[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17351]


[[Page Unknown]]

[Federal Register: July 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34352; File No. SR-NASD-94-27]

 

Self-Regulatory Organizations; Notice of Proposed Rule Change by 
the National Association of Securities Dealers, Inc. Relating to the 
Storage of Account Information for Options Customers for Supervisory 
Purposes

July 12, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 20, 
1994, the National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
NASD.\1\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\The proposed rule change was originally filed on May 23, 
1994, and was amended on June 20, 1994, in order to correct a 
technical deficiency.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend its options rules governing the 
manner in which members may store account statements and other 
information for options customers for supervisory purposes. 
Specifically, the proposal would permit NASD members to satisfy their 
record retention requirements for options accounts by storing required 
options account information in locations other than the respective 
principal supervisory office for the options accounts, provided such 
account information is readily accessible and promptly retrievable. 
Presently, NASD rules require that certain customer account information 
be maintained at both the branch office servicing the customer's 
account and the principal supervisory office having jurisdiction over 
that office. The proposal would not change the record retention 
requirements with respect to branch offices, only supervisory offices. 
The text of the proposed rule change is as follows. (Additions are 
italicized.)

Section 33 of the NASD Rules of Fair Practice

* * * * *
Section 33(b)(17)  Maintenance of Records
    (A) No change.
    (B) Background and financial information of customers who have been 
approved for options trading shall be maintained at both the branch 
office servicing the customer's account and the principal supervisory 
office having jurisdiction over that branch office. Copies of account 
statements of options customers shall also be maintained at both the 
branch office supervising the accounts and the principal supervisory 
office having jurisdiction over that branch for the most recent six-
month period. With respect solely to the above-noted record retention 
requirements applicable to principal supervisory offices, however, the 
customer information and account statements may be maintained at a 
location other than the principal supervisory office if such documents 
and information are readily accessible and promptly retrievable. Other 
records necessary to the proper supervision of accounts shall be 
maintained at a place easily accessible both to the branch office 
servicing the customer's account and to the principal supervisory 
office having jurisdiction over that branch office.
* * * * *
Section 33(b)(20)  Supervision of Accounts
    (A)-(C) No change
    (D) Headquarters Review of Accounts
    Each member shall maintain at the principal supervisory office 
having jurisdiction over the office servicing customer accounts, or 
have readily accessible and promptly retrievable, information to permit 
review of each customer's options account on a timely basis to 
determine (i) the compatibility of options transactions with investment 
objectives and with the types of transactions for which the account was 
approved; (ii) the size and frequency of options transactions; (iii) 
commission activity in the account; (iv) profit or loss in the account; 
(v) undue concentration in any options class or classes, and (vi) 
compliance with the provisions of Regulation T of the Federal Reserve 
Board.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NASD has prepared summaries, set forth in Sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Currently, NASD rules and the rules of the options exchanges 
uniformly require that both the branch office servicing an options 
customer's account and the principal supervisory office having 
jurisdiction over that branch office retain account statements and 
other financial and background information for the account for 
supervisory purposes.\2\ With the advances in data storage and 
retrieval through such means as optical disks, fax machines, computers, 
and mircofiche, among others, coupled with the increased expenses of 
storing records on-site in major financial centers such as New York 
City, however, member firms increasingly are storing their records away 
from their principal supervisory offices.
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    \2\See Sections 33(b) (17) and (20) of the NASD Rules of Fair 
Practice.
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    In light of the record retention requirements for options accounts, 
however, these new storage arrangements have necessitated action by the 
options Self-Regulatory Organizations (``SROs''). Specifically, member 
firms have obtained no-action positions from the Options Self-
Regulatory Council (``OSRC'') on a case-by-case basis when moving their 
operational facilities off-site.\3\ In this regard, the OSRC has 
determined that these arrangements are consistent with the record 
retention requirement rules so long as the documents are readily 
accessible and promptly retrievable. Thus, the OSRC has asked each of 
the options exchanges and the NASD to consider amending their rules to 
permit these types of off-site document storage arrangements. Given the 
realities of today's business environment, the NASD agrees with the 
OSRC and believes its options rules should be amended accordingly.
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    \3\The OSRC is a committee comprised of representatives from 
each of the options exchanges and the NASD that was created pursuant 
to the plan submitted by the options exchanges and the NASD under 
Rule 17d-2 of the Act (``17d-2 Plan''). The 17d-2 Plan was adopted 
to reduce regulatory duplication relative to options-related sales 
practice matters for a large number of firms which are currently 
members of two or more SRO's. The purpose of the OSRC is: (1) To 
administer the 17d-2 Plan; and (2) to address options-related sales 
practice matters in a common forum.
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    In addition, the NASD does not believe that the important 
supervisory obligations imposed on member firms will be compromised by 
allowing members to store options customer account statements and 
information off-site. Under the proposal, member firms will continue to 
have easy access to all customer account information necessary to 
discharge their supervisory responsibilities. In this connection, in 
order to ensure that off-site document storage arrangements will not 
jeopardize or constrain members' supervisory activities with respect to 
options accounts, the options SROs commit to periodically examine the 
document retrieval capabilities of members using off-site document 
storage arrangements.
    Therefore, the NASD believes the proposed rule change is consistent 
with Section 15A(b)(6) of the Act. Section 15A(b)(6) requires that the 
rules of a national securities association be designed to prevent 
fraudulent and manipulative acts and practices; to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and in general to 
protect investors and the public interest. Specifically, the NASD 
believes that the proposal will promote the maintenance of fair and 
orderly markets because it will afford member firms with the 
opportunity to discharge their supervisory responsibilities in a more 
cost-effective manner, thereby improving the efficiency of member 
firms, and, in turn, benefiting investors in the marketplace. Moreover, 
as noted above, because the NASD does not believe that the proposal 
will compromise the ability of member firms to satisfy their 
supervisory obligations, the NASD believes the proposal is consistent 
with the principle of investor protection.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD believes that the proposed rule change will not result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to file number SR-NASD-94-27 and 
should be submitted by August 8, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17351 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-14