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  • 1988

    • 88-104 Adoption of Rule Amendments Mandating the Automated Submission of Trading Data - Effective February 12, 1989

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations
      Systems
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The board Govenors of the National association of Securities Dealers, Inc,(NASD) Recently approved an amendment to Part VI, Section 4 of Schedule D and Section 3 of H of the NASD's By-Laws mandating that Standardized requests for trading data, (i.e trading questtonnaires or "blue sheet" information) be submitted in an automated format. The rule amerdmerits will be filed with fte Securities and Exchange Commission (SEC) and, subject to the SEC's approval, will be effective February 12, 1989.

      BACKGROUND

      The NASD and the other self-regulatory organizations comprising the Intermarket Surveillance Group (ISG )1 have adopted uniform policies and procedures for ensuring timely response by their members to standardized requests for trading data, which emanate from their market surveillance functions. This is in recognition of the need to reduce the time it takes to conduct an investigation and to assist members in expediting responses to the numerous requests for information received from the regulatory agencies.

      These incentives are also in response to SEC initiatives calling for more timely referral of regulatory matters to the SEC.

      EXPLANATION OF AMENDMENTS

      The amended rule requires NASD members to respond to standardized market surveillance requests for customer and proprietary trading information in NASDAQ securities by using the NASD's automated electronic "blue sheet" system. This trading information is limited to the type normally requested on a standard trading questionnaire or blue sheet and generally includes price and volume for transactions on behalf of customers or for proprietary accounts. In this regard, all members receiving such a request for information must make arrangements to file their response electronically through the Association's automated blue sheet system starting no later than February 12, 1989. Upon request, the Association may grant an exception from such requirement under certain limited circumstances. It is the NASD's understanding that all ISG participants will require their members to submit trading data in an automated fashion by the February 12, 1989, deadline noted above.

      This proposed amendment is very similar in nature to the amendments that have been filed with the SEC by the other ISG participant self-regulatory organizations. Approval for this amendment is expected shortly. Detailed specifications as to the method of transmitting blue sheet data to the NASD will be the subject of a separate Notice to Members, which will be issued in early 1989.

      TIMELINESS GUIDELINES FOR RESPONDING TO REQUEST FOR INFORMATION

      The 10-Business-Day Standard

      In a related matter and in conjunction with other ISG initiatives, any NASD requests for trading information dated on or after February 12, 1989, must be answered within no more than 10 business days of the date of the request. This is a new industry standard that will be employed by all self-regulatory organizations. Submissions of requested data that are received after the deadline or that are in a format other than that requested will be subject to probable disciplinary action unless an extension has been granted by the NASD prior to the requested return date. To assist NASD members in meeting this 10-business-day standard, the Market Surveillance Department will transmit all requests for blue sheet information by FAX if they are provided with a specific number where FAX transmissions can be sent.

      Any questions regarding this Notice may be directed to James M. Cangiano, Vice President, Market Surveillance at (202) 728-8186 or to Eneida Rosa, Assistant General Counsel, at (202) 728-8284.


      1 The members of the ISG are as follows: The American Stock Exchange, the Boston Stock Exchange, the Chicago Board Options Exchange, the Cincinnati Stock Exchange, the Midwest Stock Exchange, the National Association of Securities Dealers, the New York Stock Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange. Representatives from the SEC staff also attend ISG meetings.


    • 88-103 Adoption of Rule Amendments - Effective Immediately Professional Trading in SOES

      SUGGESTED ROUTING*

      Senior Management
      Institutional
      Legal & Compliance
      Operations
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently approved amendments to the Rules of Practice and Procedures for the Small Order Execution System (SOES or SOES Rules) proposed by the NASD to prohibit members from entering orders in SOES on behalf of a professional trading account. The rule amendments are designed to eliminate the abuse of SOES by Order Entry Firms that use the system to execute transactions for professional trading accounts.

      The amendments are effective immediately.

      BACKGROUND AND ANALYSIS

      In 1984, SOES was created by the NASD to provide an efficient and economical facility for the execution of small, retail orders in NASDAQ securities by public customers. The system was intended to further the investment objectives of retail customers, who typically have longer-term trading goals than those of professional traders. Thus, SOES is available only for retail customer orders of specified, small size, and the SOES Rules prohibit members from breaking up larger orders for execution in SOES. In recent months, the NASD has become aware of instances in which some firms have been engaging in practices that could impact the viability of SOES. These practices include placing orders of professional traders or "day trades" through SOES. Most of these orders follow patterns of professional trades in that offsetting purchases and sales are made during the trading day.

      The NASD is concerned that the execution in SOES of transactions of professional traders may distort the price at which retail investors are able to obtain execution of their transactions. To remedy the problem, earlier this year the NASD implemented SOES rule interpretations that prohibit certain securities industry professionals from entering orders into SOES for their personal accounts or for accounts of members of their immediate families. Other SOES rule interpretations permit the NASD to aggregate SOES trades entered within any five-minute period for accounts controlled by an associated person or a customer for determining compliance with SOES order-size limits.1

      EXPLANATION OF AMENDMENTS

      On December 15, 1988, the SEC approved the following amendments to SOES Rules to eliminate the entering and execution of certain orders in SOES by SOES Order Entry Firms. The new rule changes do the following:

      • Prohibit a member or person associated with a member from entering orders in SOES on behalf of a professional trading account.
      • Provide that compliance with this require ment is presumed if (1) the member instructs its as sociated persons that they shall not knowingly ac cept an order for SOES from a professional trading account and (2) the member has not been advised by the NASD that the account has been classified as a professional trading account.
      • Require members, upon written request from the NASD, to report information to the NASD concerning orders entered into SOES.
      • Specify that the NASD may identify accounts as professional trading accounts.
      • Define the term "professional trading account" to mean:
        (i) an account in which five or more day trades have been executed through SOES during any trading day; or
        (ii) an account in which there has been a professional trading pattern in SOES as demonstrated by a pattern or practice of executing day trades, executing a high volume of day trades in relation to the total transactions in the account, or executing a high volume of day trades in relation to the amount and value of securities held in the account.
      • Define the term "day trade" to mean the execution of offsetting trades in the same security for generally the same size during the same trading day.

      The NASD believes that the amendments to the SOES Rules will eliminate the abusive practice of SOES members or persons associated with members using SOES for the execution of transactions for professional trading accounts. Such a practice is inconsistent with the original purpose of SOES, to facilitate the execution of small retail orders by public customers.

      The NASD's automated surveillance systems are geared to monitor member compliance with these new requirements on an on-line basis.

      The rule amendments shall be effective immediately.

      Any questions regarding the notice may be directed to Dennis C. Hensley.Vice President and Deputy General Counsel, NASD, at (202) 728-8245, or Eneida Rosa, Assistant General Counsel, NASD, at (202) 728-8284.

      RULES OF PRACTICE AND PROCEDURES FOR THE SMALL ORDER EXECUTION SYSTEM

      (Note: New language is underlined.)

      a) DEFINITIONS
      10. The term "professional trading account" shall mean
      (i) an account in which five or more day trades have been executed through SOES during any trading day; or
      (ii) an account in which there has been a professional trading pattern in SOES as demonstrated by a pattern or practice of executing day trades, executing a high volume of day trades in relation to the total transactions in the account, or executing a high volume of day trades in relation to the amount and value of securities held in the account.
      11. The term "day trade" or "day trading" shall mean the execution of offsetting trades in the same security for generally the same size during the same trading day.
      c) PARTICIPATION OBLIGATIONS IN SOES
      3. SOES Order Entry Firms
      (E)
      (i) No member or person associated with a member shall enter any order for execution in SOES on behalf of a professional trading account.
      (ii) A member will be presumed to be in compliance with Subsection (i) if (a) the member instructs persons associated with the member that no such person shall knowingly accept any order for entry into SOES from a professional trading account, and (b) the Association has not notified the member that the account has been classified as a professional trading account pursuant to subsection (iii) hereof.
      (iii) Upon receiving written notice from the Association, a member shall report to the Association information concerning transactions entered into SOES by the firm and such other information as the Association may request. Based upon such information, the Association may identify to the member specific accounts as professional trading accounts.

      1 See NASD Notices to Members 88-61, August 25, 1988, Supplement.


    • 88-102 NASDAQ National Market System Additions as of November 21, 1988

      SUGGESTED ROUTING*

      Internal Audit
      Operations
      Systems
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm

      As of November 21, 1988, the following 25 issues joined the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,902:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      METC

      Metcalf & Eddy Companies, Inc.

      10/18/88

      500

      RODS

      American Steel & Wire Corporation

      10/19/88

      500

      SOFS

      Softsel Computer Products, Inc.

      10/20/88

      1000

      VSBC

      VSB Bancorp, Inc.

      10/27/88

      500

      BHAGB

      BHA Group, Inc. (Cl B)

      10/31/88

      500

      GNEXP

      Genex Corporation (Pfd)

      11/1/88

      200

      MDEV

      Medical Devices, Inc.

      11/1/88

      500

      MWGP

      Midwest Grain Products, Inc.

      11/1/88

      1000

      PAGH

      Pacific Agricultural Holdings, Inc.

      11/1/88

      1000

      PENG

      Prima Energy Corporation

      11/1/88

      500

      SATI

      Satellite Information Systems Company

      11/1/88

      1000

      TJCK

      Timberjack Corporation

      11/1/88

      1000

      VSLF

      VMS Strategic Land Fund II

      11/1/88

      500

      LOGC

      Logic Devices Incorporated

      11/2/88

      200

      MTBS

      Metro Bancshares, Inc.

      11/4/88

      1000

      GGNS

      Genus, Inc.

      11/10/88

      500

      PSAB

      Prime Bancorp, Inc.

      11/14/88

      1000

      AGPH

      Agouroh Pharmaceuticals, Inc.

      11/15/88

      500

      CPRC

      Computer Components Corporation

      11/15/88

      1000

      CPRCW

      Computer Components Corporation (Wts)

      11/15/88

      1000

      IMRI

      IMCO Recycling Inc.

      11/15/88

      500

      QLTIF

      Quadra Logic Technologies, Inc.

      11/15/88

      200

      TOMKY

      Tomkins, Plc.

      10/15/88

      200

      WAIN

      Wainwright Bank & Trust Company

      10/15/88

      1000

      FLSPV

      FLS Holdings, Inc. (Ser A Pfd) (WI)

      10/18/88

      200

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS upon effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol

      Company

      Location

      SOES Execution Level

      BTUI

      BTU International, Inc.

      North Billerica, MA

      1000

      FSII

      FSI International, Inc.

      Chaska, MN

      1000

      FRCC

      First Financial Caribbean Corporation

      Puerto Nuevo, PR

      1000

      GNWF

      GNW Financial Corporation

      Bremerton, WA

      1000

      HICA

      Hitok Corporation of America

      Corpus Christi, TX

      500

      PMCM

      Pico Macom, Inc.

      Lakeview Terrace, CA

      500

      WLPI

      Wellington Leisure Products, Inc.

      Madison, GA

      500

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since October 18, 1988.

      New/Old New/Old Symbol

      New/Old Security

      Date of Change

      IEHC/IEHC

      IEH Corp./Industrial Electronic Hardware Corp.

      10/20/88

      CMBK/CMBK

      Cumberland Federal Bancorporation, Inc. (The)/Cumberland Federal Savings Bank (The)

      10/25/88

      FAHS/FAHS

      Farm and Home Financial Corporation/Farm and Home Savings Association

      10/25/88

      CCUR/CCURD

      Concurrent Computer Corp./Concurrent Computer Corp. (New)

      10/31/88

      COMR/COMR

      Comair Holdings, Inc./Comair, Inc.

      11/1/88

      MCRN/DRAM

      Micron Technology, Inc./Micron Technology, Inc

      11/1/88

      UBNK/CFBK

      Union Bank/California First Bank

      11/1/88

      COBK/COBK

      Co-Operative Bank of Concord (The)/Co-Operative Bancorp

      11/2/88

      MTIK/MTIK

      Miller Building Systems, Inc./Modular Technology, Inc.

      11/2/88

      INVF/ISLA

      Investors Financial Corporation/Investors Savings Bank

      11/3/88

      SCSL/SCSLA

      Suncoast Savings and Loan Association/Suncoast Savings and Loan Association (Cl A)

      11/3/88

      AFED/AFED

      AtlanFed Bancorp, Inc./Atlanta Federal Savings Bank

      11/8/88

      CHFD/CHFD

      Charter Federal Savings Bank/Charter Federal Savings and Loan Association

      11/9/88

      RHCI/HSAI

      Ramsay Healthcare, Inc./Healthcare Services of America, Inc.

      11/18/88

      TPIE/TELE

      TPI Enterprises, Inc./TPI Enterprises, Inc.

      11/18/88

      MRNO/MOAI

      Morino, Inc./Morino Associates, Inc

      11/21/88

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      ALEC

      Alleco, Inc.

      10/19/88

      DLWD

      Delta Woodside Industries, Inc.

      10/19/88

      UBCP

      Unibancorp, Inc.

      10/19/88

      NCTY

      National City Corporation

      10/25/88

      RKWD

      Rockwood Holding Company

      10/25/88

      SETD

      Sierra Capital Realty Trust IV

      10/26/88

      BEZRY

      Beazer, Plc.

      10/28/88

      MONY

      Metropolitan Consolidated Industries, Inc.

      10/28/88

      VIKG

      Viking Freight, Inc.

      10/31/88

      EWSB

      East Weymouth Savings Bank

      11/1/88

      GNIC

      Guaranty National Corp.

      11/1/88

      ITAN

      InterTAN, Inc.

      11/1/88

      KISC

      Kimmons Corp.

      11/1/88

      MLMC

      Multi-Local Media Corp.

      11/1/88

      RESM

      Restaurant Management Services, Inc.

      11/1/88

      RICH

      Richmond Hill Savings Bank

      11/1/88

      MOKG

      Morgan, Olmstead, Kennedy and Gardner Capital Corp.

      11/4/88

      LOND

      London House, Inc.

      11/7/88

      GPAK

      Graphic Packaging Corp.

      11/8/88

      BOLT

      Bolt Technology Corporation

      11/9/88

      CRMK

      Cermetek Microelectronics, Inc.

      11/9/88

      CITQE

      CitiPostal, Inc.

      11/9/88

      CSCN

      Compuscan, Inc.

      11/9/88

      ELEX

      Elexis Corporation

      11/9/88

      HHBX

      HHB Systems, Inc.

      11/9/88

      IBSI

      Independent Bankshares, Inc.

      11/9/88

      MXXX

      Mars Stores, Inc.

      11/9/88

      MMSTE

      MedMaster Systems, Inc.

      11/9/88

      TRVMF

      T.R.V. Minerals Corporation

      11/9/88

      TSIC

      Transducer Systems, Inc.

      11/9/88

      TUHC

      Tucker Holding Company, Inc.

      11/9/88

      XEBC

      Xebec

      11/9/88

      GROF

      Groff Industries, Inc.

      11/10/88

      HYPX

      Hyponex Corporation

      11/10/88

      MNST

      Minstar, Inc.

      11/11/88

      CFMIE

      Convenient Food Mart, Inc.

      11/16/88

      RDKN

      Redken Laboratories, Inc.

      11/16/88

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192

    • 88-101 Clarification of NASD Filing Requirements and Review Procedures for Offerings Made Pursuant to SEC Rule 415

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD is publishing the views of the Corporate Financing Committee on questions that members frequently ask when they are involved in offerings of securities to be conducted pursuant to SEC Rule 415. This Notice states the Committee's view that any transaction engaged in for the benefit of an issuer or its selling security holders that involves distributing securities "off the shelf" on a delayed or continuous basis constitutes participation in a public offering on behalf of the member. It also clarifies the filing obligations that members must comply with when they are involved in such offerings. In addition, this Notice presents the Committee's views as to participating in the preparation of the registration statement and exercising the usual standards of due diligence in respect thereto, when a qualified independent underwriter is involved in a Rule 415 offering.

      BACKGROUND

      On November 23, 1983, the Securities and Exchange Commission adopted SEC Rule 415 (17CFR 230.415 referred to as "Rule 415"). Rule 415 governs the offering of securities on a delayed or continuous basis. For the two years prior to its adoption, the NASD commented on a number of issues that it felt would impact the manner in which its members would participate in Rule 415 distributions. One of the NASD's principal concerns was that the compressed time schedules under which members must operate when they participate in Rule 415 offerings would impact the quality of disclosure in the prospectus and the ability of underwriters to perform adequate due diligence on the facts presented in the registration statement.

      Since 1983, the Corporate Financing Department has received numerous inquiries regarding the review procedures it uses with respect to offerings conducted pursuant to Rule 415 and has been asked to render opinions on how certain provisions of Schedule E to the NASD By-Laws ("Schedule E") and the Interpretation of the Board of Governors — Review of Corporate Financing (the "Interpretation") should be applied to Rule 415 offerings.

      The most frequent inquiries relate to: the definition of "participation in a public offering"; the procedures to be followed in connection with NASD filing requirements contained in the Interpretation and Schedule E; and the appropriate timing of a qualified independent underwriter's participation in the preparation of the offering documents.

      Participation in a Public Offering and Filing Requirements

      Frequently, members raise questions about when a member's activities in connection with a distribution subject to Rule 415 are considered to be "participation in a public offering" under NASD rules. Both the Interpretation and Schedule E provide that if a member is to participate in a distribution, it must file the appropriate documents with the Corporate Financing Department and seek an opinion from the Department that it has no objections to the underwriting terms and arrangements that are proposed.

      This question first was raised in 1982 shortly after the Securities and Exchange Commission adopted Rule 415 on a temporary basis. The Department presented the issue to the Corporate Financing Committee for its consideration in September 1982. The Committee made a determination that the Department should review all offerings to be distributed under 415 on the basis of all information available at the time of filing with the exception of Rule 415 offerings on Form S-3 that are specifically exempt from filing under the Interpretation.*

      In connection with Rule 415 offerings, the Committee determined to exempt from the filing requirements securities registered on Form S-3 because an issuer able to satisfy Form S-3's "registrant requirements" would be followed closely by investors and market professionals. The Committee also felt that the securities markets would efficiently determine a fair price for the securities being offered and that any underwriting compensation received by members ordinarily would be determined under very competitive circumstances (generally limited to normal brokerage transactions). The Committee did not believe that the same facts were present in Rule 415 offerings where the securities are registered on any form other than S-3.

      Additionally, members should note that the Rule 415 S-3 exemption and the investment-grade rating filing exemption contained in the Interpretation do not apply to offerings otherwise required to be filed because they are subject to Schedule E.

      Thus, it is the view of the Committee that the participation of a member in any offering of securities distributed pursuant to Rule 415 constitutes participation in a public offering. The Committee also concluded that any member who is named as a potential distribution participant in the registration statement or who may participate in any transaction that takes securities off the shelf is responsible for ensuring that a timely filing is made with the Department of the documents required to be filed by the Interpretation and/or Schedule E.

      Participation in the Preparation of a Registration Statement and the Conduct of Due Diligence

      Section 3(c)(l) of Schedule E and the provisions of the Interpretation concerning "Proceeds Directed to a Member" require that a qualified independent underwriter conduct due diligence, participate in the preparation of the registration statement and prospectus, and render a pricing opinion on the securities to be offered to the public. From time to time, the question arises as to what actions a member must take to satisfy the requirements that it participate in the preparation of a registration statement and exercise usual standards when conducting due diligence in respect to it. First, the Committee does not believe it appropriate to express an opinion on what constitutes "usual standards of due diligence." The NASD is aware that members, when acting as qualified independent underwriters, employ different due diligence procedures in connection with the distribution of public offerings. The Committee believes that members and their counsel must determine which procedures they will use and whether those procedures will permit them to represent to the NASD that they have exercised the usual standards of due diligence.

      The NASD is aware that a qualified independent underwriter may be engaged to participate in the preparation of a registration statement at two distinct points in the registration process. One is when a determination has been made that Schedule E applies to the offering and the services of a qualified independent underwriter are retained prior to the filing of the registration statement. Second, when it is determined during the regulatory review process that Schedule E applies and the services of a qualified independent underwriter must be retained.

      In the first instance, when the qualified independent underwriter is retained by the issuer prior to the initial filing of the registration statement, the NASD believes that a member acting as the qualified independent underwriter easily can conduct due diligence and participate in the preparation of the registration statement. The Department assumes that when the qualified independent underwriter submits its opinion letter, undertaking that it has participated in the preparation of the registration statement and has exercised the "usual" standards of due diligence with respect to the offering document, it has had full opportunity to obtain independent verification of the disclosures made in the registration statement.

      In the second instance, the Department has reviewed the registration statement filed with it and has made the determination that, based on the facts presented, Schedule E applies to the offering and a qualified independent underwriter must be retained. In those circumstances, the qualified independent underwriter is retained after the registration statement has been drafted and filed with the appropriate reviewing bodies. While the qualified independent underwriter cannot participate in the "preparation" of the registration statement as originally filed, it can conduct due diligence with respect to the registration statement and prospectus document and require the issuer to amend the disclosures made therein if necessary. Thus, the member remains obligated to independently verify the disclosure in the offering document. The Committee recognizes that although the qualified independent underwriter has not been involved in the preparation of the registration from the beginning, it has had an opportunity to verify the facts disclosed in the registration statement and to require amendments to be filed if deemed necessary, and it does assume the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933. As a result, the Committee feels that the member has participated in the preparation of the final registration statement that is declared effective.

      Circumstances do arise however when the registration statement has not been declared effective and the qualified independent underwriter has not had an adequate opportunity to complete its due diligence investigation, and the issuer and the affiliated member request that the qualified independent underwriter be permitted to comply with its obligations after the effective date of the registration statement. In these circumstances, the NASD believes that the qualified independent underwriter must complete its due diligence investigation and provide the Department with necessary undertakings that it has participated in the preparation of the registration statement and is assuming the responsibilities and liabilities of an underwriter prior to the effectiveness of the registration statement. The NASD has determined that it is inappropriate for a member to act as a qualified independent underwriter if it has not been given the opportunity to complete its due diligence and to participate in the preparation of the registration statement prior to the effective date of the offering. In such cases, the NASD believes that it is not realistic, nor is it appropriate, for a qualified independent underwriter to attempt to fulfill its obligations under Schedule E.

      Questions regarding this notice can be directed to Charles L. Bennett, Assistant Director, NASD Corporate Financing Department, at (202) 728-8258 or Richard J. Fortwengler, Assistant Director, NASD Corporate Financing Department at (202) 728-8254.


      *Also exempt from filing are securities offered by a corporate, foreign government or foreign government agency that has non-convertible debt with a term of issue of at least four years, or non-convertible preferred securities, rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.


    • 88-100 Mergers by Members With Blind-Pool Companies

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      NASD members are advised that their participation in certain transactions with blind-pool companies may be inconsistent with the provisions of Schedule E to the NASD By-Laws. The merger or acquisition of an NASD member firm or its parent by or with a blind-pool company that results in the direct or indirect public ownership of an NASD member or its parent must comply with the provisions of Schedule E. A "blind-pool" company is formed by a public offering of equity securities of a corporate entity in which the issuer discloses that the net proceeds of the offering will be used to search for and acquire as yet unidentified existing businesses. Because of the importance that the NASD places on the investor protection provisions of Schedule E, the NASD is publishing its views on the application of Schedule E to the By-Laws, the disclosure provisions of the Securities Act of 1933, and the anti-fraud provisions of Securities Exchange Act of 1934 to such transactions.

      BACKGROUND

      Recently, the NASD Corporate Financing Department has reviewed a number of public offerings of equity securities of recently formed corporations that raised between $400,000 and $800,000 from the public. In such offerings, the public offering document does not disclose a business plan for investment of the capital raised by the corporation. Rather, the offering document discloses that the corporation has been formed for the purpose of seeking business opportunities believed to hold a potential for profit. Such business opportunities include merging with or into existing businesses or acquiring assets to establish subsidiary businesses. The companies' officers and directors have complete discretion in the use of the proceeds they receive from the public. Such offerings are generally referred to as "blind-pool" or "blank-check" corporate offerings.

      In a number of instances, the NASD has learned that certain shell companies that became public through blind-pool public offerings have merged with or been acquired by an NASD member or the member's parent. These transactions are usually effected through the issuance of additional shares of stock of the blind-pool company to the owners of the private member firm or its parent.

      For example, one blind-pool company was formed in November, 1985 and began its initial public offering in late 1986. It concluded the public offering on February 17, 1987, with net proceeds of $130,000, and acquired an inactive broker/dealer March 2, 1987. It acquired the broker/dealer by issuing 10.8 million shares of common stock that had a stated value of $54,000. In this acquisition, the board of directors of the blind-pool company did not engage an independent accountant or investment banker to verify the stated value that it had set for the common stock.

      In another instance, a blind-pool company effected a reorganization with a member. Approval of the reorganization was accomplished by the issuance and solicitation of proxies to the holders of the common stock of the blind-pool company. The terms of the reorganization called for the issuance of 20 million shares of common stock of the blind-pool company to the three shareholders of the member, and for three persons associated with the member to be elected directors of the blind-pool company after the close of the reorganization. Additionally, the terms of the reorganization provided for the officers of the blind-pool company to be replaced by the officers of the member. In this transaction, no independent appraisals were used to determine the exchange ratio of the stock.

      EXPLANATION OF SCHEDULE E TO THE BY-LAWS OF THE ASSOCIATION

      In the merger and corporate reorganization described above, two member firms became publicly owned without compliance with Schedule E to the NASD By-Laws. The NASD adopted Schedule E in 1972 to address the NASD's special concerns in ensuring that public investors are protected adequately when investing in a member or its parent that is going public. Schedule E contains provisions that are designed to ensure investors that the price of the equity securities that are offered is no higher than the price recommended by a qualified independent underwriter (i.e. a member with a background in underwriting and a history of profitable operations) who has also conducted due diligence and participated in the preparation of the prospectus, offering memorandum, or similar document. These provisions provide investors protection from the conflicts of interest that exist when a member or a parent of a member offers its own securities to the public. The NASD has always believed that any offering of securities resulting in the direct or indirect public ownership of a member is subject to Schedule E and should be filed with the Corporate Financing Department for review, regardless of whether such offering is made pursuant to a registration statement or offering circular. The NASD clarified this view when it published proposed amendments to Schedule E in Notice to Members 80-39, dated August 11, 19801 and in SEC rule filing SR-NASD 80-292.

      ISSUES RAISED BY A MERGER WITH A BLIND-POOL COMPANY

      Section 9 of Schedule E is designed to ensure that an offering by an issuer that is not an affiliate of a member at the time of the offering, but as a result of the offering will be a member's affiliate, is conducted in compliance with Schedule E. Section 9 sets forth a number of types of transactions resulting in public ownership of a member and clarifies that Schedule E is applicable in such specified instances. Section 9 goes on, however, to make clear that:

      "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 Schedule E . .. "(emphasis provided).

      Thus, if a publicly owned issuer merges with a member, or a publicly owned issuer is acquired by a member or a parent of a member, the merger transaction would be subject to Schedule E since it would constitute an offering that results in the direct or indirect public ownership of the member. Members are cautioned that mergers or acquisitions involving an issuer and a member or its parent that result in the public ownership of the member or its parent are subject to Schedule E regardless of whether the merger or acquisition occurs subsequent to the public offering.

      Schedule E also applies to corporate reorganizations similar to the example cited in which a blind-pool company issues a proxy statement to investors. The proxy statement solicits their consent to a reorganization that results in the acquisition of a member or its parent, and previously authorized, but unissued, shares are to be issued to the owners of the member or its parent as a result of the affirmative action of the shareholders of the blind-pool company. Section 9 of Schedule E requires that the reorganization that is the subject of the proxy be carried out in compliance with Schedule E.

      Therefore, members are cautioned that pursuant to Section 14 of Schedule E, proxy materials filed with the SEC under SEC rules that involve a reorganization to acquire a member or its parent must be filed with the NASD Corporate Financing Department for review and must be in compliance with the provisions of Schedule E prior to the effective date of the reorganization. In addition, if a business combination between a member or its parent and a blind-pool company should be proposed and the result of the transaction would be that the member or its parent would be publicly held, the documents relating to that transaction must be filed with the NASD for review under Schedule E.

      The NASD also believes that where there is a short time period between the close of a public offering and the close of a merger, (in the case noted above, nine business days) serious questions arise concerning whether the member and the issuer provided adequate disclosure to the public with respect to merger negotiations that may have been in progress prior to the closing of the offering. If such merger negotiations were in progress and the prospectus was not amended to disclose them, serious violations of the Securities Act of 1933 and the anti-fraud provisions of the Securities Exchange Act of 1934 may have occurred.

      Questions regarding this notice can be directed to Charles L. Bennett, Assistant Director, NASD Corporate Financing Department, at (202) 728-8258.


      1 NASD Notice to Members 80-39, published August 11, 1980, at page 13 proposed that then Section 2(o) be revised to "... make it clear that public offerings whose proceeds are received by a member and public exchange offers for interests in members are subject to Schedule E. It would also be clarified that any other offering that results in the public ownership of a member would be subject to Schedule E ..."

      2 SR-NASD-80-29, filed with the SEC December 31,1980, at page 52 proposed that Section 9 (then Section 8) be revised to "... clarify that any other type of offering which results in the public ownership of a member would also be subject to Schedule E ..." The rule filing goes on to state that "Section [9] of the proposed rule change broadens the scope of former Section 2(o) with the purpose of inhibiting circumvention of Schedule E."


    • 88-99 Trade Date-Settlement Date Schedule: Christmas Day, New Year's Day, and Martin Luther King, Jr. Day

      SUGGESTED ROUTING*

      Internal Audit
      Municipal
      Operations
      Systems
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      Christmas Day and New Year's Day

      Securities markets and the NASDAQ System will be closed on Monday, December 26, 1988 and Monday, January 2, 1989 in observance of Christmas Day and New Year's Day respectively. "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

      Reg. T*

      December 16

      23

      28

      19

      27

      29

      20

      28

      30

      21

      29

      Jan. 3, 1989

      22

      30

      4

      23

      January 3

      5

      26

      Markets Closed

      27

      4

      6

      28

      5

      9

      29

      6

      10

      30

      9

      11

      January 2

      Markets Closed

      3

      10

      12

      Martin Luther King, Jr. Day:

      The schedule of trade dates/settlement dates below reflects the observance by the financial community of Martin Luther King, Jr.'s Day, Monday, January 16, 1989. On January 16, the NASDAQ System and the exchange markets will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed.

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

      Trade Date

      Settlement

      Reg. T*

      January 5

      12

      16

      6

      13

      17

      9

      17

      18

      10

      18

      19

      11

      19

      20

      12

      20

      24

      13

      23

      24

      16

      23

      25

      17

      24

      26

      January 16, 1989, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on January 16.

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

      Questions regarding this notice should be directed to the NASD Uniform Practice Department at (212) 858-4341.


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


    • 88-98 Proposed Amendment to Schedule E Re: Exemption From the Pricing Requirements For Shelf Offerings to Institutional Investors

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD is publishing for comment an amendment to Schedule E to the NASD By-Laws that would exempt a qualified independent underwriter from the pricing requirements of Section 3(c)(1) of Schedule E in connection with "shelf offerings" distributed pursuant to SEC Rule 415 that are to be distributed solely to "institutional investors." The qualified independent underwriter would be required to participate in the preparation of the registration statement and prospectus and to conduct due diligence throughout the effectiveness of the registration statement.

      The text of the amendment follows this notice.

      BACKGROUND

      For the past two years, a Subcommittee of the Corporate Financing Committee has studied the corporate financing activities in which members engage for the benefit of their issuer-clients in connection with takeover transactions, corporate reorganizations, and merchant-banking activities. The subcommittee also studied how members use SEC Rule 415 (17CFR 230.415, referred to as "Rule 415"), which governs the offering of securities on a delayed or continuous basis ("shelf offerings") to refinance those takeover transactions.

      The Subcommittee has reported on these activities to the full Committee and has made recommendations on how Schedule E to the NASD By-Laws ("Schedule E") and the Interpretation of the Board of Governors — Review of Corporate Financing (the "Interpretation") should be amended to regulate the distribution-related issues that were identified. The Subcommittee reviewed numerous transactions in which members acted as financial advisors, consultants, and underwriters in connection with private placements of high-yield debt securities to institutional customers. The placement of the high-yield debt securities in a private offering permits a rapid acquisition or restructuring of the target company. In addition, member firms often were permitted to participate as a "partner" in the takeover transaction by purchasing equity securities of the company on the same terms as were other insiders. In these latter cases, the member departs from the traditional role of financial consultant or advisor and becomes a principal in the takeover transaction.

      In such transactions, the member also agrees to provide liquidity to its institutional customers, and the issuer usually grants demand registration rights to the institutional investors. The registration rights generally obligate the issuer to file a registration statement covering the securities and use its best efforts to have the registration statement declared effective within six months of the closing of the private offering. As a result, the securities become freely transferable, and the institutional investor can act as a selling security holder in a public distribution of the securities and sell or otherwise transfer the securities on a delayed or continuous basis under Rule 415.

      SUMMARY OF PROPOSED AMENDMENTS

      As noted above, in many of these situations the member purchases an equity interest in the issuer. In cases where the ownership interest of the member rises to the level of affiliation as defined in Schedule E, and the member represents that it intends to provide liquidity to its institutional customers or to execute sale transactions in the "shelf securities on their behalf, Schedule E would apply to the offering.

      Schedule E contains requirements intended to deal with the conflicts of interest present when a member underwrites its own securities or the securities of an affiliate. These conflicts generally arise when the member engages in pricing the offering and conducting due diligence. Schedule E, therefore, requires the participation of a "qualified independent underwriter" in the offering. The qualified independent underwriter is required to perform independent due diligence, participate in the preparation of the registration statement and prospectus and to provide a recommendation stating that, in its opinion, the securities being distributed to the public are offered at a yield that is no lower or a price that is no higher than that which it would recommend.

      The Committee recognizes, however, that transactions in "high-yield" debt securities generally take place in negotiated transactions between institutional investors and are usually in large amounts. In light of this fact, the Committee believes that it is neither practical nor necessary to require a pricing opinion from a qualified independent underwriter every time a selling security holder wishes to sell a portion of its securities off the shelf. The Committee recognizes that many institutional investors regularly invest large amounts of money in high-yield securities and that they are capable of determining a fair yield or dividend for such securities. As a result, the Committee believes that it is appropriate to exempt a qualified independent underwriter from rendering an opinion on the price of the securities to be offered as required under Section 3(c)(l) of Schedule E if the securities are sold solely to institutional investors.

      Under the proposal, Section 2 of Schedule E would be amended to define an institutional investor as:

      a bank, savings and loan association, insurance company, registered investment company, or investment advisor that has more than $100 million under management, or an entity (whether a natural person, corporation, partnership, trust or otherwise) with gross assets of at least $100 million that can demonstrate that it regularly invests in the type and dollar amount of the securities being offered.

      Additionally, proposed subsection 3(d) of Schedule E provides conditions under which the pricing recommendation of a qualified independent underwriter would not be required. They are: (1) the securities offered are registered with the SEC pursuant to the Securities Act of 1933; (2) the securities are to be offered or sold pursuant to Rule 415 adopted under the Securities Act of 1933; (3) the securities will be offered or sold from time to time in negotiated transactions; (4) sales by the affiliated member must be made solely to institutional investors defined in Subsection 2(n); and (5) the qualified independent underwriter complies with its due diligence responsibility on a continuous basis as long as the registration statement is effective.

      With respect to the qualified independent underwriter's due diligence responsibilities, the Committee is aware that members acting as qualified independent underwriters employ different procedures in order to comply with their obligation to "... exercise the usual standards of 'due diligence' ... "in connection with the distribution of a public offering. The qualified independent underwriters and their counsel must determine which procedures they will use and whether those procedures will permit them to represent to the NASD that they have exercised the usual standards of due diligence. The NASD believes that, as long as the registration statement is effective, a qualified independent underwriter must, at a minimum, receive the following information: all correspondence with the SEC relating to the offering; all press releases; and all other documents customarily reviewed by underwriters in connection with a due diligence review, including quarterly and annual financial statements and reports. The NASD will require that a qualified independent underwriter be contractually obligated to receive this information on a continuous basis, as long as the registration statement is effective, so that it can comply with its due diligence responsibility.

      On June 1, 1988, the NASD adopted an amendment to the Interpretation entitled "Proceeds Directed to a Member." This provision governs members' participation in public offerings where more than 10 percent of the net offering proceeds are intended to be paid to members participating in the distribution of the offering, or associated or affiliated persons of such members, or members of the immediate family of such persons. Such participation requires the pricing opinion and due diligence of a qualified independent underwriter. The exception for Rule 415, Schedule E offerings discussed above also has been proposed to apply to "proceeds offerings" where a qualified independent underwriter is required. That proposed amendment is contained in the proposed Corporate Financing Rule [see Section C(8)(ii)], which was published for comment in NASD Notice to Members 88-92, November 1988. The last date for comment on that proposal is December 31, 1988.

      Comments on the proposed amendment to Schedule E should be directed to:

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506

      Comments must be received no later than December 31, 1988. Comments received by this date will be reviewed by the NASD Corporate Financing Committee and the NASD Board of Governors. If the proposed amendment, or an amended version resulting from comments received, is approved by the Board, it must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice can be directed to Richard J. Fortwengler, Assistant Director, Corporate Financing, at (202) 728-8254.

      Proposed Amendments to Schedule E to the By-Laws of the NASD

      Section 2

      Definitions

      (h) Institutional Investor - an investor which comes within any of the following categories:
      (a) a bank, savings and loan association, insurance company or registered investment company;
      (b) an investment advisor registered under Section 203 of the Investment Advisors Act of 1940 that has more than $100 million under management; or
      (c) an entity (whether a natural person, corporation, partnership, trust or otherwise) with gross assets of at least $100 million which can demonstrate that it regularly invests in the type and dollar amount of the securities being offered.

      Section 3

      Participation in Distribution of Securities of Member or Affiliate

      (d) The provision of Subsection 3(c)(l) which requires that the price of the securities be established based on the recommendation of a qualified independent underwriter shall not apply to an offering if:
      (1) the securities are registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended;
      (2) the registration statement pertains only to securities which are offered or sold pursuant to Rule 415 adopted under the Securities Act of 1933, as amended;
      (3) the securities will only be offered or sold from time to time in negotiated transactions;
      (4) sales by the affiliated member will be made solely to institutional investors; and
      (5) the qualified independent underwriter complies with Section 2(1) and fulfills all other requirements of Section 3(c)(l) on a continuous basis throughout the effectiveness of the registration statement.

    • 88-97 Implementation of the Form U-4 Disclosure Reporting Page (DRP) Effective Immediately

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD is publishing a suggested Customer Suitability Statement and Agreement to Purchase Form to assist members in complying with SEC Rule 15c2-6.

      BACKGROUND AND SUMMARY

      Effective January 1, 1990, the SEC adopted Rule 15c2-6, the so-called "Penny Stock/Cold Call Rule," in response to widespread unsuitable recommendations and other abusive sales practices by certain broker-dealers involving transactions in low-priced securities not listed on NASDAQ or the exchanges. The rule imposes special suitability and recordkeeping requirements on certain broker-dealers that recommend transactions in designated securities to persons who are not "established customers." Designated securities are generally defined as equity securities of companies having less than $2 million in net tangible assets and are selling below $5 per share. All securities listed on NASDAQ or a national securities exchange in the U.S. are exempt from the rule.

      SEC Rule 15c2-6 prescribes specific procedures a firm must follow before such designated securities can be recommended to nonestablished customers. Included is the requirement to obtain from each customer oral or written suitability information detailing such a customer's previous investment experience, investment objectives, and financial situation. The scope of the information gathered is very important. With that information, the firm must reasonably determine whether transactions in these designated securities are suitable for the particular customer.

      If the firm determines that the securities are suitable for purchase by the customer, the firm must prepare a written statement of its reasons for making such a determination, deliver it to the customer, and secure a manually signed copy from the customer acknowledging receipt of the firm's suitability determination. The customer also must review and agree that the information contained on the form from which the suitability determination was made accurately reflects the customer's financial situation, investment objectives, and investment experience.

      In addition, the firm must obtain the customer's written agreement for the first three purchase transactions involving designated securities. Both the customer suitability statement and the written agreement must be properly executed by the customer and then received by the firm prior to any transactions in designated securities.

      NASD members have requested guidance concerning the extent of customer information that must be gathered to make a suitability determination, and the proper text of both the firm's suitability determination and the customer's writ ten agreement for the transaction. To assist members in complying with SEC Rule 15c2-6, the NASD, in collaboration with the SEC staff, is publishing a suggested Customer Suitability Statement and an Agreement to Purchase Form, which follow this notice. Please note that these suggested forms are intended to serve as models, not as requirements for use.

      Questions concerning this notice should be directed to Gary Carleton or Daniel Sibears, NASD Compliance Division, at (202)728-8959.

      Suggested Customer Suitability Statement and Agreement to Purchase Form

    • 88-96 SEC Approval of Amendments to NASD By-Laws and Rules of Fair Practice And New Government Securities Rules

      SUGGESTED ROUTING*

      Senior Management
      Government Securities
      Legal & Compliance
      Operations
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On November 2, 1988, the Securities and Exchange Commission approved amendments to the NASD By-Laws and Rules of Fair practice and new Government Securities Rules designed to permit the NASD to carry out its regulatory responsibilities under the Government Securities Act of 1986. Included among these rules is a Government Securities Advertising Rule.

      This rule will require members to file advertising relating to government securities with the NASD. This requirement will be implemented as of January 1, 1989.

      The Government Securities Act provides for the regulation of government* securities activities by brokers and dealers"' and creates a' new section 1SC of the' Securities Exchange Act of 1934 that requires SEC registration and either NASD or exchange membership for government securities -brokers and dealers. The text of the proposed amendments follows' this notice.

      BACKGROUND

      Public Law 99-571 (the "Government Securities Act of 1986"), enacted by Congress in October 1986, amended the Securities Exchange Act of 1934 (1934 Act) by adding a new Section 15C that requires registration of government securities brokers and dealers and provides for adoption of rules for such brokers and dealers by the Treasury Department. In addition, the Government Securities Act amended Section 15A(f) of the 1934 Act to provide the NASD with the authority to adopt and implement rules applicable to its members; to enforce compliance with the provisions of the Government Securities Act and rules and regulations adopted thereunder; to discipline members for violations of the Government Securities Act and rules; to examine members' books and records; and to implement the provisions of the 1934 Act relating to denial of membership, or association with members, or persons or entities subject to statutory disqualification. In addition, the Government Securities Act provided the NASD with the authority to adopt rules to prohibit fraudulent, misleading, deceptive, and false advertising of government securities.

      A proposed amendment to Article III, Section 35 of the NASD Rules of Fair Practice, relating to advertising, was circulated for member comment in Notice to Members 87-24, dated April 14,1987. These amendments have been incorporated into the Government Securities Rules. The remainder of the rule proposals relating to government securities activities of NASD member firms were circulated for member comment in Notice to Members 87-53, dated August 12, 1987. Notice to Members 88-1 solicited member votes on the proposals, which were approved by the membership and filed with the Securities and Exchange Commission. The Commission approved the amendments on November 2, 1988.

      EXPLANATION

      The amendments and new rules provide the NASD with the ability to carry out its responsibilities under the Government Securities Act. These amendments are divided into four parts:

      • Amendments to the NASD By-Laws.
      • Amendments to Schedule C of the NASD By-Laws regarding registration of individuals.
      • An amendment to Article I, Section 5 of the NASD Rules of Fair Practice.
      • A rule package designated as "Government Securities Rules" which provides substantive rules governing the activities of government securities brokers and dealers."

      NASD By-Laws

      These amendments incorporate into existing By-Law provisions appropriate references to government securities brokers and dealers or to the rules of the Treasury Department.

      Substantive changes to the By-Laws include a new Section 8 to Article VII that allows the Board of Governors to adopt government securities rules subject to member vote and a new Section 6 to Article XVI that applies to limitations of powers. New Section 6 states that the By-Law provisions governing qualifications of members and rulemaking authority conferred upon the NASD shall not be inconsistent with the Government Securities Act. This provision is similar to an existing provision in the By-Laws relating to municipal securities brokers and dealers.

      The amendments also contain changes to Article II, Section 4 of the By-Laws that define the term "disqualification." These changes generally conform the NASD definition to the definition in the 1934 Act.

      Schedule C to the NASD By-Laws

      The amendments to Schedule C of the By-Laws add a new Part X. This section defines government securities principals and representatives. It also requires registration of government securities principals and representatives, and exempts from registration persons serving in an exclusively clerical or ministerial capacity. The definitions of the categories of individuals required to be registered either as principals or representatives track the provisions of Section 400.3(c) of the Treasury regulations. Such registration is required to provide the NASD with the information needed to make a determination of potential statutory disqualification and identify a firm's principals for purposes of contact with and examination of the firm.

      NASD Rules of Fair Practice

      The amendment to Article I, Section 5 of the Rules of Fair Practice is intended to clarify that the applicable Rules of Fair Practice do not apply to members that are registered with the SEC under Section 15C as sole government securities brokers or dealers. The provisions of the Rules of Fair Practice will, of course, remain fully applicable to members registered under Section 15(b) of the 1934 Act.

      Government Securities Rules

      The remaining provisions of the proposed rule package are designated as "Government Securities Rules." These rules are substantially parallel to the NASD Rules of Fair Practice in areas in which such rules are consistent with NASD obligations under the provisions of Section 15A(f)of the 1934 Act.

      The proposed rules include provisions relating to the maintenance of books and records, supervisory procedures, and regulation of activities of members that are experiencing financial or operational difficulties or that are changing their exemptive status under the customer protection provisions applicable to government securities brokers and dealers. In addition, these rules contain a government securities advertising rule which imposes a requirement that government security advertising be filed with the NASD Advertising Department. The rules also provide the framework for the NASD to bring disciplinary actions pursuant to the NASD Code of Procedure.

      EFFECTIVE DATE

      The amendments became effective upon approval by the Securities and Exchange Commission on November 2, 1988. With respect to the filing requirement for advertising, however, the NASD has determined that such filings should commence as of January 1,1989.

      Questions concerning this notice can be directed to T. Grant Callery, NASD Associate General Counsel, at (202) 728-8285. Questions relating to the advertising rule may be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.

      Questions relating to financial responsibility aspects of the rules may be directed to Walter J. Robertson, Associate Director, Financial Responsibility, at (202) 728-8236.

      NASD BY-LAWS

      (Note: New language is underlined; deleted language is in brackets.)

      ARTICLE I

      Definitions

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

      (a) "Act" means the Securities Exchange Act of 1934 as amended;
      (b) "bank" means (1) a banking institution organized under the laws of the United States, (2)a member bank of the Federal Reserve System, (3) any other banking institution, whether incorporated or not, doing business under the laws of any state or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks and which is supervised and examined by a State or Federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of the Act, and (4) a receiver, conservator, or other liquidating agent of any institution or firm included in clauses (1), (2) or (3) of this subsection;
      (c) "branch office" means an office which is owned or controlled by a member, and which is engaged in the investment banking or securities business;
      (d) "broker" means any individual, corporation, partnership, 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.;
      (g) "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;
      (h) "investment banking or securities business" means the business, carried on by a broker, dealer, [or] municipal securities dealer (other than a bank or department or division of a bank), or government securities broker or dealer of underwriting or distributing issues of securities, or of purchasing securities and offering the same for sale as a dealer, or of purchasing and selling securities upon the order and for the account of others;
      (i) "member" means any broker or dealer admitted to membership in the Corporation;
      (j) "municipal securities" means securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond as defined by Section 3(a)(29) of the Act;
      (k) "municipal securities 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;
      (m) "person associated with a member" or "associated person of a member" means every sole proprietor, partner, officer, director, or branch manager of any member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member, whether or not any such person is registered or exempt from registration with the Corporation pursuant to these By-Laws;
      (n) "registered broker, dealer, [or] municipal securities broker or dealer, or government securities broker or dealer" means any broker, dealer, [or] municipal securities broker or dealer, or government 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, Government Securities Rules, Code of Procedure, Uniform Practice Code, and any Interpretations thereunder.
      (p) "government securities broker" shall have the same meaning as in Section 3(a)(43) of the Act except that it shall not include financial institutions as defined in Section 3(a)(46) of the Act.
      (q) "government securities dealer" shall have the same meaning as in Section 3(a)(44) of the Act except that it shall not include financial institutions as defined in Section 3(a)(46) of the Act.

      ARTICLE II

      Qualifications of Members and Associated Persons

      Persons Eligible to Become Members and Associated Persons of Members

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

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

      Authority of Board to Adopt Qualification Requirement

      Sec. 2. (a) The Board of Governors shall have authority to adopt rules and regulations applicable to applicants for membership, members and persons associated with applicants or members establishing specified and appropriate standards with respect to the training, experience, competence and such other qualifications as the Board of Governors finds necessary or desirable, and in the case of an applicant for membership or a member, standards of financial responsibility or operational capability.

      (b) In establishing and applying such standards, the Board of Governors may classify members and persons associated with such members, taking into account relevant matters, including the nature, extent and type of business being conducted and of securities sold, dealt in, or otherwise handled. The Board of Governors may specify that all or any portion of such standards shall be applicable to any such class and may require the persons in any such class to be registered with the Corporation.
      (c) The Board of Governors may from time to time make changes in such rules, regulations and standards as it deems necessary or appropriate. Neither the adoption nor any change in such standards 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.

      Ineligibility of Certain Persons for Membership or Association

      Sec. 3. (a) No registered broker, dealer, [or] municipal securities broker or dealer, or government securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if such broker, dealer, [or] municipal securities broker or dealer, or government securities broker or dealer, or member fails or ceases to satisfy the qualification requirements under Section 2 of this Article, if applicable, or if such broker, dealer, municipal securities broker or dealer or government 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 if applicable, 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, or government securities broker or dealer shall be admitted to membership, and no member shall be continued in membership if any person associated with it is ineligible to be an associated person under this subsection.
      (c) If it deems it appropriate, the Board of Governors, upon notice and opportunity for a hearing, may cancel the membership of a member if it 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, or government securities broker or 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 and government 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.

      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[;], contract market designated pursuant to Section 5 of the Commodity Exchange Act, or futures association, registered under Section 17 of such Act, or has been denied trading privileges on any such contract market;
      (b) is subject to an order of the Commission or other appropriate regulatory agency denying, suspending for a period not exceeding twelve months, or revoking its registration as a broker, dealer, [or] municipal securities dealer (including a bank or department or division of a bank), or government securities broker or dealer, 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), or government securities broker or dealer[;], or is subject to an order of the Commodity Futures Trading Commission denying, suspending, or revoking his registration under the Commodity Exchange Act;
      (c) by his conduct while associated with a broker, dealer, [or] municipal securities dealer(including a bank or department or division of a bank), or government securities broker or dealer, or while associated with an entity or person required to be registered under the Commodity Exchange Act has been found to because of any effective suspension, expulsion or order of the character described in subsections (a) or (b) of this Section.
      (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] a self-regulatory organization or to become associated with a member of [the Corporation] a self-regulatory organization, or in any report required to be filed with [the Corporation] a self-regulatory organization, or in any proceeding before [the Corporation] a self-regulatory organization, 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 misdemean or 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 or government securities broker or dealer, investment adviser, bank insurance company, [or] fiduciary, or any entity or person required to be registered under the Commodity Exchange Act;
      (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 Tide 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] entity or person required to be registered under the Commodity Exchange Act, municipal securities dealer (including a bank or department or division of a bank) or government securities 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 any such activity, or in connection with the purchase or sale of any security.

      ARTICLE III

      Membership

      Application for Membership

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

      (1) an acceptance of and an agreement to abide by, comply with, and adhere to, all the provisions, conditions, and covenants of the Certificate of Incorporation, the By-Laws, the rules and regulations of the Corporation as they are or may from time to time be adopted, changed or amended, and all rulings, orders, directions and decisions of, and sanctions imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, [and] including [and] the rules of the Municipal Securities Rulemaking Board[,] and the Treasury Department, provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as provided in the Act;
      (2) an agreement to pay such dues, assessments, and other charges in the manner and amount as shall from time to time be fixed by the Board of Governors pursuant to these By-Laws;
      (3) an agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any district or other committee, shall be liable, except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer or member of the Board of Governors or of any district or other committee, in his official capacity, or by any employee of the Corporation while acting within the scope of his employment or under instruction of any officer, board, or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the rules of the Corporation as they are or may from time to time be adopted, or amended, or any ruling, order directive, decision of, or penalty imposed by the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, including [and] the rules of the Municipal Securities Rulemaking Board and the Treasury Department; and
      (4) such other reasonable information with respect to the applicant as the Board of Governors may require.
      (b) Any application received by the Corporation shall be referred to the District Committee of the district in which the applicant has his principal place of business, and if a majority of the members of such District Committee determine that the applicant has satisfied all of the admission requirements of the By-Laws, it shall recommend the applicant's admission to membership and promptly notify the Secretary of the Corporation of such recommendation.
      (c) If a majority of the members of such Distric Committee determine that the applicant fails to satisfy all of the admission requirements of the By-Laws, it shall promptly notify the Secretaryof the Corporation who shall thereafter take appropriate action as of the date when posted to the membership roll.
      (d) Each member shall ensure that its membership application with the Corporation is kept current at all times by supplementary amendments to the original application.

      Similarity of Membership

      Sec. 2. No change.

      Executive Representative

      Sec. 3. No change.

      Membership Roll

      Sec. 4. No change.

      Resignation of Members

      Sec. 5. No change.

      Transfer and Termination of Membership

      Sec. 6. No change.

      Registration of Branch Offices

      Sec. 7. No change.

      Vote of Branch Offices

      Sec. 8. No change.

      District Committees' Right to Classify Branches

      Sec. 9. No change.

      ARTICLE IV

      Registered Representatives and Associated Persons Qualification Requirements

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

      Application for Registration

      Sec. 2. (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Corporation, on the form to be prescribed by the Board of Governors and shall contain:

      (1) an acceptance of and an agreement to comply with all the provisions of the rules of the Corporation as they are or may from time to time be adopted or amended, all rulings, orders, directions and decisions of, and penalties imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder [, and] including the rules of the Municipal Securities Rulemaking Board and the Treasury Department, provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as provided in the Act;
      (2) an agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any District or other Committee, shall be liable except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer, member of the Board of Governors or of any District or other Committee in his official capacity, or by any employee of the Corporation while acting within the scope of his employment, or under instruction of any officer, board or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the By-Laws, any rules of the Corporation as they are or may from time to time be adopted or amended, any ruling, order, direction, decision of, or penalty imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, [or] including the rules of the Municipal Securities Rulemaking Board and the rules of the Treasury Department; and
      (3) such other reasonable information with respect to the applicant as the Corporation may require.
      (b) The Corporation shall not approve an application for registration of any person who is not eligible to be an associated person of a member under the provisions of Section 3(b)of Article II of these By-Laws.
      (c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments to the original application.

      Notification by Member to Corporation of Termination

      Sec. 3. Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than 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. Termination of registration of such person associated with a member shall not take effect so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Corporation, however, may in its discretion declare the termination effective at any time.

      Retention of Jurisdiction

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

      ARTICLE V

      Affiliates

      No change.

      ARTICLE VI

      Dues, Assessments and Other Charges

      No change.

      ARTICLE VII

      Board of Governors

      Powers and Authority of Board of Governors

      Sec. 1. (a) The Board of Governors shall be the governing body of the Corporation and, except as otherwise provided by these By-Laws, shall be vested with all powers necessary for the management and administration of the affairs of the Corporation and the promotion of the Corporation's welfare, objects and purposes. In the exercise of such powers, the Board of Governors shall have the authority to:

      (1) adopt for submission to the membership, as hereinafter provided, such By-Laws, Rules of Fair Practice and changes or additions thereto as it deems necessary or appropriate;
      (2) make such regulations, issue such orders, resolutions, interpretations, including interpretations of the Rules of Fair Practice, and directions, and make such decisions as it deems necessary or appropriate;
      (3) prescribe a code of arbitration procedure providing for the required or voluntary arbitration of controversies between members and between members and customers or others as it shall deem necessary or appropriate and neither the adoption nor any amendments to the code need be submitted to 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 member and affiliates thereof, and neither the adoption nor any amendments to such rules ant 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 Governot may prescribe;
      (5) require all over-the-counter transaction securities between members, other than transactions in exempted securities, to be cleared and settled through the facilities o;clearing agency registered with the Commsion pursuant to the Act, which clears and ties such over-the-counter transactions in securities;
      (6) organize and operate automated systen to provide qualified subscribers with securities information and automated services. The systems may be organized and operated by a division or subsidiary compr 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 Governors may adopt rules of such automated systems, establish reasonable qualifications and classifications for members and other subscribers, provide qualification standards for securities included in sue systems, require members to report prompt information in connection with securities included in such systems, and establish charge to be collected from subscribers and others The Board of Governors shall have power adopt, amend, supplement or modify such rules, qualifications, classifications, standards and charges from time to time without recourse to the membership for approval, are such rules, qualifications, classifications, standards and charges shall become effective as the Board of Governors may prescribe;
      (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; and
      (8)
      (i) adopt for submission to the membership such rules as the Board of Governors deems appropriate to implement the provisions of the Act as amended by the Government Securities Act of 1986 and the rules and regulations promulgated thereunder, and (ii) make such regulations, issue such orders, resolutions, interpretations, including interpretations of the rules adopted pursuant to this Section, and directions, and make such decisions as it deems necessary or appropriate.
      (b) In the event of the refusal, failure, neglect or inability of any member of the Board of Governors to discharge his duties,or for any cause affecting the best interests of the Corporation the sufficiency of which the Board of Governors shall be the sole judge, the Board shall have the power, by the affirmative vote of two-thirds of the Governors then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 6 of this Article.

      Authority to Suspend for Failure to Submit

      Required Information

      Sec. 2. No change.

      Composition of Board

      Sec. 3. No change

      Term of Office of Governors

      Sec. 4. No change.

      Succession to Office

      Sec. 5. No change.

      Election of Board Members

      Sec. 6. No change.

      Filling of Vacancies on Board

      Sec. 7. No change.

      Meetings of Board

      Sec. 8. No change

      Offices of Corporation

      Sec. 9. No change.

      ARTICLE VIII

      District Committees

      No change.

      ARTICLE IX

      Nominating Committees

      No change

      ARTICLE X

      Officers and Employees

      No change

      ARTICLE XI

      Committees

      No change.

      ARTICLE XII

      Rules of Fair Practice

      No change.

      ARTICLE XIII

      Disciplinary Proceedings

      No change.

      ARTICLE XIV

      Power of Board to Prescribe Sanctions

      The Board of Governors is hereby authorized to prescribe appropriate sanctions applicable to members, including censure, fine, suspension or expulsion from membership, suspension or barring from being associated with all members, limitation of activities, functions and operations of a member, or any other fitting sanction, and to prescribe appropriate sanctions applicable to persons associated with members, including censure, fine, suspension or revocation of registration, if any, suspension or barring a person associated with a member from being associated with all members, limitation of activities, functions and operations of a person associated with a member, or any other fitting sanction, for:

      (a) breach by a member or a person associated with a member of any covenant with the Corporation or its members;
      (b) violation by a member or a person associated with a member of any of the terms, conditions, covenants, and provisions of the rules of the Corporation, the federal securities laws, including the rules and regulations adopted thereunder, [and] including rules of the Municipal Securities Rulemaking Board and the rules of the Treasury Department;
      (c) failure by a member or person associated with a member to submit a dispute for arbitration under the Code of Arbitration Procedure ("Code") as required by the Code, or to fail to appear or to produce any document in their possession or control as directed pursuant to provisions of the Code, or to fail to honor an award of arbitrators properly rendered pursuant to the Code where a timely motion has not been made to vacate or modify such award pursuant to applicable law;
      (d) refusal by a member or person associated with a member to abide by an official ruling of the Board of Governors or Uniform Practice Committee acting within its appropriate authority, with respect to any transaction which is subject to the Uniform Practice Code; or
      (e) failure by a member or a person associated with a member to adhere to any ruling, order, direction or decision of, or to pay any penalty, fine or costs imposed by the Board of Governors or any District Business Conduct Committee.

      ARTICLE XV

      Uniform Practice Code

      No charge

      ARTICLE XVI

      Limitation of Powers

      Prohibitions

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

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

      Use of Name of Corporation by Members

      Sec. 2. No member shall use the name of the Corporation except to the extent that may be authorized by the Board of Governors.

      Unauthorized Expenditures

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

      Conflicts of Interest

      Sec. 4. No member of the Board of Governors or of any committee of the Corporation shall directly or indirectly participate in any adjudication of the interests of any party which would at the same time substantially affect his intere: or the interests of any person in whom he is directly or indirectly interested. In any such case, the member shall disqualify himself or shall be disqualified by the Chairman of the Board or Committee.

      Municipal Securities

      Sec. 5. The provisions of the By-Laws conferring rulemaking authority upon the Board of Governors shall not be applicable to the municipal securities activities of members or persons associated with members to the extent that the application of such authority would be inconsistent with Section 15B of the Act.

      Government Securities

      Sec. 6. The provisions of the By-Laws governing qualifications of members and persons associated with members and conferring rulemaking authority upon the Board of Governors shall not be applicable to the government securities activities of members or persons associated with members to the extent that the application of such provisions or authority would be inconsistent with Section 15A(f) of the Act.

      ARTICLE XVII

      Procedure for Adopting Amendments to By-Laws

      No change.

      ARTICLE XVIII

      Corporate Seal

      No change.

      ARTICLE XIX

      Checks

      No change.

      ARTICLE XX

      Annual Financial Statement

      No change.

      SCHEDULE C TO THE NASD BY-LAWS

      V

      PERSONS EXEMPT FROM REGISTRATION

      (1) The following persons associated with a member are not required to be registered with the Corporation:
      (a)-(c)
      No change.
      (d) persons associated with a member whose functions are related solely and exclusively to:
      (i)
      No change.
      (ii) transactions in exempted securities, except as provided in Part X hereof, or
      (iii)
      No change.

      X

      REGISTRATION OF GOVERNMENT SECURITIES PRINCIPALS AND REPRESENTATIVES

      1. Registration of Principals. All persons associated with a member not previously registered as a principal who are to function as government securities principals shall be registered as such with the Corporation.
      (a) Definition of Government Securities Principal — Persons associated with a member who are:
      (1) engaged in the management or supervision of the member's government securities business, including:
      (i) underwriting, trading or sales of government securities;
      (ii) financial advisory or consultant services for issuers in connection with the issuance of government securities:
      (iii) research or investment advice, other than general economic information or advice, with respect to government securities in connection with the activities described in (i) and (ii) above;
      (iv) activities other than those specifically mentioned that involve communication, directly or indirectly, with public investors in government securities in connection with the activities described in (i) and (ii) above; or
      (2) are responsible for supervision of:
      (i) the processing and clearance activities with respect to government securities; or
      (ii) the maintenance of records involving any of the activities described in (a)(l) above;
      are designated as principals.
      (b) Notification of Principal Status — A member shall promptly notify the Corporation of the assumption of principal status by an individual not previously registered as a principal with the member on the form designated by the Board of Governors accompanied by the applicable fees.
      2. Registration of Representatives. All persons associated with a member who are to function as government securities representatives who have not previously been registered shall be registered as such with the Corporation.
      (a) Definition of Representative — Persons associated with a member, including assistant officers other than principals, who are engaged in the government securities business for the member including:
      (i) underwriting, trading or sales of government securities;
      (ii) financial advisory or consultant services for issuers in connection with the issuance of government securities;
      (iii) research or investment advice, other than general economic information or advice, with respect to government securities in connection with the activities described in paragraphs (i) and (ii) above;
      (iv) activities other than those specifically mentioned that involve communication, directly or indirectly, with public investors in government securities in connection with the activities described in paragraphs (i) and (ii) above;
      are designated as representatives.
      (b) Notification of Representative Status — A member shall promptly notify the Corporation of the assumption by an individual not previously registered with the member of representative status on the form designated by the Board of Governors accompanied by the applicable fees.
      3. Persons Exempt From Registration. Persons associated with a member whose functions are exclusively clerical or ministerial are not required to register with the Corporation.

      PROPOSED AMENDMENT TO NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined.)

      ARTICLE I

      Adoption and Application

      Applicability

      Sec. 5. (a) These Rules of Fair Practice shall apply to all members and persons associated with a member, other than those members registered with the Securities and Exchange Commission solely under the provisions of Section 15C of the Act and persons associated with such members. Persons associated with a member shall have the same duties and obligations as a member under these Rules of Fair Practice.

      (The remainder of Section 5 remains unchanged.)

      GOVERNMENT SECURITIES RULES

      Adoption of Rules

      Sec. 1. The following provisions are adopted pursuant to Article VII, Section l(a)(8) of the NASD By-Laws and Section 15A(f)(2) of the Securities Exchange Act of 1934.

      Applicability

      Sec. 2. (a) These rules shall apply to the government securities business of all members and persons associated with a member in order to implement and enforce the provisions of the Securities Exchange Act of 1934 and the rules promulgated thereunder including the rules of the Treasury Department. Unless otherwise inc cated herein, the requirements of these rules ar in addition to those contained in the Rules of Fair Practice for members that are subject to ft provisions of the Rules of Fair Practice. Persons associated with a member shall have the same duties and obligations as a member under these rules.

      (b) A member or person associated with a member, who has been expelled, cancelled, or revoked from membership or from registration or who has been barred from being associated with all members, shall cease to have any privileges of membership or registration. A member or person associated with a member who has been suspended from membership or registration shall also cease to have any privileges of membership or registration other than those under the Code of Procedure or insurance programs sponsored by the Corporation. In neither case shall such a member or person associated with a member be entitled to recover any admission fees, dues, assessments, or other charges paid to the Corporation.
      (c) A member or person associated with a member who has been suspended from membership or from registration shall have all of the obligations imposed by the By-Laws, these rules, and other regulations of the Corporation

      Definitions in By-Laws and Rules of Fair Practice

      Sec. 3. Unless the context otherwise requires, or unless defined in these rules, terms used in the rules and provisions hereby adopted, if defined in the By-Laws or Rules of Fair Practice shall have the meaning as defined therein.

      Books and Records

      Sec. 4.

      Requirements

      (a) Each member shall keep and preserve books, accounts, records, memoranda, and correspondence in conformity with all applicable laws, rules, regulations, and statements of policy promulgated thereunder and with the rules of this Association.

      Information on accounts

      (b) Each member shall maintain accounts of customers in such form and manner as to show the following information: name, address, and whether the customer is legally of age; signature of the registered representative introducing the accounts and signature of the member or the partner, officer, or manager accepting the account for the member. If the customer is associated with or employed by another member, this fact must be noted. In discretionary accounts, the member shall also record the age or approximate age and occupation of the customer as well as the signature of each person authorized to exercise discretion in such account

      Record of written complaints

      (c) Each member shall keep and preserve either a separate file of all written complaints of customers and action taken by the member, if any, or a separate record of such complaints and a clear reference to the files containing the correspondence connected with such complaint.

      "Complaint" defined

      (d) A "complaint" shall be deemed to mean any written statement of a customer or any person acting on behalf of a customer alleging a grievance involving the activities of those persons under the control of the member in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer.

      Supervision

      Sec. 5.

      Written procedures

      (a) Each member shall establish, maintain, and enforce written procedures that will enable it to supervise properly the activities of each registered representative and associated person to ensure compliance with the applicable provisions of the Securities Exchange Act of 1934, rules, regulations, and statements of policy promulgated thereunder including the rules of the Treasury Department, and with the applicable rules of this Association.

      Responsibility of member

      (b) Final responsibility for proper supervision shall rest with the member. The member shall designate a partner, officer, or manager to carryout the written supervisory procedures. A copy of such procedures shall be kept in each office of the member.

      Eligibility investigated

      (c) Each member shall have the responsibility and the duty to ascertain by investigation the absence of any statutory disqualification as that term is defined under Section 3(a)(39) or 15C(c) of the Securities Exchange Act of 1934 and that any application for registration by an associated person is complete and accurate.

      Regulation of Activities of Members Experiencing Financial and/or Operational Difficulties

      Sec. 6. (a) Application — For the purposes of this rule, the term "member" shall be limited to any member of the Association registered with the Securities and Exchange Commission pursuant to Section 15C of the Securities Exchange Act of 1934 that is not designated to another self-regulatory organization by the Securities and Exchange Commission for financial responsibility pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17d-l thereunder. Further, the term shall not be applicable to any member that is subject to Section 402.2(c) of the rules of the Treasury Department.

      (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 fifteen (15) consecutive business days:
      (A) A firm's liquid capital is less than 150 percent of the total haircuts or such greater percentage thereof as may from time to time be prescribed by the Association.
      (B) A firm's liquid capital minus total haircuts is less than 150 percent of its minimum dollar capital requirement.
      (C) The deduction of ownership equity and maturities of subordinated debt scheduled during the next six months would result in any one of the conditions described in (A) or (B) of this sub-paragraph (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 sub-paragraphs (b)(l)(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 liquid capital is less than 125 percent of total haircuts or such greater percentage thereof as may from time to time be prescribed by the Association.
      (B) A firm's liquid capital minus total haircuts is less than 125 percent of its minimum dollar capital requirement.
      (C) The deduction of ownership equity and maturities of subordinated debt scheduled during the next six months would result in any one of the conditions described in (A) or (B) of this sub-paragraph (1).
      (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 actions under the rule. Subparagraphs (b)(2) and (c)(2) of the rule recognize 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 to 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 that 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.

      (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 conducting 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 significant reduction in excess liquid capital in the preceding month or 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 Section 404.2 of the Treasury Department rules.
      (4) The member is not in compliance, or is unable to demonstrate compliance, with applicable capital requirements of Section 402 of the Treasury Department rules.
      (5) The member is not in compliance, or is unable to demonstrate compliance, with Section 403.4 of the Treasury Department rules (Customer Protection — Reserve 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 (6), a determination of financial or operational difficulty should be made.
      (8) The member is registered as a Futures Commission Merchant and its net capital is less than required by Section 402. l(d) of the Treasury Department rules.
      (b) If the Corporation determines that any of the conditions specified in subparagraph (a) of this Explanation exists, 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.
      (13) Be subject to such other restrictions or take such other actions as the Corporation deems appropriate under the circumstances in the public interest and for the protection of members.

      Approval of Change in Exempt Status Under SEC Rule 15c3-3

      Sec. 7. (a) Application — For the purposes of this rule, the term "member" shall be limited to any member of the Association that is not designated to another self-regulatory organization by the Securities and Exchange Commission for financial responsibility pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17d-l thereunder. Further, the term shall not be applicable to any member that is subject to Section 402.2(c) of the rules of the Treasury Department.

      (b) A member operating pursuant to any exemptive provision as contained in subparagraph (k)of SEC Rule 15c3-3 under the Securities Exchange Act of 1934 (Rule 15c3-3) shall not change its method of doing business in a manner that will change its exemptive status from that governed by subparagraph (k)(l) or (k)(2)(ii) to that governed by subparagraph(k)(2)(i); or from subparagraph (k)(l), (k)(2)(i), or (k)(2)(ii) to a fully computing firm that is subject to all provisions of Rule 15c3-3; or commence operations that will disqualify it for continued exemption under Rule 15c3-3 without first having obtained the prior written approval of the Association.
      (c) In making the determination as to whether to approve or to deny in whole or in part an application made pursuant to subsection (b), the Association staff shall consider, among other things, the type of business in which the member is engaged, the training, and experience, of persons associated with the member, the member's procedures for safeguarding customer funds and securities, the member's overall financial and operational condition and any other information deemed relevant in the particular circumstances and the time these measures would remain in effect.

      Communications With the Public

      Sec. 8

      (a) Definitions
      (1) Advertisement — For purposes of this section and any interpretation thereof, "advertisement" means material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, telephone directories (other than routine listings), or other public media.
      (2) Sales Literature — For purposes of this section and any interpretation thereof, "sales literature" means any written communication distributed or made generally available to customers or the public that does not meet the foregoing definition of "advertisement." Sales literature includes, but is not limited to, circulars, research reports, market letters, performance reports or summaries, form letters, standard forms of option worksheets, seminar texts, and reprints or excerpts of any other advertisement, sales literature, or published article.
      (b) Approval and Recordkeeping
      (1) Each item of advertising and sales literature shall be approved by signature or initial, prior to use, by a registered principal (or designee) of the member.
      (2) A separate file of all advertisements and sales literature, including the name(s) of the person(s) who prepared them and/or approved their use, shall be maintained for a period of three years from the date of each use.
      (c) Filing Requirements and Review Procedures
      (1) Advertisements concerning government securities (as defined in Section 3(a)(42) of the Securities Exchange Act of 1934) shall be filed by members with the Association's Advertising Department for review within 10 days of first use or publication.
      (2)
      (A) Each member of the Association that has not previously filed advertisements with the Association shall file its initial advertisement concerning government securities with the Association's Advertising Department at least 10 days prior to use and shall continue to file its advertisements concerning government securities at least 10 days prior to use for a period of one year.
      (B) Each member that, on the effective date of this section, had been filing advertisements with the Association for a period of less than one year shall continue to file its advertisements concerning government securities at least 10 days prior to use, until the completion of one year from the date the first advertisement was filed with the Association.
      (3) Notwithstanding the foregoing provisions, any District Business Conduct Committee of the Association, upon review of a member's government securities advertising and/or sales literature, and after determining that the member will again depart from the standards of this section, may require that such member file all government securities advertising and/or sales literature, or the portion of such member's material that is related to any specific types or classes of securities or ser vices, with the Association's Advertising Department and/or the District Committee, least 10 days prior to use.
      The Committee shall notify the member in writing of the types of material to be filed and the length of time such requirement is t be in effect. The requirement shall not exceed one year, however, and shall not take effect until 30 days after the member receives the written notice, during which time the member may request a hearing before the District Business Conduct Committee, and any such hearing shall be held i reasonable conformity with the hearing and appeal procedures of the Code of Procedure
      (4) In addition to the foregoing requirememt every member's government securities advertising and sales literature shall be subject to routine spot-check procedure. Upon written request from the Association's Advertising Department, each member shall promptly submit the material requested. Members will not be required to submit material under thi procedure that has been previously submitte pursuant to one of the foregoing requirements.
      (5) The following types of material are excluded from the foregoing filing requirements and spot-check procedure:
      (A) Advertisements of sales literature solely related to changes in a member's name, personnel, location, ownership,offices, business structure, officers or partners, telephone or teletype numbers, or concerning a merger with, or acquisition by, another member;
      (B) Advertisements or sales literature that do no more than identify the membersand/or offer a specific security at a state of price;
      (C) Material sent to branch offices or other internal material that is not distributed to the public;
      (6) Material that refers to government securities solely as part of a listing of products and/or services offered by the member, is excluded from the requirements of paragraph (c)(l) of this section.
      (d) Standards Applicable to Communications With the Public
      (1) General Standards
      (A) All member communications with the public shall be based on principles of fair dealing and good faith and should provide a sound basis for evaluating the facts in regard to any particular security or securities or type of security, industry discussed, or service offered. No material fact or qualification may be omitted if the omission, in light of the context of the material presented, would cause the advertising or sales literature to be misleading.
      (B) Exaggerated, unwarranted, or misleading statements or claims are prohibited in all public communications of members. In preparing such literature, members must bear in mind that inherent in investment are the risks of fluctuating prices and the uncertainty of dividends ,rates of return, and yield, and no member shall, directly or indirectly, publish, circulate, or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.
      (C) When sponsoring or participating in a seminar, forum, radio, or television interview, or when otherwise engaged in public appearances or speaking activities that may not constitute advertisements ,members and persons associated with members shall nevertheless follow the standards of paragraph (d) of this section.
      (2) Specific Standards
      In addition to the foregoing general standards, the following specific standards apply:
      (A) Necessary Data: Advertisements and sales literature shall contain the name of the member, the person or firm preparing the material, if other than the member, and the date on which it is first published, circulated, or distributed (except that, in advertisements, only the name of the member need be stated; and except also that, in any so-called "blind" advertisement used for recruiting personnel, the name of the member may be omitted). If the information in the material is not current, this fact should be stated.
      (B) Recommendations: In making a recommendation, whether or not labeled as such, a member must have a reasonable basis for the recommendation made and must disclose the price at the time the recommendation is made, as well as any of the following situations which are applicable:
      (i) that the member usually makes a market in the securities being recommended, or in the underlying security if the recommended security is an option, and/or that the member or associated persons will sell to or buy from customers on a principal basis;
      (ii) that the member and/or its officers or partners own options, rights, or warrants to purchase any of the securities of the issuer whose securities are recommended, unless the extent of such ownership is nominal;
      (iii) that the member was manager or co-manager of a public offering of any securities of the recommended issuer within the last three years.
      The member shall also provide, or offer to furnish upon request, available investment information supporting the recommendation.
      A member may use material referring to past recommendations if it sets forth all recommendations as to the same type, kind, grade, or classification of securities made by a member within the last year. More years may be covered if they are consecutive and include the most recent year. Such material must also name each security recommended and give the date and nature of each recommendation (e.g., whether to buy or sell), the price at the time of the recommendation, the price at which or the price range within which the recommendation was to be acted upon, and the general market conditions during the period covered.
      Also permitted is material that does not make any specific recommendation but offers to furnish a list of all recommendations made by a member within the past year or over more consecutive years, including the most recent year, if this list contains all the information specified in the previous paragraph. Neither the list of recommendations, nor material offering such list, shall imply comparable future performance. Reference to the results of a previous specific recommendation, including such a reference in a follow-up research report or market letter, is prohibited if the intent or the effect is to show the success of a past recommendation, unless all of the foregoing requirements with respect to past recommendations are met.
      (C) Claims and Opinions: Communications with the public must not contain promises of specific results, exaggerated or unwarranted claims or unwarranted superlatives, opinions for which there is no reasonable basis or forecasts of future events that are unwarranted or that are not clearly labeled as forecasts.
      (D) Testimonials: In testimonials concerning the quality of a firm's investment advice, the following points must be clearly stated in the communication:
      (i) the testimonial may not be representative of the experience of other clients;
      (ii) the testimonial is not indicative of future performance or success;
      (iii) if more than a nominal sum is paid, the fact that it is a paid testimonial must be indicated;
      (iv) if the testimonial concerns a technical aspect of investing, the person making the testimonial must have knowledge and experience to form a valid opinion.
      (E) Offers of Free Service: Any statement to the effect that any report, analysis, or other service will be furnished free or without any charge must not be made unless such report, analysis, or other service actually is or will be furnished entirely free and without condition or obligation.
      (F) Claims for Research Facilities: No claim or implication may be made for search or other facilities beyond those that the member actually possesses or reasonable capacity to provide.
      (G) Hedge Clauses: No cautionary statements or caveats, often called "hedge clauses," may be used if they are missing or inconsistent with the content of material.
      (H) Recruiting Advertising: Advertisements in connection with the recruitment of sales personnel must not contain exgerated or unwarranted claims or statements about opportunities in the investment banking or securities business and should not refer to specific earning; figures or ranges that are not reasonable under the circumstances.
      (I) Periodic Investment Plans: Communications with the public should not discuss or portray any type of continue or periodic investment plan without dk closing that such a plan does not assure profit and does not protect against loss declining markets. In addition, if the material deals specifically with the principles of dollar cost averaging, it shoult point out that since such a plan involve: continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his financial ability to continue hi; purchases through periods of low price levels.
      (J) References to Regulatory Organizations: Communications with the public shall not make any reference to member ship in the Association or to registration or regulation of the securities being offered, or of the underwriter, sponsor, or any member or associated person, that could imply endorsement or approval by the Association or any federal or state regulatory body.
      References to membership in the Association or the Securities Investor Protection Corporation shall comply with all applicable by-laws and rules pertaining thereto.
      (K) Identification of Sources: Statistical tables, charts, graphs, or other illustrations used by members in advertising or sales literature should disclose the source of the information if not prepared by the member.

      Availability to Customers of Certificate, By-Laws, Rules, and Code of Procedure

      Sec. 9. Every member of the Corporation shall keep in each office maintained by him, in the form to be supplied by the Board of Governors, a copy of the Certificate of Incorporation, By-Laws, Government Securities Rules, and Code of Procedure of the Corporation, and of all additions and amendments from time to time made thereto, and of all interpretative rulings made by the Board of Governors, all of which shall be available for the examination of any customer who makes requests therefore.

      Complaints

      Sec. 10.

      Complaints by public against members

      (a) Any person feeling aggrieved by any act, practice, or omission of any member or any person associated with a member of the Corporation, which such person believes to be inviolation of the Securities Exchange Act of 1934, the rules and regulations thereunder including the rules of the Treasury Department or these Government Securities rules, may, on the form to be supplied by the Board of Governors, file a complaint against such member or such persons associated with a member in regard thereto with any District Business Conduct Committee of the Corporation, and any such complaint shall be handled in accordance with the Code of Procedure of the Corporation.

      Complaints by District Business Conduct Committees

      (b) Any District Business Conduct Committee which, on information and belief, is of the opinion that any act, practice, or omission of any member of the Corporation or any person associated with a member is in violation of the Securities Exchange Act of 1934, the rules and regulations thereunder including the rules of the Treasury Department or these Government Securities rules may, on the form to be supplied by the Board of Governors, file a complaint against such member or such person associated with a member in regard thereto with itself or with any other District Business Conduct Committee of the Corporation, as the necessities of the complaint may require, and any such complaint shall be handled in accordance with the Code of Procedure and in the same manner as if it had been filed by an individual or member.

      Complaints by the Board of Governors

      (c) The Board of Governors shall have authority, when on the basis of information and belief, it is of the opinion that any act, practice, or omission of any member of the Corporation or of any person associated with a member is in violation of the Securities Exchange Act of 1934, the rules and regulations thereunder including the rules of the Treasury Department or these Government Securities rules, to file a complaint against such member or such person associated with a member in respect thereto or to instruct any District Business Conduct Committee to do so, and any such complaint shall be handled in accordance with the Code of Procedure.

      Reports and Inspection of Books for Purpose of Investigating Complaints

      Sec. 11. For the purpose of any investigation, or determination as to filing of a complaint, or any hearing of any complaint against any member of the Corporation or any person associated with a member made or held in accordance with the Code of Procedure, any District Business Conduct Committee, or the Board of Governors, or any duly authorized member or members of any such Committees or Board, or any duly authorized agent or agents of any such Committee or Board shall have the right to:

      (1) require any member of the Corporation or person associated with a member to reportorally or in writing with regard to any matter involved in any such investigation or hearing; and
      (2) to investigate the books, records and accounts of any such member with relation to any matter involved in any such investigation or hearing.

      No member or person associated with a member shall refuse to make any report as required in this Section, or refuse to permit any inspection of books, records, and accounts as may be validly called for under this Section.

      Resolution of the Board of Governors

      Suspension of Members for Failure to Furnish Information Duly Requested

      1. The President is hereby directed and authorized to notify members of the Corporation that fail to provide information with respect to their business practices, and/or that fail to keep membership applications and supporting documents current, and/or that fail to furnish such other information or reports or other material or data duly requested by the Corporation pursuant to the powers duly vested in it by its Certificate of Incorporation, By-Laws, and such other duly authorized resolutions and directives as are necessary in the conduct of the business of the Corporation, and that the continued failure to furnish duly requested information, reports, data, or other material, constitutes grounds for suspension from membership.
      2. After fifteen (15) days' notice in writing thereof and continued failure to furnish the information, reports, data, or other material as described above in paragraph 1, the President is hereby directed and authorized to suspend the membership of any such member on behalf of the Board of Governors and to cause notification thereof in the next following membership supplement, to the effect that the membership has been suspended for failure to furnish such duly requested information.
      3. Prior to such notice in writing to the member, the Executive Committee of the Board of Governors shall be notified in writing of such contemplated action by the President.
      4. The President shall advise the member concerned, in writing, of the suspension.

      Sanctions for Violation of the Rules

      Sec. 12. Any District Business Conduct Committee, Market Surveillance Committee or the Board of Governors, in the administration and enforcement of the Securities Exchange Act of 1934, the rules and regulations thereunder including the rules of the Treasury Department or these Government Securities rules, and after compliance with the Code of Procedure, may:

      (1) censure any member or person assoc with a member; and/or
      (2) impose a fine [not in excess of Fifteen Thousand Dollars ($15,000.00)] upon an member or person associated with a member and/or
      (3) suspend the membership of any member suspend the registration of a person associated with a member, if any, for a defnite period; and/or
      (4) expel any member or revoke the registration of any person associated with a member if any; and/or
      (5) suspend or bar a member or person associated with a member from association with all members; or
      (6) impose any other fitting sanction deer appropriate under the circumstances, for or any violation of such provisions by a member or person associated with a member for any neglect or refusal to comply with orders, directions, or decisions issued by District Business Conduct Committee, Market Surveillance Committee or by the Board of Governors in the enforcement on these rules, including any interpretation made by the Board of Governors, as any subCommittee or Board, in its discretion ma;deem to be just;

      provided, however, that no such sanction i posed by any District Business Conduct C mittee or Market Surveillance Committee shall take effect until the period for appeal therefrom or review has expired, as provid in Article III, Section 1 of the Code of Procedure; and provided, further, that all p; ties to any proceeding resulting in a sanctic shall be deemed to have assented to or to have acquiesced in the imposition of such sanction unless any party aggrieved thereb shall have made application to the Board of Governors for review pursuant to the Code Procedure, within fifteen (15) days after the date of such notice.

      Payment of Fines or Costs

      Sec. 13. All fines imposed pursuant to Section 12 of these rules shall be paid to the Treasurer of the Corporation and shall be used for the general corporate purposes. Any member that fails promptly to pay any fine imposed pursuant to Section 12 of these rules, or any costs imposed pursuant to Section 12 of these rules, or any costs imposed pursuant to Section 14 of these rules after such fine or costs have become finally due and payable, may after seven (7) days' notice in writing be summarily suspended or expelled from membership in the Corporation. A member may also be summarily suspended or expelled from membership in the Corporation if the member fails to immediately terminate the association of any person who fails to pay promptly any fine imposed pursuant to Section 12 of these rules or any costs imposed pursuant to Section 14 of these rules after such fine or costs have become finally due and payable after seven (7) day's notice in writing. The registration of a person associated with a member, if any may be summarily revoked if such person fails to pay promptly any fine imposed pursuant to section 12 of these rules, or any costs pursuant to section 14 of these rules after such fine or costs have become finally due and payable after seven (7) days notice in writing.

      Cost of Proceedings

      Sec. 14. Any member or person associated with such member disciplined pursuant to Section 12 of these rules shall bear such pan of the costs of the proceedings as the District Business Conduct Committee or Market Surveillance Committee in the Board of Governors deems fair and appropriate in the circumstances.

    • 88-95 SEC Approval of Amendment to NASD Rules of Fair Practice Re: Prompt Payment for Investment Company Shares — Effective Date: January 1, 1988

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission recently approved an amendment to Article III, Section 26 of the NASD Rules of Fair Practice. This amendment, which replaces the Interpretation of the Board of Governors Relating to Prompt Payment by members for shares of investment companies, establishes time frames within which members must transfer payment for investment company shares to investment companies or their agents. The text of the amendment follows this notice.

      BACKGROUND

      On October 31, 1988, the SEC approved a proposed rule change providing for a new paragraph (m) to Article III, Section 26 of the NASD Rules of Fair Practice. Since 1955, prompt payment by NASD members for investment company shares that they had sold to customers has been governed by the NASD Board of Governors Prompt Payment Interpretation. That interpretation did not, however, include a definition of the term "prompt payment." That interpretation has been rescinded and replaced by the new paragraph (m) to Section 26. The amendment, as approved by the Commission, was adopted pursuant to member vote, which was solicited in Notice to Members 87-44.

      EXPLANATION OF AMENDMENT

      New Section 26(m) defines the term "prompt payment" in two sets of circumstances.

      (1) The new rule will require members, including underwriters, who engage in direct retail transactions with customers to transmit payments that are received from their customers to investment companies or their agents by the later of the trade date plus five business days or the end of one business day following receipt of the customer's payment for such shares.
      (2) The second paragraph of the rule requires members that are underwriters and that engage in wholesale transactions with other members to trans mit payments received from such members to the funds or their agents by the end of two business days following the receipt of such funds.

      Effective Date

      In order to facilitate changes in internal firm procedures that will be required by this rule, the NASD has determined that the rule will become effective January 1, 1989. The text of the new rule is attached. Questions concerning this notice can be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, NASD, at (202) 728-8328.

      AMENDMENT TO NASD RULES OF FAIR PRACTICE

      Investment Companies

      Sec. 26



      Prompt Payment for Investment Company Shares

      m
      (1) Members (including underwriters) that engage in direct retail transactions for investment company shares shall transmit payments received from customers for such shares, which such members have sold to customers, to payees (i.e., underwriters, investment companies, or their designated agents) by (1) the end of the fifth business day following receipt of a customer's order to purchase such shares or by (2) the end of one business day following receipt of a customer's payment for such shares, whichever is the later date.
      (2) Members that are underwriters and that engage in wholesale transactions for investment company shares shall transmit payments for investment company shares, which such members have received from other members, to investment company issuers or their designated agents by the end of two business days following receipt of such payments.

    • 88-94 NASDAQ National Market System Additions as of October 18, 1988

      SUGGESTED ROUTING*

      Corporate Finance
      Legal & Compliance
      Operations
      Research

      *These are suggested departments only. Others may be appropriate for your firm.

      As of October 18, 1988, the following 48 issues joined the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,913:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      BAIB

      Bailey Corporation

      9/20/88

      500

      CMLE

      Casual Male Corporation (The)

      9/20/88

      500

      CHMXZ

      Chemex Pharmaceuticals, Inc. (Wts)

      9/20/88

      200

      CLDRP

      Cliffs Drilling Company (Pfd)

      9/20/88

      200

      CSOL

      Convergent Solutions, Inc.

      9/20/88

      1000

      CSOLW

      Convergent Solutions, Inc. (Wts)

      9/20/88

      500

      FPRY

      First Federal Savings Bank of Perry

      9/20/88

      200

      NVLS

      Novellus Systems, Inc.

      9/20/88

      1000

      TDCX

      Technology Development Corporation

      9/20/88

      200

      WHLSP

      Wholesale Club, Inc. (The) (Pfd)

      9/20/88

      500

      DFSE

      DFSoutheastern, Inc.

      9/23/88

      1000

      ADTLY

      ADT Limited

      9/28/88

      1000

      LMRK

      Landmark Graphics Corporation

      9/28/88

      1000

      NGAS

      Associated Natural Gas Corporation

      9/29/88

      1000

      FYBR

      Critical Industries, Inc.

      10/4/88

      1000

      GWOX

      Goodheart-Willcox Company, Inc.

      10/4/88

      200

      HTWN

      Hometown Bancorporation, Inc.

      10/4/88

      500

      MIKA

      Medical Imaging Centers of America, Inc.

      10/4/88

      1000

      OSBN

      Osborn Communications Corporation

      10/4/88

      1000

      TWRX

      Software Toolworks, Inc. (The)

      10/4/88

      500

      VMORZ

      VMS Mortgage Investors L.P. III

      10/4/88

      1000

      WWTK

      Weitek Corporation

      10/4/88

      1000

      SLFX

      Selfix, Inc

      10/5/88

      500

      PACCA

      Provident Life and Accident Insurance Company of America (Cl A)

      10/11/88

      1000

      LINZ

      Lindsay Manufacturing Company

      10/12/88

      1000

      KPCI

      Key Production Company, Inc.

      10/13/88

      1000

      ARIX

      ARIX Corporation

      10/18/88

      500

      ASIX

      Assix International, Inc.

      10/18/88

      1000

      ASIXW

      Assix International, Inc. (Wts)

      10/18/88

      1000

      BULKF

      B & H Bulk Carriers Ltd

      10/18/88

      1000

      BIAC

      BI Incorporated

      10/18/88

      1000

      BGENW

      Biogen, Inc. (Wts)

      10/18/88

      200

      CLZR

      Candela Laser Corporation

      10/18/88

      1000

      CANX

      Cannon Express, Inc.

      10/18/88

      1000

      CNBL

      Centennial Beneficial Corp.

      10/18/88

      200

      CBNB

      CommerceBancorp

      10/18/88

      500

      CNPGF

      Cornucopia Resources Ltd.

      10/18/88

      200

      ECGC

      Essex County Gas Company

      10/18/88

      200

      GNUC

      GNI Group, Inc. (The)

      10/18/88

      1000

      HEAL

      Healthwatch, Inc.

      10/18/88

      1000

      MRAC

      Microamerica, Inc.

      10/18/88

      1000

      PNCR

      Pancretec, Inc.

      10/18/88

      1000

      STIZ

      Scientific Technologies, Incorporated

      10/18/88

      1000

      SHOW

      Showscan Film Corporation

      10/18/88

      500

      SIER

      Sierra On-Line, Inc.

      10/18/88

      1000

      SGHI

      Silk Greenhouse, Inc.

      10/18/88

      1000

      UGNE

      Unigene Laboratories, Inc.

      10/18/88

      1000

      UGNEW

      Unigene Laboratories, Inc. (Wts)

      10/18/88

      200

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS on effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol

      Company Level

      Location

      SOES Execution Level

      RODS

      American Steel & Wire Corporation

      Cuyahoga Heights, OH

      500

      DUBO

      DuBose Steel, Inc.

      Roseboro, NC

      500

      METC

      Metcalf & Eddy Companies, Inc.

      Branchburg, NJ

      500

      MTBS

      Metro Bancshares, Inc.

      Jericho, NJ

      1000

      SOFS

      Softsel Computer Products, Inc

      Englewood, CA

      1000

      VSBC

      VSB Bancorp, Inc

      Closter, NJ

      500

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since September 16, 1988.

      New/Old Symbol

      New/Old Security

      Date of Change

      TJCO/TJCO

      TJ International, Inc./Trus Joist Corporation

      9/19/88

      RENT/NVIS

      Rentrak Corporation/National Video, Inc.

      9/22/88

      CLRXL/CLRXL

      Colorocs Corporation (Cl D 10/25/88 Wts)/ Colorocs Corporation (Cl D 10/4/88 Wts)

      9/26/88

      CCURD/MSCP

      Concurrent Computer Corp. (New)/ Massachusetts Computer Corp.

      9/28/88

      MAXEW/MAXEW

      Max & Erma's Restaurants, Inc. (10/7/89 Wts)/ Max & Erma's Restaurants, Inc. (10/7/88 Wts)

      9/29/88

      BSBN/BING

      BSB Bancorp, Inc./Binghamton Savings Bank

      9/30/88

      SOSA/SOSA

      Somerset Bankshares, Inc./Somerset Savings Bank

      10/3/88

      WRNB/WFCS

      Warren Bancorp, Inc./Warren Five Cents Savings Bank

      10/3/88

      APIO/APIO

      American Pioneer, Inc./American Pioneer Savings Bank

      10/4/88

      MHCI/MHCI

      Maione Corporation/Maione-Hirschberg Companies, Inc.

      10/4/88

      PFCP/PASB

      Perpetual Financial Corporation/ Perpetual Savings Bank, FSB

      10/4/88

      PFCPP/PASBP

      Perpetual Financial Corporation (Pfd)/ Perpetual Savings Bank, FSB (Pfd)

      10/4/88

      CHMXW/CHMXW

      Chemex Pharmaceuticals, Inc. (5/29/89 Wts)/ Chemex Pharmaceuticals, Inc. (10/31/88 Wts)

      10/13/88

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      KNMC

      Knutson Mortgage Corporation

      9/19/88

      BKFR

      Baker, Fentress & Company

      9/20/88

      NAHL

      North American Holding Corporation

      9/20/88

      NAHAK

      North American Holding Corporation (Cl A NV)

      9/20/88

      WELB

      Welbilt Corporation

      9/20/88

      CYPM

      Cypress Minerals Company

      9/21/88

      FWCHW

      First World Cheese, Inc. (Wts)

      9/21/88

      SMSI

      Scientific Micro Systems, Inc.

      9/21/88

      VGINY

      Virgin Group, pic

      9/23/88

      IECE

      IEC Electronics Corporation

      9/26/88

      SYSM

      System Industries, Inc.

      9/26/88

      TCBY

      TCBY Enterprises, Inc.

      9/26/88

      CCUR

      Concurrent Computer Corp.

      9/28/88

      FFSH

      Farm Fresh, Inc.

      9/28/88

      PAYN

      Pay 'n Save, Inc.

      9/28/88

      PTMI

      Precision Target Marketing, Inc.

      9/28/88

      PTMIW

      Precision Target Marketing, Inc. (Wts)

      9/28/88

      DRES

      Dresher, Inc.

      9/29/88

      MICS

      Micom Systems, Inc.

      9/29/88

      AAICA

      Albany International Corp. (Cl A)

      9/30/88

      CPAP

      Century Papers, Inc.

      9/30/88

      COMI

      Computer Microfilm Corp.

      9/30/88

      NATG

      National Guardian Corp.

      9/30/88

      WFSA

      Western Federal Savings & Loan Association

      9/30/88

      BERK

      Berkline Corp.

      10/3/88

      COMD

      Command Airways, Inc.

      10/3/88

      EGAS

      Energas Company

      10/3/88

      HRMR

      Hunter Melnor, Inc.

      10/3/88

      SBFS

      Southstate Bank for Savings

      10/3/88

      TWAXP

      Trans World Airlines, Inc. (Pfd)

      10/3/88

      EPSC

      EPSCO, Inc.

      10/4/88

      EGLAW

      Eagle Telephonies, Inc. (Cl A 10/12/88 Wts)

      10/6/88

      DRAN

      Dranetz Technologies, Inc.

      10/7/88

      HABEZ

      Haber, Inc. (Cl B Wts)

      10/10/88

      LFBR

      Longview Fiber Company

      10/12/88

      VMSI

      VM Software, Inc.

      10/13/88

      ACSN

      Acuson Corporation

      10/14/88

      RGIS

      Regis Corporation

      10/14/88

      CYPR

      Cypress Semiconductor Corp.

      10/17/88

      TTCOP

      Trustcorp, Inc. (Pfd)

      10/18/88

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade-reporting rules should be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192.

    • 88-93 SEC Approval of Amendment to Free-Riding Interpretation Concerning Sales to Investment Partnerships and Corporations

      SUGGESTED ROUTING*

      Senior Management
      Institutional
      Internet Audit
      Legal & Compliance
      Operations
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      NASD members are advised that the Securities and Exchange Commission (SEC) has approved an amendment to the NASD Board of Governors' "Free-Riding and Withholding" Interpretation that would provide members with an alternative means of complying with the Interpretation for sales of new issues to the accounts of investment partnerships and investment corporations and similar type accounts.

      The text of the amendment is attached.

      BACKGROUND

      The amendment to the NASD Board of Governors' "Free-Riding and Withholding" Interpretation (Interpretation) approved by the Securities and Exchange Commission is intended to provide members with an alternative means of compliance with the existing requirements of the Interpretation in making sales of "hot issue" securities to the accounts of investment partnerships and corporations, including hedge funds, investment clubs, and other similar accounts. Under the heading "Investment Partnerships and Corporations," the Interpretation now provides, with no alternative means of compliance, that members and their associated persons are prohibited from selling securities of a new issue that trades at a premium ("hot issue" securities) to any investment partnership, corporation, or similar account unless "the member receives from such account, prior to the execution of the transaction, the names and business connections of all persons having any beneficial interest in the account." If the information discloses that a restricted person has a beneficial interest in the account, the transaction can be effected only in compliance with the restrictions of the Interpretation.

      The Interpretation has been construed strictly by the NASD. It is intended to protect the integrity of the public offering system by ensuring that underwriters make a bona fide public distribution of "hot issue" securities and do not retain those securities for their own benefit or use those securities to favor persons who can direct future business to the firm. Without restricting purchases by investment partnerships, the provisions of the Interpretation could be evaded easily.

      Because the existing provision was the exclusive means of compliance, the NASD National Business Conduct Committee (NBCC) and the NASD Board of Governors determined that it would be appropriate to propose an alternative means for members to comply with the Interpretation when selling "hot issue" securities to investment partnerships and similar accounts. Because of concern that members can encounter difficulty in complying with the requirements of the provision (since persons responsible for the management of investment partnerships and similar accounts may be hesitant to release the names of persons holding beneficial interests in such accounts), the NASD proposed in Notice to Members 86-40 (May 23, 1986) that a member or associated person would be presumed to be in compliance with the requirements of the Interpretation's section on investment partnerships either by obtaining the list of actual names pursuant to the existing requirement or by receiving from the account manager specific written representations that none of the beneficial owners are restricted persons.

      Following review of comments received, the NBCC concluded that the amendment's reliability would be determined by the time and effort expended by the account manager to understand and properly apply the complex provisions of the Interpretation. As a result, the NBCC determined that it should consider other approaches to provide members with an effective means of ensuring that restricted accounts are not recipients of "hot issue" securities in violation of the Interpretation. The NBCC appointed a subcommittee to consider alternatives to amending the Interpretation, including the May 1986 proposal and subsequent proposed modifications to it, as well as a new proposal to establish a "safe harbor" procedure by requiring a member to obtain an opinion of counsel through the account manager.

      Based on the subcommittee's study of alternative proposals, the NBCC and Board of Governors concluded that the original proposal should be rejected as a less effective means of ensuring that members are advised correctly of the restricted status of an account than is offered by an opinion-of-counsel approach, which is the approach contained in the amendment recently approved by the SEC. The NBCC also concluded that an assurance by the account manager may be accurate in many situations, but does not offer as positive an assurance as does the opinion of counsel. In particular, the NBCC also noted that account managers are not directly subject to NASD jurisdiction. In NASD Notice to Members 87-73 (November 4, 1987), the opinion-of-counsel proposal was released for member comment. Following review of the comments, the NBCC and Board concluded that an opinion of counsel has the advantage of building a "safe harbor" procedure with a greater degree of accountability than does a blanket representation of the account manager.

      EXPLANATION OF AMENDMENT

      The amendment is intended to provide an alternative means for members to comply with the Interpretation when selling "hot issue" securities to investment partnerships and similar accounts. The amendment provides that a member or associated person of a member may not sell "hot issue" securities to the types of accounts specified unless, prior to executing a transaction with the account, the member has obtained a copy of a current opinion from counsel stating that counsel reasonably believes that no person with a beneficial interest in the account is a restricted person under the Interpretation and stating that, in providing such opinion, counsel:

      1) has reviewed and is familiar with the Interpretation;
      2) has reviewed a current list of all persons with a beneficial interest in the account supplied by the account manager;
      3) has reviewed information supplied by the account manager with respect to each person with a beneficial interest in the account, including identity, employment, and any other business connections of such persons; and
      4) has requested and reviewed other documents and other pertinent information and made inquiries of the account manager and received responses thereto if counsel determines that such further review and inquiry are necessary and relevant to determine the correct status of such persons under the Interpretation.

      As the amendment offers only an alternative means of compliance, members may continue to comply with the current requirements of the Interpretation's section on investment partnerships by obtaining a list of the names and business connections of all persons having a beneficial interest in the account from the account manager in the case of both domestic and foreign accounts. The amendment, however, eliminates the present alternative for foreign investment partnership and foreign investment companies' accounts in countries having secrecy laws that now allow a member to obtain a blanket representation from his account manager that none of the beneficial owners are restricted persons. Thus, foreign investment accounts must in the future provide either a list of the names and business connections of the beneficial owners or an opinion from counsel who is required to be an attorney admitted to practice in the United States.

      In addition, the amendment requires members to maintain in their files a copy of the opinion of counsel or a list of names of the beneficial owners for at least three years following the member's last sale of a new issue to that account.

      Finally, the amendment requires that, irrespective of which means of compliance a member selects, the list of names or opinion of counsel shall be deemed current only for a period of 18 months after which a new list or a new opinion of counsel must be obtained.1

      The amendment is effective on the date of SEC approval (August 29, 1988).

      Questions concerning this notice can be directed to the NASD Offrice of General Counsel, at (202) 728-8294 or John F. Mylod, Assistant General Counsel, at (202) 728-8288.

      AMENDMENT TO FREE-RIDING INTERPRETATION

      (Note: New language is underlined; deleted language is in brackets.)

      The section under the heading "Investment Partnerships and Corporations" of the Board of Governors' Interpretation is amended as follows: Investment Partnerships and Corporations

      A member may not sell securities of a public offering that trade at a premium in the secondary market whenever such secondary market begins ("hot issue"), to the account of any investment partnership or corporation, domestic or foreign (except companies registered under the Investment Company Act of 1940) including, but not limited to, hedge funds, investment clubs, and other like accounts unless the member complies with either of the following alternatives:

      (A) [receives from such account,] prior to the execution of the transaction, the member has received from the account a current list of the names and business connections of all persons having any beneficial interest in the account, and if such information discloses that any person enumerated in paragraphs (1) through (4) hereof has a beneficial interest in such account, any sale of securities to such account must be consistent with the provisions of this Interpretation [; provided, however, that if the disclosure of such information by the account is prohibited by law, then, in such case, the member must receive written assurance from the account that no person enumerated in paragraphs (1) through (4) hereof has a beneficial interest in such account], or
      (B) prior to the execution of the transaction, the member has obtained a copy of a current opinion from counsel admitted to practice law before the highest court of any state stating that counsel reasonably believes that no person with a beneficial interest in the account is a restricted person under this Interpretation and stating that, in providing such opinion, counsel:
      1) has reviewed and is familiar with this Interpretation;
      2) has reviewed a current list of all persons with a beneficial interest in the account supplied by the account manager;
      3) has reviewed information supplied by the account manager with respect to each person with a beneficial interest in the account, including the identity, the nature of employment, and any other business connections of such persons; and
      4) has requested and reviewed other documents and other pertinent information and made inquiries of the account manager and received responses thereto, if counsel determines that such further review and inquiry are necessary and relevant to determine the correct status of such persons under the Interpretation.
      The member shall maintain a copy of the names and business connections of all persons having any beneficial interest in the account or a copy of the current opinion of counsel in its files for at least three years following the member's last sale of a new issue to the account, depending upon which of the above requirements the member elects to follow. For purposes of this section, a list or opinion shall be deemed to be current if it is based upon the status of the account as of a date not more than 18 months prior to the date of the transaction.

      The term beneficial interest means not only ownership interests, but every type of direct financial interest of any persons enumerated in paragraphs (1) through (4) hereof in such account, including, without limitation, management fees based on the performance of the account.


      1 The SEC in its approval correctly noted that neither the existing compliance procedure nor the opinion of counsel alternative provides a "safe harbor" presumption of compliance if a member has actual knowledge that a restricted person has a beneficial interest in the account. Securities Exchange Act Release No. 26039 (August 29, 1988).


    • 88-92 Proposed Corporate Financing Rule; Last Date for Comment: December 31, 1988

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance

      *These are suggested departments only. Others may be appropriate for your firm.

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests membership comment on a proposed Corporate Financing Rule that, if adopted, would replace the current Interpretation of the Board of Governors Review of Corporate Financing pursuant to Article III, Section 1 of the Rules of Fair Practice. This notice contains a section-by-section analysis and the text of the proposed Corporate Financing Rule.

      BACKGROUND

      Article III, Section 1 of the NASD Rules of Fair Practice obligates members, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade. In the early 1960s, the NASD began reviewing underwriting terms and arrangements of securities offerings in which members were participating to determine whether those terms and arrangements were in compliance with the broad standard of fairness in Article III, Section 1. By 1970, the criteria for determining fairness and reasonableness had become more defined and were incorporated into the Interpretation of the Board of Governors Review of Corporate Financing (the Interpretation), which made it a violation of NASD rules to participate in any public offering where the underwriting terms and arrangements are unfair and unreasonable.

      Although the language of the Interpretation has been amended from time to time, it no longer accurately reflects all current industry practices or the guidelines used by the NASD to determine fairness and reasonableness of underwriting terms and arrangements. In the early 1980s, the NASD developed a Corporate Financing Rule (the "Rule") intended to replace the Interpretation. The proposed Rule, developed by the Corporate Financing Committee (the "Committee") and a Subcommittee during a period of several months, was intended to codify and clarify existing NASD policies and procedures and in some cases to implement new standards of fairness.

      On April 15, 1981, the Association published Notice to Members 81-16, which requested comments on the proposed Corporate Financing Rule. Fourteen letters of comment were received and analyzed by the Committee in October 1981, and modifications to the proposed Rule reflected those comments. The Rule was approved by the Board of Governors March 19, 1982 (with subsequent changes approved March 8, and March 18, 1983), and the membership approved the proposed Rule in May 1983. Then, the NASD sought SEC approval.

      On May 31, 1984, the Association received a letter prepared by the SEC's Market Regulation Division staff containing questions and comments on the proposed Rule. The SEC comments, as well as changes that continued to occur in the corporate financing area, prompted a re-review of the entire Rule. In the course of the re-review, it was determined that the proposed Rule should not only be revised to reflect the comments of the SEC staff, but also updated to reflect amendments that had been made to the Interpretation since the original draft, and revised to codify existing policies relating to corporate financing matters.

      The form of the Rule now being presented for membership comment incorporates changes to the Interpretation adopted since the original Rule was filed with the SEC, Committee comments and interpretations, and the comments of the SEC staff. The proposed Rule includes a small number of substantive policy changes designed to address problem areas identified by the Corporate Financing Department (the "Department") in the course of its review of public offerings. Except for the small number of policy changes noted, the proposed Rule incorporates the Interpretation and all previous Committee determinations so as to reflect the current policies relating to the NASD review of public offerings.

      EXPLANATION

      A section-by-section analysis of the proposed Rule appears below. References to section numbers are to the revised and renumbered sections as they appear in the attached text of the proposed Rule.

      Subsection (a): Definitions

      A specific reference to the definitions contained in Schedule E to the By-Laws has been incorporated into the proposed Rule since a number of terms used in the Rule are already defined within Schedule E. Definitions for "gross dollar amount of the offering," "net offering proceeds," and "offering proceeds" have been included to clarify the differences between the terms as used in the Rule. "Gross dollar amount of the offering" is used only in the calculation of filing fees. The term "net offering proceeds" excludes from gross proceeds all expenses of issuance and distribution and is used only in the provision regulating offerings in which more than 10 percent of the net offering proceeds are directed to members participating in the distribution of the offering. "Offering proceeds" is defined as the gross proceeds of an offering, exclusive of the proceeds of any overallotment option, securities to be paid to underwriters and related persons, or securities underlying other securities.

      The definition of "underwriter and related persons" in the Interpretation has been restated in the proposed Rule with two modifications: the addition of immediate family members of any person in the definition and the language "any member participating in the public offering." Also, the Rule includes a definition of "participation in an offering" that is intended to specify when a member's activities in connection with a public offering will trigger the filing requirements of the Rule. The definition excludes from "participation" the rendering of an appraisal in a savings and loan conversion or a bank offering, or the issuance of a fairness opinion in a going private transaction.

      Subsection (a)(2) defines "institutional investor" for the purpose of determining when certain exemptions in the Rule that rely on a sophisticated market are applicable.

      Subsection (b): Filing Requirements

      The filing requirements subsection codifies existing requirements for the filing of public offerings without substantial change. The place of filing has been specified in Subsection (b)(2) as the Corporate Financing Department at the NASD's Executive Offices, in recognition of the fact that the NASD's multiple offices could create confusion as to where the filing should be made. Subsection (b)(4) is a new provision that states a member may not participate in an offering until the member has received an opinion from the Department as to the fairness and reasonableness of the underwriting terms and arrangements. Members have the opportunity to file modifications to the proposed underwriting arrangements for further review if the Department determines the underwriting terms and arrangements are unfair and unreasonable.

      If the proposed underwriting terms and arrangements are not modified, a requirement has been added to inform other members intending to participate in the offering that the proposed terms and arrangements have not been modified to conform to the standards of fairness and reasonableness so that such members may determine whether or not to participate in the offering.

      A provision requiring a timely filing with the Department and a list of the specific items to be filed, along with the number of copies of each, has been included in Subsection (b)(5). Certain information necessary for the Department's review and required to be filed with the documents has been enumerated in Subsection (b)(6) of the proposed Rule.

      Subsection (b)(7) contains the list of offerings exempt from filing but still subject to compliance with the Rule, which has been expanded to include the filing exemptions granted since the original drafting of the Rule. The exemption for offerings filed on Form S-3 and offered pursuant to Rule 415 has been expanded to also include offerings filed on Form F-3 and offered pursuant to Rule 415 to provide an exemption for "world class" issuers. Subsection (b)(8) lists offerings not subject to the Rule and exempt from filing. The list of offerings required to be filed included in Subsection (b)(9) tracks the list contained in the Interpretation. Finally, Subsection (b)(10) codifies the proper calculation of the appropriate filing fee, which was increased on October 1, 1988.

      Subsection (c): Underwriting Compensation and Arrangements

      Subsection (c)(l) states that no member or person associated with a member shall underwrite or participate in a public offering if the underwriting compensation in connection with the offering is unfair and unreasonable. Subsection (c)(2) prohibits a member from receiving an amount of underwriting compensation that is unfair and unreasonable and requires full disclosure of all underwriting compensation in that portion of the offering document dealing with underwriting or distribution arrangements. Where underwriting compensation is disclosed on the cover page of the offering document, a cross-reference to the section on underwriting or distribution arrangements is required. Subsection (c)(2)(D) discusses the factors considered by the NASD in determining the maximum amount of compensation considered fair and reasonable.

      Subsection (c)(3) clarifies the items of compensation that will be viewed as underwriting compensation in connection with an offering. Several modifications to the list in the Interpretation have been made: (1) a right of first refusal has been clarified to have a compensation value of 1 percent of offering proceeds or the amount contractually agreed to by the issuer and the underwriter for the underwriter to waive the right of first refusal; (2) fees paid to a prior underwriter by an issuer for a public offering that was not completed within the 12 months prior to the initial or amended filing of an offering will be included as underwriting compensation; (3) fees of a qualified independent underwriter will be included as underwriting compensation; and, (4) if the NASD filing fee is paid or reimbursed by the issuer, such payment or reimbursement will not be viewed as underwriting compensation.

      Subsection (c)(4) enumerates the criteria used by the Department in determining whether any item of value is compensation received in connection with the distribution of an offering. The Interpretation now only specifies factors that may be used to determine whether securities acquired by underwriters and related persons constitute compensation in connection with an offering. The new provision institutes guidelines for determining whether the receipt of securities or compensation not in the form of securities is in connection with the offering and considered underwriting compensation. Subsection (c)(4)(A) provides a presumption that items of value received within six months immediately preceding the filing of the offering will be considered to be underwriting compensation received in connection with the offering. Excepted are cash discounts or commissions received in connection with the successful distribution of the issuer's securities in a prior offering. Subsection (c)(4)(E) provides the basis for which financial consulting and advisory fees may be excluded from underwriting compensation.

      Several significant modifications have been made in Subsection (c)(5) of the proposed Rule dealing with the valuation of non-cash compensation received as underwriting compensation. Most importantly, underwriters and related persons would be prohibited by Subsection (c)(5)(A)(i) from receiving a security or warrant for a security as underwriting compensation that is different than the security being offered to the public or that does not have a bona fide independent market. An NASD notice published in 1981 permitted members to receive securities as underwriting compensation securities that were different from the securities offered to the public or that did not have a bona fide market. The example cited in the notice was the receipt of warrants for common stock in an underwritten debt offering where the warrants could be valued for compensation purposes on the basis of the current market value of the underlying stock, or if no market for the stock exists, on a case-by-case basis taking into account book value and other relevant factors. However, the Department has experienced difficulty in assigning a compensation value to securities which have no market, since such securities are typically acquired at little or no cost and, in the absence of any market value to determine the economic benefit received by the underwriter and related person, any analysis of the compensation value of such securities is highly subjective. The proposed Rule does state that in exceptional and unusual circumstances, upon good cause shown, the Department or the Committee may approve a different arrangement.

      Subsection (c)(5)(A)(ii) states that, in unit offerings, underwriters and related persons are permitted to receive an underwriter's warrant based only on the common stock component in a unit composed of common stock and warrants for common stock. They would not be permitted to receive an underwriter's warrant to purchase units or an underwriter's warrant based on the common stock underlying warrants contained in the unit. Currently, members are permitted to receive warrants based on the common stock in the units and on the common stock underlying warrants in the units. A prohibition on receipt of securities as underwriting compensation based on all components of units offered to the public is necessary to limit securities acquired as underwriting compensation to 10 percent of the securities offered to the public pursuant to the Stock Numerical Limitation. The Stock Numerical Limitation, in both the Interpretation and as restated in Subsection (c)(6)(B) of the proposed Rule, requires that securities received as compensation be limited to 10 percent of the securities sold to the public, without consideration of any overallotment option or shares underlying warrants, options, or convertible securities that are part of the proposed offering.

      Subsection (c)(5)(C) of the Rule discloses the warrant formula used by the Department to determine the value of options, warrants, or convertible securities received as underwriting compensation. It also states that securities restricted from sale, transfer, assignment, or hypothecation for a period longer than the required one year will receive a discounted compensation value to reflect the extended lockup period.

      Subsection (c)(6)(A) on unreasonable underwriting terms and arrangements permits the Department to deem public offering terms and arrangements unfair and unreasonable on the basis of application of the Rule, and for inconsistency with other NASD rules. Subsection (c)(6)(B) includes a prohibition on any non-accountable expense allowance in excess of 3 percent of offering proceeds. The Department has found that non-accountable expense allowances of up to 3 percent are usually justified by members as being reflective of actual out-of-pocket expenses. However, the proposed Rule provides that expense reimbursements in excess of 3 percent of offering proceeds will be required to be on an accountable basis. Accountable expenses do not include general overhead, salaries, supplies, or similar expenses incurred in the normal conduct of business. It will also be deemed an unreasonable arrangement to pay any commissions or reimburse any expenses prior to commencement of a public offering of securities, except for the reimbursement of direct out-of-pocket accountable expenses actually incurred by the underwriter and related persons in preparation for the offering. Further, the proposed Rule clarifies that the payment of any compensation by an issuer or an affiliate to an underwriter or related person in connection with an uncompleted public offering is an unfair and unreasonable arrangement. The only permitted exception would be the reimbursement of actual accountable out-of-pocket expenses paid by the member.

      A number of unfair and unreasonable arrangements have been enumerated in Subsection (c)(6)(B) of the proposed Rule to clarify and recodify policies presently applied by the Department. These include a prohibition on: a right of first refusal lasting more than five years from the effective date of the offering; warrants, options, or convertible securities lasting more than five years or exercisable below the public offering price; more than one demand registration right at the issuer's expense; a demand registration right lasting more than five years from the effective date of the offering; a piggyback registration right lasting more than seven years from the effective date of the offering; the receipt of any item of indeterminate compensation; an overallotment option greater than 15 percent of the amount of securities being offered; and, the receipt of securities as underwriting compensation in an amount in excess of 10 percent of the securities sold to the public.

      The conditions relating to receipt of warrant solicitation fees by underwriters and related persons upon the exercise of warrants contained in unit offerings has been clarified in Subsection (c)(6)(B)(x). This subsection requires disclosure of any arrangements to pay solicitation fees if the arrangements are contemplated or if any agreement exists as to such arrangements at the time of the offering. If no arrangements are contemplated or no arrangement exists at the time of the offering, the disclosure of the warrant solicitation fee must be made in the prospectus or offering circular provided to security holders at the time of exercise or conversion of warrants. Warrant solicitation fees paid within one year of the effective date of an offering are included as underwriting compensation in connection with the offering.

      The recently adopted prohibition on the receipt by a member or persons associated with a member of non-cash sales incentive items has been provided in Subsection (c)(6)(B)(xi) of the proposed Rule.

      Subsection (c)(6)(B)(xii) considers it an unfair and unreasonable arrangement for a member to participate with an issuer in a public distribution of a non-underwritten issue of securities if the issuer hires persons primarily for distributing or assisting in the distribution of the issue, or for the purpose of assisting in any way in connection with the underwriting, except to the extent that the issuer or those persons associated with the issuer are in compliance with applicable state law and the federal exemption from registration as a broker-dealer.

      Subsection (c)(7) clarifies and recodifies the lock-up restrictions on securities deemed to be underwriting compensation. Note that Subsection (c)(7)(A)(iii) states that securities to be received by a member as underwriting compensation shall be issued only to a member participating in the offering or the bona fide officers and partners thereof. This is to prevent circumvention by members of the one-year lockup period that applies to securities considered as underwriting compensation by directing the issuer to initially issue the securities to shareholders, employees, or other persons associated with the member not normally permitted to receive securities under the lockup provisions.

      The Venture Capital Restrictions of the Interpretation have been incorporated into Subsection (c)(7)(C) and updated to clarify the terms of the 1 percent de minimis exemption from the lockup provisions currently contained in the Interpretation.

      Subsection (c)(8) concerns conflicts of interest and governs members' participation in public offerings where more than 10 percent of the net offering proceeds are intended to be paid to members participating in the distribution of the offering, or associated or affiliated persons of such members, or members of the immediate family of such persons. Such participation would be permitted only in compliance with the provisions of this paragraph, which may require the pricing opinion and due diligence of a qualified independent underwriter. In addition, all offerings subject to this paragraph must disclose the name of the member acting as qualified independent underwriter in the offering document. Subsection (c)(8)(C)(ii) provides conditions under which the pricing recommendation of a qualified independent underwriter would not be required. They are: (1) the securities offered are registered with the SEC pursuant to the Securities Act of 1933; (2) the securities are to be offered or sold pursuant to Rule 415 adopted under the Securities Act of 1933; (3) the securities will be offered or sold from time to time in negotiated transactions; (4) sales by members subject to compliance with this paragraph will be made solely to institutional investors as defined in Subsection (a)(2) of the Rule; and (5) the qualified independent underwriter complies with its due diligence responsibility on a continuous basis as long as the registration statement is effective.

      The NASD is aware that members acting as qualified independent underwriters employ different procedures in order to comply with their obligation to "...exercise the usual standards of 'due diligence'..." in connection with the distribution of a public offering. Members and their counsel must determine which procedures they will use and whether those procedures will permit them to represent to the NASD that they have exercised usual standards of due diligence. The NASD believes that, as long as the registration statement is effective, a member must, at a minimum, receive the following information: all correspondence with the SEC relating to the offering; all press releases; and all other documents customarily reviewed by underwriters in connection with a due diligence review, including quarterly and annual financial statements and reports. The NASD will require that a qualified independent underwriter be contractually obligated to receive this information on a continuous basis, as long as the registration statement is effective, so that it can comply with its due diligence responsibility.

      Subsection (d): Code of Procedure

      The code of procedure outlined in Subsection (d) codifies the present informal procedures for requesting review of Department determinations in connection with the review of public offerings. Only a member aggrieved by a determination of the Department may make application for review of the Department's determination to a hearing committee of a national standing committee of the Board of Governors. With respect to the appeal of a hearing committee's determination, the proposed Rule specifies that such appeal must be requested within 15 business days following issuance of the hearing committee's written determination, which will be issued by the Director of Corporate Financing on behalf of such hearing committee. Subsection (d)(9) clarifies that determinations of hearing committees or standing committees are advisory in nature only and that a finding of a violation of any rule, interpretation or policy shall be made only by a District Business Conduct Committee pursuant to the Code of Procedure for Handling Trade Practice Complaints. Subsection (d)(9) permits a hearing committee to assess the costs of a hearing against the member requesting the hearing.

      Subsection (e): Power of the Board of Governors

      Subsection (e) of the proposed Rule permits the Board to adopt, alter, amend, supplement or modify the filing requirements under Subsection (b) without prior membership approval.

      The NASD encourages all members and other interested persons to comment on the proposed Corporate Financing Rule. Comments should be directed to:

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506

      Comments should be received by no later than December 31, 1988. Comments received by this date will be considered by the Corporate Financing Committee and the NASD Board of Governors. Any changes to the NASD Rules of Fair Practice that are approved by the Board must be voted on by the membership and filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions regarding this Notice may be directed to Richard J. Fortwengler, Assistant Director, or Charles L. Bennett, Assistant Director, NASD Corporate Financing Department, at (202) 728-8258.

      PROPOSED CORPORATE FINANCING RULE

      Note: All language is new and replaces in its entirety the current Interpretation of the Board of Governors Review of Corporate Financing, Article III, Section 1, of the Rules of Fair Practice (NASD Manual, 2151.02 at pages 2023-2035).

      Underwriting Terms and Arrangements

      Sec.______

      (a) Definitions
      When used in this section, the following terms shall have the meanings stated below. Other words which are defined in the By-Laws and Rules of Fair Practice shall, unless the context otherwise requires, have the meaning as defined therein. In particular, reference should be made to the definitions in Schedule E to the By-Laws.
      (1) Gross Dollar Amount of the Offering — public offering price of all securities offered to the public and securities included in any overallotment option, the registration price of securities to be paid to the Underwriter and Related Persons, and the registration price of any securities underlying other securities;
      (2) Institutional Investor — for purposes of this section, an institutional investor is an investor which comes within any of the following categories:
      (A) a bank, savings and loan association, insurance company or registered investment company;
      (B) an investment advisor registered under Section 203 of the Investment Advisers Act of 1940, that has more than $100 million under management; or
      (C) an entity (whether a natural person, corporation, partnership, trust or other wise) with gross assets of at least $100 million which can demonstrate that it invests in the type and dollar amount of the securities being offered.
      (3) Issuer — for purposes of this section, the Issuer of the securities offered to the public, any selling securityholders offering securities to the public, any affiliate of the Issuer or selling securityholder, and the officers or general partners, directors, employees and securityholders thereof;
      (4) Net Offering Proceeds — Offering Proceeds less all expenses of issuance and distribution;
      (5) Offering Proceeds — Public Offering price of all securities offered to the public, not including any overallotment option, securities to be received by the Underwriter and Related Persons, or securities underlying other securities;
      (6) Participation or Participating in an Offering — for purposes of this section, par ticipation in the preparation of the offering or other documents, participation in the distribu tion of the offering on an underwritten, non- underwritten, or any other basis, furnishing of customer and/or broker lists for solicitation, or participation in any advisory or consulting capacity to the Issuer related to the offering, but not the preparation of an appraisal in a savings and loan conversion or a bank offering or the preparation of a fairness opinion in a Rule 13e-3 transaction; and
      (7) Underwriter and Related Persons — for purposes of this section, shall include underwriters, underwriter's counsel, financial consultants and advisors, finders, members of the selling or distribution group, any Member participating in the Public Offering, and any and all other persons associated with or related to and members of the Immediate Family of any of the aforementioned persons.
      (b) 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 NASD.
      (2) Means of Filing
      Documents or information required by this rule to be filed with the NASD shall be considered to be filed only upon receipt by its Corporate Financing Department at the Executive Offices located at 1735 K Street, NW, Washington, DC 20006.
      (3) Confidential Treatment
      The NASD shall accord confidential treatment to all documents and information required by this section to be filed and shall utilize such documents and information solely for the purpose of review by the Corporate Financing Department to determine compliance with the provisions of this section or for other regulatory purposes deemed appropriate by the NASD.
      (4) Requirement for Filing
      (A) Any Member that anticipates Participating in an Offering of securities subject to this section shall file the documents and information with respect to the offering specified in paragraphs (5) and (6) with the Corporate Financing Department at the NASD's Executive Office on the same business day of the filing of any of such documents: (i) with the Securities and Exchange Commission; (ii) with the state securities commission; (iii) with any other regulatory authority; or (iv) if not filed with any regulatory authority, at least fifteen (15) business days prior to the anticipated offering date. Members need not file documents and information which have been filed by the Issuer, the managing underwriter, or another Member.
      (B) No Member or Person Associated with a Member which anticipates participating in an offering of securities subject to this section shall participate in the offering unless:
      (i) the documents and information specified in paragraphs (5) and (6) have been filed with and reviewed by the NASD; and
      (ii) the Corporate Financing Department has provided an opinion that it has no objections to the proposed underwriting and other terms and arrangements or an opinion that the proposed underwriting and other terms and arrangements are unfair and unreasonable. If an opinion is provided by the Corporate Financing Department that the proposed underwriting and other terms and arrangements are unfair and unreasonable, the Member has the opportunity to file modifications to the proposed underwriting and other terms and arrangements for review by the Corporate Financing Department.
      (C) Any Member acting as a managing underwriter or in a similar capacity which has been informed of an opinion by the Corporate Financing Department or a determination of the appropriate standing committee of the Board of Governors, if the opinion of the Corporate Financing Department is reviewed by a committee, that the proposed underwriting terms and arrangements of a proposed offering are unfair or unreasonable, and the proposed terms and arrangements have not been modified to conform to the standards of fairness and reasonableness, shall notify all other Members proposing to participate in the offering of that opinion at a time sufficiently prior to the Effective Date of the offering or the commencement of sales so the other Members will have an opportunity as a result of specific notice to comply with their obligation not to participate in any way in the preparation or distribution of a Public Offering containing arrangements, terms and conditions which are unfair or unreasonable.
      (5) Documents to Be Filed
      The following documents relating to all proposed Public Offerings of securities shall be filed for review:
      (A) Five (5) copies of the Registration Statement, offering circular, offering memorandum, notification of filing, notice of intention, application for conversion and/or any other document used to offer securities to the public;
      (B) Three (3) copies of any underwriting agreement, agreement among under writers, selected dealers agreement, agency agreement, purchase agreement, letter of intent, consulting agreement, partner ship agreement, underwriter's warrant agreement, escrow agreement, and anyother document which describes the underwriting or other arrangements in connection with or related to the distribution, and the terms and conditions relating thereto; and any other information or documents which may be material to or part of the said arrangements, terms and conditions and which may have a bearing on the Committee's review;
      (C) Five (5) copies of each pre- and post-effective amendment to the Registration Statement or other offering document, one copy marked to show changes; and three (3) copies of any other amended document, one copy marked to show changes; and
      (D) Three (3) copies of the final registration statement or other offering document and a list of the members of the under writing syndicate, if not indicated therein; one (1) copy of the final underwriting documents and any other document submitted to the NASD for review.
      (6) Information Required to Be Filed
      Any person filing documents pursuant to paragraph 4 shall provide the following information with respect to the offering:
      (A) an estimate of the maximum Public Offering price;
      (B) an estimate of the maximum under writing discount or commission; maxi mum reimbursement of underwriter's expenses, and underwriter's counsel's fees (except for reimbursement of blue sky fees); maximum financial consulting and/or advisory fees to the Underwriter and Related Persons; maximum finder's fees; and a statement of any other type of compensation which may accrue to the Underwriter and Related Persons;
      (C) a statement of the association or affiliation with any Member of any officer, director or securityholder of the Issuer in an initial Public Offering of equity securities, and with respect to any other offering provide such information only with respect to securityholders of five percent or more of any class of the Issuer's securities, to include:
      (i) the identity of the person,
      (ii) the identity of the Member and a statement of whether such Member is participating in any capacity in the Public Offering, and
      (iii) the number of equity or the face value of debt securities owned by such person, the date such securities were acquired, and the price paid for such securities;
      (D) a statement addressing the factors in subparagraphs (c)(4)(C) and (D), where applicable;
      (E) a detailed explanation of any other arrangement entered into during the 12-month period immediately preceding the filing of the offering which arrangement provides for the receipt of any item of value and/or the transfer of any warrants, options, or other securities from the Issuer to the Underwriter and Related Per sons; and
      (F) Any person filing documents pursuant to paragraph (5) shall file with the NASD written notice that the offering has been declared effective or approved by the Securities and Exchange Commission or other agency within 12 hours following such declaration or approval or that the offering has been withdrawn or abandoned within three business days following the withdrawal or decision to abandon the offering.
      (7) Offerings Exempt From Filing
      The provisions of paragraph (1) notwithstanding, documents and information related to the following Public Offerings need not be filed with the NASD for review, unless subject to the provisions of Schedule E to the By-Laws, provided, however, it shall be deemed a violation of Article III, Section 1 of the Rules of Fair Practice, or Appendix F to Article III, Section 34 of the Rules of Fair Practice if a direct participation program, for a Member to participate in any way in such Public Offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this section or Appendix F as applicable:
      (A) securities offered by a corporate, foreign government or foreign government agency Issuer which has unsecured non-convertible debt with a term of issue of at least 4 years, or unsecured non-convertible preferred securities, rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories, except that he initial Public Offering of the equity of an Issuer is required to be filed;
      (B) non-convertible debt securities and non-convertible preferred securities rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories;
      (C) securities registered with the Securities and Exchange Commission on Registration Statement Form S-3 orF-3 and offered pursuant to Rule 415 adopted under the Securities Act of 1933, as amended;
      (D) securities offered pursuant to a redemption standby "firm commitment" underwriting arrangement registered with the Securities and Exchange Commission on Form S-3; and
      (E) financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.
      (8) Offerings Exempt From Section
      The provisions of paragraph (1) notwithstanding, the following offerings are exempt from this section and documents and information relating to such offerings need not be filed for review:
      (A) securities exempt from registration- with the Securities and Exchange Com mission pursuant to the provisions of Sections 4(1), 4(2) and 4(6) of the Securities Act of 1933, as amended, and pursuant to Rule 504 (unless considered a Public Offering in the states where offered), Rule 505 and Rule 506 adopted under the Securities Act of 1933, as amended;
      (B) securities which are defined as"exempt securities" in Section 3(a)(12) of the Securities Exchange Act of 1934, as amended;
      (C) securities of investment companies registered under the Investment Company Act of 1940, as amended, except securities of a management company defined as "closed-end company" in Section 5 (a) (2) of that Act;
      (D) variable contracts as defined in Article III, Section 29(b)(l) of the Rules of Fair Practice;
      (E) offerings of municipal securities as defined in Section 3(a)(29) of the Securities Exchange Act of 1934, as amended;
      (F) tender offers made pursuant to Regulation 14D adopted under the Securities Ex change Act of 1934, as amended; and
      (G) securities issued pursuant to a competitively bid underwriting arrangement meeting the requirements of the Public Utility Holding Company Act of 1935, as amended.
      (9) Offerings Required to be Filed
      Documents and information relating to all other Public Offerings including, but not limited to, the following must be filed with the NASD for review:
      (A) direct participation programs as defined in Article III, Section 34(d)(2) of the Rules of Fair Practice;
      (B) mortgage and real estate investment trusts;
      (C) rights offerings;
      (D) securities exempt from registration with the Securities and Exchange Com mission pursuant to Section 3(a)(l 1) of the Securities Act of 1933, as amended, which is considered a Public Offering in the state where offered;
      (E) securities exempt from registration- with the Securities and Exchange Com mission pursuant to Rule 504 adopted under the Securities Act of 1933, as amended, which is considered a Public Offering in the states where offered;
      (F) securities offered by a bank, savings and loan association, church or other charitable institution, or common carrier even though such offering may be exempt from registration with the Securities and Exchange Commission;
      (G) securities offered pursuant to Regulation A or Regulation B adopted under the Securities Act of 1933, as amended;
      (H) securities offered pursuant to Regulation B adopted under the Securities Act of 1933, as amended; and
      (I) any offerings of a similar nature.
      (10) Filing Fees
      (A) The initial documents relating to any offering filed with the NASD pursuant to this section shall be accompanied by a filing fee equal to $500 plus .01% of the Gross Dollar Amount of the Offering, not to exceed a fee of $15,500. The amount of filing fee may be rounded to the nearest dollar.
      (B) Amendments to the initially filed documents which increase the number of securities being offered shall be accompanied by any additional amount of filing fee equal to .01% of the increase in the amended Gross Dollar Amount of the Offering; not to exceed $15,500 when aggregated with all fees previously paid.
      (C) Filing fees shall be paid in the form of check or money order payable to the National Association of Securities Dealers, Inc.
      (D) The provisions of Rule 457 adopted under the Securities Act of 1933, as amended, shall govern the computation of filing fees for all offerings filed pursuant to this rule, including intrastate offerings, to the extent the terms of Rule 457 are not inconsistent with subparagraphs(10)(A),(B)or(C).
      (c) Underwriting Compensation and Arrangements
      (1) General
      No Member or Person Associated with a Member shall participate in any manner in any Public Offering of securities in which the underwriting or other terms or arrangements in connection with or relating to the distribution of the securities, or the terms and conditions related thereto, are unfair or unreasonable.
      (2) Amount of Underwriting Compensation
      (A) No Member or Person Associated with a Member shall receive an amount of underwriting compensation in connection with a Public Offering which is un fair or unreasonable and no Member or Person Associated with a Member shall underwrite or participate in a Public Offering of securities if the underwriting compensation in connection with the Public Offering is unfair or unreasonable.
      (B) For purposes of determining the amount of underwriting compensation, all items of value received or to be received from any source by the Underwriter and Related Persons which are deemed to be in connection with or related to the distribution of the Public Offering as determined pursuant to paragraph (c)(3) and (c)(4) shall be included.
      (C) All items of underwriting compensation shall be disclosed in detail in the section on underwriting or distribution arrangements in the prospectus or similar document and, if the underwriting compensation includes items of compensation in addition to the commission or discount disclosed on the cover page of the prospectus or similar document, a footnote to the offering proceeds table on the cover page of the prospectus or similar document shall include a cross-reference to the section on underwriting or distribution arrangements.
      (D) For purposes of determining the currently effective guideline on the maxi mum amount of underwriting compensation considered fair and reasonable, the following factors, as well as any other relevant factors and circumstances, shall be taken into consideration:
      (i) the Offering Proceeds;
      (ii) the amount of risk assumed by the Underwriter and Related Persons, which is determined by (a) whether the offering is being underwritten on a "firm commitment" or "best efforts" basis and (b) whether the offering is an initial or secondary offering; and
      (iii) the type of securities being offered.
      (E) The amount of compensation (stated as a percentage of the dollar amount of the Offering Proceeds) which is considered fair and reasonable generally will vary directly with the amount of risk to be assumed by the Underwriter and Related Persons and inversely with the dollar amount of the Offering Proceeds.
      (3) Items of Compensation
      (A) For purposes of determining the amount of underwriting compensation received or to be received by the Underwriter and Related Persons pursuant to paragraph (c)(2), the following items and all other items of value received or to be received by the Underwriter and Related Persons in connection with or related to the distribution of the offering as determined pursuant to paragraph (c)(4) shall be included:
      (i) discount or commission;
      (ii) reimbursement of expenses to or on behalf of the Underwriter and Related Persons;
      (iii) fees and expenses of underwriter's counsel;
      (iv) finder's fees;
      (v) wholesaler's fees;
      (vi) financial consulting and advisory fees, whether in the form of cash, securities, or any other item of value;
      (vii) stock, options, warrants, and other securities, including securities received as underwriting compensation, for example; (a) in connection with a private placement of securities for the Issuer; (b) for providing or arranging bridge financing for the Issuer; (c) as a finder's fee; (d) for consulting services to the Issuer; and (e) securities purchased in a private placement by the Issuer;
      (viii) special sales incentive items in compliance with paragraph
      (ix) any right of first refusal provided to the Underwriter and Related Persons to underwrite or participate in future offerings by the Issuer, which will have a compensation value of one percent of the offering proceeds or that dollar amount contractually agreed to by the Issuer and underwriter to waive the right of first refusal;
      (x) compensation to be received by the underwriter or person nominated by the underwriter as an advisor to the Issuer's board of directors in excess of that received by Members of the board of directors;
      (xi) commissions, expense reimbursements, or other compensation to be received by the Underwriter and Related Persons as a result of the exercise or conversion within 12 months following the Effective Date of the offering of warrants, options, convertible securities, or similar securities distributed as part of the offering;
      (xii) fees of a Qualified Independent Underwriter; and
      (xiii) compensation, including expense reimbursements, paid in the 12 months prior to the initial or amended filing of the prospectus or similar documents to any Member or Person Associated with a Member for a Public Offering that was not completed.
      (B) Expenses customarily borne by an Issuer, such as printing costs, fees, shall be excluded from underwriter's compensation whether or not paid through an underwriter.
      /div>
      (4) Determination of Whether Compensation Is Received in Connection With the Offering
      (A) All items of value received or to be received by the Underwriter and Related Per sons during the 12-month period immediately preceding the filing of the Registration Statement or similar document, and at the time of and subsequent to the Public Offering, from the Issuer will be examined to determine whether such items of value are underwriting compensation in connection with the offering and, if received during the 6-month period immediately preceding the filing of the Registration Statement or similar document, will be presumed to be underwriting compensation received in connection with the offering, provided, however, that such presumption may be rebutted on the basis of evidence satisfactory to the NASD to support a finding that the receipt of an item is not in connection with the offering and shall not include cash discounts or commissions received in connection with a prior distribution of the Issuer's securities.
      (B) Items of value received by an Under writer and Related Person more than 12 months immediately preceding the date of filing of the Registration Statement or similar document will be presumed not to be under writing compensation, provided, however, that items received prior to such 12-month period may be included as underwriting compensation on the basis of evidence to support a finding that receipt of the item is in connection with the offering.
      (C) For purposes of determining whether any item of value received or to be received by the Underwriter and Related Persons is in connection with or related to the distribution of the Public Offering, the following factors, as well as any other relevant factors and circumstances, shall be considered:
      (i) the length of time between (a) the date of the receipt of the item of value, (b) the date of any contractual agreement for services for which the item of value was or is to be received, and (c) the date the performance of the service commenced; and the date of filing of the Registration Statement or similar document, with a shorter period of time tending to indicate that the item is received in connection with the offering;
      (ii) the details of the services provided or to be provided for which the item of value was or is to be received;
      (iii) the relationship between the services provided or to be provided for which the item of value was or is to be received and (a) the nature of the item of value, (b) the compensation value of the item of value, and (c) the proposed Public Offering;
      (iv) the presence or absence of arm's-length bargaining or the existence of any affiliate relationship between the Issuer and the recipient of the item of value, -with the absence of arm's length bargaining or the presence of any affiliation tending to indicate that the item of value is received in connection with the offering.
      (D) For purposes of determining whether securities received or to be received by the Underwriter and Related Persons are in connection with or related to the distribution of the Public Offering, the factors in sub-paragraph (C) and the following factors shall be considered:
      (i) any disparity between the price paid and the offering price or the market price, if any, at the time of acquisition, with a greater disparity tending to indicate that the securities constitute compensation;
      (ii) the amount of risk assumed by the recipient of the securities, as determined by (a) the restrictions on exercise and resale; (b) the nature of the securities (e. g. warrant, stock, or debt); and (c) the amount of securities, with a larger amount of readily marketable securities without restrictions on resale or a warrant for securities tending to indicate that the securities constitute compensation; and
      (iii) the relationship of the receipt of the securities to purchases by unrelated purchasers on similar terms at approximately the same time with an absence of similar purchases tending to indicate that the securities constitute compensation.
      (E) Notwithstanding the provisions of sub-paragraph (3)(A)(vi) hereof, financial consulting and advisory fees may be excluded from underwriting compensation upon a finding by the NASD, on the basis of evidence satisfactory to it, that an ongoing relationship between the Issuer and the Underwriter and Related Person has been established at least 12 months prior to the filing of the Registration Statement or similar document with the NASD or that the relationship, if established subsequent to that time, was not entered into in connection with the offering, and that actual services have been or will be rendered which were not or will not be connected with or related to the offering.
      (5) Valuation of Non-Cash Compensation
      For purposes of determining the value to be assigned to securities received as underwriting compensation, the following criteria and procedures shall be applied:
      (A) No Underwriter and Related Person may receive a security or a warrant for a security as compensation in connection with the distribution of a Public Offering that is different than the security to be offered to the public or that does not have a bona fide independent market, provided, however, that
      (i) in exceptional and unusual circumstances, upon good cause shown, such arrangement shall be permitted by the Corporate Financing Department or the appropriate standing committee of the Board of Governors; and
      (ii) in offerings of units, the Underwriter and Related Persons may only receive a warrant for the common stock in a unit composed of common stock and a warrants) for common stock, but may not receive a warrant for the common stock underlying the unit warrant.
      (B) securities shall be valued on the basis of the difference between the cost of such securities to the recipient and either (i) the proposed (and actual) Public Offering price or, (ii) where a bona fide independent market exists for the security the market price on the date of acquisition;
      (C) options, warrants or convertible securities, shall be valued on the basis of the following formula:
      (i) the proposed (and actual) Public Offering price multiplied by .65 (65%);
      (ii) minus the difference between the conversion price and either the market price on the date of acquisition, where a bona fide independent market exists for the security, or the proposed (and actual) Public Offering price;
      (iii) divided by two (2);
      (iv) multiplied by the number of convertible securities received or to be received as underwriting compensation;
      (v) less the price paid for the securities; and
      (vi) divided by the Offering Proceeds.
      (D) a lower value of 80% and 60% of the value calculation shall be assigned if securities, and, where relevant, underlying securities, are, or will be, restricted from sale, transfer, assignment or other disposition for a period of one and two years, respectively, beyond the one-year period of restriction required by paragraph (c)(7)(A)(i).
      (6) Unreasonable Terms and Arrangements
      (A) No Member or Person Associated with a Member shall participate in any manner in a Public Offering of securities in which any arrangement proposed in connection with the Public Offering, and the terms and conditions relating thereto, is determined to be unfair and unreasonable pursuant to this Rule or in consistent with any By-Law or any Rule of Fair Practice, or other rule or regulation, of this NASD.
      (B) Without limiting the generality of the foregoing paragraphs hereof, the following terms and arrangements, when proposed in connection with the distribution of a Public Offering of securities, shall be unfair and un reasonable:
      (i) any accountable expense allowance granted by an Issuer to the Underwriter and Related Persons which includes payment for general overhead, salaries, supplies, or similar expenses of the underwriter incurred in the normal conduct of business;
      (ii) any non-accountable expense allowance in excess of three % of Offering Proceeds;
      (iii) any payment of commissions or reimbursement of expenses directly or indirectly to the Underwriter and Related Persons prior to commencement of the public sale of the securities being offered, except the reimbursement of out-of-pocket accountable expenses actually incurred by the Underwriter and Related Persons;
      (iv) the payment of any compensation by an Issuer or an affiliate to an underwriter or related person in connection with an offering of securities which is not completed according to the terms of agreement between the Issuer and underwriter; provided, however, that the reimbursement of out-of-pocket accountable expenses other than sales commissions actually incurred by the underwriter or related person shall not be presumed to be unfair or unreasonable under normal circumstances;
      (v) any right of first refusal regarding future Public Offerings, private placements or other financings which has a duration of more than five years from the Effective Date of the offering;
      (vi) the receipt by the Underwriter and Related Persons of underwriting compensation consisting of any option, warrant or convertible security which:
      (1) has a duration of more than five years from the Effective Date of the offering;
      (2) is exercisable or convertible at a price below either the Public Offering price of the underlying security or, if a bona fide independent market exists for the security or the underlying security, the market price at the time of receipt;
      (3) is not in compliance with sub-paragraph (c)(5)(A);
      (4) has more than one demand registration right at the Issuer's expense
      (5) has a demand registration right which has a duration of more than five years from the Effective Date of the offering;
      (6) has a piggy-back registration right which has a duration of more than seven years from the Effective Date of the offering; or
      (7) is convertible or exercisable or otherwise is on terms more favorable than the terms of the securities being offered to the public;
      (vii) the receipt by the Underwriter and Related Persons of any item of compensation for which a value cannot be determined at the time of the offering;
      (viii) when proposed in connection with the distribution of a Public Offering of securities on a "firm commitment" basis, any overallotment option providing for the overallotment of more than fifteen percent of the amount of securities being offered, computed excluding any securities offered pursuant to the overallotment option;
      (ix) Stock Numerical Limitation — the receipt by the Underwriter and Related Persons of securities which constitute underwriting compensation in an aggregate amount greater than ten percent of the number or dollar amount of securities being offered to the public, which is calculated to exclude:
      (1) any securities deemed to constitute underwriting compensation;
      (2) any securities issued or to be issued pursuant to an overallotment option;
      (3) in the case of a "best efforts" offer ing, any securities not actually sold; and
      (4) any securities underlying warrants, options, or convertible securities which are part of the proposed offering;
      (x) the receipt, pursuant to an agreement entered into at any time before or after the Effective Date of a Public Offering of warrants, options, convertible securities or units containing such securities, by a Member or Person Associated with a Member, of any compensation or expense reimbursement in connection with the exercise or conversion of any such warrant, option, or convertible security in any of the following circumstances:
      (1) the market price of the security into which the warrant, option, or convertible security is exercisable or convertible is lower than the exercise or conversion price;
      (2) the warrant, option, or convertible security is held in a discretionary ac count at the time of exercise or conversion;
      (3) the arrangements whereby compensation is to be paid are not disclosed (a) in the prospectus or offering circular by which the warrants, options, or convertible securities are offered to the public, if such arrangements are contemplated or any agreement exists as to such offering circular provided to securityholders at the time of exercise or conversion; or
      (4) the exercise or conversion of the warrants, options or convertible securities is not solicited by the under writer or related person, provided however, that any request for exercise or conversion will be presumed to be unsolicited unless the customer states in writing that the transaction was solicited and designates in writing the broker/dealer to receive compensation for the exercise or conversion;
      (xi) for a Member or Person Associated with a Member to accept, directly or indirectly, any non-cash sales incentive item including, but not limited to, travel bonuses, prizes and awards, from an Issuer or an affiliate thereof in excess of $50 per person per Issuer annually. Notwithstanding the foregoing, a Member may provide non-cash sales incentive items to its associated persons provided that no Issuer, or an affiliate thereof, including specifically an affiliate of the Member, directly or indirectly participates in or contributes to providing such non-cash sales incentive; or
      (xii) for a Member to Participate with an Issuer in the public distribution of a non-underwritten issue of securities if the Issuer hires persons primarily for the purpose of distributing or assisting in the distribution of the issue, or for the purpose of assisting in any way in connection with the underwriting, except to the extent in compliance with 17 C.F.R. §240.3a4-l and applicable state law; or
      (C) In the event that the Underwriter and Related Persons receive securities deemed to be underwriting compensation in an amount constituting unfair and unreasonable compensation pursuant to subparagraph (B)(ix) hereof, the recipient shall return any excess securities to the Issuer or the source from which received at cost and without recourse, except in exceptional and unusual circumstances, upon good cause shown, a different arrangement may be permitted by the Corporate Financing Department or the appropriate standing Committee of the Board of Governors.
      (7) Restrictions on Securities
      (A) No Member or Person Associated with a Member shall Participate in Any Public Offering which does not comply with the following requirements:
      (i) securities deemed to be underwriting compensation shall not be sold, transferred, assigned, pledged or hypothecated by any person, except as provided in sub-paragraph (B) for a period of one year following the Effective Date of the offering for which the securities were received; provided, however, that securities deemed to be underwriting compensation may be transferred to any Member Participating in the Offering and the bona fide officers or partners thereof and securities which are convertible into other types of securities or which may be exercised for the purchase of other securities may be so transferred, converted or exercised if all securities so transferred or received remain subject to the restrictions specified herein for the remainder of the initially applicable time period;
      (ii) certificates or similar instruments representing securities restricted pursuant to subparagraph (i) hereof shall bear an appropriate legend describing the restriction and stating the time period for which the restriction is operative; and
      (iii) securities to be received by a Member as underwriting compensation shall only be issued to a Member Participating in the Offering and the bona fide officers or partners thereof.
      (B) The provisions of subparagraph (A) not withstanding, the transfer of any security by operation of law or by reason of reorganization of the Issuer shall not be prohibited by this paragraph.
      (C) Venture Capital Restrictions — when a Member participates in the initial Public Offering of an Issuer's securities, such Member or any officer, director, general partner, con trolling shareholder or subsidiary of the Member or subsidiary of such controlling share holder or a member of the Immediate Family of such persons, who beneficially owns any securities of said Issuer at the time of filing of the offering, shall not sell such securities during the offering or sell, transfer, assign or hypothecate such securities for ninety days following the Effective Date of the offering unless:
      (i) the price at which the issue is to be distributed to the public is established at a price no higher than that recommended by a Qualified Independent Underwriter, who does not beneficially own five percent or more of the outstanding voting securities of the Issuer, who shall also participate in the preparation of the Registration Statement and the prospectus, offering circular, or similar document and who shall exercise the usual standards of "due diligence" in respect thereto; or
      (ii) the aggregate amount of such securities held by such Member and its related persons enumerated above would not exceed one percent of the securities being offered
      (8) Conflicts of Interest
      (A) Proceeds Directed to a Member — no Member shall Participate in a Public Offering of an Issuer's securities where more than 10 percent of the Net Offering Proceeds, not including underwriting compensation, are intended to be paid to Members Participating in the Distribution of the Offering or associated or affiliated person of such members, or members of the Immediate Family of such persons, unless the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established at a price no higher or yield no lower than that recommended by a Qualified Independent Underwriter, who shall participate in the preparation of the Registration Statement and the prospectus, offering circular, or similar document and who shall exercise the usual standards of "due diligence" in respect thereto.
      (i) All offerings included within the scope of this paragraph shall disclose in the underwriting or plan of distribution section of the Registration Statement, offering circular or other similar document that the offering is being made pursuant to the provisions of this paragraph, the name of the Member acting as Qualified Independent Underwriter, and that such Member is assuming the responsibilities of acting as a Qualified Independent Underwriter in pricing the offering and conducting due diligence,
      (ii) The provision of this paragraph which requires that the price of the securities be established based on the recommendation of a Qualified Independent Underwriter shall not apply to an offering if:
      (1) the securities are registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended;
      (2) the Registration Statement pertains only to securities which are to be offered or sold pursuant to Rule 415 adopted under the Securities Act of 1933, as amended;
      (3) the securities will only be offered or sold from time to time in negotiated transactions;
      (4) sales by Member(s) (where the Member, its associated or affiliated persons or Immediate Family members thereof are subject to this sub-paragraph due to the fact that they are to receive a portion of the offering proceeds) will be made solely to Institutional Investors; and
      (5) the Qualified Independent Underwriter complies with all other provisions of this paragraph on a continuous basis throughout the effectiveness of the Registration Statement.
      (iii) The provisions of this paragraph shall not apply to:
      (1) an offering 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;
      (2) an offering of a class of securities rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories;
      (3) an offering otherwise subject to the provisions of Schedule E to the By-Laws;
      (4) an offering of securities exempt from registration with the Securities and Exchange Commission under Section 3(a)(4) of the Securities Act of 1933;
      (5) an offering of a real estate investment trust as defined in Section 856 of the Internal Revenue Code; or
      (6) an offering of securities subject to Appendix F to Article III, Section 34 of the Rules of Fair Practice, unless the Net Offering Proceeds are in tended to be paid to the above persons for the purpose of repaying loans, ad vances or other types of financing util ized to acquire an interest in a pre-existing company.
      (d) Code of Procedure for Corporate Financing and Direct Participation Program Matters
      (1) Purpose
      The purpose of this Code of Procedure is to provide a procedure for review of determinations by the NASD's staff regarding compliance with NASD rules relating to corporate financing and direct participation program matters by which any Member is aggrieved.
      (2) Application by Aggrieved Member
      Any Member aggrieved by a determination of the Corporate Financing Department rendered pursuant to any rule or regulation of the NASD relating to underwriting terms or arrangements may make application for review of such determination. In exceptional or unusual circumstances, a Member may request conditionally or unconditionally an exemption from such rules or regulations. The Director of the Corporate Financing Department may, of his own initiative, request review of the fairness or reasonableness of any terms and arrangements proposed in documents filed pursuant to this section. Applications for review will be accepted only with respect to offerings for which a Registration Statement or similar document has been filed with the appropriate federal or state regulatory agency; provided, however, that a hearing committee may waive the requirement for filing prior to review upon a finding that such review is appropriate under the circumstances.
      (3) Application for Review
      Any Member making application for review pursuant to paragraph (d)(2) (hereinafter referred to in this subsection as "applicant") shall request such review in writing and shall specify in reasonable detail the source and nature of the aggrievement and the relief requested. The applicant shall state whether a hearing is requested and shall sign the written application. All applications shall be directed to the Corporate Financing Department at the NASD's Executive Office.
      (4) Notice of Hearing
      Any applicant shall have a right to a hearing before a hearing committee constituted as provided in paragraph (5). The hearing committee may request a hearing on its own motion. A hearing shall be scheduled as soon as practicable, at a location determined by the hearing committee. Written notice of the hearing shall be sent to the applicant at the earliest practicable date, stating the date, time, and location of the hearing.
      (5) Hearing Committee and Procedure
      (A) Any hearing pursuant to this section shall be before an individual or individuals designated by the NASD, who shall be current or past Members of the appropriate standing committee of the Board of Governors, i.e. the "hearing committee." Any applicant shall be entitled to appear at, and participate in, the hearing, to be represented by counsel, and to submit any relevant testimony or evidence. A representative of the NASD shall be entitled to appear at, and participate in, the hearing, to be represented by counsel, and to submit any relevant testimony or evidence. Upon agreement of the applicant, representatives of the NASD, and the hearing committee, a hearing may be conducted by means of a telephonic or other linkage which permits all parties to participate simultaneously in the proceeding.
      (B) In the event that the applicant waives a hearing before the appropriate hearing committee, the hearing committee shall review the matter on the record before it. Any applicant and the NASD shall be entitled to submit any relevant written testimony or evidence to the hearing committee.
      (6) Requirement for Written Determination
      The hearing committee shall render a determination as to all issues which the committee finds to be relevant as soon as practicable following conclusion of the hearing or, in cases in which a hearing is not requested, completion of the committee's review of the record. The hearing committee may determine whether the proposed underwriting or other terms and arrangements in connection with or relating to the distribution of the securities, or the terms and conditions related thereto, taking into consideration all elements of compensation and all of the relevant surrounding factors and circumstances, are fair and reasonable and in compliance with applicable rules and regulations. The determination of the hearing committee shall be issued in writing by the Director, Corporate Financing. A copy of the determination shall be sent to each applicant.
      (7) Review by Committee of Board
      (A) Any Member aggrieved by a determination of a hearing committee shall have a right to have that determination reviewed by the appropriate standing committee of the Board of Governors. With respect to matters relating to offerings other than equity offerings of direct participation programs, the Corporate Financing Committee shall be the appropriate committee. With respect to matters relating to equity offerings of direct participation programs, the Direct Participation Programs Committee shall be the appropriate committee. There may be circumstances where a different standing committee of the Board of Governors may be appropriate.
      (B) Any Member seeking a review of a determination of a hearing committee shall submit a written request for such review to the NASD within fifteen business days following issuance of the hearing committee's written determination. Any such Member shall submit with the written request for review a written statement specifying the portion of the hearing committee's determination for which review is requested and the relief sought. Any such Member may submit written testimony or evidence for consideration by the committee. Representatives of the NASD may also submit written testimony or evidence to the committee.
      (C) Pursuant to a request duly made, the appropriate standing committee of the Board of Governors will review the determination of a hearing committee, giving consideration to all parts of therecord which the Board committee finds relevant. The Board committee shall render a determination as to all issues which the committee finds to be relevant. The determination of the Board committee shall be issued in writing by the Director, Corporate Financing. A copy of the determination shall be sent to each Member requesting review.
      (8) Assessment of Costs
      A hearing committee may, in its discretion, assess costs of a hearing against any Member requesting the hearing.
      (9) Nature of Determination
      Any determination by a hearing committee or standing committee rendered pursuant to this section shall constitute the opinion of that committee as to compliance with applicable NASD rules, interpretations or policies and shall be advisory in nature only. No such determination shall constitute a finding of a violation of any rule, interpretation or policy. A finding of a violation shall be made only by a District Business Conduct Committee pursuant to the Code of Procedure for Handling Trade Practice Complaints.
      (e) Power of the Board of Governors
      The Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of paragraph (b) of this section from time to time without recourse to the membership for approval.

    • 88-91 Proposed Amendment to Article III, Section 21 (c) of the Rules of Fair Practice Re: Customer Account Information; Last Date for Comments: December 1, 1988

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Article III, Section 21 (c) of the Rules of Fair Practice that would require NASD members to make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, certain information pertaining to retail customer accounts, including discretionary and corporate accounts. The proposed amendment also would require the member to make reasonable efforts to obtain certain additional information prior to making a recommendation to a customer.

      The text of the proposed amendment is attached.

      BACKGROUND AND SUMMARY OF AMENDMENT

      Pursuant to Article III, Section 21(c) of the Rules of Fair Practice (Rules), the accounts of customers now are required to be maintained in such form and manner as to show name, address, age, signatures of the introducing representative and member, partner, officer or manager accepting the account for the member, and a customer's association with or employment by another member. In discretionary accounts, the customer's occupation also is required to be noted under the current procedure, along with the signature of each person authorized to exercise discretion in such account.

      The NASD Board of Governors believes that these procedures should be strengthened to require that sufficient information be obtained on each retail customer account to permit the member firm to make more informed determinations as to accounts and investment recommendations.

      The Board, upon the recommendation of the Advisory Council and the National Business Conduct Committee, therefore proposes that members be required to request information regarding customers beyond that set forth in the current procedure contained in Section 21(c) of Article III of the Rules. The new proposal requires a member to make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, information deemed applicable to that account. That information would include, in addition to the above-listed information previously required to be obtained, the tax identification or social security number of the customer, and the occupation and name and address of the employer of each cus tomer for each account. If the customer is a corporation, the member also must obtain the names of any persons authorized to transact business on behalf of the corporation. With respect to discretionary accounts, a member would be under the additional obligation of obtaining the signature of each person authorized to exercise discretion in the account, and the written approval of the member or partner, officer, or manager with respect to each transaction in the account, indicating the time and date of approval.1

      Moreover, the proposed amendment provides that, prior to making a recommendation to a customer pursuant to Article III, Section 2 of the Rules, a member must make reasonable efforts to obtain information concerning the customer's financial background, tax status, and investment objectives, and such other information used or considered to be reasonable and necessary by the member or registered representative.

      The Board believes that the proposed amendment to Article III, Section 21(c) of the Rules will provide extra protection for both customers and firms. The Board believes that the requirement of "reasonable effort" can be met by prepared questionnaires for customers to complete and return, or by telephone inquiry. It is not necessary to obtain a written statement from a customer in each instance in order to be in compliance with the rule. The requirement that information be obtained prior to the settlement of the initial transaction also allows for freedom in opening new accounts. In addition, it may be advisable for members to keep a record of efforts that they have made to obtain a customer's tax identification or social security number, as required by section 103.35, Part 103 of Title 31 of the Code of Federal Regulations adopted by the Treasury Department, effective June 1972.

      The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506

      Comments must be received no later than December 1, 1988. Comments received by this date will be considered by the NASD National Business Conduct Committee and Board of Governors. Any changes to the NASD Rules of Fair Practice that are approved by the Board must be voted on by the membership and filed with, and ap proved by, the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to Deborah F. Mcllroy, Attorney, NASD Office of General Counsel, at (202) 728-8816.

      PROPOSED AMENDMENT TO ARTICLE III SECTION 21(C) OF THE NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined; deleted language is in brackets.)

      ¶2171 Books and Records

      Sec. 21.

      [Information on accounts

      (c) Each member shall maintain accounts of customers in such form and manner as to show the following information: name, address, and whether the customer is legally of age; the signature of the registered representative introducing the account and the signature of the member or the partner, officer, or manager accepting the ac count for the member. If the customer is associated with or employed by another member, this fact must be noted. In discretionary accounts, the member shall also record the age or approximate age and occupation of the customer as well as the signature of each person authorized to exercise discretion in such account.]

      Customer Account Information

      (c)
      (1) For each account other than an institutional account, each member shall make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the following information to the extent it is applicable to the account:
      (i) customer's name and residence or principal business address;
      (ii) whether customer is of legal age;
      (iii) tax identification or social security number;
      (iv) occupation;
      (v) name and address of employer;
      (vi) signature of the registered representative introducing the account and signature of the member or partner, officer, or manager who accepts the account;
      (vii) whether customer is an associated per son of another member; and
      (viii) if the customer is a corporation, the names of any persons authorized to transact business on behalf of the corporation.
      (2) For discretionary accounts, in addition to compliance with (1) above, and Article III, Section 15(b) of these rules, the member shall obtain the signature of each person authorized to exercise discretion in the account, and the written approval of the member or partner, officer, or manager duly designated by the member in accordance with Article III, Section 27 of these rules, with respect to each transaction in the account, indicating the time and date of approval.
      (3) Prior to making a recommendation to a customer pursuant to Article III, Section 2 of these rules, a member shall also make reasonable efforts to obtain information concerning the customer's financial background, tax status, and investment objectives, and such other information used or considered to be reasonable and necessary by such member or registered representative.
      (4) For purposes of this section, the term "institutional account" shall mean the account of an investment company as defined in Section 3(a) of the Investment Company Act of 1940, a bank, an insurance company, or any other institutional-type account.

      1 The proposed rule also incorporates a cross reference to a member's obligation under Article III, Section 15(b) of the Rules. It requires that "[n]o member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, office, or manager duly designated by the member ..."


    • 88-90 Proposed Rule Amendment, By-Laws Amendments Under Schedule C Re: Training, Qualification, and Registration of Representatives and Principals; Last Date for Comments: December 1, 1988

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Registration
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on the following:

      A proposed amendment to Article III, Section 27 of the Rules of Fair Practice that would require members to provide for the appropriate training of persons initially applying for registration and to take reasonable steps to maintain the knowledge of its registered persons with respect to the products and services such persons offer to the public.

      Proposed amendments to Schedule C to the By-Laws that would require members to submit applications for and maintain the registrations of only such persons who intend to engage or are engaged in the investment banking or securities business for the member and that would establish waiting periods between attempts to pass qualification examinations.

      In addition, the NASD wishes to inform the membership of a policy change that substantially restricts the grounds on which requests for qualification examination waivers will be reviewed. The texts of the proposed amendments are attached. Comments must be received by December 1, 1988.

      BACKGROUND

      In response to certain recommendations of the NASD Regulatory Review Task Force, the Qualifications Committee of the NASD Board of Governors has undertaken to review the NASD qualification system and to consider additional means to maintain an appropriate level of knowledge and professionalism for persons associated with NASD members. This review will not only address the adequacy of existing NASD qualifications standards, but also will consider issues relating to the need to afford reasonable assurance to the investing public that registered persons remain knowledgeable about products and services available to investors, as well as applicable rules, regulations, and policies governing the investment banking and securities business.

      Although the review is ongoing, the Board of Governors has determined at this time to publish for comment proposals that address certain issues associated with the training, qualifications, and registration of representatives and principals.

      SUPERVISION AND TRAINING

      The NASD proposes to amend Article III, Section 27 of the Rules of Fair Practice, which sets forth supervisory standards applicable to NASD members,1 to require that a member's supervisory practices and procedures include provisions for (1) the training of applicants at the time of application for registration and (2) taking reasonable steps to maintain registered persons' knowledge with respect to the products and services offered to the public.

      The NASD believes that the initial training and continued competency of registered personnel is integrally linked to supervision in a complex and changing industry and that it is appropriate to require members to incorporate these responsibilities into their supervisory systems. The proposed amendment is drafted to allow a member flexibility in determining the means most appropriate to its operations in discharging this responsibility, including the use of training products and services of other organizations.

      SCHEDULE C AMENDMENTS

      Registration of Associated Persons

      The NASD proposes to amend Part II, Section (l)(a) and Part III, Section (l)(a) of Schedule C to the By-Laws to require that members register only persons who are engaged or will engage in the investment banking or securities business on behalf of the member in the capacities of principal and representative. The proposed amendment would specifically prohibit members from maintaining registrations for persons who no longer function as principals or representatives of the firm and who no longer are active in the member's investment banking or securities business, or who wish to avoid the re-examination requirement applicable to persons who are not registered for more than two years.

      Members also would be prohibited from sponsoring an application for registration where there is no intent to maintain the applicant's employment with the member after examination. The NASD believes this amendment is fully consistent with the historic intent of the qualification and registration program and that the proposed amendment is necessary to prevent such unacceptable practices as "parking" registrations and using NASD membership to gain a competitive advantage in operating a commercial training business.

      Waiting Periods Between Attempts on Qualification Examinations

      The NASD also proposes to amend Part VI of Schedule C to the By-Laws to establish waiting periods between attempts to pass NASD qualification examinations. Waiting periods were in effect in the NASD qualification program until 1979 and now are used in connection with the qualification examinations of the Municipal Securities Rulemak-ing Board (MSRB). The extensive automation of the registration and qualification process has made it possible for applicants to make multiple attempts to pass examinations in rapid succession, often within very brief periods.

      The NASD believes this practice promotes "test learning" rather than a proper understanding of the substantive material covered in the various qualification examinations. The proposed waiting periods are intended to encourage a more professional approach to the examination process and to the training of applicants, as well as to protect the integrity of the qualification examinations. In the interest of uniformity, the proposed waiting periods are the same as those prescribed by the MSRB — 30 days between the first and second attempts, 30 days between the second and third attempts, and six months after the third and all subsequent attempts.

      EXAMINATION WAIVER POLICY

      Part VI, Section (5) of Schedule C to the By-Laws permits the waiver of a qualification examination and reads as follows:

      "(5) The President of the Corporation may, in exceptional cases and where good cause is shown, waive the applicable Qualification Examination upon written request by the member and accept other standards as evidence of an applicant's qualifications for registration. Advanced age, physical infirmity or experience in fields ancillary to the investment banking or securities business will not individually of themselves constitute sufficient grounds to waive a Qualification Examination."

      The number of waiver requests has increased significantly in recent years at a time when the securities business and, consequently, the NASD's qualification program have become more complex. Waiver requests now are reviewed under guidelines, developed by the Qualifications Committee and approved by the Board, which focus primarily upon the applicant's experience in fields related to the securities business. The NASD has become concerned that this process no longer is consistent with the best interests of the securities industry or the investing public. The purpose of the qualification examinations is to provide an objective and quantifiable measure of minimum applicant competency.

      The NASD believes the examinations do not pose an unreasonable barrier to registration to any class of applicants. Thus, the NASD has determined that the examination should be a prerequisite for all applicants, with exceptions granted only in highly unusual circumstances. As a consequence, waiver requests based only on ancillary experience, such as investment management, or advisory services, will be routinely denied. This policy will be applied to both initial examination waiver requests and requests to waive the re-examination requirements of Part II, Section l(c) and Part III, Section l(c) of Schedule C.

      It should be noted that this policy would not affect a person whose registration in a particular capacity may be wrongly terminated due, for example, to an incorrectly completed Form U-4, provided that such person's continuous activity in the registrable function can be documented by a member.

      The NASD encourages all members and interested parties to comment on the proposed amendments. Comments should be directed to:

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506

      Comments must be received no later than December 1,1988. Comments received by this date will be considered by the NASD Qualifications Committee and by the NASD Board of Governors. Any changes to the NASD Rules of Fair Practice must be voted on by the membership and filed with, and approved by, the Securities and Exchange Commission before becoming effective.Any changes to Schedule C to the By-Laws must be filed with, and approved by, the SEC before becoming effective.

      Questions concerning this notice can be directed to Frank McAuliffe, Vice President, NASD Qualifications, at (301) 590-6694, or Jacqueline D. Whelan, Senior Attorney, NASD Office of General Counsel, at (202) 728-8270.

      PROPOSED AMENDMENTS TO ARTICLE III, SECTION 27 OF THE NASD RULES OF FAIR PRACTICE

      (Note: Proposed additional language is underlined.)

      Section 27

      Supervisory System

      (a) Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations and with the rules of this Association. Final responsibility for proper supervision shall rest with the member. A member's supervisory system shall provide, at a minimum, for the following:
      (7) The training of persons applying for general or limited registration consistent with the qualification requirements of the NASD and other applicable securities self-regulatory organizations and reasonable steps to maintain levels of knowledge of registered persons with respect to the products and services such persons offer to the public.

      (Subsequent sections to be renumbered consecutively.)

      PROPOSED AMENDMENTS TO SCHEDULE C OF THE BY-LAWS

      (Note: New language is underlined; deleted language is in brackets.)

      II

      REGISTRATION OF PRINCIPALS

      (1) Registration Requirements
      (a) All Principals Must be Registered — All persons [associated] engaged or to be engaged in the investment banking or securities business of a member who are to function as principals 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 Principals appropriate to thecategory of registration as specified by the Board of Governors. A member shall not maintain a principal registration with the Corporation for any person who is no longer active in the member's investment banking or securities business in a principal capacity or for any person where the sole purpose of the registration is to avoid the examination requirement prescribed in Section (l)(c) hereof. A member shall make application for the registration of any person as principal where there is no intent to employ such person in the member's investment banking or securities business after the examination.

      III

      REGISTRATION OF REPRESENTATIVES

      (1) Registration Requirement
      (a) All Representatives Must be Registered — All persons [associated] engaged or to be engaged in the investment banking or securities business of 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 III, 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. A member shall not maintain a representative registration with the Corporation for any person who is no longer active in the member's investment banking or securities business in a representative capacity or for any person where the sole purpose of the registration is to avoid the examination requirement prescribed in Section (l)(c) hereof. A member shall not make application for the registration of any person as a representative where there is no intent to employ such person in the member's investment banking or securities business after the examination.

      VI

      QUALIFICATION EXAMINATIONS AND WAIVER OF REQUIREMENTS

      (6) Any person associated with a member who fails to pass a qualification examination prescribed by the Corporation shall be permitted to take the examination again after a period of 30 calendar days has elapsed from the date of the prior examination, except that any person who fails to pass an examination three or more times in succession shall be prohibited from again taking such examination until a period of six months has elapsed from the date of such person's last attempt to pass the examination.

      1 On August 1,1988, the NASD membership approved substantial changes in the provisions of Article III, Section 27. These changes, which were approved by the Securities and Exchange Commission on October 13, 1988, will become effective April 13,1989. See Notice to Members 88-84, dated November 1,1988. The proposals set forth herein would amend Article III, Section 27 as it will be in effect as of April 13,1989, and would take effect at that time.


    • 88-89 Amendment to Schedule E of the NASD By-Laws Re: Definition of Qualified Independent Underwriter - Effective December 1, 1988

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The SEC has approved an amendment to the definition of qualified independent underwriter contained in Section 2(l) of Schedule E to the NASD By-Laws. The amendment, which becomes effective December 1, 1988, precludes a member from acting as a qualified independent underwriter if any of its associated persons having supervisory responsibility for organizing, structuring, or performing due diligence with respect to corporate public offerings of securities have within the previous five-year period been convicted or enjoined or have been the subject of disciplinary action by the NASD, the SEC or any self-regulatory organization for distribution-related activities resulting in a suspension or bar from a self-regulatory organization.

      Additionally, the amendments would require a qualified independent underwriter to have experience in managing or co-managing public offerings of a size and type similar to the proposed offering. They also would restrict the qualified independent underwriter's direct or indirect ownership of the issuer's equity securities. The text of the amendment is attached.

      BACKGROUND

      The Securities and Exchange Commission approved an amendment to Schedule E to the NASD By-Laws regarding the definition of qualified independent underwriter. The amendment to the definition is intended to clarify and enhance the current criteria and to ensure that the purposes of Schedule E will be achieved.

      Schedule E contains a number of requirements intended to address conflicts of interest experienced by a member that engages in a public offering of its own securities or the securities of the member's parent or affiliate. One of the major conflicts arises when a member participates in establishing the public offering price of the securities and conducts due diligence with respect to the registration statement. Schedule E addresses these conflicts by requiring that a member, independent of the issuer, with a background in underwriting, a track record of profitable operations, and experienced management conducts due diligence, participates in the preparation of the registration statement and offering documents, and provides an opinion on the price of an equity issue or the yield of a debt issue. Such member is termed a qualified independent underwriter and must satisfy the objective criteria contained within the definition of that term in Section 2(1) of Schedule E.

      The Corporate Financing Committee and the Board of Governors have determined that it is necessary to amend the current criteria to ensure that the purposes of Schedule E will be achieved. Therefore, Schedule E has been amended to enhance and clarify the existing experience requirement contained in Subsection 2(1)(4) of Schedule E, specify the level at which a member's direct or indirect ownership of the issuer's equity securities would disqualify the member from acting as a qualified independent underwriter and to add restrictions that would disqualify members because of disciplinary histories of certain of their associated persons.

      EXPERIENCE REQUIREMENT

      Prior to the amendment, Section 2(1)(4) stated that a qualified independent underwriter must be actively engaged in the underwriting of public offerings for at least the five-year period immediately preceding the filing of the registration statement. The NASD believes that the phrase "actively engaged in the underwriting of public offerings" should be amended to ensure that the qualified independent underwriter is sufficiently experienced to perform the due diligence and pricing functions with respect to the proposed public offering. Therefore, the Section has been amended to require that the member have experience in "managing or co-managing" public offerings of a "size and type similar to the proposed offering." The requirement that the qualified independent underwriter have managed or co-managed public offerings ensures that the member has had previous experience in performing the functions of due diligence and pricing that are functions traditionally fulfilled by managers and co-managers.

      This requirement is coupled with the requirement that the member also have experience in offerings which are of similar size and type. The similar size and type requirement is intended to prevent, for example, a member with experience as an underwriter of small equity offerings from acting as a qualified independent underwriter for a large firm-commitment offering of high-risk, high-yield debt. As a result, subprovisions (a) and (b) of Section 2(1 )(4) include specific parameters relating to the size and type of previous offerings managed or co-managed by the member. In debt offerings, the member must have managed or co-managed other debt offerings, each with gross proceeds of not less than 25 percent of the gross proceeds of the proposed offering. In equity offerings, the member must have managed or co-managed other equity offerings, each with gross proceeds of not less than 50 percent of the gross proceeds of the proposed offering. In addition, if the member has acted as manager or co-manager of public offerings, each with gross proceeds of at least $50 million, it is believed that managing such offerings demonstrates due diligence and pricing experience that qualifies the member for any type or size offering.

      The experience requirement also contains alternative criteria that would permit a member to demonstrate that it has acquired the requisite experience through means other than acting as a manager or co-manager. The Association does not wish to preclude members from acting as qualified independent underwriters if they have extensive experience in performing due diligence and rendering fairness opinions in connection with corporate financing activities such as mergers and acquisitions but have no comparable experience as a manager or co-manager. Therefore, a member can satisfy the requirements if it can demonstrate that it has experience within the previous five years involving the pricing and due diligence functions that is comparable to the experience of a manager or co-manager of public offerings of securities of the size set forth in the first three criteria.

      DISCIPLINARY HISTORY REQUIREMENTS

      The amendment adopts a new Subsection 5 to Section 2(1) of Schedule E. The new Subsection precludes a member from acting as a qualified independent underwriter if any person associated with the member in a supervisory capacity responsible for structuring corporate public offerings or conducting due diligence has been convicted, enjoined, suspended, or barred within the previous five years for a violation of federal, state, or self-regulatory organization anti-fraud rules in connection with the distribution of securities.

      Subsection (a) would disqualify a member if any of the supervisory personnel referred to above have been convicted within five years prior to the filing of the registration statement of a violation of the anti-fraud provisions of federal or state laws or rules or regulations promulgated thereunder in connection with the distribution of a registered or unregistered offering of securities. Subsection (b) would disqualify a member if any of such supervisory personnel have been subject to any order, judgment, or decree of any court entered within five years prior to the filing of the registration statement, and if the order, judgment, or decree permanently enjoins or restrains such person from engaging in or continuing any conduct or practice in violation of the anti-fraud provisions of federal or state securities laws or any rules or regulations promulgated thereunder in connection with the distribution of a registered or unregistered offering of securities. Subsection (c) would disqualify a member if any of such supervisory personnel have been suspended or barred from association with any member by an order or decision of the Securities and Exchange Commission, any state, the NASD, or any self-regulatory organization within five years prior to the filing of the registration statement for any conduct or practice found to be in violation of the anti-fraud provisions of federal or state laws or rules or regulations promulgated thereunder or the anti-fraud rules of any self-regulatory organization in connection with the distribution of a registered or unregistered offering of securities.

      EQUITY OWNERSHIP

      The amendment redesignates present Subsection 5 as new Subsection 6, which restricts to less than 5 percent the beneficial ownership of the outstanding voting securities of a corporate issuer or partnership issuer by the qualified independent underwriter. Previously, Section 2(1)(5) provided that the qualified independent underwriter could not be an "affiliate" of the issuer. The definition of affiliate as contained in Section 2(a) of Schedule E involves the concept of control of the issuer and presumes affiliation when a member owns at least 10 percent of the voting stock of the issuer. Therefore, under the provisions of the old section, a qualified independent underwriter could, for example, own 8 percent of the outstanding securities of the issuer and meet the criteria of a qualified independent underwriter. The NASD determined that the affiliation standard did not provide for sufficient objectivity. The amendment provides that a member may not beneficially own 5 percent or more of the outstanding voting securities of a corporate issuer or beneficially own a partnership interest in 5 percent or more of the distributable profits or losses of an issuer which is a partnership.

      EFFECTIVE DATE

      The amendment becomes effective December 1, 1988. Therefore, all offerings declared effective by the SEC, or if SEC-exempt, by another reviewing regulatory authority on or after December 1, 1988, are required to comply with the new definition of qualified independent underwriter.

      Questions regarding this notice should be directed to Charles L. Bennett, Assistant Director, NASD Corporate Financing Department at (202) 728-8258.

      AMENDMENT TO SCHEDULE E TO THE BYLAWS

      (Note: New language is underlined.)

      Section 2 — Definitions

      (1) Qualified independent underwriter - a member which:
      (4) has actively engaged in the underwriting of public offerings of securities of a similar size and type for at least the five-year period immediately preceding the filing of the registration statement. For purposes of this section, the above requirement shall be satisfied if the member:
      (a) with respect to a proposed debt offering, has acted as manager or co-manager of public offerings of debt securities within the previous five years, including offerings each with gross proceeds of not less than 25% of the anticipated gross proceeds of the proposed offering,
      (b) with respect to a proposed equity offer ing, has acted as manager or co-manager of public offerings of equity securities (or of securities convertible into equity securities) within the previous five years, including of ferings each with gross proceeds of not less than 50% of the anticipated gross proceeds of the proposed offering, or
      (c) has acted as manager or co-manager of public offerings of securities within the previous five years, including offerings each with gross proceeds of not less than $50 million, or
      d) demonstrates that it has acquired experience within the previous five years involving the pricing and due diligence functions comparable to that of a manager or co-manager of public offerings of securities in the above amounts;
      (5) no person associated with the member in a supervisory capacity responsible for organizing, structuring or performing due diligence with respect to corporate public offerings of securities:
      (a) has been convicted within five years prior to the filing of the registration statement of a violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder, in con nection with the distribution of a registered or unregistered offering of securities;
      (b) is subject to any order, judgment, or decree of any court of competent jurisdictionentered within five years prior to the filing ofthe registration statement permanent ly enjoining or restraining such person from engaging in or continuing any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder in connection with the distribution of a registered or unregistered offering of securities; or
      (c) has been suspended or barred from association with any member by an order or decision of the Securities and Exchange Commission, any state, the Corporation or any other self-regulatory organization within five years prior to the filing of the registration statement for any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules, or regulations promulgated thereunder, or the anti-fraud rules of any self-regulatory organization in connection with the distribution of a registered or unregistered offering of securities; or
      (6)[(5)] is not an affiliate ofthe entity issuing securities pursuant to Section 3 of this Schedule and does not beneficially own five percent or more of the outstanding voting securities of such entity which is a corporation or beneficially own a partnership interest in five percent or more of the distributable profits or losses of such entity which is a partnership; and
      (7)[(6)] (No change)

    • 88-88 Amendment to Section 34, of the NASD Rules of Fair Practice Re: Prohibition on Non-Cash Sales Incentives in Public Offerings Effective January 1, 1989

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has approved amendments to Appendix F under Article III, Section 34 of the Rules of Fair Practice ("Appendix F") and the Interpretation of the Board of Governors Review of Corporate Financing, pursuant to Article III, Section 1 of the Rules of Fair Practice (the "Interpretation"). The amendments, which become effective January 1, 1989, prohibit members from accepting non-cash sales incentives in connection with the sale of public direct participation programs, corporate debt and equity offerings, and real estate investment trusts. The text of the amendments are attached.

      BACKGROUND

      The amendments to Appendix F and the Interpretation prohibiting non-cash sales incentives in public offerings are the result of the NASD's longstanding concern about the use of incentives as sales compensation. Sales incentives typically are offered to registered representatives of member firms based on their sales of public direct participation programs or real estate investment trusts. Non-cash incentives usually take the form of trips to vacation resorts or the selection of luxury merchandise.

      The NASD believes that the ability of members to supervise their registered representatives is severely impacted when an outside entity such as a direct participation program sponsor or real estate investment trust offers and provides non-cash incentives to a member's retail sales force. This is particularly true when direct appeals promoting incentives are made to registered representatives, making it difficult for members to adequately control the participation of their registered representatives in non-cash incentive programs.

      Since incentive programs appear to have become more prevalent and more aggressive, the NASD determined that attempts to control sales incentives, short of a prohibition, would not be effective. These amendments, by prohibiting the receipt of non-cash sales incentives and clarifying the procedures for the receipt of cash compensation, strengthen the ability of member firms to supervise their associated persons.

      The NASD has determined not to prohibit members from establishing in-house non-cash sales incentive programs where the programs are funded entirely by the member and offered only to registered representatives associated with that member. The NASD believes that it is the influence of outside entities on the member's sales force that has the effect of undermining the member's ability to supervise.With an in-house incentive program, the member has control over the suitability of the particular program, is responsible for the sales methods used to sell an offering, and is in a position to exercise control over its registered representatives.

      EXPLANATION OF AMENDMENTS

      The amendment to Subsection 5(e) of Appendix F addresses the receipt of non-cash compensation and prohibits any member or person associated with a member from accepting any non-cash compensation or sales incentive (such as travel bonuses, prizes, and awards) offered or provided by any sponsor, affiliate of a sponsor, or direct participation program, including specifically sponsors affiliated with the member.

      However, in order to provide for the receipt of small, souvenir-type incentive items by members and associated persons, the amendment permits the acceptance of non-cash incentive items offered directly by a sponsor, affiliate of a sponsor or program where (1) the aggregate value of all such items provided to each associated person during any year does not exceed $50; (2) the value of all such items made available in connection with a public offering is included as underwriting compensation subject to the NASD's underwriting compensation guidelines; and (3) the proposed payment or transfer of all such incentive items is disclosed in the prospectus or similar offering document.

      With respect to a member's own in-house incentive program, the amendment to Subsection 5(e) permits a member to provide non-cash compensation or sales incentive items to its associated persons only where no sponsor, affiliate of a sponsor, or direct participation program directly or indirectly participates in or contributes to providing such non-cash compensation.

      A sponsor, affiliate of a sponsor, or program would be deemed to be "participating" in an in-house program if it assists in the selection of or arrangements for any trip or merchandise item provided to the associated persons of a member. Similarly, a sponsor, affiliate of a sponsor, or program would be deemed to be "contributing" to an in-house incentive program if it directly or indirectly provides monetary support to such program. Sponsors affiliated with members, as well as independent sponsors, are equally subject to the prohibition on directly or indirectly funding or providing non-cash compensation to associated persons of members.

      Subsection 5(f) of Appendix F, as amended, is applicable to the acceptance of cash compensation by members, subject to the limitations on the receipt of direct or indirect non-cash compensation in Subsection 5(e). Under the new amendment, a member may accept cash compensation only if: (1) the compensation is paid directly to the member and any distribution to the member's associated persons is controlled solely by the member; (2) the value of all compensation is included as underwriting compensation subject to the NASD's limits on maximum underwriting compensation; (3) the payment of the compensation is disclosed in the prospectus or similar offering document; (4) the compensation is recorded on the member's books and records as compensation received in connection with a public offering; and (5) the compensation is not directly or indirectly related to any non-cash compensation or sales incentive provided by a member to its associated persons.

      These provisions are intended to clarify the fact that a member is permitted to use any cash compensation it may receive to defray the expenses of internal non-cash sales incentive programs, but that affiliated and non-affiliated sponsors may not offer and that affiliated and non-affiliated members may not accept participation in or contribution to such internal non-cash incentive programs. In other words, in-house incentive programs are permitted only when funded entirely by the member's own funds, the receipt of which was not directly or indirectly linked to an in-house incentive program.

      The amendment to the Interpretation is applicable to corporate debt and equity offerings, including real estate investment trusts. The amendment imposes the same prohibition as the amendment to Appendix F on members or persons associated with members from accepting, directly or indirectly, any non-cash sales compensation orsales incentive item (including, but not limited to, travel bonuses, prizes, and awards) valued in excess of $50 per person per issuer annually. As in the case of a direct participation program, a member is permitted to provide non-cash sales incentive items to its associated persons provided that no issuer, affiliate of an issuer, including an affiliate of the member, directly or indirectly participates in or contributes to providing such non-cash sales incentives.

      EFFECTIVE DATE

      The amendments to Appendix F and the Interpretation will become effective January 1, 1989. Most currently operating non-cash sales incentive programs have qualifying periods that coincide with the calendar year; therefore, the last day that sales may be applied to a current incentive program will be December 31, 1988. However, during calendar year 1989, members and their associated persons will be permitted to receive non-cash incentives earned prior to January 1, 1989, provided that the incentive program has been approved by the NASD's Corporate Financing Department and is in compliance with the current requirements of Subsection 5(f) of Appendix F.

      Questions regarding this notice can be directed to either Richard J. Fortwengler, Assistant Director, or Ms. AllynM. O'Connor, Supervisor, NASD Corporate Financing Department, at (202) 728-8258.

      AMENDMENT TO APPENDIX F UNDER ARTICLE III, SECTION 34 OF THE RULES OF FAIR PRACTICE

      (Note: New language is underlined; deleted language is in brackets.)

      Sec. 5

      Organization and Offering Expenses

      e) No [sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member), or program] member or person associated with a member shall directly or indirectly accept [provide] any non-cash compensation or sales incentive item [,] including, but not limited to, travel bonuses, prizes, and awards offered or provided to such member or its associated persons by any sponsor, affiliate of a sponsor or program. Notwithstanding the foregoing, a member may provide non-cash compensation or sales incentive items to its associated persons provided that no sponsor, affiliate of a sponsor or program, including specifically an affiliate of the member, directly or indirectly participates in or contributes to providing such non-cash compensation. Further, this section shall not prohibit [directly to] a person associated with a member from accepting any non-cash sales incentive item offered directly to that person by a sponsor, affiliate of a sponsor or program [unless] where:
      1) the aggregate value of all such items [to be received] paid by any sponsor or affiliate of a sponsor to each associated person during any year does not exceed $50;
      (2) the value of all such items to be made available in connection with an offering is in cluded as compensation to be received in con nection with the offering for purposes of subsection (b) of this section; and
      (3) the proposed payment or transfer of all such items [to be made available in connec tion with any offering] is disclosed in the prospectus or similar offering document.
      (f) Subject to the limitations on direct and indirect non-cash compensation provided under subsection (e) of this section, [N]no [sponsor, affiliate of a sponsor, or program shall provide compensation to a] member [in the form of sales incentives or bonuses] shall accept any cash compensation unless all of the following conditions are satisfied:
      (1) all [sales incentives and bonuses are] compensation is paid directly to the member in cash and the distribution, if any, of [incen tives or bonuses] all compensation to the member's associated persons is controlled solely by the member;
      (2) the value of all [incentives or bonuses] compensation to be [made available] paid in connection with an offering is included as compensation to be received in connection with the offering for purposes of subsection (b) of this section;
      (3) arrangements relating to the proposed pay ment of all [incentives or bonuses] compensa tion are disclosed in the prospectus or similar offering document; [and]
      (4) the value of all [incentives and bonuses] compensation paid in connection with an offering is reflected on the books and records of the recipient member as compensation received in connection with the offering; and
      (5) no compensation paid in connection with an offering is directly or indirectly related to any non-cash compensation or sales incentive items provided by the member to its associated persons.

      AMENDMENT TO THE INTERPRETATION OF THE BOARD OF GOVERNORS-REVIEW OF CORPORATE FINANCING, ARTICLE III, SECTION 1 OF THE RULES OF FAIR PRACTICE

      (Note: New language is underlined and follows paragraph on "Overallotment Options" under "Arrangement Factors" section of Corporate Financing Interpretation on page 2033 of the NASD Manual.)

      Sales Incentives

      When proposed in connection with the distribution of a public offering of securities, it shall be an unfair and unreasonable arrangement for a member or person associated with a member to accept, directly or indirectly, any non-cash sales incentive item, including but not limited to travel bonuses, prizes and awards, from an issuer or affiliate of an issuer in excess of $50 per person per issuer annually. Notwithstanding the foregoing, a member may provide non-cash sales incentive items to its associated persons provided that no is suer, affiliate of the issuer, including specifically an affiliate of the member, directly or indirectly participates in or contributes to providing such non-cash sales incentive.

    • 88-87 Proposed Amendment Re: Predispute Arbitration Clauses in Customer Agreements; Last Date for Comment: December 1, 1988

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice. The amendment would require each member using a predispute arbitration clause in a customer agreement to highlight that clause and to include similarly highlighted disclosures concerning the nature of arbitration and the waiver of the customer's right to litigate disputes arising under the agreement.

      The amendment also would prohibit the use in any agreement of any language that limits or contradicts the arbitration rules of any self-regulatory organization, limits the ability of a party to file a claim in arbitration, or limits the ability of the arbitrators to make an award under the arbitration rules of a self-regulatory organization and applicable law.

      The NASD Board of Governors believes this amendment is appropriate to provide customers with effective disclosure of the meaning and effect of predispute arbitration clauses and to maintain the integrity of the arbitration process.

      The text of the proposed amendment follows this notice

      BACKGROUND AND ANALYSIS

      In keeping with its support for the continued improvement of securities industry arbitration as a fair, expeditious, and economical means for the resolution of disputes, the Board of Governors has responded to suggestions of the Securities and Exchange Commission and others seeking more explicit disclosure of the existence and meaning of Predispute arbitration clauses in customer agreements.

      The Board of Governors believes that in order to provide clear and informative disclosure of the existence and meaning of predispute arbitration clauses, investors should be placed on appropriate notice of the fact they are making an important election to which they will be bound.

      Therefore, the Board is soliciting comment on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice recommended by the NASD's National Arbitration Committee. The amendment would apply to any member using a predispute arbitration clause in new agreements signed by an existing or new customer on or after the effective date of the proposed amendment. As proposed, the amendment would require each member using a predispute arbitration clause in a customer agreement to highlight that clause and to include similarly highlighted disclosures concerning the nature of arbitration and the waiver of the customer's right to litigate disputes arising under the agreement. The amendment also would prohibit the use in any agreement of any language that limits or contradicts the arbitration rules of any self-regulatory organization, limits the ability of a party to file a claim in arbitration, or limits the ability of arbitrators to make an award under the arbitration rules of a self-regulatory organization and applicable law.

      The proposed amendment sets forth five affirmative statements (proposed Section 21(f)(l)(i)-(v)), that generally describe the effect of entering into a binding predispute arbitration agreement. In addition, the proposed amendment would require that, immediately preceding the signature line in a customer agreement, a statement appear that the agreement contains a predispute arbitration clause. This statement would be initialed by the customer, and a copy of the entire agreement containing a predispute arbitration clause would be given to the customer, who would acknowledge receipt.

      The Board specifically seeks comment as to whether a customer's refusal or failure to initial this statement or acknowledge receipt would tend to affect the validity of the entire customer agreement or should result in a violation of Article III, Section 21 of the NASD Rules of Fair Practice.

      The Board also solicits comments concerning proposed Section 21(f)(4), which would prohibit members from including in customer contracts any condition that purports to limit or contradict the arbitration rules of any self-regulatory organization, limits the ability of a party to file any claim in arbitration, or limits the ability of an arbitrator or arbitrators to make an award under such rules and applicable law. In considering the foregoing

      proposed amendment, the Board of Governors determined that members should be permitted to include additional language in their disclosures concerning predispute arbitration agreements pointing out the advantages of arbitration and the fact that arbitration is favored by both federal and state law. The Board seeks comment concerning the most appropriate means for effecting and/or limiting such representations, whether by uniform rule or otherwise.

      The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, NW
      Washington, DC 20006-1506

      Comments must be received no later than December 1, 1988. Comments received by this date will be considered by the NASD's National Arbitration Committee and the NASD Board of Governors. If the proposed amendment is approved by the Board, it will be submitted to the membership for a vote. If approved by the membership, the amendment must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to Norman Sue, Jr., Senior Attorney, NASD Office of General Counsel, at (202) 728-8117.

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

      (Note: New language is underlined.)

      Books and Records

      Section 21

      Requirements Concerning Predispute Arbitration Agreements With Customers

      (f)
      (l) No member shall execute an agreement with a customer containing a predispute arbitration clause unless such clause is highlighted and contains the following disclosure language Which shall also be highlighted:
      (i) Arbitration is final and binding on the parties.
      (ii) The parties are waiving their right to seek remedies in court, including the right to jury trial.
      (iii) Pre-arbitration discovery is generally more limited than and different from court proceedings.
      (iv) The arbitrator's award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited.
      (v) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.
      (2) Immediately preceding the signature line, there shall be a statement initialed by the customer acknowledging that the agreement contains a predispute arbitration clause.
      (3) A copy of the agreement containing any such clause shall be given to the customer who shall acknowledge receipt thereof on the agreement or on a separate document.
      (4) No agreement shall include any condition which limits or contradicts the arbitration rules of any self-regulatory organization or limits the ability of a party to file any claim in arbitration or limits the ability of the arbitrators to make an award under such rules and applicable law.
      (5) The requirements of this subsection (f) shall apply only to new agreements signed by an existing or new customer of a member after (effective date)

    • 88-86 Approval and Immediate Effectiveness of Article III, Section 43 of the NASD Rules of Fair Practice Regarding Outside Business Activities

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The SEC has approved new Section 43 to Article III of the NASD Rules of Fair Practice. The new section prohibits all persons associated with a member in any registered capacity from accepting employment or compensation from any other person as a result of business activity outside the scope of the employment relationship with a member unless prompt written notice to the member firm is provided. This provision does not apply to compensation from passive investments and activities subject to the requirements of Article III, Section 40 of the Rules of Fair Practice. The text of the rule follows this notice.

      BACKGROUND

      On October 13, 1988, the Securities and Exchange Commission (SEC) approved new Section 43 to Article III of the NASD Rules of Fair Practice (see SEC Release No. 34-26178 (dated October 13, 1988). The section is intended to improve the supervision of registered personnel by providing information to member firms concerning outside business activities of their representatives.

      On January 14, 1988, the NASD issued Notice to Members 88-5, which solicited comments on a proposed NASD Rule of Fair Practice prohibiting any person associated with a member firm from being employed by, or accepting compensation from, any other person based on any business activity outside the scope of the employment relationship with a member firm, unless such person had provided prior written notice to that firm.

      When requesting comments concerning the proposed rule, the NASD Board of Governors observed that the expansion of the financial services industry had provided increased business opportunities for persons associated with a member firm, both within the scope of their employment with a member and otherwise. The Board noted that, in recent disciplinary cases, prior notice to a member firm of an associated person's outside business activities might have prevented harm to the investing public or the firm's entanglement in legal difficulties.

      The Board further observed that the internal rules of many member firms already included limitations on outside business activities and notification requirements, and that both the New York Stock Exchange and the American Stock Exchange require associated persons of member firms to notify their firms of outside business activities.1 The Board concluded that it was appropriate for member firms to receive prompt notification of all outside business activities of their associated persons so that the member's objections, if any, to such activities could be raised at a meaningful time and so that appropriate supervision could be exercised as necessary under applicable law.

      After reviewing comments submitted by the membership, the NASD Board concluded that the proposed rule should be adopted with certain modifications limiting the rule's application to persons associated with a member in a registered capacity and exempting passive investments and activities subject to the requirements of Article III, Section 40 of the NASD Rules of Fair Practice from the proposed rule's notice requirements. The Board determined that prompt, rather than prior, notice should be required under the proposed rule, and that the form of the written notice should be determined by the employer-member and could therefore include using Form U-4. The proposed rule, as modified, was approved after a member vote (see Notice to Members 88-45 dated July 1, 1988) and was filed with the SEC on July 27, 1988.

      Questions concerning this notice can be directed to Norman Sue, Jr., Senior Attorney, Office of the General Counsel, at (202) 728-8117

      OUTSIDE BUSINESS ACTIVITIES

      Sec. 43. No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Article III, Section 40 of the Rules of Fair Practice shall be exempted from this requirement.


      1 New York Stock Exchange Rule 346(b), (e), and Supplementary Material .10; American Stock Exchange Rule 342(a), (b), and Commentary .20. Both organizations also require persons in supervisory positions to devote their entire time during business hours to the business of their firms and allow such persons to obtain permission from the exchange to devote less than full time to the business of their firm when it will not impair the protection of investors or the public interest.


    • 88-85 Securities and Exchange Commission Decision Re: Handling Customers' Limit Orders

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations
      Syndicate
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has affirmed a finding by the NASD Board of Governors that a member firm, by accepting a customer's limit order, had an obligation to give that order priority over its own proprietary position unless it had previously arrived at a different understanding with the customer.

      BACKGROUND

      The Securities and Exchange Commission has issued a decision In the Matter of the Application of E.F. Hutton & Company, Inc., n/k/a Shearson Lehman Hutton, Inc., (Securities Exchange Act Release No. 25587) in which the Commission affirmed findings by the NASD Board of Governors that Hutton had failed to properly carry out its obligations to its customer in the manner in which the firm handled the customer's limit order.

      The facts of the case were that a customer of the firm had placed an open limit order to sell 5,000 shares of an over-the-counter security at a price of 17 1/8. The firm accepted the order at a time when it was a registered market maker in the security with quotes in the NASDAQ System of 17 bid, 17 1/2 asked. While holding the customer's order, the firm sold shares from its inventory at prices higher than the 17 1/8 price sought by the customer.

      The Commission affirmed the NASD's conclusion that, by accepting the customer's limit order, the firm had an obligation to give that order priority over its own proprietary position unless it had previously arrived at a different understanding with the customer. Since no such understanding had been reached in this case, the NASD and the Commission concluded that the firm did not fulfill its obligations to the customer and that such activity constituted a violation of Article III, Section 1 of the NASD Rules of Fair Practice. The Commission found "[i]t is hornbook law that, absent disclosure and a contrary agreement, a fiduciary cannot compete with his beneficiary with respect to the subject matter of their relationship."1 The Commission concluded that the practice at issue affected the fundamentals of the broker-dealer customer relationship in that the firm was, in effect, competing with the customer with respect to the subject matter for their relationship — the execution of the order.

      This matter is currently on appeal before the United States Court of Appeals for the District of Columbia Circuit.

      Questions regarding this notice may be directed to Dennis C. Hensley, Vice President and Deputy General Counsel, at (202) 728-8245, or T. Grant Callery, Associate General Counsel, at (202) 728-8285


      1 Securities and Exchange Act Release 25587 (July 6,1988) p. 6. Footnote omitted.


    • 88-84 SEC Approval of Amendments to NASD Rules of Fair Practice and Conforming Amendments to the By-Laws Re: Supervisory Practices and Definitions of Branch Office and Office of Supervisory Jurisdiction

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Registration
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      On October 13, 1988, the Securities and Exchange Commission approved amendments to Article III, Section 27 of the Rules of Fair Practice and conforming amendments to Article I of the By-Laws and Schedule C to the By-Laws. The amendments to Article III, Section 27 (1) prescribe specific supervisory practices and procedures for all member firms and (2) revise the definitions of branch office and office of supervisory jurisdiction.

      The conforming amendment amends the present text in the By-Laws to delete the substantive definition and instead references the definition set forth in Article III, Section 27. In addition, Schedule C to the By-Laws is amended to delete from an Explanation of the Board of Governors certain text pertaining to the definitions of office of supervisory jurisdiction and branch office. The texts of the amendments are attached.

      BACKGROUND

      In recent years, the NASD has become increasingly concerned that many persons associated with NASD members are engaging in the offer and sale of securities to the public without adequate ongoing supervision. In particular, the potential for significant regulatory problems exists when registered representatives conduct business at locations that are not subject to regular examination by the member and operate without direct oversight of qualified supervisory personnel.

      The NASD also has considered whether certain aspects of a firm's business should be subject to on-site supervision by a registered principal so that the member can properly discharge its regulatory obligations. Further, the NASD has from time to time considered whether the definition of "branch office" in the By-Laws should be revised.

      In connection with its review, the NASD, on February 9, 1988, issued Notice to Members 88-11, which requested comments on proposed amendments to Article III, Section 27 of the Rules of Fair Practice that set forth specific minimum requirements for supervisory practices and procedures for NASD members. After reviewing the comment letters, the NASD then published Notice to Members 88-44, requesting a member vote on proposed amendments substantially similar to those set forth in Notice to Members 88-11. The membership voted to approve the proposed amendments, and they were filed with the Securities and Exchange Commission. The Commission approved the amendments on October 13, 1988.

      EXPLANATION

      Amendments to Supervision Rules

      The amendments substantially expand the specificity of Article III, Section 27 of the NASD Rules of Fair Practice with respect to a member's supervisory obligations. The NASD believes the new provisions will assist members in ensuring compliance with applicable laws, regulations, and rules by requiring that firms review their businesses and construct and document a supervisory system that is reasonably designed to achieve compliance with the securities laws and regulations and NASD rules applicable to the various areas of business in which NASD members are engaged.

      The amendments also contain certain minimum required supervisory procedures and practices that the NASD believes to be necessary in any firm, regardless of size or type, in order to supervise adequately an investment banking and/or securities business.

      The amendments require each firm to establish and maintain supervisory procedures and practices that provide for, at a minimum, the following:

      (1) Establishment and maintenance of written supervisory and review procedures as specified in the proposed amendments;
      (2) Designation of appropriately registered principals for each type of business in which the firm engages to carry out the firm's supervisory obligations;
      (3) Designation as an OSJ for each location that meets the OSJ definition and any other loca tions for which such designation is appropriate to enable the firm to supervise properly, viewed in light of certain factors enumerated in the proposed amendments;
      (4) Designation of one or more appropriately registered principal(s) in each OSJ, including the main office, and one or more appropriately registered representative(s) or principal(s) in each branch office to carry out the supervisory responsibilities and activities assigned to that office by the member;
      (5) Assignment of each registered person to a supervisor;
      (6) Reasonable efforts to ensure that all super visory personnel are properly qualified;
      (7) Participation of each registered repre sentative, individually or collectively and not less than annually, at an interview or meeting at which compliance matters relevant to the activities of such representative(s) are discussed;
      (8) Designation and identification to the NASD of one or more principals who shall review the firm's supervisory practices and procedures and take or recommend to senior management ap propriate action reasonably designed to achieve the member's compliance with applicable securities laws and regulations and with the rules of the NASD; and
      (9) Establishment of a schedule for examin ing the firm's branch offices that takes into account the nature of the activity, volume of busi ness, and number of persons at each office.

      The amendments require that each firm maintain written supervisory procedures that describe the supervisory system implemented according to the above requirements and that list the titles, registration status, and locations of the required supervisory personnel and the specific responsibilities assigned to each. A copy of the member's supervisory procedures, or the relevant parts thereof, will be required to be kept and maintained at each OSJ and at each other location where supervisory activities are conducted on behalf of the member. The member will be required to amend its written supervisory procedures, as appropriate, within a reasonable time after changes occur in applicable laws, regulations, and rules, and as changes occur in the firm's supervisory system, and to communicate these changes throughout its organization.

      Members also will be required to conduct a review, at least annually, of the business in which it engages for purposes of detecting and preventing violations of, and to ensure compliance with, applicable laws, regulations, and rules. At a minimum, this will include the periodic examination of customer accounts to detect and prevent irregularities and abuses, an annual inspection of each OSJ, and the inspection of branch offices in accordance with a schedule to be set forth in the member's supervisory procedures. The member will be required to retain a written record of the dates upon which each inspection and review was conducted.

      Amendments to Definitions of "Office of Supervisory Jurisdiction" and "Branch Office"

      An "office of supervisory jurisdiction" (OSJ) is currently defined in Article III, Section 27 of the NASD Rules of Fair Practice as "... any office designated as directly responsible for the review of the activities of registered representatives or associated persons in such office and/or any other offices of the member." Under the amendments, an OSJ is any business location of a member firm at which one or more of the following functions take place:

      (1) Order execution and/or market making;
      (2) Structuring of public offerings or private placements;
      (3) Maintaining custody of customers' funds and/or securities;
      (4) Final acceptance (approval) of new ac counts on behalf of the member;
      (5) Review and endorsement of customer or ders pursuant to the provisions of proposed Article III, Section 27(d);
      (6) Final approval of advertising or sales literature for use by persons associated with the member, pursuant to Article III, Section 35(b)(l) of the Rules of Fair Practice; or
      (7) Responsibility for supervising the ac tivities of persons associated with the member at one or more other offices of the member.

      The term "branch office" is currently defined in Article I, Section (c) of the NASD By-Laws as "... an office which is owned or controlled by a member, and which is engaged in the investment banking or securities business." An Explanation of the Board of Governors in Schedule C to the NASD By-Laws reiterates this definition and also provides that a place of business of a person associated with a member is considered a branch office if the member (1) directly or indirectly contributes a substantial portion of the operating expenses of such place of business; and/or (2) authorizes a listing in any publication or other media, including a professional dealers digest or telephone directory, that designates a place as an office or if the member designates any such place as an office to another organization.

      The amendment redefines "branch office" as any business location of the member identified to the public or customers by any means as a location at which the investment banking or securities business is conducted on behalf of the member, excluding any location identified solely in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the office of the member responsible for supervising the activities of the identified location.

      Conforming Amendment to By-Laws

      Article I of the NASD By-Laws sets forth certain definitions applicable to terms used in the By-Laws and the Rules of Fair Practice. Section (c) defines branch office. Because branch office is now defined in Article III, Section 27(f)(2), the substantive definition is deleted from the By-Laws provisions, and a reference to Article III, Section 27 of the Rules is substituted.

      Amendment to Schedule C to the By-Laws

      An Explanation of the Board of Governors set forth at Schedule C to the By-Laws contains material pertaining to the distinction between an office of supervisory jurisdiction and a branch office and to the definition of a branch office. This material has been deleted because the text is inconsistent with the amended Article III, Section 27.

      Effective Date

      As stated in Notice to Members 88-44, the Board of Governors has determined that it is appropriate to provide members with a six-month period following SEC approval to bring their supervisory practices and procedures into compliance with the new rules. The amendments will therefore take effect April 13, 1989.

      The texts of the new rule and of the By-Law and Schedule C amendments are attached. The existing provisions of Section 27, with the exception of paragraph (e), are deleted.

      Questions concerning this notice can be directed to Dennis C. Hensley, NASD, Deputy General Counsel, at (202) 728-8245, or Jacqueline D. Whelan, Senior Attorney, Office of the General Counsel, at (202) 728-8270.

      ARTICLE III, SECTION 27 - RULES OF FAIR PRACTICE

      Sec. 27.

      Supervisory System

      (a) Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the rules of this Association. Final responsibility for proper supervision shall rest with the member. A member's supervisory system shall provide, at a minimum, for the following:
      (1) The establishment and maintenance of written procedures as required by paragraphs (b) and (c) of this Section.
      (2) The designation, where applicable, of an appropriately registered principal(s) with authority to carry out the supervisory respon sibilities of the member for each type of busi ness in which it engages for which registration as a broker-dealer is required.
      (3) The designation as an office of super visory jurisdiction (OSJ) of each location that meets the definition contained in paragraph (f) of this Section. Each member shall also designate such other OSJs as it determines to be necessary in order to supervise its regis tered representatives and associated persons in accordance with the standards set forth in this Section 27, taking into consideration the following factors:
      (i) whether registered persons at the location engage in retail sales or other activities involving regular contact with public customers;
      (ii) whether a substantial number of registered persons conduct securities activities at, or are otherwise supervised from, such location;
      (iii) whether the location is geographically distant from another OSJ of the firm;
      (iv) whether the member's registered persons are geographically dispersed; and
      (v) whether the securities activities at such location are diverse and/or complex.
      (4) The designation of one or more appropriately registered principals in each OSJ, including the main office, and one or more appropriately registered representatives or principals in each non-OSJ branch office with authority to carry out the supervisory responsibilities assigned to that office by the member.
      (5) The assignment of each registered person to an appropriately registered representative(s) and/or principal(s) who shall be responsible for supervising that person's activities.
      (6) Reasonable efforts to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their as signed responsibilities.
      (7) The participation of each registered repre sentative, either individually or collectively, no less than annually, in an interview or meet ing conducted by persons designated by the member at which compliance matters relevant to the activities of the repre- sentative(s) are discussed. Such interview or meeting may occur in conjunction with the discussion of other matters and may be con ducted at a central or regional location or at the representative's(') place of business.
      (8) Each member shall designate and specifi cally identify to the Association one or more principals who shall review the supervisory system, procedures, and inspections imple mented by the member as required by this Section and take or recommend to senior management appropriate action reasonably designed to achieve the member's com pliance with applicable securities laws and regulations, and with the rules of this Asso ciation.

      Written Procedures

      (b)
      (l) Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with the applicable rules of this Association.
      (b)
      (2) The member's written supervisory procedures shall set forth the supervisory systemstablished by the member pursuant to Section 27(a) above, and shall include the titles, registration status and locations of the required supervisory personnel and the responsibilities of each supervisory person as these relate to the types of business engaged in, applicable securities laws and regulations, and the rules of this Association. The member shall maintain on an internal record the names of all persons who are designated as supervisory personnel and the dates for which such designation is or was effective. Such record shall be preserved by the member for a period of not less than three years, the first two years in an easily accessible place.
      (b)
      (3) A copy of a member's written supervisory procedures, or the relevant portions thereof, shall be kept and maintained in each OSJ and at each location where supervisory activities are conducted on behalf of the member. Each member shall amend its written supervisory procedures as appropriate within a reasonable time after changes occur in applicable securities laws and regulations, including the rules of this Association, and as changes occur in its supervisory system, and each member shall be responsible for communicating amendments through its organization.

      Internal Inspections

      (c) Each member shall conduct a review, at least annually, of the businesses in which it engages, which review shall be reasonably designed to assist in detecting and preventing violations of and achieving compliance with applicable securities laws and regulations, and with the rules of this Association. Each member shall review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses and at least an annual inspection of each office of supervisory jurisdiction. Each branch office of the member shall be inspected according to a cycle which shall be set forth in the firm's written supervisory and inspection procedures. In establishing such cycle, the firm shall give consideration to the nature and complexity of the securities activities for which the location is responsible, the volume of business done, and the number of associated persons assigned to the location. Each member shall retain a written record of the dates upon which each review and inspection is conducted.

      Written Approval

      (d) Each member shall establish procedures for the review and endorsement by a registered prin cipal in writing, on an internal record, of alltran- sactions and all correspondence of its registered representatives pertaining to the solicitation or execution of any securities transaction.

      Qualifications Investigated

      (e) Each member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications, and experience of any person prior to making such a certification in the application of such person for registration with this Association.

      Definitions

      (f)
      (l) "Office of Supervisory Jurisdiction" means any office of a member at which any one or more of the following functions take place:
      (i) order execution and/or market making;
      (ii) structuring of public offerings or private placements;
      (iii) maintaining custody of customers' funds and/or securities;
      (iv) final acceptance (approval) of new accounts on behalf of the member;
      (v) review and endorsement of customer orders, pursuant to paragraph (d) above;
      (vi) final approval of advertising or sales literature for use by persons associated with the member, pursuant to Article III, Section 35(b)(l) of the Rules of Fair Practice; or
      (vii) responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member.
      (f)
      (2) "Branch Office" means any location identified by any means to the public or customers as a location at which the member conducts an investment banking or securities business, excluding any location identified solely in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch location are directly supervised.

      AMENDMENTS TO ARTICLE I— NASD BY-LAWS

      (Note: Deleted language is in brackets; new language is underlined.)

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

      (a) - (b) No change;
      (c) "branch office" means an office [located in the United States which is owned or controlled by a member, and which is engaged in the invest ment banking or securities business;] defined as a branch office in Article III, Section 27 of the Rules of Fair Practice;
      (d) - (o) No change.

      AMENDMENTS TO SCHEDULE C TO THE NASD BY-LAWS

      Explanation of the Board of Governors.

      [Distinction Between Branch Office and Office of Supervisory Jurisdiction;] Appointment of Executive Representative; [Standards for Determining Branch Offices].

      [The term "office of supervisory jurisdiction" defined in Section 27 of Article HI of the Rules of Fair Practice means any office designated by the member in its memorandum of supervisory procedures, established pursuant to Article III, Section 27 of the Rules. Such office shall be directly responsible for the review of the activities of Registered Representatives and persons associated with the member in that office and/or in other offices of the member.]

      The term "executive representative" as found in Section 3 of Article III of the By-Laws means that person designated by the member to represent, vote and act for the member in all the affairs of the Corporation. Pursuant to the provisions of Section 8 of Article III of the By-Laws, every member who maintains a registered branch office in a district of the Corporation other than the one in which its main office is located, is 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 of the Board of Governors from such district. Should a member maintain more than one branch office in a district, it is entitled to only one vote in that district. Therefore, each member shall designate one executive representative and shall designate one "district executive representative" for each district other than the one in which the main office is located in which the member maintains a registered branch office.

      [The term "branch office" defined in Article I of the By-Laws means any office, including a corporate subsidiary of a member, located in the United States and other than the main office which is owned or controlled by a member and engaged in the investment banking or securities business.]

      Each member is under a duty to insure that its membership application with the Corporation is kept current at all times by supplementary amendments to its original application and that any offices other than the main office are properly designated and registered, if required, with the Corporation. [Each member must also determine in light of the requirements of Article III, Section 27 of the Rules of Fair Practice, the form of its written supervisory procedures, and, accordingly, which offices are to be designated as offices of supervisory jurisdiction responsible for carrying out the written procedures.]

      Each member must designate to the Association those offices of supervisory jurisdiction, including the main office, and must register those offices which are deemed to be branch offices in accordance with the standards [found hereafter] set forth in Article HI, Section 27 of the Rules of Fair Practice. [A branch office would be considered an office of supervisory jurisdiction only if designated as such and only if specified supervisory activities are assigned to it under the member's written procedures. Members should note that the term "branch office" of itself does not carry any implication that the branch office personnel are required to perform any supervisory function. The term "branch office" is merely to designate and identify for registration purposes the various offices of a member other than the main office and as such are required to be registered and as to which a registration fee should be paid. If an office falls within the definition of both an office of supervisory jursidiction and a branch office, it must be designated to the Corporation in each category, and it must be registered as a branch office, and the applicable registration fee for a branch office must be paid.

      In determining whether an office or the activities of a person associated with a member in an area constitutes a branch office of a member, the following standards shall be used:

      1. It shall be considered a branch office if the member directly or indirectly contributes a substantial portion of the operating expenses of any place used by a person associated with a member who is engaged in the investment banking or securities business, whether it be commercial office space or a residence. Operating expenses, for the purposes of the standard, shall include items normally associated with the cost of operating the business such as rent and taxes.
      2. It shall be considered a branch office if the member authorizes a listing in any publication or any other media, including a professional dealer's digest or a telephone directory, which listing designates a place as an office or if the member designates any such place with an organization as an office.]

    • 88-83 Amendment to Article III, Section 21 of the NASD Rules of Fair Practice Re: Marking Customer Order Tickets - Effective Immediately

      SUGGESTED ROUTING*

      Senior Management
      Internal Audit
      Legal & Compliance
      Operations
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently approved an amendment to Article HI, Section 21 of the NASD Rules of Fair Practice to require the marking of customer order tickets for each transaction in a non-NASDAQ security to reflect the dealers contacted by members and the quotations received to determine the best inter-dealer market as required by an amendment to the NASD's "Best Execution Interpretation" (the Interpretation). The text of the amendment follows this notice.

      BACKGROUND

      On May 2, 1988, the SEC approved proposed rule changes providing for new Schedule H to the NASD By-Laws (Schedule H). The rule amendments establish an electronic system of mandatory price and volume reporting for over-the-counter (OTC ) securities that are not part of the National Association of Securities Dealers Automated Quotations (NASDAQ) System.1 In part, the rule changes also amend the Interpretation of the Board of Governors Execution of Retail Transactions in the Over-the-Counter Market (the Interpretation) by adding a new paragraph (D) that requires members to contact and obtain quotations from a minimum of three dealers (or all dealers in a security for which there are three or less) prior to executing any transaction on behalf of a customer in a non-NASDAQ OTC security.

      On June 1, 1988, the NASD issued Notice to Members 88-40 to announce the adoption of Schedule H and to solicit a membership vote on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice on the "Marking of Customer Order Tickets." The membership approved the proposed rule amendment and the SEC approved the amendment on August 1, 1988.2

      EXPLANATION OF AMENDMENT

      The amendment to Article III, Section 21 added to the rule a new paragraph (b), which requires that a person associated with a member note on the order ticket for each transaction in a non-NASDAQ OTC security the identities of the dealers contacted and the quotations received to determine the best interdealer market. This change complements the amendment to the Interpretation and will enable the Association to determine compliance with that change.

      The amendments to Article III, Section 21 and the Interpretation do not result in a change to the NASD's markup policy set forth in the NASD Manual as an Interpretation to Article III, Section 4 of the NASD Rules of Fair Practice (NASD Markup Policy) and compliance with the new amendments will not necessarily assure compliance with the NASD Markup Policy.3 Thus, under the new amendments, contacting three dealers that may quote prices substantially higher than the prevailing market price as determined by the standards established under the NASD Markup Policy will not permit the member to mark up a security based on those quotations.

      In addition, both the amendment to the Interpretation and the new amendment to Article III, Section 21 requiring the marking of customer order tickets must be read in conjunction with the price- and volume-reporting provisions for non-NASDAQ OTC securities under Schedule H. Under these regulatory provisions, responsibility for reporting price and volume for trades in non-NASDAQ OTC securities rests with the executing broker-dealer.

      Thus, where an introducing firm is executing trades in non-NASDAQ OTC securities, the introducing firm is responsible for reporting the price and volume of the transactions and marking the order tickets to reflect the dealers contacted. Where an introducing firm only passes an order on to another firm that executes the order, the executing firm, and not the introducing firm, is responsible for the reporting and marking of the order ticket.

      Questions regarding this notice can be directed to Elizabeth Wollin, Assistant Director, Automated Reports, at (301) 728-6887, or Eneida Rosa, Assistant General Counsel, NASD Office of General Counsel, at (202) 728-8284.

      AMENDMENT TO ARTICLE III, SECTION 21 OF THE NASD RULES OF FAIR PRACTICE

      Books and Records

      Section 21

      (Note: New language is underlined.)

      (b) Marking of Customer Order Tickets
      (i) A person associated with a member shall indicate on the memorandum for the sale of any security whether the order is "long" or "short," except that this requirement shall not apply to transactions in corporate debt securities. An order may be marked "long" if (1) the customer's account is long the security involved or (2) the customer agrees to deliver the security as soon as possible without undue inconvenience or expense.
      (ii) A person associated with a member shall indicate on the memorandum for each transaction in a non-NASDAQ security, as that term is defined in Schedule H to the NASD By-Laws, the name of each dealer contacted and the quotations received to determine the best interdealer market.

      1 Members' obligations under this new upgrading system are set forth in Notice to Members 88-54 (July 1988).

      2 Securities Exchange Act Release No. 34-25952, August 1, 1988.

      3 NASD Manual (CCH), pp. 2054-2058


    • 88-82 Veteran's Day and Thanksgiving Day Trade Date-Settlement Date Schedules

      SUGGESTED ROUTING*

      Municipal
      Operations
      Systems
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      The schedule of trade dates/settlement dates below reflects the observance by the financial community of Veteran's Day and Thanksgiving Day.

      On Friday, November 11, the NASDAQ System and the exchange markets will be open for trading. But, it will not be a settlement date since many of the nation's leading banking institutions will be closed in observance of Veteran's Day.

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

      Trade Date

      Settlement Date

      Regulation-T Date1

      November 3

      10

      14

      4

      14

      15

      7

      15

      16

      8

      16

      17

      9

      17

      18

      10

      18

      21

      11

      18

      22

      14

      21

      23

      15

      22

      25

      16

      23

      28

      17

      25

      29

      18

      28

      30

      21

      29

      December 1

      22

      30

      2

      23

      December 1

      5

      24

      Market Closed

      25

      2

      6

      All securites markets will be closed on Thursday, November 24, in observance of Thanksgiving Day.

      Note: November 11, 1988, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Friday, November 11, will be combined with transactions made on the previous day, November 10, for settlement on November 18. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, buy-ins, and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

      These settlement dates should be used by brokers, dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD 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 NASD Uniform Practice Department at (212) 858-4341.


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


    • 88-81a Broker-Dealer and Agent Renewals for 1988-89; Status of CRD Phase II Implementation

      SUGGESTED ROUTING*

      Senior Management
      Legal & compliance
      Operations
      Registration

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The 1988-89 NASD broker-dealer and agent registration renewal cycle will begin in early November. This program allows for simplification of the renewal process through the payment of one invoice amount that will include fees for NASD personnel assessments, NASD branch office fees, New York Stock Exchanges (NYSE) and American Stock Exchange (Amex) maintenance fees, state agent renewal fees, and state broker-dealer renewal fees. Members are urged to read the following Notice and the instruction materials included in the forthcoming invoice package to ensure continued eligibility to do business in the relevant states effective January 1, 1989.

      The implementation date for Phase II of CRD, the processing of Form BD on behalf of the system's regulatory participants, is February 1, 1989.

      INITIAL RENEWAL INVOICES

      On or around November 10, 1988, initial renewal invoices will be mailed to all member firms. The invoices will include fees for NASD personnel assessments, NASD branch office fees, New York Stock Exchange (NYSE) and American Stock Exchange (Amex) maintenance fees, state agent renewal fees, and state broker-dealer renewal fees. Full payment of the November invoice must be received by the NASD no later than December 16, 1988.

      This year's NASD personnel assessment will cost $10 per person with a 50 percent discount resulting in a $5 fee per registered person. NASD branch office fees remain $50 per branch office. All NASD branch offices listed as active on Schedule E of a firm's Form BD as of September 30, 1988, will be assessed.

      Agent renewal fees for NYSE, Amex, and state affiliations will be listed in a table enclosed with each invoice. The table includes a list of state broker-dealer renewal fees for states that are participating in this year's broker-dealer renewal program. NYSE and Amex maintenance fees—collected by the NASD for firms that are registered with NYSE/Amex as well as the NASD — are based on the number of NYSE and Amex registered personnel employed by the member.

      If a state is not participating in this year's broker-dealer renewal program, members registered in that state directly to assure compliance with renewal requirements. In addition, some participating states may require steps beyond the payment of renewal fees to complete the broker-dealer renewal process. Members should contact states directly for further information on state renewal requirements.

      Payment of the initial invoice should be in the form of a check drawn on the member firm's bank account. Please submit the check with the top portion of the invoice and mail it in the return envelope provided with the invoice. To ensure prompt processing, the renewal invoice payment should not be included with other forms or fee submissions. Members should be aware that failure to return payment to the NASD by December 16, 1988, will mean a loss of eligibility to do business in the relevant states effective January 1, 1989.

      FILING FORM U5

      Members may wish to avoid unwanted renewals by filing Form U5 for agent terminations in one or more affiliations. Because of the increased convenience and flexibility reported by members who used predated Form U5 for last year's renewal, the NASD will process predated agent terminations again this year. From November 1 to December 16, the NASD will accept and process Forms U5 (both partial and full terminations) with predated dates of termination. Under this procedure, if the Form U5 indicates a termination date of December 31,1988, an agent may continue doing business in a jurisdiction until the end of the calendar year without being assessed renewal fees for that jurisdiction. Please ensure that Forms U5 are filed by the renewal deadline date of December 16,1988. Also, predated Forms U5 cannot be processed if the date of termination indicated is January 1,1989, or thereafter.

      Members should exercise care when submitting predated Forms U5. The NASD will process these forms as they are received, but cannot withdraw a predated termination once processed. To withdraw a predated termination, a member would have to file a new Form U4 subsequent to the termination date. Members would still be obligated to update the Form U5 with any disciplinary information received subsequent to the filing of the Form U5.

      FILING FORM BDW

      Procedures regarding the filing for Form BDW to terminate broker-dealer registration in one or more affiliations will differ slightly from past years. Although the Central Registration Depository (CRD) Phase II program is not yet implemented, firms requesting terminations (either full or state only) will be able to file their Form BDW with the CRD in order to avoid the assessment of renewal fees in those states that are designated on the Form BDW. To effect termination in those designated states, firms also will have to comply with state requirements and file the Form BDW directly with the state, unless the state has instructed otherwise.

      The deadline for receipt of Forms BDW by the CRD for firms desiring to terminate in a state before year end 1988 is December 16, 1988. Predated Form BDW will be accepted and processed in the same manner as predated Form U5.

      REMOVING OPEN REGISTRATIONS

      For the second year, the NASD will include in the initial invoice package a roster of firm agents whose NASD registration is either terminated or purged but who have approved registrations with states. This roster should aid in the reconciliation of personnel registrations prior to year's end. Firms may terminate obsolete state registrations through the submission of a Form U5 or reinstate NASD licenses through the filing of a Page 1 of Form U4. No roster will be included if a firm does not have agents within this category.

      BILLING CODE BREAKDOWN

      This year's final invoice package will again include a breakdown of fees assessed by billing code for firms that use billing codes in the registration process. This breakdown will aid the firm in its internal research and allocation of fees.

      FINAL ADJUSTED INVOICES

      On or about January 13, 1989, the NASD will mail final adjusted invoices to members. These invoices will reflect the final status of firm and agent registrations as of December 31,1988. Any adjustments in fees owed, as a result of registration terminations or approvals subsequent to the initial invoice mailing, will be made in this final reconciled invoice. If a member has more agents registered at year end than on the November invoice date, additional fees will be assessed. If a member has fewer registered personnel at year end than in November, a credit will be issued.

      Included with this adjusted invoice will be the member renewal rosters, which will list all renewed personnel registered with the NASD, NYSE, Amex, and each state. Personnel whose registration is approved in any of these jurisdictions during November and December will automatically be included in this roster, while registrations that are pending approval or are deficient at year end will not be included in the renewal process. Firms also will receive an NASD branch office roster that lists all branches for which they have been assessed.

      Firms then will have a two-month period in which to reconcile any discrepancies on the rosters. All jurisdictions should be contacted directly in writing. Specific information and instructions concerning the final adjusted invoice package will appear in the January 1989 Notices to Members, as well as on the inside cover of the renewal roster.

      STATUS OF CRD PHASE II

      Phase II of CRD, the processing of Form BD on behalf of the system's regulatory participants, originally was targeted for implementation on November 1, 1988. However, because of industry recommendations, the date for system implementation has been postponed until February 1, 1989.

      During the Fall Conference of the North American Securities Administrators Association (NASAA), held October 8-13, 1988, industry representatives voiced concern over the proposed November start-up date for Phase II. The concern centered around the short notice provided to the industry of the revised filing requirements and the implementation of a new program during the year-end renewal period. NASAA was receptive to the industry comments and has postponed the implementation date until February 1,1989. It chose this date to avoid conflicts with the annual renewal process and to give all parties adequate time to prepare.

      During this interim period, the system will continue to operate in a pilot phase that provides Form BD data to the states. Notice will be provided regarding the revised filing requirements for the participating states in advance of the February 1, 1989, implementation date.

      Questions concerning this notice may be directed to NASD Information Services at (301) 738-6500.

    • 88-81 NASD Raises Corporate Filing Fee

      SUGGESTED ROUTING*

      Corporate Finance
      Legal & Compliance
      Syndicate

      *These are suggested departments only. Others may be appropriate for your firm.

      The NASD Board of Governors has approved an increase in the corporate financing filing fee for all public offerings filed with its Corporate Financing Department effective October 1,1988.

      The increase was approved by the NASD Board on September 19 and was approved by the SEC on September 22. The filing fee has not been increased since it was originally imposed in 1970.

      The new fee will be $500 plus 0.01 percent of the gross dollar amount of the offering, up to a maximum of $15,500. The current filing fee is $100 plus 0.01 percent of the gross dollar amount of the offering, up to a maximum of $5,100.

      Rising costs over the past 18 years necessitated the increase.

      Questions about this notice can be directed to Charles Bennett, Assistant Director, NASD Corporate Financing, at (202) 728-8253.

    • 88-80 Third-Quarter Check List of NASD Notices to Members

      SUGGESTED ROUTING*

      Corporate Finance
      Government
      Institutional
      Internal Audit
      Legal & Compliance
      Municipal
      Mutual Fund
      Operations
      Options
      Registration
      Research
      Syndicate
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      The following NASD Notices to Members were issued during the third quarter of 1988. Requests for copies of notices should be accompanied by a self-addressed mailing label and sent to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006-1506

      Notice

      Date

      Topic

      88-44

      7/01

      Mail Vote on Rule Amendments: Supervision and Definitions of "Branch Office" and "Office of Supervisory Jurisdiction"

      88-45

      7/01

      Mail Vote on Proposed Rule Re Outside Business Activity

      88-46

      7/01

      Rule Amendment to Authorize Trading Halts in NASDAQ Securities

      88-47

      7/01

      Request for Comments Re Prompt Receipt and Delivery of Securities

      88-48

      7/01

      Request for Comments on Amendment Re Filling Vacancies on District Committees

      88-49

      7/01

      Request for Comments on Proposed Prohibition of Concurrent Registration

      88-50

      7/01

      Guidelines for Registration of Persons Soliciting on Behalf of Members

      88-51

      7/01

      Registration of Foreign Branch Offices by August 1,1988

      88-52

      7/01

      Rule Amendment ReTestimonial Advertisements

      88-53

      7/01

      SIPC Trustee Appointed for Fitzgerald, DeArman & Roberts, Inc

      88-54

      7/01

      (Supplement 1) Implementation of Reporting Requirements for Non-NASDAQ OTC Securities

      88-55

      8/01

      Amendments Adopted Re Sharing in Customer Accounts and Performance-Based Fees

      88-56

      8/01

      Revisions to Form BD; State Pilot for Broker-Dealer Phase of CRD

      88-57

      8/01

      NASDAQ National Market System Additions, Changes, and Deletions as of July 22, 1988

      88-58

      8/01

      September First-Saturday Exam Session Date Changes

      88-59

      8/01

      Schedule for Labor Day Trade Date-Settlement Date

      88-60

      8/01

      Second-Quarter 1988 Notices to Members Check List

      88-61

      8/25

      (Supplement) Interpretation of SOES Rules Re Maximum Order Size Restrictions

      88-62

      9/01

      SEC Adopts Rule 10b-21 Prohibiting Short Selling into Secondaries

      88-63

      9/01

      SEC Approves Rule: Issuing Companies Must Notify NASD Re Material News Before Public Release

      88-64

      9/01

      Mail Vote on Proposed Amendment Re Advertising and Sales Literature for Investment Company Securities

      88-65

      9/01

      Request for Comment: Proposed Amendment Re Use and Disclosure of Member Names

      88-66

      9/01

      Test Center Location Change for September Houston Series 7 Exam

      88-67

      9/01

      Obligation to Provide Accurate Information on Forms U-4 and U-5 and Research Potential Employees' Backgrounds

      88-68

      9/01

      Request for Comment: Providing Terminated Employees with Form U-5 and Obtaining Prior Form U-5 for Potential Employees

      88-69

      9/01

      Procedures to Document Excused Market-Maker Withdrawal Under Schedule D of By-Laws

      88-70

      9/01

      Schedule for Columbus Day Trade Date-Settlement Date

      88-71

      9/01

      NASDAQ National Market System Additions, Changes, and Deletions as of August 19

      88-72

      10/01

      Mail Vote on Proposed Change in Definition of "Bona Fide Research"

      88-73

      10/01

      UPC Amendment Requires Syndicate Managers to Provide Itemized Expense Statements to Members of Underwriting Syndicate

      88-74

      10/01

      Amendments to Code of Procedure Re Composition of Panels for DBCC and Market Surveillance Hearings

      88-75

      10/01

      Amendment Eliminating the Fine Ceilings in Disciplinary Pro-ceed-ings

      88-76

      10/01

      Houston Test Center Change for October 15 Series 7 Examination

      88-77

      10/01

      SIPC Trustee Appointed for Fair-weather (George R.) Securities, Inc., Jersey City, New Jersey

      88-78

      10/01

      New Telephone Number for NASD's Rockville, Maryland Office Effective October 14,1988

      88-79

      10/01

      NASDAQ National Market System Additions, Changes, and Deletions as of September 16,1988

      88-80

      10/01

      Third-Quarter 1988 Check List of NASD Notices to Members

      88-81

      10/01

      NASD Raises Corporate Filing Fees, Effective October 1, 1988

      Correction to Notice to Members 88-55

      10/01 Re Sharing in Customer Accounts

    • 88-79 NASDAQ National Market System Additions, Changes, and Deletions as of September 16, 1988

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Operations
      Research
      Syndicate

      *These are suggested departments only. Others may be appropriate for your firm.

      As of September 16, 1988, the following 15 issues joined the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,906:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      FFFC

      Franklin First Financial Corporation

      8/23/88

      1000

      HPBC

      Home Port Bancorp, Inc.

      8/23/88

      1000

      SEEDB

      DEKALB Genetics Corporation (Cl B)

      8/29/88

      1000

      PRDE

      Pride Petroleum Services, Inc.

      8/29/88

      1000

      APCC

      American Power Conversion Corporation

      9/6/88

      1000

      BMCS

      BMC Software, Inc.

      9/6/88

      1000

      CLRX

      Colorocs Corporation

      9/6/88

      1000

      CLRXW

      Colorocs Corporation (Cl C) (Wts)

      9/6/88

      1000

      CLRXL

      Colorocs Corporation (Cl D) (Wts)

      9/6/88

      1000

      ECRC

      Employers Casualty Company

      9/6/88

      200

      HIPC

      High Plains Corporation

      9/6/88

      500

      KWIKF

      KWIK Products International Corporation

      9/6/88

      500

      RBPAA

      Royal Bank of Pennsylvania (Cl A)

      9/6/88

      500

      STRU

      Structofab, Inc.

      9/6/88

      500

      SNPX

      SynOptics Communications, Inc

      9/6/88

      1000

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS upon effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol

      Company

      Location

      SOES Execution Level

      NGAS

      Associated Natural Gas Company

      Denver, CO

      1000

      CMLE

      Casual Male Corporation (The)

      Shrewsbury, MA

      500

      CLDRP

      Cliffs Drilling Company (Pfd)

      Houston, TX

      200

      GGNS

      Genus, Inc.

      Mountain View, CA

      500

      LINZ

      Lindsay Manufacturing Company

      Lindsay, NE

      1000

      LOGC

      Logic Devices Incorporated

      Sunnyvale, CA

      200

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since August 19, 1988.

      New/Old Symbol

      New/Old Security

      Date of Change

      QUME/DTCI

      Qume Corporation/Data Technology Corporation

      8/29/88

      CKSB/CKSB

      CK Federal Savings Bank/CK Federal Savings & Loan Association

      8/30/88

      LIVE/LMAN

      Lieberman Enterprises Incorporated/Lieberman Enterprises Incorporated

      8/30/88

      ATCC/MESA

      AirTran Corporation/MesabaAviation, Inc

      9/1/88

      FMLY/FMLY

      Family Bancorp/Family MutualSavings Bank

      9/1/88

      ENRGB/DKLBB

      DEKALB Energy Company (Cl B)/DEKALB Corporation (Cl B)

      9/6/88

      SSIX/SAYI

      Scribe Systems, Inc/S.A.Y. Industries, Inc

      9/6/88

      SECR/ALFD

      Secor Bank, Federal Savings Bank/Alabama Federal Savings & Loan Association

      9/12/88

      VABF/VABF

      Virginia Beach Federal Savings Bank Virginia Beach Federal Savings & Loan Association

      9/14/88

      HNIS/HNIS

      Heritage Bancorp, Inc./Heritage-NIS Bank for Savings

      9/14/88

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      TSBK

      Taunton Savings Bank

      8/22/88

      EIGR

      Empire Insurance Company

      8/23/88

      ATNN

      American Telemedia Network, Inc.

      8/24/88

      BOKCC

      BancOklahoma Corp.

      8/24/88

      BIOP

      Bioplasty, Inc.

      8/24/88

      CWCC

      Capital Wire and Cable Corporation

      8/24/88

      HITK

      HITK Corporation

      8/24/88

      IDEA

      Invention, Design, Engineering Associates, Inc.

      8/24/88

      QSII

      Quality Systems, Inc.

      8/24/88

      RITZ

      G.D. Ritzy's, Inc.

      8/24/88

      STGA

      Saratoga Standardbreds, Inc.

      8/24/88

      SOONQ

      Sooner Defense of Florida, Inc.

      8/24/88

      THPR

      Thermal Profiles, Inc.

      8/24/88

      UFGIC

      United Financial Group, Inc.

      8/24/88

      WSSX

      Wessex Corporation

      8/24/88

      GPHY

      General Physics Corporation

      8/29/88

      AFCX

      Anchor Financial Corporation

      8/30/88

      BUTC

      John 0. Butler Company

      8/30/88

      XIDX

      Xidex Corporation

      8/30/88

      XIDXW

      Xidex Corporation (Wts)

      8/30/88

      ZOND

      Zondervan Corporation (The)

      9/1/88

      NRTN

      Norton Enterprises, Inc.

      9/6/88

      CXRL

      CXR Telecom Corporation

      9/7/88

      SPMD

      Spectramed, Inc.

      9/7/88

      AMLEE

      Amcole Energy Corporation

      9/8/88

      CCAMZ

      CCA Industries, Inc. (Wts)

      9/8/88

      WLMN

      Wellman, Inc.

      9/12/88

      SOVN

      Sovran Financial Corporation

      9/13/88

      GMSI

      Gateway Medical Systems, Inc.

      9/14/88

      BEAR

      Bear Automotive Service Equipment Company

      9/15/88

      SHNS

      Shoney's South, Inc.

      9/15/88

      DIET

      American Companies, Inc.

      9/16/88

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192.

      NASDAQ and NASDAQ/NMS are registered trademarks and service marks of the National Association of Securities Dealers, Inc.

    • 88-78 Telephone Number Change for NASD's Rockville, Maryland Office Effective October 14, 1988

      SUGGESTED ROUTING*

      Internal Audit
      Legal&Compliance
      Operations
      Registration
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      The phone number of the Rockville, Maryland office will change effective October 14, 1988. The change in the number of the Rockville office will not affect the NASD office in Washington, D.C.

      The new number is (301) 590-6500.

      All extensions will remain the same. For a period of six months, all calls to the old main number, (301) 738-6500, will be forwarded to the new number, (301) 590-6500.

      Call NASD Administrative Services at (301) 738-6703 with questions.

    • 88-77 SIPC Trustee Appointed: Fairweather (George R.) Securities, Inc. 75 Montgomery Street, Jersey City, New Jersey

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations

      *These are suggested departments only. Others may be appropriate for your firm.

      On September 8, the United States District Court for the Northern District of New Jersey appointed a SIPC trustee for Fairweather (George R.) Securities, Inc., 75 Montgomery Street, Jersey City, New Jersey.

      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, Muncipal Securities Rulemaking Board 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
      Securities Investor Protection Corporation
      Attention: William Fischer
      805 Fifteenth Street, N.W., Suite #800
      Washington, D.C. 20005-2207
      Telephone: (202) 371-8300

    • 88-76 Test Center Location for Houston Series 7 Exam in October

      SUGGESTED ROUTING*

      Operations
      Registration
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      Please note that the October 15, 1988, Series 7 test session in Houston will be held at:

      Holiday Inn/Hobby Airport
      Atrium Hotel & Convention Center
      9100 Gulf Freeway
      Houston, Texas 77017

      Parking is available on the hotel grounds, and signs to direct candidates to the examination will be posted prominently inside the facility.

    • 88-75 Amendment Eliminating the Fine Limitation in Disciplinary Proceedings

      SUGGESTED ROUTING*

      Senior Management
      Government
      Internal Audit
      Legal & Compliance
      Operations
      Trading
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      Executive Summary

      The Securities and Exchange Commission has approved an amendment to Article V, Section 1 of the NASD Rules of Fair Practice that removes the current fine limitation of $15,000 per violation that would be assessed against a member or a person associated with a member. The text of the amendment follows this notice.

      Background and Summary of Amendment

      Article V, Section 1 of the NASD Rules of Fair Practice sets forth various types of sanctions that may be imposed in disciplinary proceedings before the NASD. Such sanctions are authorized pursuant to Article XIV of the NASD By-Laws. Since 1984, pursuant to that provision, the Board of Governors and the Association's District Business Conduct Committees (DBCCs) have been able to assess fines up to a maximum, $15,000 for each violation.

      However, the NASD Board of Governors has been concerned that the $15,000 fine ceiling limits the NASD's ability to adequately redress violations in cases where the number of alleged violations is small but the underlying misconduct is egregious, involves substantial sums, or both. Therefore, the Board determined to eliminate the $15,000 per violation ceiling in order to respond appropriately to grave misconduct.

      On August 16, 1988, the SEC approved the NASD's adoption of an amendment to Article V, Section 1 of the NASD Rules of Fair Practice to eliminate the $15,000 per violation. The removal of the fine ceiling will enable the NASD's DBCC, Market Surveillance Committee, and Board of Governors to craft more effective remedial sanctions in cases involving serious violations of the NASD's rules or activities in contravention of the federal securities laws. Therefore, fines in excess of $15,000 per violation may be assessed by the NASD's DBCCs, Market Surveillance Committee, and Board of Governors for misconduct occurring on or after August 16, 1988.The text of the amendment follows this notice.

      Questions can be directed to Norman Sue, Jr., Senior Attorney, NASD Office of General Counsel, at (202) 728-8117.

      AMENDMENT TO ARTICLE V, SECTION 1 OF THE NASD RULES OF FAIR PRACTICE

      (Note: New language is underlined; deleted language is in brackets.)

      Penalties

      Sanctions for Violation of the Rules

      Sec. 1. Any District Business Conduct Committee, Market Surveillance Committee, or the Board of Governors, in the administration and enforcement of these Rules, and after compliance with the Code of Procedure, may (1) censure any member or person associated with a member and/or (2) impose a fine [not in excess of Fifteen Thousand Dollars ($15,000)] upon any member or person associated with a member and/or (3) suspend the membership of any member or suspend the registration of a person associated with a member, if any, for a definite period, and/or (4) expel any member or revoke the registration of any person associated with a member, if any, and/or (5) suspend or bar a member or person associated with a member from association with all members, or (6) impose any other fitting penalty deemed appropriate under the circumstances, for each or any violation of any of these Rules by a member or person associated with a member or for any neglect or refusal to comply with any orders, directions or decisions issued by any District Business Conduct Committee, Market Surveillance Committee or by the Board of Governors in the enforcement of these Rules, including any interpretive ruling made by the Board of Governors, as any such Committee or Board, in its discretion, may deem to be just; provided, however, that no such penalty imposed by any District Business Conduct Committee or Market Surveillance Committee shall take effect until the period for appeal therefrom or review has expired, as provided in [Section 14] Article III, Section 1 of the Code of Procedure; and provided, further, that all parties to any proceeding resulting in a penalty shall be deemed to have assented to or to have acquiesced in the imposition of such penalty unless any party aggrieved thereby shall have made application to the Board of Governors for review pursuant to the Code of Procedure, within fifteen (15) days after the date of such notice.

    • 88-74 Amendment to Code of Procedure Re: Composition of Panels for DBCC and Market Surveillance Hearings

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      At its July 1988 meeting, the NASD Board of Governors voted to amend the Code of Procedure so as to reduce, from three to two persons, the minimum number of persons required for hearing panels for cases before District Business Conduct Committees ("DBCC") and the Market Surveillance Committee.

      The Board also determined to reduce, from two to one, the number of persons on DBCC hearing panels required to be current DBCC members. These amendments have been filed with the SEC for approval. Members and other interested persons wishing to comment on the proposed changes should direct their comments to the SEC.

      BACKGROUND AND ANALYSIS

      Currently, under the NASD Code of Procedure, each case before a District Business Conduct Committee ("DBCC") may be heard by a subcommittee consisting of three or more persons, at least two of whom must be members of the DBCC. During the last several years, the Association's disciplinary cases have become more numerous and complex and have required significant time commitments on the part of DBCC members. As a result, the Association has experienced increasing difficulty in conducting DBCC hearings due to the unavailability of hearing subcommittee members, in order to alleviate this problem, the Board has determined to amend the Code of Procedure so as to permit two-person hearing panels and to require that only one person on the panel be a member of the DBCC.

      In the consideration of this matter, it was also noted that similar problems are being encountered in the conduct of Market Surveillance cases. Under the Code of Procedure, Market Surveillance Committee cases currently may be heard by a panel of three or more persons. The Board determined that, in order to facilitate the hearing process and reduce the demands made on Market Surveillance Committee members, the minimum number of persons required to hear a Market Surveillance case should similarly be reduced from three to two.

      In the interest of expediting the effectiveness of these amendments, the Board directed the Association staff to file the proposed rule changes with the SEC for approval. The SEC is required to solicit comment regarding the changes and expects to publish the changes for comment soon.

      The comment period will run 21 days from the date of publication in the Federal Register. Members and those who wish to comment on the proposed changes should send six copies of their written submissions to:

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

      Submissions should refer to file No. SR-NASD-88-38.

      A copy of the submission also should be sent to:

      Mr. Lynn Nellius,
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1506

      Questions regarding this notice can be directed to Therese Haberle, Special Counsel, NASD Office of General Counsel, at (202) 728-8287.

    • 88-73 Amendment to NASD UPC That Requires Syndicate Managers to Provide Itemized Expense Statements to Members of Underwriting Syndicates

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Com mission (SEC) has approved an amendment to the NASD Uniform Prac tice Code that requires syndicate managers of public offerings to provide itemized expense statements to members of underwriting syndicates.

      The text of the amendment follows this notice.

      BACKGROUND

      Section 66 of the NASD Uniform Practice Code requires final settlement of syndicate accounts by the syndicate manager within ninety days following the syndicate settlement date. Syndicate accounts are established by underwriting groups to process the income and expenses of the syndicate in distributions of corporate securities.

      As a result of concerns about the lack of details provided by syndicate managers in syndicate settlement statements, the NASD considered the need to require syndicate managers to provide to members of underwriting syndicates itemized statements of the expenses incurred by the syndicate. The Municipal Securities Rule Making Board Rule G-ll(h) currently requires an itemized statement in municipal underwritings. Compared with syndicate expense statements issued pursuant to Rule G-ll(h), syndicate expense statements used in non-municipal underwriting are diverse in format and generally provide little or no detail about the nature of expenses incurred by the syndicate. The NASD is concerned that the lack of detail in the syndicate expense statement reduces the syndicate manager's accountability for syndicate funds and determined that a detailed expense statement could result in more care being taken in determining actual syndicate expenses.

      DESCRIPTION OF AMENDMENT

      On August 3, 1988, the SEC approved the NASD's adoption of an amendment to Section 66 of the Uniform Practice Code (Code) to require syndicate managers to provide an itemized expense statement to the underwriting syndicate no later than the date of final settlement of the syndicate account, which Section 66 requires to be within 90 days after the syndicate settlement date.1 The expense statement is required to include, where applicable, the following expense categories: legal fees; advertising; travel and entertainment; closing expenses; loss on oversales; telephone; postage; communications; co-manager's expenses; computer and data processing charges; interest expense; and miscellaneous. The amendment to Section 66 provides that the "miscellaneous" category should include only minor items that cannot be easily categorized elsewhere in the statement and that the amount under miscellaneous should not be disproportionately large in relation to other items. It is anticipated that any other major expense that cannot be included in the enumerated categories will be itemized separately.

      Although the new rule was effective on Commission approval on August 3,1988, the NASD will provide a 30-day grace period from the date of this notice until November 3, 1988, for members to adjust their administrative procedures to comply with the new provision.

      Questions concerning this notice can be directed to the NASD Corporate Financing Department at (202) 728-8258 or to Suzanne E. Roth-well, Associate General Counsel, NASD Office of General Counsel, at (202) 728-8247.

      UNIFORM PRACTICE CODE

      Sec. 66

      (Note: New language is underlined.)

      SETTLEMENT OF SYNDICATE ACCOUNTS

      (a) Definitions
      (1) "selling syndicate" means any syndicate formed in connection with a public offering to distribute all or part of an issue of corporate securities by sales made directly to the public by or through participants in such syndicate.
      (2) " syndicate account" means an account formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of a public offering.
      (3 ) " syndicate manager" means the member of the selling syndicate that is responsible for maintenance of syndicate account records.
      (4) "syndicate settlement date" means the date upon which corporate securities of a public offering are delivered by the issuer to or for the account of the syndicate members.
      (b) Final settlement of syndicate accountsshall be effected by the syndicate manager within90 days following the syndicate settlement date.
      (c) No later than the date of final settlementof the syndicate account the syndicate managershall provide to each member of the selling syndicate an itemized statement of syndicate expenses that shall include, where applicable, the followingcategories of expenses: legal fees; advertising;travel and entertainment; closing expenses; loss onoversales; telephone, postage, communications; co-manager's expenses; computer and data processing charges; interest expense; and miscellaneous.The amount under "miscellaneous" should not bedisproportionately large in relation to other itemsand should include only minor items that cannotbe easily categorized elsewhere in the statement.Any other major items not included in the abovecategories shall be itemized separately.

      1 Securities Exchange Act Release No. 25962 (August 3,1988).


    • 88-72 Proposed Amendment to Definition of "Bona Fide Research" - Last Voting Date: November 3, 1988

      SUGGESTED ROUTING*

      Senior Management
      Institutional
      Legal & Compliance
      Research

      *These are suggested departments only. Others may be appropriate for your firm.

      IMPORTANT MAIL VOTE

      EXECUTIVE SUMMARY

      NASD members are invited to vote on a proposed amendment to Article III, Section 24(b) of the NASD Rules of Fair Practice to conform the definition of "bona fide research" to the standard announced by the Securities and Exchange Commission with respect to the meaning of "research" under Section 28(e) of the Securities Exchange Act of 1934, as amended.

      BACKGROUND

      Section 24(a) of Article III of the NASD Rules of Fair Practice provides that in connection with the sale of securities that are part of a fixed-price offering, no NASD member may grant selling concessions, discounts, or other allowances to anyone other than another broker/dealer for services rendered in distribution.

      However, nothing in this Section prohibits any NASD member from selling any such securities to any person or account to which it has provided or will provide bona fide research if the stated public offering price is paid by the purchaser.1

      The proposed amendment would change the definition of "bona fide research" contained in Section 24(b) of Article III of the NASD Rules of Fair Practice (hereinafter "Section 24(b) definition"). The Board of Governors has also determined to make conforming changes to the Interpretation of the Board of Governors under Section 24, which interprets and explains the Section 24(b) definition ("Interpretation"). The amendments to the Interpretation do not require membership vote and are attached for information purposes only.

      The definition proposed to be amended and the Interpretation were originally incorporated into the NASD rules as part of a larger package of new rules submitted by the NASD to the Securities and Exchange Commission ("SEC" or "Commission") regulating the granting by NASD members of selling concessions, discounts, and other allowances in connection with sales of fixed price offerings.2

      The rule package, including the provisions proposed to be amended by this filing, came to be known as the "Papilsky" rules and were approved by the Commission on December 12, 1980.3 Currently, subsection (a)(l) of Section 24 provides that nothing in the Section shall prevent any member from selling any securities that are part of a fixed- price offering to any person to whom it has or will provide "bona fide research" if the stated public offering price is paid by the purchaser.

      The proposed rule change would amend the definition contained in Section 24(b), which exempts certain products and services from being considered "bona fide research." The term "bona fide research" contained in Section 24(b) is defined to mean "advice, rendered directly or through publications or writings, as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities, or analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and performance of accounts; provided, however, that (1) investment management or investment discretionary services, and (2) products or services that are readily and customarily available and offered to the general public on a commercial basis are not bona fide research."

      The Interpretation of the NASD Board of Governors adopted under Section 24 presently states that the definition of "bona fide research" is substantially the same as the definition of the term research in Section 28(e)(3) of the Securities Exchange Act of 1934 ("Exchange Act"), as interpreted by the Commission.

      The existing exclusion from the definition of "bona fide research" provided by subsection (b)(2) of Section 24 incorporates into the NASD provision the SEC's interpretation of the term "research" under Section 28(e)(3), which was published in Securities Exchange Act Release No. 12251 (March 24, 1976).4 Thus, Section 24(b)(2) presently excludes "products or services that are readily and customarily available and offered to the general public on a commercial basis." The Board of Governors' Interpretation following Section 24 states that, for guidance concerning the meaning of "bona fide research" under Section 24(b), NASD members should refer to SEC interpretations of the definition of "research" under Section 28(e) of the Exchange Act.

      On April 30,1986, the Commission withdrew its 1976 standard and announced a revised standard to be used in determining what products and services shall be deemed protected "research" under Section 28(e) of the Act. The change being submitted for vote is intended to amend the language of Section 24(b)(2) of Article III of the NASD Rules of Fair Practice to eliminate the existing exclusion from the definition and to allow the standard established by the Commission in its most recent release to determine the parameters of "bona fide research." The Commission, in its 1986 release, stated that the controlling principle to be used to determine whether something is research under the statute is "... whether it provides lawful and appropriate assistance to the money manager in the performance of his investment decision-making responsibilities."

      The Commission also stated that, under the revised standard of "research," the fact that a product or service is readily and customarily available and offered to the general public on a commercial basis does not dictate the conclusion that the product or service is not research, as was the case under its earlier 1976 standard.

      In short, the NASD Board of Governors' Interpretation under Section 24, with respect to the exclusion in Section 24(b)(2) from the definition of "bona fide research" for products and services that are commercially available and offered to the general public, states that it is based directly upon the standard established by the Commission in its 1976 release.

      The 1986 Commission release, however, substituted a revised standard that the NASD Board of Governors now believes should be incorporated into Section 24 to replace the present language. The Board is concerned that a failure to do so may create confusion in the securities industry and among money managers who, without a change in Section 24, would be required to use one standard for fixed-price public offerings, but a totally different standard for other types of securities transactions such as secondary market trading. The NASD Board of Governors believes that consistency in the definitions under Section 24 of the NASD rules and Section 28(e) of the Exchange Act is appropriate.

      EFFECTIVE DATE

      Prior to becoming effective, the amendment to the Section 24 definition must be approved by the NASD membership and thereafter by the SEC. The conforming amendments to the Interpretation must also be approved by the SEC before they become effective. The NASD has not published the amendments to the Section 24 definition and the Interpretation for member comment prior to filing the amendments with the SEC for approval. However, NASD members and other interested persons are invited to make any comments they may have directly to the SEC at the time the Commission publishes the proposed rule changes for public comment, which is required prior to SEC approval.

      The NASD Board of Governors believes that the proposed amendment is necessary and appropriate and recommends that members vote approval. The text of the amendment to Section 24 to be voted upon follows this notice. The text of the amendments to the Interpretation thereunder also follows for information purposes and not for vote.

      Please mark the attached ballot according to your convictions and return it in the enclosed stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than November 3, 1988.

      Questions concerning this notice can be directed to either Dennis C. Hensley, Vice President and Deputy General Counsel at (202) 728-8245, or to John Mylod, Assistant General Counsel at (202) 728-8288 or to the attorney on duty for the NASD Office of General Counsel at (202) 728-8294.

      PROPOSED AMENDMENTS TO NASD RULES OF FAIR PRACTICE

      Article III

      Sec. 24.

      (Note: Deleted language is bracketed; no new language is to be added.)

      SELLING CONCESSIONS



      In connection with the sale of securities which are part of a fixed price offering:

      (a) A member may not grant or receive sell ing concessions, discounts, or other allowances except as consideration for services rendered in distribution and may not grant such concessions, discounts or other allowances to anyone other than a broker or dealer actually engaged in the in vestment banking or securities business; provided, however, that nothing in this Section shall prevent any member from (1) selling any such securities to any person, or account managed by any person, to whom it has provided or will provide bona fide research, if the stated public offering price for such securities is paid by the purchaser; or (2) selling any such securities owned by him to any person at any net price which may be fixed by him unless prevented therefrom by agreement.
      (b) The term "bona fide research," when used in this Section, means advice, rendered either directly or through publications or writings, as to the value of securities, the advisability of invest ing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities, or analyses and reports concerning is suers, industries, securities, economic factors and trends, portfolio strategy, and performance of ac counts; provided, however that [(1)] investment management or investment discretionary services [and (2) products or services that are readily and customarily available and offered to the general public on a commercial basis] are not bona fide re search.

      * * * * *

      (Note: For Information Purposes and Not for Vote)

      PROPOSED AMENDMENTS TO THE INTERPRETATION OF THE BOARD OF GOVERNORS

      BONA FIDE RESEARCH EXCLUSION

      (Note: New language is underlined; deleted language is bracketed.)

      While Section 24 provides that a member may grant or receive selling concessions, discounts and other allowances only as consideration for services rendered in distribution and may grant such concessions, discounts or other allowances only to brokers or dealers actually engaged in the investment banking or securities business, that Section also states that a member is not prohibited by Section 24 from selling securities at the stated public offering price to persons to whom it provides bona fide research. Accordingly, nothing in Section 24 prohibits a member from providing bona fide research to a customer who also purchases securities from fixed price offerings from the member whether or not there is an express or implied agreement between the member providing the research and the recipient that the member will be compensated for the research in cash, brokerage commissions, selling concessions or some other form of consideration.

      The definition of bona fide research is substantially the same as the definition of the term research in Subsection 28(e)(3) of the Securities Exchange Act of 1934, as amended, and as interpreted by the Securities and Exchange Commission. Members should refer to the Commission's interpretation[s] in Securities Exchange Act Release No. 23170 (April 30, 1986) concerning the definition of research under Section 28(e) for guidance as well as to any interpretations of the Commission or its staff thereafter issued. [For example, in Securities Exchange Act Release No. 12251 (March 24,1976) the Commission indicated that items such as "newspapers, magazines and periodicals, directories, computer facilities and software, government publications, electronic calculators, quotation equipment, office equipment, airline tickets, office furniture and business supplies" are the type of products and services which are readily and customarily available and offered to the general public on a commercial basis. Accordingly, such services and products and other similar services and products are not bona fide research for purposes of Section 24.]

      Moreover, while the provisions in the Section concerning bona fide research are intended to permit money managers to receive bona fide research from persons from whom securities are purchased, it is not intended to enable a money manager, who is also a member, to view its money management services as bona fide research. Accordingly, the performance of money management or investment discretionary services themselves are expressly excluded from the definition of bona fide research.

      Another factor relating to bona fide research is that the research must be "provided by" the member who receives or retains the selling concession, discount or other allowance. Under Section 28(e) of the Securities Exchange Act of 1934, the Commission has stated that the "safe harbor" provided by Section 28(e) only extends to research that is "provided by" the broker to whom brokerage commissions are paid. In determining whether the exclusion for bona fide research under Section 24 is available in any given instance, members should refer to the interpretations of the Commission and its staff of the similar requirement applicable to Section 28(e). [In that regard, the Commission, in Securities Exchange Act Release No. 12251, stated that:

      Section 28(e) might, under appropriate circumstances, be applicable to situations where a broker provides a money manager with research produced by third parties....]

      Whether research is provided by the member will depend on all the facts and circumstances surrounding the relationship of the member and the recipient of the research, relying upon interpretations by the Commission and staff with respect to similar questions under Section 28(e). See also Securities Exchange Act Releases 12251 (March 24, 1976, and 23170 (April 30, 1986).

      INDIRECT DISCOUNTS

      A member who, itself or through its affiliate, supplies another person with services or products which are readily and customarily available and offered to the general public on a commercial basis and which fail to qualify as bona fide research, or which, in the case of services or products other than bona fide research, are provided by the member or its affiliate to such person or others for cash or for some other agreed upon consideration, and also retains or receives selling concessions, discounts or other allowances from purchases by that person or its affiliate of securities from a fixed price offering is improperly granting a selling concession, discount or other allowance to that person unless the member or its affiliate has been, or has arranged and reasonably expects to be, fully compensated for such services or products from sources other than the selling concession, discount or allowance retained or received on the sale.


      1 NASD Manual (CCH), ¶ 2174, pp. 2097-2098.

      2 The term "fixed price offering" is defined by Section l(m) of Article II of the Rules of Fair Practice to mean the offering of securities at a stated public offering price or prices, with certain specified exceptions, including securities exempted under Sections 3(a)(12) and 3(a)(29) of the Exchange Act and certain redeemable securities of registered investment companies. NASD Manual (CCH), ¶ 2101, p. 2013.

      3 Securities Exchange Act Release No. 17371 (Dec. 12, 1980).

      4 Securities Exchange Act Release No. 12251 (March 24, 1976).


    • 88-71 NASDAQ National Market System Additions as of August 19, 1988

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Operations
      Research
      Syndicate

      *These are suggested departments only. Others may be appropriate for your firm.

      As of August 19, 1988, the following 29 issues joined the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,923:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      CFED

      Charter Federal Savings Bank

      7/29/88

      500

      SEMI

      All American Semiconductor, Inc.

      8/2/88

      1000

      AEZNS

      Asiamerica Equities, Inc.

      8/2/88

      200

      CHFC

      Chemical Financial Corp.

      8/2/88

      200

      ECGI

      Environmental Control Group, Inc.

      8/2/88

      1000

      HDGH

      Hodgson Houses, Inc.

      8/2/88

      200

      OSBW

      Olympic Savings Bank

      8/2/88

      200

      RFIN

      Rock Financial Corporation

      8/2/88

      200

      TOPT

      Tele-Optics, Inc.

      8/2/88

      500

      TOPTW

      Tele-Optics, Inc. (Wts)

      8/2/88

      500

      UNBJV

      United National Bancorp (WI)

      8/2/88

      200

      WTPR

      Wetterau Properties, Inc.

      8/2/88

      200

      WSBX

      Washington Savings Bank, FSB (The)

      8/2/88

      500

      GLYT

      Genlyte Group, Inc.

      8/8/88

      1000

      LMAC

      Landmark American Corporation

      8/9/88

      1000

      MFFC

      Mayflower Financial Corporation

      8/9/88

      200

      HAMS

      Smithfield Companies, Inc. (The)

      8/9/88

      1000

      KIND

      Kinder-Care Learning Centers, Inc.

      8/11/88

      1000

      LICF

      Long Island City Financial Corporation (The)

      8/11/88

      1000

      NERX

      NeoRx Corporation

      8/11/88

      1000

      STOT

      Stotler Group, Inc.

      8/12/88

      1000

      UTRX

      Unitronix Corporation

      8/15/88

      500

      CODS

      Corporate Data Sciences, Inc.

      8/16/88

      1000

      GULL

      Gull Laboratories, Inc.

      8/16/88

      500

      ICAR

      Intercargo Corporation

      8/16/88

      1000

      INTV

      InterVoice, Inc.

      8/16/88

      1000

      NMCO

      National Media Corporation

      8/16/88

      1000

      PTEC

      Phoenix Technology Ltd.

      8/16/88

      1000

      STKLF

      Stake Technology Ltd.

      8/16/88

      1000

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS upon effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol

      Company'

      Location

      SOES Execution Level

      DFSE

      DFSoutheastern, Inc.

      Decatur, GA

      1000

      SEEBV

      DEKALB Genetics Corporation (Cl B) (WI)

      DeKalb, IL

      1000

      FFFC

      Franklin First Financial Corp.

      Wilkes-Barre, PA

      1000

      HPBC

      Home Port Bancorp, Inc.

      Nantucket, MA

      1000

      PRIDV

      Pride Petroleum Services, Inc. (WI)

      Houston, TX

      1000

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since July 22, 1988.

      New/Old Symbol

      New/Old Security

      Date of Change

      BFCS/BFCS

      Boston Five Bancorp, Inc./Boston Five Cents Savings Bank, FSB

      7/28/88

      ABCV/VBNK

      Affiliated Bane Corporation/ Vanguard Savings Bank

      8/1/88

      BFBS/BFBS

      Brookfield Bancshares Corp./ Brookfield Federal Bank for Savings

      8/1/88

      DNFC/DNSB

      D&N Financial Corporation/D&N Savings Bank, FSB

      8/1/88

      WCBK/WCBK

      Landmark/Community Bancorp, Inc. (WI)/Landmark Financial Corporation

      8/1/88

      NWVI/NUCP

      Workingmens Corporation/ Workingmens Co-Operative Bank

      8/1/88

      NWVIP/NUCPP

      New Visions Entertainment Corp./ New Century Entertainment Corp.

      8/4/88

      SSLN/SSLN

      Security Savings, SLA/Security Savings and Loan Association

      8/4/88

      DYANW/DYANW

      Dyansen Corp. (12/30/88 Cl A Wts)/ Dyansen Corp. (8/3/88 Cl A Wts)

      8/11/88

      NSSB/NSSB

      Norwich Financial Corp./ Norwich Savings Society (The)

      8/11/88

      PTMIW/PTMIW

      Precision Target Marketing, Inc. (8/23/89 Wts)/ Precision Target Marketing, Inc. (8/23/88 Wts)

      8/12/88

      FRMBF/ANCEF

      Forum Re Group (Bermuda) Ltd./ Aneco Reinsurance Co., Ltd.

      8/15/88

      HHGP/LXXX

      Harris and Harris Group, Inc./ Lexington Group, Inc. (The)

      8/15/88

      MGNC/AVSN

      Mediagenic/Activision, Inc.

      8/17/88

      HALL/MAYP

      Hall Financial Group, Inc./ May0 Petroleum, Inc.

      8/18/88

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date of Change

      SPIP

      SPI Pharmaceuticals, Inc.

      7/22/88

      BECQE

      Bercor, Inc.

      7/26/88

      RAGQE

      Coated Sales, Inc.

      7/26/88

      CRVSQ

      Corvus Systems, Inc.

      7/26/88

      DMCZ

      Datametrics Corp.

      7/26/88

      HWSI

      Healthways Systems, Inc.

      7/26/88

      JBIEQ

      J. Bildner & Sons, Inc.

      7/26/88

      LACR

      Lancer Corporation

      7/26/88

      WYSE

      Wyse Technology

      7/26/88

      BIWC

      BIW Cable Systems, Inc.

      7/27/88

      UCFC

      UniCARE Financial Corporation

      7/27/88

      DAXR

      Daxor Corporation

      7/29/88

      BSBK

      Beverly Savings Bank

      8/1/88

      FKYN

      First Kentucky National Corp.

      8/1/88

      FUNC

      First Union Corporation

      8/2/88

      CPCO

      Central Pacific Corporation

      8/2/88

      GEMH

      Gemcraft, Inc.

      8/2/88

      SDSB

      Southhold Savings Bank

      8/2/88

      FRFE

      Freedom Federal Savings Bank

      8/3/88

      MMSTW

      MedMaster Systems, Inc. (Wts)

      8/5/88

      CHFS

      Chief Automotive Systems, Inc.

      8/8/88

      FEXP

      Frozen Food Express Industries, Inc.

      8/9/88

      GART

      Gartner Group, Inc.

      8/9/88

      GCGI

      Geneve Capital Group, Inc.

      8/9/88

      INTCL

      Intel Corporation (8/15/88 Wts)

      8/9/88

      IRINE

      International Robomation/Intelligence

      8/9/88

      RMTKE

      Ramtek Corporation

      8/9/88

      SIMM

      Simmons Airlines, Inc.

      8/9/88

      SHOSQ

      Southern Hospitality Corporation

      8/9/88

      USPTS

      USP Real Estate Investment Trust

      8/10/88

      WING

      Wings West Airlines, Inc.

      8/10/88

      SLCN

      Silicon Systems, Inc.

      8/11/88

      FOOD

      P&C Foods, Inc.

      8/15/88

      BIGI

      Brougher Insurance Group, Inc.

      8/16/88

      PHOT

      Photronics Corporation

      8/16/88

      MTRX

      Matrix Science Corporation

      8/18/88

      INFTA

      Infinity Broadcasting Corporation (Cl A)

      8/19/88

      LWIS

      Palmer G. Lewis Company, Inc.

      8/19/88

      Questions regarding this notice should be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192.

      NASDAQ and NASDAQ/NMS are registered trademarks and service marks of the National Association of Securities Dealers, Inc.

    • 88-70 Columbus Day Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING*

      Municipal
      Operations
      Syndicate
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      The schedule of trade dates/settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 10, 1988. On this day, the NASDAQ System and the exchange markets will be open for trading. However, it will not be a settlement date since many of the nation's leading banking institutions will be closed in observance of Columbus Day.

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

      Trade Date

      Settlement Date

      Regulation T Date1

      September 30

      October 7

      October 11

      October 3

      11

      12

      4

      12

      13

      5

      13

      14

      6

      14

      17

      7

      17

      18

      10

      17

      19

      11

      18

      20

      NOTE: October 10, 1988 is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 10, will be combined with transactions made on the previous day, October 7, for settlement on October 17. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 10.

      These settlement dates should be used by brokers, dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD 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 NASD Uniform Practice Department at (212) 858-4341.


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


    • 88-69 Documentation for Excused Withdrawal Under Schedule D of By-Laws

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Legal & Compliance
      Syndicate
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      BACKGROUND AND EXPLANATION

      Part VI, Sec. 7(b) of Schedule D to the NASD By-Laws permits excused withdrawals based on demonstrated legal or regulatory requirements when supported by appropriate documentation.

      In order to streamline procedures for market makers requesting excused withdrawal for legal reasons relating to participation in an underwriting group for a secondary offering, the following procedure has been adopted:

      A single letter furnished by the lead underwriter, listing all participating dealers, will be accepted by NASDAQ Operations as appropriate documentation for excused withdrawal status for all market makers participating in that underwriting.

      The letter should include: the name of the security, the specific reason for the excused withdrawal request, and a list of the other firms participating in the underwriting. The letter must be signed by an officer of the firm, with the officer's title indicated.

      The letter should be addressed to:

      NASDAQ OPERATIONS
      33 Whitehall Street
      New York, NY 10004

      As an alternative to mailing, the letter may be faxed to: (212) 509-5799.

      The procedures described above apply to the documentation requirement only - individual market makers must still call NASDAQ Operations (212) 509-3640 and request the excused withdrawal.

      In the case of excused withdrawal requests for other legal reasons, documentation should be supplied in the format described above, with reference to the specific securities law necessitating the withdrawal.

      Please direct any questions on this notice to Sue Kober, NASDAQ Operations, (212) 858-4439.

    • 88-68 Proposed Amendment Re Providing Terminated Employee with Form U-5 and Obtaining Prior Form U-5 for Potential Employees; Comment by October 1, 1988

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Registration

      *These are suggested departments only. Others may be appropriate for your firm.

      REQUEST FOR COMMENT

      EXECUTIVE SUMMARY

      The NASD requests comment on proposed amendments to Article IV, Section 3 of the NASD By-Laws and Article III, Section 27 of the Rules of Fair Practice. These amendments would require NASD members to provide a copy of the Form U-5 to persons who terminate or are terminated by the member. Members would provide the Form U-5 concurrently with the filing of the Form U-5 with the NASD. Further, each NASD member seeking to associate a person in a registered capacity would be required to obtain the most recent Form U-5 from any person seeking employment.

      BACKGROUND AND ANALYSIS

      The NASD Board of Governors, in implementing the recommendations of the Regulatory Review Task Force, has determined that a member submitting to the NASD a Uniform Termination Notice of Securities Industry Registration (Form U-5), pursuant to Article IV, Section 3 of the By-Laws, should provide a copy to the terminated employee.

      Further, the Board of Governors has determined that it is appropriate to require NASD members who employ persons previously registered with an NASD member to obtain a copy of the Form U-5 (and any amendments thereto) filed by the person's most recent employer. The Board believes that, by making the Form U-5 available in this manner, members will be better able to meet their obligation under Article III, Section 27(e) of the Rules of Fair Practice to adequately investigate the background of potential employees.

      Article III, Section 27(e) requires that "each member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications and experience of any person prior to making such a certification in the application of such person for registration with this association." Members are not required to obtain the Form U-5 for the most recent employment with an NASD member.

      The NASD believes, however, that the circumstances of a termination, as disclosed on the Form U-5, may well be relevant to the hiring decision and that this information should be readily available to any NASD member for that purpose. This information is particularly pertinent in the situation where the person was terminated for cause or where affirmative answers have been provided to Items 13-15 of the Form U-5 regarding possible rule violations during the period of employment. As part of the hiring process, members should be allowed to compare the Form U-5 with any statements made by the potential employee regarding the termination. The proposed amendments would establish the requirement to obtain the Form U-5, set forth timeliness standards for compliance, and provide for obtaining the Form U-5 through FAQS for FAQS subscribers or from the prospective employee for firms that do not subscribe to FAQS.

      The present Article IV, Section 3 of the NASD By-Laws does not require NASD members to give terminated employees a copy of the Form U-5 filed with the NASD. The NASD believes that the policy of providing broader access to the information on the Form U-5 requires that terminated persons be given the Form U-5 so they can verify the accuracy and completeness of the representations in the form. The terminated individual can then take appropriate steps to have this information changed or corrected as necessary and can express any disagreement with the Form U-5 to his or her subsequent NASD member employer. The proposed amendments would establish this requirement. In addition, the amendments would codify the requirement that an amendment to the Form U-5 be filed if later-discovered information causes any statements in the form to be inaccurate or incomplete.

      The NASD also invites comments on whether it would be appropriate for the NASD to require that an NASD member, upon request by the hiring member, provide a copy of the Form U-5 directly to the hiring member, rather than through FAQS or the employee.

      The NASD encourages all members and other interested persons to comment on the proposed amendments. Comments should be received no later than October 1, 1988 and should be sent to:

      Mr. Lynn Nellius, Secretary National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1506

      Questions concerning this notice may be directed to Craig L. Landauer, NASD Office of General Counsel, at 202-728-8287.

      PROPOSED AMENDMENTS TO ARTICLE IV, SECTION 3 OF NASD BY-LAWS AND ARTICLE III, SECTION 27 OF THE RULES OF FAIR PRACTICE.

      (Note: New language is underlined.)

      NASD BY-LAWS

      ARTICLE IV

      REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS

      Notification by Member to Corporation and Associated Person of Termination; Amendments to Notification.

      Sec. 3(a). 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, and concurrently shall provide to the person whose association has been terminated a copy of said notice as filed with the Association. A member who does not submit such notification in writing, or provide a copy thereof to the person whose association has been terminated, within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors. Termination of registration of such person associated with a member shall not take effect so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Corporation, however, may in its discretion declare the termination effective at any time.

      (b) The member shall notify the Association in writing by means of an amendment to the notice filed pursuant to paragraph (a) above in the event that the member learns of facts or circumstances causing any information set forth in said notice to become inaccurate or incomplete. Such amendment shall be provided to the Association and to the person whose association with the member has been terminated not later than thirty (30) calendar days after the member learns of the facts and circumstances giving rise to the amendment.

      RULES OF FAIR PRACTICE ARTICLE III, SECTION 27 SUPERVISION



      Qualifications investigated.

      Sec. 27(e) Each member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications and experience of any person prior to making such a certification in the application of such person for registration with this Association. Where applicable, each member shall obtain from the Firm Access Query System (FAQS) or shall request and obtain from the applicant for registration a copy of the Uniform Termination Notice of Securities Industry Registration ("Form U-5") filed with the Association by such person's most recent previous NASD member employer, together with any amendments thereto that may have been filed pursuant to Article IV, Section 3(b) of the Association's By-Laws.

      Where the member utilizes FAQS to comply with this paragraph, the Form U-5 shall be obtained (i) prior to the submission of the application for registration if such application is filed more than thirty (30) days following the termination of the applicant's most recent employment with an NASD member or (ii) not more than sixty (60) days following such termination if the application is filed less than thirty (30) days after the termination.

      Where the member obtains a copy of the Form U-5 from the applicant for registration, the member shall request the Form U-5 (i) prior to the filing of the application if such application is filed more than thirty (30) days following the termination of the applicant's most recent employment with an NASD member or (ii) not more than sixty (60) days following such termination if the application is filed less than thirty (30) days after the termination. Any applicant for registration who receives a request for a copy of his or her Form U-5 from a member pursuant to this paragraph shall provide such copy to the member within two (2) business days of the request if the Form U-5 has been provided to such person by his or her former employer. If the former employer has failed to provide the Form U-5 to the applicant for registration, such person shall promptly obtain the Form U-5 and shall provide it to the requesting member within two (2) business days of receipt thereof. Any subsequent amendments to a Form U-5 received by the applicant shall be promptly provided to the requesting member.

      A member receiving a Form U-5 pursuant to the foregoing paragraphs shall review the Form U-5 and any amendments thereto and shall take such action as may be deemed appropriate.

    • 88-67 Obligation to Provide Accurate Information on Forms U-4 and U-5 and to Research Potential Employee's Background

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Registration

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The NASD reminds members that the NASD By-Laws and Rules of Fair Practice require that complete and accurate information be provided on Forms U-4 and U-5 and that members are responsible for investigating a potential employee's background prior to hiring such person.

      BACKGROUND

      The NASD Board of Governors, in implementing the recommendations of the Regulatory Review Task Force, has determined that it is appropriate to re-emphasize the NASD's policy with respect to complete and accurate disclosure on Forms U-4 and U-5 and with respect to a member's obligation to adequately research the background of its potential employees.

      Complete and Accurate Forms U-4 and U-5

      Associated persons of NASD members have an obligation to provide complete and accurate information on any Uniform Application for Securities Industry Registration or Transfer ("Form U-4") that is to be filed with the NASD. Article IV, Section 2(a)(3) of the By-Laws, which relates to registered representatives and associated persons, together with the instructions to Form U-4, clearly require that complete and accurate information be provided on this Form. In addition, Item 1 on page 4 of the Form U-4 requires each applicant for registration with the NASD to swear or affirm that the applicant has read and understood the items and instructions on the form and that the applicant's answers (including attachments) are true and complete to the best of the applicant's knowledge.

      Member firms are also required to file complete and accurate information on any Uniform Termination Notice for Securities Industry Registration ("Form U-5") that is required to be filed with the NASD. Article IV, Section 3 of the By-Laws requires that a member firm file Form U-5 promptly, but not later than 30 calendar days after terminating a registered person. Items 13-15 on Form U-5 ask for information concerning apparent misconduct by a person while associated with the firm submitting the Form U-5. A "yes" answer to Items 13-15 must be accompanied by a detailed explanation of the apparent misconduct. Failure to provide accurate answers to Items 13-15 may deprive the NASD of its ability to detect violations and subsequently sanction persons for violations of the NASD's rules and other applicable federal statutes and regulations. Failure to provide this information may also subject members of the investing public to repeated misconduct and may deprive member firms of the ability to make informed hiring decisions.

      The NASD would also point out that members and their associated persons may be subject to administrative, civil, and even criminal penalties for failing to provide complete and accurate information on Forms U-4 and U-5.

      Researching a Potential Employee's Background

      Member firms have an obligation to thoroughly research a potential employee's background before hiring such person. Article III, Section 27(e) of the Rules of Fair Practice provides that "[e]ach member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications and experience of any person prior to making such a certification in the application of such person for registration with this association." The last section of Form U-4 on page 4 also requires that the member firm cer tify that the member has communicated with all of the applicant's previous employers for the past three years and has taken appropriate steps to verify the items and attachments contained in the Form U-4. The NASD has brought disciplinary actions against member firms who have failed to properly research a potential employee's background prior to hiring such person. Members are reminded that they may use the Firm Access Query Systems (FAQS) or may file an information request through NASD Disclosure Program in order to comply with the investigation requirement.

      Questions concerning this notice may be directed to Craig L. Landauer, Senior Attorney, Office of General Counsel, at (202) 728-8291.

    • 88-66 Test Center Change for Houston Series 7 Exam in September

      SUGGESTED ROUTING*

      Operations
      Registration
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      Please note that the September 17, 1988 Series 7 test session in Houston will be held at:

      Houston Airport Marriott Hotel
      Intercontinental Airport
      18700 Kennedy Boulevard
      Houston, Texas 77032

      Candidates are to report to the intercontinental ballroom. The hotel is located within the Intercontinental Airport.

      Free parking is available in the hotel's south tower parking lot, which is adjacent to the Intercontinental Ballroom.

    • 88-65 Proposed Amendment: Use and Disclosure of Member Names; Last Date for Comment: October 3, 1988

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Mutual Fund
      Registration
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      REQUEST FOR COMMENT

      EXECUTIVE SUMMARY

      The NASD requests comment on a proposed amendment to Article Ml, Section 35 of the NASD Rules of Fair Practice that would establish standards regarding the use and disclosure of member names in advertising, sales literature, business cards, arid letterhead.

      The proposed amendment reflects the NASD's concern that members of the public may be confused by advertising or sales literature that either fails to refer to an NASD member firm by its registered name, or includes unclear references to both NASD member firms and entities that are not NASD members. Unless the identity of and the products offered by an NASD member firm are made clear In such advertising or sales literature, the public may be confused or misled as to which entity does, in fact, offer securities.

      The proposed amendment seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public.

      The text of the amendment follows this notice.

      BACKGROUND AND SUMMARY OF AMENDMENT

      Article III, Section 35 of the NASD Rules of Fair Practice governs members' communications with the public. Among the standards set forth in the rules are requirements that all advertising and sales literature contain the name of the NASD member and that no material fact be omitted if the omission would cause the communication to be misleading.

      In recent years, non-member entities, such as financial planners, insurance companies, banks, and thrift institutions, have increasingly become in volved in the securities field. As a consequence, the names of both NASD member firms and non-member entities often appear in a single advertisement or item of sales literature. Sometimes, advertising and sales literature that have included the names of both member and non-member entities have done so in ways that made it difficult for the public to identify which entity was actually offering securities. Similar problems have arisen when an individual who is affiliated with member and non-member entities is named in public communications, but the nature of the individual's relationships with named member and nonmember entities is left unclear.

      A related problem that has also developed during recent years stems from some members' use in advertising and other public communications of fictitious names or variations upon member names. Once again, this practice can make it difficult for the public to identify the NASD member with which it is dealing.

      The recurrent problems in this area can be divided into five broad categories. Generally speaking, problems of public confusion have tended to occur when: (1) NASD members conduct business under a fictional "doing business as" (DBA) name rather than the name set forth on their Forms BD; (2) members use "generic" names that are based upon the firm name to promote certain areas of the firm's business; (3) the term "division of is used to distinguish those divisions of the member that conduct specialized businesses; (4) members permit certain firms, primarily financial planning firms, to use in advertising the phrases such as "service of or "securities offered through," followed by the name of the NASD member; or (5) members use confusing or misleading business cards and letterhead that incorporate one or more of the foregoing characteristics.

      GENERAL STANDARDS

      To address these problem areas, the proposed amendment sets forth general standards that would apply to any business card, letterhead, or other communication used in the promotion of a member's securities business. These general standards would require, among other things, that the names of NASD members be disclosed as prominently as any non-member entities named in communications; that when multiple entities are named in one communication, the nature of the relationships among the named entities and the products offered by each entity be made clear; that when an individual and multiple entities are named in one communication, the nature of the individual's relationship with each entity be clearly identified. The proposed general standards would also prohibit individuals from including in communications references to non-existent degrees or designations, or the use of bona fide degrees or designations in a misleading manner.

      SPECIFIC STANDARDS

      In addition to such general standards, the proposed amendment sets forth a number of specific standards that would apply to advertising and other commercial communications with the public. The specific guidelines seek to address four recurring problems that have been seen in advertising and sales literature.

      Fictional Names. Under these specific guidelines, members would be permitted voluntarily to use fictional, or DBA, designations only when the DBA name has been filed with the NASD and the SEC on the Form BD, and when it was the only name under which the member conducts business. In cases in which a state or other regulatory authority requires a member to use a DBA (e.g., because the member's NASD-approved name was deemed too similar to that of another corporation registered in the state), the amendment would permit the member to use the DBA only in the jurisdiction that requires its use. With respect to required use of DBA names, the proposed amendment would also require that, whenever possible, the member use the same DBA name in every jurisdiction that requires the use of a DBA. The proposed amendment would further require, with respect to a required DBA, that members clearly disclose in any communication both the name of the member as set forth on the Form BD and the fact that the firm is using a DBA designation in the particular state or jurisdiction.

      Generic Names. As to the use of generic names to promote certain areas of a member firm's business, the amendment would permit an NASD member to use an altered version of the firm name only when the generic name is a derivative of the name of the member, the member name is disclosed as prominently as the generic name, and the relationship between the member and the generic entity is made clear.

      "Division of" Designations. With respect to the use of "division of" and similar designations, the amendment would permit members to designate a portion of their businesses in this manner only when the designation is used with respect to a bona fide division of the member (i.e., a division that results from a merger or acquisition, or a functional division that conducts a specialized aspect of the member's business). The amendment would also require that the member name be disclosed as prominently as that of the division, and that the division be clearly identified as a division of the member.

      "Service of" and "Securities Offered Through." With respect to the use by financial planners or other non-member entities of phrases such as "service of" or "securities offered through," followed by the name of a member firm, the amendment would permit the use of member names in this manner only if the name of the member were disclosed as prominently as that of the non-member entity, and the securities function were clearly identified as a function of the member rather than the financial planning or other entity that was also named in the communication.

      The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:

      Mr. Lynn Nellius
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1506

      Comments must be received no later than October 3,1988. Comments received by this date will be considered by the NASD National Business Conduct Committee and NASD Board of Governors. Any changes to the NASD Rules of Fair Practice that are approved by the Board must be voted upon by the membership and thereafter filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice can be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330 or Anne H. Wright, NASD Office of General Counsel, at (202)728-8815.

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

      NOTE: New language is underlined.

      COMMUNICATIONS WITH THE PUBLIC

      Sec. 35.



      (g) Standards Applicable to the Use and Disclo; of the NASD Member's Name
      In addition to the provisions of subsection (. of this Section, members' public communications shall conform to the following provisions concerning the use and disclosure of the member's name:
      (1) General Standards
      (A) Any business card, letterhead or other communication used in the promotion of a member's securities business must clearly and prominently set forth the name of the NASD member.
      (B) The name of the NASD member firm shall be in type size at least as prominent as that used for any other entity named in the communication.
      (C) If more than one entity is named in the communication, any relationship among the entities shall be clear. However, if there is r direct relationship, the communication shall not imply that there is one.
      (D) If an individual is named in the com munication, the nature of the affiliation or relationship of the individual with each entit shall be made clear.
      (E) Individuals shall not create or award to themselves non-existent degrees or designa tions or use bona fide designations in a mis leading manner.
      (F) If products or services are offered by companies identified in the communication, there shall be no confusion as to which entity is offering which products and/or services. Securities products and services shall be clearly identified as being offered by the registered broker/dealer.
      (G) If the communication identifies a single company, the communication shall not be used in a manner which implies the offering of a product or service not available from the company named (e.g., an insurance agency business card should not accompany an offer of securities).
      (H) The positioning of disclosures can create confusion even if the disclosures or references are entirely accurate. To avoid confusion, a reference to an affiliation (e.g., registered representative), shall not be placed in proximity to the wrong entity.
      (I) Any references to memberships, (e.g.,NASD, SIPC, etc.) shall be clearly identified as belonging to the entity that is the actual member of the organization.
      (2) Specific Standards
      In addition to the foregoing general standards, the following specific standards apply:
      (A) Doing Business As: An NASD member may conduct business under a fictional name provided the following conditions are met:
      (i) Non-Required Fictional Name: A member may voluntarily conduct its business under a fictional name provided that the name has been filed with the NASD and the SEC, all business is conducted under that name and it is the only name by which the firm is recognized.
      (ii) Required Fictional Name: If a state or other regulatory authority requires a member to use a fictional name, the following conditions shall be met:
      • The fictional name shall be used to conduct business only within the state or jurisdiction requiring its use.
      • If more than one state or jurisdiction requires a firm to use a fictional name, the same name shall be used in each, wherever possible.
      • Any communication, including business cards and letterhead, shall disclose the name of the member and the fact that the firm is doing business in that state or jurisdiction under the fictional name, unless the regulatory authority prohibits such disclosure.
      (B) Generic Names: An NASD member may use altered versions of the firm name to promote certain areas of the firm's business or as an "umbrella" tag line to promote name recognition, provided the following conditions are met:
      (i) The generic name shall be a derivative of the name of the member.
      (ii) The name of the member shall be prominently disclosed as prominently as the generic name.
      (iii) The relationship between the entities named shall be made clear.
      (C) "Division of": An NASD member firm may designate an aspect of its business as a division of the firm, provided that the following conditions are met:
      (i) The designation shall only be used by a bona fide division of the member. This shall include:
      • a division resulting from a merger or acquisition that will continue the previous firm's business; or
      • a functional division that will conduct one specialized aspect of the firm's business.
      (ii) The name of the member shall be disclosed as prominently as the name of the division.
      (iii) The division shall be clearly identified as a division of the member firm.
      (D) "Service of": An NASD member firm may identify its brokerage service being offered through other institutions as a service of the member, provided that the following conditions are met:
      (i) The name of the member shall be disclosed as prominently as the name of the service.
      (ii) The service shall be clearly identified as a service of the member firm.

    • 88-64 Proposed Amendment Regarding Filing of Advertising and Sales Literature for Investment Company Securities; Deadline for Voting: October 3, 1988

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Mutual Fund
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      IMPORTANT MAIL VOTE

      EXECUTIVE SUMMARY

      The NASD invites members to vote on a proposed amendment to Article III, Section 35 of the NASD Rules of Fair Practice.

      The amendment would require advertising and sales literature for registered investment company securities to be filed by members with the NASD Advertising Department within 10 days of first use or publication. Currently, the rule requires members that are investment company underwriters to file advertising and sales literature concerning such companies.

      The proposed amendment would extend this requirement to all NASD members.

      BACKGROUND

      Article III, Section 35 of the NASD Rules of Fair Practice regulates members' communications with the public. It requires that all such communications be based on principles of fair dealing and good faith and that they provide a sound basis for evaluating the facts regarding any securities offered by members.

      Material facts and qualifications may not be omitted if, in the context of material presented, the omission would make the communication misleading. Exaggerated or misleading statements are prohibited, and members may not publish or distribute any public communication that the member knows or has reason to know contains any untrue statements of material facts or is otherwise false or misleading.

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

      Members must also file advertising and sales literature pertaining to direct participation programs within 10 days of first use, and certain options materials must be filed 10 days prior to first use. Also, advertising and sales literature concerning registered investment company securities must be filed within 10 days of first use by members that are underwriters of such companies.

      During the past two years, attention has been focused on problems with mutual fund advertising, particularly income fund advertising. The Securities and Exchange Commission (SEC) recently adopted extensive rule amendments governing the presentation of investment company performance (See SEC Release Nos. 33-6753; IC-16245). The NASD Board of Governors also addressed these concerns in Notice to Members 86-41 regarding the presentation of investment companies' yield quotations.

      One of the Board's concerns was that the problems were not limited to material prepared by investment company underwriters but were also common in material prepared by dealers. The Board noted that the majority of complaints received by the NASD about investment company communications related to material prepared by dealers. Much of the material was written and published by individual representatives or branch managers and reflected a lack of knowledge or observance of SEC and NASD Rules.

      In addition, numerous violations resulted from a dealer inappropriately revising an advertisement that was prepared by the underwriter or using the material long after the information contained therein was current. The NASD has referred such practices to the appropriate District Business Conduct Committee.

      The Board of Governors notes that the underwriter or distributor of a fund bears the responsibility to disseminate literature to dealers that has been filed with the NASD and that complies with applicable regulations. The Board is of the opinion that underwriters supplying non-complying material should be referred to the appropriate District Business Conduct Committee for possible disciplinary action. Nevertheless, the Board recognizes that a large number of problems are created after the material is distributed to dealers, or when dealers prepare the material themselves.

      Therefore, the Board of Governors has approved the proposed amendment to Article III, Section 35(c)(l) of the NASD Rules of Fair Practice and the amendment is now being submitted for membership approval. Prior to becoming effective, the rule change must also be approved by the Securities and Exchange Commission.

      COMMENTS RECEIVED

      The proposed amendment to Article III, Section 35(c)(l) of the NASD Rules of Fair Practice was published for comment in NASD Notice to Members 88-20 dated March 14, 1988. The NASD received 34 comments on the proposed amendment. Of these, 16 commentators were generally in favor of the proposed amendment and 16 were generally opposed. Two commented only on proposed procedures.

      The most frequent comment made both for and against the proposal was the concern that filings would be duplicated because it would be difficult to ascertain whether a piece had been filed previously by the underwriter.

      Additionally, it was noted that the proposed amendment did not clearly state the necessity to refile any communication supplied by the underwriter if the dealer has changed the communication in any way. It was also pointed out that the proposed language exempted from filing only material already filed by "the underwriter or distributor ... or by another member firm." Since the material may be filed by an entity other than an NASD member for subsequent use by NASD members, the proposed language was considered too restrictive.

      To deal with these concerns, the Investment Companies Committee recommended that the last sentence of the proposed amendment be further amended as follows:

      "Members are not required to file advertising and sales literature which have previously been filed [by the underwriter or distributor of the securities or by another member] and which are used without change."

      NOTE: New language underlined; deleted language in brackets.

      The Board of Governors approved the recommendation of the Investment Companies Committee.

      * * * * *

      The Board of Governors believes that the amendment to Article III, Section 35 of the NASD Rules of Fair Practice is necessary and appropriate and recommends that members vote their approval.

      Please mark the enclosed ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company."

      Ballots must be postmarked no later than October 3, 1988.

      Questions concerning this notice may be directed to R. Clark Hooper, NASD Advertising Department, at (202) 728-8330.

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

      NOTE: New language is underlined; deleted language is in brackets.

      Communications with the Public

      Sec. 35.



      (c) Filing Requirements and Review Procedures
      (1) Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts) shall be filed with the Association's Advertising Department within 10 days of first use or publication by any member, [who has utilized or distributed such material in connection with the offer or sale of such securities issued by companies for which such member is a principal underwriter.] Filing in advance of use is recommended [optional]. Members are not required to file advertising and sales literature which have previously been filed and which are used without change.



    • 88-63 New Requirements - Effective Immediately - Re Issuing Companies' Notification of NASD Regarding Material News

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Institutional
      Legal & Compliance
      Options
      Syndicate
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently approved changes to Part II of Schedule D to the NASD By-Laws requiring NASDAQ companies to notify the NASD of material news prior to release of the news to the public. Material news includes information regarding corporate events of an unusual or nonrecurring nature that may affect the value of the issuing company's securities or influence investors' decisions.

      Compliance with the new requirements may affect a company's continued NASDAQ qualification status.

      BACKGROUND AND EXPLANATION

      On August 8, the SEC approved changes to Part II of Schedule D to the NASD By-Laws requiring NASDAQ companies to notify the NASD of material news announcements prior to their release to the public. The NASD recommends that issuers notify the NASD of material news at least 10 minutes in advance.

      Another provision of the rule requires NASDAQ issuers to provide full and prompt responses to all requests for information by the NASD.

      Compliance with this new requirement may affect a company's continued NASDAQ qualification status.

      The rule change also eliminates the previous requirement that information released after 5 p.m., Eastern Time, be reported by 9 a.m., Eastern Time, the following day. The NASD Market Surveillance Section now has the ability to receive information 24 hours a day. In addition, oral notification must be confirmed promptly in writing.

      The purpose of this rule is to assist in maintaining a stable and orderly market for NASDAQ securities. One of the methods used by the NASD to accomplish this is the institution of NASDAQ trading halts. A trading halt benefits current and potential shareholders by halting trading in the NASDAQ System until there has been an opportunity for the information to be disseminated to the public. This decreases the possibility of some investors acting on information known to them but not known to others.

      A trading halt normally lasts about 30 minutes after the appearance of the news on the wire services, but it may last longer if a determination is made that the news has not been adequately disseminated. A trading halt provides the public with an opportunity to evaluate the information and consider it in making investment decisions.

      Upon receipt of the information from the company, the NASD, after consultation with the company, will immediately evaluate the information, estimate its potential impact on the market, and determine whether a trading halt in the security is appropriate.

      EXCERPTS FROM THE RULE LANGUAGE

      Schedule D requires NASDAQ companies to disclose promptly to the public through the press any material information that may affect the value of their securities or influence investors' decisions, and that NASDAQ companies notify the NASD of the release of any such information prior to its release to the public through the press. The Board of Governors recommends that NASDAQ companies provide such notification at least 10 minutes before such release.

      Schedule D, Part n, Section l(c)(13)

      The issuer shall make prompt disclosure to the public through the press of any material information that may affect the value of its securities or influence investors' decisions and shall, prior to the release of the information, provide notice of such disclosure to the NASD Market Surveillance Section. The issuer shall provide full and prompt responses to all requests for information by the NASD.

      Section 2(e)(14)

      The issuer shall make prompt disclosure to the public in the United States through international wire services or similar disclosure media of any material information that may affect the value of its securities or influence investors' decisions and shall, prior to the release of the information, provide notice of such disclosure to the NASD Market Surveillance Section. The issuer shall provide full and prompt responses to all requests for information by the NASD.

      Section 5(b)(2)

      Notification shall be provided directly to the NASD Market Surveillance Section by telephone. Information communicated orally by authorized representatives of a NASDAQ issuer should be confirmed promptly in writing.

      ADVANTAGES OF RULE CHANGE

      At its June 29 meeting, the NASD Corporate Advisory Board (CAB) considered the material news matter and concluded that the rule would be in the best interest of the investing public. The CAB is composed of 15 NASDAQ company representatives who advise the NASD Board of Governors on matters of interest to issuers.

      This rule will aid the NASD in facilitating the recent changes mandating the use of its Small Order Execution System for transactions in NASDAQ/NMS securities. By requiring issuers to notify the NASD of material news releases prior to notification to the press, the NASD will be better able to keep market participants informed.

      In the event that a trading halt would be an appropriate response to the news, prior notification will give the NASD an opportunity to make such a judgment and order a trading halt before the news becomes public.

      WHAT IS MATERIAL NEWS?

      Material information that might reasonably be expected to affect the value of a company's securities or influence investors' decisions would include information regarding corporate events of an unusual and nonrecurring nature.

      The NASD developed the following list of events, which is not exhaustive, to help determine whether information is material. Not all developments in these areas would warrant a trading halt.

      • A merger, acquisition, or joint venture.
      • A stock split or stock dividend.
      • Unusual earnings or dividends.
      • The acquisition or loss of a significant contract.
      • A significant new product or discovery.
      • A change in control or a significant change in management.
      • A call for redemption of securities.
      • The public or private sale of a significant amount of additional securities.
      • The purchase or sale of a significant asset.
      • A significant change in capital investment plans.
      • A significant labor dispute.
      • Establishment of a program to purchase a company's own shares.
      • A tender offer for another company's securities.
      • An event requiring the filing of a current report under the Securities Exchange Act.

    • 88-62 SEC Adopts Rule 10b-21 Prohibiting Shorting into Secondaries

      SUGGESTED ROUTING*

      Senior Management
      Corporate Finance
      Syndicate
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      In response to the NASD's request, the Securities and Exchange Commission (SEC) has adopted Rule 10b-21 to prohibit persons from purchasing securities out of a public offering to cover short sales executed after the registration statement is filed. The rule will be effective 30 days after publication in the Federal Register.

      BACKGROUND

      In 1974, the SEC first proposed for comment Rule 10b-21 to regulate the practice of short selling into secondary public offerings.1 Different versions of the proposal were published in 1975 and, again, in 1976.2 Since the SEC's first publication for comment of Rule 10b-21, the NASD has consistently maintained the position that the SEC should adopt a rule to regulate the practice of short selling into secondary public distributions.

      The NASD's concerns have focused on the practice of short selling prior to a secondary distribution of securities in order to lower the price of the security before the offering date and thereby reduce the offering price. The short sellers then can cover their short transactions by purchasing securities in the distribution at the reduced price.

      The NASD has argued that such short sellers are not subject to the usual market risk attendant on the covering transaction as the downward pressure of the short selling all but ensures that the transactions will be covered out of the offering at a lower price.

      As a result of the continuing concern expressed by the NASD's Corporate Financing Committee and Corporate Advisory Board, the NASD's Board of Governors submitted a petition for rulemaking (Petition) to the SEC on June 11, 1986. The Petition urged the SEC to adopt a modified version of Rule 10b-21 and included proposed language for the rule.

      In the Petition, the NASD argued that short selling into secondary distributions adversely affects issuers by depriving them of offering proceeds that would have been realized had the market not been subject to excessive short selling. Unlike the SEC's prior published versions of proposed Rule 10b-21, the NASD proposed that the rule apply only to short sale transactions entered into between the filing of the registration statement and commencement of the offering. Further, the NASD proposed that restrictions on covering transactions be limited to transactions with an underwriter or a member of the selling group where the short seller is bearing no market risk.

      In response to the NASD's Petition, the SEC published two alternative versions of Rule 10b-21 for comment in Securities Exchange Act Release No. 24485 (May 20, 1987). The NASD submitted three comment letters in response to the SEC's proposal. In support of its position, the NASD comment letters included a study of price movements immediately prior to and subsequent to secondary offerings and provided information with respect to investigations of three secondary offer ings where it was determined that manipulative short selling had occurred.3

      DESCRIPTION OF RULE 10b-21

      On August 25, 1988, the Securities and Exchange Commission approved the adoption of Rule 10b-21 on a temporary basis, but did not attach an expiration date.4 The Commission requested, however, that the NASD monitor the application of the rule to ensure its effectiveness during the first 18 months of its operation. The rule is to take effect 30 days after publication in the Federal Register.5

      A copy of the SEC release announcing adoption of Rule 10b-21 is attached.

      As adopted, Rule 10b-21 applies to all NASDAQ and exchange-listed securities that are underwritten on a "firm-commitment" basis. However, the rule includes an exemption for "shelf registrations, pursuant to SEC Rule 415. Rule 10b-21 applies only to short sale transactions between the time that a registration statement is filed with the SEC and the time that sales may be made pursuant to the registration statement.

      The rule prohibits any person who effects, during the restricted period, one or more short sales of equity securities of the same class as securities offered pursuant to a registration statement filed with the SEC from covering such short sales with offered securities purchased from an underwriter or broker or dealer participating in the offering.

      The version of the rule published for comment by the SEC included language that prohibited covering a short position "indirectly" with securities purchased from distribution participants. A number of commenters questioned whether this language imposed an insurmountable compliance burden on market makers to trace the source of securities used to cover a short sale transacted during the prohibited time period if the securities were purchased from the open market at the time of or immediately subsequent to the offering. Therefore, such commenters argued, the rule should include an exemption for market makers.

      To avoid ambiguity as to the application of the rule, the SEC has deleted the phrase "directly or indirectly" from the rule. The adopting release states that the SEC determined not to adopt an exemption for market makers as a result of concerns about the enforcement of Rule 10b-21 with respect to market makers that engage in the manipulative activity the rule is intended to address. Moreover, it is clarified that covering purchases effected by prearrangement or other understanding through other purchasers in the primary offering are proscribed through the operation of Section 20(b) of the Securities Exchange Act of 1934, which prohibits a person from doing indirectly any act that is prohibited directly by the Exchange Act or any rule thereunder.

      Questions concerning this notice can be directed to Suzanne E. Rothwell, Associate General Counsel, NASD Office of the General Counsel, at (202)728-8247 or to Laura R. Singer, Counsel to Market Surveillance, at (202)728-6982.


      1 Securities Exchange Act Release No. 10626A (February 12,1974).

      2 Securities Exchange Act Release No. 11328 (April 2, 1975) and Securities Exchange Act Release No. 13092 (September 21, 1976).

      3 The NASD's letters of comment are available for public inspection and copying at the SEC's Public Reference Room (See File No. S7-18-87) and from the NASD's Office of the General Counsel.

      4 Securities Exchange Act Release No. 26028 (August 25, 1988).

      5 Securities Exchange Act Release No. 26028 (August 25, 1988) was published in the Federal Register on August 31, 1988 and will be effective on September 30, 1988. See, 53 FR 33455 (August 31, 1988).


      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 33-6798; 34-26028; File No. S7-18-87]

      Short Sales in Connection with a Public Offeing

      AGENCY: Securities and Exchange Commission.

      ACTION: Temporary Rule.

      SUMMARY: The Commission today announced the adoption, on a temporary basis, of Rule 10b-21(T) under the Securities Exchange Act of 1934, pertaining to certain short sales in connection with a public offering of securities. Rule 10b-21(T) prohibits a person who effects short sales of an equity security during the period beginning at the time that a registration statement or Form 1-A relating to the same class of equity securities is filed and ending at the time that sales may be made in the offering, from covering such short sales with offered securities purchased from an underwriter or other broker or dealer participating in the offering of such securities.

      EFFECTIVE DATE: (Thirty days after publication in the Federal Register).

      FOR FURTHER INFORMATION CONTACT: Nancy J. Burke or Ivette Lopez at (202) 272-2848, Office of Trading Practices, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

      SUPPLEMENTARY INFORMATION:

      I. INTRODUCTION

      The Commission has adopted, on a temporary basis, Rule 10b-21(T) ("Rule") under the Securities Exchange Act of 1934 ("Exchange Act"),1 which is designed to prevent manipulative short selling of securities in anticipation of a public offering of the same securities. The Commission proposed the Rule for public comment2 in response to a petition ("NASD Petition") for rulemaking filed by the National Association of Securities Dealers, Inc. ("NASD"). 3 The Rule prohibits a person who effects one or more short sales of equity securities of the same class as securities distributed for cash pursuant to a registration statement filed under the Securities Act of 1933 ("Securities Act") 4 or pursuant to a notification on Form 1-A5 under the Securities Act, from covering such short sale or sales with offered securities purchased from an underwriter or broker or dealer participating in such public offering, if such short sale or sales took place during the period beginning at the time that the registration statement or Form 1-A is filed and the time that sales are permitted to be made pursuant to the registration statement or Form 1-A6. After considering the public comments received on the Proposing Release, the Commission has adopted the Rule substantially as proposed.

      The NASD Petition was based on concerns relating to short selling prior to a public offering.7 Such short sales may result in a decrease in the price of the security and consequently a lower offering price. The short sellers are then able to cover their sales and realize a profit by purchasing securities in the offering at the reduced price. Because of the availability of securities at a fixed price from the public offering, the risks entailed in covering those short sales are reduced substantially. The NASD indicated that this practice deprives the issuer of offering proceeds that otherwise would have been realized.

      The Commission suggested in the Proposing Release that certain drafting changes could improve the NASD proposal ("Alternative A"). Accordingly, an alternative formulation ("Alternative B") was presented that: (1) reflected the scope of the Commission's authority to promulgate the Rule by substituting the phrase "it shall be unlawful" for the proposed reference solely to Section 10(b) of the Exchange Act; 8 (2) deleted paragraph (b) of Alternative A since it was virtually identical to the definition of "short sale" contained in Rule 3b-3 under the Exchange Act; 9 (3) inserted the term "offered securities" since the Commission understood the NASD Petition to be addressed only to covering purchases involving the securities that are offered pursuant to a registration statement or Form 1-A;10 and (4) substituted the term "offering" for "distribution" since the latter term has a specific definition in Rule 10b-6 under the Exchange Act.11

      II. DISCUSSION

      A. The Need for the Rule

      The Commission received thirty-six comment letters submitted by thirty-two commentators.12 The majority of the commentators supported the adoption of the Rule. 13 Commentators favoring adoption stated that short selling in anticipation of a public offering can and does have the effect of driving down the price of the securities to be distributed. These commentators also indicated that, unlike the traditional short sale, persons selling short in anticipation of a public offering are not subject to the usual market risk accompanying the covering transaction, but are assured of covering with offered securities purchased in the public offering at a fixed, and generally lower, price. Only three commentators opposed adoption of the Rule, stating that manipulative short selling practices already are proscribed by existing laws, and that the Rule would have an adverse impact on normal market operations and result in unnecessary compliance burdens.

      Nine commentators responded to the Commission's request for comment regarding the extent of pre-offering short selling activity and the impact of such sales on the costs to issuers of completing an offering. Seven of these commentators described first-hand experiences with the adverse effects of short selling activity, which caused them to cancel proposed offerings, or to complete offerings even though they were deprived of proceeds that would have been realized had the market not been subject to such activity. They noted that the market price of the security to be offered had declined significantly just prior to the public offer ing, allegedly as a result of short selling, and caused them to forfeit substantial proceeds that they otherwise would have received.

      The NASD submitted information relating to investigations of three separate public offerings, and stated that, based on these investigations and others involving similar circumstances, it believed that the practice of short selling before a public offering with the intention of covering with shares purchased in the public offering is not uncommon. The investigations revealed substantial short selling activity by certain firms after the filing of the registration statement and a decline in the price of the stock prior to the effective date of the registration statement.14 In each investigation, the short sellers covered their short positions immediately after the offering at a profit with shares purchased from entities that had obtained them in the public offering. The NASD stated that the timing and prices involved in these transactions may indicate prearrangement.15

      The NASD also pointed to problems it faces in pursuing enforcement actions in such cases. The NASD does not have jurisdiction over certain non-broker-dealer entities from whom its members may routinely acquire offered securities to cover short positions established prior to an offering. Thus, the NASD may have difficulty obtaining information from those entities necessary to develop cases against such members. In addition, the NASD indicated that, since this abuse has not been specifically prohibited by a Commission rule, it must bring such cases under general anti-manipulation provisions of the federal securities laws which entail the difficult step of proving specific intent to depress the market price of the issuer's stock.

      B. Decision to Adopt Rule 10b-21(T)

      In light of the comments discussed above, the Commission believes that there is sufficient reason to adopt the Rule on a temporary basis,16 and has determined to adopt Alternative B with slight modifications. The Rule will help deter a practice that the Commission views as manipulative and destructive of issuers' capital raising activities.17 The Commission believes that the Rule will serve an important purpose by avoiding the difficult proof problems involved in demonstrating manipulative purpose.18

      Short selling involves sales of stock that the seller does not own. These sales are made with the expectation that the market price of the stock will be lower at the time of the covering transactions. This selling entails the risk that the security's price might increase or the security's supply might be limited. The Commission believes that legitimate short selling activity contributes to the efficient pricing of securities. The activity prohibited by the Rule differs, however, from short selling as usually practiced because a short seller who covers from an offering has access to a pool of securities obtainable from identifiable sources at prices based upon market values that can be adversely affected by the short seller's activity. No such pool of securities or pricing relationships are, however, available for short selling activity as usually practiced. The market risk facing short sellers who cover their positions from the offering can therefore be less than the market risk that generally faces short sellers. This lower degree of risk can, in turn, provide the incentive for manipulative short selling. Because it results in a level of short selling activity greater than that which would otherwise occur in the secondary market for the issuer's shares, that manipulative short selling can cause an artificial price decline around the time of the offering.

      The Rule will not adversely affect legitimate market activity. It does not proscribe short selling, nor does it prevent covering transactions made in the open market. Moreover, the Rule does not prevent using securities acquired in a public offering to cover short sales effected prior to the time that the registration statement was filed, or short sales effected after the time that sales may be made in the offering.19 The Rule is narrowly drawn to impede the particularly abusive conduct of short selling in anticipation of a public offering and covering with offered securities. As a result, all short sellers will be exposed to the risks inherent in short selling, namely, that the necessary securities may not be readily available, or that if available, they may be priced higher than the public offering price.

      C. Time Period Covered by the Rule

      As proposed, the Rule would have applied to short sales effected during the period "between the filing date of the registration statement or Form 1-A and the date that sales may be made pursuant to the registration statement or Form 1-A." The Commission believes that this period is overly broad in that it captures short sales made (1) on the date of filing, but prior to the time of filing, and (2) on the date of effectiveness, but after the time of effectiveness. Short sales made at those times, however, do not implicate the abuses to which the Rule is addressed. Accordingly, the period specified in the Rule has been refined to begin at the time that the registration statement or Form 1-A is filed with the Commission and end at the time that sales may be made pursuant to the registration statement or Form 1-A.20

      D. Indirect Covering Purchases

      The Rule as proposed would have prohibited a short seller from "directly or indirectly" covering short sales with securities purchased in the public offering, if the short sales took place between the filing date of the registration statement or Form 1-A and the time that sales may be made. Several commentators objected to the term "indirectly," particularly as it would apply in the context of market making activities, and suggested that the Commission include an exemption for market makers from the Rule's restrictions.21

      Specifically, one commentator stated that the word "indirectly" was undefined and ambiguous, leaving open to question exactly what types of transactions were prohibited by the Rule. Several commentators suggested that the term "indirectly" could be read to require a market maker who had established a short position in the normal course of business to ascertain whether the shares purchased in the market following an offering had been issued in that offering. This was described as an insurmountable compliance burden that might severely restrict the legitimate activities of market makers during the period from the filing date of the registration statement and its effectiveness. Commentators remarked that, because no market maker would want to assume such a burden, trading would be disrupted, thereby adversely affecting the liquidity of the market and the stability of security prices. Such result, it was argued, would not be in the public interest.

      The NASD, in its letter dated June 8,1988, however, urged the Commission not to remove market makers from the Rule's coverage, although it acknowledged that prior proposals of the Rule did provide for an exemption for bona fide market makers. According to the NASD, the term "indirectly" was intended to cover the situation where a short seller interjects an intermediary for the purpose of covering a short sale with securities purchased in a public offering. In the NASD's opinion, normal market making purchases would not constitute the type of conduct meant to be covered by the term "indirectly." Consequently, it believed that no special compliance procedure to determine the source of the securities purchased would be required. Any exemption for market makers, stated the NASD, would shield market makers engaged in manipulative short selling and would hinder successful enforcement of the Rule.

      The Commission agrees with the NASD that a market maker exemption may allow certain persons who engage in manipulative pre-offering short selling to continue that activity free of the Rule's restrictions. Nonetheless, the Commission recognizes the adverse effects that the reading of the proposed Rule suggested by some commentators might have on market makers and securities markets, and has modified the Rule to address those concerns. The "indirectly" language of the proposed Rule was intended to address circumstances where a person covers his short sale by an arrangement or understanding to obtain offered securities from another person who acquires the securities in the primary offering. However, that language could have been interpreted broadly to bring within the Rule transactions in which a person acquired in the marketplace offered securities from persons who had purchased in the offering, but where there was no arrangement or understanding as described above. In order to avoid this ambiguity and possible uncertainty on the part of market participants, the phrase "directly or indirectly" has been deleted from the Rule.

      The Rule as adopted prohibits purchases of offered securities to cover short sales made during the specified period, as originally intended. The Rule proscribes such covering purchases effected directly from an underwriter, broker, or dealer participating in the offering. Moreover, such covering purchases effected by prearrangement or other understanding through other purchasers in the primary offering are proscribed through the operation of Section 20(b) of the Exchange Act,22 which prohibits a person from doing indirectly any act that he is prohibited from doing directly by the Exchange Act or any rule thereunder. Thus, the "prearrangement" of the sort that the NASD believes may have been present in the cases it investigated23 would be prohibited by Rule 10b-21(T) through the operation of Section 20(b).24

      E. Other Issues

      The Commission requested commentators to address various other issues related to the Rule including the specified time period of the Rule, and application of the Rule to exchange-traded securities and to shelf offerings conducted pursuant to Rule 415 under the Securities Act.25

      Two commentators expressed concern about the time period specified in the Proposing Release, i.e., from the filing date of a registration statement or Form 1-A until the time that sales may be made. They noted that a significant period of time could occur between those two events and suggested the period begin on the later of a specified number of days prior to the date sales may be made or the date of filing of the registration statement or Form 1-A. The Commission recognizes that, where, for example, extended review of a registration statement is involved, a substantial period of time could elapse before the public offering commences. Nevertheless, use of a lesser time period would create compliance problems because short sellers would not necessarily be aware of the effective date planned for an offering. Accordingly, the Commission is adopting the Rule with the time period essentially as proposed.26

      There was little comment on the propriety of applying the Rule to exchange-traded securities. Two commentators noted that the "tick test" of Rule 10a-127 may not be a proper deterrent to short selling prior to an offering of exchange-listed securities and that the Rule should apply to such securities. One commentator pointed out that, in light of the differences between the over-the-counter and exchange markets, the Rule should apply to over-the-counter securities only. The NASD specifically declined to comment on the issue. The Commission believes that the potential for manipulative short selling based on the ability to cover in the offering exists both on an exchange and in the over-the-counter market. Accordingly, the Rule as adopted applies to both over-the-counter and exchange-listed securities.28

      Several commentators stated that the Rule should not apply to shelf offerings conducted pursuant to Rule 415 under the Securities Act. The Commission agrees that such offerings are not normally conducive to the abuse at which the Rule is directed. Accordingly, the Commission has decided to except Rule 415 offerings from the coverage of the Rule. The Commission has also determined to limit the applicability of the Rule to firm commitment offerings, as these offerings present a greater potential for manipulative short selling.29

      III. FINAL REGULATORY FLEXIBILITY ANALYSIS

      This Final Regulatory Flexibility Analysis, which relates to Rule 10b-21(T), has been prepared in accordance with 5 U.S.C. 604. The corresponding Initial Regulatory Flexibility Analysis ("IRFA") is contained in the Proposing Release.30 No comments on the IRFA were received.

      A. The Need for and Objectives of the Rule

      Rule 10b-21(T) prohibits a person who effects short sales of an equity security during the period beginning at the time that a registration statement or Form 1-A relating to the same class of equity securities is filed and ending at the time that sales may be made pursuant to such registration statement or Form 1-A, from covering such short sales with securities purchased from an underwriter or broker or dealer participating in the public offering of such equity securities. The Rule excludes offerings conducted pursuant to Rule 415 under the Securities Act and offerings conducted otherwise than on a firm commitment basis. The Rule is designed to prevent manipulative short selling by market participants in anticipation of underwritten public offerings.

      Manipulative opportunities exist in such offerings because outstanding securities can be sold short prior to the commencement of a public offering of such securities with the motive that such selling activity will lower the price of the offered security and enable the short seller to cover at a depressed price. The ability to purchase shares in the public offering substantially reduces the risks entailed in such short selling. Because the shares in a public offering are generally priced at or slightly below the price of securities of the same class and series in the existing trading market as of a given date shortly before the public offering commences, the issuer and underwriting group may be forced to offer the security at a lower price if the market price decreases during the registration process, especially in the period immediately before the offering price is fixed. As a result, the issuer may realize lower than expected proceeds while the short sellers may cover their short sales with lower priced securities purchased in the public offering.

      The Rule addresses the concerns created by the type of short selling activity described above without affecting open market activities. It is designed to deter a practice that does not involve legitimate short selling activity. The Rule only prohibits covering short sales with offered securities purchased from an underwriter or broker or dealer participating in a public offering of such securities. Short sellers will still be able to cover their short sales with purchases outside the public offering. Such purchases would expose short sellers to the risks inherent in short selling, namely, that the necessary securities may not be available in the amount required, or that if available, the securities may be priced higher than the public offering price.

      B. Issues Raised by Public Comment

      No comments were received on the IRFA. Several commentators remarked, however, that the Rule would impose difficult compliance burdens on market makers as it applied to their purchases to cover short positions established in the course of normal market making activities. The Commission does not intend that market makers establish specific procedures to ensure that shares purchased in normal market making transactions did not originate from a public offering. The Rule is designed to address those situations in which a per son covers his short sale by an arrangement or understanding to obtain offered securities from another person who acquired the securities in the primary offering.

      C. Significant Alternatives

      The Regulatory Flexibility Act directs the Commission to consider significant alternatives to the Rule consistent with the stated objectives of the applicable statutes and designed to minimize any significant economic impact of the Rule on small entities. The Rule has the potential to affect small businesses that engage in short sales prior to a distribution, small businesses with an existing market for their stock that anticipate a public offering of stock, and small broker-dealers that participate in the offering of securities.

      The Rule prohibits the covering of a short sale from a broker or dealer participating in a public offering of the security sold short. The Commission has previously proposed three different versions of the Rule, none of which were adopted. In the Commission's opinion, the Rule adopted today is the least intrusive to deal with the practice of manipulative short selling prior to a public offering. Indeed, small issuers with an existing market in their stock may benefit from the Rule since it should remove an incentive to engage in short selling of the issuer's stock before a public offering. The Commission continues to believe that any adverse economic impact on small entities will be outweighed by the primary objective of the Rule, which is to prevent manipulative short selling of an issuer's securities by market participants in anticipation of an underwritten public offering.

      IV. COST-BENEFIT ANALYSIS

      The Commission indicated in the Proposing Release that the cost associated with the Rule would be a reduction in the ability of market participants to sell short in advance of offerings that they believed to be overpriced, resulting in an increased incidence of such offerings. The NASD questioned the assumption underlying this statement, namely, that there is a correct price for securities distributed in a public offering, and stated that the criteria to be used in determining when an offering is overpriced are not well defined. The NASD pointed out that the Rule is intended to ensure that a short seller will not use the distribution process to eliminate the market risk associated with short sale transactions. Another commentator pointed out that the Rule does not prohibit short selling, but merely restricts covering transactions in the context of a registered offering and for a limited and well-defined period. A third commentator acknowledged that short selling could benefit the public by allowing a security to be purchased at a more attractive price, but also was of the opinion that to allow the short seller to cover through the public offering represented an unfair advantage and could result in manipulative conduct.

      Although the Commission recognizes that the Rule will diminish a short seller's ability to effect a covering transaction by restricting the source of securities from which he may cover, it believes the Rule will not prevent the beneficial effects of short selling from reaching the market. If legitimate market forces would have driven down the price of a security before a public offering in the past, those same forces are free to operate in the same manner today.

      The Commission believes that the cost of restricting a short seller's ability to cover is balanced by the benefits derived from preventing manipulative short selling activity before a public offering. Several commentators described instances of such selling resulting in the withdrawal of proposed public offerings or in lower proceeds than anticipated. In the case of a withdrawn public offering, an issuer faces out-of-pocket expenses that have been incurred by the time the offering is filed. When an issuer completes a public offering despite lower proceeds, it may have been forced to do so because of an urgent need for the funds or the higher cost of alternative financing. The Rule adopted today will allow an issuer to proceed with a proposed offering without facing the situations described above. The Commission believes that the resulting benefit to issuers outweighs the limited cost imposed on short sellers.

      V. EFFECTS ON COMPETITION

      Section 23(a)(2) of the Exchange Act31 requires the Commission, in adopting rules under the Exchange Act, to consider the anti-competitive effects of such rules, if any, and to balance any impact against the regulatory benefits gained in terms of furthering the purposes of the Exchange Act. The Commission has considered Rule 10b-21(T) in light of the standards cited in Section 23(a)(2) and believes for the reasons stated in this release that adoption of Rule 10b-21(T) will not impose any burden on competition not necessary or appropriate in furtherance of the Exchange Act.

      List of Subjects in 17 CFR Part 240

      Broker-dealers, Reporting and recordkeeping requirements, Securities, Issuers, Fraud.

      Statutory Authority and Text of Rule

      The Commission hereby amends Part 240 of Chapter II of Title 17 of the Code of Federal Regulations as follows:

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

      1. The authority citation for Part 240 is amended by adding the following citation.
      Authority: Sec. 23, 48 Stat. 901, as amended, 15 U.S.C. 78w, * * * §240.10b-21(T) also issued under Sees. 2, 3, 9(a)(6), 10(a), 10(b), 15(c), 23(a), and 30(a), 15 U.S.C. 78b, 78c, 78i(a)(6), 78j(a), 78j(b), 78o(c), 78w(a), and 78dd(a).
      2. By adding new text of §240.10b-21(T) to read as follows:
      §240.10b-21(T). Short Selling in connection with a public offering.
      (a) It shall be unlawful for any person who effects one or more short sales of equity securities of the same class as securities offered for cash pursuant to a registration statement filed under the Securities Act of 1933 ("Securities Act") or pursuant to a notification on Form 1-A under the Securities Act ("offered securities") to cover such short sale or sales with offered securities purchased from an underwriter or broker or dealer participating in the offering, if such short sale or sales took place during the period beginning at the time that the registration statement or Form 1-A is filed and ending at the time that sales may be made pursuant to the registration statement or Form 1-A.
      (b) This rule shall not apply to offerings filed under Rule 415 under the Securities Act (17 CFR 230.415) or to offerings that will not be conducted on a firm commitment basis.
      (c) This rule shall not prohibit any transac tion or transactions if the Commission, upon writ ten request or upon its own motion exempts such transaction or transactions either unconditionally or on specified terms and conditions.

      By the Commission.

      Jonathan G. Katz
      Secretary

      Date: August 25,1988


      1 15U.S.C.78a etseq.

      2 Securities Exchange Act Release No. 24485 (May 20, 1987), 52 FR 19885 ("Proposing Release").

      3 The NASD Petition was filed with the Com mission on June 12, 1986 pursuant to 553(e) of the Administrative Procedure Act, 5 U.S.C. §553(e), and Rule 4(a) of the Commission's Rules of Prac tice, 17 CFR 201.4(a), and is publicly available in File No. S7-18-87 in the Commission's Public Reference Room.

      4 15 U.S.C. 77a et seq.

      5 17 CFR 239.90. Form 1-A is used in con nection with offerings made pursuant to Regula tion A under the Securities Act. 17 CFR 230.251- 230.264.

      6 The Commission previously proposed three different versions of the Rule, none of which has been adopted. See Securities Exchange Act Release No. 10636 (February 11, 1974), 39 FR 7806; Securities Exchange Act Release No. 11328 (April 2, 1975), 40 FR 16090; and Securities Exchange Act Release No. 13092 (December 21, 1976), 41 FR 56542; File No. S7-510. For further discussion of these proposals, see Proposing Release, 52 FR at 19886. In light of today's adoption of the Rule as proposed in 1987, the Commission is withdrawing all three prior proposals.

      7 The NASD's study, "Short-Sale Regulation of NASDAQ Securities" (November 2, 1986), headed by former Commissioner Irving M. Pollack, endorsed the NASD Petition and the proposed Rule.

      8 The Commission observed that the notational convention of using "10b-" to designate a rule is not a reflection of the scope of the rule's statutory authority. See Proposing Release, 52 FR at 19987 n.19.

      9 17 CFR 240.3b-3.

      10 The NASD urged the Commission to regulate only those covering purchases made out of the public offering to avoid affecting the operation of the market for the securities already outstanding. The Commission agrees that covering short sales in the open market exposes the short seller to the risk that securities to cover the short sale will not be readily available in the amount required, or will be priced higher than the public offering price, and that such purchases should not be restricted by the Rule.

      11 See 17 CFR 240.10b-6(c)(5).

      12 The letters of comment, as well as a summary of the comment letters prepared by the staff, are available for public inspection and copying at the Commission's Public Reference Room. See File No. S7-18-87.

      13 The six commentators who discussed the alternative proposed formulations, including the NASD, endorsed Alternative B.

      14 The Commission had requested that commentators provide statistical analysis demonstrating the extent to which short selling prior to public offerings results in a decrease in the market price of the security to be offered. In response, the NASD conducted a study ("NASD Study") that analyzed the price movements of 194 NASDAQ issues (i.e., securities quoted in the National Association of Securities Dealers Automated Quotation System) and 158 exchange-listed issues immediate ly prior to and subsequent to non-initial public of ferings of common stock conducted from May 1, 1986 to May 31, 1987 and priced at $5 or more.
      The NASD Study also examined equity audit trail data for NASDAQ/NMS securities (i.e., NASDAQ securities designated as national market system securities under Rule HAa2-l under the Exchange Act, 17 CFR 240.11Aa2-l), and National Securities Clearing Corporation (NSCC) clearing short position data for many of the 194 NASDAQ securities included in the price performance analysis.
      The NASD Study concluded that its findings provide evidence of unusual short selling, as well as the possible effect of Rule 10b-6 under the Ex change Act, 17 CFR 240.10b-6, on the market price of securities subject to non-initial public offerings. Rule 10b-6 precludes persons participating in a distribution from bidding for or purchasing the security to be distributed, absent an exception to or exemption from the rule. The NASD further concluded that the price data reviewed are consistent with the widely held view that a pattern exists of short selling prior to a non-initial public offering, with covering transactions made from offered securities.
      The NASD Study, along with two other studies it references, Barclay and Litzenberger, "Announcement Effects of New Equity Issues and the Use of Intraday Price Data," and Barclay, "Common Stock Returns Preceding Seasoned New Equity Offerings on the New York Stock Exchange," are attached as exhibits to the NASD's comment letter dated November 2,1987, included in File No. S7-18-87.

      15 Any prearrangement between short sellers and those purchasing from underwriters or broker-dealers participating in the offering would be an "indirect" covering transaction with offered securities and would violate the Rule. See Section II.D. infra.

      16 The Commission is adopting the Rule on a temporary basis to give it the opportunity to analyze, at a later date, whether the Rule is achieving its intended purpose. In this regard, the Commission's staff will request the NASD and the exchanges to furnish statistical information for non-initial public offerings conducted after adoption of the Rule for an eighteen-month period. The staff will then review this data and report to the Commission, within twenty-four months of adoption, whether the pricing impact the NASD believes is indicative of short selling persists and whether any new pricing impacts are observed. At that time, the Commission may revisit Rule 10b-21(T), including whether the Rule should continue to apply to exchange-traded securities.

      18 The Commission has on other occasions recognized the need to protect the market for of-fered securities from the manipulative influences of certain market participants by adopting such rules as Rules 10b-6 and 10b-7 under the Exchange Act, 17 CFR 240.10b-6 and 240.10b-7. These rules limit bids and purchases, including stabilizing transactions, by persons participating in a distribution of securities to prevent their artificially conditioning the market to facilitate the distribution.
      A few commentators, including the NASD in its comment letter dated November 2, 1987, sug gested that Rule 10b-6, which requires distribution participants to cease market making in the security to be distributed two or nine business days prior to the offering's commencement, may also play a role in a decline of the security's price immediately preceding the offering. The NASD, in its comment letter dated June 2, 1988, stated that its investigation of a corporation that experienced a lower stock price prior to an offering demonstrated that such decline is not necessarily due to the withdrawal of market makers for Rule 10b-6 purposes, but may be due to short selling. The Commission believes that adoption of Rule 10b-21(T) will prevent price declines due to abusive short selling activity related to the ability to cover from the offering, independent of price effects, if any, that may result as a consequence of Rule 10b-6.

      19 See Section II.C. infra for a discussion of the time period covered by the Rule.

      20 In most registered offerings, the time that sales may be made occurs on the date of effectiveness of the pricing amendment to the registration statement. However, for offerings conducted pursuant to Rule 430A under the Securities Act, 17 CFR 230.430A, the time that sales may first be made is on the date of pricing, which may be later than the effective date.
      Where a short position is held immediately prior to the time of filing, and one or more subsequent short sales and covering transactions occur, it will not always be evident whether the short sales associated with a current short position were effected before the time of filing or subsequently. Under these circumstances, it is intended that holders of short positions prior to the time of filing may cover, with offered shares purchased from a broker or dealer participating in an offering, the lesser of the short position that existed immediately prior to the filing time or the smallest short position held subsequent to that time. Cf. Letter regarding Bernard H. Raouls, Jr., [1985-1986 Transfer Binder] Fed.Sec.L.Rep. (CCH) |78,144, at 76,637 (June 7, 1985).

      21 Previous versions of the Rule included an exemption for bonafide market makers, exchange specialists, odd-lot dealers, and bonafide ar bitrageurs. See note 6 supra.

      22 15 U.S.C. 78t(b). Section 20(b) provides: It shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this title or any rule or regulation thereunder through or by means of any other person.
      Although Section 20 is entitled "Liabilities of Controlling Persons," paragraph (b) is not limited to situations involving persons in control relationships.

      23 See note 15 supra.

      24 Trading volume in a security subject to an offering may be greater than usual on the offering's effective date, indicating that a significant number of shares sold in the public offering have entered the secondary market. Customers of the distribution participants may have purchased in the offering and have decided to sell shortly thereafter. Moreover, certain distribution participants may resume market making as soon as the distribution is completed. However, a person with a short position is not required by the Rule to inquire whether any covering purchases he makes in the secondary market (e.g., from a market maker who had participated in the distribution) include shares that had been acquired in the offering.

      25 17 CFR 230.415.

      26 See Section II.C. supra.

      27 17CFR240.10a-l.

      28 See note 16 supra.

      29 One commentator suggested adding to theRule a prohibition on covering purchases made from an issuer to prevent manipulative short selling in connection with rights offerings. The Commission is not aware of this type of abuse occurring in rights offerings and is therefore not adopting the suggested change. The Commission will, however, continue to review whether the Rule should be extended to rights offerings, self offerings, and best efforts offerings.

      30 52 FR at 19888.

      31 15 U.S.C. 78w(a)(2).


    • 88-61 Interpretations - Effective Immediately - of SOES Rules Regarding Compliance With Maximum Order Size Restrictions.

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Small Order Execution System (SOES) was created to allow public customers to enter orders of limited size into the NASDAQ System for immediate execution at the best available price. Section 3(c) of the SOES Rules states that, "Agency orders in excess of the maximum order size may not be divided into smaller parts for purposes of meeting the size requirements for orders entered into SOES."

      In light of certain order aggregation practices by associated persons and by customers who control several accounts, the NASD has adopted interpretations of SOES Rules to clarify the intent of the rules. These interpretations are effective immediately.

      Where a single investment decision has been made involving the purchase or sale of more than the maximum order size, the order cannot be executed through SOES. Trades entered within any five-minute period in accounts controlled by an associated person or customer will be presumed to be based on a single investment decision.

      For purposes of SOES Rules, an order will not be considered an order from a public customer if it is for an account of a person associated with a member firm who has physical access to a terminal capable of entering orders into SOES or if it is for an account of a member of the "immediate family" of the associated person.

      BACKGROUND

      In 1984, the NASD implemented the Small Order Execution System (SOES) to enable public customers to have their orders of limited size entered into the NASDAQ System for immediate execution at the best available price. SOES was designed exclusively for individual retail customer orders restricted to a maximum size. Accordingly, the SOES rules prohibit any practice designed to circumvent the SOES execution size limits, including breaking up larger orders for execution in SOES. The NASD Market Surveillance Committee has taken several disciplinary actions against firms and individuals for such conduct. SOES rules also restrict its use to agency orders of public customers, not principal trades by dealers. Disciplinary actions have also been taken against firms entering professional, proprietary orders through the system.

      After the market break of October 1987, SOES was upgraded to enhance the quality of service and access provided to individual customers. Participation in SOES became mandatory for all market makers in NASDAQ National Market System securities. Such market makers are committed to executions for at least five times the maximum order size in every security for which they are making markets if their quotes are the inside market or the orders are preferenced to them. NASDAQ market makers are also now subject to a 20-business-day penalty for any unexcused withdrawal from NASDAQ. All of these changes were made to enhance SOES as a system designed to serve individual customers entering small orders.

      As a result of the system's enhancements and the increased commitment of market makers to SOES, the NASD has carefully monitored the utilization of SOES since the June 30, 1988 effective date of mandatory SOES participation. It appears that the SOES size limitations are being circumvented by the entry of a group or series of orders which individually may appear to be SOES eligible but are the result of one investment decision. These orders are generally entered in the form of a group or series of transactions for one or more accounts that are related or controlled by a person associated with a member firm or by a customer, and therefore should be aggregated for purposes of determining compliance with SOES size limitations.

      The NASD is issuing this interpretation of the SOES Rules of Practice and Procedures to clarify how those rules apply to these practices.

      INTERPRETATIONS OF SOES RULES

      Aggregation of Transactions in Related Accounts -Section c) 3) C) of the SOES Rules provides:

      Only agency orders no larger that the maximum order size, as defined herein, received from public customers may be entered by a SOES Order Entry Firm in to SOES for execution against a SOES Market Maker. Agency orders in excess of the maximum order size may not be divided into smaller parts for purposes of meeting the size requirements for orders entered in to SOES.

      Section a) 7) of the SOES Rules defines "maximum order size" for SOES as:

      the maximum size of individual orders for a security that may be entered into or executed through SOES.1

      Since the initiation of SOES, the NASD has interpreted the above-cited provisions as preventing a firm or customer from breaking up an order too large for SOES into a series of smaller orders executed through the system. Thus, where a single investment decision has been made involving the purchase or sale of more than the maximum order size, the order cannot be executed through SOES.

      The recent development of certain aggregation practices by associated persons and customers who control several accounts makes it necessary to clarify the application of the SOES rules to these new situations. In some cases, an associated person or customer controlling several accounts may, after making one investment decision, simultaneously place a group of maximum-size orders, one for each controlled account. Associated persons have been accepting these orders and entering them into SOES as a series of SOES-eligible transactions. In other cases, customers or associated persons have executed a series of orders in their personal accounts based on one investment decision. These practices violate the intent underlying the SOES Rules.

      For purposes of the SOES rules, orders that are based on a single investment decision and that are entered by a SOES order entry firm for accounts under the control of an associated person or public customer will be deemed to constitute a single order and will be aggregated for determining compliance with the SOES order size limits. Trades entered within any five-minute period in accounts controlled by an associated person or customer will be presumed to be based on a single investment decision. An associated person or customer will be deemed to control an account if he exercises discretion over the account or has been granted a power of attorney to execute transactions in the account, or if the account is his personal account or, in the case of an associated person, the account of a member of his "immediate family" as that term is defined in the NASD Free-Riding Interpretation.

      Restriction to Public Customer Orders -The restriction in the SOES Rules that permits the system to be used only for agency orders of public customers is intended to preclude use by firms for their proprietary trading or for similar types of activity by professionals trading for their own accounts. It would change the character of SOES as a system designed exclusively for individual investors' small orders to permit professional trading activity to occur in the system.

      To assure that SOES is utilized only for orders of public customers and not for orders for firms' accounts or accounts of professional trading personnel, the NASD is clarifying what constitutes an order from a public customer.

      For purposes of the SOES Rules, an order will not be considered an order from a public customer if it is for any account of a person associated with a member firm who has physical access to a terminal capable of entering orders in to SOES or for any account of a member of the "immediate family" of such associated person, as that term is defined in the NASD Free-Riding Interpretation.2

      The NASD believes these clarifying interpretations of the SOES Rules will assure the continued integrity of the Small Order Execution System as a premier order execution system for public customers.

      Activity of members inconsistent with the provisions of this Interpretation shall, in addition to violating the referenced SOES rules, violate Article III, Section 1 of the NASD Rules of Fair Practice.

      This Interpretation shall be effective immediately.

      Any questions regarding this notice may be directed to Dennis Hensley (202) 728-8245, James M. Cangiano (202) 728-8186, or Laura R. Singer (202) 728-8204.


      1 The maximum size for each security is published from time to time by the NASD. See, for example, NASD Notice to Members 88-43 (June 22, 1988) in which levels of 1,000,500, and 200 shares were established.

      2 See Interpretation of the Board of Governors - Free-Riding and Withholding under Article III, Section 1 of the NASD Rules of Fair Practice, NASD Manual (CCH), pages 2041, 2045. The Free-Riding Interpretation defines "immediate family as including parents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children.


    • 88-60 Quarterly Check List of NASD Notices to Members

      SUGGESTED ROUTING*

      Senior Management
      Operations
      Research

      *These are suggested departments only. Others may be appropriate for your firm.

      The following NASD Notices to Members were issued during the second quarter of 1988. Requests for copies of notices should be accompanied by a self-addressed mailing label and sent to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006-1506.

      Notice

      Date

      Topic

      88-26

      4/12

      Request for Comments on Proposed Amendments to Appendix A to Article III, Section 30 of the NASD Rules of Fair Practice

      88-27

      4/13

      NASDAQ National Market System Totals 2,994 Securities With 11 Additions on April 19, 1988

      88-28

      4/15

      Quarterly Check List of NASD Notices to Members

      88-29

      4/28

      Proposed New Section 3 to Article VII and Amendment to Article XI, Section 4 of the NASD By-Laws Concerning Emergency Authority Of the NASD Board of Goverors

      88-30

      4/28

      NASDAQ National Market System Totals 2,976 Securities With Two Additions on May 3, 1988

      88-31

      5/4

      Proposed Amendments to ArticleV, Section 1 of the NASD Rules of Fair Practice and Section 12(2) of the Proposed Government Securities Rules: Removal of Fine Limitations

      88-32

      5/10

      Amendment to the NASD Board of Governors' Corporate Financing Interpretation Regarding Public Offerings When Proceeds Are Directed to NASD Members

      88-33

      5/12

      Adoption of Amendments to Schedule E to the NASD By-Laws, Effective Immediately

      88-34

      5/12

      Adoption of New Section 67 of the NASD Uniform Practice Code Regarding Delayed Closings, Effective June 12, 1988

      88-35

      5/12

      NASDAQ National Market System Totals 2,945 Securities With Seven Additions on May 17, 1988

      88-36

      5/19

      Memorial Day Trade Date-Settlement Date Schedule

      88-37

      5/26

      SIPC Trustee Appointed: Omni Mutual, Inc., Two Wall Street, New York, New York 10005

      88-38

      5/31

      SEC Approves New Category of Limited Representative Registration—Corporate Securities Examinations (Series 62); Study Outline Available

      88-39

      6/1

      NASDAQ National Market System Totals 2,950 Securities With 10 Additions on June 7, 1988

      88-40

      6/1

      Adoption of New Schedule H to the NASD By-Laws and Proposed Amendment to Article III, Section 21 Of the NASD Rules of Fair Practice

      88-41

      6/7

      Independence Day Trade Date-Settlement Date Schedule

      88-42

      6/17

      NASDAQ National Market System Advances to 2,954 Securities With 14 Additions on June 21,1988

      88-43

      6/22

      Adoption of Amendments to the Rules of Practice and Procedures For the NASD Small Order Execution System And to Schedule D to The NASD By-Laws, Effective June 30, 1988

      © National Association of Securities Dealers, Inc., 1988.

      NASDAQ and NASDAQ/NMS are registered trademarks and service marks of the National Association of Securities Dealers, Inc.

    • 88-59 Labor Day Trade Date-Settlement Date Schedule

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Training

      *These are suggested departments only. Others may be appropriate for your firm.

      Securities markets and the NASDAQ System will be closed on Monday, September 5, 1988, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule.

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

      Trade Date

      Settlement Date

      Regulation T Date*

      August 26

      September 2

      September 7

      29

      6

      8

      30

      7

      9

      31

      8

      12

      September 1

      9

      13

      2

      12

      14

      5

      Markets Closed

      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 NASD 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 can be directed to the NASD Uniform Practice Department at (212) 858-4341.


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

    • 88-58 September First-Saturday Exam Session Changed

      SUGGESTED ROUTING*

      Senior Management
      Operations
      Registration

      *These are suggested departments only. Others may be appropriate for your firm.

      The first-Saturday exam session date for September has been changed to August 27,1988, for all test centers because of the Labor Day holiday, which falls during the first weekend of the month.

      Requests for appointments for the August 27

      session must be received no later than August 17 (the eighth business day prior to the session).

      The August, October, and November exam sessions are still scheduled for the first Saturday of those months.

    • 88-57 NASDAQ National Market System Additions as of July 22, 1988

      SUGGESTED ROUTING*

      Corporate Finance
      Institutional
      Legal & Compliance
      Operations
      Research
      Syndicate

      *These are suggested departments only. Others may be appropriate for your firm.

      As of July 22, 1988, the following 30 issues joined the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,932:

      Symbol

      Company

      Entry Date

      SOES Execution Level

      CLDR

      Cliffs Drilling Company

      6/15/88

      500

      LFSA

      First Federal Savings & Loan Association of Lenawee County

      6/15/88

      500

      HVDK

      Harvard Knitwear, Inc.

      6/16/88

      500

      DELL

      Dell Computer Corporation

      6/22/88

      1000

      INDX

      Index Technology Corporation

      6/23/88

      1000

      MIND

      Mindscape, Inc.

      6/23/88

      1000

      EWSCA

      E.W. Scripps Company (The) (Cl A)

      6/29/88

      500

      CNCD

      Concorde Career Colleges, Inc.

      6/30/88

      1000

      DEMP

      Drug Emporium, Inc.

      6/30/88

      1000

      NOVXM

      Nova Pharmaceutical Corporation (Cl C Wts)

      7/1/88

      500

      NOVXL

      Nova Pharmaceutical Corporation (Cl D Wts)

      7/1/88

      500

      KOSM

      Cascade International, Inc.

      7/5/88

      500

      HFSA

      Home Federal Savings Bank

      7/5/88

      500

      PACE

      Pacesetter Homes, Inc.

      7/5/88

      200

      SJNB

      SJNB Financial Corp.

      7/5/88

      200

      TMSTA

      Thomaston Mills, Inc. (Cl A)

      7/5/88

      200

      TMSTB

      Thomaston Mills, Inc. (Cl B)

      7/5/88

      200

      PBCT

      People's Bank

      7/6/88

      1000

      NHLI

      National Health Laboratories, Inc.

      7/7/88

      1000

      TRIAP

      Triangle Industries, Inc. (Pfd)

      7/11/88

      200

      LENS

      Concord Camera Corp.

      7/12/88

      500

      EAFC

      Eastland Financial Corp.

      7/12/88

      1000

      RATNY

      Ratners Group, pic.

      7/13/88

      1000

      BBGS

      Babbage's, Inc.

      7/15/88

      500

      EBCI

      Eagle Bancorp, Inc.

      7/18/88

      500

      RICE

      American Rice, Inc.

      7/19/88

      500

      ICOC

      ICO, Inc.

      7/19/88

      200

      JFFN

      Jefferson Bank

      7/19/88

      500

      PTNM

      Putnam Trust Company of Greenwich (The)

      7/19/88

      200

      TUSC

      Tuscarora Plastics, Inc.

      7/21/88

      500

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS upon effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol

      Company

      Location

      SOES Execution Level

      CFED

      Charter Federal Savings Bank

      Randolph, NJ

      500

      ECGI

      Environmental Control Group, Inc.

      Maple Shade, NJ

      1000

      HAMS

      Smithfield Companies, Inc. (The)

      Smithfield, VA

      1000

      SLTN

      Solectron Corporation

      San Jose, CA

      1000

      UTRX

      Unitronix Corporation

      Piscataway, NJ

      500

      WSBX

      Washington Savings Bank, FSB

      Waldorf, MD

      500

      WILFP

      Wilson Foods Corporation (Pfd)

      Oklahoma City, OK

      1000

      NASDAQ/NMS Symbol and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since June 13,1988.

      New/Old Symbol

      New/Old Security

      Date of Change

      FSPG/FSPG

      First Home Savings Bank, S.L.A./ First Savings & Loan Association of Penns Grove

      6/20/88

      PHBK/PHBK

      Peoples Heritage Financial Group, Inc./ Peoples Heritage Savings Bank

      6/20/88

      USGL/SSMC

      U.S. Gold Corporation/Silver State Mining Corp.

      6/23/88

      SWARA/SWAR

      Schwartz Brothers, Inc. (Cl A)/Schwartz Brothers, Inc.

      6/24/88

      WSMCA/WTLCA

      WestMarc Communications, Inc. (Cl A)/ Western Tele-Communications, Inc. (Cl A)

      6/24/88

      CODNW/CODNW

      Codenoll Technology Corporation (9/10/89 Wts)/ Codenoll Technology Corporation (9/10/88 Wts)

      6/29/88

      HARVY/HARVY

      Harvard Group, PLC/Harvard Securities Group, pic

      6/29/88

      RTII/RTCH

      RTI, Inc./Radiation Technology Inc.

      6/29/88

      INRD/INRD

      INRAD, Inc./Interactive Radiation, Inc.

      6/30/88

      BCNJ/NJSB

      Bancorp New Jersey, Inc./New Jersey Savings Bank

      7/1/88

      BGEN/BGENF

      Biogen, Inc./Biogen, NV

      7/1/88

      FCFI/CFSD

      First Capitol Financial Corp./ Capitol Federal Savings & Loan Association of Denver

      7/1/88

      FFCH/FFCH

      First Financial Holdings, Inc./ First Federal Savings & Loan Association of Charleston

      7/1/88

      CSESF/CLSIF

      Connaught Biosciences, Inc./CDC Life Sciences, Inc.

      7/5/88

      SFFD/SFFD

      SFFed Corp./ San Francisco Federal Savings & Loan Association

      7/5/88

      XTON/VTEK

      Executone Information Systems, Inc./ Vodavi Technology Corp.

      7/8/88

      TRIA/CJIIA

      Triangle Industries, Inc. (Cl A)/CJI Industries, Inc. (Cl A)

      7/11/88

      IMMCW/IMMCW

      International Mobile Machines Corporation (8/5/89 Wts)/ International Mobile Machine Corporation (8/5/88 Wts)

      7/11/88

      NHDI/NHRD

      NHD Stores, Inc./National Hardgoods Distributors, Inc.

      7/13/88

      CJSB/CJSL

      Central Jersey Savings Bank, SLA/ Central Jersey Savings & Loan Association

      7/14/88

      UNSA/UNSA

      United Financial Corp. of South Carolina, Inc./ United Savings & Loan Association

      7/19/88

      ACXM/CCXN

      Acxiom Corporation/CCX Network, Inc.

      7/21/88

      WSMP/WSMP

      WSMP, Inc./Western Steer - Mom 'N' Pop's, Inc.

      7/21/88

      NASDAQ/NMS Deletions

      Symbol

      Security

      Date

      ICLB

      International Clinical Laboratories, Inc.

      6/14/88

      LNBK

      Lane Financial, Inc.

      6/14/88

      AMSH

      American Shared Hospital Services

      6/16/88

      OSTNN

      Old Stone Corporation (Ser C Pfd)

      6/16/88

      UNGR

      Ungermann-Bass, Inc.

      6/16/88

      IGEN

      IGI, Inc.

      6/20/88

      LTLE

      Arthur D. Little, Inc.

      6/20/88

      SALNW

      Sahlen and Associates, Inc. (Wts)

      6/20/88

      SCNN

      Scantron Corporation

      6/20/88

      TMCIW

      T.M. Communications, Inc. (Wts)

      6/20/88

      TOWR

      Tower Federal Savings Bank

      6/20/88

      ATMI

      ATI Medical, Inc.

      6/23/88

      PHCC

      Preferred Health Care Ltd.

      6/23/88

      DXTKZ

      Diagnostek, Inc. (Cl B Wts)

      6/24/88

      UBTC

      University Bank, National Association

      6/27/88

      ATRN

      Austron, Inc.

      6/27/88

      BIMD

      ICN Biomedicals, Inc.

      6/27/88

      MUXVF

      Musto Explorations Limited

      6/28/88

      IDEL

      Ideal School Supply Corp.

      6/29/88

      MTCH

      MTech Corp.

      6/29/88

      OMBK

      Omnibank of Connecticut, Inc.

      6/29/88

      DCPY

      Datacopy Corp.

      7/1/88

      FHVN

      Fairhaven Savings Bank

      7/1/88

      FFBN

      First Federal Bank, FSB

      7/1/88

      KEII

      Keithley Instruments, Inc.

      7/1/88

      LCNAF

      Lacana Mining Corp.

      7/1/88

      DSLT

      Diamond Crystal Salt Co.

      7/5/88

      DUSA

      Dryclean USA, Inc.

      7/5/88

      ITELO

      Itel Corporation (Cl B Pfd)

      7/5/88

      MBSB

      Mt. Baker, A Savings Bank

      7/5/88

      SOLI

      Solitec, Inc.

      7/6/88

      ENZO

      Enzo Biochem, Inc.

      7/8/88

      ISOE

      ISOETEC Corporation

      7/8/88

      LNER

      Linear Films, Inc.

      7/8/88

      VRTX

      Vortec Corporation

      7/8/88

      CITR

      Citytrust Bancorp, Inc.

      7/11/88

      MMAC

      Merrimac Industries, Inc.

      7/11/88

      PACR

      Pacer Corporation

      7/11/88

      CSAR

      Calstar, Inc.

      7/13/88

      DCOR

      Decor Corporation

      7/13/88

      DEWY

      Dewey Electronics Corp.

      7/13/88

      MFCO

      Microwave Filter Company

      7/13/88

      MIDD

      Middleby Corporation

      7/13/88

      PCRO

      Philip Crosby Associates, Inc.

      7/13/88

      FPBTW

      Fountain Powerboat Industries, Inc. (Wts)

      7/14/88

      COIL

      Crystal Oil Company

      7/15/88

      DPCZ

      Diagnostic Products, Inc.

      7/15/88

      CCCOA

      Century Communications Corp. (Cl A)

      7/18/88

      CMPH

      Comprehensive Care Corp.

      7/18/88

      ACST

      Amcast Industries Corporation

      7/20/88

      HOOP

      Hooper Holmes, Inc.

      7/20/88

      DNIC

      Diasonics, Inc.

      7/21/88

      JSON

      Josephson International, Inc.

      7/21/88

      Questions regarding this notice can be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade-reporting rules can be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192.

      NASDAQ and NASDAQ/NMS are registered trademarks and service marks of the National Association of Securities Dealers, Inc.

    • 88-56 Revisions to Form BD; State Pilot for Broker-Dealer Phase of CRD

      SUGGESTED ROUTING*

      Legal & Compliance
      Registration

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently approved two revisions to Form BD, the Uniform Registration Application for Broker-Dealers, under the Securities Exchange Act of 1934. These revisions, which are effective August 1, 1988, include an additional paragraph on the execution page of Form BD providing for an explicit consent to service of process for actions brought by the SEC, self-regulatory organizations (SROs), or the Securities Investors Protection Corporation (SIPC), as well as a requirement for disclosure of the broker-dealer's fiscal year.

      Members are not required to submit a special amendment filing of the new version of the form (Form BD, revised 7/88) as a result of these changes. All future filings, however, must be made on the revised form.

      In preparation for state entry into the broker-dealer phase of the Central Registration Depository (CRD), the NASD is introducing amended system software on a pilot basis. The focus of this pilot software is directed to state users of the system. However, NASD members will notice minor revisions to their CRD status reports.

      BACKGROUND INFORMATION

      The SEC recently adopted an amendment to Form BD, the uniform registration application that is filed by a broker-dealer to become registered or to amend an existing application, under the Securities Exchange Act of 1934. The amendment provides for consent from the applicant that service of any civil action brought by or notice of any proceeding before the SEC or any self-regulatory organization, or application for protective decree filed by SIPC, may be given to the applicant's contact employee at the applicant's main address as identified in Items 1G and IE on Form BD.

      This revision addresses the SEC's concern for consent language relating to the SEC and SROs, as well as SIPC's difficulties in obtaining adequate service of process in applications for protective decrees for broker-dealers that failed financially.

      A second revision to Form BD incorporates a request from the North American Securities Administrators Association (NASAA). At its spring meeting in April 1988, the NASAA membership approved an amendment to Form BD requiring fiscal-year disclosure. Many states require information concerning an applicant's fiscal year and it was believed that Form BD is the most effective means of obtaining this information. To address state needs, the SEC is also amending Item 3 on Form BD to require an applicant to disclose its fiscal year-end.

      The SEC adoption of these amendments is further detailed in SEC Release No. 34-25806.

      FILING REQUIREMENTS

      Neither the SEC nor the NASD will require existing broker-dealers to file amendments to their Form BDs as a result of these changes. Members will be required to provide the consent and fiscal year-end only when Form BD is next amended for some other reason.

      A copy of the revised (7/88) Form BD is included with this notice. Members are urged to replace existing supplies of Form BD with the new version to avoid use of the obsolete form. Supplies of the revised Form BD may be ordered through NASD Information Services at (301) 738-6500.

      BROKER-DEALER PHASE OF CRD

      In preparation for state participation in the broker-dealer phase of CRD, the NASD is introducing new system software on a pilot basis to assist states in training prior to the full implementation of this phase of the system.

      Phase I of the system, begun in 1981, provided for the centralized processing of Forms U-4 and U-5 for associated persons of NASD member firms. Phase II, which will begin in September 1988, will enable the NASD to centrally process

      Form BD, amendments to Form BD, and Form BDW, the uniform document used to terminate the registration of a broker-dealer.

      The introduction of this pilot program, which will be implemented in early August, will result in only minor changes to the broker-dealer status reports generated by the system.

      The most significant change will be the introduction of new edits for branch offices. Status reports indicating these edits will be generated when the following conditions are present: the branch office address or effective date is missing or incomplete; the branch manager is not properly registered; the manager does not maintain an active registration in the state where the branch is located; or, the firm is not registered in the state where the branch is located.

      The NASD has maintained the broker-dealer data base since January 1986, so the implementation of the broker-dealer phase of the system will not result in additional filing requirements; but it will reduce the volume of amendment mailings due to the centralized filing with the CRD on behalf of the NASD and the states.

      Additional information regarding state participation in the September implementation of the broker-dealer phase of CRD will be published as it develops.

      Questions concerning this notice can be directed to either Chris Goodwin, Assistant Director, or Maudese King, Manager, NASD Member Firm Registration Services, at (301) 738-6717.

    • 88-55 Correction to Notice to Members 88-55

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations

      *These are suggested departments only. Others may be appropriate for your firm.

      CORRECTION TO NOTICE TO MEMBERS 88-55

      Notice to Members 88-55 announced the approval by the Securities and Exchange Commission of amendments to Article III, Section 19(f) of the NASD Rules of Fair Practice permitting performance-based fees under some circumstances. One of the requirements for charging such a fee is that the customer either has a net worth of not less than $1 million at the time the account is opened or the minimum amount to be invested in the account is not less than $500,000.

      The text of the change to Section 19 that accompanied Notice to Members 88-55 erroneously stated that the minimum net worth was $100,000 rather than $1 million. A corrected copy of the amendments to Section 19(f) accompanies this notice.

      PROPOSED AMENDMENTS TO ARTICLE III, SECTION 19(f) OF THE NASD RULES OF FAIR PRACTICE

      (Note: New language underlined; deleted language in brackets; correction in boldface.)

      Customers' Securities or Funds

      .
      .
      .

      Sharing in accounts; extent permissible

      (f)
      (1)
      (A) Except as provided in Subsection (f)(2) no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member [unless]; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if (i) such member or person associated with a member obtains prior written authorization from the member carrying the account; and (ii) the member or person associated with a member shares in the profits or losses in the account only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
      (B) Exempt from the direct proportionate share limitation of subsection (f)(l)(A)(ii) 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.
      (2) Notwithstanding the prohibition of subsection (f)(l), a member or person associated with a member may receive compensation based on a share in profits or gains in an account if all of the following conditions are satisfied:1
      (A) The member or person associated with a member seeking such compensation obtains prior written authorization from the member carrying the account;
      (B) The customer has at the time the ac count is opened either a net worth which the mem ber or person associated with a member reasonably believes to be not less than $1,000,000, or the mini mum amount invested in the account is not less than $500,000;
      (C) The member or person associated with a member reasonably believes the customer is able to understand the proposed method of compensation and its risks prior to entering into the arrangement;
      (D) The compensation arrangement is set forth in a written agreement executed by the customer and the member;
      (E) The member or person associated with a member reasonably believes, immediately prior to entering into the arrangement, that the agreement represents an arm's-length arrangement between the parties;
      (F) The compensation formula takes into account both gains and losses realized or accrued in the account over a period of at least one year; and
      (G) The member has disclosed to the customer all material information relating to the arrangement including the method of compensation and potential conflicts of interest which may result from the compensation formula.

      1 It is the position of the Division of Investment Management of the Securities and Exchange Commission that compensation received by a member or person associated with a member under this rule would constitute "special compensation" for purposes of the exception to the definition of "investment adviser" in Section 202(a)(ll)(C) of the Investment Advisers Act of 1940 (Advisers Act). Any member or person associated with a member, required to be registered under the Advisers Act, or state law, who receives compensation based on a share of profits or capital appreciation of a customer's account must comply with Section 205(1) and Rule 205-3 under the Advisers Act, or applicable state law, with respect to such compensation. (SEC Release 34-24355,52 Fed. Reg.


    • 88-55 Amendments Adopted - Sharing in Customer Accounts

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently approved amendments to Article III, Section 19(f) of the NASD Rules of Fair Practice governing sharing in customer accounts by members and by persons associated with members.

      The amendment will permit performance-based fees under certain circumstances. The text of the amendment follows this notice.

      BACKGROUND

      The SEC recently approved amendments to Article III, Section 19(f) of the NASD Rules of Fair Practice (see SEC Release No. 34-25736, dated May 23, 1988) that would allow performance-based fees under certain circumstances. Section 19(f) generally prohibits members or persons associated with members from sharing in the profits or losses in customer accounts other than in direct proportion to the amount invested. The amendments would permit performance-based compensation under circumstances similar to those enumerated in Rule 205-3 of the Investment Advisers Act of 1940.

      EXPLANATION OF AMENDMENTS

      The amendments will allow members or persons associated with members to receive compensation based on a share of profits or gains in an account when:

      1. Written authorization is obtained from the member carrying the client's account.
      2. The customer meets stated minimum net-worth or account investment-size requirements.
      3. There is a reasonable belief that the customer understands the compensation method and its risks.
      4. The arrangement is in writing.
      5. The agreement was reached through "arm's length" negotiation.
      6. The arrangement takes into account both gains and losses over at least a one-year period.
      7. The member has disclosed all material information relating to the arrangement.

      Members are cautioned, however, that it is the position of the SEC's Division of Investment Management that compensation received by a member or person associated with a member under this rule would constitute "special compensation" for purposes of the exception to the definition of "investment adviser" in Section 202(a)(ll)(C) of the Investment Advisers Act of 1940. This would limit the availability of the broker-dealer exemption from investment adviser registration. In addition, any member or person associated with a member required to be registered under the Advisers Act, or state law, who receives compensation based on a share of profits or capital appreciation of a customer's account must comply with Section 205(1) and Rule 205-3 under the Advisers Act, which set forth the terms upon which such compensation may be received or applicable state law with respect to such compensation. (See SEC Release 34-24355, dated April 16,1987.)

      The NASD rule, while not identical to Rule 205-3 under the Advisers Act, uses the same basic criteria as that rule. However, Rule 205-3 in some respects imposes requirements that go beyond those of amended Section 19(f). Firms and persons associated with members who are in compliance with the current provisions of Rule 205-3 would also generally be in compliance with the provisions of Section 19(f). Questions about this notice can be directed to T. Grant Callery, NASD Associate General Counsel, at (202) 728-8285.

      PROPOSED AMENDMENTS TO ARTICLE III, SECTION 19(f) OF THE NASD RULES OF FAIR PRACTICE

      (New language underlined; deleted language in brackets.)

      Customers' Securities or Funds



      Sharing in accounts; extent permissible

      (f)
      (1)
      (A) Except as provided in Subsection (f)(2) no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member [unless]; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if (i) such member or person associated with a member obtains prior written authorization from the member carrying the account; and (ii) the member or person associated with a member shares in the profits or losses in the account only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
      (B) Exempt from the direct proportionate share limitation of subsection (f)(l)(A)(ii) 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.
      (2) Notwithstanding the prohibition of subsection (f)(l), a member or person associated with a member may receive compensation based on a share in profits or gains in an account if all of the following conditions are satisfied:1
      (A) The member or person associated with a member seeking such compensation obtains prior written authorization from the member carrying the account;
      (B) The customer has at the time the account is opened either a net worth which the member or person associated with a member reasonably believes to be not less than $100,000, or the minimum amount invested in the account is not less than $500,000;
      (C) The member or person associated with a member reasonably believes the customer is able to understand the proposed method of compensation and its risks prior to entering into the arrangement;
      (D) The compensation arrangement is set forth in a written agreement executed by the customer and the member;
      (E) The member or person associated with a member reasonably believes, immediately prior to entering into the arrangement, that the agreement represents an arm's-length arrangement between the parties;
      (F) The compensation formula takes into account both gains and losses realized or accrued in the account over a period of at least one year; and
      (G) The member has disclosed to the customer all material information relating to the arrangement including the method of compensation and potential conflicts of interest which may result from the compensation formula.

      1 It is the position of the Division of Investment Management of the Securities and Exchange Commission that compensation received by a member or person associated with a member under this rule would constitute "special compensation" for purposes of the exception to the definition of "investment advisor" in Section 202(a)(ll)(Q of the Investment Advisers Act of 1940 (Advisers Act). Any member or person associated with a member, required to be registered under the Advisers Act, or state law, who receives compensation based on a share of profits or capital appreciation of a customer's account must comply with Section 205(1) and Rule 205-3 under the Advisers Act, or applicable state law, with respect to such compensation. (SEC Release 34-24355, 52 Fed. Reg. 13778, April 24,1987).


    • 88-54 Implementation of Reporting Requirements for Non-NASDAQ OTC Securities; Effective September 1, 1988

      SUGGESTED ROUTING*

      Senior Management
      Legal & Compliance
      Operations
      Trading
      Syndicate

      *These are suggested departments only. Others may be appropriate for your firm.

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently approved new Schedule H to the NASD By-Laws that establishes an electronic system of mandatory price and volume reporting for principal transactions in OTC equity securities that are not part of the NASDAQ System. Under new Schedule H, members that are NASDAQ subscribers will be required to use their NASDAQ/ Harris terminals, NASDAQ Workstations, or authorized foreign-terminal emulations to report the price and volume data under the minimum reporting thresholds required by Schedule H.

      Those members that use a computer-to-computer interface (CTCI) with NASDAQ, either directly or through service bureaus, will be permitted to use that interface to report price and volume data as required by Schedule H. Those Members that are not NASDAQ subscribers will be required to report through a dial-up electronic reporting system for non-NASDAQ OTC securities developed by the NASD for this purpose.

      Implementation of the new reporting requirements will proceed in two phases. During Phase I, which will become effective on September 1, 1988, all members will be required to report price and volume data for all non-NASDAQ OTC equity securities that are cleared through the National Securities Clearing Corporation (NSCC). The second phase, which is anticipated to go into effect at the beginning of 1989, will require price and volume reporting for all non-NASDAQ OTC equity securities whether or not the securities are cleared through NSCC. The text of Schedule H follows this notice.

      BACKGROUND

      The SEC recently approved new Schedule H to the NASD By-Laws,1 which establishes an electronic system of mandatory price and volume reporting for OTC securities that are not part of the NASDAQ System.

      The NASD adopted new Schedule H to enhance its regulatory capabilities to routinely surveil for trading abuses in the non-NASDAQ OTC securities market and in response to directives from the SEC urging the NASD to develop a nationwide automated market surveillance program for non-NASDAQ OTC securities. To address these concerns, the NASD Market Surveillance Committee considered possible approaches to the routine surveillance of this market ("pink-sheet" securities2) and subsequently made a series of recommendations relative to price and volume reporting to the NASD Board of Governors. The Board approved the recommendations of the Market Surveillance Committee at its meeting on September 14, 1987.

      Prior to the NASD's initiation of its automated surveillance system of the non-NASDAQ market, no facility existed for gathering, disseminating, and electronically testing market information in non-NASDAQ OTC issues. This lack of readily available and reliable transaction information created a serious impediment to the systemic automated surveillance of the non-NASDAQ OTC market and in general, hampered NASD regulatory efforts in this area. The electronic non-NASDAQ reporting system provides the means for creating a centralized data base of price and transaction information that will be subjected to a computerized market surveillance system to detect the types of violative practices that have been a concern for OTC issues traded outside the NASDAQ System. This automated surveillance system will generate computerized regulatory reports for use in addressing abuses (in "pink sheet" stocks) such as manipulation, fraudulent pricing and markups, and other serious sales/trading practices.

      The NASD's enhanced oversight of the non-NASDAQ OTC securities market was fully supported by the NASD's Regulatory Review Task Force (Task Force) in its Final Report. In its discussion of the NASD's efforts to develop the non-NASDAQ reporting system, the Task Force indicated, in pertinent part, that it favored compliance with the mandatory reporting requirements of Schedule H by all firms. The Task Force further stated that "[T]he goal should be the development of surveillance capabilities comparable to those that exist for the NASDAQ market." 3

      EXPLANATION OF AMENDMENTS

      New Schedule H to the NASD By-Laws defines the terms "non-NASDAQ security" and "non-NASDAQ reporting system" and establishes minimum threshold-reporting requirements for non-NASDAQ OTC equity securities.

      Section 1 of Schedule H defines the term "non-NASDAQ reporting system" as any electronic price- and volume-reporting system operated by the NASD for non-NASDAQ securities. The term "non-NASDAQ security" is defined as any equity security that is neither included in the NASDAQ System nor traded on any national securities exchange.

      Section 2 of Schedule H requires members executing principal transactions in non-NASDAQ equity securities to provide price and volume data for both purchase and sale transactions if the member's aggregate daily volume of sales or purchases exceeds either a minimum of 50,000 shares or $10,000. In addition, members must report price and volume data for both sides of the market if the aggregate share or dollar volume is reached on either side of the market. For example, if a member executes an aggregate purchase volume in a non-NASDAQ issue of 70,000 shares and has an aggregate sale volume of 20,000 shares, it will be required to report both the purchase and sale sides of the transaction, as well as price data, because the minimum threshold level was reached on the buy side of the market. (Additional examples of the minimum reporting levels accompany the rules as explanatory material.) If they choose to do so, members may report even if the minimum threshold levels established by Schedule H are not reached.

      Members meeting the daily minimum reporting levels are also required to report the highest price at which the member sold the non-NASDAQ OTC equity security and the lowest price at which it bought the non-NASDAQ OTC equity security, and indicate whether these trades were executed with a customer or with another broker-dealer. The price to be reported on customer transactions is inclusive of markups or markdowns.

      Finally, the new rules also amend the Interpretation of the Board of Governors Execution of Retail Transactions in the Over-the-Counter Market (the "Best Execution Interpretation") by adding a new paragraph (D) that requires members to check a minimum of three dealers (or all dealers in a security if three or less) prior to executing any transaction on behalf of a customer in a non-NASDAQ security.4

      IMPLEMENTATION OF SCHEDULE H

      The NASD will implement the price and volume reporting requirements of Schedule H in two phases. In Phase I, all NASD members are required to report price and volume data on transactions in non-NASDAQ OTC securities that are cleared through the NSCC and that meet the minimum threshold-reporting requirements of Schedule H.5 Phase II will require price and volume reporting for all non-NASDAQ securities whether or not the securities clear through NSCC. From the beginning of Phase I, the following additional requirements apply:

      • Members have the option to report price and volume data under new Schedule H either between the hours of 4 p.m. and 6:30 p.m. Eastern Time on trade date or between 7:30 a.m. and 9 a.m. on the next business day. Members experiencing technical problems in reporting their trades of non-NASDAQ securities may call (800) 321-NASD for assistance.
      • Members that are NASDAQ subscribers (e.g., Level 2/3 or TARS-only subscribers) will be required to use their NASDAQ/Harris terminals, NASDAQ Workstations, CTCI (direct and through service bureaus), or authorized foreign-terminal emulations to report the price and volume data required by Schedule H.
      • Members that do not subscribe to NASDAQ service will be required to report through a dial-up electronic reporting system for non-NASDAQ securities that is similar in function to the system currently provided to NASDAQ subscribers.

      All firms using the dial-up, non-NASDAQ reporting system will be required to subscribe to and pay for the Telenet public network and possess a terminal or PC and a modem. Appropriate hardware specifications and information as to the method of subscribing to the Telenet service will be provided to users of the dial-up, non-NASDAQ reporting system responding to the questionnaire discussed below and attached to this Notice.

      • To comply with the provisions of Schedule H, members must use an electronic reporting system to meet the requirements to report price and volume information on non-NASDAQ OTC securities. There are no provisions for hard-copy reporting; thus failure to report via electronic means will be contrary to the rule.

      Non-NASDAQ Subscribers Questionnaire

      Members that are not NASDAQ subscribers are required to report principal trades in non-NASDAQ issues pursuant to Schedule H through the NASD's dial-up electronic reporting system. To determine the universe of NASD members that will be required to use this reporting system, the attached brief questionnaire has been developed. All NASD members that do not subscribe to NASDAQ service that transact any business in non-NASDAQ OTC securities must complete and return this questionnaire no later than July 27, 1988, to Elizabeth Wollin, Assistant Director, NASD Automated Reports, 9513 Key West Avenue, Rockville, Maryland 20850.

      Questions regarding this notice can be directed to either Elizabeth Wollin, Assistant Director, NASD Automated Reports, at (301) 738-6887, or James M. Cangiano, Director, NASD Market Surveillance, at (202) 728-8186.

      * * * * *

      NEW SCHEDULE H TO THE NASD BY-LAWS

      Section 1—Definitions

      For purposes of Schedule H, unless the context requires otherwise:

      (a) "Non-NASDAQ security" means any equity security that is neither included in the National Association of Securities Dealers Automated Quotations System nor traded on any national securities exchange.
      (b) "Non-NASDAQ Reporting System" means the electronic price and volume reporting system operated by the Association for non-NASDAQ securities.

      Section 2—Price and Volume Reporting

      (a) On any day that principal transactions in the non-NASDAQ security exceed an aggregate daily volume of sales or purchases of either a minimum of 50,000 shares or a minimum of $10,000, each member shall report through the Non-NASDAQ Reporting System (i) the highest price at which it sold and the lowest price at which it purchased any non-NASDAQ security; (ii) the total volume of purchases and sales executed by it in any non-NASDAQ security; and (iii) whether the trades establishing the highest price at which the member sold and the lowest price at which the member purchased the security represented an execution with a customer or with another broker-dealer. The price to be reported for principal sales and purchases from customers shall be inclusive of markup or markdown.

      The following examples illustrate the minimum reporting levels established by paragraph (a) above.

      1. Dealer A executes aggregate purchases of 70,000 shares of AAA stock and executes aggregate sales of 20,000 shares of AAA stock. Because the minimum reporting requirement is exceeded by the purchases, Dealer A is required to report aggregate purchases of 70,000 shares, aggregate sales of 20,000 shares of AAA stock, and the highest price at which it sold and lowest price at which it purchased AAA stock, even though the volume of sales did not reach the minimum requirement.
      2. Dealer B executes aggregate purchases of 60,000 shares of BBB stock and does not execute any sales of BBB stock. Dealer B is required to report purchases of 60,000 shares, zero volume of sales, and the lowest price at which it purchased BBB stock.
      3. Dealer C executes aggregate purchases of 40,000 shares for a total of $8,000 in CCC stock and executes aggregate sales of 49,000 shares for a total of $9,900 in CCC stock. CCC stock is not subject to reporting by Dealer C, as neither the volume nor price of aggregate purchases or sales of CCC stock exceed the minimum requirements for reporting.
      4. Dealer D executes aggregate purchases of 45,000 shares in DDD stock for a total of $11,000 and executes aggregate sales of 35,000 shares in DDD stock for a total of $9,000. Dealer D is required to report aggregate purchases of 45,000 shares and sales of 35,000 shares of DDD stock, as well as the highest purchase price and lowest sale price of DDD stock, because the aggregate purchase price exceeds the minimum requirement.
      (b) Members shall report the price and volume information required by Section 2(a) above through the Non-NASDAQ Reporting System between the hours of 4 p.m. and 6:30 p.m. Eastern Time on the trade date or between 7:30 a.m. and 9 a.m. Eastern Time on the next business day or, at such other time as determined by the Association.

      INTERPRETATION OF THE BOARD OF GOVERNORS—EXECUTION OF RETAIL

      TRANSACTIONS IN THE OVER-THE-COUNTER MARKET

      Add the following new section:



      (D) In any transaction for or with a customer pertaining to the execution of an order in a non-NASDAQ security (as defined in Schedule H to the By-Laws), a member or person associated with a member, shall contact and obtain quotations from three dealers (or all dealers if three or less) to determine the best inter-dealer market for the subject security.

      1 File No. SR-NASD-87-55, Securities Exchange Act Release No. 25637 (May 2,1988).

      2 Non-NASDAQ OTC securities are commonly referred to as "pink sheet" securities because information on many of the securities is published by the National Quotation Bureau in its Pink Sheets.

      3 Final Report of the NASD Regulatory Review Task Force at p. 14.

      4 The provisions of Schedule H and its approval by the SEC also were discussed in NASD Notice to Members 88-40 (June 1,1988). That Notice also solicited NASD member vote on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice. The proposed amendment will require the marking of customer order tickets to reflect the dealers contacted by members and the quotations received to determine the best inter-dealer market as required by the new amendment to the NASD's "Best Execution Interpretation," recently approved by the SEC in conjunction with new Schedule H.

      5 Prior to implementation of Phase I, the NASD will publish a list that establishes, as of a specific date, all of the securities subject to price and volume reporting under Schedule H during Phase I. The NASD anticipates approximately 7,000 issues will be involved.


    • 88-53 SiPC Trustee Appointed: Fitzgerald, DeArman & Roberts, Inc., 6400 South Lewis, Tulsa, Oklahoma 74170

      ROUTE TO

      Senior Management
      Operations
      Other

      Attn: Operations Officer, Cashier, Fail-Control Department

      On June 28,1988, the United States District Court for the Northern District of Oklahoma appointed a SIPC trustee for the above firm.

      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) 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
      P. David Newsome, Jr., Esquire
      Conner & Winters
      2400 First National Tower
      Tulsa, Oklahoma 74130
      Telephone: (918) 586-8555

    • 88-52 Amendment to Rule: Testimonial Advertisements.

      ROUTE TO

      Senior Management
      Corporate Finance
      Legal & Compliance
      Operations
      Research
      Syndicate
      Trading

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission recently approved an amendment to Article III, Section 35(d)(2)(D) of the NASD Rules of Fair Practice relating to testimonials used in members' communications with the public. The rule amendment limits application of the rule on testimonial advertisements to testimonials concerning the quality of a member's investment advice and requires the disclosure of compensation paid to the person making a testimonial only if the compensation is more than a nominal amount. The text of the amendment follows this notice.

      BACKGROUND AND SUMMARY OF AMENDMENT

      Article m, Section 35 of the NASD Rules of Fair Practice relates to members' communications with the public and contains specific standards governing testimonials used in such communications. The rule's provisions were originally adopted in 1980 and were patterned after the rules of other self-regulatory organizations for purposes of consistency and reduction of unnecessary burdens on dual members. Because the New York Stock Exchange has amended its testimonial rule provisions since then, a conforming amendment to Article m, Section 35(d)(2)(D) was approved by the NASD Board of Governors at its meeting on September 15,1987, and then sent for NASD member vote. (See Notice to Members 87-67, dated October 14,1987).

      To conform with NYSE Rule 472.40(8), the NASD thereafter amended Article in, Section 35(d)(2)(D) to limit the standards governing testimonials to those testimonials that concern the quality of a firm's investment advice. In addition, the amended rule limits the requirement to disclose compensation paid to the person giving the testimonial to those situations when the compensation is more than a nominal amount

      Questions can be directed to either Eneida Rosa, NASD Assistant General Counsel, at (202) 728-8284, or R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.

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

      Note: New language is underlined; deleted language is in brackets.

      Communications With the Public

      Sec. 35.



      (d) Standards Applicable to Communications With the Public

      (2) Specific Standards



      (D) Testimonials: [Testimonial material concerning the member or concerning any advice, analysis, report, or other investment or related service rendered by the member must make clear that such experience is not necessarily indicative of future performance or results obtained by others. Testimonials must also disclose that compensation has been paid to the maker directly or indirectly, if applicable, and if they imply an experienced or specialized opinion, the qualifications of the maker of the testimonial should be given.]

      In testimonials concerning the quality of a firm's investment advice, the following points must be clearly stated in the communication:

      (i) The testimonial may not be representative of the experience of other clients.
      (ii) The testimonial is not indicative of future performance or successful
      (iii) If more than a nominal sum is paid, the fact that it is a paid testimonial must be indicated,
      (iv) If the testimonial concerns a technical aspect of investing, the person making the testimonial must have knowledge andjexperience to form a valid opinion.

    • 88-51 Registration of Foreign Branch Offices by August 1, 1988

      ROUTE TO

      Senior Management
      Legal & Compliance
      Registration
      Training

      EXECUTIVE SUMMARY

      The NASD has amended its By-Laws to require that members register with the NASD all branch offices located outside the United States. Article I, Section (c) of the NASD By-Laws defines the term "branch office" to include any office that is owned or controlled by a member and that is engaged in the investment banking or securities business.

      Recently, the Securities and Exchange Commission (SEC) approved1 the NASD's adoption of an amendment to delete the phrase "located in the United States" from the definition of "branch office," which technically restricted the NASD's branch office registration requirements to branches located only in the United States. The text of the amendment, with deleted language in brackets, is as follows:2

      ARTICLE II

      DEFINITIONS

      (c) "branch office" means an office [located in the United States] which is owned or controlled by a member, and which is engaged in the investment banking or securities business.

      Therefore, the NASD is requiring members to register all branch offices regardless of their location by August 1, 1988. Pursuant to Article HI, Section 7 of the NASD By-Laws, the NASD must be promptly advised of lhe opening or closing of any branch office. Such advice must be filed with the NASD on Schedule E to Form BD, the Uniform Application for Broker-Dealer Application adopted by the SEC.

      Branch offices located outside the United States are assigned to an NASD District Office for purposes of examination, elections and other district-level functions.

      The amendment does not affect the availability of the "foreign associate" category of registration for persons associated with foreign branch offices.3

      Questions concerning this notice can be directed to the NASD Membership Department at (301) 738-6715.


      1 SEC Release No. 34-25428 (March 9, 1988).

      2 This amendment is separate from the more extensive amendment to the definition of "branch office" published most recently in Notice to Members 88-11 (February 8, 1988). Those amendments will incorporate the change announced here.

      3 Part IX of Schedule C to the NASD By-Laws exempts associated persons of a foreign branch office from the requirement to pass a qualification examination under certain circumstances.


    • 88-50 Registration of Persons Soliciting on Behalf of Members Under Schedule C of the NASD By-Laws.

      ROUTE TO

      Senior Management
      Legal & Compliance
      Operations
      Registration
      Other

      EXECUTIVE SUMMARY

      In response to member inquiries, the NASD is publishing guidelines that apply to the employment of unregistered persons to contact prospective customers. Unregistered persons may extend invitations to firm-sponsored events and inquire whether the prospective customer wishes to discuss investments with a registered representative or receive investment literature from the firm, provided that the firm observes certain practices with regard to the qualification, training, compensation, and supervision of the unregistered persons.

      BACKGROUND

      Section (l)(b), Part ffl of Schedule C to the NASD By-Laws defines "representative" as:

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

      In Notice to Members 85-8, dated July 17,1985, the NASD reviewed the applicability of Schedule C to the employment of unregistered persons to solicit hew accounts on behalf of a member. The notice stated:

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

      On March 30,1988, the NASD issued Notice to Members 88-24 and emphasized that the registration requirement articulated above is not intended to "restrict a member's administrative personnel, in the normal course of their duties, from contacting customers regarding routine administrative matters involving customers' accounts or from extending invitations to the public to firm-sponsored events, such as investment seminars at which any substantive presentations and account or order solicitations will be made by appropriately registered personnel."

      In response to inquiries from members resulting from Notice to Members 88-24, the NASD wants to clarify the circumstances under which a member may employ unregistered persons to contact prospective customers.

      PERMISSIBLE ACTIVITIES OF UNREGISTERED PERSONS

      Unregistered persons may contact prospective customers for purposes of:

      • extending invitations to firm-sponsored events at which any substantive presentations and account or order solicitation will be conducted by appropriately registered personnel;
      • inquiring whether the prospective customer wishes to discuss investments with a registered person; and
      • determining whether the prospective customer wishes to receive investment literature from the firm.

      Firms employing unregistered persons to perform these functions should observe the following guidelines:

      (l) Pursuant to Section (l)(b), Part n of Schedule C to the By-Laws, unregistered persons may not discuss general or specific investment products or services offered by the firm, pre-qualify prospective customers as to financial status and investment history and objectives, or solicit new accounts or orders.
      (2) The member should provide unregistered persons with orientation and training that specifically addresses the limitations of such persons' activities, the regulatory consequences of exceeding these limitations, and the fact that such persons are associated persons of the member, subject to the rules of the NASD and its disciplinary authority.
      (3) The member should conduct a reasonable investigation of such persons' backgrounds to determine that they are not statutorily disqualified from becoming associated with the member.
      (4) Unregistered persons are regarded as employees of the member and should not be compensated on any basis other than a salary or hourly wage.
      (5) The member should take reasonable steps to assure that the activities of unregistered persons are consistent with applicable state statutes and rules and with the rules of other self-regulatory organizations.
      (6) The member should be able, upon request, to demonstrate that its supervisory procedures include procedures reasonably designed to prevent violative conduct by unregistered persons.

      As stated in Notice to Members 88-24, the registration requirements of Section (l)(b), Part n of Schedule C to the NASD By-Laws do not apply to a member's administrative personnel who, in the normal course of their duties, contact existing customers regarding clerical or ministerial matters affecting such customers' accounts.

      Members are advised to review the activities of unregistered employees to ascertain that such persons are not functioning in a manner requiring registration

      Questions concerning this notice can be directed to either Frank J. McAuliffe, Vice President, NASD Qualifications, at (301) 738-6694, or Jacqueline D. Whelan, Senior Attorney, NASD Office of the General Counsel, at (202) 728-8270.

    • 88-49 By-Law Amendment: Prohibition of Concurrent Registration Under Schedule C; Last Date for Comment: August 1, 1988

      ROUTE TO

      Senior Management
      Legal & Compliance
      Operations
      Registration
      Other

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comment on a proposed amendment to Schedule C to the NASD By-Laws that would prohibit a person associated with a member from being registered concurrently in any capacity with any other member. The amendment would exempt from the prohibition those associated persons registered concurrently with affiliated members. The text of the proposed amendment follows this notice.

      BACKGROUND

      Neither the NASD By-Laws, the Schedules to the By-Laws, nor the NASD Rules of Fair Practice prohibit associated persons from registering concurrently with more than one member firm. Concurrent registration is, however, prohibited by a number of states. The NASD has observed that concurrent registration may give rise to confusion among public investors as to which employer-member is responsible for supervising the various sales efforts undertaken by a concurrently registered person and may also present opportunities for the registered person to engage in activities of which neither employer is aware.

      Further, concurrent registration can result in a failure to supervise certain activities because each employer is of the belief that the other employer is supervising the registered person. The NASD believes that these difficulties may well outweigh any benefits that may attach to concurrent registration and that they may not be remediable by adopting additional supervisory rules. Therefore, the NASD Board of Governors has determined to seek member comment as to whether concurrent registration should be prohibited, with an exemption provided for concurrent registration with affiliated members. For purposes of the proposed amendment, affiliation would exist when one member controls, is controlled by, or is under common control with another member.

      The NASD believes that the exemptive provision for affiliated members is appropriate because the confusion among the investing public and concurrent employers is less likely to occur in affiliate arrangements. For example, many affiliates utilize common or substantially similar names, which reduces the likelihood of investor confusion. The exemption also recognizes that some members have formed separate broker-dealers to offer a variety of products.

      PROPOSED AMENDMENTS

      New paragraph (l)(f) of Part n of Schedule C to the NASD By-Laws would prohibit concurrent registration of registered principals, with the above-described exemptive provision for concurrent registrations with affiliated members.

      New paragraph (l)(d) of Part HI would prohibit concurrent registration of registered representatives, with the above-described exemptive provision for concurrent registrations with affiliated members.

      The NASD encourages all members and interested persons to comment on the proposed amendments. Comments should be directed to:

      Mr. LynnNellius
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1506

      Comments must be received no later than August 1,1988. Comments received by this date will be considered by the NASD Board of Governors. If approved by the NASD Board, the proposal must be filed with and approved by the SEC before becoming effective.

      Questions concerning this notice can be directed to either Frank J. McAuliffe, Vice President, NASD Qualifications at (301) 738-6694, or Jacqueline D. Whelan, Senior Attorney, NASD Office of the General Counsel, at (202) 728-8270.

      PROPOSED AMENDMENTS TO SCHEDULE C TO THE NASD BY-LAWS

      II REGISTRATION OF PRINCIPALS

      (1) Registration Requirements



      (f) Prohibition of Concurrent Registrations A person associated with a member as a Registered Principal shall not be concurrently registered in any capacity with another member. This prohibition shall not apply to persons concurrently registered in any capacity with members that are affiliated organizations. For purposes of this paragraph, members shall be affiliated organizations if one controls, is controlled by, or is under common control with the other.

      III REGISTRATION OF REPRESENTATIVES

      (1) Registration Requirements



      (d) Prohibition of Concurrent Registrations A person associated with a member as a Registered Representative shall not be concurrently registered in any capacity with another member. This prohibition shall not apply to persons concurrently registered in any capacity with members that are affiliated organizations. For purposes of this paragraph, members shall be affiliated organizations if one controls, is controlled by, or is under common control with the other.

    • 88-48 Proposed By-Laws Amendment Concerning Filling Vacancies on District Committees - Last Date for Comment: August 1, 1988

      ROUTE TO

      Senior Management

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD requests comment on a proposed amendment to Article VIII, Section 5 of the NASD By-Laws that would expedite the filling of vacancies created by departures of District Business Conduct Committee (DBCC) members during their terms and avoid the necessity of holding interim elections.

      The amendment would provide for appointment of a person by the DBCC to fill the departing Committee member's seat until the next regularly scheduled election. At that time, the normal election process would occur to elect a Committee member to serve for the duration of the departing Committee member's term.

      The text of the proposed amendment follows this notice.

      BACKGROUND AND SUMMARY OF AMENDMENT

      The NASD is concerned about practical problems encountered by its District Offices when vacancies on a DBCC occur due to departures of Committee members during their terms. Such problems, including the necessity for holding special interim elections, would be alleviated by the proposed amendment to Article Vin, Section 5 of the NASD By-Laws.

      The current procedure under Sections 5(a) and (b) of Article VIII of the NASD By-Laws sets forth a two-step mechanism. If the unexpired term of the Committee member causing the vacancy is less than 12 months, the vacancy is to be filled by appointment, by the remaining members of the DBCC, of a representative of a member firm having a place of business in the same district If the unexpired term of the Committee member causing the vacancy is 12 months or more, the vacancy is to be filled by election conducted in accordance with the provisions of Section 4 of Article VET.

      The NASD Board of Governors believes that the current procedure may be burdensome and unnecessary. The Board, upon the recommendation of the Advisory Council and the National Business Conduct Committee, is therefore proposing to implement one procedure for situations involving unexpired terms of any length that result in a vacancy on a DBCC. That procedure would involve the appointment, by the remaining members of the DBCC, of a representative of a member firm doing business in the same district to fill the departing Committee member's seat until the next regularly scheduled election. Pursuant to the normal election process, a Committee member would then be elected to serve for the duration of the departing Committee member's term.

      In so proposing, the Board recommends that in each instance, the DBCC should seriously consider former DBCC members for the appointments. Because of prior experience, such persons would readily be able to assume such a position and make a meaningful contributioa

      The NASD encourages all members and other interested persons to comment on the proposed amendment Comments should be directed to:

      Mr. LynnNellius
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1506

      Comments must be received no later than August 1,1988. Comments received by this date will be considered by the NASD National Business Conduct Committee and NASD Board of Governors. Any changes to the NASD By-Laws that are approved by the Board must be voted upon by the membership and thereafter filed with, and approved by, the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice can be directed to Deborah F. Mcllroy, Attorney, NASD Office of General Counsel, at (202) 728-8816.

      PROPOSED AMENDMENTTO ARTICLE VIII OF THE NASD BY-LAWS

      Note: New text is underlined; deleted text is in brackets.

      Filling of Vacancies on District Committees Sec 5. All vacancies in any District Committee other than those caused by the expiration of a Committee Member's term of office shall be filled as follows:

      [(a) If the unexpired term of the member causing the vacancy is for less than twelve months, such vacancy shall be filled by appointment by the remaining members of the District Committee of some member of the Corporation having a place of business in the same district
      (b) If the unexpired term of the member causing the vacancy is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 4 of this Article.]

      The District Committee shall appoint a representative of a member firm having a place of business in the same district to fill any vacancy resulting from the unexpired term of a departed Committee Member. Such appointment shall be effective until the next regularly scheduled election occurs, in accordance with the provisions of Section 4 of this Article. Following this election, the newly elected Committee Member will serve only the duration of the departed Committee Member's term.

    • 88-47 Proposed Amendment: Short Sales-Last Date for Comment: August 1, 1988

      ROUTE TO

      Senior Management
      Institutional
      Legal & Compliance
      Operations
      Options
      Trading

      REQUEST FOR COMMENTS

      EXECUTIVE SUMMARY

      The NASD is requesting comment on a proposed amendment to the Board of Governors' Interpretation on Prompt Receipt and Delivery of Securities (Interpretation). The amendment would require a member to make an affirmative determination, before effecting a short sale for its own account, that the security will be borrowed or delivered prior to the settlement date. The requirement would not apply to market-making or hedging transactions. The text of the proposed amendment follows this notice.

      BACKGROUND AND ANALYSIS

      Over the last several years, the NASD Board of Governors has adopted rules providing for additional regulation of short-sale practices in the over-the-counter market In addition, it has amended its Interpretation on Prompt Receipt and Delivery of Securities to establish requirements for accepting customer short-sale orders.

      At its May 1988 meeting, the Board discussed the possible need for additional regulation of short-selling practices in the over-the-counter market, particularly with respect to broker-dealer proprietary transactions. The Board determined to publish for comment an amendment to its Interpretatioan

      The Interpretation currently prohibits members from accepting a short-sale order from a customer unless the member makes an affirmative determination that it will receive delivery of the security from the customer or that it can borrow the security on behalf of the customer for delivery by settlement date. The term "customer," as defined in Article II, Section l(f) of the NASD Rules of Fair Practice, excludes brokers and dealers.

      The Board is considering amending the Interpretation to impose a similar requirement upon members effecting short sales for their own accounts. Under the proposed amendment, a member would be prohibited from effecting a short sale for its own account in any security unless the member makes an affirmative determination that it can borrow the security or otherwise provide for delivery of the security by the settlement date. The proposed amendment would not apply to transactions in corporate debt securities, to transactions by a member in securities in which it is registered as a NASDAQ market maker, or to transactions which result in a fully hedged or arbitraged position.

      The Board is also soliciting comment on whether the proposed amendment should be reformulated to impose upon members on affirmative obligation to borrow the securities by settlement date.

      The NASD encourages all members and other interested persons to comment on the proposed amendment Comments should be received no later than August 1,1988.

      Comments should be directed to:

      Mr. Lynn Nellius, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006-1506

      Questions concerning this notice can be directed to Therese M. Haberle, NASD Office of General Counsel, at 202-728-8287.

      PROPOSED AMENDMENT TO THE INTERPRETATION OF THE BOARD OF GOVERNORS ON PROMPT RECEIPT AND DELIVERY OF SECURITIES

      Note: New language is underlined.



      (2) "Short" Sales
      (a) No member or person associated with a member shall accept a "short" sale order for any customer in any security unless the member makes an affirmative determination that it will receive delivery of the security from the customer or that it can borrow the security on behalf of the customer for delivery by settlement date. This requirement shall not apply, however, to transac tions in corporate debt securities.
      (b) No member shall effect a "short" sale for its own account in any security unless the member makes an affirmative determination that it can borrow the securities or otherwise provide for delivery of the securities by the settlement date. This requirement will not apply to transactions in corporate debt securities, to transactions by a member in securities in which it is registered as a NASDAQ market maker or to transactions which result in fullv hedged or arhitraged positions.

    • 88-46 Adoption of Rule Amendment to Authorize Trading Halts in NASDAQ Securities.

      ROUTE TO

      Senior Management
      Legal & Compliance
      Operations
      Options
      Syndicate
      Trading
      Training
      Other

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) recently approved new Section 42 of Article III of the NASD Rules of Fair Practice. The section prohibits NASD members from effecting, directly or indirectly, over-the-counter transactions in a security in which a trading halt is currently in effect.

      The SEC also approved an amendment to Schedule D of the NASD By-Laws that provides procedures to be used by the NASD to halt over-the-counter trading in a NASDAQ security pending the dissemination of material news by the issuer or to halt over-the-counter trading in a security listed on a national securities exchange during a trading halt imposed by the exchange to permit the dissemination of material news.

      The text of new Section 42 and the amendment to Schedule D are attached.

      BACKGROUND

      On May 5,1988, the SEC approved Section 42 of Article HI of the NASD Rules of Fair Practice. The new section prohibits an NASD member from effecting any transactions in the over-the-counter market in a security subject to a trading halt called by the NASD.1 The SEC also approved amendments to Schedule D to the NASD By-Laws to provide procedures to be used by the NASD when a trading halt is called. These procedures stipulate that the NASD may call a trading halt pending the dissemination of material news by the issuer of a NASDAQ security or halt over-the-counter trading in a security listed on a national securities exchange during a trading halt imposed by the exchange to permit the dissemination of material news. Finally, the SEC also approved conforming amendments to the provisions of Part n of Schedule D to the NASD By-Laws relating to the "Notification to NASD of News Releases" that reflect the changes to Schedule D and to Article HI relating to trading halts.

      EXPLANATION OF AMENDMENTS

      Article HI, Section 42 of the NASD Rules of Fair Practice prohibits NASD members from effecting any over-the-counter transactions, directly or indirectly, in a security in which a trading halt is currently in effect

      Part H, Section 5 of Schedule D provides that the NASD may authorize the initiation of a trading halt in NASDAQ securities in the over-the-counter market pending the dissemination of material news or a trading halt in the over-the-counter market of a security listed on a national securities exchange during a trading halt imposed by the exchange to permit the dissemination of material news.

      Procedures for initiating a trading halt are provided in flie amendments to Schedule D. These procedures include notifying the NASD Market Surveillance Section by NASDAQ issuers of the release of any material news. Upon receipt of such information from

      a NASDAQ issuer, and in consultation with the issuer, the NASD will evaluate the information, estimate its potential impact on the market, and determine whether a trading halt in the security is appropriate.

      If a trading halt is deemed appropriate, notice of the trading halt will appear on the NASDAQ NEWS frame. As soon as notice of a trading halt appears on the NASDAQ NEWS frame, members will be prohibited from effecting any transactions in the halted security. Trading in the halted security will resume as soon as adequate time to disseminate the news has been given and upon notice via the NASDAQ NEWS frame that the trading halt is no longer in effect

      If an exchange notifies the NASD that it has halted or will halt trading in a listed security pending the dissemination of material news, the NASD may halt over-the-counter trading in the security. Members will be notified of the commencement of the trading halt through the NASDAQ NEWS frame. When notice of a trading halt appears on the NASDAQ NEWS frame, members will be prohibited from effecting any over-the-counter transactions in the halted security. As soon as adequate time for dissemination of the news has been given, over-the-counter trading may resume, as indicated via the NASDAQ NEWS frame, notwithstanding an ongoing halt on the exchange for order imbalances or other non-regulatory reasons.

      The amendments to Part n of Schedule D relating to "Notification to NASD of News Releases" merely conforms the provisions of this section to reflect the changes to Schedule D and to Article HI of the Rules of Fair Practice relating to trading halts.

      Trading halts will normally last for one-half hour after the news has been published. The provisions of Section 42 and amended Schedule D are effective immediately.

      Questions regarding this notice can be directed to either Eneida Rosa, NASD Assistant General Counsel, at (202) 728-8284, or James M. Cangiano, Director, NASD Market Surveillance, at (202) 728-8186.

      ARTICLE III OF THE NASD RULES OF FAIR PRACTICE NEW RULE

      Note: New language is underlined; deleted language is in brackets.

      Sec 42.

      No member or person associated with a member shall, directly or indirectly, effect any transaction in a security as to which a trading halt is currently in effect

      AMENDMENTTO PART II OF SCHEDULE D TO THE NASD BY-LAWS

      Sec 5.

      A. Authority to Initiate Trading Halts

      In circumstances in which the Association deems it necessary to protect investors and the public interest, the Association may, pursuant to the procedures set forth in paragraph B:

      (1) halt trading in the over-the-counter market of a security authorized for inclusion in the NASDAQ System pending the dissemination of material news; or
      (2) halt trading in the over-the-counter market of a security listed on a national securities exchange during a trading halt imposed by such exchange to pe~mit the dissemination of material news.

      B. Procedure for Initiating a Trading Halt

      (1) The Board of Governors recommends that NASDAQ issuers notify the NASD of the release of any material news no later than simultaneously with the release of such information to the press as required by Schedule D of the NASD By-Laws.
      (2) Notification shall be provided directly to the NASD Market Surveillance Section by telephone, telecopier, or other means of immediate notificatioa' Information communicated orally by authorized representatives of a NASDAQ issuer should be confirmed promptly in writing. Where public release of information occurs after 6:00 p.m. Eastern Time, telephone notification should be made by 8:30 am. the following trading day.
      (3) Upon receipt of the information, the NASD, after consultation with the issuer, will promptly evaluate the information, estimate its potential impact on the market and determine whether a trading halt in the security is appropriate.
      (4) Should the NASD determine that a trading halt pending the dissemination of material news to themaricetplace is necessary and in the public interest, the trading halt will become effective simultaneously with appropriate notice in the NASDAQ NEWS frame.
      (5) Should a national securities exchange notify the NASD that it has halted or will halt trading in a security listed on that exchange pending the dissemination of material news, the NASD may halt trading in such security in the over-the-counter market. The commencement of the trading halt will he effective simultaneously with appropriate notice in the NASDAQ NEWS frame.
      (6) Trading in a halted security shall resume upon notice via the NASDAQ NEWS frame that a trading halt is no longer in effect

      NOTIFICATION TO NASD OF NEWS RELEASES

      Schedule D requires NASDAQ companies to disclose promptly to the public through the press any material information which may affect the value of their securities or influence investors' decisions. [The Board of Governors recommends that NASDAQ companies notify the NASD of the release of any such information no later man simultaneously with its release to the public through the press. Notification may be provided directly to the NASD Market Surveillance Department by telephone (call 202 728-8204). Information communicated orally should be confirmed promptly in writing. Where public release of information occurs after 5:30 pjn. Eastern Time, notification should be made by 9:30 am. of the following trading day.]

      The purpose of this recommendation is to assist in maintaining a stable and orderly market for NASDAQ securities. One of the methods used by the NASD to accomplish such is the institution of NASDAQ [quotation] trading halts. A [quotations] tjading halt benefits current and potential shareholders by halting the [display of quotations through] trading of securities in the NASDAQ System until there has been an opportunity for the information to be disseminated to the public. This decreases the possibility of some investors acting on information known to them but which is not known to others. A [quotations] fiadjng halt normally lasts [about one to two hours] one half hour after the appearance of the news on wire services, but it may last

      longer if a determination is made that the news has not been adequately disseminated. A [quotations] trading halt provides the public with an opportunity to evaluate the information and consider it in making investment decisions. It also alerts the marketplace to the fact that news has been released.

      [Upon receipt of the information from the company, the NASD, after consultation with the company, will immediately evaluate the information, estimate its potential impact on the market and determine whether a quotations halt in the security is appropriate.]

      Material information which might reasonably be expected to affect the value of the securities of a company or influence investors' decisions would include information regarding corporate events of an unusual and/or nonrecurrent nature. The following list of events, while not an exhaustive summary of all situations in which disclosure to the NASD should be considered, may be helpful in determining whether information is material. It should also be noted that every development that might be reported to the NASD in these areas would not necessarily be deemed to warrant a [quotations] trading halt

      • a merger, acquisition or joint venture;
      • a stock split or stock dividend;
      • earnings and dividends of an unusual nature;
      • the acquisition or loss of a significant contract;
      • a significant new product or discovery;
      • a change in control or a significant change in management;
      • a call of securities for redemption;
      • the public or private sale of a significant amount of additional securities;
      • the purchase or sale of a significant asset;
      • a significant labor dispute;
      • establishment of a program to make purchases of the company's own shares;
      • a tender offer for another company's securities; and
      • an event requiring the filing of a current report under the Securities Exchange Act of 1934.

      1 See File No. SR-NASD-87-13, Securities Exchange Act Release No. 25669 (May 5,1988).

      2 Subsequent to approval of the rule amendments discussed in this notice, the SEC approved additional amendments to Part n of Schedule D relating to the "Notification to NASD of News Releases" to require that NASDAQ companies notify the NASD of the release of material information no later than simultaneously with the companies' release of such information to the public through the press and recommends that issuers provide such information at least 10 minutes prior to the release of the information. This amendment will be the subject of a separate notice to members in the near future. See File No. SR-NASD-88-16, Securities Exchange Act Release No. 25792 (June 9,1988).

      1 The current telephone number is (202) 728-8221.


    • 88-45 Proposed New Rule: Outside Business Activities-Last Voting Date: August 1, 1988

      ROUTE TO

      Senior Management
      Corporate Finance
      Government Securities
      Institutional
      Legal & Compliance
      Municipal
      Mutual Fund
      Operations
      Options
      Registration
      Research
      Syndicate
      Trading
      Training
      Other

      IMPORTANT MAIL VOTE

      EXECUTIVE SUMMARY

      NASD members are invited to vote on a proposed new Section 43 to Article III of the NASD Rules of Fair Practice that would prohibit all persons associated with a member in any registered capacity from accepting employment or compensation from any other-person as a result of business activity outside the scope of the employment relationship with a member unless prompt written notice to the member firm is provided. This provision will not apply to compensation from passive investments and activities subject to the requirements of Article III, Section 40 of the Rules of Fair Practice. The text of the proposed rule follows this notice.

      BACKGROUND

      On January 14,1988, the NASD issued Notice to Members 88-5, which solicited comments on a proposed NASD Rule of Fair Practice prohibiting any person associated with a member firni from being employed by, or accepting compensation from, any other person based on any business activity outside the scope of the employment relationship with a member firm, unless such person had provided prior written notice to that firm.

      When requesting comments concerning fee proposed rule, the NASD Board of Governors observed that the expansion of the financial services industry had provided increased business opportunities for persons associated with member firms, both within the scope of their employment with a member and otherwise. The Board noted that in recent disciplinary cases, prior notice to a member firni of an associated person's outside business activities might have prevented harm to the investing public or the firm's entanglement in legal difficulties. The Board further observed that the internal rules of many member firms already included limitations on outside business activities and notification requirements, and that both the New York Stock Exchange and the American Stock Exchange require associated persons of member firms to notify their firms of outside business activities. The Board concluded that it was appropriate for member firms to receive prompt notification of all outside business activities of their associated persons so that the member's objections, if any, to such activities could be raised at a meaningful time and so that appropriate supervision could be exercised as necessary under applicable law.

      SUMMARY OF COMMENTS

      The NASD received 62 comments in response to Notice to Members 88-5. Of these, 13 generally supported the proposed rule, 17 supported the wle with modifications, and 29 opposed the rule on various grounds. Three commentators, while taking no position on the rule's adoption, suggested amendments.

      Thirteen commentators suggested that the rule's scope be limited to cover only securities- or financial services-related outside business activities. Five commentators suggested that disclosure on Form U-4 be used either to satisfy the proposed rule's notification requirement or in lieu of the rule. Three commentators supported the establishment of a de minimis reporting threshold.

      The NASD Board reviewed the comments and concluded that the proposed rule should be adopted with certain modifications limiting the rule's application to persons associated with a member in a registered capacity and exempting passive investments and activities subject to the requirements of Article HI, Section 40 of the NASD Rules of Fair Practice from the proposed rule's notice requirements. The Board determined that prompt, rather than prior notice, should be required. The Board also concluded that the form of the written notice required under the proposed rule should be determined by the employer-member and could therefore include using the Form U-4.

      The NASD Board of Governors believes that the adoption of the proposed rule would serve to protect investors and the public interest by involving member firms in the review of the outside business activities of their registered personnel. Thus, the Board believes that the proposed rule is necessary and appropriate and recommends that members vote their approval.

      Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than August 1,1988.

      Questions concerning this notice can be directed to Norman Sue, Jr., Senior Attorney, NASD Office of General Counsel, at (202) 728-8117.

      PROPOSED NASD RULE OF FAIR PRACTICE

      Outside Business Activities

      Sec. 42. No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Article HI, Section 40 of the Rules of Fair Practice shall be exempted from this requirement


      1 New York Stock Exchange Rule 346(b), (e), and Supplementary Material .10; American Stock Exchange Rule 342(a), (b), and Commentary .20. Both organizations also require persons in supervisory positions to devote their entire time during business hours to the business of their firms and allow such persons to obtain permission from the exchange to devote less man full time to the business of their firm when it will not impair the protection of investors or the public interest


    • 88-44 Proposed Rule Amendments: Supervision and the Definitions of "Office of Supervisory Jurisdiction" and "Branch Office" Conforming Amendment To By-Laws-Last Voting Date: August 1, 1988

      ROUTE TO

      Senior Management
      Legal & Compliance
      Operations
      Other

      IMPORTANT MAIL VOTE

      EXECUTIVE SUMMARY

      The WASL invited to Article III, Section 27 ID flutes of Fair Practice and planS: .Amendment to Article 1 of the NASD 5. The proposed amendments to Article III, Section 27 would (1) prescribe specific supervisory partices and precdures for all member firms to derrttions of "office of supervisory jurisdcation"(OSJ) and "branch office".The confirming amendment would delete the present definition of "branch office" from the By-Laws. The texts of the proposed amendments follow this notice.

      BACKGROUND

      In recent years, the NASD has become increasingly concerned that some persons associated with members may be engaging in the offer and sale of securities to the public without adequate ongoing supervision. In particular, the potential for significant regulatory problems exists when registered representatives conduct business at locations that are not subject to regular examination by the member and operate without direct oversight of qualified supervisory personnel.

      In addition to these concerns, the NASD has considered whether certain aspects of a firm's business should be subject to on-site supervision by a registered principal so that the member can properly discharge its regulatory obligations. Further, the NASD has from time to time considered whether the definition of "branch office" in the By-Laws should be revised.

      The NASD's concern about off-site employment was discussed in detail in Notice to Members 86-65 (September 12,1986), which emphasized existing NASD rules that most directly apply to off-site employment That notice stated that the NASD was continuing to study the need to revise requirements for designating offices of supervisory jurisdiction and branch offices and for on-site supervision by registered principals.

      On June 29, 1987, the NASD issued Notice to Members 87-41, which requested comments on (1) proposed amendments to the definitions of "office of supervisory jurisdiction" and "branch office" and (2) proposed requirements for on-site registered principals at a business location based upon the number of persons and the extent to which such location was advertised or otherwise designated as an office of the member.

      As a result of the comments received in response to these proposals, the NASD issued Notice to Members 88-11 on February 8,1988, requesting comments on proposed amendments to Article HI, Section 27 of the Rules of Fair Practice that set forth specific minimum requirements for supervisory practices and procedures for NASD members and redefinitions of "office of supervisory jurisdiction" and "branch office."

      The proposed amendments set forth herein are substantially similar to the proposals set form in Notice to Members 88-11.

      PROPOSED AMENDMENTS

      Supervision Rules

      The proposed amendments substantially expand the specificity of Article m, Section 27 of the NASD Rules of Fair Practice with respect to a member's supervisory obligations. The NASD believes that the new provisions will assist members in ensuring compliance with applicable laws, regulations, and rules by requiring that firms review their businesses and construct and document a supervisory system that is reasonably designed to achieve compliance with the securities laws and regulations and NASD rules applicable to the various areas of the securities business in which NASD members are engaged.

      The proposals also contain certain minimum required supervisory procedures and practices that tine NASD believes to be necessary in any firm, regardless of size or type, in order to supervise adequately an investment Kinking aivl'or securities business.

      The amendments require each firm to establish and maintain supeivisory procedures and practices that provide for, at a minimum, the following:

      (1) Establishment and maintenance of written supervisory and review procedures as specified in the projxised amendments;
      (2) Designation of appropriately registered principals for each type of business in which the firm engages to carry out the firm's supervisory obligations;
      (3) Designation as an OS J for each location that meets the OSJ definition and any other locations for which such designation is appropriate to enable the firm to supervise properly, viewed in light of certain factors enumerated in the proposed amendments;
      (4) Designation of one or more appropriately registered prindpal(s) in each OSJ, including the main office, and one or more appropriately registered representative(s) or principal(s) in each branch office to carry out the supervisory responsibilities and activities assigned to that office by the member,
      (5) Assignment of each registered person to a supervisor,
      (6) Reasonable efforts to ensure that all supervisory personnel are property qualified;
      (7) Participation of each registered representative, individually or collectively and not less than annually, at an interview or meeting at which compliance matters relevant to the activities of such representan've(s) are discussed;
      (8) Designation and identification to the NASD of one or more principals who shall review the firm's supervisory practices and procedures and take or recommend to senior management appropriate action reasonably designed to achieve the member's compliance with applicable securities laws and regulations and with the rules of the NASD; and
      (9) Establishment of a schedule for examining the firm's branch offices that takes into account the nature of the activity, volume of business, and number of persons at each office.

      The proposed amendments would require that each firm maintain written supervisory procedures that describe the supervisory system implemented according to the above requirements and that list the titles, registration statuses, and locations of the required supervisory personnel and the specific responsibilities assigned to each. A copy of the member's supervisory procedures, or the relevant parts thereof, would be required to be kept and maintained at each OSJ and at each other location where supervisory activities are conducted on behalf of the member. The member would be required to amend its written supervisory procedures, as appropriate, within a reasonable time after changes occur in applicable laws, regulations, and rules, and in the firm's supervisory system, and to communicate these changes throughout its organization.

      Members also would be required to conduct a review, at least annually, of the businesses in which it engages for purposes of detecting and preventing violations of, and achieving compliance with, applicable laws, regulations, and rules. At a minimum, this would include: (1) periodic examination of customer accounts to detect and prevent irregularities and abuses; (2) annual inspection of each OSJ; and (3) inspection of branch offices in accordance with a schedule to be set forth in the member's supervisory procedures. The member would be required to retain a written record of the dates upon which each inspection and review was conducted.

      In addition to the foregoing, the amendments would also revise and clarify certain existing provisions of Section 27.

      Definitions of "Office of Supervisory Jurisdiction" and "Branch Office"

      An "office of supervisory jurisdiction" (OSJ) is currently defined in Article in, Section 27 of the NASD Rules of Fair Practice as "...any office designated as directly responsible for the review of the activities of registered representatives or associated persons in such office and/or any other offices of the member." Under the proposed amendments, an OSJ would be any business location of a member firm at which one or more of the following functions take place:

      (1) Order execution and/or market making;
      (2) Structuring of public offerings or private placements;
      (3) Maintaining custody of customers' funds and/or securities;
      (4) Finai acceptance (approval) of new accounts on behalf of the member,
      (5) Review and endorsement of customer orders pursuant to the provisions of proposed Article HI, Section 27(d);
      (6) Final approval of advertising or sales literature for use by persons associated with the member, pursuant to Article m, Section 35(b)(l) of the Rules of Fair Practice; or
      (7) Responsibility for supervising the activities of persons associated with the member at one or more other offices of the member.

      The term "branch office" is currently defined in Article I, Section (c) of the NASD By-Laws as"... an office which is owned or controlled by a member, and which is engaged in the investment banking or securities business." An Explanation of the Board of Governors in Schedule C to the NASD By-Laws reiterates this definition and also provides that a place of business of a person associated with a member is considered a branch office if the member (1) directly or indirectly contributes a substantial portion of the operating expenses of such place of business; and/or (2) authorizes a listing in any publication or other media, including a professional dealers digest or telephone directory, that designates a place as an office or if the member designates any such place as an office to another organizatioan

      The proposed amendment would define "branch office" as any business location of the member identified to the public or customers by any means as a location at which the investment banking or securities business is conducted on behalf of the member, excluding any location identified solely in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the office of the member responsible for supervising the activities of the identified location.

      Conforming Amendments to NASD By-Laws

      Article I of the NASD By-Laws sets form certain definitions applicable to terms used in the By-Laws and the Rules of Fair Practice. Section (c) defines "branch office" and would be amended to reflect that the term is now to be defined Article IE, Section 27 of the Rules.

      Effective Date

      If the foregoing proposals are approved by the membership and by the Securities and Exchange Commission (SEC), the Board of Governors believes that it is appropriate to provide members with a period of time following SEC approval to bring their supervisory practices and procedures into compliance. The Board has concluded, therefore, that the amendments will take effect six months following SEC approval.

      Comments Received

      The NASD received 44 comment letters in response to Notice to Members 88-11. After a review and discussion of the comments, the Board made certain modifications that are reflected in the attached text of the proposed amendments. The most significant of these are:

      (1) The enumeration of certain factors relevant tn the determination of the need to designate additional OSJs for general supervisory purposes (see proposed Section 27(a)(3)).
      (2) Clarification of certain matters regarding the annual compliance meeting or interview required for all registered representatives {see proposed Section 27(a)(7)).
      (3) The deletion of the reference to a "compliance" principal in proposed Section 27(a)(8).
      (4) The substitution of "titles" for "names" of persons identified in the firm's written procedures as part of its supervisory "chain of command," with the addition of a requirement to make and keep a separate record of all persons designated as supervisory personnel (see proposed Section 27(b)(2)).
      (5) The codification of the NASD' s position that the required review of all transactions and correspondence be conducted by a registered principal {see proposed Section 27(d)).
      (6) The deletion of approval of correspondence from the enumeration of functions giving rise to the OSJ definition {see proposed Section 27(f)(1)).
      (7) The addition of a requirement that telephone directory line listings, business cards, and letterhead identifying non-branch locations also set forth the address and telephone number of the firm's office responsible for supervising the identified location {see proposed Section 27(f)(2)).

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

      Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than August 1,1988.

      Questions concerning this notice can be directed to Dennis C. Hensley, NASD Vice President and Deputy General Counsel, at (202) 728-8245, or Jacqueline D. Whelan, Senior Attorney, NASD Office of General Counsel, at (202) 728-8270.

      PROPOSED AMENDMENTS TO ARTICLE III, SECTION 27 OF THE NASD RULES OF FAIR PRACTICE

      Note: New language is underlined; deleted language is in brackets.

      Sec. 27.

      [Written procedures

      (a) Each member shall establish, maintain and enforce written procedures which will enable it to supervise properly the activities of each registered representative and associated person to assure compliance with applicable securities laws, rules, regulations and statements of policy promulgated thereunder and with the rules of this Association.]

      Supervisory system

      (a) Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the rules of this Association. Final responsibility for proper supervision shall rest with the member. A member's supervisory system shall provide, at a minimum, for the following:
      (1) The establishment and maintenance of written procedures as required by paragraphs (b) and (c) of this section
      (2) The designation, where applicable, of an appropriately registered principal^) with authority to carry put the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker-dealer is required.
      (3) The designation as an office of supervisory jurisdiction C'OSJ") of each location that meets the definition contained in paragraph (f) of this Section. Each member shall also designate such other OSJs as it determines to be necessary in order to supervise its registered representatives and associated persons in accordance with the standards set forth in this Section. taking into consideration the following factors:
      (i) whether registered persons at the location engage in retail sales or other activities involving regular contact with public customers:
      (ii) whether a substantial number of registered persons conduct securities activities at. or are otherwise supervised from, such location;
      (iii) whether the location is geographically distant from another OSJ of the firm:
      (iv) whether the member's registered persons are geographically dispersed; and
      (v) whether the securities activities at such location are diverse and/or complex.
      (4) The designation of one or more appropriately registered principals in each OSJ. including the main office, and one or more appropriately registered representatives or principals in each non-OSJ branch office with authority to carry out the supervisory responsibilities assigned to that office by the member.
      (5) The assignment of each registered person to an appropriately registered representative(s) and/or principal(s) who shall be responsible for supervising that person's activities.
      (6) Reasonable efforts to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their assigned responsibilities.
      (7) The participation of each registered representative, either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the member at which compliance matters relevant to the activities of the representative(s) are discussed. Such interview or meeting may occur in conjunction with the discussion of other matters and may be conducted at a central or regional location or at the representative's place of business.
      (8) Each member shall designate and specifically identify to the Association one or more principals who shall review the supervisory system, procedures, and inspections implemented by the member as required by this Section and who shall take or recommend to senior management appropriate action reasonably designed to achieve the member's compliance with applicable securities laws and regulations, and with the rules of this Association.

      [Responsibility of member

      (b) Final responsibility for proper supervision shall rest with the member. The member shall designate a partner, officer or manager in each office of supervisory jurisdiction, including the main office, to carry out the written supervisory procedures. A copy of such procedures shall be kept in each such office.]

      Written procedures

      (b)
      (1) Each member shall establish, maintain and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with the applicable rules of this Association.
      (2) The member's written supervisory procedures shall set forth the supervisory system established bv the member pursuant to Section 27(a) above, and shall include the titles, registration status and locations of the required supervisory personnel and the responsibilities of each supervisory person as these relate to the types of business engaged in. applicable securities laws and regulations, and the rules of this Association. The member shall maintain on an internal record the names of all persons who are designated as supervisory personnel and the dates for which such designation is or was effective. Such record shall he preserved by the member for a period of not less than three years, the first two years in an easily accessible place.
      (3) A copy of a member's written supervisory procedures, or the relevant portions thereof, shall be kept and maintained in each OSJ and at each location where supervisory activities are conducted on behalf of the member. Each member shall amend its written supervisory procedures as appropriate within a reasonable time after changes occur in applicable securities laws and regulatioas. including the rules of this Association. and as changes occur in its supervisory system, and each member shall he responsible for communicating amendments through its organization.

      [Written approval

      (c) Each member shall be responsible for keeping and preserving appropriate records for carrying out the member's supervisory procedures. Each member shall review and endorse in writing, on an internal record, all transactions and all correspondence of its registered representatives pertaining to the solicitation or execution of any securities transaction.]

      Internal inspections

      (c) Each member shall conduct a review, at least annually, of the businesses in which it engages, which review shall he. reasonably designed to assist in detecting and preventing violatioas of and achieving compliance with applicable securities laws and regulatioas. and with the rules of this Association. Each member shall review the activities of each office , which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses and at least an annual inspection of each office of supervisory jurisdiction. Each branch office of the member shall be inspected according to a cycle which shall be set forth in the firm's written supervisory and inspection procedures. In establish-ing such cycle, the firm shall give coasideration to the nature and complexity of the securities activities for which the location is responsible, the volume of business done and the number of associated persoas assigned to the location. Each member shall retain a written record of the dates upon which each review and inspection is conducted

      [Review of activities and annual inspection

      (d) Each member shall review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses and at least an annual inspection of each office of supervisory jurisdiction.]

      Written approval

      (d) Each member shall establish procedures for the review and endorsement by a registered principal in writing, on an internal record, of all traasactions and all correspondence of its registered representatives pertaining to the solicitation or execution of any securities transaction.

      Qualifications investigated

      (e) Each member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications and experience of any person prior to making such a certification in the application of such person for registration with this Association.

      ["Office of supervisory jurisdiction"

      (f) "Office of supervisory jurisdiction" means any office designated as directly responsible for the review of the activities of registered representatives or associated persons in such office and/or in other offices of the member.]

      Definitions

      (f)
      (1) "Office of Supervisory Jurisdiction" means any office of a member at which any one or more of the following functions take place:
      (i) order execution and/or market making:
      (ii) structuring of public offerings or private placements.
      (iii) maintaining custody of customers' funds and/or securities:
      (iv) final acceptance (approval) of new accounts on behalf of the member
      (v) review and endorsement of customer orders, pursuant to paragraph (d) above;
      (vi) final approval of advertising or sales for use by persons associated with the member, pursuant to Article III. Section 35(b)(1) of the Rules of Fair Practice: or
      (vii) responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member.
      (f)
      (2) "Branch Office" means any location identified by any means to the public or customers as a location at which the member conducts an investment banking or securities business, excluding any location identified solely in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the branch office or OS J of the firm from which the person(s) conducting business at the non-branch location is directly supervised.

      PROPOSED AMENDMENT TO ARTICLE I OF THEN BY-LAWS

      Note: New language is underlined; deleted language in brackets.

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



      (c) "branch office" means an office [located in United States which is owned or controlled by a member, and which is engaged in the investment banking securities business;] defined as a branch office in Art III. Section 27 of the Rules of Fair Practice.

    • 88-43 Adoption of Amendments to the Rules of Practice and Procedures for the NASD Small Order Execution System and to Schedule D to the NASD By-Laws, Effective June 30, 1988

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission (SEC) approved amendments to the Rules of Practice and Procedures for the Small Order Execution System (SOES) and to Schedule D to the NASD By-Laws, which will become effective June 30, 1988. The new rules significantly alter the obligations of NASDAQ market makers. Major changes to the rules:

      • Prohibit a firm that withdraws, on an unexcused basis, as a NASDAQ market maker in a security from re-entering NASDAQ as a market maker in that security for 20 business days.
      • Limit the acceptable reasons for an excused withdrawal from NASDAQ.
      • Make SOES participation mandatory for all market makers in NASDAQ National Market System (NASDAQ/NMS) securities.
      • Enable the NASD to establish different levels of maximum order-size limits for SOES orders, depending on the average daily non-block volume, bid price, and number of market makers for each security.
      • Provide that SOES executions will continue in a NASDAQ/NMS security when quotes are locked or crossed, with executions occurring at the best price.
      • Eliminate preferencing of market makers during a locked or crossed market situation.

      To permit market makers to become familiar with operating under the new rules and procedures for mandatory SOES, the NASD will delay imposition of the 20-business-day penalty for unexcused market-maker withdrawal until July 11, 1988 (six business days following implementation of mandatory SOES).

      The text of the amendments is attached.

      BACKGROUND

      The SEC approved significant amendments to the Rules of Practice and Procedures for SOES and Schedule D to the NASD By-Laws (which sets forth requirements applicable to NASDAQ market makers), which become effective June 30, 1988.1/

      SOES was established to permit small orders in NASDAQ securities to be executed efficiently at the best price for the public customer. Notwithstanding extraordinary volume during October 1987, SOES remained open and operating and continues to provide investors with an effective means for executing smaller orders. Because of certain problems that surfaced during the October market break, however, the NASD Trading and SOES Users Committees concluded that certain improvements should be made to the NASDAQ/NMS market to ensure that investors have access to an even more efficient and liquid market, especially during periods of high volume. The Committees concluded that the most effective way to ensure greater investor access is through enhancements to SOES and the NASDAQ System that will help alleviate the need for firms to rely on telephone contact. Therefore, the Committees recommended certain rule changes to the NASD Board of Governors, who authorized their publication for comment. Those proposals were published for comment in NASD Notice to Members 87-77 (November 20, 1987). After considering the comments received, the NASD Board of Governors approved the amendments January 18, 1988.

      EXPLANATION OF AMENDMENTS

      • Mandatory Participation in SOES. The amended rules require that every market maker in every NASDAQ/NMS security also be a SOES market maker in the security. This will ensure that an automated means of efficiently executing customer orders in every NASDAQ/NMS security will be available under any market condition.
      • Penalty for Withdrawal as a NASDAQ Market Maker. The amendments to Schedule D prohibit a firm that withdraws from making a market in a NASDAQ security on an unexcused basis from re-entering as a market maker in that security for 20 business days. Market makers can obtain excused withdrawals only for the following reasons: (1) physical circumstances beyond a market maker's control (e.g., equipment malfunction or relocation); (2) legal or regulatory considerations (e.g., compliance with Rule 10b-6 under the Securities Exchange Act of 1934); or (3) religious holidays (if notice is received by the NASD five business days in advance and is approved by the NASD).
        This amendment places a significant incentive on market makers to continue their market-making activity throughout all market conditions. The NASD believes this change will ensure investors of a more liquid market even during periods of high volume.
        To permit market makers to become familiar with operating under the new rules and procedures of mandatory SOES, the NASD will postpone imposition of the 20-business-day penalty for unexcused market-maker withdrawal until July 11, 1988 (six business days following the imposition of mandatory SOES).
      • SOES Executions in Locked or Crossed Markets. The amended SOES rules provide for automatic SOES executions in NASDAQ/NMS securities in a locked market (i.e., one in which at least one market maker publishes a quotation indicating it is willing to buy for the same price at which at least one market maker has indicated it is willing to sell) or a crossed market (i.e., one in which at least one market maker publishes a quotation indicating it is willing to buy at a higher price than the price at which another market maker has indicated it is willing to sell). Under the amended rules, SOES will continue to operate and will execute against the market maker with the best bid or offer (i.e., the market maker causing the locked or crossed market).2/
        This change should accomplish two results. First, SOES will continue to operate during periods of rapidly changing prices, notwithstanding locked or crossed markets. Secondly, market makers will have an economic incentive to keep their quotes current at all times to avoid creating a locked or crossed market.
      • Clearance and Settlement. The amended SOES rules provide that, as participants in SOES, all NASDAQ/NMS market makers are required to clear and settle SOES transactions through a registered clearing agency using a continuous net settlement system.
      • Tiered Order Limits. The amended SOES rules include a definition of "maximum order size" and provide guidelines that permit the NASD to establish various maximum order-size levels in SOES.

      The maximum sizes for SOES orders most recently have been 1,000 shares for NASDAQ/NMS securities and 500 shares for regular NASDAQ securities. The amendments will permit different order sizes to be set for different categories of NASDAQ/NMS securities. The definition of "maximum order size" provides that in establishing the maximum order size for a SOES security, the NASD will consider average daily non-block volume, bid price, and number of market makers for each security. By using general market parameters (instead of exact criteria), the amended rules provide the NASD with the flexibility to address the volatility exhibited by the marketplace in recent months. The exact number of tier levels, the characteristics for each tier, and the securities assigned to each tier will be established and published by the NASD from time to time.

      As of June 30, 1988, the maximum SOES order sizes for NASDAQ/NMS securities will be 1,000, 500, or 200 shares. The applicable maximum order size for each NASDAQ/NMS security has been established as follows.

      • A 1,000-share maximum order size will be applied to those NASDAQ/NMS securities that have an average daily non-block volume of 3,000 shares or more a day, a bid price that is less than or equal to $100, and three or more market makers.
      • A 500-share maximum order size will be applied to those NASDAQ/NMS securities that have an average daily non-block volume of 1,000 shares or more a day, a bid price that is less than or equal to $150, and two or more market makers.
      • A 200-share maximum order size will be applied to those NASDAQ/NMS securities that have an average daily non-block volume of less than 1,000 shares or more a day, a bid price that is less than or equal to $250, and less than two market makers.

      The NASD set these initial order-size tiers after extensive research and polls of all NASDAQ/NMS market makers. These tiers have been established in a manner that the NASD believes will provide public investors with the most efficient means of handling their small orders while ensuring that market makers are not required to assume unrealistic risks.

      A list of all NASDAQ/NMS securities indicating the maximum order size for each security is attached.

      • Exposure Limits. The amended rules define "exposure limit" as the number of shares specified by a market maker that it is willing to have executed for its account by SOES and define "minimum exposure limit" as an amount equal to five times the maximum order size for a security. (For example, a security that has a maximum execution, or tier, size of 1,000 shares has a minimum exposure of 5 X 1,000, or 5,000 shares, on both the buy and sell sides.) Market makers will continue to be able to establish their own exposure limits so long as those limits in NASDAQ/NMS securities are equal to or larger than the minimum exposure limits.Under the amended rules, a NASDAQ/NMS market maker is obligated to execute SOES orders aggregating at least the minimum exposure limit (or the firm's exposure limit, if higher). After a market maker's exposure is exhausted, the market maker will be permitted a grace period within which to update its quotations and thus restore its exposure limit.4/
        If the market maker has not updated its quotations within the grace period, it will be removed from SOES as a market maker in that security and, in the case of a NASDAQ/NMS security, may not re-enter SOES for 20 business days. Initially, the NASD will delay imposing the 20-business-day penalty until July 11, 1988, to allow market makers time to become familiar with the new rules and procedures of mandatory SOES.
      • Participation Obligations in SOES. Section (c) under the SOES rules, regarding the obligations of SOES market makers and SOES order-entry firms, has also been amended. The amended rules obligate the market maker to execut individual orders in sizes equal to or smaller than the maximum order size an provide that a SOES market maker in any NASDAQ/NMS security must obligate itself to execute individual orders equal to the minimum exposure limit.

      * * *

      Questions regarding this notice can be directed to either Dennis C. Hensley, NASD Vice President and Deputy General Counsel, at (202) 728-8245, or S. William Broka, Vice President, NASDAQ Operations at (202) 728-8050.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachments

      RULES OF PRACTICE AND PROCEDURE FOR THE SMALL ORDER EXECUTION SYSTEM

      Note: New language is underlined; deleted language is in brackets.

      a) DEFINITIONS



      7. The term ["limited size" as it pertains to] "maximum order size" shall mean the maximum size of individual orders for a security [which] that may be entered into or executed through SOES^ [shall mean the amount established] The maximum order size for each security shall be published from time to time by the Association.* [for application to the System, which shall initially be 500 shares or less of an active SOES security.] In establishing the maximum order size for each NASDAQ/NMS security, the Association will give consideration to the average daily non-block volume, bid price, and number of market makers for each security.
      Note: Insert new subsections 8 and 9 as follows and renumber existing subsection 8 as subsection 10.
      8. The term "exposure limit" means the number of shares of a security on either side of the market specified by a market maker that it is willing to have executed for its account by SOES.
      9. The term "minimum exposure limit" for a security means the aggregate number of shares of the security equal to five times the maximum order size for that security.
      b) SOES PARTICIPANT REGISTRATION



      Note: Insert a new subsection 2 as follows and renumber existing subsections 2-4 as subsections 3-5.

      2. Pursuant to Part VI, Section 1 of Schedule D to the By-Laws, participation as a SOES market maker is required for any NASDAQ market maker registered to make a market in a NASDAQ National Market System (NASDAQ/NMS) security.
      c) PARTICIPATION OBLIGATIONS IN SOES
      1. Registration — Upon the effectiveness of registration as a [SOES] Market Maker or SOES Order Entry Firm, the SOES Participant may commence activity within SOES for exposure to orders or entry of orders, as applicable. The operating hours of SOES [are currently 10:00 a.m. to 4:00 p.m. Eastern Time, but] may be [modified] established as appropriate by the Association. A [SOES] Market Maker in a security other than a NASDAQ/NMS security may withdraw from and reenter SOES at any time, and without limitations, during the operating hours of SOES. The extent of participation in the System by a SOES Order Entry Firm shall be determined solely by the firm in the exercise of its ability to enter orders into the System.
      [A. SOES Market Makers]
      2. Market Makers — (A) A SOES Market Maker shall commence participation in SOES by initially contacting the SOES Operation Center to obtain authorization for the trading of a particular SOES security and identifying those terminals on which the SOES information is to be displayed and thereafter by an appropriate keyboard entry which obligates [him to execute transactions of limited size, as herein defined, so long as the SOES Market Maker remains active in SOES] the firm, so long as it remains a market maker in SOES, (i) for any security for which it is a SOES Market Maker, to execute individual orders in sizes equal to or smaller than the maximum order size; and, (ii) for any NASDAQ/NMS security for which it Is a Market Maker, to execute individual orders equal in the aggregate to the minimum exposure limit. All entries in SOES shall be made in accordance with the requirements set forth in the SOES User Guide.
      (B) For each security in which a market maker is registered, the market maker may enter into SOES an exposure limit. For a NASDAQ/NMS security, that limit may be any amount equal to or larger than the minimum exposure limit. If no exposure limit is entered for a NASDAQ/NMS security, the firm's exposure limit will be the minimum exposure limit.
      (C) At any time a locked or crossed market, as defined in Part VI, Section 2(e) of Schedule D to the NASD By-Laws, exists for a NASDAQ/NMS security, a market maker with a quotation for that security in the NASDAQ System that is causing the locked or crossed market may have orders representing shares equal to the minimum exposure limit or the firm's exposure limit, whichever is greater, executed by SOES for that Market Maker's account at its quoted price if that price is the best price. Those orders will be executed irrespective of any preference indicated by the Order Entry Firm.
      (D) The [SOES] Market Maker may terminate his obligation by keyboard withdrawal from SOES at any time. However, the [SOES] Market Maker has the specific obligation to monitor his status in SOES to assure that a withdrawal has in fact occurred. Any transaction occurring prior to the effectiveness of the withdrawal shall remain the responsibility of the [SOES] Market Maker. In the case of a security that is not a NASDAQ/NMS security, a market maker whose exposure limit is exhausted will be deemed to have withdrawn from SOES and may reenter at any time pursuant to Section (c)(l) of these rules.
      (E) In the case of a NASDAQ/NMS security, a Market Maker will be suspended from SOES if its exposure limit is exhausted and will be permitted a standard grace period, the duration of which will be established and published by the Association, within which to take action to restore its exposure limit. A market maker that fails to renew its exposure limit in a NASDAQ/NMS security within the allotted time will be deemed to have withdrawn as a market maker. Except as provided in (F) below, a market maker that withdraws in a NASDAQ/NMS security may not reenter SOES as a market maker in that security for twenty (20) business" days.
      (F) Notwithstanding the provisions of subsection (E) above, a Market Maker that obtains an excused withdrawal pursuant to Part VI, Section 7 of Schedule D to the NASD By-Laws prior to withdrawing from SOES may reenter SOES according to the conditions of its withdrawal.
      (G) Article IX of the Code of Procedure shall apply to proceedings brought by Market Makers seeking review of (i) their removal from SOES pursuant to Subsection E above, (ii) the denial of an excused withdrawal pursuant to Part Vl7 Section 7 of Schedule D to the NASD By-Laws, or (iii) the conditions imposed on their reentry.
      (H) In the event that a malfunction in the [SOES] Market Maker's equipment occurs, rendering on-line communications with SOES inoperable, the SOES Market Maker is obligated to immediately contact the SOES Operations Center by telephone to request withdrawal from SOES. For NASDAQ/NMS securities, such request must be made pursuant to Part VI, Section 7 of Schedule D to the NASD By-Laws. If withdrawal is granted, SOES operational personnel will [in turn] enter the withdrawal notification into SOES from a supervisory terminal. Such manual intervention, however, will take a certain period of time for completion and the SOES Market Maker will continue to be obligated for any transaction executed prior to the effectiveness of his withdrawal.
      [B SOES Order Entry Firms]
      3. SOES Order Entry Firms —
      [(i)]
      (A) All entries in SOES made by a SOES Order Entry Firm shall be made in accordance with the procedures and requirements set forth in the SOES User Guide. Orders may be entered in SOES by the SOES Order Entry Firm through either its NASDAQ terminal or computer interface. The firm will receive an immediate execution report on the terminal screen and printer, if requested, or through the computer interface, as applicable.
      [(ii)]
      (B) SOES will accept both market and limit orders for execution made by a SOES Order Entry Firm; however, limit orders not immediately executed due to price will be returned to the SOES Order Entry Firm. Orders may be preferenced to specific SOES Market Maker or may be unpreferenced, thereby resulting in execution in rotation against SOES Market Makers.
      [(iii)]
      (C) Only agency orders [of limited] no larger than the maximum order size, as defined herein, received from public customers may be entered by a SOES Order Entry Firm into SOES for execution against a SOES Market Maker. Agency orders in excess of [limited] the maximum order size may not be divided into smaller parts for purposes of meeting the size requirements for orders entered into SOES.
      [(iv)]
      (D) No member or person associated with a member shall utilize SOES for the execution of agency orders in a security in which the member is a NASDAQ Market Maker but is not a SOES Market Maker.

      Note: Insert new Section d) as follows and renumber existing Sections d) and e) as Sections e) and f).

      d) CLEARANCE AND SETTLEMENT
      All transactions executed in SOES shall be cleared and settled through a registered clearing agency using a continuous net settlement system
      .

      AMENDMENTS TO SCHEDULE D TO THE NASD BY-LAWS

      Note: New language is underlined; deleted language is in brackets.



      PART VI

      REQUIREMENTS APPLICABLE TO NASDAQ MARKET MAKERS

      Sec. 1. Registration as a NASDAQ Market Maker



      (f) Unless otherwise specified by the Association, each NASDAQ Market Maker that is registered as a market maker in a NASDAQ National Market System (NASDAQ/NMS) security shall also at all time be registered as a market maker in the Small Order Execution System (SQES) with respect to that security and be subject to the Rules of Practice and Procedures for SOES.

      Sec. 2. Character of Quotations



      (e) Locked and Crossed Markets. A market maker shall not, except under extraordinary circumstances, enter or maintain quotations in the NASDAQ System during normal business hours if:
      [(l)]
      (i) the bid quotation entered is equal to or greater than the asked quotation of another market maker entering quotations in the same security; or
      [(2)]
      (ii) the asked quotation is equal to or less than the bid quotation of another market maker entering quotations in the same security.
      (2) A market maker shall, prior to entering a quotation that locks or crosses another quotation, make reasonable efforts to avoid such locked or crossed market by executing transactions with all market makers whose quotations would be locked or crossed. Pursuant to the provisions of paragraph (b) of this section, a market maker whose quotations are causing a locked or crossed market is required to execute transactions at its quotations as displayed through the NASDAQ System at the time of receipt of any order.



      Sec. 6. Clearance and Settlement

      (a) A market maker shall clear and settle transactions in NASDAQ securities other than securities in SOES through the facilities of a registered clearing agency where clearing facilities are located within 25 miles of the market maker.
      (b) Notwithstanding its proximity to a particular clearing facility, a market maker may also clear and settle its transactions in a security that is not a SOES security through a registered clearing facility using a continuous net settlement system; enter into a correspondent clearing arrangement with a member that clears through a continuous net settlement clearing facility; settle transactions "ex-clearing" provided both parties to the transaction agree; or use direct clearing services.
      (c) All SOES transactions shall be cleared and settled through a registered clearing agency using a continuous net settlement system.

      Sec. 7. Withdrawal of Quotations

      (a) A market maker that wishes to withdraw quotations in a security shall contact NASDAQ Operations[-Members] to obtain excused withdrawal status prior to withdrawing its quotations. Excused withdrawals shall be granted by NASDAQ Operations only upon the demonstration of the existence of one of the circumstances set forth in paragraph (b) of this section.
      (b) Excused withdrawal status based on [illness, vacation or] physical circumstances beyond a market maker's control may be granted for up to five (5) business days, unless extended by NASD Operations[-Members]. Excused withdrawal status based on [investment banking activity or the advice of legal counsel], demonstrated legal or regulatory requirements, supported by appropriate documentation and accompanied by a representation that the condition necessitating the withdrawal of quotations is not permanent in nature, may, upon written request, be granted for not more than sixty (60) days. Excused withdrawal status based on religious holidays may be granted only if notice is received by the Association five business days in advance and is approved by the Association. The withdrawal of quotations because of pending news, a sudden influx of orders or price changes, or to effect transactions with competitors shall not [normally] constitute acceptable reasons for granting excused withdrawal status.

      Sec. 8. Voluntary Termination of Registration.

      A market maker may voluntarily terminate its registration in a security by withdrawing its quotations from the NASDAQ System. A market maker that voluntarily terminates its registration in a security may not re-register as a market maker in that security for [two (2)] twenty (20) business days. Withdrawal from SOES participation as a market maker in a NASDAQ/NMS security shall constitute termination of registration as a market maker in that security for purposes of this section.


      1/ File No. SR-NASD-88-1, Securities Exchange Act Release No. 25791 (June 9, 1988).

      2/ Under the amended rules, during a locked or crossed market an order-entry firm's indication of a preference for a particular market maker will not be recognized so that no market maker will be required to execute at another dealer's locked or crossed quote. If more than one firm is locking or crossing the market, executions will be made against all such firms in rotation.

      4/ The duration of this period will be established and published by the NASD from time to time. Initially, the grace period will be five minutes.

      *In Notice to Members 88-43 (June 22, 1988) the NASD announced that the maximum order size for NASDAQ/NMS securities traded on SOES shall be 1,000, 500, or 200 shares and that the applicable maximum order size for each NASDAQ/NMS security would be determined generally by the following criteria:

      • a 1,000-share maximum order size shall apply to NASDAQ/NMS securities on SOES with an average daily non-block volume of 3,000 shares or more a day, a bid price of less than or equal to $100, and three or more market makers;
      • a 500-share maximum order size shall apply to NASDAQ/NMS securities on SOES with an average daily non-block volume of 1,000 shares or more a day, a bid price of less than $150, and two or more market makers;
      • a 200-share maximum order size shall apply to NASDAQ/NMS securities with an average daily non-block volume of less than 1,000 shares a day, a bid price of less than or equal to $250, and that have less than two market makers.

      The NASD announced the maximum order size for each security in NASDAQ/NMS and noted that individual securities may be reclassified from time to time depending upon unique circumstances as determined by the Association. The NASD also announced that the maximum order size for all NASDAQ securities not in NASDAQ/NMS shall be 500 shares.


    • 88-42 NASDAQ National Market System Advances to 2,954 Securities With 14 Additions on June 21, 1988

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

      On Tuesday, June 21, 1988, the following 14 issues are scheduled to join the NASDAQ National Market System (NASDAQ/NMS), bringing the total number of issues in NASDAQ/NMS to 2,954:

      Symbol*

      Company

      Location

      SOES Execution Level**

      AFPFZ

      America First Participating/Preferred Equity Mortgage L.P.

      Omaha, NE

      500

      AMEI

      American Medical Electronics, Inc.

      Dallas, TX

      1000

      ARBC

      American Republic Bancorp

      Torrance, CA

      200

      AMGD

      American Vanguard Corporation

      Los Angeles, CA

      500

      BNBC

      Broad National Bancorporation

      Newark, NJ

      200

      CIBC

      Citizens Bancorp

      River dale, MD

      500

      CIBA

      Citizens Bank

      Murphy, NC

      200

      CMDT

      Comdata Holdings Corporation

      Nashville, TN

      1000

      CMRE

      Comstock Resources, Inc.

      Dallas, TX

      1000

      EMSIF

      EMS Systems Ltd.

      Carrollton, TX

      500

      FRBK

      Fairfield First Bank & Trust Company

      Fairfield, CT

      200

      HUHO

      Hughes Homes, Inc.

      Tacoma, WA

      1000

      HUHOW

      Hughes Homes, Inc. (Wts)

      Tacoma, WA

      200

      UNRIQ

      UNR Industries, Inc.

      Chicago, IL

      1000

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS upon effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol*

      Company

      Location

      SOES Execution Level**

      CLDRV

      Cliffs Drilling Company (WI)

      Houston, TX

      500

      CNCD

      Concorde Career Colleges, Inc.

      Kansas City, MO

      1000

      DELL

      Dell Computer Corporation

      Austin, TX

      1000

      LFSA

      First Federal Savings & Loan Association of Lenawee County

      Adrian, MI

      500

      HVDK

      Harvard Knitwear, Inc.

      Brooklyn, NY

      500

      ILCI

      ILC Industries, Inc.

      Bohemia, NY

      1000

      INDX

      Index Technology Corporation

      Cambridge, MA

      1000

      NHLI

      National Health Laboratories Incorporated

      LaJolla, CA

      1000

      NOVXL

      Nova Pharmaceuticals Corporation (Cl D Wts)

      Baltimore, MD

      500

      NOVXM

      Nova Pharmaceuticals Corporation (Cl C Wts)

      Baltimore, MD

      500

      EWSCA

      E. W. Scripps Company (Cl A)

      Wilmington, DE

      500

      STOT

      Stotler Group, Inc.

      Chicago, IL

      1000

      CALLA

      Telephone Management Corporation (CIA)

      Atlanta, GA

      1000

      NASDAQ/NMS Interim Additions: Special Note

      The following securities have commenced trading in NASDAQ/NMS since June 1, 1988. A complete list of securities trading in NASDAQ/NMS as of May 31, 1988, and their SOES Execution Levels will be provided to all NASD Members and Level 2 and 3 subscribers in a forthcoming Notice to Members.

      Symbol*

      Security

      Date of Entry

      SOES Execution Level

      MSHK

      Medstone International, Inc.

      6/02/88

      1000

      CPAK

      CPAC, Inc.

      6/07/88

      1000

      CBKI

      Community Banks, Inc.

      6/07/88

      200

      CFERV

      ConferTech International, Inc. (WI)

      6/07/88

      1000

      CBNEV

      Constitutional Bancorp of New England, Inc. (WI)

      6/07/88

      200

      EGGS

      Egghead, Inc.

      6/07/88

      1000

      EDAT

      Electronic Data Technologies

      6/07/88

      500

      FSFC

      First Security Financial Corp.

      6/07/88

      200

      FSAK

      Franklin Savings Association

      6/07/88

      500

      KCSG

      KCS Group, Inc.

      6/07/88

      1000

      LECT

      Lectec Corporation

      6/07/88

      1000

      PFDC

      Peoples Federal Savings Bank of DeKalb County

      6/07/88

      200

      STLTF

      Stolt Tankers & Terminal (Holdings), S.A.

      6/07/88

      1000

      CEUFV

      Centurion Gold Ltd. (WI)

      6/08/88

      1000

      KNCI

      Kinetic Concepts. Inc.

      6/08/88

      1000

      AMFLP

      American Savings & Loan Association of Florida (Pfd)

      6/13/88

      200

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since May 25, 1988.

      New/Old Symbol

      New/Old Security

      Date of Change

      COVT/COVT

      Covington Development Group, Inc./Covington Technologies, Inc.

      5/27/88

      OXID/HOMC

      Oxidyne Group, Inc. (The)/ Homac, Inc.

      5/27/88

      CNBT/CNBT

      Community National Bancorp, Inc./Community National Bank & Trust Company of New York

      5/31/88

      ZAPSV/ZAPS

      Cooper Life Sciences, Inc. (WI)/Cooper Lasersonics, Inc.

      5/31/88

      BMAC/BMAC

      BMA Corporation/Business Men's Assurance Company of America

      6/01/88

      CDNC/ECAD

      Cadence Design Systems, Inc./ EC AD, Inc.

      6/01/88

      ARAI/ARAI

      Allied Research Corporation/ Allied Research Associates, Inc.

      6/02/88

      RFED/RFED

      Roosevelt Bank, A Federal Savings Bank/Roosevelt Federal Savings & Loan Association

      6/02/88

      UBTC/UBTC

      University Bank, National Association/University Bank & Trust Company

      6/03/88

      CFHC/STKN

      California Financial Holding Company/Stockholm Savings & Loan Association

      6/06/88

      QNTX/HRIG

      HRI Group, Inc./HRI Group, Inc.

      6/07/88

      CREB/CREB

      Champion Parts, Inc./Champion Parts Rebuilders, Inc.

      6/09/88

      PPSA/PPSA

      Prospect Park Financial Corporation/Prospect Park Savings & Loan Association

      6/10/88

      WYNB/ABWY

      Wyoming National Bancorporation/ Affiliated Bank Corporation of Wyoming

      6/10/88

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      BGLY

      Begleym Corporation

      5/25/88

      IMSI

      I.M.S. International,v Inc.

      5/26/88

      WELLE

      LivingWell, Inc.

      5/27/88

      ANWI

      American Network, Inc.

      5/31/88

      HFSL

      Home Owners Federal Savings & Loan Association

      5/31/88

      UTRK

      U.S. Truck Lines Inc. of Delaware

      5/31/88

      CSBN

      Community Savings Bank

      6/03/88

      DINB

      Dinner Bell Foods, Inc.

      6/06/88

      SURE

      SCOR U.S. Corporation

      6/07/88

      CALSF

      California Gold Mines, Ltd.

      6/08/88

      DAYS

      Days Inns Corporation

      6/08/88

      EFAC

      Energy Factors, Inc.

      6/08/88

      MDWY

      Midway Airlines, Inc.

      6/09/88

      TRCC

      TRC Companies, Inc.

      6/09/88

      Questions regarding this notice can be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules can be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192.

      Sincerely,

      Joseph R. Hardiman
      President


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

      **New rules will be implemented shortly that will require all market makers in NASDAQ/NMS issues to be active participants in the Small Order Execution System (SOES). The specific "SOES Execution Level" assigned to each new entrant in NASDAQ/NMS will be included in future Notices to Members.


    • 88-41 Independence Day Trade Date-Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      FROM: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Monday, July 4, 1988, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule.

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

      Trade Date

      Settlement Date

      Regulation T Date*

      June 24

      July 1

      July 6

      27

      5

      7

      28

      6

      8

      29

      7

      11

      30

      8

      12

      July 1

      11

      13

      4

      MARKETS CLOSED

      5

      12

      14

      The foregoing settlement dates should be used by brokers, dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD 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 NASD Uniform Practice Department at (212) 858-4341.


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


    • 88-40 Adoption of New Schedule H to the NASD By-Laws and Proposed Amendment to Article III, Section 21 of the NASD Rules of Fair Practice.

      IMPORTANT MAIL VOTE

      OFFICERS, PARTNERS, PROPRIETORS

      TO: All NASD Members

      LAST VOTING DATE IS JULY 1, 1988.

      EXECUTIVE SUMMARY

      NASD members are invited to vote on a proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice. The amendment would require the marking of customer order tickets to reflect the dealers contacted by members and the quotations received to determine the best inter-dealer market as required by an amendment to the NASD's "Best Execution Interpretation" which has been approved by the Securities and Exchange Commission (SEC).

      In a separate but related matter, the SEC approved the NASD's adoption of new Schedule H to the NASD By-Laws, which establishes an electronic system of mandatory price and volume reporting for over-the-counter securities that are not part of the National Association of Securities Dealers Automated Quotations (NASDAQ) System.

      The text of the proposed amendment to Article III, Section 21 is attached.

      BACKGROUND

      In letters to the NASD, dated October 8, 1985, and June 17, 1987, the SEC directed the NASD, to develop a nationwide automated market surveillance program for non-NASDAQ, over-the-counter (OTC) securities (commonly referred to as "pink sheet" stocks) and to develop a rule requiring member firms making a market in these securities to periodically report price and volume information to the NASD.

      In response to the SEC's concerns, the NASD adopted proposed rule changes that provide for the routine surveillance of the non-NASDAQ, OTC securities market. The proposed rule changes, providing for a new Schedule H to the NASD By-La ws, were approved by the SEC on May 2, 1988.1/ New Schedule H defines the terms "non-NASDAQ security" and "non-NASDAQ reporting system" and establishes minimum threshold reporting requirements for non-NASDAQ, OTC securities.

      EXPLANATION OF AMENDMENTS

      Schedule H to the NASD By-Laws

      Section 1 of new Schedule H defines the term "non-NASDAQ reporting system" to encompass any electronic price and volume reporting system operated by the NASD for non-NASDAQ securities. The term "non-NASDAQ security" is defined as any equity security that is neither included in the NASDAQ System nor traded on any national securities exchange. 2/

      Section 2 of Schedule H requires members executing principal transactions in non-NASDAQ securities to provide price and volume data for both purchase and sale transactions if the member's aggregate daily volume of either sales or purchases exceeds either a minimum of 50,000 shares or $10,000. For example, if a member executes an aggregate purchase volume of 70,000 shares and has an aggregate sale volume of 20,000 shares, it will be required to report aggregate volume for both the purchases and sales, as well as price data, because the minimum threshold level was reached on the buy side of the market.

      The provisions of Section 2(a) of Schedule H also require members to report the highest price at which the member sold the non-NASDAQ security meeting the minimum reporting level and the lowest price at which the member purchased the security. The price to be reported on customer transactions would be inclusive of mark-ups or mark-downs. In addition, the member would be required to indicate whether the trades that established these high and low prices represented an execution with a customer or with another broker-dealer.

      Section 2(b) of Schedule H provides for daily reporting of price and volume information of principal transactions on non-NASDAQ securities executed by members. Members will have the option to report price and volume information either between the hours of 4 p.m. and 6:30 p.m. Eastern Time on the trade date or between 7:30 a.m. and 9 a.m. Eastern Time on the next business day.

      The new rules also amend the Interpretation of the Board of Governors-Execution of Retail Transactions in the Over-the-Counter Market (the "Best Execution Interpretation") by adding a new paragraph (D) that requires members to check a minimum of three dealers (or all dealers in a security if three or less) prior to executing any transaction on behalf of a customer in a non-NASDAQ security.

      Article m, Section 21 to the Rules of Fair Practice

      In order for members to demonstrate compliance with the new amendment to the Best Execution Interpretation, the NASD determined that Article III, Section 21 of the NASD Rules of Fair Practice (pertaining to the maintenance of books and records) should be amended. The proposed amendment to Section 21 would require that a member demonstrate its compliance with the Interpretation by noting on its order ticket the identities of the dealers contacted and the quotations received to determine the best inter-dealer markets as required by the amended Best Execution Interpretation.

      * * * *

      The Board believes that the proposed amendment to Article III, Section 21 of the NASD Rules of Fair Practice is necessary and appropriate to demonstrate compliance with the amendment to the Best Execution Interpretation and to better surveil the execution of trades in the non-NASDAQ, equity securities market. The Board thus recommends that members vote their approval.

      Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to the "Corporation Trust Company." Ballots must be postmarked no later than July 1, 1988.

      Questions concerning this notice can be directed to Eneida Rosa, NASD Office of General Counsel, at (202) 728-8284.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      PROPOSED AMENDMENT TO ARTICLE m, SECTION 21 OF THE NASD RULES OF FAIR PRACTICE*

      Books and Records

      Section 21

      (b) Marking of Customer Order Tickets
      (i) A person associated with a member shall indicate on the memorandum for the sale of any security whether the order is "long" or "short," except that this requirement shall not apply to transactions in corporate debt securities. An order may be marked "long" if (l) the customer's account is long the security involved or (2) the customer agrees to deliver the security as soon as possible without undue inconvenience or expense.
      (ii) A person associated with a member shall indicate on the memorandum for each transaction in a non-NASDAQ security, as that term is defined in Schedule H to the NASD By-Laws, the name of each dealer contacted and the quotations received to determine the best inter-dealer market.

      1/ See File No. SR-NASD-87-55, Securities Exchange Act Release 34-25637.

      2/ The NASD may implement the proposed price and volume reporting requirements in phases. A separate NASD notice to members discussing the requirements and operation of the new reporting system will be issued in the near future.

      *New language is underlined.


    • 88-39 NASDAQ National Market System Totals 2,950 Securities With 10 Additions on June 7, 1988

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

      On Tuesday, June 7, 1988, the following 10 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,950:

      Symbol*

      Company

      Location

      CPAK

      CPAC, Inc.

      Leicester, NY

      CBKI

      Community Banks, Inc.

      Millersburg, PA

      CFER

      ConferTech International, Inc.

      Golden, CO

      CBNEV

      Constitution Bancorp of New England, Inc. (WI)

      Bridgeport, CT

      EDAT

      Electronic Data Technologies

      Las Vegas, NV

      FSFC

      First Security Financial Corporation

      Salisbury, NC

      FSAK

      Franklin Savings Association

      Ottawa, KS

      KCSG

      KCS Group, Inc.

      Bridgewater, NJ

      LECT

      Lectee Corporation

      Minnetonka, MN

      PFDC

      Peoples Federal Savings Bank of DeKalb County

      Auburn, IN

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS upon effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol*

      Company

      Location

      CLDR

      Cliffs Drilling Company

      Houston, TX

      EGGS

      Egghead,Inc.

      Bothwell, WA

      HVDK

      Harvard Knitwear, Inc.

      Brooklyn, NY

      NASDAQ/MMS Interim Additions

      The registration statements of the following issues were declared effective by the SEC or other appropriate regulatory authority. The issues commenced trading in NASDAQ/NMS since May 9, 1988.

      Symbol*

      Security

      Date of Entry

      BFSI

      BFS Bankorp, Inc.

      5/11/88

      RESP

      Respironies, Inc.

      5/12/88

      BMRG

      BMR Financial Group, Inc.

      5/17/88

      FRMG

      FirstMiss Gold, Inc.

      5/18/88

      RELY

      Relational Technology, Inc.

      5/18/88

      RCHFA

      Richfood Holdings, Inc. (Cl A)

      5/18/88

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since May 9, 1988.

      New/Old Symbol*

      New/Old Security

      Date of Change

      FFPC/FFPC

      Florida First Federal Savings Bank/First Federal Savings & Loan Association of Panama City

      5/10/88

      USAB/OBAT

      USA Bancorp, Ine./Olympic International Bank & Trust Company

      5/19/88

      EXCG/EXCG

      Exchange Bancorp, Inc. /Exchange International Corporation

      5/20/88

      FFCA/FFCA

      Carolina Bancorp, Ine./First Federal of the Carolinas, F.A.

      5/24/88

      PVDC/PVDC

      Princeville Corp./Princeville Development Corp.

      5/24/88

      TCII/TCII

      TCI International, Inc./ Technology for Communications International, Inc.

      5/25/88

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      AWCSA

      A W Computer Systems, Inc. (Cl A)

      5/11/88

      ALLS

      Allison's Place, Inc.

      5/11/88

      FURSA

      Antonovich, Inc. (Cl A)

      5/11/88

      CLGBB

      Clabir Corporation (Cl B)

      5/11/88

      WBED

      Classic Corporation

      5/11/88

      COMX

      Comptrex Systems Corporation

      5/11/88

      EVGD

      Evergood Products Corporation

      5/11/88

      FTSI

      Fisher Transportation Services, .

      5/11/88

      IBIAE

      IBI Security Service, Inc. (Cl A)

      5/11/88

      MAVR

      Maverick Restaurant Corporation

      5/11/88

      MOSE

      Moseley Holding Corporation (The)

      5/11/88

      OSIX

      Optical Specialties, Inc.

      5/11/88

      PAMC

      Provident American Corporation

      5/11/88

      RPCO

      Repco Incorporated

      5/11/88

      STAR

      Stars To Go, Inc.

      5/11/88

      CODA

      Step-Saver Data Systems, Inc.

      5/11/88

      CODAZ

      Step-Saver Data Systems, Inc.

      5/11/88

      STRN

      Sutron Corporation

      5/11/88

      TVIV

      Taco Viva, Inc.

      5/11/88

      VISC

      Visual Industries, Inc.

      5/11/88

      CTZN

      Citizens Financial Corporation

      5/12/88

      USMA

      Union Special Corporation

      5/12/88

      HAMB

      Hamburger Hamlets, Inc.

      5/13/88

      JPAC

      ADMAC, Inc.

      5/16/88

      CFNVF

      Centrafarm Group, N.V.

      5/16/88

      EXPO

      Insteel Industries. Inc.

      5/16/88

      CADEW

      Cade Industries, Inc. (Wts)

      5/17/88

      CNSB

      Centennial Savings Bank, F.S.B.

      5/17/88

      FCLF

      First Columbia Financial Corp.

      5/17/88

      WOWIQ

      Worlds of Wonder, Inc.

      5/17/88

      BITX

      Biotherapeutics Incorporated

      5/18/88

      NMED

      Inmed Corporation

      5/20/88

      CHAT

      Chatham Manufacturing Company

      5/24/88

      IRND

      Interand Corporation

      5/24/88

      OTFEE

      OTF Equities, Inc.

      5/24/88

      PFPF

      Price Pfister, Inc.

      5/24/88

      Questions regarding this notice can be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules can be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192.

      Sincerely,

      Joseph R. Hardiman
      President


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


    • 88-38 SEC Approves New Category of Limited Representative Registration — Corporate Securities Examination (Series 62); Study Outline Available

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      On June 1, 1988, the NASD will institute the Limited Representative—Corporate Securities, a new category of registration. This new registration category will qualify persons associated with NASD members to solicit, purchase, or sell corporate securities, as defined in the amendment to Schedule C Part III, Section 29(e) to the NASD By-Laws.

      A study outline for the new Series 62—Corporate Securities Limited Representative Qualification Examination is now available. The Series 62 examination will, under certain conditions, fulfill the prerequisite examination requirements for candidates seeking General Securities Principal registration. The new examination will be administered in the PLATO network.

      The text of the amendment to Schedule C, Part III, to the By-Laws as well as the conforming change to Schedule C, Part II, is attached.

      BACKGROUND

      When the NASD adopted the Series 7—General Securities Registered Representative Examination in 1974, the NASD Board of Governors recognized that the broad product coverage in test was not suitable for many representatives whose firms specialized in limited products. The Board therefore elected to retain the predecessor Series 1—Registered Representative Examination to qualify representatives who "limited" their securities activities to either investment company products and variable annuities, or to direct participation programs. The Series 1 examination was used until August 1980, when the Series 6~Investment Company Products/Variable Contracts Representative Examination and the Series 22—Direct Participation Programs Representative Examination were implemented. In addition, in 1978, the Municipal Securities Rulemaking Board introduced the Series 52—Municipal Securities Representative Examination which created, from an NASD perspective, another category of limited representative registration.

      These three limited examinations offered members and their representatives some, but not total, flexibility in qualifying for registration. For example, representatives who were already registered in one or more limited areas would be re-tested in those same areas when they sought General Securities Representative status through the Series 7 examination. Also, limited representatives who only wanted to add equity products to their qualifications would still have to study the full spectrum of municipal securities, investment company/variable products, and options products for the General Securities test. Compounding this problem, the options material in the Series 7 examination was significantly revised in June 1986 to include debt, foreign currency, and index options as well as the traditional coverage of equity options.

      Therefore, the NASD Qualifications Committee decided to add two more limited representative registration categories:

      1. Series 62—Corporate Securities Limited Representative Examination.
      2. Series 42—Options Limited Representative Examination (planned for the near future).

      A member or representative would then have total flexibility in qualifying in one or more product areas. Additionally, representatives qualifying in all five limited representative categories would be designated "General Securities Representatives," thereby offering an alternative to the Series 7 examination. The NASD has established procedures with other self-regulatory organizations to ensure comparability of subject matter coverage between the Series 7 examination and the five limited examinations.

      Members have indicated a need for qualification tests that reflect the various product areas in the industry, and it is expected that the Corporate Securities Limited Registration category will apply to many firms. Expected users of the program include:

      • Existing limited representatives, especially those associated with insurance companies, who want to expand their product offerings to include securities that currently require Series 7—General Securities Representative qualification.
      • Representatives of smaller firms who are not involved in all the product areas included in the Series 7—General Securities Representative program.
      • Representatives who prefer to attain general securities qualification in successive steps rather than in the all-or-nothing manner required by the Series 7— General Securities Representative program.
      • Equity and corporate debt traders.
      • Corporate finance personnel.
      • Certain research personnel required to be registered under NASD rules.

      SUMMARY OF ADOPTED AMENDMENTS TO SCHEDULE C

      Under the adopted amendments to Schedule C to the NASD By-Laws, a Series 62—Corporate Securities Limited Representative can transact a member's business in common and preferred stocks, corporate bonds, stock rights, warrants, foreign securities, ADRs, shares of closed-end investment companies and money market funds, privately issued mortgage-backed securities, other asset-backed securities, and REITs. Registration in this category alone will not allow a representative to transact a member's business in municipal securities, direct participation programs, redeemable securities of companies registered under the Investment Company Act of 1940, variable contracts, or options. A representative seeking to transact business in these latter products must register in one or more of the NASD's other limited representative categories, or as a General Securities Registered Representative.

      The amendments do not affect a member's ability to require its associated persons to qualify as Series 7—General Securities Representatives as a matter of policy. The Series 62—Corporate Securities Limited Representative Examination, either alone or in conjunction with other limited representative examinations, is intended to provide members greater flexibility in qualifying their personnel, while maintaining the necessary investor protection afforded by the NASD's qualification program. The Series 62 exam, like the other limited examinations, will be administered on a daily basis using the NASD's automated testing system in the PLATO network.

      Additionally, the Series 62 exam and registration as a Corporate Securities Limited Registered Representative may be used to fulfill the prerequisite representative qualifications requirement for becoming a General Securities Principal and taking the Series 24—General Securities Principal Examination. A candidate who qualifies as a Corporate Securities Limited Representative as a basis for becoming a General Securities Principal may only supervise a member's corporate securities business, unless the candidate also qualifies in the other limited product areas covered by the Series 24 exam; namely, investment company products/variable contracts and direct participation programs.

      * * * * *

      The attached amendments to Schedule C to the NASD By-Laws have been approved by the NASD Board of Governors and the Securities and Exchange Commission. The Series 62—Corporate Securities Limited Representative Qualification Examination will be available beginning June 1, 1988. A study outline for the Series 62 examination can be obtained by sending a request with a check for $4, payable to the NASD, to: NASD, Attn: Book Order Department, P.O. Box 9403, Gaithersburg, Maryland 20898-9403.

      Questions concerning this notice can be directed to David Uthe, NASD Senior Qualifications Analyst, at (301) 738-6695.

      Sincerely

      John T. Wall
      Executive Vice President
      Member & Market Services

      Attachments

      AMENDMENT TO SCHEDULE C, PART III TO THE NASD BY-LAWS

      III

      REGISTRATION OF REPRESENTATIVES



      (2) Categories of Representative Registration



      [The following section is new.]

      (e) Limited Representative—Corporate Securities
      (i) Each person associated with a member who is included within the definition of a representative in Part III, Section (1) hereof may register with the Corporation as a Limited Representative—Corporate Securities if:
      (a.) Such person's activities in the investment banking or securities business involve the solicitation, purchase, and/or sale of a "security," as that term is defined in Section 3(a)(10) of the Securities Exchange Act of 1934 (the "Act"), and do not include such activities with respect to the following securities unless such person is separately qualified and registered in the category or categories of registration related to these securities:
      (1.) Municipal securities as defined in Section 3(a)(29) of the Act;
      (2.) Option securities as defined in Article III, Section 33(d) of the NASD Rules of Fair Practice;
      (3.) Redeemable securities of companies registered pursuant to the Investment Company Act of 1940, except for money market funds;
      (4.) Variable contracts of insurance companies registered pursuant to the Securities Act of 1933; and/or,
      (5.) Direct Participation Programs as defined in Part II, Section 2(d)(ii) thereof.
      (b.) Such person passes an appropriate qualification examination for Limited Representative—Corporate Securities.
      (ii) A person qualified solely as a Limited Representative—Corporate Securities shall not be qualified to function in any area not prescribed by Part III, Section 2(e)(i) hereof.

      CONFORMING CHANGE TO SCHEDULE C, PART II TO THE NASD BY-LAWS*

      II

      REGISTRATION OF PRINCIPALS



      (2) Categories of Principal Registration
      (a) General Securities Principal
      (i) [Change to last sentence of this paragraph:]
      Each person seeking to register and qualify as a General Securities Principal must, prior to or concurrent with such registration, become registered pursuant to Part III hereof, either as a General Representative or as a Limited Representative—Corporate Securities.
      (ii) A Limited Representative—Corporate Securities seeking registration as General Securities Principal who will have supervisory responsibility over the conduct of business in investment company and variable contracts products and/or direct participation programs as defined herein must, prior to or concurrent with registration as a General Securities principal, become registered pursuant to Part III hereof as a Limited Representative—Investment Company/Variable Contracts Products and/or a Limited Representative—Direct Participation Programs.
      [Existing Sections (ii) through (v) are renumbered to reflect the above.]

      *New language is underlined.


    • 88-37 Operations Officer, Cashier, Fail-Control Department

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On May 25, 1988, the United States District Court for the Southern District of New York appointed a SIPC Trustee for the above member.

      Members may use the "immediate close out" procedures as provided in Section 59(i)(2) of the NASD's Uniform Practice Code to close out open OTC contracts.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Sam Scott Miller, Esquire
      Orriek Herrington & Sutcliffe
      599 Lexington Avenue
      New York, New York 10022
      Telephone:(212) 326-8800

    • 88-36 Memorial Day Trade Date-Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Monday, May 30, 1988, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule;

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

      Trade Date

      Settlement Date

      Regulation T Date*

      May 20

      May 27

      June 1

      23

      31

      2

      24

      June 1

      3

      25

      2

      6

      26

      3

      7

      27

      6

      8

      30

      MARKETS CLOSED

      31

      June 7

      9

      The foregoing settlement dates should be used by broker-dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the NASD 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 can be directed to the NASD Uniform Practice Department at (212) 858-4341.

      * * * * *


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


    • 88-35 NASDAQ National Market System Totals 2,945 Securities With Seven Additions on May 17, 1988

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

      On Tuesday, May 17, 1988, the following seven issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,945:

      Symbol*

      Company

      Location

      BOFR

      Bank of Redlands

      Redlands, CA

      CINS

      Circle Income Shares, Inc.

      Indianapolis, IN

      CODL

      Code-Alarm, Inc.

      Madison Heights, MI

      MOLE

      Flow Mole Corporation

      Kent, WA

      MSCM

      MOSCOM Corporation

      East Rochester, NY

      NSTS

      Northwestern States Portland Cement Company

      Mason City, IA

      RBNC

      Republic Bancorp Inc.

      Owosso, MI

      NASDAQ/NMS Pending Additions

      The following issues have filed for inclusion in NASDAQ/NMS upon effectiveness of their registration statements with the SEC or other appropriate regulatory authority. Their inclusion may commence prior to the next regularly scheduled phase-in date.

      Symbol*

      Company

      Location

      BMRG

      BMR Financial Group, Inc.

      Atlanta, GA

      CLDR

      Cliffs Drilling Company

      Houston, TX

      LFSA

      First Federal Savings and Loa Association of Lenawee

      Adrian, WI

      KNCI

      Kinetic Concepts, Inc.

      San Antonio, TX

      MSHK

      Medstone International Inc.

      Costa Mesa, CA

      RELY

      Relational Technology, Inc.

      Alameda, CA

      RESP

      Respironics, Inc.

      Monroeville, PA

      RCHFA

      Riehfood Holdings, Inc. (Cl A)

      Richmond, VA

      NASDAQ/NMS Interim Additions

      The registration statements of the following issues were declared effective by the SEC or other appropriate regulatory authority. These issues commenced trading in NASDAQ/NMS since April 22, 1988.

      Symbol*

      Security

      Date of Entry

      IHKSV

      Imperial Holly Corporation (WI)

      4/27/88

      MCTBV

      Metro Mobile CTS, Inc. (Cl B) (WI)

      5/05/88

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since April 22, 1988.

      New/Old Symbol*

      New/Old Security

      Date of Change

      FCON/FFCT

      First Constitution Financial Corporation/FFB Corp.

      5/02/88

      FGHC/FGSV

      First Georgia Holding, Inc./ First Georgia Savings Bank, FSB

      5/02/88

      CGIC/CGIC

      Continental General Corporation/ Continental General Insurance Company

      5/02/88

      CSFCB/CSFCA

      Citizens Savings Financial Corp. (Cl B)/Citizens Savings Financial Corp. (CIA)

      5/03/88

      PION/PION

      Pioneer Financial Corporation/ Pioneer Federal Savings & Loan Association

      5/03/88

      EXPO/EXPO

      Insteel Industries, Inc./ Exposaic Industries, Inc.

      5/05/88

      MCTAV/MMCT

      Metro Mobile CTS, Inc. (Cl A) (WI)/Metro Mobile CTS5 Inc.

      5/05/88

      TERX/NWEN

      Terex Corp./Northwest Engineering Company

      5/06/88

      CTBX/TBCX

      Centerbank/Banking Center (The)

      5/09/88

      IHEIF/IPIPF

      Interhome Energy, Inc./ Interprovincial Pipeline, Ltd.

      5/09/88

      WAVR/WAVR

      Waverly, Ine./Waverly Press, Inc.

      5/09/88

      BBTF/BNCH

      BB&T Financial Corp./Braneh Corp.

      5/10/88

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      UMBIL

      Universal Medical Buildings, L.P. (Pfd Uts)

      4/25/88

      UMBIZ

      Universal Medical Buildings, L.P. (SBI)

      4/25/88

      WASC

      Western Auto Supply Company

      4/26/88

      AECE

      AEC, Inc.

      4/27/88

      ASBSQ

      Asbestec Industries, Inc.

      4/27/88

      PASN

      Parisian, Inc.

      4/27/88

      AEROE

      Aero Services International, Inc.

      4/28/88

      AERPE

      Aero Services International, Inc. (Pfd)

      4/28/88

      COUR

      Coeur D'Alene Mines Corporation

      4/29/88

      JMPC

      J.M. Peters Corporation

      4/29/88

      CFSB

      Columbia Federal Savings Bank

      5/02/88

      OVER

      Overland Express. Inc.

      5/02/88

      STAN

      Stanline, Inc.

      5/03/88

      CRNI

      Crown Auto, Inc.

      5/04/88

      IKNG

      International King's Table, Inc.

      5/04/88

      MDCH

      MedChem Products, Inc.

      5/04/88

      FFAT

      First Federal Savings and Loan of Austin

      5/05/88

      AGLT

      Atlanta Gas Light Company

      5/06/88

      Questions regarding this notice can be directed to Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules can be directed to Leon Bastien, Assistant Director, NASD Market Surveillance, at (202) 728-8192.

      Sincerely,

      Joseph R. Hardiman
      President


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


    • 88-34 Adoption of New Section 67 of the NASD Uniform Practice Code Regarding Delayed Closings Effective June 12, 1988

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission recently approved the NASD's adoption of new Section 67 to the NASD's Uniform Practice Code. This section requires the syndicate manager of a public offering underwritten on a "firm commitment" basis to immediately notify the NASD's Uniform Practice Department of any delay in the anticipated closing date.

      The text of the new rule is attached.

      BACKGROUND

      The NASD Uniform Practice Code (Code) applies to over-the-counter transactions between NASD member firms. Within the scope of the Code are transactions in securities that are the subject of an initial or secondary public offering in the period between the effective date of the offering and the date of the closing of the offering. Securities sold pursuant to an offering underwritten on a "firm commitment" basis by a member can be traded in the secondary market on a "regular way" basis from the inception of the secondary market because "firm commitment" offerings generally close five days following the effective date. Thus, such secondary-market transactions are generally within the scope of a regular-way contract, which requires payment for the delivery of securities on the fifth business day following the date of the transactions since the securities are considered issued upon closing of the offering on the fifth business day following the effective date1/

      Situations have occurred in which the closing of an offering underwritten on a "firm commitment" basis has been delayed past the anticipated closing date cited in the prospectus and, in a few cases, the closing was eventually cancelled. When the NASD Uniform Practice Department was not notified of a delay in closing until after the anticipated closing date, the securities generally traded on a "regular way" basis from the the effective date of the offering.

      Whenever the Uniform Practice Department is advised of a delay in the closing of an offering underwritten on a "firm commitment" basis, it issues an advisory notice to members to change previously executed "regular way" trades to "when, as, and if issued." 2/ Such changes impose an extensive bookkeeping burden on members.

      The NASD determined that the NASD Uniform Practice Department should be assisted in its efforts to ensure orderly trading by requiring notification of any delay in the anticipated closing of a public offering underwritten on a firm-commitment basis.

      EXPLANATION

      On March 14, 1988, the Securities and Exchange Commission 3/ approved the NASD's adoption of new Section 67 to the Uniform Practice Code to require the syndicate manager of a public offering underwritten on a firm-commitment basis to immediately notify—no later than the scheduled closing date—the NASD's Uniform Practice Department of any anticipated delay in the closing of the offering beyond the closing date in the offering document or beyond the delayed date previously reported to the NASD in compliance with this provision. Thus, if the syndicate manager has previously reported to the Uniform Practice Department that the closing was to be delayed, the syndicate manager is obligated to provide reports on any additional delays of the closing date. The Uniform Practice Department can then ensure that all transactions in the market trade on a "when, as, and if issued" basis, rather than on a "regular way" basis if the closing is significantly delayed or, if no closing is to occur, the transactions can be cancelled.

      The new rule is effective June 12, 1988.

      Questions concerning this notice can be directed to the NASD Uniform Practice Department, at (212) 858-4341.

      Sincerely,

      Frank J.Wilson
      Executive Vice President
      and General Counsel

      Attachment

      NASD UNIFORM PRACTICE CODE*



      Settlement of Underwritten Public Offerings

      Section 67

      The syndicate manager of a public offering underwritten on a "firm commitment" basis shall, immediately, but in no event later than the scheduled closing date, notify the Uniform Practice Department of the NASD of any anticipated delay in the closing of such offering beyond the closing date in the offering document or any subsequent delays in the closing date previously reported pursuant to this section.


      1/ Section 4(b) of the Uniform Practice Code, NASD Manual (CCH), 113504.

      2/ Section 4(e) of the Uniform Practice Code, NASD Manual (CCH), H 3504.

      3/ Release No. 25459 (March 14, 1988).

      *New language is underlined.


    • 88-33 Adoption of Amendments to Schedule E to the NASD By-Laws Effective Immediately

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The SEC has approved amendments to Schedule E to the NASD By-Laws governing the public offering of securities issued by a member, the parent of a member, or an affiliate of a member. With the exception of an exemption from Schedule E for investment grade securities, eollateralized by financing instruments, the remaining changes to Schedule E involve clarifying amendments.

      The text of the amendments is attached.

      BACKGROUND

      On March 29, 1988, the Securities and Exchange Commission (SEC) approved amendments to Schedule E to the NASD By-Laws (see SEC Release No. 34-25525 (March 29, 1988)) that are intended to clarify the scope and application of the Schedule. Schedule E contains a number of requirements intended to address conflicts of interest experienced by a member that engages in a public offering of its own securities or the securities of the member's parent, or participates in a public offering of securities of an affiliate. The major conflicts of interest addressed relate to the conduct of due diligence with respect to the offering document, the pricing of the securities offered, and the suitability of investors. Most of the amendments merely clarify certain provisions and incorporate interpretations of Schedule E. However, one substantive amendment exempts investment grade financing instrument backed securities from compliance with Schedule E.

      EXPLANATION OF AMENDMENTS

      Exemption for Financing Instrument-Backed Securities

      The NASD amended Subsection 2(a)(3) to exempt from Schedule E distributions by members of securities issued by affiliates of members, regardless of the form of legal entity of the affiliate, organized solely for the purpose of offering investment grade securities to the public eollateralized with a specified portfolio of financing instruments. Although such securities are generally backed by mortgage obligations, public offerings have also occurred of securities backed by loan obligations for automobiles, boats, and credit card receivables.

      When an offering of financing instrument-backed securities rated investment grade is not issued by a member's affiliate, such offering is currently exempt from NASD review pursuant to an exemption incorporated in the Interpretation of the Board of Governors—Review of Corporate Financing, under Article III, Section 1 of the NASD Rules of Fair Practice (Corporate Financing Interpretation). This exemption reflects the NASD's view that competitive market forces that ordinarily affect investment grade debt can be relied upon to ensure the fairness and reasonableness of underwriting compensation. In reviewing whether offerings of financing instrument-backed securities issued by a member's affiliate should be subject to Schedule E, the NASD determined that the conflicts of interest experienced by the affiliate member that are addressed by Schedule E, related to the pricing of the offering, the member's due diligence obligation, and the suitability of investors, are absent in distributions of financing instrument-backed securities that have received an investment grade rating. Such rating reflects the confidence of the rating agency regarding the ability of the issuing entity to pay dividends and to redeem the obligation. In addition, the investment grade rating of securities usually results in their sales to investors that are of an institutional or financially sophisticated nature.

      Other Amendments

      Section 1 — General

      The NASD amended Section 1 to clarify that Schedule E applies to offerings by a parent of a member, as defined in Subsection 2(h)* of Schedule E, regardless of whether the member participates in the offering. Further, this provision has been amended to clarify that Schedule E applies to both debt and equity public offerings of securities.

      Section 2 — Definitions

      Affiliate. Section 2(a) defines when an issuer is considered to be an affiliate of a member firm. The NASD is concerned that members and their counsel may look to the presumptions contained in Subsection 2(a) as the sole bases upon which affiliation may be found. Therefore, the NASD amended the introductory language of Subsection 2(a)(2) to clarify that the term "affiliate" is presumed to include, but is not limited to, those situations described in the enumerated presumptions.

      Beneficial Ownership. For purposes of determining affiliation, Subsection 2(a)(2) bases a presumption of affiliation on the beneficial ownership of 10 percent or more of the outstanding voting securities of one entity by the other entity. The NASD amended Schedule E to include in new Subsection 2(b) a definition of the term "beneficial ownership" that provides that beneficial ownership is based on the "right to the economic benefits of a security."

      Immediate Family. The NASD amended the term "immediate family" in Subsection 2(g) to include the son-in-law or daughter-in-law and any other person who is supported, directly or indirectly to a material extent by an employee of, or person associated with, a member, to incorporate language similar to that contained in the Interpretation of the Board of Governors—Free-Riding and Withholding, under Article III, Section 1 of the NASD Rules of Fair Practice (Free-Riding and Withholding Interpretation).

      Public Offering. The NASD amended the definition of "public offering" in current Subsection 2(k) to reflect exemptions from Schedule E for offerings pursuant to Section 4(6) of the Securities Act of 1933, Rule 504 (unless considered a public offering in the states where offered), Rule 505, and Rule 506 of Regulation D adopted by the SEC.

      Section 3 — Experience, Pricing, and Due Diligence

      The NASD amended this section by deleting Subsection 3(d) and amended Subsection 3(a) in coordination therewith. Subsection 3(d) is now unnecessary as Subsection 3(e) was previously modified to require the participation of only one qualified independent underwriter and to permit the affiliated member to participate to an unlimited extent in the offering.

      Section 4 — Escrow of Proceeds

      Subsection 4(b) requires disclosure in the offering document of the date when a member expects to complete its offering of a security and the terms under which the proceeds will be released from escrow. The NASD amended Section 4 to redesignate Subsection (b) as Subsection (a) and to add new Subsection (b) to clarify disclosure requirements with respect to all offerings subject to Schedule E. The new provision requires disclosure in the offering document that the offering is of a member's securities or those of an affiliate, that the offering is being made pursuant to Schedule E, the name of the qualified independent underwriter, if any, and that such underwriter has assumed the responsibility of pricing and due diligence. Finally, the title of Section 4 has been changed to "Disclosure."

      Section 5 — Net Capital Computation

      The NASD amended this section to include as new Subsection (a) the provision previously in Subsection 4(a) that requires a member issuing its own securities to place the offering proceeds in an escrow account. The current language of Section 5 is being retained in new Subsection 5(b). Finally, the NASD has changed the title of Section 5 to "Escrow Proceeds; Net Capital Computation."

      Section 9 — Offerings Resulting in Affiliation or Public Ownership of a Member

      Section 9 currently provides a basis for applying Schedule E to an offering by an issuer that is not an affiliate of a member at the time of filing the offering, but as a result of the offering will be a member's affiliate. In addition, Section 9 requires compliance with Schedule E when the offering would result in the public ownership of a member. The NASD amended Section 9 to provide that Schedule E applies to those situations where the issuer proposes to utilize the proceeds from an offering to become a member or to form a broker-dealer subsidiary to become a member and where a member would become an affiliate of the issuer as the result of a transaction with the issuer or its affiliate that occurs simultaneously or subsequent to the public offering. This amendment codifies the NASD's current interpretation of Section 9.

      In addition, the NASD amended Section 9 to clarify that an offering within that section is subject to Schedule E "to the same extent as if the transaction had occurred prior to the filing of the offering." Thus, if a transaction occurs simultaneously with an offering that results in the issuer becoming a parent of a member, the offering would be subject to Schedule E as if the offering were by a parent of a member. In comparison, if the issuer proposes to utilize the proceeds of the offering to become a member of the NASD, the offering would be subject to Schedule E as if by a member firm.

      Section 13 — Sales to Employees — No Limitations

      Section 13, which provides an exemption from the NASD's Free-Riding and Withholding Interpretation for sales to employees of a member, is amended to clarify that employees of a member are only permitted to purchase securities of the member or those of the member's parent. In addition, Section 13 has been amended to reduce from six to five months, following the effective date of the offering, the lock-up period on securities acquired by a person associated with a member when an independent market does not exist for such securities.

      Section 14 — Filing Requirements

      The NASD adopted new Subsection 14(c) to clarify that members are required to file public offerings subject to Schedule E with the NASD for review, notwithstanding the fact that such offerings may not be required to be filed pursuant to an exemption from filing under the Corporate Financing Interpretation.

      * * * * *

      Questions regarding this notice can be directed to either Suzanne E. RothwelL, NASD Associate General Counsel, at (202) 728-8247, or the NASD Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      and General Counsel

      Attachment

      AMENDMENTS TO SCHEDULE E TO THE NASD BY-LAWS*

      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 debt or equity securities issued or to be issued by the member, the parent of the member, or an affiliate of the member and no member or parent of a 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) The term affiliate is presumed to include, but is not limited to, the following [F] 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; and
      (v) a corporation, trust, partnership or other entity issuing financing instrument-backed securities which are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.
      (b) Beneficial ownership—the right to the economic benefits of a security.
      [(b)](c) 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 [of the class of securities being offered]; 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)](d) 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)](e) 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)](f) Effective date—the date on which an issue of securities first becomes legally eligible for distribution to the public.
      [(f)](g) Immediate family—parents, mother-in-law, father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, or any [relative] other person [to whom financial support is contributed directly or indirectly by an employee of, or person associated with, a member] who is supported, directly or indirectly, to a material extent by an employee of, or person associated with a member.
      [(g)](h) 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)](i) Person—any natural person, partnership, corporation, association, or other legal entity.
      [(i)](j) 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)](k) Public offering—any primary or secondary distribution of securities made pursuant to a registration statement or offering circular including exchange offer[ing]s, 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 Sections 4(1), [or] 4(2), or 4(6) of the Securities Act of 1933, as amended, or pursuant to Rule 504 (unless considered a public offering in the states where offered), Rule 505 or Rule 506 adopted under the Securities Act of 1933, as amended.
      [(k)](l) 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)](m) 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 documents 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)](n) 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 ease 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 ease 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] its own or an affiliate's 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] Corporation.
      [(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] Disclosure

      [(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)](a) 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 !3(a) [hereof].
      (b) All offerings included within the scope of this Schedule shall disclose in the underwriting section of the registration statement, offering circular or similar document that the offering is being made pursuant to the provisions of this Schedule, that the offering is being made by a member of its own securities or those of an affiliate, the name of the member acting as qualified independent underwriter, if any, and that such member is assuming the responsibilities of acting as a qualified independent underwriter in pricing the offering and conducting due diligence.

      Section 5—Escrow of Proceeds; Net Capital Computation

      (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 subsection 5(b) hereof.
      (b) 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 requir