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  • 1987

    • 87-88 Request for Comments on Proposed Amendments to Section 66 of the NASD Uniform Practice Code Regarding Syndicate Expense Statements and Prompt Settlement of Commissions

      TO: All NASD Members and Other Interested Persons

      ATTN: Syndicate Department

      LAST DATE FOR COMMENT: JANUARY 30, 1988.

      EXECUTIVE SUMMARY

      The NASD requests comments on two proposed amendments to Section 66 of the NASD Uniform Practice Code. The first amendment would require syndicate managers of public offerings to provide members of underwriting syndicates with itemized statements of the expenses incurred by the syndicate. The second amendment would require that all sales commissions or concessions be paid or settled on the syndicate settlement date.

      The text of the proposed amendments is attached.

      BACKGROUND AND EXPLANATION OF PROPOSED AMENDMENTS

      Syndicate Expense Statements

      Section 66 of the NASD Uniform Practice Code requires final settlement of syndicate accounts by the syndicate manager within 90 days following the syndicate settlement date. Syndicate accounts are ordinarily 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 detail provided by syndicate managers in syndicate settlement statements, the NASD Corporate Financing Committee considered the need to require syndicate managers to provide to members of underwriting syndicates itemized statements of the expenses incurred by the syndicate. The Committee noted that Municipal Securities Rulemaking Board Rule G-ll(h) requires an itemized statement in municipal underwritings. The Committee reviewed examples of syndicate settlement statements issued under Rule G-ll(h) and syndicate settlement statements used in non-municipal underwritings and noted that the non-municipal statements were diverse in format and provided little or no detail about the nature of expenses incurred by the syndicate.

      The NASD Corporate Financing and Uniform Practice Committees determined that a requirement for a standardized and detailed syndicate settlement statement is appropriate. Therefore, the Committees recommended to the Board of Governors and the Board approved an amendment to Section (56 of the Uniform Practice Code to require syndicate managers to provide to members of the syndicate an itemized settlement statement including the following expense categories: legal fees, advertising, travel and entertainment, closing expenses, loss on oversales, telephone/postage/communications, co-manager's expenses, computer/data processing charges, interest expense, and miscellaneous. The miscellaneous category would include only minor items that cannot be easily categorized elsewhere in the statement and the amount under miscellaneous would not be disproportionately large in relation to other items. Any other major expenses not included in the above categories would be itemized separately.

      Under the proposed amendment, the itemized settlement statement would be provided to syndicate members by the syndicate manager no later than the date of final settlement of the syndicate account, which Section 66 requires to be within 90 days of the syndicate settlement date.

      Prompt Settlement of Commissions

      The Corporate Financing Committee also reviewed the practice of including commissions on "designated" sales and "manager bill and deliver" sales as an item on syndicate settlement statements. In a designated sale or manager bill and deliver sale, payment for the sale is made by the customer — usually an institution — directly to the manager of the offering and a member is designated to receive the selling commission. The Committee discussed whether commissions on such sales should be paid or settled on the syndicate settlement date — usually one week after the effective date of the offering — or later, as part of the final syndicate settlement, which occurs up to 90 days after the syndicate settlement date. Currently, syndicate managers settle commissions on regular sales on the syndicate settlement date and settle selling commissions on designated sales and manager bill and deliver sales as part of the final syndicate settlement 90 days later.

      It is the general practice of NASD members participating in a public offering to pay sales commissions to registered representatives shortly after a sale. A delay in the payment of commissions by a syndicate manager can have a negative impact on the net capital of a syndicate member. Therefore, the Corporate Financing and Uniform Practice Committees determined that syndicate managers should not delay the payment of such sales commissions. They recommended to the Board of Governors and the Board approved an amendment to Section 66 of the Uniform Practice Code to require all commissions or sales concessions to be paid or settled on the syndicate settlement date. This requirement would ensure that all commissions, including commissions on designated sales and manager bill and deliver sales, would be settled on the settlement date rather than be included on the final syndicate settlement statement.

      REQUEST FOR COMMENTS

      TheNASD encourages all members and other interested persons to comment on the proposed amendments.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 January 30, 1988. Comments received by this date will be considered by the NASD Corporate Financing and Uniform Practice Committees and the NASD Board of Governors. If approved by the Board, the proposed amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions regarding the proposed amendments can be directed to Richard J. Fortwengler, NASD Corporate Financing Department, at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      AMENDMENTS TO SECTION 66 OF THE NASD UNIFORM PRACTICE CODE*

      Sec. 66

      Settlement of Syndicate Accounts

      (a) Definitions:

      (1) "selling syndicate" means any syndicate formed in connection with a public offering to distribute all or part of an issue of corporate securities by sales made directly to the public by or through participants in such syndicate.
      (2) "syndicate account" means an account formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of a public offering.
      (3) "syndicate manager"means the member of the selling syndicate that is responsible for maintenance of syndicate account records.
      (4) "syndicate settlement date" means the date upon which corporate securities of a public offering are delivered by the issuer to or for the account of the syndicate members.
      (b) Final settlement of syndicate accounts shall be effected by the syndicate manager within 90 days following the syndicate settlement date.
      (c) No later than the date of final settlement of the syndicate account, the syndicate manager shall provide to each member of the selling syndicate an itemized statement of syndicate expenses that shall include, where applicable, the following categories of expenses;legal fees, advertising, travel and entertainment," closing expenses, loss on oversales, telephone/postage/communications, co-manager's expenses, computer/data processing charges, interest expense and miscellaneous. The amount under miscellaneous should not be disproportionately large in relation to other items and should include only minor items that cannot be easily categorized elsewhere in the statement.Any other major items not included in the above categories must be itemized separately.
      (d) The syndicate manager shall settle all commissions for sales made by the selling syndicate, including designated sales and/or manager bill and deliver sales, on the syndicate settlement date.

      * New language is underlined.


    • 87-87 Request for Comments on Proposed Amendments to Schedule E to the NASD By-Laws Regarding the Definition of a Qualified Independent Underwriter

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: JANUARY 30, 1988.

      EXECUTIVE SUMMARY

      The NASD is requesting comments on proposed amendments to Schedule E to the NASD By-Laws relating to the definition of a qualified independent underwriter. A qualified independent underwriter is required by Schedule E to establish the price and conduct due diligence in public offerings of securities of a member or an affiliate of a member.

      The proposed amendments would preclude a member from acting as a qualified independent underwriter if the member or its senior associated persons or a controlling shareholder has been convicted or enjoined for securities-related activities or has been the subject of serious disciplinary action by the NASD, the SEC, or any self-regulatory organization. Additionally, the proposed 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 and would restrict the qualified independent underwriter's direct or indirect ownership of the issuer's equity securities.

      The text of the proposed amendments is attached.

      BACKGROUND AND EXPLANATION

      The NASD adopted Schedule E in 1972 to address the conflicts of interest present in a public distribution by a member of its own securities or those of an affiliate. A major conflict of interest arises when the member participates in establishing the price at which the securities are to be distributed to the public and in conducting due diligence. Schedule E addresses this conflict by requiring that a qualified independent underwriter, with a background in underwriting and a track record of profitable operations and experienced management, conduct due diligence, participate in the preparation of the offering documents, and provide an opinion as to the price at which an equity issue, or the yield at which a debt issue, is to be distributed. The NASD believes that the objectivity and independence provided by a qualified independent underwriter resolves the conflict of interest present in such offerings.

      The NASD's Corporate Financing Committee reviewed the current criteria for a qualified independent underwriter, contained in Section 2(k) of Schedule E, and recommended to the NASD Board of Governors certain amendments, which the Board approved.

      Currently, a qualified independent underwriter must be actively engaged in the underwriting of public offerings for at least five years immediately preceding the filing of the registration statement. The NASD proposes to amend Section 2(k)(4) of Schedule E to specifically require that a member acting as a qualified independent underwriter must have been actively engaged in the underwriting of public offerings of securities of a similar type and size as the proposed offering and has acted as a manager or co-manager of such offerings for the prior five-year period. The NASD believes that the five-year experience requirement should be as a manager or co-manager of public offerings since this is the type of experience necessary to conduct the pricing and due-diligence functions of a qualified independent underwriter.

      In addition, the amendments require the qualified independent underwriter to be experienced in the same type and size of offering as the proposed offering. This requirement would 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.

      The NASD also proposes to amend Section 2(k)(4) to preclude a member from acting as a qualified independent underwriter if the member or a senior associated person or controlling shareholder associated with the member at the time of the offering has had a previous conviction, injunction, or serious disciplinary history. Specifically, the proposed amendment would preclude a member from acting as a qualified independent underwriter if the member or any senior officer, director, general partner, or controlling shareholder of the member:

      (1) has been convicted within five years prior to the filing of the registration statement of any felony or misdemeanor in connection with the purchase or sale of any security or arising out of the conduct of a broker-dealer;
      (2) has been barred, expelled, or had its registration revoked by the NASD, SEC, or any self-regulatory organization;
      (3) has been suspended from membership or association within the previous five years by the NASD, SEC, or any self- regulatory organization for any conduct or practice relating to a registered or unregistered offering of securities; or
      (4) has been subject to any injunction within the previous five years for any conduct in connection with a registered or unregistered offering of securities.

      The NASD also proposes to amend Section 2(k)(5) of Schedule E to require that the qualified independent underwriter not own 5 percent or more of the issuer's securities. Currently, Section 2(k)(5) requires that the qualified independent underwriter not be an affiliate of the entity issuing the securities. The definition of "affiliate" contained in Schedule E is based on common control, and control is not presumed until a member owns 10 percent of the voting securities of the issuer. Therefore, a qualified independent underwriter could, for example, own 8 percent of the outstanding securities of an issuer and function as a qualified independent underwriter.

      The NASD believes that such an ownership interest is inconsistent with the intent of the requirement to establish objectivity and independence in the pricing and due-diligence functions. Therefore, the NASD proposes to amend the definition to require that a member that proposes to act as a qualified independent underwriter not own, directly or indirectly, 5 percent or more of the equity securities of the issuer. The 5 percent requirement would include all securities beneficially owned by the member including securities in the member's trading account.

      REQUEST FOR COMMENTS

      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 January 30, 1988. Comments received by this date will be reviewed by the NASD Corporate Financing Committee and the NASD Board of Governors. If approved by the Board, the proposed amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions regarding the proposed amendments can be directed to Charles L. Bennett, NASD Corporate Financing Department, at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      PROPOSED AMENDMENTS TO SCHEDULE E TO THE NASD BY-LAWS

      [New language is underlined.]

      Section 2—Definitions



      (k) Qualified independent underwriter* —a member which:



      (4) has actively engaged as a manager or co-manager in the underwriting of public offerings of securities of a similar size and type as the offering for at least the five-year period immediately preceding the filing of the registration statement, provided however that no member may act as a qualified independent underwriter if, as of the date of the filing of the registration statement and/or the effective date of the offering, the member, or any senior officer, director, general partner, or controlling shareholder associated with the member:
      (i) has been convicted within five years prior to the filing of the registration statement of any felony or misdemeanor in connection with the purchase or sale of any security, or arising out of the conduct of the business of an underwriter, broker, or dealer; or
      (ii) is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily enjoining or restraining, or is subject to any order, judgment, or decree of any court of competent jurisdiction entered within five years prior to the filing of the registration statement permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in connection with the registered or unregistered offering of securities; or
      (iii) has been suspended from membership in or suspended from association with any member of the Corporation, or any self-regulatory organization, or has been suspended by an order of the Securities and Exchange Commission, within five years prior to the filing of the registration statement for any conduct or practice in connection with a registered or unregistered offering of securities; or
      (iv) has been expelled from membership in, or barred from association with, a member of the Corporation, or any self-regulatory organization, or barred from association with any broker or dealer, or had its registration as a broker or dealer revoked by the Securities and Exchange Commission.
      (5) is not an affiliate of the entity issuing securities pursuant to Section 3 of this Schedule and does not beneficially own 5 percent or more of the outstanding securities of such entity which is a corporation, or beneficially own a partnership interest in 5 percent or more of the distributable profits or losses of such entity which is a partnership; and




      * In the opinion of the National Association of Securities Dealers, Inc. and the Securities and Exchange Commission the full responsibilities and liabilities of an underwriter under the Securities Act of 1933 attach to a "qualified independent underwriter" performing the functions called for by the provisions of Section 3 hereof.


    • 87-86 NASDAQ National Market System Totals 3,052 Securities With Four Additions on January 5, 1988

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

      On Tuesday, January 5, 1988, the following four issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,052:

      Symbol*

      Company

      Location

      CPBI

      CPB, Inc.

      Honolulu, HI

      CBWA

      Central Bancorporation

      Wenatchee, WA

      INCL

      Intellicall, Inc.

      Carrollton, TX

      WSBC

      Wesbanco, Inc.

      Wheeling, WV

      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

      EIGR

      Empire Mutual Insurance Corporation

      New York, NY

      WPPGY

      WPP Group, plc

      London, England

      NASDAQ/NMS Interim Additions

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since December 7, 1987.

      Symbol*

      Security

      Date of Entry

      MSRR

      MidSouth Corporation

      12/14/87

      PBKS

      Provident Bankshares Corporation

      12/15/87

      OMET

      Orthomet, Inc.

      12/17/87

      FSFI

      First State Financial Services, Inc.

      12/21/87

      HNCO

      Henley Manufacturing Corporation

      12/21/87

      GBBS

      Great Bay Bankshares, Inc.

      12/23/87

      MFLR

      Mayflower Co-Operative Bank

      12/23/87

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since December 7, 1987:

      New/Old Symbol*

      New/Old Security

      Date of Change

      WCYS/WCYS

      BankWorchester Corporation/ Worchester County Institution for Savings

      12/14/87

      PROS/PROSZ

      Prospect Group, Inc. (The)/Prospect Group, Inc. (The) (Combined Cfts)

      12/14/87

      BFSB/BFSB

      BFS Bancorp, Inc./Bristol Federal Savings Bank

      12/17/87

      TRSP/TRSP

      Columbia Pictures Entertainment, Inc./Tri-Star Pictures, Inc.

      12/18/87

      TRSPW/TRSPW

      Columbia Pictures Entertainment, Inc. (1993 Wts)/Tri-Star Pictures, Inc. (1993 Wts)

      12/18/87

      FAMB/FAMB

      1st American Bancorp, Inc./1st American Bank of Savings

      12/21/87

      BNKW/WCYS

      BankWorchester Corporation/ BankWorchester Corporation

      12/21/87

      HFMD/HFMD

      Home Federal Corporation/Home Federal Savings Bank

      12/21/87

      SVRN/PSVB

      Sovereign Bancorp, Inc./Penn Savings Bank, F.S.B.

      12/21/87

      RSLA/RSLA

      Republic Capital Group, Inc./ Republic Savings & Loan Association of Wisconsin

      12/23/87

      DING/FFED

      Diversified Investment Group, Inc./Fidelity Federal Savings & Loan Association

      12/28/87

      JGRP/PTCC

      Jesup Group Inc. (The)/Polycast Technology Corp.

      12/28/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      SACHY

      Saatchi and Saatchi, pic.

      12/08/87

      SEMEE

      Semicon, Inc.

      12/08/87

      GAPZQ

      Great American Partners (Cl A Uts)

      12/09/87

      USSC

      United States Surgical Corporation

      12/09/87

      UPRI

      Up-Right, Inc.

      12/09/87

      GFLA

      Growth Fund of Florida, Inc. (The)

      12/10/87

      LEYS

      Lands' End, Inc.

      12/10/87

      DCAI

      Digital Communication Associates

      12/11/87

      EQUA

      Equatorial Communications Company

      12/11/87

      SOSI

      Sippican, Inc.

      12/11/87

      EECIF

      ENCOR Energy Corporation, Inc.

      12/15/87

      VIRO

      Enviropack, Inc.

      12/15/87

      ANTC

      Anitec Image Technology Corporation

      12/18/87

      TRRO

      Triton Group Ltd.

      12/18/87

      ACAJC

      Aca Joe, Inc.

      12/21/87

      FABKP

      First of America Bank Corporation (Pfd)

      12/21/87

      THIS

      Thermo Instruments Systems, Inc.

      12/21/87

      CAVH

      Cavalier Homes, Inc.

      12/22/87

      GWII

      Greater Washington Investors, Inc.

      12/22/87

      MTRXE

      Matrix Science Corporation

      12/22/87

      MILI

      Millipore Corporation

      12/23/87

      PEOP

      Peoples Bancorporation

      12/23/87

      TCOMW

      Tele-Communications Inc. (Wts)

      12/24/87

      USPC

      U.S. Playing Card Corp.

      12/28/87

      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.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-85 SEC Approves Revised Rules for Reporting NASDAQ/NMS Trades Executed Between 4 p.m. and 5 p.m. Under Schedule D to the NASD By-Laws

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

      The Securities and Exchange Commission has approved amendments to Schedule D to the NASD's By-Laws with respect to reporting trades in NASDAQ National Market System (NASDAQ/NMS) securities.

      Under the amendments, which become effective January 8, 1988, orders that are executed between 4 p.m. and 5 p.m., Eastern Time, are to be reported through the NASDAQ System. Transaction reports can be made between 4:10 p.m. and 5 p.m. and must be identified by appending a ".T" to the trade report. The ".T" function cannot be used prior to 4:10 p.m.

      Currently, Section 2 of Part XII of Schedule D to the NASD By-Laws requires transactions in NASDAQ/NMS securities that are executed outside the hours of operation of the transaction reporting system (that is, outside the hours of 9:30 a.m. and 4 p.m., Eastern Time) are to be reported to the NASD on a weekly basis, via Form T. Information submitted on the weekly Form T is not included, however, in daily market activity summaries and is not currently integrated into the NASD's automated surveillance systems.

      The NASD believes that requiring last-sale reports to the System of transactions in NASDAQ/NMS securities executed between 4 p.m. and 5 p.m., Eastern Time, will capture approximately 80 percent of the transactions that are executed after the close of the market. This requirement will increase the scope and effectiveness of the NASD's automated surveillance programs, permit the dissemination of more accurate information to the news media with respect to daily trading volume, and lessen the manual reporting burden currently placed on members having to submit Form T.

      The required last-sale reports will affect only daily volume totals. The amendments do not affect the calculation of daily high, low, and last-sale prices, which will continue to be established as of the close of the market.

      Members should continue to submit Form T to the NASD on a weekly basis for transactions in NASDAQ/NMS securities occurring after 5 p.m. and prior to 9:30 a.m.

      The text of the amendments to Part XII, Section 2 of Schedule D to the NASD By-Laws is attached.

      Questions concerning this notice should be directed to NASDAQ Operations—Members at (212) 839-62 11.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

      AMENDMENTS TO NASD BY-LAWS

      SCHEDULE D

      PART XII

      REPORTING TRANSACTIONS IN NASDAQ NATIONAL MARKET SYSTEM DESIGNATED SECURITIES

      (a) When and How Transaction Reported
      (1) Registered Reporting Market Makers shall transmit through the Transaction Reporting System, within 90 seconds after execution, last-sale reports of transactions in designated securities executed during the hours of the Transaction Reporting System. Transactions not reported within 90 seconds after execution shall be designated as late.
      (2) Non-Registered Reporting Members shall transmit through the Transaction Reporting System or, if such System is unavailable, via Telex, TWX, or telephone, to the NASDAQ Operations Department in New York City, within 90 seconds after execution, last-sale reports of transactions in designated securities executed during the trading hours of the Transaction Reporting System unless all of the following criteria are met:
      (A) The aggregate number of shares of designated securities that the member executed and is required to report during the trading day does not exceed 1,000 shares; and
      (B) The total dollar amount of shares of designated securities that the member executed and is required to report during the trading day does not exceed $25,000; and
      (C) The member's transactions in designated securities have not exceeded the limits of (A) or (B) above on five or more of the previous 10 trading days.
      Transactions not reported within 90 seconds after execution shall be designated as late. If the member has reason to believe that its transactions in a given day will exceed the above limits, it shall report all transactions in designated securities within 90 seconds after execution; in addition, if the member exceeds the above limits at any time during the trading day, it shall immediately report and designate as late any unreported transactions in designated securities executed earlier that day.
      (3) Non-Registered Reporting Members shall report weekly to the NASDAQ Operations Department in New York City, on a form designated by the Board of Governors, last-sale reports of transactions in designated securities that are not required by paragraph (2) to be reported within 90 seconds after execution.
      (4) Last-sale reports of transactions in designated securities executed between the hours of 4 p.m. and 5 p.m. Eastern Time shall be transmitted through the Transaction Reporting System no later than 5 p.m. Eastern Time.
      (5) All members shall report weekly to the NASDAQ Operations Department in New York City, on a form designated by the Board of Governors, last- sale reports of transactions in designated securities executed outside the hours of 9:30 a.m. and 5 p.m. Eastern Time (during the trading hours of the Transaction Reporting System).
      (6) All trade tickets for transactions in eligible securities shall be time- stamped at the time of execution.

    • 87-84 Annual State, Agent, and Broker-Dealer Renewals for 1988

      TO: All NASD Members and Other Interested Persons

      IMPORTANT REMINDER

      ALL STATE, AGENT, AND BROKER-DEALER RENEWAL FEES MUST BE RECEIVED BY THE NASD NO LATER THAN DECEMBER 18, 1987, IF YOUR FIRM INTENDS TO CONTINUE DOING BUSINESS IN 1988. PLEASE NOTE THE FOLLOWING:

      Invoices for the 1987-1988 renewal cycle have been mailed to your firm. The invoices include annual fees that must be paid to allow business to be conducted from January 1, 1988, through December 31, 1988, in states in which your firm is licensed. The invoices apply to NASD personnel assessments, NASD branch office fees, New York Stock Exchange maintenance fees, state agent renewal fees, state broker-dealer renewal fees, and annual SIPC assessments. In addition, investment advisors currently registered under the Virginia Investment Advisor Pilot Program were also assessed.

      Firms are reminded that full payment of the invoice must be received no later than December 18, 1987, if your firm intends to continue doing business in 1988. FAILURE TO DO SO WILL MEAN LOSS OF ELIGIBILITY TO DO BUSINESS IN THE STATES, EFFECTIVE JANUARY 1, 1988.

      No adjustments should be made to the invoice. The full amount noted on the invoice must be remitted. At year end, a final calculation will be made of all renewal fees owed by your firm. If your firm has more agents registered at year end than on the November invoice date, additional fees will be assessed and reflected on the adjusted invoice mailed to your firm in January 1988. Similarly, your firm will be credited if it has fewer registered personnel at year end than in November.

      Please refer to the Q&R REPORT, Volume 7, Number 9, dated November 12, 1987, for additional information.

      * * * * *

    • 87-83 Member Comment on NASD Proposals

      TO: All NASD Members and Other Interested Persons

      The NASD Board of Governors is concerned that some NASD members may not have sufficient time to comment on NASD proposals published in Notices to Members because the appropriate person in the firm does not receive the notices on a timely basis. The NASD normally provides a thirty-day period in which members and other interested persons can submit comments on proposed new rules or amendments to current rules.

      All NASD members receive one copy of all Notices to Members. The notices are directed to the person designated by the firm on Form BD (Uniform Application for Broker-Dealer Registration) as its "contact employee." The NASD recommends that members ensure that the firm's designated contact employee is appropriate and up to date. In this way, the NASD Board believes that all members will have an opportunity to comment on NASD proposals on a timely basis.

      In this connection, the NASD also offers two subscription services for both members and non-members. The first is a subscription to all Notices to Members and is available for the 1988 annual fee of $100. NASD member firms may be interested in subscribing to this service to ensure that certain key persons within their firms receive the notices in addition to the designated contact person.

      For a 1988 annual fee of $125, a subscription to a variety of NASD and NASDAQ publications can be ordered. Subscribers to this service receive:

      • Notices to Members
      • Executive Digest
      • Committee & Staff Report
      • NASD Press Releases
      • NASD Guide to Information & Services
      • Qualification & Registration (Q&R) Report
      • Regulatory Compliance Alert
      • NASD Annual Report
      • NASDAQ Fact Book
      • NASDAQ Company Directory
      • NASDAQ Notes
      • NASDAQ Subscriber Bulletin

      To subscribe to either subscription service, send a request with a check or money order in the correct amount to:

      National Association of Securities Dealers, Inc.
      Attn: Book Order Department
      P.O. Box 9403
      Gaithersburg, MD 20898-9403

      * * * * *

      Questions concerning this notice can be directed to either Suzanne E. Rothwell, NASD Associate General Counsel, at (202) 728-8247, or NASD Administrative Services, at (301) 738-6703.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

    • 87-82 Christmas Day - New Year's 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 Friday, December 25, 1987, Christmas Day, and Friday, January 1, 1988, New Year's Day. "Regular way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

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

      Trade Date

      Settlement Date

      Regulation T Date*

      December 17, 1987

      December 24, 1987

      December 29, 1987

      18

      28

      30

      21

      29

      31

      22

      30

      January 4, 1988

      23

      31

      5

      24

      January 4, 1988

      6

      25

      MARKETS CLOSED

      28

      5

      7

      29

      6

      8

      30

      7

      11

      31

      8

      12

      January 1, 1988

      MARKETS CLOSED

      4

      11

      13

      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) 839-6256.

      * * * * *


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


    • 87-81 NASDAQ National Market System Totals 3,066 Securities With 5 Additions on December 15, 1987

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

      On Tuesday, December 15, 1987, the following 5 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,066:

      Symbol*

      Company

      Location

      CLHB

      Clean Harbors, Inc.

      Braintree, MA

      CFINP

      Consumers Financial Corporation (Pfd)

      Camp Hill, PA

      TFSB

      Federal Savings Bank (The)

      New Britain, CT

      MBLA

      National Mercantile Bancorp

      Los Angeles, CA

      TFTY

      Thrifty Rent-A-Car System, Inc.

      Tulsa, OK

      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

      HNCO

      Henley Manufacturing Corporation

      Hampton, NH

      MSRRV

      MidSouth Corporation (WI)

      Jackson, MS

      OMET

      Orthomet, Inc.

      Minneapolis, MN

      PBKS

      Provident Bankshares Corporation

      Baltimore, MD

      The following changes to the list of NASDAQ/NMS securities occurred since November 20, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      TMCIW/TMCIW

      TM Communications, Inc. (12/1/88 Wts)/TM Communications, Inc. (12/1/87 Wts)

      11/24/87

      TCFC/TCFC

      TCF Financial Corporation/TCF Banking and Savings, F.A.

      11/30/87

      SBLI/TLCI

      Staff Builders, Inc./Tender Loving Care Health Care Services, Inc.

      12/01/87

      SCNN/SCNN

      Scantron Corporation/Scan-Tron Corporation

      12/04/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      GTRE

      Grantree Corporation

      11/23/87

      RSTY

      Rusty Pelican Restaurants, Inc.

      11/23/87

      PNUTE

      Specialty Retail Concepts, Inc.

      11/24/87

      BIORC

      Bio-Response, Inc.

      11/25/87

      GDFY

      Godfrey Company

      11/27/87

      AJGC

      Arthur J. Gallagher & Company

      12/02/87

      ZNTL

      Zehntel, Inc.

      12/02/87

      KVPHB

      K. V. Pharmaceutical Company (Cl B)

      12/03/87

      JEPS

      Jepson Corporation (The)

      12/04/87

      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) 728-8 192.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-80 NASDAQ National Market System Totals 3,068 Securities With 2 Additions on December 1, 1987

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

      On Tuesday, December 1, 1987, the following 2 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,068:

      Symbol*

      Company

      Location

      HIWDF

      Highwood Resources Ltd.

      Vancouver, Canada

      KPTL

      Keptel, Inc.

      Tinton Falls, NJ

      NASDAQ/NMS Interim Additions

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since November 9, 1987:

      Symbol*

      Security

      Date of Entry

      WCRSY

      WCRS Group, pic (The)

      11/06/87

      INSY

      Interim Systems Corporation

      11/11/87

      WEXWV

      Wolverine Exploration Company (CIA Wts) (WI)

      11/16/87

      POAI

      Properties of America, Inc.

      11/19/87

      The following changes to the list of NASDAQ/NMS securities occurred since November 9, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      MRGX/MRGX

      Margaux, Inc./Margaux Controls, Inc.

      11/10/87

      VFSB/VFSB

      Virginia First Savings Bank, F.S.B./Virginia First Savings, F.S.B.

      11/18/87

      LLSL/LLSL

      Lakeland Savings Bank, S.L.A./ Lakeland Savings and Loan Association

      11/19/87

      BMRA/NMSI

      Biomerica, Inc./NMS Pharmaceuticals, Inc.

      11/23/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      FNBC

      First National Corporation

      11/09/87

      MORL

      Morlan International, Inc.

      11/09/87

      SIGR

      Sigma Research, Inc.

      11/09/87

      A MSA

      American Bank of Connecticut

      11/11/87

      CESI

      Cogenic Energy Systems, Inc.

      11/11/87

      CYPSA

      Cypress Savings Association (Cl A)

      11/11/87

      DNNR

      Danners, Inc.

      11/11/87

      HHI

      Harman International Industries, Incorporated

      11/11/87

      INSI

      Information Science, Inc.

      11/11/87

      PAGE

      Page America Group, Inc.

      11/11/87

      SSKY

      Super Sky International, Inc.

      11/11/87

      WDSI

      Worlco Data Systems, Inc.

      11/11/87

      CSARW

      Calstar, Inc. (Wts)

      11/13/87

      BATM

      Baird Corporation

      11/17/87

      CYPSW

      Cypress Savings Association (Wts)

      11/17/87

      AXCO

      American Exploration Company

      11/19/87

      GPCK

      Guardian Packaging Corporation

      11/20/87

      TIMB

      Timberland Industries. Inc.

      11/20/87

      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.

      Sincerely,

      Joseph R Hardiman
      President


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


    • 87-79 Request for Comments on Proposed New NASD By-Law Authorizing Mandatory Reporting of Trade Comparison Information

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: DECEMBER 24, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed new By-Law that would permit the NASD to require trade comparison reporting by members conducting' an inter-dealer OTC securities business, as intended when the Trade Acceptance and Reconciliation Service (TARS) began development in 1981.

      The text of the proposed new By-Law is attached.

      BACKGROUND

      Since 1983, the NASD has offered the Trade Acceptance and Reconciliation Service (TARS) to members that are participants in a registered clearing corporation. TARS is an on-line trade reconciliation facility that allows both parties of an unresolved trade to view on their NASDAQ terminals uncompared and advisory OTC trades that are cleared through the facilities of a registered clearing agency and to enter corrections at once. Corrections entered by one side are immediately displayed to the other side and this information is automatically transmitted each day to the clearing corporation, eliminating the need to separately prepare and submit trade correction tickets to the clearing corporation.

      Since 1981, when TARS was in its developmental stage, the NASD has contemplated that mandatory trade comparison reporting would be required of all NASD members conducting an interdealer OTC securities business. Currently, 105 TARS subscribers account for 86 percent of all cleared OTC transactions. Since its introduction, TARS has substantially reduced the percentage of uncompared OTC transactions by bringing those transactions into an automated comparison environment.

      PROPOSED NEW BY-LAW

      The proposed new NASD By-Law would authorize the NASD Board of Governors to require members to report all original and supplemental OTC trade comparison data as the Board deems appropriate. Reporting would be administered either by the NASD or through the facilities of a registered clearing corporation.

      The NASD Board approved, in concept, the development of rules that would require (1) mandatory participation in TARS by all NASD members that are participants in a registered clearing agency for purposes of clearing OTC transactions, and (2) all NASD members conducting an interdealer business in OTC securities to submit trade data to a comparison facility. The NASD is currently studying the most cost-effective methods for allowing members that are not clearing corporation participants to input such trade comparison information.

      In a related matter, the SEC Division of Market Regulation has urged the NASD to enhance its surveillance capabilities for non-NASDAQ, OTC securities. For the NASD to effectively surveil this segment of the market, the NASD must obtain, in a timely manner, information similar to that now available for NASDAQ securities. In response to the SEC's request, the NASD is currently developing reporting and other requirements to enable it to carry out this task.

      Therefore, the proposed new By-Law may be enhanced to permit the NASD Board to require the reporting of trade data, including aggregate volume information. To facilitate reporting of non-NASDAQ, OTC transaction information, the NASD intends to integrate the reporting of this information, to the greatest degree possible, with any trade comparison reporting requirement.

      REQUEST FOR COMMENTS

      The NASD encourages all members and other interested persons to comment on the proposed new By-Law and to include comments relating to expansion of the By-Law provisions to permit reporting requirements for surveillance of the non-NASDAQ, OTC securities market. 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 by December 24, 1987. Comments received by this date will be considered by the NASD Uniform Practice Committee and the NASD Board of Governors. If approved by the Board, the proposal will be submitted to the membership for a vote. If approved by the membership, the proposal must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice should be directed to Donald C. Catapano, Director, NASD Uniform Practice/TARS, at (212) 839-6255.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

      PROPOSED NEW NASD BY-LAW

      ARTICLE XXI

      The Board of Governors is hereby authorized to require the prompt reporting by members of such original and supplementary trade comparison data as the Board deems appropriate. Such reporting requirement may be administered by the Corporation, a division or subsidiary thereof, or a clearing agency registered under the Securities Exchange Act of 1934.

    • 87-78 1988 Schedule of Holidays

      TO: All NASD Members and Other Interested Persons

      Listed below is the NASD's 1988 schedule of holidays.

      January 1 (Friday)

      New Year's Day

      February 15 (Monday)

      Washington's Birthday Observed

      April 1 (Friday)

      Good Friday

      May 30 (Monday)

      Memorial Day

      July 4 (Monday)

      Independence Day

      September 5 (Monday)

      Labor Day

      November 24 (Thursday)

      Thanksgiving Day

      December 26 (Monday)

      Day after Christmas

      Sincerely,

      Joseph R. Hardiman
      President

    • 87-77 Request for Comments on Proposed Amendments to the Rules of Practice and Procedures for the NASD's Small Order Execution System and to Schedule D to the NASD By-Laws

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: DECEMBER 21, 1987.

      EXECUTIVE SUMMARY

      The NASD is requesting comments on proposed amendments to the Rules of Practice and Procedures for the Small Order Execution System (SOES) and to Schedule D to the NASD By-Laws. In pertinent part, the proposed rule amendments would:

      (1) 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 30 days;
      (2) limit the acceptable reasons for an excused withdrawal from NASDAQ;
      (3) make SOES participation mandatory for all market makers in NASDAQ National Market System (NASDAQ/NMS) securities;
      (4) enable the NASD to establish different levels of maximum order size limits (e.g., 1,000, 500, and 200 shares) for SOES orders, depending on the characteristics of different securities;
      (5) provide that SOES executions will continue in a NASDAQ/NMS security when quotes are locked or crossed, with executions occurring at the best price; and
      (6) eliminate preferencing of market makers during a locked or crossed market situation.

      The text of the proposed amendments is attached.

      BACKGROUND

      The Small Order Execution System (SOES) was established to permit small orders in NASDAQ securities to be executed efficiently at the best price for the public customer. SOES average weekly volume doubled during the week of October 19, 1987. Notwithstanding the extraordinary volume during that and subsequent weeks, SOES remained open and operating and continues to provide investors an effective means for executing smaller orders. However, problems did occur. As a result, 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.

      ANALYSIS OF RULE PROPOSALS

      Penalty for Withdrawal as a NASDAQ Market Maker. The proposed amendments to Schedule D to the NASD By-Laws (which contain rules governing the NASDAQ System) would 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 30 days. Currently, market makers may withdraw from and re-enter SOES without penalty and as a NASDAQ market maker after a two-day delay. The Committees and the NASD Board have concluded, however, that it is necessary to impose a penalty on unexcused withdrawals from NASDAQ securities to help ensure that investors in those securities have access to a continuous, liquid market supported by as many market makers as possible.

      Market makers will continue to be able to obtain excused withdrawals. However, the conditions under which those withdrawals will be permitted would be limited under the proposal to withdrawals due to physical circumstances (e.g., equipment malfunction or relocation) or legal considerations (e.g., compliance with SEC Rule 10b-6). A market maker obtaining an excused withdrawal could re-enter NASDAQ according to the conditions of the withdrawal (e.g., withdrawals for purposes of equipment relocation would permit market makers to re-enter upon installation at the new location).

      Mandatory Participation in SOES. The SOES rules and Schedule D would each be amended to require that every market maker in every NASDAQ/NMS security also be a SOES market maker in that security. SOES participation for market makers in NASDAQ securities that are not NASDAQ/NMS securities would continue to be voluntary. As participants in SOES, all NASDAQ/NMS market makers would be required to clear and settle trades through a registered clearing facility.

      This change will facilitate the automatic execution of customers' small orders for every NASDAQ/NMS security without the need for telephone contact between the order-entry and executing firm. Every firm making a market in a NASDAQ/NMS security will be participating in the automatic execution system. By mandating wider participation in SOES, the Committees and the NASD Board believe that the NASD will significantly improve investor access to the NASDAQ/NMS market, particularly in times of high volume.

      Tiered Order Limits. The SOES rules would be amended to provide that the NASD could establish different maximum order size limits for different securities. As a small-order system, SOES is available for retail agency orders of limited size. The size limits are currently 1,000 shares for NASDAQ/NMS securities and 500 shares for other NASDAQ securities. On the basis of experience, however, the Board has concluded that the efficiency and liquidity of SOES could be improved by refining order size limits so that different categories of securities having certain trading characteristics would be subject to different size limits.

      Under this concept, the NASD will study the trading, volume, and price patterns of all NASDAQ/NMS securities to determine appropriate categories of size limits and those securities which should be in each category. For example, orders in some securities may be restricted to a maximum size of 200 shares, others 500 shares, and still others 1,000 shares. It is contemplated initially that different tiers will be established only for NASDAQ/NMS securities. The NASD specifically solicits comments on appropriate categories of order size and characteristics of securities and on the question of whether all NASDAQ securities (i.e., including non-NASDAQ/NMS securities) should be categorized by tier.

      The order size limits establish, to a certain extent, the exposure of any SOES market maker to market risk. Because SOES will be mandatory for every NASDAQ/NMS market maker, a firm's willingness to be exposed to SOES executions may be a factor in its decision to be a market maker in NASDAQ/NMS securities. The NASD is therefore particularly interested in the comments of market makers concerning their willingness to participate in NASDAQ/NMS at various SOES order size limits for different types and prices of securities.

      SOES Executions in Locked or Crossed Markets. The SOES rules would be amended to provide that orders in NASDAQ/NMS securities will continue to be executed in a security, notwithstanding that NASDAQ quotations for that security are locked (i.e., at least one market maker is willing to buy for the same price as at least one market maker is willing to sell) or crossed (i.e., at least one market maker is willing to buy at a higher price than another is willing to sell). Under current procedures, SOES orders are executed in rotation against all market makers offering the "inside," or best quotation,* but automatic executions cease if quotations become locked or crossed. In rapidly changing markets, it is more likely that quotations will be inadvertently locked or crossed as the use of telephones limits access to the market.

      Under the proposal, automatic SOES executions in NASDAQ/NMS securities would continue even with locked or crossed quotes. All executions would be made against the firm causing the locked or crossed situation if its price is the best for the customer. An order-entry firm's indication of a preference for a particular market maker would not be recognized so that no other market maker would be required to execute at another dealer's locked or crossed quote. Although this change may create greater potential exposure for firms whose quotes are locked or crossed, it will help ensure that investors have continuous access to SOES throughout periods of high volume and rapid price movement. The change will also provide an economic incentive for firms to keep their quotations current.

      The proposal contains a specific provision to protect market makers in NASDAQ/NMS issues from open-ended liability and repeated executions in the event they are unable to respond and update their quotes. Under the proposal, after a certain number of executions, market makers would be alerted that they have a period of time to respond and, if they have not done so at the expiration of the period, would be removed from the system as a market maker in that security. SOES currently permits each market maker to set a limit on the number of shares of any security that the system will execute against the firm's account each trading day. Since market making in NASDAQ/NMS securities requires SOES participation, a minimum limit capability will be required in those issues. The current capabilities will continue to be available for non-NASDAQ/NMS issues.

      Since withdrawal as a SOES market maker in NASDAQ/NMS securities on an unexcused basis would now carry a 30-day penalty, the Board concluded that any NASDAQ/NMS market maker subject to automatic removal because its exposure limit has been reached should be given a grace period within which to renew its limit or re-enter a quote. Under the proposal, the grace period would be a standard established by the NASD from time to time depending upon market conditions and other factors. The NASD is continuing to study appropriate ways to address this issue. In any case, should a market maker be unable to respond because of equipment failure, it will be permitted to re-enter when the equipment failure is removed.

      One possible approach to NASDAQ/NMS market-maker protection is to revise SOES operating procedures to automatically establish a minimum exposure limit (e.g., ten times the maximum order size) for a security each time the market maker changes its quote. If the exposure limit were exhausted (i.e., ten maximum size orders were executed), the market maker would have five minutes during which to update or re-enter its quotes, thereby renewing its exposure limit. Failure of a market maker in a NASDAQ/NMS security to update within five minutes for other than equipment failure reasons would result in its removal as a NASDAQ/NMS market maker with a 30-day penalty. Market makers would have the right to set higher limits in NASDAQ/NMS issues. Comments are specifically solicited on this and any other possible approaches.

      Telephone Access to Trading Areas. Although the NASD is not proposing specific rules at this time, it is soliciting comments on the concept of a requirement that each NASDAQ market maker maintain at least one telephone line that would provide NASD surveillance staff with direct access to the firm's trading area at all times. Recent experience has demonstrated that it is important during periods of high volume for the NASD surveillance staff to reach the trading area of market-making firms irrespective of the volume of other telephone calls. During the week of October 19, 1987, a system of direct lines was established between the NASD and the trading desks of several firms. That system was instrumental in enabling the NASD staff to address questions and potential problems quickly. The Committees and the NASD Board therefore believe it may be desirable to require each market maker to participate in a system of direct links with the NASD. The NASD specifically solicits comments on this proposal.

      SOLICITATION OF COMMENTS

      The NASD urges members and their counsel to comment on the proposed amendments. Comments should be addressed 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 December 21, 1987. The NASD Trading Committee, SOES Users Committee, and the NASD Board of Governors will review the comments received and determine whether to adopt the proposals. Any rule amendment must be filed with and approved by the Securities and Exchange Commission prior to becoming effective.

      Questions concerning this notice may be directed to either S. William Broka, Vice President, NASDAQ Operations, at (202) 728-8050, or Dennis C. Hensley, NASD Vice President and Deputy General Counsel, at (202) 728-8294, or the undersigned at (202) 728-8319.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachments

      PROPOSED AMENDMENTS TO SCHEDULE D TO THE NASD BY-LAWS*

      PART VI

      REQUIREMENTS APPLICABLE TO NASDAQ MARKET MAKERS

      Sec. 1. Registration as a NASDAQ Market Maker



      (f) Each NASDAQ market maker that is registered as a market maker in a NASDAQ National Market System (NASDAQ/NMS) security shall also at all times be registered as a market maker in the Small Order Execution System (SOES) with respect to that security and be subject to the Rules and Procedures for SOES.

      Sec. 2. Character of Quotations



      (e) Locked and Crossed Markets
      (1) A market maker shall not, except under extraordinary circumstances, enter or maintain quotations in the NASDAQ System during normal business hours if:
      [(1)]
      (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 NASDAQ/NMS securities 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 NASDAQ/NMS 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) A market maker shall clear and settle its transactions in NASDAQ/NMS securities through a registered clearing facility using a continuous net settlement system or enter into a correspondent clearing arrangement with a member that clears through such a registered clearing facility.

      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-Members 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 NASDAQ Operations-Members. Excused withdrawal status based on investment banking activity or the advice of legal counsel, 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. 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) business] thirty (30) days. Withdrawal as a market maker in a NASDAQ/NMS security in SOES shall constitute termination of registration as a market maker in that security for purposes of this section.

      RULES OF PRACTICE AND PROCEDURES FOR THE SMALL ORDER EXECUTION SYSTEM1/

      a) DEFINITIONS



      7. The term "limited size" as it pertains to the maximum size of individual orders for a security which may be entered into or executed through SOES shall mean the amount for that security published [established] 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.]



      b) SOES PARTICIPANT REGISTRATION

      2) Registration 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 pursuant to Part VI, Section 1 of Schedule 1) to the By-Laws.

      [Subsections 2 through 4 are renumbered 3 through 5, respectively.]

      c) PARTICIPATION OBLIGATIONS IN SOES

      1) Upon the effectiveness of registration as a SOHS 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 re-enter 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

      (1) 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, and for aggregate exposure limits so long as the SOES Market Maker remains active in SOES. All entries in SOES shall be made in accordance with the requirements set forth in the SOES User Guide.
      (2) 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, any SOES market maker with any quotation in the NASDAQ System that is causing the locked or crossed market will have orders executed by SOES for that market maker's account at its quoted price if that price is the best price and orders will be executed against such quotes irrespective of any preference indicated by the Order Entry Firm.
      (3) The SOES Market Maker may terminate his obligations 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. Except as provided in (4) below, a Market Maker that withdraws in a NASDAQ/NMS security may not reenter SOES as a market maker in that security for 30 days. A Market Maker that is suspended from SOES because its exposure limit is exhausted will be permitted a standard grace period (the duration of which will be established and published by the Association2/) within which to take action to restore, its exposure limit. A Market Maker that fails to renew its limit within the alloted time will be deemed to have withdrawn as a market maker.
      (4) Notwithstanding the provisions of (3) 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 re-enter SOES according to the conditions of its withdrawal.

      * An order-entry firm can send an order to the SOES market maker of its choice. This is referred to as "preferencing". If this is done, the order is executed at the best price for that market maker's account even if its quote is not the best.

      * New language is underlined; deleted language is in brackets.

      1/ New language is underlined; deleted language is in brackets.

      2/ The initial grace period is expected to be five minutes.


    • 87-76 New Category of Limited Representative Registration for Corporate Securities and Availability of a Study Outline for the Series 62 — Corporate Securities Limited Representative Qualification Examination

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      On January 4, 1988, the NASD will install the Limited Representative—Corporate Securities category of registration on the Central Registration Depository System. 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 2(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 HI, 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 filed for approval with the Securities and Exchange Commission. Pending SEC approval, the Series 62—Corporate Securities Limited Representative Qualification Examination will be available beginning January 4, 1988. A study outline for the Series 62 examination can be obtained by sending a request with a check for $2, 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 either Frank J. McAuliffe, Vice President, NASD Qualifications, at (301) 738-6694, or David Uthe, NASD Senior Qualifications Analyst, at (301) 738-6695.

      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.


    • 87-75 Revised Series 4 — Registered Options Principal (ROP) Qualification Examination and New Study Outline

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      On January 1, 1988, the options regulators will install a revised ROP qualification examination on the PLATO testing network. The revised examination will be expanded to include index, interest rate, and foreign currency option questions. A revised Series 4 study outline incorporating the new material will be available shortly.

      BACKGROUND

      As different standardized option products have been introduced to the marketplace, the options qualification examinations have been revised to include new questions on those products. The first Registered Options Principal (ROP) examinations in late 1974 only tested for equity call options. Equity put option questions were added in 1977. In 1980, a joint industry/regulatory task group completely upgraded the ROP examination to reflect the expanded importance of options in the securities industry.

      Since 1980, however, several non-equity option products have been introduced, along with specialized examinations for those product lines. The Interest Rate Options Examination (Series 5) was installed when standardized U.S. Treasury debt options became available. Likewise, the Foreign Currency Options Examination (Series 15) was installed when foreign currency options were introduced. Index options were also introduced during this period, although no specialized examination beyond the Series 7—General Securities Registered Representative Examination was required.

      In 1986, a joint industry/self-regulatory organization task group began to review the ROP examination program and to revise the test questions and study outline to include new material on index, interest rate, and foreign currency options. This group's work is nearing completion and a revised study outline will be available shortly.

      THE REVISED SERIES 4 EXAMINATION

      On January 1, 1988, the revised Series 4 — Registered Options Principal Qualification Examination will be installed on the PLATO testing network. It will include questions on index, interest rate, and foreign currency options in addition to the traditional equity option, put, and call questions. To accommodate this new material, the ROP examination has been increased to 125 questions. Three hours will be allowed to complete the test.

      The prerequisite for ROP registration status continues to be the Series 7 — General Securities Registered Representative Examination or previous registration as a general securities registered representative. The $50 examination fee remains unchanged.

      A revised examination study outline will be available shortly and can be obtained by sending a request with a check for $2, payable to the NASD, to: NASD, Attn: Book Order Department, P.O. Box 9403, Gaithersburg, MD 20898-9403. (Add 20 percent per order for first class return.)

      * * * * *

      Questions concerning this notice can be directed to David Uthe, Senior Qualifications Analyst, NASD Qualifications Department, at (301) 738-6695.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member & Market Services

    • 87-74 NASDAQ National Market System Grows to 3,076 Securities With 10 Additions on November 17, 1987

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

      On Tuesday, November 17, 1987, the following 10 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,076:

      Symbol*

      Company

      Location

      BCKY

      Buckeye Financial Corporation

      Columbus, OH

      CRLNF

      Carolin Mines, Ltd. (Cl A)

      Vancouver, Canada

      GNTE

      Granite Co-Operative Bank

      North Quincy, MA

      LPLI

      LPL Investment Group, Inc.

      Wallingford, CT

      LUNDV

      Lund Enterprises, Inc. (WI)

      Minnetonka, MN

      LUNWV

      Lund Enterprises, Inc. (Wts) (WI)

      Minnetonka, MN

      PGEN

      Plant Genetics, Inc.

      Davis, CA

      SIVB

      Silicon Valley Bancshares

      Santa Clara, CA

      SVMHF

      Silver Hart Mines, Ltd.

      Edmonton, Canada

      VVFRAF

      Wharf Resources, Ltd.

      Calgary, Canada

      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 Name

      Location

      COFI

      Charter One Financial, Inc.

      Cleveland, OH

      INSY

      Interim Systems Corporation

      Northbrook,IL

      NASDAQ/NMS Interim Addition

      The registration statement of the following issue has been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since October 23, 1987:

      Symbol*

      Security

      Date of Entry

      CMAFC

      Campeau Corporation

      11/04/87

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since October 23, 1987:

      New/Old Symbol*

      New/Old Security

      Date of Change

      ALEC/ABEV

      Alleco, Inc./Allegheny Beverage Corporation

      10/27/87

      AMSR/PHOG

      Amserv, Inc./Phone-A-Gram System, Inc.

      10/27/87

      ANDB/ANDB

      Andover Bancorp, Inc./Andover Savings Bank

      11/02/87

      FBRC/FBRC

      Fabricland, Inc./Fabric Wholesalers, Inc.

      11/03/87

      BLCC/BLCCB

      Balchem Corporation/Balchem Corporation (Cl B)

      11/04/87

      CGPS/INHO

      Stamford Capital Group, Inc./ Independence Holding Company

      11/05/87

      HABEZ/HABEZ

      Haber, Inc. (11/25/88 Cl B Wts)/ Haber, Inc. (11/26/87 Cl B Wts)

      11/06/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      ANBN

      Alaska National Bank of the North

      10/23/87

      LYND

      Lynden Incorporated

      10/26/87

      CPBI

      CPB, Inc.

      10/28/87

      FEGP

      Federated Group (The)

      10/28/87

      HHHCE

      Hanover Companies, Inc.

      10/28/87

      PARR

      PAR Technology Corporation

      10/28/87

      PKLBW

      Pharmakinetics Labs, Inc. (Wts)

      10/28/87

      PRST

      Present Company, Inc. (The)

      10/28/87

      TRIM

      Inertia Dynamics Corporation

      10/29/87

      PAWN

      Cash America Investments, Inc.

      10/30/87

      COMU

      Commerce Union Corporation

      11/02/87

      DATA

      Endata, Inc.

      11/02/87

      FMSA

      First Mutual Savings Association of Florida

      11/02/87

      GGLF

      Georgia Gulf Corporation

      11/02/87

      GFCC

      Guarantee Financial Corporation of California

      11/02/87

      CRPG

      CRPL, Inc.

      11/03/87

      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) 728-8 192.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-73 Request for Comments on Amendment to Board of Governors' Free-Riding Interpretation Concerning Investment Partnerships

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: DECEMBER 4, 1987.

      EXECUTIVE SUMMARY

      The NASD is publishing for comment a revision to its proposed amendment to the Interpretation of the Board of Governors on Free-Riding and Withholding that would provide members with an alternative means of complying with the Interpretation for sales of new issues to investment partnerships.

      The text of the proposed amendment is attached.

      BACKGROUND

      In Notice to Members 86-40, dated May 23, 1986, the NASD published for comment a proposed amendment to the Interpretation of the Board of Governors on Free-Riding and Withholding (Free-Riding Interpretation)1/ that would provide members with an alternative means of complying with the Interpretation for sales of new issues to investment partnerships. The section of the Free-Riding Interpretation titled "Investment Partnerships and Corporations"2/ currently prohibits members and their associated persons from selling securities of a new issue that trades at a premium ("hot issue" securities) to any investment partnership, corporation, of similar account unless "the member receives from such account, prior to the execution of the transaction, the names arid 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 Free-Riding Interpretation has been interpreted strictly by the NASD and 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.

      The NASD National Business Conduct Committee (NBCC) and the NASD Board of Governors determined that it would be appropriate to propose an amendment to the Free-Riding Interpretation that would provide an alternative means for members to comply with the Interpretation when selling "hot issue" securities to investment partnerships and similar accounts. Because members often 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 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.

      The NBCC reviewed 10 comment letters received concerning the proposed amendment to the Interpretation. Generally, commentators either made recommendations on specific provisions of the amendment or requested clarification of its scope. However, one commentator pointed out that the proposed amendment did not adequately address the problem members experience when seeking to comply with the Interpretation's section on investment partnerships.

      The NBCC noted that, as proposed, the amendment could result in pressure on the account manager from beneficial owners and its 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 Free-Riding 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 the alternative proposals, the NBCC concluded that the original proposal appeared to be a less-effective means of ensuring that members are correctly advised of the restricted status of an account than is offered by the opinion-of-counsel approach (discussed below). 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, it was also noted that account managers are not subject to NASD jurisdiction and cannot be held responsible or accountable for inaccurate or false information.

      In consideration of these concerns, the NBCC and the NASD Board of Governors determined that it would be appropriate to propose a revised amendment to the Free-Riding Interpretation.

      EXPLANATION OF PROPOSED AMENDMENT

      New "Safe Harbor." The proposed amendment is intended to provide an alternative means for members to comply with the Free-Riding Interpretation when selling "hot issue" securities to investment partnerships and similar accounts. The amendment would provide a member or associated person a "safe harbor" presumption of compliance with the requirements of the Free-Riding Interpretation if, prior to executing a transaction with an investment partnership, 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 Free-Riding 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.

      In addition, the member would be required to maintain in its files a copy of the current opinion of counsel for at least three years following the member's last sale of a new issue to that account.

      Alternatively, the member could 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.

      The NBCC and the NASD Board of Governors believe that an opinion of counsel has the advantage of building into a "safe harbor" procedure a greater degree of accountability than a representation by the account manager.

      Amendment to Present TSafe Harbor." The NBCC also concluded that, to be consistent, the existing provisions of the Free-Riding Interpretation should be amended to specify that information obtained from the account manager is current. Thus, a firm would be required to hold a current list of beneficial owners when selling a "hot issue" to the partnership.

      Definition of "Current." Both amendments would require members to hold "current" documents at the time of a sale to an investment partnership. The NBCC and the NASD Board considered two approaches to ensure that the information regarding beneficial ownership of account holders or the opinion of counsel relied on by the member is current. Under the first approach, members would be required to have information as of a date not more than 18 months prior to a transaction. The attached text of the proposed amendment reflects the first approach.

      Under the second approach, the member would be required to have current information, but the term "current" would not be defined. If the second approach is adopted, the last sentence of the proposed new language would be deleted.

      The NASD is specifically soliciting comments on both approaches.

      * * * * *

      The NASD encourages all members and other interested persons to comment on this proposed amendment. In particular, the NASD is soliciting comments on alternative approaches to ensure that the information provided regarding beneficial ownership of account holders or the opinion of counsel relied upon by the member is current. Comments should be addressed 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 December 4, 1987. Comments received by this date will be considered by the NBCC and the NASD Board of Governors. If the proposed amendment is approved by the Board, 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 either Dennis C. Hensley, NASD Vice President and Deputy General Counsel, or John F. Mylod, NASD Assistant General Counsel, at (202) 728-8294.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      PROPOSED AMENDMENT TO FREE-RIDING INTERPRETATION

      Amend the section titled "Investment Partnerships and Corporations" of the Interpretation of the Board of Governors, Free-Riding and Withholding, as follows:*

      Investment Partnerships and Corporations

      A member may not sell securities of a public offering which 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 37 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 riles 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 complete text of the Free-Riding Interpretation can be found beginning on page 2039-3 of the NASD Manual (CCH).

      2/ NASD Manual (CCH), p. 2043.

      * New language is underlined, deleted language is in brackets.


    • 87-72 NASDAQ National Market System Grows to 3,087 Securities With 15 Additions on November 3, 1987

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

      On Tuesday, November 3, 1987, the following 15 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,087:

      Symbol*

      Company

      Location

      BMED

      Ballard Medical Products

      Midvale, UT

      CHTB

      Cohasset Savings Bank

      Cohasset, MA

      MCON

      EMCON Associates

      San Jose, CA

      FPBT FPBTW

      Fountain Powerboat Industries, Inc. Fountain Powerboat Industries, Inc. (Wts)

      Washington, NC Washington, NC

      HMSS HIVT

      H.M.S.S., Inc. Health Insurance of Vermont, Inc.

      Houston, TX Colchester, VT

      INVS INVN

      Investors Savings Corp. Invitron Corporation

      Minnetonka, MN St. Louis, MO

      NAIG NLBK CBRYA

      National Insurance Group National Loan Bank Northland Cranberries, Inc. (Cl A)

      San Bruno, CA Houston, TX Wisconsin Rapids, WI

      OPTX

      Optek Technology, Inc.

      McKinney, TX

      PHPII

      PHP Healthcare Corporation

      Alexandria, VA

      QMAX

      Qmax Technology Group, Inc.

      Dayton, Oil

      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 Name

      Location

      ADHC

      Advantage Health Corporation

      Woburn, MA

      AAIS

      Applied ImmuneSciences, Inc.

      Menlo Park, CA

      AAFC

      Arctic Alaska Fisheries Corporation

      Seattle, WA

      CLFI

      Country Lake Foods, Inc.

      Saint Paul, MN

      DGRX

      Douglas Drug, Inc.

      North Providence, RI

      FBKG

      Ford Bank Group, Inc.

      Lubbock, TX

      HUHO

      Hughes Homes, Inc.

      Tacoma, WA

      HPRY

      Humphreys, Inc.

      Chicago, IL

      INSY

      Interim Systems Corporation

      Northbrook, IL

      MALC

      Mallard Coach Company, Inc.

      Nappanee, IN

      MFLR

      Mayflower Co-Operative Bank

      Middleboro, MA

      MDSS

      Medical Support Systems, Inc.

      Dallas, TX

      NYBC

      New York Bancorp, Inc.

      North Hills, NY

      PGRMF

      PolyGram, N.V.

      Baarn, The Netherlands

      PLCO

      Pool Company of Texas

      Houston, TX

      PLSEA

      Pulse Engineering, Inc. (Cl A)

      San Diego, CA

      SWREA

      Southwire Corporation (Cl A)

      Carrollton, GA

      CALL

      Telephone Management Corporation

      Atlanta, GA

      TUSC

      Tuscarora Plastics, Inc.

      New Brighton, PA

      USWN

      U.S. West NewVector Group, Inc.

      Bellevue, WA

      WKBC

      Wake Bancorp, Inc.

      Wake field, MA

      NASDAQ/NMS Interim Additions

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since October 12, 1987:

      Symbol*

      Security

      Date of Entry

      TTOI

      TEMPEST Technologies, Inc.

      10/14/87

      UMBIL

      Universal Medical Buildings, L.P.(Ser A Pfd Uts)

      10/15/87

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since October 12, 1987:

      New/Old Symbol*

      New/Old Security

      Date of Change

      BECHY/BHAMY

      Beecham Group, plc./Beecham Group, pic.

      10/13/87

      GACC/FMIF

      Great American Communications Company/FMI Financial Corporation

      10/14/87

      MRCCV/NMRKV

      Mark Controls Corporation (WI)/ New Mark Illinois Corporation (WI)

      10/19/87

      NMSB/NMSB

      New MilBancorp, Inc./New Milford Savings Bank

      10/20/87

      LVMHY/LVTNY

      LVMH Moet-Hennessy Louis Vuitton (ADRs)/Louis Vuitton (ADRs)

      10/23/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      WEXCW

      Wolverine Exploration Company (Wts)

      10/13/87

      LPLI

      LPL Investment Group, Inc.

      10/14/87

      WOLA

      Wolverine Technologies, Inc.

      10/14/87

      MBOXQ

      MBI Business Centers, Inc.

      10/15/87

      NBBS

      New Bedford Institution for Savings

      10/15/87

      RYALQ

      Royale Airlines, Inc.

      10/15/87

      IVAC

      IVACO Industries, Inc.

      10/16/87

      BABY

      Burnham American Properties, Inc.

      10/19/87

      DATC

      Data Card Corporation

      10/19/87

      JACK

      Jackpot Enterprises, Inc.

      10/19/87

      PNCF

      PNC Financial Corporation

      10/21/87

      GNTE

      Granite Co-Operative Bank

      10/22/87

      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.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-71 H.B. Shaine & Co., Inc. Ill Pearl Street, N.W. Grand Rapids, Michigan 49503

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On October 20, 1987, the United States District Court for the Western District of Michigan appointed a SIPC trustee for the above-captioned 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)(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
      Cyril Moscow, Esquire
      c/o Honigman, Miller, Schwarz & Conn
      2290 1st National Building
      Detroit, Michigan 48226
      Telephone: (313) 256-7800

      * * * * *

    • 87-70 Veteran's Day and Thanksgiving Day: Trade Date-Settlement Date Schedules

      TO: All NASD Members and Municipal Securities Bank Dealers

      FROM: All Operations Personnel

      The schedule of trade dates/settlement dates below reflects the observance by the financial community of Veteran's Day, Wednesday, November 11, and Thanksgiving Day, Thursday, November 26. On Wednesday, November 11, 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 in observance of Veteran's Day. All securities markets will be closed on Thursday, November 26, in observance of Thanksgiving Day.

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

      Trade Date

      Settlement Date

      Regulation T Date*

      November 3

      November 10

      November 12

      4

      12

      13

      5

      13

      16

      6

      16

      17

      9

      17

      18

      10

      18

      19

      11

      18

      20

      18

      25

      30

      19

      27

      December 1

      20

      30

      2

      23

      December 1

      3

      24

      2

      4

      25

      3

      7

      26

      MARKETS CLOSED

      27

      4

      8

      Please note that November 11 is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on November 11 will be combined with transactions made on the previous 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.

      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)839-6256.

      * * * * *


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


    • 87-69 Front-Running of Blocks—Interpretation of the Board of Governors on Article III, Section 1 of the Rules of Fair Practice

      TO: All NASD Members and Other Interested Persons

      SUMMARY

      The NASD Board of Governors believes it is necessary to clarify its policy with respect to trading in stock and index options by members or persons associated with a member while in possession of material, non-public market information concerning imminent transactions of block size. Under certain circumstances, this type of activity, generally described as "front-running," shall constitute conduct inconsistent with just and equitable principles of trade in violation of Article III, Section 1 of the NASD Rules of Fair Practice.

      Pursuant to the provisions of Article VII, Section l(a)(2) of the NASD By-Laws and Article I, Section 3 of the NASD Rules of Fair Practice, the NASD Board of Governors has adopted an Interpretation of Article III, Section 1 of the NASD Rules of Fair Practice clarifying its position. The text of the Interpretation is attached.

      Although the Board believes it is important to provide guidelines describing the kind of conduct that will not be permitted, members and persons associated with a member should be aware that any conduct that is not consistent with their fiduciary responsibilities in this area would be a violation of Article III, Section 1 of the Rules of Fair Practice. Members and persons associated with a member should also be aware that such prohibitions also apply when members or persons associated with a member provide material, non-public market information to customers who then trade on the basis of the information.

      * * * * *

      The NASD will continue to address possible front-running violations on a case-by-case basis, taking into consideration the facts in each situation.

      Questions concerning this notice should be directed to James Cangiano, Director, NASD Market Surveillance, at (202) 728-8186, or Eneida Rosa, Assistant General Counsel, NASD Office of General Counsel, at (202) 728-8294.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      ARTICLE III SECTION 1 OF THE NASD'S RULES OF FAIR PRACTICE

      • • •Interpretation of the Board of Governors__________________________________

      Front-Running Policy

      It shall be considered conduct inconsistent with just and equitable principles of trade for a member or person associated with a member, for an account in which such member or person associated with a member has an interest, or for an account with respect to which such member or person associated with a member exercises investment discretion, or for certain customer accounts, to cause to be executed:

      (1) an order to buy or sell an option when such member or person associated with a member causing such order to be executed has material, non-public market information concerning an imminent block transaction in the underlying security, or when a customer has been provided such material, non-public market information by the member or any person associated with a member, or
      (2) an order to buy or sell an underlying security when such member or person associated with a member causing such order to be executed has material, non-public market information concerning an imminent block transaction in an option overlying that security, or when a customer has been provided such material, non-public market information by the member or any person associated with a member,
      prior to the time information concerning the block transaction has been made publicly available.

      The violative practice noted above may include transactions that are executed based upon knowledge of less than all of the terms of the block transaction, so long as there is knowledge that all of the material terms of the transaction have been or will be agreed upon imminently.

      These general prohibitions shall not apply to transactions executed by member participants in automatic execution systems in instances where participants must accept automatic executions.

      These prohibitions also do not include situations in which a member or person associated with a member receives a customer's order of block size relating to both an option and the underlying security. In such cases, the member and person associated with a member may position the other side of one or both components of the order. However, in these instances, the member and person associated with a member would not be able to cover any resulting proprietary position(s) by entering an offsetting order until information concerning the block transaction has been made publicly available.

      The application of this front-running policy is limited to transactions that are required to be reported on the last-sale reporting systems administered by NASDAQ, CTA, or OPRA. Information as to a block transaction shall be considered to be publicly available when it has been disseminated via the tape or high-speed communications line of one of those systems or of a third-party newswire service.

      A transaction involving 10,000 shares or more of an underlying security or options covering such number of shares is generally deemed to be a "block" transaction, although a transaction of less than 10,000 shares could be considered a block transaction in appropriate cases. A block transaction that has been agreed upon does not lose its identity as such by arranging for partial executions of the full transaction in portions which themselves are not of block size if the execution of the full transaction may have a material impact on the market. In this situation, the requirement that information concerning the block transaction be made publicly available will not be satisfied until the entire block transaction has been completed and publicly reported.

    • 87-68 NASDAQ National Market System Grows to 3,077 Securities With 10 Additions on October 20, 1987

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

      On Tuesday, October 20, 1987, the following 10 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,077:

      Symbol*

      Company

      Location

      CNTX

      Centex Telemanagement, Inc.

      San Francisco, CA

      DSMI

      Dallas Semiconductor Corporation

      Dallas, TX

      EECIF**

      Encor Energy Corporation

      Alberta, Canada

      FLEX

      Flextronics, Inc.

      Newark, CA

      GVMI

      GV Medical, Inc.

      Minneapolis, MN

      HRDG

      Harding Associates, Inc.

      Novato, CA

      IFED

      Inter Federal Savings Bank

      Chattanooga, TN

      QZMGF

      Quartz Mountain Gold Corporation

      Vancouver, Canada

      TUHC

      Tucker Holding Company, Inc.

      Jacksonville, FL

      WALS

      Walshire Assurance Company

      Gettysburg, PA

      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

      ACCS

      Access Technology, Inc.

      South Natick, MA

      EZCO

      EZ Communications, Inc.

      Fairfax, VA

      FFLX

      First Federal Savings & Loan Association of La Crosse

      La Crosse, WI

      GMGW

      Geraghty & Miller, Inc.

      Plainview, NY

      LIDA

      Lida,Inc.

      Charlotte, NC

      PBKS

      Provident Bankshares Corporation

      Baltimore, MD

      SDAS

      SDA Systems, Inc.

      San Jose, CA

      SPGF

      Spectragraphics Corporation

      San Diego, CA

      NASDAQ/NMS Interim Additions

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since September 25, 1987:

      Symbol*

      Security

      Date of Entry

      FSCC

      First Federal Savings Bank of Charlotte County

      9/25/87

      SDRC

      Structural Dynamics Research Corporation

      9/29/87

      AAICA

      Albany International Corporation (Cl A)

      9/30/87

      ANSL

      Anchor Savings & Loan Association

      9/30/87

      GPRO

      Gen-Probe Incorporated

      9/30/87

      PSPA

      Pennview Savings Association

      9/30/87

      SUGR

      Summagraphics Corporation

      9/30/87

      IIVI

      II-VI Incorporated

      10/02/87

      CAMBY

      Cambridge Instrument Company, pic (The)

      10/02/87

      VGINY

      Virgin Group, pic

      10/02/87

      SPGLA

      Spiegel Inc. (Cl A)

      10/06/87

      SWVA

      Steel of West Virginia, Inc.

      10/06/87

      HHBX

      HHB Systems, Inc.

      10/08/87

      CTIA

      Communications Transmission, Inc.

      10/09/87

      ISOE

      ISOETEC Communications, Inc.

      10/09/87

      JWAIA

      Johnson Worldwide Associates, Inc. (CIA)

      10/09/87

      NMRKV

      New Mark Illinois Corporation (WI)

      10/12/87

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since September 25, 1987:

      New/Old Symbol*

      New/Old Security

      Date of Change

      BAPY/BAPYZ

      Burnham American Properties, Inc./ Burnham American Properties, Inc. (Uts)

      10/01/87

      CIMC/CIMC

      CIMCO, Inc./CIMCO

      10/01/87

      CLRK/CLRK

      CLARCOR, Inc./J. L. Clark Manufacturing Company

      10/01/87

      WLBK/WLBK

      Waltham Corporation/Waltham Savings Bank (The)

      10/01/87

      MRMK/LIFS

      Merrimack Bancorp, Inc./Lowell Institution for Savings

      10/06/87

      UFSB/UFSB

      University Savings Bank/University Federal Savings Bank

      10/08/87

      HCCI/HCCI

      HCC Industries, Inc./HCC Industries

      10/09/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      CARG

      Carriage Industries, Inc.

      9/29/87

      PESO

      Two Pesos, Inc.

      9/29/87

      BLAN

      Bridge Communications, Inc.

      9/30/87

      FUFS

      First Limited Financial Services, Inc.

      10/01/87

      FFBV

      First Federal Savings 6c Loan Association of Brooksville

      10/02/87

      THEN

      Thermo Analytical, Inc.

      10/02/87

      NTWK

      Network Security Corporation

      10/05/87

      UWSB

      Union Warren Savings Bank

      10/08/87

      SPDY

      Spectradyne Inc.

      10/09/87

      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) 728-8 192.

      Sincerely,

      Lynn Nellius
      Secretary


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

      ** This issue is scheduled to commence trading in the NASDAQ System concurrent with its designation as a NASDAQ/NMS security on October 20, 1987.


    • 87-67 Proposed Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Concerning Testimonials

      IMPORTANT MAIL VOTE

      OFFICERS, PARTNERS, AND PROPRIETORS

      TO: All NASD Members

      LAST VOTING DATE IS NOVEMBER 13, 1987.

      EXECUTIVE SUMMARY

      NASD members are invited to vote on a proposed amendment to Article III, Section 35(d)(2)(D) relating to testimonials used in members' communications with the public. The proposed amendment would conform the NASD rule to that of the New York Stock Exchange.

      The text of the proposed amendment is attached.

      BACKGROUND

      Article III, 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 current NASD rule applies to testimonial material concerning any advice, analysis, report, or other investment or related service rendered by the member and requires that members make clear that such experience is not necessarily indicative of future performance or of results obtained by others. A testimonial also must disclose compensation paid to the maker, and, if it implies a specialized opinion, the qualifications of the maker of the testimonial must be stipulated.

      When the NASD rule was originally adopted in 1980, the standards incorporated in the rule were patterned after those of New York Stock Exchange Rule 472.40(8) for purposes of consistency and reduction of unnecessary regulatory burdens on dual NASD/NYSE members. The NYSE has since amended its testimonial rule and a conforming amendment to Article III, Section 35(d)(2)(D) of the NASD Rules of Fair Practice has been approved by the NASD Board of Governors and is now being submitted for membership approval. Prior to becoming effective, the rule change must also be approved by the Securities and Exchange Commission.

      PROPOSED AMENDMENT

      The NASD's proposed amendment applies only to testimonials that concern the quality of a firm's investment advice. Limiting testimonial treatment to communications that relate to the quality of investment advice is consistent with other provisions of the NASD rule that focus upon disclosing that future performance may not be consistent with the experience of the individual giving the testimonial. The NASD's proposed amendment also requires disclosure of compensation only if it is more than a nominal amount.

      COMMENTS RECEIVED

      The proposed amendment to Article III, Section 35(d)(2)(D) of the NASD Rules of Fair Practice was published for comment in NASD Notice to Members 87-40 dated June 22, 1987. The NASD received four comment letters, which generally favored the rule proposal. Of these, one favored adopting the rule amendment without reservation while the other three favored the proposal but recommended that the amendment's provisions include more explicit standards. For example, it was suggested that the term "nominal" be defined.

      The NASD National Business Conduct Committee reviewed the comments and recommended that the NASD Board of Governors approve the amendment as originally proposed. The Board of Governors approved the NBCC's recommendation.

      * * * *

      The Board believes that the proposed amendment to Article III, Section 35(d)(2)(D) of the NASD Rules of Fair Practice is necessary and appropriate to eliminate inconsistent regulation in the securities industry 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 November 13, 1987.

      Questions concerning this notice may be directed to either Ms. R. Clark Hooper, NASD Advertising Department, at (202) 728-8330, or Ms. Eneida Rosa, NASD Office of General Counsel, at (202) 728-8294.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

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

      Communications With the Public

      Section 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 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.

      *New language is underlined; deleted language is in brackets.


    • 87-66 Quarterly Check List of NASD Notices to Members

      TO: All NASD Members and Other Interested Persons

      The following are NASD Notices to Members issued during the third quarter of 1987. Requests for copies of any notice should be accompanied by a self-addressed mailing label and directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006-1506.

      Notice Number

      Date

      Topic

      87-42

      July 1, 1987

      NASDAQ National Market System Grows to 2,972 Securities With 29 Voluntary Additions on July 7, 1987

      87-43

      July 1, 1987

      Adoption of Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Regarding Advertising and Sales Literature for Direct Participation Programs

      87-44

      July 6, 1987

      Proposed Amendment to Article IIL Section 26(m) of the NASD Rules of Fair Practice Governing Prompt Payment for Investment Company Shares

      87-45

      July 15, 1987

      NASDAQ National Market System Grows to 2,993 Securities With 20 Voluntary Additions on July 21, 1987

      87-46

      July 21, 1987

      SEC Approval of NASD Corporate Governance Standards for NASDAQ/ NMS Issuers and Amendments To Schedule D to the NASD By-Laws Concerning Designation of NASDAQ National Market System (NASDAQ/NMS) Securities

      87-47

      July 22, 1987

      Request for Comments on a Proposed New Level of Registration, Designated Assistant Representative-Order Processing, Under Schedule C to the NASD By-Laws

      87-48

      July 29, 1987

      NASDAQ National Market System Grows to 3,019 Securities With 30 Voluntary Additions on August 4, 1987, And One Mandatory Inclusion on August 4,1987

      87-49

      August 10, 1987

      New $10 NYSE Series 7 Development Fee to Begin in August

      87-50

      August 10, 1987

      Amendments to SEC Rules 15c3-l, 17a-3, and I7a-13 Regarding Treatment of Repurchase and Reverse Repurchase Agreements

      87-51

      August 12, 1987

      Treasury Department Adopts Changes To the Requirements Concerning Financial Recordkeeping and Reporting Of Currency and Foreign Transactions

      87-52

      August 12, 1987

      Request for Comments on Proposed Amendment to the NASD Board of Governors' Corporate Financing Interpretation Concerning Public Offerings When Proceeds Are Directed to NASD Members

      87-53

      August 12, 1987

      Request for Comments on Proposed Amendments to NASD By-Laws and Rules of Fair Practice, and Proposed New Government Securities Rules

      87-54

      August 13, 1987

      NASDAQ National Market System Grows to 3,018 Securities With 8 Additions on August 18, 1987

      87-55

      August 14, 1987

      Amendments to NASD Code of Arbitration Procedure Effective July 1, 1987

      87-56

      August 19, 1987

      Labor Day: Trade Date-Settlement Date Schedule

      87-57

      August 27, 1987

      NASDAQ National Market System Grows to 3,039 Securities With 23 Additions on September 1, 1987

      87-58

      August 31, 1987

      Amendments to SEC Rule 15c3-3 Regarding Treatment of Hold-in-Custody Repurchase Agreements

      87-59

      August 31, 1987

      Quarterly Check List of NASD Notices To Members

      87-60

      September 10, 1987

      NASDAQ National Market System Grows to 3,046 Securities With 11 Additions on September 15, 1987

      87-61

      September 10, 1987

      Suggested Escrow Agreement Provisions for Members' Compliance With Securities and Exchange Commission Rule 15c2-4

      87-62

      September 22, 1987

      NASD Board of Governors' Decision Concerning Regulation of Market Making by Issuer Affiliates

      87-63

      September 23, 1987

      Columbus Day: Trade Date-Settlement Date Schedule

    • 87-65 Statutorily Disqualified Persons Who Obtain a Controlling Interest in an NASD Member Firm and Failure of NASD-Registered Persons Who Become Statutorily Disqualified to Timely Amend Form U-4

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The NASD reminds members that the NASD By-Laws require a statutorily disqualified person who wishes to obtain a controlling interest in, or become a controlling person of, an NASD member firm must, before assuming such a position, apply to the NASD for approval through the Eligibility Proceedings described in the NASD By-Laws and Code of Procedure. In addition, the NASD By-Laws require members and their associated persons to make timely filings of amendments to Form BD and Form U-4 when changes occur in the information contained on the original applications.

      BACKGROUND

      The NASD Board of Governors has become aware that, in several instances, a statutorily disqualified 1/ person has obtained a "controlling interest" 2/ in an NASD member without approval through an NASD Eligibility Proceeding. The Board is also concerned by the failure of these registered persons to timely amend Form U-4 to reflect disciplinary actions taken against them by federal or state agencies or self-regulatory organizations, or to reflect certain criminal convictions.

      Acquisition of Control by Disqualified Persons

      Article II, Section 3(b) of the NASD By-Laws prohibits a member firm from continuing in membership if the firm has an associated person who is disqualified. Article II, Section 4 of the By-Laws specifies the conditions that disqualify a person. Section 3(a)(21) of the Securities Exchange Act of 1934 defines "associated person with a member" as ". . . any person directly or indirectly controlling, controlled by or under common control with such member, or any employee of such member." Therefore, if a disqualified person obtains a "controlling" interest in an NASD member, that person is considered an associated person of the member.

      Before a disqualified person can obtain a "controlling interest" in an NASD member, that person must apply to the NASD for approval through the NASD's Eligibility Proceedings, found in Article II, Section 3(d) of the By-Laws and Article VII of the Code of Procedure. Failure to receive approval by the NASD Board of Governors prior to obtaining the "controlling" interest will result in the immediate institution of a Revocation Proceeding under Article VI of the Code of Procedure against both the disqualified person and the NASD member that allowed the disqualified person to obtain the "controlling interest."

      Failure to Amend Form U-4

      Associated persons of NASD members have an obligation to keep current and accurate the information on Form U-4 (Uniform Application for Securities Industry Registration or Transfer) on file with the NASD. Similarly, member firms are obligated to ensure that Form BD (Uniform Application for Broker-Dealer Registration) is amended to reflect current information.

      Article IV, Section 2(c) of the By-Laws, which relates to registered representatives and associated persons, requires that "Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments to the original application."

      The instructions to Form U-4 provide that "amendment filings are required to (1) correct deficiencies in a previous filing; (2) update and keep current the information required on the form. . . ." Form U-4 is signed by the registered person and a representative of the member firm and both have the responsibility to update Form U-4 in a timely manner.

      Article III, Section l(d) of the By-Laws, which relates to membership applications, provides that "Each member shall ensure that its membership application with the Corporation is kept current at all times by supplementary amendments to the original application."

      The instructions for Form BD provide that "... the applicant must update the Form BD information by submitting amendments whenever the information on file changes."

      If a registered person becomes subject to a statutory disqualification, this fact must be reported promptly on an amended Form U-4 (and Form BD, if appropriate). The NASD Board of Governors has interpreted "promptly" to mean "within ten days of the occurrence of the disqualifying event." (The NASD must be notified so it can carry out its responsibilities under Section 15A(b)(6) of the Securities Exchange Act of 1934 and SEC Rule 19h-l.) Failure to file, or late filing, of an amended Form U-4 (or Form BD) may warrant disciplinary action with significant sanctions. In addition, failure to file, or failure to file in a timely manner, may be grounds to deny the application of the disqualified person to remain associated with the NASD member firm.

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

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance


      1/ "Statutory disqualifications" are defined in Sections 3(a)(39) and 15(b)(4) of the Securities Exchange Act of 1934, and Article II, Sections 3 and 4 of the NASD By-Laws.

      2/ SEC Rule 19h-l, which governs the NASD's handling of applications from disqualified persons and firms, in paragraph (f)(2) defines "control" as, "the power to direct or cause the direction of the management or policies of a company whether through ownership of securities, by contract or otherwise; provided, however, that (i) any person who, directly or indirectly, (A) has the right to vote 10 percent or more of the voting securities, (B) is entitled to receive 10 percent or more of the net profits, or (C) is a director (or person occupying a similar status or performing similar functions) of a company shall be presumed to be a person who controls such company."


    • 87-64 NASDAQ National Market System Grows to 3,063 Securities With 17 Additions on October 6, 1987

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

      On Tuesday, October 6, 1987, the following 17 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,063.

      Symbol*

      Company

      Location

      ARTW

      Art's-Way Manufacturing Company, Incorporated

      Armstrong, IA

      BARC

      Barrett Resources Corporation

      Denver, CO

      BHAMY

      Beeeham Group, pie

      Middlesex, England

      CADE

      Cade Industries, Inc.

      Milwaukee, WI

      CADEW

      Cade Industries, Inc. (Wts)

      Milwaukee, WI

      CSAR

      Calstar, Inc.

      Edina, MN

      CSARW

      Calstar, Inc. (Wts)

      Edina, MN

      COIL

      Crystal Oil Company

      Shreveport, LA

      COILP

      Crystal Oil Company (Pfd)

      Shreveport, LA

      XRAY

      GENDEX Corporation

      Milwaukee, WI

      GLTX

      Goldtex, Inc.

      Goldsboro, NC

      HFOX

      Home Federal Savings Bank

      Xenia, OH

      MPAC

      Impact Systems, Inc.

      San Jose, CA

      KMDC

      Kirschner Medical Corporation

      Timonium, MD

      SDNB

      SDNB Financial Corp.

      San Diego, CA

      SSOA

      Software Services of America, Inc.

      North Andover, MA

      WCBK

      Workingmens Co-Operative Bank

      Boston, MA

      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

      IIVI

      II-VI Incorporated

      Saxonburg, PA

      ANSL

      Anchor Savings and Loan Association

      Somers Point, NJ

      CAMBY

      Cambridge Instrument Company, pic (The)

      Cambridge, England

      CTIA

      Communications Transmission, Inc.

      Austin, TX

      DANR

      Dan River Holding Company

      Danville, VA

      FELL

      Fellowship Savings and Loan Association

      Bergenfield, NJ

      FATS

      First Atlantic Savings and Loan Association

      South Plainsfield, NJ

      FSCC

      First Federal Bank of Charlotte County

      Punta Gorda, FL

      GFCT

      Greenwich Financial Corporation

      Greenwich, CT

      HHBX

      HHB Systems, Inc.

      Mahwah, NJ

      KPTL

      Keptel, Inc.

      Tinton Falls, NJ

      SWVA

      Steel of West Virginia, Inc.

      Huntington, WV

      TTOI

      TEMPEST Technologies, Inc.

      Herndon, VA

      VGINY

      Virgin Group, pic

      London, England

      NASDAQ/NMS Interim Additions

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since September 4, 1987.

      Symbol*

      Security

      Date of Entry

      WHTI

      Wheelabrator Technologies, Inc.

      9/17/87

      JMPC

      J. M. Peters Company, Inc.

      9/18/87

      CBAM

      Cambrex Corporation

      9/22/87

      ETRC

      Entree Corporation

      9/22/87

      IMKTA

      Ingles Markets, Incorporated (Cl A)

      9/22/87

      DPHZ

      DATAPHAZ, Inc.

      9/23/87

      NRTN

      Norton Enterprises, Inc.

      9/24/87

      PTAC

      Penn Treaty American Corporation

      9/24/87

      CETH

      Catalyst Thermal Energy Corporation

      9/25/87

      CNCAA

      Centel Cable Television Corporation (Cl A)

      9/25/87

      NASDAQ/NMS Symbol* and/or Name Changes

      The following changes to the list of NASDAQ/NMS securities occurred since September 4, 1987.

      New/Old Symbol*

      New/Old Security

      Date of Change

      CAVN/CMCO

      CVN Companies, Inc./CVN Companies, Inc.

      9/10/87

      CKCP/CKCP

      CYBERTEK Corporation/CYBERTEK Computer Products, Inc.

      9/10/87

      STOB/STOB

      Standard Commercial Corporation/ Standard Commercial Tobacco Company, Inc.

      9/10/87

      NESB/NESB

      NESB Corp./New England Savings Bank

      9/17/87

      PSSP/PSSP

      Price/Stern/Sloan, Inc./Price/ Stern/Sloan Publishers, Inc.

      9/17/87

      ITCH/BITC

      Infotechnology, Inc./Biotech Capital Corp.

      9/18/87

      CBCT/CBCT

      Cenvest, Inc./Central Bank for Savings

      9/23/87

      TOBK/TOBK

      Tolland Bank/Tolland Bank, F.S.B.

      9/23/87

      DXTKZ/DXTKZ

      Diagnostek, Inc. (Cl B 3/31/88 Wts)/Diagnostek, Inc. (Cl B 9/30/87 Wts)

      9/24/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      PRAT

      Pratt Hotel Corporation

      9/02/87

      BMGC

      Battle Mountain Gold Company (Cl A)

      9/09/87

      PORX

      Porex Technologies Corporation

      9/11/87

      POLR

      Polymeric Resources Corporation

      9/15/87

      CMLI

      CML Group, Inc.

      9/17/87

      RENT

      Rent-A-Center, Inc.

      9/17/87

      SBAR

      San/Bar Corporation

      9/17/87

      MASXZ

      Masco Industries, Inc. (Pfd)

      9/21/87

      FFSB

      First Federal Savings Bank of California

      9/22/87

      ELDB

      Eldorado Bancorp

      9/24/87

      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.

      Sincerely,

      Joseph/R. Hardiman
      President


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


    • 87-63 Columbus Day: Trade Date-Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      FROM: All Operations Personnel

      The schedule of trade dates/settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 12, 1987. 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 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 Date*

      October 2

      October 9

      October 13

      5

      13

      14

      6

      14

      15

      7

      15

      16

      8

      16

      19

      9

      19

      20

      12

      19

      21

      13

      20

      22

      It should be noted that October 12, 1987, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, October 12, will be combined with transactions made on the previous day, October 9, for settlement on October 19. 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 12.

      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) 839-6256.

      * * * * *


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


    • 87-62 NASD Board of Governors' Decision Concerning Regulation of Market Making by Issuer Affiliates

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      In Notice to Members 87-25, dated April 14, 1987, the NASD requested comments and suggestions on the concept of a rule that would restrict broker-dealers affiliated with issuers from making markets or trading in the securities of those issuers.

      The NASD's request was the result of concerns as to whether conflicts of interest may exist or whether rule violations are more likely when broker-dealers engage in making markets or trading in securities issued by affiliates.

      At its July 1987 meeting, the NASD Board of Governors considered the comments received in response to Notice to Members 87-25. The Board of Governors decided that, at this time, no restrictions should be placed on trading in proprietary products, such as limited partnerships, closed-end investment companies, unit investment trusts, or in mortgage-backed, asset-backed, and other pass-through instruments. However, the Subcommittee on Market Making by Issuer Affiliates will continue to consider the need for rulemaking to prevent trading abuses that might arise due to market making by a member in the common stock of its parent or other affiliate.

      BACKGROUND

      In January 1987, the Subcommittee on Market Making by Issuer Affiliates (Subcommittee) was created as a result of questions that arose late last year concerning situations in which members were, or were proposing to begin, making markets in NASDAQ securities issued by the firms' parents or affiliated issuers.

      Upon the Subcommittee's recommendation, the NASD issued Notice to Members 87-25 (Notice) on April 14, 1987, requesting comments and suggestions on the concept of a rule that would restrict broker-dealers affiliated with issuers from making markets or trading in the securities of those issuers. The Notice pointed out that both the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act) contain numerous requirements that must be satisfied before an affiliate of an issuer can engage in such transactions. The Notice also stated that while some self-regulatory organizations restrict member broker-dealer activity in their own securities and those of affiliates,1/ the NASD currently does not have a rule that specifically prohibits or restricts trading by members in securities of their affiliates. Further, the Notice stated that the NASD had not formulated a specific approach on the regulation of trading by issuer affiliates and that it was soliciting comments on approaches that should be considered.

      RESPONSE TO NASD NOTICE TO MEMBERS 87-25

      The NASD received 42 comment letters in response to its Notice.2/ Six commentators favored the concept of a rule that would restrict market making by affiliates; 18 commentators said they would favor such a rule only if certain exemptions and/or restrictions were included in the rule's provisions; and 18 commentators opposed the concept of such a rule, citing various reasons.

      Many of the commentators opposing the rule concept questioned whether such a rule should be promulgated, absent data evidencing the need for such a rule governing specific types of securities. Some also believed that existing regulatory provisions adequately regulate trading by affiliates in issuer securities. These commentators pointed to the existing disclosure and suitability requirements imposed under the federal securities laws and by the NASD Rules of Fair Practice as sufficient safeguards to protect investors and to guard against adverse effects of an affiliate's trading in the securities of an issuer.

      Many commentators, while not opposing or favoring the rule concept, focused instead on exemptions or restrictions that they believe should be included in such a rule proposal. Several commentators believed that the provisions of any rule should exempt or exclude trading in proprietary products such as investment company products, limited partnerships, mortgage-backed, asset-backed, or other pass-through instruments. They believed that these products, and any conflicts related to trading in them, are already closely regulated.

      SUBCOMMITTEE'S RECOMMENDATIONS AND BOARD APPROVAL

      The Subcommittee on Market Making by Issuer Affiliates reviewed the comments received and considered the existing federal and NASD regulatory provisions pertaining to market making by affiliates. The Subcommittee then recommended to the NASD National Business Conduct Committee (NBCC) and to the NASD Board of Governors that no restrictions should be placed, at this time, on proprietary products or pass-through instruments, such as limited partnerships, closed-end investment companies, unit investment trusts, or on mortgage-backed and asset-backed instruments.

      Notwithstanding its recommendation to the NBCC, the Subcommittee believes that it may be necessary to restrict market making by a member in its common stock, or that of its parent corporation or an affiliate.

      The NBCC concluded that the Subcommittee should continue to consider the need for rulemaking and to provide recommendations on how the NASD should regulate market making by issuer affiliates in the future. The NASD will publish for comment any proposals developed by the Subcommittee that are approved by the NASD Board of Governors.

      The NASD Board approved the Subcommittee's recommendations, concluding that the NASD should not at this time apply any further restrictions on affiliates' trading in proprietary products or pass-through instruments, including asset-backed instruments.

      EXISTING REGULATION

      Federal Provisions

      Provisions in the federal securities laws and in NASD rules govern a market maker trading in its issuer's common stock. Among the federal regulatory provisions, Section 5 of the Securities Act prohibits the use of interstate commerce to sell any security unless a registration statement has been filed with and declared effective by the Securities and Exchange Commission (SEC).3/ Resales in market-making transactions by an affiliate of an issuer of securities acquired in the open market may be subject to the registration provisions of Section 5. Members should consult their counsel to determine the applicability of this section to their activities.

      In addition, Section 10 under the Exchange Act contains prohibitions against manipulating securities prices. Rule 10b-5 under Section 10 of the Exchange Act proscribes using manipulative or deceptive devices in the trading of securities and the fraudulent use of inside information in connection with the purchase or sale of any security. Trading by a firm in its own securities or in the securities of an affiliate presents serious concerns about the potential for misuse of non-public information and creates a need for the firm to focus particular attention on its mechanisms to guard against such abuse.

      As indicated by several commentators, SEC Rules 10b-6 and 1 Ob-18 under the Exchange Act provide significant safeguards against market manipulation by an issuer's affiliates. Rule 10b-6 prohibits trading by persons interested in a distribution, and Rule 10b-18 regulates purchases of certain equity securities by the issuers of the securities and others. In addition, Rule 15c 1-5 under Section 15 of the Exchange Act requires that broker-dealers in the over-the-counter market disclose that they are trading in an affiliate's securities.

      NASD Provisions

      Schedule E to the NASD By-Laws regulates the distribution of securities of members and their affiliates, defines "affiliation," and ensures the fair pricing of securities. Article III, Section 13 of the NASD Rules of Fair Practice requires that a member disclose to a customer the firm's affiliation with the issuer of a security before engaging in the purchase or sale of those securities on behalf of the customer. The NASD Rules of Fair Practice also require that the business practices of members in connection with the investment banking and securities business shall be just and equitable.

      * * * * *

      Members that propose to make markets in their own securities or in the securities of affiliates are strongly encouraged to consult counsel to ensure compliance with all applicable regulatory requirements.

      While these regulatory provisions seem to provide substantial investor protection and guidance to market-maker affiliates and issuer corporations with regard to their obligations to customers and to the marketplace, any specific concerns that may arise in the future regarding market making by issuer affiliates will be brought to the attention of the Subcommittee for its review.

      Questions concerning this notice may be directed to Eneida Rosa, NASD Assistant General Counsel, at (202) 728-8294.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel


      1/ See, for example, New York Stock Exchange Rule 3 12(g).

      2/ Thirty-one comment letters were from investment firms, five were from law firms, three were from industry associations, and the others were from a bank, an insurance company, and a government organization.

      3/ The requirements of Section 5 under the Securities Act should be read in conjunction with the definitions in Section 2 and the exemptive-transaction provisions in Section 4. Section 2 also delineates categories of persons who may be involved in a transaction in securities covered by the registration requirements of the Securities Act.


    • 87-61 Suggested Escrow Agreement Provisions for Members' Compliance With Securities and Exchange Commission Rule 15c2-4

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The NASD is publishing Suggested Escrow Agreement Provisions and Suggested Language for Selected Dealer Agreements to assist members and their counsel in complying with SEC Rule 15c2-4.

      BACKGROUND AND SUMMARY

      Through its review of public offerings of securities conducted by the Corporate Financing Department, the NASD has the responsibility to ensure compliance by members with Securities and Exchange Commission Rule 15c2-4. This rule applies to public and private offerings of securities that are distributed by members on a best-efforts basis. Subsection (b) of Rule 15c2-4 applies to those best-efforts offerings that include a contingency that may result in the return of investors' funds if the contingency is not met. In such contingent offerings, Rule 15c2-4 requires that a $5,000 broker-dealer or a $25,000 broker-dealer affiliated with the issuer may only deposit investors' funds in an escrow account with a bank independent of the issuer and broker-dealer.

      The NASD is aware of problems experienced by members in determining whether the form of escrow agreements proposed by banks meets the requirements of Rule 15c2-4. To assist members and their counsel in complying with Rule 15c2-4, the NASD is publishing suggested escrow provisions in the form of an escrow agreement and is publishing suggested language for inclusion in selected dealer agreements used in connection with public and private offerings, along with comments explaining the provisions.

      Attached are Suggested Escrow Agreement Provisions and Suggested Language for Selected Dealer Agreements. Please note that they are intended only to provide assistance and guidance to members and their counsel in complying with SEC Rule 15c2-4 in public and private offerings of securities. Neither the Suggested Escrow Agreement Provisions nor the Suggested Language is intended to be a required model. They were drafted for an offering underwritten on a best-efforts part-or-none basis. Therefore, the Suggested Escrow Agreement Provisions do not specifically address a best-efforts all-or-none offering, arrangements for a $25,000 broker-dealer to "sweep" customer accounts into the escrow, or state requirements for establishing an escrow account. Thus, certain provisions that are generally found in escrow agreements, but are unrelated to compliance with Rule 15c2-4, such as liability and indemnification, are not included. Members should consult with counsel to ensure that any escrow agreement is in compliance with applicable state requirements.

      Finally, the NASD Corporate Financing Department will continue to accept escrow agreements and selected dealer agreements with other provisions, a different structure, and different language, so long as such provisions comply with SEC Rule 15c2-4.

      Questions concerning this notice may be directed to either Charles L. Bennett or Richard J. Fortwengler, NASD Corporate Financing Department, at (202)728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachments

      SUGGESTED ESCROW AGREEMENT PROVISIONS

      This agreement is made and entered into as of __, 19__, by and among [INSERT NAME OF BANK] (the "Escrow Agent"), [INSERT NAME OF BROKER-DEALER] (the "Underwriter"), and [INSERT NAME OF ISSUER] (the "Company" or the "Partnership").

      Comment:
      This introductory paragraph sets forth the date as of which the agreement is entered into and the name of the parties. SEC Rule 15c2-4(b) under the Securities Exchange Act of 1934 (the "Rule") requires that when an escrow account is used for distributions conducted on a contingency basis (e.g., best-efforts all-or-none or part-or-none offerings), the escrow agent must be a commercial bank that is unaffiliated with either the issuer or the underwriter. A "bank" is defined in Section 3(a)(6) of the Securities Exchange Act of 1934, to include a U.S. chartered bank, a bank that is a member of the Federal Reserve System, or a bank examined by a state or federal authority. In addition, pursuant to SEC staff interpretation, a savings and loan institution that is FSLIC-insured and FHLBB-regulated may act as an escrow agent under Rule 15c2-4(b). Further, since Rule 15c2-4(b) applies only to broker-dealers, the underwriter must be one of the contracting parties. It is not necessary for the issuer to be a contracting party to the escrow agreement to meet the requirements of Rule 15c2-4.

      RECITALS

      The Company/Partnership proposes to offer for sale to investors through one or more registered broker-dealers up to______shares of common stock/units of limited partnership interest (the "Securities") at a price of $______per share/unit (the "Proceeds").

      The Underwriter intends to sell the Securities as the Company's/Partnership's agent on a best-efforts part-or-none basis for ______shares/units and on a best-efforts basis for the remaining Securities in a public/private offering (the "Offering").

      The Company and the Underwriter desire to establish an escrow account in which funds received from subscribers will be deposited pending completion of the escrow period. [INSERT NAME OF BANK] agrees to serve as Escrow Agent in accordance with the terms and conditions set forth herein.

      The term Selected Dealer as used herein shall include the Underwriter and other co-underwriters and/or other selected dealers as part of the selling group. All Selected Dealers shall be bound by this Agreement. However, for purposes of communications and directives, the Escrow Agent need only accept those signed by [INSERT NAME OF BROKER-DEALER].

      AGREEMENT

      Now therefore, in consideration of the foregoing, it is hereby agreed as follows:

      1. Establishment of Escrow Account. On or prior to the date of the commencement of the offering, the parties shall establish an interest-bearing/non-interest-bearing escrow account with the Escrow Agent, which escrow account shall be entitled [INSERT NAME OF THE ACCOUNT] (the "Escrow Account"). The Selected Dealer will instruct subscribers to make checks for subscriptions payable to the order of the Escrow Agent. Any checks received that are made payable to a party other than the Escrow Agent shall be returned to the Selected Dealer who submitted the check.
      Comment:
      This paragraph focuses on two important aspects of Rule 15c2-4: (1) the type of account that must be established to hold subscribers' funds and (2) to whom subscribers' checks should be made payable. The second and third sentences of this paragraph are optional depending on the category of broker-dealers participating in the distribution of the offering. Under Rule 15c2-4, a broker-dealer's obligation with regard to funds received from an investor depends on whether it is a "$5,000 broker-dealer" or a "$25,000 broker-dealer" under the SEC's net capital rules and whether the broker-dealer is affiliated with the issuer.
      A $5,000 broker-dealer is required to establish an escrow account to hold subscriuers' funds until the contingency occurs, may only receive investors' checks payable to an unaffiliated bank acting as escrow ngent, and may not receive cash or checks payable to the issuer or the broker-dealer.
      As an alternative to establishing an escrow account, $25,000 broker-dealers unaffiliated with the issuer may act as agent or trustee for a separate bank account until the offering contingency occurs. A "separate bank account" is one which is independent of the broker-dealer's operating account and is specifically identified as being for the benefit of a particular offering. If the "separate bank account" method of holding customer funds is elected by a $25,000 broker-dealer, a separate account at a bank must be maintained by the firm for each offering in which it is acting as an underwriter or selected dealer; funds of different offerings may not be commingled.
      A $25,000 broker-dealer is permitted to receive cash and checks payable to the broker-dealer. Therefore, if all members of the selling group are $25,000 broker-dealers, it is not mandatory to have checks made payable to the Escrow Agent. However, pursuant to SEC staff interpretation of Subsection (b)(2) of Rule 15c2-4, a $25,000 broker-dealer affiliated with the issuer must forward checks to an escrow account and may not act as agent or trustee for a separate bank account. Further, any checks received by an issuer affiliated with a broker-dealer are considered received by the broker-dealer and must be forwarded to an escrow account.
      2. Escrow Period. The Escrow Period shall begin with the commencement of the Offering and shall terminate upon the earlier to occur of the following dates:
      A. The date upon which the Escrow Agent confirms that it has received in the Escrow Account gross proceeds of $_____ in deposited funds (the "Minimum") and/or_____;* or
      B. The expiration of_____days from the date of commencement of the Offering (unless extended as permitted in the offering document for an additional_____days by mutual written agreement between the Company/Partnership and the Underwriter with a copy of such extension to the Escrow Agent); or
      C. The date upon which a determination is made by the Company/Partnership and the Underwriter to terminate the offering prior to the sale of the Minimum.
      During the escrow period, the Company/Partnership is aware and understands that it is not entitled to any funds received into escrow and no amounts deposited in the Escrow Account shall become the property of the Company/Partnership or any other entity, or be subject to the debts of the Company/Partnership or any other entity.
      Comment:
      Pursuant to Rule 10b-9 of the Securities Exchange Act of 1934, the escrow period may only be extended beyond the latest period disclosed in the offering document if the escrow period has not yet terminated and either investors' funds are returned to them or the investors affirmatively confirm in writing their decision to continue their investment before the expiration of the latest disclosed escrow period.
      3. Deposits into the Escrow Account. The Selected Dealer agrees that it shall promptly deliver all monies received from subscribers for the payment of the Securities to the Escrow Agent for deposit in the Escrow Account together with a written account of each sale, which account shall set forth, among other things, the subscriber's name and address, the number of securities purchased, the amount paid therefor, and whether the consideration received was in the form of a check, draft, or money order. All monies so deposited in the Escrow Account are hereinafter referred to as the "Escrow Amount."
      Comment:
      Under Rule 15c2-4 and pursuant to the SEC net capital rules, a $5,000 broker-dealer may not receive cash from its customers. Only $25,000 broker-dealers may accept customers' cash or checks payable to the broker-dealer. All $5,000 broker-dealers whose customers tender cash or incorrectly drawn checks, i.e., checks not payable to the Escrow Agent, must return such payment to the customers and request that payment be made in the proper form.
      4. Disbursements from the Escrow Account. In the event the Escrow Agent does not receive the Minimum deposits totaling $ prior to the termination of the Escrow Period, the Escrow Agent shall refund to each subscriber the amount received from the subscriber, without deduction, penalty, or expense to the subscriber, and the Escrow Agent shall notify the Company/Partnership and the Selected Dealer of its distribution of the funds. The purchase money returned to each subscriber shall be free and clear of any and all claims of the Company/Partnership or any of its creditors.
      In the event the Escrow Agent does receive the Minimum prior to termination of the Escrow Period, in no event will the Escrow Amount be released to the Company/Partnership until such amount is received by the Escrow Agent in collected funds. For purposes of this Agreement, the term "collected funds" shall mean all funds received by the Escrow Agent which have cleared normal banking channels and are in the form of cash.
      Comment:
      Pursuant to the requirements of both Rules 15c2-4 and 10b-9, the SEC requires that in the event the agreed-upon contingency is not met, all or a specified amount of the consideration paid must be promptly returned to each individual subscriber. Funds are not to be returned to the Selected Dealer for delivery to its customers or to the issuer for return to subscribers in the event the contingency is not met. It is the Escrow Agent's duty to directly return such funds to the subscribers. Furthermore, the Escrow Agent may not attach or place a lien on the escrowed funds for its fees until the Minimum is met.
      In offerings where an interest-bearing escrow account has been established, refunds to subscribers may, but are not required to, include each subscriber's pro-rata share of any interest earned while the subscriber's funds were on deposit. Such interest may properly be paid to the broker-dealer, the issuer, or the purchaser. However, appropriate disclosure should be made in the offering document as to whom any interest will be paid. It should be noted that if the interest is to be paid to the broker-dealer, the NASD will consider such payment additional underwriting compensation.
      The Minimum may be met by funds that are deposited from the effective date of the offering up to and including the date on which the contingency must be met, i.e., during the Escrow Period. However, escrow cannot be broken and the offering may not proceed to closing until customer checks have been collected through the normal banking channels in an aggregate amount sufficient to meet the Minimum. The Escrow Agent makes the determination as to when sufficient funds have been deposited and collected to break escrow. If the Minimum is met with checks tendered on the last day of the Escrow Period and, subsequently, such checks fail to clear the banking system, thereby reducing the funds received by the Escrow Agent to an amount less than that necessary to meet the Minimum, the offering contingency has not been met. In this event, the Escrow Agent must promptly return all funds to subscribers.
      In this connection, it should also be noted that purchases made after the Escrow Period has terminated, but prior to the date escrow is broken pending clearance of subscribers' funds, may not subsequently be counted to meet the Minimum should checks tendered prior to the termination of the Escrow Period fail to clear the banking system. Further, under Rule 15c2-4 and Rule 10b-9, a broker-dealer may not substitute its own good check for the check of a customer that has insufficient funds nor otherwise purchase to satisfy the offering contingency unless the broker-dealer is purchasing for investment prior to the termination of the Escrow Period and the offering document discloses the maximum amount of such potential purchase.*
      5. Collection Procedure. The Escrow Agent is hereby authorized to forward each check for collection and, upon collection of the proceeds of each check, deposit the collected proceeds in the Escrow Account. As an alternative, the Escrow Agent may telephone the bank on which the check is drawn to confirm that the check has been paid.
      Any check returned unpaid to the Escrow Agent shall be returned to the Selected Dealer that submitted the check. In such cases, the Escrow Agent will promptly notify the Company/Partnership of such return.
      If the Company/Partnership rejects any subscription for which the Escrow Agent has already collected funds, the Escrow Agent shall promptly issue a refund check to the rejected subscriber. If the General Partner rejects any subscription for which the Escrow Agent has not yet collected funds but has submitted the subscriber's check for collection, the Escrow Agent shall promptly issue a check in the amount of the subscriber's check to the rejected subscriber after the Escrow Agent has cleared such funds. If the Escrow Agent has not yet submitted a rejected subscriber's check for collection, the Escrow Agent shall promptly remit the subscriber's check directly to the subscriber.
      6. Investment of Escrow Amount. The Escrow Agent may invest the Escrow Amount only in such accounts or investments as the Company/Partnership may specify by written notice. The company partnership may only specify investment in (1) bank accounts, (2) bank money-market accounts, (3) short time certificates of deposit issued by a bank, or (4) short-term securities issued or guaranteed by the U S Government.
      Comment:
      Bank accounts, including savings accounts and bank money-market accounts, are the types of investments permitted under Rule 15c2-4 pursuant to SEC staff interpretation. The SEC staff has also indicated it will not recommend any enforcement action under Rule 15c2-4 if the Escrow Agent invests offering proceeds in either short-term certificates of deposit issued by a bank, or short-term securities issued or guaranteed by the U.S. Government. It should be noted that it would be inappropriate for a bank escrow agent to invest in an otherwise permissible investment under Rule 15c2-4 if that investment's maturity date extends beyond the anticipated contingency occurrence date, unless the investments can readily be disposed of for cash by the time the contingency occurs without any dissipation of the offering proceeds invested.
      Certain investments are specifically not permissible within the meaning of Rule 15c2-4:
      • money-market funds;
      • corporate equity or debt securities;
      • repurchase agreements;
      • banker acceptances;
      • commercial paper; and
      • municipal securities.
      7. Compensation of Escrow Agent. The Company/Partnership shall pay the Escrow Agent a fee for its escrow services in an amount of $_____. If it is necessary for the Escrow Agent to return funds to the Purchasers of the Securities, the Company/Partnership shall pay to the Escrow Agent an additional amount sufficient to reimburse it for its actual cost in disbursing such funds. However, no such fee, reimbursement for costs and expenses, indemnification for any damages incurred by the Escrow Agent, or any monies whatsoever shall be paid out of or chargeable to the funds on deposit in the Escrow Account.
      Comment:
      Until and unless the Minimum is reached, the Escrow Agent may not attach or otherwise place a lien on funds deposited in the Escrow Account.

      SUGGESTED LANGUAGE FOR SELECTED DEALER AGREEMENT

      Transmittal of Funds for Deposit Into the Escrow Account

      Comment:
      When an Escrow Account is utilized to meet the requirements of Rule 15c2-4(b), it is suggested that the following language regarding transmittal of subscriber funds to the Escrow Agent for deposit into the Escrow Account be included in the Selected Dealer Agreement. If parallel language is not contained in the Underwriting Agreement, then the managing underwriter may sign the Selected Dealer Agreement and be bound by its terms or the Underwriting Agreement may incorporate by reference the Selected Dealer Agreement.

      Corporate Offerings

      Until the contingency is met, Selected Dealers shall promptly, upon receipt of any and all checks, drafts, and money orders received from prospective purchasers of the shares/units, deliver same to the Escrow Agent for deposit in the Escrow Account by noon of the next business day following the receipt, together with a written account of each purchaser which sets forth, among other things, the name and address of the purchaser, the number of securities purchased and the amount paid therefor. Any checks received which are made payable to any party other than the Escrow Agent, shall be returned to the purchaser who submitted the check and not accepted.

      Comment:
      When an Escrow Account is established to meet the requirements of Rule 15c2-4 (b), the rule requires that investors' funds be transmitted promptly. The SEC has interpreted "promptly" to mean by noon of the next business day following receipt until the Minimum contingency has been met. (See also comment to paragraph 1 of the Standard Form Escrow Agreement regarding the category of broker-dealers that may accept cash.)

      Direct Participation Program Offerings

      The Selected Dealers shall promptly, upon receipt of any and all checks, drafts, and money orders received from prospective purchasers of units, transmit same together with a copy of the executed Subscription Agreement or copy of the signature page of such agreement, stating among other things, the name of the purchaser, current address, and the amount of the investment to: [Insert one or more of paragraphs A-D following, as appropriate].

      Comment:
      Paragraphs A through D following are alternative provisions, one or more of which may be included in the Underwriting and Selected Dealer Agreements depending on the structure of the distribution and the internal supervisory review procedures of participating broker-dealers. Under SEC staff interpretation of Rule 15c2-4, the procedure for transmittal of purchaser payments to the escrow agent for deposit in an offering of direct participation program securities may be accomplished by one of several methods depending on whether: (1) pursuant to a soliciting broker-dealer's internal supervisory procedures, internal supervisory review is conducted at the same location at which subscription documents and checks are received from purchasers; or (2) internal supervisory review is conducted at a different location from that which receives the subscription documents and checks from purchasers; or (3) a "processing broker-dealer," whose responsibilities in the offering include reviewing investor suitability, processing, and documentation of subscriptions and investor funds received, is involved in the distribution process.
      A. the Escrow Agent by noon of the next business day following receipt.
      B. the Escrow Agent by noon of the second business day after the General Partner receives the subscription documents for purposes of a suitability determination, which documents were forwarded to the General Partner by noon of the next business day following receipt of the check by the Selected Dealer.
      C. the Escrow Agent or the Processing Broker-Dealer by the end of the next business day following receipt where internal supervisory review is conducted at the same location at which subscription documents and checks are received and thereafter transmitted to the Escrow Agent by the Processing Broker-Dealer by the end of the second business day following receipt by the Processing Broker-Dealer.
      D. the Final Review Office by the end of the next business day following receipt where internal supervisory review is conducted at a different location at which subscription documents and checks are received, and thereafter transmitted to the Escrow Agent or the Processing Broker-Dealer by the Final Review Office by the end of the next business day following receipt by the Final Review Office and thereafter transmitted to the Escrow Agent by the end of the second business day following receipt by the Processing Broker-Dealer.

      * * * * *

      Incorporation of Escrow Agreement by Reference

      The Selected Dealer agrees that it is bound by the terms of the Escrow Agreement executed by the Underwriter and the Company/Partnership.

      Comment:
      It is suggested that the Selected Dealer Agreement include a provision that will bind the Selected Dealers to the terms of the Escrow Agreement.

      *Other conditions may be included which have been set forth in the offering document.

      *If the amount is significant, consideration should be given to disclosing such potential purchases as a risk factor.


    • 87-60 NASDAQ National Market System Grows to 3,046 Securities With 11 Additions on September 15, 1987

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

      On Tuesday, September 15, 1987, the following 11 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,046:

      Symbol*

      Company

      Location

      ATKM

      Atek Metals Center, Inc.

      Cincinnati, OH

      ACOL

      American Colloid Company

      Arlington Heights, IL

      CPBI

      CPB, Inc.

      Honolulu, HI

      CJSL

      Central Jersey Savings and Loan Association

      East Brunswick, NJ

      CCIMF

      City Resources (Canada) Ltd.

      Vancouver, Canada

      COGNF

      Cognos Incorporated

      Ottawa, Canada

      LABL

      Multi-Color Corporation

      Cincinnati, OH

      PASI

      Pacific Silver Corporation

      Salt Lake City, UT

      PICBF

      Paperboard Industries Corporation

      Toronto, Canada

      SILV

      Silver King Mines, Inc.

      Salt Lake City, UT

      UNEWY

      United Newspapers, Pic.

      London, England

      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.

      NASDAQ/NMS Pending Additions

      Symbol*

      Company

      Location

      AAICA

      Albany International Corporation (Cl A)

      Menands, NY

      CNTX

      Centex Telemanagement, Inc.

      San Francisco, CA

      DKMB

      DKM Broadcasting Corporation

      Atlanta, GA

      EHYC

      Egg Harbor Yacht Company, Inc.

      Egg Harbor City, NJ

      GPRO

      Gen-Probe Incorporated

      San Diego, CA

      ISOE

      ISOETEC Communications, Inc.

      Darien, CT

      POAI

      Properties of America, Inc.

      Williamstown, MA

      SPGLA

      Speigel, Inc. (Cl A)

      Oak Brook, IL

      WHRG

      Watch Hill Retail Group, Inc. (The)

      New York, NY

      VVHTI

      VVheelabrator Technologies, Inc.

      Hampton, NH

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority, and commenced trading in NASDAQ/NMS since August 24, 1987:

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      APOS

      Advanced Polymer Systems, Inc.

      8/26/87

      ACMTA

      AC MAT Corporation (Cl A)

      8/31/87

      HARL

      Harleysville Savings Association

      9/01/87

      SGHB

      Sag Harbor Savings Bank

      9/02/87

      ETCO

      Earth Technology Corporation (USA) (The)

      9/03/87

      HRLD

      Harold's Stores, Inc.

      9/03/87

      VLCM

      ValCom, Inc.

      9/03/87

      The following changes to the list of NASDAQ/NMS securities occurred since August 24, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      TODDA/TODD

      Todd-AO Corp. (The) (Cl A)/Todd-AO Corp. (The)

      8/25/87

      PACCB/PACC

      Provident Life & Accident Insurance Company of America (Cl B)/Provident Life & Accident Insurance Company

      9/01/87

      CMCO/CMCO

      CVN Companies, Inc./C.O.M.B. Company

      9/01/87

      CRFC/UVBK

      Crestar Financial Corporation/United Virginia Bankshares, Inc.

      9/01/87

      DSBC/DSBC

      DS Bancor, Inc./Derby Savings Bank

      9/01/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      ETCC

      Environmental Treatment and Technologies Corporation

      8/25/87

      NCAC

      NCA Corporation

      8/26/87

      ATCO

      Atcor, Inc.

      8/27/87

      PLIN

      Leiner (P.) Nutritional Products Corporation

      8/27/87

      STRL

      Sterling, Inc.

      8/27/87

      TPPS

      Tops Markets, Inc.

      8/27/87

      ARGI

      ARGO Systems, Inc.

      8/28/87

      ELDR

      Elder-Beerman Stores Corporation

      8/28/87

      SHSB

      Southern Home Savings Bank

      8/31/87

      RBAN

      Rainier BancorDoration

      9/01/87

      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) 728-8 192.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-59 Check List of NASD Notices to Members

      TO: All NASD Members and Other Interested Persons

      The following are NASD Notices to Members issued during the fourth quarter of 1986, and the first and second quarters of 1987. Requests for copies of any notice should be accompanied by a self-addressed mailing label and directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006-1506

      Fourth Quarter—1986

      Notice Number

      Date

      Topic

      86-67

      October 2, 1986

      NASDAQ National Market System Grows To 2,580 Securities With 23 Voluntary Additions on October 7, 1986

      86-68

      October 6, 1986

      Proposed Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Relating to Advertising and Sales Literature for Direct Participation Programs

      86-69

      October 10, 1986

      Amendments to NASD Rules on Short Sales Become Effective October 15, 1986

      86-70

      October 15, 1986

      NASDAQ National Market System Grows To 2,602 Securities With 12 Voluntary Additions On October 21, 1986

      86-71

      October 15, 1986

      Holiday Settlement Schedule - November 1986

      86-72

      October 15, 1986

      SIPC Trustee Appointed -Norbay Securities, Inc. 3635 BeU Boulevard Bayside, New York 11361

      86-73

      October 16, 1986

      Effectiveness of Exemption from NASD Board of Governors' Free-Riding Interpretation for Conversions of Savings And Loan Associations and Certain Other Organizations

      86-74

      October 30, 1986

      Proposed Amendments to Article III, Section 19(f) and Section 33(d) of the NASD Rules of Fair Practice and Article X, Section 6 of the NASD By-Laws

      86-75

      October 30, 1986

      NASDAQ National Market System Grows To 2,638 Securities With 25 Voluntary Additions on November 4, 1986, and Eight Mandatory Inclusions on November 11, 1986

      86-76

      November 10, 1986

      South African Sanctions Act

      86-77

      November 10, 1986

      SIPC Trustee Appointed -John Franklin <5c Associates 1975 Hempstead Turnpike East Meadow, New York 11554

      86-78

      November 13, 1986

      NASDAQ National Market System Grows To 2,658 Securities With 21 Voluntary Additions on November 18, 1986

      86-79

      November 13, 1986

      Quarterly Checklist of Notices to Members

      86-80

      November 14, 1986

      Proposed Changes to the Financial Recordkeeping and Reporting of Currency and Foreign Transactions

      86-81

      November 21, 1986

      Amendments to Appendix F Regarding Freely Tradable Partnership Units Effective Immediately

      86-82

      November 21, 1986

      1987 Schedule of Holidays

      86-83

      December 1, 1986

      Proposed New NASD Rule of Fair Practice Prohibiting Members From Effecting Securities Transactions During Trading Halts

      86-84

      November 26, 1986

      NASDAQ National Market System Grows To 2,687 Securities With 30 Voluntary Additions on December 2, 1986

      86-85

      December 5, 1986

      Request for Comments on Proposed Amendments to Article II, Sections 3, 4 And 5 of the NASD By-Laws

      86-86

      December 15, 1986

      NASDAQ National Market System Grows To 2,709 Securities With 26 Voluntary Additions on December 16, 1986

      86-87

      December 16, 1986

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

      86-88

      December 19, 1986

      Effect of the Tax Reform Act of 1986 on NASD Qualifications Examinations

      86-89

      December 29, 1986

      NASDAQ National Market System Grows To 2,734 Securities With 30 Voluntary Additions on January 6, 1987

      First Quarter—1987

      Notice Number

      Date

      Topic

      87-1

      January 6, 1987

      Martin Luther King, Jr.'s Day: Trade Date-Settlement Date Schedule

      87-2

      January 7, 1987

      Adoption of Amendments to Article III, Section 28 of the NASD Rules of Fair Practice Regarding Securities Accounts Of Associated Persons at Non-NASD Members

      87-3

      January 14, 1987

      NASDAQ National Market System Grows To 2,729 Securities With 17 Voluntary Additions on January 20, 1987

      87-4

      January 21, 1987

      Presidents' Day: Trade Date-Settlement Date Schedule

      87-5

      January 29, 1987

      NASDAQ National Market System Grows To 2,754 Securities With 24 Voluntary Additions on February 3, 1987

      87-6

      January 30, 1987

      Request for Comments on Proposed Amendments to the NASD's Rules of Practice and Procedure for the Small Order Execution System (SOES)

      87-7

      February 10, 1987

      NASDAQ National Market System Grows To 2,775 Securities With 17 Voluntary Additions on February 17, 1987

      87-8

      February 17, 1987

      South African Sanctions Act Regulations

      87-9

      February 19, 1987

      Proposed Amendments to Article XIV of The NASD By-Laws and Article V, Sections 1 and 2 of the NASD Rules of Fair Practice Concerning Disciplinary Sanctions

      87-10

      February 25, 1987

      Proposed Amendment to Section 66 of The NASD Uniform Practice Code Regarding Prompt Settlement of Syndicate Accounts

      87-11

      February 25, 1987

      NASDAQ National Market System Grows To 2,788 Securities With 17 Voluntary Additions on March 3, 1987

      87-12

      February 26, 1987

      Adoption of Amendment to Schedule G Of the NASD By-Laws

      87-13

      February 27, 1987

      Proposed Amendments to Article II, Sections 3, 4 and 5 of the NASD By-Laws

      87-14

      March 2, 1987

      Request for Comments on Proposed Amendments to Article I, Section (c) of The NASD By-Laws and Schedule C to The NASD By-Laws Relating to the Definition of the Term "Branch Office"

      87-15

      March 6, 1987

      Proposed Amendments to Article III, Sections 21(b) and 41 of the NASD Rules Of Fair Practice and the Interpretation Of the Board of Governors Concerning Short Sales

      87-16

      March 10, 1987

      Request for Comments on Proposed Amendments to Article IV, Sections 3 And 4 of the NASD By-Laws and Article IV, Section 5 of the NASD Rules of Fair Practice

      87-17

      March 11, 1987

      NASDAQ National Market System Grows To 2,802 Securities With 20 Voluntary Additions on March 17, 1987

      87-18

      March 25, 1987

      Good Friday: Trade Date-Settlement Date Schedule

      87-19

      March 27, 1987

      Federal Regulation of Government Securities Brokers and Dealers Under the Government Securities Act of 1986

      Second Quarter—1987

      Notice Number

      Date

      Topic

      87-20

      April 1, 1987

      Request for Comments on Proposed Amendment to Article V, Section 1 of The NASD Rules of Fair Practice

      87-21

      April 2, 1987

      NASDAQ National Market System Grows To 2,847 Securities With 37 Voluntary Additions on April 7, 1987

      87-22

      April 13, 1987

      Amendments to Resolution of the Board Of Governors Concerning Its Policy on Publication of Disciplinary Actions

      87-23

      April 14, 1987

      Effectiveness of Amendment to Section 66 of the NASD Uniform Practice Code Regarding Prompt Settlement of Syndicate Accounts

      87-24

      April 14, 1987

      Request for Comments on Proposed Amendments to Article III, Section 35 of The NASD Rules of Fair Practice

      87-25

      April 14, 1987

      Request for Comments and Suggestions On Regulation of Market Making by Affiliates of Issuers

      87-26

      April 14, 1987

      NASDAQ National Market System Grows To 2,850 Securities With 12 Voluntary Additions on April 21, 1987

      87-27

      April 30, 1987

      NASDAQ National Market System Grows To 2,873 Securities With 19 Voluntary Additions on May 5, 1987, and Four Mandatory Inclusions on May 12, 1987

      87-28

      May 4, 1987

      Memorial Day: Trade Date-Settlement Date Schedule

      87-29

      May 14, 1987

      NASDAQ/MSE: Unlisted Trading Privileges

      87-30

      May 28, 1987

      NASDAQ National Market System Grows To 2,893 Securities With 21 Voluntary Additions on May 19, 1987

      87-31

      May 28, 1987

      Mark-Ups and Mark-Downs on Zero-Coupon Securities

      87-32

      June 1, 1987

      Request for Comments on Shareholder Voting Rights Proposal for NASDAQ Companies

      87-33

      June 1, 1987

      Forms BD and U-4 Revisions, Government Securities Brokers and Dealers Registration Requirements

      87-34

      June 2, 1987

      NASDAQ National Market System Grows To 2,917 Securities With 28 Voluntary Additions on June 2, 1987

      87-35

      June 9, 1987

      NASDAQ National Market System Grows To 2,940 Securities With 23 Voluntary Additions on June 16, 1987

      87-36

      June 12, 1987

      Split Expiration of Index Options and Futures on June 19, 1987

      87-37

      June 16, 1987

      Proposed Amendment to Article I, Section (c) of the NASD By-Laws Relating to the Definition of the Term "Branch Office"

      87-38

      June 17, 1987

      Independence Day: Trade Date- Settlement Date Schedule

      87-39

      June 19, 1987

      Request for Comments on Addition of a Corporate Securities Limited Representative Category of Registration Under Schedule C to the NASD By-Laws

      87-40

      June 22, 1987

      Request for Comments on a Proposed Amendment to Article III, Section 35 of The NASD Rules of Fair Practice Concerning Testimonials

      87-41

      June 29, 1987

      Proposed Amendments to Definitions of "Branch Office" and "Office of Supervisory Jurisdiction" Under the NASD By-Laws, Schedule C to the By-Laws, and the Rules of Fair Practice

    • 87-58 Amendments to SEC Rule 15c3-3 Regarding Treatment of Hold-in-Custody Repurchase Agreements

      TO: All NASD Members and Other Interested Persons

      BACKGROUND

      The Securities and Exchange Commission (SEC) has amended its customer protection rule (Rule 15c3-3) under the Securities Exchange Act of 1934, in connection with repurchase (repo) agreements with customers when the broker-dealer retains custody of any securities subject to these agreements.

      The amendments become effective January 31, 1988. However, between July 25, 1987, and January 31, 1988 (the "interim period"), all broker-dealers must comply with applicable provisions of the U.S. Treasury Department's rule that was adopted on July 24, 1987. The Treasury's rule applies to all broker-dealers engaged in hold-in-custody repo activities using government securities as the collateral underlying the repo agreements.

      The text of the SEC's amendments as reprinted in the Federal Register, dated August 14, 1987, is attached.

      SUMMARY OF AMENDMENTS

      Highlights of the SEC's amendments include the requirements that broker-dealers:

      • Obtain repo agreements in writing. Note: The Treasury's rule for the interim period requires that these agreements be obtained for new customers by October 31, 1987, and for existing customers by January 31, 1988. An "existing customer" is defined as one with whom the broker-dealer has entered into a repo transaction between January 1, 1986, and July 25, 1987.
      • Confirm in writing, when a transaction is initiated or when a substitution occurs, the specific securities that are the subject of the repo agreement,
      • Disclose that the Securities Investor Protection Corporation (SIPC) has taken the position that coverage for repo agreement participants is not available under the Securities Investor Protection Act of 1970.
        Note: The Treasury's rule for the interim period requires that this disclosure must be a separate document and contain (1) the statement that SIPC coverage for repo participants is not available and (2) the modified disclosure statement regarding substitution of securities. The disclosure statements must be provided by August 31, 1987, for counterparties engaged in repo transactions initiated before August 31, 1987, and ending thereafter. For counterparties initiating repo transactions on or after August 31, 1987, disclosure must be mailed to the counterparties no later than the day the transaction is initiated. The disclosure document may not be printed on the confirmation.
      • Maintain possession or control of securities subject to hold-in-custody repo agreements, except that possession or control is not required if certain conditions are met.

      * * * * *

      Questions concerning this notice may be directed to I. William Fishkind, Associate Director, NASD Financial Responsibility, at (202) 728-8405.

      Sincerely,

      John E. Pinto, Jr.
      Senior Vice President
      Compliance

      Attachment

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-24778; File No. S7-21-86]

      Customer Protection Rule

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rule.

      SUMMARY: The Securities and Exchange Commission ("Commission") is adopting amendments to its customer protection rule under the Securities Exchange Act ("Act") in connection with repurchase agreements where the broker-dealer agrees to retain custody of the securities that are subject to those agreements ("hold in custody repurchase agreements"). The amendments to the rule will require registered broker-dealers to obtain repurchase agreements in writing, to make specific disclosures regarding certain risks associated with hold in custody repurchase transactions and to disclose that the Securities Investor Protection Corporation ("SIPC") has taken the position that coverage under the Securities Investor Protection Act of 1970 is not available to repurchase agreement participants. The amendments further require registered broker-dealers to maintain possession or control of securities subject to hold in custody repurchase agreements, except that possession or control during the trading day is not required if certain conditions are met.

      EFFECTIVE DATE: January 31, 1988.

      FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, (202) 272-2904, Julio A. Mojica, (202) 272-2372, or Michael P. Jamroz, (202) 272-2398. Division of Market Regulation, 450 5th Street NW., Washington, DC 20549.

      SUPPLEMENTARY INFORMATION: In September of 1988, the Commission proposed amendments to its financial responsibility rules relating to repurchase and reverse repurchase agreements. Those proposed amendments were in response to the failures of several government securities dealers which caused substantial harm to public investors through fraudulent prnctiens.1 The proposal included amendments to the Commission's net capital rule, securities count and recordkeeping rules and customer protection rule. Securities Exchange Act Rule 15c-3. Subsequently, Congress enacted the Government Securities Act of 1986 ("CSA"). which authorized the Department of the Treasury ('Treasury") to adopt financial responsibility and customer protection rules for all brokers and dealers of U.S. government securities, including those firms currently registered with the Commission. The Treasury has since adopted rules that, in large part, incorporate existing Commission financial responsibility rules. The Treasury's customer protection rule requires compliance with Rule 15c3-3, but modified the provisions that were proposed in the September Release. In Securities Exchange Act Release No. 24554 ("the June Release"), the Commission proposed for comment amendments to Rule 15c3-3 thai would substantially conform to the Treasury's temporary customer protection rule. Today, the Commission adopts those amendments with certain modifications to conform to the Treasury's customer protection rule as adopted in final form on July 24, 1987.2

      Unrelated to these changes, the Commission is deleting the word "last" from the wording of Item 9 of the Formula for Determination of Reserve Requirements in Rule 15c3-3a to correct »n error in the Code of Federal Regulations.

      I. Discussion

      The proposed amendments to Rule 15c3-3 announced in September were made in response to, among other things, fraudulent practices of both unregistered and registered government securities broker-dealers involving repurchase agreements where the broker-dealers retained possession of the securities underlying the repurchase agreements ("hold in custody repo"). In a repurchase agreement ("repo"), the broker-dealer sells securities and agrees to repurchase the same or similar securities at a later date. In a hold in custody repo, the broker-dealer receives the funds from the sale of the securities but retains control of the securities. Some of the failed broker-dealers allegedly used those securities in their business although they had been sold to the repo counterparties. Those counterparties will be exposed to loss if coverage under the Securities Investor Protection Act of 1970 ("SIPA") is not available.3 The position of the Securities Investor Protection Corporation is that persons engaging in repurchase and reverse repurchase agreements are not customers of the broker-dealer within the meaning of SIPA and are therefore not covered under SIPA.4

      The amendments to Rule 15c3-3 proposed in September would have required broker-dealers that enter into hold in custody repos to: (i) Disclose the rights and liabilities of the parties to hold in custody repos including a statement that SIPC has taken the position that SIPA coverage it not available to repo counterparties; (ii) disclose to the counterparty which securities are being held on his behalf under the hold in custody repo; and (iii) maintain possession and control of those securities free of lien, except for clearing liens imposed during the trading day for hold in custody renos exceeding $1 million.

      Subsequent to the Commission's original proposal, the Treasury, pursuant to authority recently granted to it under the CSA. adopted temporary financial responsibility rules for all brokers and dealers in U.S. government securities in May of 1987. The Treasury's temporary customer protection rule altered the requirements proposed by the Commission. In essence, the Treasury's temporary regulation included the Commission's amendments to Rule 15c3-3 except that: (i) The Treasury rule required broker-dealers to obtain written hold in custody repurchase agreements and to make specific disclosures in those agreements regarding the broker-dealer's use of securities obtained pursuant to hold in custody repos during the trading day; and (ii) the Treasury rule did not require intra-day possession or control of securities that were subject to hold in custody repos of under $1 million on any day on which the broker-dealer obtained the specific prior consent of the counterparty to substitution. The Commission's original proposal would have required registered broker-dealer* to maintain continuous possession or control of securities subject to hold in custody repos under $1 million.

      In the June Release, the Commission proposed for comment alternative amendments to Rule 15c3-3 relating to the treatment of hold in custody repos. One version was the same as the Treasury's temporary rule. The other version differed from the Treasury's rule only with respect to hold in custody rcpos under $1 million. The second alternative contained a continuous possession or control requirement for securities obtained under those agreements.

      The Commission received one comment letter in response to its proposal.5 In its letter, the Public Securities Association ("PSA") objected to the required confirmation of specific securities subject to hold in custody repos and the disclosure of the market value of those securities. The PSA also opposed special restrictions on hold in custody repurchase transactions under $1 million.

      In designing its proposed amendments to the customer protection rule, the Commission intended to ameliorate, among other things, two weaknesses observed in the hold in custody repo market. One concern was the duplicative use of securities obtained by broker-dealers under hold in custody repos. The use of securities that were already subject to hold in custody repos was facilitated by the broker-dealers' failure to designate specific securitriea to specific repos. In confirming specific securities, this allocation will have to be performed and the double use of securities will be inhibited.

      The other concern was the apparent lack of understanding of hold in custody repo counterparties of their rights and liabilities. To some extent, this misunderstanding was exacerbated by the unsettled legal status of repos. As noted above, SIPC has taken the position that repos are secured loans and not purchases and sales of securities protected under SIPA. If hold in custody repos are secured lending transactions, whether and when a perfected security interest attaches are questions of local law, the answers to which are not always clear. To the extent an interest in securities subject to a hold in custody repo exists, counterparties may be frustrated in submitting claims against those securities because they are not told which securities they purchased under the repo. In many instances, broker-dealers confirm those transactions by submitting a confirmation to the counterparty that states that they have purchased "various" government securities. Because the counterparty never receives the securities, it may never become aware of which securities are subject to the agreement. In some cases, even the broker-dealer is not aware of which securities are subject to the agreement. As mentined above, this may occur when the broker-dealer fails to make the designation necessary to confirm specific securities.

      The amendments to Rule 15c3-3 require broker-dealers to make basic disclosures to hold in custody repo counterparties regarding their rights and liabilities under the agreement. The amendments require that the broker-dealer inform the counterparty of SIPC's position and state to the counterparty that its securities may be subject to clearing liens during the trading day.

      The amendments also require the broker-dealer to disclose the identity of the specific securities that are the subject of the agreement so the counterparty will be able to pursue any legal interest it may have in those securities in the event that the broker-dealer defaults. The broker-dealer will also be required to include the market value of those securities on the confirmation so the conterparty can more easily determine if sufficient securities have been allocated to it under the agreement. The disclosure of market value is particularly important because it is evident that in some sectors of the repo market, counterparties are measuring credit exposure by comparing the amount of funds invested in the repurchase transaction to the face value of government securities involved. The disclosure of market value of the securities subject to the repo emphasizes to those counterparties that market value, not face value, is the appropriate measure for determining credit exposure.

      With respect to hold in custody repo transactions under $1 million, the Commission believes that special treatment for those transactions is not appropriate at this time. When the amendments to Rule 15c3-3 were proposed for comment in September 1986, the Commission sought to achieve its regulatory objectives with a minimum burden on the repo marketplace. The Commission learned that, in order to maximize the efficiency of the settlement process for U.S. government securities, broker-dealers needed to be able to substitute securities subject to hold in custody repos. In order for those substitutions to be performed, broker-dealers had to combine securities subject to hold in custody repos with other government securities in their clearance accounts and submit all of those securities to clearing liens during the day. However, the Commission was also aware of instances where securities subject to hold in custody repos were misappropriated. The Commission therefore proposed that broker-dealers obtain possession and control of securities that were the subject of hold in custody repo agreements exceeding $1 million at the end of each trading day. Because the Commission was concerned that smaller investors might not fully appreciate the risks involved with hold in custody repo transactions, the Commission propsed that small hold in custody repo transactions be subject to a continuous possession or control requirement.

      When the Commission reproposed its amendments in the alternative in June 1987, the amendments included significant modifications to the Commission's original proposal that were included in the recently adopted Treasury's temporary rule. Both alternatives required that hold in custody repo agreements be written and include specific disclosures regarding SIPC coverage and the effects of consent to substitution by the counterparty. The alternatives differed in that one would have required continuous possession or control of securities subject to hold in custody repos under $1 million while the other proposed, in a manner identical to that required under the Treasury's temporary rule, that those securities could be used by the broker-dealer provided that prior written or oral consent of the counterparty had been received on the day of use.

      The release requested comment on the enforceability of an oral consent provision but, at the tame time, the Commission was uncertain of whether the benefit obtained by a continuous possession or control requirement was worth the cost to the industry of treating smaller hold in custody repos differently. The Commission was aware that broker-dealers may incur a significant recordkeeping cost in identifying those transactions. Furthermore, a continuous possession or control requirement may hinder the settlement process if the broker-dealer is unable to effect substitutions. The Commission also understands that many small hold in custody repos are entered into by large, sophisticated investors. Since hold in custody repos often represent temporary investments of available cash balances, the size of the repo is often more a function of available funds than the net worth of the investor. Finally, the Commission was concerned that the stricter segregation requirements might result in many firms refusing to effect small hold in custody repo transactions.

      Some of the Commission's concerns have been addressed by modifications to its original proposal. The amendments, as adopted, require explicit disclosures regarding the risks of entering into hold in custody repos to be made in a written agreement. The counterparty will be informed of the ramifications of his consent to substitution and the exposure of his securities to clearing liens. Moreover, the Commission believes that the requirement that firms segregate hold in custody securities every night and confirm the specific securities employed in hold in custody repos should serve to protect against the double use of those securities. In light of all of the considerations, the Commission has determined that a separate standard for hold in custody repos under $1 million is not appropriate.

      The Commission remains concerneu about the use of free credit balances by means of hold in custody repurchase agreements. In some instances, broker-dealers have characterized free credit balances as repurchase agreements in an apparent attempt to avoid depositing those free credit balances in tne Special Reserve Bank Account for the Exclusive Benefit of Customers ("Reserve Account") under Rule 15c3-3(e).6 The Commission believes that the written agreement requirement will inhibit this practice and make smaller repo participants more conscious of the risks involved in the transaction. However, the Commission's view is thai if the broker or dealer enters into a hold in custody repurchase agreement with a retail customer who has a preexisting free credit balance with the broker or dealer, the liability of the broker or dealer will ordinarily be considered to be a free credit balance for purposes of Rule 15c3-3. Customers that conduct their business with the broker-dealer on a delivery versus payment basis would not be considered retail customers for purposes of this interpretation. The Commission will continue to monitor this area and may consider imposing separate restrictions on smaller hold in custody repos in the future. The Commission has selected an effective date of January 31, 1988, to coincide with the effective date of the Treasury rule adopted in final form July 24,1987. Between July 25, 1987 and January 31, I960 registered broker-dealers must comply with applicable provisions of the Treasury rule.

      II. Summary of Final Regulatory Flexibility Analysis

      The Commission has prepared a Final Regulatory Flexibility Analysis in accordance with 5 U.S.C. section 604 regarding the amendments to Rule 15c3-3. The Analysis notes that the objective of the amendments is to further the purposes of the various financial responsibility rules, which are designed to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers and to require broker-dealers to maintain such records as necessary or appropriate in the public interest or for the protection of investors. The Analysis states that the amendments would subject small broker-dealers to additional recordkeeping and disclosure requirements. The Analysis states that the Commission did not receive any comments concerning the Initial Regulatory Flexibility Analysis. A copy of the Final Regulatory Flexibility Analysis may be obtained by contacting Michael P. Jamroz. Division of Market Regulation. Securities and Exchange Commission, Washington, DC 20549. (202) 272-2398.

      III. Statutory Authority

      Pursuant to the Securities Exchange Act of 1834 and, particularly, sections 15(c)(3), 17 and 23 thereof, 15 U.S.C. 78o(c)(3), 78q. and 78w, the Commission is adopting amendments to 24O.15c3-3 of Title 17 of the Code of Federal Regulations in the manner set forth below.

      List of Subjects in 17 CFR Part 240

      Securities.

      Text of Amendments

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

      PART 240-OEWERAL RULES AND REGULATIONS SECURITIES EXCHANGE ACT OF 1S34

      1. The authority citation for Part 240 continues to read as follows:
      Authority: Sec. 23. 48 Stat. 901. as amended: 15 U.S.C. 78w * * *. Section 240.15c3-3 is also issued under secs. 15(c) (3) and 17(a). 15 U.S.C. 78o(c) (3) and 78q(a)
      2. By adding paragraph (b)(4) to i §240.15c3-3 as follows:

      § 240.15C3-3 Customer protection reserves and custody of securities

      * * * * *

      (b) * * *
      (4)
      (i) Notwithstanding paragraph (k)(2)(i) of this section, a broker or dealer that retains custody of securities that are the subject of a repurchase agreement between the broker or dealer and a counterparty shall:
      (A) Obtain the repurchase agreement in writing;
      (B) Confirm in writing the specific securities that are the subject of a repurchase transaction pursuant to such agreement a", the end of the trading day on which the transaction is intitiated and at the end of any other day during which other securities are substituted if the substitution results in a change to issuer, maturity date, par amount or coupon rate as specified in the previous confirmation;
      (C) Advise the counterparty in the repurchase agreement that the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 do not protect the counterparty with respect to the repurchase agreement;
      (D)Maintain possession or control of securities that are the subject of the agreement.
      (ii) For purpose of this paragraph (b)(4), securities are in the broker's or dealer's control only if they are in the control of the broker or dealer within the meaning of § 240.15c3-3 (c)(1). (c)(3), (c)(5) or(c)(6) of this title.
      (iii) A broker or dealer shall not be in violation of the requirement to maintain possession or control pursuant to paragraph (b)(4)(i)(D) during the trading day if:
      (A) In the written repurchase agreement, the counterparty grants the broker or dealer the right to substitute other securities for those subject to the agreement; and
      (B) The provision in the written repurchase agreement governing the right, if any, to substitute is immediately preceded by the following disclosure statement, which must be prominently displayed:

      Required Disclosure

      The [seller] is not permitted to substitute other securities for those subject to this agreement and therefore must keep the [buyers] securities segregated at all times, unless in this agreement the [buyer] grants the [seller] the right to substitute other securities. If the [buyer] grants the right to substitute, this means that the [buyer's] securities will likely be commingled with the [seller's] own securities during the trading day. The [buyer] is advised that, during any trading day that the [buyer's] securities are commingled with the [seller's| securities, they will be subject to liens grantt-d by the [seller] to its clearing bank and m;iy be used by the [seller] for deliveries on other securities transactions Whenever the securities are commingled, the [seller's] ability to resegregate substitute securities for the [buyer] will be subject to the [seller's] ability to satisfy the clearing lien or to obtain substitute securities.

      (iv) A confirmation issued in accordance with paragraph (b)(4)(i)(B) of this section shall specify the issuer, maturity date, coupon rate, par amount and market value of the security and shall further identify a CUSIP or mortgage-backed security pool number, as appropriate, except that a CUSIP or a pool number is not required on the confirmation if it is identified in internal records of the broker or dealer that designate the specific security of the counterparty. For purposes of this paragraph (b)(4)(iv). the market value of any security that is the subject of the repurchase transaction shall be the most recently available bid price plus accrued interest, obtained by any reasonable and consistent methodology.
      (v) This paragraph (b)(4) shall not apply to a repurchase agreement between the broker or dealer and another broker or dealer (including a government securities broker or dealer), a registered municipal securities dealer, or a general partner or director or principal officer of the broker or dealer or any person to the extent that his claim is explicitly subordinated to the claims of creditors of the broker or dealer.
      3. By amending 5 24O.15c3-3a by revising item 9 as follows:

      $240.15c3-3a Exhibit A—formula for determination of reserve requirement of brokers and dealers under § 240.15c3-3.

      * * * * *

       

      Debits

      Credits

      9 Market value of securities which are in transfer in excess of 40 calendar days and have not been confirmed to be in transfer by the transfer agent or the issuer during the 40 days.

       

      XXX

      By the Commission.

      August 6, 1987.

      Jonathan G. Katz,
      Secretary.

      [IFR Doc. 87-18478 Filed 8-1J-87; 8:45 am]

      BILLING CODE 8010-O1-M


      1See Security Exchange Act Release No. 23602 (September 4, 1986). 51 FR 3T8M (September 15, 1-1986) ("September Release").

      252 FR 27910 (July 24, 1987).

      3Under section 9(a) of SIPA. advances for cuf tomer claims are limited to $100,000 for cash claims and $500,000 for claim« for securities. To the extern the claims of repo counterparties exceed those limits, those counterparties will be exposed to loss even if SIPC coverage is extended.

      4The United States District Court for the District of New Jersey decided in Cohen v. Army Moral Support Fund (in re Bevill. Bresler and Schulmon). Adv. Proc No. 85-21-3 (slip op.) (D N ) Oct 23. 1966). that repo transaction* were purchases and sales rather than secured loans. The practical effect of this decision was to extend coverage under the Securities Investor Protection Act to repo participants within that jurisdiction. A final order in that case, however, has not yet been entered and. therefor*, no appeal has been possible from the Court's determination.

      5The Department of Treasury received 21 comiaent letten which the Commission oonsidered in evaluating this proposal. The Treasury comment letters have been placed in lh« CoaaMssion's public files.

      6Rule 15c3-3(e) require! broker-dealers to deposit in the Reserve Account an amount at computed en a periodic bant under the Rule 15c3-3a Formula for Determination of He»er»e Requirement ("Reserve Formula**). Under the Reserve Formula, the amount of the required deposit is determined by comparing the free credit balances and other funds obtained from customers to the amount by which the broker-dealer finances customer activities through the use of its own funds. Because the Commission has not taken the position that repo participants are "customers" for purposes of Rule 15c3-3. funds obtained in a repo wouid not be included in toe Reserve Formula unless customer securities were used in the repo.


    • 87-57 NASDAQ National Market System Grows to 3,039 Securities With 23 Additions on September 1, 1987

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

      On Tuesday, September 1, 1987, the following 23 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,039:

      Symbol*

      Company

      Location

      APWRA

      Applied Power, Inc. (Cl A)

      Butler, WI

      AUTO

      Autolnfo, Inc.

      Lake Success, NY

      LABB

      Beauty Labs, Inc.

      Lake Success, NY

      CISIF

      C.I.S. Technologies, Inc.

      Tulsa, OK

      CELG

      Celgene Corporation

      Warren, NJ

      CFIX

      Chemfix Technologies, Inc.

      Metairie, LA

      CFIXW

      Chemfix Technologies, Inc. (Wts)

      Metairie, LA

      CHCO

      City Holding Company

      Charleston, WV

      POWR

      Environmental Power Corporation

      Boston, MA

      FAST

      Fastenal Company

      Winona, MN

      FESX

      First Essex Bancorp, Inc.

      Lawrence, MA

      FNPC

      First National Pennsylvania Corporation (The)

      Erie, PA

      LXXX

      Lexington Group, Inc. (The)

      New York, NY

      MIDD

      Middleby Corporation (The)

      Morton Grove, IL

      MNBC

      Miners National Bancorp, Inc.

      Pottsville, PA

      PTMI

      Precision Target Marketing, Inc.

      Lake Success, NY

      PTMIW

      Precision Target Marketing, Inc.(Wts)

      Lake Success, NY

      PBKC

      Premier Bankshares Corporation

      Tazewell, VA

      SNLFA

      S.N.L. Financial Corporation (Cl A)

      Salt Lake City, UT

      SFGI

      Security Financial Group, Inc.

      St. Cloud, MN

      TRCO

      Trico Products Corporation

      Buffalo, NY

      UNSA

      United Savings and Loan Association

      Greenwood, SC

      VLABW

      Vipont Pharmaceutical, Inc. (Wts)

      Fort Collins, CO

      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.

      NASDAQ/NMS Pending Additions

      Symbol*

      Company Name

      Location

      CBAM

      Cambrex Corporation

      Bayonne, NJ

      CSFCB

      Citizens Savings Financial Corporation (C1B)

      Miami, FL

      ETCO

      Earth Technology Corporation (USA) (The)

      Long Beach, CA

      IMKTA

      Ingles Markets, Incorporated (Cl A)

      Asheville, NC

      LABL

      Multi-Color Corporation

      Cincinnati, OH

      JMPC

      Peters (J. M.) Company, Inc.

      Newport Beach, CA

      PBKS

      Provident Bankshares Corporation

      Baltimore, MD

      WSGI

      Williams Service Group, Inc.

      Stone Mountain, GA

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority, and commenced trading in NASDAQ/NMS since August 7, 1987:

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      TDAT

      Teradata Corporation

      08/11/87

      XSCR

      Xscribe Corporation

      08/11/87

      CRLDO

      Crosslands Savings, F.S.B. (Ser B Pfd)

      08/12/87

      ETEX

      Eastex Energy, Inc.

      08/12/87

      ENTC

      Entronics Corporation

      08/12/87

      MFGR

      Morsemere Financial Group, Inc.

      08/13/87

      DOMN

      Domain Technology, Incorporated

      08/14/87

      BTHL

      Bethel Bancorp

      08/19/87

      TLMD

      Telemundo Group, Inc.

      08/19/87

      JEPS

      Jepson Corporation (The)

      08/20/87

      MCAWA

      McCaw Cellular Communications, Inc. (CIA)

      08/21/87

      The following changes to the list of NASDAQ/NMS securities occurred since August 7, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      MCBKA/MCBKA

      Merchants Capital Corporation (Cl A)/Merchants Bank of Boston, A Cooperative Bank (Cl A)

      08/10/87

      MCBKB/MCBKB

      Merchants Capital Corporation Cl B)/Merchants Bank of Boston, A Cooperative Bank (Cl B)

      08/10/87

      ELXSF/ELXS

      ELXSI, Corporation/ELXSI, Ltd.

      08/12/87

      CRCT/OJAY

      Crescott, Inc./Orange Julius International, Inc.

      08/17/87

      OMBK/FFSA

      OmniBank of Connecticut, Inc./ First Federal Savings, F.A.

      08/21/87

      SCFB/SCFB

      South Carolina Federal Corporation/ South Carolina Federal Savings Bank

      08/21/87

      PREV/PREV

      Revere Fund, Inc. (The)/Revere AE Capital Fund, Inc. (The)

      08/24/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      MRCH

      Merchants Group, Inc.

      08/07/87

      ZNAT

      Zenith National Insurance Corporation

      08/10/87

      DVRY

      DeVry, Inc.

      08/11/87

      ECIN

      Electronics, Missiles & Communications, Inc.

      08/11/87

      NYCQE

      New York City Shoes, Inc.

      08/11/87

      ITELN

      Itel Corporation (C1B Pfd)

      08/13/87

      TRUS

      Trust America Services Corporation

      08/13/87

      MMIC

      Monolithic Memories, Inc.

      08/14/87

      TIPT

      Tipton Centers, Inc.

      08/17/87

      AAGC

      All American Gourmet Company

      08/18/87

      BPII

      BPI Systems, Inc.

      08/18/87

      GENA

      General Automation, Inc

      08/18/87

      MTML

      Metromail Corporation

      08/18/87

      RE1TS

      Real Estate Investment Trust of California

      08/19/87

      LAZB

      La-Z-Bov Chair Company

      08/20/87

      CLCH

      Clear Channel Communications, Inc.

      08/21/87

      TRMW

      Triangle Microwave, Inc.

      08/24/87

      Any 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.

      Sincerely,

      Lynn Nellius
      Secretary

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      GLBC/GLFS

      Great Lakes Bancorp/ Great Lakes Bancorp

      7/29/87

      IFSIA/IFSIA

      Interface, Inc. (Cl A)/Interface Flooring Systems, Inc. (CIA)

      7/31/87

      DYAN/FAAA

      Dyansen Corporation/Fine Arts Acquistions, Ltd.

      8/04/87

      DYANW/FAAAW

      Dyansen Corporation (Wts)/Fine Arts Aequistions, Ltd. (Wts)

      8/04/87

      REGB/MSBK

      Regional Bancorp, Inc./Medford Savings Bank

      8/04/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      SCOAP

      Hills Stores Company (Pfd)

      7/27/87

      HFBF

      Home Federal Savings Bank Florida, F.S.B.

      7/27/87

      AMRE

      AMRE, Inc.

      7/28/87

      CLEV

      Clevite Industries, Inc.

      7/28/87

      CLEVW

      Clevite Industries, Inc. (Wts)

      7/28/87

      MTBC

      Metrobanc Federal Savings Bank

      7/28/87

      ZBSTQ

      ZZZZ Best Company, Inc.

      7/28/87

      ZBSWQ

      ZZZZ Best Company, Inc. (Wts)

      7/28/87

      FSBF

      First Savings Bank of Florida, F.S.B.

      7/31/87

      PMCO

      Pan American Mortgage Corporation

      8/03/87

      CMRK

      Caremark, Inc.

      8/04/87

      MODX

      Modulaire Industries

      8/04/87

      BYOU

      Bayou Resources, Inc.

      8/05/87

      SITVY

      Southbrook International Television Company, Plc.

      8/07/87

      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.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-56 Labor 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, September 7, 1987, 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 28

      September 4

      September 9

      31

      8

      10

      September 1

      9

      11

      2

      10

      14

      3

      11

      15

      4

      14

      16

      7

      MARKETS CLOSED

      8

      15

      17

      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 by directed to the NASD Uniform Practice Department at (212)839-6256.


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


    • 87-55 Amendments to NASD Code of Arbitration Procedure Effective July 1, 1987

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission declared effective, on July 1, 1987, amendments to Section 43 of the NASD Code of Arbitration Procedure (Code) and the Board of Governors' Resolution titled "Failure to Act under Provisions of the Code of Arbitration Procedure" (Resolution).

      Section 43 of the Code sets forth a schedule of fees to be deposited by claimants with the NASD at the initiation of an arbitration proceeding and establishes fees charged to the parties at the conclusion of the arbitration proceeding for use of the arbitration facility. The amendment to Section 43 of the Code conforms it to changes in the securities industry's Uniform Code of Arbitration regarding the schedule of fees to be deposited by parties in connection with arbitrations in self-regulatory organizations.

      The Resolution requires NASD members and associated persons to honor any properly rendered arbitration award, absent a timely motion to vacate or modify the award. The amendment to the Resolution provides that all arbitration awards must be honored by a cash payment to the prevailing party in the exact dollar amount of the award and specifically prohibits crediting an account of the prevailing party with the amount of the award. The amendment also requires the losing party to pay the award upon its receipt, or within such time as may be set forth in the award.

      The texts of these amendments are attached.

      SUMMARY OF AMENDMENTS

      Increase in Filing Fees

      The amendments to the Code conform it to recent amendments to the Uniform Code of Arbitration (Uniform Code) approved by the Securities Industry Conference on Arbitration (SICA). The Uniform Code, as implemented by the various self-regulatory organizations, established a uniform system of arbitration procedures throughout the securities industry.

      The amendment to Section 43 only affects cases where the amount in controversy exceeds $10,000. The amendment permits the NASD to pass on to users of the arbitration facility a larger share of the cost while maintaining a fee schedule that makes arbitration affordable to the public. In addition, the amendment reduces from $500 to $400 the deposit required for claims between $20,000 and $50,000, making the filing fee less burdensome. The amendment places a higher fee — $1,000 — on claims exceeding $500,000 because claims in this category usually require multiple hearing sessions lasting more than one day and are administratively more expensive to conduct. Even with this fee increase, however, much of the cost of the arbitration facility will continue to be subsidized by the NASD.

      For purposes of Section 43(b), a "session" is defined as a meeting of presiding arbitrators and parties that lasts at least four consecutive hours.

      Manner and Time of Payment of Awards

      The amendment to the Resolution clarifies the NASD's position that arbitration awards are to be paid on a timely basis and in cash, rather than by offsetting the award against other monies owed to the prevailing party.

      * * * * *

      Questions regarding this notice may be directed to either Deborah Masucci, NASD Director of Arbitration, at (212) 839-625 1, or Eugene Bleier, NASD Office of General Counsel, at (202) 728-8287.

      Sincerely,

      Frank J.Wilson
      Executive Vice President
      Legal and Compliance

      Attachments

      AMENDMENTS TO CODE OF ARBITRATION PROCEDURE*

      Schedule of Fees

      Sec. 43. (a) At the time of filing a Submission Agreement, a Claimant shall deposit with the Association the amount indicated below unless such deposit is specifically waived by the Director of Arbitration.

      Amount in Dispute
      (Exclusive of interest and expenses)

      Deposit

      $ 1,000 or less

      $ 15

      Above $1,000 but not exceeding $2,500

      $25

      Above $2,500 but not exceeding $5,000

      $ 100

      Above $5,000 but not exceeding $ 10,000

      $200

      Above $10,000 but not exceeding [$20,000] $50,000

      [$300] $400

      Above [$20,000] $50,000 but not exceeding $ 100,000

      $500

      Above $ 100,000 but not exceeding $500,000

      $750

      Above $500,000

      $ 1,000

      Where the amount in dispute is $10,000 or less, no additional deposits shall be required despite the number of sessions. Where the amount in dispute is above $10,000 and multiple sessions are required, the arbitrators may require any of the parties to make additional deposits for each additional session. In no event shall the aggregate amount deposited per session exceed the amount of the initial deposit as set forth in the above schedule.

      (b) The arbitrators, in their awards, may determine the amount chargeable to the parties as forum fees (fees) and shall determine by whom such fees shall be borne. Where the amount in dispute is $10,000 or less, total fees to the parties shall not exceed the amount deposited. Where the amount in dispute is above $10,000 but does not exceed [$20,000] $50,000, the maximum fee shall be [$300] $400 per session. Where the amount in dispute is above [$20,000] $50,000 but does not exceed $100,000, the maximum fee shall be $500 per session. Where the amount in dispute is above $100,000 but does not exceed $500,000, the maximum fee shall be $750 per session. Where the amount in dispute is above $500,000, the maximum fee shall be $1,000 per session. In no event shall the fees assessed by the arbitrators exceed [$750] $1,000 per session. Amounts deposited by a party shall be applied against fees, if any. If the fees are not assessed against a party who had made a deposit, the deposit will be refunded.
      (c) If the dispute, claim or controversy does not involve or disclose a money claim, the amount to be deposited by the Claimant shall be $100, or such amount as the Director of Arbitration or the panel of arbitrators may require, but shall not exceed [$750] $1,000.

      (Subsections (d), (e), and (f) remain unchanged.)

      * * * * * *

      ••• Resolution of the Board of Governors____________________

      Failure to Act Under Provisions of the Code of Arbitration Procedure

      It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Article III, Section 1 of the Rules of Fair Practice for a member or a person associated with a member to fail to submit a dispute for arbitration under the Code of Arbitration Procedure as required by that Code, or to fail to appear or to produce any document in his possession or control as directed pursuant to provisions of the Code of Arbitration Procedure, or to fail to honor an award of arbitrators, properly rendered pursuant to the Code of Arbitration Procedure where a timely motion has not been made to vacate or modify such award pursuant to applicable law.

      All awards shall be honored by a cash payment to the prevailing party of the exact dollar amount stated in the award. Awards may not be honored by crediting the prevailing party's account with the dollar amount of the award, unless authorized by the express terms of the award or consented to in writing by the" parties. Awards shall be honored upon receipt thereof, or within such other time period as may be prescribed by the award.

      Action by members requiring associated persons to waive the arbitration of disputes contrary to the provisions of the Code of Arbitration Procedure shall constitute conduct that is inconsistent with just and equitable principles of trade and a violation of Article III, Section 1 of the Rules of Fair Practice.


      * New language is underlined; deleted language is bracketed.


    • 87-54 NASDAQ National Market System Grows to 3,018 Securities With 8 Additions on August 18, 1987

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

      On Tuesday, August 18, 1987, the following 8 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,018.

      Symbol*

      Company

      Location

      APAS

      American Passage Marketing Corporation

      Seattle, WA

      CNMD

      CONMED Corporation

      Utica, NY

      CHEY

      Cheyenne Software, Inc.

      Roslyn, NY

      CSOF

      Corporate Software Incorporated

      Westwood, MA

      DETC

      Detection Systems, Inc.

      Fairport, NY

      DGIC

      Donegal Group, Inc.

      Marietta, PA

      SCFM

      Scanforms, Inc.

      Bristol, PA

      SPMD

      Spectramed, Inc.

      Newport Beach, CA

      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.

      NASDAQ/NMS Pending Additions

      Symbol*

      Company

      Location

      ACMAV

      AC MAT Corporation (Cl A) (WI)

      East Hartford, CT

      APOS

      Advanced Polymer Systems, Inc.

      Redwood City, CA

      ATKM

      Atek Metals Center, Inc.

      Cincinnati, OH

      CRLDO

      Crossland Savings, F.S.B. (Ser B Pfd)

      Brooklyn, NY

      ETEX

      Eastex Energy, Inc.

      Houston, TX

      ENTC

      Entronics Corporation

      Dallas, TX

      HRDG

      Harding Associates, Inc.

      Novato, CA

      HARL

      Harleysville Savings Association

      Harleysville, PA

      HRLD

      Harold's Stores, Inc.

      Norman, OK

      INCL

      Intellicall, Inc.

      Carrollton, TX

      JEPS

      Jepson Corporation (The)

      Elmhurst, IL

      MCAWA

      Mc Caw Cellular Communications, Inc. (Cl A)

      Kirkland, WA

      MFIG

      Morsemere Financial Group, Inc.

      Englewood Cliffs,

      PSPA

      Pennview Savings Association

      Souderton, PA

      SGHB

      Sag Harbor Savings Bank

      Sag Harbor, NY

      TDAT

      Teradata Corporation

      Los Angeles, CA

      TLMD

      Telemundo Group, Inc.

      New York, NY

      VLCM

      Valcom, Inc.

      Omaha, NE

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority, and commenced trading in NASDAQ/NMS since July 27, 1987:

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      ECLAY

      English China Clays, Pic.

      7/29/87

      PFPF

      Price Pfister, Inc.

      7/29/87

      PNET

      ProNet, Inc.

      7/29/87

      ONBK

      Onondaga Savings Bank

      7/30/87

      NJSB

      New Jersey Savings Bank

      8/04/87

      RBNH

      Rockingham Bancorp

      8/04/87

      USBC

      United Building Services Corporation of Delaware

      8/04/87

      MTWO

      Melamine Chemicals, Inc.

      8/06/87

      INTCL

      Intel Corporation (1988 Wts)

      8/07/87

      The following changes to the list of NASDAQ/NMS securities occurred since July 27, 1987:

      MASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      GLBC/GLFS

      Great Lakes Bancorp/ Great Lakes Bancorp

      7/29/87

      IFSIA/IFSIA

      Interface, Inc. (Cl A)/ Interface Flooring Systems, Inc. (CIA)

      7/31/87

      DYAN/FAAA

      Dyansen Corporation/Fine Arts Acquistions, Ltd.

      8/04/87

      DYANW/FAAAW

      Dyansen Corporation (Wts)/Fine Arts Acquistions, Ltd. (Wts)

      8/04/87

      REGB/MSBK

      Regional Bancorp, Inc./Medford Savings Bank

      8/04/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      SCOAP

      Hills Stores Company (Ptd)

      7/27/87

      HFBF

      Home Federal Savings Bank Florida, F.S.B.

      7/27/87

      AMRE

      AMRE, Inc.

      7/28/87

      CLEV

      Clevite Industries, Inc.

      7/28/87

      CLEVW

      Clevite Industries, Inc. (Wts)

      7/28/87

      MTBC

      Metrobanc Federal Savings Bank

      7/28/87

      ZBSTQ

      ZZZZ Best Company, Inc.

      7/28/87

      ZBSWQ

      ZZZZ Best Company, Inc. (Wts)

      7/28/87

      FSBF

      First Savings Bank of Florida, F.S.B.

      7/31/87

      PMCO

      Pan American Mortgage Corporation

      8/03/87

      CMRK

      Caremark, Inc.

      8/04/87

      MODX

      Modulaire Industries

      8/04/87

      BYOU

      Bayou Resources, Inc.

      8/05/87

      SITVY

      Southbrook International Television Company, Pic.

      8/07/87

      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.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-53 Request for Comments on Proposed Amendments to NASD By-Laws and Rules of Fair Practice, and Proposed New Government Securities Rules

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: SEPTEMBER 11, 1987.

      EXECUTIVE SUMMARY

      On October 28, 1986, President Reagan signed the Government Securities Act of 1986, providing for the regulation of government securities activities by brokers and dealers. This legislation created a new section 15C of the Securities Exchange Act of 1934, which requires SEC registration and either NASD or exchange membership for government securities brokers and dealers.

      The NASD requests comments on proposed amendments to the NASD By-Laws and Rules of Fair Practice, and on proposed new government securities rules designed to permit the NASD to carry out its regulatory responsibilities under the Government Securities Act.

      The texts of the proposed amendments are attached.

      BACKGROUND

      Public Law 99-571 (the "Government Securities Act of 1986"), enacted by the 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, of persons or entities subject to statutory disqualifications.

      In addition, the Government Securities Act provided the NASD with the authority to adopt rules to prohibit fraudulent, misleading, deceptive, and false advertising. 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.

      SUMMARY OF PROPOSED AMENDMENTS

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

      • Amendments to the NASD By-Laws;
      • Amendments to Schedule C to the NASD By-Laws regarding registration of individuals;
      • An amendment to Article I, Section 5 of the NASD Rules of Fair Practice; and
      • A rule package designated as "Government Securities Rules."

      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 conform the NASD definition with the definition in the 1934 Act.

      Schedule C to the NASD By-Laws

      The proposed amendments to Schedule C to 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 those firms.

      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 those areas where the NASD believes that 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 exemp-tive status under the customer protection provisions applicable to government securities brokers and dealers. In addition, the rules provide the framework for the NASD to bring disciplinary actions pursuant to the NASD Code of Procedure.

      * * * * *

      The NASD encourages members and other interested persons to comment on this proposed rule package. The NASD requests that commentators specifically address the need and authority for the adoption, either by the NASD or the Treasury Department, of rules making the NASD's Code of Arbitration Procedure applicable to government securities brokers and dealers registered under Section 15C of the 1934 Act; the need for a fidelity bonding requirement for government securities brokers and dealers similar to that contained in Article III, Section 32 of the NASD Rules of Fair Practice and Appendix C thereunder; and development of margin maintenance standards such as those contained in Appendix A to Article III, Section 30 of the Rules of Fair Practice.

      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 September 11, 1987. Comments received by this date will be considered by the NASD Ad Hoc Committee on Government Securities and the NASD Board of Governors. Any amendments to the NASD By-Laws and Rules of Fair Practice and new Government Securities Rules that are approved by the Board must be submitted to the membership for a vote. Thereafter, the proposed rule package must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to T. Grant Callery, NASD Associate General Counsel, at (202) 728-8285.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachments

      PROPOSED AMENDMENTS TO NASD BY-LAWS*

      ARTICLE I

      Definitions

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

      (a) "Act" means the Securities Exchange Act of 1934 as amended;
      (b) "bank" means (1) a banking institution organized under the laws of the United States, (2) a member bank of the Federal Reserve System, (3) any other banking institution, whether incorporated or not, doing business under the laws of any state or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those 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 located in the United States which is owned or controlled by a member, and which is engaged in the investment banking or securities business;
      (d) "broker" means any individual, corporation, partnership, 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)(43rof the Act except that it shall not include financial institutions.
      (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.

      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 Requirements

      Sec. 2. (a) The Board of Governors shall have authority to adopt rules and regulations applicable to applicants for membership, members and persons associated with applicants or members establishing specified and appropriate standards with respect to the training, experience, competence and such other qualifications as the Board of Governors finds necessary or desirable, and in the case of an applicant for membership or a member, standards of financial responsibility or operational capability. This authority shall not extend to government securities brokers or dealers or to persons associated with government securities brokers or dealers.

      (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, 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 nomember 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 become sineligible 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 as applicants or existing members and of persons as prospectiveor 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[j , 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 be a cause of any effective suspension, expulsion or order of the character described in subsections (a) or (b) of this Section, and in entering such a suspension, expulsion, or order, the Commission, an appropriate regulatory agency, or self-regulatory organization shall have jurisdiction to find whether or not any person was a cause thereof; or
      (d) has associated with him any person who is known, or in the exercise of reasonable care should be known, to him to be a person described in subsections (a), (b), or (c) of this Section.

      Misstatements

      (e) has willfully made or caused to be made in any application for membership in [the Corporation] 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 misdemeanor which;
      (1) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, or conspiracy to commit any such offense;
      (2) arises out of the conduct of the business of a broker, dealer, municipal securities dealer 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 Title 18, United States Code; or

      Injunctions

      (g) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, dealer, [or] 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 the rules of the Municipal Securities Rulemaking Board[J 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 anymember 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 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 District Committee determine that the applicant fails to satisfy all of the admission requirements of the By-Laws, it shall promptly notify the Secretary of the Corporation who shall thereafter take appropriate action as of the date when posted to the membership roll.
      (d) Each member shall ensure that its membership application with the Corporation is kept current at all times by supplementary amendments to the original application.

      Similarity of Membership Names

      Sec. 2. 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] the rules of the Municipal Securities Rulemaking Board or 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 members and affiliates thereof, and neither the adoption nor any amendments to such rules and procedures need be submitted to the membership for approval and such rules and procedures and any amendments thereto shall become effective as the Board of Governors may prescribe;
      (5) require all over-the-counter transactions in securities between members, other than transactions in exempted securities, to be cleared and settled through the facilities of a clearing agency registered with the Commission pursuant to the Act, which clears and settles such over-the-counter transactions in securities;
      (6) organize and operate automated systems to provide qualified subscribers with securities information and automated services. The systems may be organized and operated by a division or subsidiary company of the Corporation or by one or more independent firms under contract with the Corporation as the Board of Governors may deem necessary or appropriate. The Board of Governors may adopt rules of such automated systems, establish reasonable qualifications and classifications for members and other subscribers, provide qualification standards for securities included in such systems, require members to report promptly information in connection with securities included in such systems, require members to report promptly information in connection with securities included in such systems, and establish charges to be collected from subscribers and others. The Board of Governors shall have power to adopt, amend, supplement or modify such rules, qualifications, classifications, standards and charges from time to time without recourse to the membership for approval, and such rules, qualifications, classifications, standards and charges shall become effective as the Board of Governors may prescribe;
      (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)
      (a) 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 (b) 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, cr 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] the 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 ft 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 change.

      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 txy the Board of Governors.

      Unauthorized Expenditures

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

      Conflicts of Interest

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

      Municipal Securities

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

      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.

      PROPOSED AMENDMENTS TO SCHEDULE C TO THE NASD BY-LAWS

      (New language is underlined.)

      V

      PERSONS EXEMPT FROM REGISTRATION

      (1) The following persons associated with a member are not required to be registered with the Corporation:



      (d) persons associated with a member whose functions are related solely and exclusively to:



      (ii) transactions in exempted securities, except as provided in Part X hereof, or



      * * * * *

      (Part X is new.)

      X

      REGBTRATION OF GOVERNMENT SECURITIES PRINCIPALS AND REPRESENTATIVES

      1. Registration of Principals. All persons associated with a member 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 by an individual of principal status 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 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 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

      (New language is underlined.)

      ARTICLE I

      Adoption and Application

      Applicability



      Sec. 5.(a) These applicability 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.)

      PROPOSED NEW GOVERNMENT SECURITIES RULES

      Adoption of Rules

      Sec. 1. The following provsions are adopted pursuant to Article VII, Section 8 of the NASD By-Laws.

      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. The requirements of these rules are in addition to those contained in the Rules of Fair Practice for members that are subject to the 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 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 carry out 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)(29) 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 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-1 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 is less than 150 percent of its minimum liquid capital requirement.
      (C) The deduction of capital withdrawal including 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 subparagraph (1).
      (2) The Association restricts the member for any other financial or operational reason.
      (c) A member, when so directed by the Association, shall forthwith reduce its business:
      (1) To a point enabling its available capital to comply with the standards set forth in subparagraphs (b)(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 is less than 125 percent of its minimum liquid capital requirement.
      (C) The deduction of capital withdrawal including 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 subparagraph (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. Subpara-graphs (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)(b) to that governed by subparagraph (k)(2)(a); or from subparagraph (k)(l), (k)(2)(a), or (k)(2)(b) to a fully computing firm that is subject to all provisions of 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, experience, and qualifications of persons associated with the member, the member's procedures for safeguarding customer funds and securities, the member's overall financial and operational condition and any other information deemed relevant in the particular circumstances and the time these measures would remain in effect.

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

      Sec. 8. 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 therefor.

      Complaints

      Sec. 9.

      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 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 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 10. 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 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 report orally 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.

      Penalties for Violation of the Rules

      Sec. 11. Any District Business Conduct 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 associated with a member; and/or
      (2) impose a fine not in excess of Fifteen Thousand Dollars ($15,000.00) 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 of such provisions 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 or by the Board of Governors in the enforcement of these rules, including any interpretation 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 shall take effect until the period for appeal therefrom or review has expired, as provided in Article III, Section 1 of the Code of Procedure; and provided, further, that all parties to any proceeding resulting in a sanction 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.

      Payment of Fines or Costs

      Sec. 12. All fines imposed pursuant to Section 11 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 11 of these rules, or any costs imposed pursuant to Section 11 of these rules, or any costs imposed pursuant to Section 13 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 11 of these rules or any costs imposed pursuant to Section 13 of these rules after such fine or costs have become finally due and payable after seven (7) days' 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 11 of these rules, or any costs pursuant to Section 13 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. 13. Any member or person associated with such member disciplined pursuant to Section 11 of these rules shall bear such part of the costs of the proceedings as the District Business Conduct Committee or the Board of Governors deems fair and appropriate in the circumstances.


      * New language is underlined; deleted language is bracketed.


    • 87-52 Request for Comments on Proposed Amendment to the NASD Board of Governors' Corporate Financing Interpretation Concerning Public Offerings When Proceeds Are Directed to NASD Members

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: SEPTEMBER 12, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to the Interpretation of the Board of Governors—Review of Corporate Financing, under Article III, Section 1 of the NASD Rules of Fair Practice. The amendment would require a qualified independent underwriter to provide a pricing opinion and conduct due diligence when 10 percent or more of the net proceeds of a public offering are directed to NASD members participating in the distribution of the offering.

      The NASD Board of Governors believes this amendment is necessary to address potential conflicts of interest that arise when a portion of the proceeds of the offering are directed to a member responsible for pricing and due diligence.

      The text of the proposed amendment is attached.

      BACKGROUND

      Recently NASD members have become more involved in corporate takeovers by providing their clients, directly from their own funds, large sums of money to facilitate leveraged buyouts. The takeover, or leveraged buyout, is accomplished primarily with borrowed funds from a lending group that includes NASD members. The capital committed by members is not intended as a long-term investment but rather, as bridge financing to allow clients to quickly complete the transaction. The bridge loan is intended to be repaid with the proceeds of a public offering, usually of high-yield, high-risk bonds underwritten by the member.

      The SEC and the NASD Corporate Financing Committee have expressed concern regarding potential conflicts of interest by members that provide bridge loans to finance corporate acquisitions by their clients. The concern is that a member-lender might be compromised in fulfilling its due diligence and other responsibilities when underwriting subsequent offerings by its issuer-client, the proceeds of which will be used to repay the member's loan. In such situations, the member has a potential conflict of interest in evaluating the issuer objectively as part of its due-diligence responsibilities and when establishing an appropriate offering price, since a successful distribution of the issuer's securities directly benefits the member.

      SUMMARY OF PROPOSED AMENDMENT

      The NASD Corporate Financing Committee and the NASD Board of Governors reviewed this issue and determined that when a portion of the proceeds of a public offering is directed to a member that is responsible for pricing and due diligence, the member is subject to a potential conflict of interest. Particularly in the area of due diligence, the responsibility of the member to ensure disclosure of material facts adverse to the issuer may be influenced by the significant financial interest of the member in the offering and the incentive for the offering to be successful.

      Therefore, the Committee and the Board of Governors believe an amendment to the Board of Governors' Interpretation on Corporate Financing under Article III, Section 1 of the Rules of Fair Practice is the most effective method of dealing with such potential conflicts of interest. The amendment would require participation of a qualified independent underwriter in any public offering in which 10 percent or more of the net proceeds of the offering will be directed to NASD members participating in the distribution of the offering, or to affiliated or associated persons of such members, or to members of the immediate family of such persons. The qualified independent underwriter would be required to provide an opinion that the yield is no lower (in a debt offering) or the price is no higher (in an equity offering) than it would recommend. The qualified independent underwriter would also perform due diligence in the preparation of the offering document.

      To act as a qualified independent underwriter, an NASD member must meet the definition contained in Section 2(k) of Schedule E to the NASD By-Laws. Under the definition, a member must be and have been actively engaged in the investment banking or securities business and the underwriting of public offerings for at least five years preceding the offering; must have had net income from operations in at least three of the five years preceding the offering; and must have had a majority of its board of directors (if a corporation), a majority of its general partners (if a partnership), or its proprietor (if a sole proprietorship) actively engaged in the investment banking or securities business for the five-year period prior to the offering. In addition, the member must not be an affiliate of the issuer and must have agreed to undertake the legal responsibilities and liabilities of an underwriter under Section 11 of the Securities Act of 1933.

      The NASD has historically relied on qualified independent underwriters to resolve potential conflicts of interest on behalf of underwriters in public offerings. Qualified independent underwriters have been used to resolve conflicts of interest in offerings by members of their own securities and offerings of affiliates since the adoption of Schedule E (the NASD's self-underwriting regulation) in 1972. In addition, in 1984, the NASD amended the "Venture Capital Restrictions" under the Corporate Financing Interpretation to provide an exemption from the restrictions if a qualified independent underwriter participated in the offering. The "Venture Capital Restrictions" apply to initial public offerings in which members participating in the offering own securities of the issuer. The exemption has been very effective in resolving problems that had been experienced by members prior to its adoption.

      * * * * *

      The NASD encourages all members and other interested persons to comment on the proposed amendment. The NASD requests that commentators address whether the participation of a qualified independent underwriter is necessary in an equity offering that has a bona fide independent market (as defined in Section 2(b)9 of Schedule E to the NASD By-Laws) or when the offering is of debt-rated investment grade, i.e., the four highest generic rating categories by a nationally recognized statistical rating organization. The NASD is also interested in receiving information on additional costs to members that may result from the proposed amendment.

      In addition, the proposed amendment applies when 10 percent or more of the net proceeds of an offering are directed to members. Commentators may wish to address whether 10 percent is the appropriate level to use in determining that a qualified independent underwriter is required or whether a higher or lower level should be used.

      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 September 12, 1987. 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 regarding this notice may be directed to either Frank J. Formica or Richard J. Fortwengler, NASD Corporate Financing Department, at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      Proposed Amendment to The Interpretation of the Board of Governors—Review of Corporate Financing Under Article III, Section 1 of the NASD Rules of Fair Practice

      (Follows section titled "Venture Capital Restrictions" at page 2033 of the NASD Manual.)

      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 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, 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 as defined in Section 2(k) of Schedule E to Article VII, Section l(a)(4) of the By-Laws, 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. For purposes of this provision, the term "net offering proceeds" means the gross offering proceeds less all expenses of issuance and distribution.


      * See definition of "immediate family," Interpretation of the Board of Governors—Free-Riding and Withholding, under Article III, Section 1 of the NASD Rules of Fair Practice.


    • 87-51 Treasury Department Adopts Changes to the Requirements Concerning Financial Recordkeeping and Reporting of Currency and Foreign Transactions

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The Department of the Treasury has finalized amendments to the implementing regulations of the Bank Secrecy Act. Also known as the "Currency and Foreign Transactions Reporting Act of 1970," these regulations govern the financial recordkeeping and reporting of currency and foreign transactions. The amendments, which were originally published for comment in August 1986, change the requirements concerning reporting multiple, same-day currency transactions; the time periods for filing reports; verifying customer identity when filing currency transaction reports; and recording taxpayer identification numbers. The amendments also include civil penalties for structuring transactions.

      The text of the release containing all final changes (Federal Register, April 8, 1987) is attached.

      BACKGROUND

      The Bank Secrecy Act (the Act) was enacted as a means of requiring certain financial institutions, including broker-dealers, to keep records and file reports regarding various financial matters that may be useful in criminal, tax, or other regulatory investigations. The provisions of 31 CFR Part 103 of the Act, also known as the "Currency and Foreign Transactions Reporting Act," govern the payment, receipt, or transfer of currency exceeding $10,000, the export or import of currency or monetary instruments exceeding $10,000 out of or into the United States, and certain foreign financial transactions and accounts.

      The Treasury Department is authorized to implement and administer the Act's reporting and recordkeeping requirements. With respect to broker-dealers, however, the Treasury Department delegated its responsibility to the Securities and Exchange Commission (SEC). To ensure compliance and effective oversight by self-regulatory organizations, the SEC adopted Rule 17a-8 under the Securities Exchange Act of 1934 (the Exchange Act).

      SEC Rule 17a-8, which became effective on January 18, 1982, requires broker-dealers to file reports and make and preserve records pursuant to the Exchange Act and the regulations adopted thereunder. Moreover, in accordance with other SEC recordkeeping rules, such as SEC Rule 17a-3(a)(l), the SEC has taken the position that broker-dealers are required to make and retain their records in a manner that identifies the receipt and disbursement of currency in connection with securities transactions.

      On August 25, 1986, the Department of the Treasury published in the Federal Register a series of proposed changes designed to strengthen enforcement of the Bank Secrecy Act's provisions by ensuring the collection of additional information regarding transactions in currency or monetary instruments and certain foreign transactions and accounts.

      SUMMARY OF FINAL AMENDMENTS

      The proposed amendments address a number of issues. After reviewing the comments received, the Treasury Department issued a final rule encompassing most of the original proposals, although a number of provisions were modified.

      Changes that affect the activities of broker-dealers are highlighted below.

      1. Multiple, same-day currency transactions. In its proposed amendments, the Treasury Department sought to codify an instruction on Form 4789, the Currency Transaction Report, that requires broker-dealers to report multiple, same-day transactions in currency by or on behalf of any person that total more than $10,000, if the broker-dealers are aware of them.
      This requirement has been incorporated into the regulations with one modification — the Treasury Department changed the term "is aware" to "has knowledge." It applies to any partner, director, officer, or employee of a broker-dealer, or any existing system at the broker-dealer that permits the firm to aggregate transactions.
      The term "knowledge," as used in the final rule, includes the concept of "willful blindness" as well. For example, if a broker-dealer suspects someone may be structuring transactions to avoid filling out a record or report, but the broker-dealer deliberately refuses to ask questions because it wishes to remain ignorant, the broker-dealer will be deemed to have knowledge for purposes of assessing liability under the Bank Secrecy Act.
      This regulation, however, does not require broker-dealers to adopt or purchase new systems to reveal the existence of multiple, same-day transactions.
      2. Time periods for filing reports. The Treasury Department adopted without change its proposals to standardize the time periods for filing reports. All reports previously subject to filing within 30 calendar days must now be filed within 15 calendar days of the reportable event or upon request for the report from regulatory authorities.
      3. Verification of customer identification. The Treasury Department noted that some financial institutions fail to show proper identification of customers on Form 4789, the Currency Transaction Report. To correct this, the Treasury Department proposed that verification of customer identity be made by examination of a document, other than an account signature card, that normally would be acceptable when cashing checks (e.g., a driver's license or credit card).
      The Treasury Department altered its original proposal to permit financial institutions to refer to the customer's signature card when filling out Form 4789, but the specific identifying information, i.e., a driver's license or credit card number, must be recorded on the report form.
      4. Recordkeeping requirements for extensions of credit. Previously, broker-dealers were required to keep records on extensions of credit exceeding $5,000. The Treasury Department changed this recordkeeping requirement to apply to extensions of credit exceeding $ 10,000.
      5. Recordkeeping requirements for incoming transactions. In its proposal, the Treasury Department sought to extend broker-dealers' recordkeeping requirements to include incoming as well as outgoing transactions with persons, accounts, or places outside the United States that involve the transfer of currency, monetary instruments, funds, checks, investment securities, or credit in amounts exceeding $10,000. The proposal also included transactions that are later cancelled or not completed.
      The Treasury Department received opposition to the requirement to retain records on transactions later cancelled. In the final amendment, recordkeeping requirements were extended to include all incoming transactions but a record of a cancelled transaction must be retained only in instances where such a record is normally made.
      6. Taxpayer identification numbers. The Treasury Department received major opposition on its proposal to change the recordkeeping requirements and procedures for recording taxpayer identification numbers. The Treasury Department proposed that, when an account is in the name of two or more persons, broker-dealers would be required to secure the taxpayer identification number of each person having a financial interest in the account. Under existing regulations, broker-dealers are required to maintain only one taxpayer identification number for each such account.
      In a comment letter to the Treasury Department, the NASD Capital and Margin Committee noted that, to date, broker-dealers have been successfully using one taxpayer identification number to identify a responsible party for each account and report the required information. The Committee questioned the usefulness of the proposed change, especially in light of the financial and operational burden it would place on broker-dealers.
      After a review of the comments and similar concerns expressed by others, the Treasury Department decided to retain the requirement, consistent with Internal Revenue Service (IRS) rules, that only one taxpayer identification number be obtained when an account is maintained by one or more persons.
      The proposal also eliminated the 45-day grace period for obtaining the taxpayer identification number. The Treasury Department decided to retain a grace period, but to reduce it to 30 days to be more consistent with IRS rules. In addition, the Treasury Department retained the proposed requirement that additional identifying information be acquired from non-resident aliens subject to the taxpayer identification rules.
      7. Structured transactions. This amendment incorporates into the regulations the new statutory violation for structuring currency transactions to avoid the reporting requirements of the Bank Secrecy Act. The Treasury Department also added to the civil penalty section a reference to the penalties imposed for structuring transactions.

      * * * * *

      The amendments discussed above are the major changes affecting the activities of broker-dealers. The attached release, however, contains all changes finalized by the Treasury Department, including related information and commentary.

      July 7, 1987, was the effective date for the amendments concerning the shortened time period for filing reports of the international transportation of currency and monetary instruments (paragraph 103.26(b)(2)), verification of customer identity for purposes of filling out Form 4789 (paragraph 103.27), and the recordkeeping requirements concerning incoming transactions (paragraph 103.33(b)). All other changes were effective May 8, 1987.

      Questions concerning this notice may be directed to Susan Lang, NASD Surveillance Department, at (202) 728-6969.

      Sincerely,

      John E. Pinto, Jp
      Senior Vice President
      Compliance

      Attachment

      DEPARTMENT OF THE TREASURY

      Office of the Secretary

      31 CFR Part 103

      Amendments to Implementing Regulations Under the Bank Secrecy Act

      AGENCY: Office of the Secretary, Treasury.

      ACTION: Final rule.

      SUMMARY: The Bank Secrecy Act, Public Law No. 91-508 (12 U.S.C. 1829b, 12 U.S.C. 1951 etseq., 31 U.S.C. 5311 et seq.,) empowers the Secretary of the Treasury to require financial institutions to keep records and file reports that the Secretary determines have a high degree of usefulness in criminal, tax and regulatory matters. On August 25,1986, Treasury published in the Federal Register (51 FR 30233) a series of proposed changes to the Bank Secrecy Act regulations in 31 CFR Part 103 in order to ensure the collection of needed information, and to strengthen enforcement of the Act.

      After review of the many comments received, Treasury is issuing a final rule encompassing all but three of the original proposals. One proposal, regarding exempt list customer certification statements, was enacted as part of the Anti-Drug Abuse Act of 1986 and was incorporated into Part 103 by final rule dated December 17,1986 (51 FR 45108); two proposals, dealing with the purchase of more than $3,000 in monetary instruments, are still under consideration by Treasury and will be the subject of a separate notice to be issued within the next few months.

      EFFECTIVE DATE: July 7,1987 for those amendmentsto 31 CFR 103.11(e), 103.26(b)(2), 103.27,103.33(b), 103.34(b)(13), and 103.37. All other changes to Part 103 made by this final rule are effective May 8,1987.

      FOR FURTHER INFORMATION CONTACT: Jonathan J. Rusch, Director, Office of Financial Enforcement, Office of the Assistant Secretary (Enforcement), Department of the Treasury, Room 4320, 1500 Pennsylvania Ave., NW., Washington, DC 20220, (202) 566-8022.

      SUPPLEMENTARY INFORMATION:

      Discussion of Comments

      Over 300 comments, many quite detailed, were received from individuals and financial institutions. Many general comments concerned the burden on financial institutions and the costs of compliance posed by the proposed amendments. The proposals to which commenters objected most frequently concerned the reporting of cash purchases of more than $3,000 in monetary instruments, and for new recordkeeping requirements placed on the purchase of monetary instruments. Because an initial review of the comments on these proposals indicates that further review of the issue is needed prior to promulgation of any final rule, the proposals relating to the cash purchase of more than $3,000 in monetary instruments, the certification requirement relating to those purchases, and the new recordkeeping requirements on the purchase of monetary instruments are being held in abeyance at this time and are not included in this final rule. Treasury anticipates issuing a notice on this issue in the near future.

      Several commenters also asserted that the proposed rule, if adopted, would be considered a "major rule" within the meaning of Executive Order 12291. In their view, the proposed rule would create significantly increased operational costs, high implementation costs, and an ultimate cost burden that would be imposed on consumers. Many of the comments on this issue failed to present any substantial evidence to support the assertion, and apparently misunderstood the extent of the burdens the proposed rule would place upon financial institutions. The only new major substantive requirements that this final rule imposes pertain to records maintained by currency dealers and exchangers, and the majority of those records are ordinary business records. Moreover, a number of provisions in the proposed rule have been modified after review of the comments received, and other provisions (such as the monetary instruments purchase provisions) will be treated separately in a future regulatory proposal. Finally, Treasury emphasizes that no provision in this final rule will obligate financial institutions to purchase computer hardware or software to comply with the revised regulations. In view of these considerations, it is the Department's position that any cost created by this final rule will be far below the 100 million dollar threshold for a Regulatory Impact Analysis under Executive Order 12291.

      A general discussion of the comments and Treasury decisions on the various proposals is presented below.

      (1) Expand the definition of "bank" to include Edge Act corporations: An "Edge" or "Agreement" corporation, as defined by 12 U.S.C. 611 et seq., is a corporation organized in the United States for the purpose of engaging in international or foreign banking, or other foreign financial operations; such institutions are supervised by the Board of Governors of the Federal Reserve System. This amendment would clarify that the regulations include these entities. (Amendment #2.)
      As this is merely a clarification that comports with Treasury's interpretation of the present regulations, there was no substantial discussion of this issue by the commenters; it will stay as drafted.
      (2) Add a new definition of "common carrier": This new definition would clarify the reporting responsibilities for currency and monetary instruments that are transported into or out of the United States. (Amendment #2.)
      Many commenters desired further clarification and expressed a desire to have armored car services, such as Brinks, and private messenger services covered within the definition. Several also suggested that the term "undertaken to do so [supply services] indiscriminately for all persons" be deleted so that companies that supply services only to banks could be covered. The definition will be clarified to include institutions such as Brinks and businesses that limit their clientele to banks. Private messenger services are not covered by the definition of "common carrier."
      (3) Revise the definition of "financial institution " in light of recent case law, and to include certain selling agents of traveler's checks, money orders and similar instruments: This revision would modify the definition to comport with recent case law defining financial institutions for Bank Secrecy Act purposes, and expand the definition to include selling agents of certain monetary instruments and all transmitters of funds. (Amendment #2.)
      Five major issues were raised: (a) Many commenters felt that the proposed definition of "check casher" was so broad that it would cover any business which cashed a check, even if only an incidental part of its business, thus putting the concept of exempt lists in jeopardy; (b) some commenters wanted to know what a person "subject to State or Federal banking supervision" meant and whether it covered nonbanking subsidiaries of banking institutions; (c) some commenters wanted a clarification of the term "transmitter of funds;" (d) some commenters wanted to know what were "similar instruments" to money orders not already listed; and (e) some commenters wanted to know the significance of including "agents" in the definition. In response to these comments, Treasury notes that (a) the term "check casher" has been defined further as someone engaged in the business of cashing checks; (b) coverage of those persons under "State or Federal banking supervision" was meant to cover all other banking institutions subject to examination by State or Federal banking supervisory authorities not already covered within the term "financial institution;" but the term does not include nonbanking subsidiaries, even if approval for the subsidiary initially must be given by the Federal or State banking authority; (c) "transmitter of funds, including telegraph companies" will be replaced by language that more closely tracks the relevant statute, 31 U.S.C. 5312; (d) the term "similar instruments" will be deleted; and (e) the term "agent" was added in order to make this definition consistent with the others in section 103.11.
      (4) Clarify and expand the definition of "monetary instruments" to include promissory notes, checks made out to fictitious payees, and certain other types of checks: These substantive changes were proposed because enforcement experience indicated that certain cashier's checks and checks made out to fictitious payees were being used for money laundering, but arguably were not subject to current reporting requirements. Other amendments to the definition were intended to clarify the regulations. (Amendment #2.)
      The major issues raised were (a) the use of the term "fictitious payee" and the near impossibility of a bank to determine when a check is made out to a "fictitious payee;" (b) the use of the term "promissory note" and concern as to its scope; (c) a request that the term "traveler's checks" be clarified to describe the different ways that a traveler's check could be considered to be in bearer form; and (d) clarification of the term "endorsed without restriction." Treasury has changed the definition in the final rule to clarify that the term "fictitious payee" is applicable only for the purposes of § 103.23. The issue would arise only in the rare case where a bank has to file a report under § 103.23, such as when the bank sends or receives funds from outside the United States by other than common carrier, and the bank knew at the time it filed the report that the payee was fictitious. The term "promissory note" refers to the UCC definition of that term. Treasury has not changed the definition of "traveler's check" because the definition of "monetary instrument" clearly states that the instrument in question, whether personal check, traveler's check, etc., must be in such a form that title would pass upon delivery; accordingly, that definition need not include separate descriptions of the circumstances in which these instruments could be considered to be in bearer form. The term "endorsed without restriction" is included as an example of how an instrument can be considered to be in bearer form; it does not need to be clarified further. The final rule also clarifies in the definition the difference between incomplete instruments and negotiable instruments, a distinction that previously was not as clear.
      (5) Add a new definition for "transition account" and insert it in place of the deleted term "demand deposit account" wherever it appears in the Part: This new term would combine currently covered demand deposit accounts with recently developed money market and NOW accounts, which have many of the same characteristics as demand deposit accounts. (Amendments #2 & 3.)
      There were few comments. One commenter requested clarification of the status of accounts that are not subject to withdrawal by check. As long as withdrawals are by some form of negotiable order, the accounts are covered under this definition. The proposal is adopted as drafted without change.
      (6) Add a new definition for "business day": This amendment would provide that the term "business day" for banks means banking day. (Amendment #2.)
      Many commenters wanted further clarification of the proposed definition, pointing out that the hours the bank is open to the public are not necessarily the same as the hours the bank might be open for other purposes. Several commenters suggested that the definition refer to the day that the transaction is posted to the customer's account. Treasury has adopted that suggestion, and has revised the definition of "business day" to mean that day, as normally communicated to depository customers (such as by teller window sign], on which the bank routinely posts a particular transaction to its customer's account.
      (7) Clarify that financial institutions must report multiple, same-day currency transactions of which they are aware that total more than $10,000: This amendment would codify the CTR Form 4789 instruction that currently requires financial institutions to report multiple, same-day transactions of which they are aware that are by or on behalf of any person and total more than $10,000. As indicated above, this would not impose any new burden on financial institutions to adopt or purchase systems to reveal the existence of multiple, same-day transactions. (Amendment #4.)
      A majority of the comments expressed concern about this proposal. These comments were devoted largely to two issues: the meaning of the term "aware" in discussing the scienter element in reporting transactions; and the extent to which banks would have to adopt or purchase new systems to capture currency transaction data if their present systems cannot do so. In order to clarify the requirement, Treasury has changed the term "is aware" to "has knowledge." This term means knowledge on the part of a partner, director, officer or employee of a financial institution, or on the part of any existing system at the institution that permits it to aggregate transactions.
      "Knowledge," as used in the final rule, clearly includes the concept of "willful blindness" as well. See United States v. Jewell, 532 F. 2d 697 (9th Cir.), cert, denied, 426 U.S. 951 (1976). This concept applies to a person who has deliberately avoided positive knowledge; that is, "if a person has his suspicion aroused but then deliberately omits to make further inquiries, because he wishes to remain in ignorance, he is deemed to have knowledge." Jewell at 700. If a financial institution suspects someone may be structuring transactions in order to avoid the filling out of a record or report, but deliberately refuses to ask questions because it wishes to remain ignorant and therefore, "innocent," the financial institution will be deemed to have knowledge for purposes of assessing liability under the Bank Secrecy Act.
      Treasury emphasizes that this regulation does not require institutions to adopt or purchase new systems; however if and when financial institutions are considering the purchase of new computer systems, software or recordkeeping methods, Treasury urges that they consider the systems' ability to aggregate. Therefore, if a bank's existing system provides its officers or employees with information on transactions that may require reporting as aggregated transactions, that bank must make use of that system to comply with the reporting requirements of the Bank Secrecy Act, but need not adopt or purchase enhancements to increase that system's capability to identify multiple related transactions.
      The commenters also raised the question of deposits and withdrawals accomplished through the use of night depository slots or automatic teller machines (ATM's). Treasury realizes that there is not a teller physically present when these transactions take place; however, when these transactions are later processed by a teller, if the teller (or the system) has knowledge that an aggregated deposit or withdrawal has taken place, then there is a duty to file a Form 4769 under this section. Commenters also wished to know whether the term "by or on behalf of any person" in the aggregation requirement required institutions to track multiple transactions to one specific account even if made by more than one person, or to track transactions by one person making deposits/ withdrawals in reportabte amounts to or from several accounts. As long as "a transaction in currency of more than $10,000" has occurred, it does not matter if it was done by one person with one account several persons with the same account or one person with several accounts. Examples of reportable transactions would be two people depositing more than $10,000 in one account, though neither deposited a reportable amount or one person making a deposit of more than $10,000, but depositing the money in more than one account Obviously, the regulations cover more than activity tied to a particular account. Reportable transactions need not and often do not, involve an account at all. Finally, Treasury also wishes to reiterate that "cash in or cash out totalling more than $10,000" means the total of all deposits or the total of all withdrawals. Deposits and withdrawals are not to foe aggregated together for purposes of the Bank Secrecy Act. However, the total of all deposits or the total of all withdrawals during a particular business day should be aggregated in order to determine if a reportable deposit or withdrawal limit has been reached.
      (3) Require banks to obtain signed statements from their customers attesting to the basis for their exemption from the currency transaction reporting requirements: (Amendment #4.)
      Subtitle H of Title I of the Anti-Drug Abuse Act of 1986 (Pub. L. No. 99-570), the "Money Laundering Control Act of 1986," contained an amendment substantially similar to this proposal. By final rule dated December 17,1988 (51 FR 45108), the Treasury Department issued a final rule incorporating this statutory requirement into Part 103 for all exemptions granted after October 27, 1986, the effective date of the legislation.
      (9) Permit banks to exempt from the currency transaction reporting requirement deposits by certain public utilities and commercial passenger carriers: This proposed amendment to the exemption procedure would permit banks to exempt cash deposits by certain public utilities and commercial passenger carriers. (Amendment #4.)
      Most commenters approved of the proposal and requested that the restrictions be lifted which limited the public utilities to governmentally supervised utilities, and the passenger carriers to those whose stock is publicly traded. After consideration. Treasury is dropping the restrictions and expanding the exemption to include all passenger carriers and public utilities.
      (10) Clarify the prohibition on exempting automobile, boat and airplane dealerships: This proposed amendment would clarify that no motor vehicle dealership (including, but not limited to, motorcycle, recreational vehicle, and farm equipment dealers), may be exempted from the currency reporting requirements. (Amendment #4.)
      There was considerable confusion about use of the terra "conveyance." After consideration of the comments, it is being dropped from the final rule, since it seemed to confuse the issue more than clarify it. Several comments were received concerning other exempt issues. Several commenters wanted the exemption privilege extended to other entities such as retail sellers of services or foreign businesses. Others wished the governmental entity exemption to be clarified, and some wished deletion of the requirement to report transactions with foreign correspondent banks. The question of expansion of the exemption privilege Was not a matter at issue in this proposal. Also, Treasury feels that the governmental entity exemption is sufficiently clear as written. However, Treasury is clarifying the exemption privilege as it applies to check cashing services in order to resolve an internal inconsistency in § 103.22. Finally, some commenters raised operational difficulties with the requirement that a centralized exempt list be maintained. These commenters should be aware that the requirement to maintain a centralized list is not a new requirement, as it is presently required under 31 CFR 103.22(f).
      (11) Revise the procedures for filing all reports and for recording foreign financial accounts: This amendment would update and clarify the procedures for filing all reports, and for keeping records of interests in foreign financial accounts. All reports previously subject to filing within 30 days would be filed within 15 days of the reportable event or the request for the report, whichever is applicable. (Amendments #5, 6 & 8.)
      Many commenters wanted a universal 30 day filing date; a few commenters were under the mistaken impression that the CTR filing deadline was presently 30 days instead of 15. Many complained about the retention of original records, not copies, of the Form 4789. Some commenters also wanted the forms published for comments. The only changes proposed for 31 CFR 103.26 were to change the date for filing the Form 4790 (CMIR) to 15 days after receipt of the currency or monetary instruments, and to require that any exempt list information requested by Treasury under 31 CFR 103.22(g) be submitted within 15 days. After review of the comments, Treasury is retaining the proposal as originally drafted. As for publishing forms for public comment, information contained on the forms originally is specified in regulations which have been published for notice and comment. There is no need to publish proposed forms and request comments on an issue for which comment had already been solicited. Treasury, however, always is open to any written comments from institutions that may have difficulty dealing with a specific Treasury form.
      A few questions were raised about the foreign financial report itself; one bank wanted an assurance that employees authorized to sign ex officio on accounts were not required to file the reports. Another commenter wanted to assure that its international interbank transfer accounts ("nostro accounts") also were not included. Employees authorized to sign on accounts are not required to file a report unless they have a personal financial interest in the account. Additionally, nostro accounts are not subject to the foreign financial account report, but are subject to the Forms 4789 and 4790 requirements.
      (12) Require that customer identification be verified by document examination: This amendment would address a compliance problem Treasury identified with financial institutions that reported insufficient information on Forms 4789 to show proper identification of customers. This amendment would require financial institutions to exercise no less care in identifying the individuals conducting reportable transactions than they do when identifying nondepositors cashing checks. Signature cards alone would not satisfy the identification requirement (Amendment #7.)
      This was a major target for commenters, centering mainly on the proposal's impact on customer services and customer relations problems. Many banks said that they verify the identity of a customer when opening an account, and that they therefore should be permitted to rely on a signature card when filling out a Form 4789. Other commenters raised the issue of whether they must refuse a transaction if the customer refuses to supply the identification, while others wanted to know to what extent the bank could rely on the identification actually produced. Finally, some commenters wanted clarification of when a report "may be required" for purposes of obtaining the required information. After review of the comments, Treasury has altered the original proposal to permit banks that have obtained sufficient identifying information from the customer when opening the account, and that have noted that specific informaton on the signature card, to refer to the customer's signature card in filling out the Form 4789. Only specific identifying information, i.e., a driver's license or credit card number, may be used on the Form 4789; the notation "known customer" or "signature card on file" still is not permitted. A conforming amendment provides that the signature card need not be consulted prior to conducting the transaction. Other foreign identity requirements are being clarified by specifying a foreign driver's license with a listed residence as an example of an acceptable document proving identity. The term "may be required" has been deleted. While Treasury has not taken the position that a financial institution must refuse a transaction if a customer refuses to supply sufficient identifying information, it reminds financial institutions that § 103.26(a) of the regulations already obligates a financial institution to file complete and accurate Forms 4789 on all reportable transactions. Financial institutions should treat the identification of persons conducting reportable transactions, whether or not account holders, with as much care as they would treat the identification of nondepositors who cash checks.
      (13) Limit financial institution recordkeeping requirements to extensions of credit exceeding $10,000 instead of $5,000: This amendment would eliminate this recordkeeping requirement since it is no longer justified by the usefulness of the information retained. (Amendment #9.)
      There was no dissent on this point. The proposal will stay as originally drafted.
      (14) Expand financial institution recordkeeping requirements to include incoming as well as outgoing transactions with persons, accounts or places outside the United States: This amendment was proposed to respond to increasingly sophisticated international financial schemes, and would require that recordkeeping cover incoming as well as outgoing transactions, including transactions that are later cancelled or not completed for any reason. (Amendment #9.)
      There was major opposition on the requirement to retain records on transactions later cancelled, mostly focusing on the fact that few banks recorded nonevents, and that therefore their systems would not capture this information. The regulation will be clarified in order to require that only where a record ordinarily was made of an order later cancelled should that record be retained.
      (15) Revise additional recordkeeping requirements for banks, casinos and brokers or dealers in securities to simplify the procedures for recording taxpayer identification numbers, and require those financial institutions to keep lists of all persons from whom taxpayer identification numbers have not been obtained: This amendment would replace the current exemption provisions in §§ 103.34,103.35 and 103.36 regarding taxpayer identification numbers (TINs) with a simpler requirement in section 103.38(c) that a list be maintained of all persons from whom a taxpayer identification number is not obtained. Similar procedures would be incorporated in the new additional recordkeeping requirements for foreign currency exchanges. (Amendments #10,12,13,14 & 15.)
      There was major opposition to this requirement-centering on: (a) What is considered a "financial interest" in the account for the purposes of obtaining the TIN of every person who has a financial interest in an account; (b) a conflict with the regulation in proposed § 103.38 (and present § 103.34(a)(4)) that directs adherences to IRS rules, which require the retention of one TIN; (c) the possible retroactivity of the requirement; (d) possible costly recordkeeping and computer system changes; (ej the ambiguity as to which accounts are included in the new requirement; and (f) the problem of obtaining all of the TINs when not all the parties are present at the time of the transaction. After review of the comments, Treasury has decided to retain the requirement, consistent with IRS rules, that only one TIN be obtained, instead of creating two different sets of requirements for obtaining TINs. The proposal also had eliminated the 45-day grace period to obtain the TIN. Treasury has decided to retain a grace period, but to reduce it to 30 days to be more consistent with IRS TIN rules. In addition, Treasury will retain the requirement contained in the proposal that additional identifying information be acquired from those nonresident aliens subject to the TIN rules, and to use the TIN rules for securities and brokers as a guide to formulating TIN rules for currency dealers and exchangers.
      (16) Clarify that additional recordkeeping requirements for banks include deposit slips and credit tickets: This amendment would clarify that deposit slips and credit tickets should be retained as part of the paper trail already required by § 103.34 to be recorded, and that such records must stipulate whether transactions involve currency. (Amendment #11.). There was a great deal of opposition, centering primarily on: a) banks that do not have a currency line on their deposit slips; b) businesses that merely submit a register tape with the deposit and do not individually list all items; c) retention of the original as opposed to copies or microfilm; d) the $100 minimum for retention of the deposit slips, which many banks felt was too small; and e) various storage problems.
      The regulation presently in effect provides that copies may be kept of any required documents; the proposed change does not alter this. This minimum amount will stay at $100, in order to maintain the consistency and uniformity of the recordkeeping requirements for banks. Treasury again notes that the originals of these slips need not be kept; copies will suffice. The proposal that the individual deposited items be listed on the slip will be deleted. The deletion was made so that businesses that merely attach a register tape to a deposit slip to indicate the total amount deposited would not have to fill out a large number of deposit slips. The requirement that a bank be able to reconstruct a deposit has not been altered.
      (17) Require foreign currency dealers to keep certain additional records: Treasury's enforcement experience indicates that foreign currency dealers are an increasingly important component of sophisticated money laundering and tax evasion schemes and currently are subject to little or no oversight other than under the Bank Secrecy Act. (Amendment #14.)
      The comments received in response to this proposal centered on the low reporting threshold of $500, and the request for a definition of a "foreign currency dealer," with a specific exemption for banks. After review of the comments, it was decided to amend the regulation to change its heading to "currency dealer or exchanger" in order to be consistent with the statute, and to define "currency dealer or exchanger" in the definition section (31 CFR 103.11) as one engaged in business as such. Banks will be specifically exempted, as they already are subject to detailed recordkeeping requirements under Part 103. Additionally, the threshold reporting amount will be raised to 81,000, and the term "air express" will be changed to "common carrier" in order to make the terminology consistent with the rest of the Part.
      (18) Establish a uniform minimum retention period for transaction account records: Under present regulations, bank records required to reconstruct deposits to demand deposit accounts can be destroyed two years after the transaction. However, the constraints placed on the Department by the twoyear retention period have made it extremely difficult to document violations for more than one year with deposit records. The amendment to the record retention period was proposed to alleviate this problem and make the deposit record retention period consistent with the five-year retention requirement for the other records required by Part 103. (Amendment #15.)
      There was major opposition to this proposal, mainly as to the increased costs associated with compliance and storage problems. Many also questioned the law enforcement utility of an increased retention period for these deposit records. As Treasury still feels that the constraints imposed on the Department by the two-year retention period make it difficult to document Bank Secrecy Act violations and tax and related financial crimes, the regulation will remain as drafted. Additionally, some commenters also wrote of the difficulty of retention of proof tapes. The regulation does not specifically require retention of proof tapes, the preamble in the Notice of Proposed Rulemaking merely mentioned proof tapes as the type of record which might be maintained by the bank to be able to reconstruct transactions at a later date.
      (19) Clarify the overall Bank Secrecy Act enforcement and compliance authority of the Assistant Secretary (Enforcement); replace references to "Administrator" of the NCUA with "Chairman of the Board;" delegate certain examination authority to the Commissioner, Internal Revenue Service; specify the criminal investigatory responsibilities of the Commissioners of Customs and Internal Revenue; and specify the requirement for periodic reports to the Assistant Secretary (Enforcement): These amendments would: (1) Restate the overall responsibility of the Assistant Secretary for implementation and administration of Bank Secrecy Act reporting and recordkeeping requirements; (2) update regulatory language to reflect the recent change in the Assistant Secretary's title from "(Enforcement & Operations)" to "(Enforcement);" (3) correct a technical error in the delegations of Bank Secrecy Act compliance responsibility; (4) delegate to the Commissioner of Internal Revenue responsibility for the criminal investigation of all violations of Part 103 other than section 103.23; (5) restate existing delegations of investigatory responsibility; and (6) restate the requirement of periodic reports to the Assistant Secretary by agencies to which BSA compliance responsibility has been delegated. (Amendment #16.)
      No real substantive issues were raised, although one commenter questioned changing the term "responsibility for assuring compliance" to "authority for assuring compliance." Further clarification is being accomplished in the final rule by changing the introductory wording in § 103.46(b) to "Authority to examine institutions to determine their compliance with the provisions of this part is delegated as follows:". New language also is being added to the section to incorporate the clarification in the Anti-Drug Abuse Act concerning what documents may be reviewed in a Bank Secrecy Act investigation. Finally, the Department's exclusive authority to impose civil penalties under the Bank Secrecy Act will be specifically stated, as will an assurance that a bank supervisory agency may report specific violations of the Act to the Department at any time.
      (20) Correct the civil penalty amount that can be assessed for willful violations of the recordkeeping requirements of this Part: This amendment corrects a technical error in the regulations that implemented the increase in civil penalty amount made by the Comprehensive Crime Control Act of 1984. (Amendment #17.)
      In order to keep the regulations as current as possible, the amendments to the civil penalty amounts now reflect civil penalties applicable to pre-1984 violations, civil penalties applicable to violations between October 1984 and October 1986 under the Comprehensive Crime Control Act, and civil penalties for violations after October 1986 under the Anti-Drug Abuse Act of 1986. A few commenters wished to have Treasury announce a "safe harbor" of allowable civil violations of the regulations prior to assessing penalties. Treasury has been given the authority and responsibility to enforce the Bank Secrecy Act, and intends to do so to the fullest extent possible. There will be no "safe harbor" of allowable violations.
      (21) A new section is being added to reference the new violation relating to the structuring of transactions: This amendment merely incorporates into the regulations the new statutory violation of structuring currency transactions in order to avoid the reporting requirements of the Bank Secrecy Act. An addition also is being made to the civil penalty section to reference civil penalties, for structuring transactions. (Amendments #17 & 18.)

      In addition, readers should note that due to the passage of the Government Securities Act, Pub. L. 99-571, October 28,1986, the Securities Exchange Act of 1934 has been amended to require government securities brokers and dealers to register with the Securities and Exchange Commission beginning July 25,1987. Those government securities brokers and dealers presently not reqistered with the SEC will be required to do so, and therefore also will be subject to Part 103 Bank Secrecy Act regulations by virtue of the definition of "broker or dealer in securities" in 31 CFR 103.11(b).

      Finally, because of the changes in the Bank Secrecy Act regulations that this final rule will effect, financial institutions may recognize some inconsistencies between the provisions of the regulations, as revised, and the instructions on the current version of Form 4789. Although Treasury will need to revise the Form 4789 instructions to take the regulatory changes into account, financial institutions are advised in the interim that in the event of conflict or inconsistency between a provision of the regulations and the Form 4789 instructions, the regulatory provisions shall control.

      Executive Order 12291

      This final rule is not a major rule for purposes of Executive Order 12291. It is not anticipated to have an annual effect on the economy of $100 million or more. It will not result in a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions. It will not have any significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States based enterprises to compete with foreign-based enterprises in domestic or foreign markets.

      Regulatory Flexibility Act

      Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., it is hereby certified that this final rule will not have a significant economic impact on a substantial number of small entities. Most of the recordkeeping and reporting requirements imposed by this final rule concern information already found in routine business records. To the extent an affected financial institution has prudent record retention practices, it will already be retaining a substantial portion of the information identified in this proposed regulation.

      Paperwork Reduction Act

      The collection of information requirements mandated by this final rule have been reviewed and approved by the Office of Management and Budget under section 3504(h) of the Paperwork Reduction Act. (OMB Control No. 1505-0063.)

      Drafting Information

      The principal authors of this document are the Office of the Assistant General Counsel (Enforcement), and the Office of Financial Enforcement, Department of the Treasury.

      List of Subjects in 31 CFR Part 103

      Authority delegations (Government agencies), Banks and banking, Currency, Foreign banking, Investigations, Law enforcement, Reporting and recordkeeping requirements, Taxes.

      PART 103—[AMENDED]

      Amendment

      31 CFR Part 103 is amended as set forth below:

      1. The authority citation for Part 103 is revised to read as follows:
      Authority: Sec. 21 of the Federal Deposit Insurance Act, Pub. L. 91-506, Title I, 84 Stat. 1114,1116 (12 U.S.C. 1829b, 1951-9); and the Currency and Foreign Transactions Reporting Act, Pub. L 91-508, Title II, 84 Stat. lllti, as amended (31 U.S.C. 5311-24).
      2. Section 103.11 is revised to read as follows:

      § 103.11 Meaning of terms.

      When used in this part and in forms prescribed under this part, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, terms shall have the meanings ascribed in this section.

      (a) Bank. Each agent, agency, branch or office within the United States of any person doing business in one or more of the capacities listed below:
      (1) A commerical bank or trust company organized under the laws of any State or of the United States;
      (2) A private bank;
      (3) A savings and loan association or a building and loan association organized under the laws of any State or of the United States;
      (4) An insured institution as defined in section 401 of the National Housing Act;
      (5) A savings bank, industrial bank or other thrift institution;
      (6) A credit union organized under the law of any State or of the United States;
      (7) Any other organization chartered under the banking laws of any State and subject to the supervision of the bank supervisory authorities of a State;
      (8) a bank organized under foreign law;
      (9) Any national banking association or corporation acting under the provisions of section 25(a) of the Act of Dec. 23,1913, as added by the Act of Dec. 24,1919, ch. 18, 41 Stat. 378, as amended (12 U.S.C. 611-32).
      (b) Broker or dealer in securities. A broker or dealer in securities, registered or required to be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.
      (c) Common carrier. Any person engaged in the business of transporting individuals or good for a fee holds himself out as ready to engage in such transportation for hire and who undertakes to do so indiscriminately for all persons who are prepared to pay the fee for the particular service offered.
      (d) Currency. The coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes U.S. silver certificates, U.S. notes" and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country.
      (e) Currency dealer or exchanger. A person who engages as a business in dealing in or exchanging currency, except for banks which offer such services as an adjunct to their regular services.
      (f) Domestic. When used herein, refers to the doing of business within the United States, and limits the applicability of the provision where it appears to the performance by such institutions or agencies of functions within the United States.
      (g) Financial Institution. Each agent, agency, branch, or office within the United States of any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the capacities listed below:
      (1) A bank (except bank credit card systems);
      (2) A broker or dealer in securities;
      (3) A currrency dealer or exchanger, including a person engaged in the business of a check casher,
      (4) An issuer, seller, or redeemer of traveler's checks or money orders, except as a selling agent exclusively who does not sell more than $150,000 of such instruments within any given 30-day period;
      (5) A licensed transmitter of funds, or other person engaged in the business of transmitting funds;
      (6) A telegraph company;
      (7)
      (i) A casino or gambling casino licensed as a casino or gambling casino by a State or local government and having gross annual gaming revenue in excess of $1,000,000.
      (ii) A casino or gambling casino includes the principal headquarters and any branch or place of business of the casino or gambling casino.
      (8) A person subject to supervision by any state or federal bank supervisory authority.
      (h) Foreign bank. A bank organized under foreign law, or an agency, branch or office located outside the United States of a bank. The term does not include an agent, agency, branch or office within the United States of a bank organized under foreign law.
      (i) Foreign financial agency. A person acting outside the United States for a person (except for a country, a monetary or financial authority acting as a monetary or financial authority, or an international financial institution of which the United States Government is a member) as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.
      (j) Investment security. An instrument which:
      (1) Is issued in bearer or registered form;
      (2) Is of a type commonly dealt in upon securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium for investment;
      (3) Is either one of a class or series or by its terms is divisible into a class or series of instruments; and
      (4) Evidences a share, participation or other interest in property or in enterprise or evidences an obligation of the issuer.
      (k) Monetary instruments.
      (1) Monetary instruments include:
      (i) Currrency;
      (ii) All negotiable instruments (including personal cheeks, business checks, official bank checks, cashier's checks, third-party checks, promissory notes (as that term is defined in the Uniform Commercial Code), traveler's checks, and money orders) that are either in bearer form, endorsed without restriction, made out to a fictitious payee (for the purposes of section 103.23), or otherwise in such form that title thereto passes upon delivery;
      (iii) Incomplete instruments (including personal checks, business checks, official bank checks, cashier's checks, third-party checks, promissory notes (as that term is defined in the Uniform Commercial Code), traveler's checks, and money orders) signed but with the payee's name omitted; and
      (iv) Securities or stock in bearer form or otherwise in such form that title thereto passes upon delivery.
      (2) Monetary instruments do not include warehouse receipts or bills of lading.
      (l) Person. An individual, a corporation, a partnership, a trust or estate, a joint stock company, an association, a syndicate, joint venture, or other unincorporated organization or group, and all entities cognizable as legal personalities.
      (m) Secretary. The Secretary of the Treasury or any person duly authorized by the Secretary to perform the function mentioned.
      (n) Transaction account. Transaction accounts include those accounts described in 12 U.S.C. § 461(b)(l)(C), money market accounts and similar accounts that take deposits and are subject to withdrawal by check or other negotiable order.
      (o) Transaction in currency. A transaction involving the physical transfer of currency from one person to another. A transaction which is a transfer of funds by means of bank check, bank draft, wire transfer, or other written order, and which does not include the physical transfer of currency is not a transaction in currency within the meaning of this part.
      (p) United States. The various States, the District of Columbia, the Commonwealth of Puerto Rico, and the territories and possessions of the United States.
      (q) Business day. Business day, as used in this part with respect to banks, means that day, as normally communicated to its depository customers, on which a bank routinely posts a particular transaction to its customer's account.
      3. Part 103 is amended by removing the phrase "demand deposit account" wherever it appears and inserting in its place the phrase "transaction account".
      4. Section 103.22 is revised to read as follows:

      § 103.22 Reports of currency transactions.

      (a)
      (l) Each financial institution other than a casino shall file a report of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000. Multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totalling more than $10,000 during any one business day. Deposits made at night or over a weekend or holiday shall be treated as if received on the next business day following the deposit.
      (2) Each casino shall file a report of each deposit, withdrawal, exchange of currency, gambling tokens or chips, or other payment or transfer, by, through, or to such casino which involves a transaction in currency of more than $10,000. Multiple currency transactions shall be treated as a single transaction if the casino has knowledge that they are by or on behalf of any person and result in either cash in or cash out totalling more than $10,000 during any twenty-four hour period.
      (3) A financial institution includes all of its domestic branch offices for the purpose of this paragraph's reporting requirements.
      (b) Except as otherwise directed in writing by the Assistant Secretary (Enforcement) or the Commissioner of Internal Revenue:
      (1) This section shall not require reports:
      (i) Of transactions with Federal Reserve Banks or Federal Home Loan banks;
      (ii) Of transactions between domestic banks; or
      (iii) By nonbank financial institutions of transactions with commercial banks (however, commercial banks must report such transactions with nonbank financial institutions).
      (2) A bank may exempt from the reporting requirement of paragraph (a) of this section the following:
      (i) Deposits or withdrawals of currency from an existing account by an established depositor who is a United States resident and operates a retail type of business in the United States. For the purpose of this subsection, a retail type of business is a business primarily engaged in providing goods to ultimate consumers and for which the business is paid in substantial portions by currency, except that dealerships which buy or sell motor vehicles, vessels, or aircraft are not included and their transactions may not be exempted from the reporting requirements of this section.
      (ii) Deposits or withdrawals of currency from an existing account by an established depositor who is a United States resident and operates a sports arena, race track, amusement park, bar, restaurant, hotel, check cashing service licensed by state or local governments, vending machine company, theater, regularly scheduled passenger carrier or any public utility.
      (iii) Deposits or withdrawals, exchanges of currency or other payments and transfers by local or state governments, or the United States or any of its agencies or instrumentalities.
      (iv) Withdrawals for payroll purposes from an existing account by an established depositor who is a United States resident and operates a firm that regularly withdraws more than $10,000 in order to pay its employees in currency.
      (c) In each instance the transactions exempted under paragraph (b) of this section must be in amounts which the bank may reasonably conclude do not exceed amounts commensurate with the customary conduct of the lawful, domestic business of that customer, or in the case of transactions with a local or state govenment or the United States or any of its agencies or instrumentalities, in amounts which are customary and commensurate with the authorized activities of the agency or instrumentality. This section does not permit a bank to exempt its transactions with nonbank financial institutions (except for check cashing services licensed by state or local governments), nor will additional exemption authority be granted for such transactions (except transactions by other check cashers).
      (d) After October 27,1986, a bank may not place any customer on its exempt list without first obtaining a written statement, signed by the customer, describing the customary conduct of the lawful domestic business of that customer and a detailed statement of reasons why such person is qualified for an exemption. The statement shall include the name, address, nature of business, taxpayer identification number, and account number of the customer being exempted. The signature, including the title and position of the person signing, will attest to the accuracy of the information concerning the name, address, nature of business, and tax identification number of the customer. Immediately above the signature line, the following statement shall appear: "The information contained above is true and correct to the best of my knowledge and belief. I understand that this information will be read and relied upon by the Government." The bank shall indicate in this statement whether the exemption covers withdrawals, deposits, or both, as well as the dollar limit of the exemption for both deposits and withdrawals. The bank also shall indicate whether the exemption is limited to certain types of deposits and withdrawals (e.g., withdrawals for payroll purposes). In each instance, the exempted transactions must be in amounts that the bank may reasonably conclude do not exceed amounts commensurate with the customary conduct of the lawful domestic business of that customer. The bank is responsible for independently verifying the activity of the account and determining applicable dollar limits for exempted deposits or withdrawals. The bank must retain each statement that it obtains pursuant to this subparagraph as long as the customer is on the exempt list, and for a period of five years following removal of the customer from the bank's exempt list.
      (e) A bank may apply to the Commissioner of Internal Revenue for additional authority to grant an exemption to the reporting requirement, not otherwise permitted under paragraph (b) of this section, if the bank believes that circumstances warrent such an exemption. Such requests shall be addressed to: Chief, Currency and Banking Reports Branch, Exemption Review Staff. IRS Data Center, Post Office Box 32063, Detroit, Michigan 48232, and must be accompanied by a statement of the circumstances that warrant special exemption treatment and a copy of the statement signed by the customer required by paragraph (d) of this section.
      (f) A record of each exemption granted under this section and the reason therefor must be kept in a centralized list. The record shall include the names and addresses of all banks referred to in paragraph (b)(l)(ii) of this section, as well as the name, address, business, taxpayer identification number and account number of each depositor that has engaged in currency transactions which have not been reported because of the exemption provided in paragraph (b)(2) of this section. The record concerning the group of depositors exempted under the provisions of paragraph (b)(2) of this section shall also indicate whether the exemption covers withdrawals, deposits, or both; as well as the dollar limit of the exemption.
      (g) Upon the request of the Assistant Secretary (Enforcement) or the Commissioner of Internal Revenue, a bank shall provide a report containing the list of the bank's customers whose transactions have been exempted under this section and such related information as the Assistant Secretary or Commissioner shall require, including copies of the statements required in paragraph (d) of this section. The report must be provided within 15 days of the request. Any exemption may be rescinded at the discretion of the requesting official, who may require the bank to file reports required by paragraph (a) of this section with respect to future transactions of any customer whose transactions previously were exempted.

      (Approved by the Office of Management and Budget under control number 1505-0063)

      5. The first sentence of § 103.24 is revised to read as follows:

      §103.23 Reports of foreign financial accounts.

      Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons.

      * * *

      6. Section 103.26 is revised to read as follows:

      § 103.26 Filing of reports.

      (a)
      (l) A report required by § 103.22(a) shall be filed by the financial institution within 15 days following the day on which the responsible transaction occurred.
      (2) A report required by § 103.22(g) shall be filed by the bank within 15 days after receiving a request for the report.
      (3) A copy of each report filed pursuant to §103.22 shall be retained by the financial institution for a period of five years from the date of the report.
      (4) All reports required to be filed by § 103.22 shall be filed with the Commissioner of Internal Revenue, unless otherwise specified.
      (b)
      (l) A report required by § 103.23(a) shall be filed at the time of entry into the United States or at the time of depature, mailing or shipping from the United States, unless otherwise specified by the Commissioner of Customs.
      (2) A report required by § 103.23(b) shall be filed within 15 days after receipt of the currency or other monetary instruments.
      (3) AH reports required by § 103.23 shall be filed with the Customs officer in charge at any port of entry or departure, or as otherwise specified by the Commissioner of Customs. Reports required by § 103.23(a) for currency or other monetary instruments not physically accompanying a person entering or departing from the United States, may be filed by mail on or before the date of entry, departure, mailing or shipping. All reports required by § 103.23(b) may also be filed by mail. Reports filed by mail shall be addressed to the Commissioner of Customs, Attention: Currency Transportation Reports, Washington, DC 20226.
      (c) Reports required to be filed by § 103.24 shall be filed with the Commissioner of Internal Revenue on or before June 30 of each calendar year with respect to foreign financial acccounts exceeding $10,000 maintained during the previous calendar year.
      (d) Reports required by §§ 103.22, 103.23 or 103.24 shall be filed on forms prescribed by the Secretary. All information called for in such forms shall be furnished.
      (e) Forms to be used in making the reports required by § § 103.22 and 103.24 may be obtained from the Internal Revenue Service. Forms to be used in making the reports required by § 103.23 may be obtained from the U.S. Customs Service.

      (Approved by the Office of Management and Budget under control number 1505-0063)

      7. Section 103.27 is revised to read as follows:

      § 103.27 Identification required.

      Before concluding any transaction with respect to which a report is required under § 103.22, a financial institution shall verify and record the name and address of the individual presenting a transaction, as well as record the identity, account number, and the social security or taxpayer identification number, if any, of any person or entity for whose or which account such transaction is to be effected. Verification of the identity of an individual who indicates that he or she is an alien or is not a resident of the United States must be made by passport, alien identification card, or other official document evidencing nationality or residence (e.g., a Provincial driver's license with indication of home address). Verification of identity in any other case shall be made by examination of a document, other than a bank signature card, that is normally acceptable within the banking community as a means of identification when cashing checks for nondepositors (e.g., a drivers license or credit card). A bank signature card may be relied upon only if it was issued after documents establishing the identity of the individual were examined and notation of the specific information was made on the signature card. In each instance, the specific identifying information (i.e., the account number of the credit card, the driver's license number, etc.) used in verifying the identity of the customer shall be recorded on the report, and the mere notation of "known customer" or "bank signature care on file" on the report is prohibited.

      (Approved by the Office of Management and Budget under control number 1505-0063)

      8. The first sentence of § 103.32 is revised to read as follows:

      § 103.32 Records to be made and retained by persons having financial interests in foreign financial accounts.

      Records of accounts required by § 103.24 to be reported to the Commissioner of Internal Revenue shall be retained by each person having a financial interest in or signature or other authority over any such account. * * *

      9. Section 103.33 introductory text, (a), and (b) are revised and the OMB control number is added to read as follows:

      § 103.33 Records to be made and retained by financial institutions.

      Each financial institution shall retain either the original or a microfilm or other copy or reproduction of each of the following:

      (a) A record of each extension of credit in an amount in excess of $10,000, except an extension of credit secured by an interest in real property, which record shall contain the name and address of the person to whom the extension of credit is made, the amount thereof, the nature or purpose thereof, and the date thereof;
      (b) A record of each advice, request, or instruction received or given regarding any transaction resulting (or intended to result and later cancelled if such a record is normally made) in the transfer of currency or other monetary instruments, funds, checks, investment securities, or credit, of more than $10,000 to or from any person, account, or place outside the United States.

      * * * * *

      (Approved by the Office of Management and Budget under control number 1505-0063)

      10. Section 103.34(a) (1) introductory text and (2) are amended by removing the number "45" wherever it appears and inserting in its place the number "30", and by adding a new sentence at the end of paragraph (a)(l) to read as follows:

      § 103.34 Additional records to be made and retained by banks.

      (a)
      (l) * * * Where a person is a nonresident alien, the bank shall also record the person's passport number or a description of some other government document used to verify his identity.

      * * * * *

      11. Section 103.34 is further amended by revising paragraph (b)(l) and adding a new paragraph (b)(13) and the OMB control number to read as follows:

      § 103.34 Additional records to be made and retained by banks.

      * * * * *

      (b) * * *
      (1) Each document granting signature authority over each deposit or share account, including any notations, if such are normally made, of specific identifying information verifying the identity of the signer (such as a driver's license number or credit card number);

      * * * * *

      (13) Each deposit slip or credit ticket reflecting a transaction in excess of $100 or the equivalent record for direct deposit or other wire transfer deposit transactions. The slip or ticket shall record the amount of any currency involved.

      (Approved by the Office of Management and Budget under control number 1505-0063)

      12. Paragraphs (a) (1) introductory and (2) § 103.35 are amended by removing the number "45" wherever it appears and inserting in its place the number "30," and by adding a sentence at the end of paragraph (a)(l) and adding the OMB control number to read as follows:

      § 103.35 Additional records to be made and retained by brokers or dealers in securities.

      (a) * * * Where a person is a nonresident alien, the broker or dealer in securities shall also record the person's passport number or a description of some other government document used to verify his identity.

      * * * * *

      (Approved by the Office of Management and Budget under control number 1505-0063)

      13. Section 103.36 is amended by adding a sentence to the end of paragraph (a) and adding the OMB control number to read as follows:

      § 103.36 Additional records to be made and retained by casinos.

      (a) * * * Where a person is a nonresident alien, the casino shall also record the person's passport number or a description of some other government document used to verify his identity.

      * * * * *

      (Approved by the Office of Management and Budget under control number 1505-0063)

      §§ 103.37 and 103.38 [Redesignated as §§ 103.38 and 103.39]

      14. Sections 103.37 and 103.38 are redesignated as §§ 103.38 and 103.39, and a new § 103.37 is added to read as follows:

      § 103.37 Additional records to be made and retained by currency dealers or exchangers.

      (a)
      (l) After July 7,1987, each currency dealer or exchanger shall secure and maintain a record of the taxpayer identification number of each person for whom a transaction account is opened or a line of credit is extended within 30 days after such account is opened or credit line extended. Where a person is a non-resident alien, the currency dealer or exchanger shall also record the person's passport number or a description of some other government document used to verify his identity. Where the account or credit line is in the names of two or more persons, the currency dealer or exchanger shall secure the taxpayer identification number of a person having a financial interest in the account or credit line. In the event that a currency dealer or exchanger has been unable to secure the identification required within the 30-day period specified, it shall nevertheless not be deemed to be in violation of this section if:
      (i) It has made a reasonable effort to secure such identification, and
      (ii) It maintains a list containing the names, addresses, and account or credit line numbers of those persons from whom it has been unable to secure such identification, and makes the names, addresses, and account or credit line numbers of those persons available to the Secretary as directed by him.
      (2) The 30-day period provided for in paragraph (a)(l) of this section shall be extended where the person opening the account or credit line has applied for a taxpayer identification or social security number on Form SS-4 or SS-5, until such time as the person maintaining the account or credit line has had a reasonable opportunity to secure such number and furnish it to the currency dealer or exchanger.
      (3) A taxpayer identification number for an account or credit line required under paragraph (a)(l) of this section need not be secured in the following instances:
      (i) Accounts for public funds opened by agencies and instrumentalities of Federal, State, local or foreign governments,
      (ii) Accounts for aliens who are—
      (A) Ambassadors, ministers, career diplomatic or consular officers, or
      (B) Naval, military or other attaches of foreign embassies, and legations, and for members of their immediate families,
      (iii) Accounts for aliens who are accredited representatives to international organizations which are entitled to enjoy privileges, exemptions, and immunities as an international organization under the International Organizations Immunities Act of December 29,1945 (22 U.S.C. 288), and for the members of their immediate families,
      (iv) Aliens temporarily residing in the United States for a period not to exceed 180 days,
      (v) Aliens not engaged in a trade or business in the United States who are attending a recognized college or any training program, supervised or conducted by any agency of the Federal Government, and
      (vi) Unincorporated subordinate units of a tax exempt central organization which are covered by a group exemption letter.
      (b) Each currency dealer or exchanger shall retain either the original or a microfilm or other copy or reproduction of each of the following:
      (1) Statements of accounts from banks, including paid checks, charges or other debit entry memoranda, deposit slips and other credit memoranda representing the entries reflected on such statements;
      (2) Daily work records, including purchase and sales slips or other memoranda needed to identify and reconstruct currency transactions with customers and foreign banks;
      (3) A record of each exchange of currency involving transactions in excess of $1000, including the name and address of the customer (and passport number or taxpayer identification number unless received by mail or common carrier) date and amount of the transaction and currency name, country, and total amount of each foreign currency;
      (4) Signature cards or other documents evidencing signature authority over each deposit or security account, containing the name of the depositor, street address, taxpayer identification number (TIN) or employer identification number (EIN) and the signature of the depositor or of a person authorized to sign on the account (if customer accounts are maintained in a code name, a record of the actual owner of the account);
      (5) Each item, including checks, drafts, or transfers of credit, of more than $10,000 remitted or transferred to a person, account or place outside the United States;
      (6) A record of each receipt of currency, other monetary instruments, investment securities and checks, and of each transfer of funds or credit, or more than $10,000 received on any one occasion directly and not through a domestic financial institution, from any person, account or place outside the United States;
      (7) Records prepared or received by a dealer in the ordinary course of business, that would be needed to reconstruct an account and trace a check in excess of $100 deposited in such account through its internal recordkeeping system to its depositary institution, or to supply a description of a deposited check in excess of $100;
      (8) A record maintaining the name, address and taxpayer identification number, if available, of any person presenting a certificate of deposit for payment, as well as a description of the instrument and date of transaction;
      (9) A system of books and records that will enable the currency dealer or exchanger to prepare an accurate balance sheet and income statement.

      (Approved by the Office of Management and Budget under control number 1505-0063)

      15. Paragraph (c) of newly redesignated § 103.38 is redesignated as (d), a new paragraph (c) is added, and newly redesignated paragraph (d) is revised and the OMB control number is added to read as follows:

      § 103.38 Nature of records and retention period.

      * * * * *

      (c) the rules and regulations issued by the Internal Revenue Service under 26 U.S.C. § 6109 determine what constitutes a taxpayer identification number and whose number shall be obtained in the case of an account maintained by one or more persons.
      (d) All records that are required to be retained by this Part shall be retained for a period of five years. All such records shall be filed or stored in such a way as to be accessible within a reasonable period of time, taking into consideration the nature of the record, and the amount of time expired since the record was made.

      (Approved by the Office of Management and Budget under control number 1505-0063)

      16. Section 103.46 is amended by removing paragraph (b), by redesignating paragraph (a) as paragraph (b), by revising the introductory test of newly redesignated (b) and by revising (b)(5) and (b)(8), and by adding new paragraphs (a), (c), (d), (e) and (f) to read as follows:

      § 103.46 Enforcement.

      (a) Overall authority for enforcement and compliance, including coordination and direction of procedures and activities of all other agencies exercising delegated authority under this Part, is delegated to the Assistant Secretary (Enforcement).
      (b) Authority to examine institutions to determine compliance with the requirements of this Part is delegated as follows:

      * * * * *

      (5) To the Chairman of the Board of the National Credit Union Administration with respect to those financial institutions regularly examined for safety and soundness by NCUA examiners.

      * * * * *

      (8) To the Commissioner of Internal Revenue with respect to all financial institutions, except brokers or dealers in securities, not currently examined by Federal bank supervisory agencies for soundness and safety.
      (c) Authority for investigating criminal violations of this Part is delegated as follows:
      (1) To the Commissioner of Customs with respect to § 103.23;
      (2) To the Commissioner of Internal Revenue except with respect to § 103.23.
      (d) Authority for the imposition of civil penalties for violations of this part lies with the Assistant Secretary, and in the Assistant Secretary's absence, the Deputy Assistant Secretary (Law Enforcement).
      (e) Periodic reports shall be made to the Assistant Secretary by each agency to which compliance authority has been delegated under paragraph (b) of this section. These reports shall be in such a form and submitted at such intervals as the Assistant Secretary may direct. Evidence of specific violations of any of the requirements of this Part may be submitted to the Assistant Secretary at any time.
      (f) The Assistant Secretary or his delegate, and any agency to which compliance has been delegated under paragraph (b) of this section, may examine any books, papers, records, or other data of domestic financial institutions relevant to the recordkeeping or reporting requirements of this Part.
      17. Paragraph (a) of § 103.47 is revised and redesignated as (b), paragraph (b) is redesignated as (d), and new paragraphs (a), (c), (e), (f). (g) and (h) are added to read as follows:

      §103.47 Civil penalty.

      (a) For any willful violation, committed on or before October 12, 1984, of any reporting requirement for financial institutions under this Part or of any recordkeeping requirements of § 103.22, the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed $1,000.
      (b) For any willful violation committed after October 12,1984 and before October 28,1986, of any reporting requirement for financial institutions under this part or of the recordkeeping requirements of § 103.32, the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed $10,000.
      (c) For any willful violation of any recordkeeping requirement for financial institutions, except violations of § 103.32, under this part, the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed $1,000.

      * * * * *

      (e) For any willful of violation § 103.53 committed after January 26,1987, the Secretary may assess upon any person a civil penalty not to exceed the amount of coins and currency involved in the transaction with respect to which such penalty is imposed. The amount of any civil penalty assessed under this paragraph shall be reduced by the amount of any forfeiture to the United States in connection with the transaction for which the penalty was imposed.
      (f) For any willful violation committed after October 27,1986, of any reporting requirement for financial institutions under this part (except $$ 103.24,103.25 or 103.32), the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) involved in the transaction or $25,000.
      (g) For any willful violation committed after October 27,1986, of any requirement of §§ 103.24,103.25, or 103.32, the Secretary may assess upon any person, a civil penalty:
      (1) In the case of a violation of § 103.25 involving a transaction, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) of the transaction, or $25,000; and
      (2) In the case of a violation of § § 103.24 or 103.32 involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.
      (h) For each negligent violation of any requirement of this Part, committed after October 27,1986, the Secretary may assess upon any financial institution a civil penalty not to exceed $500.
      18. Part 103 is amended by adding at the end a new § 103.53 to read as follows:

      §103.53 Structured transactions.

      No person shall for the purpose of evading the reporting requirements of § 103.22 with respect to such transaction—

      (a) Cause or attempt to cause a domestic financial institution to fail to file a report required under § 103.22;
      (b) Cause or attempt to cause a domestic financial institution to file a report required under § 103.22 that contains a material omission or misstatement of fact; or
      (c) Structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with one or more domestic financial institutions.

      Dated: March 30,1987.

      Francis A. Keating, II,

      Assistant Secretary (Enforcement).

      [FR Doc. 87-7797 Tiled 4-6-S7; 10:17 am]

      BILLING CODE 4810-25-M

    • 87-50 Amendments to SEC Rules 15c3-l, 17a-3, and 17a-13 Regarding Treatment of Repurchase and Reverse Repurchase Agreements

      TO: All NASD Members and Other Interested Persons

      The Securities and Exchange Commission (SEC) has amended its net capital, recordkeeping, and quarterly securities-count rules under the Securities Exchange Act of 1934 regarding the treatment of repurchase (repo) and reverse repurchase (reverse repo) agreements entered into by registered broker-dealers.

      The amendments to SEC Rule 15c3-l will become effective on September 10, 1987. The amendments to SEC Rules 17a-3 and 17a-13 became effective on July 25, 1987.

      The text of the SEC's amendments, as reprinted in the Federal Register, is attached as Exhibit A.

      The significant aspects of the amendments are discussed below.

      Rule 15c3-l—Uniform Net Capital Rule

      1. Reverse Repurchase Agreement Deficits
      Broker-dealers will be required to take a charge to net worth in arriving at net capital for the full amount by which the contract price of a reverse repo exceeds the value of the securities received under the agreement. The charge may be reduced for certain permissible same-party offsets and margin or other deposits held by the broker-dealer. The charge may also be reduced by calls for margin and marks to market or other required deposits that are outstanding one business day or less. Currently, the charge for deficits on reverse repos ranges from 0 percent to 100 percent depending on maturity of the agreement.
      2. Repurchase Agreement Deficits
      For repo deficits, broker-dealers will be required to deduct from net worth in arriving at net capital the greater amount computed under combined Tests 1 and 2, or Test 3, if greater. (Tests 1, 2, and 3 are described below.) The first test addresses the deficit in an individual repo contract while the second test deals with the aggregate repo deficits with any one party in excess of 25 percent of tentative net capital (TNC). The third test involves the aggregate deficits of all repo contracts with all parties in excess of 300 percent of TNC. When computing the deductions, broker-dealers may net repo and reverse repo agreements entered into with the same party and these deficits may also be reduced by margin calls outstanding one business day or less.
      Test 1:
      Deduct the amount by which the value of securities subject to a repo agreement exceeds the allowable percentage of funds received by the broker-dealer under those agreements as follows:
      (1) 105 percent for U.S. Treasury Bills, Notes, and Bonds.
      (2) 110 percent for securities issued or guaranteed as to principal or interest by an agency of the United States or mortgage-related securities.
      (3) 120 percent for all other securities.

      and

      Test 2:
      Deduct the excess of the difference between the market value of securities subject to repo agreements with a counterparty and the funds received (if less than market value of the securities) over 25 percent of the broker-dealer's TNC. However, as to the same counterparty, the charge will be the greater of the amount computed under either this test or Test 1 above.

      or

      Test 3;
      Compare the aggregate market value of securities subject to repo agreements to the total amount of funds received under such agreements. If the aggregate market value of the securities exceeds the funds received by an amount greater than 300 percent of the broker-dealer's tentative net capital, the broker-dealer is required to deduct the amount equal to the excess over 300 percent of the broker-dealer's TNC. If the deficit computed under Test 3 is greater than the combined deficits under Tests 1 and 2, then the charge to net capital shall be the deficit computed under Test 3. If the deficit under Test 3 is less, the charge to net capital shall be the combined deficits from Tests 1 and 2.

      (Exhibit B shows examples of calculation of charges under Tests 1, 2, and 3.)

      3. Excess Margin on Reverse Repurchases
      The amendments require a broker-dealer to increase its required net capital by 10 percent of the excess market value of U.S. Treasury securities subject to reverse repo agreements with one counterparty over 105 percent of the funds paid pursuant to such agreements. The percentage parameter for reverse repos using U.S. agency or mortgage-backed securities will be 110 percent and for all other securities, 120 percent. The SEC will entertain no-action requests from those broker-dealers that can show that specific securities received under a reverse repurchase agreement were not used to obtain funds.
      4. Transactions With Affiliates
      The amendments provide for a deduction in certain circumstances from net worth in arriving at net capital for intercompany receivables and liabilities to affiliates, where collateral given to the affiliate exceeds the liability, unless the books and records of the affiliate are made available for inspection.

      Rule 17a-3—Maintenance of Books and Records

      Broker-dealers will, in addition to other provisions of the rule, be required to (1) maintain a separate ledger reflecting the assets and liabilities resulting from repo and reverse repo transactions, (2) record securities subject to repos on the securities position record, and (3) maintain copies of confirmations that it sends out with regard to repo transactions.

      Rule 17a-13—Quarterly Securities Count

      Broker-dealers will be required to account for securities that are the subject of repo and reverse repo agreements as they do for other securities for which they are responsible.

      * * * * *

      Questions concerning this notice may be directed to I. William Fishkind, Associate Director, NASD Financial Responsibility, at (202) 728-8405.

      Sincerely

      John E. Pinto, Jr
      Senior Vice President
      Compliance

      Attachments

      Exhibt A

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-24553; File No. S7-21-86]

      Financial Responsibility Rules

      AGENCY: Securities and Exchange Commission.

      ACTION: Final rule amendments.

      SUMMARY: The Securities and Exchange Commission ("Commission") is amending its net capital, recordkeeping and quarterly securities count rules under the Securities Exchange Act of 1934 ("Act") in connection with the treatment of repurchase and reverse repurchase agreements entered into by registered broker-dealers. The recordkeeping rule is amended to specifically require broker-dealers to maintain certain books and records with respect to their repurchase and reverse repurchase transactions, including securities records and copies of all confirmations. The quarterly securities count rule is amended to clarify that broker-dealers are required to account for securities that are the subjects of repurchase and reverse repurchase agreements, as they do for other securities for which they are responsible. The net capital rule is amended to establish deductions from net worth in arriving at net capital for repurchase and reverse repurchase agreements under certain risk circumstances. The rule is further amended to require additional capital when the broker-dealer has attained a high degree of leverage as a result of those agreements. The rule as amended will also require deductions regarding transactions with affiliates when the affiliate's records are not made available for examination.

      EFFECTIVE DATE: Ninety days from publication in the Federal Register, except for amendments to § § 240.17a-3 and 240.17a-13 which will be effective on July 25,1987.

      FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, (202) 272-2904, Julio A. Mojica, (202) 272-2372, or Michael P. Jamroz, (202) 272-2398, Division of Market Regulation, 450 5th Street, NW., Washington. DC 20549.

      SUPPLEMENTARY INFORMATION:

      I. Introduction

      In September of 1986, the Commission proposed amendments to its financial responsibility rules relating to repurchase and reverse repurchase agreements ("repos" and "reverse repos").1 Those proposed amendments were the result of the failures of several government securities dealers which caused substantial harm to public investors and broker-dealers through, fraudulent practices or inadequate accountability.2

      In response to those failures, the Congress has enacted the Government Securities Act ("GSA") which, among other things, granted the Department of Treasury ("Treasury") authority to adopt financial responsibility rules for all brokers and dealers in government securities, including those currently registered with the Commission. 3 Subsequently, the Treasury has proposed rules that, to a large extent, incorporate existing Commission financial responsibility regulations. 4 With some modification, the Treasury's proposed rules would require all government securities brokers and dealers to comply with Securities Exchange Act Rules 17a-3, 17a-4, 17a-5, 17a-7, 17a-8, 17a-ll, 17a-13 and 15c3-3. The modifications to the Treasury's proposed version of Commission Rules 17a-3 and 17a-13 5 include those amendments proposed by the Commission in September.

      The Treasury also proposed to apply Rule 15c3-3 to all government securities dealers, with certain modifications. The proposed modifications to Rule 15c3-3 6 relate to hold in custody repos 7 and would alter the requirements proposed by the Commission in September. In its release, the Commission proposed to require broker-dealers that enter into hold in custody repurchase agreements to: (i) Disclose the rights and liabilities of the parties, including the fact that the Securities Investor Protection Corporation ("SIPC") has taken the position that coverage under the Securities Investor Protection Act of 1970 may not be available; (ii) confirm the securities that are subject to such agreement; and (iii) maintain possession and control of those securities with certain exceptions. The Commission's proposed amendments would not require possession and control during the trading day for securities subject to hold in custody repurchase agreements of over $1 million. That exemption was provided to facilitate the settlement of government securities transactions during the trading day.

      The comments rearding the proposed amendments to Rule 153-3 were favorable in most instances except with respect to the requirement to disclose the rights and liabilities of the parties to repurchase agreements. The Commission has determined, however, to repropose the amendments to Rule 15c3-3 in a manner that will substantially conform Rule 15c3-3 to the Treasury's rule. The Commission's proposal is the subject of a separate release.

      Although not every comment is discussed in this release, the comments received with respect to Release No. 34-23602 have been reviewed extensively by the Commission and incorporated, as appropriate, in the amendments that the Commission is adopting today. In addition, a summary of comments has been prepared and placed in Public File No. S7-21-66. The comments received by the Commission regarding the proposed amendments to Rules 17a-3 and 17a-13 were generally favorable. With respect to Rule 15c3-l, the comments suggested that:

      (i) The increased capital requirement for excess margin would inhibit the broker-dealer's ability to control credit risk;
      (ii) The deduction for reverse repos should not be 100% of the deficit and should allow for margin calls; and
      (iii) The examination of the affiliate should be limited to verification of which entity has possession and control over the collateral. The amendments to Rules 17a-3,17a-13 and Rule 15c3-l and the comments received with respect to those rules are discussed in greater detail below.

      II. Accountability for Money and Securities

      1. Rule 17a-3

      Rule 17a-3 prescribes the books and records that a broker-dealer is required to maintain. The proposed amendments will specifically require a broker-dealer to: (i) Maintain a separate ledger reflecting the assets and liabilities resulting from repo and reverse repo transactions (commonly referred to as the "Repo Book"); (ii) record securities subject to repos and reverse repos on the securities record; and (iii) maintain copies of confirmations that it sends out with regard to repurchase transactions. The commentators generally supported the amendments to Rule 17a-3 and the Commission has determined to adopt the proposed amendments to ensure accountability for the funds and securities involved in repo transactions.

      2. Rule 170-13

      Rule 17a-13 requires that a broker-dealer physically count, verify and account for securities held in his physical possession or otherwise within his control or direction. Currently, the Rule does not contain a specific reference to securities that are the subjects of repurchase and reverse repurchase agreements. The purpose of the amendment is to make it clear that a broker-dealer is held accountable for repo securities as it is other securities subject to its possession or control. The commentators generally expressed support for the amendment and the Commission is adopting it in the form proposed.8

      III. Leverage and Risk Control

      1. Introduction

      Securities Exchange Act Rule 15c3-l requires that a broker-dealer's net capital must exceed the greater of $25,000 or 6% percent of its aggregate indebtedness 9 if the broker-dealer does not elect the alternative method. If it elects the alternative method under paragraph (f), the broker-dealer's net capital must exceed the greater of $100,000 or 2 percent of its aggregate debit items as computed in accordance with the Securities Exchange Act Rule 15c3-3a Formula for Determination of Reserve Requirement for Brokers and Dealers ("Reserve Formula"). Net capital, defined in paragraph (c)(2) of Rule 15c3-l, is computed by deducting from net worth, among other things, illiquid assets, unsecured receivables, and certain percentage deductions of the market value of securities and commodities positions of the firm. Those percentages generally take into account market risk, liquidity and volatility of the broker-dealer's holdings.

      2. Reverse Repurchase Agreements Deficits

      When the uniform net capital rule was adopted in 1975, the Commission required broker-dealers to deduct from net worth in arriving at net capital the amount by which the contract price of a reverse repo exceeded the value of the securities received under the agreement ("reverse repo deficit").10 The Commission's rule reflected that if a broker-dealer does not receive securities or other property of sufficient worth to cover the counterparty's obligation under a reverse repurchase agreement, the broker-dealer is exposed to risk for the amount of the deficiency.

      In 1982, the Commission adopted the current treatment of reverse repo deficits 11 Instead of deducting the entire deficit, the Commission amended the rule such that only a percentage of the deficit, depending on the term of the agreement, would be required to be deducted. Those amendments were in response to the concerns of broker-dealers regarding the application of the rule to the practices of the time. The rule recognized that many repurchase agreements were term, as opposed to overnight agreements, and reverse repo deficits were likely to occur as time passed.

      Some commentators suggested that the reverse repo deficit deduction should be similar to the proposed charges for repo deficits. 12 Under the proposal, the broker-dealer would not deduct the entire repo deficit as it would a reverse repo deficit. The proposal would only require a deduction when the repo deficit exceeded certain specified constraints. The Commission designed the repo deficit deductions in this manner to recognize that broker-dealers normally provide excess securities under a repo as a "cushion" or margin. Conversely, the Commission understands that when broker-dealers engage in reverse repos, they normally receive excess securities. Therefore, the deduction for reverse repo deficits not only more accurately reflects risk, but also the current industry practice. Accordingly, the Commission has adopted the proposed amendment.

      3. Repurchase Agreement Deficits

      For repo deficits, the proposed amendments required broker-dealers to deduct the largest amount computed under three separate tests. Under the first test, the broker-dealer deducts the amount by which the value of U.S. Treasury securities subject to repurchase agreements with a counterparty exceeds 105 percent of the funds received by the broker-dealer under those agreements. This charge takes into account the risk that the broker-dealer is exposed to when it delivers securities under a repurchase agreement that are valued in excess of the amount the broker-dealer receives from the counterparty.

      Under the second test, the broker-dealer deducts the excess of the difference between the market value of securities subject to repurchase agreements with a counterparty and the funds received (if less than the market value of the securities) over 25 percent of the broker-dealer's tentative net capital. The second charge takes into account the exposure to risk incurred by the broker-dealer in delivering a concentration of excess securities under repurchase agreements to one counterparty.

      Under the third test, the broker-dealer compares the aggregate market value of securities subject to repurchase agreements to the total amount of funds it has received under such agreements. If the aggregate market value of the securities exceeds the funds received by an amount greater than 300 percent of the broker-dealer's tentative net capital, the broker-dealer is required to deduct the amount equal to the excess over 300 percent of the broker-dealer's tentative net capital. The third computation compares the aggregate repurchase agreement exposure with all counterparties to the broker-dealer's tentative net capital.

      The Commission continues to believe that the three alternative tests accurately measure the risks entailed in repurchase transactions. Accordingly, the Commission has adopted the proposed amendments with two modifications. As in the case of reverse repo deficits, the commentators requested that margin calls be taken. into account. In recognition of the industry practice of requesting margin when exposure exceeds certain limits, the Commission has modified the amendments to reduce the repo deficit for purposes of the rule by margin calls outstanding one business day or less. In computing the deductions, the broker-dealer is allowed to net repurchase and reverse repurchase agreements into with the same party.13

      The commentators also pointed out that the 105% parameter under the first test should be increased where the securities subject to the repo are not United States Treasury securities. These commentators noted that it was common industry practice to require Government Agency Securities valued in excess of 105 percent of the funds received in the repo. For this reason, the factor has been increased to 110 percent for mortgage-backed securities and to 120 percent for other securities.

      4. Excess Margin on Reverse Repos

      While most broker-dealers properly protect themselves against credit risk related to reverse repos by receiving securities that are valued in excess of the funds they have extended under the agreement, some broker-dealers create leverage by obtaining the use of funds through matched repurchase agreements. Those broker-dealers enter into reverse repurchase agreements, receive securities that are valued substantially in excess of the amount advanced, then sell the securities pursuant to repurchase agreements for an amount of cash greater than the amount advanced under the reverse repurchase agreements. The net funds obtained are then used in the business of the broker-dealer.

      Under the amendments, the broker-dealer is required to increase its required net capital by ten percent of the excess market value of U.S. Treasury securities subject to reverse repos agreements with one counterparty over 105 percent of the funds paid pursuant to such agreements. Commentators reported that this amendment would inhibit the credit function of the broker-dealer because it would require capital when the broker-dealer is protecting itself against credit risk.

      The Commission does not wish to interfere in the normal credit policies of a broker-dealer. The Commission, however, believes that the leverage obtainable in repurchase transactions is of such magnitude that some restraint is necessary. Restraint in the use of "customer" property usually occurs through Rule 15c3-3, which prevents use of customer funds and securities to finance the broker-dealer's inventory. If Rule 15c3-3 were applicable to repurchase transactions, there would be no need for this amendment. However, the Commission, relying to some degree on the determination of the Securities Investor Protection Corporation that for purposes of the Securities Investor Protection Act l4 repo participants are not customers, has not taken the position that repo participants are "customers" for purposes of Rule 15c3-3. Such a determination would in effect result in a 100 percent capital charge as to the excess margin because the broker-dealer would likely fund the additional Reserve Account deposit with its own capital

      In sum, the Commission believes that the use of excess repb margin does raise concerns. Indeed, the misappropriation of excess margin accounted for a large percentage of total losses hvboth the E.S.M. and Bevill, Bresler failures. Accordingly, the Commission believes that because the broker-dealer has obtained leverage through the use of third party funds, an additional capital requirement is appropriate. Therefore, the Commission adopts the proposed amendments, but with one modification as suggested by the commentators.15 The 105% parameter will apply only to reverse repos using U.S. Treasury securities. As in the repo deficit area, the appropriate parameter for mortgage-backed securities will be 110%. The parameter for securities other than U.S. Treasury and mortgaged-backed securities will be 120 percent. With this modification, the Commission believes that the amendment provide assurance that firms will be able to meet customer obligations without unduly revising current industry practices.

      5. Transactions with Affiliates

      The amendments announced today also include a deduction from net worth in arriving at net capital for intercompany transactions with affiliates where the registered broker-dealer is potentially exposed to loss unless the books and records of the affiliate are available for examination. The amendment covers all intercompany receivables (not otherwise deducted) and liabilities to affiliates where collateral given to the affiliate exceeds the amount of the liability. The comment letters stated that the scope of the examination of the affiliate should be limited to verification of the location and control of the collateral. The Commission believes, however, that it is difficult, if not impossible, to determine which entity has control over collateral without the ability to conduct a broad examination, the Commission has clarified the language of the amendment, however, to indicate that the purpose of the examination is to demonstrate the validity of the receivable or payable.

      The Commission emphasizes that a broad review of the books and records of the affiliate will be necessary in some cases because the assets pledged as collateral by the affiliate in the intercompany loan may be fungible, for example securities or commodities positions. If the assets are fungible, and examiner will need to determine, by review of the firm's use of all of the assets of that group, if the assets pledged by the affiliate are being used for another purpose.

      The Commission's concerns extend beyond the question of control over collateral. In past examinations and investigations, the Commission has noted that some registered broker-dealers have used unregistered affiliates to embezzle customer funds or conduct fraudulent transactions. Those transactions have, in some cases, been initiated in the registered broker-dealer and transfered, via an intercompany account, to an unregistered affiliate upon regulatory investigation.

      The Commission does, however, adopt this amendment with the understanding that examiners will use discretion in applying the rule. The Commission expects any examination to be limited to demonstrating the validity of the receivable or payable. Moreover, no examination would be necessary if the examiner believes that the capital of the registered broker-dealer is not at risk as a result of the transactions. For example, under most circumstances examiners should not find it necessary to question transactions with affiliated publicly held companies that are subject to the independent annual audit requirements under the Securities Exchange Act Rules.

      Some commentators have suggested that futures commission merchants be exempt from this provision. The amendments announced today include that modification. The Commission has also decided to exempt registered government securities brokers or dealers from the provision.

      IV. Summary of Final Regulatory Flexibility Analysis

      The Commission has prepared a final Regulatory Flexibility Analysis in accordance with 5 U.S.C. 604 regarding the amendments to Rules 17a-3, 17a-13 and 15c3-l. The Analysis notes that the objective of the amendments is to further the purposes of the various financial responsibility rules which are to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers and to require broker-dealers to maintain such records as necessary or appropriate in the public interest or for the protection of investors. The analysis states that the amendments would subject small broker-dealers to additional record-keeping, disclosure, capital and accountability requirements. The Analysis states that the Commission did not receive any comments concerning the Initial Regulatory Flexibility Analysis. A copy of the Final Regulatory Flexibility Analysis may be obtained by contacting Michael P. Jamroz, Division of Market Regulation, Securities and Exchange Commission, Washington, DC 20549 (202) 272-2398.

      V. Statutory Authority

      Pursuant to the Securities Exchange Act of 1934 and particularly sections 15(c)(3), 17 and 23 thereof, 15 U.S.C. 78o(c)(3), 78q, and 78w, the Commission is adopting amendments to §§ 240.15c3-1, 240.17a-3, and 240.17a-13 of Title 17 of the Code of Federal Regulations in the manner set forth below.

      List of Subjects in 17 CFR Part 240

      Brokers, Reporting and recordkeeping requirements, Securities.

      VI. Text of Amendments

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

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

      1. The authority citation for Part 240 continues to read in part as follows:
      Authority: Sec. 23,48 Stat. 901, as amended; 15 U.S.C. 78w * * *. § 240.15c3-l, { 240.17a-4 and § 240.17a-l3 are also issued under Sees. 15(c)(3) and 17(a), 15 U.S.C. 78o (c)(3) and 78q(a).
      2. By revising paragraphs (c)(2)(iv)(F)tf}, (c)(2)(iv)(F)(2) and (c)(2)(iv)(F)(3) and by adding paragraphs (a)(9) and (c)(2)(iv)(H) of J 240.15c3-l as follows:

      § 240.15C3-1 Net capital requirements for brokers and dealers.

      (a) * * *
      (9) Certain Additional Capital Requirements for Brokers or Dealers Engaging in Reverse Repurchase Agreements. Notwithstanding the provisions of paragraphs (a)(l)-(8) of this section, a broker or dealer shall maintain net capital in addition to the amounts required under paragraphs (a) or (f) of this section in an amount equal to 10 percent of:
      (i) The excess of the market value of United States Treasury Bills, Bonds and Notes subject to reverse repurchase agreements with any one party over 105 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that person; and
      (ii) The excess of the market value of securities issued or guaranteed as to principal or interest by an agency of the United States or mortgage related securities as defined in section 3(a)(41) of the Act subject to reverse repurchase agreements with any one party over 110 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that person; and
      (iii) The excess of the market value of other securities subject to reverse repurchase agreements with any one party over 120 percent of the contract prices (including accrued interest) for reverse repurchase agreements with that person.

      * * * * *

      (c) * * *
      (2) * * *
      (iv) * * *
      (F)
      (1) For purposes of this paragraph:
      (i) The term "reverse repurchase agreement deficit" shall mean the difference between the contract price for resale of the securities under a reverse repurchase agreement and the market value of those securities (if less than the contract price).
      (ii) The term "repurchase agreement deficit" shall mean the difference between the market value of securities subject to the repurchase agreement and the contract price for repurchase of the securities (if less than the market value of the securities).
      (iii) As used in paragraph (c)(2)(iv)(F)(1) of this section, the term "contract price" shall include accrued interest.
      (iv) Reverse repurchase agreement deficits and the repurchase agreement deficits where the counterparty is the Federal Reserve Bank of New York shall be disregarded.
      [2]
      (i) In the case of a reverse repurchase agreement, the deduction shall be equal to the reverse repurchase agreement deficit.
      (ii) In determining the required deductions under paragraph (c)(2)(iv)(F)(2)(i) of this section, the broker or dealer may reduce the reverse repurchase agreement deficit by:
      [A] Any margin or other deposits held by the broker or dealer on account of the reverse repurchase agreement;
      [B] Any excess market value of the securities over the contract price for resale of those securities under any other reverse repurchase agreement with the same party;
      [C] The difference between the contract price for resale and the market value of securities subject to repurchase agreements with the same party (if the market value of those securities is less than the contract price); and
      [D] Calls for margin, marks to the market, or other required deposits which are outstanding one business day or less.
      [3]
      [i] In the case of repurchase agreements, the deduction shall be:
      [A] The excess of the repurchase agreement deficit over 5 percent of the contract price for resale of United States Treasury Bills, Notes and Bonds, 10 percent of the contract price for the resale of securities issued or guaranteed as to principal or interest by an agency of the United States or mortgage related securities as defined in section 3(a)(41) of the Act and 20 percent of the contract price for the resale of other securities and;
      [B] The excess of the aggregate repurchase agreement deficits with any one party over 25 percent of the broker or dealer's net capital before the application of paragraphs (c)(2)(vi) or (f)(3) of this section (less any deduction taken under paragraph (c)(2)(iv)(F)(3)(i)(A) of this section or. if greater;
      [C] The excess of the aggregate repurchase agreement deficits over 300 percent of the broker or dealer's net capital before the application of paragraphs (c)(2)(vi) or (f)(3) of this section.
      [ii] In determining the required deduction under paragraph (c)(2)(iv)(F)(3)(i) of this section, the broker or dealer may reduce a repurchase agreement deficit by:
      [A] Any margin or other deposits held by the broker or dealer on account of a reverse repurchase agreement with the same party to the extent not otherwise used to reduce a reverse repurchase deficit;
      [B] The difference between the contract price and the market value of securities subject to other repurchase agreements with the same party (if the market value of those securities is less than the contract price) not otherwise used to reduce a reverse repurchase agreement deficit; and
      [C] Calls for margin, marks to the market, or other required deposits which are outstanding one business day or less to the extent not otherwise used to reduce a reverse repurchase agreement deficit.

      * * * * *

      [H] Any receivable from an affiliate of the broker or dealer (not otherwise deducted from net worth) and the market value of any collateral given to an affiliate (not otherwise deducted from net worth) to secure a liability over the amount of the liability of the broker or dealer unless the books and records of the affiliate are made available for examination when requested by the representatives of the Commission or the Examining Authority for the broker or dealer in order to demonstrate the validity of the receivable or payable. The provisions of this subsection shall not apply where the affiliate is a registered broker or dealer, registered government securities broker or dealer or bank as defined in section 3(a)(6) of the Act or insurance company as defined in section 3(a)(19) of the Act or investment company registered under the Investment Company Act of 1940 or federally insured savings and loan association or futures commission merchant registered pursuant to the Commodity Exchange Act.

      * * * * *

      3. By revising paragraphs (a)(4)(v), (a)(4)(vi), (a)(5) and (a)(8), and adding paragraph (a)(4)(vii) to § 240.17a-3.

      § 240.17a-3 Records to be made by certain exchange members, brokers and dealers.

      (a) * * *
      (4) * * *
      (v) Securities failed to receive and failed to deliver;
      (vi) All long and all short securities record differences arising from the examination, count, verification and comparison pursuant to Rule 17a-13 and Rule 17a-5 hereunder (by date of examination, count, verification and comparison showing for each security the number of long or short count differences);
      (vii) Repurchase and reverse repurchase agreements;
      (5) A securities record or ledger reflecting separately for each security as of the clearance dates all "long" or "short" positions (including securities in safekeeping and securities that are the subjects of repurchase or reverse repurchase agreements) carried by such member, broker or dealer for his account of for the account of his customers or partners or others and showing the location of all securities long and the offsetting position to all securities short, including long security count differences and short security count differences classified by the date of the physical count and verification in which they were discovered, and in all cases the name or designation of the account in which each position is carried.

      * * * * *

      (8) Copies of confirmations of all purchases and sales of securities, including all repurchase and reverse repurchase agreements, and copies of notices of all other debits and credits for securities, cash and other items for the account of customers and partners of such member, broker or dealer.

      * * * * *

      4. By revising paragraph (b)(l), (b)(2) and (b)(3) of § 240.17a-13 as follows:

      § 240.17a-13 Quarterly security counts to be made by certain exchange members, brokers and dealers.

      (b) * * *
      (1) Physically examine and count all securities held including securities that are the subjects of repurchase or reverse repurchase agreements;
      (2) Account for all securities in transfer, in transit, pledged, loaned, borrowed, deposited, failed to receive, failed to deliver, subject to repurchase or reverse repurchase agreements or otherwise subject to his control or direction but not in his physical possession by examination and comparison of the supporting detail records with the appropriate ledger control accounts;
      (3) Verify all securities in transfer, in transit, pledge, loaned, borrowed, deposited, failed to receive, failed to deliver, subject to repurchase or reverse repurchase agreements or otherwise subject to his control or direction but not in his physical possession, where such securities have been in said status for longer than thirty days;

      * * * * *

      By the Commission.

      June 4,1987.

      Shirley E. Hollis,

      Assistant Secretary.

      [FR Doc. 87-13390 Filed 6-10-87; 8:45 am]

      BILLING CODE 8010-01-M

      Exhibt B

      EXAMPLES OF CALCULATIONS OF CHARGES

      Assumed Tentative Net Capital (TNC): $50 Million

      Test 1

      Individual Repo Funds Received

      $10 million

       

      Collateral Market Value

      12 million

       

      105%*

      10.5 million

       

      Excess Collateral

      1.5 million

       

      Tentative Capital Charge**

       

      $1.5 million

      Test 2

      Total Repo Funds Received with Single Account not including individual in Test 1 above

      $50 million

       

      Total Collateral Market Value for above account

      65 million

       

      Deficit

      15 million

       

      25% of TNC

      12.5 million

       

      Tentative Capital Charge**

       

      $2.5 million

      Test 3

      Total of all Repo Funds Received

      $300 million

       

      Total Collateral Market Value for all Repos

      452 million

       

      Deficit

      152 million

       

      300% of TNC

      150 million

       

      Tentative Capital Charge

       

      $2 million

      The charge shall be the greater of the amounts computed under Tests 1 and 2 combined, or Test 3.

      Capital Charge Calculation:

       

      Test 1

      $1.5 million

      Test 2

      2.5 million

       

      4 million

      Test 3

      2 million

      Actual Charge (Tests 1 & 2 combined)

      $4 million


      1 See Securities Exchange Act Release No. 23602 (September 4,1986) 51 FR 32858 (September 15. 1986). A repurchase agreement involving a security is the sale of that security at a specified price with a simultaneous agreement to repurchase the security at a specified price on a specified future date. A reverse repurchase agreement involving a security is the purchase of that security at a specified price with a simultaneous agreement to resell the security at a specified price on a specified future date.

      2 See The Regulation of the Government Securities Market, Report by the Securities and Exchange Commission to the Subcommittee on Telecommunications, Consumer Protection and Finance of the Committee on Energy and Commerce of the U.S. House of Representatives (June 20 1985).

      3 See section 15C(b) of the Securities Exchange Act as amended by the GSA.

      4 See 52 FR 5680 (February 25.1867).

      5 See 17 CFR 240.17a-3 and 17 CFR 24O.17a-13.

      6 See 17 CFR 24O.15C3-3.

      7 A hold in custody repurchase agreement is a repurchase agreement where the broker-dealer retains custody of the counterparty's securities.

      8 One commentator asked if substitution of securities subject to a repurchase agreement would cause the thirty day period under the rule to start again. Paragraph (b)(3) to Rule 17a-13 requires verification of securities "* * * subject to his control or direction but not in his physical possession, where such securities have been in said status for longer than thirty days". The Commission takes the position that the substitution of securities subject to a repurchase agreement changes the status of those securities for purposes of Rule 17a- 13. Consequently, any substitution would cause the thirty day period to start again.

      9 The term aggregage indebtedness is defined in paragraph Rule 15c3-l(c)(l).

      10 See Securities Exchange Act Release No. 11497 (June 26, 1975). 40 FR 29729 (July 18, 1975).

      11 See Securities Exchange Act Release No. 18737 (Mar. 13, 1982). 47 FR 21759 (May 20.1982). Subparagraph (c)(2)(iv)(F) of Rule 15c3-l prescribes a schedule of deductions ranging from zero to 100 percent for deficits resulting from reverse repurchase agreements [i.e., the difference between the contract price and the market value of the security). The amount of the charge depends on the maturity of the repo agreement.

      12 A repurchase agreement deficit occurs when the market value of securities subject to a repurchase agreement exceeds the contract price of the repurchase agreement.

      13 The Commission recognizes that when a broker-dealer enters into repurchase agreements using proprietary securities, the firm may incur a deduction because of a repo deficit and a deduction, or haircut, related to the securities. The Commission also understands that it is difficult for broker-dealers that engage in a significant amount of repurchase transactions to identify the specific securities that were used in a particular repurchase agreement. For those broker-dealers that believe they have a program which can specifically indentify those proprietary securities which are used in a particular repurchase agreement, the Commission will entertain requests for no-action positions that would allow any repurchase agreement deficit deduction to be reduced by the haircut already incurred with respect to the repurchase agreement securities.

      14 The status of repo participants for SIPA purposes has become more uncertain, however, as the United States District Court for the District of New Jersey has decided that repo participants are customers for purposes of the Securities Investor Protection Act of 1970 ("S1PA"). The United States District Court for the District of New Jersey decided in Cohen v. Army Moral Support Fund (in re Bevill, Bresler and Schulman). Adv. Proc. No. 85-2103 (slip op.) (D.N.J. Oct. 23,1966 that repo transactions were purchases and sales rather than secured loans. The practical effect of this decision was to extend coverage under the Securities Investor Protection Act to repo participants within that Jurisdiction.

      15 The Commission understands that it is difficult for broker-dealers that engage in significant repurchase agreement activity to identify whether specific securities obtained under a reverse repurchase agreement were used by the firm to obtain the use of funds. The Commission is willing to entertain no-action requests from those broker-dealers that can show that specific securities received under a reverse repurchase agreement were not used to obtain funds.

      * Collateral assumed to be U.S. Treasury Bills, Notes, and Bonds.

      ** As to the same counterparty, the charge will be the greater of the amount computed under either Test 1 or Test 2.


    • 87-49 New $ 10 NYSE Series 7 Development Fee to Begin in August

      TO: All NASD Members and Other Interested Persons

      ATTENTION: REGISTRATION AND TRAINING PERSONNEL

      EXECUTIVE SUMMARY

      Beginning with the August 15, 1987, administration of the Series 7 General Securities Registered Representative Examination, the NASD will collect a $10 test-development fee from its members for the New York Stock Exchange (NYSE) for each Series 7 grade posted to a candidate's registration record. These fees will be collected for and transferred to the NYSE to defray the expenses incurred by the NYSE for the development and maintenance of the Series 7 question bank.

      BACKGROUND

      Under a long-standing agreement with the NASD, the NYSE has borne most of the costs to develop and maintain the Series 7 General Securities Registered Representative Examination question bank. The NYSE maintains five geographically dispersed industry committees of question writers and reviewers. Each committee meets several times a year to add new or improved questions to the Series 7. The NYSE maintains this question bank at the exchange and delivers future test forms to the NASD, which, in turn, prints, administers, and grades the tests. Over the years, the NYSE has paid most of the expenses of the industry committees and the NYSE test-assembly programs.

      To help defray these expenses, beginning August 15, 1987, the NASD will collect a $10 test-development fee for the NYSE from all candidates who take a Series 7. The fees collected from NASD members will be transferred in their entirety to the NYSE.

      The NASD is expecting SEC approval of an amendment to Schedule A to the NASD By-Laws that will incorporate this fee assessment. In this connection, the NASD will debit a member's registration account $10 for each Series 7 grade posted to a candidate's registration record.

      Questions concerning this notice may be directed to David Uthe, Senior Qualifications Analyst, NASD Qualifications, at (301) 738-6695.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member & Market Services

    • 87-48 NASDAQ National Market System Grows to 3,019 Securities With 30 Voluntary Additions on August 4, 1987, and One Mandatory Inclusion On August 4, 1987

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

      On Tuesday, August 4, 1987, 30 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 3,018. These 30 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 30 issues scheduled to join NASDAQ/NMS on Tuesday, August 4, 1987, are:

      Symbol*

      Company

      Location

      ANECF

      Aneco Reinsurance Company Limited

      Hamilton, Bermuda

      BRLN

      Brooklyn Savings Bank (The)

      Danielson, CT

      CECX

      Castle Energy Corporation

      Blue Bell, PA

      CCAB

      Communications & Cable, Inc.

      West Palm Beach, FL

      CWDI

      Craft World International, Inc.

      Tampa, FL

      CXIM

      Criticare Systems, Inc.

      Waukesha, WI

      DXTK

      Diagnostek, Inc.

      Albuquerque, NM

      DXTKZ

      Diagnostek, Inc. (Wts)

      Albuquerque, NM

      ECOA

      Equipment Company of America

      Hialeah, FL

      FAAA

      Fine Art Acquisitions, Ltd.

      New York, NY

      FAAAW

      Fine Art Acquisitions, Ltd. (Wts)

      New York, NY

      FASB

      First American Savings Bank, F.S.B.

      Canton, OH

      FSCB

      First Commercial Bancshares, Inc.

      Birmingham, AL

      FABKP

      First of America Bank Corporation (Pfd)

      Kalamazoo, MI

      HIPT

      Hi-Port Industries, Inc.

      Houston, TX

      HORL

      Home Office Reference Laboratory, Inc.

      Lenexa, KS

      HRMR

      Hunter-Melnor, Inc.

      Memphis, TN

      ITIL

      International Telecharge, Inc.

      Dallas, TX

      JASN

      Jason,Incorporated

      Milwaukee, WI

      JETS

      Jetborne International, Inc.

      Miami, FL

      LSNB

      Lake Shore Bancorp, Inc.

      Chicago, IL

      MDCI

      Medical Action Industries, Inc.

      Farmingdale, NY

      NMDY

      Normandy Oil & Gas Company, Inc.

      Fort Worth, TX

      PETD

      Petroleum Development Corporation

      Bridgeport, WV

      ROYG

      Royal Business Group, Inc.

      Boston, MA

      ROYLW

      Royalpar Industries, Inc. (Wts)

      West Hartford, CT

      SWIS

      St. Ives Laboratories Corporation

      Chatsworth, CA

      TMCI

      TM Communications, Inc.

      Dallas, TX

      TMCIVV

      TM Communications, Inc. (Wts)

      Dallas, TX

      VISA

      Vista Organization, Ltd. (The)

      New York, NY

      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.

      NASDAQ/NMS Pending Additions

      Symbol*

      Company

      Location

      BTHL

      Bethel Bancorp

      Bethel, ME

      ELCO

      Electronic Concepts, Inc.

      Eatontown, NJ

      HFEI

      Home Furnishings Enterprises, Inc.

      Monroe, NC

      INTCL

      Intel Corporation (Wts)

      Santa Clara, CA

      NJSB

      New Jersey Savings Bank

      Somerville, NJ

      SUGR

      Summagraphics Corporation

      Fairfield, CT

      XSCR

      Xscribe Corporation

      San Diego, CA

      The following security will enter NASDAQ/NMS under mandatory Tier 1 criteria on August 4, 1987:

      Symbol*

      Company

      Location

      KMAG

      Komag, Incorporated

      Milpitas, CA

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since July 10, 1987:

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      DNNY

      Frances Denney Companies, Inc. (The)

      7/10/87

      VKSI

      Vikonics, Inc.

      7/14/87

      FFKY

      First Federal Savings Bank of Elizabethtown

      7/15/87

      HRHC

      Hilb, Royal and Hamilton Company

      7/15/87

      PVSA

      Parkvale Savings Association

      7/16/87

      FILE

      FileNet Corporation

      7/21/87

      WWGPY

      Ward White Group, pic.

      7/21/87

      EBKC

      Eliot Savings Bank

      7/22/87

      CGRP

      Chase Medical Group, Inc.

      7/23/87

      EVRX

      Everex Systems, Inc.

      7/24/87

      The following changes to the list of NASDAQ/NMS securities occurred since July 10, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      COES/COES

      Commodore Environmental Services, Inc./Commodore Resources Corporation

      7/13/87

      ATNN/ATNN

      American Telemedia Network, Inc./ATN, Inc.

      7/14/87

      GMED/GMED

      GMI Group, Inc. (The)/Graphic Media, Inc.

      7/20/87

      GLFS/GLFS

      Great Lakes Bancorp, A Federal Savings Bank/Great Lakes Federal Savings

      7/20/87

      APER/APER

      Atlantic Permanent Savings Bank, F.S.B./Atlantic Permanent Savings & Loan Association

      7/22/87

      BJIC/BJICA

      Ben & Jerry's Homemade Ice Cream, Inc. (Cl A)/Ben & Jerry's Homemade Ice Cream, Inc.

      7/24/87

      TRNI/TRIN

      Trans Industries, Inc./Trans Industries, Inc.

      7/27/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      HETC

      HETRA Computer and Communications Industries, Inc.

      7/13/87

      ISOL

      Information Solutions, Inc.

      7/13/87

      IMMCP

      International Mobile Machines Corporation (Pfd)

      7/13/87

      PERLF

      Perle Systems, Ltd.

      7/13/87

      CMTK

      Comptek Research, Inc.

      7/15/87

      JNSV

      Jones & Vining, Inc.

      7/15/87

      SCHL

      Scholastic, Inc.

      7/17/87

      BBUY

      Best Buy Company, Inc.

      7/20/87

      NESA

      Northeast Savings, F.A.

      7/21/87

      NESAP

      Northeast Savings, F.A. (Pfd)

      7/21/87

      CFUR

      Cochrane Furniture Company, Inc.

      7/23/87

      BISC

      Barrister Information Systems Corporation

      7/24/87

      NATH

      Nathan's Famous, Inc.

      7/24/87

      SHAW

      Shaw's Supermarkets. Inc.

      7/27/87

      Any 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) 728-8 192.

      Sincerely,

      Lynn Nellius
      Secretary


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


    • 87-47 Request for Comments on a Proposed New Level of Registration, Designated Assistant Representative-Order Processing, Under Schedule C to the NASD By-Laws

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: AUGUST 22, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Schedule C to the By-Laws that would establish a new level of registration — below the level of "Representative" — for persons in member firms whose activities are limited to providing current securities quotations and accepting unsolicited customer orders and unsolicited new accounts.

      The text of the proposed amendment is attached.

      BACKGROUND

      The growth of discount brokerage operations in recent years has raised questions regarding the appropriate level of qualification for persons who accept orders and provide certain related information services on behalf of public customers. Typically, such persons do not solicit transactions or new accounts, render investment advice, or make recommendations to customers regarding the appropriateness of securities transactions. The NASD Board of Governors is concerned that members may be allowing persons to accept customer orders who are not properly registered pursuant to Schedule C to the NASD By-Laws.

      The NASD currently requires that persons engaged in accepting customer orders be registered as General Securities Representatives and pass the Series 7 examination. This is the most comprehensive representative examination the NASD administers. The appropriateness of this requirement has been challenged at the SEC and in the courts and, while the NASD's position has been upheld, both the SEC and a federal court have suggested that a more narrow qualification standard may be appropriate for persons in member firms who accept unsolicited customer orders and provide certain related information services.

      SUMMARY OF PROPOSED AMENDMENT

      The Qualifications Committee of the NASD Board of Governors has proposed a new level of registration, below the level of "Representative," that is designated "Assistant Representative-Order Processing." A new Part IV to Schedule C to the NASD By-Laws would establish this new registration level. This registration level would continue the requirement that persons who accept customer orders be registered and subject to the statutory disqualification and fingerprint screening processes, while establishing a qualification requirement commensurate with their job responsibilities.

      Persons registered at this new level would be limited to accepting unsolicited customer orders or accounts and providing current market quotations to the public. Under no circumstances would they be permitted to solicit transactions or new accounts, render investment advice, make recommendations regarding the appropriateness of securities transactions, or function as market makers or traders in securities markets. Members would be required to compensate such persons on an hourly wage or salaried basis only and to directly supervise their activities on the members' premises. Persons registered as Assistant Representatives-Order Processing would not be eligible to register as Representatives or Principals pursuant to Parts I and II of Schedule C to the By-Laws.

      The Assistant Representative-Order Processing level of registration is intended to apply to persons employed by members for the sole or primary purpose of accepting unsolicited customer orders — typically, in a discount brokerage operation. The proposed registration level would not affect the "ministerial" exemption from registration contained in existing Part V of Schedule C for certain administrative personnel in member firms. In keeping with long-standing NASD policy and rule interpretations of other self-regulatory organizations, the "ministerial" exemption would continue to apply to administrative personnel who occasionally receive communications from the public at a time when appropriately qualified representatives or principals are unavailable. In these circumstances, unregistered administrative personnel may record and transmit unsolicited customer orders to the firm's normal order-processing channels, provided such orders are subsequently reviewed by a registered principal of the firm and the unregistered personnel do not routinely accept customer orders as part of their normal duties.

      * * * * *

      The NASD encourages members to comment on these proposals. The NASD Board of Governors requests that commentators specifically address whether this new level of registration would lower the qualification standards for the industry and whether it would be burdensome for firms to supervise their associated persons' activities.

      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

      All comments and suggestions must be received no later than August 22, 1987. Comments and suggestions received by this date will be considered by the NASD Qualifications Committee and the NASD Board of Governors. If the proposed amendments are approved by the Board, they must be filed with and approved by the Securities and Exchange Commission before they become effective.

      Questions concerning this notice may be directed to either Frank J. McAuliffe, Vice President, NASD Qualifications, at (301) 738-6694, or Carole Hartzog, Senior Qualifications Analyst, at (301) 738-6696.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

      AMENDMENT TO SCHEDULE C TO THE NASD BY-LAWS

      NEW PART IV

      IV

      REGISTRATION OF ASSISTANT REPRESENTATIVE-ORDER PROCESSING

      (1) All Assistant Representatives-Order Processing Must Be Registered—All persons associated with a member who are to function as Assistant Representatives-Order Processing shall be registered with the Corporation and shall pass a Qualification Examination for Assistant Representatives-Order Processing specified by the Board of Governors before such registrations may take effect.
      (2) Definition of Assistant Representative-Order Processing—The term "Assistant Representative-Order Processing" shall apply to persons associated with a member who accept telephone or other communications from the public for the purposes of providing current securities quotations, accepting unsolicited customer orders for submission to the normal execution operations of the member, and/or accepting unsolicited new accounts for submission to the normal account-approval operations of the member.
      (3) Prohibitions—Under no circumstances may an Assistant Representative-Order Processing solicit transactions or new accounts on behalf of members, render investment advice, or make recommendations to customers regarding the appropriateness of securities transactions, or effect transactions in securities markets on behalf of members.
      (4) Compensation—Members may only compensate Assistant Representatives-Order Processing on an hourly wage or salaried basis and may not in any way directly or indirectly relate their compensation to the number or size of transactions effected for customers or to the number of accounts submitted to the member's account-approval operations.
      (5) Supervision—The activities of Assistant Representative-Order Processing must be conducted on the premises of a member under the direct supervision of an appropriately registered principal.
      (6) Requirement for Examination on Lapse of Registration—Any person whose most recent registration as an Assistant Representative-Order Processing has been terminated for a period of two (2) or more years immediately preceding the date of receipt by the Corporation of a new application shall be required to pass a Qualification Examination for Assistant Representative-Order Processing.

      July 27, 1987

      TO: Selected NASD Members and Other Interested Persons

      RE: Communications With the public

      The purpose of this notice is to express the concern of the NASD Advisory Council regarding the advertising developed by some NASD members that are subsidiaries or affiliates of banks, insurance companies, and other financial institutions (hereinafter referred to as "financial institutions") and to remind NASD members of their responsibilities under the NASD's advertising rule.

      The Advisory Council, which is comprised of the Chairman of each District Business Conduct Committee in the 14 NASD District Offices, meets twice a year to consider major issues and problems in the districts and to make recommendations to the NASD Board of Governors as to those issues that are important to the industry.

      Article III, Section 35 of the NASD Rules of Fair Practice governs members' communications with the public. In addition to the filing requirements for such communications, the rule sets forth standards that basically require accuracy, balance, and substantiation of information presented in members' advertising and sales literature. The Advisory Council recognizes that certain standards for securities advertising differ from those applicable to financial institutions' advertising and believes that these differences may cause confusion for financial institutions preparing material subject to Article III, Section 35.

      The following are the major areas in which the Advisory Council noted problems:

      1. Prominent Disclosure of the NASD Member's Name

      Article III, Section 35(d)(2)(A) requires that advertising and sales literature contain the name of the member. Such material should clarify which products and services are offered by the NASD broker-dealer member and which are offered by the financial institution or other subsidiary. If the material solely concerns business of the broker-dealer, the financial institution may be referred to in order to identify the location of the broker-dealer's services, but such reference should not appear prominently. The potential client should be able to determine which company is the broker-dealer and there must be a clear distinction between the services and products offered by the broker-dealer and those offered by the financial institution. There should be no implication that the financial institution offers securities products or services.

      2. Discount Commission Advertising

      Many NASD member financial institutions offer discount brokerage services to their clients. The NASD Board of Governors has long recognized the importance of adequate disclosure in written materials promoting commission discounts. Recommendations were developed to assist members in preparing material that is accurate, fair, not misleading, and consistent with the standards set forth in NASD rules. It is not intended that all the recommended disclosures be included in every public communication. However, if the content of the communication dictates specific disclosure, such disclosure must be made. A copy of these recommendations is attached as Exhibit A.

      3. Investment Company Advertising

      Another area in which a significant number of financial institutions are involved is the sale of investment company securities. In addition to the standards in the NASD advertising rule, such communications, depending on their content, are subject to SEC Rule 156 and also may be subject to either SEC Rules 134, 482, or 135a. The SEC rules set forth specific conditions under which investment company securities may be advertised and are contained in the Investment Company Securities section of the NASD Manual, beginning on page 5041.

      Communications concerning investment company securities can be complicated and technical, particularly when related to investment results or comparisons. To assist members in preparing investment company sales material and in complying with the NASD's general rules, the NASD Investment Companies Committee developed and the Board of Governors approved the "Guidelines Regarding Communications With the Public About Investment Companies and Variable Contracts."

      These guidelines apply to sales literature as well as to communications subject to the above-mentioned SEC rules. They are also contained in the Investment Company Securities section of the NASD Manual, beginning on page 5101.

      The NASD distributed two additional notices to provide guidance to members in this area. The first (Notice to Selected Members, dated December 29, 1983) concerns the advertising of mutual fund performance over short time periods. The second (Notice to Members 86-41, dated May 27, 1986) concerns the presentation of yield quotations for investment company securities. Both of these notices strongly emphasize the importance of disclosing all material information. The general principles outlined apply to such communications of all members. The notices are attached as Exhibits B and C, respectively.

      * * * * *

      Some financial institutions utilize a consolidated facility to prepare and distribute advertising and sales literature. Financial institutions are urged to familiarize their staff with the above information, particularly personnel involved in preparing communications with the public. Members are also urged to ensure that their advertising and sales literature meet the conditions set forth in Article III, Section 35 of the NASD Rules of Fair Practice and to ensure that customers have no basis for claiming that they were misled by the content of such communications.

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

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachments

      Exhibit A

      RECOMMENDATIONS CONCERNING ADVERTISING AND PROMOTION OF COMMISSION DISCOUNTS

      NASD rules require that members' communications with the public be accurate, fair and not misleading. An investor considering the services of a broker-dealer, including a "discount" broker, should be informed of all factors material to his use of such broker-dealer's services. There are many variables in the charges and services offered by broker-dealers and it isn't reasonable to expect their every variation be included in media advertising, given the expense of such advertising. Relevant factors not included in advertisements should be communicated to persons responding, however. Certain items should be included in the advertisement itself, when the advertisement would be misleading in the absence of their disclosure.

      Generally, any communication with the public concerning "discount" brokerage should reflect recognition of the following factors:

      • Stocks are not the only types of securities available. Commission rates may vary markedly for other types of products (e.g., options, bonds).
      • Certain types of securities offered by prospectus cannot normally be sold at prices reflecting discounts from the commission or sales charge stated in the prospectus (e.g., mutual funds and certain other registered offerings).
      • Generalized, unqualified statements concerning a commission or discount rate will be inherently inaccurate and misleading if there are any undisclosed factors which would cause that rate to be unavailable (e.g., minimum commissions, volume requirements, separate service charges, etc.).

      Importance of Full Disclosure

      The public will have a much better understanding of a member's services, and future disputes will be minimized if certain disclosures are made, preferably in writing. The most common method of disclosing these items is through use of a brochure or mailer. Examples of important basic disclosures include:

      1. The basic commission rate schedule of the member, including variations in the rates applicable to larger transactions or to transactions in options, bonds, or other products.
      2. Any applicable minimum commission, minimum transaction size, registration fee or initial deposit requirement.
      3. Any special service charges applicable to limit orders, safekeeping of securities, transfer or issue of certificates, odd lot transactions, research, or other services.
      4. If applicable, the services not offered by the firm which might be expected by an investor. The most common services eliminated by discount brokers are personalized recommendations and research.
      5. If mutual funds or fixed-price products are specifically mentioned in advertising or sales literature, the fact that discounts on such products are not available. If such products are not offered by the member, consideration should be given to so stating.
      6. If the member ever acts as principal, as a market maker or otherwise, the policies of the member in this regard and the relevance to such transactions, or lack thereof, of the member's agency commission rates.
      7. Any other factor which might be necessary to any understanding of the member's rates or services. Where a member's rates may be difficult to determine due to the combined impact of minimum commissions, separate registration or service charges, etc., use of specific examples should be considered.

      Discount Advertising

      While, as noted, including all of the above disclosures in every advertisement or public communication may be neither necessary nor practical, advertisements which omit such items should include an offer to furnish further information. Also, the content of a particular advertisement may dictate specific disclosures in order to make it accurate and not misleading, and there are certain unwarranted implications which can be contained in advertisements which are not carefully prepared. For example, advertisements and promotional material should disclose:

      • any time limitations or material conditions applicable to a rate or discount advertised, especially the conditions under which an advertised maximum savings would be achieved. For example, if a minimum transaction amount is required, or the savings applies only to OTC trades, such should be disclosed.
      • what an advertised discount is based upon, e.g., the member's normal commission rates, formerly existing fixed rates, recent survey of competitors, etc. If the discount is based upon a survey of competitors, the date and nature of such survey should be disclosed, and consideration should be given to disclosing the details of the survey, or at least offering such details.
      • any factor which would alter an advertised discount which is stated or implied to be a minimum or across-the-board discount. A minimum commission, volume requirement, special service charge, etc., would fall into this category. Even where the context of a particular advertisement doesn't require it, disclosure of a minimum commission charge will reduce both misunderstandings and inquiries from unqualified respondents.

      Implications to be avoided in discount advertising include:

      • that a single discount or rate is applicable to all transactions in all types of securities.
      • that all products and services typically offered by broker-dealers are available when such is not the case.
      • that a particular service offered (or exchange membership) is that of the advertising member when it is provided by a correspondent or clearing firm.
      • that a survey of competitors' commission rates is current when such is not the case. (It may be misleading to base an advertised discount on a survey which isn't current.)

      Adherence to principles of full disclosure to clients will reduce troublesome and potentially costly misunderstandings about rates or services. The Association stands ready to assist members in applying its standards with respect to advertising and sales literature (primarily Article III, Section 35 of the Rules of Fair Practice). Inquiries should be directed to:

      NASD Advertising Department
      1735 K Street, N.W.
      Washington, D.C. 20006
      (202) 728-8330

    • 87-46 SEC Approval of NASD Corporate Governance Standards for NASDAQ/NMS Issuers and Amendments to Schedule D to the NASD By-Laws Concerning Designation of NASDAQ National Market System (NASDAQ/NMS) Securities

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The Securities and Exchange Commission has approved amendments to its rules, to Schedule D to the NASD By-Laws, and to the NASD's Transaction Reporting Plan, which will have the effect of: (1) requiring NASDAQ/NMS companies to comply with certain standards of corporate governance; (2) moving NASDAQ/NMS designation criteria from an SEC rule to Schedule D to the NASD By-Laws; (3) eliminating the concept of mandatory NASDAQ/NMS designation; and (4) designating all securities subject to an effective transaction reporting plan as "national market system securities."

      The new corporate governance standards will become effective for issuers that have securities designated as NASDAQ/NMS securities after August 4, 1987. For issuers having securities that are currently designated or will become designated on or before August 4, the standards will become effective 18 months thereafter.

      The text of the amendments to Schedule D to the NASD By-Laws is attached.

      BACKGROUND

      At a meeting on June 11, 1987, the SEC approved amendments to Schedule D to the NASD By-Laws and to the NASD's Transaction Reporting Plan. The primary effect of these amendments is to give SEC approval to corporate governance rules for NASDAQ/NMS securities that were adopted by the NASD Board of Governors in July 1985. The rules were developed by the NASD Corporate Advisory Board and the NASD Board of Governors during late 1984 and early 1985. Comments on the proposed rules were solicited from NASD members and NASDAQ issuers in March 1985. The SEC also solicited public comment on the proposed rules as its normal routine in its consideration of them.

      SUMMARY OF AMENDMENTS

      In addition to corporate governance standards, the amendments to Schedule D to the NASD By-Laws incorporate the Tier 2 NASDAQ/NMS criteria currently in SEC Rule 11Aa2-l.

      The SEC is amending Rule 11Aa2-l to replace the existing NASDAQ/NMS designation criteria with a standard that will designate as "national market system securities" all over-the-counter and exchange-listed securities for which transactions are reported pursuant to an effective transaction reporting plan approved by the SEC.

      The SEC is also amending Rule 11Aa3-l, its transaction reporting rule, to require the NASD to designate those NASDAQ securities that are subject to transaction reporting.

      The amendments are contained in a new Part III of Schedule D to the NASD By-Laws. The following summarizes the provisions of the corporate governance standards as well as other changes approved by the SEC.

      Corporate Governance Provisions

      The NASD's new corporate governance standards for NASDAQ/NMS issuers are included in Section 5 of new Part III of Schedule D. The rules will become effective for issuers having securities designated as NASDAQ/NMS securities after August 4, 1987. For issuers having securities that are currently designated or will become designated as NASDAQ/NMS securities on or before August 4, the standards will become effective 18 months thereafter (February 1989).

      Substantive provisions of the corporate governance rules are:

      Applicability of Rules to Foreign Issuers—The NASD has the authority to exempt a foreign issuer from application of the rules in cases where compliance would be in contravention of law or business practice in the issuer's country of domicile.

      Distribution of Annual and Interim Reports—Issuers are required to distribute annual, quarterly, and other interim reports to shareholders. Annual reports must be distributed a reasonable period of time prior to the company's annual meeting. Interim reports must be distributed either before or as soon as practicable following filing of reports with the issuer's regulatory authority. Issuers filing Form 10-Q with the SEC must distribute statements of operations. Other issuers must distribute information as contained in their required interim reports.

      Independent Directors—Issuers are required to maintain a minimum of two independent directors on their boards. An "independent director" is defined to exclude officers or employees of the company or its subsidiaries or other individuals having a relationship with the issuer that, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

      Audit Committees—Issuers are required to establish and maintain an audit committee, a majority of the members of which must be independent directors.

      Shareholder Meetings—Issuers are required to hold an annual shareholder meeting.

      Quorum—Issuers must establish a quorum requirement of at least 33 1/3 percent of the outstanding shares, or at such greater level as specified in the corporate by-laws, for any meeting of the holders of common stock.

      Solicitation of Proxies—Issuers are required to solicit proxies for all shareholder meetings and to file copies of proxy solicitations with the NASD.

      Conflicts of Interest—Issuers are required to conduct an appropriate review of all related-party transactions. The rules provide that either the audit committee or a comparable body must be used for reviewing potential conflicts.

      Listing Agreement—Each NASDAQ/NMS issuer must execute a listing agreement as prescribed by the NASD.

      Related Amendments

      Also approved by the SEC was a restructuring, without major substantive change, of the manner in which "national market system securities" are designated. These amendments eliminate from SEC Rule 11Aa2-l the NASDAQ/NMS financial designation criteria and place those criteria in Schedule D to the NASD By-Laws. Also, the mandatory designation criteria that were included in the SEC rule have been eliminated.*

      In addition, the SEC approved amendments which transfer the NASDAQ/NMS designation procedures in the NASD's National Market System Designation Plan to Schedule D to the By-Laws. The overall effect of these changes is to place NASDAQ/NMS designation procedures in the same posture under SEC rules as the listing procedures of the exchanges.

      * * * * *

      Questions concerning this notice may be directed to either S. William Broka, Vice President, NASDAQ Operations-Companies, at (202) 728-8050, or T. Grant Callery, NASD Associate General Counsel, at (202) 728-8285.

      Sincerely

      Frank J. Wilson
      Executive Vice President
      and General Counsel

      Attachment

      AMENDMENTS TO SCHEDULE D TO THE NASD BY-LAWS

      NEW PART III

      III

      DESIGNATION OF NASDAQ NATIONAL MARKET SYSTEM SECURITIES

      INTRODUCTION

      Pursuant to Securities and Exchange Commission Rule 11Aa2-l, those securities for which transaction reporting is required by an effective transaction reporting plan are designated as national market system securities. The Association has filed with the Securities and Exchange Commission a transaction reporting plan under which securities satisfying the requirements of this Part III are covered by the transaction reporting plan and transactions in such securities are subject to the transaction reporting provisions of Part XI of this schedule.

      Section 1

      Applications for Designation

      (a) Application for designation shall be on a form supplied by the Association and signed by a corporate officer of the issuer. Compliance with the designation criteria will be determined on the basis of information filed with the appropriate regulatory authority and the records of the Association as of the application date. The Association may require the issuer to submit such other information as is relevant to a determination of designation as a national market system security.
      (b) Designation of a security shall be declared effective within a reasonable time after determination of qualification. The effective date of designation shall be determined by the Association giving due regard to the requirements of the NASDAQ System, the media and market makers. Effectiveness of designation may be delayed upon written request by the issuer. An issuer which has been determined to be qualified but is pending effectiveness shall not be required to meet the designation criteria prior to effectiveness.
      (c) The Association may make exceptions to the criteria contained in this Part III where it deems appropriate.

      Section 2

      Quantitative Designation Criteria

      In order to be designated, an issuer shall be required to substantially meet the criteria set forth in paragraph (a), (b), or (c) below.

      Initial public offerings substantially meeting such criteria are eligible for immediate inclusion in NASDAQ/NMS upon prior application and with the written consent of the managing underwriter that immediate inclusion is desired. All other qualifying issues, excepting special situations, are included on the next inclusion date established by the Association.

      (a) Alternative 1
      (1) The issuer of the security had annual net income of at least $300,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.
      (2) There are at least 350,000 publicly held shares.
      (3) The market value of publicly held shares is at least $2 million.
      (4) The price per share on each of the five business days prior to the date of application by the issuer is $3 or more.
      (5) At least two dealers act as NASDAQ market makers with respect to the security on each of the five business days preceding the date of application by the issuer.
      (b) Alternative 2
      (1) The issuer of the security has capital and surplus of at least $8 million.
      (2) There are at least 800,000 publicly held shares.
      (3) The market value of publicly held shares is at least $8 million.
      (4) At least two dealers act as NASDAQ market makers with respect to the security on each of the five business days preceding the date of application by the issuer.
      (5) The issuer has a four-year operating history.
      (c) Warrants
      Warrants to purchase designated securities may be designated if the warrants substantially meet the above criteria; provided, however, that they shall not be required to meet the criteria set forth in paragraph (a)(2) if immediately after the distribution, there are at least 450,000 warrants outstanding.
      (d) Computations
      The computations required by paragraphs (a)(l) and (b)(l) shall be taken from the issuer's most recent financial information filed with the Association. The computations required in paragraphs (a)(2), (a)(3), (b)(2), and (b)(3) shall be as of the date of application of the issuer. Determinations of beneficial ownership for purposes of paragraphs (a)(2) and (b)(2) shall be made in accordance with SEC Rule 13d-3. In the case of American Depositary Receipts, the computations required by paragraphs (a)(l) and (b)(l) shall relate to the foreign issuer and not to any depositary or any other person deemed to be an issuer for purposes of Form S-12 under the Securities Act of 1933.

      Section 3

      Registration Standards

      In addition to meeting the quantitative criteria for NASDAQ/NMS inclusion, the issue must also be:

      (a) registered under Section 12(g)(l) of the Securities Exchange Act of 1934 (Act); or
      (b) issued by an insurance company meeting the conditions of Section 12(g)(2)(G) of the Act; or
      (c) registered under the Securities Act of 1933 and issued by a closed- end investment management company registered under Section 8 of the Investment Company Act of 1940; or
      (d) an American Depositary Receipt issued against the equity security of a foreign issuer if such equity securities are registered pursuant to Section 12 of the Act; or
      (e) registered under Section 12(b) of the Act and listed on a national securities exchange, or admitted to unlisted trading privileges on an exchange, provided that:
      (1) No rule, stated policy, or practice of such exchange shall prohibit or condition, or be construed to prohibit or condition or otherwise limit, directly or indirectly, the ability of any member to effect any transaction in such security otherwise than on such exchange; and
      (2) Such exchange shall permit NASDAQ market makers telephone access to exchange trading facilities with respect to transactions in NASDAQ/NMS securities to the same extent that exchange market makers are permitted access to NASDAQ market makers; and
      (3) Transaction reports in such security are not collected, processed, and made available pursuant to the plan submitted to the Securities and Exchange Commission pursuant to Rule 11Aa3-l under the Securities Exchange Act of 1934, as amended, (the "CTA Plan"), which plan was declared effective as of May 17, 1974.
      (f) Foreign securities and American Depositary Receipts where either the issuer is required to file reports pursuant to Section 15(d) of the Act or the security is exempt from registration under Section 12(g) of the Act by reason of the applicability of Rule 12g3-2(b) are not eligible for designation in NASDAQ/NMS.

      Section 4

      Quantitative Maintenance Criteria

      After designation as a NASDAQ National Market System security, a security must substantially meet the criteria set forth below to continue to be designated as a national market system security.

      (a) Common Stock, Preferred Stock, Shares or Certificates of Beneficial Interest of Trusts, and Limited Partnership Interests in Foreign or Domestic Issues
      (1) 200,000 shares publicly held.
      (2) Market value of publicly held shares of $2 million.
      (3) Either annual net income of $200,000 for the previous fiscal year or in two of the last three fiscal years or net worth of at least $ 1 million.
      (b) Rights and Warrants
      Common stock of issuer must continue to be designated.
      (c) Market Makers
      At least two authorized NASDAQ market makers.
      (d) Bankruptcy and/or Liquidation
      Should an issuer file under any of the sections of the Bankruptcy Act or announce that liquidation has been authorized by its board of directors and that it is committed to proceed, its securities shall not remain designated unless it is determined that the public interest and the protection of investors would be served by continued designation.

      Section 5

      Non-Quantitative Designation Criteria

      (a) Applicability
      No provision of this Section 5 shall be construed to require any foreign issuer to do any act that is contrary to a law, rule, or regulation of any public authority exercising jurisdiction over such issuer or that is contrary to generally accepted business practices in the issuer's country of domicile. The Association shall have the ability to provide exemptions from the applicability of these provisions as may be necessary or appropriate to carry out this intent.
      (b) Distribution of Annual and Interim Reports
      (1) Each NASDAQ/NMS issuer shall distribute to shareholders copies of an annual report containing audited financial statements of the company and its subsidiaries. The report shall be distributed to shareholders a reasonable period of time prior to the company's annual meeting of shareholders and shall be filed with the Association at the time it is distributed to shareholders.
      (2)
      a. Each NASDAQ/NMS issuer that is subject to SEC Rule 13a-13 shall distribute copies of quarterly reports including statements of operating results to shareholders either prior to or as soon as practicable following the company's filing of its Form 10-Q with the Securities and Exchange Commission. If the form of such quarterly report differs from the Form 10-Q, the issuer shall file one copy of the report with the Association in addition to filing its Form 10-Q pursuant to Section l(c)(13) of Part II. The statement of operations contained in quarterly reports shall disclose, as a minimum, any substantial items of unusual or non-recurrent nature and net income before and after estimated federal income taxes or net income and the amount of estimated federal taxes.
      b. Each NASDAQ/NMS issuer that is not subject to SEC Rule 13a-13 and that is required to file with the Securities and Exchange Commission, or another federal or state regulatory authority, interim reports relating primarily to operations and financial position, shall distribute to shareholders reports that reflect the information contained in those interim reports. Such reports shall be distributed to shareholders either before or as soon as practicable following filing with the appropriate regulatory authority. If the form of the interim report provided to shareholders differs from that filed with the regulatory authority, the issuer shall file one copy of the report to shareholders with the Association in addition to the report to the regulatory authority that is filed with the Association pursuant to Section l(c)(13) of Part II.
      (c) Independent Directors
      Each NASDAQ/NMS issuer shall maintain a minimum of two independent directors on its board of directors. For purposes of this section, "independent director" shall mean a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
      (d) Audit Committee
      Each NASDAQ/NMS issuer shall establish and maintain an audit committee, a majority of the members of which shall be independent directors.
      (e) Shareholder Meetings
      Each NASDAQ/NMS issuer shall hold an annual meeting of shareholders and shall provide notice of such meeting to the Association.
      (f) Quorum
      Each NASDAQ/NMS issuer shall provide for a quorum as specified in its by-laws for any meeting of the holders of common stock; provided, however, that in no case shall such quorum be less than 33 1/3 percent of the outstanding shares of the company's common voting stock.
      (g) Solicitation of Proxies
      Each NASDAQ/NMS issuer shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of such proxy solicitation to the Association.
      (h) Conflicts of Interest
      Each NASDAQ/NMS issuer shall conduct an appropriate review of all related party transactions on an ongoing basis and shall utilize the company's audit committee or a comparable body for the review of potential conflict-of-interest situations where appropriate.
      (i) Listing Agreement
      Each NASDAQ/NMS issuer shall execute a Listing Agreement in the form designated by the Association.
      (j) Effective Date
      This Part III, Section 5 shall apply to any issuer that first has a security designated as a national market system security after August 4, 1987, and shall become effective as to any other NASDAQ/NMS issuer on February 1, 1989.

      Section 6

      Termination Procedure

      (a) Failure to maintain compliance with the provisions of Sections 4 and 5 of this Part III will result in the termination of an issue's designation unless an exception is granted as provided in this section. Termination shall become effective in accordance with the terms of notice by the Association.
      (b) An issuer that is subject to termination of its designation may request a review by a Committee of the Board of Governors. If a review is requested, the issuer is entitled to submit materials and arguments in connection with such review.
      (c) The Committee may grant or deny continued designation on the basis of the written submission by the issuer and whatever other data it deems relevant.
      (d) Determinations by the Committee may be appealed to the NASD Board of Governors by any aggrieved person. An appeal to the Board shall not operate as a stay of the decision of the Committee unless the Board in its discretion determines to grant such a stay.
      (e) An issuer may voluntarily terminate its designation upon written notice to the Association.

      Note: Current Parts III through XI are renumbered Parts IV through XII, respectively.


      * The original purpose of establishing mandatory designation criteria was to enable the SEC and the securities industry to gain experience in transaction reporting for over-the-counter securities which had not previously been subject to last-sale trade reporting. While this was true in 1981 when the rule was adopted, both the NASD and the SEC have concluded that last-sale trade reporting in the over-the-counter market has been well established and, since most issuers enter NASDAQ/NMS by voluntary designation, the mandatory designation standards no longer serve a useful purpose.


    • 87-45 NASDAQ National Market System Grows to 2,993 Securities With 20 Voluntary Additions on July 21, 1987

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

      On Tuesday, July 21, 1987, 20 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,993. These 20 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 20 issues scheduled to join NASDAQ/NMS on Tuesday, July 21, 1987, are:

      Symbol*

      Company

      Location

      BNHC

      Bank of New Hampshire Corporation

      Manchester, NH

      BRRYA

      Berry Petroleum Company (Cl A)

      Taft, CA

      CBOT

      Cabot Medical Corporation

      Langhorne, PA

      CBOTW

      Cabot Medical Corporation (Wts)

      Langhorne, PA

      CITI

      CitiPostal, Inc.

      New York, NY

      COMI

      Computer Microfilm Corporation

      Atlanta, GA

      TOOL

      Easco Hand Tools, Inc.

      Hunt Valley, MD

      ENEX

      Enex Resources Corporation

      Kingwood, TX

      HOSPW

      Hosposable Products, Inc. (Wts)

      Bound Brook, NJ

      HIGB

      Higby's (J.), Inc.

      Sacramento, CA

      METB

      Metropolitan Bancorp, Inc.

      Lima, OH

      MCOM

      Midwest Communications Corporation

      Edgewood, KY

      PLNS

      Plains Resources, Inc.

      Oklahoma City, OK

      PLNSP

      Plains Resources, Inc. (Pfd)

      Oklahoma City, OK

      RCDC

      Ross Cosmetics Distribution Centers, Inc.

      Staten Island, NY

      SALNW

      Sahlen & Associates, Inc. (Wts)

      Deerfield Beach, FL

      SWAR

      Schwartz Brothers, Inc.

      Lanham, MD

      SNCO

      Sensor Control Corporation

      Sunnyvale, CA

      WEXC

      Wolverine Exploration Company

      Fort Worth, TX

      WEXCW

      Wolverine Exploration Company (Wts)

      Fort Worth, TX

      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.

      NASDAQ/NMS Pending Additions

      Symbol*

      Company

      Location

      CGRP

      Chase Medical Group, Inc.

      Hialeah, FL

      CSOF

      Corporate Software Incorporated

      Westwood, MA

      DOMN

      Domain Technologies, Incorporated

      Milpitas, CA

      EBKC

      Eliot Savings Bank

      Boston, MA

      ECLAY

      English China Clays, Pic

      Cornwall, England

      FILE

      FileNet Corporation

      Costa Mesa, CA

      DNNY

      Frances Denney Companies, Inc. (The)

      New York, NY

      HRHC

      Hilb, Rogal and Hamilton Company

      Richmond, VA

      HORL

      Home Office Reference Laboratory, Inc.

      Lenexa, KS

      NRTN

      Norton Enterprises, Inc.

      Salt Lake City, UT

      PFPF

      Price Pfister, Inc.

      Pacoima, CA

      PNET

      ProNet, Inc.

      Richardson, TX

      UBSC

      United Building Services Corporation of Delaware

      Phoenix, AZ

      VKSI

      Vikonics, Inc.

      Secaucus, NJ

      WWGPY

      Ward Wright Group, Pic

      Wellingborough, England

      WINS

      Winston Resources, Inc.

      New York, NY

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since June 29, 1987:

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      INEL

      Intelligent Electronics, Inc.

      6/30/87

      ADMS

      Advanced Marketing Services, Inc

      7/01/87

      DLPH

      Delphi Information Systems, Inc.

      7/01/87

      LDIC

      LDI Corporation

      7/01/87

      MICA

      MicroAge, Inc.

      7/01/87

      CKSB

      CK Federal Savings & Loan Association

      7/06/87

      UCOA

      United Coasts Corporation

      7/07/87

      EFSB

      Elmwood Federal Savings Bank

      7/09/87

      The following changes to the list of NASDAQ/NMS securities occurred since June 29, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      TYGR/FSYS

      Tigera Group, Inc./Fortune Systems Corporation

      7/01/87

      ITIC/ITIC

      Investors Title Company/Investors Title Insurance Company

      7/08/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      BSGI

      BancServe Group, Inc.

      7/01/87

      FDLB

      Faraday Laboratories, Inc.

      7/01/87

      UTEL

      United Telecontrol Electronics, Inc.

      7/01/87

      OLNB

      Old National Bancorporation

      7/02/87

      DUAL

      Dual-Lite Incorporated

      7/06/87

      KMWS

      KMW Systems Corporation

      7/06/87

      PESOZ

      Two Pesos, Inc. (Wts)

      7/08/87

      GATO

      Lewis Galoob Toys, Inc.

      7/09/87

      Questions regarding this notice may 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.

      Sincerely,

      Lynn Nellius
      Corporate Secretary


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


    • 87-44 Proposed Amendment to Article III, Section 26(m) of the NASD Rules of Fair Practice Governing Prompt Payment for Investment Company Shares

      IMPORTANT MAIL VOTE

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members

      LAST VOTING DATE IS AUGUST 6, 1987.

      EXECUTIVE SUMMARY

      NASD members are invited to vote on a proposal to amend recently adopted Article III, Section 26(m) of the NASD Rules of Fair Practice. (See Notice to Members 86-54, dated July 30, 1986.) The proposed amendment to Section 26(m) would limit the circumstances under which members are required to transmit payments for investment company shares purchased by customers to mutual funds or their agents to those instances in which payments for those shares have actually been received from the customers.

      The text of the proposed amendment is attached.

      BACKGROUND AND SUMMARY OF PROPOSED AMENDMENT

      Article III, Section 26(m) of the NASD Rules of Fair Practice as originally approved by the membership would require members, including underwriters, that engage in direct retail transactions with customers to transmit payments to mutual funds or their agents by the later of trade date plus five business days or by the end of one business day following receipt of a customer's payment for such shares. The rule would also require members to transmit to the mutual fund or its agent payments by the end of the seventh business day following receipt of the customer's order whether or not payment has been received from the customer.

      The NASD was advised by the staff of the SEC's Division of Market Regulation that the provision in the rule requiring transmittal, irrespective of receipt of payment, was an impermissible requirement which would violate the provisions of Section 11(d)(l) of the Securities Exchange Act of 1934 (1934 Act). This section prohibits a person that acts as both a broker and a dealer from effecting transactions in which the broker-dealer extends to or maintains credit for a customer on a security that is part of a new issue in which it participated as a member of the selling group or syndicate within thirty days prior to the transaction. Since investment company shares are continuously in registration and members normally offer these shares pursuant to a sales agreement with a principal underwriter, the SEC believes that members that are both brokers and dealers and that offer investment company shares are subject to the provisions of Section 11(d)(l) of the 1934 Act.

      The NASD Investment Companies Committee considered various courses of action including limiting the scope of the NASD's rule to members that do not function both as brokers and dealers and petitioning the SEC for a rule exempting such payments from the provisions of Section 11(d)(l). The Committee concluded, however, and the Board of Governors concurred, that the appropriate course of action is to amend the proposal to require that members transmit payments for investment company shares received from customers by the end of trade date plus five business days or within 24 hours after the receipt of a customer's payment, whichever is the later date. Both the Committee and the Board of Governors believe that such an approach will fulfill the primary purposes of the NASD's rule by requiring prompt turnaround of customer funds and by establishing definitive time frames for such action. The amendment would remove the requirement that payments be transmitted in instances in which customer payments have not been received by the member.

      * * * *

      The Board believes that the proposed amendment is appropriate and recommends that members vote their approval.

      Please mark the attached ballot according your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than August 6, 1987.

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

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      and General Counsel

      Attachment

      PROPOSED 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 [;provided, however, that members shall transmit such payments to payees by the end of the seventh business day following receipt of a customer order to purchase such shares whether or not payment has been received from a customer].
      (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.

      * New language is underlined; deleted language is bracketed.


    • 87-43 Adoption of Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Regarding Advertising and Sales Literature for Direct Participation Programs

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      This notice announces adoption of an amendment to Article HI, Section 35 of the NASD Rules of Fair Practice. The amendment was adopted by the NASD Board of Governors in response to the use by certain members of misleading advertising and improper sales literature in the marketing of public direct participation programs.

      The amendment requires that advertising and sales literature concerning publicly offered direct participation programs be filed with the NASD Advertising Department for review within 10 days of first use or publication by an NASD member.

      The text of the amended section is attached.

      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 the communications provide a sound basis for evaluating the facts regarding the securities offered by members.

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

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

      The NASD has noted that certain advertising and sales literature used in connection with public direct participation programs have involved misleading illustrations of past performance, the inclusion of information on projected performance, and the unbalanced presentation of programs by not including a statement of significant risks. The NASD has referred such practices to the appropriate District Business Conduct Committees.

      The NASD Direct Participation Programs/Real Estate Committee considered whether specific guidelines should be developed and applied to sales literature and advertising used in connection with public direct participation program offerings but concluded that current guidelines contained in Article III, Section 35 are adequate to regulate the content of member communications with the public. However, the Board of Governors believes that a filing requirement for public direct participation program advertising and sales literature is necessary.

      SUMMARY OF AMENDMENT

      The amendment, which was approved by the SEC on June 5, 1987, requires that advertising and sales literature used in connection with public direct participation programs be filed with the NASD Advertising Department within 10 days of first use or publication by a member. Filing prior to use is recommended. The NASD will review the material for conformance with the standards contained in Article III, Section 35 of the NASD Rules of Fair Practice.

      The responsibility of members to comply with the filing requirement applies regardless of whether the advertising and/or sales literature is prepared by a sponsor, general partner, underwriter, or member. However, the member need not file advertising and/or sales literature that was previously filed by the sponsor, general partner, or underwriter.

      In order to expedite the review of this material, the NASD Advertising Department suggests that a prospectus for the offering accompany the filing of advertising and/or sales literature relating to that offering.

      * * * * *

      Questions regarding this notice should be directed to Ms. R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

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

      (New language is underscored.)

      Section 35. Communications with the Public

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

      Note: Current subsections (3) through (7) will be renumbered (4) through (8), respectively.

    • 87-42 NASDAQ National Market System Grows to 2,972 Securities With 29 Voluntary Additions on July 7, 1987

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

      On Tuesday, July 7, 1987, 29 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,972. These 29 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 29 issues scheduled to Join NASDAQ/NMS on Tuesday, July 7, 1987,

      Symbol*

      Company

      Location

      ELUXY

      A. B. Eleetrolux

      Stockholm, Sweden

      ALDC

      Aldus Corporation

      Seattle, WA

      ALCI

      Alleity Insurance Company

      New York, NY

      ALET

      Aloette Cosmetics, Ine.

      Malvern, PA

      BABL

      Barr Laboratories, lac.

      Northvale, NJ

      CRBI

      Cal Rep Bancorp, Inc.

      Bakersfield, CA

      PAWN

      Cash America Investments, Inc.

      Fort Worth, TX

      CCAX

      Corrections Corporation of America

      Nashville, TN

      DVES

      DIverseo, Ine

      Spartanburg, SC

      FLOG

      Falcon Oil & Gas Company, Inc.

      Odessa, TX

      FGBC

      First Golden Bancorporation

      Golden, CO

      FABKM

      First of America Bank Corporation (Ser G Pfd)

      Kalamazoo, MI

      FABKN

      First of America Bank Corporation (Ser E Pfd)

      Kalamazoo, MI

      GRQF

      Groff Industries, Inc.

      Tampa, FL

      HBSI

      Hamptons Bancshares, Inc.

      East Hampton, NY

      IGEI

      International Genetic Engineering, Inc.

      Santa Monica, CA

      IMPX

      International Microelectronic Products, Inc.

      San Jose, CA

      ITIC

      Investors Title Company

      Chapel Hill, NC

      KMSI

      KMS Industries, Inc.

      Ann Arbor, MI

      LCNB

      Lincoln Bancorp

      Encino, CA

      MAYF

      Mayfair Industries, Inc.

      New York, NY

      NYCO

      NYCOR, Inc.

      Peapack, NJ

      ONPR

      One Price Clothing Stores, Inc.

      Spartanburg, SC

      PDLPY

      Pacific Dunlop Limited

      Melbourne, Australia

      PHMT

      PhoneMate, Inc.

      Torrance, CA

      RRMN

      Railroadmen's Federal Savings & Loan Association of Indianapolis

      Indianapolis, IN

      SHIP

      Regency Cruises, Inc.

      New York, NY

      RDWI

      Roadway Motor Plazas, Inc.

      Rochester, NY

      SALN

      Sahlen & Associates, Inc.

      Deerfield Beach, FL

      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.

      NASDAQ/NMS Pending Additions

      Symbol*

      Company

      Location

      ADMS

      Advance Marketing Services, Inc.

      San Diego, CA

      DLPH

      Delphi Information Systems, Inc.

      Westlake Village, CA

      EMLD

      Emerald Systems Corporation

      San Diego, CA

      INEL

      Intelligent Electronics, Inc.

      Exton, PA

      JENY

      Jenny Craig, Inc.

      Carlsbad, CA

      LDIC

      LDI Corporation

      Cleveland, OH

      MICA

      MicroAge, Inc.

      Tempe, AZ

      PVSA

      Parkvale Savings Bank

      Pittsburgh, PA

      SVMT

      Save Mart Supermarts

      Modesto, CA

      SLFX

      Selfix, Inc.

      Chicago, IL

      UCOA

      United Coasts Corporation

      Hartford, CT

      The registration statements of the following issues have been declared effective by the SEC or other appropriate regulatory authority and commenced trading in NASDAQ/NMS since June 8, 1987.

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      FFWP

      First Federal of Western Pennsylvania

      6/09/87

      ECAD

      ECAD, Inc.

      6/10/87

      ESSF

      ESSEF Corporation

      6/12/87

      ISPC

      Interspec, Inc.

      6/16/87

      BNDY

      Brandywine Savings & Loan Association

      6/17/87

      DDDI

      Downey Designs International, Inc.

      6/17/87

      GRTR

      Greater New York Savings Bank (The)

      6/17/87

      MLMC

      Multi-Local Media Corporation

      6/17/87

      SMNA

      Samna Corporation

      6/17/87

      FFES

      First Federal Savings & Loan of East Hartford

      6/23/87

      HWCD

      HWC Distribution Corporation

      6/23/87

      MYCO

      Mycogen Corporation

      6/23/87

      NYCOP

      NYCOR, Inc. (Pfd)

      6/24/87

      ITGN

      Integon Corporation

      6/25/87

      RFBK

      Raleigh Federal Savings Bank

      6/26/87

      TCGN

      Tecogen, Inc.

      6/26/87

      The following changes to the list of NASDAQ/NMS securities occurred since June 5, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      KVPHB/KVPH

      K-V Pharmaceutical Company (Cl B)/ K-V Pharmaceutical Company

      6/11/87

      VENT/NPCO

      Venturian Corporation/Napco International, Inc.

      6/15/87

      CUCD/CUCD

      CUC International, Inc./Comp-U-Card International, Inc.

      6/18/87

      RHII/BCMP

      Robert Half International, Inc./Boothe Financial Corporation

      6/18/87

      HARG/HARG

      Harper Group, Inc. (The)/Harper Group (The)

      6/19/87

      UACI/UACIA

      United Artists Communications, Inc./United Artists Communications, Inc. (Cl A)

      6/23/87

      FAMF/FAMF

      First AmFed Cornoratinn/First American Savings & Loan Association

      6/25/87

      ACLE/ACLE

      Accel International Corporation/Acceleration Corporation

      6/29/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      KLOS

      Kloss Video Corporation

      6/05/87

      RDSIP

      ANAC Holding Corporation (Pfd)

      6/09/87

      AUXT

      Auxton Computer Enterprises, Inc.

      6/09/87

      KDNYP

      American Surgery Centers Corporation

      6/09/87

      SRGY

      Home Intensive Care, Inc. (Pfd)

      6/11/87

      PSSB

      Palm Springs Savings Bank

      6/12/87

      THMD

      Thermedics, Inc.

      6/16/87

      TCJCA

      Town and Country Jewelry Manufacturing Corporation (Cl A)

      6/16/87

      MTRUS

      Meditrust (SBI)

      6/23/87

      NCFS

      North Carolina Federal Savings & Loan Association

      6/24/87

      AMWE

      Amwest Insurance Group, Inc.

      6/25/87

      UFSL

      Union Federal Savings & Loan Association

      6/25/87

      PRMD

      Pro-Med Capital. Inc.

      6/26/87

      Any 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.

      Sincerely,

      Lynn Nellius
      Corporate Secretary


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


    • 87-41 Proposed Amendments to Definitions of "Branch Office" and "Office of Supervisory Jurisdiction" Under the NASD By-Laws, Schedule C to the By-Laws, and the Rules of Fair Practice

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: AUGUST 14, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to the definitions of "branch office" and "office of supervisory jurisdiction." Under the proposed amendments, any office at which certain specified functions take place would be defined as an office of supervisory jurisdiction; branch offices would be defined by the number of individuals located therein and whether the location is advertised as an office of the firm. Offices where three or fewer registered persons are employed and that are not advertised or listed as offices of the member would be defined as "non-branch business offices."

      The proposed amendments are intended to address certain regulatory problems noted by the NASD in situations where there is an absence of on-site supervision by registered principals. The amendments would retain the requirement of an annual inspection of each office of supervisory jurisdiction and would establish requirements for the inspection of branch offices and the employment of on-site principals.

      The proposed amendments are attached as Exhibits A, B, and C.

      BACKGROUND

      In recent years, the NASD has become increasingly concerned with the operation by member firms of business locations that are not subject to on-site supervision by a registered principal or to regular examination by the firm. This concern was discussed in detail in Notice to Members 86-65 (September 12, 1986) regarding the employment and supervision of off-site personnel, which emphasized those existing NASD rules most directly applicable to off-site employment. The notice stated that the NASD was continuing to study the possible revision of requirements for designating branch offices and for on-site supervision by principals.

      After studying patterns of past disciplinary cases involving deficiencies in supervisory structure, the NASD Qualifications Committee and the National Business Conduct Committee concluded that it is necessary to revise the current definitions of "branch office" and "office of supervisory jurisdiction." The primary intent of the proposed changes is to require a minimum supervisory structure that facilitates closer supervision by principals with clear responsibilities.

      DESCRIPTION AND ANALYSIS OF PROPOSED AMENDMENTS

      An "office of supervisory jurisdiction" (OSJ) is presently 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 in 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:

      • Order execution and/or market making;
      • Origination of underwritings or private placements;
      • Maintaining custody of firm or customers' funds and/or securities;
      • Acceptance (approval) of new accounts on behalf of the member;
      • Review and approval of customer orders;
      • Origination of advertising or sales literature, including the authorization of such material developed by an organization or person other than the member;
      • Review and endorsement of correspondence of associated persons pertaining to the solicitation or execution of any securities transaction; or
      • Responsibility for supervising the activities of persons associated with the member at one or more other offices of the member, as defined below.

      Thus, the proposed amendments broaden the range of functions which, if undertaken at a particular business location, would cause that location to be designated as an OSJ. Further, the designation as an OSJ would be mandatory, rather than by the firm's choice. An OSJ would be required to have at least one individual on site who is fully qualified to act in a principal capacity with respect to any functions undertaken by the office. Also, as presently provided, each OSJ would be required to be examined annually by the firm's main office.

      The term "branch office" is presently defined in Article I, Section (c) of the NASD By-Laws as "... 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."1/ An Explanation of the Board of Governors set forth in Schedule C to the NASD By-Laws reiterates this definition and provides further that a place of business of a person associated with a member shall be considered a branch office if the member:

      • Directly or indirectly contributes a substantial portion of the operating expenses of such place of business; and/or
      • Authorizes the listing in any publication or other media of such place of business as an office of the member or designates it as such with any organization.

      The proposed amendments would define a "branch office" as a place of business at which persons registered with the member engage in the investment banking or securities business where either:

      • Four or more registered individuals are located, in which case at least one individual located at the office must be qualified to function in a principal capacity with respect to all activities occurring therein; or
      • Three or fewer registered individuals are located and the office is advertised in the media, listed in any publication or directory, or designated with any securities regulatory body by the individuals or by the member as an office of the member, in which case either:
        • One of the registered individuals located at the office must be qualified to act in a principal capacity with respect to all of the activities occurring therein; or
        • The office must be examined at least once every six months by a registered principal from the main office or an OSJ responsible for the branch.

      In addition, a branch office with a resident principal would be required to be examined annually by a principal from the firm's main office or an OSJ designated as responsible for the branch.

      Thus, as summarized above, the proposed amendments would significantly change the designation and operation of branch offices, including the establishment of a quantitative standard by which branch offices are defined and the institution of requirements for on-site registered principals and regular branch office examinations.

      Offices at which three or fewer registered persons engage in the investment banking or securities business and that are not advertised or designated as offices of the member would be designated as "non-branch business locations." Advertising in any form, including a listing in a telephone directory, would make this category unavailable. Non-branch business locations would not be required to have a registered principal on the premises, but the firm would be required to conduct an annual personal compliance interview with each registered person operating at the non-branch business location. The interview may take place at the non-branch business location or elsewhere, but it must be conducted by a registered principal, who may be associated with the firm's main office, an OSJ, or a branch office.

      At this time, the Board of Governors has not endorsed amendments that would require a particular ratio of registered principals to registered representatives or limit the number of branch offices for which a given OSJ may be responsible. The Board does, however, invite comments on such proposals.

      * * * *

      The NASD encourages all members and other interested persons to comment on the proposed amendments. 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 August 14, 1987. Comments received by this date will be considered by the NASD Qualifications Committee. Any changes to the NASD By-Laws and Rules of Fair Practice approved by the Board must be submitted to the membership for a vote. Thereafter the proposed amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to Jacqueline D. Whelan, Attorney, NASD Office of General Counsel, at (202) 728-8270.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachments

      Exhibit A

      PROPOSED AMENDMENTS TO NASD BY-LAWS*

      ARTICLE I

      Definitions

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



      (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;] any location at which activities for which membership in the Corporation is required are conducted on behalf of a member and at which either four or more registered persons are located or at which three or fewer registered persons are located and such location is advertised in any media, listed in any publication or directory, or designated with any regulatory organization, by the member or by such individuals, as a business location of the member;



      (m) "non-branch business location" means any location at which activities for which membership in the Corporation is required are conducted on behalf of a member and at which three or fewer registered persons are located and which is neither advertised in any media, listed in any publication or directory, nor designated with any regulatory organization, by the member or by such individuals, as a business location of the member.
      (n) "office of supervisory jurisdiction" means any location of the member at which any one or more of the following functions take place:
      (i) order execution and/or market making;
      (ii) origination of under writings or private placements;
      (iii) maintaining custody of firm or customers' funds and/or securities;
      (iv) acceptance (approval) of new accounts on behalf of the member;
      (v) review and approval of customer orders;
      (vi) origination of advertising or sales literature, including the authorization of such material developed by an organization or person other than the member;
      (vii) review and endorsement of correspondence of associated persons pertaining to the solicitation or execution of any securities transaction; or
      (viii) responsibility for supervising the activities of persons associated with the member at one or more other offices (as defined in Sections (c) and (m) above) of the member.

      Note: Current Sections (m), (n), and (o) would be redesignated as Sections (o), (p), and (q).

      Exhibit B

      PROPOSED AMENDMENTS TO SCHEDULE C TO THE NASD BY-LAWS*

      ••• Explanation of Board of Governors______________________________

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

      Identification and Registration of Offices

      [The term "office of supervisory jurisdiction" defined in Section 27 of Article III 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] identified 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 own written supervisory procedures, and, accordingly, which offices are to be [designated as office of supervisory jurisdiction] responsible for carrying out the written procedures.

      Each member must [designate] identify to the [Association] Corporation those offices of supervisory jurisdiction, including the main office, and must register those offices which are deemed to be branch offices in accordance with the standards set forth in Article I of the By-Laws. [found hereafter. 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 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 jurisdiction 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 purposes of this 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.]

      Exhibit C

      PROPOSED AMENDMENTS TO NASD RULES OF FAIR PRACTICE*

      Supervision

      Sec. 27




      Registered Principals; 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]. At least one registered principal qualified to act in a principal capacity with respect to all of the activities occurring at such office shall be located at each office of supervisory jurisdiction and each branch officer provided, however, that a member may elect, in the case of a branch office at which three or fewer registered persons are located, to examine the office at six-month intervals in lieu of employing a resident registered principal. Each office of supervisory jurisdiction and each branch office at which a registered principal is located shall be examined annually by the member. Each member annually shall conduct a personal compliance interview with each registered person employed at a non-branch business location. Each member shall maintain a record of its examination of each branch office and of its interview with each registered person in each non-branch business location.



      ["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.]

      1/ On May 11, 1987, the NASD Board of Governors adopted an amendment to this definition that eliminates the language "located in the United States." This amendment has been submitted to the membership for a vote. (See NASD Notice to Members 87-37, dated June 16, 1987.)

      * New text is underlined; deleted text is bracketed.


    • 87-40 Request for Comments on a Proposed Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Concerning Testimonials

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: JULY 22, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Article III, Section 35(d)(2)(D) relating to testimonials used in members' communications with the public. The amendment would conform the NASD rule to that of the New York Stock Exchange.

      The text of the proposed amendment is attached.

      BACKGROUND

      Article III, 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. When the rule was originally adopted in 1980, these standards were patterned after those of the New York Stock Exchange for purposes of consistency and reduction of unnecessary regulatory burdens on dual NASD/Exchange members. The current NASD rule applies to testimonial material concerning any advice, analysis, report, or other investment or related service rendered by the member and requires that members make clear that such experience is not necessarily indicative of future performance or of results obtained by others. Testimonials also must disclose compensation paid to the maker and if they imply a specialized opinion, the qualifications of the maker of the testimonial must be stipulated.

      It was brought to the attention of the NASD's Advertising Department that the New York Stock Exchange had amended its testimonial rule and the question of a conforming amendment was presented to the National Business Conduct Committee in March 1987. At that time, the NBCC referred the issue for further study and subsequent to a report submitted to it at its May meeting, the NBCC recommended that the NASD amend its rule to conform to the NYSE rule.

      PROPOSED AMENDMENT

      The proposed amendment would conform the NASD rule to New York Stock Exchange Rule 472.40(8). The NYSE rule differs from the current NASD rule in two respects. First, and of the greatest significance, the NYSE's rule applies only to testimonials concerning the quality of a firm's investment advice. Secondly, the NYSE rule only requires disclosure of compensation if it is more than a nominal amount. Limiting testimonial treatment to communications that relate to the quality of investment advice is consistent with other provisions of the rule that focus upon disclosing that future performance may not be consistent with the experience of the individual giving the testimonial. The "nominal sum" exclusion allows payment to announcers or non-customer actors without requiring disclosure of such payment.

      The NASD Board of Governors believes that this amendment will eliminate inconsistent regulation in the securities industry and that it is appropriate to limit the scope of testimonial amendments to communications relating to the quality of investment advice.

      * * * * *

      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 July 22, 1987. Comments received by this date will be considered by the NASD National Business Conduct Committee and the NASD Board of Governors. If approved by the Board, the amendment 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 Ms. R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.

      Sincerely,

      Frank J. Wilson
      Executive Vice President Legal and Compliance

      Attachment

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

      Communications With the Public

      Section 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 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.

      New language is underlined; deleted language is bracketed.


    • 87-39 Request for Comments on Addition of a Corporate Securities Limited Representative Category of Registration Under Schedule C to the NASD By-Laws

      TO: All NASD Members and Other Interested Persons

      Existing Limited Representative Examinations

      • Investment Company Products/Variable Contracts
      • Direct Participation Programs
      • Municipal Securities
      • Option Securities*

      Products Covered in Proposed Corporate Securities United Representative Examinations

      • Common and Preferred Stock
      • Corporate Debt Issues
      • Stock Rights and Warrants
      • Foreign Securities and ADRs
      • Mortgage and Other Asset-Backed Securities
      • REITs
      • Shares of Closed-End Investment Companies and Money Market Funds

      LAST DATE FOR COMMENT: JULY 19, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposal to establish a category of registration for persons who transact business in corporate and certain other securities and to require such persons to pass a test that covers these areas only. Presently, these representatives must pass the Series 7—General Securities Registered Representative Examination. The Series 7 examination, however, includes extensive testing of products that are not offered by all members, such as options and municipal securities, as well as duplicate coverage of other areas for representatives who have already qualified in one or more of the existing limited registration categories.

      The proposed Corporate Securities Limited Representative registration category is a continuation of the existing system of limited representative registrations for investment company products/variable contracts, direct participation programs, and municipal securities. Successful completion of all of the limited examinations would be equivalent to qualifying by passing the Series 7.

      The text of the proposed amendments to Schedule C to the NASD By-Laws is attached.

      BACKGROUND

      When the NASD adopted the Series 7—General Securities Registered Representative Examination in 1974, the Board of Governors recognized that the broad product coverage in that test was not suitable for many representatives whose firms specialized in limited product areas of the industry. The Board, therefore, elected to retain the predecessor Series I—Registered Representative Examination to qualify those representatives who "limited" their securities activities to either investment company products and variable annuities, or to direct participation programs. The Series 1 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. Two similar categories of limited representative were added to Schedule C to the NASD By-Laws at that time. In addition, in 1978, the Municipal Securities Rulemaking Board introduced the Series 52—Municipal Securities Representative Examination that created, from an NASD perspective, another category of limited representative.

      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 areas when they sought General Securities Representative status through the Series 7 examination. Also, those limited representatives who only wanted to add equity products to their qualifications would still have to engage the full spectrum of municipal securities and options products training in studying for the General Securities test. Compounding this problem, the options material in the Series 7 examination was significantly revised in June 1986, to include not only the traditional coverage of equity options, but also, debt, foreign currency, and index options.

      Therefore, the NASD Qualifications Committee decided to add two more limited representative registration categories. The first, Series 62—Corporate Securities Limited Representative Examination, is the subject of this notice. The second, the Series 42—Options Limited Representative Examination, is 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 categories would be designated "General Securities Representatives," thereby offering an alternative to the Series 7 examination in qualifying for that particular category. The NASD would also establish procedures with other self-regulatory organizations to ensure comparability of subject matter coverage between the Series 7 examination and the five limited examinations.

      SUMMARY OF PROPOSED AMENDMENTS

      Under the proposed amendments to Schedule C, a Series 62—Corporate Securities Limited Representative would be able to transact a member's business in the following products: 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 would 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. Representatives seeking to transact business in these latter products would have to register in one or more of the NASD's other limited representative categories, or as General Securities Registered Representatives.

      Members have indicated a need for qualification tests that reflect the various product markets in the industry, and it is expected that a corporate securities registration category will apply broadly to many member firms. Expected users of the program include:

      • Existing limited representatives, especially those associated with insurance company members, who wish to expand their product offerings to include securities that presently require Series 7—General Securities Representative qualification;
      • Representatives of smaller firms who are not involved in all the securities markets included in the Series 7—General Securities Representative program;
      • Representatives who would 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; and
      • Certain research personnel required to be registered under NASD rules.

      Nothing in this proposal would affect a member's ability to require its associated persons to qualify as Series 7—General Securities Representatives as a matter of firm policy. The Series 62—Corporate Securities Limited Representative Examination, either alone or in conjunction with other limited representative examinations, is intended to provide greater flexibility to members in qualifying their personnel, while still maintaining the necessary investor protection afforded by the NASD's qualification programs. The Series 62—Corporate Securities Limited Representative Examination, like the other limited examinations, would be administered on a daily basis using the NASD's automated testing system in the PLATO network.

      The NASD Qualifications Committee authorized the changes to Schedule C that incorporate a new category of limited representative. This new category would qualify associated persons to conduct a member's business in corporate and certain other securities. The Committee also authorized development of a qualification examination (Series 62) for this new limited representative category. Accordingly, a study outline was developed by a task force of NASD member delegates and a bank of test questions is now being completed.

      Additional information in the form of a draft study outline for the Series 62 is available from the NASD Qualifications Department at (301) 738-6693.

      The proposed amendments to Schedule C to the NASD By-Laws would add a paragraph (e) to Part III, Section (2). Conforming changes to Part II, Section (2)(a) are also being proposed to permit the use of the Corporate Securities Limited Representative Examination as a prerequisite for the Series 24—General Securities Principal Examination.

      * * * * *

      The NASD urges members to comment on these proposals. The Board of Governors requests that commentators specifically address the issue of whether creation of this separate registration category would result in lessening the qualification standards for the industry and whether a system that permits persons to hold multiple registrations would make it burdensome for firms to supervise their associated persons' activities. 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

      All comments and suggestions must be received no later than July 19, 1987. All comments and suggestions received by this date will be considered by the NASD Board of Governors. If the proposed amendments are approved by the Board, they must be filed with and approved by the Securities and Exchange Commission before becoming effective.

      Questions concerning this notice may be directed to either Frank McAuliffe, Vice President, NASD Qualifications, at (301) 738-6694, or David Uthe, Senior Qualifications Analyst, at (301) 738-6695.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and 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) hereof.
      (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 and Variable Contracts Products and/or a Limited Representative—Direct Participation Programs.

      [Existing Sections (ii) through (v) are renumbered to reflect the above.]


      * A limited registration category for Options Representatives presently exists under Schedule C. A new examination for this category is planned for late 1987.

      * New language is underlined.


    • 87-38 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 Friday, July 3, 1987, 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 25

      July 2

      July 7

      26

      6

      8

      29

      7

      9

      30

      8

      10

      July 1

      9

      13

      2

      10

      14

      3

      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 may by directed to the NASD Uniform Practice Department at (212) 839-6256.


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


    • 87-37 Proposed Amendment to Article I, Section (c) of the NASD By-Laws Relating to the Definition of the Term "Branch Office"

      IMPORTANT MAIL VOTE

      OFFICERS, PARTNERS, PROPRIETORS

      TO: All NASD Members and Other Interested Persons

      LAST VOTING DATE IS JULY 16, 1987.

      EXECUTIVE SUMMARY

      NASD members are invited to vote on a proposed amendment to Article I, Section (e) of the NASD By-Laws that would clarify that branch offices of NASD member firms located outside of the United States fall within the definition of "branch office." The amendment would delete the phrase "located in the United States" from the definition of "branch office" contained in Article I, Section (e) of the By-Laws.

      A conforming change also has been approved by the NASD Board of Governors in the Explanation of the Board of Governors — "Distinction Between Branch Office and Office of Supervisory Jurisdiction; Appointment of Executive Representative; Standards for Determining Branch Offices," which follows Schedule C to the By-Laws.

      The proposed amendment to Section (c) of Article I has been approved by the NASD Board of Governors and now requires membership approval. Prior to becoming effective, the proposed amendment must also be approved by the Securities and Exchange Commission.

      The texts of both amendments are attached.

      BACKGROUND AND SUMMARY OF PROPOSED AMENDMENTS

      The NASD Board of Governors believes that the restrictive language now contained in the NASD By-Laws and Schedule C is inconsistent with the current environment of increasing internationalization of the securities markets and that such restrictive language serves no useful purpose. The Board of Governors has approved amendments to the By-Laws and Schedule C that delete the restrictive language, making the definition applicable to all branch offices, wherever located.

      Under the proposed amendments, branch offices located outside the United States will be assigned to existing NASD districts for purposes of examinations, elections, and other district-level functions. The amendments would not affect the availability of the "foreign associate" category of registration for persons associated with foreign branch offices.

      * * * * *

      The Board of Governors believes that the clarifying amendment to Article I, Section (c) of the NASD By-Laws 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 July 16, 1987.

      Questions concerning this notice may be directed to Eugene Bleier, Attorney, NASD Office of General Counsel, at (202) 728-8287.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachments

      AMENDMENT TO NASD BY-LAWS*

      ARTICLE I

      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;

      * * *

      AMENDMENT TO SCHEDULE C TO THE BY-LAWS*

      [This change has been approved by the NASD Board of Governors and is presented here for informational purposes only.]

      • • • 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 "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.


      * Deleted language is bracketed.


    • 87-36 Split Expiration of Index Options and Futures on June 19, 1987

      TO: All NASD Members and Other Interested Persons

      FROM: Options Committee of the NASD Board of Governors

      The June 19, 1987, expiration of index options and futures contracts, in addition to being a quarterly expiration, will be unique in that it will mark the first time that the settlement prices of the various stock indices will not be uniformly based on the closing price, of the primary market, of each component stock. Depending on the derivative instrument, some will settle vs. a value calculated against the primary market opening (a.m.) price of each component stock while others will continue to settle vs. a value calculated against the primary market closing (p.m.) stock prices.

      Due to the unusual nature of this "split expiration," the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and others have raised concerns about the potential for trading abuses that may occur during the a.m./p.m. expirations. As appropriate, trading positions in expiring index options and futures contracts, together with related trading in underlying stocks, will be closely monitored. In particular, the NASD will closely examine unusual trading activity in NASDAQ/NMS stocks that are components of indices underlying expiring derivative products.

      The SEC and CFTC have advised the NASD that members may be required to address questions such as what economic rationale was employed in establishing, liquidating, or substituting positions and why identifiable alternatives were not employed. To the extent that such inquiries may involve customer accounts, members are reminded of their obligation to use due diligence to learn the essential facts relative to every customer and every order adopted on behalf of customer accounts.

      Questions concerning this notice may be directed to James M. Cangiano, Director, NASD Market Surveillance, at (202) 728-8186.

    • 87-35 NASDAQ National Market System Grows to 2,940 Securities With 23 Voluntary Additions on June 16, 1987

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

      On Tuesday, June 16, 1987, 23 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,940. These 23 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 23 issues scheduled to join NASDAQ/NMS on Tuesday, June 16, 1987, are:

      Symbol*

      Company

      Location

      ALBM

      Alpha 1 Biomedicals, Inc.

      Washington, D.C.

      BEAR

      Bear Automotive Service Equipment Company

      New Berlin, WI

      BRJS

      Brajdas Corporation

      Beverly Hills, CA

      CAME

      Carme, Inc.

      Novato, CA

      CHMXW

      Chemex Pharmaceuticals, Inc. (Wts)

      Denver, CO

      COBAP

      Commerce Bancorp, Inc. (Pfd)

      Cherry Hill, NJ

      DFLX

      Dataflex Corporation

      Edison, NJ

      FRBC

      First Republic Bancorp, Inc.

      San Francisco, CA

      GISH

      Gish Biomedical, Inc.

      Santa Ana, CA

      HAKO

      Hako Minuteman, Inc.

      Addison, IL

      INDHK

      Independent Insurance Group, Inc.

      Jacksonville, FL

      ITXIW

      Interactive Technologies, Inc. (Wts)

      North St. Paul, MN

      JAYJ

      Jay Jacobs, Inc.

      Seattle, WA

      MMST

      MedMaster Systems, Inc.

      Logan, UT

      MMSTW

      MedMaster Systems, Inc. (Wts)

      Logan, UT

      MONY

      Metropolitan Consolidated Industries, Inc.

      New York, NY

      ORGS

      Organogenesis, Inc.

      Cambridge, MA

      OSIC

      Osicom Technologies, Inc.

      Rockaway Township, NJ

      SWTX

      Southwall Technologies, Inc.

      Palo Alto, CA

      UBSI

      United Bankshares, Inc.

      Parkersburg, WV

      VAGO

      Vanderbilt Gold Corporation

      Las Vegas, NV

      WHOO

      Waterhouse Investor Services, Inc.

      New York, NY

      YORK

      York Research Corporation

      Stamford, CT

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

      Pending Additions

      Symbol*

      Company

      Location

      BNDY

      Brandywine Savings & Loan Association

      Dowingtown, PA

      CKSB

      CK Federal Savings & Loan Association

      Concord, NC

      DDDI

      Downey Designs International, Inc.

      Indianapolis, IN

      ESSF

      ESSEF Corporation

      Mentor, OH

      EFSB

      Elmwood Federal Savings Bank

      Media, PA

      FFES

      First Federal Savings & Loan Association of East Hartford

      East Hartford, CT

      FFKY

      First Federal Savings Bank of Elizabethtown

      Elizabethtown, KY

      HWCD

      HWC Distribution Corp.

      Houston, TX

      ITGN

      Integon Corporation

      Winston-Salem, NC

      ISPC

      Intraspec, Inc.

      Conshohoken, PA

      JASN

      Jason Incorporated

      Milwaukee, WI

      ONBK

      Onondaga Savings Bank

      Syracuse, NY

      PTAC

      Penn Treaty American Corporation

      Allentown, PA

      PFDC

      Peoples Federal Savings Bank of DeKalb County

      Auburn, IN

      RFBK

      Raleigh Federal Savings Bank

      Raleigh, NC

      SCRV

      Scrivner, Inc.

      Oklahoma City, OK

      SFGI

      Security Financial Group, Inc.

      St. Cloud, MN

      NASDAQ/NBAS Interim Additions

      Symbol*

      Security

      Date of Entry

      HCCC

      Healthcare COMPARE Corporation

      5/29/87

      IMMCO

      International Mobile Machines Corporation (Pfd)

      5/29/87

      CRBN

      Calgon Carbon Corporation

      6/02/87

      DESI

      Designs, Inc.

      6/02/87

      MFSL

      Maryland Federal Savings & Loan Association

      6/02/87

      GATW

      Gateway Federal Savings & Loan Association

      6/03/87

      PRFT

      Proffitt's, Inc.

      6/03/87

      WLMN

      Wellman, Inc.

      6/03/87

      AREL

      Alpharel, Inc.

      6/04/87

      BEZRY

      C. H. Beazer (Holdings) Pic.

      6/04/87

      FCTR

      First Charter Corporation

      6/04/87

      SSLN

      Security Savings & Loan Association

      6/05/87

      The following changes to the list of NASDAQ/NMS securities occurred since May 22, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      CVGT/CVGT

      Convergent, Inc./Convergent Technologies, Inc.

      5/26/87

      COBK/COBK

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

      5/27/87

      SUDS/SUDS

      Sudbury, Inc./Sudbury Holdings, Inc.

      5/28/87

      GLXIF/IHIRF

      Glenex Industries, Inc./International HRS Industries, Inc.

      5/29/87

      ZION/ZION

      Zions Bancorporation/Zions Utah Baneorporation

      5/29/87

      ALTS/FSFA

      Altus Bank, A Federal Savings Bank/First Southern Federal Savings and Loan Association

      6/01/87

      A MSB/AMSB

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

      6/01/87

      GRAN/GRAN

      Bank of Granite Corporation/Bank of Granite

      6/01/87

      COOL/BUGS

      Cooper Development Company/Cooper Development Company

      6/01/87

      GMFD/GMFD

      Germania Bank, A Federal Savings Bank/Germania, F.A.

      6/01/87

      SOCS/SOCS

      Society for Savings Bancorp, Inc./Society for Savings

      6/01/87

      XTGX/TMPL

      TGX Corporation/Temple ton Energy, Inc.

      6/02/87

      TCJCA/TCJC

      Town & Country Jewelry Manufacturing Corporation (Cl A)/Town & Country Jewelry Manufacturing Corporation

      6/02/87

      IGEN/IGEN

      IGI, Inc./ImmunoGenetics, Inc.

      6/04/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      KECO

      Kent Electronics Corporation

      5/22/87

      RETI

      Riedel Environmental Technologies,Inc.

      5/22/87

      AMRS

      American Restaurants Corporation

      5/26/87

      CRII

      Computer Resources, Inc.

      5/26/87

      FSSLA

      Financial Security Savings and Loan Association (Cl A)

      5/26/87

      GNUC

      GNI, Inc.

      5/26/87

      USCC

      U.S. Capital Corporation

      5/26/87

      USDC

      U.S. Design Corporation

      5/27/87

      BDSY

      Baron Data Systems

      5/29/87

      HPOC

      High Plains Oil Corporation

      6/01/87

      PSWA

      Pacific Southwest Airlines

      6/01/87

      PROG

      Progressive Corporation (The)

      6/01/87

      QCBK

      Quincy Co-Operative Bank (The)

      6/01/87

      BAPO

      Bamberger Polymers, Inc.

      6/03/87

      ITIC

      Investors Title Company

      6/03/87

      BPAC

      Burnham Pacific Properties, Inc.

      6/04/87

      NAVIW

      North American Ventures, Inc. (Wts)

      6/05/87

      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.

      Sincerely,

      Gordon S. Macklin
      President


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


    • 87-34 NASDAQ National Market System Grows to 2,917 Securities With 28 Voluntary Additions on June 2, 1987

    • 87-33 Forms BD and U-4 Revisions, Government Securities Brokers and Dealers Registration Requirements

      TO: All NASD Members and Other Interested Persons

      ATTN: All Chief Executive Officers, Compliance Officers, and Registration Managers

      EXECUTIVE SUMMARY

      On October 28, 1986, President Reagan signed the Government Securities Act of 1986 providing for regulation of government securities activities by brokers and dealers. This legislation created new Section 15 C under the Securities Exchange Act of 1934 (Act), which necessitated revisions to Form BD and Form U-4 to accommodate this new area of regulatory jurisdiction.

      A copy of the 4/87 Revised Form BD is attached. Effective immediately, all members are required to use the new version of the form, although no filing is required at this time for members that do not engage in any government securities activities.

      NASD members and member applicants that engage in any government securities activities must comply with the provisions of new Section 15 C of the Act by completing and submitting a registration amendment on the 4/87 Revised Form BD to report their government securities activities.

      FILING REQUIREMENTS FOR MEMBERS ENGAGED IN GOVERNMENT SECURITIES ACTIVITIES AND OTHER SECURITIES BUSINESS

      All NASD members and applicants for membership that engage, or intend to engage, in any government securities activities in addition to other types of investment banking or securities activities are required to complete an originally signed and properly notarized 4/87 Revised Form BD amendment. This filing is due on or before July 25, 1987, and should be sent to:

      NASD
      P.O. Box 9401
      Gaithersburg, Maryland 20898-9401

      The purpose of this filing is to report government securities-related activities and information. While it is not necessary to submit the entire form, members should review the complete form to ensure all information contained in the form that is affected by government securities activities disclosure is identified. The page or pages of the 4/87 Revised Form BD that must be updated to disclose government securities-related information should be completed and submitted with an originally signed and notarized execution page (page 1). For most firms, a completed filing can be accomplished using pages 1 and 5.

      FILING REQUIREMENTS FOR MEMBERS ENGAGED EXCLUSIVELY IN GOVERNMENT SECURITIES ACTIVITIES

      All NASD members or applicants that have applied for membership under Section 15C as exclusive government securities brokers or dealers using the old 1/86 Form BD are required to complete and submit a 4/87 Revised Form BD amendment. The filing must include an originally signed and notarized page 1 and a fully completed page 5, and be submitted no later than July 25, 1987.

      FILING REQUIREMENTS FOR INDIVIDUALS ENGAGED IN GOVERNMENT SECURITIES ACTIVITIES — REVISED FORM U-4

      A few minor changes were made to Form U-4 to accommodate the new registration requirements for individuals who function as government securities representatives or principals.

      Individuals who are associated with an NASD member, are engaged in government securities activities and are not currently NASD-registered as a representative or principal in another category, are now subject to the registration requirements of the new government securities statutes. Those individuals are required to use the revised 4/87 version of Form U-4 to become effectively registered.

      Therefore:

      • If you are not engaged in government securities activities, the NASD will continue to accept both the 7/85 and 4/87 versions of Form U-4.
      • If you have already filed for government securities representative or principal registration using the old (7/85) version of Form U-4, you are not required to file an additional form as long as the old form was completed by checking the "Other" box under item 11 and writing in "Government Securities Representative" or "Government Securities Principal."
      • If you are associated with an NASD member, are engaged in government securities activities and are NASD-registered as a representative or principal in another category, there are no additional filing requirements.

      NO EXAMINATION REQUIREMENT

      While currently there is no qualification examination requirement for registration as a government securities representative or principal, the Form U-4, fingerprint card, and appropriate fees should be submitted to the NASD. Registration must be approved no later than July 25, 1987, in order to conduct business thereafter.

      If you are applying for registration as a government securities representative or principal and are subject to statutory disqualification pursuant to the Act, you should submit your application as soon as possible to allow adequate time to process the registration request and obtain approval from the SEC.

      * * * *

      Questions concerning this notice may be directed to Chris Goodwin, Assistant Director, at (301) 738-6717, or Maudese B. King, Manager, at (301) 738-6716, Member Firm Registration Services, NASD Membership Department.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

    • 87-32 Request for Comments on Shareholder Voting Rights Proposal For NASDAQ Companies

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: JUNE 30, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on a proposed amendment to Schedule D to the NASD By-Laws that would make an issuer ineligible for initial or continued inclusion in the NASDAQ System if it issues securities or takes corporate action that would have the effect of nullifying, restricting, or disparately reducing voting rights of holders of an outstanding class or classes of common stock.

      The text of the proposed amendment is attached.

      BACKGROUND

      During the fall of 1984 and the spring of 1985, the NASD Corporate Advisory Board, which is currently composed of chief executives of 16 NASDAQ issuers, and the NASD Board of Governors developed an initial set of corporate governance criteria to be applicable to NASDAQ National Market System issuers. This process included a survey of issuers 1/ and publication for comment of proposed rules. 2/ The criteria developed by the Board of Governors are currently on file with the Securities and Exchange Commission3/ and approval is anticipated in the near future.

      One area in which the Corporate Advisory Board and the Board of Governors determined not to impose requirements during their initial consideration of the corporate governance issue had to do with allowing issuers to create either multiple classes of stock having unequal voting rights or voting and non-voting stock.

      In July 1985, the NASD Board of Governors authorized the solicitation of public comment on the voting rights issue. 4/ At that time, the NASD proposed for consideration two possible concepts for limiting issuers' ability to create disparate voting rights. The NASD received approximately 100 comment letters. The NASD Board reviewed the comment letters at its September 1985 meeting and concluded that the issue of shareholder voting rights required further study. The Board retained an independent outside consultant to study a number of issues raised during the comment process. The NASD selected Professor Daniel R. Fischel of the University of Chicago's Center for Law and Economics to undertake the study.

      In that study, 5/ Professor Fischel analyzed the status of multiple classes of common stock in the context of the "race to the bottom" thesis, the economics of shareholder voting, and the evidence developed by other studies of shareholder voting rights. In addition, the study analyzed the costs and the benefits inherent in the imposition of a prohibition on dual-class common stock. Among other conclusions, the Fischel study found that the vast majority of companies opt for a one-share, one-vote structure, but that in appropriate cases, multiple classes may fulfill legitimate business and economic functions.

      The issue of voting rights was again brought to the fore by the filing of a proposed rule change by the New York Stock Exchange in September 19866/ which would have eliminated the exchange's long-standing one-share, one-vote requirement. Using a procedure reserved for only the most critical of policy issues, in December 1986, the SEC held two days of public hearings on the proposal. Approximately 50 witnesses, including representatives of the NASD, testified. A common theme in those hearings was that some uniformity among the marketplaces is appropriate in this area, with some witnesses suggesting that there may be a need for federal legislation.

      In March 1987, at the request of the NASD Corporate Advisory Board and the Board of Governors, the NASD suggested, in a letter to SEC Chairman John S. R. Shad, 7/ the framework of an approach to voting rights that would allow the creation of disparate voting or non-voting stock if it would be accomplished in a manner which would not disenfranchise existing securities holders. NASD President Gordon S. Macklin also stated in that letter that "the Association would like to suggest that all equity securities markets should have a uniform rule for domestic securities which would emphasize the principle of equal voting rights but allow for legitimate variations."

      As a result of this initiative, the SEC convened several meetings among representatives of the New York and American stock exchanges and the NASD. Based upon discussions at these meetings, the Corporate Advisory Board recommended and the NASD Board of Governors authorized solicitation of comments on the rule proposal which accompanies this notice to members.

      PROPOSED AMENDMENT

      The rule proposal takes the form of an amendment to the provisions of Schedule D to the NASD By-Laws that sets qualification standards for domestic NASDAQ securities. The general premise of the proposal is to prohibit issuers of NASDAQ securities from issuing any class of securities or taking any other corporate action that would nullify, restrict, or disparately reduce the voting rights of holders of an outstanding class or classes of publicly traded securities of the issuer.

      The proposed rule creates two sets of presumptions as to transactions which do, or do not, have the effect of restricting, nullifying, or disparately reducing voting rights. These are, however, only presumptions and the ultimate decision as to whether the issuance of a class of greater, lesser, or non-voting securities violates the rule must be based upon a determination of whether the action restricts, nullifies, or disparately reduces voting rights.

      The following transactions are presumed not to restrict, nullify, or disparately reduce voting rights:

      (1) Issuance of securities in an initial public offering. When securities with reduced or no voting rights are issued as part of an issuer's first public offering of securities, purchasers are aware of what they are purchasing and are able to factor the nature of the securities into their investment decisions. Nothing is being forced upon shareholders and pre-existing rights are in no way impacted.
      (2) Issuance of securities in a public offering with voting rights not greater than those of any outstanding class of the issuer's common stock. This provision allows investors in a new class of securities to make the same investment decisions as investors in an initial public offering, but protects against the disenfranchisement of existing shareholders.
      (3) Issuance of securities as approved by a shareholder vote pursuant to a proxy statement in a merger or acquisition or in a stock dividend transaction where the voting rights of the securities would not be greater than those of any outstanding class of the issuer's common stock. This provision allows the issuance of securities that would "participate" in the earnings or operations of the merged or acquired entity but still protects the voting rights of existing shareholders against a dilution of their voting power.
      (4) Issuance of securities of a class which protect the relative voting rights of existing shareholders, which are freely transferable and whose issuance is not coupled with other present or future corporate actions designed to adversely impact or dilute the rights of existing shareholders. This provision would allow the declaration of stock dividends and other issuances of securities carrying differing (greater or lesser) voting rights than existing shares so long as no restrictions on transferability or other impediments are attached to the new shares. Some impediments could, for example, have the effect of inducing a certain group of shareholders to convert the new shares into a class of lesser voting securities, thereby disparately reducing the per-share voting rights of that group. To qualify for this presumption of compliance, the issuance of securities must not be coupled with any other corporate action which is designed to, or has the effect of, adversely impacting or diluting the per-share rights of existing shareholders. Such corporate action could include a determination to purchase, through an employee stock ownership plan or other corporate-controlled plan, large amounts of greater voting securities.

      This provision (Subsection (2)(D)) is intended to clarify that companies are permitted to issue new classes of securities with greater or lesser voting rights so long as such issuance is not contrary to the prohibition of Section 3.o., but that any such issuance must meet the requirements of Subsection (2)(D) in order to enjoy a presumption of compliance. Any company deviating from the criteria of Subsection (2) would bear the burden of demonstrating compliance with Section 3.o.

      The following transactions are presumed to restrict, nullify, or disparately reduce voting rights:

      (1) Restrictions on voting power based upon the number of shares held which, for example, result in diminished voting power as the amount of shares held by any one shareholder increases.
      (2) Restrictions on voting power based upon the length of time such shares have been held, such as voting structures that require securities to have been held for a stated period of time before full voting power accrues.
      (3) Issuance of securities pursuant to an exchange offer where the securities being issued result in a nullification, restriction, or disparate reduction of voting rights of outstanding common stock.

      The proposed rule would be prospective in its application and would "grandfather" issuers that currently have outstanding multiple classes of stock with disparate voting rights or that are in the process of implementing such a structure for which proxy materials have been filed with the SEC on or before May 15, 1987. Issuers that have had multiple class capitalizations authorized but that have not issued securities pursuant thereto before May 15, 1987 would not be grandfathered. However, if the issuer had on file with the SEC before May 15, 1987 a registration statement or offering circular for the issuance of securities of a previously authorized class, authorized securities of that class would be grandfathered. Subsequent offerings of new classes of securities of grandfathered issuers would have to comply with the rule.

      REQUEST FOR COMMENTS

      The NASD is requesting comments on the foregoing proposal, as well as other constructive alternatives and suggestions which commentators may offer. In particular, the NASD requests comments on the effect the proposal would have on the ability of issuers to adopt so-called "fair price" and other charter amendments that would operate in the context of a two-tier tender offer. An example is an amendment to a corporate charter that requires that shareholders in the second phase of a tender offer receive substantially the same form and amount of consideration as those in the first. These provisions are frequently adopted in conjunction with a super-majority provision requiring a vote of a higher percentage of shareholders to approve the second step of a tender offer where equivalent compensation is not going to be paid. The NASD understands that there are several variations of such provisions. Commentators are requested to identify and address these variations in the context of the proposed rule and its impact, if any, upon them.

      The NASD also requests comments with respect to any areas of the voting rights issue which have not been addressed in this notice, but which commentators feel are pertinent.

      All comments received will be reviewed by the NASD Corporate Advisory Board and the Board of Governors. Comments should be addressed to:

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

      All comments must be received by June 30, 1987. Questions regarding this notice should be directed to either the undersigned, at (202) 728-8319, or John F. Guion, Senior Vice President, NASDAQ Company Services, at (202) 728-8379.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      PROPOSED AMENDMENT TO PART IIB, SCHEDULE D OF THE NASD BY-LAWS*

      II

      QUALIFICATIONS FOR AUTHORIZED SECURITIES

      * * * *

      B. Rules for Authorized Domestic Securities

      * * * *

      3. An eligible security shall not be authorized, and an authorized security shall be subject to suspension or termination of authorization, if:

      * * * *

      o. on or after May 15, 1987, the issuer of such security issues any class of securities or takes other corporate action that would have the effect of nullifying, restricting, or disparately reducing the per-share voting rights of holders of an outstanding class or classes of common stock of such issuer registered pursuant to Section 12 of the Securities Exchange Act of 1934; provided, however, that this subsection (o) shall not apply to the issuance of any securities pursuant to a registration statement or offering circular, or the issuance of any security authorized by a shareholder vote solicited by proxy material, filed with the Commission on or before May 15, 1987.
      (1) For purposes of this Subsection (o):
      (A) the term "security" shall not include any class of securities, other than common stock, having a preference over the issuer's common stock as to dividends, interest payments, redemption, or payments in liquidation if the voting rights of such securities only become effective as a result of specified events, which reasonably can be expected to jeopardize the issuer's financial ability to meet its payment obligations to the holders of that class of securities not relating to an acquisition of the issuer's common stock; and
      (B) the term "common stock" shall include any security of an issuer designated as common stock and any security of an issuer, however designated, which by its terms is a common stock (e.g., a security that entitles the holders thereof to vote on matters submitted to the issuer's security holders for a vote); however, nothing herein shall be construed to prevent a company from obtaining financing by issuing a class of securities (other than common stock) to institutional investors under an indenture or purchase agreement containing security arrangements (such as covenants not to merge, consolidate, or sell substantially all the company's assets without the consent of a percentage of the holders of the class of securities) reasonably related to the financing.
      (2) For purposes of this Subsection (o), the following shall be presumed not to have the effect of "nullifying, restricting, or disparately reducing" voting rights:
      (A) the issuance of securities pursuant to an initial public offering;
      (B) the issuance of any class of securities, through a public offering, with voting rights not greater than the per-share voting rights of any outstanding class of the issuer's common stock;
      (C) the issuance of any class of securities for which proxies were solicited to effect a merger or acquisition, or by way of a stock dividend to all holders of an outstanding class of the issuer's common stock, where the voting rights of these securities would not be greater than the per-share voting rights of any outstanding class of the issuer's common stock; or
      (D) the issuance of a class of securities which protect the relative per-share voting rights of existing shareholders, are freely saleable and transferable without any impact upon or dilution of the voting rights or other property rights inherent in the ownership of the newly issued shares, and which issuance is not coupled with other present or future corporate action which is designed to, or has the effect of, adversely impacting or diluting the rights of existing shareholders.
      (3) For purposes of Subsection (o), the following shall be presumed to have the effect of "restricting, nullifying, or disparately reducing" voting rights:
      (A) any restriction on the voting power of shares of the issuer's common stock held by a beneficial or record holder based on the number of shares held by such beneficial or record holder;
      (B) any restriction on the voting power of shares of the issuer's common stock held by a beneficial or record holder based on the length of time such shares have been held by such beneficial or record holder; or
      (C) any issuance of securities through an exchange offer by the issuer for shares of an outstanding class of the issuer's common stock where the securities issued have voting rights, whether greater than or lesser than the per-share voting rights of any outstanding class of the issuer's common stock, that have the effect of nullifying, restricting, or disparately reducing the per-share voting rights of holders of an outstanding class of the issuer's common stock.

      1/ This survey was mailed to all NASDAQ companies on May 13, 1985.

      2/ Notice to Members 85-20 (March 28, 1985).

      3/ SEC File Nos. SR-NASD-85-20 and 86-27.

      4/ Notice to Members 85-49 (July 19, 1985).

      5/ D. Fischel, Organized Exchanges and the Regulation of Dual Class Common Stock (March 1986).

      6/ SEC File No. SR-N YSE-86-17.

      7/ Letter from NASD President Gordon S. Macklin to Chairman John S. R. Shad, dated March 13, 1987.

      * New language is underlined


    • 87-31 Mark-Ups and Mark-Downs on Zero-Coupon Securities

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The NASD wishes to apprise its members of the SEC's recent release relating to mark-ups on zero-coupon securities. The SEC has become aware of potential abuses in this area and emphasizes that applicable provisions of the federal securities laws, NASD rules, and MSRB rules apply equally to zero-coupon securities. The SEC cautions broker-dealers to establish mark-ups in these securities based upon their face value rather than taking into account the discount at which such securities are sold.

      The text of the SEC's release, as reprinted in the Federal Register, is attached.

      SUMMARY OF THE SEC'S RELEASE

      In Release No. 34-24368, dated April 21, 1987, the SEC expressed concern about the mark-up or mark-down practices of broker-dealers in conjunction with secondary market transactions in zero-coupon securities. In the release, the SEC defines "zero-coupon securities" to include securities sold at original issue discounts, stripped coupon bonds, or coupons stripped from bonds and sold as separate instruments.

      The SEC states that the anti-fraud provisions of the federal securities laws proscribe charging excessive mark-ups to retail customers without proper disclosure to the customers, and that rules of the self-regulatory organizations proscribe excessive mark-ups on the sale of securities in a principal transaction, regardless of whether the mark-up is disclosed. The SEC further states that it has consistently held that mark-ups in excess of 10 percent above the prevailing market price are fraudulent in the sale of equity securities and that mark-ups in the sale of debt securities generally are expected to be lower than those on equities. The release also contains a detailed discussion of case law in the area of mark-ups, background and application of the NASD's Mark-Up Policy, and MSRB Rules G-17 and G-30 as they relate to mark-ups.

      The SEC indicates that for zero-coupon securities, it is particularly difficult to ascertain the prevailing market price upon which to base a mark-up and that generally the best indication of the prevailing market is the broker-dealer's contemporaneous retail purchases adjusted to reflect mark-downs.

      The SEC also believes that the market price for an "unstripped" security is not necessarily an appropriate indication of its zero-coupon components and that the market must be established for each stripped coupon and bond separately to ensure that the mark-up on each is not excessive.

      Finally, the SEC states that basing mark-ups upon a percentage of a bond's face value may result in inappropriate mark-ups on securities trading at deep discounts.

      For further information on the SEC's release, please contact either Alden Adkins, SEC Branch Chief, at (202) 272-2857, or Christine Sakach, SEC Attorney, at (202) 272-2418. Questions concerning this notice should be directed to the NASD Office of the General Counsel at (202) 728-8294.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      SECURITIES AND EXCHANGE COMMISSION

      (Release No.34-24368)

      Zero-Coupon Securities

      AGENCY: Securities and Exchange Commission.

      ACTION: Notice to broker-dealers concerning disclosure requirements for mark-ups on zero-coupon securities.

      SUMMARY: The Commission has become aware of potential abuses in the markups and mark-down practices of broker-dealers trading various, zero-coupon securities. Because there is limited market Information available concerning the secondary market for zero-coupon securities, and those securities generally are sold at a deep discount to the face amount, investors may not fully appreciate the size of the percentage mark-ups that sometimes have been charged by broker-dealers. Broker-dealers must recognize that sales of zero-coupon securities with mark-ups that are excessive and undisclosed violate the federal securities laws, and the rules and regulations of the Commission. Further, excessive markups, whether or not disclosed, violate the rules of the National Association of Securities Dealers, Inc. ("NASD") and the Municipal Securities Rulemaking Board ("MSRB").

      DATE: April 21, 1987.

      FOR FURTHER INFORMATION CONTACT: Alden Adkins, Branch Chief, (202) 272-2857. or Christine Sakach, Attorney, (202) 272-2418, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street NW., Washington, DC 20549.

      SUPPLEMENTARY INFORMATION:

      I. Background

      Zero-coupon securities are debt securities that do not pay interest to tbe holder periodically prior to maturity, and are sold, therefore, at a substantial discount from the face amount.1 Most bonds can be issued in zero-coupon form or can be stripped; tbe discount from face value in effect represents the aggregate interest the holder receives if he holds the security to its stated term of maturity. Zero-coupon securities have become increasingly popular with retail customers for various reasons including the substantially lower price of these instruments relative to coupon bonds and the locked-in yields they produce If held to maturity.2 While stripped United States Treasury securities initially were the most prevalent type of zero-coupon security,3 zero-coupon municipal securities also are now being issued.4

      Dealers engaging in principal transactions with customers usually charge their customers a net price that, in lieu of or in addition to a commission or service charge, includes a mark-up or mark-down5 over the prevailing inter-dealer market price as compensation for effecting the trade. Rule 10b-10 under the Securities Exchange Act of 1934 ("Exchange Act")6 generally requires the customer's confirmation for transactions in debt securities to show the net dollar price and yield. It does not, however, require that the mark-up be separately stated. In addition to these confirmation requirements. Rule lOb-5 requires disclosure of excessive mark-ups7 and the rules of the NASD and MSRB prohibit excessive dealer mark-ups.8

      II. Discussion

      A. Federal Securities Law

      The antifraud provisions of the federal securities laws proscribe deceptive pricing practices by broker-dealers.9 Charging retail customers excessive mark-ups without proper disclosure constitutes such a deceptive practice or scheme.10 The fact that a broker-dealer is acting in a principal capacity does not diminish its obligation to deal fairly with public customers.11 This duty of fair dealing includes the implied representation that the price a firm charges bears a reasonable relationship to the prevailing market price.12 If a dealers price to a customer includes an excessive mark-up over the prevailing market price, then, absent proper disclosure, the dealer has violated section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and section 17(a) of the Securities Act of 1933 ("Securities Act").13 The Commission consistently has held that, at the least, undisclosed mark-ups of more than 10% above the prevailing market price are fraudulent inthe sale of equity securities.14 The Commission also consistently has taken the position that mark-ups on debt securities, including municipal securities, generally are expected to be lower than mark-ups on equity securities,15 and has upheld NASD decisions finding mark-ups as low as 5.1% to violate the rules of the MSRB.16

      As a result of the Commission's ongoing oversight of the secondary markets, the Commission believes that as a general matter, common industry practice regarding mark-ups is to charge a mark-up over the prevailing inter-dealer market price of between 1/32% and 3½% (including minimum charges) for principal sales to customers of conventional or "straight" Treasuries, depending on maturity, order size and availability. In light of this evidence, the Commission concludes that mark-ups on government securities, like mark-ups on corporate and municipal debt securities, usually are smaller than those on equity securities.

      To determine the mark-up charged to the customer, the broker-dealer must determine the "prevailing market price." 17 The dealer mark-up equals the price charged to the customer minus the prevailing market price. The proper method for determining the prevailing market price for a security, however, is often the major contested issue in markup cases.18

      As a general matter, the best evidence of the prevailing market price for a broker-dealer who is not making a market in the security is that dealer's contemporaneous cost of acquiring a security.19 For integrated market makers (i.e., dealers who both make a market in a security and sell it to retail customers), the best evidence of the prevailing market generally is contemporaneous sales by the firm (or by other market makers) to other dealers.20 For actively traded securities, if ask quotations have been determined to be an accurate indication of the offer side of the market [i.e., transactions generally occur at these quotations), they may be used instead of sales transactions. For inactively traded securities, inter-dealer sales transactions are of primary importance in calculating a firm's mark-ups because quotations for such securities frequently are the subject of negotiation.21 Thus, the quotations for the security may not accurately reflect the prevailing market price for the security.22

      B. NASD and MSRB Regulation

      Since 1943 the NASD has enforced an interpretation of its Rules of Fair Practice that deems it inconsistent with just and equitable principles of trade for a member to enter into any transaction with a customer at a price not reasonably lejated to the current market price of the Security.23 Under the NASD's Mark-Up Policy, mark-ups for equity securities greater than 5% above the prevailing market price generally are considered to be unreasonable, and thus violative of NASD rules.24

      Similarly, excessive mark-ups involving municipal securities have been held to violate MSRB Rule G-17, which requires dealers to deal fairly with their customers,25 and MSRB Rule C-30, which requires dealers to sell municipal securities to customers at a price which is "fair and reasonable, taking into consideration all relevant factors."26 The NASD and MSRB rules cannot be satisfied by disclosure of the amount of the mark-up.27

      C. Applicability of Policies to Zero-Coupon Bonds

      Mark-ups for corporate, municipal and government debt securities, including zero-coupon securities, are subject to the applicable rules and policies described above. Thus, charging an excessive, undisclosed mark-up on a transaction in a zero-coupon security violates section 10(b) and Rule lOb-5.28 Similarly, excessive mark-ups on zero-coupon securities violate the NASD's and MSRB's rules within their respective jurisdictions.

      (1) Prevailing Market Price29

      As with other securities, the first step in calculating an appropriate mark-up for zero-coupon securities is to determine the prevailing market price. Ascertaining the prevailing market price is particularly difficult for zero-coupon securities because there usually it limited information regarding inter-dealer market transactions. Indeed, where the inter-dealer market is dominated by a single market maker (which may be the case where a zero-coupon security is a proprietary product of a broker-dealer), the best evidence of the prevailing market generally will be the broker-dealer's contemporaneous retail purchases, adjusted to reflect the mark-down inherent in such customer transactions.30 Moreover, because both the stripped interest coupons and the bond are separate securities, it is not sufficient for a broker-dealer to assure itself that the aggregate mark-up for the unstripped security taken as a whole is not excessive. Instead, the broker-dealer must evaluate the mark-up for each stripped coupon and the stripped bond separately and ensure that each is not excessive.

      (2) Amount of Mark-up

      As noted above, the Commission, the NASD and the MSRB have indicated that the percentage mark-up for debt securities historically has been less than the amount charged for equity securities. It is expected, therefore, that percentage mark-ups on zero-coupon securities, as with other debt securities, usually will be smaller than those on equity securities. Therefore, broker-dealers should be advised when marking up debt securities, including zero-coupon securities, that what might be an appropriate mark-up for the sale of an equity security may be an excessive mark-up for a debt security transaction of the same size.31

      The Commission has become aware of the practice of a number of broker-dealers of charging a percentage markup based on the face amount of a zero-coupon security for all maturities, a pricing practice often employed in the market for conventional coupon bonds. Although this percentage may be as low as 1% of the face amount, such pricing can result in a mark-up that is excessive relative to the prevailing market price because zero-coupon bonds trade at a deep discount.33 This problem will be especially acute for securities with long maturities because the purchase price, net of the mark-up, that an investor will pay per $1,000 face amount for a zero-coupon bond with a long maturity is significantly less than that for a zero-coupon with a short maturity.

      III. Conclusion

      The established mark-up rules and policies of the Commission, the NASD and the MSRB apply fully to transactions in zero-coupon securities. The Commission's rules prohibit excessive undisclosed mark-ups, and the NASD's and MSRB's rules and policies prohibit excessive mark-ups whether or not disclosed. The Commission expects that mark-ups on zero-coupon securities, as with other debt securities, usually will be less than those charged for equity securities. In this regard, markups calculated based upon the face amount at maturity may be excessive in relation to the discounted price of the security.

      The Commission urges broker-dealers to review their procedures and policies for marking up zero-coupon securities to ensure that they are consistent with the federal securities laws, the rules and regulations of the Commission, and the rules of the NASD and the MSRB.

      Dated: April 21, 1987.

      By the Commiision.

      Jonathan G. Katx,

      Secretary.

      [FR Doc. 87-9628 Filed 4-28-87; 8:45 am]

      BILLING CODE 8010-01-M


      1 As used in this ralease the term "zero-coupon security" includes: (1) Original issue discount bonds (bonds sold by the issuer without coupons attached); (2) stripped coupon bonds (bonds originally issued with coupons from which the coupons have been stripped); and (3) interest coupons stripped from bonds and sold as separate instruments.

      2 The holders of coupon bonds bear the risk that they may not be able to reinvest periodic interest payments at the same rate as that used to calculate their original yield to maturity.

      3 More recently, an active secondary market has developed in "STRIPS" bonds that are directly issued by the US Treasury in a format that allows dealers immediately to sell them as zero-coupon products and thus do not entail the repackaging steps that are necessary to tranaform straight Treasuries into zero-coupon instruments. Prior to Treasury's stripping program, stripped U.S. Treasury bonds were created as proprietary products of certain broker-dealers. Merrill Lynch, Pierce, Penner & Smith Incorporated ("Merrill") and Salomon Brothers Inc. ("Salomon"), for example, sold proprietary zero-coupon U.S. Treasury products called TIGRs (Treasury Investment Growth Receipts) and CATS (Certificates of Accrual on Treasury Securities), respectively. Also, several other firms issued zero-coupon instruments under the nonproprietary name "Treasury Receipts" All were created by stripping the coupons from Treasury securities and setting a certificate representing an interest in the stripped coupons or securities. Since implementation of the Treasury program, Merrill and Salomon have not issued new TIGRs or CATS.

      4 Since enactment of the Tax Reform Act of 1986, Pub. L. No. 99-514. 100 Stat.____ (1986), several broker-dealers have introduced stripped municipal bonds. See Monroe. "Stripped Municipal Bonds to Be Offered by Securities Firms Under New Tax Law." Wall St. J., at 53. col. 2. October 21 1986; "Morgan Stanley joining issuers of Stripped Munis" Wall St. J., at 41, col 1, October 29. 1986; and "More Zero-Coupons" Daily Bond Buyer, at 2. col 4. November 5, 1986.

      5 This release generally will discuss broker-dealer sales transactions involving mark-ups. Tbe principles stated in the release, however, are equally applicable to broker-dealer purchase transactions involving mark-downs.

      6 17 CFR 240.10b-10 (1986). Rule 10b-10 applies to transactions by broker-dealers in US. Treasury securities and corporate bonds but not municipal securities. The rule applies to zero-coupon securities as well as other forms of debt. The NASD and MSRB have substantially similar confirmation rules. See Disclosure on Confirmations, NASD Manual (CCH) ¶ 2182; and MSRB Rule G-12. MSRB Manual (CCH) ¶ 3571.

      7 See, e.g., Krome v. Merrill Lynch & Co., 837 F. Supp. 910 (S.D.N.Y. 1986). But see Ettinger v. Merrill Lynch, Pierce, Penner & Smith Inc., Fed. Sec L. Rep. (CCH) ¶ 93.102 (E.D. Pa, Dec. 22, 1986), appeal pending. No 87-104S (3d Clr.). In Ettinger, the court held that Rule 10b-5 does not require that excessive mark-ups be disclosed. Tbe court also held that the Commission's failure to promulgate a rule defining under what circumstances a mark-up is excessive precluded the court's finding Merrill's mark-up excessive. The Commission disagrees with the district court's holding and will file a brief, amicus curiae in the court of appeals arguing that Rule 10b-5 imposes an obligation to disclose excessive mark-ups to customers and that decided cases and rules provide adequate guidance regarding what constitutes an excessive mark-up.

      8 While disclosure is one of the factors to be considered in determining the reasonableness of a mark-up under self regulatory organization rules. In re Herrick. Waddell & Co., Inc., 25 S.E.C. 437, 448 (1947), these rules are not antifraud rules, but rules reflecting just and equitable principles of trade, and thus prohibit mark-ups which are unfair in the light of all other relevant circumstances, even if disclosed. In re Amsbray, Allen & Morton. Inc., 42 S.E.C. 919.922 (1986); In re Thill Securities Corporation, 42 S.E.C. 89.95 (1984).

      9 The Commission recently has announced settlement of a mark-up case involving zero-coupon securities. See In re Sutro & Co. Incorporated. Securities Exchange Act Release No. 23883. 38 S.E.C. Doc. 1199.

      10 The previous cases and Commission decisions have not addressed what disclosure would have been sufficient under the facts and circumstances of those cases.

      11 In re Duker & Duker. 6 S.E.C. 388 (1939). cited in In re Alstead. Dempsey & Co., Securities Exchange Act Release No. 20825 (April 5 1984). 30 S.E.C. Doc. 259; and 3 L. Loss. Securities Regulation 1483(1961).

      12 Charles Hughes & Co., Inc v. SEC. 139 F. 2d 434. (2d) Cir.). cert. denied. 321 U.S. 786 (1943). See L. Loss. Fundamentals of Securities Regulation 948-58 (1983). Although some cases have not been couched in terms of disclosure, the Commission believes that the gravamen of a mark-up violation under the federal securities laws is charging excessive mark-ups without disclosure

      13 See. e.g., Ryan v. SEC. Sec Reg & L. Rep. (BNA) No 26 at 1273 (July 1. 1983) (9th Cir. May 23 1983). affg. In re James E. Ryan. Securities Exchange Act Release No 18617 (April 5. 1982). 24 S.E.C Doc. 1859; Barnett v. United States. 319 F. 2d 340 (8th Cir. 1981); Samuel B Franklin & Co v. SEC 290 F.2d 719 (9th Cir). cert denied 368 U.S. 889 (1981): and Charles Hughes & Co v. SEC. 139 F.2d 434. 437 (2d Cir. 1943). cert denied. 321 U.S. 788 (1944). If it needs repetition at this late date, dealers engaged in over-the-counter trading with their customers are held to a simple standard:
      When nothing [is] said about market price, the natural implication in the untutored minds of the purchasers [is] that the price asked [is] close to the market. The law of fraud knows no difference between express representation on the one hand and implied misrepresentation or concealment on the other . . . .
      Charles Hughes & Co., 139 F.2d at 437. The dealer's disclosure obligation reflects Congress' determination to regulate broker-dealers so as to require a "high standard of business ethics." US v.Naftalin. 441 U.S. 766, 778 (1979). The disclosure obligation also may be justified by that feature of the normal functioning of the secondary over-the-counter market which affords each purchaser the ability to make a realistic assessment of the risk of profit or loss upon resale immediately or (after allowing for intervening market movements and accompanying changes in inter-dealer bid-asked spreads) at some subsequent lime Undisclosed excessive mark-ups distort thai risk and frustrate that ability.

      14 In re Alstead, Dempsey & Co.,supra note 11: In re Peter J. Kisch. Securities Exchange Act Release No. 19005 (August 24.1982). 25 S.E.C. 1533. 1539; In re Powell & Associates, Securities Exchange Act Release No. 18577 (March 22, 1982). 24 S.E.C. Doc. 1871. 1873; James E. Ryan, supra note 12; In re Sherman Cleason. IS SEC. 639. 8S1 (1944): and Duker&Duker. supra note 11. at 388-87

      15 In re Crosby ft Elkm. Inc.. 22 S.E.C. Doc. 772. 77S (1981): In re Edward ). Blumenfeld. 18 SEC Doc. 1.379.1.381 (1980): and SEC v Charles A. Morris & Associates. Inc.. 788 F. Supp. 1327,1334 n.J (W.D. Term 1973). The Commission has observedthat It Is the Industry practice, in general, for broker-dealers in principal transaction! to charge retail customers mark-ups on sales of debt securities that are measurably lower than those charged on sales of equity securities.

      16 In re Staten Securities Corporation. Securities Exchange Act Release No. 18628 (April 9. 1982). 25 SEC Doc 2008

      17 See discussion, infra Section U C (l). on the method of determining the prevailing market price."

      18 See N. Wolfson. R. Phillip* ft T. Ruseo. Regulation of Broken. Dealers and Securiliet Market* 2-48 (1977).

      19 See e.g.. In re Peter |. Kisch. supra note 14. at 1530: and In re Alstead. Dempsey ft Co.. Inc. tupro note 11.

      20 See id.

      21 Stated otherwise, the quotation* are not firm and transactions often do not occur it or around the quotation*.

      22 See In re Alstead. Dempsey ft Co.. Securities Exchange Act Release No 20825 (April 5.1984). 30 8 EC Doc 2S9. offg and rev g. in part AlsleadL Strangis ft Dempsey. Incorporated, Admin. Pro. File No. 3-8135 (December 2a 1982). Cf. B. Becker ft H. Kramer. SEC Plays Proper Role in OTC Pricing Regulation. Legal Times. November 28,1984. at 14.
      In situations where the security I* not only inactively traded, but a competitive market does not exist, the u*e of market maker sales or quotation* may be impractical or misleading. Accordingly, the most reliable besls for determining the prevailing market in such a "dominated" market generally la the dealer's contemporaneous coet which is either the price the market maker paid to other dealer* or I* the price paid to retail customers, ad|usted for (/.«.. by adding beck) the mark-down inherent in the transaction.

      23 Interpretation of the Board of Governors on the NASD Mark-Up Policy. NASD Manual (CCH) f 2154.

      24 Samuel B. Franklin » Co.. supra note 13; and In re Vota ft Co.. Inc. Securities Exchange Act Release No. 21301 (September 10.1984). 31 S.E.C. Doc 490. As with the Commission's mark-up policy, the NASD's i% threshold is only a guideline. The circumstances surrounding trading in a security may suggest that mark-ups lass than 5% may be unreasonable, or that mark-up* greater than these figures may be reasonable. See. e.g.. In re SUten Securities Corporation, supra note 18.

      25 MSRB Manual[CCH) • 3581.

      26 MSRB Manual (CCH) 3648.

      27 But cf.. supra note 8.

      28 SECv. MVSecurities. Inc.. (S.D.N.Y.. No. 84 Civ 1184). Litigation Rel. No. 10288 (February 21. 1984). 29 S.E.C. Doc. 1454: and Litigation R*L No. 10303 (March 5.1984). 29 S.E.C. Doc 1501 (describing consent order). In that case, the Commission's memorandum of law requesting t temporary restraining order alleged mark-up* on tero-coupon bonds that were excessive compared to the firm'* contemporaneous cost. Set Memorandum in Support of Application for an Order lo Show CtuM, Temporary Restraining Order, and Motion for a Preliminary Injunction and Other Equitable Relief, at 23. in SEC v. MV Securities. Inc.. (S.D.N.Y.. No. 84 Civ. 1164). See In re Sutro a Co. Incorporated, lupra note 9.

      29 See discussion. $upra Section 11 A

      30 In re AUtead. Dampsey a Co. supra note 11. See Inn Manthoa. Moaa a Co. 40 S.E.C. 542.543-44 (1881). See N. Wolfton. R. Phillip* ft T. Ruaao. lupra not* 15. at 2-47; and S L Loaa. Securitiet Regulation 3088(1861).

      31 Cf. eg.. "(A) higher percentage of mark-up customarily applie* to a common dock tranaactlon than to a bond transaction of the same tize." See NASD Mark-Up Policy. NASD Manual (CCH) 1 21S4.


    • 87-30 NASDAQ National Market System Grows to 2,893 Securities With 21 Voluntary Additions on May 19, 1987

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

      On Tuesday, May 19, 1987, 21 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,893. These 21 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 21 issues scheduled to join NASDAQ/NMS on Tuesday, May 19, 1987, are:

      Symbol*

      Company

      Location

      LUBE

      AutoSpa Corporation

      Woodside, NY

      AVRY

      Avery, Inc.

      New York, NY

      CAVH

      Cavalier Homes, Inc.

      Wichita Falls, TX

      CHLN

      Chalone, Inc.

      San Francisco, CA

      COES

      Commodore Resources Corporation

      New York, NY

      DEVC

      Devcon International Corp.

      Pompano Beach, FL

      DOSK

      Doskocil Companies Inc.

      Hutchinson, KS

      EQTX

      Equitex, Inc.

      Englewood, CO

      FFUT

      First Federal Savings & Loan Association of Salt Lake City

      Salt Lake City, UT

      FFSW

      First Federal Savings & Loan Association of Wooster

      Wooster, OH

      FSBG

      First Federal Savings Bank of Georgia

      Winder, GA

      FSBC

      First Savings Bank, F.S.B.

      Clovis, NM

      GAIN

      Gainsco, Inc.

      Fort Worth, TX

      IBCA

      International Broadcasting Corporation

      Minneapolis, MN

      MCCL

      McClain Industries, Inc.

      Utica, MI

      MIDS

      Mid-South Insurance Company

      Fayetteville, NC

      NWIB

      Northwest Illinois Bancorp, Inc.

      Freeport, IL

      REXW

      Rexworks, Inc.

      Milwaukee, WI

      SHCO

      Schult Homes Corporation

      Elkhart, IN

      SHCOW

      Schult Homes Corporation (Wts)

      Elkhart, IN

      SHRP

      Sharper Image Corporation

      San Francisco, CA

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

      Symbol*

      Company

      Location

      ADDR

      Addington Resources, Inc.

      Ashland, KY

      BMCC

      Bando-McGlocklin Capital Corporatior

      Brookfield, WI

      BEZRY

      C.H. Beazer (Holdings) Pic.

      Bath, England

      BROD

      Broderbond Software, Inc.

      San Rafael, CA

      CRBN

      Calgon Carbon Corporation

      Pittsburgh, PA

      CRSY

      Criticare Systems, Inc.

      Waukesha, WI

      CMBK

      Cumberland Federal Savings & Loan Association (The)

      Louisville, KY

      DTCI

      Data Technology Corporation

      Santa Clara, CA

      FFWP

      First Federal of Western Pennsylvania

      Sharon, PA

      GPAK

      Graphic Packaging Corporation

      Paoli, PA

      INGNP

      Integrated Genetics, Inc. (Pfd)

      Framingham, MA

      IMMCO

      International Mobile Machines Corporation (Pfd)

      Philadelphia, PA

      LITZ

      Liposome Technology, Inc.

      Menlo Park, CA

      MNPI

      Microcom, Inc.

      Norwood, MA

      MNSN

      Munson Transportation, Inc.

      Monmouth, NJ

      NELL

      Nellcor, Incorporated

      Hayward, CA

      NJST

      New Jersey Steel Corporation

      Sayreville, NJ

      PSBX

      Peoples Savings Bank, F.S.B.

      Monroe, MI

      RARB

      Raritan Bancorp, Inc.

      Raritan, NJ

      SMNA

      Sumna Corporation

      Atlanta, GA

      Sswc

      Super Saver Warehouse Club, Inc.

      Monroe, LA

      TOPP

      Topps Company, Inc. (The)

      Brooklyn, NY

      WBNC

      Washington Bancorp, Inc.

      Hoboken, NJ

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      DAVX

      Davox Corporation

      4/28/87

      SDSB

      Southold Savings Bank (The)

      4/28/87

      FBNC

      First Bancorp

      4/30/87

      SQNT

      Sequent Computer Systems, Inc.

      4/30/87

      WFOR

      Washington Federal Savings Bank

      4/30/87

      MIKL

      Michael Foods, Inc.

      5/01/87

      ENVI

      Envirosafe Services, Inc.

      5/05/87

      SODA

      A & W Brands, Inc.

      5/08/87

      The following changes to the list of NASDAQ/NMS securities occurred since April 27, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      SOLI/REAS

      Solitec, Inc./Reid-Ashman, Inc.

      5/01/87

      MNCF/MDNT

      MNC Financial, Inc./Maryland National Corporation

      5/04/87

      VLAB/VLAB

      Vipont Pharmaceutical, Inc./Vipont Laboratories, Inc.

      5/04/87

      VBAN/VBAN

      V Band Corporation/V Band Systems, Inc.

      5/11/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      ENDOQ

      Endotronics, Inc.

      4/28/87

      ALCR

      American Land Cruisers, Inc.

      4/29/87

      ALCRW

      American Land Cruisers, Inc. (Wts)

      4/29/87

      WRIT

      William E. Wright Company

      4/30/87

      INTW

      IntraWest Financial Corporation

      5/01/87

      SWIX

      Shelby Williams Industries, Inc.

      5/04/87

      CHEM

      Chemlawn Corporation

      5/07/87

      RLIC

      RLI Corporation

      5/08/87

      ZIAD

      Ziyad, Inc.

      5/11/87

      Any 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.

      Sincerely,

      Gordon S. Macklin
      President


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


    • 87-29 NASDAQ/MSE: Unlisted Trading Privileges

      TO: All NASD Members
      All Level 2 and Level 3 Subscribers
      Other Interested Persons

      EXECUTIVE SUMMARY

      On May 15, 1987, the Midwest Stock Exchange (MSE) will begin trading 25 NASDAQ National Market System (NASDAQ/NMS) securities under the SEC-approved National Association of Securities Dealers/Midwest Stock Exchange joint unlisted trading privileges (UTP) program. This notice explains the operation of the program, including which members are eligible to participate, how to contact MSE specialists in these 25 UTP stocks, how information on UTP securities will be displayed on NASDAQ terminals, and what the trade reporting obligations will be under the program.

      On April 29, the SEC approved the NASD/MSE joint plan that gives the Midwest Stock Exchange unlisted trading privileges in 25 NASDAQ/NMS stocks. Trading under the plan will begin on Friday, May 15, 1987.

      Which NASDAQ Market Makers May Contact MSE Specialists

      The NASD/MSE joint UTP plan requires that MSE specialists provide for direct telephone access; this access, however, is limited to NASDAQ market makers in the same stock. Therefore, only a firm that is a NASDAQ market maker in the UTP stock may directly contact the MSE specialist in that stock to negotiate a trade.

      The 25 NASDAQ/NMS issues that the SEC has approved to trade under the NASD/MSE UTP plan are listed below with the names and telephone numbers of the designated MSE specialists.

      MIDWEST SPECIALIST ASSIGNMENTS FOR UTP NASDAQ/NMS ISSUES

      BILLINGS & CO. 312-663-0320 or 800-443-8895

      Larry Augustyn and Alexander Cimaglia

      AGREA

      American Greetings Corp., CI A

      KEMC

      Kemper Corporation

      LMED

      Lyphomed, Inc.

      SHON

      Shoney's Inc.

      SMED

      Shared Medical Systems Corp.

      DEMPSEY & CO. 312-663-2634 or 800-344-8676

      Roger Hendrick

      APCI

      Apollo Computer, Inc.

      DAZY

      Daisy Systems Corp.

      MCIC

      MCI Communications Corp.

      TATE

      Ashton Tate

      TCOMA

      Telecommunications Inc., CI A

      Robert Kleiber

      BMGC

      Battle Mountain Gold Co.

      GENE

      Genetech, Inc.

      HENG

      Henley Group, Inc.

      LIZC

      Liz Claiborne, Inc.

      PCLB

      Price Co. (The)

      Lisa Shoup

      AAPL

      Apple Computer, Inc.

      DIGI

      DSC Communications Corp.

      LOTS

      Lotus Development Corp.

      MAXI

      Maxicare Health Plans Inc.

      SGAT

      Seagate Technology

      MESIROW WEB-MARSH 312-663-3025 or 800-824-0801

      David Sullivan

      COMB

      C.O.M.B. Co.

      CTUS

      Cetus Corp.

      CVGT

      Convergent Technologies Inc.

      INTC

      Intel Corporation

      INGR

      Intergraph Corporation

      NASDAQ market makers trading in UTP stocks who have any difficulty contacting specialists on the floor of the Midwest Stock Exchange should call NASDAQ Operations, New York, at 212-938-8300 or Nancy Leverette, MSE Operations, at 312-663-2111.

      How Information on UTP Stocks Will Be Displayed on NASDAQ Level 2/3 Terminals

      MSE specialists in the UTP stocks will be identified by "#MWSE" (signifying the Midwest Stock Exchange) on the far left of the screen, where market makers' symbols are ordinarily listed. The subscriber symbol of the specialist firm will be displayed to the right of the #MWSE quotation, as illustrated below.

      #MWSE

      BID PRICE

      ASK PRICE

      SIZE

      SPECIALIST MMID

      The subscriber symbol of Billings & Co. is BILL; of Dempsey & Co., DEMP; and of Mesirow Web-Marsh, MWMC.

      NASDAQ Level 1 displays will remain unchanged.

      Transaction Reporting Obligations Under the NASD/MSE UTP Plan

      Under the NASD/MSE joint UTP plan, specialists are treated as market makers for transaction reporting rules. NASDAQ's NMS transaction reporting rules will apply to trades involving MSE specialists in UTP stocks. That is, in a transaction between a market maker and a specialist, the sell side is required to report.

      All transactions must be reported within 90 seconds of execution. A trade that is executed and is not reported within 90 seconds of execution must be reported as late [.SLD].

      MSE specialists will be governed by MSE rules concerning the entry of quotations that create locked and crossed markets. The exchange has stated that it will police locked and crossed markets and take appropriate action against any specialist who intentionally locks or crosses a market in a UTP security. Calls regarding locked or crossed markets should be directed to NASDAQ Operations in New York, at 212-938-8300.

      John T. Wall
      Executive Vice President
      Member and Market Services

    • 87-28 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 25, 1987, 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 15

      May 22

      May 27

      18

      26

      28

      19

      27

      29

      20

      28

      June 1

      21

      29

      2

      22

      June 1

      3

      25

      MARKETS CLOSED

      -

      26

      June 2

      4

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

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


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


    • 87-27 NASDAQ National Market System Grows to 2,873 Securities With 19 Voluntary Additions on May 5, 1987, and Four Mandatory Inclusions on May 12, 1987

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

      On Tuesday, May 5, 1987, 19 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,869. These 19 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 19 issues scheduled to join NASDAQ/NMS on Tuesday, May 5, 1987, are:

      Symbol*

      Company

      Location

      AMRF

      Amerford International Corporation

      Jamaica, NY

      ATNN

      American Telemedia Network, Inc.

      Provo, UT

      AMPI

      Amplicon, Inc.

      Santa Ana, CA

      AILP

      Automated Language Processing Systems, Inc.

      Salt Lake City, UT

      BIGI

      Brougher Insurance Group,Inc.

      Greenwood, IN

      CPLS

      Care Plus, Inc.

      Miami, FL

      CPLSZ

      Care Plus, Inc. (Wts)

      Miami, FL

      DMCB

      Data Measurement Corporation

      Gaithersburg, MD

      EACO

      EA Engineering, Science & Technology, Inc.

      Sparks, MD

      FFWV

      First Fidelity Bancorp, Inc.

      Fairmont, WV

      GRPI

      Greenwich Pharmaceuticals Incorporated

      Greenwich, CT

      PNTAP

      Pentair, Inc. (Pfd)

      St. Paul, MN

      QFCI

      Quality Food Centers, Inc.

      Bellevue, WA

      SOMR

      Somerset Group, Inc. (The)

      Indianapolis, IN

      PESO

      Two Pesos, Inc.

      Houston, TX

      PESOZ

      Two Pesos, Inc. (Wts)

      Houston, TX

      USMX

      U.S. Minerals Exploration Company

      Lakewood, CO

      VLANS

      VMS Strategic Land Trust

      Chicago, IL

      VTEX

      Vertex Communications Corporation

      Kilgore, TX

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

      Pending Additions

      Symbol*

      Company

      Location

      BOYS

      Boys Markets, Inc.

      Los Angeles, CA

      BGET

      Budget Rent-A-Car Corporation

      Chicago, IL

      CFMC

      COMFED Mortgage Company, Inc.

      Lowell, MA

      CBNCA

      Century Bancorp, Inc. (Cl A)

      Somerville, MA

      ENVI

      Envirosafe Services, Inc.

      King of Prussia, PA

      GRTR

      Greater New York Savings Bank (The)

      New York, NY

      MFSL

      Maryland Federal Savings & Loan Association

      Hyattsville, MD

      SQNT

      Sequent Computer Systems, Inc.

      Beaverton, OR

      SPBC

      St. Paul Bancorp, Inc.

      Chicago, IL

      WFSB

      Washington Federal Savings Bank

      Washington, D.C.

      The following four securities will enter NASDAQ/NMS under mandatory Tier 1 criteria on May 12, 1987:

      Symbol*

      Company

      Location

      INMC

      In mac Corp.

      Santa Clara, CA

      OUCH

      Occupational-Urgent Care Health Systems, Inc.

      Sacramento, CA

      TLHT

      Total Health Systems, Inc.

      Great Neck, NY

      WTDI

      WTD Industries, Inc.

      Portland, OR

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      CAFS

      Cardinal Federal Savings Bank

      4/13/87

      FFMA

      Fidelity Federal Savings Bank

      4/15/87

      FRML

      Freymiller Trucking, Inc.

      4/15/87

      FTSI

      Fisher Transportation Services, Inc.

      4/16/87

      ITELM

      Itel Corporation (Ser C Pfd)

      4/16/87

      FSPG

      First Savings & Loan Association of Penns Grove

      4/21/87

      CACOA

      Cato Corporation (The) (Cl A)

      4/22/87

      FFNS

      First Financial Savings Association, F.A.

      4/22/87

      SBFS

      Southstate Bank for Savings

      4/22/87

      GSBK

      Germantown Savings Bank

      4/23/87

      PPSA

      Prospect Park Saviners & Loan Association

      4/24/87

      The following changes to the list of NASDAQ/NMS securities occurred since April 10, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      SCOAP/SCOAP

      Hills Stores Co. (Ser B Pfd)/SCOA Industries, Inc. (Ser B Pfd)

      4/13/87

      BLAU/BBPI

      Barry Blau & Partners, Inc./Barry Blau & Partners, Inc.

      4/14/87

      PRBC/LABS

      Premier Bancorp, Inc./Lousiana Bancshares, Inc.

      4/16/87

      IVAC/IVAC

      IVACO Resources, Inc./Inland Vacuum Industries, Inc.

      4/20/87

      ALFA/FDGC

      Alfa Corporation/Federated Guaranty Corporation

      4/21/87

      NWOR/NWOR

      Neworld Bancorp, Inc./Neworld Bank for Savings

      4/21/87

      SCRP/SCRP

      Scripps Howard Broadcasting Company/ Scripps-Howard Broadcasting Company

      4/23/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      DRCH

      Data Architects, Inc.

      4/10/87

      ABPI

      American Businessphones, Inc.

      4/13/87

      LANE

      Lane Company Incorporated

      4/14/87

      PGLOY

      Philips Gloeilampenfabrieken, N.V.

      4/14/87

      AGLS

      Anchor Glass Container Corporation

      4/16/87

      ORBN

      Orbanco Financial Services Corporation

      4/16/87

      CNFG

      Conifer Group, Inc.

      4/22/87

      DWWS

      Davis Water & Waste Industries, Inc.

      4/22/87

      CPAC

      Chicago Pacific Corporation

      4/23/87

      PARP

      Par Pharmaceuticals, Inc.

      4/24/87

      Any 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, Market Surveillance, at (202) 728-8192.

      Sincerely,

      Gordon S. Macklin
      President


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


    • 87-26 NASDAQ National Market System Grows to 2,850 Securities With 12 Voluntary Additions on April 21, 1987

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

      On Tuesday, April 21, 1987, 12 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,850. These 12 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 12 issues scheduled to join NASDAQ/NMS on Tuesday, April 21, 1987, are:

      Symbol*

      Company

      Location

      CECI

      California Energy Company, Inc.

      Santa Rosa, CA

      CAII

      Capital Associates, Inc.

      Colorado Springs, CO

      FNBR

      FNB Rochester Corp.

      Rochester, NY

      FFHP

      First Federal Savings & Loan Association of Harrisburg

      Harrisburg, PA

      INDB

      Independent Bank Corp.

      Rockland, MA

      IFSL

      Indiana Federal Savings & Loan Association

      Valparaiso, IN

      INFD

      Infodata Systems, Inc.

      Pittsford, NY

      MFED

      Maury Federal Savings Bank

      Columbia, TN

      PCOR

      PSICOR, Inc.

      San Diego, CA

      SBTC

      SBT Corp.

      Old Saybrook, CT

      VIVI

      Vivigen, Inc.

      Santa Fe, NM

      XRIT

      X-Rite, Incorporated

      Grand Rapids, MI

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

      Pending Additions

      Symbol*

      Company

      Location

      CDNL

      Cardinal Savings & Loan Association

      Richmond, VA

      CACOA

      Cato Corporation (The) (Cl A)

      Charlotte, NC

      DAVX

      Davox Corporation

      Billerica, MA

      DNECZ

      Denver Nuggets Entertainment Company L.P. (The)

      Denver, CO

      FFMA

      Fidelity Federal Savings Bank

      Marion, IN

      FASB

      First American Savings Bank

      Canton, OH

      FBNC

      First Bancorp

      Troy, NC

      FTSI

      Fisher Transportation Services, Inc.

      Springdale, AR

      GATW

      Gateway Federal Savings & Loan Association

      Cincinnati, OH

      HCFI

      Health Concepts IV, Inc.

      Cedar Vale, KS

      ITELM

      Itel Corporation (Ser C, Cl B Pfd)

      Chicago, IL

      NASDAQ/NMS Interim Additions

      Symbol*

      Security

      Date of Entry

      FSHG

      Fisher Scientific Group, Inc.

      3/30/87

      AIRSY

      Airship Industries, Ltd

      3/31/87

      FURSA

      Antonovich, Inc. (Cl A)

      3/31/87

      SSBA

      Seacoast Savings Bank

      3/31/87

      AMEA

      A.M.E., Inc.

      4/01/87

      DEER

      Deerfield Federal Savings & Loan Association

      4/01/87

      ABKR

      Anchor Savings Bank, F.S.B.

      4/07/87

      YCSL

      Yorkridsre-Calvert Savines & Loan Association

      4/10/87

      The following changes to the list of NASDAQ/NMS securities occurred since March 30, 1987:

      NASDAQ/NMS Symbol* and/or Name Changes

      New/Old Symbol*

      New/Old Security

      Date of Change

      BAYA/BAYA

      Federal Savings Bank of Puerto Rico (The)/Bayamon Federal Savings & Loan Association

      3/31/87

      VIKG/VIKG

      Viking Freight, Inc./Viking Freight Systems, Inc.

      3/31/87

      BPAC/DOZEZ

      Burnham Pacific Properties, Inc./ Burnham Sleepy Hollow Limited

      4/01/87

      TELE/TELE

      TPI Enterprises, Inc./Telecom Plus International, Inc.

      4/03/87

      DJCO/DJCO

      Daily Journal Corp./Daily Journal Company

      4/08/87

      NASDAQ/NMS Deletions

      Symbol*

      Security

      Date

      PBAN

      Popular Bancshares Corporation

      3/30/87

      USVC

      USLICO Corporation

      3/30/87

      OXEC

      Oxford Energy Company (The)

      3/31/87

      EBCO

      Ehrlich Bober Financial Corporation

      4/01/87

      GNVA

      Genova, Inc.

      4/01/87

      SOVR

      Sovereign Corporation

      4/01/87

      ARKR

      Ark Restaurants Corp.

      4/02/87

      CSBK

      Coastal Bancorp

      4/02/87

      TNDM

      Tandem Computers Incorporated

      4/07/87

      HZIR

      Horizon Air Industries, Inc.

      4/10/87

      UBCPP

      Unibancoro. Inc. (Ser A Pfd)

      4/10/87

      Any 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, Market Surveillance, at (202) 728-8192.

      Sincerely,

      Gordon S. Macklin
      President


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


    • 87-25 Request for Comments and Suggestions on Regulation of Market Making By Affiliates of Issuers

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: MAY 8, 1987.

      EXECUTIVE SUMMARY

      The NASD is requesting comments and suggestions on the concept of a rule that would restrict broker-dealers that are affiliated with issuers from making a market or trading in the securities of those issuers. The NASD invites comments on whether such practices should be restricted and, if so, the nature of affiliation that should trigger the restrictions and the types of restrictions that should apply.

      This request for comments and suggestions on the need for regulation in this area is the result of concerns as to whether conflicts of interest may exist or rule violations are more likely when broker-dealers engage in making a market or trading in securities issued by affiliates.

      BACKGROUND

      Questions have arisen concerning conflicts of interest and rule violations that are possible when broker-dealers engage in market making or otherwise execute principal transactions in securities issued by affiliates. In today's changing market environment, broker-dealers frequently are components of larger corporate families, a growing number of broker-dealers' securities are publicly traded and there is a continued proliferation of proprietary products and other securities being issued by broker-dealer affiliates.

      Numerous requirements under the Securities Acts of 1933, the Securities Exchange Act of 1934 and SEC rules must be satisfied before an affiliate of an issuer can engage in such transactions, especially on a continuous basis. 1/ Some self-regulatory organizations restrict member broker-dealers' activity in their own securities and those of affiliates. 2/ The NASD, however, currently does not have a rule that specifically prohibits or restricts trading by members in securities of their affiliates.

      POSSIBLE APPROACHES TO REGULATION

      The NASD has not formulated a specific approach to regulation of trading by issuer affiliates and is therefore soliciting comments or suggestions on approaches that should be considered. The Subcommittee on Market Making by Issuer Affiliates of the NASD National Business Conduct Committee has considered various possible approaches. For example, an NASD rule could parallel or complement similar rules for other markets.

      It should be noted that any rule is likely to affect (1) broker-dealers whose own securities or whose holding company's securities are publicly traded, (2) broker-dealers that are part of a larger corporate structure that includes any company whose securities are publicly traded, and (3) broker-dealers whose subsidiaries or affiliates issue "proprietary" mutual funds, venture capital or other specialty investment funds, limited partnerships, asset-backed securitized vehicles or similar products.

      There are a number of questions and issues members and their counsel should address before making comments and suggestions to the NASD. Some of these are:

      • Should the NASD restrict market making or other principal transactions by affiliates of issuers?
      • If so, what degree of affiliation is necessary between a broker- dealer and an issuer before restrictions should apply?
      • Should different restrictions apply to trading in a broker-dealer's own securities as opposed to trading in an affiliate's securities? Should different restrictions apply to a holding company whose only subsidiary is a broker-dealer?
      • Should different restrictions apply to different kinds of securities, i.e., debt versus equity, rated debt versus unrated, proprietary funds, securitized vehicles or limited partnerships issued by a broker-dealer's affiliate versus securities of that affiliate or of the broker-dealer.
      • Should trading activity be a factor in determining the extent of restrictions applied to a security? Should actively traded securities be subject to less restriction?
      • Should special price and volume restrictions, such as those listed in SEC Rule 10b-18, for example, apply to trading in securities of affiliates?
      • Should special disclosure requirements be imposed?
      • Should market-making transactions be treated differently than other principal transactions? Should agency trades be treated differently than principal trades? Should solicited and unsolicited transactions be treated differently?

      SOLICITATION OF COMMENTS

      The NASD urges members and their counsel to provide comments and suggestions concerning these issues.

      Additional background information is available from the NASD Office of General Counsel at (202) 728-8294.

      Comments regarding this notice should be directed to:

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

      All comments and suggestions must be received no later than May 8, 1987. After a review of the information received, the NASD Board of Governors will determine whether to propose a rule on this subject. Any proposed rule would be published for comment prior to its adoption and submission to the Securities and Exchange Commission.

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

      Sincerely,

      Frank J. Wilson Executive Vice President and General Counsel


      1/ Firms engaging, or proposing to engage, in these transactions may wish to consult counsel regarding these requirements. An NASD memorandum analyzing these requirements is available from the Office of General Counsel.

      2/ For example, New York Stock Exchange Rule 312(g) prohibits NYSE members from soliciting transactions in their own securities or from recommending transactions in their own or their affiliates' securities.


    • 87-24 Request for Comments on Proposed Amendments to Article III, Section 35 of the NASD Rules of Fair Practice

      TO: All NASD Members and Other Interested Persons

      LAST DATE FOR COMMENT: MAY 14, 1987.

      EXECUTIVE SUMMARY

      The NASD requests comments on proposed amendments to Article III, Section 35 of the NASD Rules of Fair Practice. The amendments provide that advertisements concerning government securities are to be filed by members with the NASD's Advertising Department within 10 days of first use or publication.

      Under the authority granted by the Government Securities Act of 1986 and upon consideration by both the NASD's Ad Hoc Committee on Government Securities and the NASD Board of Governors, it was determined that it was appropriate to adopt requirements for government securities advertising similar to existing advertising requirements for investment company securities.

      The text of the proposed amendments is attached.

      BACKGROUND

      Public Law 99-571 (the Government Securities Act of 1986), enacted by the Congress in October 1986, amended Section 15A(0 of the Securities Exchange Act of 1934 to permit registered securities associations to adopt and implement rules to prohibit fraudulent, misleading, deceptive and false advertising with respect to government securities. This requirement was considered by both the NASD's Ad Hoc Committee on Government Securities and the NASD Board of Governors. It was determined that it was not necessary to amend the NASD's existing standards for advertising by NASD members. However, it was appropriate to adopt an approach similar to that existing for investment company securities by requiring that government securities advertising be filed by members for review by the NASD Advertising Department within 10 days of first use or publication. Further, advertising by government securities brokers and dealers that are new members of the NASD would be subject to the existing requirement that NASD members which have not previously filed advertising with the NASD must do so at least 10 days prior to use for a period of one year.

      SUMMARY OF PROPOSED AMENDMENTS

      The proposed amendments to Article in, Section 35 of the Rules of Fair Practice would add a new paragraph, (c)(4), to Section 35 requiring the filing of advertising relating to government securities within 10 days of first use, but would recommend the filing of such advertising in advance of use.

      The NASD encourages all members and other interested persons to comment on the proposed amendments. 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 May 14, 1987. All comments received by this date will be considered by the NASD National Business Conduct Committee and the NASD Board of Governors. If the proposed amendments are approved by the Board, they will be submitted to the membership for a vote. If approved by the membership, the amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

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

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

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

      (New language is underscored)

      Communications with the Public

      Section 35.



      (c) Filing Requirements and Review Procedures



      (4) 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 ten days of first use or publication.



      (5) Except for advertisements related to government securities, municipal securities, direct participation programs or investment company securities, members subject to the requirements of subparagraphs (c)(5)(A) or (c)(5)(B) of this section may, in lieu of filing with the Association, file advertisements on the same basis, and for the same time periods specified in those subparagraphs, with any registered securities exchange having standards comparable to those contained in this section.



      (7) In addition to the foregoing requirements, every member's advertising and sales literature shall be subject to a routine spot-check procedure. Upon written request from the Association's Advertising Department, each member shall promptly submit the material under this procedure which has been previously submitted pursuant to one of the foregoing requirements and, except for material related to government securities, direct participation programs, municipal securities, or investment company securities, the procedure will not be applied to members who have been within the preceding calendar year, subjected to a spot-check by a registered securities exchange or other self-regulatory organization utilizing comparable procedures.



      (9) Material which refers to investment company securities, options, government securities or direct participation programs solely, as a part of a listing of products and/or services offered by the member, is excluded from the requirements of paragraphs (c)(l), (c)(2), (c)(3) and (c)(4) of this section.

    • 87-23 Effectiveness of Amendment to Section 66 of the NASD Uniform Practice Code Regarding Prompt Settlement of Syndicate Accounts

      TO: All NASD Members and Other Interested Persons

      ATTN: Syndicate Department

      The NASD has adopted an amendment to Section 66 of its Uniform Practice Code that reduces the period required for final settlement of syndicate accounts from 120 days to 90 days. The text of the amendment, which will become effective May 1, 1987, is attached.

      On October 1, 1985, the NASD adopted Section 66 to its Uniform Practice Code requiring syndicate managers to settle syndicate accounts within 120 days of the date securities are delivered by the issuer to, or for the account of, syndicate members. At that time, the NASD stated its intention to review members' experience under the 120-day requirement after one year with a view to reducing the settlement period to 90 days. The NASD Board of Governors and its Corporate Financing Committee have reviewed members' experience since adoption of Section 66 and have determined that a reduction in the period required to settle syndicate accounts is appropriate. The Board, therefore, has adopted an amendment to Section 66 reducing the period required for final settlement of syndicate accounts from 120 days to 90 days. Notice to Members 87-10, dated February 25, 1987, announced the Board's adoption of the reduced time period and gave the membership advance notice of the reduction in the settlement period.

      The amendment to Section 66 will become effective May 1, 1987. Therefore, syndicate accounts are required to be settled within 90 days with respect to all corporate securities offerings effective on or after May 1, 1987.

      All comments or questions pertaining to the amendment to Section 66 may be directed to the NASD Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J: Wilsor
      Executive Vice President
      Legal and Compliance

      Attachment

      AMENDMENT TO SECTION 66 OF THE NASD UNIFORM PRACTICE CODE*

      Section 66

      Settlement of Syndicate Accounts

      (a) Definitions:
      (1) "selling syndicate" means any syndicate formed in connection with a public offering to distribute all or part of an issue of corporate securities by sales made directly to the public by or through participants in such syndicate.
      (2) "syndicate account" means an account formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of a public offering.
      (3) "syndicate manager" means the member of the selling syndicate that is responsible for maintenance of syndicate account records.
      (4) "syndicate settlement date" means the date upon which corporate securities of a public offering are delivered by the issuer to or for the account of the syndicate members.
      (b) Final settlement of syndicate accounts shall be effected by the syndicate manager within [120] 90 days following the syndicate settlement date.

      * New language underlined; deleted language bracketed.


    • 87-22 Amendments to Resolution of the Board of Governors Concerning Its Policy on Publication of Disciplinary Actions

      TO: All NASD Members and Other Interested Persons

      EXECUTIVE SUMMARY

      The NASD has amended its policy regarding the publication of disciplinary actions to provide that actions resulting in monetary sanctions of $10,000 or more will be published in the same manner as actions resulting in suspensions, bars, expulsions and/or revocations. The new policy will be implemented with respect to District Business Conduct Committee, Market Surveillance Committee or Board of Governors decisions issued, and Offers of Settlement, Summary Complaints, and Acceptance, Waiver and Consent filings submitted, after April 24, 1987. Monetary sanctions, such as fines and orders of disgorgement, will be aggregated as to each respondent to determine whether the disciplinary action will be published as to that respondent.

      The NASD believes that publishing a more complete description of sanctions imposed for serious misconduct will further the remedial purpose of publication of disciplinary actions.

      The text of the amended resolution is attached.

      SUMMARY

      The Board of Governors of the National Association of Securities Dealers, Inc., has amended its resolution concerning "Notice to Membership and Press of Suspensions, Expulsions and Revocations" (Resolution), which is appended to Article V, Section 1 of the Rules of Fair Practice. The amendments were filed with the Securities and Exchange Commission on January 29, 1987, to be effective immediately, pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934 and SEC Rule 19b-4(e) thereunder.

      ANALYSIS OF AMENDMENTS

      The amended Resolution continues the NASD's policy of publishing suspensions, expulsions, revocations and bars and, in addition, provides for publication of disciplinary actions where monetary sanctions of $10,000 or more are imposed. The amendments also authorize the inclusion in such publications of more detailed information regarding the nature of the conduct found to violate the rules. Also, where appropriate, the amendments allow for inclusion of the name of the member firm with which an individual was associated at the time such misconduct occurred. The amendments do not change existing provisions regarding the timing and manner of publication.

      The amendments were adopted to provide for publication to members and to the press of significant disciplinary actions that do not result in suspensions, expulsions, revocations or bars, and to include for the membership's guidance a more complete description of the violative conduct. The $10,000 threshold will further the remedial purposes of publication by providing for publication of only those actions involving the type of serious misconduct that warrants substantial monetary sanctions.

      PLAN OF IMPLEMENTATION

      In the interest of fairness and notwithstanding that the amended Resolution was effective upon filing with the Commission, the NASD plans to implement the amended publication policy as follows. Decisions of District Business Conduct Committees, the Market Surveillance Committee or the Board of Governors rendered after April 24, 1987, will be published in accordance with the provisions of the amended Resolution. Offers of Settlement, Summary Complaints and Acceptance, Waiver and Consent proceedings that are submitted to the District Business Conduct Committees after April 24, 1987, will be subject to the amended Resolution.

      In determining whether the monetary sanctions imposed warrant publication under the terms of the amended Resolution, fines, orders of disgorgement and any other monetary sanctions will be aggregated as to each respondent individually. For example: If a matter results in a $12,000 fine as to respondent A and fines of $5,000 each as to respondents B and C, only the monetary sanction imposed on respondent A will be published. If a matter results in a $12,000 fine as to respondent A, a $5,000 fine and an order to disgorge $7,500 as to respondent B and a $5,000 fine as to respondent C, only the monetary sanctions imposed on respondents A and B would be published. Joint and several fines and/or orders of disgorgement in excess of $10,000 will be published as to each affected party.

      * * * * *

      Questions regarding this notice may be directed to Jacqueline D. Whelan, NASD Office of the General Counsel, at (202) 728-8270.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      AMENDMENTS* TO

      ••• Resolution of the Board of Governors_____

      Notice to Membership and Press of Suspensions, Expulsions, [and] Revocations, and Monetary Sanctions

      The Association shall report to the membership and to the press pursuant to the procedures and at the times outlined herein any order of suspension, cancellation or expulsion of a member; or suspension or revocation of the registration of a person associated with a member; or suspension or barring of a member or person associated with a member from association with all members; or imposition of monetary sanctions of $10,000 or more upon a member or person associated with a member.

      If a decision of a District Business Conduct Committee is not appealed to or called for review by the Board of Governors, the order of the District Business Conduct Committee shall become effective on a date set by the Association but not before the expiration of 30 days after the date of decision. Notices of decisions imposing monetary sanctions of $10,000 or more or penalties of expulsion, revocation, suspension and/or the barring of a person from being associated with all members shall promptly be transmitted to the membership and to the press, concurrently; provided, however, no such notice shall be sent prior to the expiration of 30 days from the date of the said decision.

      If a decision of a District Business Conduct Committee is appealed to or called for review by the Board of Governors, the order of the District Business Conduct Committee is stayed pending a final determination and decision by the Board and notice of the action of the District Business Conduct Committee shall not be sent to the membership or the press during the pendency of proceedings before the Board of Governors.

      If a decision of the Board of Governors is not appealed to the Securities and Exchange Commission, the decision shall become effective on a date established by the Association but not before the expiration of 30 days after the date of the decision. Notices of decisions imposing monetary sanctions of $10,000 or more or penalties of expulsion, revocation, suspension and/or the barring of a person from being associated with all members shall promptly be transmitted to the membership and to the press, concurrently; provided, however, no such notice shall be sent prior to the expiration of 30 days from the date of the said decision.

      If a decision of the Board of Governors imposing monetary sanctions of $10,000 or more or a penalty of expulsion, revocation, suspension and/or barring of a member being associated with all members is appealed to the Securities and Exchange Commission, notice thereof shall be given to the membership and to the press as soon as possible after receipt by the Association of notice from the Securities and Exchange Commission of such appeal and the Association's notice shall state whether the effectiveness of the Board's decision has or has not been stayed pending the outcome of proceedings before the Securities and Exchange Commission.

      In the event an appeal to the courts is filed from a decision by the Securities and Exchange Commission in a case previously appealed to it from a decision of the Board of Governors, involving the imposition of monetary sanctions of $10,000 or more or a penalty of expulsion, revocation, suspension and/or barring of a member from being associated with all members, notice thereof shall be given to the membership as soon as possible after receipt by the Association of a formal notice of appeal. Such notice shall include a statement that the order of the Commission has or has not been stayed.

      Any order issued by the Securities and Exchange Commission of revocation or suspension of a member's broker/dealer registration with the Commission; or the suspension or expulsion of a member from the Association; or the suspension or barring of a member or person associated with a member from association with all broker/dealers or membership; or the imposition of monetary sanctions of $10,000 or more shall be made known to the membership of the Association through a notice containing the effective date thereof sent as soon as possible after receipt by the Association of the order of the Securities and Exchange Commission.

      Cancellations of membership or registration pursuant to the Association's By-Laws, Rules or Resolutions shall be sent to the membership and, when appropriate, to the press as soon after the effective date of the cancellation as possible.

      Notices to the membership and releases to the press referred to above shall [briefly describe the violations found and/or] identify the section of the Association's Rules and By-Laws or the Securities and Exchange Commission Rules violated [.], and shall describe the conduct constituting such violation. Notices may also identify the member with which an individual was associated at the time the violations occurred if such identification is determined by the Association to be in the public interest. Notice of all orders and decisions referred to above shall be included in the supplement to the list of members next published.


      *New text is underlined; deleted text is bracketed.


    • 87-21 NASDAQ National Market System Grows to 2,847 Securities With 37 Voluntary Additions on April 7, 1987

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

      On Tuesday, April 7, 1987, 37 issues are scheduled to join the NASDAQ National Market System, bringing the total number of issues in NASDAQ/NMS to 2,847. These 37 issues, which will begin trading under real-time trade reporting, are entering NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 37 issues scheduled to join NASDAQ/NMS on Tuesday, April 7, 1987, are:

      Symbol*

      Company

      Location

      ABGA

      Allied Bankshares, Inc.

      Thomson, GA

      AMJX

      American Federal Savings Bank of Duval County

      Jacksonville, FL

      AMTY

      Amity Bancorp, Inc.

      New Haven, CT

      BBPI

      Barry Blau & Partners, Inc.

      Fairfield, CT

      BITX

      Biotherapeutics, Incorporated

      Franklin, TN

      BSBC

      Branford Savings Bank

      Branford, CT

      CBTF

      CB&T Financial Corp.

      Fairmont, WV

      CNSB

      Centennial Savings Bank, F.S.B.

      Durango, CO

      CFNE

      Circle Fine Art Corporation

      Chicago, IL

      CLSC

      Clinical Sciences, Inc.

      Whippany, NJ

      CRFH

      Craft House Corporation

      Toledo, OH

      DOMZ

      Dominguez Water Corporation

      Long Beach, CA

      FBXC

      FBX Corporation

      Hauppauge, NY

      FFOD

      First Federal Savings Bank

      Dickson, TN

      FFAT

      First Federal Savings & Loan Association of Austin

      Austin, TX