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  • Retired Rules

    • Retired NASD Rules

      • GENERAL PROVISIONS (0100)

        • 0100. GENERAL PROVISIONS

          This rule is no longer applicable. NASD Rule 0100 has been superseded by FINRA Rule 0100. Please consult the appropriate FINRA Rule.

          • 0110. Adoption and Application of Rules

            This rule is no longer applicable. NASD Rule 0110 has been superseded by FINRA Rule 0110. Please consult the appropriate FINRA Rule.

            • 0111. Adoption of Rules

              This rule is no longer applicable. NASD Rule 0111 has been superseded by FINRA Rule 0110. Please consult the appropriate FINRA Rule.

              The following provisions are adopted pursuant to Article VII, Section 1, of the By-Laws of the Corporation.

            • 0112. Effective Date

              This rule is no longer applicable. NASD Rule 0112 has been superseded by FINRA Rule 0120. Please consult the appropriate FINRA Rule.

              The Rules shall become effective as provided in Section 1 of Article XI of the By-Laws.
              Amended by SR-NASD-98-86 eff. Nov. 19, 1998.

            • 0113. Interpretation

              This rule is no longer applicable. NASD Rule 0113 has been superseded by FINRA Rule 0130. Please consult the appropriate FINRA Rule.

              The Rules shall be interpreted in such manner as will aid in effectuating the purposes and business of the Association, and so as to require that all practices in connection with the investment banking and securities business shall be just, reasonable and not unfairly discriminatory.
              Cross Reference–

              Resolution under Article XI, Section 4, of the By-Laws: Interpretations and Explanations

            • 0114. Effect on Transactions in Municipal Securities

              This rule is no longer applicable. NASD Rule 0114 has been superseded by FINRA Rule 0150. Please consult the appropriate FINRA Rule.

              The Rules shall not be construed to apply to contracts made prior to the effective date of the Rules or to transactions in municipal securities (as defined in Section 3(a)(29) of the Act).
              Amended by SR-NASD-95-39 eff. Aug. 20, 1996.

            • 0115. Applicability

              This rule is no longer applicable. NASD Rule 0115 has been superseded by FINRA Rule 0140. Please consult the appropriate FINRA Rule.

              (a) These Rules shall apply to all members and persons associated with a member. Persons associated with a member shall have the same duties and obligations as a member under these Rules.
              (b) A member or person associated with a member, who has been expelled, canceled or revoked from membership or from registration or who has been barred from being associated with all members, shall cease to have any privileges of membership or registration. A member or person associated with a member who has been suspended from membership or registration shall also cease to have any privileges of membership or registration other than those under the Code of Procedure as set forth in the Rule 9000 Series or insurance programs sponsored by the Association. In neither case shall such a member or person associated with a member be entitled to recover any admission fees, dues, assessments or other charges paid to the Association.

              Cross Reference–

              IM-8310-1, Effect of a Suspension, Revocation or Bar

              (c) A member or person associated with a member who has been suspended from membership or from registration shall be considered as a non-member during the period of suspension for purposes of applying the provisions of these Rules which govern dealings between members and non-members. However, such member or person associated with a member shall have all of the obligations imposed by the rules of the Corporation.
              Amended by SR-NASD-95-39 eff. Aug. 20, 1996.

              Selected Notices: 87-53, 88-96.

            • 0116. Application of Rules of the Association to Exempted Securities

              This rule is no longer applicable. NASD Rule 0116 has been superseded by FINRA Rule 0150. Please consult the appropriate FINRA Rule.

              (a) For purposes of this Rule, the terms "exempted securities" and "municipal securities" shall have the meanings specified in Sections 3(a)(12) and 3(a)(29) of the Act, respectively.
              (b) Unless otherwise indicated within a particular provision, the following Rules of the Association and Interpretative Materials thereunder are applicable to transactions and business activities relating to exempted securities, except municipal securities, conducted by members and associated persons: 2110, 2120, 2210, IM-2210-1, IM-2210-2, IM-2210-3, 2250, 2270, 2310, IM-2310-2, IM-2310-3, 2320, 2330, IM-2330, 2340, 2430, 2450, 2510, 2520, 2521, 2522, IM-2522, 2770, 2780, 2820(g), 2910, 3010, 3020, 3030, 3040, 3050, 3060, 3070, 3110, IM-3110, 3120, 3130, IM-3130, 3131, 3140, 3230, 3310, IM-3310, 3320, IM-3320, 3330, 8110, 8120, 8210, 8310, IM-8310-1, IM-8310-2, 8320, 8330, and 9552.
              Amended by SR-NASD-2003-110 eff. June 28, 2004.
              Adopted by SR-NASD-2000-38 eff. Oct. 28, 2001.

              Selected Notices: 01-63, 04-36.

          • 0120. Definitions

            This rule is no longer applicable. NASD Rule 0120 has been superseded by FINRA Rule 0160. Please consult the appropriate FINRA Rule.

            When used in these Rules, unless the context otherwise requires:
            (a) "Act"
            The term "Act" means the Securities Exchange Act of 1934, as amended.
            (b) "Association"
            The term "Association" means, collectively, the NASD, NASD Regulation, and NASD Dispute Resolution.
            (c) "By-Laws"
            The term "By-Laws" means the By-Laws of the Corporation.
            (d) "Code of Procedure"
            The term "Code of Procedure" means the procedural rules contained in the Rule 9000 Series.
            (e) "Commission"
            The term "Commission" means the Securities and Exchange Commission (SEC), established pursuant to the Act.
            (f) "Completion of the Transaction"
            The term "the completion of the transaction" means:
            (1) In the case of a customer who purchases a security through or from a member, except as provided in subparagraph (2), the time when such customer pays the member any part of the purchase price, or, if payment is effected by a bookkeeping entry, the time when such bookkeeping entry is made by the member for any part of the purchase price;
            (2) In the case of a customer who purchases a security through or from a member and who makes payment therefor prior to the time when payment is requested or notification is given that payment is due, the time when such member delivers the security to or into the account of such customer;
            (3) In the case of a customer who sells a security through or to a member, except as provided in subparagraph (4), if any security is not in the custody of the member at the time of sale, the time when the security is delivered to the member, and if the security is in the custody of the member at the time of sale, when the member transfers the security from the account of such customer;
            (4) In the case of a customer who sells a security through or to a member and who delivers such security to such member prior to the time when delivery is requested or notification is given that delivery is due, the time when such member makes payment to or into the account of such customer.
            (g) "Customer"
            The term "customer" shall not include a broker or dealer.
            (h) Reserved.
            (i) "Member"
            The term "member" means any individual, partnership, corporation or other legal entity admitted to membership in the Association under the provisions of Articles III and IV of the By-Laws.
            (j) "NASD"
            The term "NASD" means, collectively, NASD Inc., NASD Regulation, and NASD Dispute Resolution.
            (k) "Nasdaq"
            The term "Nasdaq" mean The Nasdaq Stock Market, Inc.
            (l) "NASD Regulation"
            The term "NASD Regulation" means NASD Regulation, Inc.
            (m) "National Adjudicatory Council"
            The term "National Adjudicatory Council" means the committee of NASD Regulation which may be authorized and directed to act for the Board of Directors of NASD Regulation in a manner consistent with the By-Laws of NASD Regulation, the Rules of the Association, and the Delegation Plan with respect to (1) an appeal or review of a disciplinary proceeding; (2) a statutory disqualification decision; (3) a review of a membership proceeding; (4) a review of an offer of settlement, a letter of acceptance, waiver, and consent, and a minor rule violation plan letter; (5) the exercise of exemptive authority; and (6) such other proceedings or actions authorized by the Rule of the Association.
            (n) "Person"
            The term "person" shall include any natural person, partnership, corporation, association, or other legal entity.
            (o) "Rules" or "Rules of the Association"
            The term "Rules" or "Rules of the Association" means the numbered rules set forth in the NASD Manual beginning with the Rule 0100 Series, as adopted by the Board of Governors of the NASD pursuant to the By-Laws of the NASD, as hereafter amended or supplemented.
            (p) "Selling Group"
            The term "selling group" means any group formed in connection with a public offering, to distribute all or part of an issue of securities by sales made directly to the public by or through members of such selling group, under an agreement which imposes no financial commitment on the members of such group to purchase any such securities except as they may elect to do so.
            (q) "Selling Syndicate"
            The term "selling syndicate" means any syndicate formed in connection with a public offering, to distribute all or part of an issue of securities by sales made directly to the public by or through participants in such syndicate under an agreement which imposes a financial commitment upon participants in such syndicate to purchase any such securities.
            Amended by SR-FINRA-2010-029 eff. Feb. 8, 2011.
            Amended by SR-NASD-2006-104 eff. March 5, 2007.
            Amended by SR-NASD-2003-75 eff. July 9, 2003.
            Amended by SR-NASD-99-21 eff. July 9, 2000.
            Amended by SR-NASD-98-57 eff. March 26, 1999.
            Amended by SR-NASD-98-86 eff. Nov. 19, 1998.
            Amended by SR-NASD-97-28 eff. Aug. 7, 1997.

            Selected Notice: 10-47

            • 0121. Definitions in NASD By-Laws

              This rule is no longer applicable. NASD Rule 0121 has been superseded by FINRA Rule 0160. Please consult the appropriate FINRA Rule.

              Unless the context otherwise requires, or unless otherwise defined in these Rules, terms used in the Rules and interpretive material, if defined in the NASD By-Laws, shall have the meaning as defined in the NASD By-Laws.
              Amended by SR-NASD-97-28 eff. Aug. 7, 1997.

          • 0130. Delegation, Authority and Access

            This rule is no longer applicable. NASD Rule 0130 has been superseded by FINRA Rule 0170. Please consult the appropriate FINRA Rule.

            (a) The National Association of Securities Dealers, Inc., delegates to its subsidiaries (NASD Regulation, Inc., and NASD Dispute Resolution, Inc., hereinafter "Subsidiaries") the authority to act on behalf of the Association as set forth in a Plan of Allocation and Delegation adopted by the Board of Governors and approved by the Commission pursuant to its authority under the Act.
            (b) Notwithstanding any delegation of authority to the Subsidiaries pursuant to this Rule, the staff, books, records and premises of the Subsidiaries are the staff, books, records and premises of the Association subject to oversight pursuant to the Act, and all officers, directors, employees and agents of the Subsidiaries are the officers, directors, employees and agents of the Association for purposes of the Act.
            Amended by SR-NASD-2006-104 eff. March 5, 2007.
            Amended by SR-NASD-2005-087 eff. Aug. 1, 2006
            Adopted by SR-NASD-96-16 eff. Apr. 11, 1996.

      • MEMBERSHIP AND REGISTRATION RULES (1000)

        • 1000. MEMBERSHIP, REGISTRATION AND QUALIFICATION REQUIREMENTS

          • IM-1000-1. Filing of Misleading Information as to Membership or Registration

            This rule is no longer applicable. NASD IM-1000-1 has been superseded by FINRA Rule 1122. Please consult the appropriate FINRA Rule.

            The filing with the Association of information with respect to membership or registration as a Registered Representative which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or the failure to correct such filing after notice thereof, may be deemed to be conduct inconsistent with just and equitable principles of trade and when discovered may be sufficient cause for appropriate disciplinary action.

          • IM-1000-4. Branch Offices and Offices of Supervisory Jurisdiction

            This rule is no longer applicable. NASD IM-1000-4 has been superseded by FINRA Rule 3110. Please consult the appropriate FINRA Rule.

            Each member is under a duty to insure that its membership application with the Association is kept current at all times by supplementary amendments to its original application and that any offices other than the main office are properly designated and registered, if required, with the Association.
            Each member must designate to the Association those offices of supervisory jurisdiction, including the main office, and must register those offices which are deemed to be branch offices in accordance with the standards set forth in Rule 3010.
            Amended by SR-NASD-2003-07 eff. March 24, 2003.
            Amended by SR-NASD-98-46 eff. July 9, 1998.

            Selected Notices: 85-48, 87-14, 87-53, 88-90, 88-96.

          • 1120. Continuing Education Requirements

            This rule is no longer applicable. NASD Rule 1120 has been superseded by FINRA Rule 1250. Please consult the appropriate FINRA Rule.

            This Rule prescribes requirements regarding the continuing education of certain registered persons subsequent to their initial qualification and registration with NASD. The requirements shall consist of a Regulatory Element and a Firm Element as set forth below.
            (a) Regulatory Element
            (1) Requirements
            No member shall permit any registered person to continue to, and no registered person shall continue to, perform duties as a registered person unless such person has complied with the requirements of paragraph (a) hereof.
            Each registered person shall complete the Regulatory Element on the occurrence of their second registration anniversary date and every three years thereafter, or as otherwise prescribed by NASD. On each occasion, the Regulatory Element must be completed within 120 days after the person's registration anniversary date. A person's initial registration date, also known as the "base date," shall establish the cycle of anniversary dates for purposes of this Rule. The content of the Regulatory Element shall be determined by NASD and shall be appropriate to either the registered representative or principal status of person subject to the Rule.
            (2) Failure to Complete
            Unless otherwise determined by the Association, any registered persons who have not completed the Regulatory Element within the prescribed time frames will have their registrations deemed inactive until such time as the requirements of the program have been satisfied. Any person whose registration has been deemed inactive under this Rule shall cease all activities as a registered person and is prohibited from performing any duties and functioning in any capacity requiring registration. A registration that is inactive for a period of two years will be administratively terminated. A person whose registration is so terminated may reactivate the registration only by reapplying for registration and meeting the qualification requirements of the applicable provisions of the Rule 1020 Series and the Rule 1030 Series. The Association may, upon application and a showing of good cause, allow for additional time for a registered person to satisfy the program requirements.
            (3) Disciplinary Actions
            Unless otherwise determined by NASD, a registered person will be required to retake the Regulatory Element and satisfy all of its requirements in the event such person:
            (A) is subject to any statutory disqualification as defined in Section 3(a)(39) of the Act;
            (B) is subject to suspension or to the imposition of a fine of $5,000 or more for violation of any provision of any securities law or regulation, or any agreement with or rule or standard of conduct of any securities governmental agency, securities self-regulatory organization, or as imposed by any such regulatory or self-regulatory organization in connection with a disciplinary proceeding; or
            (C) is ordered as a sanction in a disciplinary action to retake the Regulatory Element by any securities governmental agency or self-regulatory organization.
            The retaking of the Regulatory Element shall commence with participation within 120 days of the registered person becoming subject to the statutory disqualification, in the case of (A) above, or the disciplinary action becoming final, in the case of (B) and (C) above. The date of the disciplinary action shall be treated as such person's new base date with NASD.
            (4) Reassociation in a Registered Capacity
            Any registered person who has terminated association with a member and who has, within two years of the date of termination, become reassociated in a registered capacity with a member shall participate in the Regulatory Element at such intervals that may apply (second anniversary and every three years thereafter) based on the initial registration anniversary date rather than based on the date of reassociation in a registered capacity.
            (5) Definition of Registered Person
            For purposes of this Rule, the term "registered person" means any person registered with NASD as a representative, principal, assistant representative or research analyst pursuant to the Rule 1020, 1030, 1040, 1050 and 1110 Series.
            (6) In-Firm Delivery of the Regulatory Element
            Members will be permitted to administer the continuing education Regulatory Element program to their registered persons by instituting an in-firm program acceptable to the Association.
            The following procedures are required:
            (A) Principal/Officer In-Charge. The firm has designated a principal to be responsible for the in-firm delivery of the Regulatory Element.
            (B) Site Requirements.
            (i) The location of all delivery sites will be under the control of the firm.
            (ii) Delivery of Regulatory Element continuing education will take place in an environment conducive to training. (Examples: a training facility, conference room or other area dedicated to this purpose would be appropriate. Inappropriate locations would include a personal office or any location that is not or cannot be secured from traffic and interruptions.)
            (iii) Where multiple delivery terminals are placed in a room, adequate separation between terminals will be maintained.
            (C) Technology Requirements. The communication links and firm delivery computer hardware must comply with standards defined by the Association or its designated vendor.
            (D) Supervision.
            (i) The firm's Written Supervisory Procedures must contain the procedures implemented to comply with the requirements of in-firm delivery of the Regulatory Element continuing education.
            (ii) The firm's Written Supervisory Procedures must identify the principal designated pursuant to Rule 1120(a)(6)(A) and contain a list of individuals authorized by the firm to serve as proctors.
            (iii) Firm locations for delivery of the Regulatory Element continuing education will be specifically listed in the firm's Written Supervisory Procedures.
            (E) Proctors.
            (i) All sessions will be proctored by an authorized person during the entire Regulatory Element session. Proctors must be present in the session room or must be able to view the person(s) sitting for Regulatory Element continuing education through a window or by video monitor.
            (ii) The individual responsible for proctoring at each administration will sign a certification that required procedures have been followed, that no material from Regulatory Element continuing education has been reproduced, and that no candidate received any assistance to complete the session. Such certification may be part of the sign-in log required under Rule 1120(a)(6)(F).
            (iii) Individuals serving as proctors must be persons registered with an SRO and supervised by the designated principal for purposes of in-firm delivery of the Regulatory Element continuing education.
            (iv) Proctors will check and verify the identification of all individuals taking Regulatory Element continuing education.
            (F) Administration.
            (i) All appointments will be scheduled in advance using the procedures and software specified by the Association to communicate with the Association's system and designated vendor.
            (ii) The firm/proctor will conduct each session in accordance with the administrative appointment scheduling procedures established by the Association or its designated vendor.
            (iii) A sign-in log will be maintained at the delivery facility. Logs will contain the date of each session, the name and social security number of the individual taking the session, that required identification was checked, the sign-in time, the sign-out time, and the name of the individual proctoring the session. Such logs are required to be retained pursuant to SEC Rules 17a-3 and 17a-4.
            (iv) No material will be permitted to be utilized for the session nor may any session-related material be removed.
            (v) Delivery sites will be made available for inspection by the SROs.
            (vi) Before commencing in-firm delivery of the Regulatory Element continuing education, members are required to file with their Designated Examining Authority ("DEA"), a letter of attestation (as specified below) signed by a principal executive officer or executive representative, attesting to the establishment of required procedures addressing principal in-charge, supervision, site, technology, proctors, and administrative requirements. Letters filed with NASD Regulation, Inc. should be sent to Member Regulation, Continuing Education Department, 9509 Key West Avenue, Rockville, MD 20850.
            Letter of Attestation for In-Firm Delivery of Regulatory Element Continuing Education

            [Name of member] has established procedures for delivering Regulatory Element continuing education on its premises. I have determined that these procedures are reasonably designed to comply with SRO requirements pertaining to in-firm delivery of Regulatory Element continuing education, including that such procedures have been implemented to comply with principal/officer in-charge, supervision, site, technology, proctors, and administrative requirements.

            Signature

            __________________________________________

            Printed name

            __________________________________________

            Title [Must be signed by a Principal Executive Officer (or Executive Representative) of the firm]

            __________________________________________

            Date
            (7) Regulatory Element Contact Person
            Each member shall designate and identify to NASD (by name and e-mail address) an individual or individuals responsible for receiving e-mail notifications provided via the Central Registration Depository regarding when a registered person is approaching the end of his or her Regulatory Element time frame and when a registered person is deemed inactive due to failure to complete the requirements of the Regulatory Element program. Each member shall identify, review, and, if necessary, update the information regarding its Regulatory Element contact person(s) in the manner prescribed by Rule 1160.
            (b) Firm Element
            (1) Persons Subject to the Firm Element
            The requirements of this subparagraph shall apply to any person registered with a member who has direct contact with customers in the conduct of the member's securities sales, trading and investment banking activities, any person registered as a research analyst pursuant to Rule 1050, and to the immediate supervisors of such persons (collectively, "covered registered persons"). "Customer" shall mean any natural person and any organization, other than another broker or dealer, executing securities transactions with or through or receiving investment banking services from a member.
            (2) Standards for the Firm Element
            (A) Each member must maintain a continuing and current education program for its covered registered persons to enhance their securities knowledge, skill, and professionalism. At a minimum, each member shall at least annually evaluate and prioritize its training needs and develop a written training plan. The plan must take into consideration the member's size, organizational structure, and scope of business activities, as well as regulatory developments and the performance of covered registered persons in the Regulatory Element. If a member's analysis establishes the need for supervisory training for persons with supervisory responsibilities, such training must be included in the member's training plan.
            (B) Minimum Standards for Training Programs — Programs used to implement a member's training plan must be appropriate for the business of the member and, at a minimum must cover the following matters concerning securities products, services, and strategies offered by the member:
            (i) General investment features and associated risk factors;
            (ii) Suitability and sales practice considerations;
            (iii) Applicable regulatory requirements; and
            (iv) With respect to registered research analysts and their immediate supervisors, training in ethics, professional responsibility and the requirements of Rule 2711.
            *NASD members must implement the provisions of Rule 1120(b)(2)(B)(iv) on January 26, 2004, or such later date as determined by NASD*
            (C) Administration of Continuing Education Program — A member must administer its continuing education programs in accordance with its annual evaluation and written plan and must maintain records documenting the content of the programs and completion of the programs by covered registered persons.
            (3) Participation in the Firm Element
            Covered registered persons included in a member's plan must take all appropriate and reasonable steps to participate in continuing education programs as required by the member.
            (4) Specific Training Requirements
            The Association may require a member, individually or as part of a larger group, to provide specific training to its covered registered persons in such areas as the Association deems appropriate. Such a requirement may stipulate the class of covered registered persons for which it is applicable, the time period in which the requirement must be satisfied and, where appropriate, the actual training content.
            Amended by SR-NASD-2007-034 eff. Dec. 31, 2007.
            Amended by SR-NASD-2004-098 eff. April 4, 2005.
            Amended by SR-NASD-2003-183 eff. April 16, 2004.
            Amended by SR-NASD-2002-154 eff. July 29, 2003.
            Amended by SR-NASD-2000-64 eff. March 11, 2001.
            Amended by SR-NASD-98-03 eff. July 1, 1998.
            Amended by SR-NASD-95-22 eff. July 1, 1995.
            Adopted by SR-NASD-94-72 eff. July 1, 1995.

            Selected Notices: 94-59, 95-13, 95-35, 96-27, 98-23, 01-14, 03-44, 04-22, 05-20, 07-42.

          • 1130. Reliance on Current Membership List

            This rule is no longer applicable effective December 15, 2008.

            The Secretary of the Association shall furnish every member of the Association a list of all members of the Association, and shall currently keep every member advised, by amendments to the list or otherwise, of all new members and of all suspensions and cancellations of membership. Each member shall be responsible for providing such information to its offices and associated persons as appropriate. For the purpose of complying with pertinent Rules, a member shall be entitled to rely on the information provided by the Association.

            Cross References–

            By-Laws, Article III, Sec. 4
            IM-8310-2, Release of Disciplinary Information

            Amended eff. Sept. 19, 1989.

            Selected Notices: 89-47, 89-71.

          • 1140. Electronic Filing Rules

            This rule is no longer applicable. NASD Rule 1140 has been superseded by FINRA Rule 1010. Please consult the appropriate FINRA Rule.

            (a) Filing Requirement
            Except as provided in Rule 1013(a)(2), all forms required to be filed by Article IV, Sections 1, 7, and 8, and Article V, Sections 2 and 3, of the By-Laws shall be filed through an electronic process or such other process the Association may prescribe to the Central Registration Depository.
            (b) Supervisory Requirements
            (1) In order to comply with the supervisory procedures requirement in Rule 3010, each member shall identify a Registered Principal(s) or corporate officer(s) who has a position of authority over registration functions, to be responsible for supervising the electronic filing of appropriate forms pursuant to this Rule.
            (2) The Registered Principal(s) or corporate officer(s) who has or have the responsibility to review and approve the forms filed pursuant to this Rule shall be required to acknowledge, electronically, that he is filing this information on behalf of the member and the member's associated persons.
            (c) Form U4 Filing Requirements
            (1) Every initial and transfer electronic Form U4 filing shall be based on a signed Form U4 provided to the member or applicant for membership by the person on whose behalf the Form U4 is being filed. As part of the member's recordkeeping requirements, it shall retain the person's signed Form U4 and make it available promptly upon regulatory request. An applicant for membership also must retain every signed Form U4 it receives during the application process and make them available promptly upon regulatory request.
            (2) Fingerprint Cards
            Upon filing an electronic Form U4 on behalf of a person applying for registration, a member shall promptly submit a fingerprint card for that person. NASD may make a registration effective pending receipt of the fingerprint card. If a member fails to submit a fingerprint card within 30 days after NASD receives the electronic Form U4, the person's registration shall be deemed inactive. In such case, NASD shall notify the member that the person must immediately cease all activities requiring registration and is prohibited from performing any duties and functioning in any capacity requiring registration. NASD shall administratively terminate a registration that is inactive for a period of two years. A person whose registration is administratively terminated may reactivate the registration only by reapplying for registration and meeting the qualification requirements of the applicable provisions of the Rule 1020 Series and the Rule 1030 Series. Upon application and a showing of good cause, NASD may extend the 30-day period.
            (d) Form U-5 Filing Requirements
            Initial filings and amendments of Form U-5 shall be submitted electronically. As part of the member's recordkeeping requirements, it shall make such records available upon regulatory request.
            (e) Third Party Filing
            A member may employ a third party to file the required forms electronically on its behalf.
            Amended by SR-NASD-2003-136 eff. Aug. 28, 2003.
            Amended by SR-NASD-99-67 eff. Nov. 15, 2000.
            Amended and implemented by SR-NASD-99-28 eff. Aug. 16, 1999.
            Adopted by SR-NASD-96-21 on July 15, 1996.

            Selected Notices: 99-56, 99-63, 00-73.

          • 1150. Executive Representative

            This rule is no longer applicable. NASD Rule 1150 has been superseded by FINRA Rule 4517. Please consult the appropriate FINRA Rule.

            Each member must identify, review and, if necessary, update its executive representative designation and contact information as required by Article IV, Section 3 of the NASD By-Laws in the manner prescribed by Rule 1160.
            Amended by SR-NASD-2007-034 eff. Dec. 31, 2007.
            Adopted by SR-NASD-2003-184 eff. May 14, 2004.

            Selected Notice: 07-42.

          • 1160. Contact Information Requirements

            This rule is no longer applicable. NASD Rule 1160 has been superseded by FINRA Rule 4517. Please consult the appropriate FINRA Rule.

            (a) Each member shall report to NASD all contact information required by NASD via the NASD Contact System or such other means as NASD may specify.
            (b) Each member shall update its required contact information promptly, but in any event not later than 30 days following any change in such information. In addition, each member shall review and, if necessary, update its required contact information, via the NASD Contact System or such other means as NASD may specify, within 17 business days after the end of each calendar year.
            (c) Each member shall comply with any NASD request for such information promptly, but in any event not later than 15 days following the request, or such longer period that may be agreed to by NASD staff.
            Adopted by SR-NASD-2007-034 eff. Dec. 31, 2007.

            Selected Notice: 07-42.

      • CONDUCT RULES (2000–3000)

        • 2000. BUSINESS CONDUCT

          • 2100. GENERAL STANDARDS

            • 2110. Standards of Commercial Honor and Principles of Trade

              This rule is no longer applicable. NASD Rule 2110 has been superseded by FINRA Rule 2010. Please consult the appropriate FINRA Rule.

              A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
              Cross References–

              IM-1000-1, Filing of Misleading Information as to Membership or Registration
              IM-1000-3, Failure to Register Personnel
              2790, Restrictions on the Purchase and Sale of Initial Equity Public Offerings
              IM-2110-2, Trading Ahead of Customer Limit Order
              IM-2110-3, Front Running Policy
              IM-2230, "Third Market" Confirmations
              IM-2310-2, Fair Dealing with Customers
              IM-2440, Mark-Up Policy
              IM-2830-1, "Breakpoint" Sales
              IM-3310, Manipulative and Deceptive Quotations
              IM-3320, Firmness of Quotations
              IM-10100, Failure to Act Under Provisions of Code of Arbitration Procedure
              IM-11110, Refusal to Abide by Rulings of the Committee

              Amended by SR-NASD-2005-087 eff. Aug. 1, 2006

              Selected SEC Decisions:
              Albert P. Fosha, SEC Rel. No. 34-22815 (1986).
              C. Brock Lippitt, Thomas M. Svalberg and Gerald B. Fitzgerald, SEC Rel. No. 34-23495 (1986).
              Robert J. Jautz, SEC Rel. No. 34-24346 (1987).
              Robert S.C. Peterson, Inc. and Robert S.C. Peterson, SEC Rel. No. 34-24688 (1987).
              Rita Delaney, SEC Rel. No. 34-25119 (1987).
              Gary D. Cohee, SEC Rel. No. 34-25210 (1987).
              Traiger Energy Investments and Michael A. Traiger, SEC Rel. No. 34-25306 (1988).
              E.F. Hutton & Co., Inc. (n/k/a) Shearson Lehman Hutton, Inc., SEC Rel. No. 34-25587 (1988).
              Stephen M. Carter, SEC Rel. No. 34-26264 (1988).
              Cosse International Securities, Inc. and Charles B. Cosse, SEC Rel. No. 34-26424 (1989).
              L.C. Thomas and Stephen V. Wallace, SEC Rel. No. 34-26530 (1989).
              Stanley D. Gardenswartz, SEC Rel. No. 34-27194 (1989).
              Walter Capital Corp. and Frank R. Grillo, SEC Rel. No. 34-27536 (1989).

              Selected Notices: 96-44.

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

                This rule is no longer applicable. NASD IM-2110-2 has been superseded by FINRA Rule 5320. Please consult the appropriate FINRA Rule.

                (a) General Application
                To continue to ensure investor protection and enhance market quality, NASD's Board of Governors is issuing an interpretation to NASD Rules dealing with member firms' treatment of their customer limit orders in NMS stocks and OTC equity securities. This interpretation, which is applicable from 9:30 a.m. to 6:30 p.m. Eastern Time, will require members to handle their customer limit orders with all due care so that members do not "trade ahead" of those limit orders. Thus, members that handle customer limit orders, whether received from their own customers or from another member, are prohibited from trading at prices equal or superior to that of the limit order without executing the limit order. In the interests of investor protection, NASD is eliminating the so-called disclosure "safe harbor" previously established for members that fully disclosed to their customers the practice of trading ahead of a customer limit order by a market-making firm.1 For purposes of this interpretation, (1) "NMS stock" shall have the meaning set forth in SEC Rule 600(b)(47) of Regulation NMS and (2) "OTC equity security" shall have the meaning set forth in Rule 6610(d).
                Rule 2110 states that:
                A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.
                Rule 2320, the Best Execution Rule, states that:
                In any transaction for or with a customer, a member and persons associated with a member shall use reasonable diligence to ascertain the best inter-dealer market for the subject security and buy or sell in such a market so that the resultant price to the customer is as favorable as possible to the customer under prevailing market conditions.
                Interpretation
                The following interpretation of Rule 2110 has been approved by the Board:
                A member firm that accepts and holds an unexecuted limit order from its customer (whether its own customer or a customer of another member) in an NMS stock or OTC equity security and that continues to trade the subject security for its own account at prices that would satisfy the customer's limit order, without executing that limit order, shall be deemed to have acted in a manner inconsistent with just and equitable principles of trade, in violation of Rule 2110, provided that a member firm may negotiate specific terms and conditions applicable to the acceptance of limit orders only with respect to limit orders that are: (a) for customer accounts that meet the definition of an "institutional account" as that term is defined in Rule 3110(c)(4); or (b) 10,000 shares or more, unless such orders are less than $100,000 in value. In the event that a member trades ahead of an unexecuted customer limit order at a price that is better than the unexecuted limit order, such member is required to execute the limit order at the price received by the member or better. Nothing in this interpretation, however, requires members to accept limit orders from any customer.
                By rescinding the safe harbor position and adopting this interpretation, NASD wishes to emphasize that members may not trade ahead of their customer limit orders even if the member had in the past fully disclosed the practice to its customers prior to accepting limit orders. NASD believes that, pursuant to Rule 2110, members accepting and holding unexecuted customer limit orders owe certain duties to their customers and the customers of other member firms that may not be overcome or cured with disclosure of trading practices that include trading ahead of the customer's order. The terms and conditions under which institutional account or appropriately sized customer limit orders are accepted must be made clear to customers at the time the order is accepted by the firm so that trading ahead in the firm's market-making capacity does not occur.
                The minimum amount of price improvement necessary for a member to execute an order on a proprietary basis when holding an unexecuted limit order in that same security, and not be required to execute the held limit order is as follows:
                1) For customer limit orders priced greater than or equal to $1.00, the minimum amount of price improvement required is $0.01 for NMS stocks and the lesser of $0.01 or one-half (1/2) of the current inside spread for OTC equity securities;
                2) For customer limit orders priced greater than or equal to $.01 and less than $1.00, the minimum amount of price improvement required is the lesser of $0.01 or one-half (1/2) of the current inside spread;
                3) For customer limit orders priced less than $.01 but greater than or equal to $0.001, the minimum amount of price improvement required is the lesser of $0.001 or one-half (1/2) of the current inside spread;
                4) For customer limit orders priced less than $.001 but greater than or equal to $0.0001, the minimum amount of price improvement required is the lesser of $0.0001 or one-half (1/2) of the current inside spread;
                5) For customer limit orders priced less than $.0001 but greater than or equal to $0.00001, the minimum amount of price improvement required is the lesser of $0.00001 or one-half (1/2) of the current inside spread;
                6) For customer limit orders priced less than $.00001, the minimum amount of price improvement required is the lesser of $0.000001 or one-half (1/2) of the current inside spread; and
                7) For customer limit orders priced outside the best inside market, the minimum amount of price improvement required must either meet the requirements set forth above or the member must trade at a price at or inside the best inside market for the security.
                For purposes of determining the minimum price improvement standards for customer limit orders in OTC equity securities priced below $1.00 where there is no published current inside spread, members may calculate a current inside spread by contacting and obtaining priced quotations from at least two unaffiliated dealers and using the highest bid and lowest offer obtained in calculating the current inside spread. Where there is only a one-sided quote in an OTC equity security priced below $1.00, members may calculate the current inside spread by contacting and obtaining priced quotations from at least two unaffiliated dealers and using the best price obtained on the other side of the quote. Members must document the name of each dealer contacted and the quotations received for purposes of determining the current inside spread.
                In addition, if the minimum price improvement standards above would trigger the protection of a pending customer limit order, any better-priced customer limit order(s) must also be protected under this IM, even if those better-priced limit orders would not be directly triggered under the minimum price-improvement standards above.
                NASD also wishes to emphasize that all members accepting customer limit orders owe those customers duties of "best execution" regardless of whether the orders are executed through the member or sent to another member for execution. As set out above, the Best Execution Rule requires members to use reasonable diligence to ascertain the best inter-dealer market for the security and buy or sell in such a market so that the price to the customer is as favorable as possible under prevailing market conditions. NASD emphasizes that order entry firms should continue to monitor routinely the handling of their customers' limit orders regarding the quality of the execution received.
                (b) Exclusion for Limit Orders that are Marketable at Time of Receipt
                NASD has previously recognized the functional equivalency of marketable limit orders and market orders. Accordingly, it has adopted the following interpretation. IM-2110-2 shall not apply to a customer limit order if the limit order is marketable at the time it is received by a member. These orders shall be treated as market orders for purposes of determining execution priority; however, these orders must continue to be executed at their limit price or better.
                The exclusion for marketable customer limit orders from the general application of IM-2110-2 is limited solely to customer limit orders that are marketable when received by a member. If a customer limit order is not marketable when received by a member, the limit order must be accorded the full protections of IM-2110-2. In addition, if the limit order was marketable when received and then becomes non-marketable, once the limit order becomes non-marketable it must be accorded the full protections of IM-2110-2.
                The following scenario illustrates the application of the exclusion. The market in XYZ stock is 25 bid–25 1/16 ask, the volume of trading in XYZ stock is extremely active, and Market Maker A ("MMA") has a queue of market orders to buy and sell. Assume the following order receipt scenario. Each sell market order in the queue is for 1,000 shares and there are no special conditions attached to the orders. MMA then receives a customer limit order to sell 1,000 shares at 25. The customer limit order is marketable at the time it is received by MMA. MMA hits another market maker's bid at 25 for 1,000 shares. Normally, IM-2110-2 would require that the customer limit order be executed before the market orders in the queue. However, because the marketable limit order and the market orders should be treated as functionally equivalent in determining execution priority, the marketable customer limit order shall not be given execution priority over the market orders that were already in the queue. When the limit order is executed, however, it must be executed at the limit price or better.
                In addition, if in the scenario just described the limit order does not get executed and the inside market in XYZ becomes 24 7/16 bid, the member would have to protect the limit order as required by IM 2110-2 if the member trades at the limit order price or better.
                (c) Exemption for the Facilitation on a Riskless Principal Basis of Other Customer Orders
                A member shall be exempt from the obligation to execute a customer limit order in a manner consistent with this interpretation if such member engages in trading activity to facilitate the execution, on a riskless principal basis, of another order from its customer (whether its own customer or the customer of another member) (the "facilitated order"), provided that all of the following requirements are satisfied:
                (1) The handling and execution of the facilitated order must satisfy the definition of a "riskless" principal transaction, as that term is defined in NASD Rules 4632(d)(3)(B), 4642(d)(3)(B) and 4652(d)(3)(B);
                (2) A member that relies on this exemption to this interpretation must give the facilitated order the same per-share price at which the member accumulated or sold shares to satisfy the facilitated order, exclusive of any markup or markdown, commission equivalent or other fee;
                (3) A member must submit, contemporaneously with the execution of the facilitated order, a report as defined in NASD Rules 4632(d)(3)(B)(ii), 4642(d)(3)(B)(ii) and 4652(d)(3)(B)(ii) to the Automated Confirmation Transaction Service;
                (4) Members must have written policies and procedures to assure that riskless principal transactions relied upon for this exemption comply with NASD Rules 4632(d)(3)(B), 4642(d)(3)(B) and 4652(d)(3)(B). At a minimum these policies and procedures must require that the customer order was received prior to the offsetting transactions, and that the offsetting transactions are allocated to a riskless principal or customer account in a consistent manner and within 60 seconds of execution. Members must have supervisory systems in place that produce records that enable the member and NASD to accurately and readily reconstruct, in a time-sequenced manner, all orders on which a member relies in claiming this exemption.
                (d) Intermarket Sweep Order Exemption
                A member shall be exempt from the obligation to execute a customer limit order in a manner consistent with this interpretation with regard to trading for its own account that is the result of an intermarket sweep order routed in compliance with Rule 600(b)(30)(ii) of Regulation NMS ("ISO") where the customer limit order is received after the member routed the ISO. A member also shall be exempt with respect to trading for its own account that is the result of an ISO where the member executes the ISO to facilitate a customer limit order and that customer has consented to not receiving the better prices obtained by the ISO.

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

                Amended by SR-FINRA-2009-037 eff. June 29, 2009.
                Amended by SR-FINRA-2008-064 eff. Feb. 11, 2009.
                Amended by SR-FINRA-2007-023 eff. Nov. 16, 2007; amended by SR-FINRA-2007-038 eff. Dec. 21, 2007; amended by SR-NASD-2007-041 Nov. 11, 2008.
                Amended by SR-FINRA-2007-039 eff. May 6, 2008.
                Amended by SR-NASD-2007-039 eff. July 26, 2007.
                Amended by SR-NASD-2005-146 eff. July 26, 2007.
                Amended by SR-NASD-2006-134 eff. Dec. 8, 2006.
                Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
                Amended by SR-NASD-2006-069 eff. July 1, 2006.
                Amended by SR-NASD-2006-035 eff. April 14, 2006.
                Amended by SR-NASD-2004-089 eff. Jan. 2, 2006.
                Amended by SR-NASD-2005-085 eff. July 1, 2005.
                Amended by SR-NASD-2003-14 eff. January 31, 2003.
                Amended by SR-NASD-2002-66 eff. Dec. 13, 2002.
                Amended by SR-NASD-2001-27 eff. April 6, 2001.
                Amended by SR-NASD-2001-09 eff. March 2, 2001.
                Amended by SR-NASD-99-57 eff. Oct. 25, 1999.
                Amended by SR-NASD-99-44 eff. Sept. 10, 1999.
                Amended by SR-NASD-94-62 eff. June 21, 1995.
                Adopted by SR-NASD-93-58 eff. July 7, 1994.

                Selected Notices: 89-39, 90-37, 95-43, 95-67, 05-64, 07-19, 08-49, 09-14.

              • IM-2110-3. Front Running Policy

                This rule is no longer applicable. NASD IM-2110-3 has been superseded by FINRA Rule 5270. Please consult the appropriate FINRA Rule.

                It shall be considered conduct inconsistent with just and equitable principles of trade for a member or person associated with a member, for an account in which such member or person associated with a member has an interest, for an account with respect to which such member or person associated with a member exercises investment discretion, or for certain customer accounts, to cause to be executed:
                (a) an order to buy or sell an option or a security future when such member or person associated with a member causing such order to be executed has material, non-public market information concerning an imminent block transaction in the underlying security, or when a customer has been provided such material, non-public market information by the member or any person associated with a member; or
                (b) an order to buy or sell an underlying security when such member or person associated with a member causing such order to be executed has material, non-public market information concerning an imminent block transaction in an option or a security future overlying that security, or when a customer has been provided such material, non-public market information by the member or any person associated with a member; prior to the time information concerning the block transaction has been made publicly available.
                The violative practice noted above may include transactions which are executed based upon knowledge of less than all of the terms of the block transaction, so long as there is knowledge that all of the material terms of the transaction have been or will be agreed upon imminently.
                The general prohibitions stated above shall not apply to transactions executed by member participants in automatic execution systems in those instances where participants must accept automatic executions.
                These prohibitions also do not include situations in which a member or person associated with a member receives a customer's order of block size relating to both an option and the underlying security or both a security future and the underlying security. In such cases, the member and person associated with a member may position the other side of one or both components of the order. However, in these instances, the member and person associated with a member would not be able to cover any resulting proprietary position(s) by entering an offsetting order until information concerning the block transaction involved has been made publicly available.
                The application of this front running policy is limited to transactions that are required to be reported on the last sale reporting systems administered by Nasdaq, Consolidated Tape Association (CTA), or Option Price Reporting Authority (OPRA). The front running policy also applies to security futures transactions regardless of whether such products are reported pursuant to such systems. Information as to a block transaction shall be considered to be publicly available when it has been disseminated via the tape or high speed communications line of one of those systems, a similar system of a national securities exchange under Section 6 of the Act, an alternative trading system under Regulation ATS, or by a third-party news wire service.
                A transaction involving 10,000 shares or more of an underlying security, or options or security futures covering such number of shares is generally deemed to be a block transaction, although a transaction of less than 10,000 shares could be considered a block transaction in appropriate cases. A block transaction that has been agreed upon does not lose its identity as such by arranging for partial executions of the full transaction in portions which themselves are not of block size if the execution of the full transaction may have a material impact on the market. In this situation, the requirement that information concerning the block transaction be made publicly available will not be satisfied until the entire block transaction has been completed and publicly reported.
                Amended by SR-NASD-2002-40 eff. Oct. 15, 2002.
                Adopted by SR-NASD-87-45 eff. Dec. 30, 1987.

                Selected Notice: 96-66.

              • IM-2110-4. Trading Ahead of Research Reports

                This rule is no longer applicable. NASD IM-2110-4 has been superseded by FINRA Rule 5280. Please consult the appropriate FINRA Rule.

                The Board of Governors, under its statutory obligation to protect investors and enhance market quality, is issuing an interpretation to the Rules regarding a member firm's trading activities that occur in anticipation of a firm's issuance of a research report regarding a security. The Board of Governors is concerned with activities of member firms that purposefully establish or adjust the firm's inventory position in an exchange-listed security traded otherwise than on an exchange or a derivative security based primarily on a specific exchange-listed security in anticipation of the issuance of a research report in that same security. For example, a firm's research department may prepare a research report recommending the purchase of a particular Nasdaq-listed security. Prior to the publication and dissemination of the report, however, the trading department of the member firm might purposefully accumulate a position in that security to meet anticipated customer demand for that security. After the firm had established its position, the firm would issue the report, and thereafter fill customer orders from the member firm's inventory positions.
                The Association believes that such activity is conduct that is inconsistent with just and equitable principles of trade, and not in the best interests of the investors. Thus, this interpretation prohibits a member from purposefully establishing, creating or changing the firm's inventory position in an exchange-listed security traded otherwise than on an exchange , or a derivative security related to the underlying equity security, in anticipation of the issuance of a research report regarding such security by the member firm.
                In accordance with Article VII, Section 1(a)(ii) of the NASD By-Laws, the Association's Board of Governors has approved the following interpretation of Rule 2110:
                Trading activity purposefully establishing, increasing, decreasing, or liquidating a position in an exchange-listed security traded otherwise than on an exchange or a derivative security based primarily upon a specific exchange-listed security, in anticipation of the issuance of a research report in that security, is inconsistent with just and equitable principles of trade and is a violation of Rule 2110.
                For the purposes of this interpretation, a "purposeful" change in the firm's inventory position means any trading activities undertaken with the intent of altering a firm's position in a security in anticipation of accommodating investor interest once the research report has been published. Hence, the interpretation does not apply to changes in an inventory position related to unsolicited order flow from a firm's retail or broker/dealer client base or to research done solely for in-house trading and not in any way used for external publication.
                Under this interpretation, the Board recommends, but does not require, that member firms develop and implement policies and procedures to establish effective internal control systems and procedures that would isolate specific information within research and other relevant departments of the firm so as to prevent the trading department from utilizing the advance knowledge of the issuance of a research report. Firms that choose not to develop "Chinese Wall" procedures bear the burden of demonstrating that the basis for changes in inventory positions in advance of research reports was not purposeful.
                Amended by SR-NASD-2005-087 eff. Aug. 1, 2006
                Amended by SR-NASD-98-86 eff. Nov. 19, 1998.
                Adopted by SR-NASD-95-28 eff. Aug. 15, 1995.

                Selected Notice: 95-75.

              • IM-2110-5. Anti-Intimidation/Coordination

                This rule is no longer applicable. NASD IM-2110-5 has been superseded by FINRA Rule 5240. Please consult the appropriate FINRA Rule.

                The Board of Governors is issuing this interpretation to codify a longstanding policy. It is conduct inconsistent with just and equitable principles of trade for any member or person associated with a member to coordinate the prices (including quotations), trades, or trade reports of such member with any other member or person associated with a member; to direct or request another member to alter a price (including a quotation); or to engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence another member or person associated with a member. This includes, but is not limited to, any attempt to influence another member or person associated with a member to adjust or maintain a price or quotation, whether displayed on any facility operated by NASD or otherwise, or refusals to trade or other conduct that retaliates against or discourages the competitive activities of another market maker or market participant. Nothing in this interpretation respecting coordination of quotes, trades, or trade reports shall be deemed to limit, constrain, or otherwise inhibit the freedom of a member or person associated with a member to:
                (1) set unilaterally its own bid or ask in any security, the prices at which it is willing to buy or sell any security, and the quantity of shares of any security that it is willing to buy or sell;

                (2) set unilaterally its own dealer spread, quote increment, or quantity of shares for its quotations (or set any relationship between or among its dealer spread, inside spread, or the size of any quote increment) in any security;

                (3) communicate its own bid or ask, or the prices at or the quantity of shares in which it is willing to buy or sell any security to any person, for the purpose of exploring the possibility of a purchase or sale of that security, and to negotiate for or agree to such purchase or sale;

                (4) communicate its own bid or ask, or the price at or the quantity of shares in which it is willing to buy or sell any security, to any person for the purpose of retaining such person as an agent or subagent for the member or for a customer of the member (or for the purpose of seeking to be retained as an agent or subagent), and to negotiate for or agree to such purchase or sale;

                (5) engage in any underwriting (or any syndicate for the underwriting) of securities to the extent permitted by the federal securities laws;

                (6) take any unilateral action or make any unilateral decision regarding the market makers with which it will trade and the terms on which it will trade unless such action is prohibited by the second and third sentences of this Interpretation; and

                (7) deliver an order to another member for handling,

                provided, however, that the conduct described in (1) through (7) is otherwise in compliance with all applicable law.

                Amended by SR-NASD-2002-97 eff. July 29, 2002.
                Adopted by SR-NASD-97-37 eff. July 17, 1997.

              • IM-2110-6. Confirmation of Callable Common Stock

                This rule is no longer applicable.

                Any member providing a customer confirmation pursuant to SEC Rule 10b-10 in connection with any transaction in callable common stock shall disclose on such confirmation that:
                •   The security is callable common stock; and
                •   A customer may contact the member for more information concerning the security.
                Adopted by SR-NASD-2000-24 eff. April 25, 2000.

                Selected Notice: 00-33.

              • IM-2110-7. Interfering With the Transfer of Customer Accounts in the Context of Employment Disputes

                This rule is no longer applicable. NASD IM-2110-7 has been superseded by FINRA Rule 2140. Please consult the appropriate FINRA Rule.

                It shall be inconsistent with just and equitable principles of trade for a member or person associated with a member to interfere with a customer's request to transfer his or her account in connection with the change in employment of the customer's registered representative, provided that the account is not subject to any lien for monies owed by the customer or other bona fide claim. Prohibited interference includes, but is not limited to, seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his or her account. Nothing in this interpretation shall affect the operation of Rule 11870.
                Adopted by SR-NASD-2001-95 eff. Dec. 21, 2001.

                Selected Notice: 02-07.

            • 2111. Trading Ahead of Customer Market Orders

              This rule is no longer applicable. NASD Rule 2111 has been superseded by FINRA Rule 5320. Please consult the appropriate FINRA Rule.

              (a) A member must make every effort to execute a customer market order that it receives fully and promptly.
              (b) A member that accepts and holds a market order of its own customer or a customer of another broker-dealer in a Nasdaq or exchange-listed security without immediately executing the order is prohibited from trading that security on the same side of the market for its own account, unless it immediately thereafter executes the customer market order up to the size and at the same price at which it traded for its own account or at a better price.
              (c)(1) A member that is holding a customer market order that has not been immediately executed must make every effort to cross such order with any market order, marketable limit order, or non-marketable limit order priced better than the best bid or offer, received by the member on the other side of the market up to the size of such order at a price that is no less than the best bid and no greater than the best offer at the time that the subsequent market order, marketable limit order or non-marketable limit order is received by the member and that is consistent with the terms of the orders.
              (2) In the event that a member is holding multiple orders on both sides of the market that have not been executed, the member must make every effort to cross or otherwise execute such orders in a manner that is reasonable, and is consistent with the objectives of this rule and with the terms of the orders.
              (3) For purposes of this paragraph (c), a member can satisfy the crossing requirement by contemporaneously buying from the seller and selling to the buyer at the same price.
              (4) A member must have a written methodology in place governing the execution and priority of all pending orders that is consistent with the requirements of this rule. A member also must ensure that this methodology is consistently applied.
              (d) A member may negotiate specific terms and conditions applicable to the acceptance of a market order only with respect to market orders that are: (1) for customer accounts that meet the definition of an "institutional account" as that term is defined in Rule 3110(c)(4), or (2) 10,000 shares or more, unless such orders are less than $100,000 in value.
              (e) This rule applies to limit orders that are marketable at the time they are received by the member or become marketable at a later time. Such limit orders shall be treated as market orders for purposes of this rule, however, these orders must continue to be executed at their limit price or better. If a customer limit order is not marketable when received, the limit order must be provided the full protections of IM-2110-2. In addition, if the limit order was marketable when received and then becomes non-marketable, once the limit order becomes non-marketable, it must be provided the full protections of IM-2110-2.
              (f) The obligations under this rule shall not apply to a member's proprietary trade if such proprietary trade is for the purposes of facilitating the execution, on a riskless principal basis, of another order from a customer (whether its own customer or the customer of another broker-dealer) (the "facilitated order"), provided that all of the following requirements are satisfied:
              (1) The handling and execution of the facilitated order must satisfy the definition of a "riskless" principal transaction, as that term is defined in NASD Rules 4632(d)(3)(B), 4642(d)(3)(B), 4652(d)(3)(B), 4632A(e)(1)(C) or 6420(d)(3)(B);
              (2) A member that relies on this exclusion to the rule must give the facilitated order the same per-share price at which the member accumulated or sold shares to satisfy the facilitated order, exclusive of any markup or markdown, commission equivalent or other fee;
              (3) A member must submit, contemporaneously with the execution of the facilitated order, a report as defined in NASD Rules 4632(d)(3)(B)(ii), 4642(d)(3)(B)(ii), 4652(d)(3)(B)(ii), 6420(d)(3)(B)(ii) and 4632A(e)(1)(C)(ii), or a substantially similar report to another trade reporting system; and
              (4) Members must have written policies and procedures to assure that riskless principal transactions relied upon for this exclusion comply with applicable NASD rules. At a minimum these policies and procedures must require that the customer order was received prior to the offsetting transactions, and that the offsetting transactions are allocated to a riskless principal or customer account in a consistent manner and within 60 seconds of execution. Members must have supervisory systems in place that produce records that enable the member and NASD to reconstruct accurately, readily, and in a time-sequenced manner all orders on which a member relies in claiming this exception.
              (g) The obligations under this rule shall not apply to trading for a member's own account that is the result of an intermarket sweep order routed in compliance with Rule 600(b)(30)(ii) of Regulation NMS (“ISO”) where the customer market order is received after the member routed the ISO. The obligations under this rule also shall not apply with respect to trading for a member's own account that is the result of an ISO where the member executes the ISO to facilitate a customer market order and that customer has consented to not receiving the better prices obtained by the ISO.
              (h) Nothing in this rule changes the application of Rule 2320 with respect to a member's obligations to customer orders.
              Amended by SR-FINRA-2007-039 eff. May 6, 2008.
              Amended by SR-NASD-2005-139 eff. Jan. 9, 2006.
              Adopted by SR-NASD-2004-045 eff. Jan. 9, 2006.

              Selected Notices: 05-69, 08-31.

            • 2120. Use of Manipulative, Deceptive or Other Fraudulent Devices

              This rule is no longer applicable. NASD Rule 2120 has been superseded by FINRA Rule 2020. Please consult the appropriate FINRA Rule.

              No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.
              Cross References–

              IM-2310-2, Fair Dealing with Customers
              IM-3310, Manipulative and Deceptive Quotations

            • 2130. Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD System)

              This rule is no longer applicable. NASD Rule 2130 has been superseded by FINRA Rule 2080. Please consult the appropriate FINRA Rule.

              (a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.
              (b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name NASD as an additional party and serve NASD with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.
              (1) Upon request, NASD may waive the obligation to name NASD as a party if NASD determines that the expungement relief is based on affirmative judicial or arbitral findings that:
              (A) the claim, allegation or information is factually impossible or clearly erroneous;
              (B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or
              (C) the claim, allegation, or information is false.
              (2) If the expungement relief is based on judicial or arbitral findings other than those described above, NASD, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name NASD as a party if it determines that:
              (A) the expungement relief and accompanying findings on which it is based are meritorious; and
              (B) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system, or regulatory requirements.
              (c) For purposes of this rule, the terms "sales practice violation," "investment-related," and "involved" shall have the meanings set forth in the Uniform Application for Securities Industry Registration or Transfer ("Form U4") in effect at the time of issuance of the subject expungement order.
              Amended by SR-NASD-2003-200 eff. April 12, 2004.
              Adopted by SR-NASD-2002-168 eff. April 12, 2004.

              Selected Notice: 04-16.

          • 2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC

            • 2210. Communications with the Public

              This rule is no longer applicable. NASD Rule 2210 has been superseded by FINRA Rule 2210. Please consult the appropriate FINRA Rule.

              (a) Definitions
              For purposes of this Rule and any interpretation thereof, "communications with the public" consist of:
              (1) "Advertisement." Any material, other than an independently prepared reprint and institutional sales material, that is published, or used in any electronic or other public media, including any Web site, newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or telephone directories (other than routine listings).
              (2) "Sales Literature." Any written or electronic communication, other than an advertisement, independently prepared reprint, institutional sales material and correspondence, that is generally distributed or made generally available to customers or the public, including circulars, research reports, . . . performance reports or summaries, form letters, telemarketing scripts, seminar texts, reprints (that are not independently prepared reprints) or excerpts of any other advertisement, sales literature or published article, and press releases concerning a member's products or services.
              (3) "Correspondence" as defined in Rule 2211(a)(1).
              (4) "Institutional Sales Material" as defined in Rule 2211(a)(2).
              (5) "Public Appearance." Participation in a seminar, forum (including an interactive electronic forum), radio or television interview, or other public appearance or public speaking activity.
              (6) "Independently Prepared Reprint."
              (A) Any reprint or excerpt of any article issued by a publisher, provided that:
              (i) the publisher is not an affiliate of the member using the reprint or any underwriter or issuer of a security mentioned in the reprint or excerpt and that the member is promoting;
              (ii) neither the member using the reprint or excerpt nor any underwriter or issuer of a security mentioned in the reprint or excerpt has commissioned the reprinted or excerpted article; and
              (iii) the member using the reprint or excerpt has not materially altered its contents except as necessary to make the reprint or excerpt consistent with applicable regulatory standards or to correct factual errors;
              (B) Any report concerning an investment company registered under the Investment Company Act of 1940, provided that:
              (i) the report is prepared by an entity that is independent of the investment company, its affiliates, and the member using the report (the "research firm");
              (ii) the report's contents have not been materially altered by the member using the report except as necessary to make the report consistent with applicable regulatory standards or to correct factual errors;
              (iii) the research firm prepares and distributes reports based on similar research with respect to a substantial number of investment companies;
              (iv) the research firm updates and distributes reports based on its research of the investment company with reasonable regularity in the normal course of the research firm's business;
              (v) neither the investment company, its affiliates nor the member using the research report has commissioned the research used by the research firm in preparing the report; and
              (vi) if a customized report was prepared at the request of the investment company, its affiliate or a member, then the report includes only information that the research firm has already compiled and published in another report, and does not omit information in that report necessary to make the customized report fair and balanced.
              Cross Reference—

              Rules Concerning Review and Endorsement of Correspondence are Found in paragraph (d) to Conduct Rule 3010.
              (b) Approval and Recordkeeping
              (1) Registered Principal Approval for Advertisements, Sales Literature and Independently Prepared Reprints
              (A) A registered principal of the member must approve by signature or initial and date each advertisement, item of sales literature and independently prepared reprint before the earlier of its use or filing with NASD's Advertising Regulation Department ("Department").
              (B) With respect to debt and equity securities that are the subject of research reports as that term is defined in Rule 472 of the New York Stock Exchange, the requirements of paragraph (A) may be met by the signature or initial of a supervisory analyst approved pursuant to Rule 344 of the New York Stock Exchange.
              (C) A registered principal qualified to supervise security futures activities must approve by signature or initial and date each advertisement or item of sales literature concerning security futures.
              (D) The requirements of paragraph (A) shall not apply with regard to any advertisement, item of sales literature, or independently prepared reprint if, at the time that a member intends to publish or distribute it:
              (i) another member has filed it with the Department and has received a letter from the Department stating that it appears to be consistent with applicable standards; and
              (ii) the member using it in reliance upon this paragraph has not materially altered it and will not use it in a manner that is inconsistent with the conditions of the Department's letter.
              (2) Record-keeping
              (A) Members must maintain all advertisements, sales literature, and independently prepared reprints in a separate file for a period beginning on the date of first use and ending three years from the date of last use. The file must include:
              (i) a copy of the advertisement, item of sales literature or independently prepared reprint, and the dates of first and (if applicable) last use of such material;
              (ii) the name of the registered principal who approved each advertisement, item of sales literature, and independently prepared reprint and the date that approval was given, unless such approval is not required pursuant to paragraph (b)(1)(D); and
              (iii) for any advertisement, item of sales literature or independently prepared reprint for which principal approval is not required pursuant to paragraph (b)(1)(D), the name of the member that filed the advertisement, sales literature or independently prepared reprint with the Department, and a copy of the corresponding review letter from the Department.
              (B) Members must maintain in a file information concerning the source of any statistical table, chart, graph or other illustration used by the member in communications with the public.
              (c) Filing Requirements and Review Procedures
              (1) Date of First Use and Approval Information
              The member must provide with each filing under this paragraph the actual or anticipated date of first use, the name and title of the registered principal who approved the advertisement or sales literature, and the date that the approval was given.
              (2) Requirement to File Certain Material
              Within 10 business days of first use or publication, a member must file the following communications with the Department:
              (A) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts, continuously offered closed-end funds, and unit investment trusts) not included within the requirements of paragraph (c)(3). The filing of any advertisement or sales literature that includes or incorporates a performance ranking or performance comparison of the investment company with other investment companies must include a copy of the ranking or comparison used in the advertisement or sales literature.
              (B) Advertisements and sales literature concerning public direct participation programs (as defined in Rule 2810).
              (C) Advertisements concerning government securities (as defined in Section 3(a)(42) of the Act).
              (D) any template for written reports produced by, or advertisements and sales literature concerning, an investment analysis tool, as such term is defined in Rule IM-2210-6.
              (3) Sales Literature Containing Bond Fund Volatility Ratings
              Sales literature concerning bond mutual funds that include or incorporate bond mutual fund volatility ratings, as defined in Rule IM-2210-5, shall be filed with the Department for review at least 10 business days prior to use (or such shorter period as the Department may allow in particular circumstances) for approval and, if changed by NASD, shall be withheld from publication or circulation until any changes specified by NASD have been made or, if expressly disapproved, until the sales literature has been refiled for, and has received, NASD approval. Members are not required to file advertising and sales literature which have previously been filed and which are used without change. The member must provide with each filing the actual or anticipated date of first use. Any member filing sales literature pursuant to this paragraph shall provide any supplemental information requested by the Department pertaining to the rating that is possessed by the member.
              (4) Requirement to File Certain Material Prior to Use
              At least 10 business days prior to first use or publication (or such shorter period as the Department may allow), a member must file the following communications with the Department and withhold them from publication or circulation until any changes specified by the Department have been made:
              (A) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts, continuously offered closed-end funds and unit investment trusts) that include or incorporate performance rankings or performance comparisons of the investment company with other investment companies when the ranking or comparison category is not generally published or is the creation, either directly or indirectly, of the investment company, its underwriter or an affiliate. Such filings must include a copy of the data on which the ranking or comparison is based.
              (B) Advertisements concerning collateralized mortgage obligations.
              (C) Advertisements concerning security futures.
              (5) Requirement for Certain Members to File Material Prior to Use
              (A) Each member that has not previously filed advertisements with the Department (or with a registered securities exchange having standards comparable to those contained in this Rule) must file its initial advertisement with the Department at least 10 business days prior to use and shall continue to file its advertisements at least 10 business days prior to use for a period of one year.
              (B) Notwithstanding the foregoing provisions, the Department, upon review of a member's advertising and/or sales literature, and after determining that the member has departed from the standards of this Rule, may require that such member file all advertising and/or sales literature, or the portion of such member's material which is related to any specific types or classes of securities or services, with the Department, at least 10 business days prior to use. The Department will notify the member in writing of the types of material to be filed and the length of time such requirement is to be in effect. Any filing requirement imposed under this paragraph will take effect 21 calendar days after service of the written notice, during which time the member may request a hearing under Rules 9551 and 9559.
              (6) Filing of Television or Video Advertisements
              If a member has filed a draft version or "story board" of a television or video advertisement pursuant to a filing requirement, then the member also must file the final filmed version within 10 business days of first use or broadcast.
              (7) Spot-Check Procedures
              In addition to the foregoing requirements, each member's written and electronic communications with the public may be subject to a spot-check procedure. Upon written request from the Department, each member must submit the material requested in a spot-check procedure within the time frame specified by the Department.
              (8) Exclusions from Filing Requirements
              The following types of material are excluded from the filing requirements and (except for the material in paragraphs (G) through (J)) the foregoing spot-check procedures:
              (A) Advertisements and sales literature that previously have been filed and that are to be used without material change.
              (B) Advertisements and sales literature solely related to recruitment or changes in a member's name, personnel, electronic or postal address, ownership, offices, business structure, officers or partners, telephone or teletype numbers, or concerning a merger with, or acquisition by, another member.
              (C) Advertisements and sales literature that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker.
              (D) Advertisements and sales literature that do no more than identify the member or offer a specific security at a stated price.
              (E) Prospectuses, preliminary prospectuses, fund profiles, offering circulars and similar documents that have been filed with the Securities and Exchange Commission (the "SEC") or any state, or that is exempt from such registration, except that an investment company prospectus published pursuant to SEC Rule 482 under the Securities Act of 1933 will not be considered a prospectus for purposes of this exclusion.
              (F) Advertisements prepared in accordance with Section 2(10)(b) of the Securities Act of 1933, as amended, or any rule thereunder, such as SEC Rule 134, and announcements as a matter of record that a member has participated in a private placement, unless the advertisements are related to direct participation programs or securities issued by registered investment companies.
              (G) Press releases that are made available only to members of the media.
              (H) Independently prepared reprints.
              (I) Correspondence.
              (J) Institutional sales material.
              Although the material described in paragraphs (c)(8)(G) through (J) is excluded from the foregoing filing requirements, investment company communications described in those paragraphs shall be deemed filed with NASD for purposes of Section 24(b) of the Investment Company Act of 1940 and Rule 24b-3 thereunder.
              (9) Material that refers to investment company securities, direct participation programs, or exempted securities (as defined in Section 3(a)(12) of the Act) solely as part of a listing of products or services offered by the member, is excluded from the requirements of paragraphs (c)(2) and (c)(4).
              (10) Pursuant to the Rule 9600 Series, NASD may exempt a member or person associated with a member from the pre-filing requirements of this paragraph (c) for good cause shown.
              (d) Content Standards
              (1) Standards Applicable to All Communications with the Public
              (A) All member communications with the public shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service. No member may omit any material fact or qualification if the omission, in the light of the context of the material presented, would cause the communications to be misleading.
              (B) No member may make any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public. No member may publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.
              (C) Information may be placed in a legend or footnote only in the event that such placement would not inhibit an investor's understanding of the communication.
              (D) Communications with the public may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast. A hypothetical illustration of mathematical principles is permitted, provided that it does not predict or project the performance of an investment or investment strategy.
              (E) If any testimonial in a communication with the public concerns a technical aspect of investing, the person making the testimonial must have the knowledge and experience to form a valid opinion.
              (2) Standards Applicable to Advertisements and Sales Literature
              (A) Advertisements or sales literature providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following:
              (i) The fact that the testimonial may not be representative of the experience of other clients.
              (ii) The fact that the testimonial is no guarantee of future performance or success.
              (iii) If more than a nominal sum is paid, the fact that it is a paid testimonial.
              (B) Any comparison in advertisements or sales literature between investments or services must disclose all material differences between them, including (as applicable) investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features.
              (C) All advertisements and sales literature must:
              (i) prominently disclose the name of the member and may also include a fictional name by which the member is commonly recognized or which is required by any state or jurisdiction;
              (ii) reflect any relationship between the member and any non-member or individual who is also named; and
              (iii) if it includes other names, reflect which products or services are being offered by the member.
              This paragraph (C) does not apply to so-called "blind" advertisements used to recruit personnel.
              (3) Disclosure of Fees, Expenses and Standardized Performance
              (A) Communications with the public, other than institutional sales material and public appearances, that present non-money market fund open-end management investment company performance data as permitted by Rule 482 under the Securities Act of 1933 and Rule 34b-1 under the Investment Company Act of 1940 must disclose:
              (i) the standardized performance information mandated by Rule 482 and Rule 34b-1; and
              (ii) to the extent applicable:
              a. the maximum sales charge imposed on purchases or the maximum deferred sales charge, as stated in the investment company's prospectus current as of the date of submission of an advertisement for publication, or as of the date of distribution of other communications with the public; and
              b. the total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements, as stated in the fee table of the investment company's prospectus described in paragraph (a).
              (B) All of the information required by paragraph (A) must be set forth prominently, and in any print advertisement, in a prominent text box that contains only the required information and, at the member's option, comparative performance and fee data and disclosures required by Rule 482 and Rule 34b-1.
              (e) Violation of Other Rules
              Any violation by a member of any rule of the SEC, the Securities Investor Protection Corporation or the Municipal Securities Rulemaking Board applicable to member communications with the public will be deemed a violation of this Rule 2210.
              Cross Reference—
              SEC Rules Concerning Investment Company Sales Literature and Advertising (SEC Rules and Regulation T Tab).
              Amended by SR-FINRA-2008-044 eff. Feb. 5, 2009.
              Amended by SR-FINRA-2007-020 eff. March 26, 2008.
              Amended by SR-NASD-2004-043 eff. April 1, 2007.
              Amended by SR-NASD-2006-105 eff. Sept. 7, 2006.
              Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
              Amended by SR-NASD-2003-110 eff. June 28, 2004.
              Amended by SR-NASD-2000-12 and SR-NASD-2003-94 eff. Nov. 3, 2003.
              Amended by SR-NASD-2002-40 eff. Oct. 15, 2002.
              Amended by SR-NASD-98-32 eff. April 1, 2000.
              Amended by SR-NASD-98-57 eff. March 26, 1999.
              Amended by SR-NASD-98-29 eff. Nov. 16, 1998.
              Amended by SR-NASD-98-28 eff. July 15, 1998.
              Amended by SR-NASD-97-28 eff. Aug. 7, 1997.
              Amended by SR-NASD-97-33 eff. May 9, 1997.
              Amended by SR-NASD-95-39 eff. Aug. 20, 1996.
              Amended by SR-NASD-95-12 eff. Aug. 9, 1995.
              Amended by SR-NASD-93-66 eff. Mar. 17, 1994.
              Amended by SR-NASD-92-53 eff. July 1, 1993.
              Amended eff. Aug. 2, 1983; June 5, 1987; July 1, 1988; Nov. 28, 1988; June 26, 1990; Mar. 27, 1991; Sept. 13, 1991; Nov. 16, 1992.

              Selected Notices: 98-83, 99-16, 00-15, 00-22, 03-38, 04-36, 06-48, 09-10.

              • IM-2210-1. Guidelines to Ensure That Communications With the Public Are Not Misleading

                This rule is no longer applicable. NASD IM-2210-1 has been superseded by FINRA Rule 2210. Please consult the appropriate FINRA Rule.

                Every member is responsible for determining whether any communication with the public, including material that has been filed with the Department, complies with all applicable standards, including the requirement that the communication not be misleading. In order to meet this responsibility, member communications with the public must conform with the following guidelines. These guidelines do not represent an exclusive list of considerations that a member must make in determining whether a communication with the public complies with all applicable standards.
                (1) Members must ensure that statements are not misleading within the context in which they are made. A statement made in one context may be misleading even though such a statement could be appropriate in another context. An essential test in this regard is the balanced treatment of risks and potential benefits. Member communications should be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield inherent to investments.
                (2) Members must consider the nature of the audience to which the communication will be directed. Different levels of explanation or detail may be necessary depending on the audience to which a communication is directed. Members must keep in mind that it is not always possible to restrict the audience that may have access to a particular communication with the public. Additional information or a different presentation of information may be required depending upon the medium used for a particular communication and the possibility that the communication will reach a larger or different audience than the one initially targeted.
                (3) Member communications must be clear. A statement made in an unclear manner can cause a misunderstanding. A complex or overly technical explanation may be more confusing than too little information.
                (4) In communications with the public, income or investment returns may not be characterized as tax-free or exempt from income tax when tax liability is merely postponed or deferred, such as when taxes are payable upon redemption.
                (5) In advertisements and sales literature, references to tax-free or tax-exempt income must indicate which income taxes apply, or which do not, unless income is free from all applicable taxes. For example, if income from an investment company investing in municipal bonds is subject to state or local income taxes, this fact must be stated, or the illustration must otherwise make it clear that income is free only from federal income tax.
                (6) Recommendations
                (A) In making a recommendation in advertisements and sales literature, whether or not labeled as such, a member must have a reasonable basis for the recommendation and must disclose any of the following situations which are applicable:
                (i) that at the time the advertisement or sales literature was published, the member was making a market in the securities being recommended, or in the underlying security if the recommended security is an option or security future, or that the member or associated persons will sell to or buy from customers on a principal basis;
                (ii) that the member and/or its officers or partners have a financial interest in any of the securities of the issuer whose securities are recommended, and the nature of the financial interest (including, without limitation, whether it consists of any option, right, warrant, future, long or short position), unless the extent of the financial interest is nominal;
                (iii) that the member was manager or co-manager of a public offering of any securities of the recommended issuer within the past 12 months.
                (B) The member shall also provide, or offer to furnish upon request, available investment information supporting the recommendation. Recommendations on behalf of corporate equities must provide the price at the time the recommendation is made.
                (C) A member may use material referring to past recommendations if it sets forth all recommendations as to the same type, kind, grade or classification of securities made by a member within the last year. Longer periods of years may be covered if they are consecutive and include the most recent year. Such material must also name each security recommended and give the date and nature of each recommendation (e.g., whether to buy or sell), the price at the time of the recommendation, the price at which or the price range within which the recommendation was to be acted upon, and indicate the general market conditions during the period covered.
                (D) Also permitted is material that does not make any specific recommendation but which offers to furnish a list of all recommendations made by a member within the past year or over longer periods of consecutive years, including the most recent year, if this list contains all the information specified in subparagraph (C). Neither the list of recommendations, nor material offering such list, shall imply comparable future performance. Reference to the results of a previous specific recommendation, including such a reference in a follow-up research report or market letter, is prohibited if the intent or the effect is to show the success of a past recommendation, unless all of the foregoing requirements with respect to past recommendations are met.
                Adopted by SR-NASD-2000-12 eff. Nov. 3, 2003.

                Selected Notice: 03-38.

              • IM-2210-2. Communications with the Public About Variable Life Insurance and Variable Annuities

                This rule is no longer applicable. NASD IM-2210-2 has been superseded by FINRA Rule 2211. Please consult the appropriate FINRA Rule.

                The standards governing communications with the public are set forth in Rule 2210. In addition to those standards, the following guidelines must be considered in preparing advertisements and sales literature about variable life insurance and variable annuities. The guidelines are applicable to advertisements and sales literature as defined in Rule 2210, as well as individualized communications such as personalized letters and computer generated illustrations, whether printed or made available on-screen.
                (a) General Considerations
                (1) Product Identification
                In order to assure that investors understand exactly what security is being discussed, all communications must clearly describe the product as either a variable life insurance policy or a variable annuity, as applicable. Member firms may use proprietary names in addition to this description. In cases where the proprietary name includes a description of the type of security being offered, there is no requirement to include a generalized description. For example, if the material includes a name such as the "XYZ Variable Life Insurance Policy," it is not necessary to include a statement indicating that the security is a variable life insurance policy. Considering the significant differences between mutual funds and variable products, the presentation must not represent or imply that the product being offered or its underlying account is a mutual fund.
                (2) Liquidity
                Considering that variable life insurance and variable annuities frequently involve substantial charges and/or tax penalties for early withdrawals, there must be no representation or implication that these are short-term, liquid investments. Presentations regarding liquidity or ease of access to investment values must be balanced by clear language describing the negative impact of early redemptions. Examples of this negative impact may be the payment of contingent deferred sales loads and tax penalties, and the fact that the investor may receive less than the original invested amount. With respect to variable life insurance, discussions of loans and withdrawals must explain their impact on cash values and death benefits.
                (3) Claims About Guarantees
                Insurance companies issuing variable life insurance and variable annuities provide a number of specific guarantees. For example, an insurance company may guarantee a minimum death benefit for a variable life insurance policy or the company may guarantee a schedule of payments to a variable annuity owner. Variable life insurance policies and variable annuities may also offer a fixed investment account which is guaranteed by the insurance company. The relative safety resulting from such a guarantee must not be overemphasized or exaggerated as it depends on the claims-paying ability of the issuing insurance company. There must be no representation or implication that a guarantee applies to the investment return or principal value of the separate account. Similarly, it must not be represented or implied that an insurance company's financial ratings apply to the separate account.
                (b) Specific Considerations
                (1) Fund Performance Predating Inclusion in the Variable Product
                In order to show how an existing fund would have performed had it been an investment option within a variable life insurance policy or variable annuity, communications may contain the fund's historical performance that predates its inclusion in the policy or annuity. Such performance may only be used provided that no significant changes occurred to the fund at the time or after it became part of the variable product. However, communications may not include the performance of an existing fund for the purposes of promoting investment in a similar, but new, investment option (i.e., clone fund or model fund) available in a variable contract. The presentation of historical performance must conform to applicable NASD and SEC standards. Particular attention must be given to including all elements of return and deducting applicable charges and expenses.
                (2) Product Comparisons
                A comparison of investment products may be used provided the comparison complies with applicable requirements set forth under Rule 2210. Particular attention must be paid to the specific standards regarding "comparisons" set forth in Rule 2210(d)(2)(B).
                (3) Use of Rankings
                A ranking which reflects the relative performance of the separate account or the underlying investment option may be included in advertisements and sales literature provided its use is consistent with the standards contained in IM-2210-3.
                (4) Discussions Regarding Insurance and Investment Features of Variable Life Insurance
                Communications on behalf of single premium variable life insurance may emphasize the investment features of the product provided an adequate explanation of the life insurance features is given. Sales material for other types of variable life insurance must provide a balanced discussion of these features.
                (5) Hypothetical Illustrations of Rates of Return in Variable Life Insurance Sales Literature and Personalized Illustrations
                (A)(i) Hypothetical illustrations using assumed rates of return may be used to demonstrate the way a variable life insurance policy operates. The illustrations show how the performance of the underlying investment accounts could affect the policy cash value and death benefit. These illustrations may not be used to project or predict investment results as such forecasts are strictly prohibited by the Rules. The methodology and format of hypothetical illustrations must be modeled after the required illustrations in the prospectus.
                (ii) An illustration may use any combination of assumed investment returns up to and including a gross rate of 12%, provided that one of the returns is a 0% gross rate. Although the maximum assumed rate of 12% may be acceptable, members are urged to assure that the maximum rate illustrated is reasonable considering market conditions and the available investment options. The purpose of the required 0% rate of return is to demonstrate how a lack of growth in the underlying investment accounts may affect policy values and to reinforce the hypothetical nature of the illustration.
                (iii) The illustrations must reflect the maximum (guaranteed) mortality and expense charges associated with the policy for each assumed rate of return. Current charges may be illustrated in addition to the maximum charges.
                (iv) Preceding any illustration there must be a prominent explanation that the purpose of the illustration is to show how the performance of the underlying investment accounts could affect the policy cash value and death benefit. The explanation must also state that the illustration is hypothetical and may not be used to project or predict investment results.
                (B) In sales literature which includes hypothetical illustrations, member firms may provide a personalized illustration which reflects factors relating to the individual customer's circumstances. A personalized illustration may not contain a rate of return greater than 12% and must follow all of the standards set forth in subparagraph (A), above.
                (C) In general, it is inappropriate to compare a variable life insurance policy with another product based on hypothetical performance as this type of presentation goes beyond the singular purpose of illustrating how the performance of the underlying investment accounts could affect the policy cash value and death benefit. It is permissible, however, to use a hypothetical illustration in order to compare a variable life insurance policy to a term policy with the difference in cost invested in a side product. The sole purpose of this type of illustration would be to demonstrate the concept of tax-deferred growth as a result of investing in the variable product. The following conditions must be met in order to make this type of comparison balanced and complete:
                (i) the comparative illustration must be accompanied by an illustration which reflects the standards outlined in subparagraph (A), above;
                (ii) the rate of return used in the comparative illustration must be no greater than 12%;
                (iii) the rate of return assumed for the side product and the variable life policy must be the same;
                (iv) the same fees deducted from the required prospectus illustration must be deducted from the comparative illustration;
                (v) the side product must be illustrated using gross values which do not reflect the deduction of any fees; and,
                (vi) the side product must not be identified or characterized as any specific investment or investment type.
                Amended by SR-NASD-2004-176 eff. Jan. 1, 2005.
                Amended by SR-NASD-2000-12 eff. Nov. 3, 2003.
                Adopted by SR-NASD-94-02 eff. Mar. 21, 1994.

                Selected Notice: 03-38.

              • IM-2210-3. Use of Rankings in Investment Companies Advertisements and Sales Literature

                This rule is no longer applicable. NASD IM-2210-3 has been superseded by FINRA Rule 2212. Please consult the appropriate FINRA Rule.

                (a) Definition of "Ranking Entity"
                For purposes of the following guidelines, the term "Ranking Entity" refers to any entity that provides general information about investment companies to the public, that is independent of the investment company and its affiliates, and whose services are not procured by the investment company or any of its affiliates to assign the investment company a ranking.
                (b) General Prohibition
                Members may not use investment company rankings in any advertisement or item of sales literature other than (1) rankings created and published by Ranking Entities or (2) rankings created by an investment company or an investment company affiliate but based on the performance measurements of a Ranking Entity. Rankings in advertisements and sales literature also must conform to the following requirements.
                (c) Required Disclosures
                (1) Headlines/Prominent Statements
                A headline or other prominent statement must not state or imply that an investment company or investment company family is the best performer in a category unless it is actually ranked first in the category.
                (2) Required Prominent Disclosure
                All advertisements and sales literature containing an investment company ranking must disclose prominently:
                (A) the name of the category (e.g., growth);
                (B) the number of investment companies or, if applicable, investment company families, in the category;
                (C) the name of the Ranking Entity and, if applicable, the fact that the investment company or an affiliate created the category or subcategory;
                (D) the length of the period (or the first day of the period) and its ending date; and
                (E) criteria on which the ranking is based (e.g., total return, risk-adjusted performance).
                (3) Other Required Disclosure
                All advertisements and sales literature containing an investment company ranking also must disclose:
                (A) the fact that past performance is no guarantee of future results;
                (B) for investment companies that assess front-end sales loads, whether the ranking takes those loads into account;
                (C) if the ranking is based on total return or the current SEC standardized yield, and fees have been waived or expenses advanced during the period on which the ranking is based, and the waiver or advancement had a material effect on the total return or yield for that period, a statement to that effect;
                (D) the publisher of the ranking data (e.g., "ABC Magazine, June 2003"); and
                (E) if the ranking consists of a symbol (e.g., a star system) rather than a number, the meaning of the symbol (e.g., a four-star ranking indicates that the fund is in the top 30% of all investment companies).
                (d) Time Periods
                (1) Current Rankings
                Any investment company ranking included in an item of sales literature must be, at a minimum, current to the most recent calendar quarter ended prior to use. Any investment company ranking included in an advertisement must be, at minimum, current to the most recent calendar quarter ended prior to the submission for publication. If no ranking that meets this requirement is available from the Ranking Entity, then a member may only use the most current ranking available from the Ranking Entity unless use of the most current ranking would be misleading, in which case no ranking from the Ranking Entity may be used.
                (2) Rankings Time Periods; Use of Yield Rankings
                Except for money market mutual funds:
                (A) advertisements and sales literature may not present any ranking that covers a period of less than one year, unless the ranking is based on yield;
                (B) an investment company ranking based on total return must be accompanied by rankings based on total return for a one year period for investment companies in existence for at least one year; one and five year periods for investment companies in existence for at least five years; and one, five and ten year periods for investment companies in existence for at least ten years supplied by the same Ranking Entity, relating to the same investment category, and based on the same time period; provided that, if rankings for such one, five and ten year time periods are not published by the Ranking Entity, then rankings representing short, medium and long term performance must be provided in place of rankings for the required time periods; and
                (C) an investment company ranking based on yield may be based only on the current SEC standardized yield and must be accompanied by total return rankings for the time periods specified in paragraph (d)(2)(B).
                (e) Categories
                (1) The choice of category (including a subcategory of a broader category) on which the investment company ranking is based must be one that provides a sound basis for evaluating the performance of the investment company.
                (2) An investment company ranking must be based only on (A) a published category or subcategory created by a Ranking Entity or (B) a category or subcategory created by an investment company or an investment company affiliate, but based on the performance measurements of a Ranking Entity.
                (3) An advertisement or sales literature must not use any category or subcategory that is based upon the asset size of an investment company or investment company family, whether or not it has been created by a Ranking Entity.
                (f) Multiple Class/Two-Tier Funds
                Investment company rankings for more than one class of investment company with the same portfolio must be accompanied by prominent disclosure of the fact that the investment companies or classes have a common portfolio.
                (g) Investment Company Families
                Advertisements and sales literature may contain rankings of investment company families, provided that these rankings comply with the guidelines above, and further provided that no advertisement or sales literature for an individual investment company may provide a ranking of an investment company family unless it also prominently discloses the various rankings for the individual investment company supplied by the same Ranking Entity, as described in paragraph (d)(2)(B). For purposes of this IM-2210-3, the term "investment company family" means any two or more registered investment companies or series thereof that hold themselves out to investors as related companies for purposes of investment and investor services.
                Amended by SR-NASD-2000-12 eff. Nov. 3, 2003.
                Amended by SR-NASD-96-39 eff. Mar. 5, 1997.
                Adopted by SR-NASD-93-69 eff. July 12, 1994.

                Selected Notices: 86-41, 92-59, 93-18, 93-73, 93-76, 93-85, 93-87, 94-16, 94-25, 94-36, 94-60, 95-49, 95-74, 95-80.

              • IM-2210-4. Limitations on Use of FINRA's Name and Any Other Corporate Name Owned by FINRA

                This rule is no longer applicable. NASD IM-2210-4 has been superseded by FINRA Rule 2210. Please consult the appropriate FINRA Rule.

                Members may indicate FINRA membership in conformity with Article XV, Section 2 of the FINRA By-Laws in one or more of the following ways:
                (1) in any communication with the public, provided that the communication complies with the applicable standards of Rule 2210 and neither states nor implies that FINRA, or any other corporate name or facility owned by FINRA, or any other regulatory organization endorses, indemnifies, or guarantees the member's business practices, selling methods, the class or type of securities offered, or any specific security;
                (2) in a confirmation statement for an over-the-counter transaction that states: "This transaction has been executed in conformity with the NASD Uniform Practice Code."
                (3) on a member's internet Web site provided that the member provides a hyperlink to FINRA's internet home page, www.finra.org, in close proximity to the member's indication of FINRA membership. A member is not required to provide more than one such hyperlink on its Web site. If the member's Web site contains more than one indication of FINRA membership, the member may elect to provide any one hyperlink in close proximity to any reference reasonably designed to draw the public's attention to FINRA membership. This provision also shall apply to an internet Web site relating to the member's investment banking or securities business maintained by or on behalf of any person associated with a member.
                Amended by SR-FINRA-2007-014 eff. Nov. 17, 2007.
                Amended by SR-NASD-2006-073 eff. July 7, 2007.
                Amended by SR-NASD-2007-042 eff. June 27, 2007 (Implementation date of IM-2210-4 (3) is Oct 31, 2007).
                Amended by SR-NASD-2004-123 eff. Aug. 10, 2004.
                Amended by SR-NASD-2000-12 eff. Nov. 3, 2003.
                Amended by SR-NASD-98-86 eff. Nov. 19, 1998.
                Adopted by SR-NASD-97-28 eff. Aug. 7, 1997.

                Selected Notices: 04-64, 07-02, 07-47.

              • IM-2210-5. Requirements for the Use of Bond Mutual Fund Volatility Ratings

                This rule is no longer applicable. NASD IM-2210-5 has been superseded by FINRA Rule 2213. Please consult the appropriate FINRA Rule.

                (a) Definition of Bond Mutual Fund Volatility Ratings
                For purposes of this Rule and any interpretation thereof, the term "bond mutual fund volatility rating" is a description issued by an independent third party relating to the sensitivity of the net asset value of a portfolio of an open-end management investment company that invests in debt securities to changes in market conditions and the general economy, and is based on an evaluation of objective factors, including the credit quality of the fund's individual portfolio holdings, the market price volatility of the portfolio, the fund's performance, and specific risks, such as interest rate risk, prepayment risk, and currency risk.
                (b) Prohibitions on Use
                Members and persons associated with a member may use a bond mutual fund volatility rating only in supplemental sales literature and only when the following requirements are satisfied:
                (1) The rating does not identify or describe volatility as a "risk" rating.
                (2) The supplemental sales literature incorporates the most recently available rating and reflects information that, at a minimum, is current to the most recently completed calendar quarter ended prior to use.
                (3) The criteria and methodology used to determine the rating must be based exclusively on objective, quantifiable factors. The rating and the Disclosure Statement that accompanies the rating must be clear, concise, and understandable.
                (4) The supplemental sales literature conforms to the disclosure requirements described in paragraph (c).
                (5) The entity that issued the rating provides detailed disclosure on its rating methodology to investors through a toll-free telephone number, a web site, or both.
                (c) Disclosure Requirements
                (1) Supplemental sales literature containing a bond mutual fund volatility rating shall include a Disclosure Statement containing all the information required by this Rule. The Disclosure Statement may also contain any additional information that is relevant to an investor's understanding of the rating.
                (2) Supplemental sales literature containing a bond mutual fund volatility rating shall contain all current bond mutual fund volatility ratings that have been issued with respect to the fund. Information concerning multiple ratings may be combined in the Disclosure Statement, provided that the applicability of the information to each rating is clear.
                (3) All bond mutual fund volatility ratings shall be contained within the text of the Disclosure Statement. The following disclosures shall be provided with respect to each such rating:
                (A) the name of the entity that issued the rating;
                (B) the most current rating and date of the current rating, with an explanation of the reason for any change in the current rating from the most recent prior rating;
                (C) a description of the rating in narrative form, containing the following disclosures:
                (i) a statement that there is no standard method for assigning ratings;
                (ii) a description of the criteria and methodologies used to determine the rating;
                (iii) a statement that not all bond funds have volatility ratings;
                (iv) whether consideration was paid in connection with obtaining the issuance of the rating;
                (v) a description of the types of risks the rating measures (e.g., short-term volatility);
                (vi) a statement that the portfolio may have changed since the date of the rating; and
                (vii) a statement that there is no guarantee that the fund will continue to have the same rating or perform in the future as rated.
                Amended by SR-NASD-2005-117 eff. Dec. 27, 2005.
                Amended by SR-NASD-2005-104 eff. Aug. 31, 2005.
                Amended by SR-NASD-2003-126 eff. Aug. 31, 2003.
                Amended by SR-NASD-2001-49 eff. August 10, 2001.
                Adopted by SR-NASD-97-89 eff. Feb. 29, 2000.

                Selected Notices: 96-84, 00-17, 00-23.

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

                This rule is no longer applicable. NASD IM-2210-6 has been superseded by FINRA Rule 2214. Please consult the appropriate FINRA Rule.

                (a) General Considerations
                This Interpretive Material provides a limited exception to NASD Rule 2210(d)(1)(D).1 No member may imply that NASD endorses or approves the use of any investment analysis tool or any recommendation based on such a tool. A member that offers or intends to offer an investment analysis tool under this Interpretive Material (whether customers use the member's tool independently or with assistance from the member) must, within 10 days of first use, (1) provide NASD's Advertising Regulation Department (Department) access to the investment analysis tool and, (2) pursuant to Rule 2210(c)(2)(D), file with the Department any template for written reports produced by, or advertisements and sales literature concerning, the tool.2 The member also must provide any supplemental information requested by the Department. The Department may require that the member modify the investment analysis tool, written-report template, advertisement or sales literature. The Department also may require that the member not offer or continue to offer or use the tool, written-report template, advertisement or sales literature until all changes specified by the Department have been made by the member.
                A member that offers an investment analysis tool exclusively to "institutional investors," as defined in Rule 2211(a)(3), is not subject to the post-use access and filing requirement in this paragraph if the communications relating to or produced by the tool meet the criteria for "institutional sales material," as defined in Rule 2211(a)(2). A member that intends to make the tool available to, or that intends to use the tool with, any person other than an institutional investor (such as an employee benefit plan participant or a retail broker-dealer customer) will be subject to the filing and access requirements, however.
                As in all cases, a member's compliance with this Interpretive Material does not mean that the member is acting in conformity with other applicable laws and rules. A member that offers an investment analysis tool under this Interpretive Material (whether customers use the member's tool independently or with assistance from the member) is responsible for ensuring that use of the investment analysis tool and all recommendations based on the investment analysis tool (whether made via the automated tool or a written report) comply, as applicable, with NASD's suitability rule (Rule 2310), the other provisions of Rule 2210 (including, but not limited to, the principles of fair dealing and good faith, the prohibition on exaggerated, unwarranted or misleading statements or claims, and any other applicable filing requirements for advertisements and sales literature), the federal securities laws (including, but not limited to, the antifraud provisions), the Securities and Exchange Commission rules (including, but not limited to, SEC Rule 156 under the Securities Act of 1933) and other NASD rules.
                (b) Definition
                For purposes of this Interpretive Material and any interpretation thereof, an "investment analysis tool" is an interactive technological tool that produces simulations and statistical analyses that present the likelihood of various investment outcomes if certain investments are made or certain investment strategies or styles are undertaken, thereby serving as an additional resource to investors in the evaluation of the potential risks and returns of investment choices.
                (c) Use of Investment Analysis Tools and Related Written Reports and Sales Material
                A member may provide an investment analysis tool (whether customers use the member's tool independently or with assistance from the member), written reports indicating the results generated by such tool and related advertisements and sales literature3 only if:
                (1) the member describes the criteria and methodology used, including the investment analysis tool's limitations and key assumptions;
                (2) the member explains that results may vary with each use and over time;
                (3) if applicable, the member describes the universe of investments considered in the analysis, explains how the tool determines which securities to select, discloses if the tool favors certain securities and, if so, explains the reason for the selectivity,4 and states that other investments not considered may have characteristics similar or superior to those being analyzed; and
                (4) the member displays the following additional disclosure: "IMPORTANT: The projections or other information generated by [name of investment analysis tool] regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results."
                (d) Disclosures
                The disclosures and other required information discussed in paragraph (c) must be clear and prominent and must be in written or electronic narrative form.

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

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

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

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

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

                Amended by SR-NASD-2006-105 eff. Sept. 7, 2006.
                Adopted by SR-NASD-2003-13 eff. Feb. 15, 2005.

                Selected Notices: 04-86.

              • IM-2210-7. Guidelines for Communications with the Public Regarding Security Futures

                This rule is no longer applicable. NASD IM-2210-7 has been superseded by FINRA Rule 2215. Please consult the appropriate FINRA Rule.

                (a) NASD Approval Requirements and Review Procedures
                (1) As set forth in paragraph (c)(4) of Rule 2210, all advertisements concerning security futures shall be submitted to the Advertising Regulation Department of NASD at least ten days prior to use for approval and, if changed by NASD, shall be withheld from circulation until any changes specified by NASD have been made or, in the event of disapproval, until the advertisement has been refiled for, and has received, NASD approval.
                (2) The requirements of this paragraph (a) shall not be applicable to:
                (A) advertisements submitted to another self-regulatory organization having comparable standards pertaining to such advertisements, and
                (B) advertisements in which the only reference to security futures is contained in a listing of the services of a member organization.
                (b) Disclosure Statement
                (1) All communications concerning security futures shall be accompanied or preceded by the security futures risk disclosure statement unless they meet the following requirements:
                (A) Such communications shall be limited to general descriptions of the security futures being offered.
                (B) Such communications shall contain contact information for obtaining a copy of the security futures risk disclosure statement.
                (C) Such communications shall not contain recommendations or past or projected performance figures, including annualized rates of return.
                (2) Communications concerning security futures that meet the requirements of subparagraph (1) may have the following characteristics:
                (A) the text of the communication may contain a brief description of security futures, including a statement that identifies registered clearing agencies for security futures. The text may also contain a brief description of the general attributes and method of operation of the security exchange or notice-registered securities exchange on which such security futures are traded, including a discussion of how a security future is priced;
                (B) the communication may include any statement required by any state law or administrative authority; and
                (C) advertising designs and devices, including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics may be used, provided such material is not misleading.
                (c) Recordkeeping
                Consistent with paragraph (b)(2) of Rule 2210, a member shall keep a separate file of all advertisements and sales literature concerning security futures, including the name(s) of the person(s) who prepared them and approved their use for a period of three years from the date of each use. In addition, members shall meet the same recordkeeping requirements for all correspondence concerning security futures. In the case of sales literature concerning security futures, a member shall record the source of any recommendation contained therein.
                (d) Specific Standards
                (1) The special risks attendant to security futures transactions and the complexities of certain security futures investment strategies shall be reflected in any communications that discuss the uses or advantages of security futures. Any statement referring to the potential opportunities or advantages presented by security futures shall be balanced by a statement of the corresponding risks. The risk statement shall reflect the same degree of specificity as the statement of opportunities, and broad generalities should be avoided.
                (2) Security futures communications shall include a warning to the effect that security futures are not suitable for all investors and such communications shall not contain suggestions to the contrary.
                (3) Security futures communications shall state that supporting documentation for any claims (including any claims made on behalf of security futures programs or the security futures expertise of sales persons), comparisons, recommendations, statistics or other technical data, will be supplied upon request.
                (4) No cautionary statements or caveats, often called hedge clauses, may be used in communications with the public if they are not legible, are misleading, or are inconsistent with the content of the material.
                (5) Statements suggesting the certain availability of a secondary market for security futures shall not be made.
                (e) Projections
                Notwithstanding the provisions of Rule 2210(d)(1)(D), security futures sales literature and correspondence may contain projected performance figures (including projected annualized rates of return), provided that:
                (1) all such sales literature and correspondence must be accompanied or preceded by the security futures risk disclosure statement;
                (2) no suggestion of certainty of future performance is made;
                (3) parameters relating to such performance figures are clearly established;
                (4) all relevant costs, including commissions, fees, and interest charges (as applicable) are disclosed and reflected in the projections;
                (5) such projections are plausible and are intended as a source of reference or a comparative device to be used in the development of a recommendation;
                (6) all material assumptions made in such calculations are clearly identified;
                (7) the risks involved in the proposed transactions are also disclosed; and
                (8) in communications relating to annualized rates of return, that such returns are not based upon any less than a sixty-day experience; any formulas used in making calculations are clearly displayed; and a statement is included to the effect that the annualized returns cited might be achieved only if the parameters described can be duplicated and that there is no certainty of doing so.
                (f) Historical Performance
                Security futures sales literature and correspondence may feature records and statistics that portray the performance of past recommendations or of actual transactions, provided that:
                (1) all such sales literature and correspondence must be accompanied or preceded by the security futures risk disclosure statement;
                (2) any such portrayal is done in a balanced manner, and consists of records or statistics that are confined to a specific "universe" that can be fully isolated and circumscribed and that covers at least the most recent 12-month period;
                (3) such communications include the date of each initial recommendation or transaction, the price of each such recommendation or transaction as of such date, and the date and price of each recommendation or transaction at the end of the period or when liquidation was suggested or effected, whichever was earlier; provided that if the communications are limited to summarized or averaged records or statistics, in lieu of the complete record there may be included the number of items recommended or transacted, the number that advanced and the number that declined, together with an offer to provide the complete record upon request;
                (4) such communications disclose all relevant costs, including commissions, fees, and daily margin obligations (as applicable);
                (5) whenever such communications contain annualized rates of return, such communications shall disclose all material assumptions used in the process of annualization;
                (6) an indication is provided of the general market conditions during the period(s) covered, and any comparison made between such records and statistics and the overall market (e.g., comparison to an index) is valid;
                (7) such communications state that the results presented should not and cannot be viewed as an indicator of future performance; and
                (8) a principal qualified to supervise security futures activities determines that the records or statistics fairly present the status of the recommendations or transactions reported upon and so initials the report.
                (g) Security Futures Programs
                In communications regarding a security futures program (i.e., an investment plan employing the systematic use of one or more security futures strategies), the cumulative history or unproven nature of the program and its underlying assumptions shall be disclosed.
                (h) Standard Forms of Worksheets
                Such worksheets must be uniform within a member firm. If a member has adopted a standard form of worksheet for a particular security futures strategy, nonstandard worksheets for that strategy may not be used.
                (i) Recordkeeping
                Communications that portray performance of past recommendations or actual transactions and completed worksheets shall be kept at a place easily accessible to the sales office for the accounts or customers involved.
                Amended by SR-NASD-2000-12 eff. Nov. 3, 2003.
                Adopted by SR-NASD-2002-40 eff. Oct. 15, 2002.

              • IM-2210-8. Communications with the Public About Collateralized Mortgage Obligations (CMOs)

                This rule is no longer applicable. NASD IM-2210-8 has been superseded by FINRA Rule 2216. Please consult the appropriate FINRA Rule.

                (a) Definition
                For purposes of the following guidelines, the term "collateralized mortgage obligation" (CMO) refers to a multiclass debt instrument backed by a pool of mortgage pass-through securities or mortgage loans, including real estate mortgage investment conduits (REMICs) as defined in the Tax Reform Act of 1986.
                (b) Disclosure Standards and Required Educational Material
                (1) Disclosure Standards
                All advertisements, sales literature and correspondence concerning CMOs:
                (A) must include within the name of the product the term "Collateralized Mortgage Obligation";
                (B) may not compare CMOs to any other investment vehicle, including a bank certificate of deposit;
                (C) must disclose, as applicable, that a government agency backing applies only to the face value of the CMO and not to any premium paid; and
                (D) must disclose that a CMO's yield and average life will fluctuate depending on the actual rate at which mortgage holders prepay the mortgages underlying the CMO and changes in current interest rates.
                (2) Required Educational Material
                Before the sale of a CMO to any person other than an institutional investor, a member must offer to the customer educational material that includes the following:
                (A) a discussion of:
                (i) characteristics and risks of CMOs including credit quality, prepayment rates and average lives, interest rates (including their effect on value and prepayment rates), tax considerations, minimum investments, transaction costs and liquidity;
                (ii) the structure of a CMO, including the various types of tranches that may be issued and the rights and risks pertaining to each (including the fact that two CMOs with the same underlying collateral may be prepaid at different rates and may have different price volatility); and
                (iii) the relationship between mortgage loans and mortgage securities;
                (B) questions an investor should ask before investing; and
                (C) a glossary of terms.
                (c) Promotion of Specific CMOs
                In addition to the standards set forth above, advertisements, sales literature and correspondence that promote a specific security or contain yield information must conform to the standards set forth below. An example of a compliant communication appears at the end of this section.
                (1) The advertisement, sales literature or correspondence must present the following disclosure sections with equal prominence. The information in Sections 1 and 2 must be included. The information in Section 3 is optional; therefore, the member may elect to include any, all or none of this information. The information in Section 4 may be tailored to the member's preferred signature.
                Section 1 Title — Collateralized Mortgage Obligations
                Coupon Rate
                Anticipated Yield/Average Life
                Specific Tranche — Number & Class
                Final Maturity Date
                Underlying Collateral
                Section 2 Disclosure Statement:
                "The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions."
                Section 3 Product Features (Optional):
                Minimum Denominations
                Rating Disclosure
                Agency/Government Backing
                Income Payment Structure
                Generic Description of Tranche (e.g., PAC, Companion)
                Yield to Maturity of CMOs Offered at Par
                Section 4 Company Information:
                Name, Memberships
                Address
                Telephone Number
                Representative's Name
                (2) Additional Conditions
                The following conditions must also be met:
                (A) All figures in Section 1 must be in equal type size.
                (B) The disclosure language in Section 2 may not be altered and must be given equal prominence with the information in Section 1.
                (C) The prepayment assumption used to determine the yield and average life must either be obtained from a nationally recognized service or the member firm must be able to justify the assumption used. A copy of either the service's listing for the CMO or the firm's justification must be attached to the copy of the communication that is maintained in the firm's advertising files in order to verify that the prepayment scenario is reasonable.
                (D) Any sales charge that the member intends to impose must be reflected in the anticipated yield.
                (E) The communication must include language stating that the security is "offered subject to prior sale and price change." This language may be included in any one of the four sections.
                (F) If the security is an accrual bond that does not currently distribute principal and interest payments, then Section 1 must include this information.
                (3) Radio/Television Advertisements
                (A) The following oral disclaimer must precede any radio or television advertisement in lieu of the Title information set forth in Section 1:
                "The following is an advertisement for Collateralized Mortgage Obligations. Contact your representative for information on CMOs and how they react to different market conditions."
                (B) Radio or television advertisements must contain the following oral disclosure statement in lieu of the legend set forth in Section 2:
                "The yield and average life reflect prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life."
                (4) Standardized CMO Communication Example
                Collateralized Mortgage Obligations
                7.50% Coupon
                7.75% Anticipated Yield to 22-Year Average Life
                FNMA 9532X, Final Maturity March 2023
                Collateral 100% FNMA 7.50%
                The yield and average life shown above reflect prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions.
                $5,000 Minimum
                Income Paid Monthly
                Implied Rating/Volatility Rating
                Principal and Interest Payments Backed by FNMA
                PAC Bond
                Offered subject to prior sale and price change.
                Call Mary Representative at (800)555-1234
                Your Company Securities, Inc., Member SIPC
                123 Main Street
                Anytown, State 12121
                Adopted by SR-NASD-2000-12 eff. Nov. 3, 2003.

              • 2211. Institutional Sales Material and Correspondence

                This rule is no longer applicable. NASD Rule 2211 has been superseded by FINRA Rule 2210. Please consult the appropriate FINRA Rule.

                (a) Definitions
                For purposes of Rule 2210, this Rule, and any interpretation thereof:
                (1) "Correspondence" consists of any written letter or electronic mail message and any market letter distributed by a member to:
                (A) one or more of its existing retail customers; and
                (B) fewer than 25 prospective retail customers within any 30 calendar-day period.
                (2) "Institutional Sales Material" consists of any communication that is distributed or made available only to institutional investors.
                (3) "Institutional Investor" means any:
                (A) person described in Rule 3110(c)(4), regardless of whether that person has an account with an NASD member;
                (B) governmental entity or subdivision thereof;
                (C) employee benefit plan that meets the requirements of Section 403(b) or Section 457 of the Internal Revenue Code and has at least 100 participants, but does not include any participant of such a plan;
                (D) qualified plan, as defined in Section 3(a)(12)(C) of the Act, that has at least 100 participants, but does not include any participant of such a plan;
                (E) NASD member or registered associated person of such a member; and
                (F) person acting solely on behalf of any such institutional investor.
                No member may treat a communication as having been distributed to an institutional investor if the member has reason to believe that the communication or any excerpt thereof will be forwarded or made available to any person other than an institutional investor.
                (4) "Existing Retail Customer" means any person for whom the member or a clearing broker or dealer on behalf of the member carries an account, or who has an account with any registered investment company for which the member serves as principal underwriter, and who is not an institutional investor. "Prospective Retail Customer" means any person who has not opened such an account and is not an institutional investor.
                (5) “Market Letter” means any written communication excepted from the definition of “research report” pursuant to Rule 2711(a)(9)(A).
                (b) Approval and Recordkeeping
                (1) Registered Principal Approval
                (A) Correspondence. Correspondence need not be approved by a registered principal prior to use, unless such correspondence is distributed to 25 or more existing retail customers within any 30 calendar-day period and makes any financial or investment recommendation or otherwise promotes a product or service of the member. All correspondence is subject to the supervision and review requirements of Rule 3010(d).
                (B) Institutional Sales Material. Each member shall establish written procedures that are appropriate to its business, size, structure, and customers for the review by a registered principal of institutional sales material used by the member and its registered representatives. Such procedures should be in writing and be designed to reasonably supervise each registered representative. Where such procedures do not require review of all institutional sales material prior to use or distribution, they must include provision for the education and training of associated persons as to the firm's procedures governing institutional sales material, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available to NASD upon request.
                (2) Record-keeping
                (A) Members must maintain all institutional sales material in a file for a period of three years from the date of last use. The file must include the name of the person who prepared each item of institutional sales material.
                (B) Members must maintain in a file information concerning the source of any statistical table, chart, graph or other illustration used by the member in communications with the public.
                (c) Spot-Check Procedures
                Each member's correspondence and institutional sales literature may be subject to a spot-check procedure under Rule 2210. Upon written request from the Advertising Regulation Department (the "Department"), each member must submit the material requested in a spot-check procedure within the time frame specified by the Department.
                (d) Content Standards Applicable to Institutional Sales Material and Correspondence
                (1) All institutional sales material and correspondence are subject to the content standards of Rule 2210(d)(1) and the applicable Interpretive Materials under Rule 2210, and all correspondence is subject to the content standards of Rule 2210(d)(3).
                (2) All correspondence (which for purposes of this provision includes business cards and letterhead) must:
                (A) prominently disclose the name of the member and may also include a fictional name by which the member is commonly recognized or which is required by any state or jurisdiction;
                (B) reflect any relationship between the member and any non-member or individual who is also named; and
                (C) if it includes other names, reflect which products or services are being offered by the member.
                (3) Members may not use investment company rankings in any correspondence other than rankings based on (A) a category or subcategory created and published by a Ranking Entity as defined in IM-2210-3(a) or (B) a category or subcategory created by an investment company or an investment company affiliate but based on the performance measurements of a Ranking Entity.
                (e) Violation of Other Rules
                Any violation by a member of any rule of the SEC, the Securities Investor Protection Corporation or the Municipal Securities Rulemaking Board applicable to institutional sales material or correspondence will be deemed a violation of this Rule and Rule 2210.
                Amended by SR-FINRA-2008-044 eff. Feb. 5, 2009.
                Amended by SR-NASD-2004-043 eff. April 1, 2007.
                Amended by SR-NASD-2006-011 eff. Dec. 1, 2006.
                Adopted by SR-NASD-2000-12 eff. Nov. 3, 2003.

                Selected Notices: 06-45, 06-48, 09-10.

              • 2212. Telemarketing

                This rule is no longer applicable. NASD Rule 2212 has been superseded by FINRA Rule 3230. Please consult the appropriate FINRA Rule.

                (a) General Telemarketing Requirements
                No member or person associated with a member shall initiate any telephone solicitation, as defined in paragraph (g)(2) of this rule, to:
                (1) Time of Day Restriction
                Any residence of a person before the hour of 8 a.m. or after 9 p.m. (local time at the called party's location), unless
                (A) the member has an established business relationship with the person pursuant to paragraph (g)(1)(A)(i),
                (B) the member has received that person's prior express invitation or permission, or
                (C) the person called is a broker or dealer;
                (2) Firm-Specific Do-Not-Call List
                Any person that previously has stated that he or she does not wish to receive an outbound telephone call made by or on behalf of the member; or
                (3) National Do-Not-Call List
                Any person who has registered his or her telephone number on the Federal Trade Commission's national do-not-call registry.
                (b) National Do-Not-Call List Exceptions
                A member making telephone solicitations will not be liable for violating paragraph (a)(3) if:
                (1) Established Business Relationship Exception
                The member has an established business relationship with the recipient of the call. A person's request to be placed on the firm-specific do-not-call list terminates the established business relationship exception to that national do-not-call list provision for that member even if the person continues to do business with the member;
                (2) Prior Express Written Consent Exception
                The member has obtained the person's prior express invitation or permission. Such permission must be evidenced by a signed, written agreement between the person and member which states that the person agrees to be contacted by the member and includes the telephone number to which the calls may be placed; or
                (3) Personal Relationship Exception
                The associated person making the call has a personal relationship with the recipient of the call.
                (c) Safe Harbor Provision
                A member or person associated with a member making telephone solicitations will not be liable for violating paragraph (a)(3) if the member or person associated with a member demonstrates that the violation is the result of an error and that as part of the member's routine business practice, it meets the following standards:
                (1) Written procedures. The member has established and implemented written procedures to comply with the national do-not-call rules;
                (2) Training of personnel. The member has trained its personnel, and any entity assisting in its compliance, in procedures established pursuant to the national do-not-call rules;
                (3) Recording. The member has maintained and recorded a list of telephone numbers that it may not contact; and
                (4) Accessing the national do-not-call database. The member uses a process to prevent telephone solicitations to any telephone number on any list established pursuant to the do-not-call rules, employing a version of the national do-not-call registry obtained from the administrator of the registry no more than thirty-one (31) days prior to the date any call is made, and maintains records documenting this process.
                (d) Procedures
                Prior to engaging in telemarketing, a member must institute procedures to comply with paragraph (a). Such procedures must meet the following minimum standards:
                (1) Written policy. Members must have a written policy for maintaining a do-not-call list.
                (2) Training of personnel engaged in telemarketing. Personnel engaged in any aspect of telemarketing must be informed and trained in the existence and use of the do-not-call list.
                (3) Recording, disclosure of do-not-call requests. If a member receives a request from a person not to receive calls from that member, the member must record the request and place the person's name, if provided, and telephone number on the firm's do-not-call list at the time the request is made. Members must honor a person's do-not-call request within a reasonable time from the date such request is made. This period may not exceed thirty days from the date of such request. If such requests are recorded or maintained by a party other than the member on whose behalf the telemarketing call is made, the member on whose behalf the telemarketing call is made will be liable for any failures to honor the do-not-call request.
                (4) Identification of sellers and telemarketers. A member or person associated with a member making a call for telemarketing purposes must provide the called party with the name of the individual caller, the name of the member, an address or telephone number at which the member may be contacted, and that the purpose of the call is to solicit the purchase of securities or related service. The telephone number provided may not be a 900 number or any other number for which charges exceed local or long distance transmission charges.
                (5) Affiliated persons or entities. In the absence of a specific request by the person to the contrary, a person's do-not-call request shall apply to the member making the call, and will not apply to affiliated entities unless the consumer reasonably would expect them to be included given the identification of the caller and the product being advertised.
                (6) Maintenance of do-not-call lists. A member making calls for telemarketing purposes must maintain a record of a caller's request not to receive further telemarketing calls. A firm-specific do-not-call request must be honored for 5 years from the time the request is made.
                (e) Wireless Communications
                The provisions set forth in this rule are applicable to members telemarketing or making telephone solicitations calls to wireless telephone numbers.
                (f) Outsourcing Telemarketing
                If a member uses another entity to perform telemarketing services on its behalf, the member remains responsible for ensuring compliance with all provisions contained in this rule.
                (g) Definitions
                (1) Established business relationship
                (A) An established business relationship exists between a member and a person if:
                (i) the person has made a financial transaction or has a security position, a money balance, or account activity with the member or at a clearing firm that provides clearing services to such member within the previous 18 months immediately preceding the date of the telemarketing call;
                (ii) the member is the broker/dealer of record for an account of the person within the previous 18 months immediately preceding the date of the telemarketing call; or;
                (iii) the person has contacted the member to inquire about a product or service offered by the member within the previous three months immediately preceding the date of the telemarketing call.
                (B) A person's established business relationship with a member does not extend to the member's affiliated entities unless the person would reasonably expect them to be included. Similarly, a person's established business relationship with a member's affiliate does not extend to the member unless the person would reasonably expect the member to be included.
                (2) The terms telemarketing and telephone solicitation mean the initiation of a telephone call or message for the purpose of encouraging the purchase or rental of, or investment in, property, goods, or services, which is transmitted to any person.
                (3) The term personal relationship means any family member, friend, or acquaintance of the telemarketer making the call.
                (4) the term "account activity" shall include, but not be limited to, purchases, sales, interest credits or debits, charges or credits, dividend payments, transfer activity, securities receipts or deliveries, and/or journal entries relating to securities or funds in the possession or control of the member.
                (5) the term "broker/dealer of record" refers to the broker/dealer identified on a customer's account application for accounts held directly at a mutual fund or variable insurance product issuer.
                Amended by SR-NASD-2004-174 eff. March 1, 2005.
                Amended by SR-NASD-2003-131 eff. March 31, 2004.
                Amended by SR-NASD-2000-12 eff. Nov. 3, 2003.
                Adopted by SR-NASD-96-28 eff. Dec. 2, 1996.

                Selected Notice: 04-15, 05-07.

            • 2220. Options Communications

              This rule is no longer applicable. NASD Rule 2220 has been superseded by FINRA Rule 2220. Please consult the appropriate FINRA Rule.

              (a) Definitions
              For purposes of this Rule and any interpretation thereof:
              (1) "Options communications" consist of:
              (A) "Advertisement." Any "Advertisement" as defined in Rule 2210(a)(1) concerning options.
              (B) "Sales literature." Any "Sales Literature" as defined in Rule 2210(a)(2) concerning options including worksheet templates.
              (C) "Correspondence." Any "Correspondence" as defined in Rule 2211(a)(1) concerning options.
              (D) "Institutional sales material." Any "Institutional Sales Material" as defined in Rule 2211(a)(2) concerning options.
              (E) "Public appearance." Any participation in a seminar, forum (including an interactive electronic forum), radio, television or print media interview, or other public speaking activity, or the writing of a print media article, concerning options.
              (F) "Independently prepared reprint." Any "Independently Prepared Reprint" as defined in Rule 2210(a)(6)(A) concerning options.
              (2) "Existing retail customer" as is defined in Rule 2211(a)(4).
              (3) "Standardized option." means any option contract issued, or subject to issuance, by The Options Clearing Corporation, that has standardized terms for the strike price, expiration date, and amount of the underlying security, and is traded on a national securities exchange registered pursuant to section 6(a) of the Act.
              (4) "Options" as is defined in Rule 2860(a).
              (5) "Options disclosure document" has the same meaning as the term "disclosure document" as defined in Rule 2860(b)(2)(T).
              (b) Approval by a Registered Options Principal and Recordkeeping
              (1) Advertisements, Sales Literature, and Independently Prepared Reprints. All advertisements, sales literature (except completed worksheets), and independently prepared reprints issued by a member concerning options shall be approved in advance by a Registered Options Principal designated by the member's written supervisory procedures.
              (2) Correspondence. Correspondence need not be approved by a Registered Options Principal prior to use, unless such correspondence is distributed to 25 or more existing retail customers within any 30 calendar-day period and makes any financial or investment recommendation or otherwise promotes a product or service of the member. All correspondence is subject to the supervision and review requirements of Rule 3010(d).
              (3) Institutional Sales Material. Each member shall establish written procedures that are appropriate to its business, size, structure, and customers for the review by a Registered Options Principal of institutional sales material used by the member and its registered representatives as described in Rule 2211(b)(1)(B).
              (4) Copies of the options communications shall be retained by the member in accordance with SEC Rule 17a-4 of the Act. The names of the persons who prepared the options communications, the names of the persons who approved the options communications and, the source of any recommendations contained therein, shall be retained by the member and be kept in the form and for the time period required for options communications by SEC Rule 17a-4 of the Act.
              (c) Association Approval Requirements and Review Procedures
              (1) In addition to the approval required by paragraph (b) of this Rule, all advertisements, sales literature, and independently prepared reprints issued by a member concerning standardized options used prior to delivery of the applicable current options disclosure document or prospectus shall be submitted to the Advertising Regulation Department of the Association (the "Department") at least ten calendar days prior to use (or such shorter period as the Department may allow in particular instances) for approval and, if changed or expressly disapproved by the Department, shall be withheld from circulation until any changes specified by the Department have been made or, in the event of disapproval, until such options communication has been resubmitted for, and has received, Department approval.
              (2)(A) Notwithstanding the foregoing provision, the Department, upon review of a member's options communications, and after determining that the member has departed from the standards of this Rule, may require that such member file some or all options communications or the portions of such member's communications that are related to options with the Department, at least ten calendar days prior to use.
              (B) The Department shall notify the member in writing of the types of options communications to be filed and the length of time such requirement is to be in effect. The requirement shall not exceed one year, however, and shall not take effect until 21 calendar days after service of the written notice, during which time the member may request a hearing under Rules 9551 and 9559.
              (3) In addition to the foregoing requirements, every member's options communications shall be subject to a routine spot-check procedure. Upon written request from the Department, each member shall promptly submit the communications requested. Members will not be required to submit communications under this procedure that have been previously submitted pursuant to one of the foregoing requirements.
              (4) The requirements of this paragraph (c) shall not be applicable to:
              (A) options communications submitted to another self-regulatory organization having comparable standards pertaining to such communications;
              (B) communications in which the only reference to options is contained in a listing of the services of the member;
              (C) the options disclosure document; and
              (D) the prospectus.
              (d) Standards Applicable to Communications
              (1) Communications Regarding Standardized Options used Prior to Delivery of Options Disclosure Document
              (A) Options communications regarding standardized options exempted under SEC Rule 238 under the Securities Act of 1933 used prior to options disclosure document delivery:
              (i) must be limited to general descriptions of the options being discussed. The text may also contain a brief description of options, including a statement that identifies registered clearing agencies for options and a brief description of the general attributes and method of operation of the exchanges on which such options are traded, including a discussion of how an option is priced;
              (ii) must contain contact information for obtaining a copy of the options disclosure document;
              (iii) must not contain recommendations or past or projected performance figures, including annualized rates of return, or names of specific securities;
              (iv) may include any statement required by any state law or administrative authority;
              (v) may include advertising designs and devices, including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics, provided such material is not misleading; and
              (B) Options communications regarding options not exempted under SEC Rule 238 under the Securities Act of 1933 used prior to delivery of a prospectus that meets the requirements of Section 10(a) of said Act must conform to SEC Rule 134 or 134a under said Act, as applicable.
              (2) General Standards
              (A) No member or associated person of the member shall use any options communications which:
              (i) contains any untrue statement or omission of a material fact or is otherwise false or misleading;
              (ii) contains promises of specific results, exaggerated or unwarranted claims, opinions for which there is no reasonable basis or forecasts of future events which are unwarranted or which are not clearly labeled as forecasts;
              (iii) contains cautionary statements or caveats that are not legible, are misleading, or are inconsistent with the content of the material;
              (iv) would constitute a prospectus as that term is defined in the Securities Act of 1933, unless it meets the requirements of Section 10 of said Act;
              (v) contains statements suggesting the certain availability of a secondary market for options;
              (vi) fails to reflect the risks attendant to options transactions and the complexities of certain options investment strategies;
              (vii) fails to include a warning to the effect that options are not suitable for all investors or contains suggestions to the contrary; or
              (viii) fails to include a statement that supporting documentation for any claims (including any claims made on behalf of options programs or the options expertise of sales persons), comparison, recommendations, statistics, or other technical data, will be supplied upon request.
              (B) Subparagraphs (vii) and (viii) above shall not apply to institutional sales material as defined in paragraph (a) of this Rule.
              (C) Any statement in any options communications referring to the potential opportunities or advantages presented by options shall be balanced by a statement of the corresponding risks. The risk statement shall reflect the same degree of specificity as the statement of opportunities, and broad generalities must be avoided.
              (3) Projections
              Options communications may contain projected performance figures (including projected annualized rates of return) provided that:
              (A) all such communications regarding standardized options are accompanied or preceded by the options disclosure document;
              (B) no suggestion of certainty of future performance is made;
              (C) parameters relating to such performance figures are clearly established (e.g., to indicate exercise price of option, purchase price of the underlying stock and its market price, option premium, anticipated dividends, etc.);
              (D) all relevant costs, including commissions, fees, and interest charges (as applicable ) are disclosed and reflected in the projections;
              (E) such projections are plausible and are intended as a source of reference or a comparative device to be used in the development of a recommendation;
              (F) all material assumptions made in such calculations are clearly identified (e.g., "assume option expires," "assume option unexercised," "assume option exercised," etc.);
              (G) the risks involved in the proposed transactions are also disclosed; and
              (H) in communications relating to annualized rates of return, that such returns are not based upon any less than a sixty-day experience; any formulas used in making calculations are clearly displayed; and a statement is included to the effect that the annualized returns cited might be achieved only if the parameters described can be duplicated and that there is no certainty of doing so.
              (4) Historical Performance
              Options communications may feature records and statistics that portray the performance of past recommendations or of actual transactions, provided that:
              (A) all such communications regarding standardized options are accompanied or preceded by the options disclosure document;
              (B) any such portrayal is done in a balanced manner, and consists of records or statistics that are confined to a specific "universe" that can be fully isolated and circumscribed and that covers at least the most recent 12-month period;
              (C) such communications include the date of each initial recommendation or transaction, the price of each such recommendation or transaction as of such date, and the date and price of each recommendation or transaction at the end of the period or when liquidation was suggested or effected, whichever was earlier; provided that if the communications are limited to summarized or averaged records or statistics, in lieu of the complete record there may be included the number of items recommended or transacted, the number that advanced and the number that declined, together with an offer to provide the complete record upon request;
              (D) all relevant costs, including commissions, fees, and daily margin obligations (as applicable) are disclosed and reflected in the performance;
              (E) whenever such communications contain annualized rates of return, all material assumptions used in the process of annualization are disclosed;
              (F) an indication is provided of the general market conditions during the period(s) covered, and any comparison made between such records and statistics and the overall market (e.g., comparison to an index) is valid;
              (G) such communications state that the results presented should not and cannot be viewed as an indicator of future performance; and
              (H) a Registered Options Principal determines that the records or statistics fairly present the status of the recommendations or transactions reported upon and so initials the report.
              (5) Options Programs
              In communications regarding an options program (i.e., an investment plan employing the systematic use of one or more options strategies), the cumulative history or unproven nature of the program and its underlying assumptions shall be disclosed.
              (6) Violation of Other Rules
              Any violation by a member or associated person of any rule or requirement of the SEC or any rule of the Securities Investor Protection Corporation applicable to member communications concerning options will be deemed a violation of this Rule 2220.

              Amended by SR-FINRA-2008-013 eff. March 4, 2009.
              Amended by SR-FINRA-2007-035 eff. June 23, 2008.
              Amended by SR-NASD-2003-110 eff. June 28, 2004.
              Amended by SR-NASD-98-57 eff. March 26, 1999.
              Adopted eff. Sept. 13, 1991.

              Selected Notices: 85-69, 86-68, 87-24, 87-43, 88-20, 88-52, 88-65, 89-11, 91-26, 91-62, 92-56, 99-16, 04-36, 08-28, 08-73.

            • 2230. Confirmations

              This rule is no longer applicable. NASD Rule 2230 has been superseded by FINRA Rule 2232. Please consult the appropriate FINRA Rule.

              A member at or before the completion of each transaction with a customer shall give or send to such customer written notification disclosing (a) whether such member is acting as a broker for such customer, as a dealer for his own account, as a broker for some other person, or as a broker for both such customer and some other person; and (b) in any case in which such member is acting as a broker for such customer or for both such customer and some other person, either the name of the person from whom the security was purchased or to whom it was sold for such customer and the date and time when such transaction took place or the fact that such information will be furnished upon the request of such customer, and the source and amount of any commission or other remuneration received or to be received by such member in connection with the transaction.
              Selected Notices: 89-77, 90-11, 90-63.

            • 2240. Disclosure of Control Relationship with Issuer

              This rule is no longer applicable. NASD Rule 2240 has been superseded by FINRA Rule 2262. Please consult the appropriate FINRA Rule.

              A member controlled by, controlling, or under common control with, the issuer of any security, shall, before entering into any contract with or for a customer for the purchase or sale of such security, disclose to such customer the existence of such control, and if such disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction.

            • 2250. Disclosure of Participation or Interest in Primary or Secondary Distribution

              This rule is no longer applicable. NASD Rule 2250 has been superseded by FINRA Rule 2269. Please consult the appropriate FINRA Rule.

              A member who is acting as a broker for a customer or for both such customer and some other person, or a member who is acting as a dealer and who receives or has promise of receiving a fee from a customer for advising such customer with respect to securities, shall, at or before the completion of any transaction for or with such customer in any security in the primary or secondary distribution of which such member is participating or is otherwise financially interested, give such customer written notification of the existence of such participation or interest.

            • 2260. Forwarding of Proxy and Other Materials

              This rule is no longer applicable. NASD Rule 2260 has been superseded by FINRA Rule 2251. Please consult the appropriate FINRA Rule.

              (a) A member has an inherent duty to forward promptly certain information regarding a security to the beneficial owner (or the beneficial owner's designated investment adviser) if the member carries the account in which the security is held for the beneficial owner and the security is registered in a name other than the name of the beneficial owner.
              (1) Equity Securities
              For an equity security, the member must forward:
              (A) all proxy material that is properly furnished to the member by the issuer of the securities or a stockholder of such issuer; and
              (B) all annual reports, information statements and other material sent to stockholders that are properly furnished to the member by the issuer of the securities.
              (2) Debt Securities
              For a debt security other than a municipal security, the member must make reasonable efforts to forward any communication, document, or collection of documents pertaining to the issue that: (A) was prepared by or on behalf of, the issuer, or was prepared by or on behalf of, the trustee of the specific issue of the security; and (B) contains material information about such issue including, but not limited to, notices concerning monetary or technical defaults, financial reports, information statements, and material event notices.
              (b) No member shall give a proxy to vote stock that is registered in its name, except as required or permitted under the provisions of paragraphs (c) or (d) hereof, unless such member is the beneficial owner of such stock.
              (c)(1) Whenever an issuer or stockholder of such issuer soliciting proxies shall timely furnish to a member:
              (A) sufficient copies of all soliciting material that such person is sending to registered holders, and
              (B) satisfactory assurance that he or she will reimburse such member for all out-of-pocket expenses, including reasonable clerical expenses incurred by such member in connection with such solicitation,
              such member shall transmit promptly to each beneficial owner of stock of such issuer (or the beneficial owner's designated investment adviser) that is in its possession or control and registered in a name other than the name of the beneficial owner, all such material furnished. Such material shall include a signed proxy indicating the number of shares held for such beneficial owner and bearing a symbol identifying the proxy with proxy records maintained by the member, and a letter informing the beneficial owner (or the beneficial owner's designated investment adviser) of the time limit and necessity for completing the proxy form and forwarding it to the person soliciting proxies prior to the expiration of the time limit in order for the shares to be represented at the meeting. A member shall furnish a copy of the symbols to the person soliciting the proxies and shall also retain a copy thereof pursuant to the provisions of SEC Rule 17a-4.
              (2) Notwithstanding the provisions of subparagraph (1), a member may give a proxy to vote any stock pursuant to the rules of any national securities exchange to which the member is also responsible provided that the records of the member clearly indicate which procedure it is following.
              (3) This paragraph shall not apply to beneficial owners residing outside of the United States of America, although members may voluntarily comply with the provisions hereof in respect to such persons if they so desire.
              (d)(1) A member may give a proxy to vote any stock registered in its name if such member holds such stock as executor, administrator, guardian, trustee, or in a similar representative or fiduciary capacity with authority to vote.
              (2) A member that has in its possession or within its control stock registered in the name of another member and that desires to transmit signed proxies pursuant to the provisions of paragraph (c), shall obtain the requisite number of signed proxies from such holder of record.
              (3) Notwithstanding the foregoing,
              (A) any member designated by a named ERISA* Plan fiduciary as the investment manager of stock held as assets of the ERISA Plan may vote the proxies in accordance with the ERISA Plan fiduciary responsibilities if the ERISA Plan expressly grants discretion to the investment manager to manage, acquire, or dispose of any plan asset and has not expressly reserved the proxy voting right for the named ERISA Plan fiduciary; and
              (B) any designated investment adviser may vote such proxies.
              (e)(1) As required in paragraph (a), a member must forward promptly the material set forth in (a)(1), in connection with an equity security, or must make reasonable efforts to forward promptly the material set forth in (a)(2), in connection with a debt security, provided that the member:
              (A) is furnished with sufficient copies of the material (e.g., annual reports, information statements or other material sent to security holders) by the issuer, stockholder, or trustee;
              (B) is requested by the issuer, stockholder, or trustee to forward the material to security holders; and,
              (C) receives satisfactory assurance that it will be reimbursed by such issuer, stockholder, or trustee for all out-of-pocket expenses, including reasonable clerical expenses.
              (2) This paragraph shall not apply to beneficial owners residing outside of the United States of America although members may voluntarily comply with the provisions hereof in respect to such persons if they so desire.
              (f) For purposes of this Rule, the term "designated investment adviser" is a person registered under the Investment Advisers Act of 1940 or registered as an investment adviser under the laws of a state,1 who exercises investment discretion pursuant to an advisory contract for the beneficial owner and is designated in writing by the beneficial owner to receive proxy and related materials and vote the proxy, and to receive annual reports and other material sent to security holders.
              (1) The written designation must be signed by the beneficial owner; be addressed to the member; and include the name of the designated investment adviser.
              (2) Members that receive such a written designation from a beneficial owner must ensure that the designated investment adviser is registered with the Commission pursuant to the Investment Advisers Act of 1940 or with a state as an investment adviser under the laws of such state,2 and that the investment adviser is exercising investment discretion over the customer's account pursuant to an advisory contract to vote proxies and/or to receive proxy soliciting material, annual reports and other material. Members must keep records substantiating this information.
              (3) Beneficial owners have an unqualified right at any time to rescind designation of the investment adviser to receive materials and to vote proxies. The rescission must be in writing and submitted to the member.
              (g) The Board of Governors for the guidance of members is authorized to establish a suggested rate of reimbursement of members for expenses incurred in connection with transmitting the proxy solicitation to the beneficial owners of the securities pursuant to paragraph (c) hereof or in transmitting information statements or other material to the beneficial owners of securities pursuant to paragraph (e) hereof.

              * For purposes of this Rule, the term "ERISA" is an acronym for the Employee Retirement Income Security Act of 1974.

              1 The term "state" as used herein shall have the meaning given to such term in Section 202(a)(19) of the Investment Advisers Act of 1940, and as such term may be amended from time to time therein.

              2 Members may verify registration of an investment adviser through the use of the Investment Adviser Registration Depository ("IARD") system.

              Amended by SR-NASD-2002-124 eff. June 16 2003.
              Amended by SR-NASD-2002-11 eff. July 9, 2002.
              Amended by SR-NASD-95-06 eff. May 5, 1995.
              Amended eff. Mar. 31, 1974; May 1, 1980; Apr. 29, 1986; May 30, 1986; Aug, 7, 1991.
              Adopted eff. Jan. 2, 1969.

              Selected Notices: 85-26, 86-35, 86-46, 91-57, 92-17, 95-45, 02-33, 03-26.

              • IM-2260. Approved Rates of Reimbursement

                This rule is no longer applicable. NASD IM-2260 has been superseded by FINRA Rule 2251. Please consult the appropriate FINRA Rule.

                (a) The following approved rates of reimbursement for expenses incurred in forwarding proxy material, annual reports, information statements and other material shall be considered reasonable rates of reimbursement. In addition to the charges specified in this schedule, members also are entitled to receive reimbursement for: (1) actual postage costs (including return postage at the lowest available rate); (2) the actual cost of envelopes (provided they are not furnished by the issuer, the trustee, or a person soliciting proxies); and (3) any actual communication expenses (excluding overhead) incurred in receiving voting returns either telephonically or electronically.
                (1) Charges for Initial Proxy and/or Annual Report Mailings
                (A) 40 cents for each set of proxy material, i.e., proxy statement, form of proxy and annual report when mailed as a unit, unless an opposition proxy statement has been furnished to securities holders, with a minimum of $5.00 for all sets mailed;
                (B) 15 cents for each copy, plus postage, for annual reports that are mailed separately from the proxy material pursuant to the instruction of the person soliciting proxies with a minimum of $3.00 for all sets mailed;
                (C) $1.00 for each set of proxy material, i.e., proxy statement, form of proxy and annual report when mailed as a unit, for a meeting for which an opposition proxy statement has been furnished to security holders, with a minimum of $5.00 for all sets mailed;
                (D) NASD has approved, as fair and reasonable, the following supplemental proxy fees for intermediaries that coordinate multiple nominees: $20.00 per nominee plus (i) 10 cents for each set of proxy material, with respect to issuers whose shares are held in fewer than 200,000 nominee accounts, or (ii) 5 cents for each set of proxy material, with respect to issuers whose shares are held in at least 200,000 nominee accounts.
                (2) Charges for Proxy Follow-Up Mailings
                40 cents for each set of follow-up material, plus postage.
                (3) Charge for Providing Beneficial Ownership Information
                Six and one-half cents per name of non-objecting beneficial owner provided to the issuer pursuant to the issuer's request. Where the non-objecting beneficial ownership information is not furnished directly to the issuer by the member, but is furnished through an agent designated by the member, the issuer will be expected to pay the reasonable expenses of the agent in providing such information, in addition to the rate described above. (See SEC Rules 14a-13(b) and 14c-7(b) under the Securities Exchange Act of 1934 and notes thereto.)
                Any member that designates an agent for the purpose of furnishing requesting issuers with beneficial ownership information pursuant to SEC Rule 14b-1(c) and thereafter cancels that designation or appoints a new agent for such purpose should promptly inform interested issuers.
                (4) Charges for Interim Report, Post Meeting Report and Other Material Mailings
                15 cents for each copy, plus postage, for interim reports, post meeting reports, or other material with a minimum of $2.00 for all sets mailed.
                (5) Incentive Fees
                An "incentive fee" (as defined below) for proxy material mailings, including the annual report, and 10 cents for interim report mailings, with respect to each account where the member has eliminated the need to send materials in paper format through the mails (such as by including multiple proxy ballots or forms in one envelope with one set of material mailed to the same household, by distributing multiple proxy ballots or forms electronically thereby reducing the sets of material mailed, or by distributing some or all material electronically) shall be: (i) 25 cents with respect to issuers whose shares are held in at least 200,000 nominee accounts; and (ii) 50 cents with respect to issuers whose shares are held in fewer than 200,000 nominee accounts.
                (b) Members are reminded that Rule 2430 requires that any such charges must be reasonable. Members may request reimbursement of expenses at less than the approved rates; however, no member may seek reimbursement at rates higher than the approved rates or for items or services not specifically listed above without the prior notification to and consent of the person soliciting proxies or the company.
                (c) Rule 2260 requires members to forward promptly issuer-supplied annual reports, interim reports, proxy statements and other material to beneficial owners. Members are not required to transmit more than one annual report, interim report, proxy statement or other material to beneficial owners with more than one account (including trust accounts). In addition, member organizations may eliminate multiple transmissions of reports, statements or other materials to beneficial owners having the same address, provided they comply with applicable SEC rules with respect thereto (see SEC Rule 14b-1 under the Act).
                Amended by SR-NASD-2003-19 eff. Feb. 12, 2003.
                Amended by SR-NASD-2002-11 eff. July 9, 2002.
                Amended by SR-NASD-91-20 eff. Sept. 14, 1991.
                Amended by SR-NASD-86-10 eff. May 30, 1986.
                Amended by SR-NASD-86-09 eff. Apr. 29, 1986.
                Adopted by SR-NASD-85-07 eff. April 1, 1985.

                Selected Notices: 85-26, 86-35, 86-46, 91-57, 02-33.

            • 2270. Disclosure of Financial Condition to Customers

              This rule is no longer applicable. NASD Rule 2270 has been superseded by FINRA Rule 2261. Please consult the appropriate FINRA Rule.

              (a) A member shall make available to inspection by any bona fide regular customer, upon request, the information relative to such member's financial condition as disclosed in its most recent balance sheet prepared either in accordance with such member's usual practice or as required by any state or federal securities laws, or any rule or regulation thereunder.

              (b) As used in paragraph (a) of this Rule, the term "customer" means any person who, in the regular course of such member's business, has cash or securities in the possession of such member.

            • 2280. Investor Education and Protection

              This rule is no longer applicable. NASD Rule 2280 has been superseded by FINRA Rule 2267. Please consult the appropriate FINRA Rule.

              (a) Each member shall, with a frequency of not less than once every calendar year, provide in writing to each customer the following items of information:

              (1) NASD Regulation Public Disclosure Program Hotline Number;

              (2) NASD Regulation Web Site Address; and

              (3) A statement as to the availability to the customer of an investor brochure that includes information describing the Public Disclosure Program.

              (b) Notwithstanding the requirement in paragraph (a) above, any member that does not carry customer accounts and does not hold customer funds or securities is exempt from the provisions of this Rule.

              Amended by SR-NASD-97-75 eff. Oct. 14, 1997.
              Adopted by SR-NASD-97-10 eff. Sept. 10, 1997.

            • 2290. Fairness Opinions

              This rule is no longer applicable. NASD Rule 2290 has been superseded by FINRA Rule 5150. Please consult the appropriate FINRA Rule.

              (a) Disclosures
              If at the time a fairness opinion is issued to the board of directors of a company the member issuing the fairness opinion knows or has reason to know that the fairness opinion will be provided or described to the company's public shareholders, the member must disclose in the fairness opinion:
              (1) if the member has acted as a financial advisor to any party to the transaction that is the subject of the fairness opinion, and, if applicable, that it will receive compensation that is contingent upon the successful completion of the transaction, for rendering the fairness opinion and/or serving as an advisor;
              (2) if the member will receive any other significant payment or compensation contingent upon the successful completion of the transaction;
              (3) any material relationships that existed during the past two years or that are mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between the member and any party to the transaction that is the subject of the fairness opinion;
              (4) if any information that formed a substantial basis for the fairness opinion that was supplied to the member by the company requesting the opinion concerning the companies that are parties to the transaction has been independently verified by the member, and if so, a description of the information or categories of information that were verified;
              (5) whether or not the fairness opinion was approved or issued by a fairness committee; and
              (6) whether or not the fairness opinion expresses an opinion about the fairness of the amount or nature of the compensation to any of the company's officers, directors or employees, or class of such persons, relative to the compensation to the public shareholders of the company.
              (b) Procedures
              Any member issuing a fairness opinion must have written procedures for approval of a fairness opinion by the member, including:
              (1) the types of transactions and the circumstances in which the member will use a fairness committee to approve or issue a fairness opinion, and in those transactions in which it uses a fairness committee:
              (A) the process for selecting personnel to be on the fairness committee;
              (B) the necessary qualifications of persons serving on the fairness committee;
              (C) the process to promote a balanced review by the fairness committee, which shall include the review and approval by persons who do not serve on the deal team to the transaction; and
              (2) the process to determine whether the valuation analyses used in the fairness opinion are appropriate.
              Adopted by SR-NASD-2005-080 eff. Dec. 8, 2007.

              Selected Notice: 07-54.

          • 2310. Recommendations to Customers (Suitability)

            This rule is no longer applicable. NASD Rule 2310 has been superseded by FINRA Rule 2111. Please consult the appropriate FINRA Rule.

            (a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.
            (b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:
            (1) the customer's financial status;
            (2) the customer's tax status;
            (3) the customer's investment objectives; and
            (4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.
            (c) For purposes of this Rule, the term "non-institutional customer" shall mean a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).
            Amended by SR-NASD-95-39 eff. Aug. 20, 1996.
            Amended by SR-NASD-90-09 and SR-NASD-90-39 May 2, 1990 eff. for accounts opened and recommendations made after Jan. 1, 1991.

            Selected Notices: 90-12, 90-52, 96-60, 96-86, 01-23, 05-59.

            • IM-2310-1. Possible Application of SEC Rules 15g-1 through 15g-9

              This rule is no longer applicable. NASD IM-2310-1 has been superseded by FINRA Rule 2111. Please consult the appropriate FINRA Rule.

              Members should be aware that any transaction that involves a non-exchange-listed equity security trading for less than five dollars per share may be subject to the provisions of SEC Rules 15g-1 through 15g-9, and those Rules should be reviewed to determine if an executed customer suitability agreement is required.
              Accounts opened, and recommendations made, prior to January 1, 1991 remain subject to former Article III, Sections 2 and 21(c) of the Rules of Fair Practice as previously in effect, as set forth in Notice to Members 90-52 (August 1990).
              Amended by SR-NASD-2005-087 eff. Aug. 1, 2006

            • IM-2310-2. Fair Dealing with Customers

              This rule is no longer applicable. NASD IM-2310-2 has been superseded by FINRA Rule 2111. Please consult the appropriate FINRA Rule.

              (a)(1) Implicit in all member and registered representative relationships with customers and others is the fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken only on a basis that can be judged as being within the ethical standards of the Association's Rules, with particular emphasis on the requirement to deal fairly with the public.
              (2) This does not mean that legitimate sales efforts in the securities business are to be discouraged by requirements which do not take into account the variety of circumstances which can enter into the member-customer relationship. It does mean, however, that sales efforts must be judged on the basis of whether they can be reasonably said to represent fair treatment for the persons to whom the sales efforts are directed, rather than on the argument that they result in profits to customers.
              (b) District Business Conduct Committees and the Board of Governors have interpreted the Rules, taken disciplinary action and imposed penalties in many situations where members' sales efforts have exceeded the reasonable grounds of fair dealing. Some practices that have resulted in disciplinary action and that clearly violate this responsibility for fair dealing are set forth below, as a guide to members:
              (1) Recommending Speculative Low-Priced Securities
              Recommending speculative low-priced securities to customers without knowledge of or attempt to obtain information concerning the customers' other securities holdings, their financial situation and other necessary data. The principle here is that this practice, by its very nature, involves a high probability that the recommendation will not be suitable for at least some of the persons solicited. This has particular application to high pressure telephone sales campaigns.
              (2) Excessive Trading Activity
              Excessive activity in a customer's account, often referred to as "churning" or "overtrading." There are no specific standards to measure excessiveness of activity in customer accounts because this must be related to the objectives and financial situation of the customer involved.
              (3) Trading in Mutual Fund Shares
              Trading in mutual fund shares, particularly on a short-term basis. It is clear that normally these securities are not proper trading vehicles and such activity on its face may raise the question of Rule violation.
              (4) Fraudulent Activity
              (A) Numerous instances of fraudulent conduct have been acted upon by the Association and have resulted in penalties against members. Among some of these activities are:
              (i) Fictitious Accounts
              Establishment of fictitious accounts in order to execute transactions which otherwise would be prohibited, such as the purchase of hot issues, or to disguise transactions which are against firm policy.
              (ii) Discretionary Accounts
              Transactions in discretionary accounts in excess of or without actual authority from customers.
              (iii) Unauthorized Transactions
              Causing the execution of transactions which are unauthorized by customers or the sending of confirmations in order to cause customers to accept transactions not actually agreed upon.
              (iv) Misuse of Customers' Funds or Securities
              Unauthorized use or borrowing of customers' funds or securities.
              (B) In addition, other fraudulent activities, such as forgery, non-disclosure or misstatement of material facts, manipulations and various deceptions, have been found in violation of Association Rules. These same activities are also subject to the civil and criminal laws and sanctions of federal and state governments.
              (5) Recommending Purchases Beyond Customer Capability
              Recommending the purchase of securities or the continuing purchase of securities in amounts which are inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment.
              (c) While most members are fully aware of the fairness required in dealing with customers, it is anticipated that the practices enumerated in paragraph (b), which are not all inclusive, will be of future assistance in the training and education of new personnel.
              (d) The Commission has also recognized that brokers and dealers have an obligation of fair dealing in actions under the general anti-fraud provisions of the federal securities laws. The Commission bases this obligation on the principle that when a securities dealer opens his business he is, in effect, representing that he will deal fairly with the public. Certain of the Commission's cases on fair dealing involve practices not covered in the foregoing illustrations. Usually, any breach of the obligation of fair dealing as determined by the Commission under the anti-fraud provisions of the securities laws could be considered a violation of the Association's Rules.
              (e) Fair Dealing with Customers with Regard to Derivative Products or New Financial Products
              The Board emphasizes members' obligations for fair dealing with customers when making recommendations or accepting orders for new financial products. As new products are introduced from time to time, it is important that members make every effort to familiarize themselves with each customer's financial situation, trading experience, and ability to meet the risks involved with such products and to make every effort to make customers aware of the pertinent information regarding the products. Members must follow specific guidelines, set forth below, for qualifying the accounts to trade the products and for supervising the accounts thereafter.
              (1) Security Futures
              Members must comply with the Rules, regulations and procedures applicable to security futures contained in Rule 2865.
              (2) Index Warrants
              Members are obliged to comply with the Rules, regulations and procedures applicable to index warrants and foreign currency warrants contained in the Rule 2840 Series.
              (3) Hybrid Securities and Selected Equity-Linked Debt Securities ("SEEDS") Listed on Nasdaq as Global Market Securities
              With respect to Hybrid Securities and Selected Equity-Linked Debt Securities ("SEEDS") that have been listed as Nasdaq Global Market Securities, members are obligated to comply with any Rules, regulations, or procedures applicable to such securities.
              Amended by SR-NASD-2006-087 eff. Aug. 1, 2006.
              Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
              Amended by SR-NASD-2002-40 eff. Oct. 15, 2002.
              Amended by SR-NASD-95-37 eff. Sept. 28, 1995.
              Amended by SR-NASD-94-49 eff. Sept. 30, 1994.
              Amended by SR-NASD-91-48 eff. June 11, 1992.

              Selected Notices: 90-52, 94-62, 95-21, 96-32, 96-60.

            • IM-2310-3. Suitability Obligations to Institutional Customers

              This rule is no longer applicable. NASD IM-2310-3 has been superseded by FINRA Rule 2111. Please consult the appropriate FINRA Rule.

              Preliminary Statement as to Members' Obligations
              As a result of broadened authority provided by amendments to the Government Securities Act adopted in 1993, the Association is extending its sales practice rules to the government securities market, a market with a particularly broad institutional component. Accordingly, the Association believes it is appropriate to provide further guidance to members on their suitability obligations when making recommendations to institutional customers. The Association believes this interpretation is applicable not only to government securities but to all debt securities, excluding municipals.1 Furthermore, because of the nature and characteristics of the institutional customer/member relationship, the Association is extending this interpretation to apply equally to the equity securities markets as well.
              The Association's suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct. Members' responsibilities include having a reasonable basis for recommending a particular security or strategy, as well as having reasonable grounds for believing the recommendation is suitable for the customer to whom it is made. Members are expected to meet the same high standards of competence, professionalism, and good faith regardless of the financial circumstances of the customer.
              Rule 2310(a) requires that, In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.
              This interpretation concerns only the manner in which a member determines that a recommendation is suitable for a particular institutional customer. The manner in which a member fulfills this suitability obligation will vary depending on the nature of the customer and the specific transaction. Accordingly, this interpretation deals only with guidance regarding how a member may fulfill such "customer-specific suitability obligations" under Rule 2310(a).2
              While it is difficult to define in advance the scope of a member's suitability obligation with respect to a specific institutional customer transaction recommended by a member, the Board has identified certain factors which may be relevant when considering compliance with Rule 2310(a). These factors are not intended to be requirements or the only factors to be considered but are offered merely as guidance in determining the scope of a member's suitability obligations.
              Considerations Regarding the Scope of Members' Obligations to Institutional Customers
              The two most important considerations in determining the scope of a member's suitability obligations in making recommendations to an institutional customer are the customer's capability to evaluate investment risk independently and the extent to which the customer is exercising independent judgment in evaluating a member's recommendation. A member must determine, based on the information available to it, the customer's capability to evaluate investment risk. In some cases, the member may conclude that the customer is not capable of making independent investment decisions in general. In other cases, the institutional customer may have general capability, but may not be able to understand a particular type of instrument or its risk. This is more likely to arise with relatively new types of instruments, or those with significantly different risk or volatility characteristics than other investments generally made by the institution. If a customer is either generally not capable of evaluating investment risk or lacks sufficient capability to evaluate the particular product, the scope of a member's customer-specific obligations under the suitability rule would not be diminished by the fact that the member was dealing with an institutional customer. On the other hand, the fact that a customer initially needed help understanding a potential investment need not necessarily imply that the customer did not ultimately develop an understanding and make an independent investment decision.
              A member may conclude that a customer is exercising independent judgment if the customer's investment decision will be based on its own independent assessment of the opportunities and risks presented by a potential investment, market factors and other investment considerations. Where the broker-dealer has reasonable grounds for concluding that the institutional customer is making independent investment decisions and is capable of independently evaluating investment risk, then a member's obligation to determine that a recommendation is suitable for a particular customer is fulfilled.3 Where a customer has delegated decision-making authority to an agent, such as an investment advisor or a bank trust department, this interpretation shall be applied to the agent.
              A determination of capability to evaluate investment risk independently will depend on an examination of the customer's capability to make its own investment decisions, including the resources available to the customer to make informed decisions. Relevant considerations could include:
              •   the use of one or more consultants, investment advisers or bank trust departments;
              •   the general level of experience of the institutional customer in financial markets and specific experience with the type of instruments under consideration;
              •   the customer's ability to understand the economic features of the security involved;
              •   the customer's ability to independently evaluate how market developments would affect the security; and
              •   the complexity of the security or securities involved.
              A determination that a customer is making independent investment decisions will depend on the nature of the relationship that exists between the member and the customer. Relevant considerations could include:
              •   any written or oral understanding that exists between the member and the customer regarding the nature of the relationship between the member and the customer and the services to be rendered by the member;
              •   the presence or absence of a pattern of acceptance of the member's recommendations;
              •   the use by the customer of ideas, suggestions, market views and information obtained from other members or market professionals, particularly those relating to the same type of securities; and
              •   the extent to which the member has received from the customer current comprehensive portfolio information in connection with discussing recommended transactions or has not been provided important information regarding its portfolio or investment objectives.
              Members are reminded that these factors are merely guidelines which will be utilized to determine whether a member has fulfilled its suitability obligations with respect to a specific institutional customer transaction and that the inclusion or absence of any of these factors is not dispositive of the determination of suitability. Such a determination can only be made on a case-by-case basis taking into consideration all the facts and circumstances of a particular member/customer relationship, assessed in the context of a particular transaction.
              For purposes of this interpretation, an institutional customer shall be any entity other than a natural person. In determining the applicability of this interpretation to an institutional customer, the Association will consider the dollar value of the securities that the institutional customer has in its portfolio and/or under management. While this interpretation is potentially applicable to any institutional customer, the guidance contained herein is more appropriately applied to an institutional customer with at least $10 million invested in securities in the aggregate in its portfolio and/or under management.

              1 Rules for municipal securities are promulgated by the Municipal Securities Rulemaking Board.

              2 This interpretation does not address the obligation related to suitability that requires that a member have "... a 'reasonable basis' to believe that the recommendation could be suitable for at least some customers." In the Matter of the Application of F.J. Kaufman and Company of Virginia and Fredrick J. Kaufman, Jr. 50 SEC 164 (1989).

              3 See note 2.

              Adopted by SR-NASD-95-39 eff. Aug. 20, 1996.

              Selected Notices: 94-62, 95-21.

          • 2315. Recommendations to Customers in OTC Equity Securities

            This rule is no longer applicable. NASD Rule 2315 has been superseded by FINRA Rule 2114. Please consult the appropriate FINRA Rule.

            Preliminary Note: The requirements of this Rule are in addition to other existing member obligations under NASD rules and the federal securities laws, including obligations to determine suitability of particular securities transactions with customers and to have a reasonable basis for any recommendation made to a customer. This Rule is not intended to act or operate as a presumption or as a safe harbor for purposes of determining suitability or for any other legal obligation or requirement imposed under NASD rules or the federal securities laws.
            (a) Review Requirement
            No member or person associated with a member shall recommend that a customer purchase or sell short any equity security that is published or quoted in a quotation medium and that either (1) is not listed on Nasdaq or on a national securities exchange or (2) is listed on a regional securities exchange and does not qualify for dissemination of transaction reports via the Consolidated Tape, unless the member has reviewed the current financial statements of the issuer, current material business information about the issuer, and made a determination that such information, and any other information available, provides a reasonable basis under the circumstances for making the recommendation.
            (b) Definitions
            (1) For purposes of this Rule, the term "current financial statements" shall include:
            (A) For issuers that are not foreign private issuers,
            (i) a balance sheet as of a date less than 15 months before the date of the recommendation;
            (ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
            (iii) if the balance sheet is not as of a date less than 6 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 6 months before the date of the recommendation;
            (iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer's principal financial or securities regulatory authority in its home jurisdiction, including the Commission, foreign regulatory authorities, bank and insurance regulators; and
            (v) all publicly available financial information filed with the Commission during the 12 months preceding the date of the recommendation contained in registration statements or Regulation A filings.
            (B) For foreign private issuers,
            (i) a balance sheet as of a date less than 18 months before the date of the recommendation;
            (ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
            (iii) if the balance sheet is not as of a date less than 9 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 9 months before the date of the recommendation, if any such statements have been prepared by the issuer; and
            (iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer's principal financial or securities regulatory authority in its home jurisdiction, including the Commission, foreign regulatory authorities, bank and insurance regulators.
            (2) For purposes of this Rule, the term "quotation medium" shall mean any:
            (A) System of general circulation to brokers or dealers that regularly disseminates quotations or indications of interest of identified brokers or dealers; or
            (B) Publication, alternative trading system or other device that is used by brokers or dealers to disseminate quotations or indications of interest to others.
            (c) Compliance Requirements
            (1) A member shall designate a registered person to conduct the review required by this Rule. In making such designation, the member must ensure that:
            (A) Either the person is registered as a Series 24 principal, or the person's conduct in complying with the provisions of this Rule is appropriately supervised by a Series 24 principal; and
            (B) Such designated person has the requisite skills, background and knowledge to conduct the review required under this Rule.
            (2) The member shall document the information reviewed, the date of the review, and the name of the person performing the review of the required information.
            (d) Additional Review Requirement for Delinquent Filers
            If an issuer has not made current filings required by the issuer's principal financial or securities regulatory authority in its home jurisdiction, including the Commission, foreign regulatory authorities, or bank and insurance regulators, such review must include an inquiry into the circumstances concerning the failure to make current filings, and a determination, based on all the facts and circumstances, that the recommendation is appropriate under the circumstances. Such a determination must be made in writing and maintained by the member.
            (e) Exemptions
            (1) The requirements of this Rule shall not apply to:
            (A) Transactions that meet the requirements of Rule 504 of Regulation D under the Securities Act of 1933 ("Securities Act") and transactions with an issuer not involving any public offering pursuant to Section 4(2) of the Securities Act;
            (B) Transactions with or for an account that qualifies as an "institutional account" under Rule 3110(c)(4) or with a customer that is a "qualified institutional buyer" under Rule 144A promulgated under the Securities Act or "qualified purchaser" under Section 2(a)(51) of the Investment Company Act of 1940;
            (C) Transactions in an issuer's securities if the issuer has at least $50 million in total assets and $10 million in shareholder's equity as stated in the issuer's most recent audited current financial statements, as defined in this Rule;
            (D) Transactions in securities of a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934 and/or insurance company subject to regulation by a state or federal bank or insurance regulatory authority;
            (E) A security with a worldwide average daily trading volume value of at least $100,000 during each month of the six full calendar months immediately before the date of the recommendation;
            (F) A convertible security, if the underlying security meets the requirement of Section (e)(1)(E) of this Rule;
            (G) A security that has a bid price, as published in a quotation medium, of at least $50 per share. If the security is a unit composed of one or more securities, the bid price of the unit divided by the number of shares of the unit that are not warrants, options, rights, or similar securities must be at least $50; or
            (2) Pursuant to the Rule 9600 Series, NASD, for good cause shown after taking into consideration all relevant factors, may exempt any person, security or transaction, or any class or classes of persons, securities or transactions, either unconditionally or on specified terms, from any or all of the requirements of this Rule if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.
            Adopted by SR-NASD-99-04 eff. Oct. 30, 2002.

            Selected Notice: 02-66.

          • 2320. Best Execution and Interpositioning

            This rule is no longer applicable. NASD Rule 2320 has been superseded by FINRA Rule 5310. Please consult the appropriate FINRA Rule.

            (a)(1) In any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Among the factors that will be considered in determining whether a member has used "reasonable diligence" are:
            (A) the character of the market for the security, e.g., price, volatility, relative liquidity, and pressure on available communications;
            (B) the size and type of transaction;
            (C) the number of markets checked;
            (D) accessibility of the quotation; and
            (E) the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.
            (2) In any transaction for or with a customer or a customer of another broker-dealer, no member or person associated with a member shall interject a third party between the member and the best market for the subject security in a manner inconsistent with paragraph (a)(1) of this Rule.
            (b) When a member cannot execute directly with a market maker but must employ a broker's broker or some other means in order to insure an execution advantageous to the customer, the burden of showing the acceptable circumstances for doing so is on the retail firm. Examples of acceptable circumstances are where a customer's order is "crossed" with another retail firm which has a corresponding order on the other side, or where the identity of the retail firm, if known, would likely cause undue price movements adversely affecting the cost or proceeds to the customer.
            (c) Failure to maintain or adequately staff an over-the-counter order room or other department assigned to execute customers' orders cannot be considered justification for executing away from the best available market; nor can channeling orders through a third party as described above as reciprocation for service or business operate to relieve a member of his obligations. However, the channeling of customers' orders through a broker's broker or third party pursuant to established correspondent relationships under which executions are confirmed directly to the member acting as agent for the customer, such as where the third party gives up the name of the retail firm, are not prohibited if the cost of such service is not borne by the customer.
            (d) A member through whom a retail order is channeled, as described above, and who knowingly is a party to an arrangement whereby the initiating member has not fulfilled his obligations under this Rule, will also be deemed to have violated this Rule.
            (e) The obligations described in paragraphs (a) through (d) above exist not only where the member acts as agent for the account of his customer but also where retail transactions are executed as principal and contemporaneously offset. Such obligations do not relate to the reasonableness of commission rates, markups or markdowns which are governed by Rule 2440 and IM-2440.
            (f)(1) Except as provided in subparagraph (3) below, in any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security, a member or person associated with a member shall contact and obtain quotations from three dealers (or all dealers if three or less) to determine the best inter-dealer market for the subject security.
            (2) Members that display priced quotations on a real-time basis for a non-exchange-listed security in two or more quotation mediums that permit quotation updates on a real-time basis must display the same priced quotations for the security in each medium, except with respect to a priced quotation that represents a customer limit order displayed on an electronic communications network in conformance with the exception to FINRA Rule 6460 provided in paragraph (b)(5) of that rule.
            (3) The requirements described in subparagraph (1) above shall not apply:
            (A) when two or more priced quotations for a non-exchange-listed security are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis; or
            (B) to any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security of a foreign issuer that is part of the FTSE All-World Index if such transaction is executed during the regular business hours of the foreign market for the foreign security and no trading halt or other similar trading or quoting restriction is in effect in any foreign market on which such foreign security is listed; or
            (C) to any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security that is listed on a Canadian exchange, provided that (i) such order is executed by the member or a person associated with the member on a Canadian exchange in an agency or riskless principal capacity; and (ii) the member or a person associated with the member conducts, pursuant to NASD Rule 2320(a) and the duty of best execution, regular and rigorous reviews of the quality of the execution of such orders in such securities.
            (4) Definitions
            For purposes of this paragraph (f):
            (A) The term "inter-dealer quotation system" means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers.
            (B) The term "quotation medium" means any inter-dealer quotation system or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
            (C) "Non-exchange-listed security" means any equity security that is not traded on any national securities exchange. The term "non-exchange-listed security" shall not include "restricted securities," as defined by Securities Act Rule 144(a)(3).
            (5) Pursuant to the Rule 9600 Series, the staff, for good cause shown, after taking into consideration all relevant factors, may exempt any transaction or classes of transactions, either unconditionally or on specified terms, from any or all of the provisions of this paragraph if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.
            Amended by SR-FINRA-2009-054 eff. May 9, 2011.
            Amended by SR-FINRA-2010-003 eff. June 28, 2010.
            Amended by SR-FINRA-2009-078 eff. Dec. 14, 2009.
            Amended by SR-FINRA-2007-024 eff. Sep. 8, 2009.
            Amended by SR-NASD-2004-130 eff. Sep. 28, 2007.
            Amended by SR-NASD-2004-026 eff. Nov. 8, 2006.
            Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
            Amended by SR-NASD-2000-20 eff. Nov. 24, 2000.
            Amended by SR-NASD-98-57 eff. March 26, 1999.
            Amended by SR-NASD-97-42 eff. Oct. 22, 1997.
            Amended by SR-NASD-87-55 eff. May 2, 1988.
            Interpretation adopted eff. May 1, 1968.

            Selected Notices: 97-88, 99-16, 00-78, 06-58, 07-40, 09-58, 10-26, 10-42.

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

              This rule is no longer applicable. NASD Rule 2320 has been superseded by FINRA Rule 5310. Please consult the appropriate FINRA Rule.

              Rule 2320(a) requires, among other things, that a member or person associated with a member comply with Rule 2320(a) when customer orders are routed to it from another broker/dealer for execution. This Interpretive Material addresses certain interpretive questions concerning the applicability of the best execution rule.
              The term “market” has been in the text of Rule 2320 since its adoption, but it is an undefined term. For the purposes of Rule 2320, the term “market” or “markets” is to be construed broadly, and it encompasses a variety of different venues, including, but not limited to, market centers that are trading a particular security. This expansive interpretation is meant to both inform broker/dealers as to the breadth of the scope of venues that must be considered in the furtherance of their best execution obligations and to promote fair competition among broker/dealers, exchange markets, and markets other than exchange markets, as well as any other venue that may emerge, by not mandating that certain trading venues have less relevance than others in the course of determining a firm's best execution obligations.
              Rule 2320(a)(1)(D) provides that one of the factors used to determine if a member has used reasonable diligence in exercising best execution is the “location and accessibility to the customer's broker/dealer of primary markets and quotations sources.” In the context of the debt market, this means that, when quotations are available, NASD will consider the ''accessibility of such quotations'' when examining whether a member has used reasonable diligence. For purposes of debt securities, the term “quotation” refers to either dollar (or other currency) pricing or yield pricing. NASD notes, however, that accessibility is only one of the non-exhaustive reasonable diligence factors set out in Rule 2320. In the absence of accessibility, members are not relieved from taking reasonable steps and employing their market expertise in achieving the best execution of customer orders.
              Lastly, NASD is clarifying that a member's duty to provide best execution in any transaction “for or with a customer of another broker/dealer” does not apply in instances when another broker/dealer is simply executing a customer order against the member's quote. Stated in another manner, the duty to provide best execution to customer orders received from other broker/dealers arises only when an order is routed from the broker/dealer to the member for the purpose of order handling and execution. This clarification is intended to draw a distinction between those situations in which the member is acting solely as the buyer or seller in connection with orders presented by a broker/dealer against the member's quote, as opposed to those circumstances in which the member is accepting order flow from another broker/dealer for the purpose of facilitating the handling and execution of such orders.

              Amended by SR-FINRA-2007-024 eff. Sep. 8, 2009.
              Adopted by SR-NASD-2004-026 eff. Nov. 8, 2006.

              Selected Notice: 06-58.

          • 2330. Customers' Securities or Funds

            This rule is no longer applicable. NASD Rule 2330 has been superseded by FINRA Rules 2150 and 4330. Please consult the appropriate FINRA Rules.

            (a) Improper Use
            No member or person associated with a member shall make improper use of a customer's securities or funds.
            (b) General Provisions
            Every member in the conduct of its business shall adhere to the provisions of SEC Rule 15c3-3 under the Act with respect to obtaining possession and control of securities, and the maintenance of appropriate cash reserves. For the purposes of this Rule, the definitions contained in Rule 15c3-3 shall apply.
            (c) Authorization to Lend
            No member shall lend, either to himself or to others, securities carried for the account of any customer, which are eligible to be pledged or loaned unless such member shall first have obtained from the customer a written authorization permitting the lending of securities thus carried by such member.
            (d) Segregation and Identification of Securities
            No member shall hold securities carried for the account of any customer which have been fully paid for or which are excess margin securities unless such securities are segregated and identified by a method which clearly indicates the interest of such customer in those securities.
            Cross Reference–
            "Hypothecation of Customers' Securities" — See SEC Rules and Regulation T Tab
            (e) Prohibition Against Guarantees
            No member or person associated with a member shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.
            (f) Sharing in Accounts; Extent Permissible
            (1)(A) Except as provided in paragraph (f)(2) no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if (i) such person associated with a member obtains prior written authorization from the member employing the associated person; (ii) such member or person associated with a member obtains prior written authorization from the customer; and (iii) such member or person associated with a member shares in the profits or losses in any account of such customer only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
            (B) Exempt from the direct proportionate share limitation of paragraph (f)(1)(A)(iii) are accounts of the immediate family of such member or person associated with a member. For purposes of this Rule, the term "immediate family" shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly.
            (2) Notwithstanding the prohibition of paragraph (f)(1), a member or person associated with a member that is acting as an investment adviser (whether or not registered as such) may receive compensation based on a share in profits or gains in an account if (i) such person associated with a member seeking such compensation obtains prior written authorization from the member employing the associated person; (ii) such member or person associated with a member seeking such compensation obtains prior written authorization from the customer; and (iii) all of the conditions in Rule 205-3 of the Investment Advisers Act of 1940 (as the same may be amended from time to time) are satisfied.
            Amended by SR-FINRA-2009-014 eff. Dec. 14, 2009.
            Amended by SR-NASD-84-33 eff. Feb. 7, 1985.

            Selected Notices: 83-74, 09-60.

            • IM-2330. Segregation of Customers' Securities

              This rule is no longer applicable.

              (a) Improper Use
              No member or person associated with a member shall make improper use of a customer's securities or funds.
              (b) General Provisions
              Every member in the conduct of its business shall adhere to the provisions of SEC Rule 15c3-3 under the Act with respect to obtaining possession and control of securities, and the maintenance of appropriate cash reserves. For the purposes of this Rule, the definitions contained in Rule 15c3-3 shall apply.
              (c) Authorization to Lend
              No member shall lend, either to himself or to others, securities carried for the account of any customer, which are eligible to be pledged or loaned unless such member shall first have obtained from the customer a written authorization permitting the lending of securities thus carried by such member.
              (d) Segregation and Identification of Securities
              No member shall hold securities carried for the account of any customer which have been fully paid for or which are excess margin securities unless such securities are segregated and identified by a method which clearly indicates the interest of such customer in those securities.
              Cross Reference–
              "Hypothecation of Customers' Securities" — See SEC Rules and Regulation T Tab
              (e) Prohibition Against Guarantees
              No member or person associated with a member shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.
              (f) Sharing in Accounts; Extent Permissible
              (1)(A) Except as provided in paragraph (f)(2) no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if (i) such person associated with a member obtains prior written authorization from the member employing the associated person; (ii) such member or person associated with a member obtains prior written authorization from the customer; and (iii) such member or person associated with a member shares in the profits or losses in any account of such customer only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
              (B) Exempt from the direct proportionate share limitation of paragraph (f)(1)(A)(iii) are accounts of the immediate family of such member or person associated with a member. For purposes of this Rule, the term "immediate family" shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly.
              (2) Notwithstanding the prohibition of paragraph (f)(1), a member or person associated with a member that is acting as an investment adviser (whether or not registered as such) may receive compensation based on a share in profits or gains in an account if (i) such person associated with a member seeking such compensation obtains prior written authorization from the member employing the associated person; (ii) such member or person associated with a member seeking such compensation obtains prior written authorization from the customer; and (iii) all of the conditions in Rule 205-3 of the Investment Advisers Act of 1940 (as the same may be amended from time to time) are satisfied.
              Amended by SR-FINRA-2009-014 eff. Dec. 14, 2009.
              Amended by SR-NASD-84-33 eff. Feb. 7, 1985.

              Selected Notices: 83-74, 09-60.
              (a) Rule 2330(d) requires members to segregate and identify by customers both fully paid and "excess margin" securities. With regard to a customer's account which contains only stocks, it is general practice for firms to segregate that portion of the stocks having a market value in excess of 140% of the debit balance therein. When a customer's account contains bonds, the basis upon which the member is borrowing or can borrow on such bonds should be taken into consideration in determining the amount of securities to be segregated.
              (b) Following are three general types of segregation of customers' securities currently in use by many firms:
              (1) Physical segregation of securities by issue, with a separate list showing ownership of the securities by each customer. The listing, on cards or other records, should reflect all changes in ownership interest. This method is for securities in street name (not in individual customers' names), but the proportionate interests of the individual customers are indicated by the records.
              (2) Physical segregation of securities by issue, affixing to each certificate a tab or other identification showing the name of the beneficial owner of the certificate. This may be used for shares in street name or in the customer's name.
              (3) Specific segregation of all certificates of each customer in separate envelopes or folders, identified by customer, or by clipping the certificates together and identifying the customer by tab or other notation affixed to the segregated certificates.
              (c) In the methods enumerated in paragraph (b), the records should note the dates when the securities are segregated. When such securities are not in the actual custody of the member, for instance, when they are in the physical possession of a correspondent firm, their location and the means by which they may be identified as belonging to each customer should be indicated on the books of the member carrying the customers' accounts.

          • 2341. Margin Disclosure Statement

            This rule is no longer applicable. NASD Rule 2341 has been superseded by FINRA Rule 2264. Please consult the appropriate FINRA Rule.

            (a) No member shall open a margin account, as specified in Regulation T of the Board of Governors of the Federal Reserve System, for or on behalf of a non-institutional customer, unless, prior to or at the time of opening the account, the member has furnished to the customer, individually, in writing or electronically, and in a separate document, the margin disclosure statement specified in this paragraph (a). In addition, any member that permits non-institutional customers either to open accounts on-line or to engage in transactions in securities on-line must post such margin disclosure statement on the member's Web site in a clear and conspicuous manner.
            Margin Disclosure Statement
            Your brokerage firm is furnishing this document to you to provide some basic facts about purchasing securities on margin, and to alert you to the risks involved with trading securities in a margin account. Before trading stocks in a margin account, you should carefully review the margin agreement provided by your firm. Consult your firm regarding any questions or concerns you may have with your margin accounts.
            When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from your brokerage firm. If you choose to borrow funds from your firm, you will open a margin account with the firm. The securities purchased are the firm's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the firm can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held with the member, in order to maintain the required equity in the account.
            It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:
            •   You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities or assets in your account(s).
            •   The firm can force the sale of securities or other assets in your account(s). If the equity in your account falls below the maintenance margin requirements, or the firm's higher "house" requirements, the firm can sell the securities or other assets in any of your account held at the firm to cover the margin deficiency. You also will be responsible for any short fall in the account after such a sale.
            •   The firm can sell your securities or other assets without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate securities or other assets in their accounts to meet the call unless the firm has contacted them first. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. However, even if a firm has contacted a customer and provided a specific date by which the customer can meet a margin call, the firm can still take necessary steps to protect its financial interests, including immediately selling the securities without notice to the customer.
            •   You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, the firm has the right to decide which security to sell in order to protect its interests.
            •   The firm can increase its "house" maintenance margin requirements at any time and is not required to provide you advance written notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the member to liquidate or sell securities in your account(s).
            •   You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension.
            (b) Members shall, with a frequency of not less than once a calendar year, deliver individually, in writing or electronically, the disclosure statement described in paragraph (a) or the following bolded disclosures to all non-institutional customers with margin accounts:
            Securities purchased on margin are the firm's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the firm can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held with the member, in order to maintain the required equity in the account. It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:
            •   You can lose more funds than you deposit in the margin account.
            •   The firm can force the sale of securities or other assets in your account(s).
            •   The firm can sell your securities or other assets without contacting you.
            •   You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call.
            •   The firm can increase its "house" maintenance margin requirements at any time and is not required to provide you advance written notice.
            •   You are not entitled to an extension of time on a margin call.
            The annual disclosure statement required pursuant to this paragraph (b) may be delivered within or as part of other account documentation, and is not required to be provided in a separate document.
            (c) In lieu of providing the disclosures specified in paragraphs (a) and (b), a member may provide to the customer and, to the extent required under paragraph (a) post on its Web site, an alternative disclosure statement, provided that the alternative disclosures shall be substantially similar to the disclosures specified in paragraphs (a) and (b).
            (d) For purposes of this Rule, the term "non-institutional customer" means a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).
            Amended by SR-NASD-2002-69 eff. July 1, 2002.
            Adopted by SR-NASD-2000-55 eff. June 4, 2001.

            Selected Notices: 01-31, 02-35.

          • 2342. SIPC Information

            This rule is no longer applicable. NASD Rule 2342 has been superseded by FINRA Rule 2266. Please consult the appropriate FINRA Rule.

            All members, except those members: (a) that pursuant to Section 3(a)(2)(A)(i) through (iii) of the Securities Investor Protection Act of 1970 (SIPA) are excluded from membership in the Securities Investor Protection Corporation (SIPC) and that are not SIPC members; or (b) whose business consists exclusively of the sale of investments that are ineligible for SIPC protection, shall advise all new customers, in writing, at the opening of an account, that they may obtain information about SIPC, including the SIPC brochure, by contacting SIPC, and also shall provide the Web site address and telephone number of SIPC. In addition, such members shall provide all customers with the same information, in writing, at least once each year. In cases where both an introducing firm and clearing firm service an account, the firms may assign these requirements to one of the firms.
            Amended by SR-NASD-2007-036 eff. Nov 6, 2007.
            Adopted by SR-NASD-2006-124 eff. Nov 6, 2007.

            Selected Notice: 07-29.

          • 2350. Broker/Dealer Conduct on the Premises of Financial Institutions

            This rule is no longer applicable. NASD Rule 2350 has been superseded by FINRA Rule 3160. Please consult the appropriate FINRA Rule.

            (a) Applicability
            This section shall apply exclusively to those broker/dealer services conducted by members on the premises of a financial institution where retail deposits are taken. This section does not alter or abrogate members' obligations to comply with other applicable NASD rules, regulations, and requirements, nor those of other regulatory authorities that may govern members operating on the premises of financial institutions.
            (b) Definitions
            (1) For purposes of this section, the term "financial institution" shall mean federal and state-chartered banks, savings and loan associations, savings banks, credit unions, and the service corporations of such institutions required by law.
            (2) "Networking arrangement" and "brokerage affiliate arrangement" shall mean a contractual or other arrangement between a member and a financial institution pursuant to which the member conducts broker/dealer services for customers of the financial institution and the general public on the premises of such financial institution where retail deposits are taken.
            (3) "Affiliate" shall mean a company that controls, is controlled by, or is under common control with, a member as defined in Rule 2720.
            (4) "Broker/Dealer services" shall mean the investment banking or securities business as defined in paragraph (p) of Article I of the By-Laws.
            (c) Standards for Member Conduct
            No member shall conduct broker/dealer services on the premises of a financial institution where retail deposits are taken unless the member complies initially and continuously with the following requirements:
            (1) Setting
            Wherever practical, the member's broker/dealer services shall be conducted in a physical location distinct from the area in which the financial institution's retail deposits are taken. In all situations, members shall identify the member's broker/dealer services in a manner that is clearly distinguished from the financial institution's retail deposit-taking activities. The member's name shall be clearly displayed in the area in which the member conducts its broker/dealer services.
            (2) Networking and Brokerage Affiliate Agreements
            Networking and brokerage affiliate arrangements between a member and a financial institution must be governed by a written agreement that sets forth the responsibilities of the parties and the compensation arrangements. The member must ensure that the agreement stipulates that supervisory personnel of the member and representatives of the Securities and Exchange Commission and the Association will be permitted access to the financial institution's premises where the member conducts broker/dealer services in order to inspect the books and records and other relevant information maintained by the member with respect to its broker/dealer services.
            (3) Customer Disclosure and Written Acknowledgment
            At or prior to the time that a customer account is opened by a member on the premises of a financial institution where retail deposits are taken, the member shall:
            (A) disclose, orally and in writing, that the securities products purchased or sold in a transaction with the member:
            (i) are not insured by the Federal Deposit Insurance Corporation ("FDIC");
            (ii) are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and
            (iii) are subject to investment risks, including possible loss of the principal invested; and
            (B) make reasonable efforts to obtain from each customer during the account opening process a written acknowledgment of receipt of the disclosures required by paragraph (c)(3)(A).
            (4) Communications with the Public
            (A) All member confirmations and account statements must indicate clearly that the broker/dealer services are provided by the member.
            (B) Advertisements and sales literature that announce the location of a financial institution where broker/dealer services are provided by the member or that are distributed by the member on the premises of a financial institution must disclose that securities products: are not insured by the FDIC; are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and are subject to investment risks, including possible loss of the principal invested. The shorter, logo format described in paragraph (c)(4)(C) may be used to provide these disclosures.
            (C) The following shorter, logo format disclosures may be used by members in advertisements and sales literature, including material published, or designed for use, in radio or television broadcasts, Automated Teller Machine ("ATM") screens, billboards, signs, posters, and brochures, to comply with the requirements of paragraph (c)(4)(B), provided that such disclosures are displayed in a conspicuous manner:
            •   Not FDIC Insured
            •   No Bank Guarantee
            •   May Lose Value
            (D) As long as the omission of the disclosures required by paragraph (c)(4)(B) would not cause the advertisement or sales literature to be misleading in light of the context in which the material is presented, such disclosures are not required with respect to messages contained in:
            •   radio broadcasts of 30 seconds or less;
            •   electronic signs, including billboard-type signs that are electronic, time, and temperature signs and ticker tape signs, but excluding messages contained in such media as television, on-line computer services, or ATMs; and
            •   signs, such as banners and posters, when used only as location indicators.
            (5) Notifications of Terminations
            The member must promptly notify the financial institution if any associated person of the member who is employed by the financial institution is terminated for cause by the member.
            Adopted by SR-NASD-95-63 eff. Feb. 15, 1998.

            Selected Notices: 94-94, 96-3, 97-26, 97-89.

          • 2360. Approval Procedures for Day-Trading Accounts

            This rule is no longer applicable. NASD Rule 2360 has been superseded by FINRA Rule 2130. Please consult the appropriate FINRA Rule.

            (a) No member that is promoting a day-trading strategy, directly or indirectly, shall open an account for or on behalf of a non-institutional customer, unless, prior to opening the account, the member has furnished to the customer the risk disclosure statement set forth in Rule 2361 and has:

            (1) approved the customer's account for a day-trading strategy in accordance with the procedures set forth in paragraph (b) and prepared a record setting forth the basis on which the member has approved the customer's account; or

            (2) received from the customer a written agreement that the customer does not intend to use the account for the purpose of engaging in a day-trading strategy, except that the member may not rely on such agreement if the member knows that the customer intends to use the account for the purpose of engaging in a day-trading strategy.

            (b) In order to approve a customer's account for a day-trading strategy, a member shall have reasonable grounds for believing that the day-trading strategy is appropriate for the customer. In making this determination, the member shall exercise reasonable diligence to ascertain the essential facts relative to the customer, including:

            (1) Investment objectives;

            (2) Investment and trading experience and knowledge (e.g., number of years, size, frequency and type of transactions);

            (3) Financial situation, including: estimated annual income from all sources, estimated net worth (exclusive of family residence), and estimated liquid net worth (cash, securities, other);

            (4) Tax status;

            (5) Employment status (name of employer, self-employed or retired);

            (6) Marital status and number of dependents; and

            (7) Age.

            (c) If a member that is promoting a day-trading strategy opens an account for a non-institutional customer in reliance on a written agreement from the customer pursuant to paragraph (a)(2) and, following the opening of the account, knows that the customer is using the account for a day-trading strategy, then the member shall be required to approve the customer's account for a day-trading strategy in accordance with paragraph (a)(1) as soon as practicable, but in no event later than 10 days following the date that such member knows that the customer is using the account for such a strategy.

            (d) Any record or written statement prepared or obtained by a member pursuant to this rule shall be preserved in accordance with Rule 3110(a).

            (e) For purposes of this rule, the term "day-trading strategy" means an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.

            (f) For purposes of this rule, the term "non-institutional customer" means a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).

            (g) A firm will not be deemed to be "promoting a day-trading strategy" for purposes of this rule solely by its engaging in the following activities:

            (1) Promoting efficient execution services or lower execution costs based on multiple trades;

            (2) Providing general investment research or advertising the high quality or prompt availability of such general research; and

            (3) Having a Web site that provides general financial information or news or that allows the multiple entry of intra-day purchases and sales of the same securities.

            Adopted by SR-NASD-99-41 eff. Oct. 16, 2000.

            Selected Notices: 00-62.

          • 2361. Day-Trading Risk Disclosure Statement

            This rule is no longer applicable. NASD Rule 2361 has been superseded by FINRA Rule 2270. Please consult the appropriate FINRA Rule.

            (a) Except as provided in paragraph (b), no member that is promoting a day-trading strategy, directly or indirectly, shall open an account for or on behalf of a non-institutional customer unless, prior to opening the account, the member has furnished to each customer, individually, in writing or electronically, the disclosure statement specified in this paragraph (a). In addition, any member that is promoting a day-trading strategy, directly or indirectly, must post such disclosure statement on the member's Web site in a clear and conspicuous manner.
            Day-Trading Risk Disclosure Statement
            You should consider the following points before engaging in a day-trading strategy. For purposes of this notice, a "day-trading strategy" means an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.
            Day trading can be extremely risky. Day trading generally is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.
            Be cautious of claims of large profits from day trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.
            Day trading requires knowledge of securities markets. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
            Day trading requires knowledge of a firm's operations. You should be familiar with a securities firm's business practices, including the operation of the firm's order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
            Day trading will generate substantial commissions, even if the per trade cost is low. Day trading involves aggressive trading, and generally you will pay commissions on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses.
            Day trading on margin or short selling may result in losses beyond your initial investment. When you day trade with funds borrowed from a firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day-trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
            Potential Registration Requirements. Persons providing investment advice for others or managing securities accounts for others may need to register as either an "Investment Advisor" under the Investment Advisors Act of 1940 or as a "Broker" or "Dealer" under the Securities Exchange Act of 1934. Such activities may also trigger state registration requirements.
            (b) In lieu of providing the disclosure statement specified in paragraph (a), a member that is promoting a day-trading strategy may provide to the customer, individually, in writing or electronically, prior to opening the account, and post on its Web site, an alternative disclosure statement, provided that:

            (1) The alternative disclosure statement shall be substantially similar to the disclosure statement specified in paragraph (a); and

            (2) The alternative disclosure statement shall be filed with the Association's Advertising Department (Department) for review at least 10 days prior to use (or such shorter period as the Department may allow in particular circumstances) for approval and, if changes are recommended by the Association, shall be withheld from use until any changes specified by the Association have been made or, if expressly disapproved, until the alternative disclosure statement has been refiled for, and has received, Association approval. The member must provide with each filing the anticipated date of first use.

            (c) For purposes of this rule, the term "day-trading strategy" shall have the meaning provided in Rule 2360(e).

            (d) For purposes of this Rule, the term "non-institutional customer" means a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).

            Amended by SR-NASD-2002-69 eff. July 1, 2002.
            Adopted by SR-NASD-99-41 eff. Oct. 16, 2000.

            Selected Notices: 00-62, 02-35.

          • 2370. Borrowing From or Lending to Customers

            This rule is no longer applicable. NASD Rule 2370 has been superseded by FINRA Rule 3240. Please consult the appropriate FINRA Rule.

            (a) No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless: (1) the member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member; and (2) the lending or borrowing arrangement meets one of the following conditions: (A) the customer is a member of such person's immediate family; (B) the customer is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business; (C) the customer and the registered person are both registered persons of the same member firm; (D) the lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the associated person not maintained a relationship outside of the broker/customer relationship; or (E) the lending arrangement is based on a business relationship outside of the broker-customer relationship.

            (b) Procedures

            (1) Members must pre-approve in writing the lending or borrowing arrangements described in subparagraphs (a)(2)(C), (D), and (E) above.

            (2) With respect to the lending or borrowing arrangements described in subparagraph (a)(2)(A) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such lending or borrowing arrangements.

            (3) With respect to the lending or borrowing arrangements described in subparagraph (a)(2)(B) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such lending or borrowing arrangements, provided that, the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For purposes of this subparagraph, the member may rely on the registered person's representation that the terms of the loan meet the above-described standards.

            (c) The term immediate family shall include parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and shall also include any other person whom the registered person supports, directly or indirectly, to a material extent.

            Amended by SR-NASD-2004-05 eff. Feb. 18, 2004.
            Adopted by SR-NASD-2003-92 eff. Nov. 10, 2003.

          • 2430. Charges for Services Performed

            This rule is no longer applicable. NASD Rule 2430 has been superseded by FINRA Rule 2122. Please consult the appropriate FINRA Rule.

            Charges, if any, for services performed, including miscellaneous services such as collection of moneys due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory between customers.

          • 2410. Net Prices to Persons Not in Investment Banking or Securities Business

            This rule is no longer applicable. NASD Rule 2410 has been superseded by FINRA Rule 2040. Please consult the appropriate FINRA Rule.

            No member shall offer any security or confirm any purchase or sale of any security, from or to any person not actually engaged in the investment banking or securities business at any price which shows a concession, discount, or other allowance, but shall offer such security and confirm such purchase or sale at a net dollar or basis price.
            Cross Reference–

            IM-2420-1, Transactions Between Members and Non-Members

            Selected Notice: 15-07.

          • 2420. Dealing with Non-Members

            This rule is no longer applicable. NASD Rule 2420 has been superseded by FINRA Rule 2040. Please consult the appropriate FINRA Rule.

            (a) No member shall deal with any non-member broker or dealer except at the same prices, for the same commissions or fees, and on the same terms and conditions as are by such member accorded to the general public.
            (b) Without limiting the generality of the foregoing, no member shall:
            (1) in any transaction with any non-member broker or dealer, allow or grant to such non-member broker or dealer any selling concession, discount or other allowance allowed by such member to a member of a registered securities association and not allowed to a member of the general public;
            (2) join with any non-member broker or dealer in any syndicate or group contemplating the distribution to the public of any issue of securities or any part thereof; or
            (3) sell any security to or buy any security from any non-member broker or dealer except at the same price at which at the time of such transaction such member would buy or sell such security, as the case may be, from or to a person who is a member of the general public not engaged in the investment banking or securities business.
            (c) Transaction with Foreign Non-Members
            The provisions of paragraphs (a) and (b) of this Rule shall not apply to any non-member broker or dealer in a foreign country who is not eligible for membership in a registered securities association, but in any transaction with any such foreign non-member broker or dealer, where a selling concession, discount, or other allowance is allowed, a member shall as a condition of such transaction secure from such foreign broker or dealer an agreement that, in making any sales to purchasers within the United States of securities acquired as a result of such transactions, he will conform to the provisions of paragraphs (a) and (b) of this Rule to the same extent as though he were a member of the Association.
            (d) "Non-Member Broker or Dealer"
            For the purpose of this Rule, the term "non-member broker or dealer" shall include any broker or dealer who makes use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security, otherwise than on a national securities exchange, who is not a member of any securities association registered with the Commission pursuant to Section 15A of the Act, except a broker or dealer who deals exclusively in commercial paper, bankers' acceptances or commercial bills.
            (e) Nothing in this Rule shall be so construed or applied as to prevent any member of the Association from granting to any other member of any registered securities association any dealer's discount, allowance, commission, or special terms.

            Selected Notice: 15-07.

            • IM-2420-1. Transactions Between Members and Non-Members*

              This rule is no longer applicable. NASD IM-2420-1 has been superseded by FINRA Rule 0190. Please consult the appropriate FINRA Rule.

              (a) Non-members of the Association
              (1) "Member"
              Rule 0120(i) defines a "member" as any individual, partnership, corporation or other legal entity admitted to membership in the Association. All other persons, firms or corporations, whether or not they are brokers or dealers, are therefore to be regarded as non-members of the Association.
              (2) Expelled Dealer
              A dealer who has been expelled from the Association by order either of the Commission or the Association becomes a non-member of the Association from the effective date of such order.

              (3) Suspended Dealer
              A dealer who has been suspended from membership in the Association by order either of the Commission or the Association is to be treated as a non-member of the Association from the effective date of such order and during the period of such suspension. At the termination of the suspension period, such dealer is automatically reinstated to membership in the Association.
              (4) Broker or Dealer Registration Revoked by SEC
              Revocation by the Commission of an Association member's registration as a broker or dealer automatically terminates the membership of such broker or dealer in the Association as of the effective date of such order. Under Article III, Section 4 of the By-Laws of the Corporation, a firm whose registration as a broker or dealer is revoked is thereby disqualified for membership in the Association, and from the effective date of such order, the membership of such broker or dealer in the Association is discontinued. Thereafter such broker or dealer is a non-member of the Association.
              (5) Membership Resigned or Canceled
              The membership of a broker or dealer in the Association is automatically terminated when the Association accepts the resignation of such member or cancels its membership in the Association under the provisions of Article III, Section 3; Article IV, Section 5; or Article XIII, Section 1, of the By-Laws. After the date of acceptance by the Association of the resignation of such member or the date of cancellation of membership by the Association, such broker or dealer is a non-member of the Association.
              (b) Transactions in "Exempted Securities"
              Rule 2420 shall not apply to "exempted securities," which are defined by Section 3(a)(12) of the Act. The Rule therefore does not apply to transactions in government or municipal securities if within the definition of "exempted securities." Members may join with non-members or with banks in a joint account, syndicate or group to purchase and distribute an issue of "exempted securities" and may trade such securities with non-members or with banks at different prices or on different terms and conditions than are accorded to members of the general public.
              (c) Transactions on an Exchange
              (1) An Association member may pay a commission to a member of a national securities exchange for executing an order upon an exchange even though the exchange member is not a member of the Association. Rule 2420 does not apply to transactions upon an exchange and, therefore, does not prohibit such transactions.
              (2) Where an Association member is also a member of an exchange, an order of the Commission or of the Association expelling or suspending the firm from membership in the Association will not directly affect the business of the firm as a member of an exchange because Rule 2420 does not apply to transactions on the floor of an exchange. While an order of suspension or expulsion is in effect, the firm may continue to conduct its normal business on an exchange and participate in special offerings on an exchange without involving any violation by an Association member of Rule 2420.
              (d) Over-the-Counter Transactions in Securities Other than "Exempted Securities"
              (1) Participation in Underwriting or Selling Groups
              An Association member may not enter into a joint account, underwriting or selling group, or join a syndicate or group, with any non-member broker or dealer or with a member of a national securities exchange, who is not also a member of the Association, for the purpose of acquiring and distributing an issue of securities. Rule 2420, paragraphs (a) and (b) would be applicable and such exchange member would be a "non-member broker or dealer" within the definition of paragraph (d) of that Rule.
              (2) Sale to Bank or Trust Company
              An Association member, participating in the distribution of an issue of securities as an underwriter or in a selling group, may not allow any selling concession, discount or other allowance in connection with the sale of such securities to any bank or trust company. Under Article I, paragraphs (e) and (h), of the By-Laws a bank or trust company is excluded from the definition of a broker or dealer and therefore may not receive selling concessions, discounts or other allowances from an Association member under Rule 2740.
              (3) Suspended or Expelled Dealer — Group Contemplating Distribution
              An Association member may not join any underwriting or selling group with a dealer who has been and is suspended from membership in the Association by order of the Commission or of the Association if at the time such group was organized, it was contemplating the distribution of an issue of securities to the public. A dealer who has been suspended from membership in the Association is to be treated as a non-member during the suspension period and Rule 2420(b)(2) prohibits members from joining with non-members in a group "contemplating the distribution to the public of any issue of securities." Even though the suspension period had terminated before the time when the securities were to be distributed, the Rule prohibits a member from joining with a non-member in a group which is contemplating the distribution of an issue of securities at a future time.
              (4) Dealer Suspended or Expelled After Underwriting Group Formed
              Where a dealer is suspended or expelled from membership in the Association by an order of the Commission or of the Association which became effective after such dealer had joined an underwriting group under which each underwriter had severally purchased securities from the issuer, such dealer could thereafter during the period of suspension or expulsion accept delivery from the issuer of the securities which it had underwritten prior to the effective date of such order and pay to the issuer its commitment therefor without involving any violation of the Rules by members. After the effective date of such order and during the period of suspension or expulsion, Association members could only buy the securities from or sell the securities to the dealer, who was suspended or expelled, at the public offering price, regardless of whether the Association members were also members of the underwriting or selling group for the particular issue. Rule 2420 prohibits an Association member from dealing with any non-member broker or dealer except at the same prices, for the same commissions or fees, and on the same terms and conditions as the member would deal with a member of the general public at the same time. Delivery of the securities by the issuer to the particular dealer suspended or expelled and payment therefor by such dealer would not involve a violation of Rule 2420 in this situation.
              (5) Dealer Suspended or Expelled After Selling Group Formed
              Where a dealer is suspended or expelled from the Association by an order of the Commission or of the Association which became effective after such dealer had joined a selling group, members of the Association, including the underwriters and other selling group members, would be prohibited by Rule 2420 from selling the securities to, or buying the securities from, such dealer at any price different from the public offering price. Members would not violate Rule 2420 by accepting from such dealer, during the period such order of suspension or expulsion was in effect, payment of the full public offering price for the securities allotted to such dealer. After the effective date of such order, Rule 2420 prohibits Association members from granting or allowing to the dealer suspended or expelled any selling concession, discount or other allowance for the securities distributed by such dealer. While such order is in effect, Association members could only deal with such dealer at the same prices, for the same commissions, fees, concessions, discounts or other allowances as the Association members would deal at the time of the transaction with a member of the general public.
              (6) Commissions in Over-the-Counter Transactions with Non-Members
              An Association member may not pay a commission to any non-member broker or dealer for executing a brokerage order for the Association member in the over-the-counter market. Rule 2420 requires an Association member to deal with non-members only on the same terms and conditions as are accorded by such Association member to members of the general public. On the other hand, Rule 2420 does not prohibit an Association member from executing over-the-counter an order for a non-member and charging such non-member a commission therefore. Rule 2420 merely requires that in transactions with a non-member, such non-member must be dealt with at the same prices, for the same commissions or fees and on the same terms and conditions as are by such member accorded to the general public.
              (7) Members of a National Securities Exchange
              In over-the-counter transactions in either listed or unlisted securities an Association member may not buy from or sell to a member of a national securities exchange who is not also a member of the Association at different prices or on different terms or conditions that are accorded by such Association member to members of the general public. Such exchange member, with respect to such over-the-counter transactions, comes within the definition of a "non-member broker or dealer" in Rule 2420(d), and Rule 2420 is therefore applicable. For the same reason an Association member may not pay a commission to an exchange member, who is not also a member of the Association, for executing a brokerage order over-the-counter.
              When a dealer has been and is suspended or expelled from membership in the Association by order of the Commission or of the Association, under Rule 2420, during the period of such suspension or expulsion, an Association member may only deal with such dealer at the same prices, for the same commissions, fees, concessions, discounts or other allowances as the Association member would deal at the time of the transaction with a member of the general public.
              (8) Investment Advisory Fee
              When an Association member has rendered an investment advisory service for a fee to other members and thereafter is suspended or expelled from membership in the Association by order of the Commission or of the Association, another Association member may continue to pay the fee to such investment adviser provided that over-the-counter transactions in securities with such investment adviser are made only at the same price and on the same terms as the member would deal with the public and the fee for acting as investment adviser is not used as a method of avoiding the provisions of Rule 2420.

              * "The reader should be aware of the decision of the Commission in what is commonly called the Aetna proceeding partially abrogating former Article III, Section 25, Securities Exchange Act Release No. 9632 (June 7, 1972), as well as the Commission's decision in the Plaza Securities Corporation case. Securities Exchange Act Release No. 10643 (February 14, 1974) setting aside Association disciplinary action under former Section 25. The Commission's order in first case reads, in pertinent part, that Section 25 is partially abrogated "... to the extent that it permits or has been construed to permit the Association to bar a member's receipt of commissions, concessions, discounts, or other allowances from nonmember brokers or dealers...."

              Amended by SR-NASD-98-86 eff. Nov. 19, 1998.
              Amended by SR-NASD-95-39 eff Aug 30, 1996.

              Selected Notice: 15-07.

            • IM-2420-2. Continuing Commissions Policy

              This rule is no longer applicable. NASD IM-2420-2 has been superseded by FINRA Rule 2040. Please consult the appropriate FINRA Rule.

              The Board of Governors has held that the payment of continuing commissions in connection with the sale of securities is not improper so long as the person receiving the commissions remains a registered representative of a member of the Association.
              However, payment of compensation to registered representatives after they cease to be employed by a member of the Association — or payment to their widows or other beneficiaries — will not be deemed in violation of Association Rules, provided bona fide contracts call for such payment.
              Also, a dealer-member may enter into a bona fide contract with another dealer-member to take over and service his accounts and, after he ceases to be a member, to pay to him or to his widow or other beneficiary continuing commissions generated on such accounts.
              An arrangement for the payment of continuing commissions shall not under any circumstances be deemed to permit the solicitation of new business or the opening of new accounts by persons who are not registered. Any arrangement for payment of continuing commissions must, of course, conform with any applicable laws or regulations.
              This policy recognizes the validity of contracts entered into in good faith between employers and employees at the time the employees are registered representatives of the employing members. Such a contract may vest in an employee the right to receive continuing compensation on business done in the event the employee retires and the right to designate such payments to his widow or other beneficiary.
              It is not to be implied that the Board suggests that members must enter into contracts with registered representatives for continuing compensation. Nor will the Board specify or rule on the terms of such contracts.
              The Board has also considered the question as to whether Rule 2830(c) requires that a sales agreement be in effect in order for a dealer-member to receive continuing commissions. The Board has concluded that the sales agreement requirement is intended to apply to new business, such as the sale of a new plan or a "wire order." It is not intended that a sales agreement be required in order for a dealer to receive commissions on direct payments by existing clients to the fund or its agent, or on automatic dividend reinvestments. (See Notice to Members 74-33, Aug. 9, 1974).
              Under no circumstances shall payment of any kind be made by a member to any person who is not eligible for membership in the Association or eligible to be associated with a member because of any disqualification, as set forth in Article III of the Association's By-Laws, such as revocation, expulsion, or suspension still in effect.

              Amended by SR-NASD-98-86 eff. Nov. 19, 1998.

              Selected Notice: 15-07.

          • 2440. Fair Prices and Commissions

            This rule is no longer applicable. NASD Rule 2440 has been superseded by FINRA Rule 2121. Please consult the appropriate FINRA Rule.

            In securities transactions, whether in "listed" or "unlisted" securities, if a member buys for his own account from his customer, or sells for his own account to his customer, he shall buy or sell at a price which is fair, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense involved, and the fact that he is entitled to a profit; and if he acts as agent for his customer in any such transaction, he shall not charge his customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and the market therefor.
            Amended by SR-NASD-2006-005 eff. June 13, 2008.

            Selected Notice to Members: 08-36.

            • IM-2440-1. Mark-Up Policy

              This rule is no longer applicable. NASD IM-2440-1 has been superseded by FINRA Rule 2121. Please consult the appropriate FINRA Rule.

              The question of fair mark-ups or spreads is one which has been raised from the earliest days of the Association. No definitive answer can be given and no interpretation can be all-inclusive for the obvious reason that what might be considered fair in one transaction could be unfair in another transaction because of different circumstances. In 1943, the Association's Board adopted what has become known as the "5% Policy" to be applied to transactions executed for customers. It was based upon studies demonstrating that the large majority of customer transactions were effected at a mark-up of 5% or less. The Policy has been reviewed by the Board of Governors on numerous occasions and each time the Board has reaffirmed the philosophy expressed in 1943. Pursuant thereto, and in accordance with Article VII, Section 1(a)(ii) of the By-Laws, the Board has adopted the following interpretation under Rule 2440.
              It shall be deemed a violation of Rule 2110 and Rule 2440 for a member to enter into any transaction with a customer in any security at any price not reasonably related to the current market price of the security or to charge a commission which is not reasonable.
              (a) General Considerations
              Since the adoption of the "5% Policy" the Board has determined that:
              (1) The "5% Policy" is a guide, not a rule.
              (2) A member may not justify mark-ups on the basis of expenses which are excessive.
              (3) The mark-up over the prevailing market price is the significant spread from the point of view of fairness of dealings with customers in principal transactions. In the absence of other bona fide evidence of the prevailing market, a member's own contemporaneous cost is the best indication of the prevailing market price of a security.
              (4) A mark-up pattern of 5% or even less may be considered unfair or unreasonable under the "5% Policy."
              (5) Determination of the fairness of mark-ups must be based on a consideration of all the relevant factors, of which the percentage of mark-up is only one.
              (b) Relevant Factors
              Some of the factors which the Board believes that members and the Association's committees should take into consideration in determining the fairness of a mark-up are as follows:
              (1) The Type of Security Involved
              Some securities customarily carry a higher mark-up than others. For example, a higher percentage of mark-up customarily applies to a common stock transaction than to a bond transaction of the same size. Likewise, a higher percentage applies to sales of units of direct participation programs and condominium securities than to sales of common stock.
              (2) The Availability of the Security in the Market
              In the case of an inactive security the effort and cost of buying or selling the security, or any other unusual circumstances connected with its acquisition or sale, may have a bearing on the amount of mark-up justified.
              (3) The Price of the Security
              While there is no direct correlation, the percentage of mark-up or rate of commission generally increases as the price of the security decreases. Even where the amount of money is substantial, transactions in lower priced securities may require more handling and expense and may warrant a wider spread.
              (4) The Amount of Money Involved in a Transaction
              A transaction which involves a small amount of money may warrant a higher percentage of mark-up to cover the expenses of handling.
              (5) Disclosure
              Any disclosure to the customer, before the transaction is effected, of information which would indicate (A) the amount of commission charged in an agency transaction or (B) mark-up made in a principal transaction is a factor to be considered. Disclosure itself, however, does not justify a commission or mark-up which is unfair or excessive in light of all other relevant circumstances.
              (6) The Pattern of Mark-Ups
              While each transaction must meet the test of fairness, the Board believes that particular attention should be given to the pattern of a member's mark-ups.
              (7) The Nature of the Member's Business
              The Board is aware of the differences in the services and facilities which are needed by, and provided for, customers of members. If not excessive, the cost of providing such services and facilities, particularly when they are of a continuing nature, may properly be considered in determining the fairness of a member's mark-ups.
              (c) Transactions to Which the Policy is Applicable
                  The Policy applies to all securities, whether oil royalties or any other security, in the following types of transactions:
              (1) A transaction in which a member buys a security to fill an order for the same security previously received from a customer. This transaction would include the so-called "riskless" or "simultaneous" transaction.
              (2) A transaction in which the member sells a security to a customer from inventory. In such a case the amount of the mark-up would be determined on the basis of the mark-up over the bona fide representative current market. The amount of profit or loss to the member from market appreciation or depreciation before, or after, the date of the transaction with the customer would not ordinarily enter into the determination of the amount or fairness of the mark-up.
              (3) A transaction in which a member purchases a security from a customer. The price paid to the customer or the mark-down applied by the member must be reasonably related to the prevailing market price of the security.
              (4) A transaction in which the member acts as agent. In such a case, the commission charged the customer must be fair in light of all relevant circumstances.
              (5) Transactions wherein a customer sells securities to, or through, a broker/dealer, the proceeds from which are utilized to pay for other securities purchased from, or through, the broker/dealer at or about the same time. In such instances, the mark-up shall be computed in the same way as if the customer had purchased for cash and in computing the mark-up there shall be included any profit or commission realized by the dealer on the securities being liquidated, the proceeds of which are used to pay for securities being purchased.
              (d) Transactions to Which the Policy is Not Applicable
              The Mark-Up Policy is not applicable to the sale of securities where a prospectus or offering circular is required to be delivered and the securities are sold at the specific public offering price.
              Amended by SR-NASD-2006-005 eff. June 13, 2008.
              Amended by SR-NASD-2003-141 eff. July 5, 2007.
              Amended by SR-NASD-98-86 eff. Nov. 19, 1998.
              Adopted eff. Oct. 31, 1943, see SEC Release No. 3574 (June 1, 1944) and SEC Release No. 3623 (Nov. 25, 1944).

              Selected Notices to Members: 75-65, 89-20, 91-69, 92-16, 93-81, 94-62, 08-36.

            • IM-2440-2. Additional Mark-Up Policy For Transactions in Debt Securities, Except Municipal Securities1

              This rule is no longer applicable. NASD IM-2440-2 has been superseded by FINRA Rule 2121. Please consult the appropriate FINRA Rule.

              (a) Scope
              (1) IM-2440-1 applies to debt securities transactions, and this IM-2440-2 supplements the guidance provided in IM-2440-1.
              (b) Prevailing Market Price
              (1) A dealer that is acting in a principal capacity in a transaction with a customer and is charging a mark-up or mark-down must mark-up or mark-down the transaction from the prevailing market price. Presumptively for purposes of this IM-2440-2, the prevailing market price for a debt security is established by referring to the dealer's contemporaneous cost as incurred, or contemporaneous proceeds as obtained, consistent with NASD pricing rules. (See, e.g., Rule 2320).
              (2) When the dealer is selling the security to a customer, countervailing evidence of the prevailing market price may be considered only where the dealer made no contemporaneous purchases in the security or can show that in the particular circumstances the dealer's contemporaneous cost is not indicative of the prevailing market price. When the dealer is buying the security from a customer, countervailing evidence of the prevailing market price may be considered only where the dealer made no contemporaneous sales in the security or can show that in the particular circumstances the dealer's contemporaneous proceeds are not indicative of the prevailing market price.
              (3) A dealer's cost is considered contemporaneous if the transaction occurs close enough in time to the subject transaction that it would reasonably be expected to reflect the current market price for the security. (Where a mark-down is being calculated, a dealer's proceeds would be considered contemporaneous if the transaction from which the proceeds result occurs close enough in time to the subject transaction that such proceeds would reasonably be expected to reflect the current market price for the security.)
              (4) A dealer that effects a transaction in debt securities with a customer and identifies the prevailing market price using a measure other than the dealer's own contemporaneous cost (or, in a mark-down, the dealer's own proceeds) must be prepared to provide evidence that is sufficient to overcome the presumption that the dealer's contemporaneous cost (or, the dealer's proceeds) provides the best measure of the prevailing market price. A dealer may be able to show that its contemporaneous cost is (or proceeds are) not indicative of prevailing market price, and thus overcome the presumption, in instances where (i) interest rates changed after the dealer's contemporaneous transaction to a degree that such change would reasonably cause a change in debt securities pricing; (ii) the credit quality of the debt security changed significantly after the dealer's contemporaneous transaction; or (iii) news was issued or otherwise distributed and known to the marketplace that had an effect on the perceived value of the debt security after the dealer's contemporaneous transaction.
              (5) In instances where the dealer has established that the dealer's cost is (or, in a mark-down, proceeds are) no longer contemporaneous, or where the dealer has presented evidence that is sufficient to overcome the presumption that the dealer's contemporaneous cost (or proceeds) provides the best measure of the prevailing market price, such as those instances described in (b)(4)(i), (ii) and (iii), a member must consider, in the order listed, the following types of pricing information to determine prevailing market price:
              (A) Prices of any contemporaneous inter-dealer transactions in the security in question;
              (B) In the absence of transactions described in (A), prices of contemporaneous dealer purchases (sales) in the security in question from (to) institutional accounts with which any dealer regularly effects transactions in the same security; or
              (C) In the absence of transactions described in (A) and (B), for actively traded securities, contemporaneous bid (offer) quotations for the security in question made through an inter-dealer mechanism, through which transactions generally occur at the displayed quotations.
              (A member may consider a succeeding category of pricing information only when the prior category does not generate relevant pricing information (e.g., a member may consider pricing information under (B) only after the member has determined, after applying (A), that there are no contemporaneous inter-dealer transactions in the same security).) In reviewing the pricing information available within each category, the relative weight, for purposes of identifying prevailing market price, of such information (i.e., either a particular transaction price, or, in (C) above, a particular quotation) depends on the facts and circumstances of the comparison transaction or quotation (i.e., such as whether the dealer in the comparison transaction was on the same side of the market as the dealer is in the subject transaction and timeliness of the information).
              (6) In the event that, in particular circumstances, the above factors are not available, other factors that may be taken into consideration for the purpose of establishing the price from which a customer mark-up (mark-down) may be calculated, include but are not limited to:
              •   Prices of contemporaneous inter-dealer transactions in a “similar” security, as defined below, or prices of contemporaneous dealer purchase (sale) transactions in a “similar” security with institutional accounts with which any dealer regularly effects transactions in the “similar” security with respect to customer mark-ups (mark-downs);
              •   Yields calculated from prices of contemporaneous inter-dealer transactions in "similar" securities;
              •   Yields calculated from prices of contemporaneous dealer purchase (sale) transactions with institutional accounts with which any dealer regularly effects transactions in "similar" securities with respect to customer mark-ups (mark-downs); and
              •   Yields calculated from validated contemporaneous inter-dealer bid (offer) quotations in "similar" securities for customer mark-ups (mark-downs).
              The relative weight, for purposes of identifying prevailing market price, of the pricing information obtained from the factors set forth above depends on the facts and circumstances surrounding the comparison transaction (i.e., whether the dealer in the comparison transaction was on the same side of the market as the dealer is in the subject transaction, timeliness of the information, and, with respect to the final factor listed above, the relative spread of the quotations in the similar security to the quotations in the subject security).
              (7) Finally, if information concerning the prevailing market price of the subject security cannot be obtained by applying any of the above factors, NASD or its members may consider as a factor in assessing the prevailing market price of a debt security the prices or yields derived from economic models (e.g., discounted cash flow models) that take into account measures such as credit quality, interest rates, industry sector, time to maturity, call provisions and any other embedded options, coupon rate, and face value; and consider all applicable pricing terms and conventions (e.g., coupon frequency and accrual methods). Such models currently may be in use by bond dealers or may be specifically developed by regulators for surveillance purposes.
              (8) Because the ultimate evidentiary issue is the prevailing market price, isolated transactions or isolated quotations generally will have little or no weight or relevance in establishing prevailing market price. For example, in considering yields of “similar” securities, except in extraordinary circumstances, members may not rely exclusively on isolated transactions or a limited number of transactions that are not fairly representative of the yields of transactions in “similar” securities taken as a whole.
              (9) "Customer," for purposes of Rule 2440, IM-2440-1 and this IM-2440-2, shall not include a qualified institutional buyer ("QIB") as defined in Rule 144A under the Securities Act of 1933 that is purchasing or selling a non-investment grade debt security when the dealer has determined, after considering the factors set forth in IM-2310-3, that the QIB has the capacity to evaluate independently the investment risk and in fact is exercising independent judgment in deciding to enter into the transaction. For purposes of Rule 2440, IM-2440-1 and this IM-2440-2, "non-investment grade debt security" means a debt security that: (i) if rated by only one nationally recognized statistical rating organization ("NRSRO"), is rated lower than one of the four highest generic rating categories; (ii) if rated by more than one NRSRO, is rated lower than one of the four highest generic rating categories by any of the NRSROs; or (iii) if unrated, either was analyzed as a non-investment grade debt security by the dealer and the dealer retains credit evaluation documentation and demonstrates to NASD (using credit evaluation or other demonstrable criteria) that the credit quality of the security is, in fact, equivalent to a non-investment grade debt security, or was initially offered and sold and continues to be offered and sold pursuant to an exemption from registration under the Securities Act of 1933.
              (c) "Similar" Securities
              (1) A "similar" security should be sufficiently similar to the subject security that it would serve as a reasonable alternative investment to the investor. At a minimum, the security or securities should be sufficiently similar that a market yield for the subject security can be fairly estimated from the yields of the "similar" security or securities. Where a security has several components, appropriate consideration may also be given to the prices or yields of the various components of the security.
              (2) The degree to which a security is "similar," as that term is used in this IM-2440-2, to the subject security may be determined by factors that include but are not limited to the following:
              (A) Credit quality considerations, such as whether the security is issued by the same or similar entity, bears the same or similar credit rating, or is supported by a similarly strong guarantee or collateral as the subject security (to the extent securities of other issuers are designated as “similar” securities, significant recent information of either issuer that is not yet incorporated in credit ratings should be considered (e.g., changes to ratings outlooks));
              (B) The extent to which the spread (i.e., the spread over U.S. Treasury securities of a similar duration) at which the “similar” security trades is comparable to the spread at which the subject security trades;
              (C) General structural characteristics and provisions of the issue, such as coupon, maturity, duration, complexity or uniqueness of the structure, callability, the likelihood that the security will be called, tendered or exchanged, and other embedded options, as compared with the characteristics of the subject security; and
              (D) Technical factors such as the size of the issue, the float and recent turnover of the issue, and legal restrictions on transferability as compared with the subject security.
              (3) When a debt security's value and pricing is based substantially on, and is highly dependent on, the particular circumstances of the issuer, including creditworthiness and the ability and willingness of the issuer to meet the specific obligations of the security, in most cases other securities will not be sufficiently similar, and therefore, other securities may not be used to establish the prevailing market price.

              1 The Interpretation does not apply to transactions in municipal securities. Single terms in parentheses within sentences, such as the terms “(sale)” and “(to)” in the phrase, “contemporaneous dealer purchase (sale) transactions with institutional accounts,” refer to scenarios where a member is charging a customer a mark-down.

              Adopted by SR-NASD-2003-141 eff. July 5, 2007.

              Selected Notice: 07-28.

          • 2441. Net Transactions with Customers

            This rule is no longer applicable. NASD Rule 2441 has been superseded by FINRA Rule 2124. Please consult the appropriate FINRA Rule.

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

            Adopted by SR-NASD-2004-135 eff. Oct. 2, 2006.

            Selected Notice: 06-47.

          • 2450. Installment or Partial Sales

            This rule is no longer applicable.

            (a) Prohibition
            No member shall take or carry any account or make a transaction for any customer under any arrangement which contemplates or provides for the purchase of any security for the account of the customer or for the sale of any security to the customer, where payment for the security is to be made to the member by the customer over a period of time in installments or by a series of partial payments, unless:
            (1) Member Acts as Agent
            In the event such member acts as an agent or broker in such transaction he shall immediately, in the regular course of business, make an actual purchase of the security for the account of the customer, and shall immediately, in the regular course of business, take possession or control of such security and shall maintain possession or control thereof so long as he remains under obligation to deliver the security to the customer;
            (2) Member Acts as Principal
            In the event such member acts as principal in such transaction, he shall, at the time of such transaction own such security and shall maintain possession or control thereof so long as he remains under obligation to deliver the security to the customer;
            (3) Regulation T Satisfied
            The provisions of Regulation T of the Federal Reserve Board, if applicable to such member, are satisfied.
            (b) Hypothecation
            No member, whether acting as principal or agent, shall, in connection with any transaction referred to in this Rule, make any agreement with his customer under which such member shall be allowed to pledge or hypothecate any security involved in such transaction for any amount in excess of the indebtedness of the customer to such member.

          • 2460. Payments for Market Making

            This rule is no longer applicable. NASD Rule 2460 has been superseded by FINRA Rule 5250. Please consult the appropriate FINRA Rule.

            (a) No member or person associated with a member shall accept any payment or other consideration, directly or indirectly, from an issuer of a security, or any affiliate or promoter thereof, for publishing a quotation, acting as market maker in a security, or submitting an application in connection therewith.

            (b) The provisions of paragraph (a) shall not preclude a member from accepting:

            (1) payment for bona fide services, including, but not limited to, investment banking services (including underwriting compensation and fees); and

            (2) reimbursement of any payment for registration imposed by the Securities and Exchange Commission or state regulatory authorities and for listing of an issue of securities imposed by a self-regulatory organization.

            (c) For purposes of this rule, the following terms shall have the stated meanings:

            (1) "affiliate" shall have the same definition as used in Rule 2720 of the Business Conduct Rules of the Association;

            (2) "promoter" means any person who founded or organized the business or enterprise of an issuer, is a director or employee of an issuer, acts or has acted as a consultant, advisor, accountant or attorney to an issuer, is the beneficial owner of any of an issuer's securities that are considered "restricted securities" under Rule 144, or is the beneficial owner of five percent (5%) or more of the public float of any class of an issuer's securities, and any other person with a similar interest in promoting the entry of quotations or market making in an issuer's securities; and

            (3) "quotation" shall mean any bid or offer at a specified price with respect to a security, or any indication of interest by a member in receiving bids or offers from others for a security, or an indication by a member that he wishes to advertise his general interest in buying or selling a particular security.

            Amended by SR-NASD-97-85 eff. Dec. 1, 1997.
            Adopted by SR-NASD-97-29, eff. July 3, 1997.

            Selected Notices: 75-16, 92-50, 96-83, 97-46.

          • 2520. Margin Requirements

            This rule is no longer applicable. NASD Rule 2520 has been superseded by FINRA Rule 4210. Please consult the appropriate FINRA Rule.

            (a) Definitions
            For purposes of this paragraph, the following terms shall have the meanings specified below:
            (1) The term "basket" shall mean a group of stocks that the Association or any national securities exchange designates as eligible for execution in a single trade through its trading facilities and that consists of stocks whose inclusion and relative representation in the group are determined by the inclusion and relative representation of their current market prices in a widely-disseminated stock index reflecting the stock market as a whole.
            (2) The term "current market value" means the total cost or net proceeds of a security on the day it was purchased or sold or at any other time the preceding business day's closing price as shown by any regularly published reporting or quotation service except for security futures contracts (see paragraph (f)(11)(C)(ii)). If there is no closing price, a member organization may use a reasonable estimate of the market value of the security as of the close of business on the preceding business day.
            (3) The term "customer" means any person for whom securities are purchased or sold or to whom securities are purchased or sold whether on a regular way, when issued, delayed or future delivery basis. It will also include any person for whom securities are held or carried and to or for whom a member organization extends, arranges or maintains any credit. The term will not include the following: (A) a broker or dealer from whom a security has been purchased or to whom a security has been sold for the account of the member organization or its customers, or (B) an "exempted borrower" as defined by Regulation T of the Board of Governors of the Federal Reserve System ("Regulation T"), except for the proprietary account of a broker/dealer carried by a member pursuant to paragraph (e)(6) of this Rule.
            (4) The term "designated account" means the account of:
            (A) a bank (as defined in Section 3(a)(6) of the Act),
            (B) a savings association (as defined in Section 3(b) of the Federal Deposit Insurance Act), the deposits of which are insured by the Federal Deposit Insurance Corporation,
            (C) an insurance company (as defined in Section 2(a)(17) of the Investment Company Act of 1940),
            (D) an investment company registered with the Securities and Exchange Commission (SEC) under the Investment Company Act,
            (E) a state or political subdivision thereof, or
            (F) a pension or profit sharing plan subject to Employee Retirement Income Security Act (ERISA) or of an agency of the United States or of a state or a political subdivision thereof.
            (5) The term "equity" means the customer's ownership interest in the account, computed by adding the current market value of all securities "long" and the amount of any credit balance and subtracting the current market value of all securities "short" and the amount of any debit balance. Any variation settlement received or paid on a security futures contract shall be considered a credit or debit to the account for purposes of equity.
            (6) The term "exempted security" or "exempted securities" has the meaning as in Section 3(a)(12) of the Act.
            (7) The term "margin" means the amount of equity to be maintained on a security position held or carried in an account.
            (8) The term "person" has the meaning as in Section 3(a)(9) of the Act.
            (9) The term "highly rated foreign sovereign debt securities" means any debt securities (including major foreign sovereign debt securities) issued or guaranteed by the government of a foreign country, its provinces, state or cities, or a supranational entity, if at the time of the extension of credit the issue, the issuer or guarantor, or any other outstanding obligation of the issuer or guarantor ranked junior to or on a parity with the issue or the guarantee is assigned a rating (implicitly or explicitly) in one of the top two rating categories by at least one nationally ranked statistical rating organization.
            (10) The term "investment grade debt securities" means any debt securities (including those issued by the government of a foreign country, its provinces, states or cities, or a supranational entity), if at the time of the extension of credit the issue, the issuer or guarantor, or any other outstanding obligation of the issuer or guarantor ranked junior to or on a parity with the issue or the guarantee is assigned a rating (implicitly or explicitly) in one of the top four rating categories by at least one nationally recognized statistical rating organization.
            (11) The term "major foreign sovereign debt" means any debt securities issued or guaranteed by the government of a foreign country or a supranational entity, if at the time of the extension of credit the issue, the issuer or guarantor, or any other outstanding obligation of the issuer or guarantor ranked junior to or on a parity with the issue or the guarantee is assigned a rating (implicitly or explicitly) in the top rating category by at least one nationally recognized statistical rating organization.
            (12) The term "mortgage related securities" means securities falling within the definition in Section 3(a)(41) of the Act.
            (13) The term "exempt account" means:

            (A) a member, non-member broker/dealer registered as a broker or dealer under the Act, a "designated account," or
            (B) any person that:
            (i) has a net worth of at least forty-five million dollars and financial assets of at least forty-million dollars for purposes of subparagraphs (e)(2)(F) and (e)(2)(G), and
            (ii) either:
            a. has securities registered pursuant to Section 12 of the Act, has been subject to the reporting requirements of Section 13 of the Act for a period of at least 90 days and has filed all the reports required to be filed thereunder during the preceding 12 months (or such shorter period as it was required to file such reports), or
            b. has securities registered pursuant to the Securities Act of 1933, has been subject to the reporting requirements of Section 15(d) of the Act for a period of at least 90 days and has filed all the reports required to be filed thereunder during the preceding 12 months (or such shorter period as it was required to file such reports), or
            c. if such person is not subject to Section 13 or 15(d) of the Act, is a person with respect to which there is publicly available the information specified in paragraphs (a)(5)(i) to (xiv), inclusive, of Rule 15c2-11 under the Act, or
            d. furnishes information to the Securities and Exchange Commission as required by Rule 12g3-2(b) of the Act, or
            e. makes available to the member such current information regarding such person's ownership, business, operations and financial condition (including such person's current audited statement of financial condition, statement of income and statement of changes in stockholder's equity or comparable financial reports), as reasonably believed by the member to be accurate, sufficient for the purposes of performing a risk analysis in respect of such person.
            (14) The term "non-equity securities" means any securities other than equity securities as defined in Section 3(a)(11) of the Act.
            (15) The term "listed non-equity securities" means any non-equity securities that: (A) are listed on a national securities exchange; or (B) have unlisted trading privileges on a national securities exchange.
            (16) The term "other marginable non-equity securities" means:
            (A) Any debt securities not traded on a national securities exchange meeting all of the following requirements:
            (i) At the time of the original issue, a principal amount of not less than $25,000,000 of the issue was outstanding;
            (ii) The issue was registered under Section 5 of the Securities Act of 1933 and the issuer either files periodic reports pursuant to Section 13(a) or 15(d) of the Act or is an insurance company which meets all of the conditions specified in Section 12(g)(2)(G) of the Act; and
            (iii) At the time of the extensions of credit, the creditor has a reasonable basis for believing that the issuer is not in default on interest or principal payments; or
            (B) Any private pass-through securities (not guaranteed by any agency of the U.S. government) meeting all of the following requirements:
            (i) An aggregate principal amount of not less than $25,000,000 (which may be issued in series) was issued pursuant to a registration statement filed with the SEC under Section 5 of the Securities Act of 1933;
            (ii) Current reports relating to the issue have been filed with the SEC; and
            (iii) At the time of the credit extension, the creditor has a reasonable basis for believing that mortgage interest, principal payments and other distributions are being passed through as required and that the servicing agent is meeting its material obligations under the terms of the offering.
            (b) Initial Margin
            For the purpose of effecting new securities transactions and commitments, the customer shall be required to deposit margin in cash and/or securities in the account which shall be at least the greater of:
            (1) the amount specified in Regulation T, or Rules 400 through 406 under the Act or Rules 41.42 through 41.48 under the Commodity Exchange Act ("CEA"); or
            (2) the amount specified in paragraph (c)(3) of this Rule; or
            (3) such greater amount as NASD may from time to time require for specific securities; or
            (4) equity of at least $2,000 except that cash need not be deposited in excess of the cost of any security purchased (this equity and cost of purchase provision shall not apply to "when distributed" securities in a cash account). The minimum equity requirement for a "pattern day trader" is $25,000 pursuant to paragraph (f)(8)(B)(iv)a. of this Rule.
            Withdrawals of cash or securities may be made from any account which has a debit balance, "short" position or commitments, provided it is in compliance with Regulation T and Rules 400 through 406 under the Act and Rules 41.42 through 41.48 under the CEA, and after such withdrawal the equity in the account is at least the greater of $2,000 ($25,000 in the case of a "pattern day trader") or an amount sufficient to meet the maintenance margin requirements of this Rule.
            (c) Maintenance Margin
            The margin which must be maintained in all accounts of customers, except for cash accounts subject to other provisions of this rule, shall be as follows:
            (1) 25 percent of the current market value of all securities, except for security futures contracts, "long" in the account; plus
            (2) $2.50 per share or 100 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at less than $5.00 per share; plus
            (3) $5.00 per share or 30 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at $5.00 per share or above; plus
            (4) 5 percent of the principal amount or 30 percent of the current market value, whichever amount is greater, of each bond "short" in the account.
            (5) The minimum maintenance margin levels for security futures contracts, long and short, shall be 20 percent of the current market value of such contract. (See paragraph (f) of this Rule for other provisions pertaining to security futures contracts.)
            (d) Additional Margin
            Procedures shall be established by members to:
            (1) review limits and types of credit extended to all customers;
            (2) formulate their own margin requirements; and
            (3) review the need for instituting higher margin requirements, mark-to-markets and collateral deposits than are required by this paragraph for individual securities or customer accounts.
            (e) Exceptions to Rule
            The foregoing requirements of this Rule are subject to the following exceptions:
            (1) Offsetting "Long" and "Short" Positions
            When a security carried in a "long" position is exchangeable or convertible within a reasonable time, without restriction other than the payment of money, into a security carried in a "short" position for the same customer, the margin to be maintained on such positions shall be 10 percent of the current market value of the "long" securities. When the same security is carried "long" and "short" the margin to be maintained on such positions shall be 5 percent of the current market value of the "long" securities. In determining such margin requirements "short" positions shall be marked to the market.
            (2) Exempted Securities, Non-equity Securities and Baskets

            (A) Obligations of the United States and Highly Rated Foreign Sovereign Debt Securities
            On net "long" or net "short" positions in obligations (including zero coupon bonds, i.e., bonds with coupons detached or non-interest bearing bonds) issued or guaranteed as to principal or interest by the United States Government or by corporations in which the United States has a direct or indirect interest as shall be designated for exemption by the Secretary of the Treasury, or in obligations that are highly rated foreign sovereign debt securities, the margin to be maintained shall be the percentage of the current market value of such obligations as specified in the applicable category below:

            (i)

            Less than one year to maturity

            1 percent

            (ii)

            One year but less than three years to maturity

            2 percent

            (iii)

            Three years but less than five years to maturity

            3 percent

            (iv)

            Five years but less than ten years to maturity

            4 percent

            (v)

            Ten years but less than twenty years to maturity

            5 percent

            (vi)

            Twenty years or more to maturity

            6 percent

            Notwithstanding the above, on zero coupon bonds with five years or more to maturity the margin to be maintained shall not be less than 3 percent of the principal amount of the obligation.
            When such obligations other than United States Treasury bills are due to mature in thirty calendar days or less, a member, at its discretion, may permit the customer to substitute another such obligation for the maturing obligation and use the margin held on the maturing obligation to reduce the margin required on the new obligation, provided the customer has given the member irrevocable instructions to redeem the maturing obligation.
            (B) All Other Exempted Securities
            On any positions in exempted securities other than obligations of the United States, the margin to be maintained shall be 7 percent of the current market value.
            (C) Non-Equity Securities
            On any positions in non-equity securities, the margin to be maintained (except where a lesser requirement is imposed by other provisions of this Rule) shall be:

            (i) 10 percent of the current market value in the case of investment grade debt securities; and
            (ii) 20 percent of the current market value or 7 percent of the principal amount, whichever amount is greater, in the case of all other listed non-equity securities, and all other marginable non-equity securities as defined in paragraph (a)(16) of this Rule.
            (D) Baskets
            Notwithstanding the other provisions of this Rule, a member may clear and carry basket transactions of one or more members registered as market makers (who are deemed specialists for purposes of Section 7 of the Act pursuant to the rules of a national securities exchange) upon a margin basis satisfactory to the concerned parties, provided all real and potential risks in accounts carried under such arrangements are at all times adequately covered by the margin maintained in the account or, in the absence thereof, by the carrying member when computing net capital under SEC Rule 15c3-1.
            (E) Special Provisions
            Notwithstanding the foregoing in this paragraph (e)(2):
            i.  A member may, at its discretion, permit the use of accrued interest as an offset to the maintenance margin required to be maintained; and
            ii. The Association upon written application, may permit lower margin requirements on a case-by-case basis.
            (F) Transactions with Exempt Accounts Involving Certain "Good Faith" Securities
            On any position resulting from a transaction involving exempted securities, mortgage related securities, or major foreign sovereign debt securities made for or with an "exempt account," no margin need be required and any marked to the market loss on such position need not be collected. However, the amount of any uncollected marked to the market loss shall be deducted in computing the member's net capital as provided in SEC Rule 15c3-1, subject to the limits provided in paragraph (e)(2)(H) below.
            (G) Transactions With Exempt Accounts Involving Highly Rated Foreign Sovereign Debt Securities and Investment Grade Debt Securities
            On any position resulting from a transaction made for or with an "exempt account" (other than a position subject to paragraph (e)(2)(F)), the margin to be maintained on highly rated foreign sovereign debt and investment grade debt securities shall be, in lieu of any greater requirements imposed under this Rule, (i) 0.5 percent of current market value in the case of highly rated foreign sovereign debt securities, and (ii) 3 percent of current market value in the case of all other investment grade debt securities. The member need not collect any such margin, provided the amount equal to the margin required shall be deducted in computing the member's net capital as provided in SEC Rule 15c3-1, subject to the limits provided in paragraph (e)(2)(H) below.
            (H) Limits on Net Capital Deductions for Exempt Accounts
            (i) Members shall maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraphs (e)(2)(F) and (e)(2)(G) which shall be made available to the Association upon request.
            (ii) In the event that the deductions of securities positions from net capital deductions taken by a member as a result of marked to the market losses incurred under paragraphs (e)(2)(F) and (e)(2)(G) (exclusive of the percentage requirements established thereunder) exceed:
            a. on any one account or group of commonly controlled accounts, 5 percent of the member's tentative net capital, or
            b. on all accounts combined, 25 percent of the member's tentative net capital, and, such excess exists on the fifth business day after it was incurred, the member shall give prompt written notice to the Association and shall not enter into any new transaction(s) subject to the provisions of paragraphs (e)(2)(F) or (e)(2)(G) that would result in an increase in the amount of such excess under, as applicable, subparagraph a. or b. above.
            (3) Joint Accounts in Which the Carrying Organization or a Partner or Stockholder Therein Has an Interest
            In the case of a joint account carried by a member in which such member, or any partner, or stockholder (other than a holder of freely transferable stock only) of such member participates with others, each participant other than the carrying member shall maintain an equity with respect to such interest pursuant to the margin provisions of this paragraph as if such interest were in a separate account.
            Pursuant to the Rule 9600 Series, the Association may grant an exemption from the provisions of paragraph (e)(3), if the account is confined exclusively to transactions and positions in exempted securities.
            (4) International Arbitrage Accounts
            International arbitrage accounts for non-member foreign brokers or dealers who are members of a foreign securities exchange shall not be subject to this paragraph. The amount of any deficiency between the equity in such an account and the margin required by the other provisions of this paragraph shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
            (5) Specialists' and Market Makers' Accounts
            (A) A member may carry the account of an "approved specialist or market maker," which account is limited to specialist or market making transactions, upon a margin basis which is satisfactory to both parties. The amount of any deficiency between the equity in the account and the haircut requirements pursuant to SEC Rule 15c3-1 shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
            For the purpose of this subparagraph, the term "approved specialist or market maker" means either:
            i. a specialist or market maker, who is deemed a specialist for all purposes under the Act and who is registered pursuant to the rules of a national securities exchange; or
            ii. an OTC market maker or third market maker, who meets the requirements of Section 220.7(g)(5) of Regulation T.
            (B) In the case of a joint account carried by a member in accordance with subparagraph (i) above in which the member participates, the equity maintained in the account by the other participants may be in any amount which is mutually satisfactory. The amount of any deficiency between the equity maintained in the account by the other participants and their proportionate share of the haircut requirements pursuant to SEC Rule 15c3-1 shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
            (6) Broker/Dealer Accounts
            (A) A member may carry the proprietary account of another broker/dealer, which is registered with the Commission, upon a margin basis which is satisfactory to both parties, provided the requirements of Regulation T and Rules 400 through 406 under the Act and Rules 41.42 through 41.48 under the CEA are adhered to and the account is not carried in a deficit equity condition. The amount of any deficiency between the equity maintained in the account and the haircut requirements pursuant to SEC Rule 15c3-1 shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
            (B) Joint Back Office Arrangements
            An arrangement may be established between two or more registered broker/dealers pursuant to Regulation T Section 220.7, to form a joint back office ("JBO") arrangement for carrying and clearing or carrying accounts of participating broker/dealers. Members must provide written notification to the Association prior to establishing a JBO arrangement.
            (i) A carrying and clearing, or carrying member must:
            a. maintain a minimum tentative net capital of $25 million as computed pursuant to SEC Rule 15c3-1, except that a member whose primary business consists of the clearance of options market-maker accounts may carry JBO accounts provided that it maintains a minimum net capital of $7 million as computed pursuant to SEC Rule 15c3-1. In addition, the member must include in its ratio of gross options market maker haircuts required by the provisions of SEC Rule 15c3-1 gross deductions for JBO participant accounts. Clearance of option market maker accounts shall be deemed a broker/dealer's primary business if a minimum of 60% of the aggregate deductions in the above ratio are options market maker deductions. In the event that a carrying and clearing, or a carrying member's tentative net capital, or net capital, respectively, has fallen below the above requirements, the firm shall: 1. promptly notify the Association in writing of such deficiency, 2. take appropriate action to resolve such deficiency within three consecutive business days, or not permit any new transactions to be entered into pursuant to the JBO arrangement;
            b. maintain a written risk analysis methodology for assessing the amount of credit extended to participating broker/dealers which shall be made available to the Association on request; and
            c. deduct from net capital haircut requirements pursuant to SEC Rule 15c3-1 amounts in excess of the equity maintained in the accounts of participating broker/dealers.
            (ii) A participating broker/dealer must:
            a. be a registered broker/dealer subject to the SEC's net capital requirements;
            b. maintain an ownership interest in the carrying/clearing member organization pursuant to Regulation T of the Federal Reserve Board, Section 220.7; and
            c. maintain a minimum liquidating equity of $1 million in the JBO arrangement exclusive of the ownership interest established in (ii)b. above. When the minimum liquidating equity decreases below the $1 million requirement, the participant must deposit an amount sufficient to eliminate this deficiency within 5 business days or be subject to margin account requirements prescribed for customers in Regulation T, and the margin requirements pursuant to the other provisions of this Rule.
            (7) Nonpurpose Credit
            In a nonsecurities credit account, a member may extend and maintain nonpurpose credit to or for any customer without collateral or on any collateral whatever, provided:
            (A) the account is recorded separately and confined to the transactions and relations specifically authorized by Regulation T;
            (B) the account is not used in any way for the purpose of evading or circumventing any regulation of NASD or of the Board of Governors of the Federal Reserve System and Rules 400 through 406 under the Act and Rules 41.42 through 41.48 under the CEA; and
            (C) the amount of any deficiency between the equity in the account and the margin required by the other provisions of this paragraph shall be charged against the member's net capital as provided in SEC Rule 15c3-1.
            The term "nonpurpose credit" means an extension of credit other than "purpose credit" as defined in Section 220.2 of Regulation T.
            (8) Shelf-Registered, Control and Restricted Securities

            (A) Shelf-Registered Securities — The equity to be maintained in margin accounts of customers for securities which are the subject of a current and effective registration for a delayed offering (shelf-registered securities) shall be at least the amount of margin required by paragraph (c)(3) provided the member:

            (i) obtains a current prospectus in effect with the Commission, meeting the requirements of Section 10 of the Securities Act of 1933, covering such securities;

            (ii) has no reason to believe the Registration Statement is not in effect or that the issuer has been delinquent in filing such periodic reports as may be required of it with the Commission and is satisfied that such registration will be kept in effect and that the prospectus will be maintained on a current basis; and

            (iii) retains a copy of such Registration Statement, including the prospectus, in an easily accessible place in its files. Shelf-registered securities which do not meet all the conditions prescribed above shall have no value for purposes of this paragraph (c). Also see subparagraph (C) below.
            (B) Control and Restricted Securities — The equity in accounts of customers for control securities and other restricted securities of issuers who continue to maintain a consistent history of filing annual and periodic reports in timely fashion pursuant to the formal continuous disclosure system under the Act, which are subject to Rule 144 or 145(d) under the Securities Act of 1933, shall be 40 percent of the current market value of such securities "long" in the account, provided the member:

            (i) in computing net capital, deducts any margin deficiencies in customers' accounts based upon a margin requirement as specified in subparagraph (C)(ii) below for such securities and values only that amount of such securities which are then saleable under Rule 144 or 145(d) under the Securities Act of 1933 in conformity with all of the applicable terms and conditions thereof, for purposes of determining such deficiencies; and

            (ii) makes volume computations necessary to determine the amount of securities then saleable under Rule 144 or 145(d) under the Securities Act of 1933 on a weekly basis or at such frequency as the member and/or the Association may deem appropriate under the circumstances. See also subparagraph (C) below.

            (C) Additional Requirements on Shelf-Registered Securities and Control and Restricted Securities — A member extending credit on shelf-registered, control and other restricted securities in margin accounts of customers shall be subject to the following additional requirements:

            (i) The Association may at any time require reports from members showing relevant information as to the amount of credit extended on shelf-registered, control and restricted securities and the amount, if any, deducted from net capital due to such security positions.

            (ii) Concentration Reduction. A concentration exists whenever the aggregate position in control and restricted securities of any one issue, excluding excess securities (as defined below), exceeds:

            a. 10 percent of the outstanding shares or
            b. 100 percent of the average weekly volume during the preceding three-month period. Where a concentration exists, for purposes of computing subparagraph (B)(i) above, the margin requirement on such securities shall be, based on the greater of (ii).a or .b, above, as specified below:

            Percent of Outstanding Shares or Percent of Average Weekly Volume Margin Requirement
            Up to 10 percent Up to 100 percent 25 percent
            Over 10 percent and under 15 percent Over 100 percent and under 200 percent 30 percent
            15 percent and under 20 percent 200 percent and under 300 percent 45 percent
            20 percent and under 25 percent 300 percent and under 400 percent 60 percent
            25 percent and under 30 percent 400 percent and under 500 percent 75 percent
            30 percent and above 500 percent and above 100 percent
            For purposes of this sub-paragraph (e)(8)(C)(ii), "excess securities" shall mean the amount of securities, if any, by which the aggregate position in control and restricted securities of any one issue exceeds the aggregate amount of securities that would be required to support the aggregate credit extended on such control and restricted securities if the applicable margin requirement were 50%.

            (D) Restricted Securities — Securities either:
            (i) then saleable pursuant to the terms and conditions of Rule 144(k) under the Securities Act of 1933, or

            (ii) then saleable pursuant to the terms and conditions of Rule 145(d)(2) or (d)(3) under such Act, shall not be subject to the provisions of subparagraph (e)(8), provided that the issuer continues to maintain a consistent history of filing annual and periodic reports in timely fashion pursuant to the formal continuous disclosure system under the Act.
            (f) Other Provisions

            (1) Determination of Value for Margin Purposes
            Active securities dealt in on a national securities exchange or OTC Marginable securities shall, for margin purposes, be valued at current market prices provided that only those options contracts on a stock or stock index, or a stock index warrant, having an expiration that exceeds nine months and that are listed or guaranteed by the carrying broker-dealer, may be deemed to have market value for the purposes of Rule 2520. Other securities shall be valued conservatively in view of current market prices and the amount that might be realized upon liquidation. Substantial additional margin must be required in all cases where the securities carried in "long" or "short" positions are subject to unusually rapid or violent changes in value, or do not have an active market on a national securities exchange, or where the amount carried is such that the position(s) cannot be liquidated promptly.

            (2) Puts, Calls and Other Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants

            (A) Except as provided below, and in the case of a put, call, index stock group option, or stock index warrant with a remaining period to expiration exceeding nine months, no put or call carried for a customer shall be considered of any value for the purpose of computing the margin to be maintained in the account of such customer.

            (B) The issuance, guarantee or sale (other than a "long" sale) for a customer of a put or a call shall be considered a security transaction subject to paragraph (c)(2).

            (C) For purposes of this subparagraph (f)(2), obligations issued by the United States Government shall be referred to as United States Government obligations. Mortgage pass-through obligations guaranteed as to timely payment of principal and interest by the Government National Mortgage Association shall be referred to as GNMA obligations.
            In the case of any put, call, currency warrant, currency index warrant, or stock index warrant carried "long" in a customer's account that expires in nine months or less, initial margin must be deposited and maintained equal to at least 100% of the purchase price of the option or warrant.
            Long Listed Option or Warrant With An Expiration Exceeding Nine Months. In the case of a put, call, index stock group option, or stock index warrant that is issued by a registered clearing agency, margin must be deposited and maintained equal to at least 75% of the current market value of the option or warrant; provided that the option or warrant has a remaining period to expiration exceeding nine months.
            Long OTC Option or Warrant With An Expiration Exceeding Nine Months. In the case of a put, call, index stock group option, or stock index warrant carried long that is not issued by a registered clearing agency, margin must be deposited and maintained equal to at least 75% of the option's or warrant's "in-the-money" amount plus 100% of the amount, if any, by which the current market value of the option or warrant exceeds its “in-the-money” amount provided the option or warrant:
            (i) is guaranteed by the carrying broker-dealer,
            (ii) has an American-style exercise provision, and
            (iii) has a remaining period to expiration exceeding nine months.
            (D) The margin required on any put, call, currency warrant, currency index warrant, or stock index warrant issued, guaranteed or carried "short" in a customer's account shall be:

            (i) In the case of puts and calls issued by a registered clearing agency, 100 percent of the current market value of the option plus the percentage of the current market value of the underlying component specified in column II of the chart below. In the case of currency warrants, currency index warrants and stock index warrants, 100 percent of the current market value of each such warrant plus the percentage of the warrant's current "underlying component value" (as column IV of the chart below describes) specified in column II of the chart below.
            The margin on any put, call, currency warrant, currency index warrant, or stock index warrant issued, guaranteed or carried "short" in a customer's account may be reduced by any "out-of-the-money amount" (as defined below), but shall not be less than 100 percent of the current market value of the option or warrant plus the percentage of the current market value of the underlying component specified in column III, except in the case of any put issued, guaranteed or carried "short" in a customer's account. Margin on such put option contracts shall not be less than the current value of the put option plus the percentage of the put option's aggregate exercise price as specified in column III.
                    I
            Security or
            Index
            II
            Initial and/or
            Maintenance
            Margin Required
            III
            Minimum
            Margin
            Required
            IV
            Underlying Component Value
            (1) Stock 20 percent 10 percent The equivalent number of shares at current market prices.
            (2) Industry index stock group 20 percent 10 percent The product of the current index group value and the applicable index multiplier.
            (3) Broad index stock group 15 percent 10 percent The product of the current index group value and the applicable index multiplier.
            (4) U.S. Treasury bills — 95 days or less to maturity .35 percent 1/20 percent The underlying principal amount.
            (5) U.S. Treasury notes 3 percent 1/2 percent The underlying principal amount.
            (6) U.S. Treasury bonds 3.5 percent 1/2 percent The underlying principal amount.
            (7) Foreign Currencies 4 percent 3/4 percent The product of units per foreign currency contract and the closing spot price.
            (8) Interest Rate contracts 10 percent 5 percent The product of the current interest rate measure and the applicable multiplier.
            For purposes hereof, "out-of-the-money amounts" are determined as follows:
            Option Issue Call Put
            Stock Options Any excess of the aggregate exercise price of the option over the current market value of the equivalent number of shares of the underlying security. Any excess of the current market value of the equivalent number of shares of the underlying security over the aggregate exercise price of the option.
            U.S. Treasury Options Any excess of the aggregate exercise price of the option over the current market value of the underlying principal amount. Any excess of the current market value of the underlying principal amount over the aggregate exercise price of the option.
            Index Stock Group Options Any excess of the aggregate exercise price of the option over the product of the current index group value and the applicable multiplier. Any excess of the product of the current index group value and the applicable multiplier over the aggregate exercise price of the option.
            Foreign Currency Options Any excess of the aggregate exercise price of the option over the product of units per foreign currency contract and the closing spot prices. The product of units per foreign currency contract and the closing spot prices over the aggregate price of the option.
            Interest Rate Options Any excess of the aggregate exercise price of the option over the product of the current interest rate measure value and the applicable multiplier. Any excess of the product of the current interest rate measure value and the applicable multiplier over the aggregate exercise price of the option.
            If the option contract provides for the delivery of obligations with different maturity dates or coupon rates, the computation of the "out-of-the-money amount," if any, where required by this Rule, shall be made in such a manner as to result in the highest margin requirement on the short option position.

            (ii) In the case of puts and calls issued by a registered clearing agency which represent options on GNMA obligations in the principal amount of $100,000, 130 percent of the current market value of the option plus $1,500, except that the margin required need not exceed $5,000 plus the current market value of the option.

            (iii) In the case of puts and calls not issued by a registered clearing agency, the percentage of the current value of the underlying component and the applicable multiplier, if any, specified in column II below, plus any "in-the-money amount" (as defined in this paragraph (f)(2)(D)(iii)).
            In the case of options not issued by a registered clearing agency, the margin on any put or call issued, guaranteed or carried "short" in a customer's account may be reduced by any "out of the money amount" (as defined in paragraph (f)(2)(D)(i)), but shall not be less than the percentage of the current value of the underlying component and the applicable multiplier, if any, specified in column III below, except in the case of any put issued or guaranteed or carried "short" in a customer's account. Margin on such put option contracts shall not be less than the percentage of the put option's exercise price as specified in column III below.
                     I
            Type of Option
            II
            Initial and/or
            Maintenance
            Margin
            Required
            III
            Minimum
            Margin
            Required
            IV
            Underlying Component Value
            1. Stock and convertible corporate debt securities 30% 10% The equivalent number of shares at current market prices for stocks or the underlying principal amount for convertible corporate debt securities.
            2 Industry Index stock group 30% 10% The product of the current index group value and the applicable index multiplier.
            3 Broad index stock group 20% 10% The product of the current index group value and the applicable index multiplier.
            4. U.S. Government or U.S. Government Agency debt securities other than those exempted by Rule 3a12-7 under the Securities Exchange Act of 1934 * 5% 3% The underlying principal amount.
            5. Corporate debt securities registered on a national securities exchange and marginable OTC corporate debt securities as defined in Regulation T Section 220.2(t)(1) ** 15% 5% The underlying principal amount.
            6. All other OTC options not covered above 45% 20% The underlying principal amount.


            * Option contracts under category (4) must be for a principal amount of not less than $500,000.
            ** Option transactions on all other OTC margin bonds as defined in Regulation T Section 220.2(t) are not eligible for the margin requirements as contained in this provision. Margin requirements for such securities are to be computed pursuant to category (6).
            For the purpose of this paragraph (f)(2)(D)(iii), "in-the-money amounts" are determined as follows:
            Option Issue Call Put
            Stock options Any excess of the current market value of the equivalent number of shares of the underlying security over the aggregate exercise price of the option. Any excess of the aggregate exercise price of the option over the current market value of the equivalent number of shares of the underlying security.
            Index stock group options Any excess of the product of the current index group value and the applicable multiplier over the aggregate exercise price of the option. Any excess of the aggregate exercise price of the option over the product of the current index group value and the applicable multiplier.
            U.S. Government mortgage related or corporate debt securities options Any excess of the current value of the underlying principal amount over the aggregate exercise price of the option. Any excess of the aggregate exercise price of the option over the current value of the underlying principal amount.
            (iv) Puts and calls not issued by a registered clearing agency and representing options on U.S. Government and U.S. Government Agency debt securities that qualify for exemption pursuant to Rule 3a12-7 under the Securities Exchange Act of 1934, must be for a principal amount of not less than $500,000, and shall be subject to the following requirements:

            a. For exempt accounts, 3% of the current value of the underlying principal amount on thirty (30) year U.S. Treasury bonds and non-mortgage backed U.S. Government agency debt securities; and 2% of the current value of the underlying principal amount on all other U.S. Government and U.S. Government agency debt securities, plus any "in-the-money amount" (as defined in (f)(2)(D)(iii)) or minus any "out-of-the-money amount" (as defined in (f)(2)(D)(i)). The amount of any deficiency between the equity in the account and the margin required shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements on the following basis:

            1. On any one account or group of commonly controlled accounts to the extent such deficiency exceeds 5% of a member organization's tentative Net Capital (net capital before deductions on securities), 100% of such excess amount, and

            2. On all accounts combined to the extent such deficiency exceeds 25% of a member organization's tentative Net Capital, 100% of such excess amount, reduced by any amount already deducted pursuant to (a) above.

            b. For non-exempt accounts, 5% of the current value of the underlying principal amount on thirty (30) year U.S. Treasury bonds and non-mortgage backed U.S. Government agency debt securities; and 3% of the current value of the underlying principal amount on all other U.S. Government and U.S. Government agency debt securities, plus any "in-the-money amount" or minus any "out-of-the-money amount", provided the minimum margin shall not be less than 1% of the current value of the underlying principal amount.
            For purposes of this subsection (f)(2)(D)(iv), an "exempt account" shall be defined as a member organization, non-member broker/dealer, "designated account", any person having net tangible assets of at least sixteen million dollars or in the case of mortgage-related debt securities transactions an independently audited mortgage banker with both more than $1.5 million of net current assets (which may include 3/4 of 1% maximum allowance on loan servicing portfolios) and with more than $1.5 million of net worth.
            (E)(i) Each put or call shall be margined separately and any difference between the current market value of the underlying component and the exercise price of a put or call shall be considered to be of value only in providing the amount of margin required on that particular put or call. Substantial additional margin must be required on options issued, guaranteed or carried "short" with an usually long period of time to expiration, or written on securities which are subject to unusually rapid or violent changes in value, or which do not have an active market, or where the securities subject to the option cannot be liquidated promptly.

            (ii) No margin need be required on any "covered" put or call.
            (F)(i) Where both a put and call specify the same underlying component are issued by a registered clearing agency and are carried "short" for a customer, the amount of margin required shall be the margin on the put or call, whichever is greater, as required pursuant to subparagraph (f)(2)(D)(i) above, plus the current market value on the other option.

            (ii) Where either or both the put and call specifying the same underlying component are not issued by a registered clearing agency and are issued, guaranteed or carried "short" for a customer by the same broker-dealer (as defined in subparagraph (f)(2)(G)(iii) below), the amount of margin required shall be the margin on the put or call, whichever is greater, as required pursuant to subparagraph (f)(2)(D)(iii) and (D)(iv) above, plus any unrealized loss on the other option. Where either or both the put or call are not issued, guaranteed or carried by the same broker/dealer then the put and call must be margined separately pursuant to subparagraph (f)(2)(D)(iii) and (D)(iv) above, however, the minimum margin shall not apply to the other option.

            (iii) If both a put and call for the same GNMA obligation in the principal amount of $100,000 are issued, guaranteed or carried "short" for a customer, the amount of margin required shall be the margin on the put or call, whichever is greater, as required pursuant to subparagraph (f)(2)(D)(ii) above, plus the current market value of the other option.
            (G)(i) Where a call that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a call issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed call and specifying the same underlying component the margin required on the "short" call shall be the lower of:

            a. the margin required pursuant to subparagraph (f)(2)(D)(i) above; or

            b. the amount, if any, by which the exercise price of the "long" call exceeds the exercise price of the "short" call.

            (ii) Where a put that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a put issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed put and specifying the same underlying component the margin required on the "short" put shall be the lower of:

            a. the margin required pursuant to subparagraph (iv)a. above, in the case of stock options, United States Government obligations, foreign currency options or index stock group options; or

            b. the amount, if any, by which the exercise price of the "short" put exceeds the exercise price of the "long" put.
            (iii)a. Where a call that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a call issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed call and written on the same GNMA obligation in the principal amount of $100,000, the margin required on the "short" call shall be the lower of:

            1. the margin required pursuant to subparagraph (f)(2)(D)(ii) above; or

            2. the amount, if any, by which the exercise price of the "long" call exceeds the exercise price of the "short" call multiplied by the appropriate multiplier factor set forth below.

            b. Where a put that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a put issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed put and written on the same GNMA obligation in the principal amount of $100,000, the margin required on the "short" put shall be the lower of:

            1. the margin required pursuant to subparagraph (iv)b. above; or

            2. the amount, if any, by which the exercise price of the "short" put exceeds the exercise price of the "long" put multiplied by the appropriate multiplier factor set forth below.

            c. For purposes of this subparagraph(f)(2)(G)(iii) the multiplier factor to be applied shall depend on the then current highest qualifying rate as defined by the rules of the national securities exchange or national securities association on or through which the option is listed or traded. If the then current highest qualifying rate is less than 8 percent, the multiplier factor shall be 1; if the then current highest qualifying rate is greater than or equal to 8 percent but less than 10 percent, the multiplier factor shall be 1.2; if the then current highest qualifying rate is greater than or equal to 10 percent but less than 12 percent, the multiplier factor shall be 1.4; if the then current highest qualifying rate is greater than or equal to 12 percent but less than 14 percent, the multiplier factor shall be 1.5; if the then current highest qualifying rate is greater than or equal to 14 percent but less than 16 percent, the multiplier factor shall be 1.6; and if the then current highest qualifying rate is greater than or equal to 16 percent but less than or equal to 18 percent, the multiplier factor shall be 1.7. The multiplier factor or factors for higher qualifying rates shall be established by the Association as required.
            (iv)a. Where a call that is issued by a broker/dealer is carried "long" for a customer's account and the account is also "short" a call issued by the same broker/dealer, expiring on or before the date of expiration of the "long" call and specifying the same underlying component, the margin required on the short "call" shall be the lower of:

            1. the margin required pursuant to subparagraph (f)(2)(D)(iii) or (D)(iv) above; or

            2. the amount, if any, by which the exercise price of the "long" call exceeds the exercise price of the "short" call.

            b. Where a put that is issued by a broker/dealer is carried "long" for a customer's account and the account is "short" a put issued by the same broker/dealer, expiring on or before the date of expiration of the "long" put and specifying the same underlying component, the margin required on the "short" put shall be the lower of:

            1. the margin required pursuant to subparagraphs (f)(2)(D)(iii) or (D)(iv) above; or

            2. the amount, if any, by which the exercise price of the "short" put exceeds the exercise price of the "long" put.

            c. A "long" call and a "short" call or a "long" put and a "short" put are deemed to be issued by the same broker/dealer when either the broker/dealer has issued or guaranteed both options or issued or guaranteed one of the options and the other option was issued by a registered clearing agency on behalf of that broker/dealer. If the options are not issued by the same broker/dealer then the "short" put or the "short" call must be margined separately pursuant to subparagraphs (f)(2)(D)(iii) or (D)(iv) above.

            (v) The following requirements set forth the minimum amount of margin that must be maintained in margin accounts of customers having positions in components underlying options, and stock index warrants, when such components are held in conjunction with certain positions in the overlying option or warrant. The option or warrant must be issued by a registered clearing agency or guaranteed by the carrying broker/dealer. In the case of a call or warrant carried in a short position, a related long position in the underlying component shall be valued at no more than the call/warrant exercise price for margin equity purposes.

            a. Long Option or Warrant Offset. When a component underlying an option or warrant is carried long (short) in an account in which there is also carried a long put (call) or warrant specifying equivalent units of the underlying component, the minimum amount of margin that must be maintained on the underlying component is 10% of the option/warrant exercise price plus the "out-of-the-money" amount, not to exceed the minimum maintenance required pursuant to paragraph (c) of this Rule.

            b. Conversions. When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and is also carried with a long put or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short call or warrant, the minimum amount of margin that must be maintained for the underlying component shall be 10% of the exercise price.

            c. Reverse Conversions. When a put or warrant carried in a short position is covered by a short position in equivalent units of the underlying component and is also carried with a long call or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short put or warrant, the minimum amount of margin that must be maintained for the underlying component shall be 10% of the exercise price plus the amount by which the exercise price of the put exceeds the current market value of the underlying, if any.

            d. Collars. When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and is also carried with a long put or warrant specifying equivalent units of the same underlying component and having a lower exercise price and the same expiration date as the short call/warrant, the minimum amount of margin that must be maintained for the underlying component shall be the lesser of 10% of the exercise price of the put plus the put "out-of-the-money" amount or 25% of the call aggregate exercise price.

            e. Butterfly Spread. This subparagraph applies to a butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer.

            1. With respect to a long butterfly spread as defined in Rule 2522, the net debit must be paid in full.

            2. With respect to a short butterfly spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the difference between the two lowest exercise prices with respect to short butterfly spreads comprised of calls or the difference between the two highest exercise prices with respect to short butterfly spreads comprised of puts. The net proceeds from the sale of short option components may be applied to the requirement.

            f. Box Spread. This subparagraph applies to box spreads as defined in Rule 2522, where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer.

            1. With respect to a long box spread as defined in Rule 2522, the net debit must be paid in full.

            2. With respect to a short box spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the difference between the exercise prices. The net proceeds from the sale of the short option components may be applied to the requirement.

            g. Long Box Spread in European-Style Options. With respect to a long box spread as defined in Rule 2522, in which all component options have a European-style exercise provision and are issued by a registered clearing agency or guaranteed by the carrying broker/dealer, margin must be deposited and maintained equal to at least 50% of the difference in the exercise prices. The net proceeds from the sale of short option components may be applied to the requirement. For margin purposes, the long box spread may be valued at an amount not to exceed 100% of the difference in the exercise prices.

            h. Long Condor Spread. This subparagraph applies to a long condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a long condor spread as defined in Rule 2522, the net debit must be paid in full.
            i. Short Iron Butterfly Spread. This subparagraph applies to a short iron butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short iron butterfly spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
            j. Short Iron Condor Spread. This subparagraph applies to a short iron condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short iron condor spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
            k. Long Calendar Butterfly Spread. This subparagraph applies to a long calendar butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a long calendar butterfly spread as defined in Rule 2522, the net debit must be paid in full.
            l. Long Calendar Condor Spread. This subparagraph applies to a long calendar condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a long calendar condor spread as defined in Rule 2522, the net debit must be paid in full.
            m. Short Calendar Iron Butterfly Spread. This subparagraph applies to a short calendar iron butterfly spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short calendar iron butterfly spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
            n. Short Calendar Iron Condor Spread. This subparagraph applies to a short calendar iron condor spread as defined in Rule 2522 where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker/dealer. With respect to a short calendar iron condor spread as defined in Rule 2522, margin must be deposited and maintained equal to at least the amount of the exercise price interval. The net proceeds from the sale of short option components may be applied to the requirement.
            (H)(i) Where a call is issued, guaranteed or carried "short" against an existing net "long" position in the security under option or in any security immediately exchangeable or convertible, other than warrants, without restriction including the payment of money into the security under option, no margin need be required on the call, provided:

            a. such net long position is adequately margined in accordance with this Rule and

            b. the right to exchange or convert the net "long" position does not expire on or before the date of expiration of the "short" call. Where a put is issued, guaranteed or carried "short" against an existing net "short" position in the security under option, no margin need be required on the put, provided such net "short" position is adequately margined in accordance with this Rule.
            (ii) Where a call representing stock options is issued, guaranteed or carried "short" against an existing net "long" position in a warrant convertible into the underlying security under option, margin shall be required on the call equal to any amount by which the conversion price of the "long" warrant exceeds the exercise price of the call, provided:

            a. such net long position is adequately margined in accordance with this Rule and

            b. the right to convert the net "long" position does not expire on or before the date of expiration of the "short" call. However, when a payment of money is required to convert the "long" warrant such warrant shall have no value for purposes of this Rule.

            (iii) In determining net "long" and net "short" positions, for purposes of subparagraphs (f)(2)(H)(i) and (ii) above, offsetting "long" and "short" positions in exchangeable or convertible securities (including warrants) or in the same security, as discussed in paragraph (c)(5)(A), shall be deducted. In computing margin on such an existing net security position carried against a put or call, the current market price to be used shall not be greater than the exercise price in the case of a call or less than the current market price in the case of a put and the required margin shall be increased by any unrealized loss.

            (iv) Where a put or call is carried "short" in the account of a customer against a letter of guarantee in form satisfactory to the Association and issued by a third party custodian bank or trust company (the guarantor), which letter of guarantee is held in the account at the time the put or call is written, or is received in the account promptly thereafter, no margin need be required on the put or call.
            In the case of a call on a broad index stock group, the letter of guarantee must certify that the guarantor holds for the account of the customer as security for the letter either cash, cash equivalents, one or more qualified securities, or any combination thereof, having an aggregate market value, computed as at the close of business on the day the call is written, of not less than 100 percent of the aggregate current index value computed as at the same time and that the guarantor will promptly pay the member the exercise settlement amount in the event the account is assigned an exercise notice. The letter of guarantee may provide for substitution of qualified securities held as collateral provided that the substitution shall not cause the value of the qualified securities held to be diminished. A qualified security means an equity security, other than a warrant, right or option, that is traded on any national securities exchange; or any equity security, other than a warrant, listed in the current list of Over-the-Counter Margin Stocks as published by the Board of Governors of the Federal Reserve System.
            In the case of a call on any other option contract, the letter of guarantee must certify that the guarantor holds for the account of the customer as security for the letter, the underlying security (or a security immediately convertible into the underlying security without the payment of money) or foreign currency and that the guarantor will promptly deliver to the member the underlying security or foreign currency in the event the account is assigned an exercise notice.
            In the case of a put on an option contract (including a put on a broad index stock group), the letter of guarantee must certify that the guarantor holds for the account of the customer as security for the letter, cash or cash equivalents which have an aggregate market value, computed as at the close of business on the day the put is written, of not less than 100 percent of the aggregate exercise price of the put and that the guarantor will promptly pay the member the exercise settlement amount (in the case of a put on a broad index stock group) or the aggregate exercise price (in the case of any other put on an option contract) in the event the account is assigned an exercise notice. Cash equivalents shall mean those instruments referred to in Section 220.2 of Regulation T.

            (I) When a member issues or guarantees an option to receive or deliver securities or foreign currencies for a customer, such option shall be margined as if it were a put or call.
            (J)(i) Registered specialists, market makers or traders — Notwithstanding the other provisions of this subparagraph (f)(2), a member may clear and carry the listed option transactions of one or more registered specialists, registered market makers or registered traders in options (whereby registered traders are deemed specialists for all purposes under the Act, pursuant to the rules of a national securities exchange) (hereinafter referred to as "specialist(s)"), upon a "Good Faith" margin basis satisfactory to the concerned parties, provided the "Good Faith" margin requirement is not less than the Net Capital haircut deduction of the member carrying the transaction pursuant to SEC Rule 15c3-1 under the Act. In lieu of collecting the "Good Faith" margin requirement, a carrying member may elect to deduct in computing its Net Capital the amount of any deficiency between the equity maintained in the account and the "Good Faith" margin required.
            For purposes of this paragraph (f)(2)(J), a permitted offset position means, in the case of an option in which a specialist or market maker makes a market, a position in the underlying asset or other related assets, and in the case of other securities in which a specialist or market maker makes a market, a position in options overlying the securities in which a specialist or market maker makes a market. Accordingly, a specialist or market maker in options may establish, on a share-for-share basis, a long or short position in the securities underlying the options in which the specialist or market maker makes a market, and a specialist or market maker in securities other than options may purchase or write options overlying the securities in which the specialist or market maker makes a market, if the account holds the following permitted offset positions:

            a. A short option position which is not offset by a long or short option position for an equal or greater number of shares of the same underlying security which is "in the money";

            b. A long option position which is not offset by a long or short option position for an equal or greater number of shares of the same underlying security which is "in the money";

            c. A short option position against which an exercise notice was tendered;

            d. A long option position which was exercised;

            e. A net long position in a security (other than an option) in which a specialist or market maker makes a market;

            f. A net short position in a security (other than an option) in which the specialist or market maker makes a market; or

            g. A specified portfolio type as referred to in SEC Rule 15c3-1, including its appendices, or any applicable SEC staff interpretation or no-action position.
            Permitted offset transactions must be effected for specialist or market making purposes such as hedging, risk reduction, rebalancing of positions, liquidation, or accommodation of customer orders, or other similar specialist or market maker purpose. The specialist or market maker must be able to demonstrate compliance with this provision.
            For purposes of this paragraph (f)(2)(J), the term "in the money" means the current market price of the underlying asset or index is not below (with respect to a call option) or above (with respect to a put option) the exercise price of the option; and, the term "overlying option" means a put option purchased or a call option written against a long position in an underlying asset; or a call option purchased or a put option written against a short position in an underlying asset.
            (ii) Securities, including options, in such accounts shall be valued conservatively in the light of current market prices and the amount which might be realized upon liquidation. Substantial additional margin must be required or excess Net Capital maintained in all cases where the securities carried:
            a. are subject to unusually rapid or violent changes in value including volatility in the expiration months of options;

            b. do not have an active market; or

            c. in one or more or all accounts, including proprietary accounts combined, are such that they cannot be liquidated promptly or represent undue concentration of risk in view of the carrying member's Net Capital and its overall exposure to material loss.

            (K) The Association may at any time impose higher margin requirements with respect to any option position(s) when it deems such higher margin requirements are appropriate.

            (L) Exclusive designation — A customer may designate at the time an option order is entered which security position held in the account is to serve in lieu of the required margin, if such service is offered by the member; or the customer may have a standing agreement with the member as to the method to be used for determining on any given day which security position will be used in lieu of the margin to support an option transaction. Any security held in the account which serves in lieu of the required margin for a short put or short call shall be unavailable to support any other option transaction in the account.

            (M) Cash account transactions — A member may make option transactions in a customer's cash account, provided that:

            (i) The transaction is permissible under Regulation T, Section 220.8; or

            (ii) Spreads. A European-style cash-settled index stock group option or stock index warrant carried in a short position is deemed a covered position, and eligible for the cash account, provided a long position in a European-style cash-settled stock group index option, or stock index warrant having the same underlying component or index that is based on the same aggregate current underlying value, is held in or purchased for the account on the same day, provided that:

            a. the long position and the short position expire concurrently;

            b. the long position is paid is full; and

            c. there is held in the account at the time the positions are established, or received into the account promptly thereafter:

            1. cash or cash equivalents of not less than any amount by which the exercise price of the long call or call warrant (short put or put warrant) exceeds the exercise price of the short call or call warrant (long put or put warrant), to which net proceeds from the sale of the short position may be applied, or

            2. an escrow agreement.
            The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement i. cash, ii. cash equivalents, or iii. a combination thereof having an aggregate market value at the time the positions are established of not less than any amount by which the exercise price of the long call or call warrant (short put or put warrant) exceeds the exercise price of a short call or call warrant (long put or put warrant) and that the bank will promptly pay the member such amount in the event the account is assigned an exercise notice or that the bank will promptly pay the member funds sufficient to purchase a warrant sold short in the event of a buy-in.

            d. A long warrant may offset a short option contract and a long option contract may offset a short warrant provided that they have the same underlying component or index and equivalent aggregate current underlying value. In the event that the long position is not listed, it must be guaranteed by the carrying broker/dealer; otherwise the short position is not eligible for the cash account and must be margined separately pursuant to subparagraph (f)(2)(D).

            (iii) Long Butterfly Spreads, Short Butterfly Spreads, Long Condor Spreads, Short Iron Butterfly Spreads, or Short Iron Condor Spreads. Put or call options carried in a short position are deemed covered positions and eligible for the cash account provided that the account contains long positions of the same type which in conjunction with the short options, constitute a long butterfly spread, short butterfly spread, long condor spread, short iron butterfly spread, or short iron condor spread as defined in Rule 2522 and provided that:

            a. all component options are listed, or guaranteed by the carrying broker/dealer;

            b. all component options are European-style;

            c. all component options are cash settled;

            d. the long options are held in, or purchased for the account on the same day;

            e. all components options expire concurrently;

            f. with respect to a long butterfly spread or long condor spread as defined in Rule 2522, the net debit is paid in full; and

            g. with respect to a short butterfly spread, short iron butterfly spread or short iron condor spread as defined in Rule 2522, there is held in the account at the time the positions are established or received into the account promptly thereafter:

            1. cash or cash equivalents of not less than the amount of the difference between the two lowest exercise prices with respect to short butterfly spreads comprised of call options or the difference between the two highest exercise prices with respect to short butterfly spreads comprised of put options, to which the net proceeds from the sale of short option components may be applied; or

            2. an escrow agreement.
            The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement i. cash, ii. cash equivalents or iii. a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the difference between the two lowest exercise prices with respect to short butterfly spreads comprised of calls or the difference between the two highest exercise prices with respect to short butterfly spreads comprised of puts and that the bank will promptly pay the member such amount in the event the account is assigned an exercise notice on the call (put) with the lowest (highest) exercise price.

            (iv) Box Spreads. Puts and calls carried in a short position are deemed covered positions and eligible for the cash account provided that the account contains long positions which in conjunction with the short options constitute a box spread as defined in Rule 2522 provided that:

            a. all component options are listed, or guaranteed by the carrying broker/dealer;

            b. all component options are European-style;

            c. all component options are cash settled;

            d. the long options are held in, or purchased for the account on the same day;

            e. all component options expire concurrently;
            f. with respect to a long box spread as defined in Rule 2522, the net debit is paid in full; and

            g. with respect to a short box spread as defined in Rule 2522, there is held in the account at the time the positions are established, or received into the account promptly thereafter:

            1. cash or cash equivalents of not less than the amount of the difference between the exercise prices, to which the net proceeds from the sale of short option components may be applied; or

            2. an escrow agreement.
            The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement i. cash, ii. cash equivalents or iii. a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the difference between the exercise prices and that the bank will promptly pay the member such amount in the event the account is assigned an exercise notice on either short option.

            (3) "When Issued" and "When Distributed" Securities
            (A) Margin Accounts
            The margin to be maintained on any transaction or net position in each "when issued" security shall be the same as if such security were issued.
            Each position in a "when issued" security shall be margined separately and any unrealized profit shall be of value only in providing the amount of margin required on that particular position.
            When an account has a "short" position in a "when issued" security and there are held in the account securities upon which the "when issued" security may be issued, such "short" position shall be marked to the market and the balance in the account shall for the purpose of this Rule be adjusted for any unrealized loss in such "short" position.
            (B) Cash Accounts
            On any transaction or net position resulting from contracts for a "when issued" security in an account other than that of a member, non-member broker/dealer, or a "designated account," equity must be maintained equal to the margin required were such transaction or position in a margin account.
            On any net position resulting from contracts for a "when issued" security made for or with a non-member broker/dealer, no margin need be required, but such net position must be marked to the market.
            On any net position resulting from contracts for a "when issued" security made for a member or for or with a "designated account," no margin need be required and such net position need not be marked to the market. However, where such net position is not marked to the market, an amount equal to the loss at the market in such position shall be charged against the member's net capital as provided in SEC Rule 15c3-1.
            The provisions of this subparagraph (f)(3) shall not apply to any position resulting from contracts on a "when issued" basis in a security:
            (i) which is the subject of a primary distribution in connection with a bona fide offering by the issuer to the general public for "cash," or
            (ii) which is exempt by the Association as involving a primary distribution. The term "when issued" as used herein also means "when distributed."
            (4) Guaranteed Accounts
            Any account guaranteed by another account may be consolidated with such other account and the margin to be maintained may be determined on the net position of both accounts, provided the guarantee is in writing and permits the member carrying the account, without restriction, to use the money and securities in the guaranteeing account to carry the guaranteed account or to pay any deficit therein; and provided further that such guaranteeing account is not owned directly or indirectly by (i) a member, or any stockholder (other than a holder of freely transferable stock only) in the organization carrying such account, or (ii) a member, or any stockholder (other than a holder of freely transferable stock only) therein having a definite arrangement for participating in the commissions earned on the guaranteed account. However, the guarantee of a limited partner or of a holder of non-voting stock, if based upon his resources other than his capital contribution to or other than his interest in a member, is not affected by the foregoing prohibition, and such a guarantee may be taken into consideration in computing margin to be maintained in the guaranteed account.
            When one or more accounts are guaranteed by another account and the total margin deficiencies guaranteed by any guarantor exceeds 10 percent of the member's excess net capital, the amount of the margin deficiency being guaranteed in excess of 10 percent of excess net capital shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
            (5) Consolidation of Accounts
            When two or more accounts are carried for a customer, the margin to be maintained may be determined on the net position of said accounts, provided the customer has consented that the money and securities in each of such accounts may be used to carry or pay any deficit in all such accounts.
            (6) Time Within Which Margin or "Mark to Market" Must Be Obtained
            The amount of margin or "mark to market" required by any provision of this Rule shall be obtained as promptly as possible and in any event within fifteen business days from the date such deficiency occurred, unless the Association has specifically granted the member additional time.
            (7) Practice of Meeting Regulation T Margin Calls by Liquidation Prohibited
            When a "margin call," as defined in Section 220.2 of Regulation T, is required in a customer's account, no member shall permit a customer to make a practice of either deferring the deposit of cash or securities beyond the time when such transactions would ordinarily be settled or cleared, or meeting the margin required by the liquidation of the same or other commitments in the account.
            This prohibition on liquidations shall only apply to those accounts that, at the time of liquidation, are not in compliance with the equity to be maintained pursuant to the provisions of this Rule.
            (8) Special Initial and Maintenance Margin Requirements
            (A) Notwithstanding the other provisions of this Rule, the Association may, whenever it shall determine that market conditions so warrant, prescribe:
            (i) higher initial margin requirements for the purpose of effecting new securities transactions and commitments in accounts of customers with respect to specific securities;
            (ii) higher maintenance margin requirements for accounts of customers with respect to any securities; and
            (iii) such other terms and conditions as the Association shall deem appropriate relating to initial and/or maintenance margin requirements for accounts of customers with respect to any securities.
            (B) Day Trading
            (i) The term "day trading" means the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account except for:
            a. a long security position held overnight and sold the next day prior to any new purchase of the same security, or
            b. a short security position held overnight and purchased the next day prior to any new sale of the same security.
            (ii) The term "pattern day trader" means any customer who executes four or more day trades within five business days. However, if the number of day trades is 6% or less of total trades for the five business day period, the customer will not be considered a pattern day trader and the special requirements under paragraph (f)(8)(B)(iv) of this Rule will not apply. In the event that the organization at which a customer seeks to open an account or to resume day trading knows or has a reasonable basis to believe that the customer will engage in pattern day trading, then the special requirements under paragraph (f)(8)(B)(iv) of this Rule will apply.
            (iii) The term "day-trading buying power" means the equity in a customer's account at the close of business of the previous day, less any maintenance margin requirement as prescribed in paragraph (c) of this Rule, multiplied by four for equity securities.
            Whenever day trading occurs in a customer's margin account the special maintenance margin required for the day trades in equity securities shall be 25% of the cost of all the day trades made during the day. For non-equity securities, the special maintenance margin shall be as required pursuant to the other provisions of this Rule. Alternatively, when two or more day trades occur on the same day in the same customer's account, the margin required may be computed utilizing the highest (dollar amount) open position during that day. To utilize the highest open position computation method, a record showing the "time and tick" of each trade must be maintained to document the sequence in which each day trade was completed.
            (iv) Special Requirements for Pattern Day Traders
            a. Minimum Equity Requirement for Pattern Day Traders — The minimum equity required for the accounts of customers deemed to be pattern day traders shall be $25,000. This minimum equity must be deposited in the account before such customer may continue day trading and must be maintained in the customer's account at all times.
            b. Pattern day traders cannot trade in excess of their day-trading buying power as defined in paragraph (f)(8)(B)(iii) above. In the event a pattern day trader exceeds its day-trading buying power, which creates a special maintenance margin deficiency, the following actions will be taken by the member:
            1. The account will be margined based on the cost of all the day trades made during the day,
            2. The customer's day-trading buying power will be limited to the equity in the customer's account at the close of business of the previous day, less the maintenance margin required in paragraph (c) of this Rule, multiplied by two for equity securities, and
            3. "time and tick" (i.e., calculating margin using each trade in the sequence that it is executed, using the highest open position during the day) may not be used.
            c. Pattern day traders who fail to meet their special maintenance margin calls as required within five business days from the date the margin deficiency occurs will be permitted to execute transactions only on a cash available basis for 90 days or until the special maintenance margin call is met.
            d. Pattern day traders are restricted from using the guaranteed account provision pursuant to paragraph (f)(4) of this Rule for meeting the requirements of paragraph (f)(8)(B).
            e. Funds deposited into a pattern day trader's account to meet the minimum equity or maintenance margin requirements of paragraph (f)(8)(B) of this Rule cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit.
            (C) When the equity in a customer's account, after giving consideration to the other provisions of this Rule, is not sufficient to meet the requirements of paragraph (f)(8)(A) or (B), additional cash or securities must be received into the account to meet any deficiency within five business days of the trade date.
            In addition, on the sixth business day only, members are required to deduct from Net Capital the amount of unmet maintenance margin calls pursuant to SEC Rule 15c3-1.

            (9) Free-Riding in Cash Accounts Prohibited
            No member shall permit a customer (other than a broker/dealer or a "designated account") to make a practice, directly or indirectly, of effecting transactions in a cash account where the cost of securities purchased is met by the sale of the same securities. No member shall permit a customer to make a practice of selling securities with them in a cash account which are to be received against payment from another broker/dealer where such securities were purchased and are not yet paid for. A member transferring an account which is subject to a Regulation T 90-day freeze to another member firm shall inform the receiving member of such 90-day freeze.
            The provisions of Section 220.8(c) of Regulation T dictate the prohibitions and exceptions against customers' free-riding. Members may apply to the Association in writing for waiver of a 90-day freeze not exempted by Regulation T.

            (10) Margin For Index/Currency Warrants
            (A) This subparagraph (10) sets forth the minimum amount of margin that must be deposited and maintained in margin accounts of customers having positions in index warrants, currency index warrants or currency warrants dealt in on a national securities exchange. The Association may at any time impose higher margin requirements in respect of such positions when it deems such higher margin requirements to be advisable. The initial deposit of margin required under this Rule must be made within five full business days after the date on which a transaction giving rise to a margin requirement is effected. The margin requirements set forth in this subparagraph (J) are applicable only to index warrants, currency index warrants and currency warrants listed for trading on a national securities exchange on or after September 28, 1995.
            (B) Definitions
            The following definitions shall apply to transactions in index warrants, currency index warrants, and currency warrants.
            (i) The term "currency call warrant" means a warrant structured as a call on the underlying currency. The term "currency put warrant" means a warrant structured as a put on the underlying currency.

            (ii) The term "currency index call warrant" means a warrant structured as a call on the underlying currency index. The term "currency index put warrant" means a warrant structured as a put on the underlying currency index.

            (iii) The term "current market value" of an index warrant, currency index warrant or currency warrant shall mean the total cost or net proceeds of the transaction on the day the warrant was purchased or sold and at any other time shall mean the most recent closing price of that issue of warrants on the exchange on which it is listed on any day with respect to which a determination of current market value is made.

            (iv) The term "index call warrant" means a warrant structured as a call on the underlying stock index group. The term "index put warrant" means a warrant structured as a put on the underlying stock index group.

            (v) The term "index group value" in respect to a currency index warrant means the numerical index value of particular currency index multiplied by $1.00 U.S. or the applicable index multiplier.

            (vi) The term "index group value" in respect of an index warrant means the numerical index value of a particular stock index multiplied by $1.00 U.S. or other applicable index multiplier.

            (vii) The term "numerical index value" in respect of a currency index warrant means the level of a particular currency index as reported by the reporting authority for the index.

            (viii) The term "numerical index value" in respect of an index warrant means the level of a particular stock index as reported by the reporting authority for the index.

            (ix) The term "reporting authority" in respect of a currency index warrant means the institution or reporting service specified in the prospectus for the warrant as the official source for calculating and reporting the levels of such currency index.

            (x) The term "reporting authority" in respect of an index warrant means the institution or reporting service specified in the prospectus for the warrant as the official source for calculating and reporting the levels of such stock index.

            (xi) The term "spot price" in respect of a currency warrant on a particular business day means the noon buying rate in U.S. dollars on such day in New York City for cable transfers of the particular underlying currency as certified for customs purposes by the Federal Reserve Bank of New York.

            (xii) The terms "stock index group," "index warrants," "currency warrants," currency index," and "currency index warrants" when used in reference to an index warrant, currency index warrant, or currency warrant shall have the same meanings as set forth in Rule 2842.

            (xiii) The term "strike price" in respect of an index warrant, currency index warrant or currency warrant means the price at which the warrant may be exercised in accordance with its terms.

            (xiv) The term "unit of underlying currency" in respect of a currency warrant means a single unit of the currency covered by the warrant.

            (C) Except as provided in this subparagraph (J), no index warrant, currency index warrant or currency warrant carried for a customer shall be considered of any value for the purpose of computing the margin required in the account of such customer. Subject to the exceptions set forth in subparagraph (J)(v) of this Rule, the minimum margin on any currency warrant, currency index warrant or index warrant issued, guaranteed or carried "short" in a customer's account shall be:
            (i) In the case of an index put or call warrant, 100% of the current market value of each such warrant plus 15% of the current index group value. Such amount shall be decreased by the excess of the strike price of the warrant over the current index group value in the case of an index call warrant, or the excess of the current index group value over the strike price of the warrant in the case of an index put warrant; or

            (ii) In the case of a currency put or call warrant, 100% of the current market value of each such warrant plus 4% (or such other percentage, as specified by the national securities exchange listing the warrant and approved by the Commission on a case-by-case basis) of the product of the units of underlying currency per warrant and the spot price for such currency. The add-on percentage with respect to warrants on the German Mark, French Franc, Swiss Franc, Japanese Yen, British Pound, Australian Dollar, U.S. and European Currency Unit ("ECU") shall be four percent (4%), and for the Canadian Dollar the "add-on" percentage shall be one percent (1%). Such amount shall be decreased by the excess of the strike price of the warrant over the product of the units of underlying currency per warrant and the spot price of the currency in the case of a currency call warrant, or any excess of the product of the units of underlying currency per warrant and the spot price over the strike price of the warrant in the case of a currency put warrant; or

            (iii) In the case of the currency index put or call warrants, 100% of the current market value of each such warrant plus a percentage, as specified by the national securities exchange listing the warrant and approved by the Commission on a case-by-case basis, of the current index group value. Such amount shall be decreased by the excess of the strike price of the warrant over the current index group value in the case of a currency index call warrant, or any excess of the current index group value over the strike price of the warrant in the case of a currency index put warrant.
            Notwithstanding the foregoing:
            (D) The minimum margin on each currency put or call warrant, currency index put or call warrant or index put or call warrant issued, guaranteed or carried "short" in a customer's account shall be not less than 100% of the current market value of such warrant plus:

            (i) 10% of the current index group value in the case of an index warrant;

            (ii) .75% (.0075) (or such other percentage as specified by the national securities exchange listing the warrant and approved by the Commission) of the product of the units of underlying currency per warrant and the spot price of such currency, in the case of a currency warrant; or

            (iii) in the case of currency index warrants, a percentage of the current index group value as specified by the national securities exchange listing the warrant and approved by the Commission.
            (E)(i) When a "short" position in an index call warrant, currency index call warrant or currency call warrant is offset by a "short" position of equivalent underlying value in a put warrant or a put option issued by The Options Clearing Corporation on the same index or currency, or a "short" position in an index put warrant, currency index put warrant or currency put warrant is offset by a "short" position of equivalent underlying value in a call warrant or a call option issued by The Options Clearing Corporation on the same index or currency, the margin required shall be the margin on the put position or the call position, whichever is greater, plus the current market value of the other position.

            (ii) When a "long" position in an index call warrant, currency index call warrant or currency call warrant is offset by a "short" position of equivalent underlying value in a call warrant or a call option issued by The Options Clearing Corporation on the same index or currency, then, provided that the "long" position expires no earlier than the "short" position, the margin required shall be the amount, if any, by which the strike price of the "long" position exceeds the strike price of the "short" position.

            (iii) When a "long" position in an index put warrant, currency index put warrant or currency put warrant is offset with a "short" position of equivalent underlying value in a put warrant or a put option issued by The Option Clearing Corporation on the same index or currency, then, provided that the "long" position expires no earlier than the "short" position, the margin required shall be the amount, if any, by which the strike price of the "short" position exceeds the strike price of the "long" position.

            (iv) The margin treatment for spread positions pursuant to subparagraphs (iii)a., b., and c. above is subject to a one-year pilot program scheduled to begin September 28, 1995.

            (v) No margin is required in respect of a "short" position in an index call warrant where the customer has delivered, promptly after the warrant has been sold short, to the member with which such position is maintained, a Market Index Warrant Escrow Receipt in a form satisfactory to the Association, issued by a bank or trust company pursuant to specific authorization from the customer which certifies that the issuer of the agreement holds for the account of the customer:

            a. cash;

            b. cash equivalents;

            c. one or more qualified equity securities; or

            d. a combination thereof;
            that such deposit has an aggregate market value, at the time the warrant is sold short, of not less than 100% of the aggregate current index value; and that the issuer will promptly pay the member sufficient funds to purchase the warrant sold short in the event of a buy-in.
            (11) Customer Margin Rules Relating to Security Futures
            (A) Applicability
            No member may effect a transaction involving, or carry an account containing, a security futures contract with or for a customer in a margin account, without obtaining proper and adequate margin as set forth in this section.
            (B) Amount of customer margin
            (i) General Rule. As set forth in paragraphs (b) and (c) of this rule, the minimum initial and maintenance margin levels for each security futures contract, long and short, shall be twenty (20) percent of the current market value of such contract.

            (ii) Excluded from the rule's requirements are arrangements between a member and a customer with respect to the customer's financing of proprietary positions in security futures, based on the member's good faith determination that the customer is an "Exempted Person," as defined in Rule 401(a)(9) under the Act, and Rule 41.43(a)(9) under the CEA, except for the proprietary account of a broker/dealer carried by a member pursuant to paragraph (e)(6)(A) of this Rule. Once a registered broker or dealer, or member of a national securities exchange ceases to qualify as an "Exempted Person," it shall notify the member of this fact before establishing any new security futures positions. Any new security futures positions will be subject to the provisions of this paragraph.

            (iii) Permissible Offsets.
            Notwithstanding the minimum margin levels specified in paragraph (f)(11)(B)(i) of this Rule, customers with offset positions involving security futures and related positions may have initial or maintenance margin levels (pursuant to the offset table below) that are lower than the levels specified in paragraph (f)(11)(B)(i) of this Rule.

                    Description of Offset Security
            Underlying
            the Security
            Future
            Initial Margin
            Requirement
            Maintenance Margin
            Requirement
            (1) Long security future (or basket of security futures representing each component of a narrow-based securities index) and long put option on the same underlying security (or index). Individual stock or narrow-based security index 20 percent of the current market value of the long security future, plus pay for the long put in full. The lower of: (1) 10 percent of the aggregate exercise price of the put plus the aggregate put out-of-the-money amount, if any; or (2) 20 percent of the current market value of the long security future.
            (2) Short security future (or basket of security futures representing each component of a narrow-based securities index) and short put option on the same underlying security (or index). Individual stock or narrow-based security index. 20 percent of the current market value of the short security future, plus the aggregate put in-the-money amount, if any. Proceeds from the put sale may be applied. 20 percent of the current market value of the short security future, plus the aggregate put in-the-money amount, if any.
            (3) Long security future and short position in the same security (or securities basket) underlying the security future. Individual stock or narrow-based security index. The initial margin required under Regulation T for the short stock or stocks. 5 percent of the current market value as defined in Regulation T of the stock or stocks underlying the security future.
            (4) Long security future (or basket of security futures representing each component of a narrow-based securities index) and short call option on the same underlying security (or index). Individual stock or narrow-based security index. 20 percent of the current market value of the long security future, plus the aggregate call in-the-money amount, if any. Proceeds from the call sale may be applied. 20 percent of the current market value of the long security future, plus the aggregate call in-the-money amount, if any.
            (5) Long a basket of narrow-based security futures that together tracks a broad based index and short a broad-based security index call option contract on the same index. Narrow-based security index. 20 percent of the current market value of the long basket of narrow-based security futures, plus the aggregate call in-the-money amount, if any. Proceeds from the call sale may be applied. 20 percent of the current market value of the long basket of narrow-based security futures, plus the aggregate call in-the-money amount, if any.
            (6) Short a basket of narrow-based security futures that together tracks a broad-based security index and short a broad-based security index put option contract on the same index. Narrow-based security index. 20 percent of the current market value of the short basket of narrow-based security futures, plus the aggregate put in-the-money amount, if any. Proceeds from the put sale may be applied. 20 percent of the current market value of the short basket of narrow-based security futures, plus the aggregate put in-the-money amount, if any.
            (7) Long a basket of narrow-based security futures that together tracks a broad-based security index and long a broad-based security index put option contract on the same index. Narrow-based security index. 20 percent of the current market value of the long basket of narrow-based security futures, plus pay for the long put in full. The lower of: (1) 10 percent of the aggregate exercise price of the put, plus the aggregate put out-of-the-money amount, if any; or (2) 20 percent of the current market value of the long basket of security futures.
            (8) Short a basket of narrow-based security futures that together tracks a broad-based security index and long a broad-based security index call option contract on the same index. Narrow-based security index. 20 percent of the current market value of the short basket of narrow-based security futures, plus pay for the long call in full. The lower of: (1) 10 percent of the aggregate exercise price of the call, plus the aggregate call out-of-the-money amount, if any; or (2) 20 percent of the current market value of the short basket of security futures.
            (9) Long security future and short security future on the same underlying security (or index). Individual stock or narrow-based security index. The greater of: 5 percent of the current market value of the long security future; or (2) 5 percent of the current market value of the short security future. The greater of: 5 percent of the current market value of the long security future; or (2) 5 percent of the current market value of the short security future.
            (10) Long security future, long put option and short call option. The long security future, long put and short call must be on the same underlying security and the put and call must have the same exercise price. (Conversion) Individual stock or narrow-based security index. 20 percent of the current market value of the long security future, plus the aggregate call in-the-money amount, if any, plus pay for the put in full. Proceeds from the call sale may be applied. 10 percent of the aggregate exercise price, plus the aggregate call in-the-money amount, if any.
            (11) Long security future, long put option and short call option. The long security future, long put and short call must be on the same underlying security and the put exercise price must be below the call exercise price. (Collar) Individual stock or narrow-based security index. 20 percent of the current market value of the long security future, plus the aggregate call in-the-money amount, if any, plus pay for the put in full. Proceeds from call sale may be applied. The lower of: (1) 10 percent of the aggregate exercise price of the put plus the aggregate put out-of-the-money amount, if any; or (2) 20 percent of the aggregate exercise price of the call, plus the aggregate call in-the-money amount, if any.
            (12) Short security future and long position in the same security (or securities basket) underlying the security future. Individual stock or narrow-based security index. The initial margin required under Regulation T for the long security or securities. 5 percent of the current market value, as defined in Regulation T, of the long stock or stocks.
            (13) Short security future and long position in a security immediately convertible into the same security underlying the security future, without restriction, including the payment of money. Individual stock or narrow-based security index. The initial margin required under Regulation T for the long security or securities. 10 percent of the current market value, as defined in Regulation T, of the long stock or stocks.
            (14) Short security future (or basket of security futures representing each component of a narrow-based securities index) and long call option or warrant on the same underlying security (or index). Individual stock or narrow-based security index. 20 percent of the current market value of the short security future, plus pay for the call in full. The lower of: (1) 10 percent of the aggregate exercise price of the put plus the aggregate put out-of-the-money amount, if any; or (2) 20 percent of the current market value of the short security future.
            (15) Short security future, short put option and long call option. The short security future, short put and long call must be on the same underlying security and the put and call must have the same exercise price. (Reverse Conversion) Individual stock or narrow-based security index. 20 percent of the current market value of the short security future, plus the aggregate put in-the-money amount, if any, plus pay for the call in full. Proceeds from put sale may be applied. 10 percent of the aggregate exercise price, plus the aggregate put in-the-money amount, if any.
            (16) Long (short) a security future and short (long) an identical1 security future traded on a different market. Individual stock and narrow-based security index. The greater of: (1) 3 percent of the current market value of the long security future(s); or (2) 3 percent of the current market value of the short security future(s). The greater of: (1) 3 percent of the current market value of the long security future(s); or (2) 3 percent of the current market value of the short security future(s).
            (17) Long (short) a basket of security futures that together tracks a narrow-based index and short (long) a narrow-based index future. Individual stock and narrow-based security index. The greater of: (1) 5 percent of the current market value of the long security future(s); or (2) 5 percent of the current market value of the short security future(s). The greater of: (1) 5 percent of the current market value of the long security future(s); or (2) 5 percent of the current market value of the short security future(s).
            1 Two security futures contracts will be considered "identical" for this purpose if they are issued by the same clearing agency or cleared and guaranteed by the same derivatives clearing organization, have identical specifications, and would offset each other at the clearing level.
            (C) Definitions
            For the purposes of paragraph (f)(11) of this Rule and the offset table noted above, with respect to the term "security futures contracts," the following terms shall have the meanings specified below:
            (i) The term "security futures contract" means a "security future" as defined in Section 3(a)(55) of the Act.

            (ii) The term "current market value" has the same meaning as defined in Rule 401(a)(4) under the Act and Rule 41.43(a)(4) under the CEA.

            (iii) The term "underlying security" means, in the case of physically settled security futures contracts, the security that is delivered upon expiration of the contract, and, in the case of cash settled security futures contracts, the security or securities index the price or level of which determines the final settlement price for the security futures contract upon its expiration.

            (iv) The term "underlying basket" means, in the case of a securities index, a group of security futures contracts where the underlying securities as defined in subparagraph (iii) above include each of the component securities of the applicable index and that meets the following conditions: (1) the quantity of each underlying security is proportional to its representation in the index, (2) the total market value of the underlying securities is equal to the aggregate value of the applicable index, (3) the basket cannot be used to offset more than the number of contracts or warrants represented by its total market value, and (4) the security futures contracts shall be unavailable to support any other contract or warrant transaction in the account.

            (v) The term "underlying stock basket" means a group of securities that includes each of the component securities of the applicable index and that meets the following conditions: (1) the quantity of each stock in the basket is proportional to its representation in the index, (2) the total market value of the basket is equal to the underlying index value of the index options or warrants to be covered, (3) the securities in the basket cannot be used to cover more than the number of index options or warrants represented by that value, and (4) the securities in the basket shall be unavailable to support any other option or warrant transaction in the account.

            (vi) The term "variation settlement" has the same meaning as defined in Rule 401(a) under the Act and Rule 41.43(a)(32) under the CEA.

            (D) Security Futures Dealers' Accounts.
            (i) Notwithstanding the other provisions of this paragraph (f)(11), a member may carry and clear the market maker permitted offset positions (as defined below) of one or more security futures dealers in an account that is limited to market maker transactions, upon a "Good Faith" margin basis that is satisfactory to the concerned parties, provided the "Good Faith" margin requirement is not less than the Net Capital haircut deduction of the member carrying the transaction pursuant to Rule 15c3-1 under the Act. In lieu of collecting the "Good Faith" margin requirement, a carrying member may elect to deduct in computing its Net Capital the amount of any deficiency between the equity maintained in the account and the "Good Faith" margin required.
            For the purpose of this paragraph (f)(11)(D), the term "security futures dealer" means (1) a member or member organization of a national securities exchange or a national securities association registered pursuant to Section 15A(a) of the Act; (2) is registered with such exchange or association as a security futures dealer pursuant to rules that are effective in accordance with Section 19(b)(2) of the Act and, as applicable Section 5c(c) of the CEA, that: (a) requires such member or member organization to be registered as a floor trader or a floor broker with the CFTC under Section 4f(a)(1) of the CEA, or as a dealer with the Commission under Section 15(b) of the Act; (b) requires such member or member organization to maintain records sufficient to prove compliance with the rules of the exchange or association of which it is a member; (c) requires such member or member organization to hold itself out as being willing to buy and sell security futures for its own account on a regular and continuous basis; and (d) provides for disciplinary action, including revocation of such member's or member organization's registration as a security futures dealer, for such member's or member organization's failure to comply with Rule 400 through 406 of the Act and Rules 41.42 through 41.49 of the CEA or the rules of the exchange or association of which the security futures dealer is a member or member organization.
            (ii) For purposes of this paragraph (f)(11)(D), a permitted offset position means in the case of a security futures contract in which a security futures dealer makes a market, a position in the underlying asset or other related assets, or positions in options overlying the asset or related assets. Accordingly, a security futures dealer may establish a long or short position in the assets underlying the security futures contracts in which the security futures dealer makes a market, and may purchase or write options overlying those assets if the account holds the following permitted offset positions:

            a. A long position in the security futures contract or underlying asset offset by a short option position that is "in or at the money;"

            b. A short position in the security futures contract or underlying asset offset by a long option position that is "in or at the money;"

            c. A position in the underlying asset resulting from the assignment of a market-maker short option position or making delivery in respect of a short security futures contract;

            d. A position in the underlying asset resulting from the assignment of a market-maker long option position or taking delivery in respect of a long security futures contract;

            e. A net long position in a security futures contract in which a security futures dealer makes a market or the underlying asset;

            f. A net short position in a security futures contract in which a security futures dealer makes a market or the underlying asset; or

            g. An offset position as defined in Rule 15c3-1 under the Act, including its appendices, or any applicable SEC staff interpretation or no-action position.

            (E) Approved Options Specialists' or Market Maker Accounts.

            (i) Notwithstanding the other provisions of (f)(11) and (f)(2)(J), a member may carry and clear the market maker permitted offset positions (as defined below) of one or more approved options specialists or market makers in an account that is limited to approved options specialist or market maker transactions, upon a "Good Faith" margin basis that is satisfactory to the concerned parties, provided the "Good Faith" margin requirement is not less than the Net Capital haircut deduction of the member carrying the transaction pursuant to Rule 15c3-1 under the Act. In lieu of collecting the "Good Faith" margin requirement, a carrying member may elect to deduct in computing its Net Capital the amount of any deficiency between the equity maintained in the account and the "Good Faith" margin required. For the purpose of this paragraph (f)(11)(E), the term "approved options specialist or market maker" means a specialist, market maker, or registered trader in options as referenced in paragraph (f)(2)(J) of this Rule, who is deemed a specialist for all purposes under the Act and who is registered pursuant to the rules of a national securities exchange.

            (ii) For purposes of this paragraph (f)(11)(E), a permitted offset position means a position in the underlying asset or other related assets. Accordingly, a specialist or market maker may establish a long or short position in the assets underlying the options in which the specialist or market maker makes a market, or a security futures contract thereon, if the account holds the following permitted offset positions:

            a. A long position in the underlying instrument or security futures contract offset by a short option position that is "in or at the money;"

            b. A short position in the underlying instrument or security futures contract offset by a long option position that is "in or at the money;"

            c. A stock position resulting from the assignment of a market-maker short option position or delivery in respect of a short security futures contract;

            d. A stock position resulting from the exercise of a market maker long option position or taking delivery in respect of a long security futures contract;

            e. A net long position in a security (other than an option) in which the market maker makes a market;

            f. A net short position in a security (other than an option) in which the market maker makes a market; or

            g. An offset position as defined in Rule 15c3-1 under the Act, including its appendices, or any applicable SEC staff interpretation or no-action position.

            (iii) For purposes of paragraphs (f)(11)(D) and (E), the term "in or at the money" means that the current market price of the underlying security is not more than two standard exercise intervals below (with respect to a call option) or above (with respect to a put option) the exercise price of the option; the term "in the money" means that the current market price of the underlying asset or index is not below (with respect to a call option) or above (with respect to a put option) the exercise price of the option; the term "overlying option" means a put option purchased or a call option written against a long position in an underlying asset; or a call option purchased, or a put option written against a short position in an underlying asset.

            (iv) Securities, including options and security futures contracts, in such accounts shall be valued conservatively in light of current market prices and the amount that might be realized upon liquidation. Substantial additional margin must be required or excess Net Capital maintained in all cases where the securities carried: (a) are subject to unusually rapid or violent changes in value including volatility in the expiration months of options or security futures contracts, (b) do not have an active market, or (c) in one or more or all accounts, including proprietary accounts combined, are such that they cannot be liquidated promptly or represent undue concentration of risk in view of the carrying member's Net Capital and its overall exposure to material loss.

            (F) Approved Specialists' Accounts-others

            (i) Notwithstanding the other provisions of (f)(11) and (f)(2)(J), a member may carry the account of an "approved specialist," which account is limited to specialist transactions including hedge transactions with security futures contracts upon a margin basis that is satisfactory to both parties. The amount of any deficiency between the equity in the account and haircut requirement pursuant to Rule 15c3-1 shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.

            (ii) For purposes of this paragraph (f)(11)(F), the term "approved specialist" means a specialist who is deemed a specialist for all purposes under the Act and who is registered pursuant to the rules of a national securities exchange.

            (G) Additional Requirements

            (i) Money market mutual funds, as defined in Rule 2a-7 under the Investment Company Act of 1940, can be used for satisfying margin requirements under this paragraph (f)(11), provided that the requirements of Rule 404(b) under the Act and Rule 46(b)(2) under the CEA are satisfied.

            (ii) Day trading of security futures is subject to the minimum requirements of this Rule. If deemed a pattern day-trader, the customer must maintain equity of $25,000. The 20 percent requirement, for security futures contracts, should be calculated based on the greater of the initial or closing transaction and any amount exceeding NASD excess must be collected. The creation of a customer call subjects the account to all the restrictions contained inRule 2520(f)(8)(B).

            (iii) The use of the "time and tick" method is based on the member's ability to substantiate the validity of the system used. Lacking this ability dictates the use of the aggregate method.

            (iv) Security futures contracts transacted or held in a futures account shall not be subject to any provision of this Rule.
            (g) Portfolio Margin
            As an alternative to the “strategy-based” margin requirements set forth in paragraphs (a) through (f) of this Rule, members may elect to apply the portfolio margin requirements set forth in this paragraph (g) to all margin equity securities,1 listed options, security futures products (as defined in Section 3(a)(56) of the Exchange Act), unlisted derivatives, warrants, index warrants and related instruments, provided that the requirements of paragraph (g)(6)(B)(i) of this Rule are met.
            In addition, a member, provided that it is a Futures Commission Merchant (“FCM”) and is either a clearing member of a futures clearing organization or has an affiliate that is a clearing member of a futures clearing organization, is permitted under this paragraph (g) to combine an eligible participant's related instruments as defined in paragraph (g)(2)(D), with listed index options, unlisted derivatives, options on exchange traded funds (“ETF”), index warrants and underlying instruments and compute a margin requirement for such combined products on a portfolio margin basis.
            The portfolio margin provisions of this Rule shall not apply to Individual Retirement Accounts (“IRAs”).
            (1) Monitoring. — Members must monitor the risk of portfolio margin accounts and maintain a comprehensive written risk analysis methodology for assessing the potential risk to the member's capital over a specified range of possible market movements of positions maintained in such accounts. The risk analysis methodology shall specify the computations to be made, the frequency of computations, the records to be reviewed and maintained, and the person(s) within the organization responsible for the risk function. This risk analysis methodology must be filed with NASD, or the member's designated examining authority (“DEA”) if other than NASD, and submitted to the Commission prior to the implementation of portfolio margining. In performing the risk analysis of portfolio margin accounts required by this Rule, each member shall include in the written risk analysis methodology procedures and guidelines for:
            (A) obtaining and reviewing the appropriate account documentation and financial information necessary for assessing the amount of credit to be extended to eligible participants;
            (B) the determination, review and approval of credit limits to each eligible participant, and across all eligible participants, utilizing a portfolio margin account;
            (C) monitoring credit risk exposure to the member from portfolio margin accounts, on both an intra-day and end of day basis, including the type, scope and frequency of reporting to senior management;
            (D) the use of stress testing of portfolio margin accounts in order to monitor market risk exposure from individual accounts and in the aggregate;
            (E) the regular review and testing of these risk analysis procedures by an independent unit such as internal audit or other comparable group;
            (F) managing the impact of credit extended related to portfolio margin accounts on the member's overall risk exposure;
            (G) the appropriate response by management when limits on credit extensions related to portfolio margin accounts have been exceeded;
            (H) determining the need to collect additional margin from a particular eligible participant, including whether that determination was based upon the creditworthiness of the participant and/or the risk of the eligible product; and
            (I) monitoring the credit exposure resulting from concentrated positions within both individual portfolio margin accounts and across all portfolio margin accounts.
            Moreover, management must periodically review, in accordance with written procedures, the member's credit extension activities for consistency with these guidelines. Management must periodically determine if the data necessary to apply this paragraph (g) is accessible on a timely basis and information systems are available to adequately capture, monitor, analyze and report relevant data.
            (2) Definitions. — For purposes of this paragraph (g), the following terms shall have the meanings specified below:
            (A) The term “listed option” means any equity-based or equity index-based option traded on a registered national securities exchange or automated facility of a registered national securities association.
            (B) The term “portfolio” means any eligible product, as defined in paragraph (g)(6)(B)(i), grouped with its underlying instruments and related instruments.
            (C) The term “product group” means two or more portfolios of the same type (see table in paragraph (g)(2)(F)below) for which it has been determined by SEC Rule 15c3-1a that a percentage of offsetting profits may be applied to losses at the same valuation point.
            (D) The term “related instrument” within a security class or product group means broad-based index futures and options on broad-based index futures covering the same underlying instrument. The term “related instrument” does not include security futures products.
            (E) The term “security class” refers to all listed options, security futures products, unlisted derivatives, and related instruments covering the same underlying instrument and the underlying instrument itself.
            (F) The term “theoretical gains and losses” means the gain and loss in the value of individual eligible products and related instruments at ten equidistant intervals (valuation points) ranging from an assumed movement (both up and down) in the current market value of the underlying instrument. The magnitude of the valuation point range shall be as follows:
            Portfolio Type Up / Down Market Move
            (High & Low Valuation Points)
            High Capitalization, Broad-based Market Index2 +6% / -8%
            Non-High Capitalization, Broad-based Market Index3 +/- 10%
            Any other eligible product that is, or is based on, an equity security or a narrow-based index +/- 15%
            (G) The term “underlying instrument” means a security or security index upon which any listed option, unlisted derivative, security future, or broad-based index future is based.
            (H) The term “unlisted derivative” means any equity-based or equity index-based unlisted option, forward contract, or security-based swap that can be valued by a theoretical pricing model approved by the Commission.
            (3) Approved Theoretical Pricing Models. — Theoretical pricing models must be approved by the Commission.
            (4) Eligible Participants. — The application of the portfolio margin provisions of this paragraph (g) is limited to the following:
            (A) any broker or dealer registered pursuant to Section 15 of the Exchange Act;
            (B) any member of a national futures exchange to the extent that listed index options, unlisted derivatives, options on ETFs, index warrants or underlying instruments hedge the member's index futures; and
            (C) any person or entity not included in paragraphs (g)(4)(A) and (g)(4)(B) above approved for uncovered options and, if transactions in security futures are to be included in the account, approval for such transactions is also required. However, an eligible participant under this paragraph (g)(4)(C) may not establish or maintain positions in unlisted derivatives unless minimum equity of at least five million dollars is established and maintained with the member. For purposes of this minimum equity requirement, all securities and futures accounts carried by the member for the same eligible participant may be combined provided ownership across the accounts is identical. A guarantee pursuant to paragraph (f)(4) of this Rule is not permitted for purposes of the minimum equity requirement.
            (5) Opening of Accounts
            (A) Members must notify and receive approval from NASD, or the member's DEA if other than NASD, prior to establishing a portfolio margin methodology for eligible participants.
            (B) Only eligible participants that have been approved to engage in uncovered short option contracts pursuant to NASD Rule 2860, or the rules of the member's DEA if other than NASD, are permitted to utilize a portfolio margin account.
            (C) On or before the date of the initial transaction in a portfolio margin account, a member shall:
            (i) furnish the eligible participant with a special written disclosure statement describing the nature and risks of portfolio margining which includes an acknowledgement for all portfolio margin account owners to sign, attesting that they have read and understood the disclosure statement, and agree to the terms under which a portfolio margin account is provided (see NASD Rule 2860(c)); and
            (ii) obtain the signed acknowledgement noted above from the eligible participant and record the date of receipt.
            (6) Establishing Account and Eligible Positions
            (A) For purposes of applying the portfolio margin requirements prescribed in this paragraph (g), members are to establish and utilize a specific securities margin account, or sub-account of a margin account, clearly identified as a portfolio margin account that is separate from any other securities account carried for an eligible participant.
            A margin deficit in the portfolio margin account of an eligible participant may not be considered as satisfied by excess equity in another account. Funds and/or securities must be transferred to the deficient account and a written record created and maintained. However, if a portfolio margin account is carried as a sub-account of a margin account, excess equity in the margin account (determined in accordance with the rules applicable to a margin account other than a portfolio margin account) may be used to satisfy a margin deficit in the portfolio margin sub-account without having to transfer any funds and/or securities.
            (B) Eligible Products
            (i) For eligible participants as described in paragraphs (g)(4)(A) through (g)(4)(C), a transaction in, or transfer of, an eligible product may be effected in the portfolio margin account. Eligible products under this paragraph (g) consist of:
            (a) a margin equity security (including a foreign equity security and option on a foreign equity security, provided the foreign equity security is deemed to have a “ready market” under SEC Rule 15c3-1 or a “no-action” position issued thereunder, and a control or restricted security, provided the security has met the requirements in a manner consistent with SEC Rule 144 or a Commission “no-action” position issued thereunder, sufficient enough to permit the sale of the security, upon exercise or assignment of any listed option or unlisted derivative written or held against it, without restriction);
            (b) a listed option on an equity security or index of equity securities;
            (c) a security futures product;
            (d) an unlisted derivative on an equity security or index of equity securities;
            (e) a warrant on an equity security or index of equity securities; and
            (f) a related instrument as defined in paragraph (g)(2)(D).
            (7) Margin Required. — The amount of margin required under this paragraph (g) for each portfolio shall be the greater of:
            (A) the amount for any of the ten equidistant valuation points representing the largest theoretical loss as calculated pursuant to paragraph (g)(8) below; or
            (B) for eligible participants as described in paragraph (g)(4)(A) through (g)(4)(C), $.375 for each listed option, unlisted derivative, security future product, and related instrument, multiplied by the contract's or instrument's multiplier, not to exceed the market value in the case of long contracts in eligible products.
            (C) Account guarantees pursuant to paragraph (f)(4) of this Rule are not permitted for purposes of meeting margin requirements.
            (D) Positions other than those listed in Paragraph (g)(6)(B)(i) above are not eligible for portfolio margin treatment. However, positions not eligible for portfolio margin treatment (except for ineligible related instruments) may be carried in a portfolio margin account, provided the member has the ability to apply the applicable strategy-based margin requirements promulgated under this Rule. Shares of a money market mutual fund may be carried in a portfolio margin account, also subject to the applicable strategy-based margin requirement under this Rule provided that:
            (i) the customer waives any right to redeem shares without the member's consent;
            (ii) the member (or, if the shares are deposited with a clearing organization, the clearing organization) obtains the right to redeem shares in cash upon request;
            (iii) the fund agrees to satisfy any conditions necessary or appropriate to ensure that the shares may be redeemed in cash, promptly upon request; and
            (iv) the member complies with the requirements of Section 11(d)(1) of the Exchange Act and SEC Rule 11d1-2 thereunder.
            (8) Method of Calculation
            (A) Long and short positions in eligible products, including underlying instruments and related instruments, are to be grouped by security class; each security class group being a “portfolio.” Each portfolio is categorized as one of the portfolio types specified in paragraph (g)(2)(F) above, as applicable.
            (B) For each portfolio, theoretical gains and losses are calculated for each position as specified in paragraph (g)(2)(F) above. For purposes of determining the theoretical gains and losses at each valuation point, members shall obtain and utilize the theoretical values of eligible products as described in this paragraph (g) rendered by an approved theoretical pricing model.
            (C) Offsets. Within each portfolio, theoretical gains and losses may be netted fully at each valuation point. Offsets between portfolios within the eligible product groups, as described in paragraph (g)(2)(F), may then be applied as permitted by SEC Rule 15c3-1a.
            (D) After applying the offsets above, the sum of the greatest loss from each portfolio is computed to arrive at the total margin required for the account (subject to the per contract minimum).
            (E) In addition, if a security that is convertible, exchangeable, or exercisable into a security that is an underlying instrument requires the payment of money or would result in a loss if converted, exchanged, or exercised at the time when the security is deemed an underlying instrument, the full amount of the conversion loss is required.
            (9) Portfolio Margin Minimum Equity Deficiency
            (A) If, as of the close of business, the equity in the portfolio margin account of an eligible participant as described in paragraph (g)(4)(C), declines below the five million dollar minimum equity required, if applicable, and is not restored to at least five million dollars within three business days by a deposit of funds and/or securities or through favorable market action, members are prohibited from accepting new opening orders beginning on the fourth business day, except that new opening orders entered for the purpose of reducing market risk may be accepted if the result would be to lower margin requirements. This prohibition shall remain in effect until,
            (i) equity of five million dollars is established, or
            (ii) all unlisted derivatives are liquidated or transferred from the portfolio margin account to the appropriate securities account.
            (B) Members will not be permitted to deduct any portfolio margin minimum equity deficiency amount from Net Capital in lieu of collecting the minimum equity required.
            (10) Portfolio Margin Deficiency
            (A) If, as of the close of business, the equity in the portfolio margin account of an eligible participant, as described in paragraph (g)(4)(A) through (g)(4)(C), is less than the margin required, the eligible participant may deposit additional funds and/or securities or establish a hedge to meet the margin requirement within three business days. After the three business day period, members are prohibited from accepting new opening orders, except that new opening orders entered for the purpose of reducing market risk may be accepted if the result would be to lower margin requirements. In the event an eligible participant fails to hedge existing positions or deposit additional funds and/or securities in an amount sufficient to eliminate any margin deficiency after three business days, the member must liquidate positions in an amount sufficient to, at a minimum, lower the total margin required to an amount less than or equal to the account equity.
            (B) If the portfolio margin deficiency is not met by the close of business on the next business day after the business day on which such deficiency arises, members will be required to deduct the amount of the deficiency from Net Capital until such time the deficiency is satisfied or positions are liquidated pursuant to paragraph (g)(10)(A) above.
            (C) Members will not be permitted to deduct any portfolio margin deficiency amount from Net Capital in lieu of collecting the margin required.
            (D) NASD, or the member's DEA if other than NASD, may grant additional time for an eligible participant to meet a portfolio margin deficiency upon written request, which is expected to be granted in extraordinary circumstances only.
            (E) Notwithstanding the provisions of subparagraph (B) above, members should not permit an eligible participant to make a practice of meeting a portfolio margin deficiency by liquidation. Members must have procedures in place to identify accounts that periodically liquidate positions to eliminate margin deficiencies, and the member is expected to take appropriate action when warranted. Liquidation to eliminate margin deficiencies that are caused solely by adverse price movements may be disregarded.
            (11) Determination of Value for Margin Purposes. — For the purposes of this paragraph (g), all eligible products shall be valued at current market prices. Account equity for the purposes of paragraphs (g)(9)(A) and (g)(10)(A) shall be calculated separately for each portfolio margin account by adding the current market value of all long positions, subtracting current market value of all short positions, and adding the credit (or subtracting the debit) balance in the account.
            (12) Net Capital Treatment of Portfolio Margin Accounts
            (A) No member that requires margin in any portfolio account pursuant to paragraph (g) of this Rule shall permit the aggregate portfolio margin requirements to exceed ten times its Net Capital for any period exceeding three business days. The member shall, beginning on the fourth business day, cease opening new portfolio margin accounts until compliance is achieved.
            (B) If, at any time, a member's aggregate portfolio margin requirements exceed ten times its Net Capital, the member shall immediately transmit telegraphic or facsimile notice of such deficiency to the principal office of the Commission in Washington, D.C., the district or regional office of the Commission for the district or region in which the member maintains its principal place of business; and to NASD, or the member's DEA if other than NASD. Notice to NASD shall be in such form as NASD may prescribe.
            (13) Day Trading Requirements. — The day trading restrictions promulgated under paragraph (f)(8)(B) of this Rule shall not apply to portfolio margin accounts that establish and maintain at least five million dollars in equity, provided that a member has the ability to monitor the intra-day risk associated with day trading. Portfolio margin accounts that do not establish and maintain at least five million dollars in equity will be subject to the day trading restrictions under paragraph (f)(8)(B) of this Rule, provided the member has the ability to apply the applicable day trading requirement under this Rule. However, if the position or positions day traded were part of a hedge strategy, the day trading restrictions will not apply. A “hedge strategy” for purposes of this Rule means a transaction or a series of transactions that reduces or offsets a material portion of the risk in a portfolio. Members are expected to monitor these portfolio margin accounts to detect and prevent circumvention of the day trading requirements. In the event day trades executed in a portfolio margin account exceed the day trading buying power, the day trade margin deficiency that is created must be met by the deposit of cash and/or securities within three business days.
            (14) Requirements to Liquidate
            (A) A member is required immediately either to liquidate, or transfer to another broker-dealer eligible to carry portfolio margin accounts, all portfolio margin accounts with positions in related instruments if the member is:
            (i) insolvent as defined in section 101 of title 11 of the United States Code, or is unable to meet its obligations as they mature;
            (ii) the subject of a proceeding pending in any court or before any agency of the United States or any State in which a receiver, trustee, or liquidator for such debtor has been appointed;
            (iii) not in compliance with applicable requirements under the Exchange Act or rules of the Commission or any self-regulatory organization with respect to financial responsibility or hypothecation of eligible participant's securities; or
            (iv) unable to make such computations as may be necessary to establish compliance with such financial responsibility or hypothecation rules.
            (B) Nothing in this paragraph (g)(14) shall be construed as limiting or restricting in any way the exercise of any right of a registered clearing agency to liquidate or cause the liquidation of positions in accordance with its by-laws and rules.
            (15) Members must ensure that portfolio accounts are in compliance with Rule 2860.

            1 For purposes of this paragraph (g) of the Rule, the term “margin equity security” utilizes the definition at Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System.

            2 In accordance with paragraph (b)(1)(i)(B) of SEC Rule 15c3-1a (Appendix A to SEC Rule 15c3-1), 17 CFR 240.15c3-1a(b)(1)(i)(B).

            3 See footnote 2.

            Amended by SR-FINRA-2008-042 eff. Aug. 1, 2008.
            Amended by SR-FINRA-2008-041 eff. Aug. 1, 2008.
            Amended by SR-NASD-2007-045 eff. Aug. 1, 2007.
            Amended by SR-NASD-2007-024 eff. April 2, 2007.
            Amended by SR-NASD-2007-013 eff. April 2, 2007.
            Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
            Amended by SR-NASD-2006-045 eff. April 3, 2006.
            Amended by SR-NASD-2000-08 eff. Dec. 1, 2003.
            Amended by SR-NASD-2003-45 eff. March 20, 2003.
            Amended by SR-NASD-2002-166 eff. Jan. 24, 2003.
            Amended by SR-NASD-2000-03 eff. Sept. 28, 2001.
            Amended by SR-NASD-2000-15 eff. Feb. 26, 2001.
            Amended by SR-NASD-99-05 eff. Aug. 21, 2000.
            Amended by SR-NASD-97-28 eff. Aug. 7, 1997.
            Amended by SR-NASD-97-14 eff. June 10, 1997.
            Amended by SR-NASD-95-37 eff. Sept. 28, 1995.
            Amended by SR-NASD-92-35 eff. April 19, 1993.

            Selected Notices: 74-08, 76-08, 76-31, 77-19, 93-23, 00-51, 01-11, 01-26, 03-66, 06-26, 07-11, 08-41.

            • 2521. Margin Requirements — Exception for Certain Members

              This rule is no longer applicable. NASD Rule 2521 has been superseded by FINRA Rule 4210. Please consult the appropriate FINRA Rule.

              Any member designated to another self-regulatory organization for oversight of the member's compliance with applicable securities laws, rules and regulations, and self-regulatory organization rules under SEC Rule 17d-2 is exempt from the provisions of Rule 2520.
              Adopted by SR-NASD-97-14 eff. June 10, 1997.

            • 2522. Definitions Related to Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants Transactions

              This rule is no longer applicable. NASD Rule 2522 has been superseded by FINRA Rule 4210. Please consult the appropriate FINRA Rule.

              (a) The following definitions shall apply to the margin requirements for options, currency warrants, currency index warrants and stock index warrants transactions:
              (1) Aggregate Discount Amount
              The term "aggregate discount amount" as used with reference to a Treasury bill option contract means the principal amount of the underlying Treasury bill (A) multiplied by the annualized discount (i.e., 100 percent minus the exercise price of the option contract) and (B) further multiplied by a fraction having a numerator equal to the number of days to maturity of the underlying Treasury bill on the earliest date on which it could be delivered pursuant to the rules of The Options Clearing Corporation in connection with the exercise of the option (normally 91 or 182 days) and a denominator of 360.
              (2) Aggregate Exercise Price
              The term "aggregate exercise price" as used with reference to an option contract means:
              (A) if a single stock underlies the option contract, the exercise price of the option contract multiplied by the number of shares of the underlying stock covered by such option contract;

              (B) if a Treasury bond or Treasury note underlies the option contract,

              (i) the exercise price of the option contract multiplied by the principal amount of the underlying security covered by such option contract, plus

              (ii) accrued interest:

              a. on bonds (except bonds issued or guaranteed by the United States Government), that portion of the interest on the bonds for a full year, computed for the number of days elapsed since the previous interest date on the basis of a 360-day-year. Each calendar month shall be considered to be 1/12 of 360 days, or 30 days, and each period from a date in one month to the same date in the following month shall be considered to be 30 days.

              b. on bonds issued or guaranteed by the United States Government, that portion of the interest on the bonds for the current full interest period, computed for the actual number of days elapsed since the previous interest date on the basis of actual number of calendar days in the current full interest period. The actual elapsed days in each calendar month shall be used in determining the number of days in a period.
              * * * * * * * * * *
              (Rule 2522 continued after IM-2522)

            • IM-2522. Computation of Elapsed Days

              This rule is no longer applicable. NASD IM-2522 has been superseded by FINRA Rule 4210. Please consult the appropriate FINRA Rule.

              The following tables are given to illustrate the method of computing the number of elapsed days in conformity with Rule 2522(a)(2)(B) above:
              On bonds (except bonds issued or guaranteed by the United States Government):
              From 1st to 30th of the same month to be figured as 29 days
              From 1st to 31st of the same month to be figured as 30 days
              From 1st to 1st of the following month to be figured as 30 days.

              Where interest is payable on 30th or 31st of the month:
              From 30th or 31st to 1st of the following month to be figured as 1 day
              From 30th or 31st to 30th of the following month to be figured as 30 days
              From 30th or 31st to 31st of the following month to be figured as 30 days
              From 30th or 31st to 1st of second following month, figured as 1 month, 1 day

              On bonds issued or guaranteed by the United States Government:
              From 15th of a 28-day month to the 15th of the following month is 28 days
              From 15th of a 30-day month to the 15th of the following month is 30 days
              From 15th of a 31-day month to the 15th of the following month is 31 days.

              The six month's interest period ending:
              January 15 is 184 days July 15 is 181* days
               
              February 15 is 184 days August 15 is 181* days
               
              March 15 is 181* days September 15 is 184 days
               
              April 15 is 182* days October 15 is 183 days
               
              May 15 is 181* days November 15 is 184 days
               
              June 15 is 182* days December 15 is 183 days

              * Leap Year Adds 1 day to this period

            • 2522. (continued) Definitions Related to Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants Transactions

              This rule is no longer applicable. NASD Rule 2522 has been superseded by FINRA Rule 4210. Please consult the appropriate FINRA Rule.

              (C) if a Treasury bill underlies the option contract, the difference between the principal amount of such Treasury bill and the aggregate discount amount;

              (D) if an index stock group underlies the option contract, the exercise price of the option contract times the index multiplier; or

              (E) if a GNMA underlies the option contract, the exercise price of the option contract multiplied by the nominal principal amount of the underlying GNMA covered by such option contract. In the case of an underlying GNMA, if the remaining unpaid principal balance of a GNMA delivered upon exercise of an option contract is a permissible variant of, rather than equal to, the nominal principal amount, the aggregate exercise price shall be adjusted to equal the product of the exercise price and such remaining unpaid principal balance, plus in each case the appropriate differential.
              (3) Annualized Discount
              The term "annualized discount" as used with reference to a Treasury bill means the percent discount from principal amount at which the Treasury bill may be purchased or sold, expressed as a discount for a term to maturity of 360 days.

              (4) Applicable Current Options Disclosure Document
              The term "applicable current Options Disclosure Document" means, as to any kind of option, the most recent edition of the Options Disclosure Document and any supplement that pertains to that kind of option and that meet the requirements of SEC Rule 9b-1.

              (5) Appropriate Differential
              The term "appropriate differential" as used with reference to a GNMA option contract means a positive or negative amount equal to the product of (A) the difference between the remaining unpaid principal balance of a GNMA delivered upon exercise of that contract and the nominal principal amount, and (B) the difference between the current cash market price of GNMAs bearing the same stated rate of interest as that borne by the GNMA delivered upon exercise and the exercise price.

              (6) Box Spread
              The term "box spread" means an aggregation of positions in a long call and short put with the same exercise price ("buy side") coupled with a long put and short call with the same exercise price ("sell side") structured as: (A) a "long box spread" in which the sell side exercise price exceeds the buy side exercise price or (B) a "short box spread" in which the buy side exercise price exceeds the sell side exercise price, all of which have the same contract size, underlying component or index and time of expiration, and are based on the same aggregate current underlying value.

              (7) Broad Index Stock Group
              The term "broad index stock group" means an index stock group of 25 or more stocks whose inclusion and relative representation in the group are determined by the inclusion and relative representation of their current market prices in a widely-disseminated stock index reflecting the stock market as a whole or an inter-industry sector of the stock market.

              (8) Broad Index Stock Group Option (Contract)
              The term "broad index stock group option (contract)" means an option contract on a broad index stock group.
              (9) Butterfly Spread
              The term "butterfly spread" means an aggregation of positions in three series of either puts or calls, structured as either: (A) a "long butterfly spread" in which two short options in the same series are offset by one long option with a higher exercise price and one long option with a lower exercise price or (B) a "short butterfly spread" in which two long options in the same series offset one short option with a higher exercise price and one short option with a lower exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in ascending order.

              (10) Calendar Spread
              The term "calendar spread" or "time spread" means the sale of one option and the simultaneous purchase of another option of the same type, both specifying the same underlying component with the same exercise price or different exercise prices, where the "long" option expires after the "short" option.
              (11) Call
              The term "call" means an option contract under which the holder has the right, in accordance with the terms of the option, to purchase from The Options Clearing Corporation:

              (A) the number of shares of the underlying stock (if a single stock underlies the option contract);

              (B) the principal amount of the underlying security (if a Government security underlies the option contract);

              (C) the multiple of the current index group value of the underlying group (if an index stock group underlies the option contract); or

              (D) the nominal principal amount or any permissible variant of the underlying GNMA (if a GNMA underlies the option contract) covered by the option contract.

              (12) Class (of Options)
              The term "class (of options)" means all option contracts of the same type and kind covering the same underlying security or underlying stock group.

              (13) Clearing Member
              The term "clearing member" means a member which has been admitted to membership in The Options Clearing Corporation pursuant to the provisions of the rules of The Options Clearing Corporation.

              (14) Closing Purchase Transaction
              The term "closing purchase transaction" means an option transaction in which the purchaser's intention is to reduce or eliminate a short position in the series of options involved in such transaction.

              (15) Closing Sale Transaction
              The term "closing sale transaction" means an option transaction in which the seller's intention is to reduce or eliminate a long position in the series of options involved in such transaction.

              (16) Complement
              The term "complement," as used with reference to an annualized discount, means the difference between 100 percent and the annualized discount.

              (17) Covered

              (A) The term "covered" in respect of a short position in a call option contract means that the writer's obligation is secured either by a "specific deposit" or an "escrow deposit" meeting the conditions of Rule 610(e) or 610(h), respectively, of the rules of The Options Clearing Corporation, or by a letter of guarantee meeting the requirements of Rule 2520(f)(2)(H)(iv) or that the writer holds in the same account as the short position,

              (i) on a share-for-share basis (if a single stock underlies the option contract),

              (ii) on the basis of a matching principal amount (if a Government security underlies the option contract),

              (iii) on the basis of market value ("covering" underlying stocks) or of the index multiplier ("covering" option contracts) (if an index stock group underlies the option contract), or

              (iv) on the basis of the remaining unpaid principal balance (if a GNMA underlies the option contract),a long position either in the underlying security or underlying index stock group or in an option contract of the same class having an expiration date on or subsequent to the expiration date of the option contract in such short position and having an exercise price equal to or less than the exercise price of the option contract in such short position.
              (B) The term "covered" in respect of a short position in a put option contract means that the writer's obligation is secured by a letter of guarantee meeting the requirements of Rule 2520(f)(2)(H)(iv) of this Rule or that the writer holds in the same account as the short position,

              (i) on a share-for-share basis (if a single stock underlies the option contract),

              (ii) on the basis of a matching principal amount (if a Government security underlies the option contract),

              (iii) on the basis of the index multiplier (if an index stock group underlies the option contract), or

              (iv) on the basis of a matching remaining unpaid principal balance (if a GNMA underlies the option contract),a long position in an option contract of the same class having an expiration date on or subsequent to the expiration date of the option contract in such short position and having an exercise price equal to or greater than the exercise price of the option contract in such short position.
              (C) In the case of a "covering" underlying GNMA, the remaining unpaid principal balance must be equal to, or be a permissible variant of, the nominal principal amount and the "covering" underlying GNMA must bear a qualifying rate of interest.

              (18) Current Cash Market Price
              The term "current cash market price" as used with reference to GNMAs means the prevailing price in the cash market for GNMAs bearing a particular stated rate of interest to be delivered on the next applicable monthly settlement date determined in the manner specified in the rules of The Options Clearing Corporation.
              (19) Current Options Disclosure Document
              See "Applicable Current Options Disclosure Document."
              (20) Current Index Group Value
              The term "current index group value" means $1.00 multiplied by the current value reported for the index that is derived from the current market prices of the stocks in the group. When used with reference to the exercise of an index stock group option, the value is the last one reported on the day of exercise or, if the day of exercise is not a trading day, on the last trading day before exercise.

              (21) Current Market Value or Current Market Price
              The terms "current market value" or "current market price" of an option, currency warrant, currency index warrant or stock index warrant are as defined in Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System.

              (22) Designated Rate
              The term "designated rate" as used with reference to a GNMA option means a rate of interest of eight percent or such other rate as may be designated in the manner specified in the rules of The Options Clearing Corporation.

              (23) Dominant Underlying Stock
              The term "dominant underlying stock" means, when used with reference to an industry index stock group, a stock that accounts for 30 percent or more of the index group value.

              (24) Escrow Agreement
              The term "escrow agreement," when used in connection with cash settled calls, puts, currency warrants, currency index warrants, or stock index warrants carried short, means any agreement issued in a form acceptable to NASD under which a bank holding cash, cash equivalents, one or more qualified equity securities or a combination thereof in the case of a call or warrant or cash, cash equivalents or a combination thereof in the case of a put or warrant is obligated (in the case of an option) to pay the creditor the exercise settlement amount in the event an option is assigned an exercise notice or, (in the case of a warrant) the funds sufficient to purchase a warrant sold short in the event of a buy-in.
              (25) Exchange Option Transaction
              The term "Exchange option transaction" means an option transaction effected on the floor of a registered securities exchange between or among members.
              (26) Exchange Options Trading
              The term "Exchange options trading" means options trading on the floor of a registered securities exchange.
              (27) Exercise Price
              The term "exercise price" in respect of an option contract means:
              (A) if a single stock underlies the option contract, the stated price per share at which the underlying stock;

              (B) if a Treasury bond or Treasury note underlies the option contract, the specified percentage of the principal amount at which the underlying Treasury security;

              (C) if a Treasury bill underlies the option contract, the specified complement of the annualized discount at which the underlying Treasury bill;

              (D) if an index stock group underlies the option contract, the specified index group value at which the current index group value; or

              (E) if a GNMA underlies the option contract, the specified percentage of the nominal principal amount (assuming delivery of a GNMA bearing a stated rate of interest equal to the designated rate) at which the underlying GNMA; may be purchased (in the case of call) or sold (in the case of a put) upon the exercise of such option contract. In the case of an underlying GNMA, if the stated rate of interest of a GNMA delivered upon exercise of an option contract is a qualifying rate other than the designated rate, the exercise price shall be an amount which provides the same yield to maturity as the amount which would have been payable if the stated rate of interest had been equal to the designated rate (assuming a 30-year term and prepayment at the end of the twelfth year of the mortgage obligations underlying GNMAs).
              (28) Exercise Settlement Amount
              The term "exercise settlement amount" shall mean the difference between the "aggregate exercise price" and the "aggregate current index value" (as such terms are defined in the pertinent By-Laws of the Options Clearing Corporation).
              (29) Expiration Date
              The term "expiration date" in respect of an option contract means the date and time fixed by the rules of The Options Clearing Corporation for the expiration of all option contracts covering the same underlying security or underlying index stock group and having the same expiration month as such option contract.
              (30) Expiration Month
              The term "expiration month" in respect of an option contract means the month and year in which such option contract expires.
              (31) GNMA
              The term "GNMA" means a mortgage pass-through security guaranteed as to timely payment of principal and interest by the Government National Mortgage Association, as described in the current standard prospectus of the Department of Housing and Urban Development covering such securities, bearing a stated rate of interest which is a qualifying rate. Any two or more separate certificates representing GNMAs bearing the same qualifying rate delivered in accordance with the rules of The Options Clearing Corporation upon exercise of an option contract shall, for purposes of this Rule, be deemed to be a single GNMA, having a remaining unpaid principal balance equal to the sum of the remaining unpaid principal balances of such separate certificates.
              (32) GNMA Option (Contract)
              The term "GNMA option (contract)" means an option contract on GNMAs.
              (33) GNMA Production Rate
              The term "GNMA production rate" means a rate of interest .50 percent below the maximum stated rate of interest on residential mortgages which the Federal Housing Administration is willing to insure and which the Veterans Administration is willing to guarantee, as it may vary from time to time in accordance with official announcements of changes in such rates made by the Federal Housing Administration.
              (34) Government Security
              The term "Government security" means a bond, note, bill, debenture or other evidence of indebtedness that is a direct obligation of, or an obligation guaranteed as to principal or interest by, the United States or a corporation in which the United States has a direct or indirect interest (except debt securities guaranteed as to timely payment of principal and interest by the Government National Mortgage Association).

              (35) Government Security Option (Contract)
              The term "Government security option (contract)" means an option contract on Government securities.
              (36) Index Multiplier
              The term "index multiplier" as used with reference to an index stock group option contract means the amount specified in the contract by which the current index group value is to be multiplied to arrive at the value required to be delivered to the holder of a call or by the holder of a put upon valid exercise of the contract.
              (37) Index Stock Group
              The term "index stock group" means either a broad index stock group or an industry index stock group.
              (38) Index Stock Group Option (Contract)
              The term "index stock group option (contract)" means either a broad index stock group option contract or an industry index stock group option contract.
              (39) Industry Index Stock Group
              The term "industry index stock group" means an index stock group of six or more stocks whose inclusion and relative representation in the group are determined by the inclusion and relative representation of their current market prices in a widely-disseminated stock index reflecting a particular industry or closely-related industries.
              (40) Industry Index Stock Group Option (Contract)
              The term "industry index stock group option (contract)" means an option contract on an industry index stock group.
              (41) Kind of Option
              The term "kind of option" means either a stock option contract, a Government security option contract, a broad index stock group option contract, an industry index stock group option contract or a GNMA option contract.
              (42) Long Calendar Butterfly Spread
              The term "long calendar butterfly spread" means an aggregation of positions in three series of either puts or calls, structured as two short options with the same exercise price, offset by a long option with a lower exercise price and a long option with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar butterfly spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread and one long butterfly spread, as defined in this rule.
              (43) Long Calendar Condor Spread
              The term "long calendar condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar condor spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread and two long butterfly spreads, as defined in this rule.
              (44) Long Condor Spread
              The term "long condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of two long butterfly spreads, as defined in this rule.
              (45) Long Position
              The term "long position" means the number of outstanding option contracts of a given series of options held by a person (purchaser).
              (46) Nominal Principal Amount
              The term "nominal principal amount" as used with reference to a GNMA option means the remaining unpaid principal balance of GNMAs required to be delivered to the holder of a call or by the holder of a put upon exercise of an option without regard to any variance in the remaining unpaid principal balance permitted to be delivered upon such exercise and shall be $100,000 in the case of a single call or put.
              (47) Opening Purchase Transaction
              The term "opening purchase transaction" means an option transaction in which the purchaser's intention is to create or increase a long position in the series of options involved in such transaction.
              (48) Opening Writing Transaction
              The term "opening writing transaction" means an option transaction in which the seller's (writer's) intention is to create or increase a short position in the series of options involved in such transaction.
              (49) Option (Contract)
              The term "option (contract)" means a put or a call issued, or subject to issuance, by The Options Clearing Corporation pursuant to the rules of The Options Clearing Corporation.
              (50) Option Transaction
              The term "option transaction" means a transaction for the purchase or sale of an option contract, or for the closing out of a long or short position in an option contract.
              (51) Options Trading
              The term "options trading" means trading in any option issued by The Options Clearing Corporation, whether or not of a type, class or series that has been approved for trading on a national securities exchange.
              (52) Outstanding
              The term "outstanding" in respect of an option contract means an option contract which has been issued by The Options Clearing Corporation and has neither been the subject of a closing sale transaction on or through the facilities of, or otherwise subject to the rules of, a Participating Exchange or Association nor been exercised nor reached its expiration date.
              (53) Participating Exchange (Association)
              The term "Participating Exchange (Association)" means a national securities exchange (association) which has qualified for participation in The Options Clearing Corporation.
              (54) Primary Market
              The term "primary market" means (A) in respect of an underlying security that is principally traded on a national securities exchange, the principal exchange market in which the underlying security is traded and (B) in respect of an underlying security that is principally traded in the over-the-counter market, the market reflected by any widely recognized quotation dissemination system or service .
              (55) Public Customer of a Member Organization
              The term "public customer of a member organization" means a customer that is not a broker or a dealer.
              (56) Put
              The term "put" means an option contract under which the holder has the right, in accordance with the terms of the option, to sell to The Options Clearing Corporation:

              (A) the number of shares of the underlying stock (if a single stock underlies the option contract);

              (B) the principal amount of the underlying security (if a Government security underlies the option contract);

              (C) the multiple of the current index group value of the underlying group (if an index stock group underlies the option contract); or

              (D) the nominal principal amount or any permissible variant of the underlying GNMA (if a GNMA underlies the option contract);covered by the option contract.
              (57) Qualifying Rate
              The term "qualifying rate" as used with reference to a GNMA option means any rate of interest equal to or less than the GNMA production rate, provided that:

              (A) in the event of any increase in the GNMA production rate, a GNMA issued prior to the date of any such change bearing a stated rate of interest equal to any such increased GNMA production rate (or any lower rate of interest which was not a qualifying rate on the day prior to that date) shall be deemed not to bear a qualifying rate until the expiration of 45 days from the date of such increase or until after the settlement date for options on GNMAs following the next expiration date for any series of such options, whichever shall last occur unless such GNMA bears a stated rate of interest deemed to constitute a qualifying rate in accordance with subparagraph (B) below; and

              (B) in the event of any decrease in the GNMA production rate, a GNMA bearing a stated rate of interest which was equal to the GNMA production rate (or any lower rate of interest which is not otherwise a qualifying rate) on the day prior to the date of any such decrease shall be deemed to continue to bear a qualifying rate for a period of 45 days from the date of such decrease or until the settlement date for options on GNMAs following the next expiration date for any series of such options, whichever shall last occur.

              (58) Registered Clearing Agency
              The term "registered clearing agency" shall mean a clearing agency as defined in Section (3)(a)(23) of the Act that is registered with the Commission pursuant to Section 17A(b)(2) of the Act.

              (59) Registered Options Principal
              The term "Registered Options Principal" means a person who has qualified as a "Registered Options Principal."
              (60) Registered Options Representative
              The term "Registered Options Representative" means a registered representative who has qualified as a "Registered Options Representative."

              (61) Related Security
              The term "related security" means:
              (A) as used with reference to a Government security option, (i) all securities underlying Government security options, (ii) futures contracts on such underlying security, and (iii) all options on such futures contracts;

              (B) as used with reference to a stock option, the underlying stock; and

              (C) as used with reference to an index stock group option, (i) all futures contracts on the underlying stock group or on any substantially identical index stock group, all options contracts on any substantially identical index stock group, and all options on such futures contracts, and (ii) also, in the case of an industry index stock group option only, all underlying stocks accounting for five percent or more of the current index group value of the underlying industry index stock group and all individual stock options on such underlying stocks.

              (62) Rules of The Options Clearing Corporation
              The term "rules of The Options Clearing Corporation" means the by-laws and the rules of The Options Clearing Corporation and all written interpretations thereof, as the same may be in effect from time to time.
              (63) Series (of Options)
              The term "series (of options)" means all option contracts of the same class of options having the same expiration date, exercise price and unit of trading.
              (64) Shares
              The term "shares" means the basic unit of issue of a stock.
              (65) Short Calendar Iron Butterfly Spread
              The term "short calendar iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron butterfly spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread, one long butterfly spread, and one short box spread, as defined in this rule.
              (66) Short Calendar Iron Condor Spread
              The term "short calendar iron condor spread" means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices and a long call with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron condor spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread, two long butterfly spreads, and one short box spread, as defined in this rule
              (67) Short Iron Butterfly Spread
              The term "short iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of one long butterfly spread and one short box spread, as defined in this rule.
              (68) Short Iron Condor Spread
              The term “short iron condor spread” means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices, and a long call with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of two long butterfly spreads and one short box spread, as defined in this rule.
              (69) Short Position
              The term "short position" means the number of outstanding option contracts of a given series of options with respect to which a person is obligated as a writer (seller).
              (70) Stock
              The term "stock" shall be broadly interpreted to mean any equity security, as defined in Section 3(a)(11) of the Act, and SEC Rule 3a11-1 under the Act, that confers directly on the holder a present equity ownership or participation interest in an enterprise.

              (71) Stock Option (Contract)
              The term "stock option (contract)" means an option contract on a single stock.
              (72) Stock Index Warrant
              The term "stock index warrant" shall mean a put or call warrant that overlies a broad index stock group or an industry index stock group.
              (73) Stock-Related Option (Contract)
              The term "stock-related option (contract)" means either a stock option contract, a broad industry index stock group option contract or any industry index stock group option contract.
              (74) The Options Clearing Corporation
              The term "The Options Clearing Corporation" means The Options Clearing Corporation, a subsidiary of the Participating Exchanges and Association.
              (75) Treasury Bill
              The term "Treasury bill" means a Government security sold by the U.S. Treasury Department at a discount from principal amount, bearing no interest and normally having a term to maturity of not more than one year at the time of original issue.
              (76) Treasury Bond
              The term "Treasury bond" means a Government security sold by the U.S. Treasury that has been designated by the U.S. Treasury Department with reference to its term to maturity as a "bond" (normally confined to Treasury securities with a term to maturity of more than ten years at the time of original issue).
              (77) Treasury Note
              The term "Treasury note" means a Government security sold by the U.S. Treasury Department that has been designated by the U.S. Treasury Department with reference to its term to maturity as a "note" (normally confined to Treasury securities with a term to maturity of more than one year but not more than ten years at the time of original issue).
              (78) Type of Option
              The term "type of option" means the classification of an option contract as either a put or a call.
              (79) Uncovered
              The term "uncovered" in respect of a short position in an option contract means that the short position is not covered.
              (80) Underlying Component
              The term "underlying component" shall mean in the case of stock, the equivalent number of share: industry and broad index stock groups, the current index group value and the applicable index multiplier; U.S. Treasury bills, notes and bonds, the underlying principal amount; foreign currencies, the units per foreign currency contract; and interest rate contracts, the interest rate measure based on the yield of U.S. Treasury bills, notes or bonds and the applicable multiplier. The term "interest rate measure represents, in the case of U.S. Treasury bills, the annualized discount yield of a specific issue multiplied by ten, or in the case of long term U.S. Treasury notes and bonds, the average of the yield to maturity of the specific issues multiplied by ten.
              (81) Underlying GNMA
              The term "underlying GNMA" means an underlying security that is a GNMA.
              (82) Underlying Government Security
              The term "underlying Government security" means an underlying security that is a Government security.
              (83) Underlying (Index) Stock Group
              The term "underlying (index) stock group" as used with reference to an index stock group option contract means the index stock group, a multiple of the current index group value at which The Options Clearing Corporation is obligated to sell (in the case of a call) or purchase (in the case of a put) upon valid exercise of the contract.
              (84) Underlying Security
              The term "underlying security" means:
              (A) as used with reference to an option contract other than an index stock group option contract, the security which The Options Clearing Corporation is obligated to sell (in the case of a call) or purchase (in the case of a put) upon valid exercise of the contract; and

              (B) as used with reference to an index stock group option contract, any of the stocks included in the underlying index stock group.

              (85) Underlying Stock

              The term "underlying stock" means an underlying security that is a stock.

              Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
              Amended by SR-NASD-2006-045 eff. April 3, 2006.
              Amended by SR-NASD-2000-15 eff. Feb. 26, 2001.
              Amended by SR-NASD-97-14 eff. June 10, 1997.
              Amended by SR-NASD-95-37 eff. Sept. 28, 1995.
              Amended by SR-NASD-93-48 eff. Mar. 8, 1994.
              Amended eff. Apr. 19, 1993.
              Added eff. Feb. 15, 1974.

              Selected Notices: 88-26, 93-15, 94-24, 94-70, 95-82, 01-11, 06-26.

          • 2710. Corporate Financing Rule — Underwriting Terms and Arrangements

            This rule is no longer applicable. NASD Rule 2710 has been superseded by FINRA Rules 5110 and 5190. Please consult the appropriate FINRA Rule.

            (a) Definitions

            For purposes of this Rule, the following terms shall have the meanings stated below. The definitions in Rule 2720 are incorporated herein by reference.
            (1) Issuer
            The issuer of the securities offered to the public, any selling security holders offering securities to the public, any affiliate of the issuer or selling security holder, and the officers or general partners, directors, employees and security holders thereof.

            (2) Net Offering Proceeds
            Offering proceeds less all expenses of issuance and distribution.
            (3) Offering Proceeds
            Public offering price of all securities offered to the public, not including securities subject to any overallotment option, securities to be received by the underwriter and related persons, or securities underlying other securities.

            (4) Participating Member(s)
            Any NASD member that is participating in a public offering, any associated person of the member, any members of their immediate family, and any affiliate of the member.

            (5) Participation or Participating in a Public Offering
            Participation in the preparation of the offering or other documents, participation in the distribution of the offering on an underwritten, non-underwritten, or any other basis, furnishing of customer and/or broker lists for solicitation, or participation in any advisory or consulting capacity to the issuer related to the offering, but not the preparation of an appraisal in a savings and loan conversion or a bank offering or the preparation of a fairness opinion pursuant to SEC Rule 13e-3.

            (6) Underwriter and Related Persons
            Consists of underwriter's counsel, financial consultants and advisors, finders, any participating member, and any other persons related to any participating member.

            (7) Listed Securities
            Securities meeting the listing standards to trade on the national securities exchanges identified in SEC Rule 146, markets registered with the SEC under Sections 6 of the Exchange Act, and any offshore market that is a "designated offshore securities market" under Rule 902(b) of SEC Regulation S.

            (8) Derivative Instruments
            A derivative instrument is any "eligible OTC derivative instrument" as defined in SEC Rule 3b-13(a)(1), (2) and (3).
            (9) Fair Price
            A derivative instrument or non-convertible or non-exchangeable debt security has been acquired or entered into at a fair price for purposes of subparagraphs (b)(6)(A)(iv), (c)(3)(B)(vi) and (vii), and (e)(5) if the underwriters and related persons have priced the debt security or derivative instrument in good faith; on an arm's length, commercially reasonable basis; and in accordance with pricing methods and models and procedures used in the ordinary course of their business for pricing similar transactions. A derivative instrument or other security received for acting as a private placement agent for the issuer, for providing or arranging a loan, credit facility, merger, acquisition or any other service, including underwriting services, is not included within this "fair price" definition.

            (10) Required Filing Date
            The required filing date shall be the dates provided in subparagraph (b)(4), and for a public offering exempt from filing under subparagraph (b)(7), the required filing date for purposes of subparagraphs (d) and (g) shall be the date the public offering would have been required to be filed with the NASD but for the exemption.

            (b) Filing Requirements

            (1) General
            No member or person associated with a member shall participate in any manner in any public offering of securities subject to this Rule, Rule 2720 or Rule 2810 unless documents and information as specified herein relating to the offering have been filed with and reviewed by NASD.

            (2) Means of Filing
            Documents or information required by this Rule to be filed with NASD shall be considered to be filed only upon receipt by its Corporate Financing Department.*
            (3) Confidential Treatment
            NASD shall accord confidential treatment to all documents and information filed pursuant to this Rule and shall utilize such documents and information solely for the purpose of review to determine compliance with the provisions of applicable NASD Rules or for other regulatory purposes deemed appropriate by NASD.

            (4) Requirement for Filing

            (A) Unless filed by the issuer, the managing underwriter, or another member, a member that anticipates participating in a public offering of securities subject to this Rule shall file with NASD the documents and information with respect to the offering specified in subparagraphs (5) and (6) below:

            (i) no later than one business day after any of such documents are filed with or submitted to:

            a. the Commission; or

            b. any state securities commission or other regulatory authority; or

            (ii) if not filed with or submitted to any regulatory authority, at least fifteen business days prior to the anticipated date on which offers will commence.

            (B) No sales of securities subject to this Rule shall commence unless:

            (i) the documents and information specified in subparagraphs (5) and (6) below have been filed with and reviewed by NASD; and

            (ii) NASD has provided an opinion that it has no objections to the proposed underwriting and other terms and arrangements or an opinion that the proposed underwriting and other terms and arrangements are unfair and unreasonable. If NASD's opinion states that the proposed underwriting and other terms and arrangements are unfair and unreasonable, the member may file modifications to the proposed underwriting and other terms and arrangements for further review.

            (C) Any member acting as a managing underwriter or in a similar capacity that has been informed of an opinion by NASD, or a determination by the appropriate standing committee of the Board of Governors, that the proposed underwriting terms and arrangements of a proposed offering are unfair or unreasonable, and the proposed terms and arrangements have not been modified to conform to the standards of fairness and reasonableness, shall notify all other members proposing to participate in the offering of that opinion or determination at a time sufficiently prior to the effective date of the offering or the commencement of sales so the other members will have an opportunity as a result of specific notice to comply with their obligation not to participate in any way in the distribution of a public offering containing arrangements, terms and conditions that are unfair or unreasonable.

            (5) Documents to be Filed

            (A) The following documents relating to all proposed public offerings of securities that are required to be filed under subparagraph (b)(4) above shall be filed with NASD for review:

            (i) Three copies of the registration statement, offering circular, offering memorandum, notification of filing, notice of intention, application for conversion and/or any other document used to offer securities to the public;

            (ii) Three copies of any proposed underwriting agreement, agreement among underwriters, selected dealers agreement, agency agreement, purchase agreement, letter of intent, consulting agreement, partnership agreement, underwriter's warrant agreement, escrow agreement, and any other document that describes the underwriting or other arrangements in connection with or related to the distribution, and the terms and conditions relating thereto; and any other information or documents that may be material to or part of the said arrangements, terms and conditions and that may have a bearing on NASD's review;

            (iii) Three copies of each pre- and post-effective amendment to the registration statement or other offering document, one copy marked to show changes; and three (3) copies of any other amended document previously filed pursuant to subparagraphs (i) and (ii) above, one copy marked to show changes; and

            (iv) Three copies of the final registration statement declared effective by the Commission or equivalent final offering document and a list of the members of the underwriting syndicate, if not indicated therein, and one copy of the executed form of the final underwriting documents and any other document submitted to NASD for review.

            (B) All documents that are filed with the Commission through the Commission's Electronic Data Gathering and Retrieval System shall be treated as filed with NASD.

            (6) Information Required to be Filed

            (A) Any person filing documents with NASD pursuant to subparagraph (4) above shall provide the following information with respect to the offering through NASD's electronic filing system:

            (i) an estimate of the maximum public offering price;

            (ii) an estimate of the maximum underwriting discount or commission; maximum reimbursement of underwriter's expenses, and underwriter's counsel's fees (except for reimbursement of "blue sky" fees); maximum financial consulting and/or advisory fees to the underwriter and related persons; maximum finder's fees; and a statement of any other type and amount of compensation which may accrue to the underwriter and related persons;

            (iii) a statement of the association or affiliation with any member of any officer or director of the issuer, of any beneficial owner of 5% or more of any class of the issuer's securities, and of any beneficial owner of the issuer's unregistered equity securities that were acquired during the 180-day period immediately preceding the required filing date of the public offering, except for purchases described in subparagraph (c)(3)(B)(iv) below. This statement must identify:

            a. the person;

            b. the member and whether such member is participating in any capacity in the public offering; and

            c. the number of equity securities or the face value of debt securities owned by such person, the date such securities were acquired, and the price paid for such securities.

            (iv) a detailed explanation of any other arrangement entered into during the 180-day period immediately preceding the required filing date of the public offering, which arrangement provides for the receipt of any item of value or the transfer of any warrants, options, or other securities from the issuer to the underwriter and related persons, provided however:

            a. information regarding debt securities and derivative instruments not considered an item of value under subsection (c)(3)(B)(vi) and (vii) is not required to be filed; and

            b. information initially filed in connection with debt securities and derivative instruments acquired or entered into for "fair price" as defined in subsection (a)(9), but not excluded from items of value under subsection (c)(3)(B)(vi) or (vii), may be limited to a brief description of the transaction (additional information may be required in the review process) and a representation by the member that a registered principal or senior manager on behalf of the member has determined that the transaction was or (if the pricing terms have not been set) will be entered into at a fair price as defined in subsection (a)(9).

            (v) a statement demonstrating compliance with all of the criteria of an exception from underwriting compensation in subparagraph (d)(5) below, when applicable; and

            (vi) a detailed explanation and any documents related to:

            a. the modification of any information or representation previously provided to NASD or of any item of underwriting compensation including the information required in subparagraph (b)(6)(A)(iii) above with respect to any securities of the issuer acquired subsequent to the required filing date and prior to the effectiveness or commencement of the offering ; or

            b. any new arrangement that provides for the receipt of any additional item of value by any participating member subsequent to the issuance of an opinion of no objections to the underwriting terms and arrangements by NASD and within 90 days immediately following the date of effectiveness or commencement of sales of the public offering, provided, however, that information filed in connection with debt securities and derivative instruments acquired or entered into for a "fair price" as defined in subsection (a)(9) may be limited as described in subsection (b)(6)(A)(iv)b.

            (vii) any other information required to be filed under this Rule.
            (B) Any person filing documents pursuant to subparagraph (b)(5) above shall notify NASD through its electronic filing system that the offering has been declared effective or approved by the Commission or other agency no later than one business day following such declaration or approval or that the offering has been withdrawn or abandoned within three business days following the withdrawal or decision to abandon the offering.

            (7) Offerings Exempt from Filing
            Notwithstanding the provisions of subparagraph (1) above, documents and information related to the following public offerings need not be filed with NASD for review, unless subject to the provisions of Rule 2720. However, it shall be deemed a violation of this Rule or Rule 2810, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Rule or Rule 2810, as applicable:

            (A) securities offered by a corporate, foreign government or foreign government agency issuer which has unsecured non-convertible debt with a term of issue of at least four (4) years, or unsecured non-convertible preferred securities, rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories, except that the initial public offering of the equity of an issuer is required to be filed;

            (B) non-convertible debt securities and non-convertible preferred securities rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories;

            (C) offerings of securities:

            (i) registered with the Commission on registration statement Forms S-3 or F-3 pursuant to the standards for those Forms prior to October 21, 1992 and offered pursuant to SEC Rule 415 adopted under the Securities Act of 1933, as amended; or

            (ii) of a foreign private issuer incorporated or organized under the laws of Canada or any Canadian province or territory, and is registered with the Commission on Form F-10 pursuant to the standards for that Form approved in Securities Act Release No. 6902 (June 21, 1991) and offered pursuant to Canadian shelf prospectus offering procedures;

            (D) securities offered pursuant to a redemption standby "firm commitment" underwriting arrangement registered with the Commission on Forms S-3, F-3 or F-10 (only with respect to Canadian issuers);

            (E) financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four (4) highest generic rating categories; and

            (F) exchange offers of securities where:

            (i) the securities to be issued or the securities of the company being acquired are listed on The Nasdaq Global Market, the New York Stock Exchange, or the American Stock Exchange; or

            (ii) the company issuing securities qualifies to register securities with the Commission on registration statement Forms S-3, F-3, or F-10, pursuant to the standards for those Forms as set forth in subparagraphs (C)(i) and (ii) of this paragraph; and

            (G) offerings of securities by a church or other charitable institution that is exempt from SEC registration pursuant to Section 3(a)(4) of the Securities Act.

            (8) Exempt Offerings
            Notwithstanding the provisions of subparagraph (1) above, the following offerings are exempt from this Rule, Rule 2720, and Rule 2810. Documents and information relating to the following offerings need not be filed for review:

            (A) securities exempt from registration with the Commission pursuant to the provisions of Sections 4(1), 4(2) or 4(6) of the Securities Act of 1933, as amended, or pursuant to Rule 504 if the securities are "restricted securities" under SEC Rule 144(a)(3), Rule 505, or Rule 506 adopted under the Securities Act of 1933, as amended;

            (B) securities which are defined as "exempt securities" in Section 3(a)(12) of the Act, as amended;

            (C) securities of "open-end" investment companies as defined in Section 5(a)(1) of the Investment Company Act of 1940 and securities of any "closed-end" investment company as defined in Section 5(a)(2) of that Act that:

            (i) makes periodic repurchase offers pursuant to Rule 23c-3(b) under of the Investment Company Act of 1940; and

            (ii) offers its shares on a continuous basis pursuant to Rule 415(a)(1)(xi) under the Securities Act of 1933.

            (D) variable contracts as defined in Rule 2820(b)(1);

            (E) modified guaranteed annuity contracts and modified guaranteed life insurance policies, which are deferred annuity contracts or life insurance policies the value of which are guaranteed if held for specified periods, and the nonforfeiture value of which are based upon a market-value adjustment formula for withdrawals made before the end of any specified period;

            (F) offerings of municipal securities as defined in Section 3(a)(29) of the Act;

            (G) tender offers made pursuant to Regulation 14D adopted under the Act;

            (H) securities issued pursuant to a competitively bid underwriting arrangement meeting the requirements of the Public Utility Holding Company Act of 1935, as amended;

            (I) securities of a subsidiary or other affiliate distributed by a company in a spin-off or reverse spin-off or similar transaction to its existing security holders exclusively as a dividend or other distribution; and

            (J) securities registered with the Commission in connection with a merger or acquisition transaction or other similar business combination, except for offerings required to be filed pursuant to subparagraph (9)(I) below.

            (9) Offerings Required to be Filed
            Documents and information relating to all other public offerings including, but not limited to, the following must be filed with NASD for review:
            (A) direct participation programs as defined in Rule 2810(d)(2);

            (B) mortgage and real estate investment trusts;

            (C) rights offerings;

            (D) securities exempt from registration with the Commission pursuant to Section 3(a)(11) of the Securities Act of 1933, as amended;

            (E) securities exempt from registration with the Commission pursuant to Rule 504 adopted under the Securities Act of 1933, as amended, unless the securities are "restricted securities" under SEC Rule 144(a)(3);

            (F) securities offered by a bank, savings and loan association, or common carrier even though such offering may be exempt from registration with the Commission;

            (G) securities offered pursuant to Regulation A or Regulation B adopted under the Securities Act of 1933, as amended;

            (H) exchange offers that are exempt from registration with the Commission under Sections 3(a)(4), 3(a)(9), or 3(a)(11) of the Securities Act of 1933 (if a member's participation involves active solicitation activities) or registered with the Commission (if a member is acting as dealer-manager) (collectively "exchange offers"), except for exchange offers exempt from filing pursuant to subparagraph (7)(F) above that are not subject to filing by subparagraph (9)(I) below;

            (I) any exchange offer, merger and acquisition transaction, or other similar corporate reorganization involving an issuance of securities that results in the direct or indirect public ownership of the member; and

            (J) any offerings of a similar nature that are not exempt under subparagraph (7) or (8) above.

            (10) Request for Underwriting Activity Report
            Notwithstanding the availability of an exemption from filing under subparagraph (b)(7) of this Rule, a member acting as a manager (or in a similar capacity) of a distribution of a publicly traded subject or reference security that is subject to SEC Rule 101 or an "actively-traded" security under SEC Rule 101 (except for a security listed on a national securities exchange) shall submit a request to the Market Regulation Department for an Underwriting Activity Report with respect to the subject and/or reference security in order to facilitate compliance with SEC Rules 101, 103, or 104, and other distribution-related NASD Rules. The request shall be submitted at the time a registration statement or similar offering document is filed with the Corporate Financing Department, the SEC, or other regulatory agency or, if not filed with any regulatory agency, at least two (2) business days prior to the commencement of the restricted period under SEC Rule 101. The request shall include a copy of the registration statement or similar offering document (if not previously submitted pursuant to subparagraph (b)(5) of this Rule). If no member is acting as managing underwriter of such distribution, each member that is a distribution participant or an affiliated purchaser shall submit a request for an Underwriting Activity Report, unless another member has assumed responsibility for compliance with this subparagraph. For purposes of subparagraphs (b)(10) and (11), SEC Rules 100, 101, 103, and 104 are rules of the Commission adopted under Regulation M and the following terms shall have the meanings as defined in SEC Rule 100: "distribution," "distribution participant," "reference security," "restricted period," and "subject security."

            (11) Submission of Pricing Information
            A member acting as a manager (or in a similar capacity) of a distribution of securities that are listed on a national securities exchange and considered a subject security or reference security that is subject to SEC Rule 101 or an "actively-traded" security under SEC Rule 101 or a distribution of any other securities that are considered "actively-traded" under SEC Rule 101 shall provide written notice to the Market Regulation Department of NASD, no later than the close of business the day the offering terminates, that includes the date and time of the pricing of the offering, the offering price, and the time the offering terminated, which notice may be submitted on the Underwriting Activity Report.

            (c) Underwriting Compensation and Arrangements

            (1) General
            No member or person associated with a member shall participate in any manner in any public offering of securities in which the underwriting or other terms or arrangements in connection with or relating to the distribution of the securities, or the terms and conditions related thereto, are unfair or unreasonable.

            (2) Amount of Underwriting Compensation

            (A) No member or person associated with a member shall receive an amount of underwriting compensation in connection with a public offering that is unfair or unreasonable and no member or person associated with a member shall underwrite or participate in a public offering of securities if the underwriting compensation in connection with the public offering is unfair or unreasonable.

            (B) For purposes of determining the amount of underwriting compensation, all items of value received or to be received from any source by the underwriter and related persons which are deemed to be in connection with or related to the distribution of the public offering as determined pursuant to subparagraphs (3) and (4) below shall be included.

            (C) All items of underwriting compensation shall be disclosed in the section on underwriting or distribution arrangements in the prospectus or similar document and, if the underwriting compensation includes items of compensation in addition to the commission or discount disclosed on the cover page of the prospectus or similar document, a footnote to the offering proceeds table on the cover page of the prospectus or similar document shall include a cross-reference to the section on underwriting or distribution arrangements.

            (D) For purposes of determining the currently effective guideline on the maximum amount of underwriting compensation considered fair and reasonable, the following factors, as well as any other relevant factors and circumstances, shall be taken into consideration:

            (i) the offering proceeds;

            (ii) the amount of risk assumed by the underwriter and related persons, which is determined by:

            a. whether the offering is being underwritten on a "firm commitment" or "best efforts" basis and

            b. whether the offering is an initial or secondary offering; and

            (iii) the type of securities being offered.

            (E) The maximum amount of compensation (stated as a percentage of the dollar amount of the offering proceeds) that is considered fair and reasonable generally will vary directly with the amount of risk to be assumed by participating members and inversely with the dollar amount of the offering proceeds.

            (3) Items of Value

            (A) For purposes of determining the amount of underwriting compensation received or to be received by the underwriter and related persons pursuant to subparagraph (c)(2) above, the following items and all other items of value received or to be received by the underwriter and related persons in connection with or related to the distribution of the public offering, as determined pursuant to paragraph (d) below shall be included:

            (i) discount or commission;

            (ii) reimbursement of expenses to or on behalf of the underwriter and related persons;

            (iii) fees and expenses of underwriter's counsel (except for reimbursement of "blue sky" fees);

            (iv) finder's fees, whether in the form of cash, securities or any other item of value;

            (v) wholesaler's fees;

            (vi) financial consulting and advisory fees, whether in the form of cash, securities, or any other item of value;

            (vii) common or preferred stock, options, warrants, and other equity securities, including debt securities convertible to or exchangeable for equity securities, received:

            a. for acting as private placement agent for the issuer;

            b. for providing or arranging a loan, credit facility, merger or acquisition services, or any other service for the issuer;

            c. as an investment in a private placement made by the issuer; or

            d. at the time of the public offering;

            (viii) special sales incentive items;

            (ix) any right of first refusal provided to any participating member underwrite or participate in future public offerings, private placements or other financings, which will have a compensation value of 1% of the offering proceeds or that dollar amount contractually agreed to by the issuer and underwriter to waive the right of first refusal;

            (x) compensation to be received by the underwriter and related persons or by any person nominated by the underwriter as an advisor to the issuer's board of directors in excess of that received by other members of the board of directors;

            (xi) commissions, expense reimbursements, previously or other compensation to be received by the underwriter and related persons as a result of the exercise or conversion within twelve months following the effective date of the offering of warrants, options, convertible securities, or similar securities distributed as part of the public offering;

            (xii) fees of a qualified independent underwriter; and

            (xiii) compensation, including expense reimbursements, paid to any member in connection with a proposed public offering that was not completed, unless the member does not participate in the revised public offering..

            (B) Notwithstanding subparagraph (c)(3)(A) above, the following shall not be considered an item of value:

            (i) expenses customarily borne by an issuer, such as printing costs; SEC, "blue sky" and other registration fees; NASD filing fees; and accountant's fees, whether or not paid through a participating member;

            (ii) cash compensation for acting as placement agent for a private placement or for providing a loan, credit facility, or for services in connection with a merger/acquisition;

            (iii) listed securities purchased in public market transactions;

            (iv) securities acquired through any stock bonus, pension, or profit-sharing plan that qualifies under Section 401 of the Internal Revenue Code;

            (v) securities acquired by an investment company registered under the Investment Company Act of 1940;

            (vi) nonconvertible or non-exchangeable debt securities acquired for a fair price in the ordinary course of business in a transaction unrelated to the public offering; and

            (vii) derivative instruments entered into for a fair price in the ordinary course of business in a transaction unrelated to the public offering.

            (d) Determination of Whether Items of Value Are Included In Underwriting Compensation

            (1) Pre-Offering Compensation
            All items of value received and all arrangements entered into for the future receipt of an item of value by the underwriter and related persons during the period commencing 180 days immediately preceding the required filing date of the registration statement or similar document pursuant to subparagraph (b)(4) above until the date of effectiveness or commencement of sales of the public offering will be considered to be underwriting compensation in connection with the public offering.

            (2) Undisclosed and Post-Offering Compensation
            All items of value received and all arrangements entered into for the future receipt of an item of value by any participating member that are not disclosed to NASD prior to the date of effectiveness or commencement of sales of a public offering, including items of value received subsequent to the public offering, are subject to post-offering review to determine whether such items of value are, in fact, underwriting compensation for the public offering.

            (3) Date of Receipt of Securities
            Securities of the issuer acquired by the underwriter and related persons will be considered to be received for purposes of subparagraphs (d)(1) and (d)(5) as of the date of the:

            (A) closing of a private placement, if the securities were purchased in or received for arranging a private placement; or

            (B) execution of a written contract with detailed provisions for the receipt of securities as compensation for a loan, credit facility, or put option; or

            (C) transfer of beneficial ownership of the securities, if the securities were received as compensation for consulting or advisory services, merger or acquisition services, acting as a finder, or for any other service.

            (4) Definitions
            For purposes of subparagraph (d)(5) below, the following terms will have the meanings stated below.
            (A) An entity:

            (i) includes a group of legal persons that either:

            a. are contractually obligated to make co-investments and have previously made at least one such investment; or

            b. have filed a Schedule 13D or 13G with the SEC that identifies the legal persons as members of a group that have agreed to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer in connection with a previous investment; and

            (ii) may make its investment or loan through a wholly owned subsidiary (except when the entity is a group of legal persons).

            (B) An institutional investor is any individual or legal person that has at least $50 million invested in securities in the aggregate in its portfolio or under management, including investments held by its wholly owned subsidiaries; provided that no participating members direct or otherwise manage the institutional investor's investments or have an equity interest in the institutional investor, either individually or in the aggregate, that exceeds 5% for a publicly owned entity or 1% for a nonpublic entity.

            (C) A bank or insurance company is only the regulated entity, not its subsidiaries or other affiliates.

            (D) A right of pre-emption means the right of a shareholder to acquire additional securities in the same company in order to avoid dilution when additional securities are issued, pursuant to:

            (i) any option, shareholder agreement, or other contractual right entered into at the time of a purchase of securities;

            (ii) the terms of the security purchased;

            (iii) the issuer's charter or by-laws; or

            (iv) the domestic law of a foreign jurisdiction that regulates the issuance of the securities.

            (E) "Total equity securities" means the aggregate of the total shares of:

            (i) common stock outstanding of the issuer; and

            (ii) common stock of the issuer underlying all convertible securities outstanding that convert without the payment of any additional consideration.

            (5) Exceptions From Underwriting Compensation
            Notwithstanding subparagraph (d)(1) above, the following items of value are excluded from underwriting compensation (but are subject to the lock-up restriction in subparagraph (g)(1) below), provided that the member does not condition its participation in the public offering on an acquisition of securities under an exception and any securities purchased are purchased at the same price and with the same terms as the securities purchased by all other investors.

            (A) Purchases and Loans by Certain Entities — Securities of the issuer purchased in a private placement or received as compensation for a loan or credit facility before the required filing date of the public offering pursuant to subparagraph (b)(4) above by certain entities if:

            (i) each entity:

            a. either:

            1. manages capital contributions or commitments of $100 million or more, at least $75 million of which has been contributed or committed by persons that are not participating members;

            2. manages capital contributions or commitments of $25 million or more, at least 75% of which has been contributed or committed by persons that are not participating members;

            3. is an insurance company as defined in Section 2(a)(13) of the Securities Act or is a foreign insurance company that has been granted an exemption under this Rule; or

            4. is a bank as defined in Section 3(a)(6) of the Act or is a foreign bank that has been granted an exemption under this Rule; and

            b. is a separate and distinct legal person from any member and is not registered as a broker/dealer;

            c. makes investments or loans subject to the evaluation of individuals who have a contractual or fiduciary duty to select investments and loans based on the risks and rewards to the entity and not based on opportunities for the member to earn investment banking revenues;

            d. does not participate directly in investment banking fees received by any participating member for underwriting public offerings; and

            e. has been primarily engaged in the business of making investments in or loans to other companies; and

            (ii) all entities related to each member in acquisitions that qualify for this exception do not acquire more than 25% of the issuer's total equity securities during the review period in subparagraph (d)(1), calculated immediately following the transaction.

            (B) Investments In and Loans to Certain Issuers — Securities of the issuer purchased in a private placement or received as compensation for a loan or credit facility before the required filing date of the public offering pursuant to subparagraph (b)(4) above by certain entities if:

            (i) each entity:

            a. manages capital contributions or commitments of at least $50 million;

            b. is a separate and distinct legal person from any member and is not registered as a broker/dealer;

            c. does not participate directly in investment banking fees received by the member for underwriting public offerings; and

            d. has been primarily engaged in the business of making investments in or loans to other companies; and

            (ii) institutional investors beneficially own at least 33% of the issuer's total equity securities, calculated immediately prior to the transaction;

            (iii) the transaction was approved by a majority of the issuer's board of directors and a majority of any institutional investors, or the designees of institutional investors, that are board members; and

            (iv) all entities related to each member in acquisitions that qualify for this exception do not acquire more than 25% of the issuer's total equity securities, calculated immediately following the transaction.

            (C) Private Placements With Institutional Investors — Securities of the issuer purchased in, or received as placement agent compensation for, a private placement before the required filing date of the public offering pursuant to subparagraph (b)(4) above if:

            (i) institutional investors purchase at least 51% of the "total offering" (comprised of the total number of securities sold in the private placement and received or to be received as placement agent compensation by any member);

            (ii) an institutional investor was the lead negotiator or, if the terms were not negotiated, was the lead investor with the issuer to establish or approve the terms of the private placement; and

            (iii) underwriters and related persons did not, in the aggregate, purchase or receive as placement agent compensation more than 20% of the "total offering" (excluding purchases by any entity qualified under subparagraph (d)(5)(A) above).

            (D) Acquisitions and Conversions to Prevent Dilution — Securities of the issuer if:

            (i) the securities were acquired as the result of:

            a. a right of preemption that was granted in connection with securities that were purchased either:

            1. in a private placement and the securities are not deemed by NASD to be underwriting compensation; or

            2. from a public offering or the public market; or

            b. a stock-split or a pro-rata rights or similar offering; or

            c. the conversion of securities that have not been deemed by NASD to be underwriting compensation; and

            (ii) the only terms of the purchased securities that are different from the terms of securities purchased by other investors are pre-existing contractual rights that were granted in connection with a prior purchase;

            (iii) the opportunity to purchase in a rights offering or pursuant to a right of preemption, or to receive additional securities as the result of a stock-split or conversion was provided to all similarly situated security holders; and

            (iv) the amount of securities purchased or received did not increase the recipient's percentage ownership of the same generic class of securities of the issuer or of the class of securities underlying a convertible security calculated immediately prior to the investment, except in the case of conversions and passive increases that result from another investor's failure to exercise its own rights.

            (E) Purchases Based On A Prior Investment History — Purchases of securities of the issuer if:

            (i) the amount of securities purchased did not increase the purchaser's percentage ownership of the same generic class of securities of the issuer or of the class of securities underlying a convertible security calculated immediately prior to the investment; and

            (ii) an initial purchase of securities of the issuer was made at least two years and a second purchase was made more than 180 days before the required filing date of the public offering pursuant to subparagraph (b)(4) above.

            (e) Valuation of Non-Cash Compensation
            For purposes of determining the value to be assigned to securities received as underwriting compensation, the following criteria and procedures shall be applied.

            (1) Limitation on Securities Received Upon Exercise or Conversion of Another Security
            An underwriter and related person may not receive a security (including securities in a unit), a warrant for a security, or a security convertible into another security as underwriting compensation in connection with a public offering unless:

            (A) the security received or the security underlying the warrant or convertible security received is identical to the security offered to the public or to a security with a bona fide independent market; or

            (B) the security can be accurately valued, as required by subparagraph (f)(2)(I) below.

            (2) Valuation of Securities That Do Not Have an Exercise or Conversion Price
            Securities that do not have an exercise or conversion price shall have a compensation value based on:
            (A) the difference between:

            (i) either the market price per security on the date of acquisition, or, if no bona fide independent market exists for the security, the public offering price per security; and

            (ii) the per security cost;

            (B) multiplied by the number of securities received or to be received as underwriting compensation;

            (C) divided by the offering proceeds; and

            (D) multiplied by one hundred.

            (3) Valuation of Securities That Have an Exercise or Conversion Price
            Options, warrants or convertible securities that have an exercise or conversion price ("warrants") shall have a compensation value based on the following formula:

            (A) the public offering price per security multiplied by .65;

            (B) minus the resultant of the exercise or conversion price per warrant less either:

            (i) the market price per security on the date of acquisition, where a bona fide independent market exists for the security, or

            (ii) the public offering price per security;

            (C) divided by two;

            (D) multiplied by the number of securities underlying the warrants

            (E) less the total price paid for the warrants;

            (F) divided by the offering proceeds; and

            (G) multiplied by one hundred;

            (H) provided, however, that, notwithstanding subparagraph (e)(4) below, such warrants shall have a compensation value of at least .2% of the offering proceeds for each amount of securities that is up to 1% of the securities being offered to the public (excluding securities subject to an overallotment option).

            (4) Valuation Discount For Securities With a Longer Resale Restriction
            A lower value equal to 10% of the calculated value shall be deducted for each 180-day period that the securities or underlying securities are restricted from sale or other disposition beyond the 180-day period of the lock-up restriction required by subparagraph (g)(1) below. The transfers permitted during the lock-up restriction by subparagraphs (g)(2)(A)(iii)–(iv) are not available for such securities.

            (5) Valuation of Items of Value Acquired in Connection with a Fair Price Derivative or Debt Transaction
            Any debt or derivative transaction acquired or entered into at a "fair price" as defined in subsection (a)(9) and item of value received in or receivable in the settlement, exercise or other terms of such debt or derivative transaction shall not have a compensation value for purposes of determining underwriting compensation. If the actual price for the debt or derivative security is not a fair price, compensation will be calculated pursuant to this subsection (e) or based on the difference between the fair price and the actual price.

            (f) Unreasonable Terms and Arrangements
            (1) General
            No member or person associated with a member shall participate in any manner in a public offering of securities after any arrangement proposed in connection with the public offering, or the terms and conditions relating thereto, has been determined to be unfair or unreasonable pursuant to this Rule or inconsistent with any By-Law or any Rule or regulation of NASD.

            (2) Prohibited Arrangements
            Without limiting the foregoing, the following terms and arrangements, when proposed in connection with a public offering of securities, shall be unfair and unreasonable.

            (A) Any accountable expense allowance granted by an issuer to the underwriter and related persons that includes payment for general overhead, salaries, supplies, or similar expenses of the underwriter incur red in the normal conduct of business.

            (B) Any non-accountable expense allowance in excess of 3% of offering proceeds.

            (C) Any payment of commissions or reimbursement of expenses directly or indirectly to the underwriter and related persons prior to commencement of the public sale of the securities being offered, except a reasonable advance against out-of-pocket accountable expenses actually anticipated to be incurred by the underwriter and related persons, which advance is reimbursed to the issuer to the extent not actually incurred.

            (D) The payment of any compensation by an issuer to a member or person associated with a member in connection with an offering of securities that is not completed according to the terms of agreement between the issuer and underwriter, except those negotiated and paid in connection with a transaction that occurs in lieu of the proposed offering as a result of the efforts of the underwriter and related persons and provided, however, that the reimbursement of out-of-pocket accountable expenses actually incurred by the member or person associated with a member shall not be presumed to be unfair or unreasonable under normal circumstances.

            (E) Any "tail fee" arrangement granted to the underwriter and related persons that has a duration of more than two years from the date the member's services are terminated, in the event that the offering is not completed in accordance with the agreement between the issuer and the underwriter and the issuer subsequently consummates a similar transaction, except that a member may demonstrate on the basis of information satisfactory to NASD that an arrangement of more than two years is not unfair or unreasonable under the circumstances.

            (F) Any right of first refusal provided to the underwriter or related persons to underwrite or participate in future public offerings, private placements or other financings that:

            (i) has a duration of more than three years from the date of effectiveness or commencement of sales of the public offering; or

            (ii) has more than one opportunity to waive or terminate the right of first refusal in consideration of any payment or fee.

            (G) Any payment or fee to waive or terminate a right of first refusal regarding future public offerings, private placements or other financings provided to the underwriter and related persons that:

            (i) has a value in excess of the greater of 1% of the offering proceeds in the public offering where the right of first refusal was granted (or an amount in excess of 1% if additional compensation is available under the compensation guideline of the original offering) or 5% of the underwriting discount or commission paid in connection with the future financing (including any overallotment option that may be exercised), regardless of whether the payment or fee is negotiated at the time of or subsequent to the original public offering; or

            (ii) is not paid in cash.

            (H) The terms or the exercise of the terms of an agreement for the receipt by the underwriter and related persons of underwriting compensation consisting of any option, warrant or convertible security that:

            (i) is exercisable or convertible more than five years from the effective date of the offering;

            (ii) is not in compliance with subparagraph (e)(1) above;

            (iii) has more than one demand registration right at the issuer's expense;

            (iv) has a demand registration right with a duration of more than five years from the date of effectiveness or the commencement of sales of the public offering;

            (v) has a piggyback registration right with a duration of more than seven years from the date of effectiveness or the commencement of sales of the public offering;

            (vi) has anti-dilution terms that allow the underwriter and related persons to receive more shares or to exercise at a lower price than originally agreed upon at the time of the public offering, when the public shareholders have not been proportionally affected by a stock split, stock dividend, or other similar event; or

            (vii) has anti-dilution terms that allow the underwriter and related persons to receive or accrue cash dividends prior to the exercise or conversion of the security.

            (I) The receipt by the underwriter and related persons of any item of compensation for which a value cannot be determined at the time of the offering.

            (J) When proposed in connection with the distribution of a public offering of securities on a "firm commitment" basis, any over allotment option providing for the over allotment of more than 15% of the amount of securities being offered, computed excluding any securities offered pursuant to the over allotment option.

            (K) The receipt by a member or person associated with a member, pursuant to an agreement entered into at any time before or after the effective date of a public offering of warrants, options, convertible securities or units containing such securities, of any compensation or expense reimbursement in connection with the exercise or conversion of any such warrant, option, or convertible security in any of the following circumstances:

            (i) the market price of the security into which the warrant, option, or convertible security is exercisable or convertible is lower than the exercise or conversion price;

            (ii) the warrant, option, or convertible security is held in a discretionary account at the time of exercise or conversion, except where prior specific written approval for exercise or conversion is received from the customer;

            (iii) the arrangements whereby compensation is to be paid are not disclosed:

            a. in the prospectus or offering circular by which the warrants, options, or convertible securities are offered to the public, if such arrangements are contemplated or any agreement exists as to such arrangements at that time, and

            b. in the prospectus or offering circular provided to security holders at the time of exercise or conversion; or

            (iv) the exercise or conversion of the warrants, options or convertible securities is not solicited by the underwriter or related person, provided however, that any request for exercise or conversion will be presumed to be unsolicited unless the customer states in writing that the transaction was solicited and designates in writing the broker/dealer to receive compensation for the exercise or conversion.

            (L) For a member to participate with an issuer in the public distribution of a non-underwritten issue of securities if the issuer hires persons primarily for the purpose of distributing or assisting in the distribution of the issue, or for the purpose of assisting in any way in connection with the underwriting, except to the extent in compliance with SEC Rule 3a4-1 and applicable state law.

            (M) For a member or person associated with a member to participate in a public offering of real estate investment trust securities, as defined in Rule 2340(c)(4), unless the trustee will disclose in each annual report distributed to investors pursuant to Section 13(a) of the Act a per share estimated value of the trust securities, the method by which it was developed, and the date of the data used to develop the estimated value.

            (g) Lock-Up Restriction on Securities

            (1) Lock-Up Restriction
            In any public equity offering, other than a public equity offering by an issuer that can meet the requirements in subparagraphs (b)(7)(C)(i) or (ii) any common or preferred stock, options, warrants, and other equity securities of the issuer, including debt securities convertible to or exchangeable for equity securities of the issuer, that are unregistered and acquired by an underwriter and related person during 180 days prior to the required filing date, or acquired after the required filing date of the registration statement and deemed to be underwriting compensation by NASD, and securities excluded from underwriting compensation pursuant to subparagraph (d)(5) above, shall not be sold during the offering, or sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of the public offering, except as provided in subparagraph (g)(2) below.

            (2) Exceptions to Lock-Up Restriction
            Notwithstanding subparagraph (g)(1) above, the following shall not be prohibited:
            (A) the transfer of any security:

            (i) by operation of law or by reason of reorganization of the issuer;

            (ii) to any member participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction in subparagraph (g)(1) above for the remainder of the time period;

            (iii) if the aggregate amount of securities of the issuer held by the underwriter or related person do not exceed 1% of the securities being offered;

            (iv) that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund;

            (v) that is not an item of value under subparagraphs (c)(3)(B)(iii)-(vii) above;

            (vi) that is eligible for the limited filing requirement in subparagraph (b)(6)(A)(iv)b and has not been deemed to be underwriting compensation under the Rule;

            (vii) that was previously but is no longer subject to the lock-up restriction in subparagraph (g)(1) above in connection with a prior public offering (or a lock-up restriction in the predecessor rule), provided that if the prior restricted period has not been completed, the security will continue to be subject to such prior restriction until it is completed; or

            (viii) that was acquired subsequent to the issuer's initial public offering in a transaction exempt from registration under SEC Rule 144A; or

            (B) the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction in subparagraph (g)(1) above for the remainder of the time period.

            (h) Proceeds Directed to a Member
            (1) Compliance With Rule 2720
            No member shall participate in a public offering of an issuer's securities where more than 10% of the net offering proceeds, not including underwriting compensation, are intended to be paid to participating members, unless the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established pursuant to Rule 2720(c)(3).

            (2) Disclosure
            All offerings included within the scope of subparagraph (h)(1) shall disclose in the underwriting or plan of distribution section of the registration statement, offering circular or other similar document that the offering is being made pursuant to the provisions of this subparagraph and, where applicable, the name of the member acting as qualified independent underwriter, and that such member is assuming the responsibilities of acting as a qualified independent underwriter in pricing the offering and conducting due diligence.

            (3) Exception From Compliance
            The provisions of subparagraphs (h)(1) and (2) shall not apply to:
            (A) an offering otherwise subject to the provisions of Rule 2720;

            (B) an offering of securities exempt from registration with the Commission under Section 3(a)(4) of the Securities Act of 1933;

            (C) an offering of a real estate investment trust as defined in Section 856 of the Internal Revenue Code; or

            (D) an offering of securities subject to Rule 2810, unless the net offering proceeds are intended to be paid to the above persons for the purpose of repaying loans, advances or other types of financing utilized to acquire an interest in a pre-existing company.

            (i) Non-Cash Compensation

            (1) Definitions
            The terms "compensation," "non-cash compensation" and "offeror" as used in this Section (d) of this Rule shall have the following meanings:
            (A) "Compensation" shall mean cash compensation and non-cash compensation.

            (B) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of securities that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.

            (C) "Offeror" shall mean an issuer, an adviser to an issuer, an underwriter and any affiliated person of such entities.

            (2) Restrictions on Non-Cash Compensation
            In connection with the sale and distribution of a public offering of securities, no member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Non-cash compensation arrangements are limited to the following:

            (A) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors1 and are not preconditioned on achievement of a sales target.

            (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.

            (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:

            (i) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not conditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by subparagraph (d)(2)(D);

            (ii) the location is appropriate to the purpose of the meeting, which shall mean an office of the issuer or affiliate thereof, the office of the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;

            (iii) the payment or reimbursement is not applied to the expenses of guests of the associated person; and (iv) the payment or reimbursement by the issuer or affiliate of the issuer is not conditioned by the issuer or an affiliate of the issuer on the achievement of a sales target or any other non-cash compensation arrangement permitted by subparagraph (d)(2)(D).

            (D) Non-cash compensation arrangements between a member and its associated persons or a company that controls a member company and the member's associated persons, provided that no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and

            (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in subparagraph (d)(2)(D).

            A member shall maintain records of all non-cash compensation received by the member or its associated persons in arrangements permitted by subparagraphs (d)(2)(C)-(E). The records shall include: the names of the offerors, non-members or other members making the non-cash compensation contributions; the names of the associated persons participating in the arrangements; the nature and value of non-cash compensation received; the location of training and education meetings; and any other information that proves compliance by the member and its associated persons with subparagraph (d)(2)(C)-(E).

            (j) Exemptions
            Pursuant to the Rule 9600 Series, the appropriate NASD staff, for good cause shown after taking into consideration all relevant factors, may conditionally or unconditionally grant an exemption from any provision of this Rule to the extent that such exemption is consistent with the purposes of the Rule, the protection of investors, and the public interest.


            * This Department is located at 9509 Key West Avenue, Rockville, Maryland 20850.

            1 The current annual amount fixed by the Board of Governors is $100.

            Amended by SR-NASD-2006-068 eff. July 1, 2006.
            Amended by SR-NASD-2000-04 eff. March 22, 2004.
            Amended by SR-NASD-2003-139 eff. Oct. 15, 2003.
            Amended by SR-NASD-2003-75 eff. July 9, 2003.
            Amended by SR-NASD-2003-68 eff. April 7, 2003.
            Amended by SR-NASD-2001-46 eff. July 12, 2002.
            Amended by SR-NASD-2000-13 eff. April 16, 2001.
            Amended by SR-NASD-99-74 eff. June 20, 2000.
            Amended by SR-NASD-99-02 eff. Dec. 7, 1999.
            Amended by SR-NASD-99-01 eff. May 17, 1999.
            Amended by SR-NASD-98-81 eff. Dec. 21, 1998.
            Amended by SR-NASD-98-87 eff. Nov. 23, 1998.
            Amended by SR-NASD-97-38 eff. Dec. 15, 1997.
            Amended by SR-NASD-97-68 eff. Oct. 3, 1997.
            Amended by SR-NASD-97-28 eff. Aug. 7, 1997.
            Amended by SR-NASD-97-18 eff. Mar. 14, 1997.
            Amended by SR-NASD-97-15 eff. Mar. 4, 1997.
            Amended by SR-NASD-95-29 eff. Jan. 1, 1996.
            Amended by SR-NASD-95-18 eff. June 19, 1995.
            Amended by SR-NASD-94-61 eff. Mar. 2, 1995.
            Amended by SR-NASD-94-64 eff. Feb. 9, 1995.
            Amended by SR-NASD-94-12 eff. Mar. 7, 1994.
            Amended by SR-NASD-93-13 eff. Feb. 1, 1994.
            Amended by SR-NASD-93-45 eff. Dec. 13, 1993.
            Corporate Financing Rule adopted Apr. 15, 1992.

            Replaced Interpretation of the Board of Governors — Review of Corporate Financing, Art. III, Sec. 1 of the Rules of Fair Practice, which was amended eff. May 4, 1971; June 17, 1971; Mar. 19, 1982; May 31, 1983; Aug. 4, 1983; July 13, 1984; Sept. 12, 1985; Mar. 1, 1986; Oct. 14, 1988; Jan. 1, 1989.

            Selected Notices: 75-14, 76-27, 81-16, 81-17, 83-12, 83-15, 83-43, 83-44, 84-37, 85-6, 86-27, 88-32, 88-88, 88-92, 90-10, 92-28, 93-84, 93-88, 94-82, 95-22, 95-73, 95-95, 97-80, 98-88, 99-17, 99-50, 00-53, 02-26, 04-13.

          • 2711. Research Analysts and Research Reports

            This Rule is no longer applicable. NASD Rule 2711 has been superseded by FINRA Rule 2241. Please consult the appropriate FINRA Rule.

            (a) Definitions
            For purposes of this rule, the following terms shall be defined as provided.
            (1) "Equity security" has the same meaning as defined in Section 3(a)(11) of the Securities Exchange Act of 1934.
            (2) "Investment banking department" means any department or division, whether or not identified as such, that performs any investment banking service on behalf of a member.

            (3) "Investment banking services" include, without limitation, acting as an underwriter or participating in a selling group in an offering for the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital, equity lines of credit, private investment, public equity transactions (PIPEs) or similar investments; or serving as placement agent for the issuer.

            (4) "Member of a research analyst's household" means any individual whose principal residence is the same as the research analyst's principal residence. This term does not include an unrelated person who shares the same residence as a research analyst provided that the research analyst and unrelated person are financially independent of one another.

            (5) "Public appearance" means any participation in a conference call, seminar, forum (including an interactive electronic forum) or other public speaking activity before 15 or more persons or before one or more representatives of the media, radio, television or print media interview, or the writing of a print media article, in which a research analyst makes a recommendation or offers an opinion concerning an equity security. This term does not include a password protected Webcast, conference call or similar event with 15 or more existing customers, provided that all of the event participants previously received the most current research report or other documentation that contains the required applicable disclosures, and that the research analyst appearing at the event corrects and updates during the public appearance any disclosures in the research report that are inaccurate, misleading or no longer applicable.

            (6) "Research analyst" means the associated person who is primarily responsible for, and any associated person who reports directly or indirectly to such a research analyst in connection with, preparation of the substance of a research report, whether or not any such person has the job title of "research analyst."

            (7) "Research analyst account" means any account in which a research analyst or member of the research analyst's household has a financial interest, or over which such analyst has discretion or control, other than an investment company registered under the Investment Company Act of 1940.This term does not include a "blind trust" account that is controlled by a person other than the research analyst or member of the research analyst's household where neither the research analyst nor a member of the research analyst's household knows of the account's investments or investment transactions.

            (8) "Research department" means any department or division, whether or not identified as such, that is principally responsible for preparing the substance of a research report on behalf of a member.

            (9) "Research Report" means any written (including electronic) communication that includes an analysis of equity securities of individual companies or industries, and that provides information reasonably sufficient upon which to base an investment decision. This term does not include:
            (A) communications that are limited to the following:
            (i) discussions of broad-based indices;
            (ii) commentaries on economic, political or market conditions;
            (iii) technical analyses concerning the demand and supply for a sector, index or industry based on trading volume and price;
            (iv) statistical summaries of multiple companies' financial data, including listings of current ratings;
            (v) recommendations regarding increasing or decreasing holdings in particular industries or sectors; or
            (vi) notices of ratings or price target changes, provided that the member simultaneously directs the readers of the notice to the most recent research report on the subject company that includes all current applicable disclosures required by this rule and that such research report does not contain materially misleading disclosure, including disclosures that are outdated or no longer applicable;
            (B) the following communications, even if they include an analysis of an individual equity security and information reasonably sufficient upon which to base an investment decision:
            (i) any communication distributed to fewer than 15 persons;
            (ii) periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients that discuss individual securities in the context of a fund's or account's past performance or the basis for previously made discretionary investment decisions; or
            (iii) internal communications that are not given to current or prospective customers; and
            (C) communications that constitute statutory prospectuses that are filed as part of the registration statement.
            (10) "Subject company" means the company whose equity securities are the subject of a research report or a public appearance.
            (11) "Emerging Growth Company" has the same meaning as in Section 3(a)(80) of the Securities Exchange Act of 1934.
            (b) Restrictions on Relationship with Research Department

            (1) No research analyst may be subject to the supervision or control of any employee of the member's investment banking department, and no personnel engaged in investment banking activities may have any influence or control over the compensatory evaluation of a research analyst.

            (2) Except as provided in paragraph (b)(3), no employee of the investment banking department or any other employee of the member who is not directly responsible for investment research ("non-research personnel"), other than legal or compliance personnel, may review or approve a research report of the member before its publication.

            (3) Non-research personnel may review a research report before its publication as necessary only to verify the factual accuracy of information in the research report or identify any potential conflict of interest, provided that:

            (A) any written communication between non-research personnel and research department personnel concerning the content of a research report must be made either through authorized legal or compliance personnel of the member or in a transmission copied to such personnel; and

            (B) any oral communication between non-research personnel and research department personnel concerning the content of a research report must be documented and made either through authorized legal or compliance personnel acting as intermediary or in a conversation conducted in the presence of such personnel.

            (c) Restrictions on Communications with the Subject Company

            (1) Except as provided in paragraphs (c)(2) and (c)(3), a member may not submit a research report to the subject company before its publication.

            (2) A member may submit sections of such a research report to the subject company before its publication for review as necessary only to verify the factual accuracy of information in those sections, provided that:

            (A) the sections of the research report submitted to the subject company do not contain the research summary, the research rating or the price target;

            (B) a complete draft of the research report is provided to legal or compliance personnel before sections of the report are submitted to the subject company; and

            (C) if after submitting the sections of the research report to the subject company the research department intends to change the proposed rating or price target, it must first provide written justification to, and receive written authorization from, legal or compliance personnel for the change. The member must retain copies of any draft and the final version of such a research report for three years following its publication.

            (3) The member may notify a subject company that the member intends to change its rating of the subject company's securities, provided that the notification occurs on the business day before the member announces the rating change, after the close of trading in the principal market of the subject company's securities.

            (4) No research analyst may participate in efforts to solicit investment banking business. Accordingly, no research analyst may, among other things, participate in any "pitches" for investment banking business to prospective investment banking clients, or have other communications with companies for the purpose of soliciting investment banking business. This paragraph shall not prevent a research analyst from attending a pitch meeting in connection with an initial public offering of an Emerging Growth Company that is also attended by investment banking personnel; provided, however, that a research analyst may not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business.

            (5) A research analyst is prohibited from directly or indirectly:
            (A) participating in a road show related to an investment banking services transaction; and
            (B) engaging in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction.
            (6) Investment banking department personnel are prohibited from directly or indirectly:
            (A) directing a research analyst to engage in sales or marketing efforts related to an investment banking services transaction; and
            (B) directing a research analyst to engage in any communication with a current or prospective customer about an investment banking services transaction.
            (7) Any written or oral communication by a research analyst with a current or prospective customer or internal personnel related to an investment banking services transaction must be fair, balanced and not misleading, taking into consideration the overall context in which the communication is made.
            (d) Restrictions on Research Analyst Compensation

            (1) No member may pay any bonus, salary or other form of compensation to a research analyst that is based upon a specific investment banking services transaction.

            (2) The compensation of a research analyst who is primarily responsible for the preparation of the substance of a research report must be reviewed and approved at least annually by a committee that reports to the member's board of directors, or when the member has no board of directors, to a senior executive officer of the member. This committee may not have representation from the member's investment banking department. The committee must consider the following factors when reviewing such a research analyst's compensation, if applicable:
            (A) the research analyst's individual performance, including the analyst's productivity and the quality of the analyst's research;

            (B) the correlation between the research analyst's recommendations and the stock price performance; and

            (C) the overall ratings received from clients, sales force, and peers independent of the member's investment banking department, and other independent ratings services.
            The committee may not consider as a factor in reviewing and approving such a research analyst's compensation his or her contributions to the member's investment banking business. The committee must document the basis upon which each such research analyst's compensation was established. The annual attestation required by Rule 2711(i) must certify that the committee reviewed and approved each such research analyst's compensation and documented the basis upon which this compensation was established.
            (e) Prohibition of Promise of Favorable Research
            No member may directly or indirectly offer favorable research, a specific rating or a specific price target, or threaten to change research, a rating or a price target, to a company as consideration or inducement for the receipt of business or compensation.

            (f) Restrictions on Publishing Research Reports and Public Appearances; Termination of Coverage

            (1) No member may publish or otherwise distribute a research report and no research analyst may make a public appearance regarding a subject company for which the member acted as manager or co-manager of:

            (A) an initial public offering, for 40 calendar days following the date of the offering; or

            (B) a secondary offering, for 10 calendar days following the date of the offering; provided that:

            (i) paragraphs (f)(1)(A) and (f)(1)(B) will not prevent a member from publishing or otherwise distributing a research report, or prevent a research analyst from making a public appearance, concerning the effects of significant news or a significant event on the subject company within such 40- and 10-day periods, and provided further that legal or compliance personnel authorize publication of that research report before it is issued or authorize the public appearance before it is made; and

            (ii) paragraph (f)(1)(B) will not prevent a member from publishing or otherwise distributing a research report pursuant to SEC Rule 139 regarding a subject company with "actively-traded securities," as defined in Regulation M, 17 CFR 242.101(c)(1), and will not prevent a research analyst from making a public appearance concerning such a company.

            (2) No member that has agreed to participate or is participating as an underwriter or dealer (other than as manager or co-manager) of an issuer's initial public offering may publish or otherwise distribute a research report or make a public appearance regarding that issuer for 25 calendar days after the date of the offering.

            (3) For purposes of paragraphs (f)(1) and (f)(2), the term "date of the offering" refers to the later of the effective date of the registration statement or the first date on which the security was bona fide offered to the public.

            (4) No member that has acted as a manager or co-manager of a securities offering may publish or otherwise distribute a research report or make a public appearance concerning a subject company 15 days prior to and after the expiration, waiver or termination of a lock-up agreement or any other agreement that the member has entered into with a subject company or its shareholders that restricts or prohibits the sale of securities held by the subject company or its shareholders after the completion of a securities offering. This paragraph will not prevent a member from publishing or otherwise distributing a research report concerning the effects of significant news or a significant event on the subject company within such period, provided legal or compliance personnel authorize publication of that research report before it is issued. In addition, this paragraph shall not apply to the publication or distribution of a research report pursuant to SEC Rule 139 regarding a subject company with "actively traded securities," as defined in Regulation M, 17 CFR 242.101(c)(1), or to a public appearance concerning such a subject company.

            (5) Paragraphs (f)(1), (f)(2) and (f)(4) shall not apply to the publication or distribution of a research report or a public appearance following an initial public offering or secondary offering of the securities of an Emerging Growth Company.

            (6) If a member intends to terminate its research coverage of a subject company, notice of this termination must be made. The member must make available a final research report on the subject company using the means of dissemination equivalent to those it ordinarily uses to provide the customer with its research reports on the subject company. The report must be comparable in scope and detail to prior research reports and must include a final recommendation or rating, unless it is impracticable for the member to produce a comparable report (e.g., if the research analyst covering the subject company or sector has left the member or if the member terminates coverage of the industry or sector). If it is impracticable to produce a final recommendation or rating, the final research report must disclose the member's rationale for the decision to terminate coverage.

            (g) Restrictions on Personal Trading by Research Analysts
            (1) No research analyst account may purchase or receive any securities before the issuer's initial public offering if the issuer is principally engaged in the same types of business as companies that the research analyst follows.

            (2) No research analyst account may purchase or sell any security issued by a company that the research analyst follows, or any option on or derivative of such security, for a period beginning 30 calendar days before and ending five calendar days after the publication of a research report concerning the company or a change in a rating or price target of the company's securities; provided that:

            (A) a member may permit a research analyst account to sell securities held by the account that are issued by a company that the research analyst follows, within 30 calendar days after the research analyst began following the company for the member;

            (B) a member may permit a research analyst account to purchase or sell any security issued by a subject company within 30 calendar days before the publication of a research report or change in the rating or price target of the subject company's securities due to significant news or a significant event concerning the subject company, provided that legal or compliance personnel pre-approve the research report and any change in the rating or price target.

            (3) No research analyst account may purchase or sell any security or any option on or derivative of such security in a manner inconsistent with the research analyst's recommendation as reflected in the most recent research report published by the member.

            (4) Legal or compliance personnel may authorize a transaction otherwise prohibited by paragraphs (g)(2) and (g)(3) based upon an unanticipated significant change in the personal financial circumstances of the beneficial owner of the research analyst account, provided that:

            (A) legal or compliance personnel authorize the transaction before it is entered;

            (B) each exception is granted in compliance with policies and procedures adopted by the member that are reasonably designed to ensure that these transactions do not create a conflict of interest between the professional responsibilities of the research analyst and the personal trading activities of a research analyst account; and

            (C) the member maintains written records concerning each transaction and the justification for permitting the transaction for three years following the date on which the transaction is approved.

            (5) The prohibitions in paragraphs (g)(1) through (g)(3) do not apply to a purchase or sale of the securities of:

            (A) any registered diversified investment company as defined under Section (5)(b)(1) of the Investment Company Act of 1940; or

            (B) any other investment fund over which neither the research analyst nor a member of the research analyst's household has any investment discretion or control, provided that:

            (i) the research analyst accounts collectively own interests representing no more than 1% of the assets of the fund;

            (ii) the fund invests no more than 20% of its assets in securities of issuers principally engaged in the same types of business as companies that the research analyst follows; and

            (iii) if the investment fund distributes securities in kind to the research analyst or household member before the issuer's initial public offering, the research analyst or household member must either divest those securities immediately or the research analyst must refrain from participating in the preparation of research reports concerning that issuer.

            (6) Legal or compliance personnel of the member shall pre-approve all transactions of persons who oversee research analysts to the extent such transactions involve equity securities of subject companies covered by the research analysts that they oversee. This pre-approval requirement shall apply to all persons, such as the director of research, supervisory analyst, or member of a committee, who have direct influence or control with respect to the preparation of the substance of research reports or establishing or changing a rating or price target of a subject company's equity securities.

            (h) Disclosure Requirements

            (1) Ownership and Material Conflicts of Interest
            A member must disclose in research reports and a research analyst must disclose in public appearances:
            (A) if the research analyst or a member of the research analyst's household has a financial interest in the securities of the subject company, and the nature of the financial interest (including, without limitation, whether it consists of any option, right, warrant, future, long or short position);

            (B) if, as of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), the member or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company. Computation of beneficial ownership of securities must be based upon the same standards used to compute ownership for purposes of the reporting requirements under Section 13(d) of the Securities Exchange Act of 1934;

            (C) any other actual, material conflict of interest of the research analyst or member of which the research analyst knows or has reason to know at the time of publication of the research report or at the time of the public appearance.

            (2) Receipt of Compensation
            (A) A member must disclose in research reports:

            (i) if the research analyst received compensation:

            a. based upon (among other factors) the member's investment banking revenues; or

            b. from the subject company in the past 12 months.

            (ii) the member or affiliate:

            a. managed or co-managed a public offering of securities for the subject company in the past 12 months;

            b. received compensation for investment banking services from the subject company in the past 12 months; or

            c. expects to receive or intends to seek compensation for investment banking services from the subject company in the next 3 months.

            (iii) if (1) as of the end of the month immediately preceding the date of publication of the research report (or the end of the second most recent month if the publication date is less than 30 calendar days after the end of the most recent month) or (2) to the extent the research analyst or an employee of the member with the ability to influence the substance of the research knows:

            a. the member received any compensation for products or services other than investment banking services from the subject company in the past 12 months; or

            b. the subject company currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of the member. In such cases, the member also must disclose the types of services provided to the subject company. For purposes of this Rule 2711(h)(2), the types of services provided to the subject company shall be described as investment banking services, non-investment banking securities-related services, and non-securities services.

            (iv) if, to the extent the research analyst or an employee of the member with the ability to influence the substance of the research report knows an affiliate of the member received any compensation for products or services other than investment banking services from the subject company in the past 12 months.

            (v) if, to the extent the research analyst or member has reason to know, an affiliate of the member received any compensation for products or services other than investment banking services from the subject company in the past 12 months.

            a. This requirement will be deemed satisfied if such compensation is disclosed in research reports within 30 days after completion of the last calendar quarter, provided that the member has taken steps reasonably designed to identify any such compensation during that calendar quarter. This requirement shall not apply to any subject company as to which the member initiated coverage since the beginning of the current calendar quarter.

            b. The research analyst and the member will be presumed not to have reason to know whether an affiliate received any compensation for products or services other than investment banking services from the subject company in the past 12 months if the member maintains and enforces policies and procedures reasonably designed to prevent the research analysts and employees of the member with the ability to influence the substance of research reports from, directly or indirectly, receiving information from the affiliate concerning whether the affiliate received such compensation.

            (vi) For the purposes of this Rule 2711(h)(2), an employee of the member with the ability to influence the substance of the research report is an employee who, in the ordinary course of that person's duties, has the authority to review the particular research report and to change that research report prior to publication.

            (B) A research analyst must disclose in public appearances:

            (i) if, to the extent the research analyst knows or has reason to know, the member or any affiliate received any compensation from the subject company in the past 12 months;

            (ii) if the research analyst received any compensation from the subject company in the past 12 months; or

            (iii) if, to the extent the research analyst knows or has reason to know, the subject company currently is, or during the 12-month period preceding the date of distribution of the research report, was, a client of the member. In such cases, the research analyst also must disclose the types of services provided to the subject company, if known by the research analyst.

            (C) A member or research analyst will not be required to make a disclosure required by paragraphs (h)(2)(A)(ii)(b) and (c), (h)(2)(A)(iii)(b), or (h)(2)(B)(i) and (iii) to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company.
            (3) Position as Officer or Director
            A member must disclose in research reports and a research analyst must disclose in public appearances if the research analyst or a member of the research analyst's household serves as an officer, director or advisory board member of the subject company.

            (4) Meaning of Ratings
            If a research report contains a rating, the member must define in the research report the meaning of each rating used by the member in its rating system. The definition of each rating must be consistent with its plain meaning.

            (5) Distribution of Ratings

            (A) Regardless of the rating system that a member employs, a member must disclose in each research report the percentage of all securities rated by the member to which the member would assign a "buy," "hold/neutral," or "sell" rating.

            (B) In each research report, the member must disclose the percentage of subject companies within each of these three categories for whom the member has provided investment banking services within the previous twelve months.

            (C) The information that is disclosed under paragraphs (h)(5)(A) and (h)(5)(B) must be current as of the end of the most recent calendar quarter (or the second most recent calendar quarter if the publication date is less than 15 calendar days after the most recent calendar quarter) and must reflect the distribution of the most recent ratings issued by the member for all subject companies, unless the most recent rating was issued more than 12 months ago.

            (D) The requirements of paragraph (h)(5) shall not apply to any research report that does not contain a rating.
            (6) Price Chart
            If a research report contains either a rating or a price target, and the member has assigned a rating or price target to the subject company's securities rating for at least one year, the research report must include a line graph of the security's daily closing prices for the period that the member has assigned any rating or price target or for a three-year period, whichever is shorter. The line graph must:

            (A) indicate the dates on which the member assigned or changed each rating or price target;

            (B) depict each rating and price target assigned or changed on those dates; and

            (C) be current as of the end of the most recent calendar quarter (or the second most recent calendar quarter if the publication date is less than 15 calendar days after the most recent calendar quarter).

            (7) Price Targets
            If a research report contains a price target, the member must disclose in the research report the valuation methods used to determine the price target. Price targets must have a reasonable basis and must be accompanied by a disclosure concerning the risks that may impede achievement of the price target.

            (8) Market Making
            A member must disclose in research reports if it was making a market in the subject company's securities at the time that the research report was published.

            (9) Disclosure Required by Other Provisions
            In addition to the disclosure required by this rule, members and research analysts must provide disclosure in research reports and public appearances that is required by applicable law or regulation, including NASD Rule 2210 and the antifraud provisions of the federal securities laws.
            (10) Prominence of Disclosure
            The disclosures required by this paragraph (h) must be presented on the front page of research reports or the front page must refer to the page on which disclosures are found. Disclosures and references to disclosures must be clear, comprehensive and prominent.

            (11) Disclosures in Research Reports Covering Six or More Companies
            When a member distributes a research report covering six or more subject companies (a "compendium report"), for purposes of the disclosures required in paragraph (h), the compendium report may direct the reader in a clear manner as to where they may obtain applicable current disclosures. Electronic compendium reports may include a hyperlink to the required disclosures. Paper-based compendium reports must provide either a toll-free number to call or a postal address to write for the required disclosures and may also include a web address of the member where the disclosures can be found.
            (12) Records of Public Appearances
            Members must maintain records of public appearances by research analysts sufficient to demonstrate compliance by those research analysts with the applicable disclosure requirements under paragraph (h) of this Rule. Such records must be maintained for three years from the date of the public appearance.

            (13) Third-Party Research Reports
            (A) Subject to paragraph (h)(13)(B) of this Rule, if a member distributes or makes available any third-party research report, the member must accompany the research report with, or provide a web address that directs the recipient to, the current applicable disclosures, as they pertain to the member, required by paragraphs (h)(1)(B), (h)(1)(C), (h)(2)(A)(ii) and (h)(8) of this Rule. Members must establish written supervisory policies and procedures reasonably designed to ensure the completeness and accuracy of all applicable disclosures.
            (B) The requirements of paragraph (h)(13)(A) of this Rule shall not apply to independent third-party research reports made available by a member to its customers:
            (i) upon request;
            (ii) in connection with a solicited order in which a registered representative has informed the customer, during the solicitation, of the availability of independent research on the solicited equity security, and the customer requests such independent research; or
            (iii) through a member-maintained web site.
            (C) Subject to paragraph (h)(13)(D) of this Rule, a registered principal (or supervisory analyst approved pursuant to Rule 344 of the New York Stock Exchange) must approve by signature or initial all third-party research reports distributed by a member. The approval of third-party research shall be based on a review by the designated principal (or supervisory analyst approved pursuant to NYSE Rule 344) to determine that the content of the research report, pursuant to Rule 2210(d)(1)(B), contains no untrue statement of material fact or is otherwise not false or misleading. For the purposes of this Rule only, a member's obligation to review a third-party research report pursuant to Rule 2210(d)(1)(B) extends to any untrue statement of material fact or any false or misleading information that:
            a. should be known from reading the report; or
            b. is known based on information otherwise possessed by the member.
            (D) The requirements of paragraph (h)(13)(C) of this Rule shall not apply to independent third-party research reports distributed or made available by a member.
            (E) For the purposes of this Rule, “third-party research report” shall mean a research report that is produced by a person or entity other than the member and “independent third-party research report” shall mean a third-party research report, in respect of which the person or entity producing the report:
            (i) has no affiliation or business or contractual relationship with the distributing member or that member's affiliates that is reasonably likely to inform the content of its research reports; and
            (ii) makes content determinations without any input from the distributing member or that member's affiliates.
            (i) Supervisory Procedures
            Each member subject to this rule must adopt and implement written supervisory procedures reasonably designed to ensure that the member and its employees comply with the provisions of this rule (including the attestation requirements of Rule 2711(d)(2)), and a senior officer of such a member must attest annually to NASD by April 1 of each year that it has adopted and implemented those procedures.

            (j) Prohibition of Retaliation Against Research Analysts
            No member and no employee of a member who is involved with the member's investment banking activities may, directly or indirectly, retaliate against or threaten to retaliate against any research analyst employed by the member or its affiliates as a result of an adverse, negative, or otherwise unfavorable research report or public appearance written or made by the research analyst that may adversely affect the member's present or prospective investment banking relationship with the subject company of a research report. This prohibition shall not limit a member's authority to discipline or terminate a research analyst, in accordance with the member's policies and procedures, for any cause other than the writing of such an unfavorable research report or the making of such an unfavorable public appearance.
            (k) Exceptions for Small Firms
            The provisions of paragraph (b) shall not apply to members that over the previous three years, on average per year, have participated in 10 or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross investment banking services revenues from those transactions. For purposes of this paragraph (k), the term "investment banking services transactions" includes the underwriting of both corporate debt and equity securities but not municipal securities. Members that qualify for this exemption must maintain records for three years of any communication that, but for this exemption, would be subject to paragraph (b) of this Rule.
            Amended by SR-FINRA-2012-045 eff. April 5, 2012 and Oct. 11, 2012.
            Amended by SR-FINRA-2007-011 eff. April 7, 2008.
            Amended by SR-NASD-2006-112 eff. Sep. 27, 2006.
            Amended by SR-NASD-2004-141 eff. June 6, 2005.
            Amended by SR-NASD-2004-003 eff. April 26, 2004.
            Amended by SR-NASD-2002-154 eff. July 29, 2003.
            Amended by SR-NASD-2002-74 eff. June 4, 2002.
            Adopted by SR-NASD-2002-21 eff. April 24, 2002.

            Selected Notices: 02-39, 03-44, 05-34, 12-49.

          • 2720. Public Offerings of Securities With Conflicts of Interest

            This rule is no longer applicable. NASD Rule 2720 has been superseded by FINRA Rule 5121. Please consult the appropriate FINRA Rule.

            (a) Requirements for Participation in Certain Public Offerings
            No member that has a conflict of interest may participate in a public offering unless the offering complies with subparagraphs (1) or (2).
            (1) There must be prominent disclosure of the nature of the conflict of interest in the prospectus, offering circular or similar document for the public offering, and one of the following conditions must be met:
            (A) the member(s) primarily responsible for managing the public offering does not have a conflict of interest, is not an affiliate of any member that does have a conflict of interest, and meets the requirement of paragraph (f)(12)(E);
            (B) the securities offered have a bona fide public market; or
            (C) the securities offered are investment grade rated or are securities in the same series that have equal rights and obligations as investment grade rated securities.
            (2) (A) A qualified independent underwriter has participated in the preparation of the registration statement and the prospectus, offering circular, or similar document and has exercised the usual standards of "due diligence" in respect thereto; and
            (B) there must be prominent disclosure in the prospectus, offering circular or similar document for the offering of:
            (i) the nature of the conflict of interest;
            (ii) the name of the member acting as qualified independent underwriter; and
            (iii) a brief statement regarding the role and responsibilities of the qualified independent underwriter.
            (b) Escrow of Proceeds; Net Capital Computation
            (1) All proceeds from a public offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by the member in any manner until the member has complied with subparagraph (2) hereof.
            (2) Any member offering its securities pursuant to this Rule shall immediately notify FINRA when the public offering has been terminated and settlement effected and shall file with FINRA a computation of its net capital computed pursuant to the provisions of SEC Rule 15c3-1 under the Act (the net capital rule) as of the settlement date. If at such time its net capital ratio as so computed is more than 10:1 or, net capital fails to equal 120 percent of the minimum dollar amount required by Rule 15c3-1 or, in the event the member calculates its net capital requirement using the alternative standard (set forth in Rule 15c3-1(a)(1)(ii)), its net capital is less than seven percent of aggregate debit items as computed in accordance with Rule 15c3-3a, all monies received from sales of securities of the public offering must be returned in full to the purchasers thereof and the offering withdrawn, unless the member has obtained from the Commission a specific exemption from the net capital rule. Proceeds from the sales of securities in the public offering may be taken into consideration in computing net capital ratio for purposes of this paragraph.
            (3) Any member offering its securities pursuant to this Rule shall disclose in the registration statement, offering circular or similar document a date by which the offering is reasonably expected to be completed and the terms upon which the proceeds will be released from the escrow account described in paragraph (b)(1).
            (c) Discretionary Accounts
            Notwithstanding Rule 2510, no member that has a conflict of interest may sell to a discretionary account any security with respect to which the conflict exists, unless the member has received specific written approval of the transaction from the account holder and retains documentation of the approval in its records.
            (d) Application of Rule 5110
            Any public offering subject to paragraph (a)(2) is subject to Rule 5110, whether or not the offering would be otherwise exempted from the filing or other requirements of that rule.
            (e) Requests for Exemption from Rule 2720
            Pursuant to the Rule 9600 Series, FINRA may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member unconditionally or on specified terms from any or all of the provisions of this rule that it deems appropriate.
            (f) Definitions
            The definitions in Rule 5110 are incorporated herein by reference. For purposes of this Rule, the following words shall have the stated meanings:
            (1) Affiliate
            The term "affiliate" means an entity that controls, is controlled by or is under common control with a member.
            (2) Beneficial Ownership
            The term "beneficial ownership" means the right to the economic benefits of a security.
            (3) Bona Fide Public Market
            The term "bona fide public market" means a market for a security of an issuer that has been reporting under the Act for at least 90 days and is current in its reporting requirements, and whose securities are traded on a national securities exchange with an Average Daily Trading Volume (as provided by Regulation M under the Act) of at least $1 million, provided that the issuer's common equity securities have a public float value of at least $150 million.
            (4) Common Equity
            The term "common equity" means the total number of shares of common stock outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.
            (5) Conflict of Interest
            The term "conflict of interest" means, if at the time of a member's participation in an entity's public offering, any of the following applies:
            (A) the securities are to be issued by the member;
            (B) the issuer controls, is controlled by or is under common control with the member or the member's associated persons;
            (C) at least five percent of the net offering proceeds, not including underwriting compensation, are intended to be:
            (i) used to reduce or retire the balance of a loan or credit facility extended by the member, its affiliates and its associated persons, in the aggregate; or
            (ii) otherwise directed to the member, its affiliates and associated persons, in the aggregate; or
            (D) as a result of the public offering and any transactions contemplated at the time of the public offering:
            (i) the member will be an affiliate of the issuer;
            (ii) the member will become publicly owned; or
            (iii) the issuer will become a member or form a broker-dealer subsidiary.
            (6) Control
            (A) The term "control" means:
            (i) beneficial ownership of 10 percent or more of the outstanding common equity of an entity, including any right to receive such securities within 60 days of the member's participation in the public offering;
            (ii) the right to 10 percent or more of the distributable profits or losses of an entity that is a partnership, including any right to receive an interest in such distributable profits or losses within 60 days of the member's participation in the public offering;
            (iii) beneficial ownership of 10 percent or more of the outstanding subordinated debt of an entity, including any right to receive such subordinated debt within 60 days of the member's participation in the public offering;
            (iv) beneficial ownership of 10 percent or more of the outstanding preferred equity of an entity, including any right to receive such preferred equity within 60 days of the member's participation in the public offering; or
            (v) the power to direct or cause the direction of the management or policies of an entity.
            (B) The term "common control" means the same natural person or entity controls two or more entities.
            (7) Entity
            For purposes of the definitions of affiliate, conflict of interest and control under this Rule, the term "entity":
            (A) includes a company, corporation, partnership, trust, sole proprietorship, association or organized group of persons; and
            (B) excludes the following:
            (i) an investment company registered under the Investment Company Act of 1940;
            (ii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940;
            (iii) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code; or
            (iv) a "direct participation program" as defined in Rule 2810.
            (8) Investment Grade Rated
            The term "investment grade rated" refers to securities that are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.
            (9) Preferred Equity
            The term "preferred equity" means the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.
            (10) Prominent Disclosure
            A member may make "prominent disclosure" for purposes of paragraphs (a)(1) and (a)(2)(B) by:
            (A) providing the notation "(Conflicts of Interest)" following the listing of the Plan of Distribution in the Table of Contents section required in Item 502 of SEC Regulation S-K, and by providing such disclosures in the Plan of Distribution section required in Item 508 and any Prospectus Summary section required in Item 503 of SEC Regulation S-K; or
            (B) for an offering document not subject to SEC Regulation S-K, by providing disclosure on the front page of the offering document that a conflict exists, with a cross-reference to the discussion within the offering document and in the summary of the offering document if one is included.
            (11) Public Offering
            The term "public offering" means any primary or secondary offering of securities made pursuant to a registration statement or offering circular including exchange offers, rights offerings, offerings made pursuant to a merger or acquisition and all other securities offerings of any kind whatsoever, except any offering made pursuant to:
            (A) an exemption from registration under Sections 4(1), 4(2), or 4(6) of the Securities Act of 1933;
            (B) SEC Rule 504, if the securities are "restricted securities" under SEC Rule 144(a)(3), SEC Rules 505 or 506; or
            (C) SEC Rule 144A or Regulation S.
            The term public offering shall exclude exempted securities as defined in Section 3(a)(12) of the Act.
            (12) Qualified Independent Underwriter
            The term "qualified independent underwriter" means a member:
            (A) that does not have a conflict of interest and is not an affiliate of any member that has a conflict of interest;
            (B) that does not beneficially own as of the date of the member's participation in the public offering, more than 5% of the class of securities that would give rise to a conflict of interest, including any right to receive any such securities exercisable within 60 days;
            (C) that has agreed in acting as a qualified independent underwriter to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 thereof; and
            (D) that has served as underwriter in at least three public offerings of a similar size and type during the three-year period immediately preceding the filing of the registration statement or the date of first sale in an offering without a registration statement. This requirement will be deemed satisfied if, during the past three years, the member:
            (i) with respect to a proposed public offering of debt securities, has acted as sole underwriter or book-running lead or co-manager of at least three public offerings of debt securities each with gross proceeds of not less than 25% of the anticipated gross proceeds of the proposed offering; and
            (ii) with respect to a proposed public offering of equity securities, has acted as sole underwriter or book-running lead or co-manager of at least three public offerings of equity securities (or of securities convertible into equity securities), each with gross proceeds of not less than 50% of the anticipated gross proceeds of the proposed offering.
            (E) none of whose associated persons in a supervisory capacity who are responsible for organizing, structuring or performing due diligence with respect to corporate public offerings of securities:
            (i) has been convicted within ten years prior to the filing of the registration statement or the preparation of an offering circular in an offering without a registration statement of a violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder, in connection with a registered or unregistered offering of securities;
            (ii) is subject to any order, judgment, or decree of any court of competent jurisdiction entered within ten years prior to the filing of the registration statement, or the preparation of an offering circular in an offering without a registration statement, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder in connection with a registered or unregistered offering of securities; or
            (iii) has been suspended or barred from association with any member by an order or decision of the Commission, any state, FINRA or any other self-regulatory organization within ten years prior to the filing of the registration statement, or the preparation of an offering circular in an offering without a registration statement, for any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules, or regulations promulgated thereunder, or the anti-fraud rules of any self-regulatory organization in connection with a registered or unregistered offering of securities.
            (13) Registration Statement
            The term "registration statement" means a registration statement as defined by Section 2(a)(8) of the Securities Act of 1933; notification on Form 1A filed with the Commission pursuant to the provisions of SEC Rule 252 under the Securities Act of 1933; or any other document, by whatever name known, initiating a registration or similar process for an issue of securities which is required to be filed by the laws or regulations of any federal or state agency.
            (14) Subordinated Debt
            The term "subordinated debt" includes (A) debt of an issuer which is expressly subordinate in right of payment to, or with a claim on assets subordinate to, any existing or future debt of such issuer; or (B) all debt that is specified as subordinated at the time of issuance. Subordinated debt shall not include short-term debt with maturity at issuance of less than one year and secured debt and bank debt not specified as subordinated debt at the time of issuance.
            Amended by SR-FINRA-2007-009 eff. Sep. 14, 2009.
            Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
            Amended by SR-NASD-2000-04 eff. March 22, 2004.
            Amended by SR-NASD-2002-97 eff. July 29, 2002.
            Amended by SR-NASD-99-02 eff. Dec. 7, 1999.
            Amended by SR-NASD-97-95 eff. Aug. 17, 1998.
            Amended by SR-NASD-97-38 eff. Dec. 15, 1997.
            Amended by SR-NASD-97-45 eff. Sept. 10, 1997.
            Amended by SR-NASD-97-28 eff. Aug. 7, 1997.
            Amended by SR-NASD-96-17 eff. Aug 15, 1996.
            Amended by SR-NASD-92-46 eff. May 10, 1994.
            Amended by SR-NASD-94-12 eff. Mar. 7, 1994.
            Amended eff. Feb. 8, 1971; Dec. 29, 1971; Sept. 1, 1972; Mar. 21, 1972; Apr. 1, 1974; May 19, 1977; June 2, 1983; Feb. 22, 1984; Mar. 29, 1988; Oct. 24, 1988; Oct. 16, 1992; Jan. 28, 1993.

            Selected Notices: 75-14, 77-13, 80-3, 80-39, 83-45, 86-28, 88-33, 88-89, 88-98, 88-100, 90-39, 92-57, 92-58, 94-45, 95-44, 96-53, 04-13, 09-49.

          • 2730. Securities Taken in Trade

            This rule is no longer applicable.

            (a) A member engaged in a fixed price offering, who purchases or arranges the purchase of securities taken in trade, shall purchase the securities at a fair market price at the time of purchase or shall act as agent in the sale of such securities and charge a normal commission therefor.

            (b) When used in this Rule:

            (1) the term "taken in trade" means the purchase by a member as principal, or as agent for the account of another, of a security from a customer pursuant to an agreement or understanding that the customer purchase securities from the member which are part of a fixed price offering.

            (2) the term "fair market price" means a price not higher than the price at which the securities would be purchased from the customer or from a similarly situated customer in the ordinary course of business by a dealer in such securities in transactions of similar size and having similar characteristics but not involving a security taken in trade.

            (3) the term "normal commission" means an amount of commission which the member would normally charge to that customer or a similarly situated customer in the ordinary course of business in transactions of similar size and having similar characteristics but not involving a security taken in trade.

            (c) For purposes of this Rule a member shall be:

            (1) deemed, with respect to securities other than common stocks, to have taken such securities in trade at a fair market price when the price paid is not higher than the highest independent bid for the securities at the time of purchase, if such bid quotations for the securities are readily available.

            (2) presumed, with respect to common stocks, to have taken such common stocks in trade at a fair market price when the price paid is not higher than the highest independent bid for the securities at the time of purchase, if such bid quotations for the securities are readily available.

            (3) presumed to have taken a security in trade at a price higher than a fair market price when the price paid is higher than the lowest independent offer for the securities at the time of purchase, if such offer quotations for the securities are readily available.

            (d) A member, in connection with every transaction subject to this Rule, shall with respect to:

            (1) common stocks, which are traded on a national securities exchange or for which quotations are entered in an automated quotation system, obtain the necessary bid and offer quotations from the national securities exchange or from the automated quotation system; and

            (2) other securities and common stocks not included in subparagraph (1), above, obtain directly or with the assistance of an independent agent bid and offer quotations from two or more independent dealers relating to the securities to be taken in trade or, if such quotations are not readily available, exercise its best efforts to obtain such quotations with respect to securities having similar characteristics and of similar quality as those to be taken in trade.

            (e) A member who purchases a security taken in trade shall keep or cause to be kept adequate records to demonstrate compliance with this Rule and shall preserve the records for at least 24 months after the transaction. If an independent agent is used for the purpose of obtaining quotations, the member must request the agent to identify the dealers from whom the quotations were obtained and the time and date they were obtained or request the agent to keep and maintain for at least 24 months a record containing such information.

            Amended by SR-NASD-78-03 eff. March 1, 1981.

            Selected Notices: 77-31, 78-05, 78-14, 80-37, 80-66, 81-03.

            • IM-2730. Safe Harbor and Presumption of Compliance

              This rule is no longer applicable.

              Rule 2730(c)(1) provides that, with respect to a security, other than a common stock, a member will be deemed to have paid the fair market price for a security taken in trade if the price paid is no higher than the highest independent bid for the securities at the time of purchase, if bid quotations are readily available. Rule 2730(c)(2) provides, with respect to common stock, that a member will be presumed to have paid no more than the fair market price for the shares of common stock taken in trade if the price paid for the shares of common stock taken in trade is no higher than the highest independent bid for such shares at the time of purchase, if bid quotations are readily available. The presumption of compliance contained in Rule 2730(c)(2) may be rebutted by the Association upon a showing that the price paid, in fact, exceeded the fair market price as that term is defined in Rule 2730(b)(2). Inasmuch as a member is presumed to have complied with Rule 2730 when taking common stock in trade at a price no higher than the highest independent bid, the Association will have a heavier burden of demonstrating noncompliance in such circumstances than it has in the circumstances described below where there is neither a presumption of compliance nor one of noncompliance. Nonetheless, the factors described below in the sections titled "Presumption of Noncompliance," and "No Presumptions" will be relevant in determining whether the Association has rebutted the presumption. Particular attention will be directed to the size of the transaction and the relative liquidity of the position.
              Presumption of Noncompliance
              Rule 2730(c)(3) establishes a presumption of noncompliance with Rule 2730 if securities for which offer quotations are readily available are taken in trade at prices higher than the lowest independent offer. While the presumption in Rule 2730(c)(3) is not conclusive, it may be rebutted by the member only in an exceptional or unusual case. To rebut the presumption of noncompliance, all factors relevant to the transaction must be taken into consideration, including, among other things, whether a customer of a member has given an indication of interest to purchase the securities taken in trade at a higher price; the member's pattern of trading in the securities or comparable securities at the time of the transaction; the member's position in, and the availability of, the securities taken in trade; the size of the transaction; and the amount by which the price paid exceeds the lowest independent offer.
              The several factors described in the preceding paragraph will be relevant to determining whether the presumption of noncompliance has been rebutted. The existence of only one such factor, however, will not necessarily be sufficient to meet the heavy burden placed on a member, though in a given case it may be sufficient. In any event, all facts and circumstances must be considered. For example, a member may be able to satisfy the burden of demonstrating that fair market price was paid by showing that the price paid did not exceed the price, less an amount equal to a normal commission on an agency transaction, at which a customer had given the member an indication of interest to purchase the securities, or that the member held a short position in the security purchased, that it desired to cover that short position, that the availability of the security was scarce and that the amount of securities taken in trade could not have been acquired at a lower price.
              No Presumptions
              In instances when a member takes a security in trade at a price higher than the highest independent bid and not higher than the lowest independent offer, or when bid and offer quotations are not readily available, there shall be no safe harbor and there shall be neither a presumption of compliance nor one of noncompliance with Rule 2730. In such circumstances, whether the price paid is the fair market price will be determined by reference to the definition of fair market price in Rule 2730(b)(2).
              Rule 2730(b)(2) states generally that fair market price is the price a dealer would pay for the amount of securities taken in trade if purchased from the customer in the ordinary course of business but not involving a security taken in trade. Accordingly, the price paid by a member or other dealers for the same security or a comparable security as that taken in trade but not in a transaction involving a security taken in trade will be relevant in determining compliance with Rule 2730. In comparing such transactions, all facts and circumstances will be considered, including such things as the size of the transactions being compared, the time of each transaction and the difference in price paid. In determining whether fair market price has been paid, other relevant factors, including those set forth above with respect to rebutting the presumption of noncompliance, will also be considered.
              Quotations
              Paragraphs (d) and (e) of Rule 2730 obligate members taking securities in trade to obtain and maintain records of bid and offer quotations. If the securities taken in trade are common stocks that are traded on a national securities exchange or for which quotations are entered in an automated quotation system, the quotations must be obtained from any such exchange or automated quotation system at the time of purchase.

              Quotations for all other securities must be obtained from at least two independent dealers at the time of purchase. While the quotations from two dealers in such circumstances need not be for the specific size of the transaction, they must be for a size corresponding generally to the amount of the securities to be taken in trade. Quotations relating only to an odd lot, such as those typically available from a dealer in bonds on a national securities exchange, will not be acceptable for a transaction of a size normally traded by institutions.

              If bid and offer quotations required by Rule 2730(d) are not readily available and a member is able to obtain such quotations for comparable securities, such quotations will be treated as though they are quotations for the securities taken in trade in determining whether the "safe harbor" in Rule 2730(c)(1) and the presumptions in subparagraphs (c)(2) and (c)(3), are applicable. In such circumstances, however, the member's determination of what constitutes comparable securities may be challenged.
              Adequate Records
              If the member purchases securities taken in trade at a price which is no higher than the lowest independent offer as determined according to Rule 2730, it will have kept adequate records if it records the time and date quotations were received, the identity of the security to which the quotations pertain, the identity of the dealer from whom, or the exchange or quotation system from which, the quotations were obtained, and the quotations furnished. If a member uses the services of an independent agent to obtain the quotations and the agent does not disclose the identity of the dealers from whom quotations were obtained, the member will have kept adequate records if it otherwise complies with Rule 2730(e) and it records the time and date it received the quotations from the agent, the identity of the agent, and the quotations transmitted by the agent.
              If a member takes a security in trade and pays more than the lowest independent offer, it will have kept adequate records if, in addition to the foregoing records, it keeps records of all relevant factors it considered important in concluding that the price paid for the securities was fair market price.
              Fair Market Price at the Time of Purchase
              Swap transactions that are arranged before the effectiveness of a fixed price offering are not generally viewed as being legally consummated until effectiveness of the fixed price offering. Nonetheless, the fair market price of securities taken in trade in such situations is normally determined at the time of the pricing of the fixed price offering, which occurs on the day before effectiveness usually in the afternoon, and the swap is arranged on the basis of that price. In such cases, for purposes of Rule 2730(a), the determination of the "fair market price at the time of purchase" of the securities to be taken in trade may be made as of the time of pricing of the fixed price offering. As to swaps agreed upon at a time after effectiveness of the offering, fair market price of the swapped securities must be determined as of the time the transaction is legally consummated.

          • 2740. Selling Concessions, Discounts and Other Allowances

            This rule is no longer applicable.

            In connection with the sale of securities which are part of a fixed price offering:
            (a) A member may not grant or receive selling concessions, discounts, or other allowances except as consideration for services rendered in distribution and may not grant such concessions, discounts or other allowances to anyone other than a broker or dealer actually engaged in the investment banking or securities business; provided, however, that nothing in this Rule shall prevent any member from (1) selling any such securities to any person, or account managed by any person, to whom it has provided or will provide bona fide research, if the stated public offering price for such securities is paid by the purchaser; or (2) selling any such securities owned by him to any person at any net price which may be fixed by him unless prevented therefrom by agreement.

            (b) The term "bona fide research," when used in this Rule means advice, rendered either directly or through publications or writings, as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities, or analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and performance of accounts; provided, however, that investment management or investment discretionary services are not bona fide research.

            (c) A member who grants a selling concession, discount or other allowance to another person shall obtain a written agreement from that person that he will comply with the provisions of this Rule, and a member who grants such selling concession, discount or other allowance to a non-member broker or dealer in a foreign country shall also obtain from such broker or dealer a written agreement to comply, as though such broker or dealer were a member, with the provisions of Rules 2730 and 2750 and to comply with Rule 2420 as that Rule applies to a non-member broker/dealer in a foreign country.

            (d) A member who receives an order from any person designating another broker or dealer to receive credit for the sale shall, within 30 days after the end of each calendar quarter, file reports with the Association containing the following information with respect to each fixed price offering which terminated during that calendar quarter: the name of the person making the designation; the identity of the brokers or dealers designated; the identity and amount of securities for which each broker or dealer was designated; the date of the commencement and termination of the offering and such other information as the Association shall deem pertinent.

            (e) A member who is designated by its customer for the sale of securities shall keep, and maintain for a period of 24 months, records in such form and manner to show the following information: name of customer making the designation; the identity and amount of securities for which the member was designated; the identity of the manager or managers in the offering, if any; the date of the commencement of the offering and such other information as the Association shall deem pertinent.

            Amended by SR-NASD-88-47 eff. Jan. 27, 1989.
            Amended by SR-NASD-78-03 eff. March 1, 1981.

            Selected Notices: 77-31, 78-05, 78-14, 80-37, 80-66, 81-03, 81-11, 88-72, 89-28.

            • IM-2740. Services in Distribution

              This rule is no longer applicable.

              The proper application of Rule 2740 requires that, in connection with fixed price offerings, selling concessions, discounts or other allowances be paid only to brokers or dealers actually engaged in the investment banking or securities business and only as consideration for services rendered in distribution.
              A dealer has rendered services in distribution in connection with the sale of securities from a fixed price offering if the dealer is an underwriter of a portion of that offering, has engaged in some selling effort with respect to the sale or has provided or agreed to provide bona fide research to the person to whom or at whose direction the sale is made.
              A broker or dealer who has received or retained a selling concession, discount or other allowance may not grant or otherwise reallow all or part of that concession, discount or allowance to anyone other than a broker or dealer engaged in the investment banking or securities business and only as consideration for services rendered in distribution. The improper grant or reallowance of a selling concession, discount or other allowance might occur directly or indirectly through such devices as transactions in violation of Rule 2730, or other indirect means such as those described below.
              A member granting a selling concession, discount or other allowance to another person is not responsible for determining whether such other person may be violating Rule 2740 by granting or reallowing that selling concession, discount or other allowance to another person, unless the member knew, or had reasonable cause to know, of the violation.
              Bona Fide Research Exclusion
              While Rule 2740 provides that a member may grant or receive selling concessions, discounts and other allowances only as consideration for services rendered in distribution and may grant such concessions, discounts or other allowances only to brokers or dealers actually engaged in the investment banking or securities business, that Rule also states that a member is not prohibited by Rule 2740 from selling securities at the stated public offering price to persons to whom it provides bona fide research. Accordingly, nothing in Rule 2740 prohibits a member from providing bona fide research to a customer who also purchases securities from fixed price offerings from the member whether or not there is an express or implied agreement between the member providing the research and the recipient that the member will be compensated for the research in cash, brokerage commissions, selling concessions or some other form of consideration.
              The definition of bona fide research is substantially the same as the definition of the term research in Section 28(e)(3) of the Act, and as interpreted by the Commission. Members should refer to the Commission's interpretation in Securities Exchange Act Release No. 23170 (April 30, 1986) concerning the definition of research under Section 28(e) for guidance as well as to any interpretations of the Commission or its staff thereafter issued.

              Moreover, while the provisions in Rule 2840 concerning bona fide research are intended to permit money managers to receive bona fide research from persons from whom securities are purchased, it is not intended to enable a money manager, who is also a member, to view its money management services as bona fide research. Accordingly, the performance of money management or investment discretionary services themselves are expressly excluded from the definition of bona fide research.

              Another factor relating to bona fide research is that the research must be "provided by" the member who receives or retains the selling concession, discount or other allowance. Under Section 28(e) of the Act, the Commission has stated that the "safe harbor" provided by Section 28(e) only extends to research that is "provided by" the broker to whom brokerage commissions are paid. In determining whether the exclusion for bona fide research under Rule 2740 is available in any given instance, members should refer to the interpretations of the Commission and its staff of the similar requirement applicable to Section 28(e).
              Whether research is provided by the member will depend on all the facts and circumstances surrounding the relationship of the member and the recipient of the research, relying upon interpretations by the Commission and staff with respect to similar questions under Section 28(e). See Securities Exchange Act Release No. 23170 (April 30, 1986).
              Indirect Discounts
              A member who, itself or through its affiliate, supplies another person with services or products which fail to qualify as bona fide research, or which, in the case of services or products other than bona fide research, are provided by the member or its affiliate to such person or others for cash or for some other agreed upon consideration, and also retains or receives selling concessions, discounts or other allowances from purchases by that person or its affiliate of securities from a fixed price offering is improperly granting a selling concession, discount or other allowance to that person unless the member or its affiliate has been, or has arranged and reasonably expects to be, fully compensated for such services or products from sources other than the selling concession, discount or allowance retained or received on the sale.

              A person will be deemed to be providing services or products for cash or other agreed upon consideration if the service or product, or a substantially identical service or product, is provided to any person for cash or for some other agreed upon consideration. A service or product will be deemed to be provided for an agreed upon consideration if there is an express or implied agreement between the person providing the service or product and the recipient thereof calling for the provider of the service or product to be compensated therefor with an agreed upon or mutually understood source and general amount of consideration. Under such circumstances a member or its affiliate providing such service or product would be required to demonstrate that it was fully compensated for the service or product with consideration other than selling concessions, discounts or other allowances received or retained on the sale of securities from fixed price offerings.

              A member may show that it or its affiliate received or reasonably expects to receive full consideration, independent of selling concessions, discounts or other allowances, for providing certain services and products, by identifying the arrangement for the consideration (including its source and amount) and, if appropriate, the collection process for obtaining it.
              In order to demonstrate that the cash or other consideration is full consideration, records of account should be kept which identify the recipient of the services or products, the amount of cash or other consideration paid or to be paid by such person or its affiliate.
              Unless the amount of cash or other consideration agreed upon appears on its face to be unreasonably low, it will not be necessary for the member or its affiliate to demonstrate that the agreed upon price represented fair market price. Likewise, as long as price differentials are based on factors other than the customer's willingness to purchase, or practice of purchasing, securities from the member out of fixed price offerings, it is not necessary, for purposes of Rule 2740, that the member or its affiliate charge the same amount to each person to whom they provide the same or similar services or products.
              Amended eff. Jan. 27, 1989.

          • 2750. Transactions with Related Persons

            This rule is no longer applicable.

            (a) Except as otherwise provided in paragraph (d), hereof, no member engaged in a fixed price offering of securities shall sell the securities to, or place the securities with, any person or account which is a related person of the member unless such related person is itself subject to this Rule or is a non-member foreign broker or dealer who has entered into the agreements required by Rule 2740(c).

            (b) For purposes of this Rule, a "related person" of a member includes any person or account which directly or indirectly owns, is owned by or is under common ownership with the member.

            (c) A person owns another person or account for purposes of this Rule if the person directly or indirectly:

            (1) has the right to participate to the extent of more than 25 percent in the profits of the other person; or

            (2) owns beneficially more than 25 percent of the outstanding voting securities of the person.

            (d) The prohibition contained in paragraph (a), hereof, does not apply to the sale of securities to, or the placement of securities in, a trading or investment account of a member or a related person of a member after termination of the fixed price offering if the member or the related person of the member has made a bona fide public offering of the securities. A member or a related person of a member is presumed not to have made a bona fide public offering for the purpose of this paragraph if the securities being offered immediately trade in the secondary market at a price or prices which are at or above the public offering price.
            Adopted by SR-NASD-78-03 eff. March 1, 1981.

            Selected Notices: 77-31, 78-05, 78-14, 80-37, 80-66, 81-03.

            • IM-2750. Transactions with Related Persons

              This rule is no longer applicable.

              A member who is acting, or plans to act, as sponsor of a unit investment trust will not violate Rule 2750 if it accumulates securities with respect to which the member has acted as a syndicate member, selling group member or reallowance dealer in an account of the member or related person of the member if, at the time of accumulation, the member in good faith intends to deposit the securities into the unit investment trust at the public offering price and intends to make a bona fide public offering of the participation units of that trust. Members engaged in such activity, however, will continue to be subject to Rule 2790.
              While Rule 2750(d) provides that a person is presumed not to have made a bona fide public offering if, immediately following the termination of the fixed price offering, the securities trade at or above the public offering price, there is no presumption that a person has made a bona fide public offering if, at such time, the securities trade below the public offering price. Whether a person has made a bona fide pubic offering will be determined on the basis of all relevant facts and circumstances.
              Amended by SR-NASD-99-60 eff. March 23, 2004.

              Selected Notice: 03-79.

          • 2760. Offerings 'At the Market'

            This rule is no longer applicable.

            A member who is participating or who is otherwise financially interested in the primary or secondary distribution of any security which is not admitted to trading on a national securities exchange, shall make no representation that such security is being offered to a customer "at the market" or at a price related to the market price unless such member knows or has reasonable grounds to believe that a market for such security exists other than that made, created, or controlled by such member, or by any person for whom he is acting or with whom he is associated in such distribution, or by any person controlled by, controlling or under common control with such member.

          • 2770. Disclosure of Price in Selling Agreements

            This rule is no longer applicable. NASD Rule 2770 has been superseded by FINRA Rule 5160. Please consult the appropriate FINRA Rule.

            Selling syndicate agreements or selling group agreements shall set forth the price at which the securities are to be sold to the public or the formula by which such price can be ascertained, and shall state clearly to whom and under what circumstances concessions, if any, may be allowed.

          • 2780. Solicitation of Purchases on an Exchange to Facilitate a Distribution of Securities

            This rule is no longer applicable.

            (a) No member, participating or otherwise financially interested in the primary or secondary distribution of any security of any issuer, shall:

            (1) pay or offer or agree to pay, directly or indirectly, to any person any compensation for soliciting another to purchase any security of the same issuer on a national securities exchange, or for purchasing any security of the same issuer on any such exchange for any account other than the account of the member who pays or is to pay such compensation; or

            (2) sell, offer to sell or induce an offer to buy such security, or deliver such security after sale, if, in connection with such distribution, such member has paid, or has offered or agreed to pay, directly or indirectly, to any person, any compensation for soliciting another to purchase any security of the same issuer on any national securities exchange, or for purchasing any security of the same issuer on any such exchange for any account other than the account of the member who has paid or is to pay such compensation.

            (b) No member, participating or otherwise financially interested in the primary or secondary distribution of any security of any issuer, shall cause a purchase or sale of any security of the same issuer on a national securities exchange by paying or offering or agreeing to pay, directly or indirectly, to any person any compensation for soliciting another to purchase such security on any such exchange, or for purchasing such security on any such exchange for any account other than the account of the member who pays or is to pay such compensation.

            (c) The provisions of this Rule shall not apply in respect to any salary paid by a member to any person regularly employed by him whose ordinary duties include the solicitation or execution of brokerage orders on a national securities exchange, if such salary represents only ordinary compensation for the discharge by such person of such duties in the regular course of his employment, and is not paid, in whole or in part, directly or indirectly, for the inducement by such person of the purchase or sale on a national securities exchange of any security of the issuer of the security in the primary or secondary distribution of which such member is participating or otherwise financially interested.

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

            This rule is no longer applicable. NASD Rule 2790 has been superseded by FINRA Rule 5130. Please consult the appropriate FINRA Rule.

            (a) General Prohibitions
            (1) A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.
            (2) A member or a person associated with a member may not purchase a new issue in any account in which such member or person associated with a member has a beneficial interest, except as otherwise permitted herein.
            (3) A member may not continue to hold new issues acquired by the member as an underwriter, selling group member, or otherwise, except as otherwise permitted herein.
            (4) Nothing in this paragraph (a) shall prohibit:
            (A) sales or purchases from one member of the selling group to another member of the selling group that are incidental to the distribution of a new issue to a non-restricted person at the public offering price;
            (B) sales or purchases by a broker/dealer of a new issue at the public offering price as part of an accommodation to a non-restricted person customer of the broker/dealer; or
            (C) purchases by a broker/dealer (or owner of a broker/dealer), organized as an investment partnership, of a new issue at the public offering price, provided such purchases are credited to the capital accounts of its partners in accordance with paragraph (c)(4).
            (b) Preconditions for Sale
            Before selling a new issue to any account, a member must in good faith have obtained within the twelve months prior to such sale, a representation from:
            (1) Beneficial Owners
            the account holder(s), or a person authorized to represent the beneficial owners of the account, that the account is eligible to purchase new issues in compliance with this rule; or
            (2) Conduits
            a bank, foreign bank, broker/dealer, or investment adviser, or other conduit that all purchases of new issues are in compliance with this rule.
            A member may not rely upon any representation that it believes, or has reason to believe, is inaccurate. A member shall maintain a copy of all records and information relating to whether an account is eligible to purchase new issues in its files for at least three years following the member's last sale of a new issue to that account.
            (c) General Exemptions
            The general prohibitions in paragraph (a) of this rule shall not apply to sales to and purchases by the following accounts or persons, whether directly or through accounts in which such persons have a beneficial interest:
            (1) An investment company registered under the Investment Company Act of 1940;
            (2) A common trust fund or similar fund as described in Section 3(a)(12)(A)(iii) of the Act, provided that:
            (A) the fund has investments from 1,000 or more accounts; and
            (B) the fund does not limit beneficial interests in the fund principally to trust accounts of restricted persons;
            (3) An insurance company general, separate or investment account, provided that:
            (A) the account is funded by premiums from 1,000 or more policyholders, or, if a general account, the insurance company has 1,000 or more policyholders; and
            (B) the insurance company does not limit the policyholders whose premiums are used to fund the account principally to restricted persons, or, if a general account, the insurance company does not limit its policyholders principally to restricted persons;
            (4) An account if the beneficial interests of restricted persons do not exceed in the aggregate 10% of such account;
            (5) A publicly traded entity (other than a broker/dealer or an affiliate of a broker/dealer where such broker/dealer is authorized to engage in the public offering of new issues either as a selling group member or underwriter) that:
            (A) is listed on a national securities exchange;
            (B) is traded on the Nasdaq Global Market; or
            (C) is a foreign issuer whose securities meet the quantitative designation criteria for listing on a national securities exchange or trading on the Nasdaq Global Market;
            (6) An investment company organized under the laws of a foreign jurisdiction, provided that:
            (A) the investment company is listed on a foreign exchange for sale to the public or authorized for sale to the public by a foreign regulatory authority; and
            (B) no person owning more than 5% of the shares of the investment company is a restricted person;
            (7) An Employee Retirement Income Security Act benefits plan that is qualified under Section 401(a) of the Internal Revenue Code, provided that such plan is not sponsored solely by a broker/dealer;
            (8) A state or municipal government benefits plan that is subject to state and/or municipal regulation;
            (9) A tax exempt charitable organization under Section 501(c)(3) of the Internal Revenue Code; or
            (10) A church plan under Section 414(e) of the Internal Revenue Code
            (d) Issuer-Directed Securities
            The prohibitions on the purchase and sale of new issues in this rule shall not apply to securities that:
            (1) are specifically directed by the issuer to persons that are restricted under the rule; provided, however, that securities directed by an issuer may not be sold to or purchased by:
            (A) a broker-dealer; or
            (B) an account in which any restricted person specified in subparagraphs (i)(10)(B) or (i)(10)(C) of this rule has a beneficial interest, unless such person, or a member of his or her immediate family, is an employee or director of the issuer, the issuer's parent, or a subsidiary of the issuer or the issuer's parent. Also, for purposes of this paragraph (d)(1) only, a parent/subsidiary relationship is established if the parent has the right to vote 50% or more of a class of voting security of the subsidiary, or has the power to sell or direct 50% or more of a class of voting security of the subsidiary;
            (2) are specifically directed by the issuer and are part of an offering in which no broker-dealer:
            (A) underwrites any portion of the offering;
            (B) solicits or sells any new issue securities in the offering; and
            (C) has any involvement or influence, directly or indirectly, in the issuer's allocation decisions with respect to any of the new issue securities in the offering;
            (3) are part of a program sponsored by the issuer or an affiliate of the issuer that meets the following criteria:
            (A) the opportunity to purchase a new issue under the program is offered to at least 10,000 participants;
            (B) every participant is offered an opportunity to purchase an equivalent number of shares, or will receive a specified number of shares under a predetermined formula applied uniformly across all participants;
            (C) if not all participants receive shares under the program, the selection of the participants eligible to purchase shares is based upon a random or other non-discretionary allocation method; and
            (D) the class of participants does not contain a disproportionate number of restricted persons as compared to the investing public generally; or
            (4) are directed to eligible purchasers who are otherwise restricted under the rule as part of a conversion offering in accordance with the standards of the governmental agency or instrumentality having authority to regulate such conversion offering.
            (e) Anti-Dilution Provisions
            The prohibitions on the purchase and sale of new issues in this rule shall not apply to an account in which a restricted person has a beneficial interest that meets the following conditions:
            (1) the account has held an equity ownership interest in the issuer, or a company that has been acquired by the issuer in the past year, for a period of one year prior to the effective date of the offering;
            (2) the sale of the new issue to the account shall not increase the account's percentage equity ownership in the issuer above the ownership level as of three months prior to the filing of the registration statement in connection with the offering;
            (3) the sale of the new issue to the account shall not include any special terms; and
            (4) the new issue purchased pursuant to this paragraph (e) shall not be sold, transferred, assigned, pledged or hypothecated for a period of three months following the effective date of the offering.
            (f) Stand-by Purchasers
            The prohibitions on the purchase and sale of new issues in this rule shall not apply to the purchase and sale of securities pursuant to a stand-by agreement that meets the following conditions:
            (1) the stand-by agreement is disclosed in the prospectus;
            (2) the stand-by agreement is the subject of a formal written agreement;
            (3) the managing underwriter(s) represents in writing that it was unable to find any other purchasers for the securities; and
            (4) the securities sold pursuant to the stand-by agreement shall not be sold, transferred, assigned, pledged or hypothecated for a period of three months following the effective date of the offering.
            (g) Under-Subscribed Offerings
            Nothing in this rule shall prohibit an underwriter, pursuant to an underwriting agreement, from placing a portion of a public offering in its investment account when it is unable to sell that portion to the public.
            (h) Exemptive Relief
            Pursuant to the Rule 9600 series, the staff, for good cause shown after taking into consideration all relevant factors, may conditionally or unconditionally exempt any person, security or transaction (or any class or classes of persons, securities or transactions) from this rule to the extent that such exemption is consistent with the purposes of the rule, the protection of investors, and the public interest.
            (i) Definitions
            (1) "Beneficial interest" means any economic interest, such as the right to share in gains or losses. The receipt of a management or performance based fee for operating a collective investment account, or other fees for acting in a fiduciary capacity, shall not be considered a beneficial interest in the account.
            (2) "Collective investment account" means any hedge fund, investment partnership, investment corporation, or any other collective investment vehicle that is engaged primarily in the purchase and/or sale of securities. A "collective investment account" does not include a "family investment vehicle" or an "investment club."
            (3) "Conversion offering" means any offering of securities made as part of a plan by which a savings and loan association, insurance company, or other organization converts from a mutual to a stock form of ownership.
            (4) "Family investment vehicle" means a legal entity that is beneficially owned solely by immediate family members.
            (5) "Immediate family member" means a person's parents, mother-in-law or father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, and any other individual to whom the person provides material support.
            (6) "Investment club" means a group of friends, neighbors, business associates, or others that pool their money to invest in stock or other securities and are collectively responsible for making investment decisions.
            (7) "Limited business broker/dealer" means any broker/dealer whose authorization to engage in the securities business is limited solely to the purchase and sale of investment company/variable contracts securities and direct participation program securities.
            (8) "Material support" means directly or indirectly providing more than 25% of a person's income in the prior calendar year. Members of the immediate family living in the same household are deemed to be providing each other with material support.
            (9) "New issue" means any initial public offering of an equity security as defined in Section 3(a)(11) of the Act, made pursuant to a registration statement or offering circular. New issue shall not include:
            (A) offerings made pursuant to an exemption under Section 4(1), 4(2) or 4(6) of the Securities Act of 1933, or SEC Rule 504 if the securities are "restricted securities" under SEC Rule 144(a)(3), or Rule 144A or Rule 505 or Rule 506 adopted thereunder;
            (B) offerings of exempted securities as defined in Section 3(a)(12) of the Act, and rules promulgated thereunder;
            (C) offerings of securities of a commodity pool operated by a commodity pool operator as defined under Section 1a(5) of the Commodity Exchange Act;
            (D) rights offerings, exchange offers, or offerings made pursuant to a merger or acquisition;
            (E) offerings of investment grade asset-backed securities;
            (F) offerings of convertible securities;
            (G) offerings of preferred securities;
            (H) offerings of an investment company registered under the Investment Company Act of 1940;
            (I) offerings of securities (in ordinary share form or ADRs registered on Form F-6) that have a pre-existing market outside of the United States; and
            (J) offerings of a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940, a direct participation program as defined in NASD Rule 2810(a)(4), or a real estate investment trust as defined in Section 856 of the Internal Revenue Code.
            (10) "Restricted person" means:
            (A) Members or other broker/dealers
            (B) Broker/Dealer Personnel
            (i) Any officer, director, general partner, associated person, or employee of a member or any other broker/dealer (other than a limited business broker/dealer);
            (ii) Any agent of a member or any other broker/dealer (other than a limited business broker/dealer) that is engaged in the investment banking or securities business; or
            (iii) An immediate family member of a person specified in subparagraph (B)(i) or (ii) if the person specified in subparagraph (B)(i) or (ii):
            a. materially supports, or receives material support from, the immediate family member;
            b. is employed by or associated with the member, or an affiliate of the member, selling the new issue to the immediate family member; or
            c. has an ability to control the allocation of the new issue.
            (C) Finders and Fiduciaries
            (i) With respect to the security being offered, a finder or any person acting in a fiduciary capacity to the managing underwriter, including, but not limited to, attorneys, accountants and financial consultants; and
            (ii) An immediate family member of a person specified in subparagraph (C)(i) if the person specified in subparagraph (C)(i) materially supports, or receives material support from, the immediate family member.
            (D) Portfolio Managers
            (i) Any person who has authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment advisor, or collective investment account.
            (ii) An immediate family member of a person specified in subparagraph (D)(i) that materially supports, or receives material support from, such person.
            (E) Persons Owning a Broker/Dealer
            (i) Any person listed, or required to be listed, in Schedule A of a Form BD (other than with respect to a limited business broker/dealer), except persons identified by an ownership code of less than 10%;
            (ii) Any person listed, or required to be listed, in Schedule B of a Form BD (other than with respect to a limited business broker/dealer), except persons whose listing on Schedule B relates to an ownership interest in a person listed on Schedule A identified by an ownership code of less than 10%;
            (iii) Any person listed, or required to be listed, in Schedule C of a Form BD that meets the criteria of subparagraphs (E)(i) and (E)(ii) above;
            (iv) Any person that directly or indirectly owns 10% or more of a public reporting company listed, or required to be listed, in Schedule A of a Form BD (other than a reporting company that is listed on a national securities exchange or is traded on the Nasdaq Global Market, or other than with respect to a limited business broker/dealer);
            (v) Any person that directly or indirectly owns 25% or more of a public reporting company listed, or required to be listed, in Schedule B of a Form BD (other than a reporting company that is listed on a national securities exchange or is traded on the Nasdaq Global Market, or other than with respect to a limited business broker/dealer);
            (vi) An immediate family member of a person specified in subparagraphs (E)(i)–(v) unless the person owning the broker/dealer:
            a. does not materially support, or receive material support from, the immediate family member;
            b. is not an owner of the member, or an affiliate of the member, selling the new issue to the immediate family member; and
            c. has no ability to control the allocation of the new issue.
            (j) Information Required to be Filed
            (1) The book-running managing underwriter of a new issue shall be required to file the following information in the time and manner specified by NASD with respect to new issues:

            (A) the initial list of distribution participants and their underwriting commitment and retention amounts on or before the offering date; and
            (B) the final list of distribution participants and their underwriting commitment and retention amounts no later than three business days after the offering date.
            Amended by SR-NASD-2006-074 eff. Sept. 5, 2007.
            Amended by SR-NASD-2006-068 eff. July 1, 2006.
            Amended by SR-NASD-2004-165 eff. Nov. 2, 2005.
            Amended by SR-NASD-99-60 eff. March 23, 2004.

            Selected Notices: 03-79, 05-65, 07-34.

          • 2800. SPECIAL PRODUCTS

            • 2810. Direct Participation Programs

              This rule is no longer applicable. NASD Rule 2810 has been superseded by FINRA Rule 2310. Please consult the appropriate FINRA Rule.

              (a) Definitions
              For the purposes of this Rule, the following terms shall have the stated meanings:
              (1) Affiliate — when used with respect to a member or sponsor, shall mean any person which controls, is controlled by, or is under common control with, such member or sponsor and includes:
              (A) any partner, officer or director (or person performing similar functions) of (i) such member or sponsor, or (ii) a person which beneficially owns 50% or more of the equity interest in, or has the power to vote 50% or more of the voting interest in, such member or sponsor;
              (B) any person which beneficially owns or has the right to acquire 10% or more of the equity interest in or has the power to vote 10% or more of the voting interest in (i) such member or sponsor, or (ii) a person which beneficially owns 50% or more of the equity interest in, or has the power to vote 50% or more of the voting interest in, such member or sponsor;
              (C) any person with respect to which such member or sponsor, the persons specified in subparagraph (A) or (B), and the immediate families of partners, officers or directors (or persons performing similar functions) specified in subparagraph (A), or other person specified in subparagraph (B), in the aggregate beneficially own or have the right to acquire 10% or more of the equity interest or have the power to vote 10% or more of the voting interest;
              (D) any person an officer of which is also a person specified in subparagraph (A) or (B) and any person a majority of the board of directors of which is comprised of persons specified in subparagraph (A) or (B); or
              (E) any person controlled by a person or persons specified in subparagraphs (A), (B), (C), or (D).
              (2) Cash available for distribution — cash flow less amount set aside for restoration or creation of reserves.
              (3) Cash flow — cash funds provided from operations, including lease payments on net leases from builders and sellers, without deduction for depreciation, but after deducting cash funds used to pay all other expenses, debt payments, capital improvements and replacements.
              (4) Direct participation program (program) — a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof. A program may be composed of one or more legal entities or programs but when used herein and in any rules or regulations adopted pursuant hereto the term shall mean each of the separate entities or programs making up the overall program and/or the overall program itself. Excluded from this definition are real estate investment trusts, tax qualified pension and profit sharing plans pursuant to Sections 401 and 403(a) of the Internal Revenue Code and individual retirement plans under Section 408 of that Code, tax sheltered annuities pursuant to the provisions of Section 403(b) of the Internal Revenue Code, and any company including separate accounts, registered pursuant to the Investment Company Act of 1940.
              (5) Dissenting limited partner — a person who, on the date on which soliciting material is mailed to investors, is a holder of a beneficial interest in a limited partnership that is the subject of a limited partnership rollup transaction, and who casts a vote against the transaction and complies with procedures established by the Association, except that for purposes of an exchange or tender offer, such person shall file an objection in writing under the Rules of the Association during the period in which the offer is outstanding. Such objection in writing shall be filed with the party responsible for tabulating the votes or tenders.
              (6) Equity interest — when used with respect to a corporation, means common stock and any security convertible into, exchangeable or exercisable for common stock, and, when used with respect to a partnership, means an interest in the capital or profits or losses of the partnership.
              (7) Fair market net worth — total assets computed at fair market value less total liabilities.
              (8) Limited partner or investor in a limited partnership — the purchaser of an interest in a direct participation program that is a limited partnership who is not involved in the day-to-day management of the limited partnership and bears limited liability.
              (9) Limited partnership — an unincorporated association that is a direct participation program organized as a limited partnership whose partners are one or more general partners and one or more limited partners, which conforms to the provisions of the Revised Uniform Limited Partnership Act or the applicable statute that regulates the organization of such partnership.
              (10) Limited partnership rollup transaction — a transaction involving the combination or reorganization of one or more limited partnerships, directly or indirectly, in which:
              (A) some or all of the investors in any of such limited partnerships will receive new securities, or securities in another entity, that will be reported under a transaction reporting plan declared effective before January 1, 1991, by the Commission under Section 11A of the Act.*
              (B) any of the investors' limited partnership securities are not, as of the date of the filing, reported under a transaction reporting plan declared effective before January 1, 1991, by the Commission under Section 11A of the Act.**
              (C) investors in any of the limited partnerships involved in the transaction are subject to a significant adverse change with respect to voting rights, the term of existence of the entity, management compensation, or investment objectives; and
              (D) any of such investors are not provided an option to receive or retain a security under substantially the same terms and conditions as the original issue. Notwithstanding the foregoing definition, a "limited partnership rollup transaction" does not include:
              (i) a transaction that involves only a limited partnership or partnerships having an operating policy or practice of retaining cash available for distribution and reinvesting proceeds from the sale, financing, or refinancing of assets in accordance with such criteria as the Commission determines appropriate;
              (ii) a transaction involving only limited partnerships wherein the interests of the limited partners are repurchased, recalled or exchanged pursuant to the terms of the pre-existing limited partnership agreements for securities in an operating company specifically identified at the time of the formation of the original limited partnership;
              (iii) a transaction in which the securities to be issued or exchanged are not required to be and are not registered under the Securities Act of 1933;
              (iv) a transaction that involves only issuers that are not required to register or report under Section 12 of the Act, both before and after the transaction;
              (v) a transaction, except as the Commission may otherwise provide for by rule for the protection of investors, involving the combination or reorganization of one or more limited partnerships in which a non-affiliated party succeeds to the interests of the general partner or sponsor, if:
              a. such action is approved by not less than 66 2/3 percent of the outstanding units of each of the participating limited partnerships; and
              b. as a result of the transaction, the existing general partners will receive only compensation to which they are entitled as expressly provided for in the pre-existing partnership agreements; or
              (vi) a transaction, except as the Commission may otherwise provide for by rule for the protection of investors, in which the securities offered to investors are securities of another entity that are reported under a transaction reporting plan declared effective before January 1, 1991, by the Commission under Section 11A of the Act;* if:
              a. such other entity was formed, and such class of securities was reported and regularly traded, not less than 12 months before the date on which soliciting material is mailed to investors; and
              b. the securities of that entity issued to investors in the transaction do not exceed 20 percent of the total outstanding securities of the entity, exclusive of any securities of such class held by or for the account of the entity or a subsidiary of the entity.
              (vii) a transaction involving only entities registered under the Investment Company Act of 1940 or any Business Development Company as defined in Section 2(a)(48) of that Act.
              (11) Management fee — a fee paid to the sponsor, general partner(s), their affiliates, or other persons for management and administration of a direct participation program.
              (12) Organization and offering expenses — expenses incurred in preparing a direct participation program for registration and subsequently offering interests in the program to the public, including all forms of compensation paid to underwriters, broker/dealers, or affiliates thereof in connection with the offering of the program.
              (13) Participant — the purchaser of an interest in a direct participation program.
              (14) Person — any natural person, partnership, corporation, association or other legal entity.
              (15) Prospectus — a prospectus as defined by Section 2(10) of the Securities Act of 1933, as amended, an offering circular as described in SEC Rule 256 under the Securities Act of 1933, or, in the case of an intrastate offering, any document utilized for the purpose of announcing the offer and sale of securities to the public.
              (16) Registration statement — a registration statement as defined by Section 2(8) of the Securities Act of 1933, as amended, a notification on Form 1-A filed with the Commission pursuant to the provisions of SEC Rule 255 under the Securities Act of 1933 and, in the case of an intrastate offering, any document initiating a registration or similar process for an issue of securities which is required to be filed by the laws or regulations of any state.
              (17) Solicitation expenses — direct marketing expenses incurred by a member, in connection with a limited partnership rollup transaction such as telephone calls, broker/dealer fact sheets, members' legal and other fees related to the solicitation, as well as direct solicitation compensation to members.
              (18) Sponsor — a person who directly or indirectly provides management services for a direct participation program whether as general partner, pursuant to contract or otherwise.
              (19) Transaction costs — costs incurred in connection with a limited partnership rollup transaction, including printing and mailing the proxy, prospectus or other documents; legal fees not related to the solicitation of votes or tenders; financial advisory fees; investment banking fees; appraisal fees; accounting fees; independent committee expenses; travel expenses; and all other fees related to the preparatory work of the transaction, but not including costs that would have otherwise been incurred by the subject limited partnerships in the ordinary course of business or solicitation expenses.
              (b) Requirements
              (1) Application
              No member or person associated with a member shall participate in a public offering of a direct participation program, a limited partnership rollup transaction or, where expressly provided below, a real estate investment trust as defined in Rule 2340 (d)(4) ("REIT"), except in accordance with this paragraph (b), provided however, this paragraph (b) shall not apply to an initial or secondary public offering of or a secondary market transaction in a unit, depositary receipt or other interest in a direct participation program that complies with subparagraph (2)(D).
              (2) Suitability
              (A) A member or person associated with a member shall not underwrite or participate in a public offering of a direct participation program unless standards of suitability have been established by the program for participants therein and such standards are fully disclosed in the prospectus and are consistent with the provisions of subparagraph (B).
              (B) In recommending to a participant the purchase, sale or exchange of an interest in a direct participation program, a member or person associated with a member shall:
              (i) have reasonable grounds to believe, on the basis of information obtained from the participant concerning his investment objectives, other investments, financial situation and needs, and any other information known by the member or associated person, that:
              a. the participant is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the prospectus, including the tax benefits where they are a significant aspect of the program;
              b. the participant has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and
              c. the program is otherwise suitable for the participant; and
              (ii) maintain in the files of the member documents disclosing the basis upon which the determination of suitability was reached as to each participant.
              (C) Notwithstanding the provisions of subparagraphs (A) and (B) hereof, no member shall execute any transaction in direct participation program in a discretionary account without prior written approval of the transaction by the customer.
              (D) Subparagraphs (A) and (B), and, only in situations where the member is not affiliated with the direct participation program, subparagraph (C) shall not apply to:
              (i) a secondary public offering of or a secondary market transaction in a unit, depositary receipt, or other interest in a direct participation program that is listed on a national securities exchange; or
              (ii) an initial public offering of a unit, depositary receipt or other interest in a direct participation program for which an application for listing on a national securities exchange has been approved by such exchange and the applicant makes a good faith representation that it believes such listing on an exchange will occur within a reasonable period of time following the formation of the program.
              (3) Disclosure
              (A) Prior to participating in a public offering of a direct participation program or REIT, a member or person associated with a member shall have reasonable grounds to believe, based on information made available to him by the sponsor through a prospectus or other materials, that all material facts are adequately and accurately disclosed and provide a basis for evaluating the program.
              (B) In determining the adequacy of disclosed facts pursuant to subparagraph (A) hereof, a member or person associated with a member shall obtain information on material facts relating at a minimum to the following, if relevant in view of the nature of the program:
              (i) items of compensation;
              (ii) physical properties;
              (iii) tax aspects;
              (iv) financial stability and experience of the sponsor;
              (v) the program's conflict and risk factors; and
              (vi) appraisals and other pertinent reports.
              (C) For purposes of subparagraphs (A) or (B) hereof, a member or person associated with a member may rely upon the results of an inquiry conducted by another member or members, provided that:
              (i) the member or person associated with a member has reasonable grounds to believe that such inquiry was conducted with due care;
              (ii) the results of the inquiry were provided to the member or person associated with a member with the consent of the member or members conducting or directing the inquiry; and
              (iii) no member that participated in the inquiry is a sponsor of the program or an affiliate of such sponsor.
              (D) Prior to executing a purchase transaction in a direct participation program or a REIT, a member or person associated with a member shall inform the prospective participant of all pertinent facts relating to the liquidity and marketability of the program or REIT during the term of the investment. Included in the pertinent facts shall be information regarding whether the sponsor has offered prior programs or REITs in which disclosed in the offering materials was a date or time period at which the program or REIT might be liquidated, and whether the prior program(s) or REIT(s) in fact liquidated on or around that date or during the time period.
              (4) Organization and Offering Expenses
              (A) No member or person associated with a member shall underwrite or participate in a public offering of a direct participation program or REIT if the organization and offering expenses are not fair and reasonable, taking into consideration all relevant factors.
              (B) In determining the fairness and reasonableness of organization and offering expenses that are deemed to be in connection with or related to the distribution of the public offering for purposes of subparagraph (A) hereof, the arrangements shall be presumed to be unfair and unreasonable if:
              (i) organization and offering expenses, as defined in subparagraph (b)(4)(C), in which a member or an affiliate of a member is a sponsor, exceed an amount that equals fifteen percent of the gross proceeds of the offering;
              (ii) the total amount of all items of compensation from whatever source, including compensation paid from offering proceeds and in the form of "trail commissions," payable to underwriters, broker/dealers, or affiliates thereof exceeds an amount that equals ten percent of the gross proceeds of the offering (excluding securities purchased through the reinvestment of dividends);
              (iii) any compensation in connection with an offering is to be paid to underwriters, broker/dealers, or affiliates thereof out of the proceeds of the offering prior to the release of such proceeds from escrow, provided, however, that any such payment from sources other than proceeds of the offering shall be made only on the basis of bona fide transactions;
              (iv) commissions or other compensation are to be paid or awarded either directly or indirectly, to any person engaged by a potential investor for investment advice as an inducement to such advisor to advise the purchaser of interests in a particular program or REIT, unless such person is a registered broker/dealer or a person associated with such a broker/dealer;
              (v) the program or REIT provides for compensation of an indeterminate nature to be paid to members or persons associated with members for sales of the program or REIT, or for services of any kind rendered in connection with or related to the distribution thereof, including, but not necessarily limited to, the following: a percentage of the management fee, a profit sharing arrangement, brokerage commissions, an over-riding royalty interest, a net profits interest, a percentage of revenues, a reversionary interest, a working interest, a security or right to acquire a security having an indeterminate value, or other similar incentive items;
              (vi) the program or REIT charges a sales load or commission on securities that are purchased through the reinvestment of dividends, unless the registration statement registering the securities under the Securities Act of 1933 became effective prior to August 6, 2008; or
              (vii) the member has received reimbursement for due diligence expenses that are not included in a detailed and itemized invoice, unless the amount of the reimbursement is included in the calculation of underwriting compensation as a non-accountable expense allowance, which when aggregated with all other such non-accountable expenses, does not exceed three percent of offering proceeds.
              (C) The organization and offering expenses subject to the limitations in subparagraph (b)(4)(B)(i) above include the following:
              (i) issuer expenses that are reimbursed or paid for with offering proceeds, including overhead expenses, which issuer expenses include, but are not limited to, expenses for:
              a. assembling, printing and mailing offering materials, processing subscription agreements, generating advertising and sales materials;
              b. legal and accounting services provided to the sponsor or issuer;
              c. salaries and non-transaction-based compensation paid to employees or agents of the sponsor or issuer for performing services for the issuer;
              d. transfer agents, escrow holders depositories, engineers and other experts; and
              e. registration and qualification of securities under federal and state law, including taxes and fees and NASD fees;
              (ii) underwriting compensation, which includes but is not limited to items of compensation listed in Rule 2710 (c)(3) including payments:
              a. to any wholesaling or retailing firm that is engaged in the solicitation, marketing, distribution or sales of the program or REIT securities;
              b. to any registered representative of a member who receives transaction-based compensation in connection with the offering, except to the extent that such compensation has been included in a. above;
              c. to any registered representative who is engaged in the solicitation, marketing, distribution or sales of the program or REIT securities, except:
              1. to the extent that such compensation has been included in a. above;
              2. for a registered representative whose functions in connection with the offering are solely and exclusively clerical or ministerial; and
              3. for a registered representative whose sales activities are de minimis and incidental to his or her clerical or ministerial job functions; or
              d. for training and education meetings, legal services provided to a member in connection with the offering, advertising and sales material generated by the member and contributions to conferences and meetings held by non-affiliated members for their registered representatives.
              (iii) due diligence expenses incurred when a member affirmatively discharges its responsibilities to ensure that all material facts pertaining to a program or REIT are adequately and accurately disclosed in the offering document.
              (D) Notwithstanding subparagraphs (b)(4)(C)(ii)b. and c. above, for every program or REIT filed with the Corporate Financing Department (the "Department") for review, the Department shall, based upon the information provided, make a determination as to whether some portion of a registered representative's non-transaction-based compensation should not be deemed to be underwriting compensation if the registered representative is either:
              (i) a dual employee of a member and the sponsor, issuer or other affiliate with respect to a program or REIT with ten or fewer registered representatives engaged in wholesaling, in which instance the Department may make such determination with respect to the ten or fewer registered representatives engaged in wholesaling; or
              (ii) a dual employee of a member and the sponsor, issuer or other affiliate who is one of the top ten highest paid executives based on non-transaction-based compensation in any program or REIT.
              (E) All items of compensation paid by the program or REIT directly or indirectly from whatever source to underwriters, brokers/dealers, or affiliates thereof, including, but not limited to, sales commissions, wholesaling fees, due diligence expenses, other underwriter's expenses, underwriter's counsel's fees, securities or rights to acquire securities, rights of first refusal, consulting fees, finder's fees, investor relations fees, and any other items of compensation for services of any kind or description, which are deemed to be in connection with or related to the public offering, shall be taken into consideration in computing the amount of compensation for purposes of determining compliance with the provisions of subparagraphs (A) and (B).
              (F) The determination of whether compensation paid to underwriters, broker/dealers, or affiliates thereof is in connection with or related to a public offering, for purposes of this subparagraph (4), shall be made on the basis of such factors as the timing of the transaction, the consideration rendered, the investment risk, and the role of the member or affiliate in the organization, management and direction of the enterprise in which the sponsor is involved.
              (i) An affiliate of a member which acts or proposes to act as a general partner, associate general partner, or other sponsor of a program or REIT shall be presumed to be bearing investment risk for purposes of this paragraph (b) if the affiliate:
              a. is subject to potential liability as a general partner to the same extent as any other general partner;
              b. is not indemnified against potential liability as a general partner to any greater or different extent than any other general partner for its actions or those of any other general partner;
              c. has a net worth equal to at least five percent of the net proceeds of the public offering or $1.0 million, whichever is less; provided, however, that the computation of the net worth shall not include an interest in the program offered but may include net worth applied to satisfy the requirements of this paragraph (b) with respect to other programs or REITs; and
              d. agrees to maintain net worth as required by subparagraph c. above under its control until the earlier of the removal or withdrawal of the affiliate as a general partner, associate general partner, or other sponsor, or the dissolution of the program or REIT.
              (ii) For purposes of determining the factors to be utilized in computing compensation derived from securities received in connection with a public offering, the guidelines set forth in Rule 2710 shall govern to the extent applicable.
              (G) Subject to the limitations on direct and indirect non-cash compensation provided under subparagraph (C), no member shall accept any cash compensation unless all of the following conditions are satisfied:
              (i) all compensation is paid directly to the member in cash and the distribution, if any, of all compensation to the member's associated persons is controlled solely by the member;
              (ii) the value of all compensation to be paid in connection with an offering is included as compensation to be received in connection with the offering for purposes of subparagraph (B);
              (iii) arrangements relating to the proposed payment of all compensation are disclosed in the prospectus or similar offering document;
              (iv) the value of all compensation paid in connection with an offering is reflected on the books and records of the recipient member as compensation received in connection with the offering; and
              (v) no compensation paid in connection with an offering is directly or indirectly related to any non-cash compensation or sales incentive items provided by the member to its associated persons.
              (5) Valuation for Customer Account Statements
              No member may participate in a public offering of direct participation program or REIT securities unless the general partner or sponsor of the program or REIT will disclose in each annual report distributed to investors pursuant to Section 13(a) of the Act a per share estimated value of the direct participation program securities, the method by which it was developed, and the date of the data used to develop the estimated value.
              (6) Participation in Rollups
              (A) No member or person associated with a member shall participate in the solicitation of votes or tenders from limited partners in connection with a limited partnership rollup transaction, irrespective of the form of the resulting entity (i.e., a partnership, real estate investment trust or corporation), unless any compensation received by the member:
              (i) is payable and equal in amount regardless of whether the limited partner votes affirmatively or negatively in the proposed limited partnership rollup transaction;
              (ii) in the aggregate, does not exceed 2% of the exchange value of the newly-created securities; and
              (iii) is paid regardless of whether the limited partners reject the proposed limited partnership rollup transaction.
              (B) No member or person associated with a member shall participate in the solicitation of votes or tenders from limited partners in connection with a limited partnership rollup transaction unless the general partner(s) or sponsor(s) proposing the limited partnership rollup transaction agrees to pay all solicitation expenses related to the limited partnership rollup transaction, including all preparatory work related thereto, in the event the limited partnership rollup transaction is rejected.
              (C) No member or person associated with a member shall participate in any capacity in a limited partnership rollup transaction if the transaction is unfair or unreasonable.
              (i) A limited partnership rollup transaction will be presumed not to be unfair or unreasonable if the limited partnership rollup transaction provides for the right of dissenting limited partners:
              a. to receive compensation for their limited partnership units based on an appraisal of the limited partnership assets performed by an independent appraiser unaffiliated with the sponsor or general partner of the program that values the assets as if sold in an orderly manner in a reasonable period of time, plus or minus other balance sheet items, and less the cost of sale or refinancing and in a manner consistent with the appropriate industry practice. Compensation to dissenting limited partners of limited partnership rollup transactions may be cash, secured debt instruments, unsecured debt instruments, or freely tradeable securities; provided, however, that:
              1. limited partnership rollup transactions which utilize debt instruments as compensation must provide for a trustee and an indenture to protect the rights of the debt holders and provide a rate of interest equal to at least 120% of the applicable federal rate as determined in accordance with Section 1274 of the Internal Revenue Code of 1986;
              2. limited partnership rollup transactions which utilize unsecured debt instruments as compensation, in addition to the requirements of subparagraph 1., must limit total leverage to 70% of the appraised value of the assets;
              3. all debt securities must have a term no greater than 8 years and provide for prepayment with 80% of the net proceeds of any sale or refinancing of the assets previously owned by the partnership entitles subject to the limited partnership rollup transaction or any part thereof; and
              4. freely tradeable securities used as compensation to dissenting limited partners must be previously listed on a national securities exchange prior to the limited partnership rollup transaction, and the number of securities to be received in return for limited partnership interests must be determined in relation to the average last sale price of the freely tradeable securities in the 20-day period following the date of the meeting at which the vote on the limited partnership rollup transaction occurs. If the issuer of the freely tradeable securities is affiliated with the sponsor or general partner, newly issued securities to be used as compensation to dissenting limited partners shall not represent more than 20 percent of the issued and outstanding shares of that class of securities after giving effect to the issuance. For purposes of the preceding sentence, a sponsor or general partner is "affiliated" with the issuer of the freely tradeable securities if the sponsor or general partner receives any material compensation from the issuer or its affiliates in conjunction with the limited partnership rollup transaction or the purchase of the general partner's interest; provided, however, that nothing herein shall restrict the ability of a sponsor or general partner to receive any payment for its equity interests and compensation as otherwise provided by this subparagraph.
              b. to receive or retain a security with substantially the same terms and conditions as the security originally held. Securities received or retained will be considered to have the same terms and conditions as the security originally held if:
              1. there is no material adverse change to dissenting limited partners' rights with respect to the business plan or the investment, distribution and liquidation policies of the limited partnership; and
              2. the dissenting limited partners receive substantially the same rights, preferences and priorities as they had pursuant to the security originally held; or
              c. to receive other comparable rights including, but not limited to:
              1. approval of the limited partnership rollup transaction by 75% of the outstanding units of each of the individual participating limited partnerships and the exclusion of any individual limited partnership from the limited partnership rollup transaction which fails to reach the 75% threshold. The third-party appointed to tabulate votes and dissents pursuant to subparagraph (C)(ii)b.4. hereof shall submit the results of such tabulation to the Association;
              2. review of the limited partnership rollup transaction by an independent committee of persons not affiliated with the general partner(s) or sponsor. Whenever utilized, the independent committee:
              A. shall be approved by a majority of the outstanding securities of each of the participating partnerships;

              B. shall have access to the books and records of the partnerships;

              C. shall prepare a report to the limited partners subject to the limited partnership rollup transaction that presents its findings and recommendations, including any minority views;

              D. shall have the authority to negotiate the proposed transaction with the general partner or sponsor on behalf of the limited partners, but not the authority to approve the transaction on behalf of the limited partners;

              E. shall not deliberate for a period longer than 60 days, although extensions will be permitted if unanimously agreed upon by the members of the independent committee or if approved by the Association;

              F. may be compensated and reimbursed by the limited partnerships subject to the limited partnership rollup transaction and shall have the ability to retain independent counsel and financial advisors to represent all limited partners at the limited partnerships' expense provided the fees are reasonable; and

              G. shall be entitled to indemnification to the maximum extent permitted by law from the limited partnerships subject to the limited partnership rollup transaction from claims, causes of action or lawsuits related to any action or decision made in furtherance of their responsibilities; provided, however, that general partners or sponsors may also agree to indemnify the independent committee; or

              3. any other comparable rights for dissenting limited partners proposed by general partners or sponsors, provided, however, that the general partner(s) or sponsor demonstrates to the satisfaction of the Association or, if the Association determines appropriate, to the satisfaction of an independent committee, that the rights proposed are comparable.
              (ii) Regardless of whether a limited partnership rollup transaction is in compliance with subparagraph (C)(i), a limited partnership rollup transaction will be presumed to be unfair and unreasonable:
              a. if the general partner(s):
              1. converts an equity interest in any limited partnership(s) subject to a limited partnership rollup transaction for which consideration was not paid and which was not otherwise provided for in the limited partnership agreement and disclosed to limited partners, into a voting interest in the new entity (provided, however, an interest originally obtained in order to comply with the provisions of Internal Revenue Service Revenue Proclamation 89-12 may be converted);
              2. fails to follow the valuation provisions, if any, in the limited partnership agreements of the subject limited partnerships when valuing their limited partnership interests; or
              3. utilizes a future value of their equity interest in the limited partnership rather than the current value of their equity interest, as determined by an appraisal conducted in a manner consistent with subparagraph (C)(i)a., when determining their interest in the new entity;
              b. as to voting rights, if:
              1. the voting rights in the entity resulting from a limited partnership rollup transaction do not generally follow the original voting rights of the limited partnerships participating in the limited partnership rollup transaction; provided, however, that changes to voting rights may be effected if the Association determines that such changes are not unfair or if the changes are approved by an independent committee;
              2. a majority of the interests in an entity resulting from a limited partnership rollup transaction may not, without concurrence by the sponsor, general partner(s), board of directors, trustee, or similar governing entity, depending on the form of entity and to the extent not inconsistent with applicable state law, vote to:
              A. amend the limited partnership agreement, articles of incorporation or by-laws, or indenture;

              B. dissolve the entity;

              C. remove the general partner, board of directors, trustee or similar governing entity, and elect a new general partner, board of directors, trustee or similar governing entity; or

              D. approve or disapprove the sale of substantially all of the assets of the entity;

              3. the general partner(s) or sponsor(s) proposing a limited partnership rollup transaction do not provide each limited partner with a document which instructs the limited partner on the proper procedure for voting against or dissenting from the transaction; or
              4. the general partner(s) or sponsor(s) does not utilize an independent third party to receive and tabulate all votes and dissents in connection with the limited partnership rollup transaction, and require that the third party make the tabulation available to the general partner and any limited partner upon request at any time during and after voting occurs;
              c. as to transaction costs, if:
              1. transaction costs of a rejected limited partnership rollup transaction are not apportioned between general and limited partners of the subject limited partnerships according to the final vote on the proposed transaction as follows:
              A. the general partner(s) or sponsor(s) bear all transaction costs in proportion to the total number of abstentions and votes to reject the limited partnership rollup transaction; and

              B. limited partners bear transaction costs in proportion to the number of votes to approve the limited partnership rollup transaction; or

              2. individual limited partnerships that do not approve a limited partnership rollup transaction are required to pay any of the transaction costs, and the general partner or sponsor is not required to pay the transaction costs on behalf of the non-approving limited partnerships, in a limited partnership rollup transaction in which one or more limited partnerships determines not to approve the transaction, but where the transaction is consummated with respect to one or more approving limited partnerships; or
              d. as to fees of general partners, if:
              1. general partners are not prevented from receiving both unearned management fees discounted to a present value (if such fees were not previously provided for in the limited partnership agreement and disclosed to limited partners) and new asset-based fees;
              2. property management fees and other general partner fees are inappropriate, unreasonable and more than, or not competitive with, what would be paid to third parties for performing similar services; or
              3. changes in fees which are substantial and adverse to limited partners are not approved by an independent committee according to the facts and circumstances of each transaction.
              (c) Non-Cash Compensation
              (1) Definitions
              The terms "compensation," "non-cash compensation" and "offeror" as used in this Section (c) of this Rule shall have the following meanings:
              (A) "Compensation" shall mean cash compensation and non-cash compensation.
              (B) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of direct participation securities that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.
              (C) "Offeror" shall mean an issuer, sponsor, an adviser to an issuer or sponsor, an underwriter and any affiliated person of such entities.
              (2) Restriction on Non-Cash Compensation
              In connection with the sale and distribution of direct participation program or REIT securities, no member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Non-cash compensation arrangements are limited to the following:
              (A) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors1 and are not conditioned on achievement of a sales target.
              (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
              (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
              (i) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not conditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by subparagraph (c)(2)(D);
              (ii) the location is appropriate to the purpose of the meeting, which shall mean a United States office of the offeror or the member holding the meeting, or a facility located in the vicinity of such office, or a United States regional location with respect to meetings of associated persons who work within that region or, with respect to meetings with direct participation programs or REITs, a United States location at which a significant or representative asset of the program or REIT is located;
              (iii) the payment or reimbursement is not applied to the expenses of guests of the associated person; and
              (iv) the payment or reimbursement by the offeror is not conditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by subparagraph (c)(2)(D).
              (D) Non-cash compensation arrangements between a member and its associated persons or a company that controls a member company and the member's associated persons, provided that no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and
              (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in subparagraph (c)(2)(D).
              A member shall maintain records of all non-cash compensation received by the member or its associated persons in arrangements permitted by subparagraphs (c)(2)(C)–(E). The records shall include: the names of the offerors, non-members or other members making the non-cash compensation contributions; the names of the associated persons participating in the arrangements; the nature and value of non-cash compensation received; the location of training and education meetings; and any other information that proves compliance by the member and its associated persons with subparagraph (c)(2)(C)–(E).
              (d) Exemptions
              Pursuant to the Rule 9600 Series, the Association may exempt a member or person associated with a member from the provisions of this Rule for good cause shown.



              * Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991 for the Nasdaq National Market System, the New York Stock Exchange, and the American Stock Exchange.

              ** Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991 for the Nasdaq National Market System, the New York Stock Exchange, and the American Stock Exchange.

              1The current annual amount fixed by the Board of Governors is $100.

              Amended by SR-NASD-2005-114 eff. Aug. 6, 2008.
              Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
              Amended by SR-NASD-2003-68 eff. April 7, 2003.
              Amended by SR-NASD-00-13 eff. April 16, 2001.
              Amended by SR-NASD-97-28 eff. Aug. 7, 1997.
              Amended by SR-NASD-95-21 eff. July 11, 1995.
              Amended by SR-NASD-95-19 eff. July 3, 1995.
              Amended by SR-NASD-93-03 eff. Nov. 1, 1994.
              Amended to incorporate Appendix F by SR-NASD-93-48 eff. Mar. 8, 1994.
              Amended SR-NASD-81-19 eff. Sept. 16, 1982; Jan. 17, 1984; SR-NASD-84-2 eff. July 3, 1984; SR-NASD-85-26 eff. Nov. 5. 1985; SR-NASD-86-21 eff. Sept. 15, 1986; SR-NASD-86-22 eff. Jan. 1, 1989; SR-NASD-84-10 eff. Feb. 1, 1989; SR-NASD-91-24 eff. Aug. 19, 1991; SR-NASD-93-29 eff. June 23, 1993.
              Adopted by SR-NASD-77-8 eff. July 14, 1980.

              Selected Notices: 73-50, 77-03, 78-12, 81-34, 82-14, 82-50, 82-51, 82-52, 83-13, 84-28, 84-64, 85-17, 85-29, 86-66, 86-81, 88-88, 89-16, 91-56, 91-78, 93-15, 93-44, 94-24, 94-70, 95-63, 95-64, 08-35.

            • 2820. Variable Contracts of an Insurance Company

              This rule is no longer applicable. NASD Rule 2820 has been superseded by FINRA Rule 2320. Please consult the appropriate FINRA Rule.

              (a) Application
              This Rule shall apply exclusively (and in lieu of Rule 2830) to the activities of members in connection with variable contracts, to the extent such activities are subject to regulation under the federal securities laws.

              (b) Definitions

              (1) The term "purchase payment" as used throughout this Rule shall mean the consideration paid at the time of each purchase or installment for or under the variable contract.

              (2) The term "variable contracts" shall mean contracts providing for benefits or values which may vary according to the investment experience of any separate or segregated account or accounts maintained by an insurance company.

              (3) The terms "affiliated member," "compensation," "cash compensation," "non-cash compensation" and "offeror" as used in paragraph (h) of this Rule shall have the following meanings:

              (A) "Affiliated Member" shall mean a member which, directly or indirectly, controls, is controlled by, or is under common control with a non-member company.

              (B) "Compensation" shall mean cash compensation and non-cash compensation.

              (C) "Cash compensation" shall mean any discount, concession, fee, service fee, commission, asset based sales charge, loan, override, or cash employee benefit received in connection with the sale and distribution of variable contracts.

              (D) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of variable contracts that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.

              (E) "Offeror" shall mean an insurance company, a separate account of an insurance company, an investment company that funds a separate account, any adviser to a separate account of an insurance company or an investment company that funds a separate account, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities.

              (c) Receipt of Payment
              No member shall participate in the offering or in the sale of a variable contract on any basis other than at a value to be determined following receipt of payment therefor in accordance with the provisions of the contract, and, if applicable, the prospectus, the Investment Company Act of 1940 and applicable rules thereunder. Payments need not be considered as received until the contract application has been accepted by the insurance company, except that by mutual agreement it may be considered to have been received for the risk of the purchaser when actually received.

              (d) Transmittal
              Every member who receives applications and/or purchase payments for variable contracts shall transmit promptly to the issuer all such applications and at least that portion of the purchase payment required to be credited to the contract.

              (e) Selling Agreements
              No member who is a principal underwriter as defined in the Investment Company Act of 1940 may sell variable contracts through another broker/dealer unless (1) such broker/dealer is a member, and (2) there is a sales agreement in effect between the parties. Such sales agreement must provide that the sales commission be returned to the issuing insurance company if the variable contract is tendered for redemption within seven business days after acceptance of the contract application.

              (f) Redemption
              No member shall participate in the offering or in the sale of a variable contract unless the insurance company, upon receipt of a request in proper form for partial or total redemption in accordance with the provisions of the contract undertakes to make prompt payment of the amounts requested and payable under the contract in accordance with the terms thereof, and, if applicable, the prospectus, the Investment Company Act of 1940 and applicable rules thereunder.

              (g) Member Compensation
              In connection with the sale and distribution of variable contracts:
              (1) Except as described below, no associated person of a member shall accept any compensation from anyone other than the member with which the person is associated. This requirement will not prohibit arrangements where a non-member company pays compensation directly to associated persons of the member, provided that:

              (A) the arrangement is agreed to by the member;

              (B) the member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "no-action" letter issued by the Commission that applies to the specific fact situation of the arrangement;

              (C) the receipt by associated persons of such compensation is treated as compensation received by the member for purposes of the Rules of the Association; and

              (D) the record keeping requirement in paragraph (g)(3) is satisfied.

              (2) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.

              (3) Except for items as described in subparagraphs (g)(4)(A) and (B), a member shall maintain records of all compensation received by the member or its associated persons from offerors. The records shall include the names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation received.

              (4) No member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Notwithstanding the provisions of paragraph (g)(1), the following non-cash compensation arrangements are permitted:

              (A) Gifts that do not exceed an annual amount per person fixed periodically by the Association1 and are not preconditioned on achievement of a sales target.
              (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.

              (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:

              (i) the record keeping requirement in paragraph (g)(3) is satisfied;

              (ii) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph (g)(4)(D);

              (iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;

              (iv) the payment or reimbursement is not applied to the expenses of guests of the associated person; and

              (v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph (g)(4)(D).

              (D) Non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member, provided that:

              (i) the member's or non-member's non-cash compensation arrangement, if it includes variable contract securities, is based on the total production of associated persons with respect to all variable contract securities distributed by the member;

              (ii) the non-cash compensation arrangement requires that the credit received for each variable contract security is equally weighted;

              (iii) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and

              (iv) the record keeping requirement in paragraph (g)(3) is satisfied.

              (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in subparagraph (g)(4)(D).


              1 The current annual amount fixed by the Association is $100.

              Amended by SR-NASD-98-14 eff. April 1, 2000.
              Amended by SR-NASD-97-35 eff. Jan. 1, 1999.
              Amended eff. May 1, 1976.
              Added eff. Feb. 8, 1971.

              Selected Notices: 75-68, 88-17, 91-25, 91-68, 94-67, 95-56, 96-52, 96-86, 97-27, 97-48, 97-50, 98-75, 99-35, 99-55, 99-103, 00-44, 01-63.

            • 2821. Members' Responsibilities Regarding Deferred Variable Annuities

              This rule is no longer applicable. NASD Rule 2821 has been superseded by FINRA Rule 2330. Please consult the appropriate FINRA Rule.

              (a) General Considerations
              (1) Application
              This Rule applies to recommended purchases and exchanges of deferred variable annuities and recommended initial subaccount allocations. This Rule does not apply to reallocations among subaccounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity. This Rule also does not apply to deferred variable annuity transactions made in connection with any tax-qualified, employer-sponsored retirement or benefit plan that either is defined as a "qualified plan" under Section 3(a)(12)(C) of the Exchange Act or meets the requirements of Internal Revenue Code Sections 403(b), 457(b), or 457(f), unless, in the case of any such plan, a member or person associated with a member makes recommendations to an individual plan participant regarding a deferred variable annuity, in which case the Rule would apply as to the individual plan participant to whom the member or person associated with the member makes such recommendations.
              (2) Creation, Storage, and Transmission of Documents
              For purposes of this Rule, documents may be created, stored, and transmitted in electronic or paper form, and signatures may be evidenced in electronic or other written form.
              (3) Definitions
              For purposes of this Rule, the term "registered principal" shall mean a person registered as a General Securities Sales Supervisor (Series 9/10), a General Securities Principal (Series 24) or an Investment Company Products/Variable Contracts Principal (Series 26), as applicable.
              (b) Recommendation Requirements
              (1) No member or person associated with a member shall recommend to any customer the purchase or exchange of a deferred variable annuity unless such member or person associated with a member has a reasonable basis to believe
              (A) that the transaction is suitable in accordance with Rule 2310 and, in particular, that there is a reasonable basis to believe that
              (i) the customer has been informed, in general terms, of various features of deferred variable annuities, such as the potential surrender period and surrender charge; potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59½; mortality and expense fees; investment advisory fees; potential charges for and features of riders; the insurance and investment components of deferred variable annuities; and market risk;
              (ii) the customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit; and
              (iii) the particular deferred variable annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or exchange of the deferred variable annuity, and riders and similar product enhancements, if any, are suitable (and, in the case of an exchange, the transaction as a whole also is suitable) for the particular customer based on the information required by paragraph (b)(2) of this Rule; and
              (B) in the case of an exchange of a deferred variable annuity, the exchange also is consistent with the suitability determination required by paragraph (b)(1)(A) of this Rule, taking into consideration whether
              (i) the customer would incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits (such as death, living, or other contractual benefits), or be subject to increased fees or charges (such as mortality and expense fees, investment advisory fees, or charges for riders and similar product enhancements);
              (ii) the customer would benefit from product enhancements and improvements; and
              (iii) the customer has had another deferred variable annuity exchange within the preceding 36 months.
              The determinations required by this paragraph shall be documented and signed by the associated person recommending the transaction.
              (2) Prior to recommending the purchase or exchange of a deferred variable annuity, a member or person associated with a member shall make reasonable efforts to obtain, at a minimum, information concerning the customer's age, annual income, financial situation and needs, investment experience, investment objectives, intended use of the deferred variable annuity, investment time horizon, existing assets (including investment and life insurance holdings), liquidity needs, liquid net worth, risk tolerance, tax status, and such other information used or considered to be reasonable by the member or person associated with the member in making recommendations to customers.
              (3) Promptly after receiving information necessary to prepare a complete and correct application package for a deferred variable annuity, a person associated with a member who recommends the deferred variable annuity shall transmit the complete and correct application package to an office of supervisory jurisdiction of the member.
              (c) Principal Review and Approval
              Prior to transmitting a customer's application for a deferred variable annuity to the issuing insurance company for processing, but no later than seven business days after an office of supervisory jurisdiction of the member receives a complete and correct application package, a registered principal shall review and determine whether he or she approves of the recommended purchase or exchange of the deferred variable annuity.
              A registered principal shall approve the recommended transaction only if he or she has determined that there is a reasonable basis to believe that the transaction would be suitable based on the factors delineated in paragraph (b) of this Rule.
              The determinations required by this paragraph shall be documented and signed by the registered principal who reviewed and then approved or rejected the transaction.
              (d) Supervisory Procedures
              In addition to the general supervisory and recordkeeping requirements of Rules 3010, 3012, 3013, and 3110, a member must establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the standards set forth in this Rule. The member also must (1) implement surveillance procedures to determine if any of the member's associated persons have rates of effecting deferred variable annuity exchanges that raise for review whether such rates of exchanges evidence conduct inconsistent with the applicable provisions of this Rule, other applicable NASD rules, or the federal securities laws ("inappropriate exchanges") and (2) have policies and procedures reasonably designed to implement corrective measures to address inappropriate exchanges and the conduct of associated persons who engage in inappropriate exchanges.
              (e) Training
              Members shall develop and document specific training policies or programs reasonably designed to ensure that associated persons who effect and registered principals who review transactions in deferred variable annuities comply with the requirements of this Rule and that they understand the material features of deferred variable annuities, including those described in paragraph (b)(1)(A)(i) of this Rule.

              • • • Supplementary Material: --------------

              .01 Under Rule 2821, a member that is permitted to maintain customer funds under SEA Rules 15c3-1 and 15c3-3 may, prior to the member's principal approval of the deferred variable annuity, deposit and maintain customer funds for a deferred variable annuity in an account that meets the requirements of SEA Rule 15c3-3.

              .02 If a customer provides a member that is permitted to hold customer funds with a lump sum or single check made payable to the member (as opposed to being made payable to the insurance company) and requests that a portion of the funds be applied to the purchase of a deferred variable annuity and the rest of the funds be applied to other types of products, Rule 2821 would not prohibit the member from promptly applying those portions designated for purchasing products other than a deferred variable annuity to such use. A member that is not permitted to hold customer funds can comply with such requests only through its clearing firm that will maintain customer funds for the intended deferred variable annuity purchase in an account that meets the requirements of SEA Rule 15c3-3. In such circumstances, the checks would need to be made payable to the clearing firm.

              .03 Rule 2821 does not prohibit a member from forwarding a check made payable to the insurance company or, if the member is fully subject to SEA Rule 15c3-3, transferring funds for the purchase of a deferred variable annuity to the insurance company prior to the member's principal approval of the deferred variable annuity, as long as the member fulfills the following requirements: (a) the member must disclose to the customer the proposed transfer or series of transfers of the funds and (b) the member must enter into a written agreement with the insurance company under which the insurance company agrees that, until such time as it is notified of the member's principal approval and is provided with the application or is notified of the member's principal rejection, it will (1) segregate the member's customers' funds in a bank in an account equivalent to the deposit of those funds by a member into a "Special Account for the Exclusive Benefit of Customers" (set up as described in SEA Rules 15c3-3(k)(2)(i) and 15c3-3(f)) to ensure that the customers' funds will not be subject to any right, charge, security interest, lien, or claim of any kind in favor of the member, insurance company, or bank where the insurance company deposits such funds or any creditor thereof or person claiming through them and hold those funds either as cash or any instrument that a broker or dealer may deposit in its Special Reserve Account for the Exclusive Benefit of Customers, (2) not issue the variable annuity contract prior to the member's principal approval, and (3) promptly return the funds to each customer at the customer's request prior to the member's principal approval or upon the member's rejection of the application.

              .04 A member is not prohibited from forwarding a check provided by the customer for the purpose of purchasing a deferred variable annuity and made payable to an IRA custodian for the benefit of the customer (or, if the member is fully subject to SEA Rule 15c3-3, funds) to the IRA custodian prior to the member's principal approval of the deferred variable annuity transaction, as long as the member enters into a written agreement with the IRA custodian under which the IRA custodian agrees (a) to forward the funds to the insurance company to complete the purchase of the deferred variable annuity contract only after it has been informed that the member's principal has approved the transaction and (b), if the principal rejects the transaction, to inform the customer, seek immediate instructions from the customer regarding alternative disposition of the funds (e.g., asking whether the customer wants to transfer the funds to another IRA custodian, purchase a different investment, or provide other instructions), and promptly implement the customer's instructions.

              .05 Rule 2821 requires that the member or person associated with a member consider whether the customer has had another deferred variable annuity exchange within the preceding 36 months. Under this provision, a member or person associated with a member must determine whether the customer has had such an exchange at the member and must make reasonable efforts to ascertain whether the customer has had an exchange at any other broker-dealer within the preceding 36 months. An inquiry to the customer as to whether the customer has had an exchange at another broker-dealer within 36 months would constitute a "reasonable effort" in this context. Members shall document in writing both the nature of the inquiry and the response from the customer.

              .06 Rule 2821 requires principal review and approval "[p]rior to transmitting a customer's application for a deferred variable annuity to the issuing insurance company for processing…." In circumstances where an insurance company and its affiliated broker-dealer share office space and/or employees who carry out both the principal review and the issuance process, FINRA will consider the application "transmitted" to the insurance company only when the broker-dealer's principal, acting as such, has approved the transaction, provided that the affiliated broker-dealer and the insurance company have agreed that the insurance company will not issue the contract prior to principal approval by the broker-dealer.

              .07 Rule 2821 does not prohibit using the information required for principal review and approval in the issuance process, provided that the broker-dealer and the insurance company have agreed that the insurance company will not issue the contract prior to principal approval by the broker-dealer. For instance, the rule does not prohibit a broker-dealer from inputting information used as part of its suitability review into a shared database (irrespective of the media used for that database, i.e., paper or electronic) that the insurance company uses for the issuance process, provided that the broker-dealer and the insurance company have agreed that the insurance company will not issue the contract prior to principal approval by the broker-dealer.

              Amended by SR-FINRA-2008-019 eff. Feb. 8, 2010.
              Amended by SR-FINRA-2008-015 eff. April 17, 2008.
              Adopted by SR-NASD-2004-183 eff. May 5, 2008.

              Selected Notices: 07-53, 09-32.

            • 2830. Investment Company Securities

              This rule is no longer applicable. NASD Rule 2830 has been superseded by FINRA Rule 2341. Please consult the appropriate FINRA Rule.

              (a) Application
              This Rule shall apply exclusively to the activities of members in connection with the securities of companies registered under the Investment Company Act of 1940 ("the 1940 Act"); provided however, that Rule 2820 shall apply, in lieu of this Rule, to members' activities in connection with "variable contracts" as defined therein.

              (b) Definitions

              (1) The terms "affiliated member," "compensation," "cash compensation," "non-cash compensation" and "offeror" as used in paragraph (l) of this Rule shall have the following meanings:

              (A) "Affiliated Member" shall mean a member which, directly or indirectly, controls, is controlled by, or is under common control with a non-member company.

              (B) "Compensation" shall mean cash compensation and non-cash compensation.

              (C) "Cash compensation" shall mean any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connection with the sale and distribution of investment company securities.

              (D) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of investment company securities that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.

              (E) "Offeror" shall mean an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the1940 Act) of such entities.

              (2) "Brokerage commissions," as used in paragraph (k), shall not be limited to commissions on agency transactions but shall include underwriting discounts or concessions and fees paid to members in connection with tender offers.

              (3) "Covered account," as used in paragraph (k), shall mean (A) any other investment company or other account managed by the investment adviser of such investment company, or (B) any other account from which brokerage commissions are received or expected as a result of the request or direction of any principal underwriter of such investment company or of any affiliated person (as defined in the 1940 Act) of such investment company or of such underwriter, or of any affiliated person of an affiliated person of such investment company.

              (4) "Person" shall mean "person" as defined in the 1940 Act.

              (5) "Prime rate," as used in paragraph (d), shall mean the most preferential interest rate on corporate loans at large U.S. money center commercial banks.

              (6) "Public offering price" shall mean a public offering price as set forth in the prospectus of the issuing company.

              (7) "Rights of accumulation" as used in paragraph (d), shall mean a scale of reducing sales charges in which the sales charge applicable to the securities being purchased is based upon the aggregate quantity of securities previously purchased or acquired and then owned plus the securities being purchased. The quantity of securities owned shall be based upon:
              (A) The current value of such securities (measured by either net asset value or maximum offering price); or
              (B) Total purchases of such securities at actual offering prices; or
              (C) The higher of the current value or the total purchases of such securities.
              The quantity of securities owned may also include redeemable securities of other registered investment companies having the same principal underwriter.
              (8) "Sales charge" and "sales charges," as used in paragraph (d), shall mean all charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding charges and fees for ministerial, recordkeeping or administrative activities and investment management fees. For purposes of this Rule, members may rely on the sales-related fees and charges disclosed in the prospectus of an investment company.

              (A) An "asset-based sales charge" is a sales charge that is deducted from the net assets of an investment company and does not include a service fee.

              (B) A "deferred sales charge" is any amount properly chargeable to sales or promotional expenses that is paid by a shareholder after purchase but before or upon redemption.

              (C) A "front-end sales charge" is a sales charge that is included in the public offering price of the shares of an investment company.

              (9) "Service fees," as used in paragraph (d), shall mean payments by an investment company for personal service and/or the maintenance of shareholder accounts.

              (10) The terms "underwriter," "principal underwriter," "redeemable security," "periodic payment plan," "open-end management investment company," and unit investment trust," shall have the same definitions used in the 1940 Act.

              (11) A "fund of funds" is an investment company that acquires securities issued by any other investment company registered under the 1940 Act in excess of the amounts permitted under paragraph (A) of Section 12(d)(1) of the 1940 Act. An "acquiring company" in a fund of funds is the investment company that purchases or otherwise acquires the securities of another investment company, and an "acquired company" is the investment company whose securities are acquired.

              (12) "Investment companies in a single complex" are any two or more companies that hold themselves out to investors as related companies for purposes of investment and investor services.

              (c) Conditions for Discounts to Dealers
              No member who is an underwriter of the securities of an investment company shall sell any such security to any dealer or broker at any price other than a public offering price unless such sale is in conformance with Rule 2420 and, if the security is issued by an open-end management company or by a unit investment trust which invests primarily in securities issued by other investment companies, unless a sales agreement is in effect between the parties as of the date of the transaction, which agreement shall set forth the concessions to be received by the dealer or broker.
              (d) Sales Charge
              No member shall offer or sell the shares of any open-end investment company, any closed-end investment company that makes periodic repurchase offers pursuant to Rule 23c-3(b) under the 1940 Act and offers its shares on a continuous basis pursuant to Rule 415(a)(1)(xi) under the Securities Act of 1933, or any "single payment" investment plan issued by a unit investment trust (collectively "investment companies") registered under the 1940 Act if the sales charges described in the prospectus are excessive. Aggregate sales charges shall be deemed excessive if they do not conform to the following provisions:

              (1) Investment Companies Without an Asset-Based Sales Charge
              (A) Aggregate front-end and deferred sales charges described in the prospectus which may be imposed by an investment company without an asset-based sales charge shall not exceed 8.5% of the offering price.
              (B)(i) Rights of accumulation (cumulative quantity discounts) may be made available to any person in accordance with one of the alternative quantity discount schedules provided in subparagraph (C)(i) below, as in effect on the date the right is exercised.
              (ii) If rights of accumulation are not made available on terms at least as favorable as those specified in subparagraph (C)(i) the maximum aggregate sales charge shall not exceed 8.0% of offering price.
              (C)(i) Quantity discounts, if offered, shall be made available on single purchases by any person in accordance with one of the following two alternatives:
              a. A maximum aggregate sales charge of 7.75% on purchases of $10,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more; or

              b. A maximum aggregate sales charge of 7.50% on purchases of $15,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more.

              (ii) If quantity discounts are not made available on terms at least as favorable as those specified in subparagraph (C)(i) the maximum aggregate sales charge shall not exceed:

              a. 7.75% of offering price if the provisions of subparagraphs (B) are met.

              b. 7.25% of offering price if the provisions of subparagraph (B) are not met.

              (D) If an investment company without an asset-based sales charge pays a service fee, the maximum aggregate sales charge shall not exceed 7.25% of the offering price.

              (2) Investment Companies with an Asset-Based Sales Charge
              (A) Except as provided in subparagraphs (C) and (D), the aggregate asset-based, front-end and deferred sales charges described in the prospectus which may be imposed by an investment company with an asset-based sales charge, if the investment company has adopted a plan under which service fees are paid, shall not exceed 6.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of an investment company with multiple classes of shares or between series of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 6.25% of the amount invested.

              (B) Except as provided in subparagraphs (C) and (D), if an investment company with an asset-based sales charge does not pay a service fee, the aggregate asset-based, front-end and deferred sales charges described in the prospectus shall not exceed 7.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of an investment company with multiple classes of shares or between series of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 7.25% of the amount invested.

              (C) The maximum aggregate sales charge on total new gross sales set forth in subparagraphs (A) and (B) may be increased by an amount calculated by applying the appropriate percentages of 6.25% or 7.25% to total new gross sales which occurred after an investment company first adopted an asset-based sales charge until July 7, 1993 plus interest charges on such amount equal to the prime rate plus one percent per annum less any front-end, asset-based or deferred sales charges on such sales or net assets resulting from such sales.

              (D) The maximum aggregate sales charges of an investment company in a single complex, a class of shares issued by an investment company with multiple classes of shares or a separate series of a series investment company, may be increased to include sales of exchanged shares provided that such increase is deducted from the maximum aggregate sales charges of the investment company, class or series which redeemed the shares for the purpose of such exchanges.

              (E) No member shall offer or sell the shares of an investment company with an asset-based sales charge if:

              (i) The amount of the asset-based sales charge exceeds .75 of 1% per annum of the average annual net assets of the investment company; or

              (ii) Any deferred sales charges deducted from the proceeds of a redemption after the maximum cap described in subparagraphs (A), (B), (C) and (D) hereof, has been attained are not credited to the investment company.

              (3) Fund of Funds
              (A) If neither an acquiring company nor an acquired company in a fund of funds structure has an asset-based sales charge, the maximum aggregate front-end and deferred sales charges that may be imposed by the acquiring company, the acquired company and those companies in combination, shall not exceed the rates provided in paragraph (d)(1).

              (B) Any acquiring company or acquired company in a fund of funds structure that has an asset-based sales charge shall individually comply with the requirements of paragraph (d)(2), provided:

              (i) If the acquiring and acquired companies are in a single complex and the acquired fund has an asset-based sales charge, sales made to the acquiring fund shall be excluded from total gross new sales for purposes of acquired fund's calculations under subparagraphs (d)(2)(A) through (d)(2)(D); and

              (ii) If both the acquiring and acquired companies have an asset-based sales charge:

              a. the maximum aggregate asset-based sales charge imposed by the acquiring company, the acquired company and those companies in combination, shall not exceed the rate provided in subparagraph (d)(2)(E)(i); and

              b. the maximum aggregate front-end or deferred sales charges shall not exceed 7.25% of the amount invested, or 6.25% if either company pays a service fee.

              (C) The rates described in subparagraphs (d)(4) and (d)(5) shall apply to the acquiring company, the acquired company and those companies in combination. The limitations of subparagraph (d)(6) shall apply to the acquiring company and the acquired company individually.

              (4) No member or person associated with a member shall, either orally or in writing, describe an investment company as being "no load" or as having "no sales charge" if the investment company has a front-end or deferred sales charge or whose total charges against net assets to provide for sales related expenses and/or service fees exceed .25 of 1% of average net assets per annum.

              (5) No member or person associated with a member shall offer or sell the securities of an investment company if the service fees paid by the investment company, as disclosed in the prospectus, exceed .25 of 1% of its average annual net assets or if a service fee paid by the investment company, as disclosed in the prospectus, to any person who sells its shares exceeds .25 of 1% of the average annual net asset value of such shares.

              (6) No member or person associated with a member shall offer or sell the securities of an investment company if:

              (A) The investment company has a deferred sales charge paid upon redemption that declines over the period of a shareholder's investment ("contingent deferred sales load"), unless the contingent deferred sales load is calculated as if the shares or amounts representing shares not subject to the load are redeemed first, and other shares or amounts representing shares are then redeemed in the order purchased, provided that another order of redemption may be used if such order would result in the redeeming shareholder paying a lower contingent deferred sales load; or

              (B) The investment company has a front-end or deferred sales charge imposed on shares, or amounts representing shares, that are purchased through the reinvestment of dividends, unless the registration statement registering the investment company's securities under the Securities Act of 1933 became effective prior to April 1, 2000.

              (e) Selling Dividends
              No member shall, in recommending the purchase of investment company securities, state or imply that the purchase of such securities shortly before an ex-dividend date is advantageous to the purchaser, unless there are specific, clearly described tax or other advantages to the purchaser, and no member shall represent that distributions of long-term capital gains by an investment company are or should be viewed as part of the income yield from an investment in such company's securities.

              (f) Withhold Orders
              No member shall withhold placing customers' orders for any investment company security so as to profit himself as a result of such withholding.
              (g) Purchase for Existing Orders
              No member shall purchase from an underwriter the securities of any open-end investment company and no member who is an underwriter of such securities shall purchase such securities from the issuer, except (1) for the purpose of covering purchase orders previously received or (2) for its own investment. Nothing herein shall be deemed to prohibit any member from purchasing securities of any investment company specifically designed for short-term investment (e.g., money market fund).

              (h) Refund of Sales Charge
              If any security issued by an open-end management investment company is repurchased by the issuer, or by the underwriter for the account of the issuer, or is tendered for redemption within seven business days after the date of the transaction, (1) the dealer or broker shall forthwith refund to the underwriter the full concession allowed to the dealer or broker on the original sale and (2) the underwriter shall forthwith pay to the issuer the underwriter's share of the sales charge on the original sale by the underwriter and shall also pay to the issuer the refund which he received under subparagraph (1) when he receives it. The dealer or broker shall be notified by the underwriter of such repurchase or redemption within ten days of the date on which the certificate or written request for redemption is delivered to the underwriter or issuer. If the original sale was made directly to the investor by the principal underwriter, the entire sales charge shall be paid to the issuer by the principal underwriter.

              (i) Purchases as Principal
              No member who is a party to a sales agreement referred to in paragraph (c) shall, as principal, purchase any security issued by an open-end management investment company or unit investment trust from a record holder at a price lower than the bid price next quoted by or for the issuer.

              (j) Repurchase from Dealer
              No member who is a principal underwriter of a security issued by an open-end investment company or a closed-end investment company that makes periodic repurchase offers pursuant to Rule 23c-3(b) under the 1940 Act and offers its shares on a continuous basis pursuant to Rule 415(a)(1)(xi) under the Securities Act of 1933 shall repurchase such security, either as principal or as agent for the issuer, from a dealer acting as principal who is not a party to a sales agreement with a principal underwriter, nor from any investor, unless such dealer or investor is the record owner of the security so tendered for repurchase. No member who is a principal underwriter shall participate in the offering or in the sale of any such security if the issuer voluntarily redeems or repurchases its securities from a dealer acting as principal who is not a party to such a sales agreement nor from any investor, unless such dealer or investor is the record owner of the security so tendered for repurchase. Nothing in this paragraph shall relate to the compulsory redemption of any security upon presentation to the issuer pursuant to the terms of the security.
              Nothing in this Rule shall prevent any member, whether or not a party to a sales agreement, from selling any such security for the account of a record owner to the underwriter or issuer at the bid price next quoted by or for the issuer and charging the investor to a reasonable charge for handling the transaction, provided that such member discloses to such record owner that direct redemption of the security can be accomplished by the record owner without incurring such charges.

              (k) Execution of Investment Company Portfolio Transactions

              (1) No member shall, directly or indirectly, favor or disfavor the sale or distribution of shares of any particular investment company or group of investment companies on the basis of brokerage commissions received or expected by such member from any source, including such investment company, or any covered account.

              (2) No member shall sell shares of, or act as underwriter for, an investment company, if the member knows or has reason to know that such investment company, or an investment adviser or principal underwriter of the company, has a written or oral agreement or understanding under which the company directs or is expected to direct portfolio securities transactions (or any commission, markup or other remuneration resulting from any such transaction) to a broker or a dealer in consideration for the promotion or sale of shares issued by the company or any other registered investment company.

              (3) No member shall, directly or indirectly, demand or require brokerage commissions or solicit a promise of such commissions from any source as a condition to the sale or distribution of shares of an investment company.

              (4) No member shall, directly or indirectly, offer or promise to another member, brokerage commissions from any source as a condition to the sale or distribution of shares of an investment company and no member shall request or arrange for the direction to any member of a specific amount or percentage of brokerage commissions conditioned upon that member's sales or promise of sales of shares of an investment company.

              (5) No member shall circulate any information regarding the amount or level of brokerage commissions received by the member from any investment company or covered account to other than management personnel who are required, in the overall management of the member's business, to have access to such information.

              (6) No member shall, with respect to such member's activities as underwriter of investment company shares, suggest, encourage, or sponsor any incentive campaign or special sales effort of another member with respect to the shares of any investment company which incentive or sales effort is, to the knowledge or understanding of such underwriter-member, to be based upon, or financed by, brokerage commissions directed or arranged by the underwriter-member.

              (7) No member shall, with respect to such member's retail sales or distribution of investment company shares:

              (A) provide to salesmen, branch managers or other sales personnel any incentive or additional compensation for the sale of shares of specific investment companies based on the amount of brokerage commissions received or expected from any source, including such investment companies or any covered account. Included in this prohibition are bonuses, preferred compensation lists, sales incentive campaign or contests, or any other method of compensation which provides an incentive to sales personnel to favor or disfavor any investment company or group of investment companies based on brokerage commissions;

              (B) recommend specific investment companies to sales personnel, or establish "recommended," "selected," or "preferred" lists of investment companies, regardless of the existence of any special compensation or incentives to favor or disfavor the shares of such company or companies in sales efforts, if such companies are recommended or selected on the basis of brokerage commissions received or expected from any source;

              (C) grant to salesmen, branch managers or other sales personnel any participation in brokerage commissions received by such member from portfolio transactions of an investment company whose shares are sold by such member, or from any covered account, if such commissions are directed by, or identified with, such investment company or any covered account; or

              (D) use sales of shares of any investment company as a factor in negotiating the price of, or the amount of brokerage commissions to be paid on, a portfolio transaction of an investment company or of any covered account, whether such transaction is executed in the over-the-counter market or elsewhere.

              (8) Provided that the member does not violate any of the specific provisions of this paragraph (k), nothing herein shall be deemed to prohibit:

              (A) the execution of portfolio transactions of any investment company or covered account by members who also sell shares of the investment company; or
              (B) a member from compensating its salesmen and managers based on total sales of investment company shares attributable to such salesmen or managers, whether by use of overrides, accounting credits, or other compensation methods, provided that such compensation is not designed to favor or disfavor sales of shares of particular investment companies on a basis prohibited by this paragraph (k).

              (l) Member Compensation
              In connection with the sale and distribution of investment company securities:
              (1) Except as described below, no associated person of a member shall accept any compensation from anyone other than the member with which the person is associated. This requirement will not prohibit arrangements where a non-member company pays compensation directly to associated persons of the member, provided that:

              (A) the arrangement is agreed to by the member;

              (B) the member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "no-action" letter issued by the Commission or its staff that applies to the specific fact situation of the arrangement;

              (C) the receipt by associated persons of such compensation is treated as compensation received by the member for purposes of the Rules of the Association; and

              (D) the record keeping requirement in paragraph (l)(3) is satisfied.

              (2) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.

              (3) Except for items described in subparagraphs (l)(5)(A) and (B), a member shall maintain records of all compensation received by the member or its associated persons from offerors. The records shall include the names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non-cash compensation received.

              (4) No member shall accept any cash compensation from an offeror unless such compensation is described in a current prospectus of the investment company. When special cash compensation arrangements are made available by an offeror to a member, which arrangements are not made available on the same terms to all members who distribute the investment company securities of the offeror, a member shall not enter into such arrangements unless the name of the member and the details of the arrangements are disclosed in the prospectus. Prospectus disclosure requirements shall not apply to cash compensation arrangements between:

              (A) principal underwriters of the same security; and

              (B) the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as its underlying investment.

              (5) No member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Notwithstanding the provisions of subparagraph (l)(1), the following non-cash compensation arrangements are permitted:

              (A) Gifts that do not exceed an annual amount per person fixed periodically by the Association1 and are not preconditioned on achievement of a sales target.
              (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.

              (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:

              (i) the record keeping requirement in paragraph (l)(3) is satisfied;

              (ii) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph (l)(5)(D);

              (iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;

              (iv) the payment or reimbursement is not applied to the expenses of guests of the associated person; and

              (v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph (l)(5)(D).

              (D) Non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member, provided that:

              (i) the member's or non-member's non-cash compensation arrangement, if it includes investment company securities, is based on the total production of associated persons with respect to all investment company securities distributed by the member;

              (ii) the non-cash compensation arrangement requires that the credit received for each investment company security is equally weighted;

              (iii) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and

              (iv) the record keeping requirement in paragraph (l)(3) is satisfied

              (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in paragraph (l)(5)(D).

              (m) Prompt Payment for Investment Company Shares
              (1) Members (including underwriters) that engage in direct retail transactions for investment company shares shall transmit payments received from customers for such shares, which such members have sold to customers, to payees (i.e., underwriters, investment companies or their designated agents) by (A) the end of the third business day following a receipt of a customer's order to purchase such shares or by (B) the end of one business day following receipt of a customer's payment for such shares, whichever is the later date.

              (2) Members that are underwriters and that engage in wholesale transactions for investment company shares shall transmit payments for investment company shares, which such members have received from other members, to investment company issuers or their designated agents by the end of two business days following receipt of such payments.

              (n) Disclosure of Deferred Sales Charges
              In addition to the requirements for disclosure on written confirmations of transactions contained in Rule 2230, if the transaction involves the purchase of shares of an investment company that imposes a deferred sales charge on redemption, such written confirmation shall also include the following legend: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." The legend shall appear on the front of a confirmation and in, at least, 8-point type.


              1 The current annual amount fixed by the Association is $100.

              Amended by SR-NASD-2004-027 eff. Feb. 14, 2005.
              Amended by SR-NASD-99-74 eff. June 20, 2000.
              Amended by SR-NASD-98-14 eff. April 1, 2000.
              Amended by SR-NASD-97-35 eff. Jan. 1, 1999.
              Amended by SR-NASD-94-56 eff. June 7, 1995.
              Amended by SR-NASD-93-42 eff. Feb. 24, 1994.
              Amended by SR-NASD-90-69 eff. July 7, 1993.
              Amended by SR-NASD-90-56 eff. Oct. 1, 1991.
              Amended by SR-NASD-86-34 eff. Oct. 31, 1988.
              Amended by SR-NASD-84-51 eff. July 10, 1984.
              Amended by SR-NASD-80-21 eff. Mar. 4, 1981.
              Amended by SR-NASD-75-13 eff. May 1, 1976.
              Amended by SEC Release No. 10147 eff. July 15, 1973.
              Amended eff. Feb. 8, 1971.
              Adopted by SEC Release No. 2866 eff. June 1, 1941.

              Selected Notices to Members: 73-42, 75-68, 75-70, 80-07, 80-13, 80-43, 81-08, 84-40, 85-86, 88-96, 89-51, 91-40, 91-68, 92-41, 93-12, 93-52, 93-82, 94-13, 94-14, 94-16, 94-41, 94-67, 95-36, 95-56, 97-48, 97-50, 98-75; 99-55, 99-103, 00-53, 05-04.

              • IM-2830-1. 'Breakpoint' Sales

                This rule is no longer applicable. NASD IM-2830-1 has been superseded by FINRA Rule 2342. Please consult the appropriate FINRA Rule.

                The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions so as to share in the higher sales charges applicable on sales below the breakpoint is contrary to just and equitable principles of trade.
                Investment company underwriters and sponsors, as well as dealers, have a definite responsibility in such matters and failure to discourage and to discontinue such practices will not be countenanced.
                For purposes of determining whether a sale in dollar amounts just below a breakpoint was made in order to share in a higher sales charge, the Association will consider the facts and circumstances, including, for example, whether a member has retained records that demonstrate that the trade was executed in accordance with a bona fide asset allocation program that the member offers to its customers:
                • which is designed to meet their diversification needs and investment goals; and

                • under which the member discloses to its customers that they may not qualify for breakpoint reductions that are otherwise available.
                Amended by SR-NASD-99-74 eff. June 20, 2000.
                Amended by SR-NASD-98-69 eff. Dec. 15, 1998.

                Selected Notices: 98-98, 00-53.

              • IM-2830-2. Maintaining the Public Offering Price

                This rule is no longer applicable.

                Rule 2420(a) states that:
                No member shall deal with any non-member broker or dealer except at the same prices, for the same commissions or fees, and on the same terms and conditions as are by such member accorded to the general public.
                Section 22(d) of the Investment Company Act of 1940 states in part that:
                . . . and, if such class of security (i.e., shares of open-end investment companies) is being currently offered to the public by or through an underwriter, no principal underwriter of such security and no dealer shall sell any such security to any person except a dealer, a principal underwriter or the issuer, except at a current public offering price described in the prospectus. . . . (emphasis added).
                It is apparent from this section of the statute that, in principal transactions between dealers and customers in shares of such open-end investment companies, the current public offering price must, by law, be maintained.
                This section of the statute taken together with Rule 2420 has been construed by the Board of Governors to mean that members of this Association must maintain the public offering price — not only to customers as required by law — but also to non-member brokers and dealers, inasmuch as members must deal with non-member brokers and dealers at the same prices, for the same commissions or fees, and on the same terms and conditions as such members accord to the general public.
                The following types of transactions illustrate these principles: (All sales in the examples below are assumed to be at less than the public offering price stated in the prospectus and are assumed not to raise any questions under Rule 2830.)
                (a) One member sells to another member:
                This is a proper transaction under Section 22(d) and under Rule 2420.
                (b) One member sells through a non-member to another member:
                This is a proper transaction under Section 22(d); but the selling member is violating Rule 2420.
                (c) A member sells to a customer:
                This is a violation of Section 22(d).
                (d) A member sells to a non-member:
                This is a proper transaction under Section 22(d); but it is a violation of Rule 2420, because the member may not treat a non-member in any manner other than he would treat the general public and to the general public he must, under Section 22(d), maintain the public offering price.
                (e) One member sells to another member who acts as agent for a non-member:
                This is a proper transaction under Section 22(d); but both members may be violating Rule 2420, as in example (d).
                (f) One member sells through another member (his agent) to a non-member:
                This is a proper transaction under Section 22(d); but both members are violating Rule 2420.
                (g) One member sells to another member who acts as agent for a customer:
                This transaction violates Section 22(d).
                (h) One member sells through another member (his agent) to a customer:
                This is a violation of Section 22(d) by the first member and his agent may also be in violation of Section 22(d).
                (i) A customer sells to another customer through a member who acts as agent for either or for both customers:
                This is a proper transaction under Section 22(d) and under Rule 2420.
                Violation of law or any Rules of the Association is also deemed to constitute a violation of Rule 2110.

                Cross References–

                "Tombstone Advertising," SEC Rule 134, under SEC Rules and Regulation T Tab
                Investment Company Sales Literature, SEC Rule 156
                Advertising by an Investment Company as Satisfying Requirements of Section 10, SEC Rule 482
                Sales Literature Deemed to be Misleading, SEC Rule 34b-1 under the Investment Company Act

            • 2840. Trading in Index Warrants, Currency Index Warrants, and Currency Warrants

              • 2841. General

                This rule is no longer applicable. NASD Rule 2841 has been superseded by FINRA Rule 2351. Please consult the appropriate FINRA Rule.

                (a) Applicability — This Rule 2840 Series shall be applicable to the extent appropriate unless otherwise stated herein, to the conduct of accounts, the execution of transactions, and the handling of orders in exchange-listed stock index warrants, currency index warrants, and currency warrants by members who are not members of the exchange on which the warrant is listed or traded.

                (b) Except to the extent that specific provisions in this Rule Series govern, or unless the context otherwise requires, the provisions of the By-Laws, Rules of the Association and all other interpretations and policies shall also be applicable to transactions in index warrants, currency index warrants, and currency warrants.

                (c) The Rules in this Rule 2840 Series are not applicable to stock index warrants, currency index warrants, and currency warrants listed on national securities exchanges prior to September 28, 1995.

                Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
                Adopted by SR-NASD-95-37 eff. Sept. 28, 1995.

                Selected Notice: 95-82.

              • 2842. Definitions

                This rule is no longer applicable. NASD Rule 2842 has been superseded by FINRA Rule 2351. Please consult the appropriate FINRA Rule.

                (a) The term "control" shall have the same meaning as the term "control" as set forth in