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  • 1983

    • 83-74 Proposed Amendments to Article III, Section 19 of the Rules of Fair Practice, "Customers' Securities or Funds"

      I M P O R T A N T

      MAIL VOTE

      Officers * Partners * Proprietors

      TO: All NASD Members

      Last Voting Date Is January 30, 1984

      Enclosed herewith are proposed amendments to Article III, Section 19 of the Rules of Fair Practice and the Explanation thereto. These amendments have been approved by the Association's Board of Governors for submission to the membership for a vote. If approved, they must then be filed with, and approved by, the Securities and Exchange Commission.

      BACKGROUND OF THE PROPOSED AMENDMENTS

      As an ongoing responsibility, the standing committees of the Board of Governors review and, if necessary, recommend revisions to the Association's rules and regulations. In this regard, the Capital and Margin Committee has proposed certain revisions to Article III, Section 19 of the Rules of Fair Practice, "Customers' Securities or Funds." The changes proposed by the Committee are more technical rather than substantive in nature and reflect similar actions by other self-regulatory organizations.

      The revisions are intended to eliminate regulation which has been rendered obsolete by a member's obligation to comply with certain requirements of SEC Rule 15c3-3, the "Customer Protection Rule," which governs the protection of customers' funds and securities. The current provisions contained in Section 19 with respect to the lending of customers' securities under a "fair and reasonable" standard are now either addressed or superseded through the possession and control requirements of Rule 15c3-3.

      The proposed revisions will also eliminate the necessity for receiving, processing and retaining certain duplicative paperwork. Specifically, the amendments will eliminate the requirement of obtaining written lending authorizations separate and apart from the standard margin agreements. This will permit members to use only one margin/loan consent agreement requiring only one signature from a customer rather than two as is currently required. As previously noted, these changes eliminating the "two signature" requirement have already been adopted by recent amendments to New York Stock Exchange Rule 402 and AMEX Rule 449.

      In light of the foregoing considerations, the Board determined that this proposal should be circulated to the membership for approval.

      DISCUSSION OF THE PROPOSED RULE AMENDMENTS

      One of the proposed amendments to Section 19 includes the addition of a new section, entitled "General Provisions." This section places an affirmative obligation on a member to adhere to the provisions of SEC Rule 15c3-3 with respect to possession and control requirements and the maintenance of cash reserves.

      A second proposed change concerns the section regarding a member's authorization to lend customers' securities. In this paragraph, the rule currently requires a member to obtain a lending authorization separate from, and in addition to, a margin account agreement before it may lend customers' securities. Federal securities laws relating to the lending of securities do not require such separate authorizations. In light of this, and in consideration of the other regulatory safeguards that have evolved over the years, the requirement for separate authorizations appears unnecessary. Therefore, the proposed revisions eliminate the two-agreement requirement entirely.

      In a third proposed change, paragraph (c) of the current rule would be deleted. This paragraph requires that a member obtain from a customer a specific authorization designating the particular securities to be loaned should they be fully paid or excess margin securities. The proposal eliminates this requirement in favor of relying on the safeguards embodied in Rule 15c3-3(b)(3) with respect to the lending of fully paid and excess margin securities.

      Finally, the Explanation of the Board of Governors, which follows the rule, has been revised in accordance with the provisions discussed above.

      * * *

      The text of the proposed rule is attached and merits your immediate attention. Please mark the ballot according to your convictions and return it in the enclosed stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than January 30, 1984.

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

      Questions concerning this notice may be directed to James M. Cangiano, Associate Director, Department of Policy Research, at (202) 728-8273, or to your District Director.

      Sincerely,

      Gordon S. Macklin
      President

      Attachments

      TEXT OF PROPOSED REVISIONS

      Customers' Securities or Funds

      Sec. 19.

      Improper Use

      (a) No member or person associated with a member shall make improper use of a customers' securities or funds.

      General Provisions

      (b) Every member in the conduct of its business shall adhere to the provisions of Rule 15c3-3 promulgated under the Securities Exchange Act of 1934 with respect to obtaining possession and control of securities, and the maintenance" of appropriate cash reserves. For the purposes of this Section, the definitions contained in Rule 15c3-3 shall apply.

      Authorization to lend - Pledging or lending related to indebtedness

      (b)
      (c) 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 separate written authorization permitting the lending of securities thus carried by such member. And, regardless of any agreement between a member and a customer authorizing the member to lend or pledge such securities, no member shall lend or pledge more of such securities than is fair and reasonable in view of the indebtedness of the customer, except such lending as may be specifically authorized under subsection (c).

      Separate lending authorization designating securities

      (c) No member shall lend securities carried for the account of any customer which have been fully paid for or which are in excess of the amount which may be loaned in view of the indebtedness of the customer, unless such member shall first have obtained from such customer a separate written authorization designating the particular securities to be loaned.

      Segregation and identification of securities

      (d) No member shall hold securities carried for the account of any customer which have been fully paid for or which are in excess of the amount which may be pledge in view of the indebtedness of the customer, excess margin securities unless such securities are segregated and identified by a method which clearly indicates the interest of such customer in those securities.

      Prohibition against guarantees

      (e) No member or person associated with a member shall guarantee a customer against loss in any securities account of such customer carried by the member or in any securities transaction effected by the member with or for such customer.

      Sharing in accounts; extent permissible

      (f) 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, unless such member or person associated with a member obtains prior written authorization from the member carrying the account; and, a member or person associated with a member shall share 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. Exempt from the direct proportionate share limitation are accounts of the immediate family of such member or person associated with a member. For purposes of this section, 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.

      o o o Explanation of the Board of Governors

      Explanation of Certain Paragraphs Paragraph (d) Section 19 of Article III of the Rules of Fair Practice

      Paragraph (b)

      The first part of this paragraph requires a member to obtain a lending authorization in addition to a margin account agreement before lending a customer's securities. The particular securities to be lent need not be designated so long as the member does not lend more securities than are "fair and reasonable."

      The second part of this paragraph limits the amount of a customer's securities which may be lent or pledged under a general agreement with the customer. With respect to lending, the "fair and reasonable" standard means that a member may lend a customer's securities only in an amount which is reasonably related to the customer's debit balance, unless the additional written authorization required under paragraph (c) is obtained from the customer.

      With respect to pledging a customer's securities, the "fair and reasonable" standard refers to the amount of the customer's securities which a member would be required to deposit as collateral in order to borrow an amount approximating the customer's debit balance; the amount of collateral so required usually depends on the type and equality of securities in question, as well as the policies of the lending institution.

      Paragraph (c)

      This paragraph requires a member to obtain a specific authorization designating the particular securities in order to lend a customer's fully paid securities or those in excess of an amount which is reasonably related to the customer's debit balance.

      Paragraph (d)

      This paragraph requires members to segregate and identify by customers both fully paid and securities held in margin accounts which are in excess of the amount which may be pledged under the "fair and reasonable" standards in paragraph (b). These are commonly referred to as excess margin securities. although not mentioned as such in the section.

      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.

      Following are three general types of segregation of customer's 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.

      In all the above methods, 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.

      For purposes of Section 19, a customer's securities subordinated under a "satisfactory subordination," as defined in Rule 15c3-1 of the Securities and Exchange Commission, are not deemed to be securities carried for the account of a customer.

    • 83-73 SEC Adopts Rule 15c2-2 Governing Binding Arbitration Clauses in Customer Agreements

      I M P O R T A N T

      Officers * Partners * Proprietors

      TO: All NASD Members

      BACKGROUND

      On November 18, 1983, the Securities and Exchange Commission issued Release No. 34-20397 announcing the adoption of Rule 15c2-2 (the "Rule") under the Securities Exchange Act of 1934 (the "Act") (17 CFR Part 240). Rule 15c2-2 prohibits broker-dealers from using mandatory arbitration clauses in customer agreements that purport to bind public customers to the arbitration of claims arising under the federal securities laws. Those clauses, in the view of the Commission, are inconsistent with the deceptive practice prohibitions of Section 10(b) and Section 15(c) of the Act.

      In adopting the Rule, the Commission reaffirmed its support for the use of arbitration as an important and effective means for resolving certain broker-customer disputes and as an economical alternative to litigation. The Commission explained, however, that public customers were intended by Congress to have the "special protection" of the federal courts for securities acts claims and that this protection may not be waived in advance by agreement of the parties. According to the SEC, the purpose of this Rule is to ensure that public customers are not misled concerning their right to such recourse. The Rule also requires broker-dealers to disclose to existing public customers that they are not precluded by such clauses from judicial recourse with respect to those claims. The Rule requires members to undertake certain compliance measures within the timeframes specified in the Rule. These measures are described in detail below.

      COMPLIANCE WITH RULE 15c2-2

      All agreements entered into by a broker-dealer and a public customer after the effective date of the Rule, December 28, 1983, are prohibited from containing clauses that purport to bind public customers to the arbitration of future disputes arising under federal securities laws. However, broker-dealers may use existing supplies of preprinted forms which may contain the prohibited language for new accounts provided that a separate written disclosure is provided to these customers using the language described in paragraph (b) of the Rule.

      This separate written disclosure may be utilized until December 31, 1984, and must read as follows:

      Although you have signed a customer agreement form with (FIRM NAME) that states that you are required to arbitrate any future dispute or controversy that may arise between us, you are not required to arbitrate any dispute or controversy that arises under the federal securities laws but instead can resolve any such dispute or controversy through litigation in the courts.

      The Commission also believes that it is important for existing customers to be made aware that they are not required by prior agreement to resolve federal securities law disputes by arbitration. Therefore, paragraph (c) of the rule requires that existing customers be so notified. The separate written disclosure noted above must also be used in providing the notification to existing public customers.

      All outstanding agreements need not be amended immediately. Those customers for whom a broker-dealer, after July 1, 1983, has carried a free credit balance, or held securities in safekeeping or as collateral, or has effected a securities transaction must be sent the required disclosure prior to January 1, 1985. Any other customers would have to be provided with the required notification only upon completion of their next transaction.

      By January 1, 1985, all broker-dealer customer agreement forms must be revised and may not contain the mandatory arbitration clause.

      On January 1, 1985, and thereafter, it shall be considered a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.

      Please refer to the attached chart for Rule 15c2-2 compliance action and deadlines. The text of the rule follows.

      Please direct any questions concerning SEC Rule 15c2-2 to Jean McNeill, at (202) 728-8286.

      Sincerely

      Frank J Wilson
      Executive Vice President and General Counsel

      Attachments

      SEC RULE 15c2-2

      DEADLINE

      REQUIRED ACTION

      After
      December 28, 1983

      • Effective date for SEC Rule 15c2-2 which prohibits broker-dealers from using predispute arbitration clauses in customer agreements that purport to bind public customers to the arbitration of claims arising under the federal securities laws.

      Between
      December 28, 1983 and December 31, 1984

      • Broker-dealers are required to attach a separate written disclosure statement if the agreement forms which contain mandatory arbitration clauses are used.
      • Broker-dealers must notify all active (see note below) existing customers by means of a separate written disclosure.

      After
      January 1, 1985

      • All customer agreement forms must be free of the binding predispute arbitration clause prohibited by the Rule.

      NOTE: Active existing customers are defined as those for whom: a free credit balance was carried, securities were held as collateral or in safekeeping, or a securities transaction was effected after July 1, 1983.

      federal register

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-20397; File No. S7-976]

      Recourse to the Courts Notwithstanding Arbitration Clauses In Broker-Dealer Customer Agreements

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rule.

      SUMMARY: The Commission is adopting a rule that prohibits broker-dealers from using predispute arbitration clauses in customer agreements that purport to bind public customers to the arbitration of claims arising under the federal securities laws. The rule also requires broker-dealers to disclose to existing public customers that they are not precluded by such clauses from judicial recourse with respect to those claims. The purpose of this rule is to ensure that public customers are not misled concerning such recourse.

      EFFECTIVE DATE: December 28, 1983.

      FOR FURTHER INFORMATION CONTACT: Robert A. Love, Esq., Division of Market Regulation (202-272-2792).

      SUPPLEMENTARY INFORMATION: The Commission today announced the adoption of a rule that prohibits the use in broker-dealer customer agreements of provisions purporting to bind public customers to the arbitration of future disputes arising under the federal securities laws. The Commission's rule codifies its longstanding view that such clauses are inconsistent with the deceptive practice prohibitions of section.l0(b) [15 U.S.C. 78j(b)] and section I5(c) [15 U.S.C. 78o(c)] of the Securities Exchange Act of 1934 ("Act") [15 U.S.C. 78a et seq.]

      Discussion

      The Commission proposed rule 15c2-2 for comment in Securities Exchange Act of 1934 Release No. 19813 (May 23, 1983) 48 FR 24728 (June 2, 1983). The Commission reaffirmed in that release its support for the use of arbitration as an important means for the resolution of certain disputes between broker-dealers and their customers. For example, the Commission recognizes that the Uniform Code of Arbitration (the "Code"), drafted by the Securities Industry Conference on Arbitration (SICA) and adopted by the securities industry's self-regulatory organizations ("SROs"), provides an efficient procedure for the resolution of disputes and is often an economical alternative to litigation.1

      The federal securities laws, however, provide that broker-dealer agreements purporting to bind public customers to the arbitration of disputes arising in the future are void and unenforceable as applied to claims arising under those laws.2 Wilko v. Swan, 346 U.S. 427 (1953), and subsequent cases have held that Congress had determined that public customers should have available the special protection of the federal courts for the resolution of disputes arising under the federal securities laws, and that under the anti-waiver provisions of those laws, that protection may not be waived in advance by contract of the parties. For example, in First Heritage Corp. v. Prescott, Ball & Turben, 3 the court noted that "[c]ourts have consistently held that Wilko's holding and rationale [under the Securities Act of 1933] are equally applicable to cases arising under the 1934 Act."4

      In First Heritage Corp. the litigants were broker-dealers and members of the National Association of Securities Dealers, Inc. ("NASD"), which has rules providing for the arbitration of disputes between NASD members firms.5The court held, however, that section 29(a), the Act's anti-waiver provision, precluded enforcement of the predispute arbitration provision because the plaintiff broker-dealer also represented numerous public customers.

      The Commission has received seventeen letters of comment regarding proposed rule 15c2-2. Those comments, which can be reviewed in file no. S7-976 in the Commission's Public Reference Room, and amendments to the proposed rule are address below.

      Virtually all of the commentors on the proposed rule agreed that the statutory and case law clearly render unenforceable agreements to arbitrate future disputes between broker-dealers and their public customers arising under the federal securities laws. 6 Nethertheless as we have stated in earlier releases, many broker-dealer continue to include in standard customer agreements language substantially as follows:

      Any controversy between us arising out of or relating to this agreement or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of either * * *.

      In light of the clearly contrary law in this area, such language is a misleading statement of customers' rights under the federal securities laws. Because years of informal discussions have failed to correct this practice, the Commission has decided that it is appropriate to adopt this rule.

      Paragraph (a) of the rule embodies the general prohibition that broker-dealers' customer agreements may not contain clauses that purport to bind public customers to the arbitration of future disputes arising under the federal securities laws. A violation of the rule requires both the existence of a deficient clause and a purchase or sale of securities. In response to those comments noting that courts often enforce predispute arbitration clauses for disputes under the federal securities laws involving such nonpublic customers as parties to international commercial disputes and members of the securities industry's SROs, the word "public" has been added to the paragraph before "customer" to clarify the intended scope of this rule. The term "public customer" has long been used in the Code and SRO arbitration pamphlets.

      Paragraph (b) of rule 15c2-2 as proposed required that predispute arbitration clauses that do purport to bind public customers to the arbitration of future federal securities law disputes include the disclosure "Arbitration cannot be compelled with respect to disputes arising under the federal securities laws." The disclosure was designed to ensure the public customers are not misled by predispute arbitration clauses.

      Proposed paragraph (b) has been deleted from the rule. Beginning January 1, 1985, it will no longer be sufficient for arbitration clauses, such as the one described above, to be supplemented with disclosure language. All new customer agreement forms must reflect as of that date the prohibition expressed by the rule and this release. The use of alternate disclosure language prescribed in new paragraph (b), however, is permitted in order to amend the agreements of existing customers and to allow broker-dealers to use existing supplies of preprinted forms that otherwise violate paragraph (a). In those instances the rule requires the following disclosure:

      Although you have signed a customer agreement form with FIRM NAME that states that you are required to arbitrate any future dispute or controversy that may arise between us, you are not required to arbitrate any dispute or controversy that arises under the federal securities laws but instead can resolve any such dispute or controversy through litigation in the courts.

      With respect to the disclosure language contained in proposed paragraph (b), various commentators have pointed out that for certain unrelated situations, the disclosure was too broad. A discussion of those comments will be helpful in understanding the amended rule. For example, although the proposing release noted that the rule is not intended to affect existing law with respect to contractual agreements for the resolution by arbitration of international commercial disputes, the proposed disclosure in paragraph (b) did not specifically make that distinction.7 Also, commentators noted that certain other agreements to arbitrate federal securities laws claims have in some instances been enforced by the courts. The validity of any such agreements, between members of the securities industry's SROs or between a broker-dealer and its public customers, agreed to after a dispute has arisen,8 is outside the scope of rule 15c2-2. The arbitration agreements that are the subject of this rule are those entered into by a public customer with his broker-dealer prior to the existence of any dispute and before an investor normally would be concerned with the matter of choosing a forum for dispute resolution. Since the rule applies only to those standard agreements between broker-dealers and their public customers that purport to govern the parties' alternatives in future disputes under the federal securities laws, these other categories of disputes are unaffected by the rule.

      Several commentators expressed the view that the Commission should not require specific disclosure language for the arbitration clauses in customer agreements.9 On a related point, another commentator, Wall Street Clearing Co., while "agreeing] completely with this concept [of disclosure] and find[ing] it a proper position for the Commission to take in furthering the protection of customers," commented that it believes the Commission has "sufficient authority to ensure compliance with the principles of Release No. 15984 without recourse to formal rulemaking."10

      The Commission is sensitive to each of these concerns. In adopting the rule the Commission has determined that prescribing specific language for the disclosure to existing public customers would simplify broker-dealer compliance in this area. The language is intended to remove any remaining uncertainty by broker-dealers as to what language is adequate to counter language currently employed in certain of their agreements.

      The use of the prescribed disclosure, however, is available only for the notification of existing public customers and the amendment of existing supplies of customer agreements. Subsequent to the transition period provided for in the rule, broker-dealers' customer agreements may not contain the representation that all future disputes between a broker-dealer and its public customers are required to be settled by arbitration.

      The Commission agrees with those commentators that stated that it should not prescribe specific language for such agreements and that the broker-dealer community and the SROs are capable of drafting agreements that will be in compliance with this rule. However, as stated in the proposing release, the Commission believes that language currently appearing in some broker-dealers' customer agreement forms, such as "unless unenforceable due to state or federal law," or "to the extent consistent with state or federal law" or which is otherwise ambiguous concerning the investors' rights is inadequate with respect to the concerns addressed by the Commission in this rule.

      Although the Commission agrees with the comment that it has authority under the general anti-fraud provisions to enforce compliance by broker-dealers with the principles in the 1979 release without recourse to rulemaking, we have determined to adopt this rule in order to provide guidance to the industry and promote compliance with the federal securities laws.

      One commentator offered its support for an alternative "proposal which codified [attempts to compel arbitration of federal securities law disputes] as a violation of the Act, with appropriate sanctions." 11Although such an approach might address "the aggressive conduct of certain broker-dealers", 12 it would miss certain of the intended beneficiaries of this rule. For example, some public customers may decide not to pursue their claims in any forum rather than submit a claim to an industry-administered arbitration forum as dictated in their customer agreement. Whether a given public customer's reservations or suspicion of arbitration have merit, the fact remains that the federal securities laws provide him with the right to seek the resolution of his disputes under those laws in forums other than arbitration. Therefore, those cases where public customers abandon a federal securities law claim based upon the dictates of an arbitration-clause would most likely not be flagged for enforcement action.13

      Another commentator expressed the view that no cause of action exists under the federal securities laws unless properly pleaded under the federal rules of civil procedures and that, consequently, it is appropriate for it to pursue arbitration pursuant to predispute arbitration clauses, subject to challenge by customers. 14 The comment, however, does not focus on the narrow issue addressed by the rule. The determination of claims "under the federal securities laws" is a separate question.

      Other commentators stated that the approach of employing predispute arbitration clauses as a basis for submitting all claims to arbitration has resulted in wasteful and costly litigation. Egon Guttman, Professor of Law at the American University commented that:

      This * * * has led to the numerous cases following Wilko v. Swan in which the broker-dealers have attempted to enforce arbitration clauses in customer contracts even though the attorneys representing the broker-dealers must have been aware that securities laws violations were in issue [citations omitted].15 The effect of such attitude is to violate the primary duty of a broker-dealer as a fiduciary to his customer as was stated by Mr. Chief Justice Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928).

      * * * * *

      Insistence on arbitration would thus be a clear overreaching and * * * a misrepresentation of legal rights of the customer. To deliberately obfuscate the existence of a right which has been repeatedly recognized by the courts and which would be material in determining the overall decision whether to deal through a particular broker [citations omitted] in connection with the purchase and sale of securities would lead to the conclusion that such obfuscation could amount to a violation of Securities Exchange Act 10(b) and Commission Rule 10b—5 promulgated thereunder, [citations omitted]

      One commentator 16 suggested that the proposal be adopted as a rule of the National Association of Securities Dealers, Inc. ("NASD"), presumably to promote just and equitable principles of trade, rather than as a Commission rule under the anti-fraud provisions.17 Inasmuch as the Commission has determined that the clauses discussed in this release are misleading statements when employed in connection with the purchase or sale of securities,18 adoption of this rule under the deceptive practice prohibitions of sections 10(b) and 15(c) of the Act is appropriate in the public interest.

      The commentator also suggested that the rule apply prospectively and not require notification of existing clients. The Commission believes, however, that it is important for existing customers to be made aware that they are not required by agreements they have signed in order to open an account with a broker-dealer to resolve federal securities law disputes by arbitration. The notification of existing customers anticipated by paragraph (c) of the rule is designed to correspond as closely as possible to the periodic mailings of broker-dealers and consequently should entail only minimal expense. Paragraph (c) provides that broker-dealers may amend outstanding customer agreements which do not comply with paragraph (a). Not all outstanding agreements must be amended. Those customers for whom a broker-dealer, after July 1, 1983, has carried a free credit balance, or held securities in safekeeping or as collateral, or has effected a securities transaction must be sent the required disclosure prior to January 1, 1985. These persons have had sufficiently recent dealings with their broker-dealers for it to be appropriate to ensure that they are supplied with the required disclosure. Furthermore, these persons should be readily identifiable by broker-dealers for inclusion into the mailing list for their next regularly scheduled mailing.

      Any other customer agreements would have to be amended only upon the completion of the next transaction pursuant to that agreement. Thus, a customer who has not had any activity in his account since July 1, 1983 would not have to be sent the disclosure unless and until he again does business with the firm under the agreement.

      Paragraph (b) permits broker-dealers to enter into new agreements with customers using existing supplies of preprinted forms that otherwise would violate paragraph (a) of the rule, until December 31, 1984, provided that adequate written disclosure accompany such agreements.19

      Another point mentioned by a number of the commentators concerns disclosure of the Wilko doctrine contained in the arbitration pamphlets of the SROs that administer arbitrations under the Code.20 These commentators believed that since all investors who are likely to submit a claim to arbitration receive the pamphlet, there is no need for additional disclosure or other changes to current customer agreement forms. The Commission does not agree with this view. First, as noted above, some investors may never receive the pamphlet because of their reluctance to submit a dispute to arbitration. Second, the disclosure in that pamphlet does not appear to have discouraged a number of broker-dealers from attempting to compel the arbitration of federal securities law claims.21

      Two of the commentators suggested that legislation be recommended that would permit the use of binding predispute arbitration clauses for future federal securities law disputes.22 Such a change in the law would require additional study and is beyond the scope of this rulemaking proceeding.23 Today's action should not be interpreted as inconsistent with the Commission's traditional strong support for the use of arbitration for the resolution of disputes that may arise between broker-dealers and their customers.

      Regulatory Flexibility Act Certification

      Pursuant to 5 U.S.C. 605(b), the Chairman certified at the time this rule was proposed that it would not, if promulgated, have a significant economic impact on a substantial number of small entities. The Commission has received one comment on the certification.24

      List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements, Securities.

      Text of Rule

      In accordance with the foregoing. Chapter II of Title 17 of the Code of Federal Regulations is amended by adding § 240.15c2-2 to read as follows:

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

      § 240.15c2-2 Disclosure regarding recourse to the courts notwithstanding arbitration clauses in broker-dealer customer agreements.

      (a) It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.
      (b) Notwithstanding paragraph (a) of this section, until December 31, 1934 a broker or dealer may use existing supplies of customer agreement forms if all such agreements entered into with public customers after December 28, 1983 are accompanied by the separate written disclosure:
      Although you have signed a customer agreement form with FIRM NAME that states that you are required to arbitrate any future dispute or controversy that may arise between us, you are not required to arbitrate any dispute or controversy that arises under the federal securities laws but instead can resolve any such dispute or controversy through litigation in the courts.
      (c) A broker or dealer shall not be in violation of paragraph (a) of this section with respect to any agreement entered into with a public customer prior to December 28, 1983 if:
      (1) Any such public customer for whom the broker or dealer has after July 1, 1983 (i) carried a free credit balance, or (ii) held securities for safekeeping or as collateral, or (iii) effected a securities transaction is sent, no later than December 31, 1984, the disclosure prescribed in paragraph (b) of this section; or
      (2) Any other public customer is sent upon the completion of his next transaction pursuant to such agreement, the disclosure prescribed in paragraph (b) of this section.

      Statutory Authority and Competitive Considerations

      The Securities and Exchange Commission, acting pursuant to the Act, and particularly sections 2, 10, 15, 23 and 29 thereof (15 U.S.C. 78b, 78j, 73o, 78w and 78cc), hereby adopts the amendment to § 240.15c2-2. The Commission finds that there will be no burden upon competition imposed by the amendments. This action becomes effective thirty days after publication in the Federal Register.

      By the Commission.

      Dated: November 18, 1983.

      Shirley E. Hollis,
      Assistant Secretary.

      [FR Doc:. 83-31895 Filed 11-25-83; 8:45 am]

      BILLING CODE 8010-01-M


      1 The Commission notes that SICA has recently reconvened in an effort to improve the Code with the benefit of the industry's first few years of experience with it. The Commission notes further that its approval of the adoption of the Code by the SROs specifically took into account that with respect to claims arising under the federal securities laws, arbitations conducted under the Code were to be an alternative to litigation, which could be agreed to by public customers only after a dispute had arisen. See, e.g., Securities Exchange Act Release No. 16390 (November 30, 1979).

      2 The basis for this view was discussed at length by the Commission in Securities Exchange Act Release No. 15984 (July 2, 1979).

      3 Fed. Sec. L. Rep. (CCH) 99,404 (6th Cir. 1983).

      4 Id. at pp. 96,328 and 96,329 (citation omitted).

      5 Courts have recognized an exception to the Wilko doctrine for suites between members of the securities industry's self-regulatory organizations. The Commission need to consider those decisions here as they are outside the scope of rule 15c2-2.

      6 One commentator, the Securities Industry Association ("SIA"), maintained, without citing a specific basis, that the case law "rests on questionable legal ground." Several commentators noted that to date predispute arbitration clauses have been held unenforceable only with respect to causes of action arising under the Securities Act of 1933 and the Securities Exchange Act of 1934. American Bar Association ("ABA"): Shearson/ American Express. Inc. ("Shearson"): Goldman Sachs & Co. ("Goldman"); American Stock Exchange, Inc. ("ASE"). These commentators have cited no basis upon which the Commission can determine that the Wilko analysis does not hold equally true for other federal securities acts, which contain substantially identical anti-waiver provisions.

      7 See comments of Thurston R. Moore, Esq.; ABA: American Arbitration Association ("AAA"); Shearson: Smith Barney, Harris Upham & Co. ("Smith Barney").

      8 See comments of Thurston R. Moore. Esq.; Professor Egon Cuttman; SIA; Smith Barney.

      9 Wall Street Clearing Co., Seligman Securities Inc.; SIA; ASE.

      10 Hanifen, Imhoff Inc. commented that use of arbitration clauses that "state the customer has no other remedy for violations of the federal securities taws" is deceptive, but believed that such "deceptive practices ... can be dealt with on a case-by-case basis."

      11 Tucker, Anthony & R.L. Day, Inc.

      12 Id.

      13 The same commentator also suggested the Commission might "require any firm which proposes arbitration to a customer as a forum for resolving a dispute be required to make the disclosure." The Commission believes that compliance with any such rule would be very difficult to monitor and thus less effective than this rule.

      14 Shearson.

      15 Similarly, Richard F. Hill, Esq. commented that "[i]n each case [in which he has represented public customers in disputes with broker-dealers], counsel to the broker-dealer has demanded that the entire action, including the securities claims, be submitted to arbitration [based upon arbitration clauses described by this release]. Consequently, [his] clients have had to incur legal fees to oppose Motions to Compel Arbitration."

      16 Bear, Stearns & Co.

      17 The NASD has not indicated an intention to propose such a rule during discussions on this subject over the past several years.

      18 Several other commentators also questioned the connection between an agreement for the purchase or sale of securities and a purchase or sale of securities. ABA; SIA; Smith Barney: Shearson.

      19 Thurston R. Moore, Esq. suggested that an interlineation on existing supplies of customer agreements would be as effective as a separate paper containing the written disclosure. Such a practice would be consistent with paragraph (b).

      20 Bear Steurns, ASE; SIA. Smith Barnny: ABA.

      21 See comment letter of Professor Guttman for a partial list of cases litigated on this question.

      22 Goldman; SIA.

      23 For a concise statement of views in this regard see Poser, Norman "Litigate? or Arbitrate? A proposed SEC rule ensuring investors know they can sue in disputes with brokers raises a minor storm of protest" Investment Dealers Digest (September 13, 1983).

      24 Smith Barney commented that compliance with the rule would be "an unreasonable financial burden in light of the proposed rule's questionable benefit." The comment does not offer support that there would be any significant impact on a substantial number of small entities, the inquiry anticipated by the Regulatory Flexibility Act. The Commission finds that there would be no such impact.


    • 83-72 Request for Comments on Proposed Amendment to Schedule C to the By-Laws

      I M P O R T A N T

      Officers * Partners * Proprietors

      TO: Members of the National Association of Securities Dealers, Inc. and Other Interested Persons

      COMMENT PERIOD CLOSES ON: January 20, 1984

      The National Association of Securities Dealers, Inc. ("Association") is publishing for comment a proposed amendment to Schedule C to the By-Laws. The amendment was approved by the Board of Governors at its November 1983 meeting. After the comment period has expired, the Board of Governors will review the proposal taking into consideration the comments received. If adopted by the Board of Governors the proposal will thereafter be filed with the Securities and Exchange Commission for approval.

      A discussion of the background and purpose of the amendment, an explanation of the changes and the text of the amendment appear below.

      BACKGROUND AND PURPOSE

      The proposal would amend the definition of "representative" in Schedule C to the By-Laws to cover a class of persons including persons who are employed by certain non-broker/dealer organizations and who perform activities on behalf of members similar to those performed by registered representatives. The effect of the amendment will be to require members to register such persons as representatives and bring them under regulation comparable to the regulation to which registered representatives of members presently are subject.

      In the mid-1940s the Association instituted its existing program for regulation of personnel of members by adopting amendments to its By-Laws and Rules of Fair Practice requiring members to register certain persons associated with members as registered representatives. The amendments also made registered representatives subject to the same obligations as members under the Association's rules and allowed disciplinary action to be brought against registered representatives for violations of Association rules. The regulation of registered representatives was extended in 1956 by the introduction of a requirement that persons becoming registered as representatives take and pass a written qualification examination before they could function as registered representatives of members.

      At the present time the registration and qualification requirements are contained in Schedule C to the By-Laws adopted by the Board of Governors pursuant to the authority granted by Article I, Section 2(d) of the By-Laws. The provisions of Schedule C have been refined in the intervening years so that today there are separate registration categories for principals and representatives and separate examinations for principals and representatives. In addition, there are specialized qualification examinations within the two broad categories for principals and representatives who engage in specialized areas such as the sale of investment company securities and variable annuities, direct participation program securities, options and municipal securities.

      Under existing Schedule C all persons who are compensated by members for solicitation, accepting orders, or recommending securities to customers or providing investment advice resulting in securities transactions must be registered before being permitted by a member to engage in such activities. The definition of "representative" in Schedule C covers persons who are engaged in the investment banking and securities business "for the member" including the functions of "solicitation or conduct of business in securities". The definition, however, has been traditionally applied only to employees, independent contractors and other natural persons who are directly compensated by the member for such activities.

      The Board is proposing to extend the coverage of Schedule C to apply to certain persons who, if they were employees of a member, would clearly fall within the definition of representative. The securities activities of banks, savings and loan associations and certain other organizations such as real estate brokers have expanded over the past few years. In addition, the relationship between members and these institutions has assumed a different direction. There have traditionally been personnel within these institutions engaged in securities activities such as trust officers, traders, portfolio managers and investment consultants and financial consultants and investment officers. In the past, however, these institutions simply referred securities business to members which charged the institutions a commission or fee. The commissions or fees earned by members from this referred business was not shared by the members with the institutions. A number of banks and savings and loan associations and other business organizations have recently entered into contractual or other arrangements with members to refer the institution's customers to members for execution of transactions and in return for such business the members have agreed to compensate the institutions by sharing commissions or in other ways. 1/ This appears to be an increasing trend in the securities industry. In many cases the ability of institutions to provide brokerage services to its customers through these arrangements with members is actively promoted through advertising and publications. Although some personnel at the institutions appear to perform only clerical and ministerial functions, there do not appear to be any requirements to limit the ability of personnel to make recommendations or engage in other functions specified in the definition of representative in Schedule C to the By-Laws. If such persons do make recommendations to customers, however, it does not appear that the registration requirements of Schedule C would apply since they often receive no direct compensation from members even though the employer institution does.

      The Board believes the public interest is not served by exempting from the registration requirements employees of organizations who are dealing with public customers in the same way in which registered representatives of members deal with the public. At the present time these persons are not required to take qualification examinations and function outside the supervisory responsibilities which members are required to exercise over their other representatives. It is also not entirely clear, absent registration, whether the Association could hold them individually accountable for misconduct by imposing disciplinary sanctions against them. The Association is concerned that the lack of any formal qualification standards, supervision and individual accountability for misconduct may create conditions which unnecessarily may expose public customers to the risk of harm. The Board believes that unless registration is a requirement it cannot fully carry out its statutory responsibility to prevent fraudulent acts and practices, to promote just and equitble principles of trade and to protect investors and the public interest.

      The proposal is intended to cover non-broker/dealer personnel who perform securities activities on behalf of members. It is thus limited to employees of organizations which have entered into arrangements with members by which the activities of the employees actively further the securities business of the members. Further, the only non-broker/dealer employees who would come under the new definition of "representative" in proposed section (b)(ii) would be employees who receive compensation from members or whose employers receive compensation from members. The Board believes that its statutory duty to regulate its members is not fully implemented by allowing a situation where persons soliciting or receiving business for members are not required to take and pass qualification examinations and to be subject to disciplinary action for violations of applicable requirements. The Board believes that if a person is soliciting or receiving business for a member and the member compensates the employer the impact on the public interest is no less great than if the person is compensated directly by the member. The need for protection against unqualified persons achieved by examinations and accountability through disciplinary proceedings and member supervisory responsibility is no less important. Accordingly, the effect of the proposal is to require members to register such persons so that investors will receive equal protection under the Association's rules and the federal securities laws.

      SCOPE OF PROPOSAL

      The following is a brief discussion of the intended scope of the proposal.

      1. It does not appear that the public interest requires registration of all persons employed by banks or other organizations which assist the organization and the member in furthering the member's securities business. Those employees who perform clerical and ministerial functions such as distributing literature describing the securities service being offered through a member or handing out necessary forms and providing routine procedural directions and instructions are not intended to be covered by the proposal. Such clerical activities do not require registration under present Schedule C for persons directly compensated by members where their employment is solely and exclusively limited to such activities.
      The only persons who would be deemed representatives under the proposed amendment are those employees of non-broker/dealer organizations whose activities fall into two categories: (1) solicit or receive orders from public customers for the purchase or sale of securities, or (2) give investment advice or make recommendations to public customers with respect to securities transactions. The language used is intended to limit the definition to employees of non-broker/dealers who receive orders directly from members of the public, whether or not solicited, or who make recommendations or give advice directly to public customers with respect to securities even though any resulting order may be directly transmitted by the customer to the member for execution.
      2. It is not intended that the proposal would apply to employees of banks or other organizations who engage in securities activities in areas of an organization where dealings with members do not result in payment of compensation by the member to the organization. The Board believes that its statutory responsibility to regulate its members makes it necessary and appropriate to assure the qualfications and integrity of employees of organizations who are employed in an area of the organization's operations where customers are introduced or referred to a member and compensation is paid to the employee or organization. Thus, the language of proposed Subsection (1)(b)(ii) of Part II of Schedule C would require registration only with respect to employees of organizations where the organization has entered into an arrangement with a member to receive compensation from transactions executed by the member. It also makes clear that only certain employees whose activities with the organization are in furtherance of the arrangement with the member are covered.
      The proposal is not intended to interfere with conventional securities activities of banks or other organizations. Where no compensation is received from members, the personnel in bank trust departments, traders, money managers, portfolio managers could continue to engage in such securities activities as making recommendations covering securities and executing or transmitting orders to broker/dealers for execution without any requirement to register.
      3. The proposal does not cover arrangements between members and organizations which are registered broker/dealers because under such arrangements the organization's personnel have satisfied applicable qualification requirements and are already subject to regulatory jurisdiction by one or more regulatory organizations. For the same reason employees of non-broker/dealer organizations who are themselves registered broker/dealers are excluded from coverage. The proposal is also intended to cover natural persons who, although not employees, are affiliated with the organization such as consultants or other independent contractors. The definition of "compensation paid by the member" to include commission sharing is intended to prevent circumvention through arrangements structured to make it appear that the compensation is being paid by the organization to the member. If the nature of the arrangement contemplates referral of customer business to the member with an agreement to share resulting commissions, the mechanics of sharing the commissions would be irrelevant for purposes of the new definition.
      4. The changes proposed in Subsections (1)(a), (2)(a)(i), (2)(b)(i), (2)(c)(i) and (2)(d) of Part II of Schedule C are technical amendments to avoid misunderstanding concerning the intended scope of new Subsection (1)(b)(ii). The Association believes that in the vast majority of eases such individuals would clearly come within the definition of associated persons under the By-Laws. The Association recognizes, however, that there may be some situations where the definition of associated persons would apply but in an indirect way. The approach the Association has taken therefore is to make the registration requirements clear by defining the term registered representative to specifically include such persons as registered representatives.
      All comments pertaining to this proposal should be in writing and sent to S. William Broka, Secretary, National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006, and be received on or before January 13, 1984, in order to receive consideration. Questions concerning the proposal may be directed to John F. Mylod, Jr., Assistant General Counsel, at (202) 728-8288.

      Sincerely

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      TEXT OF PROPOSED AMENDMENTS

      Schedule C to the By-Laws

      II.

      REGISTRATION OF REPRESENTATIVES

      (1) Registration Requirements
      (a) All Representatives Must be Registered — All persons included within the definition of Representative associated with a member who are to function as representatives shall be registered as such with the Corporation in the category of registration appropriate to the function to be performed as specified in Part II, Section (2) hereof. Before their registrations can become effective, they shall pass a Qualification Examination for Representatives appropriate to the category of registration as specified by the Board of Governors.
      (b) Definition of Representative:
      (i) Persons associated with a member, including assistant officers other than principals, who are engaged in the investment banking or securities business for the member including the functions of supervision, solicitation or conduct of business in securities or who are engaged in the training of persons associated with a member for any of these functions are designated as representatives; and
      (ii) Any other natural person, other than a registered broker or dealer, who solicits or receives orders from customers for the purchase or sale of securities for execution by a member, or gives investment advice or makes recommendations to customers with respect to securities transactions for execution by a member in furtherance of any arrangement by which compensation is paid by the member for such activities to such person or to an entity, other than a registered broker or dealer, with which such person is employed or otherwise affiliated. For purposes of this subsection, "compensation paid by the member" shall include any sharing of compensation paid by customers.

      [In addition, Subsections (2)(a)(i), (2)(b)(i), (2)(c)(i) and (2)(d) of Part II of Schedule C would be amended to eliminate the phrase "associated with a member".]


      1/ Banks are exempt from the broker /dealers definitions in the 1934 Act and a number of savings and loans have received "no-action" letters to permit such arrangements without broker/dealer registration.


    • 83-71 Hanover Square Securities Group Inc. 5 Hanover Square New York, New York 10004

      TO: ALL NASD MEMBERS

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On December 15, 1983, the United States District Court for the Southern District of New York appointed a SIPC trustee for the above captioned firm. Previously, a temporary receiver had been appointed for the firm on December 8, 1983.

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

      Questions regarding the firm should be directed to:

      SIPC Trustee

      James W. Giddens, Esquire
      Hughes Hubbard & Reed
      One Wall Street
      New York, New York 10005
      Telephone: (212) 943-6500

    • 83-70 Automatic Money Market Fund Redemptions

      TO: All NASD Members

      There appears to be a growing practice among member firms to offer their retail customers a service whereby debit balances created by the purchase of securities in the customer's cash account with the member will be automatically satisfied by the redemption of shares of a money market fund. This practice is distinguishable from what have been called "account management plans" under which a customer, upon application, by maintaining a specified account balance and paying certain fees, is entitled to a defined "package" of services including both credit and debit "sweeps" of the customer's securities and money fund accounts. The practice which is the subject of this Notice involves debit "sweeps" only and applies to any customer having both a securities and money fund account.

      The structure of the automatic redemption plans generally involves automatic sale or redemption of the money market fund shares unless the customer specifically notifies the member of his intention to make payment by another method,, Even though this service tends to be viewed as an optional method of payment for securities purchased, it does involve the processing of an order to sell securities, i.e. money market fund shares, for which a member should have proper authorization. Such authorization is necessary in light of the Policy of the Board of Governors relating to Fair Dealing with Customers, which is found under Article III, Section 2 of the Rules of Fair Practice. This policy prohibits the execution of transactions by member firms which are unauthorized by the customer.

      The Association recognizes the fact that when a member wishes to make an automatic money market fund liquidation service available to large numbers of existing clients, it may become extremely difficult and impractical to obtain specific written agreement from each client prior to initiating the procedure. The Association's Board of Governors has reviewed this question in light of existing practices of members and has concluded that, in situations where a member institutes an automatic redemption program of which adequate notice is given to account holders, no disciplinary action against the firm for executing unauthorized transactions by virtue of redemption of money market fund shares would be warranted. To be considered adequate notice in the context of potential review by a District Business Conduct Committee, the notification process should include a letter or other written notice specifically calling the program to the attention of the customer and outlining the procedures to be followed by the customer to utilize the automatic redemption or to elect not to do so. The notice should also outline the specific procedures followed by the member in effecting the automatic redemption policy, including the steps the client must take to override the automatic procedure as to a specific purchase transaction. Of course, where written discretionary authority over the account has been obtained, pursuant to Article III, Section 15 of the Association's Rules of Fair Practice, no separate notice of the automatic money market fund redemption procedure would be required.

      Members should recognize that this notice relates solely to the application and administration of NASD Rules and policies and does not purport to define the contractual obligation of the member and customer under the laws of any state. Neither should the policy outlined herein be deemed to permit members to execute transactions in securities of other than money market funds without specific authorization. The policy reflects the unique use of money market fund shares as a cash management vehicle. In addition, members undertaking and administering any automatic redemption program must, as in all dealings with customers, act in a manner consistent with Article III, Section 1 of the Rules of Fair Practice and the Association's requirements for fair dealing with customers.

      Questions regarding this Notice to Members should be addressed to T. Grant Callery at (202) 728-8285.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      and General Counsel

    • 83-69 Amendments to the Uniform Practice Code to Extend Applicability of the Code to Secondary Market Transactions in Unit investment Trust Securities

      TO: All NASD Members

      ATTN: Operations Principals, Cashiers and Buy-in Personnel

      The Association's Board of Governors has adopted various amendments to the Uniform Practice Code which prescribes the manner in which over-the-counter securities transactions are compared, cleared and settled between NASD member firms. These amendments to the Code apply to all NASD members participating in secondary transactions in unit investment trust securities.

      BACKGROUND AND EXPLANATION OF AMENDMENTS

      The amendments to the Uniform Practice Code are designed to extend the applicability of the Code to secondary market transactions in unit investment trust securities. The amendments also specifically exempt from such coverage, transactions in other redeemable securities registered under the Investment Company Act of 1940 and direct participation program securities, both of which have in the past been treated as being exempt from coverage of the Code.

      The original proposal to extend the scope of the Code was urged by member firms because of the increased popularity and trading activity in this investment product. In particular, it was perceived that a substantial "fail-to-deliver" problem existed in the secondary market for UITs. Historically, the Code has been applied only to corporate equity and debt securities and not to securities registered under the Investment Company Act of 1940. In this regard a special subcommittee of the Association's Uniform Practice Committee was formed to study the feasibility of adapting the Code to UITs and to develop the necessary amendments.

      The subcommittee concluded that UPC coverage of UITs was feasible and desireable. The subcommittee then undertook a section-by-section analysis of the Code to determine what, if any, changes were appropriate to extend the coverage of the Code to UITs. The resulting amendments to the Code will provide industry-wide uniformity in trading and trade processing for unit investment trust securities.

      The amendments to Section 1 of the Code, relating to the scope of coverage of the Code provide for the inclusion of UITs, the exclusion of DPP securities and a clarification of existing practice that the Code applies only to secondary market trades. The purpose of the amendments, with the exception of Section 59, is simply to extend application of the affected Sections to UITs. The amendments to Section 59 of the Code relating to buy-in procedures provide a number of options available to a purchaser wishing to "buy-in" contracts in unit investment trust securities. These options allow the purchaser either to buy-in identical securities, to accept UIT units comparable to those originally purchased, or if neither of the first two options are available, to require the seller to repurchase the unit investment trust securities. Such a repurchase is to be completed on terms which require the seller to bear the burden of any change in market price in the securities along with accrued interest. This option, which* is similar to that provided by MSRB Rule G-12, is made available because, as with municipal securities, only a limited number of identical or comparable trust units may be available thereby precluding a true buy-in on the part of the aggrieved purchaser.

      The following is a brief description of the adopted amendments to the Code. The full text of the amendments is attached.

      • In Section I (a) of the Code, the term "secondary market" has been added to express more clearly the fact that only aftermarket transactions are covered by the Code and that its provisions are not applicable to the original distribution of a new issue.
      • A new Section 1(a)(iv) has been added which generally excludes redeemable securities from coverage under the Code. The exception is made, however, for all secondary market transactions in UITs except redemptions.
      • Old Section 6(b) defining "record date" has been redesignated Section 3(d) and amended to specifically include unit investment trust securities and principal payments on these securities.
      • Non-substantive language has been added in Section 5(b) (3) to clarify the process for declaration of ex-dividend dates on securities of open-end management investment companies.
      • Language has been added to Section 10 relating to descriptions of securities in confirmations and comparisons to include the payment option on unit investment trust securities.
      (b)
      (1) and (2) Unchanged
      (b)
      (3) Ex-dividend dates for investment company shares
      Notwithstanding the above, the ex-dividend date on [stock] securities of an open-end management investment company shall be the date designated by the issuer or its principal underwriter.
      (c) - Unchanged

      Sec. 6 TRANSACTIONS "EX-INTEREST" IN BONDS WHICH ARE DEALT IN "FLAT"

      [(a)] - Text of subsection unchanged
      ["Record Date"
      (b) As used in this Section, the term "record date" means the date fixed by the trustee, registrar, paying agent or issuer for the purpose of determining the holders of bonds, or similar evidences of indebtedness entitled to receive interest payments.]

      Sec. 7-9 Unchanged

      Sec. 10 DESCRIPTION OF SECURITIES

      Confirmations or comparisons shall include, in addition to an adequate description of the security [and] (which shall include payment options on a unit investment trust series), the price at which the transaction was made[,] and any other information deemed necessary to insure that the buyer and seller agree as to details of the transaction. Such "other information" should include, if applicable, but need not be limited to, such phrases as "ex-warrants," "ex-stock," "registered," "flat," "part-redeemed," "Canadian funds," "with proxy," etc.

      Sec. 11-17 - Unchanged

      Sec. 17A - Units of Delivery - Unit Investment Trust Securities

      The minimum unit of delivery for Unit Investment Trust Securities shall be a single unit of the trust.

      Sec. 18-45 - Unchanged

      Sec. 46 COMPUTATION OF INTEREST

      • A new Section 17 (A) is being added to define the unit of delivery for unit investment trust securities as a single unit of the trust.
      • In Sections 46(a), (c) and (d), the term "bond" has been deleted and replaced with the word "security" in order to expand the application of those sections dealing with the computation of accrued interest for unit investment trust securities.
      • Sections 48(b) and (d) have been amended to specifically refer to unit investment trust securities in the definition of "due-bill checks."
      • In Section 49 (c), language has been added to specifically refer to unit investment trust securities in the procedure for claiming interest payments.
      • Language has been added in Section 56(a) to specifically refer to unit investment trust securities in the procedure for reclamations.
      • Old Section 59(c) has been redesignated Section 59(c) (i) and a new Section 59(c) (ii) has been added to provide a buy-in procedure for unit investment trust securities. In essence, these provisions allow a purchaser of securities which have not been delivered either to buy the securities in, to agree upon a substitution of securities or, if both of these options are unavailable, to effect a repurchase of the securities. These procedures are comparable to the buy-in provisions of Rule G-12 of the Municipal Securities Rulemaking Board.

      The text of these amendments to the Association's Uniform Practice Code is attached. Questions regarding these amendments may be directed to Donald J. Catapano, Uniform Practice Department at (212) 839-6255.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Enclosures

      (a) Interest to be added to the dollar price
      In the settlement of contracts in interest - paying securities other than for "cash," there shall be added to the dollar price interest at the rate specified in the [bond] security, which shall be computed up to but not including the fifth business day following the date of the transaction. In transactions for "cash," interest shall be added to the dollar price at the rate specified in the [bond] security up to but not including the date of transaction.
      (b) Unchanged
      (c) [Registered bonds] Securities traded "and interest"
      When a delivery of a [registered bond] security traded "and interest" is made between the record date fixed for the purpose of determining the holder entitled to receive interest and the interest payment date, a deduction equivalent to the full amount of the interest to be paid [by the obligor] shall be made on settlement.
      (d) [Registered bonds] Securities traded "flat"
      When delivery of a [registered bond] security traded "flat" is made after the record date fixed for the purpose of determining the holder entitled to receive interest, in the settlement of a contract made prior to the date on which the [issue of bonds] security was traded "ex-interest," a due-bill check for the full amount of the interest to be paid [by the obligor] shall accompany the delivery.
      (e) and (f) - Unchanged

      Sec. 47 Unchanged

      Sec. 48 DUE-BILLS AND DUE-BILL CHECKS

      (a) Unchanged
      (b) Definition of due-bill checks
      The term "due-bill checks" as used in this Section means a due-bill in the form of a check payable on the date of payment of a cash dividend [or]j_ interest on registered bonds or interest on unit investment trust securities, which prior to such date shall be considered as a due-bill, as defined in paragraph (a) above, for the amount of such dividend or interest [on registered bonds].
      (c) Unchanged

      TEXT OF AMENDMENTS TO UNIFORM PRACTICE CODE TO INCLUDE UNIT INVESTMENT TRUST SECURITIES

      (New language is underlined, deleted language is bracketed)

      UNIFORM PRACTICE CODE

      Sec. 1 SCOPE OF UNIFORM PRACTICE CODE

      (a) All over-the-counter secondary market transactions in securities between members shall be subject to the provisions of this Code except:
      (i), (ii), (iii) - Unchanged
      (iv) transactions in redeemable securities issued by companies registered under the Investment Company Act of 1940; provided however the the Code shall apply to secondary market transactions between members in any security issued by a registered investment company classified as a "unit investment trust" under Section 4 of the Investment Company Act. Redemption of securities directly by the trustee of the unit investment trust are not transactions between members for purposes of this subsection.
      (v) transactions in Direct Participation Program securities as defined in Article III, Section 34 of the Association's Rules of Fair Practice.
      (b) and (c) - Unchanged

      Sec. 2 Unchanged

      Sec. 3 DEFINITIONS

      (a), (b), (c) - Unchanged

      Record Date

      (d) As used in this Code the term "record date" means the date fixed by the trustee, registrar, paying agent or issuer for the purpose of determining the holders of bonds, similar evidences of indebtedness or unit investment trust securities entitled to receive interest or principal payments.

      Sec. 4 Unchanged

      Sec. 5 TRANSACTIONS IN SECURITIES "EX-DIVIDEND," "EX-RIGHTS" OR "EX-WARRANTS"

      (a) - Unchanged
      (d) Due-bill checks for cash distribution and interest
      Due bill checks for a cash distribution, [or] interest on registered bonds or interest on unit investment trust securities shall accompany securities delivered too late for transfer on or before the record date.
      (e) and (f) - Unchanged

      Sec. 49 CLAIMS FOR DIVIDENDS, RIGHTS, INTEREST, ETC.

      (a) and (b) Unchanged
      (c) Interest or rights [on registered bonds]
      The provisions of subsections (a) and (b) of this section shall be equally applicable to interest or rights pertaining to registered bonds and unit investment trust securities.

      Sec. 50-55 - Unchanged

      Sec. 56 IRREGULAR DELIVERY - TRANSFER REFUSED - LOST OR STOLEN SECURITIES

      (a) Irregular delivery
      Reclamation, by reasons of the fact of an irregularity in the delivery of a security, shall be within 30 months after the settlement date of the contract. For purposes of this section, the term "irregular delivery" shall include, among other things, wrong, duplicate, misdirected [and] O£ over-[delivery] deliveries and delivery of unit investment trust securities having the incorrect payment option.

      (b), (c), (d) - Unchanged

      Sec. 57-58 - Unchanged

      Sec. 59 "BUYING-IN"

      (a) and (b) - Unchanged
      (c)
      (i) Seller's failure to deliver after receipt of notice
      On failure of the seller to effect delivery in accordance with the "buy-in" notice, or to obtain a stay as hereinafter provided, the buyer may close the contract by purchasing all or any part of the securities necessary to complete the contract. Such execution will also operate to close-out all contracts covered under retransmitted notices of buy-in issued pursuant to the original notice of buy-in, A "buy-in" may be executed by a member from its long position and/or from customer's accounts maintained with such member. In all cases, members must be prepared to defend the price at which the "buy-in" is executed relative to the current market at the time of the "buy-in."
      (c)
      (ii) Buy-in for unit investment trust securities
      Buy-in execution options, in addition to those contained in (c)(i), may be available when the purchaser wishes to buy-in contracts made for unit investment trust securities.
      The purchaser may,
      (a) by mutual agreement, accept from the seller in lieu of the seller's obligation under the original contract (which shall be concurrently cancelled) the delivery of unit investment trust securities which are comparable to those originally bought in quantity, quality, yield or price and maturity, with any additional expenses or any additional cost of acquiring such substituted securities being borne by the seller.
      (b) if the purchaser's option in (c)(i) is not available and the purchaser and seller cannot agree upon option (a), above, require the seller, for the account and liability of the seller, to repurchase the unit investment trust securities on terms which provide that the seller pay an amount which requires the seller to bear the burden of any change in the market price from the original contract price, with accrued interest.
      Bearing the burden of any change in the market price from the original contract price means that if the current market price is higher than the original contract price, the purchaser may require the seller to repurchase the unit investment trust securities at the current market price and conversely means that if the current market price is lower than the original contract price, the purchaser may require the seller to repurchase the unit investment trust securities at the original contract price, with accrued interest.
      (d) - (n) - Unchanged

      Sec. 60-64 Unchanged

    • 83-68 NOT AVAILABLE AT THIS TIME

    • 83-67 Proposed Amendments to the Corporate Financing Rule Proposed Amendments to Section 26 of the Rules of Fair Practice

      I M P O R T A N T

      MAIL VOTE

      Officers * Partners * Proprietors

      TO: All NASD Members

      Last Voting Date is January 9, 1984

      Attached are amendments regarding two separate issues which are being submitted to the membership for a vote. The first issue is that of amendments to the proposed Corporate Financing Rule filing requirements which would exempt from those requirements all debt and equity securities registered with the Securities and Exchange Commission on Registration Statement Form S-3. The proposed exemption would replace the present NASD exemptions for debt rated "B" or better by a recognized rating service and for debt and equity offerings registered on a Form S-3 and distributed pursuant to Rule 415.

      On May 27, 1983, the Association requested comments on the amendments to the proposed Corporate Financing Rule filing requirements. (Notice to Members 83-25). The proposed amendment was approved by the Association's Board of Governors on July 15, 1983, and now requires approval by the membership. If approved, it must be filed with and approved by the Securities and Exchange Commission pursuant to Section 19(b) of the Securities Exchange Act of 1934, as amended. The background and details of the amendment are discussed below (Exhibit A). The text of the proposed amendments is attached to this notice (Exhibit B).

      The second issue requiring a membership vote is that of proposed amendments to Article III, Section 26 of the Rules of Fair Practice. The proposed amendments to subsection (k) of Section 26 are purely technical in nature and have no material effect on the standards contained in the rule. They represent language clarifications requested by the staff of the Securities and Exchange Commission in connection with the Commission's approval of prior amendments. The text of the proposed amendments is also attached to this notice (Exhibit C).

      Should the proposed amendments be approved by membership vote, they must be filed with and approved by the Securities and Exchange Commission pursuant to Section 19(b) of the Securities Exchange Act of 1934, as amended.

      Sincerely,

      Gordon S. Macklin
      President

      Enclosures

      Exhibit A

      CORPORATE FINANCING RULE

      BACKGROUND

      The Interpretation of the Board of Governors — Review of Corporate Financing ("Corporate Financing Interpretation") under Article III, Section 1 of the Rules of Fair Practice (NASD Manual (CCH) Para. 2151) requires that most public offerings of debt and equity securities which involve member participation be filed with the Association for a review of the underwriting terms and arrangements. Historically, the Association, through its filing requirements, has tried to identify offerings in which review of the underwriting terms and arrangements would be most meaningful. In the past, certain types of offerings have been exempted from the filing requirements where market forces or other constraints were present to assure the fairness and reasonableness of underwriting terms and arrangements, including specifically the amount of underwriting compensation.

      In Notice-to-Members 83-24 (May 19, 1983), the Association submitted to the membership for vote a new Corporate Financing Rule which, when approved by the SEC, will replace the Corporate Financing Interpretation. Sections (c)(3)(D) and (F) of the Corporate Financing Rule exempt from the filing requirements debt rated "B" or better by a recognized rating service and securities registered as part of a "shelf" registration on Form S-3 issued by a registrant which meets the requirements of Form S-3 as those requirements were in effect on March 1, 1983.

      The exemption for offerings of debt securities rated "B" or better by a recognized rating service reflects the nature of the debt market during the late 1960's when the filing requirements were developed. At that time, most outstanding debt was rated "B" or better. There was a small amount of debt rated below "B" which was of significantly lesser quality.

      The exemption for securities registered on a Form S-3 and distributed pursuant to Rule 415*/ is an extension of prior policy which provided an exemption for "shelf" offerings registered on a Form S-16 which do not involve an underwriting agreement. The current exemption reflects a determination that, irrespective of whether the securities are sold in normal brokerage transactions or pursuant to an underwriting agreement, market pressures in connection with "shelf" offerings result in the amount of underwriting compensation being determined through a virtual competitive bidding process which helps to achieve its reasonableness. Even in "shelf" offerings which eventually include a traditional underwriting agreement, the Association believes that the competitive pressures which come into play in the negotiations preceding the execution of that agreement can usually be relied upon to achieve the overall fairness of the arrangement.

      Recently, the Association reexamined its filing requirements in light of the adoption by the SEC of the Form S-3 eligibility criteria. Form S-3 is the most streamlined of SEC registration statement forms and permits issuers to incorporate by reference substantial amounts of information from annual reports and other periodic filings. The Commission devoted substantial resources to identifying those securities and issuers which were widely followed and subject to sufficiently meaningful market forces as to assure that adequate information was readily available in the marketplace.

      To use Form S-3, both the registrant and the transaction must meet specified qualifications. Form S-3 may be used by a U.S. registrant which has been a reporting company for 36 months prior to the filing, and has made timely filings for 12 months preceding the filing date. In addition, neither the registrant nor its subsidiaries may have defaulted in the payment of required dividends or any material obligations since the end of its last audited year.

      Form S-3 may be used for primary offerings of such registrants which have outstanding voting stock held by non-affiliates with an aggregate market value of $150 million, or alternatively, $100 million aggregate market value and annual trading volume of three million shares. Primary offerings by qualified registrants of "investment grade" non-convertible debt and preferred securities may also be registered on Form S-3. Investment grade debt is defined as those securities rated by a nationally recognized statistical organization in the four highest categories (e. g. "AAA" through "BBB" by Standard & Poor's and "Aaa" through "Baa" by Moody's). Secondary offerings of outstanding securities by any person other than the issuer may be registered on Form S-3 if the securities are quoted on NASDAQ or listed on a national securities exchange. Finally, rights offerings, dividend and interest reinvestment plans, and offerings of securities upon conversion and the exercise of warrants may be registered on Form S-3.

      Having observed the operation of the integrated disclosure system for over a year, the Corporate Financing Committee and Board of Governors have concluded that it is appropriate to amend the NASD filing requirements to reflect the new structure of SEC registration requirements.

      EXPLANATION OF PROPOSED AMENDMENTS

      The proposed amendments significantly alter present NASD filing requirements for both debt and equity securities. With respect to equity offerings, i.e. offerings which have any attribute of equity ownership, the number of offerings which would be required to be filed would be substantially reduced. Currently, most equity offerings are required to be filed with the Association, except where the offering is being made pursuant to Rule 415. Under the proposed amendment, the current exemption for equity offerings registered on a Form S-3 and distributed pursuant to Rule 415 would be eliminated. In its place, the Association is proposing that an exemption for all equity offerings registered with the SEC on Form S-3 (or an equivalent successor form) be adopted. As explained above, primary offerings of equity securities can generally be registered on Form S-3 when the issuer has outstanding voting stock held by non-affiliates with an aggregate market value of $150 million or such stock has an aggregate market value of $100 million and a trading volume of three million shares. The market value and trading volume requirements are inapplicable to preferred offerings, rights offerings, dividend and interest reinvestment plans and offerings upon conversion and the exercise of warrants.

      With respect to debt offerings, i.e. offerings with no equity characteristics, the proposed amendments would require a greater number of such offerings to be filed than at present. Pursuant to the proposed amendment, the present exemptions for debt rated "B" or better and "shelf" offerings of debt registered on a Form S-3 would be eliminated. In its place, an exemption for all debt registered on Form S-3 (or an equivalent successor form) would be adopted. Generally speaking, therefore, debt instruments rated "B", or "BB" by Standard and Poor's and "B" or "Ba" by Moody's would become subject to NASD filing requirements. In today's market, the nature of debt instruments is significantly different than that which existed when the filing requirements were developed in the late 1960's. There has been a proliferation of types and levels of quality debt. The Corporate Financing Committee concluded, therefore, that it is appropriate to subject these instruments to review by the Association to assure the fairness and reasonableness of their overall underwriting terms and arrangements.

      In recommending the proposed amendments, the Corporate Financing Committee concluded that competitive market forces which ordinarily affect a public offering by an issuer qualified to use Form S-3 are effective in assuring that the underwriting terms and arrangements generally are fair and reasonable. In addition, the Committee noted that rapid access to the marketplace has become increasingly critical for certain issuers and that such access has been facilitated by SEC policies which permit offerings to become effective without detailed review. The Association has long been committed to expediting its review of offerings where rapid market access was critical. It is therefore appropriate that the Association take steps to assure ready access to the marketplace so long as investor protection is assured.

      It is important to note that the proposed amendments relate only to filing requirements and do not constitute exemptions from the substantive requirements of the Corporate Financing Interpretation or the proposed Rule. Members will still be expected to assure compliance with those requirements in any offerings in which they participate. Additionally, the proposed exemptions relate only to filing requirements under the proposed Corporate Financing Rule; these exemptions do not extend to offerings which are subject to Schedule E to Article IV, Section 2 of the NASD By-Laws concerning offerings by members of their own securities or those of affiliates.

      The text of the proposed amendments is attached.

      PROCEDURES FOR ADOPTION OF RULE

      The authority for this proposal is contained in Section 15A of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78o-3), and Article VII of the Association's By-Laws.

      Exhibit B

      Text of Proposed Amendment*/

      Subsection (c): Filing Requirements

      (1) General
      No member or person associated with a member shall participate in any manner in any public offering of securities unless documents and information as specified herein relating to such offering have been filed with and reviewed by the Association for compliance with this section. For purposes of this section, participation in a public offering shall include participation in the preparation of offering or other documents, participation in the distribution of the offering on an underwritten, non-underwritten or any other basis, or participation in any advisory capacity related to the offering.

      * * *

      (3) Excepted Offerings
      The provisions of paragraph (1) notwithstanding, documents and information shall not be required to be filed with respect to offerings of the following types of securities:
      (A) securities which are defined as "exempt securities" in Section 3(a)(12) of the Securities Exchange Act of 1934, as amended;
      (B) securities of investment companies registered under the Investment Company Act of 1940, as amended, except securities of a management company defined as a "closed-end company" in Section 5(a)(2) of that Act;
      (C) variable contracts as defined in Article III, Section 29(b)(l) of the Rules of Fair Practice;
      (D) nonconvertible debt securities or preferred stock which is rated "B" or better by a national rating agency recognized by the Association;
      (E)
      (D) securities issued pursuant to a competitively bid underwriting arrangement meeting the requirements of the Public Utility Holding Company Act of 1935, as amended;
      (F)
      (E) securities registered as part of a "shelf" registration, Provided that said securities are registered with the Securities and Exchange Commission on registration statement Form S-3 or a similar form promulgated in lieu of Form S-3 and are issued by an issuer which presently meets the issuer requirements of Form S-3 as those requirements were in effect on March 1, 1983; and provided further, that said securities are reasonably expected to be offered pursuant to Rule 415 adopted under the Securities Act of 1933, as amended, as that rule was in effect on March 1, 1983;
      (G)
      (F) private offerings which are exempt from registration under Section 4(1), 4(2) or 4(6) of the Securities Act of 1933, as amended; and
      (H)
      (G) tender offers made pursuant to Regulation 14D adopted under the Securities Exchange Act of 1934, as amended, as that regulation was in effect on March 1, 1983.

      Exhibit C

      Below are technical amendments which will have no substantive effect on Article III, Section 26. The proposed changes are merely in conformance with the Commission's request for language changes.

      Proposed Amendments to Article III, Section 26(k) of the Rules of Fair Practice

      (additions underlined; deleted material in brackets)

      Execution of Investment Company Portfolio Transactions

      (k)
      (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, 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.
      (3) 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.
      (4) 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.
      (5) No member shall, with respect to such member's activities as an 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.
      (6) 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 campaigns 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.
      (7) Provided that the member does not violate any of the specific provisions of this subsection (k), [N] nothing [in this subsection (k)] 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;
      (B) a member from selling shares of, or acting as underwriter for, an investment company which follows a policy, disclosed in its prospectus, of considering sales of shares of the investment company as a factor in the selection of broker-dealers to execute portfolio transactions, subject to the requirements of best execution;
      (C) 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 or 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 subsection (k).

      */ The Association recently clarified the filing requirements with respect to "shelf" offerings registered on a Form S-3 in Notice-to-Members 83-12 (March 8, 1983).


    • 83-66 51 Securities To Voluntarily Join NMS on Tuesday, December 20

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

      An additional 51 securities voluntarily will join the NASDAQ National Market System on Tuesday, December 20. This will bring the total number of issues trading on NMS to 684. These 51 issues meet the voluntary designation criteria set by the SEC, which include an average monthly trading volume of 100,000 shares and a minimum bid price of $5.

      The 51 securities scheduled for inclusion on December 20 are:

      ACLE

      Acceleration Corporation

      Dublin, OH

      ADVC

      Advance Circuits, Inc.

      Hopkins, MN

      AMGN

      Amgen

      Thousand Oaks, CA

      ANLY

      Analysts International Corporation

      Minneapolis, MN

      AHST

      Associated Hosts, Inc.

      Beverly Hills, CA

      ATRN

      Austron, Inc.

      Austin, TX

      AITX

      Automatix Incorporated

      Billerica, MA

      AVGA

      Avant-Garde Computing Inc.

      Cherry Hill, NJ

      BKNE

      Bank of New England Corporation

      Boston, MA

      BSET

      Bassett Furniture Industries, Incorporated

      Bassett, VA

      CLHO

      Clayton Homes Inc.

      Knoxville, TN

      CPTD

      Computer Data Systems, Inc.

      Bethesda, MD

      CRII

      Computer Resources, Inc.

      Cleveland, OH

      CYCR

      CyCare Systems, Inc.

      Dubuque, IA

      DMAL

      Dayton Malleable Inc.

      Kettering, OH

      DRYR

      Dreyer's Grand Ice Cream, Inc.

      Oakland, CA

      DUCK

      Duckwall-Alco Stores, Inc.

      Abilene, KS

      GOAA

      Great Outdoor American Adventure, Inc. (The)

      Woodinville, WA

      HUGH

      Hughes Supply, Inc.

      Orlando, FL

      HYDE

      Hyde Athletic Industries, Inc.

      Cambridge, MA

      ILFC

      International Lease Finance Corporation

      Beverly Hills, CA

      JNAL

      Jackson National Life Insurance Company

      Lansing, MI

      KTOS

      Kratos, Inc.

      La Jolla, CA

      LTXX

      LTX Corporation

      Westwood, MA

      LTEC

      Lincoln Telecommunications Company

      Lincoln, NE

      MTRX

      Matrix Science Corporation

      Torrance, CA

      MXWL

      Maxwell Laboratories, Inc.

      San Diego, CA

      MDEX

      Medex, Inc.

      Hilliard, OH

      MEDT

      Medical 21 Corp.

      Dallas, TX

      MNFT

      Monfort of Colorado, Inc.

      Greeley, CO

      NCAC

      NCA Corporation

      Sunnyvale, CA

      OCAS

      Ohio Casualty Corporation

      Hamilton, OH

      OLDR

      Old Republic International Corporation

      Chicago, IL

      REAL

      Reliability Incorporated

      Houston, TX

      RYBF

      Royal Business Group, Inc.

      Nashua, NH

      SEIC

      SEI Corporation

      Wayne, PA

      SFCD

      Safecard Services, Incorporated

      Fort Lauderdale, FL

      SVAN

      Savannah Foods & Industries, Inc.

      Savannah, GA

      SHNS

      Shoney's South, Inc.

      Memphis, TN

      SVGI

      Silicon Valley Group, Inc.

      Santa Clara, CA

      SDUN

      Standun Inc.

      Rancho Dominquez, CA

      STGR

      Steiger Tractor, Inc.

      Fargo, ND

      SYSG

      Systematics General Corporation

      Sterling, VA

      SAIN

      Systems Associates, Inc.

      Charlotte, NC

      TLXN

      Telxon Corporation

      Akron, OH

      TDSC

      Tesdata Systems Corporation

      McLean, VA

      TFFC

      Texas Federal Financial Corporation

      Dallas, TX

      TTEC

      Thoratec Laboratories Corporation

      Berkeley, CA

      WFSL

      Washington Federal Savings & Loan Association of Seattle

      Seattle, WA

      ZENI

      Zenith Laboratories, Inc.

      Northvale, NJ

      ZOND

      Zondervan Corporation (The)

      Grand Rapids, MI

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

      Sincerely,

      Gordon S. Macklin
      President

    • 83-65 Due Diligence and Certification Requirements With Respect To Taxpayer Identification Numbers and Backup Withholding

      I M P O R T A N T

      Officers * Partners * Proprietors

      TO: All NASD Members and Other Interested Persons

      Earlier this year, the provisions under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") with respect to withholding on dividends and interest was repealed by Congress.

      Shortly after the repeal of withholding, the Interest and Dividend Tax Compliance Act of 1983 ("The Act") was enacted as a compromise measure.

      Certain provisions of the Act, particularly those relating to certification requirements for taxpayer identification numbers ("TIN") and backup withholding will impact members who are payors of reportable dividends, interest or gross proceeds.

      What follows is a summary of the key provisions of the temporary regulations issued under the Act. The full text of the temporary regulations, in a question and answer format, are reprinted in this notice.

      DUE DILIGENCE AND CERTIFICATION REQUIREMENTS

      Commencing January 1, 1984, Association members who act as payors of reportable interest and dividends or who are otherwise subject to the information reporting requirements under TEFRA, e.g., gross proceeds reporting, are subject to the due diligence and certification requirements with respect to taxpayer identification numbers and backup withholding.

      The IRS is authorized to impose a penalty of $50 per failure on payors who fail to furnish a taxpayer identification number or provide the service with an obviously incorrect TIN. Additionally, the Interest and Dividend Tax Compliance Act of 1983 requires a payor to commence backup withholding at a rate of 20% on any reportable payment, i.e., dividends, interest, and gross proceeds, for any non-exempt account where either of the above conditions exists.

      A payor would not be subject to penalty if the customer involved (payee) has certified, under penalty of perjury, that the taxpayer identification number furnished to the payor is the payee's correct number. Additionally, a payor would not be subject to a penalty if due diligence was exercised in soliciting the customer's correct taxpayer identification number.

      Due Diligence for Accounts in Existence Prior to January 1, 1984

      While not mandatory, the regulations provide several alternatives to broker-dealers who wish to avoid the imposition of penalties by performing due diligence.

      Alternative No.1 (Section A-5)

      • By December 31, 1983, a payor must send a separate mailing by first-class mail to any customer who has not previously certified under penalties of perjury that his taxpayer identification number is the correct number. This mailing must: (1) contain a notice which explains what a TIN is; (2) advise the payee of his obligation to provide a correct TIN to the member; (3) state that if the customer has not provided the member with the correct TIN that the customer may be subject to a $50 penalty and that any payments made to the customer may be subject to backup withholding commencing on January 1, 1984; and, (4) advise the customer on how to provide the member with a correct TIN. A sample notice is provided in Section A-7 of the regulations.
        If this alternative is chosen, the member must also provide a prepaid, postage reply envelope and a certification form on which the customer may make the appropriate certification. In this regard, the IRS has developed Form W-9 which members may rely upon to obtain a customer's TIN with the appropriate certification. (A copy of Form W-9 is enclosed in this notice). The regulations permit the use of substitute forms (Section A-10) which must provide for name, address, and TIN and appropriate space for the required certification.

      Alternative No. 2

      • Section A-6 of the temporary regulations permit Association members to defer the separate mailing required under Alternative No. 1 provided that the following steps are undertaken. First, the separate mailing referred to under Alternative No. 1 would still be required by December 31, 1983. However, the mailing would be limited to only those accounts which have not furnished a TIN or who have furnished an obviously incorrect number. Second, the member would be permitted to send a mailing (which would not be required to be separate from other mail) to all other accounts which have not previously certified as to the accuracy of their TIN. This form would request the account to verify the accuracy of the TIN and provide for the appropriate certification under penalty of perjury that the TIN is correct. This mailing must also be made no later than December 31, 1983. If Alternative No. 2 is chosen, the member must send a follow-up separate mailing, no later than March 31, 1984, to all accounts which have not by that date certified the accuracy of their TIN's.

      For accounts opened in December 1983 subsequent to the mailings described above, members will have until January 31, 1984, to send the required mailings.

      Due diligence will be considered exercised even if an account fails to return the appropriate certification to the member. In this case, the member must continue to solicit the account in each year subsequent to 1983 until the account provides the appropriate certification. Annual solicitations need not be made in separate mailings (Section A-25).

      Members are therefore advised that in the future, a Form W-9 or equivalent should be completed for all new accounts on a routine basis in order to avoid the costs of additional mailings or the implementation of backup withholding.

      Special Rules for Accounts Opened After December 31, 1983

      In order to avoid backup withholding with respect to accounts that are opened on or after January 1, 1984, a member, in addition to obtaining certification as to the accuracy of the TIN, must also obtain certification that the account is not already subject to backup withholding due to notification from the IRS of underreporting. To obtain this certification, a member may use Form W-9 or a substitute form as described in Section A-36 of the temporary regulations.

      The regulations provide that if either cetifications are not provided, the member must initiate backup withholding on any dividend or interest payments only.

      BACKUP WITHHOLDING

      As previously noted, commencing January 1, 1984, a member must commence backup withholding on all reportable payments (including gross proceeds) if:

      • an account fails to provide a TIN; or,
      • if an account has an obviously incorrect TIN (e.g., the number provided does not contain the proper number of digits).

      These are the only two conditions which would require backup withholding on all reportable payments including gross proceeds. Failure to obtain the required certification from pre-1984 accounts will not in and of itself result in backup withholding so long as the number is provided and is not obviously incorrect.

      Backup withholding will be required, however, only on reportable dividend and interest payments for "post-1983" accounts if the account has not certified as to the accuracy of its TIN or has not certified that it is not subject to backup withholding due to underreporting. Naturally, if a "post-1983" account has a missing or obviously incorrect TIN, backup withholding would be required on all reportable payments.

      Accounts Exempt from Backup Withholding

      Those accounts previously exempt from the withholding under the now repealed withholding regulations continue to be classified under the temporary regulations as "exempt recipients" for purposes of backup withholding. These accounts include:

      • a corporation;
      • a financial institution;
      • an organization exempt from tax under Section 501(a), or an individual retirement plan;
      • the United States or any agency or instrumentality thereof;
      • a state, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof;
      • a foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof;
      • an international organization or any agency or instrumentality thereof;
      • a registered dealer in securities or commodities registered in the U.S. or a possession of the U.S;
      • a real estate investment trust;
      • a common trust fund operated by a bank;
      • an exempt charitable remainder trust, or a non-exempt trust;
      • an entity registered at all times under the Investment Company Act of 1940; or,
      • a foreign central bank of issue.

      Since these types of accounts are not subject to backup withholding, they are also exempt from the mailings described in the due diligence provisions noted above.

      Payments of dividends not generally subject to backup withholding include the following:

      • Payments to nonresident aliens subject to withholding under Section 1441;
      • Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner;
      • Payments of patronage dividends where the amount received is not paid in money;
      • Payments made by certain foreign organizations.

      Payments of interest not generally subject to backup withholding include the following:

      • Payments of interest on obligations issued by individuals;
      • Payments of tax-exempt interest;
      • Payments to nonresident aliens;
      • Payments on tax-free convenant bonds;
      • Payments made by certain foreign organizations;

      Special Rules for Broker-Dealers

      Special rules also apply to members who hold securities in safekeeping which are registered in the customer's name (Section A-41), i.e., the member is not the payor on the instrument. These rules apply to "post-1983" accounts and provide that the member must:

      • obtain the required certifications on the account;
      • furnish the TIN to the actual payor; and,
      • notify the payor to impose backup withholding if either of the required certifications are not provided.

      For purposes of this section, a "post-1983" account is defined as one which was either established on or after January 1, 1984, or was established during 1983 but was inactive. For any account which is not a "post-1983" account and the broker is not the payor of the instrument, the member's only obligation is to provide the account's TIN to the payor unless the member has already been put on notice by the IRS that the account is subject to backup withholding.

      * * * *

      The full text of the temporary regulations is attached to this notice. It is anticipated that final regulations will be issued shortly. Members will be advised of publication of the final regulations as soon as possible and will also be informed of any material differences from the temporary regulations.

      Efforts are currently underway by the Securities Industry Association and others to seek a delay in the implementation of the backup withholding provisions. Chances of obtaining such a delay, however, are uncertain. Members should, therefore, already be in the process of gearing up their operations to accommodate these regulations.

      Members who employ outside service bureaus for recordkeeping purposes are urged to contact these agencies to ensure that systems will be developed to comply with these requirements.

      The Association, as a service to its members, has established a liaison with the Internal Revenue Service in an attempt to facilitate the receipt of answers to questions which might arise in attempting to comply with these regulations. In this regard, the Association will attempt to assist members in obtaining clarification of the various provisions of the regulations from the IRS.

      Members who are seeking formal rulings or requesting interpretations of the tax laws are advised that the IRS is prohibited from issuing rulings to business, or trade associations concerning the application of tax laws to members of a group and therefore, should proceed to contact the IRS directly for such rulings.

      Please direct any questions concerning the temporary regulations or any questions concerning this notice to James M. Cangiano, Associate Director, Department of Policy Research (202) 728-8273.

      Sincerely,

      Gordon S. Macklin
      President

      Attachments

      DEPARTMENT OF THE TREASURY

      Internal Revenue Service

      26 CFR Part 35a

      [T.D. 7916]

      Due diligence and certification requirements with respect to taxpayer identification numbers and backup withholding

      AGENCY: Internal Revenue Service, Treasury.

      ACTION: Temporary regulations.

      SUMMARY: This document provides temporary regulations relating to the due diligence and certification requirements with respect to taxpayer identification numbers and backup withholding. Changes to the applicable tax law were made by the Interest and Dividend Tax Compliance Act of 1983 (Pub, L. 98-67, 97 Stat. 369). These regulations affect payors and payees of reportable interest, dividends, and patronage dividends and brokers and provide them with the guidance necessary to comply with the law.

      DATE: The temporary regulations are effective for payments made after December 31, 1983.

      FOR FURTHER INFORMATION CONTACT: Diane Kroupa of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (202-566-3829).

      SUPPLEMENTARY INFORMATION:

      Background

      This document contains temporary regulations relating to the due diligence and certification requirements of payors and payees of reportable interest, dividends and patronage dividends and brokers. Section 3406 was added to the Internal Revenue Code of 1954 by section 104 of the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 371), and section 6676 of the Code was amended by section 105 of the Act (Pub. L. 98-67, 97 Stat. 380).) As these provisions are generally effective for payments made after December 31, 1983, there is a need for immediate guidance so that payors and payees can make preparations to comply with these provisions. A new Part 35a, Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983, is added by this document to Title 26 of the Code of Federal Regulations.

      It is expected that further temporary regulations with a cross-reference to a notice of proposed rulemaking will be published in the near future containing additional rules relating to backup withholding. The temporary regulations contained in this document will remain in effect until superseded by final regulations on this subject.

      These temporary regulations, presented in question and answer format, are intended to provide guidelines upon which payors and payees of reportable interest, dividend, and patronage dividend payments may rely in order to resolve questions specifically set forth herein. However, no inference should be drawn regarding issues not raised herein or reasons certain questions, and not others, are included in these regulations.

      Nonapplicability of Executive Order 12291

      The Treasury Department has determined that these temporary regulations are not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 29, 1983.

      Regulatory Flexibility Act

      No general notice of proposed rulemaking is required by 5 U.S.C. 533(b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule.

      Drafting Information

      The principal author of these regulations is Diane Kroupa of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and the Treasury Department participated in developing the regulations on matters of both substance and style.

      List of Subjects in 26 CFR Part 35a

      Employment taxes, Income taxes, Backup withholding, Interest and Dividend Tax Compliance Act of 1983

      Adoption of amendments to the regulations

      Accordingly, a new Part 35a consisting of § 35a.9999-l is added to Title 26 of the Code of Federal Regulations. The new provision reads as follows:

      PART 35a—TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE INTEREST AND DIVIDEND TAX COMPLIANCE ACT OF 1983

      § 35a.9999-1 Questions and answers concerning the due diligence requirement and the certification requirements in connection with backup withholding and other related issues.

      The following questions and answers principally concern the due diligence exception to the penalty on payors of reportable interest or dividend payments for failure to provide the payee's correct taxpayer identification number on certain information returns and the certification requirements in connection with backup withholding under the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369):

      In general

      Q-l. What payors are subject to the new due diligence requirement with respect to their obligation to provide payees' correct taxpayer identification numbers on information returns?
      A-l. Payors of reportable interest or dividend payments are subject to the new due diligence requirement.
      Q-2. What is a reportable interest or dividend payment?
      A-2. A reportable interest or dividend payment is a payment of interest, dividends, or patronage dividends that is of a kind, and to a payee, that is subject to information reporting.

      Imposition of penalty for failure to provide a correct taxpayer identification number

      Q-3. Is a payor subject to a penalty for failure to provide a correct taxpayer Identification number on an information return with respect to a reportable interest or dividend payment if the payee has certified, under penalties of perjury, that the taxpayer identification number furnished to the payor is the payee's correct number, the payor provided that number on an information return, and the number is later determined not to be the payee's correct number?
      A-3. No. A payor is not subject to a penalty for failure to provide the payee's correct taxpayer identification number on an information return, if the payee has certified, under penalties of perjury, that the taxpayer identification number provided to the payor was his correct number, and the payor included such number on the information return.
      Q-4. Is a payor subject to a penalty for failure to provide a correct taxpayer identification number on an information return if the payee does not certify, under penalties of perjury, that the taxpayer identification number provided to the payor is correct, and the number is later determined not to be the payee's correct number?
      A-4. A payor is subject to a penalty if the taxpayer identification number of a payee provided on an information return is determined not to be the payee's correct number, unless the payor exercised due diligence in soliciting the payee's correct taxpayer identification number and in furnishing such number on the information return.

      Due diligence defined for pre-1984 accounts and instruments

      Q-5. In order for a payor of a reportable interest or dividend payment to be considered to have exercised due diligence in furnishing the correct taxpayer identification number of a payee with respect to a pre-1984 account or instrument, what actions must the payor take?
      A-5. First, by the applicable date provided in A-6, the payor must send a separate mailing by first-class mail to any payee who has not previously certified, under penalties of perjury, that the taxpayer identification number furnished to the payor is the payee's correct number. This mailing must contain a notice that: (1) Informs the payee what a taxpayer identification number is, (2) advises the payee that he must provide a correct taxpayer identification number to the payor, (3) states that if the payee has not furnished a correct taxpayer identification number to the payor the payee may be subject to a $50 penalty and that payments to the payee may be subject to backup withholding starting on January 1, 1984, and (4) advises the payee how to provide a correct taxpayer identification number to the payor. The form of the notice is described in A-7. The payor must also include in the mailing a postage-prepaid reply envelope and a certification form on which the payee may certify, under penalties of perjury, that he is furnishing his correct taxpayer identification number to the payor. The specific requirements for the form of this certification are set forth in A-9 and A-10.
      Second, in the case of a pre-1984 account or instrument for which the payee has provided no taxpayer identification number br for which the taxpayer identification number provided is obviously incorrect (i.e., contains an incorrect number of digits), the payor must have commenced backup withholding on payments made after December 31, 1983.
      Third, the payor must use the same care in processing taxpayer identification numbers provided by payees that a reasonably prudent payor would use in the course of the payor's business in handling account information, such as account numbers and account balances.
      Fourth, the payor must send a mailing in each year subsequent to 1983 to payees who have not by that time provided a taxpayer identification number under penalties of perjury. This mailing need not be sent separately from other mail to the payee. This mailing also need not contain a postage-prepaid reply envelope. The payor is required to process responses to this mailing in the same manner described in the preceding paragraph.
      Q-6. In order to be considered to have exercised due diligence in soliciting the payee's taxpayer identification number, by what date must the payor send the separate mailing described in A-5 to a payee who has not previously provided his correct taxpayer identification number to the payor under penalties of perjury?
      A-6. The separate mailing must be made on or before December 31, 1983, unless the payor complies with the alternative procedure set forth in the following two paragraphs.
      A payor may defer the separate mailing referred to above, Provided, That the payor: (1) Sends a separate mailing by December 31, 1983, to all payees who have not furnished a taxpayer identification number to the payor or who have furnished an obviously incorrect number; (2) sends a mailing, which need not be separate from other mail, on or before December 31, 1983, to all other payees who have not previously provided their taxpayer identification numbers to the payor under penalties of perjury; and (3) sends, on or before March 31, 1984, a separate mailing to all payees who have not by that date certified under penalties of perjury that their taxpayer identification numbers provided to the payor are correct.
      The separate and nonseparate mailing required in 1983 and the separate mailing required on or before March 31, 1984, must include the notice, certification form, and postage-prepaid reply envelope as required in A-5. Any separate mailing made in 1984 pursuant to the prior paragraph does not replace a 1984 nonseparate mailing that is otherwise required by the fourth paragraph of A-5.
      Q-7. In what form should the payor notify the payee of the information set forth in A-5 and solicit the payee's correct taxpayer identification number, in order to satisfy the due diligence requirement with respect to a pre-1984 account or instrument?
      A-7. The notice will satisfy the requirement of A-5 if it is conspicuous and contains language substantially similar to the following:

      Important New Tax Information

      Under the Federal income tax law, you are subject to certain penalties as well as withholding of tax at a 20 percent rate if you have not provided us with your correct social security number or other taxpayer identification number. Please read this notice carefully.

      You (as a payee) are required by law to provide us (as payor) with your correct taxpayer identification number. If you are an individual, your taxpayer identification number is your social security number. If you have not provided us with your correct taxpayer identification number, you may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, interest, dividends, and other payments that we make to you may be subject to backup withholding starting on January 1, 1984.

      Backup withholding is different from the 10 percent withholding on interest and dividends that was repealed in 1983. If backup withholding applies, a payor is required to withhold 20 percent of interest, dividends, and other payments made to you. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained.

      Enclosed is a postage-prepaid reply envelope in which you may return the enclosed form to furnish us your correct name and taxpayer identification number. Please sign the form and return to us.

      Q-8. In order to be considered to have exercised due diligence, is a payor required to request the payee to return the form certifying that the taxpayer identification number provided to the payor is correct?
      A-8. The payor may request the payee to sign and return the form irrespective of whether the taxpayer identification number shown for the payee is the payee's correct taxpayer identification number. Alternatively, the payor may request that the payee return the form only in the event that the taxpayer identification number shown for the payee is incorrect, or if no taxpayer identification number is shown. If the payor uses the alternative instruction described in the preceding sentence, the payor may make suitable changes to the last paragraph of the notice prescribed in A-7.
      If, however, the payee does not return the form certifying his taxpayer identification number under penalties of perjury, the payor is required in each subsequent year to request the payee to provide his correct taxpayer identification number under penalties of perjury (until the payee so certifies his taxpayer identification number).
      Q-9. What form may the payee use to certify that the taxpayer identification lumber provided to the payor is correct?
      A-9. The Internal Revenue Service is currently preparing Form W-9 on which a payee may certify his taxpayer identification number under penalties of perjury. Form W-9 will be available in mid October upon request to any Internal Revenue Service district director.
      Q-10. May a payor use a substitute form instead of Form W-9 for a payee to certify, under penalties of perjury, that the taxpayer identification number provided to the payor is correct?
      A-10. Yes. A substitute form must include space for the payee to provide his name, address, and taxpayer identification number. The form also must include space for the payee to certify under penalties of perjury that he is furnishing his correct taxpayer identification number to the payor. The wording of the certification must be substantially similar to the following: "Under penalties of perjury, I certify that the number shown on this form is my correct taxpayer identification number." If a payor uses a substitute form, the payor must provide either the Internal Revenue Service's instructions for Form W-9 or the substance of those instructions on or with the substitute form.
      Q-11. In order to satisfy the due diligence requirement for pre-1984 accounts and instruments, is a payor required to send the mailing or mailings described in A-5 and A-6 to a payee who has previously furnished a taxpayer identification number to the payor, but who has not certified under penalties of perjury that the number provided to the payor is his correct taxpayer identification number?
      A-11. Yes. A payor must send the mailing or mailings as required in A-5 and A-6 to any payee of a reportable interest or dividend payment who has not previously certified under penalties of perjury that the taxpayer identification number provided to the payor is the payee's correct number.
      Q-12. May a payor satisfy the due diligence requirement by sending the separate mailings described in A-5 and A-6 with other mail the payor sends to the payee?
      A-12. No. The separate mailing soliciting a certificate providing the payee's correct taxpayer identification number under penalties of perjury must not include any other communication to the payee. No material may be included in the separate mailing to the payee other than the notice, certification form and instructions, and postage-prepaid reply envelope.
      Q-13. What action must a payor take with respect to accounts opened, or instruments acquired, subsequent to the date on which the payor prepares its list of payees for a mailing required in 1983 but prior to January 1, 1984?
      A-13. The payor is required to send the mailing otherwise required to be made by December 31, 1983, to the payees of such accounts and instruments not later than January 31, 1984, unless the payee has previously provided his taxpayer identification number to the payor under penalties of perjury.
      Q-14. If a payor makes no reportable interest or dividend payments to a payee with respect to an account or instrument during 1983, so that the payor is not required to make a 1983 information return with respect to the payee, is the payor nevertheless required to send the mailing or mailings to the payee as provided in A-5 and A-6?
      A-14. The payor must either: (1) Send the mailing or mailings in the manner and within the time periods provided in A-5 and A-6 or (2) send the separate mailing described in A-5 to the payee not later than October 1 of the year in which a payment to the payee with respect to the account or instrument first becomes reportable, or, if later, within 30 days after such reportable payment occurs. Thus, if payments to the payee aggregate less than $10 in 1983, so that no 1983 information return is required, the payor need not make the mailing or mailings described in A-5 and A-6 within the time period provided in A-6; the payor must, however, make the separate mailing described in A-5 to the payee in the first year that payments to the payee aggregate $10 or more.
      Q-15. If the payor has obtained a certificate, signed under penalties of perjury, setting forth the payee's taxpayer identification number within the applicable time period in A-6, must the payor nevertheless make the mailing or mailings described in A-5 and A-6 to the payee in order to be considered to have exercised due diligence in obtaining the payee's correct taxpayer identification number?
      A-15. No. The mailing requirement applies only to a payee from whom the payor has not previously received a taxpayer identification number certified under penalties of perjury.
      Q-16. May a payor obtain the form containing the payee's taxpayer identification number, signed under penalties of perjury, through a solicitation for such certification, in addition to the mailing or mailings required by A-5 and A-6, contained in a regular mailing to the payor's customers?
      A-16. Yes. Such a certification may be obtained by a solicitation contained in a regular business mailing, by a request in person to a payee, or otherwise.

      Special rules relating to the due diligence requirement for pre-1984 accounts and instruments

      Q-17. Is a payor considered to have exercised due diligence in soliciting the correct taxpayer identification number with respect to pre-1984 accounts and instruments if the payor sends the required mailings to the last known address of the payee?
      A-17. Yes.
      Q-18. Is a payor required to send the required mailing or mailings to a payee's last known address in a case where other mailings to that address have been returned to die payor because the address was incorrect and no new address has been provided to the payor?
      A-18. No. In such a situation, the payor is required to handle the required mailings in the same manner that he handles other correspondence to the payee.
      Q-19. Is a payor required to send the mailing or mailings to the payee of an account or instrument with respect to which there is currently a "do not mail" or a "stop mail hold" instruction pursuant to which the payor does not send any mail to the payee?
      A-19. No. A payor must, however, handle all required mailings in the same manner that the payor handles other correspendence with the payee?
      Q-20. Is a payor required to send mailings to all payees listed on a joint account or jointly held instrument?
      A-20. No. A payor is required to send mailings only to the first person listed on an account or instrument because the taxpayer indentification number of that person is the one required to be provided on an information return.
      Q-21. If a payor has a Form W-6 or W-7 exemption certificate, relating to the now-repealed 10 percent withholding on interest and dividends, signed by a payee, must the payor send the mailings to the payee?
      A-21. Generally, yes. The Internal Revenue Service Forms W-6 and W-7 did not contain a certification, under penalties of perjury, that the taxpayer identification number furnished by the payee was correct. If, however, the payor utilized a substitute Form W-6 or W-7 on which a payee certified under penalties of perjury in the manner provided on Form W-9 or in A-10 that the taxpayer identification number furnished to the payor was the payee's correct number, the payor is not required to send mailings to the payee.
      Q-22. Is a payor of reportable interest or dividends required to send mailings to a corporation or other exempt recipient?
      A-22. No. A payment of interest to a corporation or other exempt recipient described in § 1.6049-4(c)(l)(ii) of the Income Tax Regulations generally is not subject to information reporting. Thus, mailings to such recipients are not required. Although a payment of dividends or patronage dividends to a corporation and certain other exempt recipients generally is subject to information reporting, payors are not required to send mailings to persons described in § 31.3452(c)-l (b) through (p) of the Income Tax Regulations in order to satisfy the due diligence requirement. A payee shall be considered an exempt recipient for the purpose of this rule if (1) the payee could be treated as an exempt recipient without the requirement of filing an exemption certificate under § 31.3452(c)-1 (b) through (p) of the Income Tax Regulations or (2) the payee has provided the payor with a certificate, signed under penalties of perjury, stating that the payee is an exempt recipient described in one or more paragraphs of § 31.3452(c)-l (b) through (p) of the Income Tax Regulations. Form W-9 may be used for the purpose of making this certification. Alternatively, the payor may provide the payee with a substitute form for such certification, provided that the form conforms generally to Form W-9 and the instructions related to exempt recipients.
      Q-23. Is a payor required to send mailings to a payee with respect to an account established under the Uniform Gift to Minors Act?
      A-23. Yes. The law requires that the social security number of the minor be provided to the payor with respect to accounts established under the Uniform Gift to Minors Act. If the miner does not have a social security number, the minor may obtain one by filing a Form SS-5 with a Social Security Administration Office. The form certifying that the minor's social security number provided is correct may be signed by the custodian of the Uniform Gift to Minors Act account.
      Q-24. Is a payor required to send mailings to a payee where the account is held as a club account, bowling league account, recreation account, or other informal account?
      A-24. Yes. The law requires that the taxpayer identification number of the organization be provided to the payor. If the club, league, or other informal association does not have an employer identification number, one may be obtained by filing a Form SS-4 with an Internal Revenue Service Center.
      Q-25. Must the payee sign and return to the payor the form certifying the payee's correct taxpayer identification number under penalties of perjury in order for the payor to satisy the due diligence requirement?
      A-25. No. The determination of whether the payor exercised due diligence in soliciting the payee's correct taxpayer identification number does not depend upon whether the payee signs and returns the form certifying his correct taxpayer identification number. If, however, the payee does not provide his taxpayer identification number to the payor under penalties of perjury, the payor is required to continue to solicit a certified taxpayer identification number from the payee in each year subsequent to 1983 until the payee has provided a certified taxpayer identification number. Such subsequent annual solicitations need not be made, however, in a separate mailing.

      Requirement of backup withholding

      Q-26. If a payee does not provide a taxpayer identification number to the payor what action is a payor required to take?
      A-26. Starting January 1, 1984, the payor is required to commence backup withholding with respect to reportable payments to payees who have not provided a taxpayer identification number to the payor. If an individual payee does not have a social security number, he may obtain one by filing Form SS-5 with a Social Security Administration Office. Other payees may obtain an employer identification number by filing Form SS-4 with an Internal Revenue Service Center.
      Q-27. Is a payor of reportable interest or dividends required to impose backup withholding with respect to payments made after December 31, 1983, to a payee of an account that existed, or an instrument that was held by the payee, on December 31, 1983, if the payee has not provided the payor with a written certification under penalties of perjury that the taxpayer identification number furnished is correct?
      A-27. No. A payor of reportable interest or dividends that are paid with respect to an account or instrument existing on December 31, 1983, is not required to impose backup withholding starting on January 1, 1984, simply because the payee has failed to certify his taxpayer identification number under penalties of perjury.
      Q-28. Is a payor required to impose backup withholding with respect to a reportable interest or dividend payment made on or after January 1, 1984, if the taxpayer identification number furnished by the payee does not contain the proper number of digits?
      A-28. Yes. A payor shall treat the payee as having failed to furnish a taxpayer identification number if the number provided does not contain the proper number of digits. The proper number of digits is nine for both the social security number and the employer identification number.
      Q-29. Is a payor of reportable interest or dividend payments required to impose backup withholding on a payment made to an exempt recipient?
      A-29. No. A payor is not required to withhold on a payment made to a person described in § 31.3452(c)-l (b) through (p) of the Income Tax Regulations. A payee shall be considered an exempt recipient for purposes of this rule if (1) he may be treated as an exempt recipient without the requirement of filing an exemption certificate under the cited regulation or (2) the payee has provided the payor with a certificate, signed under penalties of perjury, stating that a payee is an exempt recipient described in one or more paragraphs of the cited regulation. Form W-9 may be used for the purpose of making this certification. Alternatively, the payor may provide the payee with a substitute form for such certification, provided that the substitute form conforms generally to Form W-9 and the instructions related to exempt recipients. A payor may in any case require an exempt recipient not otherwise required to file a certificate as to his status as an exempt recipient to file such a certificate, and may treat an exempt recipient who fails to file such a certificate as a person who is not exempt. A payor may require a separate certificate for each account or instrument maintained by an exempt recipient. A payor may require that any certification that a payee is an exempt recipient be made only on the substitute form provided by the payor; in that case, the payor must comply with the pertinent portions of § 31.3452(f)-l(b)(2) of the Income Tax Regulations relating to the procedures that a payor must follow upon receipt of an unacceptable form.
      Q-30. Is a payor required to impose backup withholding on a pension or annuity distribution made on or after January 1, 1984, if the payee has not provided his taxpayer identification number to the payor?
      A-30. If pension withholding under section 3405 applies to a pension or annuity distribution and the payee does not make an election not to have pension withholding apply under that section, backup withholding does not apply. If, however, the payee makes such election under section 3405 or pension withholding does not otherwise apply, and the payee does not provide his taxpayer identification number to the payor (or the taxpayer identification number provided is obviously incorrect), the payor is required to withhold 20 percent of any payment to the payee to which section 6041 applies, unless the conditions of the following paragraph are satisfied.
      If the annual distributions to a payee total $5,400 or less (in which case withholding under section 3405 generally is not required), and if the payor has no social security number for the payee (or the social security number provided is obviously incorrect), the payor shall not impose backup withholding until the first payment made after June 30, 1984. By that date, the payee will have been able to obtain a social security number and provide it to the payor, in which case no amounts will be withheld.
      Q-31. In determining whether a payee has failed to provide a taxpayer identification number with respect to an account that was in existence or an instrument held on December 31, 1983, so that backup withholding is imposed starting January 1, 1984, within what period of time just a taxpayer identification number provided by a payee be treated as having been received?
      A-31. A payor must process a taxpayer identification number within 30 days after the payor receives the taxpayer identification number from the payee. Thus, for example, if a payor has no taxpayer identification number for a payee, and the payee provides his taxpayer identification number to the payor on December 15, 1983, the payor must process the number not later than January 14, 1984. As a result, the payor would be authorized to commence backup withholding with respect to payments made to the payee commencing January 1, 1984, but backup withholding must cease by January 14, 1984. The payor also is authorized to treat the taxpayer identification number as having been received at any time after it is provided, so that backup withholding need not be commenced in the circumstance outlined above.

      Certification requirements for accounts opened and instruments acquired after 1383

      Q-32. What actions must a payor take with respect to accounts that are opened or instruments acquired on or after January 1, 1984, in order to avoid imposing backup withholding on reportable interest or dividend payments?
      A-32. In order to avoid imposing backup withholding with respect to accounts that are opened or instruments acquired on or after January 1, 1984, a payor of reportable interest or dividend payments must obtain a certification from the payee, signed under penalties of perjury, (1) that the taxpayer identification number provided to the payor is the payee's correct number and (2) that the payee is not subject to backup withholding due to notified payee underreporting. The form for these certifications is prescribed in A-35 and A-36.
      Q-33. What payees can make the certification that they are not subject to backup withholding due to notified payee underreporting?
      A-33. Any payee who has not been notified that he is subject to backup withholding as a result of notified payee underreporting can make the certification under the law. In addition, a payee who was subject to backup withholding due to notified payee underreporting may certify that he is not subject to backup withholding due to notified payee underreporting if the Service has provided the payee with written certification that backup withholding due to notified payee underreporting has terminated.
      Q-34. Under what circumstances will an account be considered to have been in existence, or an instrument be considered to have been held, before January 1, 1984 (a "pre-1984 account")?
      A-34. An account that is in existence before January 1, 1984, will be considered a pre-1984 account, irrespective of whether additional deposits are made to the account on or after January 1, 1984. In addition, if shares of a corporation are held before January 1, 1984 (or considered held before such date by operation of this rule), and additional shares are received by the holder, irrespective of whether such shares are received by reason of a stock dividend, as a result of an infusion of new cash, or otherwise, the new shares received will be considered a pre-1984 account, in the discretion of the payor. Where an account is opened, or an instrument is acquired automatically on the maturity or termination of an account that was in existence or instrument held before January 1, 1984 (or considered to have been in existence or held before such date by operation of this rule), without the participation of the payee, the new account or instrument will be considered a pre-1984 account, in the discretion of the payor. For purposes of the preceding sentence, a payee shall not be considered to have participated in the acquisition of the new account or instrument solely by reason of the failure to exercise a right to withdraw funds on maturity or termination of the old account or instrument. Where a discount instrument with a maturity not exceeding one year (a "short-term instrument") is acquired upon the maturity of a short-term instrument, the participation of the payee in the acquisition of the newly-acquired instrument shall not be taken into account, and the new instrument shall be considered to have been acquired automatically, with' respect to instruments acquired prior to January 1, 1985. In the case of insurance policies in effect on December 31, 1983, the election of a dividend accumulation option pursuant to which interest is paid, or the creation of an "account" in which proceeds of a policy are held for the policy beneficiary, may, in the payor's discretion, be treated as a pre-1984 account.
      Q-35. What form may a payee of reportable interest or dividends use to certify under penalties of perjury, that the taxpayer identification number provided to the payor is correct and that he is not subject to backup withhholding due to notified payee underreporting?
      A-35. A payee may use Internal Revenue Service Form W-9 for both required certifications.
      Q-36. May a payor of reportable interest or dividends or a broker provide a substitute form for a payee to certify under penalties of perjury that his taxpayer identification number is correct and that he is not subject to backup withholding due to notified payee underreporting?
      A-36. Yes. A payor or broker may use a substitute form provided the language of the certification is substantially similar to the following: "Under penalties of perjury, I certify (1) that the number shown on this form is my correct taxpayer identification number and (2) that I am not subject to backup withholding either because I have not been notified that I am subject to backup withholding as a result of a failure to report all interest or dividends, or the Internal Revenue Service has notified me that I am no longer subject to backup withholding." A payor or broker may use separate substitute forms to have the payee certify under penalties of perjury that (i) his taxpayer identification number is correct, provided the language is substantially similar to the certification in A-10 and (ii) he is not subject to backup withholding due to notified payee underreporting provided the language is substantially similar to clause (2) of the preceding sentence. A payor or broker also may incorporate both required certifications into other business forms, customarily used, such as account signature cards, provided the required certifications are clearly set forth.
      If a payor or broker uses a single substitute form for both certifications, which does not follow the Form W-9 format, the form must contain an instruction to the payee that he must strike out the language certifying that the payee is not subject to backup withholding due to notified payee underreporting if he has been notified that he is subject to backup withholding due to notified payee underreporting, and the payee has not received a notice from the Internal Revenue Service advising him that backup withholding has terminated. If the payor or broker requires that the payee make the certification on a substitute form provided by the payor, the payor or broker may refuse to accept certifications (including certifications provided on Form W-9) that are not made on the form or forms provided by the payor or broker. If the payor or broker refuses to accept the form provided by the payee, the payor or broker then must comply with the pertinent portions of § 31.3452(f)-l(b){2) of the Income Tax Regulations related to the procedures that a payor must follow upon receipt of an unacceptable form.
      Q-37. With respect to reportable interest or dividends that are paid on an account opened or an instrument acquired on or after January 1, 1984, if a payee fails to certify, under penalties of perjury, (1) that the number furnished is his correct taxpayer identification number, and (2) that he is not subject to backup withholding due to notified payee underreporting, what action is a payor required to take?
      A-37. A payor is required to withhold 20 percent of any reportable interest or dividend payment on such an account or instrument if either of the certifications specified is not provided.
      Q-38. Is a payor ever required to withhold more than 20 percent of a payment?
      Q-38. No. Irrespective of how many conditions exist which cause backup withholding to apply, a payor is required to withhold only 20 percent of a payment until all of the conditions no longer apply.
      Q-39. Is a payer required to send a notice to the payee when the payor commences backup withholding?
      Q-39. In general, no. However, a payor of a readily tradable instrument that is not acquired directly from the payor must notify the payee that backup withholding has commenced, or will commence. The notice must be sent to the payee not later than 15 days after the payor makes the first payment to the payee that is subject to backup withholding. The notice must explain the steps the payee must take to stop backup withholding. The text of this notice will be provided in a regulation to be issued in the near future.
      Q-40. Do special rules apply to payments made with respect to readily tradable instruments?
      A-40. Yes. Special backup withholding rules apply with regard to readily tradable instruments when (1) the payee did not acquire the instrument directly from the issuer of the instrument and (2) a broker does-not hold the instrument as nominee for the payee (i.e., in street name). Under the special rules, a payor is required to impose backup withholding only if (1) the payor does not receive the payee's taxpayer identification number, or (2) the payor is notified by a broker that the payee failed to make the required certifications (described in A-32) to the broker and the payee did not make the certifications- to the payor. When the payee acquires the instrument directly from the issuer of the instrument or when a broker holds the instrument as nominee for the payee, the rules applicable to payors apply.
      Q-41. What rules apply to brokers?
      A-41. When a broker is a payor (i.e., the broker holds the instrument in street name), the regular rules for payors apply. If a broker is not the payor with respect to an instrument, different rules apply to the broker depending on whether the payee's account with the broker is treated as a "post-1983 account"
      A "post-1983 account" is any account other than an account established prior to January 1, 1984, through which, during 1983, the broker either bought or sold an instrument for the payee or acted as nominee for the payee. (Both the determinations of (1) whether an account or instrument is treated as a post-1983 account of the payor for purposes of the payor's due diligence requirements (see A-34) and (2) when backup withholding applies to an instrument are made without regard to whether the instrument is acquired through a post-1983 account of a broker.)
      When a readily tradable instrument is acquired through a "post-1983 account" and the broker is not the payor of the instrument, the broker must (1) obtain the certifications (described in A-32) from the payee but only once with respect to each account, (2) furnish the payee's taxpayer identification number to the payor, and (3) notify the payor to impose backup withholding if the payee failed to make either of the required certifications to the broker. The broker is required to give the information required by clauses (2) and (3) of the prior sentence to the payor in connection with the transfer instructions for the acquisition. The notice under clause (3) shall state that: "The [named payee] is subject to backup withholding under sections 3406(a)(l)(A), 3406(a)(l)(B), 3406(a)(l)(C), or 3406(a)(l)(D) of the Internal Revenue Code [circle whichever section applies]." A magnetic media, machine readable, or other similar notice substantially to the same effect also may be employed. After the transfer instructions are transmitted, the broker is not required to seek a missing' taxpayer identification number or missing certification or to give any further notices with regard to the' acquisition of the instrument.
      When a readily tradable instrument is acquired through an account that is not a "post-1983 account" and the broker is not the payor of the instrument, the broker's sole responsibility is to furnish the payee's taxpayer identification number to the payor (unless the broker has been notified that the payee is subject to backup withholding under section 3406 (a)(l)(B) or (a)(l)(C) of the Internal Revenue Code).

      Window transactions

      Q-42. Is a payor required to exercise due diligence in soliciting the taxpayer identification number of a payee with respect to the following payments ("window transactions"): Redemptions of United States savings bonds, and payments upon interest coupons, Treasury bills, commercial paper, and banker's acceptances?
      A-42. No. The due diligence requirements do not apply to such payments. Thus, the certification requirements set forth in A-32 do not apply to such transactions. A payor is required to withhold 20 percent with respect to such payments only if the payee does not provide his taxpayer identification number to the payor. Payors remain obligated, however, to make an information return with respect to window transactions.
      Q-43. Will a payor be allowed to furnish an information return to the payee with respect to a window transaction at the time the obligation or instrument is presented?
      A-43. Yes. A payor may furnish an information return to the payee at the time of the transaction or any time prior to January 31 of the year following the calendar year in which the transaction occurs. In general, however, the payor must provide information returns with respect to window transactions to the Internal Revenue Service on magnetic tape, in accordance with section 6011(e)(2) of the Internal Revenue Code, effective for transactions after December 31, 1983.

      Separate Form 1099

      Q-44. Is a payor of interest, dividends, or patronage dividends paid in 1983 required to send a separate official Form 1099 to a payee?
      A-44. No. A payor of interest, dividends, or patronage dividends paid in 1983 is not required to send a separate official Form 1099 to a payee. A payor may satisfy his obligation to furnish the required statement to the recipient by sending the statement with other business correspondence to the payee, such as a monthly statement.
      Q-45. Is a payor of interest, dividends, or patronage dividends paid after January 1, 1984, required to send a separate official Form 1099 to a payee?
      A-45. Yes. For payments made in 1984 and subsequent years, a payor is required to provide an official Form 1099 to a payee either in a separate mailing or in person. Payors also may use a substitute Form 1099 which contains provisions substantially similar to those of the prescribed form if the payor complies with all revenue procedures relating to substitute Form 1099 in effect at the time.
      Q-46. Is a payee required to attach Form 1099 to his tax return?
      A-46. No.

      Miscellaneous

      Q-47. In what manner is a payor required to remit to the Internal Revenue Service amounts withheld from any reportable payment?
      A-47. A payor must deposit amounts withheld under the backup withholding provisions with a Federal Reserve Bank or an authorized financial institution in accordance with the deposit rules of § 31.6302(c)-l(a)(l)(i) of the Income Tax Regulations that apply to an employer with respect to employment taxes. The payor of a reportable payment may elect, however, in accordance with the instructions provided with Form 941, to deposit such amounts separately from social security taxes and income tax withheld from wages. Thus, a payor may treat amounts withheld under section 3406 separately from amounts withheld from wages for purposes of determining when to remit the withheld amounts from any reportable payment. If, however, the payor elects to aggregate the amount withheld from wages with the amounts withheld under section 3406, the payor may do so. Regardless of the manner in which the payor elects to treat the withheld amounts for purposes of determining the time within which such amounts are required to be deposited, a payor must report the amounts withheld under section 3406 on the same Form 941 that the payor uses to report the employment taxes deposited.
      Q-48. May a payor refuse to open an account for, or issue an instrument to a person on or after January 1, 1984, if the person fails to furnish his taxpayer identification number to the payor under penalties of perjury?
      A-48. Yes. If the payor refuses to open an account or issue an instrument because the person fails to provide his taxpayer identification number under penalties of perjury, the payor will not be in violation of the Internal Revenue Code. If, however, the payor allows a person who has not provided his taxpayer identification number under penalties of perjury to open an account or acquire an instrument, the payor is required to impose backup withholding with respect to any interest or dividend payments thereafter made with respect to such account or instrument (unless the payee thereafter provides his taxpayer identification number certified under penalties of perjury). The payor is not permitted, however, to refuse to open an account or to issue an instrument if the payee fails to certify under penalties of perjury, that the payee is not subject to backup withholding due to notified payee underreporting.
      Q-49. May a payor treat a certificate respecting a taxpayer identification number as valid if it is signed by a person other than the payee?
      A-49. In certain instances, yes. A certificate may be signed by any person who, under the pertinent portions of sections 6061, 6062, 6063, and 6065 of the Internal Revenue Code and the regulations thereunder, is authorized to sign a declaration under penalties of perjury on behalf of the payee.
      Q-50. What procedures must a payor follow in order to demonstrate that it has exercised due diligence in furnishing the correct taxpayer identification number of a payee, as required in A-5?
      A-50. A payor is not required to retain a copy of the communication sent to each individual payee or to prove that the communication was sent to a particular payee. Instead, payors must establish the existence of procedures that are reasonably calculated to insure that each person required to receive a mailing as prescribed in A-5, in fact received such mailing, and that the payor exercised reasonable care in processing responses to such mailings.

      Special rules for accounts, instruments and transactions of foreign persons

      Q-51. Is a payor required to send the mailing or mailings described in A-5 and A-6 to foreign persons?
      A-51. Generally no. A payor is required to send the mailing or mailings described in A-5 and A-6 to any payee to whom the payor makes a payment that is subject to information reporting. Generally, a payment of interest to a foreign person is not subject to information reporting. See §1.6049-5 (b) (2) and (3) of the Income tax Regulations for the procedures to determine whether a payee of interest is a foreign person. See § 1.6042-3(b) (1), 2, and (3) and § 1.6044-3(c) of the Income Tax Regulations concerning exceptions from the information reporting requirements for payments of dividends and patronage dividends by and to certain foreign persons.
      Q-52. Is a payor required to send the mailing or mailings described in A-5 and A-6 to foreign persons with respect to pre-1984 accounts and instruments if payments on those accounts and instruments would not have been reportable payments but for the fact that the foreign person failed to provide the penalty of perjury statement described in § 1.6049-5(b)(2)(iv) of the Income Tax Regulations?
      A-52. A payor need not send the mailing or mailings described in A-5 and A-6 to a payee who has not previously provided the penalty of perjury statement described in § 1.6049-5(b)(2)(iv) of the Income Tax Regulations if (1) the payor sends a separate mailing to the payee on or before December 31, 1983, requesting the required penalty of perjury statement and (2] the payor has evidence in its records that the payee is a foreign person (provided that the payor has no actual knowledge that such evidence is false). If the payor has sent a nonseparate mailing on or before December 31, 1983, requesting the required penalty of perjury statement, the payor may send the separate mailing referred to in clause (1) on or before March 31, 1984. The separate mailing, whether sent in 1983 or 1984, must be by first-class mail, or by airmail if sent to a foreign address, and must contain a notice describing the penalty of perjury statement set forth in § 1.6049-5(b)(2)(iv) and advising the payee that backup withholding may commence if the statement is not provided. The payor also must provide a reply envelope and a form on which the payee may make the statement described in § 1.6049-5{b)(2)(iv) under penalties of perjury. Neither the separate nor nonseparate mailing is required if the payor has received the required penalty of perjury statement from the payee.
      The rules of A-18 and A-19 relating to a "do not mail" or "stop mail hold" instruction and to payees for whom the payor has no address, shall apply. The other evidence referred to in clause (2) above on which the payor may rely for treating a payee as a foreign person includes a written statement from the payee that he is neither a resident nor a citizen of the United States or an affidavit from an employee of the payor stating that he knows that, or the payee has represented orally that, he is a foreign person. The mere fact that the payee has provided an address outside the United States is insufficient evidence to establish that the payee is a foreign person for this purpose.
      Q-53. Is a payor required to commence backup withholding on January 1, 1984, on payments with respect to accounts and instruments described fn A-52 if the foreign person failed to provide the penalty of perjury statement described in § 1.6049-5(b)(2)(iv) of the Income Tax Regulations?
      A-53. The payor need not commence backup withholding with respect to such payments made before July 1, 1984, provided that the payor (1) made the separate mailing described in A-52 before December 31, 1983, or has made the nonseparate mailing described in A-52 before December 31, 1983, and sends a separate mailing to those payees who have not provided the required statement by March 31, 1984, and (2) has in its records the evidence described in A-52 that the payee is a foreign person.
      Q-54. Do the backup withholding provisions apply to payments of interest within the United States by a payor that is an international organization or by a person acting in its capacity as a paying agent for such organization?
      A-54. No, provided the international organization is in organization of which the United States is a member and which enjoys immunity or exemption from any liability or .obligation to pay, withhold, or collect tax pursuant to an international agreement having full force and effect in the United States.
      Q-55. Is a broker required to impose backup withholding with respect to transactions effected for pre-1984 accounts if the customer is an exempt foreign person who fails to provide the broker with the penalty of perjury statement described in § 1.6045-l(g)(l). of the Income Tax Regulations?
      A-55. With respect to such transactions effected before July 1, 1984, a broker is not required to impose backup withholding if (1) the broker sends a separate mailing to the customer on or before December 31, 1983, requesting the penalty of perjury statement described in § 1.6045-l(g)(l) of the Income Tax Regulations and (2) the broker has evidence in his records that the customer is a foreign person (provided that the broker has no actual knowledge that such evidence is false). If the payor sent a nonseparate mailing on or before December 31, 1983, requesting the required penalty of perjury statement, the payor may send the separate mailing on or before March 31, 1984. The separate mailing, whether made in 1983 or 1984, must be by first-class mail, or by airmail if sent to a foreign address, and must contain a notice describing the required penalty of perjury statement and advising the customer that backup withholding may commence if the statement is not provided. The broker must also include in the mailing a reply envelope and provide a form on which the customer may make the required penalty of perjury statement. Neither the separate nor nonseparate mailing is required if the payor has received the penalty of perjury statement from the customer.

      The rules of A-18 and A-19 relating to "do not mail" or a "stop mail hold" instructions, and to payees for whom the payor has no address shall apply. The other evidence referred in clause (1) above on which the broker may rely for treating a customer as as foreign person may include a written statement from the customer that he is neither a resident nor a citizen of the United States or an affidavit from an employee of the broker stating that he knows that, or the customer has orally represented that, he is a foreign person. The mere fact that the customer has provided an address outside the United States is insufficient evidence to establish that the customer is a foreign person for this purpose.

      There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.

      This Treasury decision is issued under the authority contained in section 3406 (a), (b), (c). (e), (g), (h), and (i), section 6042(a), section 6044(a), section 6045, section 6049 (a), (b), and (d), section 6103(q), section 6109, section 6302(c), section 6676, and section 7805 of the Internal Revenue Code of 1954 (97 Stat. 371, 372, 373, 376, 377, 378, 379; 26 U.S.C. 3406 (a), (b), (c), (e), (g), (h), and (i), 96 Stat. 587; 26 U.S.C. 6042(a), 96 Stat. 587; 26 U.S.C. 6044(a), 96 Stat. 600, 26 U.S.C. 6045, 96 Stat. 592, in sections 104 and 105 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369, 371, and 380).

      Roscoe L. Egger, Jr.,
      Commissioner of Internal Revenue.

      Approved: September 30, 1983.

      John E. Chapoton,

      Assistant Secretary of the Treasury.

      [FR Doc. 83-27157 Filed 9-30-83: 3:52 pm]

      BILLING CODE M30-01-M

      Payer's Request for Taxpayer
      Identification Number

      PDF TO BE INCLUDED

    • 83-64 Implementation of the Revised Direct Participation Programs Principal Examination (Series 39)

      TO: All NASD Members and Interested Persons

      ATTENTION: Training Directors and Registration Personnel

      Effective February 1, 1984, the NASD will implement changes to the Direct Participation Programs Principal Examination (Series 39). These revisions were made by the Association under the overall direction of the Qualifications Committee of the Board. At the inception of each examination program, a review committee of industry experts is formed by the Qualifications Committee to work with the NASD staff in identifying the areas to be covered on the test and to approve each question to be used in the examination program. This process continues after an examination program is implemented with periodic meetings of the review committee to review new questions, to review questions with problem statistics and to effect revisions occasioned by changes in the tax laws and securities statutes and regulations. This revision to the Series 39 examination reflects such changes as they relate to direct participation programs and will be incorporated into all Series 39 examinations administered on February 1, 1984.

      The revised study outline for Series 39 can be ordered from the Association's Executive Office in Washington, D. C, or any of its 14 District Offices. The cost per copy is $2.00, prepaid.

      The material in the new study outline is divided among five major subject matter areas. These five areas are listed below with the number of questions from each area to be selected for inclusion in an examination. The total number of questions selected for an examination will be 100 (up from 50 questions on the current examination) and candidates will be required to score 70 percent or better in order to pass. The Series 39 examination will continue to be administered on the PLATO System of the Control Data Corporation. Testing time for the examination will be two hours.

       

      Section Title

      Number of Items In Each Examination

      1.0

      Structure of Direct Participation Programs

      18

      2.0

      Supervision of Underwriting Activities

      30

      3.0

      Sales Supervision; General Supervision of Employees; Regulatory Framework of NASD

      20

      4.0

      Compliance with Financial Responsibility Rules

      20

      5.0

      NASA A Guidelines

      12

       

      Total

      100

      New material added to the examination includes the following:

      • Section One

      IRS partnership qualification requirements and tax consequences of direct participation programs.

      • Section Two

      Updated to include Regulation D under the Securities Act of 1933 and Appendix F under Section 34 of the NASD Rules of Fair Practice.

      • Section Three

      Remains unchanged.

      • Section Four

      Coverage of the financial responsibility rules has been expanded to cover in greater detail the rules that apply to firms specializing in the sale of direct participation programs.

      • Section Five

      NASAA Guidelines for real estate and oil and gas programs have been added to assure comparability between the Association's program and state regulation of these products.

      Questions regarding this notice should be directed to Carole Hartzog in the Qualifications Department at (202) 728-8141.

      Sincerely,

      Frank J.McAuliffe
      Vice President
      Qualifications and Examinations

    • 83-63 1984 Schedule of Holidays

      TO: All NASD Members and Interested Persons

      Listed below is the NASD's 1984 schedule of holidays.

      January 2 (Monday)

      New Year's Day Observed

      February 20 (Monday)

      Washington's Birthday Observed

      April 20 (Friday)

      Good Friday

      May 28 (Monday)

      Memorial Day Observed

      July 4 (Wednesday)

      Independence Day

      September 3 (Monday)

      Labor Day

      November 6 (Tuesday)

      National Election

      November 22 (Thursday)

      Thanksgiving Day

      December 25 (Tuesday)

      Christmas Day

      Sincerely,

      Jordon S. Macklin
      President

    • 83-62 American Telephone and Telegraph Company (AT & T) Divestiture

      TO: Selected NASD Members

      Under the AT & T divestiture program, for every ten shares of existing ("old") AT & T owned, shareholders of record December 30, 1983 will receive one share in each of seven newly-formed regional holding companies, while continuing to own ten shares of divested ("new") AT & T as well.

      Beginning Monday, November 21, 1983, "when-issued" trading will commence in the seven regional holding companies and new AT & T, and is expected to continue until mid-February, 1984. Old AT & T will trade with due bills from January 3, 1984 to mid-February, 1984 representing the spin-off ownership in the holding companies.

      This pending AT & T divestiture and the anticipated heavy when-issued trading volume expected to occur during the relatively long when-issued trading period is a matter of concern especially in the areas of credit requirement and net capital. The Association in cooperation with the Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE) has been active in developing an approach to address these concerns.

      Accordingly, subject to SEC approval, the NASD in conjunction with the NYSE is requiring accounts otherwise exempt from margin requirements for when-issued transactions to make and maintain specified margin deposits. In connection therewith, the Board of Governors has enacted a temporary amendment to Appendix A of Section 30 of the Rules of Fair Practice making the exception to the margin requirements of Appendix A inapplicable with respect to when-issued transactions in special cash accounts for accounts of broker-dealers, banks, trust companies, investment companies, investment trusts, insurance companies, charitable or non-profit educational institutions and similar fiduciary type accounts hereafter referred to as "exempt" accounts. This temporary amendment is solely for the purpose of when-issued trading in the securities of AT & T and its regional holding companies and will be in effect only until such when-issued trading has terminated.

      Furthermore, the amendment will require that fiduciary accounts such as those described above deposit initial margin of 10% for each when-issued transaction and thereafter maintain a minimum maintenance of 7%. A more detailed discussion of these special margin requirements appears in Section II below.

      With this as background, members should be aware of the following areas that may be affected by the AT & T divestiture stock distribution:

      I. Options Available to Certain AT & T Stockholders of Record

      AT & T stockholders of record December 30, 1983 who own from 10 to 499 shares are being given the following three options:

      1. Receive whole shares in any or all of the regional companies, with cash payment for fractional shares;
      2. Deposit shares in each regional company's dividend reinvestment plan;
      3. Sell their holdings in one or more of the regional companies and buy stock in other regional companies.

      In mid-January, 1984, AT & T plans to mail to these stockholders their option cards, but shareholders will have until April, 1984 to elect what distribution they desire. Because of the substantial time interval, the Association strongly recommends that members require their customers to immediately complete and return their option card to AT & T to insure that the new shares are promptly distributed to them. Before accepting a when-issued sell transaction in any regional company, members should determine which option their customer will elect because up to April, 1984, AT & T will not deliver any shares prior to their having received an executed option card signed by the stockholder. After April, 1984, only whole shares in the regional companies will be distributed, with cash payment made for any fractional shares. Thereafter, members have the responsibility for obtaining the necessary securities against sales to complete delivery on settlement date at the time the when-issued transactions go regular way.

      II. Application of Regulation T to When-Issued Transactions

      A. Cash Account
      1. Regulation T, Section .8(b) requires full cash payment for customer purchases within 7 business days of the date any when-issued security is made available by the issuer for delivery to purchasers. Since the when-issued securities will not be available until the middle of February, 1984, payment under Regulation T for cash account purchases will not be required until late February, 1984. (See Ninety-Day Freeze Section below.)
      Notwithstanding this, NASD Rule of Fair Practice 30, Appendix A, Section 6 (paragraph 2180A) requires that transactions in when-issued securities executed in cash accounts are subject to the same margin maintenance requirements and marks-to-market as they would have were they executed in a margin account. (See Section n B. for details.)
      Although fiduciary-type accounts as identified in Section 6 are not subject to this margin requirement, the Board's action to adopt a temporary rule amendment as noted above renders this exception inapplicable and these types of accounts will now be required to deposit 10% of the contract price for each when-issued security transaction within seven business days from the date of the transaction and to maintain thereafter a minimum maintenance requirement of 7%.
      Members must take prompt and appropriate action when accounts fail to provide initial deposits or meet subsequent maintenance requirements. Charges to capital for deficits in accounts are discussed in Section V below.
      2. 90-Day Freeze in Cash Accounts
      Section .8(c) of Regulation T requires that a customer's cash account be frozen for a period of 90 calendar days if a non-exempt security in the account is sold or delivered to another broker-dealer without having been previously paid for in full by the customer. Subsequent purchases can be effected only if cash is deposited in the account prior to execution or if proper authorization is obtained from the NASD or a national securities exchange.
      Section .8(c) of Regulation T is applicable to transactions in all AT & T when-issued securities. Therefore, if a customer sells an existing when-issued position, full cash payment for the purchase must be made during the period of time between the purchase and sale. If not, the account is subject to a 90-day freeze period which would begin on the date of the sale of an AT & T when-issued security, regardless of the date it was previously purchased.
      B. Margin Accounts
      NASD Rule of Fair Practice, Article III, Section 30 and Regulation T apply to when-issued transactions which take place in margin accounts. Specifically, Section .5(a) of Regulation T requires that a when-issued transaction in a margin account be treated for margin purposes as if the security were an issued margin security. Therefore, all margin requirements apply, i.e. 50 percent initial margin requirement on net long or net short when-issued commitments, plus any unrealized loss or less any unrealized profit on the commitment. Should an account with a net short when-issued commitment have a net long position in the related issued security, no margin is required.
      Section 5 of Appendix A of the NASD's Rule of Fair Practice Article III, Section 30 requires that the minimum amount of margin maintained in any transaction or net position in each when-issued security be the same as if that security were issued. As such, when-issued positions are fully subject to the Association's minimum margin maintenance requirements as described in Appendix A, Section 4. Briefly, minimum margin maintenance is the greater of $2,000 or:
      • 25% of the market value of all net long positions;
      • $5 per share or 30% of market value (whichever is greater) of each stock short in the account with a market value of $5 per share or above;
      • For purchases under $2,000, a deposit equal to the total cost must be made.

      Section 5 of Appendix A also requires that each position in a when-issued security be marked to the market separately to determine margin maintenance requirements, and any unrealized profit applied only to the amount of margin required on the position in the particular security. A short position in a when-issued security in an account that is also long the securities upon which the when-issued security is to be issued should be marked to the market and the balance in the account adjusted for any unrealized loss.
      The current market value of all fully-paid securities (including the underlying security) held in a cash account may be used as an offset to the mark-to-the-market capital charge after deducting from the total value NASD maintenance requirements for such securities, provided such securities are held in negotiable form.

      III. Transaction Reporting

      As NASD Notice to Members 83-59 advises, all seven regional holding companies, while to be listed on the New York Stock Exchange, are fully subject to SEC Rule 19c-3.

      All requirements for reporting transactions to the Consolidated Tape as specified by the provisions of Article XVIII, Schedule G of the Association's By-Laws apply to member transactions in any of the AT & T when-issued securities which are executed in the over-the-counter market. Inasmuch as these securities are subject to Rule 19c-3, any market maker in CQS is a "Designated Reporting Member" for purposes of Schedule G. Members are referred to Schedule G (paragraph 1681) for details.

      With regard to when-issued trading in AT & T divested securities only, orders received prior to the opening of the reporting member's market in each such security which are simultaneously executed at the opening at the same price may be aggregated (i.e. bunched) for transaction reporting purposes into a single transaction report. However, members should not use the modifier (.B) to identify a bunched trade report in AT & T when-issued securities. Bunching is only permitted for pre-opening orders.

      Members reporting bunched trades are required to identify in their records all of the individual orders that were aggregated for each bunched trade reported.

      IV. Clearing of AT & T When-Issued Transactions

      Those NASD firms that are members of the National Securities Clearing Corporation (NSCC) have already received notifications from NSCC describing its plans for processing when-issued trades in divested AT & T and the seven regional holding companies. Briefly, NSCC will establish a special when-issued account that will produce when-issued contracts on machine-readable output, as well as on conventional hard-copy reports.

      Members are reminded that NSCC will be computing daily cash marks-to-the-market which could potentially result in substantial daily cash demands. Members are encouraged to become familiar with NSCC's comparison and clearance systems for AT & T so that they can effectively meet their commitments during the when-issued trading period and on settlement date in February, 1984.

      V. Special Net Capital Provisions

      During the period of when-issued trading, the SEC is granting special temporary net capital treatment to (i) the securities haircut requirements applicable to proprietary positions under subparagraphs (c)(2)(vi) and (c)(2)(viii) of Rule 15c3-1 all securities involved in the AT & T divestiture which are cleared through the facilities of a registered clearing agency on a continuous net settlement (CNS) system; and (ii) deficits in special cash accounts of "exempt" accounts.

      A.

      Positions

      Haircut

      1.

      Long AT & T (old shares)

       

      a.

      Long position only

      15% of long market value

       

      b.

      Long position and short equal when-issued positions of divested issues (flat after February, 1984 regular way settlement date)

      5% of when-issued market value

       

      c.

      Long position and short some when-issued positions of divested issues.

      5% of when-issued market value plus 15% of unhedged net long market value

      2.

      Short AT & T (old) shares

       

      a.

      Short position only

      15% of short market value

       

      b.

      Short position and long position equal when-issued position in divested issues (flat after February, 1984 regular way settlement date)

      5% of short market value

       

      c.

      Short position and long some when- issued positions of divested issues

      5% of long when-issued market value plus 15% of unhedged net short market value, plus mark-to-market loss if any. (Gains can be used to reduce haircuts.)

      3.

      When-Issued Positions

       

      a.

      Net long or short positions in any issue (each issue must be considered separately)

      15% of market value plus mark-to-market loss if any. (Gains can be used to reduce haircut.)

       

      b.

      Matching long and short positions in any issue

      Deduct net loss if any for all matched positions taken together. Ignore net gain.

      4.

      Undue Concentration

       

      a.

      Market value of net long or short positions in any issue exceeding 10% of tentative net capital. (Shares of divestiture issues to be received will be included.)

      7 1/2%

      5.

      Options

       

      a.

      In the money options for pre-divestiture shares offset by when- issued positions will be given the same consideration as long or short positions in 1 and 2 above adjusted for strike price and mark-to-market consideration, (i.e. matched) - 5%; net short unmatched 15% of market value of underlying shares.

       

      b.

      Out of the money options will be treated as in subparagraph (c)(2)(x) or Appendix A of Rule 15c3-l as appropriate, subject to a 15% haircut where deductions are based on underlying securities values.

      B.

      Customer Accounts

       

      The net capital charge for deficits in customer accounts after application of margin calls outstanding five business days or less is 100% of the deficit amount as required by subparagraph (c)(2)(iv)(B) of Rule 15c3-l. However, in the case of those "exempt" accounts subject to the above-noted 10% and 7% requirements, the net capital charge after application of calls for margin outstanding less than five business days shall be based on the amount of the deficit in relation to the member's excess net capital as follows:

       

      Condition

      Charge to Net Capital

      1.

      For "exempt" accounts where trades are affirmed through the Depository Trust Corporation's Institutional Delivery System (DTC-IDS):

       
       

      a.

      Deficit up to 10% of excess net capital

      10% of deficit

       

      b.

      Deficit over 10% but not over 20% of excess net capial

      25% of deficit

       

      c.

      Deficit over 20% of excess net capital

      100% of deficit

      2.

      For "exempt" accounts whose trades are not affirmed through DTC-IDS:

       
       

      a.

      Deficit up to 10% of excess net capital

      25% of deficit

       

      b.

      Deficit over 10% of excess net capital

      100% of deficit

      3.

      Total deficits in all "exempt" accounts combined, less amount of deficits charged per 1 and 2 above:

       
       

      a.

      Up to 100% of excess net capital

      No charge

       

      b.

      Over 100% of excess net capital

      100% of deficit which exceeds 100% of excess net capital

      4.

      Short due bill securities

       
       

      If payment of proceeds is made to any customer against receipt of AT & T shares with due bills, the due bill positions will be treated as unsecured shorts.

      100% of the market value of the due bill securities

      C. Other
      • "Exempt" accounts can meet margin requirements by depositing with the broker-dealer cash or readily marketable securities. If there are legal impediments to the depositing of cash or securities, then Letters of Credit or Guarantee can be accepted by the member. However, these letters will be given no value for purposes of Rule 15c3-l when computing deficits in B above.
      • Excess net capital may be based on the most recently required SEC Rule 15c3-l capital computation.
      • For valid reasons, members may request extensions of time for initial or maintenance deposits using existing NASD Regulation T processing procedures and forms.
      • For when-issued positions, the amount of deficit may be calculated by netting gains or losses in matched when-issued long and short positions in one when-issued AT & T security with the others taken together.

      * * * * *

      The Association cautions members who plan to actively engage in when-issued trading of the AT & T divested issues to be aware at all times of their cash and capital needs and to establish in-house procedures to assure that trading activity for both proprietary and customer accounts is being maintained within levels permitted by the firm's cash flow resources and excess net capital. The Association will be monitoring designated members' activities in this area and will be watching closely for any impact on a firm's financial and operational condition that might result from market movements in all AT & T issues. The Association's normal surveillance programs may be expanded to require the filing of special reports relative to AT & T trading activity if conditions warrant.

      Members are encouraged to discuss with their local NASD District Office their plans for AT & T trading and to keep the District Office apprised of any significant changes.

      * * * * *

      Any questions about this notice should be directed to Darrell Proctor, Associate Director - Financial Responsibility, at (202) 728-8236 or Thomas Cassella, Director - Financial Responsibility, at (202) 728-8237. Questions about trade reporting should be addressed to Stephen Hickman in Market Surveillance at (202) 728-8201.

      Sincerely

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

    • 83-61 Holiday Schedule for Remainder of 1983

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Thursday, November 24, Thanksgiving Day; Monday, December 26, Christmas Day Observance; and Monday, January 2, 1984, New Year's Day Observance. "Regular Way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

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

      Trade Date

      Settlement Date

      Regulation T Date*

      November 17

      November 25

      November 29

      18

      28

      30

      21

      29

      December 1

      22

      30

      2

      23

      December 1

      5

      December 19

      27

      29

      20

      28

      30

      21

      29

      January 3 1984

      22

      30

      4

      23

      January 3 1984

      5

      27

      4

      6

      28

      5

      9

      29

      6

      10

      30

      9

      11

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

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6255.

      * * *


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(e)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 83-60 National Market System to Expand to 635 Issues November 22

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

      An additional 49 issues will voluntarily join the NASDAQ National Market System on Tuesday, November 22, bringing the total number of NMS securities to 635. These 49 issues meet the SEC's criteria for voluntary designation, which include average monthly trading volume of 100,000 shares and a minimum bid price of $5.

      The 49 issues scheduled to join NMS on Tuesday, November 22, are:

      ADVS

      Advanced Systems, Incorporated

      Arlington Heights, IL

      AFSL

      American Federal Savings and Loan Association of Colorado

      Denver, CO

      AFLT

      American Fletcher Corporation

      Indianapolis, IN

      BWKR

      Bassett-Walker, Inc.

      Martinsville, VA

      BIGB

      Big B, Inc.

      Birmingham, AL

      KARE

      Care Enterprises

      Orange, CA

      CFDY

      Citizens Fidelity Corporation

      Louisville, KY

      CSHR

      Commerical Shearing, Inc.

      Youngstown, OH

      CSII

      Communications Systems, Inc.

      Hector, MN

      CSCN

      CompuScan, Inc.

      Fairfield, NJ

      CLRI

      Computer Language Research Inc.

      Carrollton, TX

      CTSK

      Computer Task Group, Incorporated

      Buffalo, NY

      DTMD

      Dento-Med Industries, Inc.

      N. Miami Beach, FL

      DLOG

      Distributed Logic Corporation

      Garden Grove, CA

      EAGL

      Eagle Clothes, Inc.

      New York, NY

      ECTH

      Electro-Catheter Corporation

      Rahway, NJ

      ELEC

      Electro space Systems, Inc.

      Richardson, TX

      FATN

      First American Corporation

      Nashville, TN

      FCFN

      First City Financial Corporation

      Albuquerque, NM

      FCLF

      First Columbia Financial Corporation

      Englewood, CO

      FRRG

      First Railroad & Banking Company of Georgia

      Augusta, GA

      FLXS

      Flex steel Industries, Inc.

      Dubuque, IA

      HCCI

      HCC Industries

      Encino, CA

      ICEYF

      International Capital Equipment Limited

      Chicago, IL

      ICLB

      International Clinical Laboratories, Inc.

      Nashville, TN

      LCOR

      Langley Corporation

      San Diego, CA

      LWIS

      Lewis (Palmer G.) Co., Inc.

      Auburn, WA

      LMED

      LyphoMed, Inc.

      Melrose, IL

      MTEC

      Machine Technology, Inc.

      Whippany, NJ

      MSCC

      Microsemi Corporation

      Santa Ana, CA

      MLHR

      Miller (Herman), Inc.

      Zeeland, MI

      NELR

      Nelson Research & Development Company

      Irvine, CA

      NMTX

      Novametrix Medical Systems Inc.

      Wallingford, CT

      OTTR

      Otter Tail Power Company

      Fergus Falls, MN

      PAMX

      Pancho's Mexican Buffett, Inc.

      Fort Worth, TX

      PTRAS

      Property Trust of America

      El Paso, TX

      QSII

      Quality Systems, Inc.

      Tustin, CA

      RAUT

      Republic Automotive Parts, Inc.

      E. Detroit, MI

      REPH

      Republic Health Corporation

      Dallas, TX

      RIBI

      Ribi ImmunoChem Research, Inc.

      Hamilton, MT

      SLCR

      Salem Carpet Mills, Inc.

      Winston-Salem, NC

      STEL

      Satelco, Incorporated

      San Antonio, TX

      SMPS

      Simpson Industries, Inc.

      Birmingham, MI

      USSSS

      U.S. Shelter

      Greenville, SC

      UPAT

      University Patents, Inc.

      Norwalk, CT

      URGE

      Urgent Care Centers of America, Inc

      Encinitas, CA.

      VRES

      VICORP Restaurants, Inc.

      Denver, CO

      VSAL

      Visual Technology Incorporated

      Tewksbury, MA

      WDFC

      WD-40 Company

      San Diego, CA

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

      Sincerely,

      Gordon S. Macklin
      President

    • 83-59 Pilot Ends — Expansion of ITS/CAES Linkage — Open to All Rule 19c-3 Securities — ATT Divestiture

      TO: All NASD Members and NASDAQ Subscribers

      The Securities and Exchange Commission has recently authorized the expansion of the number of securities eligible for trading by our members through the linkage between the Intermarket Trading System (ITS) and the Computer Assisted Execution System (CAES). This linkage was mandated by the Commission in its order dated April 21, 1981, the first phase of which permitted only the thirty most active Rule 19c-3 securities with ITS/CAES market makers to be traded through the ITS/CAES linkage. Rule 19c-3 securities are those tape-eligible securities that were listed on an exchange after April 26, 1979 or were listed on or before that date but thereafter ceased being traded for any period of time.

      The second phase of this order, which became effective on September 15, 1983, permits all Rule 19c-3 securities to be traded through the ITS/CAES interface by an ITS/CAES market maker. The effectiveness of such permits NASD members, who choose to register as ITS/CAES market makers, to make markets in over 700 Rule 19c-3 securities. A listing of all Rule 19c-3 securities compiled as of October 3, 1983 is attached to this notice.

      It should be noted that certain technical constraints impacting only exchange participants currently prevent the inclusion of warrants and preferreds from this list in the ITS system. It is our understanding that efforts are now underway to correct this problem and will be completed during the 1st quarter of 1984. These constraints do not, however, impact or prevent the inclusion and trading of warrants and preferreds in CAES. However, trading through the ITS/CAES linkage will not be possible.

      It is the feeling of many of the current CAE participants that this expanded opportunity for NASD members to trade Rule 19c-3 securities is particularly significant in view of the impending divestiture of AT&T. This divestiture will result in the classification of seven new regional holding companies as Rule 19e-3 securities eligible for trading through the ITS/CAES interface. It is anticipated that "when issued" trading will commence in these new securities, identified below, during November, 1983.

      Security

      Symbol

      American Information Technologies Corporation (Ameritech)

      AIT

      Bell Atlantic Corporation

      BEL

      BellSouth Corporation

      BLS

      NYNEX Corporation

      NYN

      Pacific Telesis Group

      PAC

      Southwestern Bell Corporation

      SBC

      U.S. West, Inc.

      USW

      Additional information regarding participation in the ITS/CAES linkage may be obtained from Ms. Debra Portman at (212) 839-6206.

      Sincerely,

      Molly G. Bayley
      Vice President
      NASDAQ Operations

      Enclosure

      NEW YORK STOCK EXCHANGE SECURITIES ELIGIBLE FOR OFF-BOARD TRADING UNDER RULE 19C-3

      October 3, 1983

      ACE

      -

      Acme Electric Corporation

      ALA

      -

      Ala Moana Hawaii Depository Units

      AMR$A

      -

      AMR Corporation - $2,125 Cumulative Convertible Preferred A

      ACO

      -

      Acco World Corporation

      AMD

      -

      Advanced Micro Devices, Inc.

      ADV

      -

      Advest Group, Inc.

      ARX

      -

      Aeroflex Laboratories, Inc.

      AET$B

      -

      Aetna Life & Casualty Company Cumulative Preferred A

      ALP$A

      -

      Alabama Power Company 15.68% Class A Cumulative Preferred

      AAL

      -

      Alexander and Alexander Services, Inc.

      AT

      -

      Allied Telephone Company

      AH$C

      -

      Allis Chalmers Corporation $5,875 Convertible C Preferred

      AC$A

      -

      American Can Company $3.00 Series Convertible Preferred

      AC$B

      -

      American Can Company $13.75 Series Preferred

      AHR

      -

      Americana Hotels and Realty Corporation

      APS

      -

      American President Companies Ltd.

      AFS

      -

      Amfesco Industries, Inc.

      ASO

      -

      Am south Bancorp

      AGV

      -

      Anderson Greenwood Company

      ANA

      -

      Anta Corporation

      BUD

      -

      Anheuser-Busch Companies, Inc.

      AAC

      -

      Anacomp, Incorporated

      APP

      -

      Apache Petroleum Company Depository Units

      APP.W

      -

      Apache Petroluem Company 1986 Warrants

      AEW$D

      -

      Appalachian Power Company - $2.65 D Preferred

      AEW$E

      -

      Appalachian Power Company - $4.18 Cumulative Preferred

      AEW$F

      -

      Appalachian Power Company - $3.80 Cumulative Preferred

      AZP$O

      -

      Arizona Public Service Co. - $3.58 Cumulative Preferred Series O

      AZP$Q

      -

      Arizona Public Service Co. - Adjustable Rate Preferred Series Q

      BMC

      -

      BMC Industries, Inc.

      BTX

      -

      BancTexas Group, Inc.

      BPP

      -

      Bally's Park Place Inc.

      ONE

      -

      Bane One Corporation

      BCM

      -

      Banco Central S.A. American Depositary Shares

      BAC$A

      -

      BankAmerica Corporation Adjustable Preferred Series A

      BAC$B

      -

      BankAmerica Corporation Adjustable Preferred Series B

      NEB$

      -

      Bank of New England Adjustable Rate Preferred Series 1982

      BRE

      -

      BankAmerica Realty Investors Shares of Beneficial Interest

      BBF

      -

      Barnett Banks of Florida, Inc.

      BBF$A

      -

      Barnett Banks of Florida, Inc. Series A $2,375 Cumulative Preferred

      BAS

      -

      Basic Resources Corporation

      BHW$

      -

      Bell and Howell Company $12.00 Convertible Preferred

      BS$

      -

      Bethlehem Steel Corporation $5.00 Cumulative Convertible Preferred

      BHP

      -

      Black Hills Power and Light

      BCC$B

      -

      Boise Cascade Corporation - 5% Convertible Exchangeable Preferred

      BHC

      -

      Brock Hotel Corporation

      BU$A

      -

      Brooklyn Union Gas $3.95 Cumulative II Preferred

      CEE

      -

      C-3, Inc.

      CPH$F

      -

      Capital Holding Corporation Adjustable Rate Cumulative Preferred F

      CIW

      -

      Cameron Iron Works, Inc.

      CCH

      -

      Campbell Resources, Inc.

      CCH$

      -

      Campbell Resources Inc. Preferred

      ENT

      -

      Canadian Pacific Enterprises

      CKE$

      -

      Castle and Cooke, Inc. Convertible Exchangeable Preferred

      CNH$

      -

      Central Hudson Gas and Electric Company Depositary Preferred A

      CNL

      -

      Central Louisiana Electric Company

      CNL$

      -

      Central Louisiana Electric Company $4.18 Preferred

      CV

      -

      Central Vermont Public Service Corporation

      CHR$

      -

      The Charter Company - Convertible Depositary Preferred

      CHA$C

      -

      Champion International $4.60 Cumulative Convertible Preferred

      CMB$D

      -

      Chase Manhattan Corporation 10 1/2% Series D Preferred

      CMB$E

      -

      Chase Manhattan Corporation Floating Rate Series E Preferred

      CHE

      -

      Chemed Corporation

      CHL$A

      -

      Chemical New York Corporation Adjusted Rate Cumulative Preferred

      CHL$B

      -

      Chemical New York Corporation Adjusted Rate Cumulative Preferred B

      CNW

      -

      Chicago Northwest Transport Class A

      C.Z

      -

      Chrysler Corporation Warrants 12/31/90

      CI

      -

      Cigna Corporation

      CIN$G

      -

      Cincinnati Gas and Electric Company - 10.20% G Preferred

      CIN$H

      -

      Cincinnati Gas and Electric Company 12.52% Series Cumulative Preferred

      FNC$

      -

      Citicorp Adjusted Rate Preferred 2nd Series

      CNV$E

      -

      City Investing Co. $2,875 Convertible Ex. Preferred E

      CG$C

      -

      Columbia Gas Sys. Inc. 10.24% Preferred C

      CG$D

      -

      Columbia Gas Sys. Inc. Adjustable Preferred D

      COC$D

      -

      Columbus & Southern Ohio Electric Company Cumulative Preferred $3.45 Series

      PMA

      -

      Combined International Corporation

      CDO

      -

      Comdisco, Inc.

      CWE$K

      -

      Commonwealth Edison Company - $11.70 Cumulative Preferred

      CWE$L

      -

      Commonwealth Edison Company - $12.75 Cumulative Preferred

      CAA

      -

      Conair Corporation

      CNE

      -

      Connecticut Energy Corporation

      CMS$N

      -

      Consumers Power Company - $3.85 Cumulative Preferred

      CMS$P

      -

      Consumers Power Company $3.98 Preferred

      CMS$R

      -

      Consumers Power Company $4.00 Preferred

      CMS$S

      -

      Consumers Power Company $4.02 Preferred

      CMS$T

      -

      Consumers Power Company $3.78 Preferred

      CMS$U

      -

      Consumers Power Company $3.60 Preferred

      COS$

      -

      Copperweld Corporation - 2.48% Convertible Exchangeable Preferred

      CYR

      -

      Cray Research

      ZB$A

      -

      Crown Zellerbach Company - $4,625 Cumulative Convertible Preferred Series A

      ZB$C

      -

      Crown Zellerbach Company Preferred C

      CUL

      -

      Cullinet Software, Inc.

      CWL

      -

      Cowles Broadcasting

      DPL$J

      -

      Dayton Power and Light $11.60 Preferred J

      DF

      -

      Dean Foods Company

      DLX

      -

      Deluxe Check Printers, Inc.

      DTE$I

      -

      Detroit Edison Company (The) - 12.80% Preferred

      DTE$J

      -

      Detroit Edison Company (The) - 15.68% Preferred J

      DTE$K

      -

      Detroit Edison Company (The) - $4.12 Series Preferred K

      DTE$L

      -

      Detroit Edison Company (The) - $4.00 Series Preferred L

      DTE$M

      -

      Detroit Edison Company (The) - $3.42 Series Preferred M

      DTE$O

      -

      Detroit Edison Company (The) - $3.40 Series Preferred O

      DTE$P

      -

      Detroit Edison Company (The) - $3.12 Preferred

      DTE$Q

      -

      Detroit Edison Company (The) - $3.13 Cumulative Preferred

      DIG$B

      -

      Di Giorgio Corporation - $2.25 Cumulative Convertible Preferred

      DIA$

      -

      Diamond Shamrock Corporation $4.00 Preferred

      DCI

      -

      Donaldson Company, Inc.

      DUK$N

      -

      Duke Power Company - 8.84% Cumulative Preferred Series N

      DUK$O

      -

      Duke Power Company - 11% Cumulative Preferred Series O

      DUK$P

      -

      Duke Power Company - 15.40% Preferred

      DYC

      -

      Dyco Petroleum Company

      EAL$B

      -

      Eastern Air Lines $3.20 Preferred B

      EAL$C

      -

      Eastern Air Lines $3.00 Convertible Jr. Preferred

      EAL.W

      -

      Eastern Air Lines - Warrants

      ELP$E

      -

      El Paso Natural Gas Company - 15% Preferred

      ELP$F

      -

      El Paso Natural Gas Company - 14% Preferred

      EEX

      -

      Energy Exchange Corporation - Class A

      EC

      -

      Englehard Corporation

      ENS$D

      -

      Enserch Corporation Adjustable Preferred D

      EEE

      -

      Ensource, Incorporated

      EN

      -

      Enterra Corporation

      ERB

      -

      Erbamont N.V.

      FCI

      -

      Fairfield Communities Inc.

      FAC

      -

      First Atlanta Corporation

      FAC$

      -

      First Atlanta Corporation Series A Preferred

      FBF

      -

      First Bankers Corporation of Florida

      FBC

      -

      First Boston Corporation

      FBT$A

      -

      First City Bancorp of Texas Adjustable Note Series A

      FNB$

      -

      First Chicago Corporation Preferred

      FNB$B

      -

      First Chicago Corporation Adjustable Preferred B

      FNS$B

      -

      First National State Bancorp Adjustable Preferred B

      FWB$A

      -

      First Wisconsin Corporation $6.25 Preferred A

      FLT$

      -

      Fleet Financial Group, Inc. Adjustable Preferred

      FLX$

      -

      Flexi-Van Corporation - $1.61 Cumulative Preferred

      FLX$B

      -

      Flexi-Van Corporation - $2.75 Cumulative Preferred

      FLP

      -

      Floating Point Systems, Incorporated

      FMR.V

      -

      Freeport McMoran Oil & Gas Royalty Trust - Units of Beneficial Interest When Issued

      FTR$

      -

      Fruehauf $2.00 Preferred

      GHX

      -

      Galveston-Houston Company

      GEC

      -

      Geico Corporation

      GCN$A

      -

      General Cinema Corporation Preferred A

      GDC

      -

      General Datacomm Industries, Incorporated

      GNC

      -

      General Nutrition, Incorporated

      GRN

      -

      General Re Corporation

      GGP$

      -

      General Growth Properties $1.90 Pfd. A - When Issued

      GGP.W

      -

      General Growth Properties - Warrants When Issued

      GEN

      -

      Genrad, Incorporated

      GX

      -

      Geo International Corporation (New)

      GP$B

      -

      Georgia Pacific Corporation - $2.24 Series B Adjustable Rate Convertible Preferred

      GP$C

      -

      Georgia Pacific Corporation Series C Adjustable Rate Convertible Preferred

      GPE$E

      -

      Georgia Power - $3.76 Class A Preferred

      GPE$F

      -

      Georgia Power - $3.44 Preferred

      GNG.W

      -

      Golden Nugget Inc. Warrants 7/1/88

      GNN$

      -

      Great Northern Nekoosa $4.75 Cumulative Exchangeable Preferred

      GHI

      -

      Greatwest Hospital, Inc.

      GMP

      -

      Green Mountain Power Corporation

      GBE

      -

      Grubb and Ellis Company

      GQ$

      -

      Grumman Corporation - $2.80 Cumulative Preferred

      GSU$B

      -

      Gulf States Utilities - $4.40 B Preferred

      GSU$N

      -

      Gulf States Utilities - $3.85 Preferred

      GA

      -

      Gulfstream Aerospace Corporation

      HPR

      -

      Harper & Row Publishers, Inc.

      HLC

      -

      Hazelton Laboratories

      HMY

      -

      Heilig Meyers Company

      HCI

      -

      Heritage Communications Incorporated

      HCI$B

      -

      Heritage Communications Incorporated - Series B Preferred

      HXL

      -

      Hexcel Corporation (Delaware)

      HIT

      -

      Hitachi Limited ADR

      HZB

      -

      Horizon Bancorp

      RTH

      -

      Houston Oil Royalty Trust

      HPT

      -

      Howell Petroleum

      THC

      -

      Hydraulic Company (The)

      IPC$K

      -

      Illinois Power Company - 11.66% Cumulative Preferred

      IPC$L

      -

      Illinois Power Company - Adjustable Series Preferred A

      IME$G

      -

      Indiana and Michigan Electric Company $2.75 Cumulative Preferred

      IME$H

      -

      Indiana and Michigan Electric Company $3.63 Cumulative Preferred

      IG

      -

      Informatics General Corporation

      IRE$A

      -

      Integrated Resources - $3.03 Cumulative Preferred A

      IRE$C

      -

      Integrated Resources - Adjustable Rate Cumulative Preferred

      IRE$D

      -

      Integrated Resources - $4.25 Cumulative Convertible Preferred

      ISS$D

      -

      Interco, Inc. - $7.75 Cumulative Convertible Series D

      ITM

      -

      Intermedics Inc.

      HR$A

      -

      International Harvester $3.00 Convertible Preferred A

      HR$C

      -

      International Harvester $5.76 Preferred C

      IUS

      -

      Interstate Uniform Services Corporation

      IFG

      -

      Inter-Regional Financial Group, Incorporated

      V$

      -

      Irving Bancorp Adjustable Rate Preferred

      JR

      -

      James River Corporation of Virginia

      KDI

      -

      KDI Corporation

      KB$B

      -

      Kaufman and Broad, Inc. $8.75 Convertible Exchangeable Preferred

      KGM$D

      -

      Kerr Glass Manufacturing Company - $1.70 Class B Cumulative Convertible Preferred Series D

      KEY

      -

      Key Banks Inc.

      KOG

      -

      Koger Properties, Inc.

      KOP$B

      -

      Kopper Company, Inc. - $10.00 Preferred

      KYO

      -

      Kyocera Corporation

      LHC

      -

      L and N Housing Corporation

      LRT

      -

      L L & E Royalty Trust - Units of Beneficial Interest

      LTV$B

      -

      LTV Corporation $3.06 Convertible Preferred B

      LPT

      -

      Lear Petroleum Corporation

      LPT$

      -

      Lear Petroleum Corporation 2.875% Exchangeable Preferred

      LM

      -

      Legg Mason, Inc.

      LEG

      -

      Leggett and Platt, Inc.

      LTD

      -

      The Limited, Incorporated

      LIL$S

      -

      Long Island Lighting Company - 9.80% Series S Preferred

      LIL$T

      -

      Long Island Lighting Company - 3.31% Cumulative Preferred Series T

      LIL$U

      -

      Long Island Lighting Company - 4.25% Cumulative Preferred Series U

      LIL$V

      -

      Long Island Lighting Company - 3.50% Preferred Series V

      LIL$W

      -

      Long Island Lighting Company - 3.52% Preferred Series W

      LPL$

      -

      Louisiana Power and Light Co. 12.64% Cumulative Preferred

      LOW

      -

      Lowe's Companies, Inc.

      LUB

      -

      Luby's Cafeterias, Inc.

      LUK$F

      -

      Leucadia National Corporation Preferred

      MGM

      -

      MGM UA Entertainment Company

      MGM.W

      -

      MGM UA Entertainment Company Warrants

      HEG

      -

      MGM UA Home Entertainment Group, Inc.

      MMB

      -

      MacMillan Bloedel Limited

      M

      -

      Management Assistance, Inc.

      MHC$

      -

      Manufacturers Hanover Corporation Adjustable Preferred

      MHC$B

      -

      Manufacturers Hanover Corporation Adjustable Preferred B

      MAR

      -

      Marcade Group, Inc.

      MM$A

      -

      Marine Midland Banks, Inc. Preferred A

      ML$

      -

      Martin Marietta Corporation $4,875 Convertible Exchangeable Preferred

      MDD

      -

      McDonald & Company Investments, Inc.

      MTR

      -

      MESA Royalty Trust

      MEL$A

      -

      Mellon National Corporation Series A Preferred

      MEL

      -

      Mellon National Corporation

      MOS

      -

      Mesa Offshore Trust Units of Beneficial Interest

      MXF

      -

      Mexico Fund, Inc. (The)

      MIC$A

      -

      Michigan Consolidated Gas Company $3.19 Series Cumulative Preferred

      MCN

      -

      MidCon Corporation

      MPV$C

      -

      Missouri Public Service Company $4,125 Series Preferred

      MLT

      -

      Mitel Corporation

      MSY

      -

      Modular Computer Systems, Inc.

      MCL

      -

      Moore Corporation Limited

      MOE

      -

      Moran Energy Corporation

      JPM$A

      -

      Morgan, J.P. and Company Adjustable Rate Preferred A

      NAF

      -

      NAFCO Financial Group, Inc.

      NBI

      -

      NBI, Incorporated

      NII$

      -

      National Intergroup Inc. $5.00 Convertible Preferred

      NUI

      -

      NUI Corporation

      NCB

      -

      NCNB Corporation

      NEV

      -

      Nevada Savings and Loan Association

      NWL

      -

      Newell Companies, Inc.

      NIP

      -

      Newhall Investment Properties Units of Limited Partnership

      NR

      -

      Newhall Resources Units of Limited Partnership

      NJR

      -

      New Jersey Resources Corporation

      NGE$D

      -

      New York State Electric and Gas 15% Series

      NIC

      -

      Nicolet Instrument Corporation

      NMK$

      -

      Niagara Mohawk Power Corporation Adjustable Preferred A

      NBL

      -

      Noble Affiliates, Inc.

      NOR

      -

      Norstar Bancorp, Inc.

      NOR$

      -

      Norstar Bancorp, Inc. Convertible Adjustable Preferred

      NET

      -

      North European Oil Royalty Trust Units of Beneficial Interest

      NI$A

      -

      Northern Indiana Public Service Adjustable Preferred A

      NOB$

      -

      Norwest Corporation Adjustable Preferred

      NOB$B

      -

      Norwest Corporation Adjustable Preferred Series B

      NWC$A

      -

      Northwest Central Pipeline Corporation Adjustable Rate Preferred A

      NWP$A

      -

      Northwest Energy Company $2,125 Preferred A

      NVO

      -

      Novo Industries A/S

      NTR

      -

      Nutri Systems, Inc.

      ODR

      -

      Ocean Drilling and Exploration Company

      OEC$M

      -

      Ohio Edison Company - $1.80 Cumulative Convertible Preferred

      OEC$N

      -

      Ohio Edison Company - $3.92 Cumulative Convertible Preferred

      OEC$O

      -

      Ohio Edison Company - $3.50 Class A Preferred

      OPW$H

      -

      Ohio Power Company - $3.75 Preferred

      OCR

      -

      Omnicare, Inc.

      PSA$

      -

      PSA, Inc. Depositary Preferred Series B

      PPW$B

      -

      Pacific Power and Light Company - $3.75 Preferred

      PPW$C

      -

      Pacific Power and Light Company - $4.07 Preferred

      PAB

      -

      Pan American Banks, Incorporated

      PNP

      -

      Pay-N-Pak Stores, Inc.

      PCI

      -

      Payless Cashways, Incorporated

      PPL$N

      -

      Pennsylvania Power and Light Company Depositary Preferred $15.00 Series

      PPL$O

      -

      Pennslyvania Power and Light Company Depositary Preferred

      PPL$P

      -

      Pennsylvania Power and Light Company Depositary Preference

      PBT

      -

      Permian Basin Royalty Trust Units of Beneficial Interest

      PDS

      -

      Perry Drug Stores, Inc.

      PEO$A

      -

      Petroleum and Resources Corporation - $1.57 Convertible Preferred

      PIL

      -

      Petroleum Investments Ltd. Depository Units

      PN.W

      -

      Pan American World Airways - 1993 Warrants

      PE$M

      -

      Philadelphia Electric Company - 15.25% Preferred

      PE$N

      -

      Philadelphia Electric Company - 17.125% Preferred

      PE$O

      -

      Philadelphia Electric Company 12.80% Preferred

      PGN$C

      -

      Portland General Electric $4.40 Cumulative Preferred

      PGN$D

      -

      Portland General Electric $4.32 Series Cumulative Preferred

      PCH$

      -

      Potlatch Corporation $12,375 Preferred Class A Cumulative Preferred

      POM$G

      -

      Potomac Electric Power Company - $4.23 Serial Preferred $4.23 (1979)

      PMK

      -

      Primark Corporation

      PRP

      -

      Prairie Producing Company

      PEG$R

      -

      Public Service Electric and Gas - 13.44% Preferred

      PEG$S

      -

      Public Service Electric and Gas - 12.80% Preferred

      PEG$T

      -

      Public Service Electric and Gas - 11.62% Preferred

      PIN$I

      -

      Public Service Company of Indiana - 9.60% Series Cumulative Preferred

      PNH$

      -

      Public Service Company of New Hampshire - 11.24% Cumulative Preferred

      PNH$C

      -

      Public Service Company of New Hampshire - Shares of Sinking Fund Preferred - 17% Division Series Cumulative

      PNH$D

      -

      Public Service Company of New Hampshire - 15% Preferred

      PNH$E

      -

      Public Service Company of New Hampshire - 15.44% Preferred

      PNH$F

      -

      Public Service Company of New Hampshire - 13% Division Series Preferred

      BQR

      -

      Quick and Reilly Group, Inc.

      RPC

      -

      RAMPAC

      RYC

      -

      Raychem Corporation

      RB$

      -

      Reading and Bates Corporation - Series 4 $2,125 Cumulative Convertible Preferred

      RB$A

      -

      Reading and Bates Corporation - Series 5 Preferred

      REC

      -

      Recognition Equipment, Inc.

      RGL

      -

      Regal International, Inc.

      RAI.W

      -

      Republic Airlines Inc. 1986 Warrants

      RNB$C

      -

      Republic of New York Corporation - $3,125 Preferred

      RNB$A

      -

      Republic of New York Corp. - Cumulative Preferred Floating Series A

      RS$

      -

      Republic Steel Corporation $5.25 Convertible Preferred

      RPT$A

      -

      Republicbank Corporation - $2,125 A Convertible Preferred

      REN

      -

      Rollins Environmental Services, Inc.

      SBR

      -

      Sabine Royalty Trust Units of Beneficial Interest

      SGB

      -

      Safeguard Business Systems, Inc.

      SFE.W

      -

      Safeguard Scientifics, Incorporated - Warrants

      SK

      -

      Safety Kleen Corporation

      SJT

      -

      San Juan Basin Royalty Trust Units of Beneficial Interest

      SAR

      -

      Santa Anita Realty Enterprises, Incorporated

      SVB$A

      -

      Savin Corp. - Series A $1.50 Cumulative Convertible Preferred

      SCR$B

      -

      Sea Container Ltd. $2.10 Preferred

      SCR$C

      -

      Sea Container Ltd. $2.10 Series 1982

      SGO

      -

      Seagull Energy Corporation

      SEE

      -

      Sealed Air Corporation

      SGN$A

      -

      Signal Company - 8.25% Convertible Preferred A

      SOR

      -

      Source Capital, Inc.

      SOR$

      -

      Source Capital, Inc. $2.40 Preferred

      SM$D

      -

      Southmark Corporation Adjustable Rate Series D Preferred

      SWX

      -

      Southwest Gas Corporation

      SWN

      -

      Southwestern Energy Company

      SUL

      -

      Sullair Corporation

      SU

      -

      Sun Banks, Inc.

      SYM

      -

      Syms Corporation

      TDK

      -

      TDK Corporation ADR

      TBO

      -

      Tacoma Boatbuilding Company

      TLR

      -

      Telerate Corporation

      TGT$E

      -

      Tenneco, Inc. - $11.00 Cumulative Preferred

      TXA

      -

      Texas American Bancshares, Incorporated

      TET$A

      -

      Texas Eastern Transmission Preferred A

      THK$

      -

      Thackeray Corp. $4.15 Preferred

      TMO

      -

      Thermo Electron Corporation

      TM

      -

      Thompson Medical Company, Inc.

      TCX

      -

      Ti-Caro, Inc.

      TIX

      -

      Timeplex, Inc.

      TED$G

      -

      Toledo Edison Company - $4.28 Cumulative Preferred

      TED$M

      -

      Toledo Edison Company - $3.47 Preferred

      TMK

      -

      Torchmark Corporation

      TOS

      -

      Tosco Corporation

      TOW

      -

      Towle Manufacturing Company

      TOW$A

      -

      Towle Manufacturing Company - Preferred A

      TOY

      -

      Toys "R" Us, Inc.

      TWA

      -

      Trans World Airlines Inc.

      TWA$

      -

      Trans World Airlines, Inc. $2.25 Preferred

      TWA$B

      -

      Trans World Airlines Inc. B Preferred

      TW.A

      -

      Trans World Corporation - 1987 Warrants

      TW.W

      -

      Trans World Corporation - Warrants

      E$

      -

      Transco Energy Company, Inc. $3,875 Cumulative Convertible Preferred

      EXP

      -

      Transco Exploration Partners Limited Depositary Units

      TCT

      -

      Tricentrol, Ltd.

      OIL

      -

      Triton Energy Corporation

      UAL$B

      -

      UAL, Inc. $2.40 Cumulative Convertible Preferred

      UEP$M

      -

      Union Electric Company Preferred M $4.00 Series 1982

      UEP$N

      -

      Union Electric Company $2.98 Preferred

      UCT

      -

      United Cable TV Corporation

      UDE

      -

      United Drilling and Exploration Company

      UIL$B

      -

      United Illuminating Company - 15.88% Preferred 1980

      UIL$C

      -

      United Illuminating Company - 16% Preferred 1980

      USH$C

      -

      USLIFE Corporation - $3.33 Series C Cumulative Preferred

      USH$D

      -

      USLIFE Corporation - $2.25 Preferred Class D

      X$

      -

      U.S. Steel Corporation Adjustable Preferred

      X$B

      -

      U.S. Steel Corporation $12.75 Convertible Preferred

      X$C

      -

      U.S. Steel Corporation $2.25 Convertible Exchangeable Preferred

      UTP$I

      -

      Utah Power and Light Company - $2.36 Cumulative Preferred Series I

      UTP$J

      -

      Utah Power and Light Company - $2.90 Cumulative Preferred Series J

      VLO

      -

      Valero Energy Corporation

      VLO$

      -

      Valero Energy Corporation Depositary Preferred

      VRC

      -

      Varco International, Inc.

      VRC$A

      -

      Varco International, Inc. $2.00 Convertible Preferred A

      WFC$A

      -

      Wells Fargo and Company Adjustable Rate Preferred A

      WEN

      -

      Wendy's International, Incorporated

      WST

      -

      West Company, Incorporated

      WAL.W

      -

      Western Air Lines 1993 Warrants

      WSN$A

      -

      Western Company N.A. $7.25 Cumulative Preferred A

      WY$A

      -

      Weyerhaeuser Company $4.50 Preferred Series A

      WMS

      -

      Williams Electronics, Inc.

      AMERICAN STOCK EXCHANGE SECURITIES ELIGIBLE FOR OFF-BOARD TRADING UNDER RULE 19C-3

      October 3, 1983

      APH

      -

      AIC Photo, Incorporated

      ATN.W

      -

      Acton Corporation - 1986 Warrants

      AE

      -

      Adams Resources and Energy, Incorporated

      AEX

      -

      Air Express International

      AXO

      -

      Alamco, Inc.

      AOC

      -

      Altex Oil Corporation

      AOC.W

      -

      Altex Oil Corporation - Warrants

      AMY

      -

      Amedco, Incorporated

      AXP.W

      -

      American Express Company - Warrants

      AWC

      -

      American Well Servicing

      AIS.A

      -

      Ampal American Israel Class A

      AMQ

      -

      Amquest Corporation

      AJ

      -

      Anderson Jacobson, Incorporated

      ATM

      -

      Anthem Electronics, Inc.

      ARG

      -

      Argo Petroleum Corporation

      ADC

      -

      Astro Drilling Company

      AVL

      -

      Atlas Van Lines

      BDM

      -

      BDM International, Inc.

      BSN

      -

      BSN Corporation

      BTK

      -

      BTK Industries, Inc.

      BLY.W

      -

      Bally Manufacturing - Warrants

      BB

      -

      Bank Building Equipment Company of America

      BOC

      -

      Beard Oil Company

      BCS

      -

      Beefsteak Charlie's, Inc.

      BHI

      -

      Beehive International Limited

      BTN

      -

      Beltran Corporation

      BTN.W

      -

      Beltran Corporation - Warrants

      BYI

      -

      Berry Industries Corporation

      BRL

      -

      Biltrite Corporation (The)

      BIO.A

      -

      Bio-Rad Laboratories, Incorporated - Class A

      BIO.B

      -

      Bio-Rad Laboratories, Incorporated - Class B

      BLK

      -

      Blocker Energy Corporation

      BLR

      -

      Bolar Pharmaceutical Company Incorporated

      BWL

      -

      Bowl America, Incorporated

      BKN

      -

      Buckhorn, Incorporated

      BKN$A

      -

      Buckhorn, Incorporated - Series A Preferred

      CT

      -

      California Real Estate Trust - Shares of Beneficial Interest

      CPP

      -

      Calprop Corporation

      CAP

      -

      Campenelli Industries, Incorporated

      CDG

      -

      Canandaigua Wine Company, Inc.

      TVL

      -

      Cardillo Travel System, Incorporated

      KRE.A

      -

      Care Corporation Class A

      KRE.B

      -

      Care Corporation Class B

      CSE

      -

      Castle Industries, Inc.

      CJN

      -

      Ceasars N.J., Incorporated

      CEG$

      -

      Centennial Group, Incorporated Preferred

      CH

      -

      Champion Products, Incorporated

      CMD.A

      -

      Charter Medical - Class A

      CGN

      -

      Cognitronics Corporation

      CCS

      -

      Computer Consoles, Incorporated

      CFA

      -

      Computer Factory (The)

      CQX

      -

      Conquest Exploration Company

      CQX.W

      -

      Conquest Exploration Company - Warrants

      CGS.W

      -

      Consolidated Oil and Gas - Warrants

      CDN

      -

      Coradian Corporation

      CCR

      -

      Countrywide Credit Industry, Inc.

      CAI

      -

      Continental Airlines Corporation

      CAI$

      -

      Continental Airlines Corporation Convertible Preferred

      CE

      -

      Crawford Energy, Incorporated

      CNP.A

      -

      Crown Central Petroleum - Class A

      CNP.B

      -

      Crown Central Petroleum - Class B

      DLE

      -

      Dale Electronics, Inc.

      DAM.W

      -

      Damson Oil Corporation - Warrants

      DAM.Z

      -

      Damson Oil Corporation 1985 Warrants

      DTM

      -

      Dataram Corporation

      DVL

      -

      Del Val Financial Corporation

      DMD

      -

      Delmed, Incorporated

      DSG

      -

      Designatronics, Inc.

      DRC.A

      -

      Diagnostic Retrieval Systems, Inc. Class A

      DRC.B

      -

      Diagnostic Retrieval Systems, Inc. Class B

      DBH

      -

      Diamond Bathurst, Inc.

      DXC

      -

      Dixico, Incorporated

      DGS

      -

      Dorchester Gas Corporation

      DBC

      -

      Dougherty Brothers Company

      DRL

      -

      Drillers, Incorporated

      DCO

      -

      Ducommun, Incorporated

      ESG

      -

      Electrosound Group, Incorporated

      ELS

      -

      Elsinore Corporation

      EMP

      -

      Empire of Carolina, Incorporated

      EMC

      -

      Energy Management Corporation

      EM

      -

      Energy Minerals Corporation

      ESV

      -

      Enerserv Products, Inc.

      ERC

      -

      Evaluation Research Corporation

      EJ.A

      -

      Everest Jennings International Class A

      EJ.B

      -

      Everest Jennings International Class B

      ESI

      -

      Exploration Surveys, Incorporated Class A

      ESR$

      -

      Enstar Indonesia Inc. Non-Voting Preferred

      FAR

      -

      First Arkansas Bankstock Corporation

      FBF

      -

      First Banker Corporation of Florida

      FHO

      -

      Frederick's of Hollywood, Inc.

      FEI

      -

      Frequency Electronics, Incorporated

      GCE

      -

      GNC Energy Corporation

      GOX

      -

      Galaxy Oil Company

      GSC

      -

      Gelman Sciences, Incorporated

      GDF

      -

      General Defense Corporation

      GNL

      -

      Gemco National, Inc.

      GDM$

      -

      Goldome National Corporation Cumulative Preferred

      GTR.R

      -

      Gould Investors Trust Shares of Beneficial Interest - Rights

      GTX

      -

      Grant Industries, Incorporated

      GTX.W

      -

      Grant Industries, Incorporated - Warrants

      GB

      -

      Guarantee Bancorp, Inc.

      HZR

      -

      Heizer Corporation

      HLP

      -

      Health Extension Services, Inc.

      HDR

      -

      Heldor Industries, Incorporated

      H

      -

      Helm Resources, Inc.

      HND

      -

      Hinderliter Industries, Inc.

      HOR.W

      -

      Horn & Hardart 1987 Warrants

      HO

      -

      Houston Oil Trust Units of Beneficial Interest

      HOV

      -

      Hovnanian Enterprises, Inc.

      HUN

      -

      Hunt Manufacturing Company

      ICO

      -

      ICO, Incorporated

      IEI

      -

      Integrated Energy, Inc.

      IC

      -

      Intercole, Inc.

      PWR

      -

      International Power Machine Corporation

      IDC

      -

      Intertec Data Systems Corporation

      KTN

      -

      Kentron International, Inc.

      KPH

      -

      Key Pharmaceuticals

      KDE.W

      -

      Kiddie, Inc. - Warrants

      KNO

      -

      Knogo Corporation

      KNL

      -

      Knoll International Inc.

      KGR

      -

      Koger Company

      LAS

      -

      Laser Industries Limited ORD

      LKI

      -

      Lazare Kaplan International

      LFA

      -

      Littlefield, Adams and Company

      LUM

      -

      Lumex, Inc.

      LUR

      -

      Luria (L.) and Sons, Incorporated

      MCR

      -

      MCO Resources, Incorporated

      MOG.A

      -

      MOOG, Incorporated - Class A

      MSI

      -

      MSI Data Corporation

      MSR

      -

      MSR Exploration Ltd.

      MKP

      -

      Mark Products, Incorporated

      MEP

      -

      May Energy Partners Ltd.

      MFL

      -

      Mayflower Corporation

      ME

      -

      McDowell Enterprises, Incorporated

      MRI.A

      -

      McRae Industries, Inc. Class A

      MRI.B

      -

      McRae Industries, Inc. Class B

      MED

      -

      Mediq, Inc.

      MAM

      -

      Mid-America Industries, Incorporated

      MNE

      -

      Monument Energy Service, Inc.

      MR

      -

      Mortronics, Inc.

      MTN

      -

      Mountain Medical Equipment, Incorporated

      MAC

      -

      Muse Air Corporation

      MYE

      -

      Myers Industries, Inc.

      NAN

      -

      Nantucket Industries, Inc.

      NLG

      -

      National Gas and Oil Company

      NPT

      -

      Newport Electric Corporation

      OLS

      -

      Olsten Corporation (The)

      ORR

      -

      Orrox Corporation

      PCG$F

      -

      Pacific Gas and Electric 17 3/8% Redeemable 1st Preferred

      PCG$Y

      -

      Pacific Gas and Electric 12.80% Preferred

      PCG$Z

      -

      Pacific Gas and Electric 16.24% Preferred

      PGE

      -

      Page Petroleum Limited

      PYF

      -

      Pay-Fone Systems, Incorporated

      PNR

      -

      Peninsula Resource Corporation

      PNL

      -

      Penril Corporation

      PTL$A

      -

      Petro Lewis Corporation - $1.65 Cumulative Preferred

      PTL$B

      -

      Petro Lewis Corporation - $2.28 Cumulative Preferred

      PTL.W

      -

      Petro Lewis Corporation - Warrants

      PPI

      -

      Pico Products Incorporated

      PIP

      -

      Postal Instant Press

      PER

      -

      Pope Evans Robbins, Incorporated

      PSI

      -

      Porta System, Incorporated

      POW

      -

      Power Test Corporation

      PRL

      -

      Premier Resources Limited

      PRS

      -

      Presidio Oil Company

      PRB

      -

      Provident Bancorp

      PSD$E

      -

      Puget Sound Power and Light Company $4,375 Cumulative Preferred

      RAC

      -

      RAI Research Corporation

      RMS

      -

      RMS Electronics, Inc.

      RDE

      -

      Ratliff Drilling & Exploration Company

      RAV

      -

      Raven Industries, Incorporated

      RI

      -

      Refinemet International

      RT.W

      -

      Resorts International - Warrants

      RTM

      -

      Richmond Tank Car Company

      RTM$

      -

      Richmond Tank Car Company - Preferred

      RGD

      -

      Rio Grande Drilling Company

      RYK

      -

      Rykoff (S.E) Company

      RYL

      -

      Ryland Group, Incorporated

      SAG

      -

      Sage Energy Company

      SDO$J

      -

      San Diego Gas and Electric Company $4.65 Preferred

      SAU.A

      -

      Saunders Leasing Systems - Class A

      SS

      -

      Schwab Safe Company, Incorporated

      SEI

      -

      Seis Pros, Incorporated

      SDL

      -

      Seiscom Delta, Incorporated

      SMC.B

      -

      Smith (A.O.) Corporation Class B

      SOI

      -

      Snyder Oil Partners Units of Limited Partnership Interest

      SSI

      -

      Solid State Science, Incorporated

      SDR

      -

      South Texas Drilling & Exploration, Incorporated

      SCE$O

      -

      Southern California Edison Company - 8.50% Cumulative Preferred

      SCE$P

      -

      Southern California Edison Company - Cumulative Preferred 12% Series

      SM.W

      -

      Southmark Corporation - Warrants Class C

      SPM

      -

      Sparkman Energy Corporation

      SPM$

      -

      Sparkman Energy Corporation Convertible Preferred

      SHV

      -

      Standard Havens, Inc. Class A

      SHV.W

      -

      Standard Havens, Inc. Warrants

      SHV.Z

      -

      Standard Havens, Inc. Warrants When Issued

      SEP

      -

      Statex Petroleum, Incorporated

      SSW

      -

      Sterling Software, Inc.

      SEQ

      -

      Storage Equities, Inc.

      SUM

      -

      Summit Energy

      SUM$

      -

      Summit Energy $1.80 Preferred

      SI

      -

      Superior Care, Incorporated

      SFT

      -

      Swift Independent Corporation

      SEM

      -

      System Engineering and Manufacturing Company

      TBR

      -

      T-Bar, Incorporated

      TIE

      -

      TIE/Communications, Incorporated

      TI

      -

      TII Industries, Incorporated

      TSS.V

      -

      TSS Seedmans Inc. - When Issued

      TCH

      -

      Techamerica Group, Incorporated

      TCM

      -

      Technicom International, Inc.

      TCC

      -

      Teleconcepts Corporation

      TDS

      -

      Telephone and Data System, Inc.

      TSP

      -

      Telesphere International, Inc.

      TXC

      -

      Texaco Canada, Incorporated

      TAE

      -

      Texas American Energy Corporation

      RES

      -

      Texas General Resources, Incorporated

      RES.A

      -

      Texas General Resources, Incorporated - New Warrants 1986 11 1/4%

      RES.B

      -

      Texas General Resources, Incorporated - Old Warrants 11%

      TXS

      -

      Texscan Corporation

      TRX

      -

      Timber Realization Depository Receipts

      TTL

      -

      Torotel, Inc.

      TPN$

      -

      Total Petroleum of North America - $2.88 Preferred

      TPN.W

      -

      Total Petroleum of North America - 1986 Warrants

      TOP

      -

      Towner Petroleum Company

      TOP.W

      -

      Towner Petroleum Company - Warrants

      TOC.W

      -

      Transcontinental Energy Corporation - Warrants

      TT

      -

      Trans Technology Corporation

      TTX

      -

      Tultex Corporation

      TYL.W

      -

      Tyler Corporation - Warrants

      TCI.V

      -

      TRT Communications Inc. - When Issued

      ULT

      -

      Ultimate Corporation

      UM

      -

      United Medical Corporation

      UNV

      -

      United Video, Inc.

      UCS

      -

      Universal Communication Systems, Inc.

      VR

      -

      Valley Resources, Incorporated

      VRB

      -

      Verbatim Corporation

      VRE

      -

      Vermont Research Corporation

      VNA

      -

      Verna Corporation

      VII

      -

      Vicon Industries, Incorporated

      VIC

      -

      Virginia International Company

      VSA

      -

      Visa Energy Corporation

      WBR

      -

      Walbar, Incorporated

      WCI.W

      -

      Warner Communication - Warrants

      WII

      -

      Weatherford International, Incorporated

      WER

      -

      Webcor Electronics Inc.

      WLD

      -

      Weldatron Corporation

      WGA

      -

      Wells Gardner Electronics Corporation

      WP

      -

      Wespercorp

      WBC

      -

      Westbridge Capital Corporation

      WEI

      -

      Wherehouse Entertainment Corp.

      WWE

      -

      Worldwide Energy Corporation

      YNK

      -

      Yankee Oil and Gas, Inc.

      PACIFIC STOCK EXCHANGE SECURITIES ELIGIBLE FOR OFF-BOARD TRADING UNDER RULE 19C-3

      October 3, 1983

      ALK$

      -

      Alaska Airlines, Inc. - $2.77 Preferred

      AFI$H

      -

      American Financial Corporation - Series H $3.95 Nonvoting Preferred

      AFI$G

      -

      American Financial Corporation - Nonvoting Cumulative Preferred Series G

      HWK

      -

      Hardwicke Companies, Incorporated

      OKC

      -

      OKC Limited Partnership

      PRB

      -

      Provident Bancorp, Incorporated

      SSR

      -

      Southwest Realty Limited

      SSR.W

      -

      Southwest Realty Limited - 3/1/84 Warrants

      SYN$B

      -

      Syntex Corporation - Class B - Preferred

      PHILADELPHIA STOCK EXCHANGE SECURITIES ELIGIBLE FOR OFF-BOARD TRADING UNDER RULE 19C-3

      October 3, 1983

      UHC

      -

      Universal Holding Corporation

    • 83-58 SEC Rule Change Relating to Foreign Securities in NASDAQ

      TO: All NASD Members and NASDAQ Subscribers

      On October 5, 1983, the Securities and Exchange Commission adopted a rule change which will require all foreign issuers seeking inclusion in NASDAQ to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934. This registration requires foreign issuers to file periodic reports with the Commission similar to those filed by domestic companies. The Commission action also provides that the 102 non-Canadian foreign securities included in NASDAQ as of October 5, 1983 are "grandfathered" and will be permitted to remain on NASDAQ indefinitely provided they satisfy all other requirements for continued inclusion. With respect to the 186 Canadian issues, they will be permitted to remain on NASDAQ, provided they continue to satisfy all other requirements, until January 2, 1986, at which time they must be registered pursuant to Section l2(g) in order to remain in the System. A copy of the Commission's order as well as lists of non-Canadian foreign securities and Canadian securities on NASDAQ as of October 5, 1983 are attached to this Notice.

      This rule change will also prohibit the reinclusion of foreign securities which are removed from NASDAQ unless they subsequently become 12(g) registered. Accordingly, the failure by a foreign issuer to comply with any NASDAQ requirement would result in the removal of its securities from the NASDAQ System until it meets the SEC requirement for 12(g) registration.

      Questions regarding this Notice may be directed to Gary W. Guinn, Assistant Director, NASDAQ Operations at (202) 728-8052.

      Sincerely,

      Molly G. Bayley
      Vice President
      NASDAQ Operations

      Enclosure

      NON-CANADIAN FOREIGN SECURITIES IN NASDAQ SYSTEM AS OF OCTOBER 5, 1983

      SYMBOL

      COMPANY NAME

      ASMIF

      Advanced Semiconductor Materials International N.V.

      ANECF

      Aneco Reinsurance Co.

      AAGIY

      Anglo American Gold - ADR

      ANGLY

      Anglo American Corporation of South Africa Limited - ADR

      ASEAY

      Asea AB - ADR

      BKLMY

      Bank Leumi Le-Israel B.M. - ADR

      BBAHF

      Basic Resources International (Bahamas) Limited

      BHAMY

      Beecham Group - ADR

      BLYVY

      Blyvooruitzicht Gold Mining Company, Limited - ADR

      BWTRY

      Bowater Corp. PLC - ADR

      BRILF

      Brilund Limited

      BRKNY

      Broken Hill Propietary Company Limited - ADR

      BFELY

      Buffelsfontein Gold Mining Limited - ADR

      BURMY

      Burmah Oil PLC - ADR

      CANNY

      Canon Inc. - ADR

      CIRCF

      Cayman Islands Reinsurance Corporation Ltd.

      CIRCZ

      Cayman Islands Reinsurance Corporation Ltd.- Units

      CPMNY

      Central Pacific Minerals - ADR

      CSTIF

      Coastal International Ltd.

      BPWRF

      Compania Boliviana De Energia Electrica, S.A.

      ELSAY

      Compania De Alumbrado Electricode San Salvador S.A. - ADR

      CSKKY

      Computer Services Corp. - ADR

      DAIEY

      Dai Ei Inc. - ADR

      DBRSY

      DeBeers Consolidated - ADR

      DRSDY

      Dresdner Bank A.G. - ADR

      DRFNY

      Driefontein Consolidated - ADR

      EGCLY

      Eagle Corp. - ADR

      ELBTF

      Elbit Computers, Ltd.

      ECILF

      Electronic Corp. of Israel

      ELRNF

      Elron Electronic Industries, Inc.

      ELSTF

      Elscint Ltd.

      ESHLY

      Energy Systems Holding - ADR

      FERVY

      Ferrovanadium Corp. - ADR

      FISNY

      Fisons Ltd. - ADR

      FLAEF

      Florida Employers Insurance Co.

      FREEY

      Free State Geduld Mines Ltd. - ADR

      FUJIY

      Fugi Photo Film - ADR

      GAMBY

      Gambro A.B. - ADR

      GLXOY

      Glaxo Holdings PLC - ADR

      GLDFY

      Gold Fields South Africa - ADR

      GOTLF

      Gotaas Larsen Shipping

      GOLDY

      Great Eastern Mines Ltd. - ADR

      HTENY

      Hartogen Energy - ADR

      HMSLF

      Hemerdon Mining and Smelting Ltd.

      HSVLY

      Highveld Steel and Vanadium Corporation Limited - ADR

      HITAZ

      Hitachi Ltd. - Debs.

      HRCLY

      Huntingdon Research Centre PLC-ADR

      IDBBY

      IDB Bankholding - ADR (Common)

      IDBBZ

      IDB Bankholding - ADR (Preferred)

      IEMSY

      IEM, S.A. - ADR

      IYCOY

      ITO Yokado Co. - ADR

      INMRY

      Instrumentarium Corp. - ADR

      ICEYF

      International Capital Equipment Limited

      IPLLF

      Interpharm Laboratories Limited

      JAPNY

      Japan Airlines - ADR

      KNBWY

      Kirin Brewery Co. - ADR

      KLOFY

      Kloof Gold Mining Co., Ltd. - ADR

      ERICY

      L.M. Ericsson Telephone Co. - ADR

      LYDPY

      Lydenburg Platinum Limited - ADR

      MKTAY

      Makita Electric Works, Ltd. - ADR

      MARTY

      Marubeni Corp. - ADR

      MEOLY

      Meridan Oil N.L. - ADR

      MNRCY

      Minerals and Resources - ADR

      MITSY

      Mitsui & Company - ADR

      NIPNY

      NEC Corp. - ADR

      NZPCY

      New Zealand Petroleum Co. - ADR

      NIMSY

      Nimslo International Ltd. - ADR

      NSANY

      Nissan Motors Co. - ADR

      NOBLF

      Nobel Insurance Ltd.

      NORKZ

      Norsk Data A.S. - ADR (Class B)

      OVRSF

      Overseas Inns S.A.

      PALAY

      Palabora Mining - ADR

      PELRY

      Pelsart Resources - ADR

      PHABY

      Pharmacia A.B. - ADR

      PGLOY

      N.V.Philips Gloeilampenfabrieke - ADR

      PRESY

      President Brand Gold Mining - ADR

      PSTYY

      President Steyn Gold Mining - ADR

      RANKY

      Rank Organization PLC - ADR

      RICOZ

      Ricoh Co. Ltd. Debentures

      RODMY

      Rodime PLC - ADR

      RPETY

      Royal Dutch Petroleum - ADR

      STOSY

      Santos Ltd. - ADR

      SANYY

      Sanyo Electric Co. - ADR

      SASOY

      Sasol Ltd. - ADR

      SCIXF

      Scitex Corporation Ltd.

      SHSDY

      Shiseido Co. Ltd. - ADR

      SPBGY

      Sotheby Parke Bernet - ADR

      SPPTY

      Southern Pacific Petroleum N.L. - ADR

      SGOLY

      St. Helena Gold Mines Limited - ADR

      SWANY

      Swan Resources - ADR

      TAROF

      Taro Vit Chemical Industries Limited

      TFONY

      Telefonos De Mexico S.A. - ADR

      TEVIY

      Teva Pharmaceuticals Industries Ltd. - ADR

      TKIOY

      Tokio Marine and Fire Insurance Company

      TOYOY

      Toyota Motor Corp. - ADR

      UFURF

      Universal Furniture Limited

      UMUKY

      Universal Money Centers, PLC - ADR

      VAALY

      Vaal Reefs Exploration and Mining Company Limited - ADR

      VELCF

      Velcro Industries N.V.

      WLKMY

      Welkom Gold Mining Company - ADR

      WDEPY

      Western Deep Levels - ADR

      WHLDY

      Western Holdings Limited - ADR

      CANADIAN SECURITIES IN NASDAQ SYSTEM AS OF OCTOBER 5, 1983

      SYMBOL

      COMPANY NAME

      TWTHF

      20th Century Energy Corp.

      AMCIF

      AMCA Resources

      AEAGF

      Agnico Eagle Mines

      APLOF

      Alaska Apollo Gold

      AMAEF

      Amark Exploration

      ACEVF

      American Energy Corp.

      AMPYF

      American Pyramid Resources, Inc.

      AMORF

      Am ore Resources Inc.

      ANGBF

      Anglo-Bomarc Mines

      AQRLF

      Aquarius Resources Ltd.

      AVCMF

      Arivaca Silver Mines

      ARZNF

      Arizona Silver Corp.

      APCOF

      Artesian Petroleum

      ASSRF

      Associated Recreation Corporation

      AVMRF

      Avino Mines and Resources

      BPIRF

      BPI Resources Ltd.

      BKGDF

      Baker Gold Ltd.

      BCATF

      Bearcat Exploration

      BTYCF

      Beauty Counselors Intl. Inc.

      BELGF

      Belgium Standard Ltd.

      BEOVF

      Belmont Resources, Inc.

      BMRFC

      Belmoral Mines Ltd. (N.P.L.)

      BIOLF

      Bio Logicals, Inc.

      BGENF

      Biogen N.V.

      BIOXF

      Bionex Corporation

      BIXFU

      Bionex Corporation (Units)

      BIXFW

      Bionex Corporation (Warrants)

      BLUSF

      Blue Sky Oil & Gas Ltd.

      BWOGF

      Bluewater Oil and Gas Limited

      BRALF

      Bralorne Resources

      BRASF

      Bras D'or Mines Ltd.

      BWRLF

      Breakwater Resources, Ltd.

      BRIIF

      Brican Resources Ltd.

      CXPVF

      C.T. Exploranda Limited

      CYECF

      Cal Dynamics Energy

      CALSF

      California Silver Ltd.

      CAMRF

      Camreco Inc.

      CDXOF

      Canadex Resources

      CBRCF

      Canadian Barranca Corp.

      CRLNF

      Carolin Mines Ltd.

      CECRF

      Century Energy Corp.

      CIORF

      Charriot Resources

      CIGCF

      Citadel Gold Mines, Inc.

      CLBMF

      Colby Resources Corp.

      CNCPF

      Concept Resources Ltd.

      CCIMF

      Consolidated Cinola Mines

      CPFTF

      Consolidated Professor Mines

      CTLSF

      Continental Silver Corp.

      CLEXF

      Copper Lake Exploration

      CORRF

      Coralta Resources Ltd.

      COWPF

      Cornwall Petroleum & Resources

      CUMOF

      Cumo Resources Ltd.

      CUSIF

      Cusac Industries Ltd.

      DAMIF

      David Minerals Ltd.

      DENIF

      Denison Mines Ltd.

      DKNFA

      Dickenson Mines Ltd. - Class A

      DKNFB

      Dickenson Mines - Class B

      DONEF

      Donegal Resources Ltd.

      EGEXF

      Energex Minerals Ltd.

      EXAIF

      Exploration Aiguebelle, Inc.

      FMGTF

      FMG Telecomputer, Ltd.

      FALCF

      Falconbridge Ltd.

      RIALF

      Flair Resources Ltd.

      GANDF

      Gandalf Technologies

      GOEDF

      Geodome Petroleum Corp.

      GLGVF

      Glamis Gold Ltd.

      GIAKF

      Goldale Investment Ltd.

      GCCVF

      Golden Concord Mining Corp.

      GWNRF

      Goldwin Resources Ltd.

      HALEF

      Hale Resources, Ltd.

      GOWGF

      Gowganda Resources

      GLICF

      Grandma Lee's Inc.

      GRVXF

      Grove Exploration Ltd.

      HRIAF

      H.R.S. Industries - Class A

      HRIBF

      H.R.S. Industries - Class B

      HSDMF

      Hemisphere Dev. Corp.

      HCORF

      Hi-Cor Resources Ltd.

      HIWDF

      Highwood Resources Ltd.

      HIMVF

      Himac Resources Ltd.

      HOSTF

      Host Ventures Ltd.

      IMGFC

      Imaginamics Inc.

      IMUFC

      Imaginamics Inc. - Units

      INCRF

      Inca Resources

      INLWF

      Inco Limited - Warrants

      INRLF

      Interaction Resources Ltd.

      ICCCF

      Intercontinental Tech. Corp.

      ILDCF

      Interlake Develop. Corp.

      ICREF

      International Corona Resources

      IPTLF

      International Phasor Telecom Ltd.

      ISTRF

      International Standard Resources

      IWWDF

      International Westward Development Corp.

      IPIPF

      Interprovincial Pipe Line Ltd.

      ITERF

      Interstat Resources, Inc.

      IOAVF

      Iona Industries, Inc.

      IRWKF

      Irwin Toy Ltd. - Non Voting

      IRWJF

      Irwin Toy Ltd. - Voting

      KMADF

      Kamad Silver Co. Ltd.

      KFRLF

      Keeley-Frontier Resources, Ltd.

      KDDYF

      Kennedy Resources

      KNOBF

      Knobby Lake Mines

      LAORF

      La Teko Resources Ltd.

      LCNAF

      Lacana Mining Corp.

      LAVAF

      Lava Cap Resources

      LEADF

      Leader Resources Inc.

      LNCRF

      Lincoln Resources, Inc.

      LSEIF

      Lodestar Energy Inc.

      LDNSF

      London Silver Corporation

      LORDF

      Loredi Resources Ltd.

      MCLNF

      MacLean Hunter Ltd.

      MZRKF

      Mackenzie Energy Corp.

      MAMNF

      Madre Mining Ltd.

      MAYMF

      Maymac Explorations Ltd.

      MEGLF

      Megaline Resources Ltd.

      MOGOF

      Monogram Oil & Gas, Inc.

      MOSPF

      Mosport Park Corporation

      MGDVF

      Murgold Resources, Inc.

      MUSMF

      Muscocho Explorations Ltd.

      NRDFC

      NRD Mining Ltd.

      NFEXF

      New Frontier Petroleum Corp.

      NICLF

      Ni-Cal Developments Ltd.

      NQRLF

      Nor-Quest Resources Ltd.

      NAPPF

      North American Power Petroleums Inc.

      NTHMF

      Northair Mines Ltd.

      NWELF

      Nowsco Well Services Ltd.

      OBERF

      O'Brien Energy Resources

      OMNRF

      Omni Resources Inc.

      PCRIF

      P.C.R. Industries Ltd.

      PCYMF

      Pacific Cypress Minerals Ltd.

      PCEXF

      Pan Central Exploration

      PARAF

      Paragon Resources

      PAPEF

      Parkside Petroleum, Inc.

      PGULF

      Pegasus Gold Ltd.

      PENRF

      Pennant Resources

      PTPLF

      Petrologic Petroleum Ltd.

      PEZAF

      Pezamerica Res. Corp.

      PILCF

      Pilgrim Coal Corporation

      PLUSF

      Plexus Resources Corp.

      PRPEF

      Prairie Pacific Energy

      QSRTF

      Quebec Sturgeon River Mines

      RERIF

      Rainier Energy Resources

      RAYOF

      Raymac Oil Corp.

      RYRKF

      Rayrock Resources

      RDFDF

      Redford Resources

      RCINZ

      Rogers Cablesystems - Class B

      ROREF

      Rosmae Resources Ltd.

      RKLMF

      Ruskin Development Ltd.

      SAXIF

      Saxton Industries Ltd.

      SCRLF

      Sceptre Resources Ltd.

      SYDMF

      Scheer Energy Dev. Corp.

      SLPTF

      Scintilore Explorations Ltd.

      SCOTF

      Scottie Gold Mines

      SGULF

      Seagull Resources

      SHFXF

      Shadowfax Resources Ltd.

      SHYDF

      Sharon Energy Ltd.

      SOGLF

      Shelter Oil and Gas Ltd.

      SECGF

      Silver Eureka Corp.

      SLVRF

      Silverado Mines Ltd.

      STMAF

      Stampede International Resources

      SEXLF

      States Exploration Ltd.

      SSECF

      Stateside Energy Corp.

      STVTF

      Sterivet Laboratories, Ltd.

      SULBF

      Sulpetro Ltd. - Class B

      TLOVF

      Talos Industries Inc.

      TARAF

      Taurus Resources Ltd.

      TMEXF

      Terra Mines, Ltd.

      TGNXF

      Tournigan Mining Explorations Ltd.

      TRIBF

      Tri Basin Resources

      TTRIF

      Trident Resources, Inc.

      TRTTF

      Trinity Resources Ltd.

      TURBF

      Turbo Resources Ltd.

      UCANF

      United Canso Oil & Gas

      UHRNF

      United Hearne Resources

      UNWRF

      United Westland Resources

      VELXF

      Velvet Exploration Co., Ltd.

      VNTRF

      Ventora Resources Ltd.

      VEOXF

      Veronex Resources Ltd.

      VISRF

      Viscount Resources

      VIPLF

      Vulcan Industrial Packaging Ltd.

      WARRF

      Warrior Resources Ltd.

      WABEF

      Western Allenbee Oil & Gas Co. Ltd

      WSFPF

      Westfort Petroleums Ltd.

      WTMRF

      West mount Resources Ltd.

      WFRAF

      Wharf Resources Ltd.

      WDSRF

      Windsor Resources Inc.

      YBRIF

      Yellowknife Bear Resources, Inc.

      ZONEF

      Zone Petroleum Corp.

      federal register

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Parts 230 and 240

      [Release Nos. 33-6493; 34-20264; File No. S7-951]

      Foreign Securities

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rules.

      SUMMARY: The Commission today announces the adoption of revisions to a current rule, known as the information-supplying exemption which exempts certain foreign securities from registration under the Securities Exchange Act of 1934. These revisions generally treat foreign securities quoted on the automated quotation system of the National Association of Securities Dealers ("NASDAQ") the same as foreign securities listed on a United States ("U.S.") exchange. Generally, non-Canadian foreign securities currently quoted on NASDAQ could continue to rely on the exemption indefinitely subject to certain conditions. Canadian securities,. however, currently quoted on NASDAQ could continue to rely on the exemption until January 2, 1986. Revisions also are made to other rules to clarify the concept of voluntary entry into the U.S. capital markets.

      EFFECTIVE DATE: October 14, 1983.

      FOR FURTHER INFORMATION CONTACT: Carl T. Bodolus (202) 272-3246, Office of International Corporate Finance, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

      SUPPLEMENTARY INFORMATION: Foreign private issuers whose securities are not trading on one of the national securities exchanges are now exempt from registering with the Commission. The Commission today is revising that exemption so that it will no longer be available to foreign issuers whose securities trade on NASDAQ. This change is being made because the Commission believes that trading on NASDAQ is substantially the same a8 trading on an exchange and therefore the information available for NASDAQ traded companies should be essentially the same as the information available for exchange traded companies. The Commission will "grandfather" foreign private issuers who are now trading on NASDAQ and relying on the exemption. Canadian issuers will be grandfathered for two years and all other foreign issuers will be grandfathered indefinitely. However, no additional foreign equity securities can begin trading on NASDAQ unless they are registered with the Commission.

      I. Background

      The Commission is adopting revisions to Rule 12g3-2 (17 CFR 240.12g3-2) 1 under the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. 78a et seq. (1976 and Supp. Ill 1979)] that would terminate the availability of that exemptive rule to certain foreign issuers with securities quoted in NASDAQ and clarify several provisions of that rule.2 Amendments to Rule 12g-3 (17 CFR 240.12g-3) and Rule 15d-5 (17 CFR 240.15d-5) relating to successor issuers further clarify the application of the periodic reporting requirements of the Exchange Act to issuers that acquire reporting issuers by the issuance of securities. The concept of the "essentially U.S. issuer" exemption in the definition of foreign private issuer in Rule 405 (17 CFR 230.405) and Rule 3b-4 (17 CFR 240-3b-4) is also revised. Rule 12g-l (17 CFR 240-12g-l) is also clarified.

      The Commission solicited public comments on these changes in Release No. 33-6433 (October 28, 1982) [47 FR 50292]. One hundred sixty-three comment letters were received on the proposals.3 One hundred twenty-six were from individuals, thirteen from issuers, eight from the securities industry, five from law firms, three each from associations and banks maintaining facilities for American Depositary Receipts, two each from analysts and self-regulatory organizations, and one from a foreign securities exchange. Most commentators addressed only the proposal that the information-supplying exemption in Rule 12g3-2(b) be no longer available for securities quoted in an automated inter-dealer quotation system, i.e., NASDAQ.

      II. Registration for NASDAQ Listing

      Proposed paragraph (d) (3) of Rule 12g3-2 would have denied the information-supplying exemption to securities quoted on NASDAQ. Foreign securities quoted only in the pink sheets would continue to be exempt under the information-supplying exemption in Rule 12g3-2(b). Virtually all comments received addressed this proposal.

      A. Comments
      Twenty-six commentators supported this proposal. These commentators stated that the proposal would result in more disclosure to investors, increase investor confidence, expand the Commission's ability to enforce the antifraud provisions, and would eliminate the unequal treatment of foreign issuers, who now can use the information-supplying exemption to get on NASDAQ, and U.S. issuers, who must register their securities for inclusion in NASDAQ. A Canadian broker stated that many investors prefer NASDAQ-quoted Canadian securities on the incorrect assumption that they were registered with the Commission. Another individual stated that the proposal failed to go far enough and that the Commission should require Canadian issuers to report on Form 10-K, 10-Q and 8-K instead of Forms 20-F and 6-K. Some commentators stated that some Canadian corporations misuse the exemption and also make illegal distributions of their securities in the U.S.
      One hundred thirty-three commentators opposed this proposal. Twenty-two commentators disagreed with the analysis in the proposing release that obtaining inclusion in NASDAQ is voluntary entry into the U.S. capital market for various reasons. Eight stated that the acts necessary to obtain inclusion in NASDAQ are minimal and should not be used to justify the imposition of Exchange Act reporting. Others noted that in the past the ADR depositary banks were allowed to list certain foreign securities and continue to pay the fees. Twelve stated that most foreign issuers have their securities included in NASDAQ as a convenience to U.S. shareholders and the issuer does not receive as many benefits as U.S. issuers.
      Eighteen commentators opposing the proposals stated that they were unaware of any problems with the current rules and thirty-one stated that the information-supplying exemption provided investors with adequate information.
      All commentators opposing the proposal assumed that many foreign issuers would withdraw from NASDAQ and have their securities traded in the pink sheets instead of registering. The following unfavorable consequences were identified: increased price spreads, decrease in information, price quotes not carried in newspapers, less liquid market and fewer institutions in the market, absence of NASD surveillance, and delays in execution of transfers. These factors could cause a price drop of twenty percent according to one estimate.
      Other objections to this proposal are: increased red tape, increased burden on foreign issuers, loss of investment opportunities and limits on freedom of choice, forced trading in foreign markets, forced use of disreputable dealers or foreign brokers, increased Commission budget, unfair change in policy, inconsistency with Congressional interest, possible retaliation by foreign governments, and reinforced fears of foreign issuers that the Commission repeatedly changes its rules.
      Two commentators estimated the cost of registering securities under Section 12(g). One estimated it to be $150,000. A law firm, representing some Canadian issuers with registered securities, estimated the cost to be $12,000-$15,000. A Canadian issuer subject to the reporting requirements of the Exchange Act stated it did not find reporting to be burdensome in terms of time or cost.
      B. Revision of Rule 12g3-2
      Since its commencement in 1971, NASDAQ has matured into a major securities market,4 providing securities quoted on NASDAQ with heightened visibility and access to active trading markets. As a result, NASDAQ has become an attractive alternative to exchange listing for foreign issuers which desire access to U.S. trading markets for the convenience of their U.S. shareholders or to raise capital, but which wish to avoid registration under Section 12. Although registration is required for exchange listing, foreign securities have been included in NASDAQ without Section 12 registration through use of the information-supplying exemption of Rule 12g3-2(b), which was adopted in 1967, prior to the start of NASDAQ, and was intended to exempt from registration foreign issuers whose securities were traded in the U.S. without the voluntary action of the issuer.
      In the past, foreign securities could be included in NASDAQ without the-participation of the issuer; at present, however, the consent of the issuer is required before a foreign security can be quoted in NASDAQ.5 Accordingly, the Commission believes that foreign securities included in NASDAQ should be regarded prospectively as voluntarily seeking U.S. trading markets, and hence should be denied the information-supplying exemption. Also, the Commission believes that the increased administrative sanctions available to the Commission resulting from the revisions are necessary. Finally, the Commission believes it is appropriate to eliminate any undue differences in the disclosure requirements of and the treatment of U.S. and foreign issuers with securities quoted on NASDAQ.
      Nevertheless, the Commission acknowledges the concerns of many of the commentators. The Commission believes that applying the revisions prospectively and grandfathering the securities, as described below, is a pragmatic balance of these competing policies.6
      Many of the foreign issuers that appear to be complying with the information-supplying exemption initially established it prior to the formation of NASDAQ or in its early years. As discussed above, until recently, persons other than the issuer could obtain the NASDAQ listing for foreign securities. Imposing the revised rule against such issuers could force them to withdraw from NASDAQ, consequently depriving U.S. investors of the accustomed market for such securities and, in some cases, reducing the depth and liquidity for these securities.
      Securities of the non-Canadian issuers in compliance with the information-supplying exemption as of October 5, 1983 and currently quoted in NASDAQ are grandfathered indefinitely.7 However, the exemption will be extended to the Canadian securities only until January 1988. The recent hot-issue market in securities from Canada has created problems and abuses of the rule. Some issuers appear to have used the exemption as a means to make unregistered, illegal distributions of their securities over NASDAQ.8 Several commentators urged the Commission to address directly the problems associated with some of the issuers from Canada rather than using an overly broad approach as proposed. The adopted revision is consistent with the Commission's position of treating Canadian issuers the same as U.S. issuers for many purposes.9 Canadian issuers generally must file the same reports as domestic issuers under the Exchange Act and, unlike other foreign issuers, are subject to the proxy regulations and the short-swing profit recovery provisions. Moreover, the requirements for Canadian issuers to ultimately register their securities under Section 12 do not appear to be particularly burdensome in light of the similarity of the accounting principles and disclosure standards of the U.S. and Canada. Canadian issuers, unlike other foreign issuers, can use Form S-18 and the limited offering exemption of Regulation A. The coming-to-rest concept in Release No. 33-4708 (July 9, 1964) [29 FR 9828] treats offerings of U.S. issuers in Canada the same as offerings in the U.S. due to the close nexus of the markets. The Commission believes the revised rule, as adopted, adequately addresses the problems without undue market interference. The two year time period was selected to provide Canadian issuers with sufficient time to adjust their procedures or to register their securities and for the market to take into account any changes in the way such securities trade.
      The Commission considered the alternative of imposing seasoning or suitability tests as conditions for listing on NASDAQ in reliance on the information-supplying exemption. Commentators suggested tests such as a history of active trading in the foreign market minimum income, minimum assets, and minimum capitalization. The Commission declined to adopt any of those tests because of the difficulty in forming objectively the proper test, and the lack of any specific theoretical basis for a particular test

      III. Other Revisions

      The Commission received no adverse comments on the proposed revisions to the successor issuer rules and has adopted them without change.

      Several commenters objected to the proposed repeal of paragraph (d) of Rule 12g3-2 that exempts from Section 12(g) registration the securities of a non-Canadian issuer with any class of securities registered under Section 12(b) or any issuer filing reports under Section 15(d). The major consequences of repealing paragraph (d) is to require some of the 83 foreign issuers now subject to a Section 15(d) reporting obligation to register under Section 12(g) and thereby making their securities subject to the Williams Act.10 The commentators to the proposal pointed out potential problems due to inconsistent tender offer regulation among various countries.

      The Williams Act has applied to Canadian and, since 1979, to other foreign equity securities registered under Section 12(b). Approximately 52 Canadian and 65 non-Canadian issuers have securities registered under this section. The proposal would merely end the anomaly of exempting foreign issuers now subject to reporting obligations because of the exchange listing of debt securities or because they have had a registration statement become effective under the Securities Act. Few problems have arisen due to the inconsistent regulations of various countries, but the Commission is aware of the possibility of such problems. As in the past, with respect to foreign securities subject to the Williams Act, such situations will continue to be resolved on a case-by-case basis.

      Another consequence of the repeal of paragraph (d) and the consequent registration of securities under Section 12(g) is that certain Canadian issuers would become subject to the proxy requirements of Sections 14(a) and 14(c) of the Exchange Act and the rules thereunder and the short-swing profits provisions of Section 16 of the Exchange Act and the rules thereunder. One commentator stated that the proposal would make Securities Act registration of equity securities more burdensome, extend U.S. regulation to the internal corporate affairs of Canadian issuers, and conflict with the voluntarism principle explained in the proposing release.

      More than 50 Canadian issuers are currently subject to such regulations and the repeal of paragraph (d) requires some of the 23 Canadian issuers subject to Section 15(d) to register their securities under Section 12(g). Few problems have arisen in the past under these rules. The Commission believes it is anomalous to exempt those Canadians that have made a registered public offering in the U.S., who would otherwise be subject to Section 12, but not those whose securities are listed on a U.S. exchange or are registered under Section 12 of the Exchange Act.

      Foreign issuers that generally are owned and managed by U.S. persons are considered to be essentially U.S. issuers and are ineligible for any of the exemptions or forms available to other issuers organized under foreign law. As amended. Rule 405 and Rule 3b-4 set forth two elements to determine whether an issuer is an essentially U.S. issuer.11 The first element is that fifty percent of the issuer's shares are held by U.S. residents. The second element is that one of three conditions is present: (1) The issuer's business be principally administered in the U.S.; (2) a majority of the issuer's directors or executive officers be U.S. persons; or (3) fifty percent of the assets of the. issuer be located in the U.S. These elements combined concepts in the former and proposed definitions. The Commission believes these amendments will prevent evasion but are unlikely to apply to many issuers not intended to be covered by the concept.

      Regulatory Flexibility Act

      A copy of the Final Regulatory Flexibility Analysis is available upon . request from the Office of International Corporate Finance, Room 3094 (3-6), Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, D.C., 20549, telephone (202) 272-3246.

      List of Subjects in 17 CFR Parts 230 and 240

      Reporting and recordkeeping requirements, Securities.

      Text of Amendments

      17 CFR Chapter II is amended as follows:

      PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

      1. By revising the definition of "Foreign Private Issuer" in § 230.405 to read as follows:

      § 230.405 Definitions of terms.

      * * * * *

      Foreign private isuer: The term "foreign private issuer" means any foreign issuer other than a foreign government except an issuer meeting the following conditions: (1) More than 50 percent of the outstanding voting securities of such issuer are held of record either directly or through voting trust certificates or depositary receipts by residents of the United States; and (2) any of the following: (i) The majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States. For the purpose of this paragraph, the term "resident," as applied to security holders, shall mean any person whose address appears on the records of the issuer, the voting trustee, or the depositary as being located in the United States.

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

      2. By revising paragraph (c) of § 240.3b-4 to read as follows:

      § 240.3b-4 Definition of "foreign government," "foreign Issuer," and "foreign private issuer."

      * * * * *

      (c) Foreign private issuer: The term "foreign private issuer" means any foreign issuer other than a foreign government except an issuer meeting the following conditions: (1) More than 50 percent of the outstanding voting securities of such issuer are held of record either directly or through voting trust certificates or depositary receipts by residents of the United States; and (2) any of the following: (i) The majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States. For the purpose of this paragraph, the term "resident," as applied to security holders, shall mean any person whose address appears on the records of the issuer, the voting trustee, or the depositary as being located in the United States.
      3. By revising § 240.12g-1 to read as follows:

      § 240.12g-1 Exemption from section 12(g).

      An issuer shall be exempt from the requirement to register any class of equity securities pursuant to section 12(g)(1) if on the last day of its most recent fiscal year the issuer had total assets not exceeding-$3,000,000 and, with respect to a foreign private issuer, such securities were not quoted in an automated inter-dealer quotation system.

      4. By revising paragraphs (a) and (b) and adding new paragraph (c) to

      § 240.12g-3 to read as follows:

      § 240.12g-3 Registration of securities of successor Issuers.

      (a) Where in connection with a succession by merger, consolidation, exchange of securities or acquisition of assets, equity securities of an issuer, not previously registered pursuant to section 12 of the Act. are issued to the holders of any class of equity securities of another issuer which is registered pursuant to section 12 of the Act. the class of securities so issued shall be deemed to be registered pursuant to section 12 of the Act unless upon consummation of the succession such class is exempt from such registration other than by Rule 12g3-2 (§ 240.12g3-2 of this chapter} or all securities of such class are held of record by less than 300 persons.
      (b) Where in connection with a succession by merger, consolidation, exchange of securities or acquisition of assets, equity securities of an issuer, which are not registered pursuant to section 12 of the Act, are issued to the holders of any class of equity securities of another issuer which is required to file a registration statement pursuant to section 12 but has not yet done so, the duty to file such statement shall be deemed to have been assumed by the issuer of the class of securities so issued and such issuer shall file a registration statement pursuant to section 12 of the Act with respect to such class within the period of time the predecessor issuer would have been required to file such a statement, or within such extended period of time as the Commission may authorize upon application pursuant to § 240.12b-25 of this chapter, unless upon consummation of the succession such class is exempt from such registration other than by Rule 12g3-2 (§ 240.12g3-2 of this chapter] or all securities of the class are held of record by less than 300 persons.
      (c) An issuer that is deemed to have a class of securities registered pursuant to section 12 according to either paragraph (a) or (b) of this section shall file reports on the same forms and such class of securities shall be subject to the provisions of sections 14 and 16 to the same extent as the predecessor issuer, except as follows:
      (1) An issuer that is not a foreign issuer shall not be eligible to file on Form 20-F (§ 249.220f of this chapter) or to use the exemption in Rule 3a12-3 (§ 240.3a12-3 of this chapter).
      (2) A non-Canadian foreign private issuer shall be eligible to file on Form 20-F and to use the exemption in Rule 3a12-3.
      (3) A Canadian foreign private issuer shall be eligible to file on Form 20-F and to use the exemption in Rule 3a12-3 only if the predecessor issuer filed on Form 20-F and was eligible to use such exemption and it does not have or has not had during the twelve months prior to the consummation of the succession a reporting obligation (suspended or active) under section 15(d) of the Act or a class of securities registered under section 12.
      5. By revising section 240.12g3-2 to read as follows:

      § 240.12g3-2 Exemptions for American depository receipts end certain foreign securities.

      (a)
      (1) Securities of any class issued by any foreign private issuer shall be exempt from section 12(g) of the Act if the class has fewer than 300 holders resident in the United States. This exemption shall continue until the next fiscal year end at which the issuer has a class of equity securities held by 300 or more persons resident in the United States. For the purpose of determining whether a security is exempt pursuant to this paragraph, securities held of record by persons resident in the United States shall be determined as provided in Rule 12g5-1 (§ 240.12g5-1 of this chapter) except that securities held of record by a broker, dealer, bank or nominee for any of them for the accounts of customers resident in the United States shall be counted as held in the United States by the number of separate accounts for which the securities are held. The issuer may rely in good faith on information as' to the number of such separate accounts supplied by all owners of the class of its securities which are brokers, dealers, or banks or a nominee for any of them.
      (2) Registration of any class of security by a foreign private issuer pursuant to section 12(g) of the Act shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a certification with the Commission that the number of holders resident in the United States of such class of security is reduced to less than 300 persons. The Commission shall, after notice and opportunity for hearing, deny termination of registration if if finds that there are 300 or more holders resident in the United States. Termination of registration shall be deferred pending final determination on the question of denial.
      (b)
      (1) Securities of any foreign private issuer shall be exempt from section 12(g) of the Act if the issuer, or a government official or agency of the country of the issuer's domicile or in which it is incorporated or organized:
      (i) Shall furnish to the Commission whatever information in each of the following categories the issuer since the beginning of its last fiscal year (A) has made or is required to make public pursuant to the law of the country of its domicile or in which it is incorporated or organized, (B) has filed or is required to file with a stock exchange on which its securities are traded and which was made public by such exchange, or (C) has distributed or is required to distribute to its security holders;
      (ii) Shall furnish to the Commission a list identifying the information referred to in paragraph (b)(1)(i) of this section and stating when and by whom it is required to be made public, filed with any such exchange, or distributed to security holders;
      (iii) Shall furnish to the Commission, during each subsequent fiscal year, whatever information is made public as described in (A), (B) or (C) of paragraph (b)(1)(i) of this section promptly after such information is made or required to be made public as described therein;
      (iv) Shall, promptly after the end of any fiscal year in which any changes occur in the kind of information required to be published as referred to in the list furnished under paragraph (b)(1)(ii) of this section or any subsequent list, furnish to the Commission a revised list reflecting such changes; and
      (v) Shall furnish to the Commission in connection with the initial submission the following information to the extent known or which can be obtained without unreasonable effort or expense: the number of holders of each class of equity securities resident in the United States, the amount and percentage of each class of outstanding equity securities held by residents in the United States, the circumstances in which such securities were acquired, and the date and circumstances of the most recent public distribution of securities by the issuer or an affiliate thereof.
      (2) The information required to be furnished under paragraphs (b)(1)(i) and (b)(1)(ii) of this section shall be furnished on or before the date on which a registration statement under section 12(g) of the Act would otherwise be required to be filed. Any issuer furnishing information under paragraph (b)(1)(i) of this section shall notify the Commission that it is furnished under that paragraph.
      (3) The information required to be furnished under this paragraph (b) is information material to an investment decision such as: the financial condition or results of operations; changes in business; acquisitions or dispositions of assets; issuance, redemption or acquisitions of their securities; changes in management or control; the granting of options or the payment of other remuneration to directors or officers; and transactions with directors, officers or principal security holders.
      (4) Only one complete copy of any information or document need be furnished under paragraph (b)(1) of this section. Such information and documents need not be under cover of any prescribed form and shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of section 18 of the Act. Press releases and all other communications or materials distributed directly to security holders of each class of securities to which the exemption relates shall be in English. English versions or adequate summaries in English may be furnished in lieu of original English translations. No other documents need be furnished unless the issuer has prepared or caused to be prepared English translations, versions, or summaries of them. If no English translations, versions, or summaries have been prepared, a brief description in English of any such documents shall be furnished. Information or documents in a language other than English are not required to be furnished. If practicable, the Commission file number shall appear on the information furnished or in an accompanying letter.
      (5) The furnishing of any information or document under paragraph (b) of this rule shall not constitute an admission for any purpose that the issuer is subject to the Act.
      (c) Depositary Shares registered on Form F-6 (§ 239.36 of this chapter), but not the underlying deposited securities, are exempt from section 12(g) of the Act under this paragraph (c).
      (d) The exemption provided by paragraph (b) of this rule shall not be available for the following securities:
      (1) Securities of a foreign private issuer that has or has had during the prior eighteen months any securities registered under section 12 of the Act or a reporting obligation (suspended or active) under section 15(d) of the Act;
      (2) Securities of a foreign private issuer issued in a transaction to acquire by merger, consolidation, exchange of securities, or acquisition of assets, another issuer that had securities registered under section 12 of the Act or a reporting obligation (suspended or active) under section 15(d) of the Act; and
      (3) Securities quoted in an "automated inter-dealer quotation system" or securities represented by American Depositary Receipts so quoted, unless all the following conditions are met:
      (i) Such securities were so quoted on October 5, 1983 and have been continuously traded since;
      (ii) The issuer is in compliance with the exemption in paragraph (b) of this section on October 5, 1983 and has continuously maintained the exemption since; and
      (iii) After January 2, 1986, the issuer is organized under the laws of any country except Canada or a political subdivision thereof.
      6. By redesignating the first paragraph of § 240.15d-5 as paragraph (a) and adding a new paragraph (b) to read as follows:

      § 240.15d-5 Reporting by successor issuers.

      * * * * *

      (b) An issuer that is deemed to be a successor issuer according to paragraph (a) of this section shall file reports on the same forms as the predecessor issuer except as follows:
      (1) An issuer that is not a foreign issuer or that is a North American foreign private issuer shall not be eligible to file on Form 20-F (§ 240.220f of this chapter).
      (2) A non-North American foreign private issuer shall be eligible to file on Form 20-F.

      Statutory Basis

      These amendments are adopted pursuant to authority in Sections 6, 7, 8. 10, and 19(a) of the Securities Act of 1933; Sections 12, 13, 15(d), and 23(a) of the Securities Exchange Act of 1934.

      (Secs. 6, 7, 8, 10, 19(a), 48 Stat. 78, 79, 81, 85; secs. 205, 209, 48 Stat. 906, 908; sec. 301, 54 Stat. 857; sec. 8, 68 Stat. 685; sec. 1, 79 Stat. 1051; sec. 308(a)(2), 90 Stat. 57,; secs. 12, 13, 15(d), 23(a), 48 Stat. 892, 894, 895, 901; secs. 1, 3, 8, 49 Stat. 1375, 1377, 1379; sec. 203(a), 49 Stat. 704; sec. 202, 68 Stat. 686; secs. 3, 4, 6, 78 Stat. 565-574; 9ecs. 1,2, 82 Stat. 454; sec. 28(c), 84 Stat. 1435; secs. 1, 2, 84 Stat. 1497; sec. 105(b), 88 Stat. 1503; secs. 8, 9, 10, 18, 89 Stat. 117, 118, 119, 155; sec. 308(b), 90 Stat. 57; secs. 202, 203, 204, 91 Stat. 1494, 1498, 1500; 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 78l, 78m, 78o(d), 78w(a))

      By the Commission.

      George A. Fftzsimmons,
      Secretary.

      October 6, 1983.

      [FR Doc. 83-27934 Filed 10-13-83:8:45 am]

      BILLING CODE 8010-01-M


      1 Paragraph (b) of that rule exempts certain foreign securities from registration under section 12(g) of the Exchange Act if the issuer furnishes the Commission with copies of disclosure documents made public under foreign law or regulations. Release No. 33-6433 (October 28, 1982) [47 FR 50292] discusses this rule in more detail.

      2 As explained below, the the securities of issuers listed in accompanying Release No. 34-20265. and currently quoted in NASDAQ are generally grandfathered.

      3 Copies of these comment letters a well as a comment highlight prepared by the staff are in File No. S7-951 and are available for public inspection and copying at the Commission's Public Reference Room.

      4 The monthly average share volume on NASDAQ for the first six months of 1983 was approximately three-fourths that of the New York Stock Exchange and nearly seven times larger than the volume of the American Stock Exchange.

      5 As explained in the proposing release, foreign securities may be included in NASDAQ directly or in ADR form. These amendments apply equally to both.

      6 Grandfathering is unusual in the securities laws, but see Section 3(a)(1) of the Securities Act and Section 12(f) of the Exchange Act.

      7 Unless, of course, the securities are delisted from NASDAQ or the issuer fails to maintain the information-supplying exemption.

      8 The Commission wishes to remind issuers and broker-dealers of their responsibilities during distributions of unregistered securities. See Release Nos. 33-4445 (February 2, 1962) [27 FR 2312] and 33-5168 (July 17, 1971).

      9 In 1980, the Commission solicited public comment on whether to eliminate the distinction between Canadian and other foreign private issuers. Few comments, even those from Canadian issuers, supported elimination. Release No. 33-6235 (September 2, 1980) [45 FR 63693].

      10 Sections 13(d), 13(e), 14(d), 14(e) and 14(f) of the Exchange Act regulate certain acquisitions of securities and tender offers.

      11 The conditions are in the except clause in the definition of a foreign private issuer. Rules 405 (17 CFR 230.405) and 3b-4 (17 CFR 240.3b-4).


    • 83-57 Trade Date—Settlement Date Schedule for Election Day and Veterans Day

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      "Regular-Way" transactions made on Tuesday, November 8, Election Day; and Friday, November 11, Veterans Day, and the days immediately preceding these days will be subject to the settlement date schedule listed below. The purpose of this schedule is to provide uniformity. While the NASDAQ System and other securities markets will be open on these days, many banking institutions will be closed.

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

      Trade Date

      Settlement Date

      Regulation T Date*

      November 1

      November 9

      November 10

      2

      10

      11

      3

      14

      14

      4

      15

      15

      7

      16

      16

      8

      16

      17

      9

      17

      18

      10

      18

      21

      11

      18

      22

      November 8 and November 11, 1983 will not be considered business days for determining the day for settlement of a trade, the day on which stock shall be quoted ex-dividend or ex-rights, or in computing interest on bond trades. Marks to the market, reclamations, and close-outs should not be made on those days.

      For purposes of Regulation T of the Federal Reserve Board, November 8 and November 11 will be counted as business days for receiving customers' payments.

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

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6255.

      * * *


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 83-56 Fidelity Bonds — Definition of "Employee"; Expiration of Grace Period

      TO: All NASD Members and Other Interested Persons

      Under the provisions of the NASD fidelity bonding rule (Article III, Section 32, NASD Rules of Fair Practice) all members who are required to be members of the Securities Investor Protection Corporation and who have employees must carry a fidelity bond.

      On December 17, 1982, in Notice to Members 82-58, which described the introduction of the group fidelity bond buying program, the Association announced the adoption of an amendment to the fidelity bonding rule (Appendix C - paragraph (e) - page 2109-15, NASD manual) defining the terms "employee" and "employees" for purposes of fidelity bonding.

      Briefly, paragraph (e) defines such terms to include most persons (registered or unregistered, full-time or part-time) who are associated with an NASD member, who engage in the investment banking or securities business and who are under the direct or indirect control of the NASD member.

      Sole proprietors or sole stockholders of member firms are not deemed to be employees for fidelity bonding purposes nor are Directors or Trustees of member firms who do not engage in activities which fall within the scope of the usual duties of officers or employees.

      A definition of "employee" which complies with paragraph (e) was inserted in the "Definitions" section of the bond form used in the group fidelity bond buying program. Consequently, all members who have purchased bonds under the program (over 1,500 to date) carry bonds which comply with the requirements of paragraph (e).

      To provide members with sufficient time to bring their bonds into compliance with the new paragraph (e) either by joining the group program or by having their current bonds amended, the Board of Governors granted a grace period of 12 months from December 17, 1982.

      The purpose of this notice is to remind those members whose current bonds do not comply with paragraph (e) that the grace period will expire on December 17, 1983.

      Members requiring information about the group buying program should contact the Administrator, Marsh & McLennan Inc., 5130 MacArthur Boulevard, Washington, D.C. 20016, Telephone No. (202) 364-1348.

      Sincerely,

      Jordon S. Macklin
      President

    • 83-55 Amendments to Association By-Laws

      I M P O R T A N T

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members And Interested Persons

      LAST VOTING DATE IS NOVEMBER 21, 1983

      Attached are amended By-Laws of the Association which are being submitted to the membership for a vote. The proposal is the product of the Association's Committee on Rule and By-Law Amendments which is reviewing and revising all of the Association's By-Laws, Rules and Interpretations. The initial step in the Committee's review was adoption by the Board of Governors of a revised Code of Procedure for Handling Trade Practice Complaints which is currently on file with the Securities and Exchange Commission for approval. The enclosed revision of the By-Laws is the second step in the Committee's review and it has been approved by the Association's Board of Governors for submission to the membership for vote.

      The proposed By-Law amendments are primarily designed to conform the language to certain statutory changes, codify existing Board interpretations, clarify the application of certain provisions and generally to update and modernize the By-Laws.

      The amendments were submitted to the membership for comment earlier this year (Notice to Members 83-8). The Association received four written comments. The comments were generally accepted by the Committee on Rule and By-Laws Amendments and the Board of Governors and are incorporated in the amendments covered by this membership vote. Prior to becoming effective, the amendments must be approved by the membership and then approved by the Securities and Exchange Commission.

      You will find a brief explanation of each amendment immediately following the text of the proposed amendments themselves. These amendments are important and merit your immediate attention. Please mark the ballot according to your convictions and return it in the enclosed stamped envelope to "The Corporation Trust Company." Ballots must be postmarked not later than November 21, 1983.

      The Board of Governors believes these amendments to the By-Laws are necessary and appropriate and recommends that members vote their approval.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      TABLE OF CONTENTS

      BY-LAWS

      Page

      Article I

      Definitions

      1

      Article II

      Qualifications of Members and Associated Persons

      Sec.

      1.

      Persons Eligible to become Members and Associated Persons of Members

      4

      2.

      Authority of Board to Adopt Qualification Requirements

      7

      3.

      Ineligibility of Certain Persons for Membership or Association

      8

      4.

      Definition of Disqualification

      12

      Article III

      Membership

      1.

      Application for Membership

      14

      2.

      Similarity of Membership Names

      16

      3.

      Executive Representative

      16

      4.

      Membership Roll

      17

      5.

      Resignation of Members

      17

      6.

      Transfer and Termination of Membership

      18

      7.

      Registration of Branch Offices

      21

      8.

      Vote of Branch Offices

      21

      9.

      District Committees' Right to Classify Branches

      22

      Article IV

      Registered Representatives and Associated Persons

      1.

      Qualification Requirements

      24

      2.

      Application for Registration

      24

      3.

      Notification by Member to Corporation of Termination

      27

      4.

      Retention of Jurisdiction

      28

      Article V

      Affiliates

      1.

      Qualifications for Affiliation

      29

      2.

      Application for Admission as Affiliate

      29

      3.

      Agreement of Affiliate

      29

      4.

      Conditions of Affiliation

      30

      5.

      Approval of Admission as an Affiliate

      31

      6.

      Suspension or Cancellation of Affiliation

      31

      7.

      Exclusion of Territory Covered by Affiliated Association

      31

      Article VI

      Dues, Assessments and Other Charges

      1.

      Power of Board to Fix and Levy Assessments

      32

      2.

      Reports of Members

      33

      3.

      Suspension or Cancellation of Membership for Non-Payment of Dues

      34

      4.

      Reinstatement of Membership

      34

      Article VII

      Board of Governors

      1.

      Powers and Authority of Board of Governors

      34

      2.

      Authority to Suspend for Failure to File Regulatory Reports

      38

      3.

      Composition of Board

      38

      4.

      Term of Office of Governors

      40

      5.

      Succession to Office

      41

      6.

      Election of Board Members

      41

      7.

      Filling of Vacancies on Board

      43

      8.

      Meetings of Board

      44

      9.

      Offices of Corporation

      45

      Article VIII

      District Committees

      1.

      Administrative Districts

      45

      2.

      District Committees and District Business
      Business Conduct Committees

      46

      3.

      Term of Office of District Committee Members

      47

      4.

      Election of District Committee Members

      47

      5.

      Filling of Vacancies on District Committees

      49

      6.

      Meetings of District Committees

      50

      7.

      Election of Chairmen and Other District Officers

      50

      8.

      Advisory Council

      50

      9.

      Expenses of District Committees

      51

      10.

      District Committees Agencies of Corporation

      51

      11.

      Certain Functions of District Committees

      51

      Article IX

      Nominating Committees

      1.

      Composition of Nominating Committees

      52

      2.

      Term of Office of Nominating Committee Members

      53

      3.

      Election of Nominating Committees

      53

      4.

      Filling of Vacancies for Nominating Committees

      55

      5.

      Meetings of Nominating Committees

      56

      6.

      Election of Chairman and Other Nominating Committee Officers

      56

      Article X

      Officers and Employees

      1.

      Election of Officers of the Board

      57

      2.

      Officers of the Corporation

      57

      3.

      Absence of President

      58

      4.

      Employment of Counsel

      58

      5.

      Administrative Staff

      58

      6.

      Restrictions on Compensation of Board and Committee Members

      58

      Article XI

      Committees

      1.

      National Standing Committees

      59

      2.

      District Standing Committees

      59

      3.

      Removal of Committeemen

      60

      4.

      Executive Committee

      60

      Article XII

      Rules of Fair Practice

      61

      Article XIII

      Disciplinary Proceedings

      63

      Article XIV

      Power of Board to Prescribe Sanctions

      65

      Article XV

      Uniform Practice Code

      1.

      Authority to Adopt Code

      67

      2.

      Administration of Code

      68

      3.

      Transactions Subject to Code

      69

      Article XVI

      Limitation of Powers

      1.

      Prohibitions

      71

      2.

      Use of Name of Corporation by Members

      71

      3.

      Unauthorized Expenditures

      71

      Article XVII

      Procedure for Adopting Amendments to By-Laws

      72

      Article XVIII

      Corporate Seal

      73

      Article XIX

      Checks

      73

      Article XX

      Annual Financial Statement

      73

      [ new language is underlined; deleted language is stricken through]

      BY-LAWS

      ARTICLE I

      Definitions

      Sec. 3. When used in these By-Laws, and any rules of the Corporation, unless the context otherwise requires, the term:

      (a) "Act" means the Securities Exchange Act of 1934 as amended;
      (c)
      (b) The term "bank" means (A) (l) a banking institution organized under the laws of the United States, (B) (2) a member bank of the Federal Reserve System, (C) (3) any other banking institution, whether incorporated or not, doing business under the laws of any State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under Section 11(k) of the Federal Reserve Act, as amended, and which is supervised and examined by a State or Federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of this title the Act, and (D) (4) a receiver, conservator, or other liquidating agent of any institution or firm included in clauses (A) (1), (B) (2) or (C) (3) of this paragraph subsection;
      (c) "branch office" including a corporate subsidiary of a member means an office located in the United States which is owned or controlled by a member, and which is engaged in the investment banking or securities business;
      (a)
      (d) The term "broker" means any individual, corporation, partnership, association, joint stock company, business trust, unincorporated organization or other legal entity engaged in the business of effecting transactions in securities for the account of others, but does not include a bank;
      (e) "Commission" means the Securities and Exchange Commission;
      (f) "Corporation" means the National Association of Securities Dealers, Inc.;

      "Dealer"

      (b)
      (g) The term "dealer" means any individual, corporation, partnership, association, joint stock company, business trust, unincorporated organization or other legal entity engaged in the business of buying and selling securities for his own account, through a broker or otherwise, but does not include a bank, or any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary capacity, but not as part of a regular business;

      "investment banking of securities business"

      (c)
      (h) The term "investment banking or securities business" means the business, carried on by a broker, or dealer, or municipal securities dealer (other than a bank or department or division of a bank) of underwriting or distributing issues of securities, or of purchasing securities and offering the same for sale as a dealer therein, or of purchasing and selling securities upon the order and for the account of others; provided, however, that the term "investment banking or securities business" shall not include transactions on regularly organized exchanges, but such term shall include all business relating to such transactions to the extent that such business is not conducted by a member of such exchange, or by any person or organization having the privilege of any such exchange for itself or any of its partners or executive officers.
      (d)
      (i) The term "member" means either any broker or dealer admitted to membership in the Corporation; or any officer or partner of such a member or, as provided in Section 5 of this Article, the executive representative of such a member or the substitute for such a representative;
      (j) "municipal securities" means securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond as defined by Section 3(a)(29) of the Act;
      (k) "municipal securities dealer" means any person, except a bank or department or division of a bank, engaged in the business of buying and selling municipal securities for his own account, through a broker or otherwise, but does not include any person insofar as he buys or sells securities for his own account either individually or in some fiduciary capacity but not as a part of a regular business;
      (l) "municipal securities broker" means a broker, except a bank or department or division of a bank, engaged in the business of effecting transactions in municipal securities for the account of others;

      "Person associated with a member"

      (f)
      (m) The term "person associated with a member" or "associated person of a member" means every sole proprietor, partner, officer, director, or branch manager of any member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member, whether or not any such person is registered or exempt from registration with the Corporation pursuant to these By-Law;
      (n) "registered broker, dealer or municipal securities broker or dealer" means any broker, dealer or municipal securities broker or dealer which is registered with the Commission under the Act;
      (o) "rules of the Corporation" means all rules of the Corporation including the Certificate of Incorporation, By-Laws, Rules of Fair Practice, Code of Procedure, Uniform Practice Code, and any interpretations thereunder.

      Explanation

      The added language at the beginning of the Article and the new definition of "rules of the Corporation" in subsection (o) are intended to make clear that the definitions in the By-Laws also apply to terms used in the Rules of Fair Practice and other Association rules.

      The new terms "municipal securities", "municipal securities dealer" and "municipal securities broker" in subsections (j), (k) and (l) parallel the statutory definitions added by the Securities Acts Amendments of 1975 bringing this class of security and type of dealer under regulation by the Commission and the Association. The definition of "registered broker, dealer or municipal securities broker or dealer" is included because under the 1975 Act Amendments only broker/dealers registered with the SEC are eligible for membership. The new definitions in subsections (a), (e) and (f) and amendments to certain existing definitions are for clarity. The definition of "branch office" has been transferred from existing Article I, Section 11 of the By-Laws and clarified.

      !All of new Article II is taken from the existing provisions of Sections 1 and 2 of Article I, and has been substantially rewritten for clarity and to conform to the Securities Acts Amendments of 1975.1

      ARTICLE I II

      Membership Qualifications of Members and Associated Persons

      Qualifications for Membership Persons Eligible to become Members and Associated Persons of Members

      Sec. 1.(a) Any registered broker, or dealer or municipal securities broker or dealer authorized to transact, and whose regular course of business consists in actually transacting, any branch of the investment banking or securities business in the United States, under the laws of any State and/or the laws of the United States, shall be eligible to for membership in the Corporation, except such registered brokers, or dealers or municipal securities brokers or dealers as which are excluded pursuant to Section 2 of this Article under the provisions of Sections 3(a) or (b) of this Article.

      (b) Any person shall be eligible to become an associated person of a member, except such persons who are excluded under the provisions of Section 3(b) of this Article.

      Explanation

      Subsection (a) is similar to existing Article I, Section 1 of the By-Laws, but incorporates the limitations of Section 15A(g)(l) of the 1934 Act that only registered broker/dealers are eligible for membership in the Association. The new reference to municipal securities brokers and dealers, when read with the definition of the term in proposed Article I, subsections (k) and (1) of the By-Laws, makes clear that only non-bank municipal securities brokers and dealers are eligible for membership in conformity with the regulatory scheme for municipal securities established under the Securities Acts Amendments of 1975.

      Subsection (b) is entirely new and conforms to the requirement of Section 15A(b)(3) of the 1934 Act that the rules of the Association must provide that, with certain exceptions, any person may become associated with a member.

      Restrictions on Admission to or Continuance in Membership

      Sec. 2. (a) No broker or dealer, except with the approval or at the direction of the Securities and Exchange Commission (hereinafter referred to in these By-laws as the Commission), in cases in which the Commission finds it appropriate in the public interest so to approve or direct pursuant to Section 15A of the Securities Exchange Act of 1934, as amended (hereinafter referred to as the Act), shall be admitted to or continued in membership in the Corporation if such broker or dealer, whether prior or subsequent to becoming such, (A) has been and is suspended or expelled from a registered national or affiliated securities association, registered pursuant to Section 15A of the Act, or from a national securities exchange, registered pursuant to Section 6 of the Act, or has been and is barred or suspended from being associated with all members of such association or national securities exchange for violation of any rule of such registered securities association or national securities exchange which prohibits any act or transaction constituting conduct inconsistent with just and equitable principles of trade, or requires any act the omission of which constitutes conduct inconsistent with just and equitable principles of trade; or (B) is subject to an order of the Commission denying, suspending or revoking his registration pursuant to Section 15 of the Act, or expelling or suspending him from membership in a registered securities association or a national securities exchange, or barring or suspending him from being associated with a broker or dealer; or (C) by his conduct while associated with a broker or dealer, was a cause of any suspension, expulsion, or order of the character described in clauses (A) or (B), which is in effect with respect to such broker or dealer, or (D) has associated with him any person who is known, or in the exercise of reasonable care should be known, to him to be a person who, if such person were a broker or dealer, would be ineligible for admission to our continuance in membership under clauses (A), (B), or (C) of this section.

      (b) No broker or dealer shall be admitted to or continued in membership in the Corporation if the Board of Governors deems it appropriate, unless the Commission directs otherwise in cases in which the Commission finds it appropriate in the public interest so to direct, if such broker or dealer, whether prior or subsequent to becoming such, or any person associated with such broker or dealer, whether prior or subsequent to becoming so associated, has been and is suspended or expelled from a national securities exchange or has been and is barred or suspended from being associated with all members of such exchange, for violation of any rule of such exchange.
      (c) In those cases where the Board of Governors deems it appropriate, no broker or dealer shall be admitted to or continued in membership in the Corporation if such broker or dealer, whether prior or subsequent to becoming such, or any person associated with such broker or dealer, whether prior or subsequent to becoming so associated, (A) has willfully made or caused to be made in any application or report filed with the Corporation, or in any proceeding before the Corporation with respect to membership or registration, any statement which was at the time and in light of the circumstances under which it was made false or misleading with respect to any material fact, or has omitted to state in any such application or report any material fact which is required to be stated therein; or (B) has been convicted within the ten years preceding the filing of an application or at any time thereafter of any felony or misdemeanor which the Corporation finds involves the purchase or sale of any security or arises out of the conduct of the business of a broker, dealer or investment adviser; or which involves embezzlement, fraudulent conversion, or misappropriation of funds or securities, or which involves mail fraud, or fraud by wire, radio, or television; or, (C) is permanently or temporarily enjoined by order, judgment or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, or dealer, or as an affiliated person or employee of any investment company, bank or insurance company, or from engaging in or continuing any conduct or practice in connection with such activity, or in connection with the purchase or sale of any security.

      Authority of Board to Adopt Qualification Requirements

      (d) Sec. 2 No broker or dealer shall be admitted to or continued in membership and no natural person shall become or continue to be associated with a member, except with the approval or at the direction of the Commission in cases in which the Commission finds it appropriate in the public interest so to approve or direct, unless such broker or dealer or person associated with a member is qualified to become a member or a person associated with a member in conformity with specified and appropriate standards with respect to the training, experience, and such other qualifications as the Board of Governors finds necessary or desirable, and in the case of a member, the financial responsibility of such member. The Board of Governors shall have authority to adopt rules and regulations applicable to applicants for membership, members and persons associated with applicants or members establishing specified and appropriate standards with respect to the training, experience, competence and such other qualifications as the Board of Governors finds necessary or desirable, and in the case of an applicant for membership or a member, standards of financial responsibility and operational capability.

      In establishing and applying such standards, the Board of Governors may classify members and persons associated with such members, taking into account relevant matters, including the nature, extent and type of business done being conducted and of securities sold., dealt in, or otherwise handled. The Board of Governors may specify that all or any portion of such standards shall be applicable to any such class and may require the persons in any such class to be registered with the Corporation.

      Such classifications, qualifications, registration requirements, standards and exceptions thereto shall be incorporated in Schedule C attached to and made a part of these By laws. Within the limitations provided herein, the Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of Schedule "C" from time to time without recourse to the membership for approval, as would otherwise be required by Article IX hereof, and Schedule "C", as adopted, altered, amended, supplemented or modified, shall become effective as the Board of Governors may prescribe unless disapproved by the Commission. The Board of Governors may from time to time make changes in such rules, regulations and standards as it deems necessary or appropriate. Neither the adoption nor any change in such standards need be submitted to the membership for approval and such rules, regulations and standards as adopted or amended shall become effective at such time as the Board of Governors may prescribe.

      Explanation

      The provision is based upon existing Article I, Section 2(d) of the By-Laws, but has been rewritten primarily for clarity and to be consistent with other provisions of the By-Laws. Article I, Sections 2(a), (b) and (c) have been completely replaced by new sections 3 and 4 below. It is proposed that the content of existing Schedule C will be moved to a different portion of the Manual.

      Ineligibility of Certain Persons for Membership or Association

      Sec. 3. (a) No registered broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if such broker, dealer, municipal securities broker or dealer or member fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such broker, dealer, municipal securities broker or dealer or member is or becomes subject to a disqualification under Section 4 of this Article.

      (b) No person shall become associated with a member, or continue to be associated with a member, or transfer association to another member, if such person fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such person is or becomes subject to a disqualification under Section 4 of this Article; and no broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if any person associated with it is ineligible to be an associated person under this subsection.
      (c) If it deems it appropriate, the Board of Governors, upon notice, may cancel the membership of a member if it becomes ineligible for continuance in membership under subsection (a) hereof, may suspend or bar a person from continuing to be associated with any member if such person is or becomes ineligible for association under subsection (b) hereof, and may cancel the membership of any member who continues to be associated with any such ineligible person.
      (d) Any broker, dealer or municipal securities dealer which is ineligible for admission into membership, or any member which is ineligible for continuance in membership, may file with the Board of Governors an application requesting relief from the ineligibility pursuant to procedures adopted by the Board of Governors and contained in the Corporation's Code of Procedure. The Board of Governors may, in its discretion, approve the admission or continuance of an applicant or member, or the association of any person, if the Board determines that such approval is consistent with the public interest and the protection of investors. Any approval hereunder may be granted unconditionally or on such terms and conditions as the Board considers necessary or appropriate. In the exercise of the authority granted hereunder, the Board of Governors may:
      (1) conduct such inquiry or investigation into the relevant facts and circumstances as it, in its discretion, considers necessary to its determination, which, in addition to the background and circumstances giving rise to the failure to qualify or disqualification may include the proposed or present business of an applicant for membership or of a member and the conditions of association of any prospective or presently associated person, among other matters;
      (2) permit, in limited types of situations, a membership or association with a member pending completion of its inquiry or investigation, and its final determination, based upon a consideration of relevant factors, and may classify situations taking into account the status of brokers, dealers and municipal securities brokers and dealers as applicants or existing members and of persons as prospective or presently associated persons of members; the type of disqualification or failure to qualify; whether a member or associated person has been the subject of a previous approval and the terms and conditions thereof; and any other relevant factors; and
      (3) delegate any of its functions and authority under this subsection (d) to appropriate committees of the Corporation' or to Corporation staff members.
      (e) An application filed under subsection (d) hereof shall not foreclose any action which the Board of Governors is authorized to take under subsection (c) hereof until approval has been granted.
      (f) Approval by the Board of Governors of an application made under subsection (d) shall be subject to whatever further action the Commission may take pursuant to authority granted to the Commission under the Act.

      Explanation

      The provision is a complete revision and consolidation of existing By-Law provisions concerning ineligibility for membership or association with a member. The changes are primarily clarifying.

      Subsection (a) carries forward the existing prohibitions of Article I, Section 2 of the By-Laws and provides that no applicant or member shall be admitted or continued in membership if there is a failure to satisfy examination and other qualification requirements, or the applicant or member is subject to a disqualification as that term is defined by Section 4. Subsection (b) imposes similar standards of ineligibility upon prospective and presently associated persons, and also carries forward existing language under which a member becomes ineligible for continuance in membership if it allows an ineligible person to become or remain associated with the member.

      Subsection (c) grants authority to the Board of Governors to cancel the membership of a member or suspend or bar a person from continuing to be associated with a member in cases where a member or person becomes ineligible under subsections (a) and (b). The provision carries forward substantially the existing language of Article I, Section 13(b) of the By-Laws and is designed to make the ineligibility provisions of subsections (a) and (b) effective in the event of a failure to voluntarily comply with the prohibitions thereunder.

      Subsection (d) is based upon existing Article I, Section 13(c) of the By-Laws, but considerably expands upon and codifies the scope of the Board's authority as it has been carried out in practice. The provision's introductory language states, in substance, that notwithstanding an ineligibility, any applicant for membership or member has a right to make application to the Board requesting approval of its admission or continuance in membership. It carries forward existing practice by requiring an application to be made by a member where an ineligibility concerns an associated person in recognition of the importance of supervision to a determination to approve or deny association. It also makes explicit the Board's authority to impose conditions on any approval where such appears necessary or appropriate.

      The remaining language of the provision is entirely new to the By-Laws, but reflects existing practice. Subsection (d)(1) authorizes the Board to conduct an investigation in such depth as it deems necessary for any determination to approve. Subsection (d)(2) gives the Board authority to deal with the variety of ineligibility situations which experience has demonstrated is likely to occur and to adopt policies or guidelines therefor concerning such matters as employment, admission and continuance in membership during the time period involved in reaching a final determination. Subsection (d)(3) recognizes the substantial number of ineligibility situations which must be handled in the course of a year and authorizes the Board to delegate some of its responsibility to appropriate committees or the Association's staff.

      Subsection (e) is intended to clarify that a pending application for approval does not, by itself, foreclose the Board from exercising its authority to cancel a membership or bar an association if it deems such action necessary or appropriate. Subsection (f) incorporates the provisions of Section 15A(g)(2) of the Act, and Commission rules and regulations thereunder, that under certain circumstances the Association is required to notify the Commission of any approval with respect to persons who are ineligible by virtue of a disqualification and the Commission is authorized to direct the Association to disapprove a membership or association of a disqualified person.

      Definition of Disqualification

      Sec. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person:

      Commission and Self-Regulatory Organization Disciplinary Sanctions

      (a) has been and is expelled or suspended from membership or participation in, or barred or suspended from being associated with a member of, any self-regulatory organization;
      (b) is subject to an order of the Commission denying, suspending or revoking its registration as a broker, dealer, or municipal securities dealer (including a bank or department or division of a bank) or barring or suspending him from being associated with a broker, dealer, or municipal securities dealer (including a bank or department or division of a bank);
      (c) by his conduct while associated with a broker, dealer, or municipal securities dealer (including a bank or department or division of a bank) has been found to be a cause of any effective suspension, expulsion or order of the character described in subsections (a) or (b) of this Section; or
      (d) has associated with him any person who is known, or in the exercise of reasonable care should be known, to him to be a person described in subsections (a), (b), or (c) of this Section.

      Misstatements

      (e) has willfully made or caused to be made in any application for membership in the Corporation, or to become associated with a member of the Corporation, or in any report required to be filed with the Corporation, or in any proceeding before the Corporation, any statement which was at the time, and in light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to be stated therein;

      Convictions

      (f) has been convicted within ten years preceding the filing of any application for membership in the Corporation, or to become associated with a member of the Corporation, or at any time thereafter, of any felony or misdemeanor which;
      (1) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, or conspiracy to commit any such offense;
      (2) arises out of the conduct of the business of a broker, dealer, municipal securities dealer, investment adviser, bank, insurance company or fiduciary;
      (3) involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities; or
      (4) involves the violation of Sections 152, 1341, 1342, or 1343 or Chapters 25 or 47 of Title 18, United States Code; or

      Injunctions

      (g) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, dealer, or municipal securities dealer (including a bank or department or division of a bank), or as an affiliated person or employee of any investment company, bank, or insurance company, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security.

      Explanation

      The provision parallels the definition of statutory disqualification in Section 3(a)(39) of the 1934 Act, added by the Securities Acts Amendments of 1975. It is somewhat broader than the types of disqualifications in existing Article I, Sections 2(a)-(c) of the By-Laws because of the broader language of the statute.

      ARTICLE I III

      Membership

      Application for Membership

      Sec. 4 1. (a) Application for membership in the Corporation, properly signed by the applicant, shall be made to the Board of Governors Corporation, on the form to be prescribed by the Board Corporation, and shall contain:

      Membership agreement

      (1) Aan acceptance of and an agreement to abide by, comply with, and adhere to, all the provisions, conditions, and covenants of the Certificate of Incorporation, the By-Laws, the rules and regulations of the Corporation as they are or may from time to time be adopted, changed or amended, and all rulings, orders, directions and decisions of, and penalties sanctions imposed by, the Board of Governors or any duly authorized committee; , the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board; provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as provided in the Act.;
      (2) Aan agreement to pay such dues, assessments, and other charges in the manner and amount as shall from time to time be fixed by the Board of Governors pursuant to these By-Laws.;
      (3) Aan agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any Ddistrict or other Ccommittee, shall be liable, except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer or member of the Board of Governors or of any Ddistrict or other Ccommittee, in his official capacity, or by any employee of the corporation while acting within the scope of his employment or under instruction of any officer, board, or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the By-laws, any of the rules and regulations of the Corporation as they are or may from time to time be adopted, changed or amended, or any ruling, order, directive, decision of, or penalty imposed by, the Board of Governors or any duly authorized committee., the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board; and
      (4) Ssuch other reasonable information with respect to the applicant as the Board of Governors may require.

      Action on Application for Membership

      (b) Any application received by the Board of Governors Corporation shall be referred to the District Committee of the district in which the applicant has his principal place of business, and if a majority of the members of such District Committee are satisfied determine that the applicant is qualified for membership pursuant to the provisions has satisfied all of the admission requirements of this Article the By-Laws, it shall recommend the applicant's admission to membership and promptly notify the Secretary of the Corporation of such recommendation.
      (c) If a majority of the members of such District Committee are not satisfied determine that the applicant is qualified for membership under any provision fails to satisfy all of the admission requirements of this Article the By-Laws, it shall promptly notify the Secretary of the Corporation who shall thereafter take appropriate action pursuant to Article I, Section 13 of these By-laws.

      Signing of the By-laws

      (d) Every applicant whose admission to membership is accepted by the Board of Governors shall sign the By-laws of the Corporation, provided that the signature of any such applicant may be affixed to an instrument incorporating the By-laws by reference and shall become a member of the Corporation as at of the date when posted to the membership roll.
      (d) Each member shall ensure that its membership application with the Corporation is kept current at all times by supplementary amendments to the original application.

      Explanation of Proposed Changes

      Subsection (a) has been amended to conform to the Securities Acts Amendments of 1975 which provide that the Association shall enforce compliance by its members with, in addition to its own rules, the federal securities laws and rules and regulations thereunder. The amendments to subsections (b) and (c) are intended to more clearly express the existing procedure followed by the District Committees in reviewing membership applications. New subsection (d) simply makes explicit that members have an obligation to keep their membership applications current. This obligation is implicit under existing requirements.

      Similarity of Membership Names

      Sec. 2. (a) No person or firm shall be admitted to or continued in membership in the Corporation having a name which is identical to the name of another member appearing on the membership roll of the Corporation or a name so similar to any such name as to tend to confuse or mislead;

      (b) No member may change its name without the prior approval of the Corporation.

      Explanation

      The effect is to convert an existing resolution of the Board of Governors into a By-Law provision.

      Executive Representative

      Sec. 5 3. Each member shall appoint and certify to the Secretary of the Corporation one "executive representative" who shall represent, vote and act for the member in all the affairs of the Corporation, except that other executives of a member may also hold office in the Corporation, serve on the Board of Governors or committees of the Corporation, or otherwise take part in the affairs of the Corporation. A member may change its executive representative at will upon giving written notice thereof to the Secretary, or may, when necessary, appoint, by written notice to the Secretary, a substitute for its executive representative. An executive representative of a member or a substitute shall preferably be an executive officer of the member, if a corporation, a partner in case of a partnership, and the member himself if an individual, but he may be an employee of the member, if given authority to act for the member in the course of the Corporation's activities.

      Explanation

      Clarifying language changes.

      Membership Roll

      Sec. 6 4. The Secretary of the Corporation shall keep a currently accurate and complete membership roll, containing the name and address of each member, and the name and address of the executive representative of each member. In any case where a membership has been terminated, such fact shall be recorded, together with the date on which the membership ceased. The membership roll of the Corporation shall at all times be available to all members of the Corporation, to all governmental authorities, and to the general public.

      Explanation

      The section is redesignated.

      Resignation of Members—Effective Date

      Sec. 7 5.

      (a) Membership in the Association may be voluntarily terminated only by formal resignation. Resignations of members must be in writing and addressed to the Board of Governors, Corporation which shall immediately notify the appropriate District Committee. Any member may resign from the Corporation at any time. Such resignation shall not take effect until thirty (30) days after receipt thereof by the Board of Governors Corporation and until all indebtedness due the Corporation from such member shall have been paid in full and so long as any complaint or action is pending against the member and so long as any examination of such member is in process. The Board of Governors, Corporation, however, may in its discretion declare a resignation effective at any time.
      (b) Retention of Jurisdiction - A resigned member shall continue to be subject to the filing of a complaint by the Corporation under the Code of Procedure based upon conduct which commenced prior to the effective date of the member's resignation from the Corporation. Any such complaint, however, shall be filed within one year after the effective date of the resignation.

      Explanation

      The intent is to clarify that a resigned member continues to be subject to a disciplinary complaint whether the complaint is filed by the Association, another member or a member of the public.

      Transfer and Termination of Membership

      Sec. 6. (a) Except as provided hereinafter, no member of the Corporation may transfer its membership or any right arising therefrom and the membership of a corporation, partnership or any other business organization which is a member of the Corporation shall terminate upon its liquidation, dissolution or winding up, and the membership of a sole proprietor which is a member shall terminate at death, provided that all obligations of membership under the By-Laws and Rules of Fair Practice have been fulfilled.

      (b) The consolidation, reorganization, merger, change of name, or similar change in any corporate member shall not terminate the membership of such corporate member provided that the member or surviving organization, if any, shall be deemed a successor to the business of the corporate member, and the member or the surviving organization shall continue in the investment banking and securities business, and shall possess the qualifications for membership in the Corporation. The death, change of name, withdrawal of any partner, the addition of any new partner, reorganization, consolidation or any change in the legal structure of a partnership member shall not terminate the membership of such partnership member provided that the member or surviving organization, if any, shall be deemed a successor to the business of the partnership member, and the member or surviving organization shall continue in the investment banking and securities business and shall possess the qualifications for membership in the Corporation. If the business of any predecessor member is to be carried on by an organization deemed to be a successor organization by the Corporation, the membership of such predecessor member shall be extended to the successor organization; otherwise, any surviving organization shall be required to satisfy all of the requirements of the By-Laws.

      Sec. 8 No member of the Corporation may transfer his membership or any right arising therefrom except that the consolidation, merger, change of name, or reorganization of any corporation which is a member of the corporation or any change in the name or membership of a partnership which is a member of the Corporation, shall not be deemed to constitute a transfer, except as otherwise herein provided. All rights of a member in the Corporation or in its property shall cease upon the termination of his membership. In the case of an individual member, his membership shall forthwith cease upon his death. In the case of the liquidation or winding up of a corporation or partnership which is a member of the Corporation, its membership shall forthwith cease provided that all obligations of membership under the By-laws and Rules of Fair Practice have been fulfilled, and unless the business of any such corporation or partnership is to be carried on by a successor organization or organizations, and the predecessor corporation shall so represent to the Board of Governors, in which case the membership of any such corporation or partnership shall be extended to such successor organization with the consent of the Board of Governors and subject to such terms and conditions as the Board deems equitable and appropriate in the circumstances. The membership of an individual may be extended to a successor organization with the consent of the Board of Governors and subject to such conditions as the Board deems suitable and appropriate in the circumstances. The membership of any partnership shall not terminate by reason of the death or withdrawal of any partner, the addition of any new partner, or any change of name, provided, however, that the new partnership formed thereby shall continue in the investment banking or securities business and shall possess the qualifications required for membership in the Corporation. The consolidation or reorganization or merger or change of name of any corporate member shall not terminate the membership of such corporate member; provided, however, that the new corporation formed thereby shall continue in the investment banking or securities business and shall possess the qualifications required for membership in the Corporation. The Board of Governors, however, shall have the right to require any successor firm or firms, whether corporations or partnerships, to sign or execute the By-laws, or otherwise confirm their membership in the Corporation.

      Explanation

      This section is largely rewritten in order to clarify the intent.

      Registration of Branch Offices

      Sec. 9 7. (a) Each branch office of a member of the Corporation shall register be registered with, and be listed upon the membership roll of, the Corporation, and shall pay such dues, assessments and other charges as shall be fixed from time to time by the Board of Governors pursuant to Article IIIVI hereof of the By-Laws.

      (b) Each member of the Corporation shall promptly advise the Corporation of the opening or closing of any branch office of such member.

      Explanation

      Subsection (b) is new and incorporates the Board of Governors Resolution under Article I, Section 9 of the existing By-Laws. The other changes are for clarity.

      Vote of Branch Offices

      Sec. 10 8. A registered branch office of a member of the Corporation shall entitle such member Each member of the Corporation having a registered branch office shall be entitled to one vote on all matters pertaining solely to the district in which such registered branch office is located (including the election of members to the Board of Governors from such district); provided, however, that if any member of the Corporation shall have more than one registered branch office in a district, or its principal office and one or more registered branch offices in a district, such member shall be entitled to only one vote in such district.

      Explanation

      The changes are for clarity.

      Definition of "Branch Office"

      Sec.11. The term "branch office" as used in Section 9 of this Article, including a corporate subsidiary of a member, is defined to be an office which is located in the United States which is owned or controlled by the member, and which is engaged in the investment banking or securities business as defined.

      Explanation

      The definition has been transferred to new Article I, subsection (c) of the By-Laws.

      District Committees' Right to Classify Branches

      Sec. 12 9. A District Committee may classify any branch or corporate subsidiary of a member not meeting the requirements of Section 11 definition of this Article I(c) of the By-Laws as a "branch office" if such Committee is satisfied that the requirements of Section 11 definition of this Article are I(c) of the By-Laws is substantially met and that the business of said branch or subsidiary in the district is of sufficient importance to justify such a classification.

      Explanation

      The changes reflect the relocation of the definition of "branch office".

      Membership Continuance Proceeding

      Sec. 13. (a) A member shall retain its membership in the Corporation only so long as the Board of Governors deems that it possesses all of the qualifications for membership, and a broker or dealer seeking membership may, if the Board of Governors deems it appropriate, be denied admission therein if it is subject to any of the disqualifications provided in this Article.

      (b) If the Corporation has reason to believe there is a disqualification, the member or broker or dealer shall be promptly notified in writing of the specific grounds of such disqualification from or denial of membership. If it deems it appropiate, the Board of Governors may summarily cancel the membership of a member if it becomes subject to any of the disqualifications provided in this Article or if it continues to associate with a person who is subject to any of the same disqualifications.
      (c) Any member or broker or dealer may make an application to the Corporation requesting continuance in or admission to membership notwithstanding the disqualification. If an application is filed with the Corporation, the applicant and any person whose association with the applicant gives or would give rise to the disqualification shall be given an opportunity to be heard with respect to the application and shall demonstrate why the application should be granted. If requested, or if directed by the Corporation, a hearing shall be held before a committee comprised of at least one member of the appropriate District Committee and at least one member of the Board of Governors, and a record shall be kept. Such committee shall make a recommendation as to the application which shall be forwarded to the Board of Governors together with the record.
      (d) The Board of Governors shall make a written determination upon the record before it, setting forth therein the specific grounds upon which such determination is based and the conditions, if any, as to the continuance in or admission to membership it considers appropriate.
      (e) The Board of Governors shall promptly notify the applicant of any action taken. When appropriate, an application shall be promptly filed with the Commission pursuant to Section 15A of the Act. Any applicant or person who is aggrieved by the action of the Board of Governors may make application for review of such action to the Commission pursuant to Section 15A of the Act.

      Explanation

      The existing provisions have been incorporated into proposed Article II, Section 3 of the By-Laws and the proposed Code of Procedure previously circulated to the membership for comment and currently on file with the Commission for approval.

      ARTICLE XV IV

      Registration of Registered Representatives and Associated Persons

      "Registered Representative"

      Sec.1. The term "registered representative" means any person associated with a member who has demonstrated his qualifications to engage in the investment banking or securities business regardless of his designation as either a principal or a representative of the member pursuant to the provisions of Schedule "C" of these By-Laws.

      Explanation

      The definition is being eliminated because portions of this Article are applicable to unregistered associated persons and because the persons required to be registered are already defined by Schedule C to the By-Laws.

      Compliance with Schedule "C"

      Qualification Requirements

      Sec. 2 1. No member shall permit any person associated with such member to engage in the investment banking or securities business unless the member determines that such person has complied with the applicable provisions of under Schedule "C," if applicable Article II of the By-Laws.

      Explanation

      The changes are primarily for clarity and to reflect the broadened scope of this Article of the By-Laws as noted in the comment above.

      Application for Registration

      Sec. 32. (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Board of Governors, Corporation, on the form to be prescribed by the Board of Governors and shall contain:

      (1) Aan acceptance of and an agreement to abide by, comply with, and adhere to, all the provisions, conditions and covenants of the Certificate of Incorporation, the By-Laws, the rules and regulations rules of the Corporation as they are or may from time to time be adopted, changed or amended, and all rulings, orders, directions and decisions of, and penalties imposed by, the Board of Governors or any duly authorized committee;, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board; provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as provided in the Act.,
      (2) Aan agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any District or other Committee, shall be liable except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer, or member of the Board of Governors or of any District or other Committee in his official capacity, or by any employee of the Corporation while acting within the scope of his employment, or under instruction of any officer, board, or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the By-Laws, any of the rules or regulations rules of the Corporation as they are or may from time to time be adopted, changed or amended, as any ruling, order, direction, decision of, or penalty imposed by, the Board of Governors or any duly authorized committee. , the provisions of the federal securities laws, including the rules and regulations adopted thereunder, or the rules of the Municipal Securities Rulemaking Board; and
      (3) Ssuch other reasonable information with respect to the applicant as the Board of Governors Corporation may require.
      (b) The Board of Governors Corporation shall not accept approve an application for registration of any person who would not be qualified to be a member is not eligible to be an associated person of a member under the provisions of Section 2 of Article I Section 3(b) of Article II of these By-Laws. or who has failed to comply with the applicable requirements of Schedule "C."
      (c) Every applicant whose application for registration is accepted by the Board of Governors shall sign the By laws of the Corporation provided that the signature of any such applicant may be affixed to an instrument incorporating the By-laws by reference and shall become registered as of the date of any such acceptance.
      (c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments to the original application.

      Explanation

      The section has been amended to conform to the Securities Acts Amendments of 1975 which provide that the Association shall enforce compliance by associated persons of members with, in addition to its own rules, the federal securities laws and rules and regulations thereunder. Subsection (c) is deleted because persons associated with members are required to comply with the By-Laws irrespective of whether they have signed them.

      Voluntary Resignation of Registered Representative

      See. 4(a) Registration with the Corporation of any person associated with a member may be voluntarily terminated at any time but only by formal resignation in writing and addressed to the Board of Governors. The Board of Governors shall immediately notify the member employing such person. Such resignation (subject to Section 6) shall not take effect until 30 days after receipt by the Board of Governors of such written resignation or so long as any complaint or action is pending against a member and to which complaint or action such person associated with the member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Board of Governors, however, may in its discretion declare the resignation effective at any time.

      (b) A person whose association with a member has been voluntarily terminated pursuant to subsection (a) hereof, shall continue to be subject to the filing of a complaint by the Corporation based upon conduct which commenced prior to the effective date of voluntary termination. Any such complaint, however, shall be filed within one year after the effective date of such termination.

      Explanation

      The provision is no longer consistent with existing practice. Although the Association forwards resignations from registered persons to an employer-member, it will only process terminations received directly from members.

      Notification by Member to Board Corporation of Termination

      Sec. 5(a) 3 No person associated with a member who is registered with the corporation may transfer his registration or any right arising therefrom. Promptly upon, but in no event later than thirty (30) calendar days after Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than thirty (30) calendar days after such termination, give written notice to the Association on a form designated by the Board of Governors of the termination of such association. A member who does not submit such notification in writing within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors in Schedule A of the By laws. Termination of registration (subject to Section 6) of such person associated with a member shall not take effect until thirty (days after receipt thereof by the Board of Governors nor so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Board of Governors Corporation, however, may in its discretion declare the resignation termination effective at any time.

      (b) A person whose association with a member is terminated pursuant to subsection (a) hereof, shall continue to be subject to the filing of a complaint by the Corporation based upon conduct which commenced prior to the effective date of termination. Any such complaint, however, shall be filed within one year after the effective date of such termination.

      Explanation

      The deleted language under existing subsection (b) has been moved to new Section 4.

      Subject to Complaint or Action

      Sec. 6 Any person associated with a member of the Corporation shall be subject to any complaint or action brought against such person individually and/or against any member with whom he has at any time been associated.

      Explanation

      The provision appears redundant in light of other provisions of the By-Laws.

      Retention of Jurisdiction

      Sec. 4. A person whose association with a member has been terminated and is no longer associated with any member of the Corporation shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the termination, but any such complaint shall be filed within one (1) year after the effective date of termination of registration pursuant to Section 3 above or, in the case of an unregistered person, within one (1) year after the date upon which such person ceased to be associated with the member.

      Explanation

      The new section incorporates the provisions of present Sections 4(b) and 5(b) which authorize the Association to file complaints against former registered persons of members within a year of the effective date of termination of registration. The provision has also been extended to apply to complaints filed against former associated persons who were never required to be registered because of the nature of their duties with a member. The provision also clarifies that a former associated person of a member continues to be subject to a disciplinary complaint whether the complaint is filed by the Association, another member or a member of the public.

      ARTICLE II V

      Affiliates

      Qualifications for Affiliation

      Sec. 1. Any association of brokers or dealers, registered with the Commission as an affiliated securities association under the provisions of Section 15A of the Act, may become an affiliate of the Corporation as hereinafter provided in this Article.

      Application for Admission as Affiliate

      Sec. 2. Application for admission as an affiliate shall be made to the Board of Governors in writing, in such form as the Board of Governors may prescribe, and shall contain a certified copy of the application to the Commission for registration as an affiliated securities association, a certified copy of the order of the Commission granting such registration, and such other reasonable information as the Board of Governors may require.

      Agreement of Affiliate

      Sec. 3. No applicant may become an affiliate of the Corporation unless it agrees:

      (a) That it will classify its members, for purposes of levying dues and assessments, on the same basis as that applicable to members of the Corporation and that the amount of dues or assessments payable by each of its members for any given period, based on such classification, shall not be lower than that payable by a member of the Corporation in the same class for the comparable period; provided, however, that if by reason of the special type of business conducted by members of an applicant, the foregoing agreement is impracticable of application to such applicant, such applicant shall agree that it will fix and levy dues or assessments payable by its members on some other basis to be agreed upon by the applicant and the Board of Governors of the Corporation, which shall be fair and equitable in view of the dues and assessments payable by members of the Corporation.
      (b) That it will pay the Corporation annually, in the form of dues or otherwise, for services to be rendered by the Corporation to the applicant, the amount to be agreed upon by the applicant and the Board of Governors of the Corporation annually in advance, and that should the applicant and the Corporation be unable to reach an agreement as to an appropriate amount, the applicant will consent to the submission of the controversy to the Commission for arbitration, and that if submitted, it will abide by the Commission's decision thereon;
      (c) That, after affiliation, it will at all times keep its charter, by laws, rules of fair practice and code of procedures so integrated with the corresponding Charter, By-Laws, Rules of Fair Practice and Code of Procedure of the Corporation as not to conflict in any way therewith; and
      (d) That the Board of Governors, in accordance with the provisions of Section 6 of this Article, may at any time suspend or cancel its affiliation with the Corporation.

      Conditions of Affiliation

      Sec. 4. No applicant may become an affiliate of the Corporation unless it appears to the Board of Governors:

      (a) That such applicant is so organized and is of such a character as to be able to comply with and carry out its purposes, and those of the Corporation and of Section 15A of the Act; and
      (b) That the charter, by-laws, rules of fair practice and code of procedure of the applicant are so integrated with the corresponding Charter, By-Laws, Rules of Fair Practice and Code of Procedure of the Corporation as not to conflict in any way therewith.

      Approval of Admission as an Affiliate

      Sec. 5. If it appears to the Board of Governors that the foregoing requirements of this Article are met by the applicant, it shall approve such applicant's admission as an affiliate; otherwise, after appropriate notice and opportunity for hearing, it shall disapprove such application in writing and shall set forth therein the specific grounds upon which such disapproval is based.

      Suspension or Cancellation of Affiliation

      Sec. 6. The Board of Governors may at any time suspend or cancel the affiliation of an affiliate with the Corporation if the Board of Governors finds that the affiliate has ceased to be of such a character as to be able to or has failed to carry out its purposes or the purposes of Section 15A of the Act, or has failed to carry out any of the conditions of affiliation. In any proceeding, however, under this Section to determine whether the affiliation of an affiliate should be suspended or canceled, specific charges shall be brought; such affiliate shall be notified of, and be given an opportunity to defend against, such charges; a record shall be kept; and any determination that the affiliation of an affiliate shall be suspended or canceled shall be in writing and shall set forth therein the specific grounds upon which such determination is based. Such suspension or expulsion shall take effect upon the 60th day after the filing with the Commission of notice thereof and a copy of the record of the proceedings before the Board of Governors, unless within thirty days after such filing such suspension or cancellation is disapproved by the Commission.

      Exclusion of Territory Covered by Affiliated Association

      Sec. 7. The Board of Governors shall, if it deems such action to be in the interest of efficient and economical administration and desirable in carrying out the purposes of Section 15A of the Act, recommend appropriate changes in the By-Laws to exclude the territory covered by an affiliate association from the geographical area covered by the Corporation.

      ARTICLE III VI

      Dues, Assessments and Other Charges

      Power of Board to Fix and Levy Assessments

      Sec. 1. The Board of Governors shall prepare an estimate of the funds necessary to defray reasonable expenses of administration in carrying on the work of the Corporation each fiscal year, and on the basis of such estimate, shall fix and levy the amount of admission fees, dues, assessments and other charges to be paid by members of the Corporation and issuers and any other persons using any facility or system which the Corporation operates or controls. which said fFees, dues, assessments and other charges shall be called and payable as determined by the Board of Governors from time to time; provided, however, that such admission fees, dues, assessments and other charges shall be equitably allocated among members. and issuers and any other persons using any facility or system which the Corporation operates or controls. The amount of admission fees, dues, assessments and other charges to be paid by the membership to the Corporation shall be set forth in Schedule A attached to and made a part of these By-laws. The Board of Governors may from time to time make such changes in Schedule A such fees, dues, assessments and other charges as it deems necessary or appropriate to assure equitable allocation of dues among members. Neither the adoption nor any No such change in Schedule A such fees, dues, assessments and other charges need be submitted to the membership for approval to become effective, as would otherwise be required by Article IX hereof, but any such proposed change shall be filed with the Commission in accordance with Section 15A of the Act, and unless it is disapproved by the Commission as therein provided, it and such fees, dues, assessments and other charges as adopted or amended shall become effective at such time as the Board of Governors may prescribe. In the event of termination of membership or the extension of any membership to a successor organization during any fiscal year for which an assessment has been levied and become payable, the Board of Governors may make such adjustment in the fees, dues, assessments or other charges payable by any such member or successor organization or organizations during such fiscal years as it deems fair and appropriate in the circumstances.

      Explanation

      The amendments conform to Section 15A(b)(5) of the 1934 Act, added by the Securities Acts Amendments of 1975, which authorizes the Association to impose charges upon, in addition to its members, issuers and persons using any facility or system operated or controlled by the Association. It is proposed that the content of existing Schedule A will be moved to a new portion of the Manual. The requirement that assessments and charges be filed with the Commission is being eliminated as unnecessary in the By-Laws since this simply restates the requirements of the Act.

      Reports of Members

      Sec. 2. (a) Each member, issuer or other person shall promptly furnish all information or reports requested by the Board of Governors Corporation in connection with the determination of the amount of admission fees, dues, assessments or other charges. payable by members during any given fiscal year.

      (b) Each member shall report promptly such information in connection with securities for which quotations are display on the NASDAQ System as the Board of Governors deems appropriate.

      Explanation

      The provision has been expanded to reflect NASDAQ issuer fees. Subsection (b) has been moved to new Article VII, Section 1(a)(6).

      Suspension or Cancellation of Membership for Non-Payment of Dues

      Sec. 3. The Corporation Board of Governors, after fifteen (15) days notice in writing, may suspend or cancel the membership of any member in arrears in the payment of any fees, dues, assessments or other charges or for failure to furnish any information or reports requested pursuant to Section 2 of this Article.

      Reinstatement of Membership

      Sec. 4. Any membership suspended or canceled under this Article may be reinstated by the Board of Governors Corporation upon such terms and conditions as it shall deem just; provided, however, that any applicant for reinstatement shall possess the qualifications required for membership in the Corporation.

      Membership list Showing Dues-Paying Classification

      Sec.5 As soon as practicable after the annual levy provided for in Section 1 of this Article, the Secretary of the Corporation shall prepare a list of the members of the Corporation which shall disclose the dues paying classification of each member and be available for inspection by any member of the Corporation or his duly authorized representative during business hours at the main office of the Corporation.

      Explanation

      The provision is being deleted because the Association has never had separate dues paying classes of membership.

      Article IV VII

      Organization and Administration

      Board of Governors

      Powers and Authority of the Board of Governors

      Sec. 21. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of thirty-one members, twenty-one to be elected by the members of the various district in accordance with the provisions of Sections 3(a) through (e), of this Article, nine to be elected by the Board of Governors in accordance with the provisions of Sections 3(f), (g) and (h) of this Article, and the President of the Corporation to be selected by the Board of Governors in accordance with the provisions of Article V Section 2.

      (a)
      (b) The Board of Governors shall be the governing body of the Corporation and, except as otherwise provided by these By-Laws, shall be vested with all powers necessary for the management and administration of the affairs of the Corporation and the promotion of the Corporation's welfare, objects and purposes. In the exercise of such powers, the Board of Governors may, shall have the authority to:
      (1) adopt for submission to the membership, as hereinafter provided, such By-Laws, Rules of Fair Practice and changes or additions thereto as it deems necessary or appropriate;
      (2) make such regulations, issue such orders, resolutions, interpretations, including interpretations of the Rules of Fair Practice, and directions, and make such decisions as it deems necessary or appropriate;
      (3) prescribe maximum penalties for violations of the provisions of these By-laws, the rules and regulations of the Corporation, for neglect or refusal to comply with orders, directions and decisions of the Board of Governors or of any District Committee or other Committee; or for violation of any rule or regulation adopted by any District Committee, as provided in Section 2 of Article VII hereof; and
      (4)
      (3) prescribe a code of arbitration procedure providing for the required or voluntary arbitration of controversies between members and between members and customers or others as it shall deem necessary or appropriate to the extent consistent with law., and neither the adoption nor any amendments to the code need be submitted to the membership for approval and the code and any amendments thereto shall become effective as the Board of Governors may prescribe;
      (4) establish rules and procedures to be followed by members in connection with the distribution of securities issued by members and affiliates thereof, and neither the adoption nor any amendments to such rules and procedures need be submitted to the membership for approval and such rules and procedures and any amendments thereto shall become effective as the Board of Governors may prescribe;
      (5) require all over-the-counter transactions in securities between members to be cleared and settled through the facilities of a clearing agency registered with the Commission pursuant to the Act, which clears and settles such over-the-counter transactions in securities;
      (c) The Board of Governors shall have the authority to establish rules and procedures to be followed by members in connection with the distribution of issues of securities in a member corporation and affiliates thereof as defined by the Board of Governors. Such rules and procedures shall be incorporated into Schedule E to be attached to and made a part of these By-laws. The Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of Schedule E from time to time without recourse to the membership for approval as would otherwise be required by Article IX hereof and Schedule E, as adopted, altered, amended, supplemented or modified shall become effective as the Board of Governors may prescribe unless disapproved by the Commission.
      (6) organize and operate automated systems to provide qualified subscribers with securities information and automated services. The systems may be organized and operated by a division or subsidiary company of the Corporation or by one or more independent firms under contract with the Corporation as the Board of Governors may deem necessary or appropriate. The Board of Governors may adopt rules for such automated systems, establish reasonable qualifications and classifications for members and other subscribers, provide qualification standards for securities included in such systems, require members to report promptly information in connection with securities included in such systems, and establish charges to be collected from subscribers and others. The Board of Governors shall have power to adopt, amend, supplement or modify such rules, qualifications, classifications, standards and charges from time to time without recourse to the membership for approval, and such rules, qualifications, classifications, standards and charges shall become effective as the Board of Governors may prescribe; and
      (7) engage in any activities or conduct necessary or appropriate to carry out the Corporation's purposes under its Certificate of Incorporation and the federal securities laws.
      (d)
      (b) In the event of the refusal, failure, neglect or inability of any member of the Board of Governors to discharge his duties, or for any cause affecting the best interests of the Corporation the sufficiency of which the Board of Governors shall be the sole judge, the Board shall have the power, by the affirmative vote of two-thirds of the Governors then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 7 6 of the this Article.

      Explanation

      Existing subsection (a) is being transferred to new Section 3 where it more appropriately belongs. The authority of the Board to establish automated systems in new subsection (a)(6) has been transferred from existing Article XVI and new subsection (a)(5) concerning use of clearing agencies has been transferred from existing Article XVII of the By-Laws. New subsection (a)(7) is intended to clarify that the Board has full power to engage in any lawful activities as prescribed by its Certificate of Incorporation and the provisions of the federal securities laws. The authority of the Board to prescribe penalties under existing Article IV, Section 2(b)(3) has been combined with similar authority in existing Section 3(c) of Article VII and transferred to new Article XIV in the interests of eliminating unnecessary duplication.

      Authority to Suspend for Failure to File Regulatory Reports

      Sec. 2(a) The Board of Governors shall have authority to cancel or suspend the membership of any member or suspend the association of any person associated with a member for failure to file, or to submit on request, any report, document or other information required to be filed with or requested by the Corporation. Before such cancellation or suspension shall become effective, the member or person associated with a member shall be given fifteen (15) days notice in writing thereof.

      (b) The Board of Governors is authorized to delegate the authority hereinabove granted to the President of the Corporation; provided, however, that the Executive Committee of the Board of Governors shall be notified in writing of any such contemplated action by the President.
      (c) Any suspension or cancellation under this section shall take effect following the fifteen (15) day notice period and shall not be subject to the requirements of the Code of Procedure.

      Explanation

      New subsection (a) makes clear that the Board has authority to suspend or cancel the membership of a firm and suspend the association of a person associated with a member for failure to file any report or other information required to be filed or for failure to honor a request for information. New subsections (b) and (c) parallel the existing procedure under Article IV, Section 5 of the Rules of Fair Practice respecting suspension for refusal by a member to permit inspection of its books and records.

      Representation of Districts on Board

      Composition of Board

      Sec. 3. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of thirty-one members, twenty-one to be elected by the members of the various districts in accordance with the provisions of subsections (b)(1) through (5) hereof, nine to be elected by the Board of Governors in accordance with the provisions of subsections (b)(6),(7) and (8) hereof, and the President of the Corporation to be selected by the Board of Governors in accordance with the provisions of Article X, Section 2 of the By-Laws.

      (b) The several districts shall be represented on the Board of Governors. The elected members of the Board of Governors shall be chosen as follows:
      (a)
      (1) Three members of the Board of Governors shall be elected from and by the members of the Corporation having places of business eligible to vote in District No. 2;
      (b)
      (2) Two members of the Board of Governors shall be elected from and by the members of the Corporation having places of business eligible to vote in District No. 8;
      (c)
      (3) Five members of the Board of Governors shall be elected from and by the members of the Corporation having places of business eligible to vote in District No. 12;
      (d)
      (4) Two members of the Board of Governors shall be elected from and by the members of the Corporation having places of business eligible to vote in District No. 13.;
      (e)
      (5) One member of the Board of Governors shall be elected from and by the members of the Corporation having places of business eligible to vote in each of the remaining districts not referred to in paragraphs (a), (b), (c) and (d) Subsections (1), (2), (3) and (4) of this Section.;
      (f)
      (6) One member of the Board of Governors shall be elected by the Board of Governors from among the principal underwriter members of investment company shares, and he shall be designated a Governor-at-Large.;
      (g)
      (7) One member of the Board of Governors shall be elected by the Board of Governors from among insurance company members or insurance company affiliated members of the Association Corporation and he shall be designated a Governor-at-Larger.;
      (h)
      (8) Seven members of the Board of Governors shall be elected by the Board of Governors and they shall be designated Governors-at-Large. Any Governor-at-Large initially filling a Governor-at-Large office shall be elected at such time as the Board of Governors in its discretion deems appropriate.;
      (9) At least one member of the Board of Governors shall be representative of issuers and not be associated with a member, broker or dealer and at least one member of the Board of Governors shall be representative of investors and not be associated with a member, broker or dealer;
      (i)
      (l0) The Board of Governors shall, from time to time, consider the fairness of the representation of the various districts on the Board of Governors, and whenever it finds any unfairness in such representation to exist, it shall recommend appropriate changes in these By-Laws to assure fair representation of all districts.

      Explanation

      In subsection (b)(7) the word "Association" is deleted and replaced with the word "Corporation" for purposes of consistency. The proposed new subsection (b)(9) implements Section 15A(b)(4) of the Act requiring that at least one member of the Board of Governors shall be representative of issuers and one of investors and shall not be affiliated with a broker/dealer. New subsection (a) has been transferred from existing Article IV, Section 2 (a) of the By-Laws.

      Term of Office of Governors

      Sec. 4. Each elected member of the Board of Governors, including the Governors-at-Large, except as otherwise herein provided, shall hold office for a term of three years, and until his successor is elected and qualified, or until his death, resignation or removal. The President of the Corporation shall serve as a member of the Board of Governors until his successor is selected and qualified, or until his death, resignation or removal.

      Succession to Office

      Sec. 5. The office of a retiring member of the Board of Governors elected under Section 3 subsections (a) (1) through (e) (5) of Section 3(b) of this Article shall be filled by the election of a member from the same district as that of the retiring member. The office of a retiring Governor-at-Large shall be filled by election by the Board of Governors as provided in Section 3 subsections (f), (g) (6), (7) and/or (h) (8) of Section 3(b) of this Article, as the case may be.

      Election of Board Members

      Sec. 6. The elected members of the Board of Governors shall be chosen as follows:

      Procedure for Nominations by Nominating Committees

      (a) Before June 1 of each year, the Secretary of the Corporation shall cause notice to be given to notify in writing the Chairman of the respective District Committees of the expiration of the term of office of any member of the Board of Governors elected under Section 3 subsections (a) (1) through (c) (5) of Section 3(b) of this Article which will expire during the next calendar year. The said Chairman shall thereupon notify the Nominating Committee elected for such District pursuant to the provisions of Section 223 of this Article IX of the By-Laws and such Nominating Committee shall proceed to nominate a candidate from such District for the office of each such member of the Board of Governors whose term is to expire. Nominating Committees in nominating candidates for the office of member of the Board of Governors shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the Board of Governors of all classes and types of members firms engaged in the investment banking and securities business;. nNo Nominating Committee shall nominate an incumbent member of the Board of Governors to succeed himself unless it first takes appropriate action (by a written ballot sent to the entire membership within the District) to ascertain that such nomination is acceptable to a majority of the members voting on such ballot in the District except where the incumbent member of the Board of Governors is serving pursuant to the provisions of Section 7(a) of this Article. Each candidate nominated by the Nominating Committee shall be certified to the District Committee by September 1 and within five (5) days thereafter a copy of such certification shall be sent by the District Committee to each member of the Corporation having a place of business eligible to vote in the district. Such candidate shall be designated the "regular candidate."

      Nomination of additional candidates

      (b) Ten per cent or more of the members of the Corporation having places of business in the district may nominate a An additional candidate or candidates may be nominated for the office of any member elected under Section 3 subsections (a) through (c) (1) through (5) of Section 3(b) of this Article, and whose term is to expire, if written notice thereof in writing of the nomination, signed by the required number of members at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Committee within thirty (30) days from the date of the notice of the action taken by the Nominating Committee. If no additional candidate or candidates are nominated within such thirty-day period, the candidate or candidates nominated by the Nominating Committee shall be considered duly elected, and the District Committee shall certify the election to the Board of Governors.

      Contested elections

      (c) If any additional candidate or candidates are nominated, as provided in paragraph subsection (b) of this Section, the District Committee shall forthwith cause the names of the regular candidate and of all other duly nominated candidates for each office to be placed upon a ballot, which shall be sent to all members of the Corporation having places of business eligible to vote in the district. Each member of the Corporation having its principal place of business in the district shall be entitled to one vote, and each member having one or more registered branch offices in the district shall be entitled to vote as provided in Section 10 8 of Article I III. The District Committee shall fix a date before which ballots must be returned to be counted. All ballots shall be opened and counted by such officer or employee of the District Committee Corporation as its the Chairman of the District Committee may designate and in the presence of a representative of each of the candidates if such representation is requested in writing by any candidate named on the ballot voted upon. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Board of Governors, and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this paragraph subsection voting shall be made by secret ballot, the procedure for which shall be prescribed by the Board of Governors.

      Explanation

      Subsection (a) would be amended to eliminate the requirement of an advance ballot to the membership before a District Nominating Committee may nominate an incumbent member of the Board to succeed himself in the case where the incumbent is filling a vacancy with an unexpired term of less than one year. The other changes are clarifying.

      Filling of Vacancies on Board

      Sec. 7. All vacancies in the Board of Governors other than those caused by the expiration of a Governor's term of office, shall be filled as follows:

      (a) If the unexpired term of a Governor elected under Sections 3 subsections (a) through (c) (b)(l) through (b)(5) of Section 3 of this Article, is for less than twelve months, such vacancy shall be filled by appointment by the District Committee of a representative of a member of the Corporation having a place of business eligible to vote in the same district.
      (b) If the unexpired term of a Governor, elected under Sections 3 subsections (a) through (c) (b)(l) through (b)(5) of Section 3 of this Article, is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 6 of this Article.
      (c) If the unexpired term is that of a Governor-at-Large, such vacancy shall be filled in accordance with the provisions of Section 3 subsections (b)(6), (b)(7), (f),(g) and/or (b)(8) (h) of Section 3 of this Article as the case may be.

      Meetings of Board

      Sec. 8. Meetings of the Board of Governors shall be held at such times and places, upon such notice, and in accordance with such procedure as the Board of Governors in its discretion may determine. A quorum of the Board of Governors shall consist of fourteen a majority of the members, and any action taken by a majority vote at any meeting at which a quorum is present, except as otherwise provided in these By-Laws, shall constitute the action of the Board. Meetings of the Board of Governors may be held by mail, telephone or telegraph, in which case any action taken by a majority vote of the Board of Governors shall constitute the action of the Board. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Board of Governors.

      Explanation

      The change in the quorum requirement to a majority of the Board members is intended to reflect the fact that the number of Board members has increased in recent years. The other changes are clarifying and to conform to existing practice.

      Offices of Corporation

      Sec. 9. The Corporation shall maintain such offices as the Board of Governors may from time to time deem necessary or appropriate.

      ARTICLE IV VIII

      District Committees

      Administrative Districts

      Sec. 1. For the purpose of administration, the several states of the United States are is hereby divided into districts, the boundaries of which are set forth in Schedule B, appended hereto shall be established by the Board of Governors. The Board of Governors may from time to time make such changes in Schedule B the boundaries as it deems necessary or appropriate. Neither the establishment nor any No such change in Schedule B the boundaries need be submitted to the membership for approval to become effective, as would otherwise be required by Article IX hereof, and the boundaries, as established or changed, but a copy of any such proposed change shall be filed with the Commission in accordance with Section 15A of the Act and unless it is disapproved by the Commission as therein provided, it shall become effective as at such time as the Board of Governors may prescribe.

      Explanation

      The changes are largely technical. It is also proposed that the content of Schedule B will be transferred to a new portion of the Manual.

      District Committees and District Business Conduct Committees

      Sec. 10 2. (a) For the purpose of effectuating a maximum degree of local administration of the affairs of the Corporation, each of the districts created under Section 1 of this Article shall elect a District Committee, as hereinafter provided. Each such District Committee shall determine the number of its members so to be elected, but in no event shall any District Committee consist of more than twelve members; provided, however, that the Board of Governors by resolution may increase, upon request, any such District Committee to a larger number.

      (b) In the event of the refusal, failure, neglect or inability of any member of any District Committee to discharge his duties, or for any cause affecting the best interests of the Corporation the sufficiency of which shall be decided by the District Committee, the District Committee shall have the power by the affirmative vote of two-thirds of the members of the District Committee then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 135 of this Article; provided, however, that any member of any District Committee who has had his position declared vacant in the manner provided herein shall have the right to appeal the determination of the District Committee to the Board of Governors within 30 days after the date he is notified of the action of the District Committee. The Board of Governors shall thereafter have the authority to affirm, reverse or modify the determination of the District Committee. Any such action by the Board shall be by the affirmative vote of at least two-thirds of the governors then in office.
      (c) The District Committees shall also serve as the District Business Conduct Committees for their respective districts.

      Explanation

      The language added by new subsection (c) reflects the fact that the persons who comprise the District Committees and the District Business Conduct Committees are the same persons. The change is made in conjunction with the elimination of existing Section 3 of Article VI of the By-Laws requiring that the District Committees go through the procedure of appointing District Business Conduct Committees.

      Term of Office of District Committeemen Members

      Sec. 11 3. Each regularly elected member of a District Committee shall hold office for a term of three (3) years, and until his successor is elected and qualified, or until his death, resignation or removal.

      Election of District Committeemen Members

      Sec. 12 4. Members of the District Committees shall be elected as follows:

      Procedure for Nominations by Nominating Committees

      (a) Before June 1 of each year, the Secretary of the Corporation shall cause notice to be given to notify in writing the Chairman of the each respective District Committees of the expiration of the term of office of any member of that District Committee which shall expire during the next calendar year. The said Chairman shall thereafter, but not later than July 1, advise the Nominating Committee, which shall proceed to nominate a candidate from their District for the office of each member of the District Committee whose term is to expire. Nominating Committees in nominating candidates for the office of member of the District Committee shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the District Committee of the various sections of the District and of all classes and types of firms members engaged in the investment banking or securities business within such District; and.N no Nominating Committee shall nominate an incumbent member of the District Committee to succeed himself unless it first takes appropriate action (by a written ballot of the entire membership within the District) to ascertain that such nomination is acceptable to a majority of the members in the District except where the incumbent member of the District Committee is serving pursuant to the provisions of Section 5(a) of this Article. Each candidate nominated by the Nominating Committee shall be certified to the District Committee, by September 1, and within five (5) days thereafter a copy of such certification shall be sent by the District Committee to each member of the Corporation having a place of business eligible to vote in the District. Such candidate shall be designated the "regular candidate."

      Nomination of additional candidates

      (b) Ten per cent or more of the members of the Corporation having places of business in the district may nominate a An additional candidate or candidates may be nominated for the office of any member whose term is to expire or for any new office created by the District Committee pursuant to Section 10 2 of this Article, if written notice thereof in writing of the nomination, signed by the required number of members at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Committee within thirty (30) days from the date of the notice of the action taken by the Nominating Committee. If no additional candidate or candidates are nominated within such thirty-day period, then the candidate or candidates nominated by the Nominating Committee shall be considered duly elected and the District Committee shall certify the election to the Board of Governors.

      Contested elections

      (c) If any additional candidate or candidates are nominated, as provided in paragraph (b) of this Section, the District Committee shall forthwith cause the names of the regular candidate for any contested office and of all other candidates for such office to be placed upon a ballot, which shall be sent to all members of the Corporation having places of business eligible to vote in the district. Each member of the Corporation having its principal place of business in the district shall be entitled to one vote, and each member having one or more registered branch offices in the district shall be entitled to vote as provided in Section 10 8 of Article I III. The District Committee shall fix the date before which ballots must be returned to be counted. All ballots shall be opened by such officer or employee of the District Committee Corporation as its the Chairman of the District Committee may designate, and in the presence of a representative of each of the candidates if such representation is requested in writing by any candidate voted upon named in the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the District Committee, and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this Section, voting shall be by secret mail ballot, the procedure for which shall be prescribed by the Board of Governors.

      Explanation

      Subsection (a) would be amended to eliminate the requirement for an advance ballot to the membership before a District Nominating Committee may nominate an incumbent member of the District Committee to succeed himself in the case where the incumbent is filling a vacancy with an unexpired term of less than one year. The other changes are clarifying.

      Filling of Vacancies on District Committees

      Sec. 13 5. All vacancies in any District Committee other than those caused by the expiration of a member's term of office, shall be filled as follows:

      (a) If the unexpired term of the member causing the vacancy is for less than six twelve months, such vacancy shall be filled by appointment by the remaining members of the District Committee of some member of the Corporation having a place of business in the same district.
      (b) If the unexpired term of the member causing the vacancy is for six twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 124 of this Article.

      Explanation

      The change in the authority of the District Committees to fill vacancies by appointment is extended to cases where the unexpired term is for less than one year in order to be consistent with the existing authority of the Board to fill vacancies under Article IV, Section 7 of the present By-Laws.

      Meetings of District Committees

      Sec. 14 6. Meetings of each District Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each District Committee in its discretion may determine. A quorum of a District Committee shall consist of a majority of its members, and any action taken by a majority at any meeting at which a quorum is present, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a District Committee may be taken by mail, telephonic or telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the District Committee.

      Explanation

      The change incorporates desirable practice with respect to confirmation of telephone votes.

      Election of Chairmen and Other District Officers

      Sec. 15 7. Following the annual election of members of the District Committees pursuant to Section 124 of this Article, each District Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws, and shall prescribe their powers and duties.

      Advisory Council

      Sec. 16 8. (a) The Chairman Chairmen of the several District Committees, elected pursuant to Section 157 of this Article, shall constitute an Advisory Council to the Board of Governors;.

      (b) Such Advisory Council shall be advised of and entitled to attend such meetings of the Board of Governors as the Board may designate and the Board shall designate at least one such meeting annually, . but such The Advisory Council shall not there be entitled to vote at meetings of the Board of Governors.

      Explanation

      The changes are clarifying.

      Expenses of District Committees

      Sec. 17 9. Funds to meet the regular expenses of each District Committee, elected pursuant to Section 124 of this Article, shall be provided by the Board of Governors out of funds collected by it under the provisions of Article III VI hereof, and all such expenses shall be subject to the approval of the Board of Governors.

      District Committees Agencies of Corporation

      Sec. 18 10. The District Committees shall act as the agencies of the Corporation for the administration of its affairs in their respective districts and as such shall have such powers and duties as are provided in the By-Laws or from time to time delegated by the Board of Governors.

      Certain Functions of District Committees

      Sec. 19 11. The District Committees shall endeavor, in such manner or through such media as they deem appropriate, to educate members and other brokers and dealers in their respective districts as to the objects, purposes and work of the Corporation in order to foster their interest and friendly cooperation. District Committees shall consider the practical operation of all provisions of the Certificate of Incorporation, By-laws, Rules of Fair Practice and Code of Procedure of the Corporation rules of the Corporation and shall report to the Secretary any which the District Committees believe do not work satisfactorily in their respective districts.

      Explanation

      The changes are primarily to incorporate the new definition of "rules of the Corporation" appearing in Article I, Section (o) hereof.

      ARTICLE IV IX

      Nominating Committees

      Composition of Nominating Committees

      Sec. 20 1. (a) Each of the Districts created under Section 1 of this Article VIII of the By-Laws shall elect a Nominating Committee, as provided in Section 22 3 hereafter: of this Article. Each such Nominating Committee shall consist of five members; provided, however, that the Board of Governors by resolution may increase any such Nominating Committee to a larger number. Members of the Nominating Committee in each District shall be members of the Corporation having places of business in the respective District, but shall not be members of the District Committee. All Nominating Committees shall include a majority of persons who have previously served on the District Committee and/or on the Board of Governors and shall, insofar as practicable, include at least one former member of the Board of Governors.

      (b) In the event of the refusal, failure, neglect or inability of any member of any Nominating Committee to discharge his duties, or for any cause aeffecting the best interest of the Corporation, the sufficiency of which shall be decided by the Nominating Committee, the Nominating committee shall have the power, by the affirmative vote of 3/5 three-fifths of the members of the Nominating Committee then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 223 of this Article; provided, however, that any member of any Nominating Committee who has had his position declared vacant in the manner provided herein shall have the right to submit a written appeal in respect to the determination of the Nominating Committee to the Board of Governors within 30 thirty (30) days after the date he is notified in writing of the action of the Nominating Committee. The Board of Governors shall thereafter have the authority to affirm, reverse or modify the determination of the Nominating Committee. A vote of 2/3's two-thirds of the Governors then in office shall be required to reverse or modify the action of the Nominating Committee.

      Explanation

      The changes are proposed for purposes of clarity and to codify a resolution of the Board of Governors adopted at the September 1982 meeting.

      Term of Office of Nominating Committeemen Members

      Sec. 21 2. Each regularly elected member of a Nominating Committee shall hold office for a term of one (1) calendar year, and until his successor is elected and qualified, or until his death, resignation or removal.

      Election of Nominating Committees

      Sec. 22 3. Members of the Nominating Committee shall be elected as follows: Procedures for Nominations by Nominating Committees

      (a) Before June 1 of each year the Secretary of the Corporation shall cause notice to be given to notify in writing the Chairmen of the respective District Committees as to those members of the District Nominating Committee who were elected for the present year and as to the offices of that Committee that are to be filled by the next election. The said Chairman shall thereupon notify the Nominating Committee elected for such District and the Nominating Committee shall proceed to nominate a candidate from such District for the offices of that Committee which are to be filled by the next election. The Nominating Committee in nominating candidates for the office of member of the Nominating Committee shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the Nominating Committee of the various sections of the District and of all classes and types of members firms engaged in the investment banking or securities business within such District and shall assure that the composition of the dominating Committee meets the standards contained in Section l(a) of this Article; and.nNo Nominating Committee shall nominate more than two incumbent members of the Nominating Committee to succeed themselves. No member of any Nominating Committee may serve more than two consecutive terms. Each candidate nominated by the Nominating Committee shall be certified to the District Committee, by September 1, and within five (5) days thereafter a copy of such certification shall be sent by the District Committee to each member of the Corporation having a place of business eligible to vote in the District. Such candidate shall be designated the "regular candidate."

      Nomination of Additional Candidates

      (b) Ten percent or more of the members of the Corporation having places of business in the District may nominate an aAdditional candidate candidates may be nominated for the office of any member whose term is to expire or for any new office created by the Board of Governors pursuant to Section 201(a) of this Article, provided that election of such candidates would be consistent with the requirements of Section 1(a) of this Article, if written notice thereof in writing of the nomination, signed by the required number of at least ten percent of the members, of the Corporation eligible to vote in the district, is filed with the District Committee within thirty (30) days from the date of the notice to the members of the action taken by the Nominating Committee. If no additional candidate or candidates are nominated within such thirty-day period, then the candidate or candidates nominated by the Nominating Committee shall be considered duly elected and the District Committee shall certify the election to the Board of Governors.

      Contested Elections

      (c) If any additional candidate or candidates are nominated, as provided in paragraph (b) of this section, the District Committee shall forthwith cause the names of the regular candidate and all other candidates for any contested office and of all other candidates for such to be placed upon a ballot, which shall be sent to all members of the Corporation having places of business eligible to vote in the District. Each member of the Corporation having its principal place of business in the District shall be entitled to one vote, and each member having one or more registered branch offices in the District shall be entitled to vote as provided in Section 10 8 of Article I III. The District Committee shall fix the date before which ballots must be returned to be counted. All ballots shall be opened by such officer or employee of the District Committee Corporation as its the Chairman of the District Committee may designate, and in the presence of a representative of each of the candidates, if such representation is requested in writing by any candidate voted upon named in the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Nominating Committee and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this Section, voting shall be by secret mail ballot, the procedure for which shall be prescribed by the Board of Governors.

      Explanation

      The proposed changes are for clarity and to reflect the composition of Nominating Committees under new language added to Section l(a) above.

      Filling of Vacancies for Nominating Committees

      Sec. 23 4. All vacancies in any Nominating Committee other than those caused by the expiration of a member's term of office shall be filled as follows:

      (a) If the unexpired term of the member causing the vacancy is for less than six months, such vacancy shall be filled by appointment by the remaining members of the Nominating Committee of a some representative of a member of the Corporation having a place of business eligible to vote in the same District.
      (b) If the unexpired term of the member causing the vacancy is for six months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 223 of this Article.

      Meetings of Nominating Committees

      Sec. 24 5. Meetings of each Nominating Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each Nominating Committee in its discretion may determine. A quorum of a Nominating Committee shall consist of a majority of its members, and any action taken by a majority of the entire Committee at any meeting at which a quorum is present, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a Nominating Committee may be taken by mail, telephonic or telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Nominating Committee.

      Explanation

      The changes make clear that any final action by a Nominating Committee must be taken by a majority of the Committee members.

      Election of Chairman and Other Nominating Committee Officers

      Sec. 25 6. Following the annual election of members of the Nominating Committees pursuant to Section 22 3 of this Article, each Nominating Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws.

      ARTICLE V X

      Officers and Employees

      Election of Officers of the Board

      Sec. 1. As soon as practicable, following the annual election of members to the Board of Governors, the Board of Governors shall elect from its members a Chairman, one or more Vice Chairmen, and such other officers as it shall deem necessary or advisable, to serve until the next annual election and or until their successors are chosen and qualify. The officers so elected shall have such powers and duties as may be determined from time to time by the Board of Governors. The Board of Governors, by affirmative vote of fourteen a majority of its members, may remove any such officer at any time.

      Officers of the Corporation

      Sec. 2. The Board of Governors shall select a chief executive officer, to be designated President of the Corporation, who as such chief executive officer of the Association, shall be responsible for the management and administration of its affairs and shall be the official representative of the Association Corporation in all public matters and shall, during his incumbancy, be a member of the Board of Governors and ex officio a member of any committee authorized by the Board of Governors. The Board may provide for other executive or administrative officers as it shall deem necessary or advisable, including, but not limited to, Executive Vice-President, Senior Vice-President, Vice-President, General Counsel, Secretary and Treasurer of the Corporation. All such officers shall have such titles, such powers and duties and shall be entitled to such compensation as shall be determined from time to time by the Board of Governors. The terms of office of such officers shall be at the pleasure of the Board of Governors, which by affirmative vote of fourteen a majority of the members, may remove any such officer at any time.

      Explanation

      The changes expand the class of authorized officers and permit removal of any officer by a majority vote of the Board. The fact that the President shall serve as a member of the Board has been transferred to new Article VII, Section 3(a) of the By-Laws.

      Absence of President

      Sec. 3. In the case of the absence or inability to act of the President of the Corporation, or in case of a vacancy in such office, the Board of Governors may appoint its Chairman or such other person as it may designate to act as such officer pro tern, who shall assume all the functions and discharge all the duties of the President.

      Employment of Counsel

      Sec. 4. The Board of Governors may retain or authorize the employment of counsel, with such powers, titles, duties and authority as it shall deem necessary or advisable.

      Administrative Staff

      Sec. 5. The Board of Governors may employ or authorize the employment and prescribe the powers and duties of such an administrative staff as it deems necessary or advisable. The employment and compensation of such administrative staff of the Corporation shall be at the pleasure of the Board of Governors.

      Restrictions on Compensation of Board and Committee Members

      Sec. 6. No member of the Board of Governors, (except the that member who is designated President of the Corporation as provided in Section 2 of this Article, or the President pro tem), as provided in Section 3 of this Article, or no member of any District Committee or of and no member of any other Committee, shall be entitled to receive any compensation from the Corporation for any work done in connection with his duties as a member of the Board of Governors, any District Committee or any other committee., but However, all members of the Board of Governors, of the Advisory Council, of the District Committees, and of all other Committees appointed either by the Board of Governors or by any District Committee, such persons shall be entitled to reimbursement for reasonable expenses incurred in connection with the business of the Corporation.

      Explanation

      Grammatical changes and a proposed revision which would permit payment by the Association for the performance of services unrelated to Board or committee activity such as acting as outside counsel to the Association.

      ARTICLE VI XI

      Committees

      National Standing Committees

      Sec. 1. The Board of Governors may appoint such standing and other committees as it deems necessary or desirable, and it shall fix their powers, duties and terms of office.

      District Standing Committees

      Sec. 2. Each District Committee, in the exercise of its powers and performance of its duties as provided in the By-Laws, may, except as otherwise herein provided, appoint such standing or other committees or subcommittees as it deems necessary or desirable, and shall fix their powers, duties and terms of office.

      District and local Business Conduct Committees

      Sec. 3. Each District Committee annually shall appoint from among its members or members of the Corporation having places of business within the District, a District Business Conduct Committee of not more than twelve members, at least one member of which shall be a member of the District Committee; provided, however, that the Board of Governors by resolution may increase, upon request any such District Business Conduct Committee to a larger number. Each such committee shall function as the Business Conduct Committee of the Corporation in such District in accordance with the By-laws, Rules of Fair Practice, and Code of Procedure for Handling Trade Practice Complaints. Each District Committee may also appoint such local Business Conduct Committees as it deems necessary or appropriate and, wherever possible, at least one member of each such local Business Conduct Committee shall be a member of the District Business Conduct Committee. Each such local Business Conduct Committee shall function as a subcommittee of the District Business Conduct Committee in accordance with the By-laws, the Rules of Fair Practice, and the Code of Procedure for Handling Trade Practice Complaints.

      Explanation

      The language concerning appointment of District Business Conduct Committee is being deleted because as a practical matter the members of the District Committees and District Business Conduct Committees are the same persons. The elimination of language concerning local Business Conduct Committees is done because no such committees have been constituted.

      Removal of Committeemen Member

      Sec. 4. 3. Any member of any committee appointed pursuant to Sections 1, 2 or 31 or 2 of this Article may be removed from office, after appropriate notice from the District Committee appointing such member, or from the Board of Governors, if it is the appointing authority, for refusal, failure, neglect or inability to discharge his duties, or for any cause the sufficiency of which shall be decided by the District Committee or the Board of Governors, whichever is the appointing authority.

      Executive Committee

      Sec. 5 4. By resolution passed not less than annually by a majority of the entire Board of Governors, there may be created an Executive Committee, consisting of five or more members of the Board, which Committee shall have and may exercise such of the powers of the Board in the management of the business and affairs of the Corporation in the interim between meetings of the Board of Governors as may be delegated to it from time to time by the Board. Each The Executive Committee created hereunder shall keep minutes of its meetings and shall report its proceedings to the Board of Governors at each the next meeting thereof.

      Explanation

      The amendment would require the Board to adopt a resolution appointing an Executive Committee at least once a year. The other changes are clarifying.

      ARTICLE VII XII

      Rules of Fair Practice

      Authority to Adopt Rules and Amendments Submission to Members Voting on Rules and Amendments

      Sec.1. To promote and enforce just and equitable principles of trade and business, to maintain high standards of commercial honor and integrity among members of the Corporation, to prevent fraudulent and manipulative acts and practices, to provide safeguards against unreasonable profits or unreasonable rates of commissions or other charges, to protect investors and the public interest, to collaborate with governmental and other agencies in the promotion of fair practices and the elimination of fraud, and in general to carry out the purposes of the Corporation and of Section 15A of the Act, the Board of Governors is hereby authorized to adopt for submission to the members of the Corporation such rRules of fFair pPractice for the members and persons associated with members, and such amendments thereto as it may, from time to time, deem necessary or appropriate. The Board of Governors, upon the adoption of any such rRules of fFair pPractice or amendments thereto, shall forthwith cause copies thereof to be sent to each member of the Corporation to be voted upon. If any such rRules of fFair pPractice or amendments thereto are approved by a majority of the members voting, within thirty (30) days after the date of submission to the membership, and are net disapproved approved by the Commission as provided in Section 15A of the Act, they shall become effective rRules of fFair pPractice of the Corporation as of such date as the Board of Governors may prescribe. In any case, however, where a particular provision of a Rule of Fair Practice provides that membership approval is not required, the Board may amend that provision without submission to the membership for a vote as hereinbefore required. In addition, where the Board of Governors by resolution finds an emergency to exist, such rRules of fFair pPractice or amendments thereto, if adopted by a two-thirds vote of the Board of Governors and not disapproved by the Commission pursuant to Section 15A of the Act, may become effective as of such time as the Board of Governors may prescribe, without submission to the members for a vote as hereinbefore required. An emergency which is found by the Board of Governors to exist shall continue until the Board of Governors by resolution terminates such but in no event shall an emergency continue for a period in excess of six months. The Board of Governors shall have the authority, however, after, in each instance, reassessing the facts and circumstances which gave rise to the emergency, by resolution to declare, if it deems such appropriate under the facts and circumstances then existing, the emergency to continue to exist for successive six-month periods as required. All emergency rules adopted during the period of the emergency shall cease to be effective upon the termination of the emergency as hereinbefore provided. The Board of Governors is hereby authorized, subject to the provisions of the By-Laws and of Section 15A of the Act, to administer, enforce, suspend, or cancel any fRules of fFair pPractice adopted hereunder.

      Explanation

      The amendments clarify that the Board is authorized to adopt appendixes and supplements to certain Rules of Fair Practice without a requirement for membership approval.

      Supplemental local Rules and Amendments

      Sec.2. Subject to the approval of the Board of Governors and the provisions of Section 15A of the Act, each District Committee may adopt such supplemental local rules of fair practice and such amendments thereto, as it may from time to time deem necessary or appropriate; provided, however, that such rules of fair practice and amendments thereto shall be designed to effect the same purposes and shall be subject to the same provisions with respect to approval by members having places of business within the district as are provided in Section 1 of this Article, with respect to rules of fair practice applicable to all members. The Board of Governors, subject to the provisions of Section 15A of the Act, may at any time suspend or cancel any such local rules of fair practice or any portion of any such local rules so adopted and approved. Any District Committee, subject to the approval of the Board of Governors and the provisions of Section 15A of the Act, may at any time suspend or cancel any local rules of fair practice or any portion of any such local rules adopted by it pursuant to this Section.

      Explanation

      The section has been in the By-Laws since the inception of the Association when the future structure of the Association was unknown. No local rules of fair practice have ever been adopted and the section appears unnecessary.

      ARTICLE VII XIII

      Disciplinary Proceedings

      Sec. 1 The Board of Governors shall have authority to establish procedures relating to disciplinary proceedings involving members and their associated persons, and neither the adoption nor any amendment to such procedures need be submitted to the membership for approval and such procedures and any amendments thereto shall become effective as the Board of Governors may prescribe.

      Sec. 4 2. Except as otherwise permitted under these By-Laws or the Act, Iin any disciplinary proceeding under this Article before the Corporation, any member or person associated with a member shall be given the opportunity to have a hearing, at which hearing any such person he shall be entitled to be heard in person and/or by counsel. Such persons may present any relevant material. In any such proceeding against a member or against a person associated with a member to determine whether the member and/or the person associated with a member shall be disciplined:

      (a) specific charges shall be brought;
      (b) such member or person associated with a member shall be notified of and be given an opportunity to defend against such charges;
      (c) a record shall be kept; and
      (d) any determination shall include (A) a statement setting forth:
      (1) any act or practice, in which such member or person associated with a member may be found to have engaged or which such member or person associated with a member may be found to have omitted;
      (B) a statement setting forth the
      (2) the specific rule or rules of the Corporation, regulation or statutory provision of which any such act or practice, or omission to act, is deemed to be in violation; (C) a statement whether the act or practice prohibited by such rule or rules, or the omission or any act required hereby, are deemed to constitute conduct inconsistent with just and equitable principles of trade, and
      (D) a statement setting forth
      (3) the basis upon which any findings are made; and
      (4) the penalty imposed.

      Explanation

      The proposed changes are to conform to the statutory changes in Section 15A(h)(l) of the Act by which the Association is no longer required to state whether a respondent's conduct was inconsistent with just and equitable principles of trade and to reflect the Association's authority to impose disciplinary sanctions based upon violations of the federal securities laws and rules and regulations thereunder.

      ARTICLE VII XIV

      Powers of the Board to Prescribe Sanctions

      Sec. 3 The Board of Governors, in the administration and enforcement of any rules of fair practice adopted under Sections 1 and 2 of this Article, shall have power: is hereby authorized:

      (a) To make and issue interpretations of all such rules of fair practice;
      (b) To prescribe such procedure for the presentation, hearing and adjudication of complaints between or against members of the Corporation and/or persons associated with members as it deems necessary or appropriate;
      (c)T to prescribe maximum appropriate sanctions penalties, applicable to members, to include including censure, fine, suspension or expulsion from membership, or suspension or barring from being associated with all members, limitation of activities, functions and operations of a member, or any other fitting penalty sanction, and to prescribe maximum penalties appropriate sanctions applicable to persons associated with members, to include including censure, fine, suspension or revocation of registration, if any, or suspension or barring a person associated with a member from being associated with all members, limitation of activities, functions and operations of a person associated with a member, or any other fitting penalty, sanction, for:
      (a) breach by a member or a person associated with a member of any convenant with the Corporation or its members;
      (b) for violation by a member or a person associated with a member of any of the terms, conditions, covenants, and provisions of these By laws, or of the Rules of Fair Practice the rules of the Corporation, the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board;
      (c) failure by a member or person associated with a member to submit a dispute for arbitration under the Code of Arbitration Procedure ("Code") as required by the Code, or to fail to appear or to produce any document in their possession or control as directed pursuant to provisions of the Code, or to fail to honor an award of arbitrators properly rendered pursuant to the Code where a timely motion has not been made to vacate or modify such award pursuant to applicable law;
      (d) refusal by a member or person associated with a member to abide by an official ruling of the Board of Governors or Uniform Practice Committee acting within its appropriate authority, with respect to any transaction which is subject to the Uniform Practice Code; or
      (e) for failure by a member or a person associated with a member to adhere to any ruling, order, direction or decision of, or to pay any penalty, fine or costs, imposed by, the Board of Governors or any District Business Conduct Committee,. or for violation of any local rule of fair practice adopted by any District Committee, provided, however, that no member or person associated with a member shall be disciplined unless and until the requirements of Section 4 of this Article are met.

      Explanation

      The changes primarily conform to Section 15A(b)(7) of the 1934 Act, as amended by the Securities Acts Amendments of 1975, which authorizes the Association to impose disciplinary sanctions consisting of limitation of activities, functions and operations of members and associated persons. The changes also reflect statutory changes authorizing the Association to impose disciplinary sanctions based upon violations of the federal securities laws and rules and regulations thereunder. In addition, new subsections (c) and (d) codify what are presently resolutions of the Board of Governors. The changes also clarify that the Association may impose sanctions for violations of all applicable requirements rather than just for violations of the Rules of Fair Practice.

      Grounds for Disqualification to Participate in Determination of Complaint

      Sec. 5 No member of the Board of Governors or of any District Business Conduct Committee or of any local Business Conduct Committee shall in any manner, directly or indirectly, participate in the determination of any complaint affecting his interest or the interests of any person in whom he is directly or indirectly interested. In any case where such an interest is involved, the particular member shall disqualify himself, or shall be disqualified by the Chairman of any such Board or Committee.

      Explanation

      The provision has been transferred to the proposed Code of Procedure which has previously been circulated to the membership for comment and is presently on file with the Commission.

      ARTICLE XIV XV

      Uniform Practice Code

      Authority to Adopt Code

      Sec.1. The Board of Governors is hereby authorized to adopt a Uniform Practice Code and amendments, interpretations and explanations thereto, designed to make uniform, where practicable, custom, practice, usage, and trading technique in the investment banking and securities business with respect to such matters as trade terms, deliveries, payments, dividends, rights, interest, reclamations, exchange of confirmations, stamp taxes, claims, assignments, powers of substitution, computation of interest and basis prices, due-bills, transfer fees, "when, as and if issued" trading, "when, as and if distributed" trading, marking to the market and close-out procedure, all to the end that the transaction of day-to-day business by members may be simplified and facilitated, that business disputes and misunderstandings, which arise from uncertainty and lack of uniformity in such matters, may be eliminated, and that the mechanisms of a free and open market may be improved and impediments thereto removed. Such code, and any amendments thereto, if duly adopted by the Board of Governors and not disapproved by the Commission pursuant to Section 15A of the Act, Neither the adoption nor any change in the Uniform Practice Code need be submitted to the membership for approval and the Code as adopted or amended shall become effective as at such time as the Board of Governors may prescribe.

      Explanation

      The proposed changes are primarily technical and clarifying.

      Administration of Code

      Sec. 2 The administration of any uUniform pPractice cCode, or any amendment thereto, adopted by the Board of Governors pursuant to Section 1 of this Article, shall be vested in the Board of Governors, and the Board is hereby granted such powers as are reasonably necessary to achieve its effective operation. In the exercise of such powers, the Board may issue explanations and interpretations, and may act as arbitrator or conciliator in controversies arising under or in connection with said code. The Board may also issue and make binding rulings with respect to the applicability of the provisions of this cCode to situations in which there is no substantial disagreement as to the facts involved. The Board may delegate to appropriate Ccommittees such of its powers, hereunder as it deems necessary and appropriate to achieve effective administration and operation of the cCode.

      Explanation

      The change is to reflect the fact that the Board does not act as an arbitrator of disputes under the Code and render awards which are intended to be judicially enforceable. Under the Association's rules the arbitration function rests with arbitration panels which are appointed and act pursuant to the Association's Code of Arbitration Procedure.

      Transactions Subject To Code

      Sec. 3. All over-the-counter transactions in securities by members, except transactions in securities which are exempted under Section 3(a)(12) of the Act, or are municipal securities as defined in Section 3(a)(29) of the Act, are subject to the provisions of the Uniform Practice Code and to the provisions of Section 2 of this Article unless exempted therefrom by the terms of the Code.

      Explanation

      The express exclusion from the Code for transactions in municipal securities is intended to avoid confusion by making clear that after the Securities Acts Amendments of 1975 such transactions continue to be exempt from the Code because they are now subject to the rulemaking authority of the Municipal Securities Rulemaking Board which has its own uniform practice rules.

      Authority to Adopt District Code

      Scope — Effective Date of Code and Amendments

      Sec. 4. Each District Committee, after submission to the membership in its district for comment and criticism, and subject to the approval of the Board of Governors, is hereby authorized to adopt a district uniform practice code and amendments thereto, provided, however, that any such district uniform practice code and any amendment thereto shall be designed to effect the same general purposes as are provided in Section 1 of this Article with respect to any uniform practice code adopted by the Board of Governors, and shall not conflict in any way therewith. Any such district uniform practice code, and any amendment thereto, if duly adopted by the District Committee, approved by the Board of Governors and not disapproved by the Commission pursuant to Section 15A of the Act, shall become effective as at such time as the District Committee may prescribe. The Board of Governors, subject to the provisions of Section 15A of the Act, may at any time declare ineffective any such district uniform practice code or any portion thereof.

      Explanation

      The section has been in the By-Laws since the inception of the Association when the future structure of the Association was unknown. No local uniform practice codes have ever been adopted and the provision appears unnecessary.

      Administration of District Code

      Sec. 5. The administration of any district uniform practice code or any amendment thereto, adopted pursuant to Section 4 of this Article, shall be vested in the District Committee adopting same, and such committee is hereby granted such powers as are reasonably necessary to achieve effective operation. In the exercise of such powers, a District Committee may issue explanations and interpretations, and may act as arbitrator or conciliator in controversies arising under or in connection with such district uniform practice code. A District Committee may also issue binding rulings with respect to the applicability of the provisions of such district uniform practice code to situations in which there is no substantial disagreement as to the facts involved. A District Committee may delegate to appropriate Committees such of its powers hereunder as it deems necessary and appropriate to achieve effective administration and operation of such code.

      Explanation

      See comment above.

      Transactions Subject to District Code

      Sec. 6. All over the counter transactions in securities between members in any district wherein a district uniform practice code is duly adopted pursuant to Section 4 of this Article, except transactions in securities exempted under Section 3(a)(12) of the Act, shall be subject to the pertinent provisions of any such district uniform practice code and to the provisions of Section 5 of this Article.

      Explanation

      See comment above.

      ARTICLE VIII XVI

      Limitation of Powers

      Prohibitions

      Sec. 1. Under no circumstances shall the Board of Governors or any officer, employee or member of the Corporation have power to:

      (a) To make any donation or contribution from the funds of the Corporation or to commit the Corporation for the payment of any donations or contributions for political, or charitable purposes; or
      (b) To use the name or facilities of the Corporation in aid of any political party or candidate for any public office.

      Explanation

      The changes are grammatical.

      Use of Name of Corporation by Members

      Sec. 2. No member shall use the name of the Corporation on letterheads, circulars or other advertising matter or literature except to the extent that may be authorized by the Board of Governors.

      Explanation

      The change would allow the Board of Governors greater flexibility in determining how the Association's name may be used by members.

      Unauthorized Expenditures

      Sec. 3. No officer, employee, member of the Board of Governors or of any District or other Committee, shall have any power to incur or contract any liability on behalf of the Corporation not authorized by the Board of Governors. The Board may delegate to the President of the Association Corporation, or his delegate, such authority as it deems necessary to contract on behalf of the Association Corporation or to satisfy unanticipated liabilities during the period between Board meetings.

      Explanation

      The changes are for clarity and consistency with language in other By-Law provisions.

      ARTICLE IX XVII

      Amendments to By-Laws

      Procedure for Adopting Additions, Alterations or Amendments to By-Laws

      Any member of the Board of Governors by resolution, any District Committee by resolution, or any twenty-five members of the Corporation by petition signed by such members, may propose additions, alterations, or amendments to these By-Laws. Every proposed addition, alteration or amendment shall be presented in writing to the Board of Governors and a record shall be kept thereof. The Board of Governors shall first pass on all proposed additions, alterations or amendments to these By-Laws, and may adopt any proposed addition, alteration or amendment to these By-Laws by affirmative vote of a majority of the members of the Board of Governors then in office. The Board of Governors, upon adoption of any such addition, alteration or amendment to these By-Laws, except as otherwise provided in these By-Laws Section 2 of Article I, Section 1 of Article III, Section 1 of Article IV and Section 3 of Article XVI hereof, shall forthwith cause a copy thereof to be sent to and voted upon by each member of the Corporation to be voted upon. If such addition, alteration or amendment to these By-Laws is approved by a majority of the members voting within thirty (30) days after the date of submission to the membership, and is not disapproved approved by the Commission as provided in Section 15A of the Act, it shall become effective as of such date as the Board of Governors may prescribe.

      Explanation

      The changes are to eliminate unnecessary language and to conform to the existing Commission review authority prescribed under Section 19(b) of the 1934 Act, added by the Securities Acts Amendments of 1975.

      ARTICLE X XVIII

      Corporate Seal

      The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile thereof to be imposed or affixed or reproduced or otherwise.

      ARTICLE XI XIX

      Checks

      All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Governors may from time to time designate.

      ARTICLE XII

      Fiscal Year

      The fiscal year shall begin the first day of October in each year.

      Explanation

      The provision appears unnecessary.

      ARTICLE XIII XX

      Annual Financial Statement

      As soon as practicable after the end of each fiscal year, the Board of Governors shall send to each member of the Corporation a reasonably itemized statement of receipts and expenditures of the Corporation for such preceding fiscal year.

      Article XVI

      Automated Quotations System (NASDAQ)

      Definitions

      Sec. 1. The term "automated quotations system" means an electronic data processing system interconnected by wire or other means with terminals which make readily available to appproved subscribers, and to the general public at specific times and in appropriate summary form, the quotes of registered market makers in authorized securities.

      The term "registered market maker" means a member which is willing and able to serve as such in connection with a specified authorized security and which meets the qualifications for such set forth in Schedule "D" to these By-laws.

      The term "authorized security" means a security which meets the qualifications for such set forth in Schedule "D" to these By-laws.

      Board Authorized to Organize and Operate

      Sec. 2. The Board of Governors is hereby authorized to organize and operate automated quotations systems to provide qualified subscribers with quotations on authorized securities traded on the "over the counter" market. The systems may be organized and operated by a division or subsidiary company of the Corporation or by one or more independent firms under contract with the Corporation, as the Board from time to time may deem necessary or appropriate.

      Rules, Charges, Classifications, Qualifications, Requirements, Standards and Aggrievement Procedure

      Sec. 3. Taking into account relevant matters including the type of business done, securities traded, and service rendered, the Board of Governors may publish operating rules for the automated quotations systems, establish reasonable qualifications and classifications for registered market makers and other subscribers, provide standards for authorized securities, and publish the charges to be collected from subscribers by the operator of automated quotations systems. Services shall be provided to members on a nondiscriminatory basis and at reasonable and uniform rates designed to encourage maximum utilization by all members, with due allowance for the geographic remoteness of members of their branch offices receiving service outside of the 48 contiguous states.

      Members and other persons aggrieved by action taken or authorized by the Board of Governors in applying such qualifications, criteria, standards, and charges, or ensuing out of the operation of the automated quotations systems shall, upon filing a complaint with the Board, be entitled to a hearing thereon (if requested), decision and review by the Board in accordance with procedures specified by the Board.

      Such rules, charges, classifications, qualifications, registration requirements, standards, exceptions thereto, and aggrievement procedure shall be incorporated in Schedule D attached to and made a part of these By laws.

      Within the limitations provided herein, the Board of Governors shall have power to adopt, alter, amend, supplement or modify the provisions of Schedule D from time to time without recourse to the membership for approval, as would otherwise be required by Article IX hereof, and Schedule D, as adopted, altered, amended, supplemented or modified, shall, become effective as the Board of Governors may prescribe unless disaproved by the Commission.

      Lists to be Kept

      Sec. 4. The Board of Governors shall keep a currently accurate and complete roll (a) of registered market makers together with a list of the authorized securities as to which each may enter quotes on the automated quotations systems, and (b) of authorized securities.

      Explanation

      The entire Article has been reworded in a shorter form and transferred to new Section l(a)(6) of Article VII of the By-Laws. Schedule "D" will be transferred to a new portion of the Manual. In addition, the aggrievement and other procedural provisions concerning the NASDAQ System now appearing in Schedule D have been moved to the proposed Code of Procedure which previously was sent to the membership for comment and is presently on file with the Commission for approval.

      ARTICLE XVII

      Clearing and Settling of Transactions of Members Transactions to Be Cleared Through Facilities of Registered Clearing Agencies

      Sec. 1. All over the counter transactions in securities between members shall be cleared and settled through the facilities of a clearing agency registered with the Commission pursuant to the Securities Exchange Act of 1934 which clears and settles such over the counter transactions in securities, unless,

      (a) the security involved in the transaction shall not have been qualified for clearance by the Board of Directors of the registered clearing agency under the standards estabished by the rules of the registered clearing agency,
      (b) one or more of the members involved in the transaction shall not have been qualified as a clearing member by the Board of Directors of the registered clearing agency pursuant to standards established by the rules of the registered clearing agency,
      (c) the rules of the registered clearing agency provide that the transaction shall not be cleared through the facilities of the registered clearing agency, or
      (d) the members involved in the transaction otherwise mutually agree.

      Explanation

      The Article has been reworded and transferred to new Section 1 (a)(5) of Article VII of the By-Laws.

      ARTICLE XVIII

      Reporting Transactions on Consolidated Tape Authorization

      Under the provisions of Rule 17a–15 adopted by the Securities and Exchange Commission under Section 17 of the Securities Exchange Act of 1934 the Corporation is required to file with the Securities and Exchange Commission a written plan meeting specified standards concerning the collection and dissemination by the Corporation of information relating to over the counter transactions executed by its members in securities registered or admitted to unlisted trading privileges on an exchange. The Board of Governors is hereby authorized to adopt rules and procedures in order to carry out the Corporation's responsibilities and duties under Rule 17a–15 and implement the plan filed pursuant to the rule as it may be amended from time to time. Such rules and procedures may include, among other things:

      (1) The manner of collecting and reporting last sale information;
      (2) The standards and methods to insure the promptness, accuracy and completeness of reporting and similar matters; and
      (3) The procedures to provide that last sale information will not be reported in a fraudulent or manipulative manner.

      The Board of Governors shall also have authority to use any automated quotations system established under the provisions of Article XVI of the By-laws in any manner it deems necessary and appropriate to further the implementation and operation of any composite transaction reporting system established pursuant to Rule 17a–15. The Board of Governors shall also have authority to impose reasonable and equitable fees and changes in connection with the collection and dissemination of last sale information.

      Such rules, procedures and charges shall be incorporated into Schedule G attached to and made a part of these By laws. The Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of Schedule G from time to time without recourse to the membership for approval as would otherwise be required by Article IX hereof, and Schedule G as adopted, altered, amended, supplemented or modified shall become effective as the Board of Governors shall prescribe unless disapproved by the Commission.

      Explanation

      The provisions are proposed to be moved to the Rules of Fair Practice because they prescribe a standard of member conduct.

    • 83-54 16 Securities Mandated to Join NMS on November 8, 1983

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

      An additional 16 securities will join the 570 already trading in the NASDAQ National Market System on Tuesday, November 8, 1983. (The 570 include the 50 issues scheduled to join NMS on October 18.) These securities have met the NMS mandatory designation requirements, which include an average trading volume of 600,000 shares a month for six months and a bid price of $10 on the last five business days in September. As required by SEC Rule HAa2-l, all issues meeting the mandatory designation criteria at the end of each quarter automatically are added to the National Market System within 45 days of the quarter ending date.

      The 16 securities joining NMS on Tuesday, November 8 are:

      SYMBOL

      COMPANY

      LOCATION

      CASH

      Comdata Network, Inc.

      Nashville, TN

      CVRS

      Converse Inc.

      Wilmington, MA

      CSMO

      Cosmo Communications Corporation

      Miami, FL

      DA.ZY

      Daisy Systems Corporation

      Sunnyvale, CA

      FMED

      Foster Medical Corporation

      Dedham, MA

      GHOM

      General Homes Corporation

      Houston, TX

      GIBG

      Gibson Greetings, Inc.

      Cincinnati, OH

      ICOM

      Instacom, Inc.

      Dallas, TX

      MACK

      Mack Trucks, Inc.

      Allentown, PA

      JFRY

      Martin (Jeffrey), Inc.

      Union, NJ

      MLIS

      Micropolis Corporation

      Chatsworth, CA

      PATK

      Patrick Industries, Inc.

      Elkhart, IN

      PSFS

      Philadelphia Saving Fund Society (The)

      Philadelphia, PA

      SMLB

      Smith Laboratories, Inc.

      Northbrook, IL

      TRKA

      Trak Auto Corporation

      Landover, MD

      UNGR

      Ungermann-Bass, Inc.

      Santa Clara, CA

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

      Sincerely,

      Gordon S. Macklin
      President

    • 83-53 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      Following is a list of NASD Notices to Members issued during the third quarter of 1983. Requests for copies of any notice should be accompanied by a self-addressed label and may be directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D. C. 20006.

      Notice Number

      Date

      Topic

      83-31

      July 7, 1983

      Adoption of Revised and Simplified Regulation T of the Federal Reserve Board

      83-32

      July 12, 1983

      50 Securities Scheduled to Join NMS on July 19

      83-33

      July 12, 1983

      Compliance With State Registration Requirements

      83-34

      July 12, 1983

      Western Pacific Securities, Inc. (SIPC Trustee Appointed)

      83-35

      July 12, 1983

      Adoption of Section 9 of Article III, Schedule A of the Association's By-Laws; Fee on Cleared Transactions

      83-36

      July 20, 1983

      Subscriptions to Monthly Statistical Reports of NASDAQ Issues

      83-37

      July 18, 1983

      44 Securities Scheduled to Join NMS on August 9

      83-38

      July 21, 1983

      SEC Adopts Amendments to Rule 10b-10; Confirmation Rule

      83-39

      July 21, 1983

      Final Reporting Regulations Under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA")

      83-40

      July 25, 1983

      Quarterly Checklist of Notices to Members

      83-41

      July 25, 1983

      SEC Staff Issues No-Action Letter Providing Temporary Relief From Certain Provisions of Rules 15c3-l and 15c3-3 Dealing With Municipal Securities

      83-42

      August 5, 1983

      100 Securities Scheduled to Join NMS in August and September

      83-43

      August 17, 1983

      Rescission of Venture Capital Policy and Adoption of New Requirement

      83-44

      August 17, 1983

      Change of Policy on Overallotment Options

      83-45

      August 17, 1983

      Adoption of Amendments to Schedule E on Self-Underwriting

      83-46

      August 17, 1983

      Labor Day: Trade Date-Settlement Date Schedule

      83-47

      August 18, 1983

      Proposed New Rule of Fair Practice to Regulate the Activities of Members Experiencing Financial and/or Operational Difficulties

      83-48

      August 22, 1983

      Proposed New Rule of Fair Practice Relating to Permission For Members to Carry Customer Accounts

      83-49

      September 7, 1983

      Request for Comments on Proposed Amendment to Appendix F Concerning Associate General Partners of Direct Participation Programs

      83-50

      September 29, 1983

      50 Securities Scheduled to Join NMS on October 18

      83-51

      September 30, 1983

      Columbus Day: Trade Date-Settlement Date Schedule

      * * * *

    • 83-52 Group Surety Bond Buying Program

      TO: All NASD Members and Other Interested Persons

      It is a pleasure to announce the commencement of an NASD sponsored program to provide members with the surety bonds required by many States under their securities laws.

      The program will provide a quick and easy way for members to acquire surety bonds at reasonable premium rates. Bonds will be issued automatically with no underwriting on receipt of the required forms and premium payment.

      It will not be necessary for members to provide financial statements to the underwriter or to post collateral at inception. The program is available in all States that have surety bond requirements.

      The program will be underwritten by the American Insurance Company, a member of the Fireman's Fund Group of Insurance Companies. It will be administered by Marsh & McLennan, Inc., using the facilities it created for the Group Fidelity Bond Buying Program.

      Full details about the program are contained in the attached material.

      Please direct all inquiries about the program to Marsh & McLennan, Inc., 5130 MacArthur Boulevard, N.W., Washington, D.C. 20016; telephone number: (202) 364-1300.

      Questions about State surety bond requirements should be directed to the appropriate State Securities Commissioners Office.

      Sincerely,

      Gordon S. Macklin
      President

      Enclosures

    • 83-51 Columbus Day: Trade Date—Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      FROM: All Operations Personnel

      "Regular-Way" transactions made on Monday, October 10, Columbus Day and the days immediately preceding this day will be subject to the settlement date schedule listed below. The purpose of this schedule is to provide uniformity since, while the NASDAQ System and other securities markets will be open on these days, many banking institutions will be closed.

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

      Trade Date

      Settlement Date

      Regulation T Date*

      October 3

      October 11

      October 12

      4

      12

      13

      5

      13

      14

      6

      14

      17

      7

      17

      18

      10

      17

      19

      October 10 will not be considered a business day for determining the day for settlement of a trade, the day on which stock shall be quoted ex-dividend or ex-rights, or in computing interest on bond trades. Marks to the market, reclamations, and close-outs should not be made on that day.

      For purposes of Regulation T of the Federal Reserve Board, October 10 will be counted as a business day for receiving customers' payments.

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

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212)839-6255.

      * * *


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 83-50 50 Securities Scheduled to Join NMS on October 18

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

      An additional 50 issues will voluntarily join the NASDAQ National Market System on October 18, bringing the total number of NMS securities to 571. These 50 issues meet the SEC's criteria for voluntary designation, which include average monthly trading volume of 100,000 shares and a minimum bid price of $5.

      The 50 issues scheduled to join NMS on Tuesday, October 18, are:

      AIAI

      AIA Industries, Inc.

      Trevose, PA

      ALGO

      Algorex Corporation

      Syosset, NY

      AQAS

      American Quasar Petroleum Company

      Fort Worth, TX

      AXXX

      Artel Communications Corporation

      Worcester, MA

      AZIN

      Aztech International, Ltd.

      Albuquerque, NM

      BASEA

      Base Ten Systems, Inc. (Class A)

      Trenton, NJ

      BRAE

      Brae Corporation

      San Francisco, CA

      CHOM

      Chomerics, Inc.

      Woburn, MA

      COLL

      Collins Industries, Inc.

      Hutchinson, KS

      CUSE

      Computer Usage Company, Inc.

      San Francisco, CA

      DBIO

      Damon Biotech, Inc.

      Needham Heights, MA

      DIAG

      Diagnostic Data, Inc.

      Mountain View, CA

      DMBK

      Dominion Bankshares Corporation

      Roanoke, VA

      GEEN

      Genetic Engineering, Inc.

      Denver, CO

      HSYS

      Hale Systems, Inc.

      Palo Alto, CA

      HELX

      Helix Technology Corporation

      Waltham, MA

      HILXZ

      Helionetics, Inc. (Wts)

      Irvine, CA

      INFN

      Infotron Systems Corporation

      Cherry Hill, NJ

      INET

      Institutional Networks Corporation

      New York, NY

      JAME

      Jamesbury Corporation

      Worcester, MA

      JOIN

      Jones Intercable, Inc.

      Englewood, CO

      JOINA

      Jones Intercable, Inc. (Class A)

      Englewood, CO

      JOAMS

      Johnstown American Companies

      Atlanta, GA

      JSTN

      Justin Industries, Inc.

      Fort Worth, TX

      KLIC

      Kulicke and Soffa Industries, Inc.

      Horsham, PA

      MGNE

      Magnetic Controls Company

      Minneapolis, MN

      MDTA

      Megadata Corporation

      Bohemia, NY

      MNST

      Minstar, Inc.

      Minneapolis, MN

      MABS

      Monoclonal Antibodies, Inc.

      Mountain View, CA

      MOSE

      Moseley, Hallgarten, Estabrook & Weeden Holding Corporation

      Boston, MA

      OHSC

      Oak Hill Sportswear Corp.

      New York, NY

      ORCO

      Optical Radiation Corporation

      Azusa, CA

      ORBN

      Orbanco Financial Services Corporation

      Portland, OR

      PERC

      Perceptronics, Inc.

      Woodland Hills, CA

      PCCM

      Price Communications Corp.

      New York, NY

      PROG

      Progressive Corporation (The)

      Mayfield Village, OH

      RYAN

      Ryan's Family Steak Houses, Inc.

      Greenville, SC

      SISB

      SIS Corporation

      Westlake, OH

      SCIXF

      Scitex Corporation Ltd.

      Herzlia B, Israel

      STJM

      St. Jude Medical, Inc.

      St. Paul, MN

      SEQP

      Supreme Equipment & Systems Corp.

      Brooklyn, NY

      STRX

      Syntrex Incorporated

      Eatontown, NJ

      TVIV

      Taco Viva, Inc.

      Pompano Beach, FL

      TCAT

      TCA Cable TV, Inc.

      Tyler, TX

      USVC

      United Services Life Insurance Company

      Washington, D.C.

      UVBK

      United Virginia Bankshares, Incorporated

      Richmond, VA

      UHCO

      Universal Holding Corp.

      Garden City, NY

      WSGC

      Williams-Sonoma Inc.

      Emeryville, CA

      WOOD

      Woodward & Lothrop Inc.

      Washington, D.C.

      WRTC

      Writer Corporation (The)

      Englewood, CO

      Any questions regarding the notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Leon Bastien at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 83-49 Request for Comments on Proposed Amendment to Appendix F Concerning Associate General Partners of Direct Participation Programs

      TO: All NASD Members and Other Interested Persons

      Attention: Direct Participation Program Department

      The Association is requesting comments on a proposed amendment to Appendix F to Article III, Section 34 of the Rules of Fair Practice ("Appendix F"). Appendix F relates primarily to public offerings of direct participation programs, most of which are limited partnerships. The amendment would clarify the status under Appendix F of certain broker/dealer affiliates when those affiliates receive ongoing compensation as an associate or co-general partner of a public program distributed by the broker/dealer.

      The background and terms of the proposed amendment are discussed below.

      Background

      The Direct Participation Programs Committee ("Committee") of the Association's Board of Governors has become concerned about an evolving practice whereby subsidiaries or other affiliates of member firms seek to obtain continuing compensation in the form of general partner compensation under circumstances in which that compensation is apparently received as a reward for the distribution of a public direct participation program.

      Historically, most direct participation programs were sponsored and managed by organizations with an operating history in the area of program activity, e.g. real estate, oil and gas, and without a direct affiliation with traditional broker/dealers. While the Association has never prohibited members from creating or acquiring bona fide operating sponsors, most programs continue to be managed by traditional, unaffiliated sponsors. Recently, however, an increasing number of programs have been structured with affiliates of traditional broker/dealers acting as associate or co-general partners with programs' operating general partners. These associate general partners typically receive substantial amounts of compensation during the life of the program. The Committee is concerned that the associate general partner structure is being used in some cases to enable broker/dealers to receive otherwise impermissible forms and amounts of underwriting compensation disguised as general partner compensation. Typical arrangements and their status under existing rules are described below.

      Fact Pattern

      In a typical arrangement, the broker/dealer which will distribute a new program's units forms a subsidiary (or sister subsidiary under a common holding company) which joins the traditional operating general partner as an associate general partner. The associate general partner can contribute minimal capital because the operating general partner's capital is used to satisfy state securities and tax law requirements. The associate general partner can negotiate to receive any proportion of general partner compensation, however, and that compensation typically is a percentage of program revenues and dissolution proceeds, payable throughout the life of the program.

      The associate general partner may not be required to perform any functions in return to its compensation or may perform functions such as investor relations work which are usually performed by broker/dealers. The associate general partner is often able to negotiate both its compensation and functions from a strong position because of its affiliation with the broker/dealer which raises proceeds for the program.

      Application of Present Rule

      Pursuant to Section 5(b)(l) of Appendix F, the Association presumes underwriting compensation to be unfair and unreasonable if

      the total amount of all items of compensation from whatever source payable to underwriters, broker/dealers, or affiliates thereof ... in connection with ... the distribution of the public offering ...

      exceeds 10 percent of offering proceeds (plus 0.5 percent for reimbursed due diligence expenses). (Emphasis added.) Section 5(b)(5) of Appendix F contains a presumption against

      compensation of an indeterminate nature ... paid to members or persons associated with members for sales of program units, or for services o£ any kind rendered in connection with ... the distribution....*

      Fees, such as associate general partner compensation fees, which take the form of participation in program revenues and dissolution profits virtually always are subject to both Subsection 5(b)(1) and (5) if the fees are received "in connection with" the sales effort for a public offering. General partner compensation received for bona fide functions and not "in connection with" a public offering is generally not regulated by the Association.

      The critical question under Appendix F in each case of an associate general partner arrangement, therefore, is whether the compensation is received in connection with the public offering. Section 5(d) of Appendix F contains four factors which determine whether compensation is connected to an offering. That section states that

      [t]he determination of whether compensation paid to underwriters, broker/dealers, or affiliates thereof is in connection with or related to a public offering ... 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 in the organization, management and direction of the enterprise in which the sponsor is involved. Emphasis added.

      The NASD Corporate Financing Department ("Department") applies these factors in deciding whether a connection exists.

      The last two factors — risk and the role in management — usually receive the greatest attention when there is a question as to whether a connection exists between an associate general partner arrangement and the sales effort for the offering. The risk factor can be viewed as being two separate factors. First is the risk that any consideration paid or contribution to the program will be lost if the program does poorly. The amounts committed in these capacities are usually small, minimizing risks and suggesting that these are compensation arrangements.

      The second aspect of risk in associate general partner structures is the risk of assuming unlimited liability as a general partner, and, therefore, the risk to the capital of the associate general partner. In reviewing offerings, the Department seeks to determine whether associate general partners are bearing full general partner liability. In some cases, agreements have been found indemnifying the associate general partner against any loss. In other cases, there may be full general partner liability but it is borne by a newly-created corporation which has been capitalized with minimal funds.

      The final factor — role in management — is viewed as a means of determining whether an associate general partner is performing a bona fide function in return for the compensation to be received or whether the compensation is further payment for the sales effort. As a result of the difficulty in weighing this factor, the Department seeks substantial detail on the anticipated role of a proposed associate general partner, the relevant expertise and experience of its employees, and the need which it is going to fill. Partnership and other agreements are studied to determine whether the associate general partner is legally obligated to perform any service or provide any specific number of man-hours or any facilities. In some cases, personnel of the associate general partners are permitted but not required to attend meetings of the operating general partner's decision-making body. In other eases, such persons are required to attend meetings or provide services if requested by the operating general partner, but there is no indication that the general partner will ever need or want to call on the associate general partner.

      After weighing all four factors, the Department concludes whether there is a connection between the proposed compensation of the associate general partner and the distribution of the public offering. If a connection is found, the compensation to the associate general partner is treated as underwriting compensation and, if continuing in nature, is not permitted under Section 5(b)(5) of Appendix F.

      On the basis of a review of the applicability of the present provisions of Appendix F to evolving practices, the Committee concluded that it is necessary to amend the language of Appendix F to clarify the applicability of its provisions to these evolving practices.

      Proposed Amendment

      The Association is therefore publishing for comment a proposed amendment to Section 5(d) of Appendix F which would clarify those instances in which associate general partners will be presumed to be bearing sufficient risk as to satisfy that criteria in determining whether a connection exists between a proposed associate general partner arrangement and a public offering. The conclusion to clarify instances in which the risk test would be satisfied reflects the conclusion of the Committee that the other three tests contained in Section 5(d) are not usually in issue or are sufficiently subjective as to be difficult to refine further. Under the proposed amendment, however, those criteria would be retained and would need to be satisfied for each offering.

      Under the proposed amendment, an associate general partner would be presumed to be bearing investment risk when it meets four criteria. First, the associate general partner must be bearing full general partner liability. Secondly, the associate general partner cannot be indemnified against general partner liability by any party.

      Thirdly, the associate general partner must have assets equal to at least five percent of the net proceeds of the proposed public offering or $1.0 million, whichever is less. This is intended to assure that a substantial amount of assets are placed at risk and in turn to assure that the associate general partner is performing a bona fide function.

      Lastly, the associate general partner must have agreed to retain the above-referenced assets under its control until the dissolution of the program. This is intended to assure that the associate general partner will continue to bear substantial risk throughout the life of the program.

      Although not specified in the language of the proposed amendment, it is the Committee's intent that the capital required for associate general partners reflect the capitalization of the associate general partner irrespective of the number of programs for which it acts in that capacity.

      Request for Comments

      The Association's Board of Governors is given the authority to adopt changes to Appendix F without a vote of the membership by Article III, Section 34 of the Rules of Fair Practice. The Board contemplates adopting the proposed amendments pursuant to that authority.

      The Association is requesting comments on the proposed amendments prior to final Board consideration. All comments received during this comment period will be reviewed by the Direct Participation Programs Committee and changes to the amendments will be recommended as deemed appropriate. The Board of Governors will then consider the amendments again. If the Board approves the amendments, they must be filed with, and approved by, the Securities and Exchange Commission before they become effective.

      All written comments should be addressed to the following:

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

      All comments must be received by October 7, 1983. All comments received will be made available for public inspection.

      Any questions regarding this notice should be directed to Dennis C. Hensley or Harry E. Tutwiler of the Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      Proposed Amendment to Appendix F to Article III, Section 34 of the Rules of Fair Practice*

      Section 5(d)

      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 section, 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; provided however, that an affiliate of a member which acts or proposes to act as a general partner, associate general partner, or other sponsor of a program shall be presumed to be bearing investment risk if the affiliate is subject to liability as a general partner; is not indemnified against such liability; has assets equal to at least five percent of the net proceeds of the proposed public offering or $1.0 million, whichever is less; and has agreed that said assets will be retained under the affiliate's control until dissolution of the program. 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 the Interpretation of the Board of Governors — Review of Corporate Financing shall govern to the extent applicable.


      * The NASD Board of Governors recently approved an amendment to Section 5(b)(5) which will permit continuing compensation to be received under certain circumstances. Among other things, such compensation will only be permitted if cash distribution is less than that normally permitted and the continuing compensation is limited in percentage amount. That amendment must be approved by the Securities and Exchange Commission before it becomes effective. If the amendment were effective, associate general partner compensation received in connection with the offering would be permitted only if all of the amendment's restrictions were satisfied.

      * New material is underlined.


    • 83-48 Proposed New Rule of Fair Practice Relating To Permission For Members to Carry Customer Accounts

      TO: All NASD Members

      The Association's Board of Governors is publishing for comment a proposed new Rule of Fair Practice relating to permission for members to carry customer accounts. Interested persons are advised that comments must be received by the Association by September 22, 1983, in order to receive consideration. After the comment period has closed, the proposal will again be reviewed by the Board of Governors. Thereafter, the proposed rule will be submitted to the membership for vote. Upon completion of such, if approved, the proposal will be submitted to the Securities and Exchange Commission for approval.

      BACKGROUND OF PROPOSED RULE

      In January 1982, the Board of Governors authorized the Capital and Margin Committee (the "Committee") to proceed with the development of a rule, or rules, which would provide the Association with additional regulatory tools to evaluate the financial and operational condition of members. One recommendation which emerged from the Committee's deliberations is the proposed new Rule of Fair Practice regarding permission for members to carry customer accounts.

      The proposed rule requires that an existing member obtain the Association's prior approval before it begins carrying customer accounts. At the present time, a member is not required to obtain such approval. As long as a member has the minimum amount of net capital prescribed by SEC Rule 15c3-l, (the "Net Capital Rule") and an appropriately qualified financial and operations principal, it may begin carrying customer accounts at any time without prior notification. In the Committee's opinion, these are very minimal requirements given the significance a change of operations from non-clearing to clearing presents with respect to a member's financial and operational viability. Such a change also presents potential risks to customers, particularly in times of heavy volume. The current requirements do not provide a means whereby the Association can evaluate, in advance, a firm's capacity, in terms of facilities and trained personnel, to process and clear its own transactions; nor do they provide the means to evaluate management's understanding of and ability to comply with applicable rules designed to safeguard customers' property.

      In light of the foregoing considerations, the Committee determined that it is necessary for the Association to ensure that a member has the proper mechanisms in place prior to carrying customer accounts. The proposed rule is designed to provide the Association with that mechanism. Upon its review of this matter, the Board of Governors determined that this proposal should be circulated to the membership for comment.

      DISCUSSION OF THE PROPOSAL

      The proposed rule prohibits a member from carrying customer accounts, i.e., holding customer funds and/or securities, without having obtained the written approval of the Association prior to commencing this activity. The request for such approval must be submitted to the appropriate District Director of the District in which the main office of the member is located. The member is required to describe in detail the reasons why it has decided to carry customer accounts and the procedures it has established to supervise this activity. In turn, the proposed rule requires the District Director to advise the member, in writing, of a decision within five business days of the receipt of the member's request.

      The proposed rule specifies several conditions which will be considered by a District Director in making a determination as to the approval or disapproval of a proposed arrangement. Such considerations include, but are not limited to, the following:

      • the type of business conducted by the member;
      • the training, experience and qualifications of the member and its associated persons;
      • the member's procedures for safeguarding customer funds and securities;
      • the member's overall financial and operational condition; and,
      • any other relevant information under the circumstances.

      If permission to carry customer accounts is denied by the District Director, the rule provides that a member may appeal to the District Committee and thereafter to the Board of Governors.

      * * *

      All comments pertaining to the proposal should be in writing and sent to S. William Broka, Secretary, National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006, and be received on or before September 22, 1983, in order to receive consideration. Questions concerning the proposal may be directed to James M. Cangiano, Assistant Director, Department of Policy Research, at (202) 728-8273.

      Sincerely,

      Frank J. Wilson
      Executive Vice President Legal and Compliance

      Enclosure

      PROPOSED RULE OF FAIR PRACTICE

      Article III, Section ____

      a. No member shall commence carrying customer accounts, i.e., the holding of customers' funds and/or securities, without first having obtained the written approval of the Association. Application for such approval may be made by filing a request to carry customer accounts with the Director of the District within whose jurisdiction the member's principal place of business is located. Such notice shall be in writing and shall detail the reasons which precipitated the member's decision to carry customer accounts and the methods the member has established to manage such activity. Within five (5) business days of the receipt of the application, the District Director shall inform the member, in writing, of his decision to approve or deny the request.
      b. In making the determination as to whether to approve the application required in subsection (a) above, the District Director shall take into account relevant matters including the type of business done and securities sold, the training, experience and qualifications of persons associated with the member, the member's procedures for the safeguarding of customer funds and securities, its overall financial and operational condition and any other information deemed relevant in the particular circumstances.
      c. Whenever permission to carry customer accounts is denied by the District Director, the member may petition the District Committee for review of such decision and thereafter the Board of Governors. Review before the District Committee and/or the Board of Governors shall be on the record unless the District Committee and/or Board of Governors determines that a personal appearance is necessary.

    • 83-47 Proposed New Rule of Fair Practice to Regulate the Activities of Members Experiencing Financial and/or Operational Difficulties

      I M P O R T A N T

      MAIL VOTE

      Officers * Partners * Proprietors

      TO: All NASD Members

      Last Voting Date Is September 19, 1983

      Enclosed herewith is a proposed new rule under Article III of the Rules of Fair Practice. Proposed Section 38 was approved by the Association's Board of Governors and now requires the approval of the membership. If approved, it must then be filed with, and approved by, the Securities and Exchange Commission. As discussed below, the proposed rule was published for member comment on August 19, 1982 (Notice to Members 82-45).

      BACKGROUND AND EXPLANATION OF THE PROPOSED RULE

      The proposed rule provides the Association with authority to prescribe certain remedial courses of action which a member must follow during periods when the member is experiencing financial or operational difficulty. The rule is intended to address such problems in a timely fashion to protect the member, the investing public and other members.

      As proposed, the rule addresses two levels of possible financial and/or operational difficulties. First, it restricts a member from expanding its business whenever certain early warning financial criteria relating to minimum net capital, ratio requirements and/or scheduled capital withdrawals are exceeded. Secondly, it covers a deteriorating situation in which another set of warning criteria with lower tolerances are exceeded. In such situations, the proposed rule requires a member to reduce or eliminate certain facets of its business.

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

      Additionally, the procedures permit a District Surveillance Committee to issue additional or supplemental notices to members whenever the Committee finds that the problems which gave rise to previous limitations are continuing or becoming more pronounced. Appropriate hearing procedures are also provided in such cases. Another provision specifies that action taken by the Association pursuant to the proposed rule would not preclude a District Committee from taking formal complaint action for violation of the Rules of Fair Practice.

      Finally, the proposed rule is accompanied by an Explanation of the Board of Governors. The Explanation includes examples of conditions that might cause the Association to determine that a member is in or approaching financial and/or operational difficulties. Also included are examples of the types of remedial actions that might be selected to correct the problems. This list of possible problem situations and possible remedial actions is not intended to be, and is not, all inclusive. Rather, the list and the Explanation in general is intended to facilitate members' understanding of how the proposed rule would be administered and implemented by citing hypothetical problems and corrective actions as examples.

      COMMENTS RECEIVED

      The Association received 15 comment letters on the proposed rule. Each letter was reviewed by the Association's Capital and Margin Committee and the full Board of Governors. The general concerns expressed in these letters and the Board's decisions regarding such are described below. General headings are used since similar points are made in more than one letter.

      Applicability of the Rule — In response to the comments, the Board agreed that as to dual members (i.e., firms which are members of two or more self-regulatory organizations), the proposed rule would be limited solely to those members which have been designated to the NASD by the Securities and Exchange Commission pursuant to Rule 17d-l (the regulatory allocation rule for financial responsibility).

      The question of whether the rule should include introducing firms as well as firms carrying customer accounts was also addressed by the Board. It noted that certain introducing firms, particularly those engaged in market making activities or those which hold positions for their own accounts, could potentially pose some risk and exposure as a result of such activities. However, it observed that those firms which introduced strictly agency business, the so-called "$5,000" firms under the net capital rule, posed no such problems. The Committee therefore concluded that the rule should only be applicable to firms required to maintain $25,000 in capital in accordance with the applicable provisions of the net capital rule irrespective of whether such firms carry customer accounts.

      Rule Was Too Vague And/Or Placed Too Much Power With the Association's Staff — A number of commentators stated that because of the vagueness of Subsections (b)(2) and (c)(2) of the proposed rule, too much discretion would be left with the Association staff in interpreting these provisions.

      It should be emphasized that under the rule, the staff's function is simply to obtain the necessary facts and make recommendations to the District Surveillance Committee. It has no decision-making authority as to implementation of the rule in any case. It would be the responsibility of the District Surveillance Committee, not the staff, to determine whether the provisions of the rule should be implemented. The proposed rule authorizes the District Surveillance Committee, not the staff, to prescribe the limitations by which the member would be obligated to abide.

      Additionally, the procedure adopted by the Board makes available to a member ample opportunity for appeal of the District Surveillance Committee's decision to the Board of Governors and thereafter to the Securities and Exchange Commission.

      The Committee therefore concluded that no changes should be made to the proposed rule based on these comments.

      The Proposed Rule Imposes More Restrictive Criteria Than Rule 17a-11, the SEC's "Early Warning" Rule — Several commentators noted that SEC Rule 17a-11 already provided an "early warning" measure with respect to broker-dealers and that the early warning threshold was set at 120%, significantly less than the 150% prescribed in the proposed rule. In response, the Board noted that the purpose of the proposed rule differs from the Commission's rule in that the proposed rule is designed to have a remedial effect on a member. In other words, the rule's approach is to put the Association on notice well before a firm reaches the more "critical" stage of 17a-11 reporting in order that corrective measures may be taken early enough to ensure the continuing viability of the firm. In the Board's opinion, sufficient lead time is necessary in order to address a firm's difficulties before they become irreversible.

      The Board therefore determined that the early warning financial criteria as contained in the proposed rule were appropriate and should be retained.

      Examples Cited in the "Explanation of the Board of Governors" — Commentators also noted that some situations and remedies specified in the companion explanation to the rule were too narrow in scope, unduly harsh, or not truly indicative in some cases of a firm's true financial health.

      The Board emphasizes that the instances cited in the "Explanation" are merely examples of problems and suggested remedies and are not intended to be "automatic" in their application. The language of the rule and the accompanying Explanation make it sufficiently clear that these situations are provided as further explanation and were simply illustrative of situations and corrective actions which could be imposed depending on the circumstances.

      The Board therefore determined not to alter the "Explanation of the Board of Governors" as a result of these comments.

      Other Areas — One letter noted that the proposed rule did not speak to how and when any restrictions imposed by the rule would be lifted. The Board agreed and revised the procedure to vest responsibility for lifting the imposed restrictions in the District Surveillance Committee. Thus, restrictions once imposed would remain in effect until lifted or modified by the District Surveillance Committee.

      Another commentator suggested that the procedure be changed to provide that a hearing on an order issued by the District Surveillance Committee be requested within five (5) business days of the receipt of the notice rather than three (3) business days after the issuance of the notice.

      The Board noted that, in most instances, these notices would be hand-delivered to the member and therefore agreed that receipt of notice would not be difficult to document. The Board therefore determined to amend the procedure retaining the specified time frames but changing the starting point from "issuance" to "receipt of." A request for a hearing would, therefore, have to be made within three business days of receipt of the notice.

      * * *

      The text of the proposed rule and the Explanation of the Board of Governors is attached and merits your immediate attention. Also attached are amendments to the Code of Procedure which do not require a membership vote and are included for informational purposes. Please mark the ballot according to your convictions and return it in the enclosed stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than September 19, 1983.

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

      Questions concerning this notice may be directed to James M. Cangiano at (202) 728-8273, or your District Director.

      Sincerely,

      Gordon S. Macklin
      President

      Enclosures

      PROPOSED RULE OF FAIR PRACTICE

      Proposed Article III, Section 38
      of the Rules of Fair Practice

      (a) Application - For the purposes of this rule, the term "member" shall be limited to any member of the Association who is not designated to another self- regulatory organization by the Securities and Exchange Commission for financial responsibility pursuant to Section 17 of the Securites Exchange Act of 1934 and Rule 17d-l there under. Further, the term shall not be applicable to any member who is subject to paragraphs (a)(2) and (a)(3) of SEC Rule 15c3-l, or is otherwise exempt from the provisions of said rule.
      (b) A member, when so directed by the Association, shall not expand its business during any period in which:
      (1) Any of the following conditions continue to exist, or have existed, for more than 15 consecutive business days:
      (A) A firm's net capital is less than 150 percent of its net capital minimum requirement or such greater percentage thereof as may from time to time be pre-scribed by the Association;
      (B) If subject to the aggregate indebtedness requirement under SEC Rule 15c3-l, a firm's aggregate indebtedness is more than 1,000 per centum of its net capital;
      (C) If, in lieu of subparagraph (b)(l)(B) above, the specified percentage of the aggregate debit items in the Formula for Determination of Reserve Requirements for Brokers and Dealers under SEC Rule 15c3-3 (the alternative net capital requirement) is applicable, a firm's net capital is less than 5 percent of the aggregate debit items there under; or,
      (D) The deduction of capital withdrawals including maturities of subordinated debt scheduled during the next six months would result in any one of the conditions described in (A), (B) or (C) of this subparagraph (1).
      (2) The Association restricts the member for any other financial or operational reason.
      (c) A member, when so directed by the Association, shall forthwith reduce its business:
      (1) To a point enabling its available capital to comply with the standards set forth in subparagraphs (b)(1)(A), (B) or (C) of this rule if any of the following conditions continue to exist, or have existed, for more than fifteen (15) consecutive business days:
      (A) A firm's net capital is less than 125 percent of its net capital minimum requirement or such greater percentage thereof as may from time to time be prescribed by the Association;
      (B) If subject to the aggregate indebtedness requirement under SEC Rule 15c3-l, a firm's aggregate indebtedness is more than 1,200 per centum of its net capital;
      (C) If, in lieu of subparagraph (c)(l)(B) above, the specified percentage of the aggregate debit items in the Formula for Determination of Reserve Requirements for Brokers and Dealers, under SEC Rule 15c3-3 (the alternative net capital requirement) is applicable, a firm's net capital is less than 4 percent of the aggregate debit items there under; or,
      (D) If the deduction of capital withdrawals including maturities of subordinated debt scheduled during the next six months would result in any one of the conditions described in subparagraph (c)(l)(A), (B) or (C) of this rule.
      (2) As required by the Association when it restricts a member for any other financial or operational reason.

      * * * * * * *

      EXPLANATION OF THE BOARD OF GOVERNORS

      Restrictions On A Member's Activity

      This explanation outlines and discusses some of the financial and operational deficiencies which could initiate action under the rule. Subparagraphs (b)(2) and (c)(2) of the rule recognizes that there are various unstated financial and operational reasons for which the Association may impose restrictions on a member so as to prohibit its expansion or require a reduction in overall level of business. These provisions are deemed necessary in order to provide for the variety of situations and practices which do arise and, which if allowed to persist, could result in increased exposure to customers and to broker-dealers.

      In the opinion of the Board of Governors, it would be impractical and unwise to attempt to identify and list all of the situations and practices which might lead to the imposition of restrictions or the types of remedial actions the Corporation may direct be taken because they are numerous and cannot be totally identified or specified with any degree of precision. The Board believes, however, that it would be helpful to members' understanding to list some of the other bases upon which the Corporation may conclude that a member is in or approaching financial difficulty.

      Explanation

      (a) For purposes of subparagraphs (b)(2) and (c)(2) of the rule, a member may be considered to be in or approaching financial or operational difficulty in con ducting its operations and therefore subject to restrictions if it is determined by the Corporation that any of the parameters specified therein are exceeded or one or more of the following conditions exist:
      (1) The member has experienced a reduction in excess net capital of 25% in the preceding two months or 30% or more in the three-month period immediately preceding such computation.
      (2) The member has experienced a substantial change in the manner in which it processes its business which, in the view of the Corporation, increases the potential risk of loss to customers and members.
      (3) The member's books and records are not maintained in accordance with the provisions of SEC Rules 17a-3 and 17a-4.
      (4) The member is not in compliance, or is unable to demonstrate compliance, with applicable net capital requirements.
      (5) The member is not in compliance, or is unable to demonstrate compliance, with SEC Rule 15c3-3 (Customer Protection Reserves and Custody of Securities).
      (6) The member is unable to clear and settle transactions promptly.
      (7) The member's overall business operations are in such a condition, given the nature and kind of its business that, notwithstanding the absence of any of the conditions enumerated in subparagraphs (1) through (5), a determination of financial or operational difficulty should be made, or
      (8) The member is registered as a Futures Commission Merchant and its net capital is less than 7% of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations there under.
      (b) If the Corporation determines that any of the conditions specified in subparagraph (a) of this Explanation exist, it may require that the member take appropriate action by effecting one or more of the following actions until such time as the Corporation determines they are no longer required:
      (1) Promptly pay all free credit balances to customers.
      (2) Promptly effect delivery to customers of all fully-paid securities in the member's possession or control.
      (3) Introduce all or a portion of its business to another member on a fully- disclosed basis.
      (4) Reduce the size or modify the composition of its inventory.
      (5) Postpone the opening of new branch offices or require the closing of one or more existing branch offices.
      (6) Promptly cease making unsecured loans, advances or other similar receivables, and, as necessary, collect all such loans, advances or receivables where practicable.
      (7) Accept no new customer accounts.
      (8) Undertake an immediate audit by an independent public accountant at the member's expense.
      (9) Restrict the payment of salaries or other sums to partners, officers, directors, shareholders, or associated persons of the member.
      (10) Effect liquidating transactions only.
      (11) Accept unsolicited customer orders only.
      (12) File special financial and operating reports and/or
      (13) Be subject to such other restrictions or take such other action as the Corporation deems appropriate under the circumstances in the public interest and for the protection of members.

      * * * * * * *

      AMENDMENTS TO CODE OF PROCEDURE FOR HANDLING TRADE PRACTICE COMPLAINTS

      Limitation Procedures Under Article III, Section 38 of the Rules of Fair Practice

      Board of Governors Surveillance Committee

      (1) The Board of Governors shall appoint a standing Committee of the Board to be known as the Board of Governors Surveillance Committee which is composed of such members as are from time to time determined by the Board.

      District Surveillance Committee

      (2) As required to implement the provisions of this rule, each District Committee shall create a District Surveillance Committee composed of two current or former District Business Conduct Committee members; two members of the Board of Governors Surveillance Committee, and one former member of the Board of Governors.

      Written Notification

      (3) If the District Surveillance Committee has reason to believe that a member has not complied with any of the conditions contained in sub- sections (b) or (c) of Section 38, it may exercise the authority conferred by Section 38 by issuing a notice directing the member to limit its business. Such notice shall contain a statement of the specific grounds on which such action is being taken, specify in reasonable detail the nature of the limitations being imposed and inform the member that he has an opportunity to be heard, if such request is made within three business days of receipt of the notice. The District Surveillance Committee shall also provide a similar notice in writing to a member of any revision or modification of restrictions or limitations previously imposed.

      Hearing

      (4) If an opportunity to be heard is requested, it shall be provided by the District Surveillance Committee within five business days of the receipt of the notice. A member requesting the opportunity to be heard shall present its reasons why the notice should be withdrawn or modified and shall be entitled to be represented by counsel. A record shall be kept of the proceeding before the District Surveillance Committee.

      Decision and Effective Date

      (5)
      (A) The District Surveillance Committee shall within five business days of a hearing issue a written decision approving or modifying the limitations specified in the notice. The decision shall also provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed.
      (B) When an opportunity to be heard is not requested, the limitations contained in the notice shall become effective three days following receipt of the notice without any written decision unless the District Surveillance Committee decides upon a later effective date or unless the matter is reviewed by the Board of Governors, subject to the provisions of subsections (6), (7), and (8) hereof, and they shall remain in effect until such time as they are removed, revised or modified by the District Surveillance Committee.

      Review by Board

      (6) The written decision issued pursuant to subsection (5) shall be subject to review by the Board of Governors upon application by the member aggrieved thereby filed within five business days of the date of the decision. The decision, or the notice where no opportunity to be heard was requested before the District Surveillance Committee, shall also be subject to review by the Board of Governors on its own motion within 30 calendar days of the decision or notice. Where two members of the District Surveillance Committee disagree with the determination of the Committee, the matter will automatically be reviewed by the Board of Governors. In the case of an appeal, the member shall be given an opportunity to be heard before a subcommittee of the Board within 10 business days of the written decision. If called for review, the matter shall be heard within 30 days of such action In any hearing before the Board, a member shall be entitled to be represented by counsel. The institution of review, whether by application or on the initiative of the Board, shall operate as a stay of the action by the District Surveillance Committee unless otherwise ordered by the Board.
      Composition of Board of Governors Hearing Subcommittee
      (7) The Board of Governors' hearing subcommittee shall be composed of two members of the Board of Governors' Surveillance Committee and one current member of the Board.

      Decision

      (8) Upon consideration of the record, the Board of Governors shall in writing affirm, modify, reverse or dismiss the decision of the District Surveillance Committee or remand the matter for further proceedings consistent with its instructions. The Board shall set forth specific grounds upon which its determination is based and shall provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed. If a hearing is held, a decision shall issue within five business days of the hearing and the decision shall be the final action of the Board. If no hearing is requested, the matter shall be considered on the record and a decision shall be issued promptly. Any limitation imposed as a result of Board action shall become effective immediately upon issuance of its decision and shall remain in effect until such time as removed or modified by the District Surveillance Committee.

      Application to Commission for Review

      (9) In any case where a member feels aggrieved by any action taken or approved by the Board of Governors, such member may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.

      Successive Notices

      (10) If it appears at any time to the District Surveillance Committee that, notwithstanding an effective notice or decision under subsections (3), (5) and (8) hereof, the member is still approaching financial or operational difficulty, the District Surveillance Committee may prescribe additional limitations of a member's business in which case all of the procedures specified above shall be followed prior to the implementation thereof.

      Complaint by District Committee

      (11) Action by the Corporation under this Article is not intended to foreclose complaint action by the District Business Conduct Committee under the Code of Procedure for Handling Trade Practice Complaints where a violation of the Rules of Fair Practice may be involved.

      * * * * * * *

    • 83-46 Labor Day: Trade Date—Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Monday, September 5, 1983, in observance of Labor Day. "Regular-Way" transactions made on the business days immediately preceding that day will be subject to the following schedule.

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

      Trade Date

      Settlement Date

      * Regulation T Date

      August 29

      September 6

      September 8

      30

      7

      9

      31

      8

      12

      September 1

      9

      13

      2

      12

      14

      6

      13

      15

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

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6257.


      * Pursuant to Section 4(e)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date members must take such action is shown in the column entitled "Regulation T Date."


    • 83-45 Adoption of Amendments to Schedule E on Self-Underwriting

      TO: All NASD Members and Other Interested Persons

      On June 2, 1983, the Securities and Exchange Commission ("SEC") approved amendments to Schedule E to Article IV, Section 2 of the Association's By-Laws ("Schedule E") which relates to the distribution of members' own securities and those of affiliates. The amendments became effective upon approval and are applicable to all offerings filed with the Association after June 2, 1983.

      The amendments effect significant changes both with respect to offerings by members of their own securities and offerings by affiliates of members. The prior requirement that the public offering price be established, in certain circumstances, at the price recommended by two independent underwriters with the participation of independent counsel has been amended to require only the recommendation of one qualified independent underwriter. Prior requirements for operating history and profitability of a broker/dealer proposing to participate in a distribution have been eliminated, although the requirement for five years investment banking or securities business experience by a majority of management has been retained.

      With respect to requirements applicable to a broker/dealer issuing its own securities, regardless of whether it anticipates participating in the distribution, several liberalizing amendments were approved. Prior requirements regarding financial statements, transfer restrictions on securities of the member held by affiliates, specifications as to the size and duration of the offering, and limitation on the timing of any subsequent offering have been eliminated.

      The text of Schedule E as amended, a copy of which is attached hereto, should be closely studied for a complete understanding of present requirements. Any questions concerning this notice or the applicability of Schedule E to any fact situation, may be directed to Dennis C. Hensley at (202) 728-8258.

      Sincerely,

      Gordon S. Macklin
      President

      SCHEDULE E

      DISTRIBUTION OF SECURITIES OF MEMBERS AND AFFILIATES

      Section 1 — General

      No member or person associated with a member shall participate in the distribution of a public offering of securities issued or to be issued by the member or an affiliate of the member and no member shall issue securities except in accordance with this Schedule.

      Section 2 — Definitions

      For purposes of this Schedule, the following words shall have the stated meanings:

      (a) Affiliate —
      (1) a company which controls, is controlled by or is under common control with a member.
      (2) For purposes of subsection 2(a)(l) hereof,
      (i) a company will be presumed to control a member if the company beneficially owns 10 percent or more of the outstanding voting securities of a member which is a corporation, or beneficially owns a partnership interest in 10 percent or more of the distributable profits or losses of a member which is a partnership;
      (ii) a member will be presumed to control a company if the member and persons associated with the member beneficially own 10 percent or more of the outstanding voting securities of a company which is a corporation, or beneficially own a partnership interest in 10 percent or more of the distributable profits or losses of a company which is a partnership;
      (iii) a company will be presumed to be under common control with a member if:
      (1) the same natural person or company controls both the member and company by beneficially owning 10 percent or more of the outstanding voting securities of a member or company which is a corporation, or by beneficially owning a partnership interest in 10 percent or more of the distributable profits or losses of a member or company which is a partnership; or
      (2) a person having the power to direct or cause the direction of the management or policies of the member or the company also has the power to direct or cause the direction of the management or policies of the other entity in question.
      (3) The provisions of paragraphs (1) and (2) hereof notwithstanding, none of the following shall be presumed to be an affiliate of a member for purposes of this Schedule E:
      (i) an investment company registered with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, as amended;
      (ii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940, as amended;
      (iii) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code;
      (iv) a "direct participation program" as defined in Article III, Section 34 of the Rules of Fair Practice.
      (b) Bona fide independent market—a market in a security which:
      (1) is registered pursuant to the provisions of Sections 12(b) or 12(g) of the Securities Exchange Act of 1934 or issued by a company subject to Section 15(d) of such Act, unless exempt from those provisions;
      (2) has an aggregate trading volume for the 12 months immediately preceding the filing of the registration statement of at least 100,000 shares;
      (3) has outstanding for the entire twelve-month period immediately preceding the filing of the registration statement, a minimum of 250,000 publicly held shares; and
      (4) in the case of over-the-counter securities, has had at least three bona fide independent market makers for a period of at least 30 days immediately preceding the filing of the registration statement and the effective date of the offering.
      (c) Bona fide independent market maker — a market maker which:
      (1) continually maintains net capital as determined by Rule 15c3-l of the General Rules and Regulations under the Securities Exchange Act of 1934 of $50,000 or $5,000 for each security in which it makes a market, whichever is less;
      (2) regularly publishes bona fide competitive bid and offer quotations in a recognized interdealer quotation system;
      (3) furnishes bona fide competitive bid and offer quotations to other brokers and dealers on request; and
      (4) stands ready, willing and able to effect transactions in reasonable amounts, and at his quoted prices, with other brokers and dealers.
      (d) Company — a corporation, a partnership, an association, a joint stock company, a trust, a fund, or any organized group of persons whether incorporated or not; or any receiver, trustee in bankruptcy or similar official or any liquidating agent for any of the foregoing, in his capacity as such.
      (e) Effective date — the date on which an issue of securities first becomes legally eligible for distribution to the public.
      (f) Immediate family — parents, mother-in-law, father-in-law, husband or wife, brother or sister, brother-in-law or sister-in- law, children, or any relative to whom financial support is contributed directly or indirectly by an employee of, or person associated with, a member.
      (g) Parent — any entity affiliated with a member from which member the entity derives 50 percent or more of its gross revenues or in which it employs 50 percent or more of its assets.
      (h) Person — any natural person, partnership, corporation, association, or other legal entity.
      (i) Public director — a person elected from the general public to the board of directors of a member or its parent which has made a public distribution of an issue of its own securities. Such person shall not beneficially own five percent or more of the outstanding voting securities of the member or its parent and shall not be engaged in the investment banking or securities business or be an officer or employee of the member or its parent, or be a member of the immediate family of an employee occupying a managerial position with a member or its parent.
      (j) Public offering — any primary or secondary distribution of securities made pursuant to a registration statement or offering circular including exchange offers, rights offerings, offerings made pursuant to a merger or acquisition, straight debt offerings and all other securities distributions of any kind whatsoever except any offering made pursuant to an exemption under Section 4(1) or 4(2) of the Securities Act of 1933.
      (k) Qualified independent underwriter* — a member which:
      (1) is actively engaged in the investment banking or securities business and which has been so engaged, in its present form or through predecessor broker/dealer entities, for at least five years immediately preceding the filing of the registration statement;
      (2) in at least three of the five years immediately preceding the filing of the registration statement has had net income from operations of the broker/dealer entity or from the pro forma combined operations of predecessor broker/dealer entities, exclusive of extraordinary items, as computed in accordance with generally accepted accounting principles;
      (3) as of the date of the filing of the registration statement and as of the effective date of the offering:
      a. if a corporation, a majority of its board of directors or, if a partnership, a majority of its general partners, are persons who have been actively engaged in the investment banking or securities business for the five-year period immediately preceding the filing of the registration statement;
      b. if a sole proprietorship, the proprietor has been actively engaged in the investment banking or securities business for the five-year period immediately preceding the filing of the registration statement;
      (4) has actively engaged in the underwriting of public offerings of securities for at least the five-year period immediately preceding the filing of the registration statement;
      (5) is not an affiliate of the entity issuing securities pursuant to Section 3 of this Schedule; and
      (6) 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.
      (l) Registration statement — a registration statement as defined by Section 2(8) of the Securities Act of 1933; notification on Form 1A filed with the Securities and Exchange Commission pursuant to the provisions of Rule 255 of the General Rules and Regulations 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.
      (m) Settlement — the distribution of the net proceeds from an offering to the issuer or selling stockholders.

      Section 3 — Participation in Distribution of Securities of Member or Affiliate

      (a) No member shall underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of an issue of debt or equity securities issued or to be issued by the member or an affiliate of the member unless the member is in compliance with subsection 3(b) and either subsection 3(c) or 3(d) below, depending on the nature of the member's participation.
      (b) In the case of a member which is a corporation, the majority of the board of directors, or in the case of a member which is a partnership, a majority of the general partners or, in the case of a member which is a sole proprietorship, the proprietor as of the date of the filing of the registration statement and as of the effective date of the offering shall have been actively engaged in the investment banking or securities business for the five year period immediately preceding the filing of the registration statement.
      (c) If a member proposes to underwrite, participate as a member of the underwriting syndicate or selling group, or otherwise assist in the distribution of a public offering of debt or equity securities subject to this Section without limitation as to the amount of securities to be distributed by the member, one or more of the following three criteria shall be met:
      (1) the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established at a price no higher or yield no lower than that recommended by a qualified independent underwriter which shall also participate in the preparation of the registration statement and the prospectus, offering circular, or similar document and which shall exercise the usual standards of "due diligence" in respect thereto; provided, however, that an offering of securities by a member which has not been actively engaged in the investment banking or securities business, in its present form or as a predecessor broker/ dealer, for at least the five years immediately preceding the filing of the registration statement shall be managed by a qualified independent underwriter; or
      (2) the offering is of a class of equity securities for which a bona fide independent market exists as of the date of the filing of the registration statement and as of the effective date thereof; or
      (3) the offering is of a class of securities rated Baa or better by Moody's rating service or BBB or better by Standard & Poor's rating service or rated in a comparable category by another rating service acceptable to the Association.
      (d) A member may participate as a member of the underwriting syndicate or selling group in the distribution of a public offering of debt or equity securities subject to this Section without regard to the requirements of subsection (c), if the member restricts its participation to an amount not exceeding ten percent of the total dollar amount of the offering and the offering is underwritten on a firm commitment basis and managed by a qualified independent underwriter.

      Section 4 — Escrow of Proceeds

      (a) All proceeds from an offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by a member in any manner until the member has complied with Section 5 hereof.
      (b) Any member offering its securities pursuant to this Schedule 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 subsection (a) hereof.

      Section 5 — Net Capital Computation

      Any member offering its securities pursuant to this Schedule shall immediately notify the Corporation when the offering has been terminated and settlement effected and it shall file with the Corporation a computation of its net capital computed pursuant to the provisions of Rule 15c3-l of the General Rules and Regulations under the Securities Exchange Act of 1934 (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-l or, in the event the provisions of Rule 15c3-l(f) are utilized in making such computation, the net capital is less than seven percent of aggregate debit items as computed in accordance with Rule 15c3-3a, all monies received from sales of securities of the offering must be returned in full to the purchasers thereof and the offering withdrawn, unless the member has obtained from the Securities and Exchange Commission a specific exemption from the net capital rule. Proceeds from the sales of securities in the offering may be taken into consideration in computing net capital ratio for purposes of this section.

      Section 6 - Audit Committees

      Any member or parent of a member which makes a public offering of an issue of its securities shall be required to establish within twelve months of the effective date of said offering an audit committee composed of members of the board of directors (except that it shall not include the chief accounting or chief financial officer of the member or its parent) and the functions of the audit committee shall include the following:

      (a) to review the scope of the audit;
      (b) to review with the independent auditors the corporate accounting practices and policies and recommend to whom reports should be submitted within the company;
      (c) to review with the independent auditors their final report;
      (d) to review with internal and independent auditors overall accounting and financial controls; and
      (e) to be available to the independent auditors during the year for consultation purposes.

      Section 7 - Public Director

      Any member or parent of a member which makes a public offering of an issue of its securities shall cause to be elected to its board of directors within twelve months of the effective date of said offering a public director who shall serve as a member of the audit committee.

      Section 8 — Periodic Reports

      Any member which makes a distribution to the public of an issue of its securities pursuant to this Schedule, shall send to each of its shareholders or, in the case of debt offerings, to each of its investors:

      (1) quarterly, a summary statement of its operations; and
      (2) annually, independently audited and certified financial statements.

      Section 9 - Offerings Resulting in Affiliation or Public Ownership of Member

      If an issuer proposes to direct all or part of the proceeds from a public offering to a member or exchange securities by means of a public offering for an interest in a member, and the member is, or as a result of the proposed transaction would be, an affiliate of the issuer, or if an issuer proposes to engage in any offering which results in the public ownership of a member, the offering shall be subject to the provisions of this Schedule E to the same extent as if the offering were of securities issued by the member.

      Section 10 - Registration Statements for Intrastate Offerings

      Any member offering its securities pursuant to an exemption under Section 3(a)(11) of the Securities Act of 1933 shall disclose in the registration statement at a minimum that information suggested by the Securities and Exchange Commission in Securities Act Release No. 5222 (January 3, 1972).

      Section 11 — Suitability

      Every member underwriting an issue of its securities, or securities of an affiliate, pursuant to the provisions of Section 3 hereof, who recommends to a customer the purchase of a security of such an issue shall have reasonable grounds to believe that the recommendation is suitable for such customer on the basis of information furnished by such customer concerning the customer's investment objectives, financial situation, and needs, and any other information known by such member. In connection with all such determinations, the member must maintain in its files the basis for its determination.

      Section 12 - Discretionary Accounts

      Notwithstanding the provisions of Article III, Section 15 of the Corporation's Rules of Fair Practice, or any other provisions of law, a transaction in securities issued by a member or an affiliate of a member shall not be executed by any member in a discretionary account without the prior specific written approval of the customer.

      Section 13 — Sales to Employees — No Limitations

      Notwithstanding the provisions of the Board of Governors' Interpretation With Respect To "Free-Riding And Withholding," a member may sell securities issued by a member or an affiliate of a member to its employees; potential employees resulting from intended mergers, acquisitions, or other business combination of members resulting in one public successor corporation, or persons associated with it; and the immediate family of such employees or associated persons without limitation as to amount and regardless of whether such persons have an investment history with the member as required by that Interpretation.

      Section 14 — Filing Requirements; Coordination with Corporate Financing Interpretation

      (a) Notwithstanding the provisions of the "Interpretation of the Board of Governors — Review Of Corporate Financing" relating to factors to be taken into consideration in determining underwriter's compensation, the value of securities of a new corporate member succeeding to a previously established partnership or sole proprietorship member acquired by such member or person associated therewith, or created as a result of such reorganization, shall not be taken into consideration in determining such compensation.
      (b) All offerings of securities included within the scope of this Schedule shall be subject to the provisions of the "Interpretation of the Board of Governors — Review Of Corporate Financing", and documents and filing fees relating to such offerings shall be filed with the Corporation pursuant to the provisions of that Interpretation. The responsibility for filing the required documents and fees shall be that of the member issuing securities, or, in the case of an issue of an affiliate, the managing underwriter or, if there is none, the member affiliated with the issuer.

      Section 15 — Predominance of Schedule E

      If the provisions of this Schedule E are inconsistent with any other provisions of the Corporation's By-Laws, Rules of Fair Practice or Uniform Practice Code, or of any interpretation thereof or resolution of the Board of Governors, the provisions of this Schedule shall prevail.

      Section 16 — Requests for Exemption from Schedule E

      The Corporate Financing Committee of the Board of Governors, upon written request, 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 Schedule E which it deems appropriate. Unless waived by the party requesting an exemption, a hearing shall be held upon a request before the Corporate Financing Committee, or a Subcommittee thereof designated for that purpose.

      Section 17 — Violation of Schedule E

      A violation of the provisions of this Schedule shall constitute conduct inconsistent with high standards of commercial honor and just and equitable principles of trade and a violation of Article III, Section 1 of the Corporation's Rules of Fair Practice and possibly other sections, especially Sections 2 and 18, as the circumstances of the case may indicate.


      * In the opinion of the National Association of Securities Dealers, Inc. and the Securities and Exchange Commission the full responsibilities and liabilities of an underwriter under the Securities Act of 1933 attach to a "qualified independent underwriter" performing the functions called for by the provisions of Section 3 hereof.


    • 83-44 Change of Policy on Overallotment Options

      TO: All NASD Members and Other Interested Persons

      The National Association of Securities Dealers, Inc. ("NASD" or "Association") is announcing a change in its policy with respect to overallotment options for firm commitment offerings. On August 4, 1983, the Securities and Exchange Commission ("SEC") approved an amendment to the Interpretation of the Board of Governors — Review of Corporate Financing under Article III, Section 1 of the Rules of Fair Practice (NASD Manual (CCH) para. 2151) ("Interpretation"). Effective immediately, the new policy changes the size of an overallotment option which is presumptively reasonable from ten to fifteen percent of the amount of securities being offered. Background information and an explanation of the new policy are set forth below.

      Background

      The new provision amends the longstanding policy of the Association which established as presumptively unfair and unreasonable the granting to underwriters or related persons of an overallotment option of more than ten percent of the amount of securities in a public offering. The Association determined that this policy was no longer an appropriate response to market forces as they presently exist.

      The Association's policy on overallotment options has not been previously codified into the Interpretation, although the policy has been consistently applied from the 1960's and has been periodically reviewed by the Corporate Financing Committee ("Committee"). The ten percent limitation had been retained based upon the belief that an underwriter should be able to measure demand for a new issue within a ten percent range. There was an additional concern that large over-allotment options can alter the underwriter's obligation such that a "firm commitment" offering becomes more akin to a "best efforts" undertaking.

      Over the past several months, it has become apparent that the increased volatility of prices and trading volume in the securities markets has made it more difficult for underwriters to accurately judge demand or to achieve an orderly distribution of an issuer's securities. These problems are exacerbated by the increasingly large size of public offerings, especially initial public offerings. In view of these factors, the Committee determined that the ten percent policy should be reviewed to ascertain its viability under current market conditions.

      In reviewing the ten percent policy, the need for any Association regulation of overallotment options was considered. It was concluded that it is in issuers' and investors' interest for the Association to place reasonable restrictions upon overallotment options. Such restrictions assist in assuring that the size of an offering does not become distorted from that originally described to investors and help to achieve a more orderly distribution. Recognizing that price and volume volatility has changed dramatically since the adoption of the ten percent policy, it was concluded that greater flexibility in determining the size of an offering may be necessary for some offerings in the present market environment.

      Giving effect to all of these considerations, it was concluded that the Association's policy on overallotment options should be revised and that overallotment options which do not exceed fifteen percent of the offering should be presumed to be reasonable. The Association anticipates, however, that the size of the overallotment option in any offering will be determined by negotiation between the issuer and underwriter, and that many offerings will be made with overallotment options of less than fifteen percent.

      New Policy on Overallotment Options

      Effective August 4, 1983, the Association's policy on overallotment options is changed and any arrangements for such an option in a registration statement filed after that date will be presumed to be fair and reasonable if the amount of the option does not exceed fifteen percent of the amount of securities being offered. The policy applies to any public offering, including an initial public offering, which is underwritten on a "firm commitment" basis and in which any NASD member participates.

      The amount of an overallotment option is calculated by the Association as a percentage of the amount of securities being offered. Securities received as underwriting compensation and securities to be issued as part of the option are not included in calculating the option.

      A copy of the text of the new provision, which will be added to the Interpretation, is attached.

      * * * * *

      Questions regarding this notice may be directed to Dennis C. Hensley, Harry E. Tutwiler or Daniel P. Weitzel of the Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Gordon S. Macklin
      President

      OVERALLOTMENT OPTIONS

      When proposed in connection with the distribution of a public offering of securities on a "firm commitment" basis, any option to be granted to an underwriter or related person for an overallotment of more than fifteen percent of the amount of securities being offered (computed excluding any securities offered pursuant to the option) shall be presumed to be unfair and unreasonable.

    • 83-43 Rescission of Venture Capital Policy and Adoption of New Requirement

      TO: All NASD Members and Other Interested Persons

      On May 31, 1983, the Securities and Exchange Commission ("SEC") approved an amendment to the Association's rules rescinding the Policy of the Board of Governors — Venture Capital and Other Investments by Broker/Dealers Prior to Public Offerings ("Venture Capital Policy"). Simultaneously, the SEC approved an amendment to the Interpretation of the Board of Governors — Review of Corporate Financing under Article III, Section 1 of the Rules of Fair Practice ("Corporate Financing Interpretation") requiring that certain investments by members in private companies be restricted in connection with an initial public offering.

      The Association's decision to rescind the Venture Capital Policy recognizes the significantly changed conditions of the securities industry which have evolved since its adoption in the late 1960's. The Policy was originally intended to be temporary pending further study of the practice of venture capital investments prior to initial public offerings. With the adoption of other Association rules on self-underwriting and certain SEC rules on sales of securities held by affiliates, the Association concluded that the Venture Capital Policy was no longer necessary to assure investor protection.

      In the course of SEC review of the Association's proposal to rescind the Venture Capital Policy, it was determined that a restriction should be added to the Corporate Financing Interpretation relating to situations in which members and certain control persons propose to sell their holdings in companies at the time the member participates in an initial public offering of the company. It was concluded that this situation can present certain conflicts of interest with respect to the establishment of a public offering price and the assurance of full disclosure. Accordingly, it was agreed that members and specifically enumerated control persons of members be restricted from selling their holdings during an initial public offering of a company and for a 12 month period following the effective date, if the member participates in the distribution of the offering.

      Language to implement this restriction has been added to the Corporate Financing Interpretation and became effective upon approval by the SEC on May 31, 1983. The restriction is applicable to all offerings filed with the Association after May 31, 1983.

      A copy of the text of the new provision as approved by the SEC is attached. Questions regarding this notice may be directed to Dennis C. Hensley at (202) 728-8258.

      Sincerely,

      Gordon S. Macklin
      President

      VENTURE CAPITAL RESTRICTIONS

      No member or officer, director, general partner or controlling shareholder of a member which participates in the initial public offering of an issuer's securities and which beneficially owns any securities of said issuer at the time of filing of the offering shall sell those securities during the offering or sell, transfer, assign or hypothecate those securities for one year following the effective date of the offering.

    • 83-42 100 Securities Scheduled to Join NMS in August and September

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

      An additional 50 issues will voluntarily join NASDAQ's National Market System on August 23 and another 50 will join September 20. This will bring the total number of NMS securities to 522. (An additional 43 securities are mandated to join NMS on August 9.) These 100 securities meet the SEC's criteria for voluntary designation, which include average monthly trading volume of 100,000 shares and a minimum bid price of $5.

      The 50 securities scheduled to join NMS on Tuesday, August 23, are:

      ALOG

      Analogic Corporation

      Wakefield, MA

      AMSY

      American Management Systems, Incorporated

      Arlington, VA

      ATTC

      Auto-Trol Technology Corporation

      Denver, CO

      BANG

      Bangor Hydro-Electric Company

      Bangor, ME

      BGBT

      Big Bite, Inc.

      Columbus, OH

      BKFS

      Brooks Fashion Stores, Inc.

      New York, NY

      CACH

      Cache, Inc.

      Miami, FL

      CRIV

      Charles River Breeding Laboratories, Inc.

      Wilmington, MA

      CITUA

      Citizens Utilities Company

      Stamford, CT

      DEBS

      Deb Shops, Inc.

      Philadelphia, PA

      DLTA

      Delta Drilling Company

      Tyler, TX

      DOYL

      Doyle Dane Bernbach International, Inc

      New York, NY

      DURI

      Duriron Company (The), Inc.

      Dayton, OH

      EDCC

      Educational Computer Corp.

      Stafford, PA

      EHIL

      E-H International, Inc.

      San Jose, CA

      ERES

      Energy Reserve, Inc.

      Phoenix, AZ

      FOIL

      Forest Oil Corporation

      Bradford, PA

      HONI

      HON INDUSTRIES, Inc.

      Muscatine, IA

      HAML

      Hamilton Brothers Petroleum Corporation

      Denver, CO

      HECH

      Hechinger Company

      Landover, MD

      HTEK

      Hytek Microsystems, Inc.

      Los Gatos, CA

      ITSI

      International Totalizator Systems, Inc.

      San Diego, CA

      ITSIW

      International Totalizator Systems, Inc. (Warrants)

      SanDiego, CA

      JACK

      Jackpot Enterprises, Inc.

      Las Vegas, NV

      KOSS

      Koss Corporation

      Milwaukee, WI

      KRUE

      Krueger (W.A.) Company

      Scottsdale, AZ

      LWSI

      Laidlaw Industries, Inc.

      Hinsdale, IL

      LIZC

      Liz Claiborne, Inc.

      New York, NY

      LMAR

      Lorimar

      Culver City, CA

      MIDL

      Midlantie Banks, Inc.

      Edison, NJ

      MECC

      Miller Technology & Communications Corporation

      Phoenix, AZ

      MCCAA

      Mobile Communications Corporation of America

      Jackson, MS

      NMSI

      NMS Pharmaceuticals, Inc.

      Newport Beach, CA

      NLCS

      National Computer Systems, Inc.

      Edina, MN

      NTSC

      National Technical Systems

      Woodland Hills, CA

      NICLF

      Ni-Cal Developments Ltd.

      Vancouver, BC

      NUMS

      Nu-Med Systems, Inc.

      Encino, CA

      ODEX

      Odetics, Inc.

      Anaheim, CA

      ORBT

      Orbit Instrument Corp.

      Hauppauge, NY

      PTIX

      Patient Technology, Inc.

      Hauppauge, NY

      PMSC

      Policy Management Systems Corporation

      Columbia, SC

      RGIS

      Regis Corporation

      Edina, MN

      SMAS

      ServiceMaster Industries Inc

      Downers Grove, IL.

      SIZZ

      Sizzler Restaurants International, Inc.

      Los Angeles, CA

      STTG

      Statesman Group, Inc. (The)

      Des Moines, IA

      SBRU

      Subaru of America, Inc.

      Pennsauken, NJ

      USTC

      U.S. Trust Corporation

      New York, NY

      UESS

      United Education & Software

      Encino, CA

      UNIR

      United-Guardian, Inc.

      Smithtown, NY

      VIKG

      Viking Freight System, Inc.

      Santa Clara, CA

      The 50 securities scheduled to join NMS on Tuesday, September 20, are:

      ACRA

      AccuRay Corporation

      Columbus, OH

      ARGI

      ARGOSystems, Inc.

      Sunnyvale, CA

      ADGE

      Adage, Inc.

      Billerica, MA

      AGNC

      Agency Rent-A-Car, Inc.

      Bedford, OH

      BRHF

      BR Communications

      Sunnyvale, CA

      BIEN

      Billings Corporation

      Independence, MO

      BGENF

      Biogen N.V.

      Cambridge, MA

      BMAC

      Business Men's Assurance Company of America

      Kansas City, MO

      CBCT

      CBT Corporation

      Hartford, CT

      CLBR

      Calibre Corp.

      Worthington, OH

      CHEM

      ChemLawn Corporation

      Columbus, OH

      CESI

      Cogenic Energy Systems, Inc.

      New York, NY

      CSHP

      CompuShop Inc.

      Richardson, TX

      CASI

      Computer Associates International, Inc.

      Jericho, NY

      CRNS

      Cronus Industries, Inc.

      Dallas, TX

      CULL

      Cullum Companies, Inc.

      Dallas, TX

      WDHD

      Daniel Woodhead, Inc.

      Northbrook, IL

      DNEX

      Dion ex Corporation

      Sunnyvale, CA

      ELAN

      Elan Pharmaceutical Research Corp.

      Gainesville, GA

      FUNC

      First Union Corporation

      Charlotte, NC

      BNTA

      George Banta Company, Inc.

      Menasha, WI

      HBAN

      Huntington Bancshares Incorporated

      Columbus, OH

      IRIS

      International Remote Imaging Systems, Inc.

      Chatsworth, CA

      KLAC

      KLA Instruments Corporation

      Santa Clara, CA

      MSREF

      MSR Exploration Ltd.

      Cut Bank, MT

      MRDN

      Meridian Bancorp, Inc.

      Reading, PA

      MORF

      Mor-Flo Industries, Inc.

      Cleveland, OH

      MMED

      Multimedia, Inc.

      Greenville, SC

      OBOD

      Owens & Minor, Inc.

      Richmond, VA

      PTCM

      Pacific Telecom, Inc.

      Vancouver, WA

      QCHM

      Quaker Chemical Corporation

      Conshohocken, PA

      SCON

      SYSCON Corporation

      Washington, D.C.

      STAG

      Security Tag Systems, Inc.

      St. Petersburg, FL

      SILN

      Silicon General, Inc.

      Concord, CA

      SILI

      Siliconix Incorporated

      Santa Clara, CA

      SOSI

      Sippican Ocean Systems, Inc.

      Marion, MA

      SWTN

      Swanton Corporation

      New York, NY

      SMBL

      Symbol Technologies, Inc.

      Hauppauge, NY

      TACO

      Good Taco Corporation (The)

      Pompano Beach, FL

      THFR

      Thetford Corporation

      Ann Arbor, MI

      TJCO

      Trus Joist Corporation

      Boise, ID

      TRGA

      Trust Company of Georgia

      Atlanta, GA

      UBKS

      United Banks of Colorado, Inc.

      Denver, CO

      USAC

      United States Antimony Corporation

      Thompson Falls, MT

      USHC

      United States Health Care Systems, Inc.

      Willow Grove, PA

      VTRX

      Ventrex Laboratories, Inc.

      Portland, ME

      WTEL

      Walker Telecommunications Corp.

      Hauppauge, NY

      WBBC

      Webb Company (The)

      St. Paul, MN

      WCTV

      Wometco Cable TV, Inc.

      Miami, FL

      WYMN

      Wyman-Gordon Company

      Worcester, MA

      Applications are being accepted for the NMS phase-in scheduled for October.

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

      Sincerely,

      Gordon S. Macklin
      President

    • 83-41 SEC Staff Issues No-Action Letter Providing Temporary Relief from Certain Provisions of Rules 15c3-1 and 15c3-3 Dealing with Municipal Securities

      TO: All NASD Members and Other Interested Persons

      SUMMARY

      Recently, in response to a request by the Association, the staff of the SEC's Division of Market Regulation issued a no-action letter concerning 17 C.F.R. 240.15c3-l (the "net capital rule") and 17 C.F.R. 240.15c3-3 (the "customer protection rule"). The letter provides, until December 31, 1983, a temporary extension of certain time periods specified in the rules before which capital deductions and/or other actions are required to be taken for transactions involving registered municipal securities.

      The Association's request was prompted by a concern on the part of its Capital and Margin Committee, and others, that the issuance of municipal securities in registered form, as required by the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), would have a deleterious effect on the clearance and settlement of municipal securities transactions which, in turn, would subject broker-dealers to increased capital and reserve requirements in accordance with the provisions of the net capital and customer protection rules. A brief discussion of the background concerning the Association's request, and the sections of the rules affected as a result thereof, follows. Also, a copy of the letter issued by the Division of Market Regulation is reprinted as part of this Notice.

      BACKGROUND

      The Tax Equity and Fiscal Responsibility Act of 1982, which was signed into law on September 3, 1982, contains a number of provisions affecting the broker-dealer community. The Association has taken an active role in attempting to assess the impact of the new law by identifying various areas of concern to its members. One such area is the issuance of municipal securities in registered form.

      Under the provisions of TEFRA, municipal securities issued after July 1, 1983, must be issued solely in registered form, both as to principal and interest, in order to preserve their tax-exempt status.1/ The registration requirement, however, does not change the status of municipal securities as exempt securities under the Securities Exchange Act of 1934 (the "1934 Act"). Therefore, issuing municipalities would not be required to use registered transfer agents who are subject to SEC rules regarding "turnaround" time for transfer items.

      Municipal securities broker-dealers were concerned that the performance of the transfer function by issuers and unregistered transfer agents would increase the number of aged fails in the marketplace. The SEC's net capital and customer protection rules, which set forth methods of measuring the adequacy of a broker-dealer's capital and customer-related reserves, contain provisions, among others, which penalize the broker-dealer for: (1) transactions remaining uncompleted beyond specified dates after settlement; and, (2) transfer items which have not been returned from transfer after a specified time. If significant delays develop in the transfer process, causing clearance problems and an increase in the number of uncompleted transactions, broker-dealers would be subject to much higher capital penalties.

      The Association believed that these were very real concerns on the part of municipal securities broker-dealers. In connection therewith, the NASD conducted a survey of selected municipal securities broker-dealers to gather data with respect to the aging of fails in municipal securities. Eight broker-dealers participated in the survey and supplied information regarding total aged fails and total mortgage revenue bond fails 2/ for the period September 1981 through January 1982 and correspondingly for the period September 1982 through January 1983. The findings of the survey supported the contention that the requirement to register previously unregistered securities results in an increase in total aged fails.

      The Association was not alone in expressing concern over this situation. A number of industry groups including the Municipal Securities Rulemaking Board ("MSRB") and Public Securities Association ("PSA") have also undertaken actions with respect to the question of registration. On October 18, 1982, the PSA issued a white paper which, among other things, called for net capital relief for municipal securities in fail situations due to the action of transfer agents. Also, in October 1982, the MSRB conducted a two-day conference for all segments of the municipal industry on registered municipal securities in an effort to identify problems and to propose solutions. One of the many recommendations which came forth from the conference was the recommendation to liberalize certain of the provisions of the net capital and customer protection rules as they would apply to transactions in registered municipal securities.

      In light of the above findings and discussions, the Association petitioned the Commission to extend by interpretation relevant time periods in the net capital and customer protection rules as applicable to registered municipal securities. The following is a summary of the Commission's no-action letter granting such relief.

      SEC Rule 15c3-l

      The no-action letter issued by the SEC's Division of Market Regulation provides relief in the following instances which would otherwise affect the capital requirements of a broker-dealer relative to its transactions in municipal securities in accordance with the provisions of SEC Rule 15c3-l.

      • Subparagraph (c)(2)(ix) provides for a deduction from net capital for those municipal fails to deliver which are outstanding for 21 business days or longer. This time period has been extended to 30 business days for transactions involving registered municipal securities.
      • Under subparagraph (c)(2)(iv)(B), an existing interpretation provides that broker-dealers must make appropriate deductions from net worth for deficits in cash accounts for C.O.D. transactions involving municipal securities 42 calendar days after trade date. This time period has been extended to 60 calendar days after trade date for such transactions involving registered municipal securities.
      • Subparagraph (a)(8) permits a municipal securities broker's broker to compute its capital requirements in accordance with specified guidelines. In this regard, subparagraph (a)(8)(iv) requires such a broker to make a deduction from net worth equal to 1% of the market value of the underlying security for municipal securities fails to deliver which are outstanding for 21 business days or longer. This time period has been extended to 30 business days for fails to deliver involving registered municipal securities.

      SEC Rule 15c3-3

      In its no-action letter, the staff of the Division of Market Regulation provides an extension of the time period applicable to municipal securities fails to deliver as specified in the Reserve Formula computed in accordance with SEC Rule 15c3-3.

      • In computing its reserve requirement, a broker-dealer is required to exclude from the debit side of the formula fails to deliver which are outstanding more than 30 calendar days. This time period has been extended to 45 calendar days for fails to deliver involving registered municipal securities.

      Reporting Requirement

      The SEC staff as a condition for granting relief in this area is requiring the designated examining authority to secure data from each broker-dealer who takes advantage of a temporary extension. A broker-dealer who determines to avail itself of such relief would be required to supply data concerning aged fail(s) on a monthly basis as of its FOCUS Part I filing date. The information would be submitted to the firm's designated examining authority which will then forward the information to the SEC.

      In this regard, an Association member for whom the NASD is the designated examining authority is requested to complete the enclosed form and submit it to the Association along with its FOCUS Part I Report for each month in which the member relies on any of the extensions for aged fails permitted by the SEC's temporary no-action letter. This form must be submitted even if the member uses the interpretation in only one instance.

      As you will note, the form has been designed to collect information on a cumulative basis; the member may use one form to record its data each month. In this regard, the member must furnish the following information for fails involving registered municipal securities when taking interpretive relief.

      • the number of such fails which exceed 21 business days;
      • the contract values of the fails;
      • the age of the fails;
      • the number of issuers and transfer agents responsible for the delays; and,
      • the number of broker-dealers who have failed to deliver to the reporting broker-dealer.

      Members are reminded that the relief provided by the no-action letter is available only for fails involving registered municipal securities and is effective only through December 31, 1983.

      * * *

      Questions concerning this Notice may be directed to James M. Cangiano, Assistant Director, Department of Policy Research, at (202) 728-8273. Questions regarding the filing and the completion of the attached form should be referred to your local NASD District office.

      Sincerely,

      Gordon S. Macklin
      President

      Attachments

      COPY

      SECURITIES AND EXCHANGE COMMISSION
      Washington, D.C. 20549
      Division of Market Regulation

      July 7, 1983

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

      Dear Mr. Macklin:

      In your letter of June 15, 1983, you describe the problems which might arise from the required registration of municipal securities issued after July 1, 1983. You state that municipal broker-dealers will encounter delays in transferring the securities after sale or resale. These delays you believe may result in unwarranted deductions under the net capital rule and the customer protection rule. You recommend that provisions of the net capital rule and Rule 15c3-3 which require deductions for aged municipal securities failed to deliver be altered, for these registered securities. The NASD is requesting for its members temporary interpretative relief only and not a permanent rule change.

      You believe that these further delays will be caused because neither issuers which do their own transferring nor unregistered transfer agents are subject to regulatory restraints comparable to those of Rule 17Ad-2 of the Securities Exchange Act. In connection with its concerns, the NASD conducted a survey of selected municipal securities broker-dealers to gather data with respect to the aging of fails in municipal securities. So that an adequate comparison could be made, the NASD requested information with respect to the impact that the registration of mortgage revenue bonds has had on the municipal marketplace. Mortgage revenue bonds were required to be issued in registered form as of January 31, 1982. Eight broker-dealers supplied information regarding total aged fails and total mortgage revenue bond fails for the period September 1981 through January 1982 and correspondingly for the period September 1982 through January 1983.

      The findings of the survey support the contention that the requirement to register previously unregistered securities results in an increase in total aged fails. From one year to the next, total aged fail items showed an increase of 93%, and there was a corresponding increase of 246% in the dollar amount represented by these items. However, the statistics indicate even greater increases when mortgage revenue bond fails are considered separately. The total number of mortgage revenue bond fails showed an increase of 525%, with a corresponding increase in dollar amount of 2580%. In the period September 1981 through January 1982, mortgage revenue bond fails represented 3.1% of the total aged fails; for the period September 1982 through January 1983, they represented 10.0% of the total aged fails; however, they represented 17.4% of the total aged fails which constitute the increase from 1981/1982 to 1982/1983.

      The Division shares your concerns that the present change in the form of registration should not result in unwarranted charges to broker-dealers in municipal securities. However, we are equally concerned that this change not be used as a mechanism to excuse delay in the completion of securities transactions. The Commission, as you are aware, in a recent release stressed the need for reduction in the aging period for fails in municipal securities.

      In sum, we are sympathetic to the need for relief particularly as to the period for aging municipal securities fails to deliver. However, as a condition for granting relief in this area, the designated examining authority ("DEA") for each broker or dealer who takes advantage of any extension in the aging period must secure from that firm data on these fails which should be provided to the Commission in a report by the DEA. Specifically, we request data on the number of fails as to registered bonds which exceed 21 business days, their contract values, the age of the fails to deliver, the number of issuers and transfer agents responsible for the delays and the number of brokers who have failed to deliver to the reporting broker-dealer. This data should be obtained monthly as of the FOCUS filing date. It may be presented to the Commission in whatever form the DEA thinks most appropriate.

      Based on the circumstances described above, the Division will raise no question nor recommend any action to the Commission until December 31, 1983 if (1) broker-dealers in computing net capital make required deductions under Rule 15c3-l(c)(2)(ix) from the contract value of fails to deliver of registered municipal securities only after the fails to deliver are outstanding 30 business days or longer; (2) broker-dealers in computing the reserve requirements under Rule 15c3-3 remove failed to deliver contracts of registered municipal securities only if older than 45 calendar days; and (3) broker-dealers in computing net capital make appropriate deductions from net worth under Rule 15c3-l(c)(2)(iv)(B) for C.O.D. transactions involving registered municipal securities only after 60 calendar days after trade date; and (4) those broker-dealers which have elected paragraph (a)(8) of the net capital rule make the required deduction as to fails to deliver contracts of registered municipal securities only after the fail is outstanding 30 business days or longer.

      Sincerely,

      /s/
      Edward A. Kwalwasser
      Associate Director

      cc: Heather L. Ruth
      Executive Director
      Public Securities Association


      1/ TEFRA exempts from this registration requirement securities with maturities of one year or less; securities which are not of a type offered to the public; and, securities which are sold to non-U.S. nationals and are payable outside the United States.

      2/ So that an adequate comparison could be made, the Association requested information with respect to the impact that the registration of mortgage revenue bonds has had on the municipal marketplace. Mortgage revenue bonds were required to be issued in registered form as of January 31, 1982, a situation analogous to the overall registration requirement concerning municipal securities.


    • 83-40 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      Following is a list of NASD Notices to Members issued during the second quarter of 1983. Requests for copies of any notice should be accompanied by a self-addressed label and may be directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006.

      Notice Number

      Date

      Topic

      83-15

      April 8, 1983

      Underwriting Compensation Received by Members in Public Corporate Offerings

      83-16

      April 8, 1983

      Applicability of SEC Rule 10b-6 to Controlled Accounts

      83-17

      April 14, 1983

      Amendments to Rules Governing Transactions Executed for Persons Associated with Another Member

      83-18

      April 22, 1983

      43 Additional Securities Are Mandated Into National Market System

      83-19

      April 27, 1983

      Approval of Revisions to Qualification Requirements of Foreign Issues on NASDAQ

      83-20

      May 2, 1983

      Quarterly Checklist of Notices to Members

      83-21

      May 5, 1983

      Gerald Greenspan - Notification of Past Illegal Activities

      83-22

      May 11, 1983

      Real-Time Transaction Reporting in Additional 57 NASDAQ NMS Securities Effective May 24, 1983

      83-23

      May 11, 1983

      Memorial Day Trade Date-Settlement Date Schedule

      83-24

      May 19, 1983

      Request for Vote on Proposed Corporate Financing Rule

      83-25

      May 27, 1983

      Request for Comments on Amendment to Corporate Financing Filing Requirements

      83-26

      June 1, 1983

      Adoption of Amendments to Interpretation on Free-Riding and Withholding

      83-27

      June 6, 1983

      Appointment of SIPC Trustee for Gibralco, Inc.

      83-30

      June 27, 1983

      Independence Day Trade Date-Settlement Date Schedule

      * * *

    • 83-39 Final Reporting Regulations Under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA")

      I M P O R T A N T

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members and Other Interested Persons

      Although it appears at this writing that the provisions under TEFRA with respect to withholding on dividends and interest will be repealed, members should be aware that other provisions of the Act - primarily the expanded reporting requirements - are still effective for transactions occurring after July 1, 1983.

      The key provisions of the final regulations which were published earlier this year are summarized below and the text of the expanded reporting rules are also included In this notice.

      INFORMATION REPORTING REQUIREMENTS FOR BROKER-DEALERS

      TRANSACTIONAL REPORTING

      The final regulations require members to make an information return to the Internal Revenue Service with respect to the following:

      What to Report

      For transactions occurring on or after July 1, 1933:

      • On a transactional basis, the gross proceeds of customers' sales (including short sales) of securities, commodities., and on closing transactions in forward contracts;
      • On a transactional basis for each such sale, the name, address and taxpayer identification number, a description of the property sold, the CUSIP number, and such other information as may be required by Form 1099;
      • On a transactional basis for each sale of a bond, the amount of interest which is accrued and unpaid; and,
      • A statement (Form 1099 or equivalent) must be furnished to customers setting forth information reported to the IRS.

      For the purposes of the above reporting requirements, the following definitions would apply:

      Sale

      The term "sale" means any disposition of securities, commodities, regulated futures contracts, or forward contracts for cash and includes:
      • retirements of indebtedness
      • short sales

      Securities

      The regulations define "securities" as:
      • a share of stock in a corporation (foreign or domestic);
      • a debt obligation;
      • An interest in or a right to purchase any of the foregoing in connection with the issuance thereof from the issuer, an agent of the issuer or an underwriter;
      • an interest in a trust;
      • an interest in a partnership.
      The term "securities" does not include options.

      Gross Proceeds

      The term "gross proceeds" means the total amount paid or credited to a customer's account as a result of the sale less the amount of any accrued interest (which is report able separately) and increased by any amount not so paid or credited by reason of repayment of margin loans. The broker may but is not required to take commissions, and options premiums into account in determining gross proceeds, provided the method chosen is consistent.

      Sale Date

      A broker may report a sale as of trade or settlement date provided the method of reporting is consistent. A short sale, however, must be reported as of the date the short sale is entered on the books of the broker, i.e., trade date.

      How to Report

      The regulations specify that all information returns must be filed on computer readable magnetic media authorized by the Commissioner of the IRS. However, upon application to the IRS, a broker may be permitted to file information returns on Form 1099 if undue hardship is demonstrated. Such application for exemption from magnetic media reporting must be made to the IRS on or before September 15, 1983.

      The regulations allow a broker to group its customers' accounts by some logical operational classification such as:

      • department
      • branch
      • office
      • other.

      When to Report

      Brokers are permitted to elect a monthly, quarterly or annual reporting period. Brokers may also send statements to their customers on the same basis or on any other basis without regard to the reporting period elected provided that all statements required to be furnished for a calendar year must be furnished on or before January 31st of the following calendar year.

      Information returns shall be filed after the last calendar day of the reporting period elected and on or before the end of the second calendar month following the close of the calendar year of such reporting period.

      EXCEPTIONS TO REPORTING REQUIREMENTS

      An information return is not required on sales by a customer who is described in the regulations on withholding as an "exempt recipient." These include:

      • Corporations;
      • Tax-exempt organizations;
      • IRA's;
      • The United States or a respective state;
      • Foreign governments or international organizations;
      • Real estate investment trusts;
      • A foreign central bank of issue;
      • Investment companies registered under the Investment Company Act of 1940;
      • Common trust funds;
      • Nominees and custodians;
      • Financial institutions, brokers and other intermediaries which collect interest or dividends for a payee or otherwise acts as a middleman between the payor and payee; and,
      • Charitable remainder trusts which are tax exempt.

      Individuals who might otherwise be exempt from withholding regulations are not exempt from these reporting regulations. In addition, no return of information would be required on sales at the issue price of interests in regulated investment companies that compute their current price per share for purposes of distributions, redemptions, and purchases so as to stabilize the price per share at a constant amount that approximates its issue price or the price at which it was originally sold to the public.

      No reporting is required on the following payments:

      • Non-transferable obligations (example: savings accounts, checking accounts and NOW accounts);
      • Retirement of short term original issue discount;
      • Callable obligations (that have no premium or discount);
      • Obligations as to which the gross proceeds are report- able under other provisions of the law;
      • Sales of foreign currency (other than a sale on a forward contract or regulated futures contract); and,
      • Sales of a fractional share of stock if the gross proceeds on the sale of the fractional share are less than $20.

      In the case of redemptions of stock or retirement of securities, only the broker responsible for paying the holder, or crediting the gross proceeds to the customer's account has to report the sale.

      TRANSITIONAL RULE

      For reporting periods ending before January 1, 1984, a member in lieu of the transaction reporting noted above may report for each customer account:

      • Name of the customer;
      • Address;
      • Taxpayer Identification Number;
      • Aggregate gross proceeds of all sales of the account during the reporting period for which a return of information is required; and,
      • Any other information required by Form 1099.

      Additionally, such information may be submitted on hard copy Form 1099's for periods that end before January 1, 1984, or begin before 30 days after the date on which a timely filed request to file information returns on Form 1099 is denied by the IRS.

      EFFECTIVE DATE

      The regulations apply with respect to transactions occurring on or after July 1, 1983.

      EXPANDED INTEREST AND ORIGINAL ISSUE DISCOUNT REPORTING

      What to Report

      The regulations provide generally that anyone who pays interest and certain middlemen (including broker-dealers) who receive interest on behalf of other persons must make an information return if the amount of interest paid to, or received on behalf of, such person aggregates $10 or more during the calendar year.

      "Interest" is defined in the regulations to include, among other things:

      • Interest on an obligation;
      • Interest on deposits left with broker-dealers;
      • Any payment made in lieu of interest to a person whose obligation has been borrowed in connection with a short sale or other similar transaction; and,
      • Interest paid on amounts held by investment companies or other pooled funds or trusts.

      Interest excluded from the reporting requirements includes:

      • Interest on an obligation issued by a natural person; and,
      • Interest on any obligation if such interest is exempt from taxation.

      For payments of interest (other than original issue discount), an information return must be made for the calendar year on Forms 1096 and 1099 which show:

      • Aggregate amount of the payments;
      • Name;
      • Address;
      • Taxpayer Identification Number; and,
      • Any other information required by the forms.

      ORIGINAL ISSUE DISCOUNT

      As was previously noted in Notice to Members 83-10, the provisions of the proposed regulations with respect to original issue discount were perhaps the most complex and troublesome for members due to the lack of reference data on these instruments. As a result of comments to the IRS on the proposed regulations in this area by the NASD, SIA, and others, the Treasury Department announced in a news release, dated December 30, 1982, that the lack of information as to original issue discount obligations would be considered reasonable cause for failure to comply with the reporting requirements until December 31, 1983.

      In the final regulations, the IRS announced that they would publish a list of publicly traded original issue discount obligations that may be relied on in determining the amount of original issue discount which would be subject to reporting. Beginning January 1, 1984, members may rely on the IRS's publication to determine whether an obligation is issued with original issue discount and the amount of original issue discount subject to reporting. These actions by the IRS will serve to substantially lessen the burden of reporting in this area.

      Long term discount obligations in registered form are not included in the delayed reporting period as reporting on these obligations was required prior to TEFRA. Savings bonds are also not included since they are not considered by the IRS to be original issue discount obligations. For obligations issued at a discount and paying stated periodic interest, reporting on such interest is required at all times after December 31, 1982.

      How to Report

      Information returns must be made for the calendar year and must be filed on Forms 1096 and 1099. The regulations provide that returns may be made on a transactional basis if the interest payment is made on a U.S. Savings Bond, an interest coupon, short term original issue discount obligations or any other similar obligation. Magnetic media filing is permitted; however, such submission must conform to rules governing the submission of data in this form.

      When to Report

      Information returns with respect to interest reporting must be filed after September 30th of the reporting year and no later than February 28th of the following year. Members electing transactional reporting may report at any time but in no event later than February 28th of the year following the calendar year in which interest was paid. Returns shall be filed with the appropriate IRS Center, the address of which is listed in the instructions for Form 1096.

      * * *

      While repeal of withholding is anticipated, members should bear in mind that any compromise proposal probably will include an even further extension of reporting requirements and back-up withholding at the source for incorrect reporting or a failure to report. For example, currently under Sections 316 and 317 of TEFRA, if a taxpayer fails to provide or provides an obviously incorrect Taxpayer identification number, the person required to make an information return would be required to withhold 15% of any amount required to be reported under the regulations including interest, dividends and gross proceeds. Members should familiarize themselves with these and other withholding provisions which may ultimately be imposed and assess their impact on their own operations.

      Members who utilize outside service bureaus for recordkeeping purposes are urged to make contact with these agencies to ensure that systems are being developed to comply with these reporting requirements. Members who clear on a fully-disclosed basis should make arrangements with their clearing firms to insure that their reporting obligations are also fulfilled.

      Questions concerning these regulations should be directed to the appropriate IRS contact person listed in the attached notices. For information returns of brokers, contact:

      Gregory A. Roth at (202) 566-3238

      For expanded interest and OID reporting, contact:

      Diane L. Kroupa at (202) 566-3828

      Please direct any questions covering this notice to James M. Cangiano, Assistant Director, Department of Policy Research, at (202) 728-8273.

      Sincerely,

      Gordon S. Macklin
      President

      Attachments

      federal register

      DEPARTMENT OF THE TREASURY

      Internal Revenue Service

      28 CFR Part 1

      [TJX 7873]

      Income Tax; Taxable Years Beginning After December 31, 1953; Information Returns of Brokers.

      AGENCY: Internal Revenue Service, Treasury.

      ACTION: Final regulations.

      SUMMARY: This document contains final regulations relating to information returns of brokers. Changes to the applicable tax law were made by the Tax Equity and Fiscal Responsibility Act of 1982. The regulations require brokers to make returns of information on dispositions (including short sales) of securities commodities, regulated futures contracts, and forward contracts Effected for customers. They also require barter exchanges to make returns of information with respect to exchanges of property or services through the barter exchange. The regulations affect brokers effecting dispositions (including short tales) of securities, commodities, regulated futures contracts, and forward contracts. and barter exchanges, providing them with the guidance seeded to comply with the law,

      DATES: Effective on March 3, 1983.

      The regulations apply with respect to transactions occurring on or after July 1. 1983.

      FOR FURTHER INFORMATION CONTACT: Gregory A. Roth of the Legislation and Regulations Division, Office of Chief Counsel Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C 20224, Attention: CC:LR:T, 202-568-3238 (not a toll-free call).

      SUPPLEMENTARY INFORMATION:

      Background

      On November 15, 1982, the Federal Register published proposed amendments to the Income Tax Regulations (28 CFR Part 1) under section 6045 of the Internal Revenue Code of 1954 (47 FR 51415). The amendments were proposed to provide rules relating to returns of brokers under section 6045 of the Internal Revenue Code of 1954. Section 311 of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat 600) amended section 6045.

      A public hearing was held on January 27, 1983. After consideration of all comments regarding the proposed amendments, those amendments are adopted as revised by this Treasury decision.

      Explanation of Provisions

      The final regulations generally require brokers to make returns of information with respect to sales by customers. In addition, barter exchanges are required to file returns of information on exchanges of property or services through the barter exchange if there are at least 100 such exchanges during the calendar year. The rules in the final regulations are substantially the same as the rules in the notice of proposed rulemaking, which are summarized in the preamble of the notice of proposed rulemaking. Several rules have been changed, however, in response to public comments received. These changes are summarized below.

      Comments and Changes Due to comments

      A number of comments suggested that ; the regulations should permit reporting on an aggregate rather than a transactional basis. For reasons set forth below, the Internal Revenue Service believes that transactional reporting is necessary. The Service recognizes, however, that broken would benefit from additional time to implement a transactional reporting system. Accordingly, the final regulations permit brokers and barter exchanges to elect aggregate reporting for calendar year 1983 and should provide brokers and barter exchanges with sufficient time to implement a transactional reporting system in a cost-efficient manner.

      Transactional reporting is necessary. as a general rule, so that the amount received in a sale of property can be matched with the basis of the property to determine gross income. The Service received numerous comments suggesting that aggregate reporting would reduce the burden on reporters and should be adequate for the Service's needs. These comments were given careful consideration. In the case of broker reports that provide only gross proceeds information, however, the Service's planned uses of the reports (selecting returns for correction processing under the information returns processing program, selecting returns for audit implementing audits, and monitoring taxpayer compliance) generally require transactional data. Transactional data facilitates thorough, accurate, and cost-efficient audits.

      In the case of transactions in regulated futures contracts, however, the Service has concluded that aggregate reporting may provide adequate information since such reporting generally provides sufficiently accurate gross income information. Accordingly, the final regulations provide special aggregate reporting requirements for regulated futures contracts. A broker is required to separately report such contracts annually and on an account-by-account basis. As to regulated futures contracts in each customer account, the broker must report the realized profit or loss during the year, the unrealized profit or loss at the end of the preceding year, the unrealized profit or loss at the end of the year, and the unadjusted taxable gain or loss for the year. The reporting rules were formulated solely taking into consideration the optimal form of reporting of commodities transactions in general and without regard to considerations of the tax treatment of options on futures.

      The Service intends to monitor taxpayer compliance with respect to regulated futures contracts to determine whether aggregate reporting hampers enforcement efforts to reduce avoidance of tax If abuses are detected, the Service will reconsider these special reporting rules for regulated futures contracts.

      Several comments objected to the requirement in the proposed regulations that brokers and barter exchanges file returns of information on magnetic media. In general, the comments requested additional time to implement magnetic media reporting and suggested that requiring the use of magnetic media would impose an undue burden on brokers and barter exchanges that lack the necessary data processing capacity. The comments also suggested that the exemption for brokers with fewer than 250 customers and barter exchanges with fewer than 250 members or clients is of limited applicability.

      The final regulations require magnetic media reporting, but not until calendar year 1984. The final regulations provide, as did the proposed regulations, that the Commissioner may waive the magnetic media requirement on a showing of undue hardship. Existing brokers and barter exchanges must file an application for waiver on or before September 15, 1983; new brokers and barter exchanges will have at least two full months after becoming a broker or barter exchange to file an application for waiver. It is anticipated that the waiver authority will be exercised liberally so as not to unduly burden brokers and barter exchanges that lack both the necessary data processing facilities and cost-efficient access to computer service bureaus. This waiver policy will effect the relief that the exemption in the proposed regulations was intended to provide. Accordingly, these regulations do not include that exemption.

      The proposed regulations provided that for purposes of section 6045, a sale occurs on the date the customer becomes entitled to the gross proceeds thereof (settlement date). Comments received indicate that many brokers do not treat the settlement date as the sale date, but instead consider that a sale occurs on the date it is entered on the books of the broker (trade date). The final regulations allow a broker to report using either the settlement date or the trade date.

      The proposed regulations required brokers to report the cost of property used to cover a short sale in the year of cover. A number of comments objected to this requirement because such cost information frequently is not available to the broker. In addition, this requirement was inconsistent with provisions of the regulations mat required gross proceeds information with respect to other types of sales. The final regulations require broken to report the amount received on the entry into the short sale in the year of entry. The Service recognizes that in situations where a short sale is not covered in the year of entry, the report by the broker under section 0045 will be made with respect to a year preceding the year in which the customer reports the sale for tax purposes.

      The proposed regulations required brokers to report in terms of United States dollars the proceeds of a sale paid in a foreign currency directly or indirectly convertible into United States dollars, with conversion of the foreign currency into United States dollars at the exchange rate on the day of sale. Some brokers commented that it is difficult for them to determine what currencies are indirectly convertible. Additionally, some comments observed that there is no single exchange rate on a given day. Some comments expressed concern that the proposed regulations. in effect required brokers to keep dual records for all affected accounts: one in the foreign currency and another in United States dollars.

      The Service needs reports in United States dollars to audit returns effectively. However, the Service recognizes the need to provide some flexibility. Consequently, the regulations provide simplified rules for foreign currency conversion. Conversion is required as to any directly convertible foreign currencies and as to any indirectly convertible currencies specified in a notice published in the Federal Register. Conversion may be at the exchange rate on the day of sale or on the last day of the reporting period. A broker may use generally recognized financial publications as a source for exchange rates.

      The Service received a number of comments on the exemption provided in the proposed regulations for obligor payments on short-term obligations and certain types of accounts at financial institutions. Many of the comments requested clarification of the scope of the exemption. Other comments noted that certain similar transactions that have no tax effect or are already subject to reporting under provisions of the Internal Revenue Code other than section 6045 were not exempt under the proposed regulations.

      To clarify the proposed exemption and to extend the exemption to debt transactions otherwise adequately reported or not likely to have tax effect, the final regulations exempt obligor payments on nontransferable obligations (including savings bonds, savings accounts, checking accounts, and NOW accounts), obligations as to which the entire gross proceeds are reported by the broker under provisions of the Internal Revenue Code other than section 6045, retirement of short-term obligations that have original issue discount and retirement of book entry or registered form obligations as to which no interim transfers have occurred.

      Comments received from depository trusts, dividend reinvestment plans, and similarly situated brokers noted that they frequently purchase or redeem fractional shares for various reasons. It is possible that the cost of reporting such transactions would be disproportionate compared to the potential tax on such transactions. In response to these concerns, the regulations provide an exemption for redemptions and repurchases of fractional shares for less than $20.

      Some comments requested that barter exchanges be allowed to report exchanges in terms of trade credits rather than the cash equivalent of such credits. The Service is unable to use information reported in terms other than cash. Moreover, barter exchanges are better situated to convert credits into their cash equivalent than is the Service. Accordingly, this suggestion was not adopted.

      Special Analyses

      The Commissioner of Internal Revenue has determined that this rule is not a major rule as defined in Executive Order 12291. Accordingly, a Regulatory Impact Analysis is not required.

      The Secretary of the Treasury certifies that the regulations in this document do not have a significant impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. The Secretary's certification is based on a determination that the economic impact of the reporting requirements is primarily attributable to requirements imposed directly by the statute. The Service has significant discretion under the statute to require reporting of information other than information regarding gross proceeds. In general, however, the regulations require only gross proceeds information, the reporting of which is expressly contemplated by the statute. As to the manner of reporting, the regulations obtain the information contemplated by the statute in a usable form with the minimum possible impact on small entities and the economy in general The regulations require reports with respect to each transaction and require the use of magnetic media because alternative methods of reporting provide information in an unusable form and would not result in the improved compliance contemplated by Congress. In an effort to minimize the burdens on brokers, the regulations permit brokers to elect a monthly, quarterly, or annual reporting period. Brokers also may send statements to their customers on the same basis. Although the Service believes year-end statements to customers would contribute to significant improvements in taxpayer compliance, it recognizes the possibility that such a requirement would increase the burden imposed by the regulations. Finally, the impact of the regulations on small entities is minimized by certain exemptions.

      Drafting Information

      The principal author of these regulations is Gregory A. Roth of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations on matters of both substance and style.

      List of Subjects in 26 CFR 1.6001-1— 1.6109-2

      Income taxes, Administration and procedure, Filing requirements.

      PART 1—[AMENDED]

      Admendments to the Regulations

      The amendments to 28 CFR Part 1 are as follows:

      Paragraph. New § 1.6045-1 is added immediately after § 1.6044-5. The new section is set forth below.

      § 1.6045*1 Returns of Information of brokers and barter exchanges.

      (a) Meaning of terms. The following definitions apply for purposes of this section:
      (1) The term "broker" means a person that in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others. (2) The term "customer" means, with respect to a sale effected by a broker, the person (other than such broker) that makes the sale, if the broker acts as—
      (i) An agent for such person in the sale;
      (ii) A principal in the sale: or
      (iii) The participant in the sale responsible for paying to such person or crediting to such person's account the gross proceeds on the sale.
      [3] The term "security" means—
      (i) A share of stock in a corporation (foreign or domestic):
      (ii) An interest in a trust
      (iii) An interest in a partnership;
      (iv) A debt obligation;
      (v) An interest in or right to purchase any of the foregoing in connection with the issuance thereof from the issuer or an agent of the issuer or from an underwriter that purchases any of the foregoing from the issuer, or
      (vi) An interest in a security described in paragraph (a](3) (i) or (iv) (but not including options or executory contracts that require delivery of such type of security).
      (4) The term "barter exchange" means any person with members or clients that contract either with each other or with such person to trade or barter property or services either directly or through such person. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.
      (5) The term "commodity" means—
      (i) Any type-of personal property or an interest therein (other than securities as defined in paragraph (a)(3)) the trading of regulated futures contracts in which has been approved by the Commodity Futures Trading Commission:
      (ii) Lead, palm oil, rape seed. tea. tin, or an interest in any of the foregoing; or
      (iii) Any other personal property or an interest therein that is of a type the Secretary determines is to be treated as a "commodity" under this section, from and after the date specified in a notice of such determination published in the Federal Register.
      (6) The term "regulated futures contract" means a regulated futures contract within the meaning of section 12S6(b).
      (7) The term "forward contract" means—
      (i) An executory contract that requires delivery of a commodity in exchange for cash and which contract is not a regulated futures contract or
      (ii) An executory contract that requires delivery of personal property or an interest therein in exchange for cash, or a cash settlement contract if such executory contract or cash settlement contract is of a type the Secretary, determines is to be treated as a "forward contract" under this section, from and after the date specified in a notice of such determination published in the Federal Register.
      (8) The term "closing transaction" means any termination of an obligation under a forward contract or a regulated futures contract
      (9) The term "sale" means any disposition of securities, commodities, regulated futures contracts, or forward contracts for cash, and includes redemptions of stock, retirements of indebtedness, and enterings into short sales. In the case of a regulated futures contract or a forward contract the term "sale" means any closing transaction. When a closing transaction in a regulated futures contract involves making or taking delivery, the profit or loss on the contract is a sale, and, if delivery is made, such delivery is a separate sale. When a closing transaction in a forward contract involves making or taking delivery, the delivery is a sale without separation of the profit or loss on the contract from the profit or loss on the delivery, except that taking delivery for United States dollars is not a sale. The term "sale" does not include grants or purchases of options, exercises of call options, or enterings into contracts that require delivery of personal property or an interest therein.
      (10) The term "effect" means, with respect to a sale, to act as—
      (i) An agent for a party in the sale wherein the nature of the agency is such that the agent ordinarily would know the gross proceeds from the sale; or
      (ii) A principal in such sale. Acting as an agent or principal with respect to grants or purchases of options, exercises of call options, or enterings into contracts that require delivery of personal property or an interest therein is not of itself effecting a sale. A broker that has on its books a forward contract under which delivery is made effects such delivery.
      (11) The term "foreign currency" means currency of a foreign country.
      (12) The term "convertible foreign currency" means a foreign currency that is either
      (i) Readily convertible into United States dollars; or
      (ii) Of a type the Secretary determines is to be treated as a "convertible foreign currency," from and after the date specified in a notice of such determination published in the Federal Register.
      (13) The term "cash" means United States dollars or any convertible foreign currency.
      (b) Examples. The following examples illustrate the definitions in paragraph (a):
      Example (1). The following persons generally an broken within the manning of paragraph (a)(l):
      (i) A mutual fond, an underwriter of the mutual fund, or an agent for the mutual fund, any of which stands ready to redeem or repurchase than* in such mutual fund.
      (ii) An obligor that regularly issues and retires its own notes.
      (iii) A professional custodian (such as a bank) that regularly arranges sales for custodial accounts pursuant to instructions from the owner of the property.
      (iv) A depositary trust or other person who regularly acts as an escrow agent in corporate acquisitions, if the nature of the activities of the agent is such that the agent ordinarily would know the gross proceeds from sales.
      (v) A stock transfer agent for a corporation, which agent records transfers of stock in such corporation, if the nature of the activities of the agent is such that the agent ordinarily would know the gross proceeds from sales.
      (vi) A dividend reinvestment agent for a corporation that stands ready to purchase or redeem shares.

      Example (2). The following persons an not brokers within the meaning of paragraph (l)(a) in the absence of additional facts that indicate the person is a broker:

      (i) A stock transfer agent for a corporation, which agent daily records transfers of stock in such corporation, if the nature of the activities of the agent is such that the agent ordinarily would not know the gross proceeds from sales.
      (ii) A person (such as a stock exchange) that merely provides facilities in which others effect sales.
      (iii) An escrow agent or nominee if such agency is not in the ordinary course of a trade or business.
      (iv) An escrow agent otherwise a broker, which agent effects no sales other than such transactions as an incidental to the purpose of the escrow (such as sales to collect on collateral).
      (v) A floor broker on a commodities exchange, which broker maintains no records with respect to the terms of sales.
      (vi) A corporation that issues and retires long-term debt on an irregular basis.
      (vii) A clearing organization.

      Example (3). A. B. and C belong to a carpool in which they commute to and from work. Every third day. each member of the carpool provides transportation for the other two members. Because the carpool arrangement provides solely for the informal exchange of similar services on a noncommercial basis, the carpool is not a barter exchange within the meaning of paragraph (a)(4).

      Example (4). X is an organization whose members include retail merchants, wholesale merchants, and persons in the trade or business of performing services. X's member exchange property and services among themselves using credits on the books of X as a medium of exchange. Each exchange through X is reflected on the books of X by crediting the account of the member providing property or services and debiting the account of the member receiving such property or services. X also provides information to its member concerning property and services available for exchange through X. X charges its member a commission on each transaction in which credits on its books are used as a medium of exchange. X is a barter exchange within the meaning of paragraph (a)(4) of this section.

      Example (5). A warehouse receipt is an interest in personal property for purposes of paragraph (a). Consequently, a warehouse receipt for a quantity of lead is a commodity under paragraph (a)(5)(ii). Similarly an executory contract that requires delivery of a warehouse receipt for a quantity of lead is a forward contract under paragraph (a)(7)(U).

      Example (6). The only customers of a depository trust acting as an escrow agent in corporate acquisitions, which trust is a broker, an shareholders to whom the trust makes payments or shareholders for whom the trust is acting as an agent

      Example (7). The only customer of a stock transfer agent which agent is a broker an shareholders to whom the agent makes payments or shareholders for whom the agent is acting as an agent

      Example (8). D, an individual not otherwise exempt from reporting, is the holder of an obligation issued by P. a corporation. R. a broker, acting as an agent for P. retires such obligation held by D. Such obligor payments from R represent obligor payments by P. (See paragraph (cK3)(v)). D. the person to whom the grass proceeds an paid or credited by R. is the customer of R.

      (c) Reporting by broken—(1) Requirement of reporting. Any broker shall, except as otherwise provided, report in the manner prescribed in this section.
      (2) Sales required to be reported. Except as provided in paragraphs (c)(3). (c)(5). (g). and (p)(l), a broker shall make a return of information with respect to each sale by a customer of the broker effected by the broker in the ordinary course of a trade or business in which the broker stands ready to effect sales to be made by others.
      (3) Exceptions—(i) Sales for exempt recipients. No return of information is required with respect to a sale by a customer that is an exempt recipient described in section 3452(c}(2) (A) through (E) or (G) through (I) (relating to exemptions from withholding) as determined under § 35.34S2(c}-l.
      (ii) Multiple brokers. In the case of a sale in which a broker is instructed to initiate the sale by a person that is an exempt recipient described in section 3452(c)(2) (F) or (K)(i) (relating to exemptions from withholding) as determined under 5 35.3452(c)-l> no return of information is required with respect to die sale by the broker so instructed. In die case of a redemption of stock or retirement of securities, only the broker responsible for paying die holder redeemed or retired, or crediting die gross proceeds on the sale to such holder's account is required to report the sale.
      (iii) Custodians and trustees. No return of information is required with respect to a sale effected by a custodian or trustee in its capacity as such, provided die sale is otherwise reported by die custodian or trustee on a properly filed Form 1041 and all Schedule K-l reporting requirements are satisfied.
      (iv) Sales at issue price. No return of information is required with respect to a sale of an interest in a regulated investment company (within the meaning of section 851) that computes its current price per share for purposes of distributions, redemptions, and purchases so as to stabilize die price per share at a constant amount that approximates its issue price or die price at which it was originally sold to die public.
      (v) Obligor payment on certain obligations. No return of information is required with respect to payments representing obligor payments on—
      (a) Nontransferable obligations (including savings bonds, savings accounts, checking accounts, and Now accounts);
      (b) Obligations as to which the entire gross proceeds are reported by die broker of Form 1099 under provisions of the Internal Revenue Code other than section 6045 (including stripped coupons issued prior to July 1, 1982); or
      (c) Retirement of short-term obligations, as defined in § 3S.34S5(b)-l (b)(l), that have original issue discount as defined in section 1232(b)(l).
      (vi) Callable obligations. No return of information is required with respect to demand obligations that also are callable by the obligor and that have no premium or discount
      (vii) Foreign currency. No return of information is required with respect to a sale of foreign currency other than a sale pursuant to a forward contract or regulated futures contract that requires delivery of foreign currency.
      (viii) Fractional share. No return of information is required with respect to a sale of a fractional share of stock if the gross proceeds on the sale of the fractional share are less than $20.
      (ix) Certain retirements. No return information is required from an issuer or its agent with respect to the retirement of book entry or registered form obligations as to which the relevant books and records indicate that no interim transfers have occurred.
      (4) Examples. The following examples illustrate the application of the reporting requirements:
      Example (1). A. an individual, places an order with B. a person generally known in the investment community to be a federally registered broker/dealer, to sell A's stock in a publicly traded corporation. B, in turn, places an order to tell the stock with C a second broker, who executes the sale. B discloses to C the identity of the customer placing the order. C is not required to make a return of information with respect to the sale because C was instructed by B, an exempt recipient described in section 34a (cX2)(F) and S 35J452 (c)-l CD. to initiate the sale.
      Example (2). The facts are the same as in Example (1) except that B has an omnibus account with C so that B does not disclose to C whether the transaction is far a customer of B or for Fs own account C is not required to make a return of information with respect to the sale because C was instructed by B. an exempt recipient described in section 3452(c)(2)(F) and i 33452(c)-l CD. to initiate the sale.
      Example (3). D. an individual not otherwise exempt from reporting, owns bonds that an. held by E. a broker/dealer, in an account for D with E designated as nominee for D. Upon retirement of the bonds, the gross proceeds are automatically credited to the account of D. E is required to make a return of information with respect to the redemption because E is the broker responsible for making payment of the gross proceeds to 0.
      (5) Form of reporting for regulated futures contracts—(i) In general. A broker effecting closing transactions in regulated futures contracts shall report information with respect to regulated futures contracts solely in the manner prescribed in this paragraph (c)(5).
      In the case of a sale that involves making delivery pursuant to a regulated futures contract only the profit on loss on the contract is reported as a transactions with respect to regulated futures contracts under this paragraph (c)(5); such sales are, however, subject to reporting under paragraph (d)(2). The information required under this paragraph (c)(5) must be reported on a calendar year basis, unless the broker is advised in writing by an account's owner that the owner's taxable year is other than a calendar year and the broker elects to report with respect to regulated futures contracts in such account on the basis of the owner's taxable year. The following information must be reported as required by Form 1099 with respect to regulated futures contracts held in a customer's account:
      (a) The name, address, and taxpayer identification number of the customer.
      (b) The net realized profit or loss from all regulated futures contracts closed during the calendar year.
      (c) The net unrealized profit or loss in all open regulated futures contracts at the end of the preceding calendar year.
      (d) The net unrealized profit or loss in all open regulated futures contracts at the end of the calendar year.
      (e) The aggregate profit or loss from regulated futures contracts ((b)+(d)—(c))
      (f) Any other information required by Form 1099. See 17 CFR 1.33. For this purpose, the end of a year is the close of business of the last business day of such year. In reporting under this paragraph (c)(5), the broker shall make such adjustments for commissions that have actually been paid and for option premiums as are consistent with the books of the broker. No additional returns of information with respect to regulated futures contracts so reported are required.
      (ii) Examples. The following examples illustrate the application of the rules in this paragraph (c}(5):
      Example (1). On October 3a 1984. A. an individual who is a calendar year taxpayer not otherwise exempt from reporting, buys one March 1985 put on Treasury Bond futures (La. A purchases an option to enter into a short regulated futures contract of $100,000 face value U.S. Treasury bonds). A pays $500 for the option. On December 19, 1984. A, through B, exercises the option and enters into the futures contract On February 15. 1985, A. through B, enters into a dosing transaction with respect to the futures contract These are A's only transactions in the account Since B's books list A's regulated futures contract on December 31. 1984. B must report for A. for 1984. the unrealized profit or loss m the contract as of December 31, 1984. For 1985. B will report the same amount for A as the unrealized profit or loss at the beginning of 1985. The return of information for 1985 will also include the gain or loss from the contract in the net realized profit or loss from ail regulated futures contracts sales during 1985.
      Example (2). The facts an the same as in Example (1) except that A does not enter into the closing transaction, but instead, on March 2a 1985. B informs A that A will make delivery under the contract. On March 22. 1985. A does so: consequently, A becomes entitled to the gross proceeds. B enters the dosing transaction on its books on March 2a 1985. In addition to the return* of information required by paragraph (c)(5), as described in Example (1). B must report the March 22, 1985 delivery as a separate transaction. B may use as the sale date for the delivery either March 2a 1985. the date the transaction is entered on the books of B. or March 22, 1985. the date A becomes entitled to the gross proceeds. B may not deduct the $500 premium from the gross proceeds with respect to the March 22, 1985 delivery.
      Example (3). The facts an the same as in Example (2) except that A buys a call on Treasury bond futures and takes delivery. B will supply the returns of information required by paragraph (c)(5), as described in Example (1). B is not required to make a return of information with respect to A's taking delivery.
      Example (4). C an individual who is a calendar year taxpayer not otherwise exempt from reporting, has an account with D, a broker. C trades both regulated futures contracts and forward contracts through C's account with D. D must report Cs regulated futures contracts on an annual basis as required by paragraph (c)(5). With respect to C's forward contracts. D may elect to use the calendar month, quarter, or year as D's reporting period as provided in paragraph (c)(6).
      (6) Reporting periods and filing groups—(i) Reporting period—(a) In general A broker may elect to use the calendar month, quarter, or year as the broker's reporting period. A broker may separately elect a reporting period for each filing group.
      (b) Election. For each calendar year, a broker shall elect a reporting period by filing Forms 1096 and 1099 in the manner elected. A different reporting period may be subsequently elected by filing in the manner subsequently elected, provided no duplication of reported transactions results.
      (ii) Filing group—(a) In general A broker may elect to group customers or customer accounts by office, branch, department or other method of operational classification and separately file Forms 1096 and 1099 for each filing group.
      (b) Election. For each calendar year, a broker shall elect filing groups by filing Forms 1096 and 1099 in the manner elected. Different filing groups may be subsequently elected by filing in the manner subsequently elected, provided no duplication of reported transactions results.
      (iii) Example. The following example illustrates the rules of this paragraph (c)(6):
      Example. The A department of C a broker, files a separate report for each month of 1984. whereas the B department of C files one report for all of 1984. C makes no other reports or returns of information under section 6045 to 1984. C had thereby elected two Sling groups for 1984. the A department and the B department The A department has the calendar month as its 1984 reporting period, whereas the B department has the calendar year as its 1984 reporting period. The same result would occur if A and B were offices or branches of C
      (d) Information required.—(1) In general. A broker that is required to make a return of information under paragraph (c) during a reporting period shall report on a separate Form 1096 for each filing group, showing such information as may be required by Form 1096, in the form, manner, and number of copies required by Form 1096.
      (2) Transactional reporting. As to each sale with respect to which a broker is required to make a return of information under this section, the broker, except as provided in-paragraphs (c)(5) and (p)(1). shall show on Form 1099 the name, address, and taxpayer identification number of the customer, the property sold. Committee on Uniform Security Identification Procedures (CUSIP) number of the security sold (if known), the-gross proceeds, sale date, and such other information as may be required by Form 1099, in the form, manner, and number of copies required by Form 1099
      (3) Bond sales between interest payment dates. As to each sale of a debt obligation prior to maturity with respect to which a broker is required to make a return of information under this section, a broker shall show separately on Form 1099 the amount of accrued and unpaid, interest as of the sale date that must be reported by the customer as interest income under 51.61-7(d} (but not the amount of any original issue or market discount). Such interest information shall be shown in the manner and at the time required by Form 1099 and section 6049.
      (4) Sale date—(I) In general. Except as otherwise provided in this paragraph (d) (4), a broker may report a sale as occurring on the date the sale is entered on the books of the broker of the date the customer becomes entitled to the gross proceeds thereof. The method of reporting the date the sale occurs shall be consistently applied by the broker as to all reports with respect to a filing group during a calendar year.
      (ii) Exception. For purposes of this section, a broker shall report a short sale as occurring on the date the short sale is entered on the books of the broker.
      (iii) Example. The following example illustrates the application of the rules in this paragraph (d)(4):
      Example. C an individual not otherwise exempt from reporting, through I. a broker, enters into a short sale with respect to 100 shares of the stock of corporation B for S50 per share on July 12, 1985.1 is required to report the sale as occurring on July 1Z1885 with gross proceeds of S5.000 dollars.
      (5) Gross proceeds. The gross proceeds on a sale are the total amount paid to the customer or credited to the customer's account as a result of such sale reduced by the amount of any interest reported under paragraph (d}(3) and increased by any amount not so paid or credited by reason of repayment of margin loans. In the case of a closing transaction which results in a loss, gross proceeds are the amount debited from the customer's account The broker may, but is not required to. take commissions and option premiums into account in determining gross proceeds, provided the treatment chosen is consistent with the books of the broker.
      (6) Conversion of proceeds paid in foreign currency—(i) Convertible currency. In the event the proceeds of a sale are paid in convertible foreign currency, the amount subject to reporting under this section shall be computed by converting such foreign currency Into United States dollars at the exchange rate determined in the following manner. The broker may choose, with respect to a filing group, to use either the exchange rate on the date the sale occurs or the exchange rate at the close of business on the last business day of the reporting period in which the sale occurs. In either case, the broker may use as such exchange rate the rats at which the broker was able to purchase the foreign currency at the relevant time or, if there is no such rate, the exchange rate quote for such foreign currency at such time in any generally recognized financial publications provided the broker consistently uses the same publication.
      (ii) Nonconvertible currency.
      [Reserved.]
      (e) Reporting of barter exchanges—(1) Requirement of reporting. A barter exchange shall, except as otherwise provided, report in the manner prescribed in this section.
      (2) Exchanges required to be reported—(i) In general. Except as provided in paragraphs (e)(2)(ii), (g), and (p)(2), a barter exchange shall make a return of information with respect to exchanges of personal property or services through the barter exchange during the calendar year among its members or clients or between such persons and the barter exchange. For this purpose, property or services are exchanged through a barter exchange if payment for property or services is made by means of a credit on the books of the barter exchange or scrip issued by the barter exchange or if the barter exchange arranges a direct exchange of property or services among its members or clients or exchanges property or services with a member or client
      (ii) Exemption. A barter exchange through which there are fewer than 100 exchanges during the calendar year is not required to report for. or make a return of information with respect to exchanges during, such calendar year. The Commissioner may require multiple barter exchanges to be combined for purposes of the proceeding sentence upon a determination that a material purpose for the formation or continuation of one or more of the barter exchanges to be combined was to receive one or more exemptions pursuant to this subparagraph.
      (f) Information required—(1) In general. A person that is a barter exchange during a calendar year shall report on Form 1096 showing the information required thereon for such year.
      (2) Transactional reporting. As to each exchange with respect to which a barter exchange is required to make a return of information under this section the barter exchange, except as provided in paragraph (p) (2). shall show on Form 1099 the name, address, and taxpayer identification number of each member or client providing property or services in the exchange, the property or services provided, the amount received by the member or client for such property or services, the date on which the exchange occurred. and such other information as may be required by Form 1099, in the form, manner, and number of copies required by Form 1099.
      (3) Exchange date. For purposes of this section an exchange is considered to occur with respect to a member or client of a barter exchange on the date cash, property, a credit or scrip is actually or constructively received by the member or client as a result of the exchange. (See § 1.451-2 for rules pertaining to constructive receipt)
      (4) Amount received. The amount received by a member or client in an exchange includes cash received, the fair market value of any property or services received, and the fair market value of any credits to the account of the member or client on the books of the barter exchange or scrip issued to the member' or client by the barter exchange, but does not include any amount received by the member or client in a subsequent exchange of credits or scrip. For purposes of this section, the fair market value of a credit or scrip is the value assigned to such credit or scrip by the issuing barter exchange for the purpose of exchanges unless the Commissioner requires the use of a different value that the Commissioner determines more accurately reflects fair market value.
      (5) Meaning of terms. For purposes of this paragraph (f)—(i) A credit is an amount on the books of the barter exchange that is transferable from one member or client of the barter exchange to another such member or client, or to the barter exchange in payment for property or services;
      (ii) Scrip is a token issued by the barter exchange that is transferable from one member or client of the barter exchange to another such member or client or to the barter exchange, in payment for property or services; and
      (iii) Property does not include a credit or scrip.
      (6) Reporting period. A barter exchange shall use the calendar year as the reporting period.
      (g) Exempt foreign persona—(1) In general. No return of information is required with respect to the participation in any transaction daring a calendar year of a person who furnishes during such calendar year (or who has furnished during any of the two preceding calendar years) to the broker or barter exchange (irrespective of whether the branch of the broker or barter exchange is within or without the United States) a statement signed under penalty of perjury, that such person is an exempt foreign person, unless an employee or other agent of the broker or barter exchange who is responsible for receiving or reviewing such statement has actual knowledge that such statement is incorrect However, the broker or barter exchange may, at its option, require the statement to be provided with respect to each separate transaction. The broker or barter exchange shall retain such statement for at least four years following the end of the last calendar year for which a return of information is not required by reason of such statement See § 1.6001-1 (relating to records in general) for the requirements relating to the retention of statements provided under this paragraph (g). If, after providing such statement the person ceases to be an exempt foreign person, such person shall so notify the broker or barter exchange in writing within 30 days of this change in status. For purposes of this paragraph (g), an exempt foreign person is a person who, during a calendar year in which such person participates in transactions with respect to which a return of information would otherwise be required under this section—
      (i) Is neither a citizen of the United States, a resident of the United States, nor a person treated as a resident of the United States by reason of an election under section 6013 (g) or (h);
      (ii) Is not subject to the provisions of section 877;
      (iii) In the case of an individual has not been, and at the time the statement is furnished reasonably expects not to be, present in the United States for a period aggregating 183 or more days (or is a beneficiary of a tax treaty to which the United States is a party and pursuant to which gains from such person's transactions are exempt from Federal income taxation); and
      (iv) At the time the statement is furnished, is not or reasonably expects not to be, engaged in a trade or business in the United States during such year (or is a beneficiary of a tax treaty to which the United States is a party and pursuant to which gains from such person's transactions are exempt from Federal income taxation).
      (2) Example. The following example illustrates the application of the exception to the reporting requirements for exempt foreign persons:
      Example. In March 1983, F. an individual, opens an account with G. foreign branch of a brokerage firm incorporated in the United States. G requires new customers to complete a form signed under penalty of penury that includes 4 questions corresponding to the 4 criteria far an exempt foreign person listed in paragraph (g)(l)(i) through (iv). Fs responses to the 4 questions indicate that the 4 criteria are satisfied, and the sole employee of G responsible for receiving and reviewing such statement has no actual knowledge to the contrary. G does not require F to provide a statement that F is an exempt foreign person for each separate transaction it effects on Pi behalf and does not require P to provide such a statement on a periodic basis. During 1984, 1985 and 1988, F does not furnish to G a statement that F is an exempt foreign person. If G is not notified by F that F has ceased to be an exempt foreign person, G is not required to make a return of information with respect to sales effected for F during 1983, 1984 and 1985. However, if no other exception applies, G is required to make a return of information with respect to sales effected for F during 1988. The same result would occur if G wen a United States branch of either a United States or a foreign brokerage firm.
      (h) Identity of customer—(1) In general. For purposes of this section, a broker or barter exchange shall treat the person who appears on the books and records of the broker or barter exchange with respect to property or services as the principals with respect thereto.
      (2) Examples.The following examples illustrate the rule of this paragraph (h):
      Example (1). The records of A. a broker, show an account in the name of "B". B is a nominee for C All reporting with respect to such account shall treat B as the customer.
      Example (2). J. an individual, places an order with H. a broker, to sell his stock that is held by P, a broker/dealer, in an account for ] with P designated as nominee for I, and to credit the gross proceeds from the sale to f" account with P. The account is in the name of P. so that his customer is P.
      (i) [Reserved.]
      (j) Time and place for filing. Forms 1096 and 1099 required under this section shall be filed after the last calendar day of the reporting period elected by the broker or barter exchange and on or before the end of the second calendar month following the close of the calendar year of such reporting period with the appropriate Internal Revenue Service Center, the address of which is listed in the instructions for Form 1096.
      (k) Requirement and time for furnishing statement—(1) Requirement for furnishing statements. A broker or barter exchange making a return of information under this section with respect to a transaction shall furnish to the person whose identifying number is (or is required to be) shown on such return a written statement showing the information required by paragraph (c)(5). (d). (f). or (p) of this section and containing a legend stating that such information is being reported to the Internal Revenue Service if the return of information is not made on magnetic media, this requirement may be satisfied by furnishing to such person a copy of ail Forms 1099 with respect to such person filed with the Internal Revenue Service Center. A statement shall be considered to be furnished to a person to whom a statement is required to be made under this paragraph (k) if it is mailed to such person at the last address of such person known to the broker or barter exchange.
      (2) Time for furnishing statements. A broker or barter exchange may furnish the statements required by this paragraph (k) yearly, quarterly, monthly or on any other basis, without regard to the reporting period elected by the broker or barter exchange, provided that all statements required to be furnished under this paragraph (k) for a calendar year shall be furnished on or before January 31 of the following calendar year.
      (l) Use of magnetic media—(1) In general. Except as otherwise provided by paragraph (1) (2) and (3), a broker or a barter exchange required to file returns of information under this section, shall, in lieu of filing Form 1099 for such year, file such returns of information on magnetic media authorized by the Commissioner and shall follow the appropriate revenue procedures for such magnetic media filing in lieu of following Form 1099 instructions.
      (2) Exception for undue hardship, (i) The Commissioner may authorize a broker or barter exchange to file returns of information on Form 1099 instead of on magnetic media if undue hardship is shown on an application filed with the appropriate Internal Revenue Service Center.
      (ii) In the case of a person who is a broker or barter exchange on July 1. 1983, an application to file returns of information on Form 1099 must be filed on or before September 15, 1983. In the case of a person who becomes a broker or barter exchange after July 1, 1983. such application must be filed by the end of the second month following the month in which such person becomes a broker or barter exchange.
      (3) Transitional rule. A broker or barter exchange may submit returns of information on Form 1099 for reporting periods that—
      (i) End before January 1, 1984; or
      (ii) Begin before 30 days after the date on which a timely filed request to file returns of information on Form 1099 is denied.
      (m) Reporting on options transactions.[Reserved]
      (n) Reporting on bond discounts.[Reserved]
      (o) Additional reporting by stock transfer agents. [Reserved]
      (p) Transitional rules—(1) Information required from brokers. In the case of reporting periods ending before January 1, 1984, a broker may show the information required by this paragraph (p)(1) on Form 1099 in lieu of the information required under paragraph (d)(2). As to each customer account for which a return of information is required under this section with respect to sales, the broker must report the name, address, and taxpayer identification number of the customer, the aggregate gross proceeds of all sales of the account during the reporting period for which a return of information is required under this section, and such other information as may be required by Form 1099. in the form, manner, and number of copies required by Form 1099.
      (2) Information required from barter exchanges. In the case of reporting periods ending before January 1, 1984, a barter exchange may show the information required by this paragraph (p)(2) on Form 1099 in lieu of the information required under paragraph (f)(2). As to each member or client providing property or services in an exchange for which a return of information is required under this section, the barter exchange must report the name, address, and taxpayer identification number of the member or client the aggregate amount received by the member or client during the reporting period for property or services provided by such member or client in exchanges for which a return of information is required, and such other information as may be required by Form 1099, in the form, manner, and number of copies required by Form 1099.
      (q) Effective date. This section applies to calendar year 1983 and all succeeding calendar years, and. as to 1983, only to transactions occurring on or after July 1, 1983.

      (Sees. 6Oll(e), 6045 and 7805 of the Internal Revenue Code of 1954. (98 SUL 610. 68A StaL 747,917:28 U3.C 6011(e), 6045, 7805)

      James L Owens,

      Acting Commissioner of Internal Revenue.

      Approved: March 3, 1983.

      John E. Chapoton.
      Assistant Secretary of the Treasury.

      [Fo Doc 83-5878 Filled 3-3-83 4:49 pm]

      BILLING CODE 4830-01-M

      26 CFR Parts 1 and 5f

      [T.D. 7S81]

      Income Tax; Information Reporting Requirements With Respect to Interest and Original Issue Discount

      AGENCY: Internal Revenue Service, Treasury.

      ACTION: Final regulations.

      SUMMARY: This document contains final regulations relating to information reporting requirements with respect to interest and original issue discount. Changes to the applicable tax law were made by the Tax Equity and Fiscal Responsibility Act of 1982. These regulations affect issuers of obligations, payors of interest, and certain recipients, and provide them with the guidance needed to comply with the law.

      DATES: The regulations apply to payments of interest and original issue discount made after December 31, 1982.

      FOR FURTHER INFORMATION CONTACT Diane L. Kroupa of the Legislation and Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington. D.C. 20224 (Attention: CC: LR: T) (202-56-3B28 or 3829).

      SUPPLEMENTARY INFORMATION:

      Background

      On November 15, 1982, the Federal Register published temporary regulations (47 FR 51364) and proposed amendments (47 FR 51412) to the Income Tax Regulations (28 CFR Part 1) under section 6049 of the Internal Revenue Code of 1954. These amendments were proposed to conform the regulations to section 309 of the Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L 97-248,98 Stat. 591). Several written comments responding to this notice were received. A public hearing was held on January 25, 1983. After consideration of all comments regarding the proposed amendments, those amendments are adopted by this Treasury decision with several revisions in response to the comments. The revisions and the comments are discussed below.

      Public Comments

      The regulations provide generally that payors who pay interest and certain middlemen who receive interest on behalf of other persons must make an information return if the amount of interest paid to, or received on behalf of, such person aggregates $10 or more during the calendar year. If an amount of tax is withheld under section 3451 with respect to a payment of interest however, an information return is required to be made irrespective of the amount of interest paid. The regulations define the term interest for purposes of information reporting. Commentators requested clarification that amounts paid with respect to commercial paper, repurchase agreements, and banker's acceptances constitute interest subject to reporting under section 6049. The regulations are amended to state specifically that such amounts constitute interest subject to reporting.

      The definition of interest is also amended, due to commentators' requests for clarification, to provide that amounts that a governmental entity pays with respect to a refund of tax are not interest subject to reporting under section 6049. Interest paid on amounts held as a security deposit or interest on amounts held in escrow to guarantee performance on a contract or to provide security is also not subject to information reporting under section 6049 unless the amount is deposited in a bank or savings institution.

      Merchandise or property provided to a payee as interest (or in lieu of a cash payment of interest) is interest subject to reporting under section 6049. The amount subject to reporting is the fair market value of such property.'

      The proposed regulations require insurance companies to report under section 6049 any interest paid when proceeds of a policy are delayed, whether or not the policy provides for an interest payment under those circumstances. Based on the comments received, the regulations are amended to require reporting of such interest only if the policy specifically provides that such interest be paid. Rev. Rul. 74-369, 1974-2 C.B. 393, holds that if interest is not paid pursuant to the terms of the policy, such interest is subject to reporting under section 6041 if it equals or exceeds $600.

      Commentators also requested clarification as to whether an information return is required to be made with respect to payments made to individuals who are exempt from withholding under section 3451. The regulations are amended to clarify that information returns are required to be made with respect to interest paid to individuals who are exempt individuals for purposes of the withholding requirements. An individual who is exempt from withholding as a result to filing an exemption certificate under the withholding provisions is not thereby exempt from reporting. Thus, payors are required to make information returns reporting the amount of interest paid to such individuals.

      The regulations provide that payments made to persons that are exempt recipients for purposes of the withholding requirements are not subject to reporting. Persons qualifying as exempt recipients are described in the regulations. If a recipient is exempt from withholding without filing an exemption certificate, payments made to the recipient are also exempt from reporting. Thus, in general, payments of interest made to a corporation are not subject to information reporting under section 6049.

      The proposed regulations require an information return to be made to an exempt recipient, however, with respect to original issue discount. Commentators pointed out certain problems in connection with reporting original issue discount. The Treasury Department announced in a news release that the lack of information as to discount obligations would be considered reasonable cause for failure to comply until December 31, 1983, with the reporting requirements of original issue discount that were added by the Tax Equity and Fiscal Responsibility Act of 1982. The Service will publish a list of publicly traded original issue discount obligations that may be relied on in determining the amount of original issue discount subject to reporting. Beginning , January 1, 1984, persons (other than the | issuer of an obligation) will be able to rely on the Internal Revenue Service's publication to determine whether an obligation is issued with original issue discount and the amount of original issue discount subject to reporting. No information return is required to be made with respect to exempt recipients.

      Comments received after the new release was published requested clarification of whether reporting on savings bonds and certain other discount obligations has been delayed. For long term discount obligations in registered form, information reporting was required prior to enactment of the Tax Equity and Fiscal Responsibility Act of 1982. Thus, these obligations are not within the scope of the deferred effective date for reporting on discount obligations. Savings bonds are not considered original issue discount obligations under section 1232A. Thus, reporting has not been delayed on savings bonds. For obligations issued at a discount and bearing stated interest, reporting is required on the stated interest at all times after December 31, 1982.

      The proposed regulations provide that middlemen who pay interest on United ; States savings bonds, interest coupons, and short term discount obligations and Federal agencies that pay interest on United States savings bonds may report en a transactional basis rather than on an annual aggregate basis. The proposed regulations require that the issuer's name, in addition to the middleman's name, be placed on the information return when an information return is made on a transactional basis. Certain commentators stated that this requirement complicated the processing of such transactions. The final regulations provide that only the middleman's name, and not the issuer's name, is required to be placed on the information return.

      The proposed regulations provide that no information return is required with respect to tax exempt obligations. Commentators requested that payors be permitted to rely on their customer's written statement that an interest coupon is exempt and, therefore, not subject to information reporting. The regulations are amended to provide that a holder of a tax exempt obligation must provide written certification to the payor (other than the issuer of the obligation) that interest represented by the coupon is exempt from taxation. Payors may rely on such certifications in not making an information return with respect to such coupons. A statement that interest coupons are exempt from taxation on the envelope or "shell" commonly used by financial institutions to process such coupons, signed by the payee, will be sufficient for this purpose if the envelope is properly completed (i.e., shows the payee's name, address, and taxpayer identification number). An issuer who receives the envelope or "shell" on which the payee has certified that the coupon is exempt from taxation when the obligation is not in fact tax exempt is required to make an information return.

      Commentators also solicited guidance concerning the form to be used when reporting on short term discount obligations. The regulations are clarified to state that discount on short term discount obligations is treated as a payment of interest that should be reported on Form 1099-INT. This form should be used to report discount on short term government obligations as well as short term corporate obligations.

      The proposed regulations provide that amounts paid to certain persons who are not United States persons will not be considered to be interest subject to reporting under section 6049. Under the proposed regulations, a payor may treat a payee as a foreign person for this purpose if the payor receives a statement, signed by the payee under penalties of perjury. In addition, if the payee is an individual, he must establish that he holds a passport from a country other than the United States. Various comments have indicated that the passport requirement is unduly burdensome, as many foreign individuals do not have passports and as, with respect to transactions effected other than in person, it is difficult administratively to confirm the possession of a non-United States passport. In response to these comments, the passport procedure has been eliminated.

      The regulations have been amended to expand upon the types of information that should be provided on the statement certifying the status of a payee as a non-United States person. Specifically, the statement must contain the name, address, and taxpayer identification number (if any) of the payee. In response to a request by various commentators that a special Internal Revenue Service form be provided for this statement, the regulations have been modified to indicate that an optional form (W-8) will be provided by the Internal Revenue Service for this purpose.

      Commentators also have requested clarification of the situations in which the statement described above must be provided to a payor. The regulations have been clarified to indicate that, in order to avoid reporting, the statement generally must be provided to the payor in each instance in which an exception to the definition of interest is dependent on a payee's status as a person who is not a United States person. However, the regulations have been amended to provide that the statement will not be required with respect to a particular payment made in a calendar year if, with respect to that or any other payment made by the payor to the payee in that year, the payor has received a Form 1001, a Form 4224 or other appropriate documentation indicating either that the payment is subject to reduced rates of tax under a treaty or is effectively connected with a United States trade or business of the payee. Similarly, the statement certifying the status of the payee as a foreign person is not required with respect to a particular payment made to a payee in a calendar year if the payor has actually withheld tax under subchapter A of chapter 3 of the Code on that or on any other payment made to the payee during that year.

      Certain exceptions to the definition of interest are provided in the proposed regulations for amounts paid by various enumerated foreign entities (e.g., a foreign corporation not engaged in trade or business in the United States during the calendar year). The regulations have been amended to provide more clearly that the exceptions apply only if one of the enumerated foreign entities is the obligor on an obligation with respect to which the amount in question is paid. Thus, the status of a paying agent or middleman as one of the enumerated foreign entities is not material to the issue of whether the amount paid by such paying agent or middleman is to be considered interest for purposes of reporting. Similarly, the fact that a paying agent or middleman is not one of such enumerated foreign entities will not cause an amount paid on an obligation issued by one of such entities to be recharacterized as interest subject to reporting.

      Under the proposed regulations the person required to report is responsible for determining whether foreign currency, not readily convertible into United States dollars, is nevertheless indirectly convertible into United States dollars. The regulations have been amended to give the responsibility for making this determination to the Secretary.

      Non-applicability of Executive Order 12291

      The Commissioner has determined that this Treasury decision is not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 28, 1982

      Regulatory Flexibility Act

      Pursuant to 5 U.S.C. 605(b), the Secretary of the Treasury has certified that the requirements of the Regulatory Flexibility Act do not apply to this regulation as it will not have a significant economic impact on a substantial number of small entities.

      The impact of the requirement that information returns be made with respect to payments of interest and original issue discount is due to requirements imposed directly by the statute. In the areas in which the Service has been given significant discretion under the statute, the Service has exercised its discretion so as to minimize the potential impact of reporting while at the same time ensuring compliance with the statute.

      For example, the statute permits regulations to be issued to require payors to furnish duplicate written statements to the payees of the amount of interest paid and the amount of tax withheld under section 3451, if any. The statute also permits regulations to be issued to require such payees to file this duplicate copy of the information return with the payee's tax return. No regulations have been issued under this authority. Thus, payors are not required to furnish duplicate copies of the information return to the payee, and payees are not required to attach the information return to their tax return.

      Drafting Information

      The principal author of these regulations is Diane L Kroupa of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. Personnel from other offices of the Internal Revenue Service and Treasury Department, however, participated in developing the regulations, both on matters of substance and style.

      List of Subjects in 26 CFR 1.6001-1— 1.6109-2

      Income taxes. Administration and procedure, Filing requirements. Reporting and recordkeeping.

      Adoption of Amendments to the Regulations

      Accordingly, 26 CFR Part 5f is amended by removing § § 5f.6049-l, 5f.6049-2, and 5f.6049-3, and 26 CFR Part 1 is amended as follows:

      PART 1—[AMENDED]

      Paragraph 1. The headings of §§ 1.6049-1,1.6049-2, and 1.6049-3 are revised to read as follows:

      § 1.6049-1 Returns of Information as to Interest paid in calendar years before 1M3 and original Issue discount Includible in gross income for calendar years before 1983

      * * * * *

      § 1.6049-2 Interest and original issue discount subject to reporting In calendar years before 1983.

      * * * * *

      § 1.6049-3 Statements to recipients of interest payments and holders of obligations to which there Is attributed original Issue discount in calendar years before 1983.

      §1.6049-1 [Amended]

      Par. 2. Section 1.6049-1 is amended—

      1. By removing the phrase "calendar years after 1962" each place it appears in paragraph (a)(l) (i) and (iii) and inserting in lieu thereof the phrase "calendar year before 1983".
      2. By removing the phrase "calendar year after 1970" each place it appears in paragraph (a)(l)(ii)(a), (iv), and in paragraph (a)(5), and inserting in lieu thereof the phrase "calendar year before 1983", and
      3. By adding the phrase "and on or before December 31, 1982" immediately after the phrase "issued after May 27, 1969 (other than an obligation issued by a corporation pursuant to a written commitment which was binding on May 27, 1969, and at all times thereafter)" the place it appears in paragraph(a)(1)(ii)(a)

      § 1.6049-2 [Amended]

      Par. 3. Section 1.6049-2 is amended by adding the phrase "and on or before December 31, 1982" immediately after the phrase "issued after May 27, 1969 (other than an obligation issued pursuant to a written commitment which was binding on May 27, 1969, and at all times thereafter]" the place it appears in paragraph (c}(2).

      §1.6049-3 [Amended]

      Par. 4. Section 1.6049-3 is amended—

      1. By removing the phrase "calendar year after 1962" the place it appears in paragraph (b)(1)(i) and inserting in lieu thereof the phrase "calendar year before 1983", and
      2. By adding the phrase "and prior to calendar year 1983" immediately after the phrase "calendar year after 1970" the place it appears in paragraph (b)(1)(ii)

      Par. 5. New §§ 1.6049-4,1.6049-5, and 1.6049-6 are added immediately after § 1.6049-3 to read as follows:

      § 1.6049-4 Return of information as to interest paid and original issue discount includible In gross Income after December 31, 1982.

      (a) Requirement of reporting—(1) In general Except as provided in paragraph (c) of this section, an information return shall be made by the persons described in paragraph (a)(2) of this section with respect to any payment of interest (as defined in § 1.6049-5) after December 31, 1982. Such return shall contain the information required in paragraph (b) of this section.
      (2) Persons required to wake reports. The persons required to make an information return under section 6049(a) and this section are—
      (i) Every person who is required to deduct and withhold the tax imposed by section 3451;
      (ii) Every person who makes a payment of interest aggregating $1O or more to any other person during a calendar year; and
      (iii) Every person who collects (or otherwise acts as a middleman (as defined in paragraph (f)(4) of this section) with respect to) payments of interest on behalf of another person aggregating $10 or more during a calendar year.
      (b) Information to be reported—(1) Interest payments. Except as provided in paragraph (b)(3) of this section, in the case of a payment of interest other than original issue discount treated as interest under § 1.6049-5(c), an information return on Forms 1096 and 1099 shall be made for the calendar year showing the aggregate amount of the payments, the name, address, and taxpayer identification number of the person to whom paid, the amount of tax deducted and withheld under section 3451 from the payments, and such other information as is required by the forms. An information return is required if the aggregate amount of interest is $10 or more unless the tax imposed by section 3451 is required to be withheld. In such event, the amount required to be shown is the amount subject to withholding even if such amount is less than $10.
      (2) Original issue discount. Except as provided in paragraph (b)(3) of this section, in the case of original issue discount an information return on Forms 1096 and 1099 shall be made for each calendar year of any holder of an obligation as to which there is original issue discount includible in gross income aggregating $10 or more (determined, if semiannual record date reporting is being used, under § 1.6049-l(a)(l)(ii)(i>)(2), by treating each holder as holding the obligation on every day it was outstanding during the calendar year). An information return shall be made, however, in any case in which an amount of tax is required to be deducted and withheld under section 3451. In such case, the amount required to be reported is the amount subject to withholding even if the amount of original issue discount includible in gross income is less than $10. With respect to an obligation described in § 1.1232-3A (e) or (f) (relating respectively to deposits in banks and similar financial institutions and to face-amount certificates). § 1.6O49-l(a)(1)(ii)(d) and the last sentence of § 1.6049-1(a)(1)(ii)(o)(2) shall apply. The information return shall show—
      (i) The name, address, and taxpayer identification number of each record holder for whom an amount of original issue discount is includible in gross income;
      (ii) The account, serial, or other identifying number of each obligation with respect to which a return is being made;
      (iii) The aggregate amount of original issue discount includible in the gross income of each holder for the period during the calendar year for which the return is made (or, if the aggregation rules of § 1.6O49-1(a)(1)(ii)(b)(2) are being used, the aggregate amount or original issue discount for the period such holder held the obligations). If, however, the semiannual record date reporting rules are being used under S 1.6O49-1(a)(1)(ii)(b)(1). the aggregate amount shall be determined by treating each record date holder as if he held each obligation on every day it was outstanding during the calendar year. For purposes of this section, an obligation shall be considered to be outstanding from the date of original issue (as defined in § 1.1232-3(b)(3));
      (iv) The amount of tax withheld under section 3451, if any;
      (v) The name and address of the person filing the return: and
      (vi) Such other information as is required by the forms. Section S 1.6049-l(a)(l)(ii) (b) and (c) shall apply for purposes of this paragraph.
      (3) Returns made by middleman. Every person acting as a middleman (as defined in paragraph (f)(4) of this section) shall make an information return on Forms 1096 and 1099 for the calendar year. In the case of interest payments (other than original issue discount), the return shall show the aggregate amount of such interest, the name, address, and taxpayer identification number of the person on whose behalf received, the amount of tax withheld under section 3451, if any, and such other information as is required by the forms. In the case of original issue discount, the return shall show the information required to be shown for the actual owner, as described in paragraph (b)(2) of this section. A middleman shall make an information return regardless of whether the middleman receives a Form 1099. A middleman shall not be required to make an information return if the payments of interest aggregate less than $10 unless such amount is subject to withholding under section 3451. If an amount of tax is required to be deducted and withheld under section 3451, a return shall be made irrespective of the amount of the payment and irrespective of whether the payment is made to an exempt recipient described in paragraph (c)(l)(ii) of this section.
      (4) Returns made with respect to payments on certificates of deposit issued in bearer form. Every person carrying on the banking business who makes payments of interest to another person (whether or not aggregating $10 or more) during a calendar year with respect to a certificate of deposit issued in bearer form shall make an information return on Forms 1096 and 1099. The information return shall show the information required in § 1.6049-l(a)fl)(vi) (a) through (e) inclusive and a statement as to the amount of tax withheld under section 3451, if any.
      (c) Information returns not required—
      (1) Payment to exempt recipient (i) In the case of a payment to a person described in paragraph (c)(1)(ii) of this section, no return shall be required to be made unless such payment is made by a person required to make a return by paragraph (a)(2](i) of this section (relating to persons required to withhold tax). Thus, a person who withholds tax under section 3451 is required to make an information return regardless of whether the payee is an exempt recipient described in paragraph (c)(1)(ii) of this section.
      (ii) An information return shall not be required with respect to payments made to—
      (A) A corporation as defined in section 7701(a)(3), whether domestic or foreign,
      (B) An organization exempt from taxation under section 501(a) or an individual retirement plan,
      (C) The United States or a State, the District of Columbia, a possession of the United States, or a political subdivision or a wholly-owned agency or instrumentality of any one or more of the foregoing,
      (D) A foreign government, a political subdivision thereof, or an international organization,
      (E) A foreign central bank of issue (as defined in § 1.895-l(b)(i) to be a bank which is by law or government sanction the principal authority, other than the government itself, issuing instruments intended to circulate as currency),
      (F) A dealer in securities or commodities required to register as such under the laws of the United States or a State,
      (G) A real estate investment trust (as defined in section 856),
      (H) An entity registered at all times during the taxable year under the Investment Company Act of 1940.
      (I) A common trust fund (as defined in section 584(a)).
      (J) A nominee or custodian.
      (K) A financial institution such as a mutual savings bank, savings and loan association, building and loan association, cooperative bank, homestead association, credit union, industrial loan association or bank, or other similar organization.
      (L) A broker as defined in section 6045(c). or
      (M) Any trust which—
      (1) Is exempt from tax under section 664(c) (i.e., a charitable remainder annuity trust or a charitable remainder unitrust), or
      (2) Is described in section 4947(a)(l) (relating to a certain charitable trust).
      A payor who may treat any person as an exempt recipient for withholding purposes as described in 9 31.3452(c)-l (b) through (p) without requiring such person to file an exemption certificate may treat the persons listed in this subdivision (ii)(A) through (M) as an exempt recipient for information reporting purposes. A payor shall make an information return with respect to an individual who files an exemption certificate to be exempt from withholding under section 3451. The individual is not exempt for reporting purposes. A payor shall make an information return with respect to a trust which is an exempt individual under section 3452(b)(4) and S 31.3452(b)-1(d). See § 1.6049-4(c)(2) providing that the trust satisfies the reporting requirements under section 6049 if the trust files a Form 1041 and furnishes a beneficiary a Form K-l containing the information required to be shown on the form, including amounts withheld under section 3451.
      (iii) The application of this paragraph (c) may be illustrated by the following examples:
      Example (1). In 1980, Corporation Y issued 10-year debentures with 9 percent interest coupons payable semiannually on June 30 and December 31. Individual F, who is exempt from withholding under section 3451, presents a coupon for payment at Bank M on the interest payment date. Bank M transmits the coupon to Bank N, which in turn presents the coupon to Corporation Y for payment Bank M is required to make an information return with respect to the payment to individual F under 11.6O49-4(a)(2)(iii). Bank N is not required to make an information return with respect to the payment to Bank M. and Corporation Y is not required to make an information return with respect to the payment to Bank N because Banks M and N are exempt recipients described in 11.6049-()()i)(K)
      Example (2). Broker B acquires a bond issued in 1980 by the United States Treasury through the Bureau of Public Debt Broker E sells interests in the bond to the public after December 31, 1982. A purchaser may acquire an interest in any interest payment falling due under the bond or an interest in the principal of the bond. The bond is held by Custodian H for the benefit of the persons acquiring these interests. Custodian H files an exemption certificate claiming exemption from withholding under I 31.345Z(c)-l(n). On receipt of interest and principal payments under the bond. Custodian H transfers the amount received to the person whose ownership interest corresponds to the component giving rise to the payment Under section 1232B, each bond component is treated as a bond issued with original issue discount equal to the excess of the stated redemption price at maturity over the purchase price of the bond component. Accordingly, H is required to make an information return setting forth the information required in § 1.6049-4(b)(2) with respect to each holder of an interest in the bond. The Bureau of Public Debt is not required to make an information return since it made payment to Custodian H who is an exempt recipient described in I 1.6049-j
      Example (3). On January 1, 1984, the United States Treasury through the Bureau of Public Debt issues $1 million of obligations with a maturity of 1 year or less. The obligations are represented by entries on records maintained through Federal Reserve banks and branches for the account of member banks of the Federal Reserve system. Bank O, which is a member bank of the Federal Reserve system, tenders an offer for $100,000 of the obligations. The Federal Reserve opens an account for Bank O showing that it owns $100,000 of the obligations. When Bank O sells any of these obligations to an investor, it maintains a book entry account showing such investor's ownership. Upon maturity, the United States Treasury credits the amount due the Federal Reserve bank holding an interest in the obligation. The Federal Reserve bank in turn credits the account of Bank O, which then credit the accounts of the persons owning the obligations. Bank O must make the information return required under section 6049 and this section with respect to the payments made by it to persons not described in § 1.6049-4(c)(l). Thus, if, at maturity of the obligation. Bank O held an obligation on its books for D. an individual Bank O is required to make an information return with respect to the payment made to individual D. Neither the Bureau of Public Debt nor the Federal Reserve bank is required to make an information return since such payments were made to persons described in § 1.6049-4(c)(1)(ii).
      Example (4). Assume the same fact s as example (3) except a brokerage house buys the $100,000 of obligations through the Federal Reserve bank. The Federal Reserve maintains a book entry account showing that a member bank holds $100,000 of obligations for a brokerage house. The brokerage house sells these obligations to its customers. The brokerage house holds $50,000 of the obligations for a pension trust $30,000 of the obligations for Corporation Z. and $10,000 of the obligations each for Individuals I and J The brokerage house is required to make an information return with respect to the payments of interest at maturity on the obligations it holds for its customers who are not described in 5 1.6049-4(c)(l). Thus, the brokerage house is required to make an information return with respect to the payments made to Individuals I and ]. No information return is required with respect to the payments made to the pension trust or Corporation Z because such persons are exempt recipients described in § 1.6049-4(c}(l)(ii). The Bureau of Public Debt and the Federal Reserve bank are not required to make an information return because they made payment to a person described in 11.6049-*(c)(1)(ii).
      (2) Payments by certain middlemen. An information return shall not be required if—
      (i) The record owner is required to file a fiduciary return on Form 1*41 disclosing the name, address, and taxpayer identification number of the actual owner, and furnishes Form K-l to each actual owner containing the information required to be shown on the form, including amounts withheld under section 3451;
      (ii) The record owner is a nominee of a banking institution or trust company exercising trust powers, and such banking institution or trust company is required to file a fiduciary return on Form 1041 disclosing the name, address, and identifying number of the actual owner, and furnishes Form K-l to each actual owner containing the information required to be shown on the form, including amounts withheld under section 3451;
      (iii) The record owner is a banking institution or trust company exercising trust powers, or a nominee thereof, and the actual owner is an organization exempt from taxation under section 501(a) for which such banking institution or trust company files an annual return, but only if the name, address, and taxpayer identification number of the record owner is included on or with the Form 1041 fiduciary return filed for the estate or trust or the annual return filed for the tax exempt organization.
      (d) Special rules—(1) Aggregation of payments. For purposes of paragraph (b) of this section, until such time as the Commissioner determines that it is feasible to require aggregation of payments on two or more accounts, insurance contracts, or investment certificates, and, until this section is amended accordingly to provide for reporting on an aggregate basis, the requirement for filing Form 1099 under this section will be met if a person making payments of interest subject to reporting files a separate Form 1099 with respect to each account insurance contract, or investment certificate. In the case of obligations described in section 6O49(b)(l)(A). separate Forms 1099 may be filed as provided in the preceding sentence with respect to holdings in different issues.
      (2) Treatment of original issue discount The amount of original issue discount subject to reporting under section 6049 shall be the amount of original issue discount includible in the gross income of any holder that is treated as paid under § 1.6049-5(c).
      (3) Conversion of amounts paid in foreign currency into United States dollars—(i) Convertible foreign currency. In the event that an amount of interest or an amount of original issue discount on an obligation with a maturity at issue of not more than 1 year is paid or credited in convertible foreign currency, the amount shall be converted into United States dollars, and the amount subject to reporting under section 6049 shall be computed on such United States dollar amount, on the date of the payment or crediting. For this purpose, the term "convertible foreign currency" means currency of a foreign country that either is readily convertible into United States dollars or is of a type the Secretary determines is to be treated as a convertible foreign currency from the date specified in a notice of such determination published in the Federal Register.
      (ii) Nonconvertible foreign currency. [Reserved]
      (iii) Original issue discount on foreign currency obligations with a maturity at issue of more than 1 year. [Reserved)
      (4) Determination of person to whom interest or original issue discount is paid or for whom it is received. Section 1.6049-l(a)(3) and (4) shall apply with respect to payments of interest and original issue discount after December 31.198Z
      (5) Payments by governmental units. In the case of payments made by any governmental unit or any agency or ,,' instrumentality thereof, the officer or %. employee having control of the payment of interest or original issue discount (or the person appropriately designated for purposes of this section) shall make the returns and statements required under section 6049.
      (6) When payment deemed made—(i) In general. Except as provided in paragraph (d)(6)(ii) of this section, for purposes of section 6049, interest is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and is made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition.
      (ii) Instruments paid on presentment or demand. In the case of a payment made on an obligation described in paragraph (e)(2) of this section (relating to transactional reporting), interest is deemed to have been paid at the time the obligation is presented for payment For example, interest represented by a coupon detached from a bond is considered paid for purposes of section 6049 when the coupon is presented for payment.
      (7) Permission to submit information required by Form 1099 on magnetic tape, For rules relating to permission to submit the information required by Form 1099 on magnetic tape or other media, see § 1.9101-1.
      (8) Obligations that are not exempt from taxation. When an issuer of an obligation that is not exempt from taxation receives an envelope or "shell", signed by the payee, stating that interest on the obligation is exempt from taxation under section 103(a) (as described in § 1.6049-5(b)(l)(ii)), the issuer shall make an information return under section 6049. The information return shall show the name, address, and taxpayer identification number of the person who signed the statement claiming that interest on the obligation is exempt from taxation, the amount of interest paid, and such other information as is required by the form. An information return is required regardless of the amount of interest The issuer shall also furnish a written statement to such person showing the information required by 5 1.6O49-6(b).
      (9) Savings bonds—(i) In general. A person who make* payment on a United States savings, bond when the bond is presented for payment shall report the difference between the amount to be paid and the amount paid for the bond. The amount subject to reporting shall not be reduced to take into account—
      (A) Amounts previously included in the income of a holder as a result of an election under section 434 to include annually the increase in the redemption price of the bond; or
      (B) Amounts accrued prior to transfer of the bond where the bond has been reissued in the name of the person presenting the bond for payment. With respect to a savings bond that is reissued in another person's name, the amount subject to reporting when the bond is reissued is the amount of interest that has accrued. With respect to a savings bond that is exchanged in a tax-deferred transaction (as described in section 1037], the amount subject to reporting is the amount of cash paid to the holder at the time of the transaction.
      (ii) Examples. The application of the provisions of paragraph (d)(10)(i) of this section may be illustrated by the following examples:
      Example (1). On June 10, 1943. A purchases a $50 Series E savings bond The amount paid for the savings bond is $37.50. A elects under section 454 to include the increase in the redemption price of the bond annually in income. A presents the bond to Bank M to be cashed on July 1, 1983. The amount to be paid on the bond on that date is $204.96. Bank M is required to make an information return under section 6049 showing that it paid $167.46 (the difference between $204.96 and $3730) of interest, without regard to A's election to include annually the increase in the redemption price of the bond.
      Example (2). On December 1.1970. B purchases a $500 Series E savings bond. The amount paid for the bond is $375. On August 1, 1984, the bond is reissued by the Bureau of Public Debt by deleting B's name and inserting the name of B's child. At the time of reissue, the redemption value of the bond is $1,015.80. The accrued interest is $640.80 (the difference between $1,015.80 and $375). The reissue is a taxable transaction, and B must include in income the accrued interest at the time of reissue. The Bureau of Public Debt is required to make an information return under section 6049 showing that it paid $640.80 of interest to B.
      Example (3). Assume the same facts as in example (2) except that B exchanges the bond for a Series HH savings bond in the amount of $1,000 issued in B's name. The exchange is tax-deferred under section 1037. The Bureau of Public Debt stamps a legend on the bond stating that interest of S625 has been deferred. The amount of $15.80 is paid to B. The Bureau of the Public Debt must make an information return showing that it paid $15.80 of interest to B.
      Example (4). Assume the same facts as in example (3) except that the exchange is not a tax-deferred exchange. The Bureau of the Public Debt must make an information return showing that it paid $640.80 of interest to B.
      (e) Transactional reporting—(1) In general. An information return required to be made under paragraph (b) of this section may be made on a transaction-by-transaction basis, rather than on an annual aggregation basis, if payment described in paragraph (e)(2) of this section is made by a person described in paragraph (e)(3) of this section.
      (2) Payments subject to transactional reporting. An information return may be made on a transactional basis if payment is made on—
      (i) A United States savings bond,
      (ii) An interest coupon (but see § 1.6049-5(b) which provides that no information return is required to be made with respect to an interest coupon that is exempt from taxation),
      (iii) A discount obligation having a maturity at issue of 1 year or less, including commercial paper and short-term government obligations defined in section 1232(a)(3). and
      (iv) Any obligation similar to those described in subdivisions (i) through (iii), The information return with respect to payments on the types of obligations described in this paragraph shall be made on Form 1099-INT. A payor may include all interest paid in one transaction on one information return, irrespective of whether obligations of different issuers are paid as part of the transaction.
      (3) Persons subject to transactional reporting. A person may make a return on a transactional basis if the person is—
      (i) A middleman (as defined in paragraph (f)(4) of this section] who is required to make an information return under paragraph (b)(3) of this section with respect to any payment described in paragraph (e)(2) of this section, or
      (ii) A federal agency making payments on a United States savings bond.
      (4) Transaction defined. For purposes of this paragraph (e), a transaction means a payment at one time on one or more obligations. For example, if an individual who is exempt from withholding under section 3451 presents at one time five Series EE bonds on each of which $3 of interest has accrued. $15 of interest will be paid as part of the transaction. Accordingly, an information return is required under § 1.6049-4 (a)(2)(iii) because the interest paid in the transaction exceeds $10. If only three of the savings bonds were presented, however, no return would be required even if the remaining two bonds were redeemed the following day. See paragraph (a)(2)(i) of this section for the requirement that an information return be made if any amount of tax is withheld under section 3451.
      (5) Information required. The information return for any transaction under paragraph (e)of this section shall show the following:
      (i) The name, address, and taxpayer identification number of the person to whom the interest is paid;
      (ii) The name and address of the person filing the form;
      (iii) The amount of interest paid;
      (iv) The amount of tax withheld under section 3451 if any; and
      (v) Such other information as is required by the form.
      (f) Definitions. For purposes of section 6049. this section, and § § 1.6049-5 and 1.6049-6—
      (1) Person. The term "person" includes any governmental unit, international organization, and any agency or instrumentality thereof. Therefore, interest paid by one of these entities must be reported unless one of the exceptions under section 6049 applies.
      (2) Natural person. The term "natural person" means any individual but shall not include a partnership (whether of not composed entirely of individuals), a trust or an estate.
      (3) Obligation. The term "obligation" includes bonds, debentures, notes, certificates, and other evidences of indebtedness regardless of how denominated.
      (4) Middleman—(i) In general. The term "middleman" means any person, including a financial institution as described in paragraph (c)(l)(K) of this section, a broker as defined in section 6O45(c), or a nominee, who makes payment of interest for, or collects interest on behalf of, another person, or otherwise acts in a capacity as intermediary between a payor and a payee. For example, a person (other than an issuer of an obligation) who makes payment on an interest coupon of the obligation to another person is a middleman, irrespective of whether such person purchases the coupon for his own account, accepts the coupon as agent for the payee, or otherwise deals with the coupon. The term "middleman" also includes a trustee, including a corporate trustee of a trust where the trust is the payee. See § 1.6O49-4(c)(2) providing that the trustee does not have to make an information return on Form 1099 to a beneficiary if the trustee is required to file Form 1041 and furnishes Form-K-1 to the beneficiary showing the information required to be shown on the form, including amounts withheld under section 3451. A person shall not be considered to be a middleman as to any portion of an interest payment which is actually owned by another person whose name is also shown on the information return filed with respect to such interest payment. Thus, in the case of a savings account jointly owned by a husband and wife, the husband will not be considered as acting in the capacity of a middleman with respect to his wife if his wife's name is included on the information return filed by the payor with respect to the interest.
      (ii) Example. The application of the provisions of paragraph (f)(4) of this section may be illustrated by the following example:
      Example. In January, 1984. Broker B purchases on behalf of its customer. Individual A, and obligation issued by partnership RR in a public offering on that date. Broker B holds the obligation for A throughout 1984. The obligation bean no stated interest and matures in January 1980, Broker B is a middleman with respect to the obligation of RR that it holds for A. Broker B is required to make an information return showing the amount of original issue treated as paid to A during 1984 under § 1.6O49-5(c).
      (g) Time and place for filling a return for the payment of interest—(1) Annual return. Except as provided in paragraph (g)(2) of this section, the returns required under this section for any calendar year for the payment of interest shall be filed after September 30 of such year, but not before the payor's final payment to the payee for the year, and on or before February 28 of the following year. Such returns shall be filed with the appropriate Internal Revenue Service Center, the address of which is listed in the instructions for Form 1096. For extensions of time for filing returns under this section, see § 1.6081-1.
      (2) Transactional return. In the case of a return under paragraph (e) of this section, relating to returns on a transactional basis, such return shall be filed at any time but in no event later than February 28 of the year following the calendar year in which the interest was paid. The return shall be filed with the appropriate Internal Revenue Service Center, the address of which is listed in the instructions for Form 1096. For extensions of time for filing returns under this section, see § 1.6081-1

      § 1.6049-5 Interest and original Issue discount subject to reporting after December 31, 1982

      (a) interest subject to reporting requirement. For purposes of 55 1.6049-4,1.6049-6 and this section, except as. provided in paragraph (b) of this section, the term "interest" means—
      (1) Interest on an obligation—
      (i) In registered form (as defined in § 5f.l03-1(c)), or
      (ii) Of a type offered to the public. Principles consistent with § 5f.l83-l shall be applied to determine whether an obligation is of a type offered to the public.
      (2) Interest on deposits with persons carrying on the banking business. Such term shall include deposits evidenced by time certificates of deposit issued in any amount whether negotiable or non- negotiable. The term "interest" includes payments to a mortgage escrow account and amounts paid with respect to repurchase agreements and banker's acceptances. Property which the payee receives from the payor as interest (or in lieu of a cash payment of interest) shall be interest for purposes of section 6049. The amount subject to reporting is the fair market value of such property.
      (3) Amounts, whether or not designated as interest paid or credited by mutual savings banks, savings and loan associations, building and loan associations, cooperative banks, homestead associations, credit unions industrial loan associations or banks, or similar organizations, in respect of deposits, face amount certificates, investment certificates, or withdrawable or repurchasable shares. Thus, even though amounts paid or credited by such organizations with respect to deposits are designated as "dividends", such amounts are included in the definition of interest for purposes of section 6049. The term "interest" includes payments to a mortgage escrow account and amounts paid with respect to repurchase agreements. Property which the payee receives from the payor as interest (or in lieu of a cash payment of interest) is "interest" for purposes of section 6049. The fair market value of such property is the amount subject to reporting.
      (4) Interest on amounts held by insurance companies under an agreement to pay interest thereon. Any increment in value of "advance premiums" "prepaid premiums", or "premium deposit funds" which is applied to the payment of premiums due on insurance policies, or made available for withdrawal by the policyholder, shall be considered interest subject to reporting. Interest that an insurance company pays pursuant to an agreement with the policyholder to a beneficiary because the payment due has been delayed is interest subject to reporting. Interest subject to reporting also includes interest paid by insurance companies with respect to policy "dividend" accumulations (see sections 61 and 451 and the regulations thereunder for rules as to when such interest is considered paid), and interest paid with respect to the proceeds of insurance policies left with the insurer. The so-called "interest element" in the case of annuity or installment payments under life insurance or endowment contracts does not constitute interest for purposes of section 6049.
      (5) Interest on deposits with brokers as defined in section 6045(c) and the regulations thereunder. Any payment made in lieu of interest to a person whose obligation has been borrowed in connection with a short sale or other similar transaction is subject to reporting under section 6049.
      (6) Interest paid on amounts held by investment companies as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. section 80 a-3) and on amounts invested in other pooled funds or trusts. For purposes of section 6049, interest paid on amounts invested in pooled funds or trusts, such as mortgage pass-through certificates or mortgage participation certificates, shall be considered to be the interest paid as stated on the certificate, and shall not be the interest on any notes or obligations underlying such certificates. See § 1.6049-4(c)(2) providing that in the case of interest paid on amounts invested in such pooled funds or trusts, the reporting, requirements of section 6049 shall be considered satisfied if the issuer files Form 1041 as the fiduciary of a grantor trust and furnishes Form K-l to each beneficiary, containing the information required by the form, including amounts withheld under section 3451. See § 31.3454(a)-l(a)(7) for the provisions relating to withholding.
      (b) Interest excluded from reporting requirement—(1) In general. The term "interest" does not include—
      (i) Interest on any obligation issued by a natural person as defined in § 1.6049-4(f)(2) irrespective of whether such interest is collected on behalf of the holder of the obligation by a middleman.
      (ii) Interest on any obligation if such interest is exempt from taxation under section 103(a), relating to certain governmental obligations, or interest which is exempt from taxation under any other provision of law without regard to the identity of the holder. The holder of a tax exempt obligation must provide written certification to the payor (other than the issuer of the obligation) that the obligation is exempt from taxation. A statement that interest coupons are tax exempt on the envelope or "shell" commonly used by financial institutions to process such coupons, signed by the payee, will be sufficient for this purpose if the envelope is properly completed (i.e, shows the name, address, and taxpayer identification number of the payee). A payor may rely on such written certification in treating such interest as tax exempt for purposes of section 604a See § 1.6O49-4(d}(8) with respect to the requirement that the issuer of a taxable obligation shall make an information return if such issuer receives and envelope which improperly claims that the interest coupons contained therein are tax exempt.
      (iii) Interest on amounts held in escrow to guarantee performance on a contract or to provide security. However, interest on amounts held in escrow with a person described in paragraph (a) (2) or (3) of this section is interest subject to reporting under section 6049.
      (iv) Interest that a governmental unit pays with respect to tax refunds.
      (v) Interest on deposits posted for security, such as deposits posted with a public utility company. However, interest on deposits posted fox security with a person described in paragraph (a) (2) or (3) of this section is interest subject to reporting under section 6049.
      (vi) Any amount paid to—
      (A) Any nonresident alien or foreign corporation, if the amount paid is subject to withholding of tax under subchapter A of chapter 3 of- the Code by the person paying such amount, or
      (B) Any nonresident alien or foreign corporation, if the amount paid would be subject to withholding of tax under subchapter A of chapter 3 of the Code by the person paying such amount but for the fact that—
      (1) Under section 862(a)(l) such amount is considered to be from sources outside the United States,
      (2) The amount is exempted from withholding of tax by reason of the provisions of a tax treaty,
      (3) The amount of tax is exempt from withholding of tax under section 1441(a) or 1442(a) by reason of the application of section 1441(c) and paragraph (a) or (f) of § 1.1441-4, or
      (4) The amount is original issue discount (within the meaning of section 1232 (b)(l)),
      (vii) Any amount paid with respect to an obligation of, or a deposit with, an issuer or other obligor which is—
      (A) A foreign government or international organization or any agency or instrumentality thereof,
      (B) A foreign central bank of issue,
      (C) A foreign corporation not engaged in trade or business in the United States within the calendar year of the payment,
      (D) A foreign corporation, the interest payments of which would be exempt from withholding under subchapter A of chapter 3 of the Code if such an amount were paid to a person who is not a United States person, or
      (E) A partnership which is not engaged in a trade or business in the United States within the calendar year of the payment and which is composed in whole of nonresident alien individuals or persons described in paragraph (b)(l)(vii) (A) through (C) of this section.
      (viii) Any amount on which the person making the payment is required to deduct and withhold a tax under section 1451 (relating to tax-free convenant bonds), or would be so required but for section 1451(d) (relating to benefit of personal exemptions).
      (ix) Any amount not otherwise described in paragraph (b)(l) of this section which is paid outside the United States and which is income from sources outside the United States within the meaning of section 882(a)(l).
      (2) Amount paid to persons who are not United States persona, (i) A payor may treat an amount as an amount described in paragraph (b)(1)(vi)(A) of this section if such payor in fact withholds tax on such amount under subchapter A of chapter 3 of the Code in accordance with the provisions of chapter 3.
      (ii) Unless it has actual knowledge that the payee of an amount is a United States person, a payor may treat such amount as an amount described in paragraph (b)(1)(vi)(B)(2) of this section if with respect to such amount the payor is provided by the payee with a Form 1001 in accordance with § 1.1441-4 (by or (c), or with a certificate or corresponding letter in accordance with § 1.1441-6(c)(3).
      (iii) Unless it has actual knowledge that the payee of an amount is a United States person, a payor may treat such amount as an amount described in paragraph (b)(l)(vi)(B)(3) of this section if with respect to such amount it has received a Form 4224 from the payee in accordance with § 1.1441-4(a) or has on file with respect to such amount a notice described in § 1.1441—4(f)(2)(ii).
      (iv) Unless it has actual knowledge that the payee of an amount is a United States person, a payor may treat such amount as an amount described in paragraph (b)(1)(vi)(B) (7) or (4) of this section if it receives a statement, signed by the payee under penalties of perjury, certifying that the payee is not a United States person, or, in the case that the payee is an individual, that he is neither a citizen nor a resident of the United States. In addition to such certification, the statement shall contain the name of the payee, the address of the payee, and the taxpayer identification number (if any) of the payee. The address provided for an individual shall be that of his permanent residence; the address provided for a partnership or corporation shall be the address of its principal office; and the address provided for a trust or an estate shall be the address of the permanent residence or principal office of any fiduciary of the trust or estate. The statement may be made, at the option of the payor on a Form W-fl or on a form prepared by the payor which is substantially similar to Form W-8. Blank copies of Form W-8 will be supplied to payors upon request to the district director. The statement must be received by the payor in the calendar year in which the payment is made or collected or in either of the preceding 2 calendar years. The payor, however, may require the statement from the payee each time it makes a payment to, or collects an amount on behalf of, the payee. The payor shall retain the statement for at least 4 years following the end of the last calendar year during which the amount to which the statement relates, is paid or collected. If the person providing the statement becomes a United States citizen or resident during the period to which the statement relates such person shall notify the payor in writing within 30 days of such change in status. In the case of a trust or an estate, the statement shall be provided by a fiduciary, as defined in section 7701 (a)(6), on. behalf of the trust or estate; and in the case of a partnership, the statement shall be provided by any general partner on behalf of the partnership. The payor need not receive the statement described in this paragraph (b)(2)(iv) with respect to an amount paid to a payee during a calendar year if, with respect to any other payment to such payee in that year, the payor has withheld tax under subchapter A of chapter 3 of the Code in accordance with the provisions of chapter 3 or if, with respect to any amount that is or may be paid to the payee during that year, the payor has received the documentation described in paragraph (b)(2) (ii) or (iii) of this section in accordance with the provisions of J 1.1441-4 or § 1.1441-6.
      (3) Amounts paid by certain foreign obligors and amounts from sources outside the United States, (i) The provisions of this paragraph (b)(3)(i) apply with respect to determinations made by paying agents and middlemen as to whether an amount is paid with respect to an obligation or deposit of an entity described in paragraph (b)(l)(vii) of this section and as to whether an amount is income from sources outside the United States for purposes of paragraph (b](l)(ix) of this section. Absent actual knowledge to the contrary, a paying agent or middleman may treat an entity as a foreign government, an international organization, or a foreign central bank of issue if the paying agent or middleman could treat such entity as an exempt recipient without requiring an exemption certificate as provided in § 31.3452(c)-1 (g). (h). or (i). Absent actual knowledge to the contrary, a middleman generally may treat a corporation as a foreign corporation if its name reasonably so indicates and may treat such corporation as a corporation either which is not engaged in trade or business within the United States or the interest payments of which would be exempt from withholding under subchapter A of chapter 3 of the Code if such payments were made to a person who is not a United States person. However, a paying agent of, or a middleman having a contractual relationship with, the foreign corporation with respect to the payment or collection of an amount must receive a statement, signed under penalties of perjury, from the secretary or other authorized representative of the foreign corporation either that the corporation is not, or does not expect during the calendar year of payment to be, engaged in trade or business in the United States or that the interest paid by the foreign corporation would be exempt from withholding under subchapter A of chapter 3 of the Code if such interest were paid to a person who is not a United States person. Absent actual knowledge to the contrary, a middleman generally may treat a domestic corporation as as corporation the interest payments of which would not be subject to withholding under subchapter A of chapter 3 of the Code if such payments were made to a person who is not a United States person if an annual report, offering circular, or other standard source of financial information published by the corporation reasonably so indicates. However, a paying agent of, or middleman having a contractual relationship with, a domestic corporation with respect to the payment or collection of an amount may, absent actual knowledge to the contrary, treat a domestic corporation as such a corporation only if the secretary or other authorized representative of the corporation provides the paying agent or middleman with a statement, signed under penalties of perjury, that interest paid by such corporation would not be subject to withholding under subchapter A of chapter 3 of the Code if such interest were paid to a person who is not a United States person. A paying agent or middleman may, absent actual knowledge to the contrary, treat a partnership as a partnership which is not engaged in trade or business in the United States during the calendar year of payment and which is composed in whole of nonresident alien individuals or persons described in paragraph (b)(l)(vii) (A), (B). or (C) of this section if it receives a statement, signed under penalties of perjury, from any general partner of the partnership that the partnership is not, and is not expected during the calendar year of the payment to be, engaged in trade or business in the United States and that all of its partners are, and are expected during the calendar year of payment to be, nonresident alien individuals or persons described in paragraph (b)(l)(vii) (A), (B), or (C) of this section. A statement received by a paying agent or middleman in accordance with the provisions of this paragraph (b)(3) must be provided to such paying agent or middleman in the calendar year in which a payment is made or collected or in either of the 2 preceding calendar years. The paying agent or middleman may, however, require such a statement from the corporation or partnership each time it makes a payment for the corporation or partnership. The paying agent or middleman shall retain the statement for at least 4 years following the end of the last calendar year during which an amount to which the statement relates is paid or collected. If after providing such statement the status of the corporation or partnership changes from that reflected in the statement, the corporation or partnership shall notify the paying agent or middleman within 30 days of such change in status.
      (ii) Notwithstanding the provisions of paragraph (b)(l)(vii) of this section, amounts described in such paragraph are considered to be interest for purposes of this section when paid within the United States to a United States person. In such case, the person required to report under section 6049 is the payor which makes the payment within the United States. For purposes of this paragraph, the term "United States person" is defined in section 7701(a)(30).
      (iii) Paragraph (b)(3)(ii) of this section shall not apply with respect to an international organization (as described in paragraph (b)(l)(vii)(A) of this section) which is paying interest within the United States if the international organization is an organization of which the United States is a member and which enjoys immunity with respect to the inviolatability of its archives pursuant to an international agreement having full force and effect in the United States.
      (iv) For purposes of paragraph (b)(3)(ii) of this section, a payor may, j unless it has actual knowledge to the contrary, treat a person to whom it makes a payment within the United States as a person who is not a United States person if, during the calendar year of payment, it withholds tax on any amount paid to such person under subchapter A of chapter 3 of the Code in accordance with the provisions of chapter 3 or, if, with respect to any amount which is or may be paid to such person during that calendar year, it has received documentation described in paragraph (b)(2) (ii), (iii), or (iv) of this section in accordance with the provisions of such paragraphs and of 81.1441-4 or § 1.1441-6.
      (4) Examples. The application of paragraph (b) of this section may be illustrated by the following examples:
      Example (1). Corporation X is a foreign corporation which is not engaged in trade or business in the United States during the calendar year. A, a United States citizen, holds bonds of Corporation X that were issued in a public offering. A collects the interest on such bonds by presenting the coupons to M, a paying agent of Corporation X whose office la in the United States. Amounts paid with respect to obligations of Corporation X are generally not considered to be interest for purposes of section 6049 since Corporation X is an entity described in paragraph (b)(l)(vii)(C) of this section. However, because M makes a payment of such amounts within the United States to a United States person, the payment by M is considered to be a payment of interest for purposes of section 6049, and M is required to report under section 6049.
      Example (2). The facts are the same as in example (1) except that A presents his coupons directly to Corporation X at its office in the United States. In accordance with paragraph (b)(3)(ii) of this section, the payment by Corporation X with respect to the coupons is considered to be a payment of interest for purposes of section 6049, and Corporation X is required to report.
      Example (3). The facts are the same as in example (1) except that A is a non-resident alien individual. A provides M with the statement described in paragraph (b)(2)(iv) of this section, which certifies that A is not a United States citizen or resident. Unless M has actual knowledge that the statement provided by A is false, M may rely on such statement and is not required to report under section 6049.
      Example (4). The facts are the same as in example (1) except that Corporation X is engaged in trade or business in the United States and 50 percent or more of its gross income for the preceding 3-year period described in section 861(a)(l)(C) has been income which is effectively connected to its United States trade or business. Corporation X is not a beneficiary of an income tax treaty to which the United States is a party. A presents its coupons for payment directly to Corporation X at its office outside the United States. The amount paid by Corporation X is not excluded from the definition of interest for purposes of section 8049 under either paragraph (b)(l)(vii) (C) or (D) of this section since Corporation X is engaged in trade or business in the United States and since all or a portion of the interest paid by it would be subject to withholding under subchapter A of chapter 3 of the Code if such interest were paid to a person who is not a United States person. Therefore, Corporation X is required to report the amount paid to A under section 6049.
      Example (5). The facts are the same as in example (4) except that Corporation X is a resident of a country which ha* an income tax treaty with the United States that precludes the United States from imposing tax on interest paid by residents of that country to persons who are not United States persons. Under paragraph (b)(l)(vii)(D) of this section, the amount paid by Corporation X on its bonds is not considered to be interest for purposes of section 6049 since, by reason of the application of a treaty, interest paid by Corporation X would be exempt from withholding under subchapter A of chapter 3 of the Code if such interest were paid to a person other than a United States person. Corporation X is not required to report on the amounts paid to A under section 6049.
      Example (6). The facts are the same as in example (5) except that A presents its coupons from the Corporation X bonds for payment to N, a paying agent of Corporation X in the United States. The payment by N to A is considered to be a payment of interest under paragraph (b)(3)(ii) of this section, and N is required to report the payment to A under section 6049.
      Example (7). Corporation Y is a domestic corporation, all of the gross income of which for the 3-year period described in section 661 (a)(l)(B) has been from sources outside the United States. B.-a United States citizen holds bonds issued by Corporation Y in a public offering. B presents the coupons from such bonds for payment to Corporation Y at an office maintained by Corporation Y outside the United States. Under paragraph (b)(l)(ix) of this section, the amounts paid by Corporation Y are not considered to be interest for purposes of section 6049 since such amounts are considered to be from sources outside the United States under sections 861(a)(l)(B) and 862(a)(l) and are paid outside the United States. Corporation Y is not required under section 6049 to report its payment to B.
      Example (8). D has a deposit in an account maintained with a foreign branch of R. a domestic corporation which carries on a commercial banking business. R makes payment of amounts with respect to such deposit outside the United States. Such amounts are considered to be income from sources outside the United States under sections 861(a)(l)(F)(i) and 862(a)(l) and. in accordance with paragraph (b)(l)(ix) of this section, are not considered to be interest for purposes of section 6049. Therefore, R is not required to report under section 6049 regardless of whether D is or is not a United States person.
      Example (9). The facts are the same as in example (8) except that O's deposit is in a Puerto Rican branch of a United States bank. The amounts paid with respect to such deposit are income from sources outside the United States within the meaning of sections 861(a)(l)(F)(i) and 882(a)(l). In accordance with the provisions of paragraph (b)(l)(ix) of this section, such amounts are not considered to be interest for purposes of section 6049. and R is not required by section 6049 to report the amounts paid to D regardless of whether D is or is not a United States person.
      Example (10). E, a nonresident alien individual, maintains an account in the United States with Corporation S, a domestic corporation which carries on a commercial banking business. S receives the statement described in paragraph (b)(2)(iv) of this section from E with respect to the amount paid on the deposit in E's account with S. The amount paid by S to E with respect E's deposit is considered to be from sources outside the United States under sections 861(a)(1)(A) and 882(a)(1) and is not subject to withholding under subchapter A of chapter 3 of the Code. In accordance with provisions of paragraph (b)(l)(vi)(B)(l) of this section, such amount is not considered to be interest for purposes of section 6049. Thus, S is not required to report.
      Example (11) U is a domestic corporation which is engaged in a commercial banking business in the United States and outside the United States through a foreign branch. F, an alien individual resident of the United States, holds a non-deposit obligation of U which is a part of a public debt issuance. P makes a demand for payment of the interest due on such obligation at the foreign branch of U. The amount paid by U is considered to be income from sources within the United States under section 881(a)(1) and is considered to be interest under section 6049. U. therefore, is required to report the payment to F under section 6049.
      Example (12). The facts are the same as in example (11} except that the obligation held by F was issued by W, a wholly-owned foreign subsidiary of U, W is not engaged in trade or business in the United States during the calendar year. F makes a demand for payment at the office of W outside the United States. Under paragraph (b)(l)(vii)(C) of this section, the amounts paid by W to F are not considered to be interest for purposes of section 6049. Therefore, W is not required under section 6049 to report the payment to F, regardless of whether F is or is not a United States person.
      Example (13). Q, a domestic corporation, acts within the United States as custodian for G with respect to obligations of Z that are owned by G. G is a nonresident alien individual who is a resident of a country with which the United States has an income tax treaty. Z is a foreign corporation the interest payments of which would not be subject to withholding under subchapter A of chapter 3 of the Code if such payments were made to a person who is not a United States person. During the preceding calendar year, Q received a Form 1001 from G in accordance with the provisions of ( 1.1441-6(c) with respect to interest paid on other corporate obligations held by Q on G's behalf. During the present calendar year Q collects amounts paid on the Z obligations on behalf of G. G does not give Q the statement described in paragraphs (b)(2)(iv) and (b)(3)(iv) of this section with respect to such amounts. However, as the Form 1001 submitted by G in the preceding calendar year is effective during the present calendar year with respect to certain amounts that are or may be paid to G, Q is not required to report on the amounts collected on G's behalf with respect to the Z obligations.
      (c) Original issue discount treated as payment of interest In determining whether an obligation is one which was issued at a discount and the amount of discount which is includible in income of the holder, a payor (other than the issuer of the obligation) may rely on the Internal Revenue Service's publication of publicly traded original issue discount obligations. In the case of an obligation as to which there is during any calendar year an amount of original issue discount includible in the gross income of any holder (as determined under sections 1232 and 1232A and the regulations thereunder), the issuer of the obligation or a middleman (as defined in S 1.6049-4(0(4)) shall be treated as having paid to such holder during such calendar year an amount of interest equal to the amount of original issue discount so includible without regard to any reduction by reason of a purchase allowance under section 1232(a)(2)(C)(ii). 1232A (a)(6) or (b)(4) or a purchase at a premium under 1232A(c)(4)(A) or paragraph (d)(2) of § 1.1232-3. Thus, the determination of the amount of original issue discount includible in the gross income of any holder with respect to any obligation shall be determined as if any holder of the obligation were the original holder. In the case of (1) an obligation to which section 1232A does not apply (for example, a short-term government obligation as defined in section 1232(a)(3)) and (2) an obligation issued on or before December 31, 1982, in bearer form, the amount of original issue discount includible in gross income shall be treated as if paid in the calendar year in which the date of maturity occurs or in which the date of redemption occurs if redemption occurs before maturity. The amount subject to reporting on an obligation issued in bearer form with a maturity at the date of issue of more than 1 year (a long term obligation) is the amount of original issue discount includible in the gross income of the holder during the calendar year of maturity or redemption if redemption occurs before maturity. The amount of original issue discount subject to reporting on a long term obligation shall not be reduced to reflect any purchase allowance. Discount on short term government obligations as defined in section 1232(a)(3), such as Treasury bills, and discount on other obligations with a maturity at the date of issue of not more than 1 year (a short term obligation), including commercial paper, when paid at maturity or redemption if redemption occurs before maturity, shall constitute a payment of interest for purposes of section 6049. In general, the amount subject to reporting on short term obligations is the difference between the stated redemption price at maturity and the original issue price. The procedure set forth in section 3455(b)(2)(B) and § 31.3455(b)-1(b)(3) for establishing the price at which a holder purchased an obligation subsequent to the date of original issue shall apply for purposes of section 6049. Any original issue discount on an obligation (including an obligation with a maturity of not more than 6 months from the date of original issue) held by a nonresident alien individual or foreign corporation is interest described in § 1.6049-S(b)(l)(vi)(A) or (B) and, therefore, is not interest subject to reporting under section 5f.6O49.

      §1.6049-6 Statements to recipients of interest payments and holders of obligations as to which there is attributed original Issue discount after December 31, 1982.

      (a) Requirement of furnishing statement to recipient Every person filing a Form 1099 under section 6049(a) and § 1.6049-4(e) shall furnish to the person whose identifying number is required to be shown on the form a written statement showing the information required by paragraph (b) of this section. With respect to interest other than interest reported on a transactional basis under J 1.6049-4(e), no statement is required to be furnished under section 6049(c) and this section if the aggregate of the payments for the calendar year is less than $10, unless such payment is subject to the tax imposed under section 3451. In the case of any payment that is subject to withholding under section 3451, a statement shall be furnished irrespective of the amount of the payment. With respect to payments which are reported on a transactional basis, no statement is required to be furnished under section 6049(c) and this section to a person if the payment of interest to (or received on behalf of) such person for the transaction is less than $10 unless the payment is subject to withholding under section 3451. Again, in the case of any payment that is subject to withholding under section 3451, a statement shall be furnished irrespective of the amount of the payment.
      (b) Form of statement. The written statement required to be furnished to a person under paragraph (a) of this section shall show the following information:
      (1) With respect to payments of interest (other than original issue discount) to any person during a calendar year, the statement shall show—
      (i) The aggregate amount of payments shown on Form 1099 as having been made to (or received on behalf of) such person;
      (ii) The amount of tax withheld under section 3451, if any;
      (iii) The name and address of the person riling the form; and
      (iv) A legend stating that such amount is being reported to the Internal Revenue Service.
      (2) With respect to original issue discount includible in the gross income of a holder of an obligation during a calendar year, the statement shall show—
      (i) The aggregate amount of original issue discount includible in the gross income by (or on behalf of) such person for the calendar year with respect to the obligation (determined by applying the rules of paragraph (b)(2) of § 1.6049-4);
      (ii) The amount of tax withheld under section 3451, if any;
      (iii) The account, serial, or other identifying number of each obligation with respect to which a return is being made:
      (iv) All other items shown on Form 1099 for such calendar year, and
      (v) A legend stating that such amount and such items are being reported to the Internal Revenue Service.
      (c) Time for furnishing statements. Each statement required by this section to be furnished to any person for a calendar year with respect to a payment of interest (other than interest where a middleman or a Federal agency makes a return on a transactional basis (as described in paragraph (e) of § 1.6049- 4)) shall be furnished to such person after April 30 of the year of payment and on or before January 31 of the following year, but no statement may be furnished before the final interest payment for the calendar year. If a middleman or a Federal agency makes a return on a transactional basis, the statement shall be furnished at, or any time subsequent to, the time of payment, but in no event later than January 31 of the year following the calendar year of payment.
      (d) Special rule. The requirements of this section for the furnishing of a statement to any person, including the legend requirement of paragraph (b)(l)(iv) and (2)(v) of this section, may be met by the furnishing to such person a copy of the Form 1099 filed pursuant to § 1.6049-4, or a reasonable facsimile thereof, in respect of such person.t However, in the case of Form 1099 with respect to original issue discount on obligations subject to section 1232A. a copy of the instructions must also be sent to such person. A statement shall be considered to be furnished to a person within the meaning of this section if it is mailed to such person at his last known address.

      PART 5f—[AMENDED]

      §§ 5f.6049-1, 51.6049-2 and 5f.6049-3 [Removed]

      Par. 6. Sections 5f.6049-l. 5f.6049-2. and 5f.6O49-3 of the Temporary Income Tax Regulations under the Tax Equity and Fiscal Responsibility Act of 1982 (26 CFR Part 5f) are hereby removed.

      This Treasury decision is issued under authority contained in sections 6049 (a), (b), and (d) and 7805 of the Internal Revenue Code of 1954 (96 Stat. 592. 594: 26 U.S.C 6049 (a), (b). and (d); 68A Stat. 917. 26 U.S.C. 7805). and in section 309 of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat 591).

      Koscoc L. Egger, Jr.,
      Commissioner of Internal Revenue.

      Approved: March 16, 1963.

      John E. Chapoton,
      Assistant Secretary of the Treasury.

      [FR Doc 83-7718 Filed 3-22-83:1:23 pin]

      BILLING CODE 4930-01-M

    • 83-38 SEC Adopts Amendments to Rule 10b-10; Confirmation Rule

      I M P O R T A N T

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members

      BACKGROUND

      On April 18, 1983, the Securities and Exchange Commission issued Release No. 34-19687 announcing the adoption of changes to Rule 10b-10 under the Securities Exchange Act of 1934 (17 CFR 240 lOb-10), the "securities confirmation rule," (the "Rule"). Rule 10b-10 requires broker-dealers to send customers a written confirmation on or before the completion of a transaction. It also prescribes the type of information required to be displayed on securities confirmations. This information varies with the circumstances of the transaction and the type of security.

      The amendments to Rule 10b-10 fall into two categories; the first concerns the confirmation requirements for shares of certain no-load, open-end registered investment companies and the second a requirement for disclosure of yield and call information for transactions in debt securities similar to those currently in effect for municipal securities.

      INVESTMENT COMPANY CONFIRMATIONS

      Since 1977, the Commission has granted exemptions to the requirement for immediate delivery of confirmations to allow broker-dealers having account management plans* to send monthly confirmations of certain transactions in "money market" funds. In response to the comments of the Association and others to proposed changes in the Rule, the Commission determined to extend the confirmation exemption to all transactions in investment companies that attempt to maintain a constant net asset value per share, that hold themselves out to be "money market" funds, or have at least 80% of their assets in debt securities maturing in 13 months or less, and charge no sales load or redemption fee. This exemption will be available to all broker-dealers that effect transactions in such funds, whether or not the broker-dealer is affiliated with the fund.

      Accordingly, for only this type of security, Rule 1Ob-10 will be amended to permit the use of monthly account statements where previously individual confirmations were required. The monthly account statements must be sent within 5 business days of the end of each monthly period and must include all information currently required in the quarterly confirmation requirements of Rule 10b-10 including:

      (1) All purchases, sales, dividends or distributions during the period.
      (2) The date of the transaction.
      (3) The identity, number and price of any securities purchased or sold.
      (4) The total number of shares of such securities in such customer's account.
      (5) Any remuneration received or to be received in connection with the transaction.

      This requirement becomes effective July 25, 1983.

      CONFIRMATION OF DEBT SECURITIES

      The second part of the amendments to Rule 10b-10 requires the disclosure on confirmations of yield and call information for transactions in debt securities. "Debt securities" are defined in the rule as any instrument which evidences a liability of an issuer and includes bonds, debentures, notes or fractional or participation interests therein. The rule is also applicable to transactions in government securities (except U.S. Savings Bonds) and certain other debt instruments described below. This new disclosure requirement is structured as follows:

      (1) As to trades in debt securities effected exclusively on a dollar price basis, the dollar price of the trade and the yield to maturity based on that dollar price must be displayed.
      (2) As to trades in debt securities effected on a yield basis:
      (i) The dollar price calculated from the yield at which the transaction was effected must be displayed; and,
      (ii) If the transaction is effected on a basis other than yield to maturity and yield to maturity is less than the represented yield, the confirmation should display yield to maturity as well as represented yield.

      Transactions in debt securities having an interest rate or maturity date which is subject to change have been exempted from certain of the debt security confirmation requirements.* The Rule recognizes that under such circumstances, it is not possible to calculate a meaningful yield to maturity. If such transactions are effected on a yield basis, the confirmation must display that yield, including the dollar price calculated from the yield. The requirement to display yield to maturity is waived.

      If the security may be called for redemption before maturity, a legend must be displayed to that effect. The legend must also disclose that redemption could affect the represented yield and that additional information is available on request.

      The following chart summarizes the yield and call disclosure requirements.

      Debt Securities

       

      Required Disclosure

      Dollar Price Basis

      • Dollar price

      • Yield to maturity based on dollar price

      Yield Price Basis

      • Yield

      • Type of yield; (yield to maturity, yield to call, or current)

      • Dollar price based on yield

      Callable Security

      • Call legend

      The new yield and call confirmation requirements of Rule 10b-10 become effective on January 1, 1984. The text of the rule follows.

      Please direct any questions concerning Rule 1Ob-10 to Elizabeth Wollin at (202) 728-8266.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      federal register

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Rel. No. 34-19887, File No. S7-942 ]

      Securities Confirmations

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rule amendments.

      SUMMARY: The Commission is adopting amendments to Rule 10b-10 under the Securities Exchange Act of 1934 ("Act") which specifies disclosures to be made on confirmations delivered to customers by broker-dealers in connection with transactions in securities. The amendments provide an exception from the immediate delivery requirements of the rule for transactions in shares of certain investment companies that attempt to maintain a constant net asset value. The amendments also will require disclosure to investors of certain yield and call feature information in connection with transactions in debt securities other than municipal securities.

      DATES: Paragraphs (c)(l)-(3), relating to the use of monthly confirmation statements, will become effective July 25, 1983. Paragraphs (a)(3)-(5) and (e)(4) of Rule 10b-10, requiring disclosure of yield and call feature information, will become effective January 1, 1984.

      FOR FURTHER INFORMATION CONTACT:
      Susan J. Walters, Esq., (202) 272-7494,
      Division of Market Regulation,
      Securities and Exchange Commission,
      450 Fifth Street, N.W., Washington, D.C. 20549.

      SUPPLEMENTARY INFORMATION:

      I. Introduction

      The Commission today announced the adoption of amendments to its securities confirmation rule, Rule lOb-10 (17 CFR 240.10b-10) under the Act1 the amendments were published for comment in August 1982.2 As proposed, the amendments would have provided a limited exception to the immediate delivery requirements of the confirmation rule for pre-authorized or "automatic" transactions in shares of money market funds, tax-exempt bond funds or U.S. government funds in connection with certain plans defined as "account management plans." Upon its review of the proposals and consideration of the comments received, the Commission has determined to expand the exception to the immediate confirmation delivery requirements of Rule lOb-10 to allow the use of monthly statements in confirmations of all redemptions and purchases of shares of certain investment companies that attempt to maintain a constant net asset value.

      The proposed amendments requiring disclosure of yield and call provisions have been adopted substantially as proposed. These amendments will require any broker or dealer that effects a transaction for or with a customer in any debt security, with certain exceptions, to include in the customer's written confirmation information on the yield and call provisions of the security.

      II. Discussion

      1. Use of Monthly Statements
      Rule 10b-10 generally requires that broker-dealers send to customers a written confirmation of securities transactions on or before completion of the transaction. Since 1977, however, the Commission has granted exemptions from this immediate delivery, requirement to allow broker-dealers, in connection with account management plans,3 to send monthly confirmations of certain transactions in shares of money market funds. The proposed amendments would have codified these exemptions. The amendments would have drawn a distinction between pre-authorized ("automatic") and individually directed ("manual") transactions and between transactions in money market funds pursuant to account management plans and other fund transactions. Only automatic transactions in account management plans would have qualified for the exception as proposed.
      The commentators unanimously supported the amendments as a deregulatory initiative that would result in substantial cost savings to the industry and the public without adversely affecting investors. Some commentators noted, however, that extension of the proposed exception to all transactions in investment companies that seek to maintain constant net asset value would provide even greater cost reduction without materially decreasing customer protection. Commentators suggested that where funds maintain a constant net asset value per share and no load is charged, monthly statements would be adequate to ensure investor protection. One commentator also noted that alternative means to immediate confirmations are frequently available to money market fund shareholders to determine whether a transaction has been effected correctly. For example, a number of funds provide shareholders with a toll free telephone number that they may use to obtain account information. A customer's account executive may also be able to provide account information.
      The confirmation is designed to provide customers with information necessary for investment decisions. Where fund shares are priced at a constant net asset value per share and no load is charged, the need for investors to receive immediate confirmations does not appear to outweigh the cost to broker-dealers of providing the confirmation. Accordingly, the Commission has determined to extend the proposed exception to the confirmation delivery requirements of the rule to all transactions in investment companies that attempt to maintain a constant net asset value per share where no sales load or redemption fee is charged. The amendment will become effective July 25, 1983, in order to provide broker-dealers and transfer agents with sufficient time to review their internal controls and develop adequate systems to use the exception.
      As adopted, the exception will permit broker-dealers to use monthly account statements in lieu of individual, immediate confirmations for all purchases and redemptions of shares of any no-load open-end investment company registered under the Investment Company Act of 1940 that attempts to maintain a constant net asset value per share and that holds, itself out to be a "money market" fund or has an investment policy calling for at least 80% of its assets in debt securities maturing in 13 months or less. The exception will be available to all broker-dealers that effect transactions in such funds, regardless of whether the broker-dealer is affiliated with the fund.
      The monthly account statement is required to be given or sent within five business days of the end of each monthly period and must include substantially all the information currently required in the quarterly confirmation provisions of paragraph (h) of Rule lOb-10.4 This information will include, among other things, purchases and redemptions of fund shares and the total number of fund shares held by the customer.
      2. Disclosure of Yield and Call Information
      The Commission believes that disclosure of yield and call feature information for transactions in debt securities will significantly benefit investors without unduly increasing industry costs. Yield has been characterized as the single most important piece of information to an investor in the context of a transaction in debt securities, and the securities industry has suggested that broker-dealers should be required to provide that information to customers.5 The confirmation rule of the Municipal Securities Rulemaking Board ("MSRB") currently requires disclosure of yield information for transactions in municipal securities.6
      As adopted, the amendments will require broker-dealers to include in the written confirmation of transactions in debt securities with customers 7 several additional items of information. Broker-dealers must disclose, in the case of a transaction in a debt security effected exclusively on a dollar price basis,8 the dollar price at which the transaction was effected and the yield to maturity calculated from the dollar price.
      In the case of a transaction in a debt security effected on the basis of yield, the confirmation must disclose (1) the yield at which the transaction was effected, including the percentage amount and the characterization of the yield as, for example, yield to maturity or call or current yield, and, if effected at yield to call, the type of call (e.g., whole or part-issue call), the call date and call price; (2) the dollar price calculated from the yield at which the transaction was effected; and (3) if the transaction is effected on a basis other than yield to maturity and yield to maturity is less than the represented yield, the yield to maturity as well as the represented yield.
      In response to the commentators' concerns, the Commission has exempted from the yield to maturity disclosure requirements transactions in debt securities where the interest rate or maturity date is subject to change. The Commission understands that under these circumstances it is not possible to calculate a meaningful yield to maturity. Therefore, in those instances where such securities trade on a dollar basis, the yield to maturity need not be disclosed. However, if the broker-dealer effects transactions in such securities on a yield basis, the confirmation must contain that yield, including the percentage amount and the characterization of the yield. The yield to maturity, however, is not required to be disclosed for such yield basis transactions.
      Transactions in participation interests in notes secured by liens upon real estate continuously subject to prepayment, such as Government National Mortgage Association securities ("GNMA"), similarly are exempt from the yield to maturity disclosure requirements. Depending upon the level of the interest rates on the mortgages that comprise the pool, the mortgages may be prepaid within varying periods of time. The Commission understands that broker-dealers often quote investors the yield to twelve year average life for purposes of comparing different GNMAs, although that figure may be significantly different from the actual yield to investors. Where the GNMA or similar security is sold on a yield basis, as, for example, the yield to twelve year average life, that yield and the dollar price calculated from the yield must be disclosed. In addition, since some investors may not adequately understand the significance of the yield to twelve year average life, the broker-dealer should clearly explain the significance of that figure to their customers.
      If the securities may be called for redemption before maturity, a legend must be included disclosing that fact, that redemption could affect the represented yield and that additional information is available upon request.9 As discussed in the Proposing Release, the Commission is concerned that investors often" do not adequately understand the nature and effect of call provisions on debt securities.10 The rule does not set forth the particular language of the legend in order to afford flexibility to broker-dealers, particularly those that have devised a similar legend to comply with MSRB Rule G-15.11

      III. Certain Findings, Effective Date and Statutory Basis

      Section 23(a)(2) of the Act12 requires the Commission, in adopting rules under the Act, to consider the anti-competitive effect of such rules, if any, and to balance any impact against the regulatory benefits gained in terms of furthering the purposes of the Act. The Commission has considered the amendments to Rule 10b-10 in light of the standards cited in Section 23(a)(2) and believes that adoption of the amendments will not impose any burden on competition not necessary or appropriate in furtherance of the Act

      Pursuant to the Administrative Procedure Act, 5 U.S.C. 553(b), interested persons were given an opportunity to submit written views on the proposed amendments to Rule 10b-10. After consideration of the relevant matters presented, the proposed amendments concerning yield and price disclosures are adopted substantially as proposed with some technical changes for clarity. In response to commentators' suggestions, the proposed amendments dealing with the exception from the immediate confirmation delivery requirements for certain transactions in I shares of investment companies are extended to transactions in shares of investment companies that seek to maintain a constant net asset value. The issues with respect to the extension have been thoroughly considered during the comment period. Extended delay in adopting the amendments would be costly to investors and broker-dealers. Therefore, the Commission, for good cause, pursuant to 5 U.S.C. 553(b)(3)(B), finds that further notice and public procedure with respect to the amendments would be unnecessary, impracticable, and contrary to the public interest.

      The amendments to Rule lOb-10 with respect to the use of monthly confirmations in lieu of immediate confirmations have been modified in response to commentators' suggestions. These amendments will become effective July 25, 1983.13 The amendments to Rule lOb-10 with respect to disclosure of yield and call information will become effective January 1, 1984.

      Regulatory Flexibility Act Certification

      Pursuant to 5 U.S.C. 605(b), the Chairman has certified that the amendments as adopted will not have a significant economic impact on a substantial number of small entities. This certification, including the reasons therefor, is attached to the release.

      Statutory Basis

      The Securities and Exchange Commission hereby amends § 240.10b-10 in Chapter II, Title 17 of the Code of Federal Regulations, pursuant to its authority under the Act, and particularly Sections 3,10,11, 15, 17, and 23 thereof (15 U.S.C. 78c, 78j, 78k, 78o, 78q, and 78w).

      List of Subjects in 17 CFR Part 240

      Reporting requirements, Securities.

      Text of Amendments to Rule 10b-10

      Chapter II, Title 17 of the Code of Federal Regulations is amended as follows:

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

      By amending § 240.10b-10 by adding new paragraphs (a)(3), (a)(4), and (a)(5); by adding new paragraphs (c), (c)(l). (c)(2) and (c)(3); by adding new paragraph (e)(4); by revising the reference to paragraph (a)(4)(ii) in paragraph (a)(3) to read "paragraph (a)(7)(ii)"; by revising the reference to five days in paragraph (b)(2) to read "five business days"; by redesignating existing paragraphs (a)(3), (a)(4), and (a)(5) to be paragraphs (a)(6), (a)(7), and (a)(8), respectively; by redesignating existing paragraph (c) to be paragraph (d); by redesignating existing paragraphs (d), (d)(l). (d)(2). (d)(3), (d)(4), and (d)(5) to be paragraphs (e), (e)(l), (e)(2). (e)(3). (e)(5), and (e)(6), respectively; and by redesignating existing paragraph (e) to be paragraph (f), to read as follows: § 240.10b-10 Confirmation of Transactions.

      §240.10b-10 [Amended]

      (a) * * *
      (3) In the case of any transaction in a debt security subject to redemption before maturity, a statement to the effect that such debt security may be redeemed in whole or in part before maturity, that such a redemption could affect the yield represented and that additional information is available upon request; and
      (4) In the case of a transaction in a debt security effected exclusively on the basis of a dollar price
      (i) The dollar price at which the transaction was effected, and
      (ii) The yield to maturity calculated from the dollar price; Provided, however, that this paragraph (ii) shall not apply to a transaction in a debt security with a maturity date that may be extended by the issuer thereof, with a variable interest rate payable thereon, or a participation interest in notes secured by liens upon real estate continuously subject to prepayment; and
      (5) In the case of a transaction in a debt security effected on the basis of yield.
      (i) The yield at which the transaction was effected, including the percentage amount and its characterization (e.g., current yield, yield to maturity, or yield to call) and if effected at yield to call the type to call, the call date and call price;
      (ii) The dollar price calculated from the yield at which the transaction was effected; and
      (iii) If effected on a basis other than yield to maturity and the yield to maturity is lower than the represented yield, the yield to maturity as well as the represented yield; Provided, however, that this paragraph (iii) shall not apply to a transaction in a debt security with a maturity date that may be extended by the issuer thereof, with a variable interest rate payable thereon, or a participation interest in notes secured by liens upon real estate continuously subject to prepayment; and

      * * * * *

      (c) A broker or dealer may effect transactions for or with the account of a customer without giving or sending to such customer the written notification described in paragraph (a) of this section if
      (1) Such transactions are effected in shares of any no-load open-end investment company registered under the Investment Company Act of 1940 that attempts to maintain a constant net asset value per share and that holds itself out to be a "money market" fund or has an investment policy calling for investment of at least 80% of its assets in debt securities maturing in thirteen months or less; and
      (2) Such broker or dealer gives or sends to such customer within five business days after the end of each monthly period a written statement disclosing each purchase or redemption, effected for or with, and each dividend or distribution credited to, or reinvested for, the account of such customer during the month; the date of each such transaction; the identity, number and price of any securities purchased or redeemed by such customer in each such transaction; the total number of shares of such securities in such customer's account; and remuneration received or to be received by the broker or dealer in connection therewith; and that any other information required by paragraph (a) will be furnished upon written request; and
      (3) Such customer is provided with "prior notification in writing disclosing the intention to send the written information referred to in paragraph (c)(1) on a monthly basis in lieu of an immediate confirmation.

      * * * * *

      (e) * * *
      (4) "Debt security" as used in paragraphs (a)(3), (a)(4), and (a)(5) only, means any security, such as a bond, debenture, note, or any other similar instrument which evidences a liability of the issuer (including any such security that is convertible into stock or a similar security) and fractional or participation interests in one or more of any of the foregoing: Provided, however, that securities issued by an investment company registered under the Investment Company Act of 1940 shall not be included in this definition;

      * * * * *

      By the Commission.
      Dated: April 18, 1983

      George A. Fitzsimmons,
      Secretary

      Regulatory Flexibility Act Certification

      I, John Shad, Chairman of the Securities and Exchange Commission, hereby certify pursuant to 5 U.S.C. 605(b) that the proposed amendments to Rule 10b-10 set forth in Securities Exchange Act Release No. 18988, if promulgated, will not have a significant economic impact on a substantial number of small broker-dealers. The Commission received thirteen comment letters which were generally supportive. The amendments requiring yield and call disclosures have been revised to clarify technical questions raised by commentators. In addition, the limited number of small broker-dealers that trade corporate debt securities frequently clear through larger broker-dealers that process the confirmation. Finally, the extension of the exception to permit broker-dealers to use monthly account statements in connection with transactions in shares of certain investment companies will reduce confirmation costs to all broker-dealers engaged in such transactions.

      John S. R. Shad,
      Chairman.

      [FR Doc. 83-10845 Filed 4-22-83; 8:45 am]

      BILLING CODE 8010-01-M


      * Plans in which the customer may purchase shares of money market mutual funds as specified in the plan, with funds drawn from the customer's securities account, and redeem such shares also in accordance with the terms specified in the plan (e.g., to satisfy a debit balance created by the purchase of securities or by the exercise of a check, credit or debit card or similar withdrawal option provided in the plan).

      * For example, transactions in participation interests secured by liens upon real estate, continuously subject to prepayment, such as Government National Mortgage Association (GMNA) securities, are exempt from the yield to maturity disclosure requirements. Where the GNMA or similar security is sold on a special yield basis (e.g., yield to twelve year average life), that yield and related dollar price must be disclosed, and the significance of that special yield must be explained to the customer.

      1 15 U.S.C 78 et seq.

      2 Securities Exchange Act Release No. 18988 (Aug. 20, 1982), 47 FR 37920 (Aug 27, 1982) ("Proposing Release").

      3 The term "account management plan" was defined in the proposed amendments to include plans in which the customer may purchase shares of money market mutual funds as specified in the plan with funds drawn from the customer's account and redeem such shares also in accordance with the terms specified in the plan (e.g., to satisfy a debit balance created by the purchase of securities or by the exercise of a check, credit or debit card or similar withdrawal option provided in the plan). These transactions were considered to be "automatic" (pre-authorized by the customer) as opposed to "manual" (individually directed transactions).

      4 The amendment would not, of course, change the availability of other confirmation alternatives such as the use of quarterly statements now permitted by certain provisions of Rule 10b-10.

      5 See, e.g.. letter from the Corporate Bond Committee of the Securities Industry Association to Roger D. Blanc. Chief Counsel, Division of Market Regulation (July 2, 1979).

      6 MSRB Rule G-15.

      7 As defined in Rule 10b-10(d)(1), the term "customer" does Hot include a broker or dealer.

      8 One commentator questioned the use of the term "basis" as used in the Rule. For purposes of the Rule, a transaction will be considered to have been effected on a dollar price basis only if a yield figure is not provided either orally or in writing to the customer before preparation of the confirmation. If transactions are in fact effected on a dollar price basis, the confirmations must show the yield to maturity calculated from the dollar price discussed with the customer.

      9 Some commentators requested that the Commission clarify the kind of additional information that would be required to be supplied upon a customer request. Broker-dealers generally will satisfy this requirement by describing the call feature printed on the instrument.

      10 See Proposing Release, 47 FR at 37922.

      11 While the rule requires use of the legend where debt securities are subject to call, it does not prohibit inclusion of the legend on confirmations of debt securities not subject to early redemption. Therefore, the rule permits the use of pre-printed confirmation forms.

      12 15 U.S.C. 78w(a)(2).

      13 In the Proposing Release, the Commission stated that the staff would not recommend enforcement action under Rule 10b-10 if broker-dealers conformed their customer confirmation delivery procedures for account management plans. as defined in the release, to the proposed amendments. Broker-dealers may continue to rely on this position in connection with these account management plans pending the effective date of the amendments with respect to monthly confirmations.


    • 83-37 44 Securities Scheduled to Join NMS on August 9, 1983

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

      On Tuesday, August 9, 1983, 44 securities will join the 378 then trading in the NASDAQ National Market System. These securities have met the requirements for NMS mandatory designation, which include an average trading volume of 600,000 shares a month for six months through June and a bid price of $10 on the last five days in June. As required by SEC Rule HAa2-l, all issues meeting the mandatory designation requirements at the end of each quarter automatically are added to the National Market System within 45 days of the quarter ending date.

      The 44 securities joining the NASDAQ NMS on August 9 are:

      ALWC

      A. L. Williams Corporation (The)

      Atlanta, GA

      AMSWA

      American Software, Inc. (Class A)

      Atlanta, GA

      SRGY

      American Surgery Centers Corporation

      Scottsdale, AZ

      BIOR

      Bio-Response, Inc.

      Wilton, CT

      COAT

      Burlington Coat Factory Warehouse Corporation

      Burlington, NJ

      CACI

      CACI, Inc.

      Arlington, VA

      CALF

      California Federal Savings and Loan Association

      Los Angeles, CA

      CRIC

      Collaborative Research, Inc.

      Lexington, MA

      CMCSA

      Comcast Corporation (Class A)

      Bala Cynwyd, PA

      CMTL

      Comtech Telecommunications Corporation

      Syosset, NY

      DCAI

      Digital Communications Associates, Inc.

      Nor cross, GA

      DYNA

      Dynascan Corporation

      Chicago, IL

      EGLC

      Eagle Computer, Inc.

      Los Gatos, CA

      EXCA

      Excalibur Technologies Corporation

      Albuquerque, NM

      FMIF

      FMI Financial Corporation

      Miami Beach, FL

      FERO

      Ferrofluidics Corporation

      Nashua, NH

      FRST

      First Capital Financial Corporation

      Coral Gables, FL

      FLFE

      Florida Federal Savings and Loan Association

      St. Petersburg, FL

      GENA

      General Automation, Inc.

      Anaheim, CA

      GNLE

      General Energy Corporation

      Lexington, KY

      GSTX

      Gibraltar Savings Association

      Houston, TX

      HILX

      Helionetics, Inc.

      Irvine, CA

      HOGN

      Hogan Systems, Inc.

      Dallas, TX

      HFED

      Home Federal Savings and Loan Association

      San Diego, CA

      KEJO

      Kelly-Johnston Enterprises, Inc.

      Oklahoma City, OK

      LLSI

      LSI Logic Corporation

      Milpitas, CA

      MSCO

      MASSTOR Systems Corporation

      Sunnyvale, CA

      MSAI

      Management Science America, Inc.

      Atlanta, GA

      NTWK

      Network Security Corporation

      Dallas, TX

      PHAR

      Pharmacontrol Corporation

      Englewood Cliffs, NJ

      PORX

      Porex Technologies Corporation

      Fairburn, GA

      PRIA

      Priam Corporation

      San Jose, CA

      QUCA

      Quality Care, Inc.

      New York, NY

      RADC

      Radice Corporation

      Fort Lauderdale, FL

      SUMA

      Summa Medical Corporation

      Albuquerque, NM

      SYNE

      Syntech International, Inc.

      Dallas, TX

      TCRD

      Telecredit, Inc.

      Los Angeles, CA

      VFED

      Valley Federal Savings and Loan Association

      Van Nuys, CA

      VICR

      Victor Technologies, Inc.

      Scotts Valley, CA

      VSTA

      Victoria Station Incorporated

      Larkspur, CA

      WAMU

      Washington Mutual Savings Bank

      Seattle, WA

      WVTK

      Wavetek Corporation

      San Diego, CA

      WDCL

      Western Digital Corporation

      Irvine, CA

      XEBC

      Xebec

      Sunnyvale, CA

      Any questions regarding the notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Leon Bastien at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 83-36 Subscriptions to Monthly Statistical Reports of NASDAQ Issues

      TO: NASDAQ Subscribers and NASD Members

      FROM: Molly G. Bayley
      Vice President, NASDAQ Operations

      NASDAQ market makers and NASD Members have expressed an interest in receiving copies of the Monthly Statistical Report to Issuers (MSR) on a regular basis. This Report has been compiled and sent on a monthly basis to NASDAQ company executives for several years. Each Report contains daily, weekly and monthly price and volume data on a particular security, the market makers in the issue, as well as NASDAQ Index and volume statistics, as shown on page 3 in slightly reduced form (the actual Report measures 8-1/2" by 11").

      In response to the interest expressed, we are exploring the feasibility of instituting a paid subscription service for Monthly Statistical Reports. Since developmental costs could be substantial, we need to determine how much interest there is in either of two alternative approaches to a subscription service before proceeding.

      In order to receive the widest possible indication of potential interest, this Notice and the enclosed reply card have been sent to all NASD Members and NASDAQ Subscribers. Please feel free to duplicate this Notice and distribute it to other individuals or departments within your firm who might find the Monthly Statistical Report useful. It has been suggested that Corporate Finance, Research, and Compliance Departments may be particularly interested. Indications of interest may be combined or returned separately by individuals and Departments within the firm.

      The first alternative involves providing subscribers with approximately 17 microfiche each month containing the Monthly Statistical Reports for all NASDAQ and NASDAQ/NMS issues. A single subscription would cost approximately $50 per year. A set of microfiche for a single month would cost approximately $10.00.

      There are several distinct advantages to this approach. First, it is significantly less expensive for potential subscribers.

      Second, since the microfiche would cover all NASDAQ and NASDAQ/NMS issues each month, the subscriber would accumulate a complete historical file on all NASDAQ issues. In addition, general NASDAQ and NMS statistics are shown on the Reports, so subscribers to this service would build their own historical files of overall System volume and index data.

      Finally, the microfiche could be mailed within two weeks of the end of the month and could be easily stored, as each monthly set of Reports would be contained on 17 microfiche measuring 4" by 6".

      The disadvantage to this approach is that it requires the subscriber to have access to a microfiche reader. Also, if hard copies of the filmed Reports are desired, a microfiche reader/printer would need to be purchased or rented. There is a wide variety of readers or reader/printers available from, among other manufacturers: Canon, Micro Design, Minolta, National Micrographics Systems, Northwest Microfilm, Realist Micrographics Systems and 3M. Purchase prices for readers range from about $220 - $350; reader/printers are available from $1,000 - $2,000.

      The second alternative involves providing subscribers with hard copies of those Reports they desire. This is a flexible option, but it is considerably more expensive. Subscribers would be able to order single or multiple hard copies of any number of Reports. For example, 10 copies of ABC Corp.'s Report for April could be ordered; or Reports for all National Market System stocks could be ordered on a continuing (monthly) basis; or a selected group of Reports on either a one-time or monthly basis could be requested. The cost for this type of service would be $10 per Report.

      The distinct advantage to this approach is its flexibility. Rather than receiving all NASDAQ and NMS Reports, subscribers could tailor their orders to receive only the Reports for companies in which they are interested. In addition, multiple copies of a single Report could be ordered. However, all orders for Reports would have to be received by NASDAQ prior to the monthly running of the Reports.

      The distinct disadvantage to this alternative is the high per Report cost. The anticipated cost of this alternative is considerably higher than the microfiche. Depending upon the number of Reports received each month, filing space needed for storing paper copies could be considerably greater than that for the microfiche. Additionally, back issues of the Reports would not be available; subscribers would have to anticipate and pre-order Reports. Finally, it is estimated that, because of the considerable amount of manual sorting and packaging required for hard-copy Reports, it would probably take about 3 weeks following the end of the month to mail Reports to subscribers.

      We would appreciate your taking a few minutes to indicate your interest and make any additional comments you may have on the enclosed postage-paid survey card, and dropping it in the mail.

      Questions with respect to this survey, or requests for additional copies may be directed to Celia Kramer at (202) 728-8026 or to David Bowman at (202) 728-8028.

      MONTHLY STATISTICAL REPORT

      FOR MONTH ENDING 31 MAY 83

      NASDAQ SYSTEM STATISTICS

       

      COMPOSITE INDEX

      ASSIGNED INDEX

      (OTHER FINANCE )

      HIGH

      312.18

      271.57

       

      LOW

      288.56

      260.30

       

      CLOSE

      308.73

      263.99

       

      PREVIOUS CLOSE

      293.06

      263.24

       

      % CHANGE

      +5.34

      +2.56

       

      TOTAL NASDAQ VOLUME:

      1,492,081,600

       

      AVERAGE DAILY VOLUME

      71,051,504

       

      TOTAL MARKET VALUE:

      $220,635,747,000

       

      SUMMARY FOR THIS SECURITY

      QUOTE RANGE:

      HIGH BID

      20 1/2

      LOW BID

      18 3/4

       

      HIGH ASK

      21

      LOW ASK

      19 1/4

      CLOSING BID:

      (APR)

      19

      PERCENT CHANGE

      +7.89

       

      (MAY)

      20 1/2

         

      VOLUME FOR MONTH:

      81,645

         

      NASDAQ SYMBOL: XYZC

      SECURITY DESCRIPTION: COMMON STOCK ($2.00 PAR VALUE)

      TOTAL SHARES OUTSTANDING: 1,000,000

      PLEASE NOTIFY NASD OF ANY CHANGE IN COMPANY CONTACT OR ADDRESS

      Mr. John W. Doe
      President

      XYZ Corporation
      1234 Main Street
      Waterbridge, VA 22300

      DAILY STATISTICAL REPORT

      DATE

      HIGH BID

      LOW BID

      CLOSE BID

      HIGH ASK

      LOW ASK

      CLOSE ASK

      CHANGE*; (BID)

      VOLUME

      NASDAQ VOLUME

      COMPOSITE CLOSE

      MON 2

      19 1/4

      19

      19 1/4

      19 3/4

      19 1/4

      19 3/4

      + 1/4

      3,700

      62.386.300

      290.54

      TUE 3

      19 1/4

      19 1/4

      19 1/4

      19 3/4

      19 3/4

      19 3/4

      0

      4.400

      55,271,300

      289.65

      WED 4

      19 1/4

      19 1/4

      19 B1/4

      19 3/4

      19 3/4

      19 3/4

      0

      3,685

      64.346.700

      293.21

      THU 5

      19 1/2

      19 1/4

      19 1/2

      20

      19 3/4

      19 3/4

      + 1/4

      2.000

      72,182,900

      297.32

      FRI 6

      19 1/2

      19 1/2

      19 1/2

      19 3/4

      19 3/4

      19 3/4

      0

      3.900

      B2,020,800

      301.64

      WEEK

      19 1/2

      19

      19 1/2

      20

      19 1/4

      19 3/4

      + 1/2

      17.685

      336,208,000

      301.64

      MON 9

      19 1/2

      19 1/2

      19 1/2

      20

      19 3/4

      20

      0

      2.918

      67,322,400

      302.65

      TUE 10

      19 1/2

      19 1/2

      19 1/2

      20

      19 3/4

      19 3/4

      0

      2,700

      76,832.000

      304.34

      WED 11

      19 1/2

      19 1/2

      19 1/2

      20

      19 3/4

      20

      0

      3.500

      77,560,200

      302.89

      THU 12

      19 1/2

      19 1/4

      19 1/4

      20

      19 3/4

      19 3/4

      - 1/4

      11 .470

      70,914,600

      302.15

      FRI 13

      19 1/4

      19 1/4

      19 1/4

      19 3/4

      19 1/2

      19 1/2

      0

      4,232

      78,070.600

      303.94

      WEEK

      19 1/2

      19 1/4

      19 1/4

      20

      19 1/2

      19 1/2

      - 1/4

      24,820

      370,699.800