-cash incentive programs to their own registered representatives. However, the Association has determined that the rationale underlying the concerns relating to sales incentives are not present in the context of an in-house sales incentive program. Where an in-house program is involved, the member has control over the suitability of the particular program, is responsible for the sales methods utilized to sell the offering and is in a position to exercise control over its sales force. It is the influence of an outside entity over a member's sales force which has the effect of undermining the member's ability to supervise. Therefore, the Association has determined not to prohibit members in-house non-cash sales incentive programs.

      Proposed Amendment

      The Association is publishing for comment a proposed amendment to Section 5(e) of Appendix F which would prohibit a sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member) or a program from directly or indirectly offering or providing non-cash compensation in the form of sales incentive items to any NASD member or its associated persons including but not limited to travel bonuses, prizes and awards. In addition, members and their associated persons would be prohibited from accepting such non-cash compensation. Section 5(e) would also be clarified to indicate that souvenir-type sales incentives given by any sponsor directly to a person associated with a member may not exceed $50 per year per associated person for all programs of that sponsor. Section 5(f) is proposed to be eliminated.

      The text of the proposed amendment is attached and is marked to indicate the amended language.

      Request for Comments

      The Association is requesting comments on the proposed amendment prior to final Board consideration. All comments received during this comment period will be reviewed by the Direct Participation Programs and Real Estate Committees and changes to the amendment will be recommended as deemed appropriate. The Board of Governors will then reconsider the amendment. If the Board approves the amendment or an amended version, it must be filed with, and approved by, the Securities and Exchange Commission before it becomes effective.

      All written comments should be addressed to the following:

      James M. Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      All comments must be received by April 15, 1985. All comments received will be made available for public inspection.

      Any questions regarding this notice should be directed to Suzanne E. Rothwell or Richard J. Fortwengler of the Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

      Proposed Amendment to Sections 5(e) and 5(f) of Appendix F to Article III, Section 34 of the Rules of Fair Practice*

      Section 5 Organization and Offering Expenses

      (e) No sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member), or program shall directly or indirectly offer or provide any non-cash compensation or sales incentive items including, but not limited to, travel bonuses, prizes, and awards to a member or a person associated with a member and no member or person associated with a member shall agree to accept such compensation. This section shall not prohibit a sponsor, affiliate of a sponsor, or program from providing non-cash sales incentive items directly to a person associated with a member unless where:
      (1) the aggregate value of all such items to be received paid by any sponsor or affiliate of a sponsor to each associated person during any year does not exceed $50;
      (2) the value of all such items to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of paragraph (b)(l) of this section; and
      (3) the proposed payment or transfer of all such items are disclosed in the prospectus or similar offering document.
      (f) NO sponsor, affilate of a sponsor, or program shall provide compensation to a member in the form of sales incentive items including, but not limited to, travel bonuses, prizes, and awards unless all ef the following conditions are satistieds
      (1) a fair market dollar value ef the incentive items has been established;
      (2) the value of all sueh items to be made available in eenneetien with an offering is ineluded as compensation to be received in connection with the offering for purposes of subsectien (b) of this sectien;
      (3) arrangements relating to the proposed payment or transfer of all such items are disclosed in the prospectus or similar offering document;
      (4) the manner of receiving all such items and their supsequent disposition, whether to associated persons or otherwise, is controlled solely by the member in a manner whieh enables the member to properly supervise its associated persons; and
      (5) the value of all such items is reflected on the books and records of the recipient member as compensatien received in connection with the offering.

      * New language is underlined; deleted language is stricken.


    • 85-16 Holiday Settlement Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Good Friday, April 5, 1985. "Regular Way" transactions made on the business days immediately preceding that day will be subject to the following schedule.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      March 28

      April 4

      April 9

      29

      8

      10

      April 1

      9

      11

      2

      10

      12

      3

      11

      15

      4

      12

      16

      5

      Markets Closed

      8

      15

      17

      The foregoing settlement dates should be used by broker-dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Sections 22.8(b)(l) 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 seven (7) business days of the date of purchase or, pursuant to Section 220.8(d)(l), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 85-15 Questionnaire Concerning an Information Service for Direct Participation Program Securities

      TO: NASD Members Participating in Sales of Direct Participation Program Securities

      The National Association of Securities Dealers, Inc. is circulating the attached questionnaire to members which participate in sales of direct participation programs in order to ascertain the level of interest in a communications service that would disseminate information about DPPs to members and sponsors. This information service would provide the membership and sponsors of DPP programs with indications of interest from persons who would like to buy or sell securities of previously capitalized DPPs.

      In November 1979, the Association's Direct Participation Programs and Real Estate Committees recommended a study of possible means for developing an information service which would convey indications of interest in DPP securities to the membership and sponsors. In 1980, an initial survey of Association members was conducted to determine the level of interest in such a service. This initial survey drew a response from over 638 members and of those responding which were distributing DPP securities, 87.7 percent favored establishing some sort of service.

      Subsequent to the initial survey, the Direct Participation Programs and Real Estate Committees refined the concepts and proposed to establish such an information service and presented the concept along with the necessary rule changes to Schedule D to Article XVI of the Association's By-Laws to the Association's Board of Governors. The Board approved the establishment of an information service and authorized Notice to Members 82-13 (March 9, 1982) requesting comments from the membership and other interested persons on the proposed overall concept as well as the necessary rule changes to implement such a service.

      The information service or "electronic bulletin board" proposed by the Association in Notice to Members 82-13 was intended to provide the membership with a means of communicating indications of interests in DPP securities with any resulting transaction occurring outside the system. The Association proposed that the service be available for qualified securities of programs that are reporting companies under the Securities Exchange Act of 1934 which have a capitalization of 10,000 or more units and which are held by not less than 300 persons. In addition, the NASD proposed that members would be considered eligible to enter information into the service if the member is a general securities or direct participation programs-only broker-dealer which maintains a minimum net capital of at least $25,000. The service would list the name and phone number of any member who indicated an interest in buying or selling units of a qualified program.

      The Association received a total of 18 comments to Notice to Members 82-13, including comment letters from the American Bar Association, Securities Industry Association and a number of NASD member firms. Of the respondents who offered general comments on the overall concept, half considered the proposal highly attractive, both from the point of view of investor clients and from the point of view of member firms. In addition, half of the respondents offered more specific comments with respect to individual aspects of the proposed rule changes.

      Based on these generally favorable responses, the Board approved the filing with the Securities and Exchange Commission of the amendments necessary to implement the service. Subsequently, the SEC published the proposed rule in the Federal Register on two separate occasions in April and May 1983. Twenty-five responses were received by the SEC mostly from NASD member-affiliates of sponsors, all but one of which expressed opposition to the development of such an information service.

      As a result of the marked differences between the results of the initial survey completed in 1980, the comments received in connection with the Notice to Members in 1982 and the comments received by the SEC in connection with the Federal Register releases of 1983, the Direct Participation Programs and Real Estate Committees and the Association's Board of Governors determined to re-examine the interest of the membership and sponsors of DPP programs in the establishment of an information service.

      The Association has, therefore, determined to distribute this questionnaire to members which sell program securities to determine the level of interest in a service which would disseminate information on DPP programs to the NASD membership and sponsors and which members may utilize when clients request aid in liquidating their holdings of securities in direct participation programs. Conversely, if a member's client expressed an interest in purchasing securities of a program which has already concluded its capitalization period, the service would enable the member to locate a person who is willing to sell the securities they are presently holding.

      We are asking members which have participated in the sale of DPP securities to complete this questionnaire and return it to the Association. Respondents are not asked to identify their firm. However, we would appreciate your cooperation in ensuring that the person completing the questionnaire is familiar with the DPP operations of the firm. Please return your completed questionnaire by April 30, 1985, to the Association at the following address:

      National Association of Securities Dealers, Inc.
      Corporate Financing Department
      1735 K Street, N.W.
      Washington, D.C. 20006

      Questions concerning the enclosed questionnaire may be directed to Suzanne E. Rothwell, Assistant Director, Corporate Financing Department, at telephone number (202) 728-8258.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      Member Survey

      Questionnaire On An Information Service for Direct Participation Program Securities

      In order to more fully assess the need for and interest in an information service developed specifically for direct participation program securities, the National Association of Securities Dealers, Inc. is directly soliciting the comments of the membership which participate in the sale of program securities. If your firm conducts any business in direct participation program securities please complete the following questionnaire and return it to the Association in the enclosed postage-paid envelope by April 30, 1985.

      A. Information about the member: The Association is interested in gathering information about the general characteristics of the members responding to this questionnaire.

      1. How many years has your firm been involved in the distribution of DPPs?*

      __1-3 years

      __4-7 years

      __8+ years

      2. Is your firm:

      Yes

      No

       

      __

      __

      A DPP-only broker-dealer?

      __

      __

      A general securities broker-dealer?

      __

      __

      Required to maintain $25,000 minimum net capital?

      __

      __

      Required to maintain only $5,000 minimum net capital?

      __

      __

      Affiliated with a sponsor of direct participation programs?

      3. If your firm is affiliated with a sponsor of DPPs, does your firm act as: (check only one category)

      Yes

      No

       

      __

      __

      Sole retailer?

      __

      __

      Wholesaler only?

      __

      __

      Participating broker-dealer only?

      __

      __

      Both wholesaler and participating broker-dealer in retail sales?

      4. How many DPPs have you closed during the past two years?

       

      Private

      Public

      Public/Private Total

      1-5

      ______

      ______

      ______

      6-10

      ______

      ______

      ______

      11-15

      ______

      ______

      ______

      16+

      ______

      ______

      ______

      B. Information concerning the transfer of DPP securities.

      1. Has your firm received requests to buy or sell currently outstanding DPP securities?I

      __yes

      __no

      2. Do these requests come from holders of DPP securities of:

      Private programs

      Yes__

      No__

      Public programs

      yes__

      No__

      Private and public programs

      yes__

      No__

      3. Were such requests received from: (check all applicable categories)

      __

      Customers of your firm?

      __

      Persons not currently customers?

      __

      Persons seeking additional interests in a program they have invested in?

      __

      Attorneys/accountants?

      __

      Investment advisors?

      __

      Other registered broker-dealer firms?

      __

      Investment partnerships?

      4. How many requests for the purchase or sale of currently outstanding DPP securities have you received in the last 2 years?

      Last 12 months

      Between 13 & 24 months

      ___________

      _____________

      5. On average, how long has a person held their DPP securities before trying to sell them?

      __

      0-2 years

      __

      3-4 years

      __

      5 years or longer

      6. What method(s) do you use to match requests for the purchase or sale of a program security?

      __

      Maintain a list of persons interested in buying or selling DPP securities

      __

       

      __

      Distribute a memo within your firm to determine if there is another interested customer

      __

      Contact sponsor or general partner for assistance

      __

      Contact another member for assistance

      __

      Contact an investment partnership which purchases outstanding program securities

      __

      Other (please specify)________________
      __________________________________

      7. What methodology do you usually use to establish a sale price for an outstanding DPP security? (check only one category)

      __

      Value of future distributions without discount

      __

      Value of future distributions with discount

      __

      Original public offering price without discount

      __

      Original public offering price with discount

      __

      Negotiated sale price by buyer and seller

      8. Do you believe that the methods indicated in Questions 6 and 7 are adequate for buyers and sellers of DPP securities?

      __yes

      __no

      C. Information about your opinions on the desirability and feasibility of an information service for DPPs.

      1. Would you be in favor of an information service that provided indications of interest on the purchase of DPP securities?

      __yes

      __no

      2. Would you be in favor of an information service that provided indications of interest on the sale of DPP securities?

      __yes

      __no

      3. Would you be in favor of an information service that would allow indications of interest on DPP securities only after obtaining prior approval of the general partner?

      __yes

      __no

      4. Do you believe that an information service would facilitate transfers of DPP securities?

      __yes

      __no

      5. Under the Internal Revenue Code, a partnership will terminate by law if fifty percent or more of its equity interests are transferred in any twelve-month period. Do you believe that the implementation of an information service would cause an increase in transfers of DPP securities?

      __yes

      __no

      If your answer was "yes," do you believe that the transfers would increase enough to terminate a partnership?

      __yes

      __no

      6. Under Internal Revenue Code regulations, a partnership is considered an association taxable as a corporation if it possesses a majority of four corporate characteristics. The corporate characteristics are (1) perpetual life; (2) centralized management; (3) limited liability of management; and (4) free transferability of securities. Most programs are structured so that their only corporate characteristic is centralized management.

      Do you believe that a partnership may be taxed as a corporation if it has centralized management and its securities are considered freely transferable?

      __yes

      __no

      7. It is generally recognized that the valuation of the securities in a program may be affected if the program has not had sufficient time to invest the contributed capital and begin producing cash flow from operation. Would a required period of seasoning prior to transfer of program interests help alleviate this problem?

      __yes

      __no

      If seasoning is appropriate, how long should the seasoning period be after the program closes?

      __

      0-2 years

      __

      3-4 years

      __

      5-6 years

      __

      7+ years

      D. Information about the characteristics you would like to see incorporated in an information service for DPPs.

      1. What medium would be best suited to providing information on DPPs?

      __

      Printed publication

      __

      Computer access

      __

      Other (please specify) ______

      2. What categories of information should an information service permit to be included in an indication of interest on DPP securities?

      __

      One-sided indications of interest (i.e., buy only or sell only)

      __

      Two-sided indications of interest (i.e., both buy and sell)

      __

      Program name

      __

      Sponsor name

      __

      Program industry group

      __

      Broker-dealer name

      __

      Broker-dealer telephone number

      __

      Registered representative name

      __

      Dollar size of indication of interest

      __

      Unit size of indication of interest

      __

      Date program closed

      __

      Prior cash distributions of program

      __

      Current market value of program assets

      __

      Current book value of program assets

      __

      Original purchase price of security

      __

      Remaining installment payments

      __

      Remaining mandatory or contingent assessments

      __

      The minimum number of program securities which may be transferred

      __

      Securities registered or unregistered

      __

      Other________________________________
      ________________________________

      3. What eligibility criteria should a DPP security have to meet in order for a broker-dealer to insert an indication of interest in an information service?

      ___

      Approval of general partner required

      ___

      Current public information must be available on the program

      ___

      Program must be a reporting company under the Securities Exchange Act of 1934

      ___

      A minimum number of program securities must be outstanding What number?___

      ___

      A minimum number of investors must be in the program What number?___

      ___

      A minimum number of broker-dealers must be ready to enter information in the system on the program securities

      ___

      Other_____________________________
      __________________________________

      4. Do you believe that a broker-dealer which seeks to insert an indication of interest on a DPP security in an information service should be required to maintain net capital above the minimum of $5,000?

      __yes

      __no

      What minimum net capital do you suggest? $____________________

      * * * * *

      The National Association of Securities Dealers, Inc. appreciates your cooperation in completing this questionnaire. Please return the questionnaire in the enclosed, postage-paid envelope by April 30, 1985, to:

      National Association of Securities Dealers, Inc. Corporate Financing Department 1735 K Street, N.W. Washington, D.C. 20006

      * * * * *


      * Article III, Section 34 defines the term "direct participation program" to include a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution. Excluded from the definition are real estate investment trusts, tax-qualified pension and profit sharing plans, individual retirement plans, and tax-sheltered annuities.


    • 85-14 Brentwood Securities, Inc. 11487 Wilshire Boulevard, 3rd Floor Los Angeles, California 90025

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On February 7, 1985, the United States District Court for the Central District of California appointed a SIPC trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59 (i)(2) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12 (h)(iii) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Securities Investor Protection Corporation
      Attention: William H. Seckinger, Esquire
      900 Seventeenth Street, N. W., Ste. 800
      Washington, D. C. 20006
      Telephone: (202) 223-8400.

    • 85-13 NASDAQ National Market System Grows to 1,569 Securities With 100 Voluntary Additions on March 5, 1985

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, March 5, 1985, 100 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,569. These 100 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 100 issues scheduled to join NASDAQ/NMS on Tuesday, March 5, 1985, are:

      Symbol

      Company Name

      Location

      ABRI

      Abrams Industries, Inc.

      Atlanta, GA

      AESM

      Aero Systems, Inc.

      Miami, FL

      ALCO

      Alico, Inc.

      La Belle, FL

      AMCO

      American Midland Corporation

      Fort Lee, NJ

      AWST

      American Western Corporation

      Sioux Falls, SD

      BKFR

      Baker, Fentress & Company

      Chicago, IL

      BGLY

      Begley Company

      Richmond, KY

      BOTH

      Booth, Inc.

      Dallas, TX

      BRCOA

      W. H. Brady Co. Class A

      Milwaukee, WI

      CATA

      Capitol Transamerica Corporation

      Madison, WI

      CHAT

      Chatham Manufacturing Company

      Elkin, NC

      CSBKA

      Coastal Savings Bank Class A

      Portland, ME

      CGES

      Colonial Gas Company

      Lowell, MA

      CGESP

      Colonial Gas Company Preferred

      Lowell, MA

      CFSB

      Columbia Federal Savings Bank

      Wenatchee, WA

      CMRO

      Comarco, Inc.

      Anaheim, CA

      CMUC

      Comp-U-Cheek, Inc.

      South field, MI

      CONW

      Consumers Water Company

      Portland, ME

      CRRC

      Courier Corporation

      Lowell, MA

      DNAP

      DNA Plant Technology Corporation

      Cinnaminson, NJ

      DWWS

      Davis Water & Waste Industries, Inc.

      Thomasville, GA

      DLTK

      Deltak Corporation

      Minneapolis, MN

      DRES

      Dresner, Inc.

      Bedford Park, IL

      EILI

      E.I.L. Instruments, Inc.

      Sparks, MD

      ELCN

      Elco Industries, Inc.

      Rock ford, IL

      ELDB

      Eldorado Bancorp

      Tustin, CA

      FARC

      Farr Company

      El Segundo, CA

      FSCR

      Federal Screw Works

      Detroit, MI

      FSSLA

      Financial Security Savings and Loan Association

      Boca Raton, FL

      FIWI

      First Interstate Corporation of Wisconsin

      Sheboygan, WI

      FNBC

      First National Corporation

      San Diego, CA

      FIVC

      First Valley Corporation

      Bethlehem, PA

      FELE

      Franklin Electric Co., Inc.

      Bluffton,IN

      GMCC

      General Magnaplate Corporation

      Linden, NJ

      GSHL

      General Shale Products Corporation

      Johnson City, TN

      GIBS

      C. R. Gibson Company (The)

      Norwalk, CT

      GROM

      Groman Corporation

      Elkhart, IN

      HFAX

      Halifax Engineering, Inc.

      Alexandria, VA

      THCO

      Hammond Company (The)

      Newport Beach, CA

      HINS

      Hanover Insurance Company (The)

      Worcester, MA

      HBOL

      Hartford Steam Boiler Inspection and Insurance Company (The)

      Hartford, CT

      HAVA

      Harvard Industries, Inc.

      St. Louis, MO

      HAVT

      Haverty Furniture Companies, Inc.

      Atlanta, GA

      CHHC

      C. H. Heist Corporation

      Clearwater, FL

      HFBF

      Home Federal Bank of Florida, F.S.B.

      St. Petersburg, FL

      HZIR

      Horizon Air Industries Inc.

      Seattle, WA

      IDLE

      Idle Wild Foods, Inc.

      Worcester, MA

      ICTM

      Integrated Circuits Incorporated

      Redmond, WA

      JLGI

      JLG Industries, Inc.

      McConnellsburg, PA

      JCBS

      Jacobson Stores Inc.

      Jackson, MI

      KELYA

      Kelly Services, Inc. Class A

      Troy, MI

      KELYB

      Kelly Services, Inc. Class B

      Troy, MI

      LCLD

      Laclede Steel Company

      St. Louis, MO

      LRCX

      Lam Research Corporation

      Fremont, CA

      LUBC

      Liberty United Bancorp, Inc.

      Louisville, KY

      MGMA

      Magma Power Company

      Los Angeles, CA

      MAGI

      Magna Group, Inc.

      Belleville, IL

      MRIS

      Marshall & Isley Corporation

      Milwaukee, WI

      MCAL

      Merchant Bank of California (The)

      Beverly Hills, CA

      MCHN

      Merchants National Corporation

      Indianapolis, IN

      MESA

      Mesaba Aviation, Inc.

      Grand Rapids, MN

      MTML

      Metromail Corporation

      Lincoln, NE

      MPRO

      MicroPro International Corporation

      San Rafael, CA

      MIAM

      Mid-American National Bank and Trust Company

      Bowling Green, OH

      MCSB

      Morris County Savings Bank (The)

      Morristown, NJ

      MOSI

      Mosinee Paper Corporation

      Mosinee, WI

      NPCO

      Napco International Inc.

      Hopkins, MN

      NCBC

      National Commerce Bancorporation

      Memphis, TN

      PIZA

      National Pizza Company

      Pittsburg, KS

      NCNG

      North Carolina Natural Gas Corporation

      Fayetteville, NC

      NOWT

      North-West Telecommunications, Inc.

      Tomah, WI

      NUCM

      Nuclear Metals, Inc.

      Concord, MA

      OREM

      Oregon Metallurgical Corporation

      Albany, OR

      PTLX

      Patlex Corporation

      West field, NJ

      PAYC

      Payco American Corporation

      Brookfield, WI

      PBNC

      Peoples Bancorporation

      Rocky Mount, NC

      PIOG

      Pioneer Group, Inc. (The)

      Boston, MA

      PNBT

      Planters Corporation (The)

      Rocky Mount, NC

      PLMN

      Plasmine Corporation (The)

      Portland, ME

      PLEN

      Plenum Publishing Corporation

      New York, NY

      PTRK

      Preston Corporation

      Preston, MD

      PSYS

      Programming and Systems, Incorporated

      New York

      PSNB

      Puget Sound Bancorp

      Tacoma, WA

      QUAN

      Quantronix Corporation

      Smithtown, NY

      RESR

      Research,Incorporated

      Minneapolis, MN

      SNCO

      Second National Corporation

      Saginaw, MI

      SPCM

      Specialty Composites Corporation

      Newark, DE

      TIER

      Tierco Group, Inc. (The)

      Oklahoma City, OK

      TTCO

      Toledo Trustcorp, Inc.

      Toledo, OH

      TTCOP

      Toledo Trustcorp, Inc. Preferred

      Toledo, OH

      TYLN

      Tylan Corporation

      Carson, CA

      UNSB

      United Bank, A Savings Bank

      Tacoma, WA

      UCIT

      United Cities Gas Company

      Nashville, TN

      UVTB

      United Vermont Bancorporation

      Rutland, VT

      UTBN

      Utah Bancorporation

      Salt Lake City, UT

      VCRE

      Vari-Care, Inc.

      Rochester, NY

      VABF

      Virginia Beach Federal Savings and Loan Association

      Virginia Beach, VA

      WSAU

      Wausau Paper Mills Company

      Wausau, WI

      WSVS

      Wiland Services, Inc.

      Boulder, CO

      WILM

      Wilmington Trust Company

      Wilmington, DE

      The following changes to the list of NASDAQ/NMS securities occurred since February 7, 1985.

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      EXCA

      Excalibur Technologies Corporation

      02/11/85

      VICA

      Video Corporation of America

      02/15/85

      DYSN

      Dysan Corporation

      02/15/85

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 85-12 Fiduciary Obligations of Members When Handling Customer Limit Orders

      IMPORTANT

      TO: All NASD Members and Other Interested Persons

      Over the past several months, some questions have arisen relating to members' procedures when executing transactions for their own accounts while in possession of unexecuted customer limit orders for over-the-counter securities. In May 1984, the NASD Board of Governors appointed an Ad Hoc Committee on Limit Orders to review members' responsibilities. Based upon that Committee's recommendation, the Board of Governors has directed that this educational notice be published to provide NASD members guidance concerning their fiduciary obligations with respect to customer limit orders.

      At least as far back as 1966, the courts have held that, under federal securities laws and general agency principles, a broker-dealer is a fiduciary when it accepts a customer's limit order and cannot prefer its own interests over the best interests of its customer. The Securities and Exchange Commission also has found violations of the anti-fraud provisions of the federal securities laws where broker-dealers have executed sales or purchases for their own accounts on preferable terms while holding an unexecuted customer order which the broker-dealer could have executed had it chosen to do so.

      In one case, 1/ a court found that a broker-dealer had accepted a limit order to sell which remained unexecuted while the firm, a market maker in the security, sold substantial amounts from its own inventory at prices superior to the customer's limit price without prior disclosure to the customer. The court concluded that the broker-dealer's actions in placing its own interests ahead of the limit order customer was a clear breach of fiduciary responsibilities established by common law agency principles. The court also stated that the broker-dealer's "self-preferment" constituted a violation of the anti-fraud provisions of Section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934.

      The Board of Governors is concerned that market makers and other members which choose to accept limit orders from customers may be unaware that they have undertaken a fiduciary duty under the above legal principles. A failure to satisfy such legal principles would also raise questions about compliance with Article III, Section 1 of the NASD Rules of Fair Practice requiring observance of high standards of commercial honor and just and equitable principles of trade. In addition, members accepting limit orders from other members undertake a fiduciary responsibility and would be required to observe such principles.

      Therefore, to prevent inadvertent failure to comply with Association policies in the handling of limit orders where a member is also buying or selling for its own trading or investment account, the Board of Governors suggests that members take care to observe existing principles of agency law. Under those principles, a member which has accepted a limit order assumes the responsibilities of an agent, whether the transaction is to be confirmed as principal or agent. Nevertheless, the fiduciary responsibility of a member in handling a particular order may be modified by a clear understanding between the parties as to the modification before the order is accepted. In such a situation, full disclosure must have been made.

      The Board further suggests that members review their policies and procedures for handling limit orders and take steps to assure that their salespeople, customers and other members understand the way in which their limit orders will be handled. In this connection, the Board of Governors will shortly publish for comment a proposed amendment to Article III, Section 27 of the Association's Rules of Fair Practice which will require that a member's internal supervisory procedures specify whether the firm accepts limit orders and, if so, the procedures it follows in handling and processing them. Where appropriate, members should consult with their counsel to assure that the firm's policies and procedures are consistent with existing legal principles.

      Questions concerning this notice may be directed to the undersigned at (202) 728-8319 or to either Dennis C. Hensley or John F. Mylod at (202) 728-8294.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel


      1/ Opper v. Hancock Securities Corporation, 250 F. Supp. 668 (1966), aff'd 367 F.2d 157 (2d Cir. 1966).


    • 85-11 Expansion of the Small Order Execution System (SOES)

      TO: NASD Members and NASDAQ Level 2 and Level 3 Subscribers

      The Association's Small Order Execution System (SOES) began operation on December 14, 1984, with 25 NASDAQ National Market System (NASDAQ/NMS) securities. That number was expanded to 50 stocks by year-end. Recently the Board of Directors of NASD Market Services, Inc. approved a schedule whereby all NASDAQ/NMS issues will be phased into SOES by March 29, 1985. SOES additions are to take place alphabetically in accordance with the first letter in each issuer's corporate name. A copy of that schedule is attached to this notice.

      In October 1984, NASD members and NASDAQ Level 2/3 subscribers received material pertaining to the operation of SOES. Included were SOES rules, registration forms and contracts. In response to that mailing, over 200 members have registered as either SOES market makers or order entry firms or in both capacities. With the expansion of SOES to include all NASDAQ/NMS securities, we would again like to invite all NASDAQ subscribers who have not as yet executed SOES agreements to do so. Contracts, registration forms and other information on SOES may be obtained by contacting Mr. John H. Hodges, Jr., Senior Vice President, Market Services in New York at (212) 839-6326.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and