[Federal Register Volume 61, Number 167 (Tuesday, August 27, 1996)]
[Notices]
[Pages 44100-44116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21757]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37588; File No. SR-NASD-95-39]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc; Order Granting Approval to Proposed Rule Change and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
Nos. 4 and 5 to Proposed Rule Change Relating to Application of the 
Rules of Fair Practice to Transactions in Exempted Securities (Except 
Municipals) and an Interpretation of Its Suitability Rule

August 20, 1996.

I. Introduction

    On September 18, 1995, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') submitted to the Securities 
and Exchange Commission (``SEC'' or ``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder; \2\ a proposed rule change to apply the 
Association's Rules of Fair Practice to transactions in exempted 
securities, other than municipals, and to adopt an interpretation of 
the Association's suitability rule as it applies to institutional 
customers.\3\ The NASD filed Amendment No. 1 to the proposed rule 
change on October 17, 1995, Amendment No. 2 on January 22, 1996, and 
Amendment No. 3 on February 15, 1996.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Section 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change (i) Amends Article I, Section 4 and 
5 of the Rules of Fair Practice to apply the Rules of Fair Practice 
to those members registered with the SEC solely under the provisions 
of Section 15C of the Act and to transactions in all securities, 
except municipals; (ii) merges the NASD's Government Securities 
Rules, where applicable, into the Rules of Fair Practice, (iii) 
makes clarifying amendments to certain sections and Interpretations 
under Articles III and IV of the Rules of Fair Practice relating to 
the government securities business; (iv) amends certain Rules of 
Fair Practice and Board Interpretations to exempt transactions in 
government securities; (v) amends Article III, Section 2 of the 
Rules of Fair Practice by amendment to Subsection 2(b) and adoption 
of an Interpretation of the Board of Governors--Suitability 
Obligations to Institutional Customers; (vi) makes technical changes 
to NASD By-Laws, Schedules to the By-Laws, the Rules of Fair 
Practice and the Code of Procedure to replace references to 
provisions of the Government Securities Rules with references to the 
appropriate Rules of Fair Practice, and to delete the terms 
``exempted security'' or ``exempted securities,'' or, replace these 
terms with the term ``municipal securities,'' as applicable; and 
(vii) modifies references to SEC Rules 15c3-1 and 15c3-3 to reflect 
SEC amendments to those rules.
---------------------------------------------------------------------------

    The proposed rule change and Amendment No. 1 were published for 
comment in Securities Exchange Act Release No. 36383 (Oct. 17, 1995), 
60 FR 54530 (Oct. 24, 1995). Amendment No. 2 was replaced by Amendment 
No. 3 before publication.\4\ Amendment No. 3 was published for comment 
in Securities Exchange Act Release No. 36973 (Mar. 14, 1996), 61 FR 
11655 (Mar. 21, 1996). On July 22, 1996 and August 14, 1996, the NASD 
filed Amendment Nos. 4 and 5, respectively, to the proposed rule 
change.\5\ This order permanently approves the proposed rule change, as 
amended, and Amendment Nos. 4 and 5 on an accelerated basis.
---------------------------------------------------------------------------

    \4\ Amendment No. 2 responded to some of the comments received 
on the original proposed rule change. Amendment No. 3 expanded upon 
the discussion contained in Amendment No. 2 by including responses 
to nine comment letters received on the original proposed rule 
change. Amendment No. 3 to SR-NASD-95-39 completely replaced and 
superseded Amendment No. 2. See letters from Joan C. Conley, 
Secretary, NASD, to Mark P. Barracca, Branch Chief, SEC, dated 
February 15, 1996, and March 4, 1996. The Commission received seven 
additional comment letters after the publication of Amendment No. 3.
    \5\ See Letter from Joan C. Conley, Secretary, NASD, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, SEC, dated July 22, 1996. Pursuant to an NASD rule 
proposal that became effective in May 1996, the NASD Manual has been 
reorganized to make it easier to use. See Securities Exchange Act 
Release No. 36698 (Jan. 11, 1996) (Rules that were formerly 
organized under the ``Rules of Fair Practice'' generally are grouped 
under the NASD's Conduct Rules at Rules 2000-3000). Amendment No. 4 
provides the new numbering of those provisions of the NASD Manual 
that are being affected by this rule proposal. A conversion chart is 
attached to this order as Exhibit 1. Moreover, Amendment No. 4 
proposes to apply Section 50, Article III of the Rules of Fair 
Practice to transactions in exempted securities (except municipals). 
The NASD states that Section 50, Article III, which requires NASD 
members to report to the NASD the occurrence of certain specified 
events and quarterly summary statistics concerning customer 
complaints, would be applicable to exempted securities (except 
municipals). See Letter from John A. Ramsay, Deputy General Counsel, 
to Katherine A. England, Assistant Director, Division of Market 
Regulation, SEC, dated August 14, 1996 (``Amendment No. 5''). In 
Amendment No. 5, the NASD notes that actions for conduct violating 
``Fair Prices and Commissions'' of Article III, Section 4, and the 
Mark-Up Policy may be brought under Article III, Section 1, 
requiring members to adhere to just and equitable principles of 
trade.

---------------------------------------------------------------------------
II. Background

    The Government Securities Act Amendments of 1993 (``GSAA'') 
eliminated the statutory limitations on the NASD's authority to apply 
sales practice rules to transactions in exempted securities, including 
government securities, other than municipals.\6\ To implement the 
expanded sales practice authority granted to the NASD pursuant to the 
GSAA, the Association has proposed to delete the NASD Government 
Securities Rules and apply the NASD Rules of Fair Practice, where 
applicable, to exempted securities, including government securities, 
other than municipals.\7\
---------------------------------------------------------------------------

    \6\ Government Securities Act Amendments of 1993, Pub. L. No. 
103-202, Sec. 1(a), 107 Stat. 2344 (1993).
    \7\ The terms ``exempted securities,'' ``government securities'' 
and ``municipal securities'' are defined in Sections 3(a)(12), 
3(a)(42) and 3(a)(29) of the Act respectfully.
---------------------------------------------------------------------------

    Concurrently, the NASD has proposed an interpretation of its 
suitability rule as it applies to members' dealings with institutional 
customers (``Suitability Interpretation'' or ``Interpretation''). The 
Interpretation would apply to all securities, except municipals, the 
purchase or sale of which is recommended by a broker-dealer. A draft of 
the proposed suitability interpretation contained in this proposed rule 
change was first published for comment in NASD Notice to Members 94-62 
(August 1994) (``NTM 94-62'').\8\ In response to this solicitation of 
comments, the NASD received 15 comment letters.\9\ The

[[Page 44101]]

proposed suitability interpretation published in NTM 94-62 was revised, 
and a second draft was published for comment in Notice to Members 95-21 
(April 1995) (``NTM 95-21'').\10\ Sixteen comments were received in 
response thereto.\11\ Thereafter, the NASD filed a proposed 
interpretation with the Commission.
---------------------------------------------------------------------------

    \8\ A copy of the NTM 94-62 is included in File No. SR-NASD-95-
39 as Exhibit 2 thereto.
    \9\ The NASD received letters regarding NTM 94-62 from the 
following: (1) Brian C. Underwood, Director of Compliance, A.G. 
Edwards & Sons, Inc., dated September 29, 1994; (2) Alan S. Kramer, 
Senior Managing Director, Bear Stearns & Co. Inc., dated October 17, 
1994; (3) Marjorie E. Gross, Senior Vice President & Associate 
General Counsel, Chemical Bank, dated September 29, 1994; (4) 
Marjorie E. Gross, Senior Vice President & Associate General 
Counsel, Chemical Bank, dated October 14, 1994; (5) F. Smith, 
President, Freeman Securities Company, Inc., dated September 30, 
1994; (6) Wendy R. Beer, Compliance Counsel, Furman Selz, dated 
October 31, 1994; (7) Betsy Dotson, Assistant Director, Federal 
Liaison Center, Government Finance Officers Association, dated 
September 30, 1994; (8) Kathryn S. Reimann, Senior Vice President 
and Director of Fixed Income Compliance, Lehman Brothers Inc., dated 
October 17, 1994; (9) Larry Forrester, Senior Vice President, Lyn-
Hayes Financial, Inc., dated August 23, 1994; (10) Marguerite C. 
Willenbucher, Vice President and Senior Counsel, Debt and Equity 
Markets Group, Merrill Lynch, Pierce, Fenner & Smith Inc., dated 
October 17, 1994; (11) Ken DeRegt, Managing Director, Morgan Stanley 
& Co. Incorporated, dated October 14, 1994; (12) Prudential 
Insurance Company of America, dated October 31, 1994; (13) Marianna 
Maffucci, Senior Vice President and General Counsel, Public 
Securities Association, dated October 17, 1994; (14) William A. 
McIntosh, Managing Director and Co-Head of U.S. Fixed Income, 
Salomon Brothers Inc., dated September 30, 1994; and (15) Robert F. 
Price, Chairman, Federal Regulation Committee, and Mark T. 
Commander, Chairman, Self-Regulation and Supervisory Practice 
Committee, Securities Industry Association, dated October 17, 1994. 
A copy of each comment letter listed above is included in File No. 
SR-NASD-95-39 as Exhibit 3 thereto. These letters are discussed in 
Securities Exchange Act Release No. 36383 (Oct. 17, 1995), 60 FR 
54530 (Oct. 24, 1995) (notice of proposed rule change for File No. 
SR-NASD-95-39).
    \10\ A copy of NTM 95-21 is included in File No. SR-NASD-95-39 
as Exhibit 4 thereto.
    \11\ The NASD received letters regarding NTM 95-21 from the 
following: (1) Allen Weintraub, Chairman and Chief Executive 
Officer, The Advest Group, Inc., dated May 5, 1995; (2) Brian C. 
Underwood, Director of Compliance, A.G. Edwards & Sons, Inc., dated 
May 15, 1995; (3) Michael S. Caccese, Esq., Senior Vice President, 
General Counsel, and Secretary, Association for Investment 
Management and Research; (4) Marjorie E. Gross, Senior Vice 
President & Associate General Counsel, Chemical Bank, dated May 17, 
1995; (5) Michael J. Wilk, Managing Director, Comerica Securities, 
dated May 12, 1995; (6) Douglas E. Harris, Senior Deputy Comptroller 
for Capital Markets, Comptroller of the Currency, dated May 17, 
1995; (7) Lawrence Jacob, Senior Vice President, Assistant Secretary 
and Director of Compliance, Daiwa Securities America Inc., dated May 
16, 1995; (8) James A. Brickley, President and CEO, Federal Farm 
Credit Banks Funding Corp., dated May 17, 1995; (9) Mitchell Delk, 
Vice President Government and Industry Relations, Freddie Mac, dated 
June 1, 1995; (10) Betsy Dotson, Assistant Director, Federal Liaison 
Center, Government Finance Officers Association, dated May 17, 1995; 
(11) Matthew Lee, Executive Director, Inner City Press/Community on 
the Move, dated May 15, 1995; (12) Matthew Elderfield, Assistant 
Director, London Investment Banking Association, dated June 13, 
1995; (13) Linda D. Edwards, Vice President Compliance, Llama 
Company, dated May 9, 1995; (14) Scott H. Rockoff, Managing 
Director, Director of Compliance, and Assistant General Counsel, 
Nomura Securities International, Inc., dated May 17, 1995; (15) 
Robert D. McKnew, Chairman, Public Securities Association, dated May 
18, 1995; and (16) Robert F. Price, Chairman Federal Regulation 
Committee, Richard O. Scribner, Chairman, Self-Regulation and 
Supervisory Practices Committee, and Zachary Snow, Chairman OTC 
Derivative Products Committee, Securities Industry Association, 
dated June 7, 1995. A copy of each comment letter listed above is 
included in File No. SR-NASD-95-39 as Exhibit 5 thereto. These 
letters are discussed in Securities Exchange Act Release No. 36383, 
supra note 9 (notice of proposed rule change for File No. SR-NASD-
95-39).
---------------------------------------------------------------------------

III. Description

A. Application of the Rules of Fair Practice to Exempted Securities 
Except Municipals and Merger of Government Securities Rules

    As shown in Table 1 below, the proposed rule change merges certain 
provisions of the current Government Securities Rules into the Rules of 
Fair Practice. The proposed rule change also applies certain of the 
NASD Rules of Fair Practice to exempted securities (except municipals) 
for the first time. Table 2 below indicates the Rules of Fair Practice 
that will be applicable to exempted securities (except municipals).
Amendments Merging Government Securities Rules into Rules of Fair 
Practice
    The NASD proposes to merge certain provisions contained solely 
under the Government Securities Rules into corresponding sections of 
the Rules of Fair Practice to provide NASD members with one set of 
sales practice rules that will reflect the NASD's expanded authority 
under the GSAA. Specifically, the NASD proposes to add provisions of 
the Government Securities Rules into Article III, Section 21(c)(3), 38, 
and 39; Article IV, Sections 1 to 4; and Article V, Section 1 of the 
Rules of Fair Practice. The NASD also proposes to move provisions 
contained in Section 6 of the Government Securities Rules into new 
Section 38A of Article III of the Rules of Fair Practice. To effect 
these amendments, the NASD has reorganized and renumbered many of the 
provisions contained in the above-referenced sections of the Rules of 
Fair Practice.
    Table 1 identifies the provisions of the Government Securities 
Rules and the corresponding provisions of the Rules of Fair Practice 
into which the Government Securities Rules will be merged. In addition, 
Table 1 indicates the corresponding section of the Rules of Fair 
Practice for each Government Securities Rule where no rule language 
change is necessary because of expanded authority under Article I, 
Section 5 of the Rules of Fair Practice.\12\
---------------------------------------------------------------------------

    \12\ The NASD proposes to amend Article I, Section 5(a) of the 
Rules of Fair Practice by deleting the phrase ``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'' to expand the application of the 
Rules of Fair Practice to members involved in the government 
securities business pursuant to Section 1 15C of the Act.

Table 1.--Government Securities Rules Merged Into Rules of Fair Practice
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Sec. 1. Adoption of Rules..............  Article I, Sec. 1--No change.  
Sec. 2. Applicability:                                                  
    Subsection (a).....................  Article I, Sec. 4 and 5(a).    
    Subsection (b).....................  Article I, Sec. 5 (b) and (c)--
                                          No change.                    
Sec. 3. Definitions in By-Laws and       Article II, Sec. 1 and 2--No   
 Rules of Fair Practice.                  change.                       
Sec. 4. Books and Records..............  Article III, Sec. 21.          
Sec. 5. Supervision....................  Article III, Sec. 27--No       
                                          change.                       
Sec. 6. Regulation of Activities of      Article III, Sec. 38 and 38A.  
 Members Experiencing Financial and/or                                  
 Operational Difficulties.                                              
    Explanation of Board of Governors--  Explanation of Board of        
     Restrictions on a Member's           Governors Restrictions on a   
     Activity.                            Member's Activity--Article    
                                          III, Sec. 38 and 38A.         
Sec. 7. Approval of Change in Exempt     Article III, Sec. 39.          
 Status under SEC Rule 15c3-3.                                          
Sec. 8. Communications with the Public.  Article III, Sec. 35--No       
                                          change.                       
Sec. 9. Availability to Customers of     Article IV, Sec. 1--No change. 
 Certificate, By-Laws, Rules, and Code                                  
 of Procedure.                                                          
Sec. 10. Complaints:                                                    
    Subsection (a) Complaints by Public  Article IV, Sec. 2.            
     Against Members.                                                   

[[Page 44102]]

                                                                        
    Subsection (b) Complaints by         Article IV, Sec. 3.            
     District Business Conduct                                          
     Committees.                                                        
    Subsection (c) Complaints by the     Article IV, Sec. 4.            
     Board of Governors.                                                
Sec. 11. Reports and Inspection of       Article IV, Sec. 5--No change. 
 Books for Purpose of Investigating                                     
 Complaints.                                                            
    Resolution of Board of Governors--   Resolution of Board of         
     Suspension of Members for Failure    Governors--Suspension of      
     to Furnish Information Duly          Members for Failure to Furnish
     Requested.                           Information Duly Requested--No
                                          change                        
Sec. 12. Sanctions for Violation of the  Article V, Sec. 1.             
 Rules.                                                                 
Sec. 13. Payment of Fines or Costs.....  Article V, Sec. 2--No change.  
Sec. 14. Cost of Proceedings...........  Article V, Sec. 3--No change.  
------------------------------------------------------------------------

Application of NASD Rules of Fair Practice to Government Securities
    As indicated in Table 2 below, certain provisions of the Rules of 
Fair Practice will not be immediately applicable to transactions in 
government securities. The NASD intends to review the application of 
these rules to the government securities market.
    Front Running. Currently, the NASD Front Running Interpretation 
\13\ applies only to equity securities. The NASD believes, however, 
that the member conduct prohibited by the Front Running Interpretation 
may occur under certain circumstances in the government securities 
market, and will review the application of the Front Running 
Interpretation to the government securities market.\14\ In the interim, 
the NASD believes that actions for similar front running conduct 
occurring in the government securities market may be brought under 
Article III, Section 1 of the Rules of Fair Practice.\15\
---------------------------------------------------------------------------

    \13\ Interpretation of the Board of Governors at paragraph 
2151.08.
    \14\ Securities Exchange Act Release No. 36973 (Mar. 14, 1996), 
61 FR 11655 (Mar. 21, 1996).
    \15\ Id.
---------------------------------------------------------------------------

    Trading ahead of customer limit orders \16\ and trading ahead of 
research reports,\17\ also are currently drafted to apply only to 
equity securities. The NASD believes the conduct addressed by these 
Interpretations also may occur under certain circumstances in the 
government securities market and intends to review the application of 
these Interpretations to the government securities market. The NASD 
also believes that actions for similar conduct occurring in the 
government securities market may be brought under Article III, Section 
1 of the Rules of Fair Practice.
---------------------------------------------------------------------------

    \16\ Interpretation of the Board of Governors at paragraph 
2151.07.
    \17\ Interpretation of the Board of Governors at paragraph 
2151.09.
---------------------------------------------------------------------------

Article III, Section 35A of the Rules of Fair Practice/Schedule C to 
the By-Laws

    The proposed rule change would apply Schedule C of the By-Laws 
(``Schedule C''), regarding NASD registration requirements of persons 
associated with a member, to the personnel of sole-government 
securities broker-dealers, including persons selling options on 
government securities. The proposed rule change also would have the 
effect of applying Article III, Section 35A of the Rules of Fair 
Practice (``Section 35A'') to the options communications of such 
members with the public. The NASD currently is considering whether it 
is appropriate to require a government securities broker-dealer to 
register an associated person as its ``Compliance Registered Options 
Principal'' under Part II, Section 2(f) of Schedule C. The NASD intends 
to file separately a proposed rule change concerning this issue.\18\ 
Section 35A(b) of the Rules of Fair Practice requires the registration 
of such a Principal to approve certain options advertisements, sales 
materials and other literature for government securities options 
transactions. The NASD has determined that Article III, Section 35A(b) 
will not be applicable to options advertisements, sales materials and 
other literature for government securities options transactions during 
the interim period when the NASD is reviewing the registration issue.
---------------------------------------------------------------------------

    \18\ Securities Exchange Act Release No. 36973, supra note 14.
---------------------------------------------------------------------------

    Customer Account Statements. The proposed rule change would phase-
in the implementation of Article III, Sections 21, 27, 32, and 45 of 
the Rules of Fair Practice to dealers in government securities within 
three months of the effective date of the rule change. The NASD 
believes that the phase-in is necessary to provide members with 
sufficient time to change their internal procedures to comply with 
these rules.

    Table 2.--Applicability of the Rules of Fair Practice to Exempted   
     Securities, Including Government Securities (Except Municipals)    
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
                               ARTICLE III                              
                                                                        
Section 1:                                                              
    Business Conduct of Members...  Applicable.                         
    Interpretations of the Board                                        
     of Governors:                                                      
        Execution of Retail         Applicable.                         
         Transactions in the Over-                                      
         the Counter Market.                                            
        Prompt Receipt and          Not Applicable.                     
         Delivery.                                                      
        Forwarding of Proxy and     Not Applicable.                     
         Other materials.                                               
        Free-Riding and             Amending to be Not Applicable.      
         Withholding.                                                   
        Interpretation on Limit     Not Applicable.                     
         Order Protection.                                              
        Front Running Policy......  Not Applicable.                     
        Trading Ahead of Research   Not Applicable.\1\                  
         Reports.                                                       
Section 2:                                                              
    Recommendations to Customers..  Applicable.                         
    Policy of the Board of          Applicable.                         
     Governors--Fair Dealing With                                       
     Customers Policy.                                                  

[[Page 44103]]

                                                                        
Section 3:                                                              
    Charges to Customer...........  Applicable.                         
Section 4:                                                              
    Fair Prices and Commissions...  Applicable.\2\                      
    Interpretation of the Board of  Applicable.\3\                      
     Governors--NASD Mark-Up                                            
     Policy.                                                            
Section 5:                                                              
    Publication of Transactions     Applicable.                         
     and Quotations.                                                    
    Interpretation of the Board of  Applicable.                         
     Governors--Manipulative and                                        
     Deceptive Quotations.                                              
Section 6:                                                              
    Offers at Stated Prices.......  Applicable.                         
    Policy of the Board of          Applicable.                         
     Governors--Policy With                                             
     Respect to Firmness of                                             
     Quotations.                                                        
Section 7:                                                              
    Disclosure of Prices in         Applicable only to traditional      
     Selling Agreements.             underwriter arrangements.          
Section 8:                                                              
    Securities Taken in Trade.....  Not Applicable.                     
    Interpretation of the Board of  Not Applicable.                     
     Governors--Safe Harbor and                                         
     Presumption of Compliance.                                         
Section 9:                                                              
    Use of Information Obtained in  Applicable.                         
     Fiduciary Capacity.                                                
Section 10:                                                             
    Influencing or Rewarding        Applicable.                         
     Employees of Others.                                               
Section 11:                                                             
    Payment Designed to Influence   Applicable.                         
     Market Prices, Other than                                          
     Paid Advertising.                                                  
Section 12:                                                             
    Disclosure on Confirmations...  Not Applicable; superseded by SEC   
                                     rules.                             
Section 13:                                                             
    Disclosure of Control.........  Not Applicable.                     
Section 14:                                                             
    Disclosure of Participation or  Applicable.                         
     Interest in Primary or                                             
     Secondary Distribution.                                            
Section 15:                                                             
    Discretionary Accounts........  Applicable.                         
Section 16:                                                             
    Offers ``At the Market''......  Not Applicable.\4\                  
Section 17:                                                             
    Solicitation of Purchases on    Applicable.                         
     an Exchange to Facilitate a                                        
     Distribution of Securities.                                        
Section 18:                                                             
    Use of Fraudulent Devices.....  Applicable.                         
Section 19:                                                             
    Customers Securities or Funds.  Applicable.                         
Section 20:                                                             
    Installment or Partial Payment  Applicable.                         
     Sales.                                                             
Section 21:                                                             
    Books and Records.............  Applicable, except for proposed     
                                     amendments to Subsection (b)(i).   
Section 22:                                                             
    Disclosure of Financial         Applicable.                         
     Condition.                                                         
Section 23:                                                             
    Net Prices to Persons Not in    Not Applicable.                     
     Investment Banking or                                              
     Securities Business.                                               
Section 24:                                                             
    Selling Concessions...........  Not Applicable.                     
    Interpretation of the Board of  Not Applicable.                     
     Governors--Services in                                             
     Distribution.                                                      
Section 25:                                                             
    Dealing with Non-Members......  Not Applicable.                     
    Interpretation of the Board of  Not Applicable.                     
     Governors--Transactions                                            
     Between Members and Non-                                           
     members.                                                           
Section 26:                                                             
    Investment Companies..........  Not Applicable.                     
Section 27:                                                             
    Supervision...................  Applicable.                         
Section 28:                                                             
    Transaction for or by           Applicable.                         
     Associated Persons.                                                
Section 29:                                                             
    Variable Contracts of an        Not Applicable.                     
     Insurance Co..                                                     
Section 30:                                                             
    Margin Accounts...............  Applicable.                         
Section 31:                                                             
    Securities Failed to Receive    Not Applicable.                     
     and Failed to Deliver.                                             
Section 32:                                                             
    Fidelity Bonds................  Applicable.                         
Section 33:                                                             
    Options.......................  Not Applicable.                     

[[Page 44104]]

                                                                        
Section 34:                                                             
    Direct Participation Programs   Not Applicable.                     
     Appendix F.                                                        
Section 35:                                                             
    Communications With the Public  Applicable.                         
Section 35A:                                                            
    Options Communications With     Not Applicable/Under Review.        
     the Public.                                                        
Section 36:                                                             
    Transactions with Related       Not Applicable.                     
     Persons.                                                           
    Interpretation of the Board of  Not Applicable.                     
     Governors--Transactions With                                       
     Related Persons.                                                   
Section 37:                                                             
    [Reserved] \5\                  ....................................
Section 38:                                                             
    Regulation of Activities of     Applicable.                         
     Members Experiencing                                               
     Financial and/or Operational                                       
     Difficulties.                                                      
Section 39:                                                             
    Approval of Change in Exempt    Applicable.                         
     Status under SEC Rule 15c3-3.                                      
Section 40:                                                             
    Private Securities              Applicable.                         
     Transactions.                                                      
Section 41:                                                             
    Short-Interest Reporting......  Not Applicable.                     
Section 42:                                                             
    Prohibition on Transactions     Not Applicable.                     
     During Trading Halts.                                              
Section 43:                                                             
    Outside Business Activities...  Applicable.                         
Section 44:                                                             
    The Corporate Financing Rule..  Not Applicable.                     
Section 45:                                                             
    Customer Account Statements...  Applicable.                         
Section 46:                                                             
    Adjustment of Open Orders.....  Not Applicable.                     
Section 47:                                                             
    Clearing Agreements...........  Applicable.                         
Section 48:                                                             
    Short Sale Rule...............  Not Applicable.                     
Section 49:                                                             
    Primary Nasdaq Market Maker     Not Applicable.                     
     Standards.                                                         
Section 50:                                                             
    Reporting Requirements........  Applicable.\6\                      
------------------------------------------------------------------------
                               ARTICLE IV                               
------------------------------------------------------------------------
Section 1:                                                              
    Availability to Customers of    Applicable.                         
     Certificate, By-laws, Rules                                        
     and Code of Procedures.                                            
Section 2:                                                              
    Complaints by Public Against    Applicable.                         
     Members for Violations of                                          
     Rules.                                                             
Section 3:                                                              
    Complaints by District          Applicable.                         
     Business Conduct Committee.                                        
Section 4:                                                              
    Complaints by Board of          Applicable.                         
     Governors.                                                         
Section 5:                                                              
    Reports and Inspection of       Applicable.                         
     Books for Purpose of                                               
     Investigating Complaints.                                          
------------------------------------------------------------------------
                                ARTICLE V                               
------------------------------------------------------------------------
Section 1:                                                              
    Sanctions for Violations of     Applicable.                         
     Rules.                                                             
    Interpretation of the Board of                                      
     Governors--The Effect of a                                         
     Suspension or Revocation of                                        
     the Registration, if any, of                                       
     a Person Associated with a                                         
     Member or the Barring of a                                         
     Person from further                                                
     Association with any Member.                                       
Section 2:                                                              
    Payment for Fines, Other        Applicable.                         
     Monetary Sanctions, or Costs.                                      
Section 3:                                                              
    Costs of Proceedings..........  Applicable.                         
------------------------------------------------------------------------
\1\ As noted previously, the NASD will review the application of this   
  Interpretation to the government securities market.                   
\2\ Amendment No. 5 states that the NASD may bring action for conduct   
  violating Article III, Section 4 (``Fair Prices and Commissions'')    
  under its just and equitable principles of trade rule. See Amendment  
  No. 5, supra note 5.                                                  
\3\ Article III, Section 4 of the Rules of Fair Practice and the NASD   
  Mark-Up Policy currently apply to transactions in equity and corporate
  debt securities. The NASD is developing an Interpretation of the Mark-
  Up Policy with respect to exempted securities and other debt          
  securities. Therefore, the current application of Article III, Section
  4 of the Rules of Fair Practice and the NASD Mark-Up Policy will not  
  apply to transactions in exempted securities until adoption of an     
  Interpretation of the NASD Mark-Up Policy with respect to all debt    
  securities. However, current Article III, Section 4 of the Rules of   
  Fair Practice and the Mark-Up Policy remain in full force and effect  
  for all equity and corporate debt transactions. See letter from       
  Elliott R. Curzon, Assistant General Counsel, NASD, to Mark P.        
  Barracca, Branch Chief, Division of Market Regulation, SEC, dated     
  October 17, 1995 (Amendment No. 1 to the proposed rule change). In    
  Amendment No. 5, the NASD clarifies that it may bring action for      
  conduct violating the Mark-Up Policy under its just and equitable     
  principles of trade rule. See Amendment No. 5, supra note 5.          

[[Page 44105]]

                                                                        
\4\ The NASD has indicated that it will review the application of this  
  Interpretation to the government securities market.                   
\5\ In Amendment No. 4, the NASD indicated that the reference to Section
  37 in Amendment No. 3 was in error because the Commission approved the
  NASD's deletion of this section on March 8, 1994. See Amendment No. 4,
  supra note 5.                                                         
\6\ In Amendment No. 4, the NASD proposed that the Reporting            
  Requirements be applicable to exempted securities (except municipals).
  The NASD noted that Section 50, Article III was approved by the       
  Commission on September 8, 1995. See Amendment No. 4, supra note 5.   

B. Suitability Interpretation--Description of the Proposal

    The NASD is proposing to adopt an interpretation of the Board of 
Governors--Suitability Obligations to Institutional Customers under 
Article III, Section 2 of the Rules of Fair Practice. The NASD intends 
the proposed Suitability Interpretation to clarify that the NASD's 
suitability rule under Article III, Section 2(a) of the Rules of Fair 
Practice is applicable to institutional customers, while recognizing 
that generally, a member's relationship with an institutional customer 
is different from the member's relationship with retail customers.
    The proposed Suitability Interpretation states that the NASD's 
suitability rule is fundamental to fair dealing and is intended to 
promote ethical sales practices and high standards of professional 
conduct. Members' responsibilities under the Suitability Interpretation 
include having a reasonable basis for recommending a particular 
security or strategy, as well as reasonable grounds for believing that 
the recommendation is suitable for the customer to whom it is made. 
Members are expected to meet the same high standards of competence, 
professionalism, and good faith regardless of the financial 
circumstances of the customer.
    In its proposal filed with the Commission, the NASD states that the 
Suitability Interpretation is intended to provide guidance to members 
in fulfilling their customer-specific suitability obligations, i.e., 
the manner in which a member determines that a recommendation is 
suitable for a particular customer.\19\ The manner in which a member 
fulfills this suitability obligation will vary depending on the 
customer and the specific transaction. The NASD further states that the 
proposed Suitability Interpretation and the factors contained therein 
are not intended either to create a safe harbor for members or a 
burdensome evidentiary checklist.
---------------------------------------------------------------------------

    \19\ This interpretation does not address the obligation related 
to suitability that requires that a member have ``* * * a 
`reasonable basis' to believe that the recommendation could be 
suitable for at least some customers.'' In the Matter of the 
Application of F.J. Kaufman and Company of Virginia and Frederick J. 
Kaufman, Jr., 50 SEC 164 (1989).
---------------------------------------------------------------------------

    The proposed Suitability Interpretation states that the two most 
important considerations in determining the scope of a member's 
suitability obligations in making recommendations to an institutional 
customer are the customer's capability to evaluate investment risk 
independently, and the extent to which the customer is exercising 
independent judgment in evaluating a member's recommendation. Thus, 
under the proposed Interpretation, a member must determine, based on 
information available to it, the customer's capability to evaluate 
investment risk. In some cases, the member may conclude that the 
customer is not capable of making independent investment decisions in 
general. In other cases, the institutional customer may have general 
capability, but may not be able to understand a particular type of 
instrument or its risk. The NASD states that if a customer is either 
generally not capable of evaluating investment risk or lacks sufficient 
capability to evaluate the particular product, the scope of the 
member's obligation under the suitability rule would not be diminished 
by the fact that the member was dealing with an institutional 
customer.\20\
---------------------------------------------------------------------------

    \20\ The NASD also states that a customer who initially needed 
help understanding a potential investment may ultimately develop an 
understanding and make an independent investment decision.
---------------------------------------------------------------------------

    Members also must make a determination regarding whether the 
customer is exercising independent judgment in its investment decision, 
that is, whether the customer's investment decision will be based on 
its own independent assessment of the opportunities and risks presented 
by a potential investment, market factors and other investment 
considerations. The proposed Suitability Interpretation states that a 
member's determination that a customer is making independent investment 
decisions will depend on the nature of the relationship that exists 
between the member and customer.
    A member's determination of a customer's capability to evaluate 
investment risk independently will depend on an examination of the 
customer's capability to make its own investment decisions, including 
the resources available to the customer to make informed decisions. The 
NASD specified several factors relevant to making such a determination. 
These considerations include: (1) the use of one or more consultants, 
investment advisers or bank trust departments; (2) the general level of 
experience of the institutional customer in financial markets and 
specific experience with the type of instruments under consideration; 
(3) the customer's ability to understand the economic features of the 
security involved; (4) the customer's ability to independently evaluate 
how market developments would affect the security; and (5) the 
complexity of the security or securities involved.
    With respect to the determination that a customer is making 
independent investment decisions, the NASD proposed several relevant 
factors. These considerations include: (1) any written or oral 
understanding that exists between the member and the customer regarding 
the nature of the relationship between the member and the customer and 
the services to be rendered by the member; (2) the presence or absence 
of a pattern of acceptance of the member's recommendations; (3) the use 
by the customer of ideas, suggestions, market views and information 
obtained from other members or market professionals, particularly those 
relating to the same type of securities; and (4) the extent to which 
the member has received from the customer current comprehensive 
portfolio information in connection with discussing recommended 
transactions or has not been provided important information regarding 
its portfolio or investment objectives.
    The NASD states that the factors contained in the proposed 
Suitability Interpretation are merely guidelines that will be utilized 
to determine whether a member has fulfilled its suitability obligations 
with respect to a specific institutional customer transaction. The 
inclusion or absence of any of the factors is not dispositive of the 
determination of suitability. Such a determination can only be made on 
a case-by-case basis taking into consideration all the facts and 
circumstances of a particular member/customer relationship, assessed in 
the context of a particular transaction.
    The NASD states that it is important to clarify when a member may 
consider its suitability obligations fulfilled pursuant to the 
guidelines provided by the proposed Suitability Interpretation. 
Therefore, the proposed Suitability Interpretation provides that where 
the broker-dealer has reasonable grounds for concluding that the 
institutional customer is making independent

[[Page 44106]]

investment decisions and is capable of independently evaluating 
investment risk, then a member's obligation to determine that a 
recommendation is suitable for a particular customer is fulfilled.\21\
---------------------------------------------------------------------------

    \21\ See supra note 19.
---------------------------------------------------------------------------

    Finally, for purposes of the proposed Suitability Interpretation, 
the NASD states that the term ``institutional customer'' should not be 
arbitrarily defined by referencing a threshold institutional asset size 
or portfolio size or various statutory designations. Rather, the NASD 
states that for purposes of the Suitability Interpretation, an 
institutional customer shall be any entity other than a natural person. 
The NASD states that it believes the Interpretation is more 
appropriately applicable to an entity having at least $10 million 
invested in securities in the aggregate in its portfolio or under 
management.

IV. Summary of Comments

    The Commission received 16 comment letters from a total of 13 
commenters.\22\ Most of the comment letters addressed the proposed 
Suitability Interpretation of the rule proposal. The NASD responded to 
most of the comment letters in Amendment No. 3.
---------------------------------------------------------------------------

    \22\ The Commission received letters from the following: (1) 
Brian C. Underwood, Vice President-Director of Compliance, A.G. 
Edwards & Sons, Inc., to Jonathan G. Katz, Secretary, SEC, dated 
November 14, 1995 (``Edwards Letter''); (2) David J. Master, 
Chairman and CEO, Coastal Securities Ltd., to Jonathan G. Katz, 
Secretary, SEC, dated November 28, 1995 (``Coastal Letter''); (3) 
Betsy Dotson, Assistant Director, Federal Liaison Center, Government 
Finance Officers Association, to Jonathan G. Katz, Secretary, SEC, 
dated November 14, 1995 (``GFOA Letter No. 1''); (4) Thomas M. 
Selman, Associate Counsel, Investment Company Institute, to Jonathan 
G. Katz, Secretary, SEC, dated November 14, 1995 (``ICI Letter''); 
(5) Jane D. Carlin, Principal and Counsel, Morgan Stanely & Co. 
Incorporated, to Jonathan G. Katz, Secretary, SEC, dated December 5, 
1995 (``Morgan Stanley Letter''); (6) Paul Saltzman, Senior Vice 
President and General Counsel, Public Securities Association, to 
Jonathan G. Katz, Secretary, SEC, dated November 30, 1995 (``PSA 
Letter No. 1''); (7) Scott H. Rockoff, Managing Director, Director 
of Compliance, and Assistant General Counsel, Nomura Securities 
International, Inc., to Jonathan G. Katz, Secretary, SEC, dated 
December 14, 1995 (``Nomura Letter''); (8) Robert F. Price, 
Chairman, Federal Regulation Committee, and Zachary Snow, Chairman, 
OTC Derivatives Products Committee, Securities Industry Association, 
to Jonathan G. Katz, Secretary, SEC, dated December 17, 1995 (``SIA 
Letter No. 1''); (9) David Rosenau, President, The Winstar 
Government Securities Company L.P., to Jonathan G. Katz, Secretary, 
SEC, dated December 27, 1995 (``Winstar Letter''); (10) Steven Alan 
Bennett, Senior Vice President and General Counsel, Banc One 
Corporation, to Jonathan G. Katz, Secretary, SEC, dated April 16, 
1996 (``Banc One Letter''); (11) Betsy Dotson, Assistant Director/
Legislative Counsel, Federal Liaison Center, Government Finance 
Officers Association, to Jonathan G. Katz, Secretary, SEC, dated 
April 22, 1996 (``GFOA Letter No. 2''); (12) Paul Saltzman, Senior 
Vice President and General Counsel, Public Securities Association, 
to Jonathan G. Katz, Secretary, SEC, dated April 22, 1996 (``PSA 
Letter No. 2''); (13) Marshall Bennett, President, National 
Association of State Auditors, Comptrollers and Treasurers, to 
Secretary, SEC, dated April 22, 1996 (``NASACT Letter''); (14) C. 
Evan Stewart, Chairman, Federal Regulation Committee, Zachary Snow, 
Chairman, OTC Derivatives Products Committee, and Richard O. 
Scribner, Chairman, Self-Regulation and Supervisory Practices 
Committee, Securities Industry Association, to Jonathan G. Katz, 
Secretary, SEC, dated April 23, 1996 (``SIA Letter No. 2''); (15) 
Sarah A. Miller, General Counsel, American Bankers Association and 
the American Bankers Association Securities Association to Jonathan 
G. Katz, Secretary, SEC, dated April 24, 1996 (``ABA Letter''); and 
(16) William R. Rothe, Chairman, and John L. Watson III, President, 
Security Traders Association, to Jonathan G. Katz, Secretary, SEC, 
dated April 29, 1996 (``STA Letter'').
---------------------------------------------------------------------------

A. Application of the Rules of Fair Practice to Government Securities

1. Prompt Receipt and Delivery Interpretation
    One commenter requested that the ``long sale'' provisions of the 
Prompt Receipt and Delivery Interpretation,\23\ which would require a 
member to make affirmative determinations regarding whether a customer 
is ``long'' the security at the time the dealer is purchasing a 
government security from a customer, prior to accepting a long sale 
from any customer, not apply to transactions in government 
securities.\24\ This commenter argued that an affirmative determination 
requirement is contrary to the practice in the government securities 
market that permits a customer to sell a security to a dealer and then 
cover that sale with a subsequent purchase or repurchase transaction in 
the ``specials market.'' The commenter noted that this practice has 
been recognized by the Board of Governors of the Federal Reserve 
System. In response to this comment, the NASD amended its proposal to 
exempt government securities from the long sales requirements.\25\
---------------------------------------------------------------------------

    \23\See Article III, Section 1 of the Rules of Fair Practice.
    \24\ See PSA Letter No. 1, supra note 22.
    \25\ See Securities Exchange Act Release No. 36973, supra note 
14, at 9.
---------------------------------------------------------------------------

2. Best Execution Interpretation
    One commenter had reservations about the application of the ``best 
execution'' concept to government securities that are executed on a 
principal basis at a ``net price.''\26\ Two commenters noted that 
members would have difficulty complying with the procedural 
requirements of the best execution concept because the government 
securities market lacks systems similar to the Consolidated Quotation 
System (``CQS'') and the Intermarket Trading System (``ITS'').\27\ The 
NASD responded that it believes the general concept of the Best 
Execution Interpretation (e.g., that a member should seek in executing 
customer transactions to obtain the best price for the customer) \28\ 
should apply to the government securities market, just as it applies to 
all other markets subject to the NASD's jurisdiction.\29\ The NASD 
stated that it would further consider whether an amendment to the Best 
Execution Interpretation is necessary to clarify its position as it 
applies to government securities, but it considered such an amendment 
unnecessary at this time.
---------------------------------------------------------------------------

    \26\ See PSA Letter No. 1, supra note 22.
    \27\ See PSA Letter No. 1 and Winstar Letter, supra note 22.
    \28\ See Article III, Section 1 of the Rules of Fair Practice.
    \29\ See Securities Exchange Act Release No. 36973, supra note 
14, at 11.
---------------------------------------------------------------------------

3. Front Running Policy
    One commenter sought clarification on whether and how the front 
running interpretation would apply to government securities brokers and 
dealers.\30\ The commenter noted that the interpretation was designed 
for the equity securities. In response, the NASD noted that its front 
running interpretation was designed for the equity securities markets 
and, accordingly, amended its proposal so that the front running 
interpretation would not apply to the government securities market.\31\ 
The NASD, however, stated that because the member conduct probihited by 
the front running interpretation may occur in the government securities 
market under certain circumstances, it will review the application of 
the front running interpretation to this market. In the interim, the 
NASD reminded members that actions for front running conduct occurring 
in the government securities market may be brought under Article III, 
Section 1 of the Rules of Fair Practice.\32\
---------------------------------------------------------------------------

    \30\ See PSA Letter No. 1, supra note 22.
    \31\ See Securities Exchange Act Release No. 36973, supra note 
14, at 12.
    \32\ Similarly, the NASD noted that the Interpretation of the 
Board of the Governors regarding the trading ahead of customer limit 
orders and the Interpretation of the Board of Governors--trading 
Ahead of Research Reports, are drafted to apply to equity 
securities. The NASD stated that it intends to review the 
application of these Interpretations to the government securities 
market because it believes that the conduct addressed by these 
Interpretations may occur under certain circumstances in the 
government securities market.

---------------------------------------------------------------------------

[[Page 44107]]

4. Article III, Section 23 of the Rules of Fair Practice
    One commenter sought clarification on the effect of the provision 
``Net Prices to Persons Not in Investment Banking or Securities 
Business'' on government securities transactions.\33\ In response, the 
NASD determined that the requirements contained in Article III, Section 
23 are superseded and more clearly provided for under: (i) Rule 10b-10 
of the Act relating to Confirmation of Transactions; and (ii) Article 
III, Section 25 of the Rules of Fair Practice relating to Dealing with 
Non-Members.\34\ The NASD amended the proposal to reflect this change.
---------------------------------------------------------------------------

    \33\ See PSA Letter No. 1, supra note 22.
    \34\ See Securities Exchange Act Release No. 36973, supra note 
14, at 14.
---------------------------------------------------------------------------

5. Article III, Section 35A of the Rules of Fair Practice/Schedule C to 
the By-Laws
    One commenter requested clarification as to whether the proposed 
rule change would require a government securities broker or dealer to 
register an associated person as its ``Compliance Registered Options 
Principal'' under Part II, Section 2(f) of Schedule C to comply with 
Section 35A(b) of the Rules of Fair Practice, which requires the 
registration of such a Principal to approve certain options 
advertisements, sales materials, and other literature for government 
securities options transactions.\35\ In response, the NASD stated that 
it is currently reviewing the issue of whether a ``Compliance 
Registered Options Principal'' should be required for members that 
trade options on government securities. The NASD further noted that it 
intends to file a proposed rule change regarding this registration 
issue and, therefore, the NASD amended to Applicability Table to 
indicate that Article III, Section 35A(b) is ``Not Applicable/Under 
Review.'' \36\
---------------------------------------------------------------------------

    \35\ See PSA Letter, No. 1, supra note 22.
    \36\ Article III, Section 35A(b) will not be applicable to 
options advertisements, sales materials and other literature for 
government securities options transactions during this interim 
review period. See Securities Exchange Act Release No. 36973, supra 
note 14, at 15.
---------------------------------------------------------------------------

6. Customer Account Statements
    One commenter suggested that the implementation of Article III, 
Section 45 (``Customer Account Statements'') be delayed for three 
months after the effective date of the rule change to give affected 
members sufficient time to set up appropriate procedures to comply with 
the requirements of Section 45.\37\ The NASD agreed and amended the 
proposal.\38\
---------------------------------------------------------------------------

    \37\ See PSA Letter No. 1, supra note 22.
    \38\ See Securities Exchange Act Release No. 36973, supra note 
14, at 16.
---------------------------------------------------------------------------

B. Suitability Obligations to Institutional Customers

1. General Comments
    Most of the commenters agreed with the general principles expressed 
in the Suitability Interpretation, although some commenters disagreed 
on the proper allocation of responsibility between members and 
institutional customers for investment making decisions.\39\ Two 
commenters did not support the proposal.\40\ One commenter believed 
that the proposal would create both greater confusion and uncertainty 
and additional duties for NASD members with respect to institutional 
accounts.\41\ The other commenter believed that the proposal would 
impose unnecessary regulatory burdens on members.\42\
---------------------------------------------------------------------------

    \39\ See Coastal Letter, GFOA Letter No. 1, PSA Letter Nos. 1 
and 2, SIA Letter Nos. 1 and 2, Banc One Letter, NASACT Letter, STA 
Letter, and Morgan Stanley Letter, supra note 22.
    \40\ See Nomura Letter and ABA Letter, supra note 22.
    \41\ See Nomura Letter, sura note 22.
    \42\ See ABA Letter, supra note 22.
---------------------------------------------------------------------------

    One commenter believed that the proposal would create confusion 
because it does not define the terms ``recommendation'' and 
``institutional investor.'' \43\ The NASD responded that neither term 
lent itself to definition. First, it noted that Article III, Section 2 
of the Rules of Fair Practice has been applicable to members' 
recommendations since the inception of the NASD and a significant 
amount of case law has developed from NASD disciplinary actions with 
respect to this provision.\44\ The NASD further believes that defining 
the term ``recommendation'' is unnecessary and would raise many complex 
issues in the absence of the specific facts of a particular case. 
Second, the NASD believes that an objective definition of 
``institutional investor'' would arbitrarily discriminate between 
institutional investors based on factors such as asset size, portfolio 
size or institutional type. The NASD stated that the proposed 
Suitability Interpretation would provide guidance to members on 
relevant considerations that should be examined by a member in 
fulfilling its suitability obligations to all institutional customers 
and would not unfairly discriminate between institutional customers 
based on such factors.\45\
---------------------------------------------------------------------------

    \43\ See Nomura Letter, supra note 22.
    \44\ See Securities Exchange Act Release No. 36973, supra note 
14, at 39-40.
    \45\ See id. at 39.
---------------------------------------------------------------------------

2. Considerations in Determining the Scope of a Member's Suitability 
Obligations in Making Recommendations to an Institutional Customer
    Several commenters had concerns about the specific guidelines 
included in the proposal that the NASD stated could be used by a member 
in determining the scope of the member's suitability obligations.

(i) Member Determination Regarding the Institutional Customer's 
Capability to Evaluate Investment Risk Independently

    One commenter asserted that the relevance of the customer's use of 
consultants, investment advisers or a bank trust department would 
depend on the extent of the use of the outside advice and what, if any, 
contractual arrangement exists between the customer and the outside 
adviser.\46\ This commenter questioned whether outside managers of 
investment pools and trustees would fall within this guideline. In 
response, the NASD agreed that the relevance of a customer's use of 
professional advisers would depend on the extent of the use of such 
outside advice.\47\ Moreover, the NASD believes that the proposed 
Suitability Interpretation would apply to any delegated agents of the 
customer, including outside managers for investment pools, trustees, 
and other agents.\48\
---------------------------------------------------------------------------

    \46\  See GFOA Letter No. 1, supra note 22.
    \47\  See Securities Exchange Act Release No. 36973, supra note 
14, at 26.
    \48\ In fact, the Suitability Interpretation specifically states 
that where a customer has delegated decision-making authority to an 
agent, such as an investment adviser or a bank trust department, the 
Interpretation shall be applied to the agent.
---------------------------------------------------------------------------

    One commenter stated that the usefulness of the customer's general 
level of experience in the financial markets and with the type of 
instruments under consideration would depend not only on the expertise 
of the customer's staff but also on the nature of the changing 
markets.\49\ This commenter also argued that the relevance of a 
customer's ability to understand economic features of a security would 
depend on the nature of information provided to the investor by the 
NASD member about the features of a specific instrument. The commenter 
further contended that a customer's track record in making investment 
decisions or an affirmative statement by the customer that it has the 
ability to

[[Page 44108]]

evaluate independently the effect of the market on a security, are not 
reliable indicators of a customer's ability to independently evaluate 
the effects of the market on the security. The NASD agreed that the 
relevance of the factors listed in the proposed Suitability 
Interpretation would vary depending on numerous circumstances.\50\ The 
NASD also noted its belief that a customer's track record and an 
affirmative statement by the customer regarding its capability are 
helpful, but not dispositive, factors pertaining to the customer's 
capability to evaluate investment risk dependently.
---------------------------------------------------------------------------

    \49\ See GFOA Letter No. 1, supra note 22.
    \50\ See Securities Exchange Act Release No. 36973, supra note 
14, at 27.
---------------------------------------------------------------------------

    One commenter suggested three additional factors that should be 
considered by a member in determining whether an institutional customer 
has the capability to evaluate investment risk independently: (1) 
whether the customer is engaged in either the financial industry or the 
business of managing its or others' investments, (2) whether the 
customer has in-house investment professionals charged with 
responsibility for recommending or making investment decisions on 
behalf of the customer, and (3) whether the customer independently 
adopted investment guidelines and whether the customer provides 
explicit investment guidelines to the member broker-dealer.\51\ In 
response, the NASD acknowledged that additional factors may be valuable 
to members in considering whether an institutional customer is capable 
of evaluating investment risk independently or may be pertinent to a 
specific situation.\52\
---------------------------------------------------------------------------

    \51\ See Morgan Stanley Letter, supra note 22. Another commenter 
believed that institutions with the first two characteristics are 
capable of making their own independent investment decisions. See 
SIA Letter Nos. 1 and 2, supra note 22. This commenter suggested 
that the proposal be amended to state that a rebuttable presumption 
exists that institutions are capable of making their own independent 
investment decisions. See SIA Letter Nos. 1 and 2, supra note 22. 
For more discussion on rebuttable presumptions, see infra Section 
(B)(3) of the Summary of Comments.
    \52\ See Securities Exchange Act Release No. 36973, supra note 
14, at 24-25.
---------------------------------------------------------------------------

(ii) Member Determination Regarding Whether the Institutional Customer 
is Exercising Independent Judgment

    One commenter pointed out that one of the factors in determining 
the scope of a member's suitability obligation--the extent to which the 
customer intends to exercise independent judgment--is inconsistent with 
a member's obligation to determine that a customer is making 
independent investment decisions.\53\ In response to this comment, the 
NASD amended the proposal to replace the phrase ``intends to exercise'' 
with the phrase ``is exercising'' to eliminate any confusion.\54\
---------------------------------------------------------------------------

    \53\ See Morgan Stanley Letter, supra note 22.
    \54\ See Securities Exchange Act Release No. 36973, supra note 
14, at 22.
---------------------------------------------------------------------------

    One commenter sought clarification that the lack of a written 
agreement would not work against investors in disputed cases and that 
the inclusion of written or oral understandings as a relevant 
consideration in the proposal does not indicate a preference for such 
agreements.\55\ The NASD responded that whereas developing such 
agreements with a customer may be helpful to a member in determining 
its suitability obligations to the customer, the existence or absence 
of such an agreement is not intended to create a presumption as to 
whether the member has or has not fulfilled its suitability 
obligation.\56\
---------------------------------------------------------------------------

    \55\ See GFOA Letter No. 1, supra note 22.
    \56\ See Securities Exchange Act Release No. 36973, supra note 
14, at 28.
---------------------------------------------------------------------------

    One commenter argued that the factor referencing the ``presence or 
absence of a pattern of acceptance of a member's recommendation'' was 
too broad and should refer only to captive accounts, where a single 
broker-dealer is effectively controlling substantially all investment 
decisions of an account.\57\ The NASD disagreed and stated that the 
presence or absence of a pattern of customer acceptance of a member's 
recommendation should be considered whenever appropriate and reasonable 
and should not be limited to ``captive accounts.''\58\
---------------------------------------------------------------------------

    \57\ See Morgan Stanley Letter, supra note 22.
    \58\ See Securities Exchange Act Release No. 36973, supra note 
14, at 27-28.
---------------------------------------------------------------------------

    One commenter believed that the factor referencing the use by the 
customer of ideas, suggestions and information obtained from other NASD 
members or market professionals may discourage investors from becoming 
more informed and responsible.\59\ The NASD disagreed, stating that 
institutional customers often rely on financial information other than 
that provided by the member and may be required by a fiduciary 
obligation to do so.\60\
---------------------------------------------------------------------------

    \59\ See GFOA Letter No. 1, supra note 22.
    \60\ See Securities Exchange Act Release No. 36973, supra note 
14, at 29.
---------------------------------------------------------------------------

    One commenter believed that a member's consideration of ``the 
extent to which the member has received from the customer current 
comprehensive portfolio information in connection with discussing 
recommended transactions'' may not be prudent for the institutional 
investor with concerns that a member's detailed knowledge of the 
institution's holdings may affect the institution's ability to trade 
certain portions of the portfolio or may adversely affect the market 
for the institution's holdings.\61\ This commenter recommended first, 
replacing this factor with a requirement to provide ``material relevant 
to a particular transaction'' and, second a requirement that the 
broker-dealer make a reasonable request to obtain relevant portfolio or 
investment objectives information. The NASD agreed that any material 
relevant to a particular transaction provided by a customer would 
assist members in fulfilling their suitability obligations under the 
proposed Interpretation. The NASD believes, however, that the 
``material information'' referred to by the commenter would include 
current comprehensive portfolio information in connection with the 
transaction. The NASD also believes that the more specific guideline is 
appropriate even though a customer may not be willing to provide such 
information.\62\
---------------------------------------------------------------------------

    \61\ See GFOA Letter No. 1, supra note 22.
    \62\ See Securities Exchange Act Release No. 36973, supra note 
14, at 30. The NASD notes that all the factors are guidelines and 
the inclusion or absence of any factor is not dispositive of the 
suitability interpretation.
---------------------------------------------------------------------------

(iii) Portfolio Threshold

    One commenter believed that the $10 million portfolio designation 
is contrary to the language in the congressional report on the GSAA and 
contradicts the intent of the suitability rule.\63\ This commenter 
argued that the portfolio designation would be difficult to apply and 
requested clarification on how the standard would be implemented in the 
context of a government unit. The commenter also urged that if the NASD 
retains the portfolio designation, an amount higher than $10 million be 
used because the Interpretation inappropriately could be applied to 
small governmental entities with portfolios that are nominal in the 
context of government operations. The commenter further requested more 
explanation on how institutional investors with a portfolio less than 
the designated amount will be treated. The NASD responded that there is 
greater likelihood that the member could apply the proposed Suitability 
Interpretation to an institutional customer with at least $10 million 
invested in securities in the aggregate in its portfolio and/or under 
management, but it had not intended to create a presumption either 
above or below that aggregate dollar amount that the Interpretation 
will apply to a

[[Page 44109]]

particular institutional customer.\64\ Moreover, the NASD stated that 
in calculating the $10 million test, it intends to look to SEC Rule 
144A for guidance.
---------------------------------------------------------------------------

    \63\ See GFOA Letter No. 1, supra note 22.
    \64\ See Securities Exchange Act Release No. 36973, supra note 
14, at 32.
---------------------------------------------------------------------------

    One commenter recommended that the $10 million threshold not be 
considered for registered investment companies accounts.\65\ This 
commenter argued that all registered investment companies are equally 
subject to the Investment Company Act of 1940 and must operate within 
the same competitive environment in which they are expected to obtain 
professional experienced investment management for their shareholders. 
The commenter argued that an interpretation that liberalizes the 
suitability requirements of its members with respect to larger 
investment companies could inadvertently lead to discrimination against 
smaller investment companies. Another commenter also believed that the 
proposal would have an adverse effect on smaller institutional clients 
by reducing competition for these accounts.\66\
---------------------------------------------------------------------------

    \65\ See ICI Letter, supra note 22.
    \66\ See Edwards Letter, supra note 22.
---------------------------------------------------------------------------

    The NASD responded that the reference to $10 million does not imply 
a definitive threshold that distinguishes capable from non-capable 
institutional customers.\67\ Therefore, the NASD believed that the $10 
million threshold should not result in inadvertent discrimination 
against investment companies or other institutional customers with less 
than $10 million invested in securities.
---------------------------------------------------------------------------

    \67\ See Securities Exchange Act Release No. 36973, supra note 
14, at 34.
---------------------------------------------------------------------------

    One commenter criticized the definition of non-institutional 
customer as being too broad and stated that the information-gathering 
requirement in Article III, Section 2(b) should only apply to customers 
that are not considered institutional customers under the proposed 
Suitability Interpretation.\68\ This commenter argued that a member may 
reasonably conclude that an institutional customer with less than $50 
million in assets is capable of understanding the risks of the 
recommended transaction and intends to exercise reasonable judgment in 
evaluating the member's recommendation, but the member would still have 
to gather information required by Article III, Section 2(b) from that 
customer. The commenter suggested that the definition of non-
institutional customer be amended by eliminating the reference to 
Section 21(c)(4) and incorporating a definition of institutional 
customer in Section 2(b) that is consistent with the proposed 
Suitability Interpretation.
---------------------------------------------------------------------------

    \68\ See PSA Letter No. 1, supra note 22. Pursuant to Article 
III, Section 2(b), prior to the execution of a transaction 
recommended to a non-institutional customer (other than transactions 
with customers where investments are limited to money market mutual 
funds), a NASD member must make reasonable efforts to obtain 
information concerning: (1) the customer's financial status; (2) the 
customer's tax status; (3) the customer's investment objectives; and 
(4) such other information used or considered to be reasonable by 
such member or registered representative in making recommendations 
to the customer. For purposes of this information gathering 
requirement, an institutional customer means: (1) a bank, savings 
and loan association, insurance company, or registered investment 
company; (2) an investment adviser registered under Section 203 of 
the Investment Advisers Act of 1940; or (3) any other entity 
(whether a natural person, corporation, partnership, trust, or 
otherwise) with total assets of at least $50 million.
---------------------------------------------------------------------------

    In response, the NASD stated that the proposed rule change to 
Article III, Section 2(b) of the Rules of Fair Practice is meant to 
distinguish this requirement from the suitability obligations under 
Article III, Section 2(a) of the Rules of Fair Practice and the 
proposed Suitability Interpretation.\69\ The NASD stated that 
fulfilling the suitability obligation under the proposed Suitability 
Interpretation would not reduce the member's other obligation under 
Article III, Section 2(b) to customers that do not qualify as 
institutional accounts under Article III, Section 21(c)(4) of the Rules 
of Fair Practice, even though some of these customers may be considered 
institutional customers according to the proposed Suitability 
Interpretation.
---------------------------------------------------------------------------

    \69\ See Securities Exchange Act Release No. 36973, supra note 
14, at 35.
---------------------------------------------------------------------------

3. Safe Harbor/Rebuttable Presumption
    Several commenters were concerned that the proposal would in effect 
make the member a guarantor of a recommended investment's performance 
and inappropriately shift responsibility for poor investment decisions 
to the broker-dealer.\70\ Some commenters recommended that the proposal 
include a safe harbor for broker-dealers that comply with the proposed 
interpretation.\71\ Other commenters believed that if the institutional 
investor employs an investment professional, the investment 
professional should bear the responsibility for the investment 
decisions it makes.\72\
---------------------------------------------------------------------------

    \70\ See Nomura Letter, Edwards Letter, Morgan Stanley Letter, 
and ABA Letter supra note 22. One commenter was concerned that 
market participants were inappropriately using the suitability 
concept to make the dealer the guarantor of an investment's 
performance. See PSA Letter No. 1, supra note 22.
    \71\ See ABA Letter and Coastal Letter, supra note 22. 
Alternatively, one of the commenters believed that compliance with 
the interpretative guidance should create a rebuttable presumption 
that a member's suitability obligations with respect to 
institutional customers have been satisfied. See ABA Letter, supra 
note 22.
    \72\ See Edwards Letter, Morgan Stanley Letter, PSA Letter No. 
1, and STA Letter, supra note 22. One commenter, however, disagreed 
because there may be variation in the type and degree of services 
offered by a third-party professional to its clients. See GFOA 
Letter No. 2, supra note 22.
---------------------------------------------------------------------------

    In response, the NASD stated that it would not be appropriate to 
create a safe harbor for member's suitability obligations or to change 
or reduce members' obligations under the suitability rule in Article 
III, Section 2 of the Rules of Fair Practice.\73\ The NASD stated that 
there are no safe harbors in the Suitability Interpretation.\74\
---------------------------------------------------------------------------

    \73\ See Securities Exchange Act Release No. 36973, supra note 
14, at 30-31.
    \74\ See id. at 45.
---------------------------------------------------------------------------

    Rather than a safe harbor, one commenter suggested that the 
proposal provide a rebuttable presumption that a member's 
recommendations to institutional customers are suitable.\75\ This 
commenter believed that the existence of an advisory relationship 
should be the primary consideration and that, absent extraordinary 
circumstances, an advisory relationship should be deemed to exist only 
if the parties evidence such an agreement in writing.\76\
---------------------------------------------------------------------------

    \75\ See Nomura Letter, supra note 22. One commenter stated that 
there should be a cutoff for institutions with more than a stated 
amount of assets under management. See STA Letter, supra note 22. 
One commenter argued, however, that there should be no rebuttable 
presumption that recommendations made to institutional investors are 
suitable. See GFOA Letter No. 2, supra note 22. Another commenter 
agreed that the broker-dealers should be held responsible for their 
recommendations to institutional investors. See NASACT Letter, supra 
note 22.
    \76\ See Nomura Letter, supra note 22. Moreover, one commenter 
argued that three particular situations warrant reconsideration as 
determinative factors or rebuttable presumptions that the member has 
fulfilled its suitability obligation: the presence of an investment 
advisor; transactions executed consistent with investment guidelines 
or permitted investment statutes; and the execution of a written 
agreement. See PSA Letter Nos. 1 and 2, supra note 22.
---------------------------------------------------------------------------

    In response, the NASD stated that a member's suitability obligation 
under Article III, Section 2(a) of the Rules of Fair Practice remains 
with the member until fulfilled and therefore, the creation of a 
rebuttable presumption through the fulfillment of certain procedures 
would not be appropriate.\77\ Moreover, the NASD stated that such a 
rebuttable presumption would only be acceptable if a definable class of 
institutional investors could be identified that would not need the 
protection of the NASD's

[[Page 44110]]

suitability rule under all conceivable circumstances. The NASD was 
unable to define such a class.\78\
---------------------------------------------------------------------------

    \77\ See Securities Exchange Act Release No. 36973, supra note 
14, at 40.
    \78\ See id. at 42.
---------------------------------------------------------------------------

4. Additional Obligations on Members
    Several commenters argued that the NASD's proposed Suitability 
Interpretation would impose new or additional duties on its members. 
One commenter was concerned that the proposal would create an 
obligation to document affirmative determinations of the factors 
referenced under the two principal considerations because it believed 
that the proposal implies that NASD examiners will expect to see an 
affirmative determination on all or some of the described criteria for 
compliance purposes.\79\ Another commenter believed that these analyses 
will greatly increase a member's responsibility to gather detailed 
information about its institutional customers and to keep extensive 
records of any information gathered.\80\
---------------------------------------------------------------------------

    \79\ See Nomura Letter, supra note 22.
    \80\ See ABA Letter, supra note 22.
---------------------------------------------------------------------------

    One commenter requested that the NASD incorporate explicit language 
stating that it did not intend to create: (1) a checklist for NASD 
compliance examinations; (2) an affirmative obligation on NASD members 
to make trade-by-trade or continual suitability determinations based on 
the designated considerations; or (3) new NASD member suitability 
determination documentation or record maintenance requirements.\81\
---------------------------------------------------------------------------

    \81\ See SIA Letter Nos. 1 and 2, supra note 22.
---------------------------------------------------------------------------

    On the other hand, other commenters supported imposing additional 
obligations on members. One commenter suggested that the proposal 
require the broker-dealer to provide certain specific types of 
information to customers with regard to specific transactions such as 
an instrument's behavior under a variety of conditions, types of risk 
incurred with certain instruments, and valuation information.\82\ This 
commenter also supported the inclusion of an affirmative duty to 
inquire about a customer's risks and constraints, including any 
investment policies.\83\
---------------------------------------------------------------------------

    \82\ See GFOA Letter No. 1, supra note 22.
    \83\ See GFOA Letter No. 2, supra note 22.
---------------------------------------------------------------------------

    The NASD responded that it was not imposing through the proposed 
Suitability Interpretation additional duties on members that are not 
already imposed by current Article III, Section 2 of the Rules of Fair 
Practice, general anti-fraud principles in Section 10(b) of the Act and 
other provisions of the federal securities laws, or in Article III, 
Section 18 of the NASD's Rules of Fair Practice.\84\ The NASD stated 
that Article III, Section 2(a) of the Rules of Fair Practice does not 
contain books and records requirements and, similarly, the proposed 
Suitability Interpretation does not contain books and records 
requirements.\85\ The NASD warned, however, that members are 
responsible for demonstrating the fulfillment of their suitability 
obligation under Article III, Section 2(a) in NASD examinations and 
that members would have the same responsibility under the proposed 
Suitability Interpretation. The NASD also stated that it had intended 
to eliminate the appearance that the listed factors create an 
evidentiary checklist for NASD compliance review. The NASD stated that 
the responsibilities of the member are limited under Article III, 
Section 2(a) of the Rules of Fair Practice in that the member is not 
the guarantor of the investment nor reponsible for the absence of 
information not provided by the institutional customer.
---------------------------------------------------------------------------

    \84\ See Securities Exchange Act Release No. 36973, supra note 
14, at 25.
    \85\ See id. at 38.
---------------------------------------------------------------------------

V. Discussion

    The government securities market, widely considered to be the 
largest and most liquid securities market in the world, has enabled the 
U.S. government to meet its large financing needs in an effective 
manner. In 1991, however, certain events threatened the public 
confidence in the fairness and integrity of this market and prompted 
the Treasury Department, the Board of Governors of the Federal Reserve 
System and the Commission to undertake an informal review of the 
government securities market.\86\ As a result of this review, and 
Congressional inquiries into the government securities market in 
general, in 1993 Congress decided to modify the limited regulatory 
structure in the Government Securities Act of 1986 by enacting the 
GSAA.
---------------------------------------------------------------------------

    \86\ The Treasury Department, the Board of Governors of the 
Federal Reserve System, and the Commission produced a report on this 
review of the government securities market. See Joint Report on the 
Government Securities Market (Jan. 1992).
---------------------------------------------------------------------------

    In the GSAA, Congress provided the NASD and bank regulators with 
the authority to issue rules aimed at preventing fraudulent or 
manipulative acts and practices and to promote just and equitable 
principles of trade in the government securities market.\87\ Pursuant 
to this legislation, the NASD has proposed rule changes to impose for 
the first time various provisions of the Rules of Fair Practice to 
transactions in exempted securities, including government securities, 
other than municipals. The GSAA also stimulated the NASD to provide 
further guidance to members on their suitability obligations in Section 
2, Article III when making recommendations to institutional 
customers.\88\
---------------------------------------------------------------------------

    \87\ H.R. Rep. 103-255, 103d Cong., 1st Sess. (1993) (Congress 
believed that ``it is appropriate to extend normal sales practice 
standards and other registered securities association rules to 
transactions in the government securities market by removing the 
statutory restrictions on the authority of such associations in the 
government securities market'').
    \88\ The Office of the Comptroller of the Currency (``OCC''), 
the Federal Deposit Insurance Corporation (``FDIC''), and the Board 
of Governors of the Federal Reserve System (``Board'') also have 
solicited comment on rules, largely similar to those proposed by the 
NASD, to apply to government securities brokers and dealers under 
the jurisdiction of these agencies. See Government Securities Sales 
Practices, 61 FR 18470 (Apr. 25, 1996) (joint notice of proposed 
rulemaking).
---------------------------------------------------------------------------

    For the reasons discussed below, the Commission has determined that 
the NASD's proposals are consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the NASD and, in 
particular, the requirements of Section 15A \89\ and the rules and 
regulations thereunder.\90\ The Commission believes that the proposed 
rule change is consistent with the Section 15A(b)(6) requirements that 
the rules of the association be designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, 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.\91\
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78o-3.
    \90\ The GSAA also requires the Commission to consult with the 
Treasury Department prior to the adoption of the NASD proposal. The 
Commission has consulted with the Treasury Department.
    \91\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

A. Application of the Rules of Fair Practice to Exempted Securities 
Except Municipals and Merger of Government Securities Rules

    To implement the authority conferred by the GSAA to address abusive 
and manipulative practices in the government securities market, the 
NASD has proposed to merge certain provisions of its current Government 
Securities Rules into the Rules of Fair Practice, and to apply certain 
provisions of the Rules of Fair Practice to exempted securities (except 
municipals) for the first time. The Commission believes that the 
application of the various sections of the NASD's Rules of Fair 
Practice, which the NASD deems to be appropriate and necessary for 
regulating

[[Page 44111]]

transactions in exempted securities, including government securities, 
other than municipals, is consistent with the purposes of the Act and 
the intention of Congress in enacting the GSAA.\92\
---------------------------------------------------------------------------

    \92\ See H.R. Rep. 103-255, 103d Cong., 1st Sess. (1993).
---------------------------------------------------------------------------

    Under the proposal, the NASD has determined to exempt government 
securities transactions from certain provisions of the Rules of Fair 
Practice. The NASD found some provisions not to be applicable to the 
government securities market while others will be considered for 
further review. A few of the provisions under further review are 
especially worthy of note.
    First, the NASD acknowledged that its current front running 
interpretation applies only to equity securities. The NASD has 
committed, however, to review the application of its front running 
interpretation to the government securities market because the NASD 
believes that front running may occur in this market under certain 
circumstances.\93\ Moreover, in the interim, the NASD has represented 
that actions for front running conduct occurring in the government 
securities market may be brought under its rule requiring members to 
adhere to just and equitable principles of trade.\94\
---------------------------------------------------------------------------

    \93\ See Securities Exchange Act Release No. 36973, supra note 
14, at 12.
    \94\ See id.
---------------------------------------------------------------------------

    Second, with the proposed rule change, the NASD will not apply its 
prohibitions against trading ahead of customer limit orders and trading 
ahead of research reports to the government securities market. As with 
the front running interpretation, the NASD intends to review the 
application of these interpretations to the government securities 
market because the NASD believes that conduct addressed by the 
interpretations may occur in this market under certain 
circumstances.\95\ In the meantime, the NASD will bring action for such 
conduct under its just and equitable principles of trade rule.
---------------------------------------------------------------------------

    \95\ See id. at 13.
---------------------------------------------------------------------------

    The Commission believes that the NASD's determination to apply 
certain of its general rules, only formerly applicable to equity or 
corporate debt securities, to government securities is consistent with 
the Act, and that the NASD has made a reasonable determination 
regarding which of its general rules should be applicable to government 
securities. With respect to those provisions of the Rules of Fair 
Practice that the NASD plans to consider further for application to the 
government securities markets, the Commission anticipates that the NASD 
will undertake a prompt and thorough evaluation and submit proposed 
rule changes with the Commission as appropriate.

B. Suitability Interpretation

    The concept of suitability, rooted in notions of just and equitable 
principles of trade and the protection of investors, plays an important 
role in the scheme of the federal securities laws. Prohibitions against 
making unsuitable recommendations arise under the rules of all self-
regulatory organizations.\96\ They lay the foundation for good and 
sound business practices by broker-dealers and help avoid potential 
abusive sales practices regarding customers. The NASD's articulation of 
the suitability principles as set forth in Article III, Section 2 of 
the Rules of Fair Practice has applied to members' recommendations 
since the inception of the NASD. Article III, Section 2(a) requires 
that in recommending to a customer the purchase, sale or exchange of 
any security, a member must have reasonable grounds for believing that 
the recommendation is suitable for such customer upon the basis of the 
facts, if any, disclosed by such customer as to his other security 
holdings and financial situation and needs. With the enactment of the 
GSAA, and NASD has decided to provide further guidance to members on 
their suitability obligations and has proposed guidelines for its 
members regarding how members may fulfill their ``customer-specific'' 
suitability obligations when making recommendations to institutional 
customers.\97\
---------------------------------------------------------------------------

    \96\ See, e.g., New York Stock Exchange Rule 405, NYSE Guide 
(CCH) para. 2405; American Stock Exchange Rule 411, Amex Guide (CCH) 
para. 9431. See also Duker & Duker, 6 S.E.C. 386, 388 (1939). As 
part of the obligation of fair dealing, all broker-dealers are 
required to have a reasonable basis for believing that their 
securities recommendations are suitable for the customer in light of 
the customer's financial needs, objectives, and circumstances.
    \97\ The NASD Suitability Interpretation will be applicable to 
all securities, except for municipals. Municipal Securities 
Rulemaking Board (``MSRB'') rule G-19 governs the suitability 
obligations for municipal securities. Like Article III, Section 2 of 
the Rules of Fair Practice, MSRB rule G-19 makes no distinction 
between institutional and non-institutional customers in requiring 
that a broker, dealer, or municipal securities dealer must have 
reasonable grounds for believing that a recommendation is suitable.
---------------------------------------------------------------------------

    The current version of the Suitability Interpretation is the 
product of the NASD's extensive consultation with broker-dealers, 
investors and other participants in the securities industry over a 
period of several years. It reflects much discussion and great 
diversity of input by various parties. The first draft of the proposed 
Suitability Interpretation was published for comment in Notice to 
Members 94-62 (August 1994). Fourteen commenters submitted 15 comment 
letters on the draft proposals. In response to the comments received, 
the NASD amended the proposal and published a second draft for comment 
in Notice to Members 95-21 (April 1995). Sixteen comments were received 
on the second draft. The NASD, against, amended the proposal 
Suitability Interpretation in response to the comments received, before 
filing a proposed interpretation with the Commission. The NASD provided 
further clarification and amendments to the proposal in March 1996, 
when Amendment No. 3 to the proposal was filed. Thus, the final 
proposal currently before the Commission reflects the NASD's effort to 
consider all comments on the numerous versions of the proposal and 
balance the issues raised in those comments.
    The NASD's Suitability Interpretation is predicated on a 
determination that the two most important considerations in determining 
the scope of a member's suitability obligation in making 
recommendations to an institutional customer are (1) the customer's 
capability to evaluate investment risk independently, and (2) the 
extent to which the customer is exercising independent judgment. The 
Suitability Interpretation further describes factors that may be 
relevant in a members evaluation of these two important considerations. 
The NASD has emphasized that these factors are guidelines that will be 
utilized to determine whether a member has fulfilled suitability 
obligations with respect to a specific institutional customer 
transaction and that the absence or inclusion of any of these factors 
is not dispositive of the suitability determination.
    The Commission believes that the NASD's approach to determining the 
scope of a member's suitability obligation in making recommendations to 
an institutional customer appropriately responds to the varied nature 
of institutional customers and the varied significance of a member's 
recommendation for different institutional customers. The NASD 
acknowledges, as does the Commission, that the relationship between a 
broker-dealer and an institutional customer generally may be different 
in important respects from the relationship a broker-dealer has with a 
non-institutional investor. In the latter circumstance, a broker-dealer 
frequently has knowledge about the investment and its risks and costs 
that are not possessed by or easily available to the investor. Some

[[Page 44112]]

sophisticated institutional customers, however, may in fact possess 
both the capability to understand how a particular securities 
investment could perform, as well as the desire to make their own 
investment decisions, without reliance on the knowledge or resources of 
the broker-dealer. Other investors that meet a definition of 
``institutional customer'' may not possess the requisite capability to 
understand the particular investment risk, or may not be exercising 
independent judgment in making a particular investment decision, and so 
may be largely dependent on the broker-dealer's analysis and 
recommendation in evaluating whether to purchase a recommended 
security.
    The NASD proposal recognizes the varied nature of investor 
profiles, even among investors that meet some definition of 
``institutional investor.'' It accommodates a wide range of 
relationships because it does not establish rigid thresholds or 
requirements, but rather provides its members with some reasonable 
factors by which an NASD member can determine the nature of its 
relationship with a customer. The Interpretation correctly recognizes 
that there can be instances in which an institutional customer 
possesses a general capability to understand certain kinds of 
investments, but does not have the requisite capability to understand 
the particular investment under consideration. In such a circumstance, 
the NASD appropriately notes that a broker-dealer's suitability 
obligation would not be diminished based solely on the financial 
wherewithal of the customer.
    The Commission also believes that the factors enumerated in the 
Interpretation, which could be relevant to the two considerations, 
provide members with appropriate points to consider in satisfying their 
suitability obligations. Some commenters were concerned about the 
relevance of, and the proper weight to be given to, the considerations 
listed. Some commenters also expressed concern regarding the specific 
application of these considerations.\98\ The NASD acknowledges that 
these considerations are not necessarily the only relevant factors, but 
merely guidelines for use in determining whether a member has fulfilled 
its suitability obligations with respect to a specific institutional 
customer transaction. They neither create nor reduce a member's 
suitability obligation and their relevance would vary depending on 
numerous circumstances.\99\ The Commission concurs with the NASD in 
this regard. Moreover, these enumerated factors are not meant to create 
a checklist, which the Commission would consider inappropriate in these 
circumstances because it could lead to a mechanical application of the 
Interpretation without adequate consideration by the broker-dealer of 
whether the customer understands the transaction or product.
---------------------------------------------------------------------------

    \98\ For example, some commenters expressed concern about the 
$10 million portfolio designation. A few commenters believed that 
such a threshold may lead to discrimination against smaller 
institutions or investments companies. One commenter believed that 
the GSAA prohibited such a portfolio designation. The NASD has 
represented that it had not intended to create a presumption that 
the Interpretation would apply to a particular institutional 
customer either above or below the aggregate dollar amount or to 
imply that the $10 million constituted a definitive threshold in 
determining whether a broker-dealer's suitability obligation was 
satisfied in dealing with a particular institution. See Securities 
Exchange Act Release No. 36973, supra note 14, at 32, 34. The 
Commission agrees that the $10 million portfolio designation will 
not discriminate against certain institutional customers nor is it 
contrary to the language of the Congressional report on the GSAA. 
The $10 million portfolio designation does not create a presumption 
that institutions that exceed the $10 million portfolio amount 
satisfy the Interpretation's factors and thus are not covered by the 
protections of the suitability rule; rather, the Interpretation 
indicates that the analysis of the suitability obligation to be 
conducted using the factors set forth in the interpretation is more 
appropriate for these larger institutions than for institutions with 
a smaller portfolio.
    \99\ See Securities Exchange Act Release No. 36973, supra note 
14, at 27.
---------------------------------------------------------------------------

    Some commenters, believing that the suitability responsibility is 
already unevenly placed on broker-dealers, supported inclusion in the 
Suitability Interpretation of a safe harbor or a rebuttable 
presumption. In keeping with its purpose to provide guidance and not to 
create or reduce a member's suitability obligations, the NASD did not 
create a safe harbor or provide for a rebuttable presumption in the 
Suitability Interpretation.\100\ In response to the arguments of some 
industry members that if an investor employs an investment 
professional, that professional should wholly bear the responsibility 
for the investment decision it makes, the NASD clarified that while the 
institution would still be covered by the suitability rule, the factors 
analysis of the proposed Suitability Interpretation would apply to any 
delegated agents of customers, including any professional advisers that 
an investor may employ.
---------------------------------------------------------------------------

    \100\ See id. at 40, 45.
---------------------------------------------------------------------------

    The Commission believes that the NASD's decision not to create a 
safe harbor or rebuttable presumption is consistent with the purposes 
of the Act. A safe harbor or a rebuttable presumption that applied to 
institutions that were likely to rely on a broker-dealer's guidance 
regarding a security could lead to serious abuses that are inconsistent 
with the purposes of the Act. For example, a safe harbor could allow a 
broker-dealer to recommend a risky security to an institutional 
investor without consideration of the appropriateness of the investment 
for the investor, and despite knowing that the customer did not 
understand the product. Moreover, a safe harbor or a rebuttable 
presumption that all institutions with similar amounts to invest 
possess similar or equal financial acumen, which has not proven to be 
the case. As one commenter noted, ``institutional customers'' could be 
educational institutions, churches, charities, or governments, which 
range from small special districts to large state governments, and the 
characteristics and portfolios of these customers vary widely.\101\ A 
safe harbor or a rebuttable presumption would depend on the ability of 
the NASD to define objectively a class of institutional investors that 
uniformly would not need the protections of the NASD's suitability 
rule.
---------------------------------------------------------------------------

    \101\ See GFOA Letter No. 2, supra note 22.
---------------------------------------------------------------------------

    The NASD, however, has not sought to define such a class. Rather, 
the NASD has taken a flexible approach in defining the term 
``institutional investor'' by not including financial criteria in the 
term; for purposes of the Interpretation, an institutional customer may 
be any entity other than a natural person. The Suitability 
Interpretation potentially would apply to all institutional investors, 
though more appropriately to institutional investors with portfolios of 
at least $10 million in securities. The NASD believes that excluding 
institutional investors from the protections of the suitability rule 
based on objective financial criteria would arbitrarily discriminate 
among institutional investors based on factors such as asset size, 
portfolio size or institutional type that are not necessarily 
determinative of financial sophistication. The Commission believes that 
the NASD's choice not to rely on objective criteria that may mask what 
is really an unsophisticated investor is reasonable in the context of a 
standard that incorporates factors that reflect the nature of the 
investor, and where the suitability of the recommendation itself 
depends on the nature of the investor. Categorizing investors by an 
isolated financial criteria may improperly attribute the capability to 
evaluate investment risk independently and the exercise of

[[Page 44113]]

independent judgment to an customer without an appropriate analysis of 
the investor's true characteristics.\102\
---------------------------------------------------------------------------

    \102\ In testimony before the Subcommittee on Telecommunications 
and Finance Committee on Commerce, SEC Chairman Arthur Levitt 
testified against a provision in the proposed legislation that would 
crate a presumption that a broker-dealer is not liable for 
investment decisions of institutional clients unless the parties 
have contracted to the contrary. Chairman Levitt testified that the 
presumption under the federal securities laws that broker-dealers 
generally are responsible for making suitability recommendations, 
whether their clients are institutional or individual investors, 
should be maintained. See Testimony of Arthur Levitt, Chairman, U.S. 
Securities and Exchange Commission, Concerning H.R. 2131, The 
``Capital Markets Deregulation and Liberalization Act of 1995,'' 
before the Subcomm. on Telecommunications and Finance Committee on 
Commerce (Nov. 30, 1995).
---------------------------------------------------------------------------

    Moreover, in view of the great diversity of institutional 
customers, the Interpretation affords broker-dealers the flexibility to 
negotiate understandings and terms with a particular customer. Such 
agreements, freely negotiated between consenting parties, can be useful 
in establishing, prior to a transaction, the obligations and 
responsibilities of both parties. The NASD's approach assists broker-
dealers and customers to define their own expectations and roles with 
respect to their specific relationship.
    Some industry members were concerned that the Interpretation would 
create greater confusion and uncertainty and additional duties on 
broker-dealers. Industry members were especially concerned that the 
proposed Interpretation would impose an obligation on members to 
document and retain extensive records of information gathered or expose 
them to NASD compliance examinations based on a ``checklist.'' Again, 
the NASD represented that it was not imposing through the proposed 
Interpretation additional duties on members that are not already 
imposed by the NASD's suitability rules, general anti-fraud provisions 
of the federal securities laws, or Article III, Section 18 of the 
NASD's Rules of Fair Practice. The NASD confirmed that the proposed 
Interpretation does not impose a books and records requirement nor does 
it create an evidentiary checklist for NASD compliance review. The 
NASD's reassurances that these considerations are provided merely for 
guidance purposes and not to impose any additional duties or to reduce 
any existing obligations should alleviate the commenters' concerns 
regarding the specific application of the Interpretation. Moreover, the 
NASD has repeatedly indicated that the Interpretation does not make the 
broker-dealer a guarantor, which the Commission believes is 
appropriate.
    Moreover, the NASD has committed to continuing its examination of 
members for compliance with the suitability obligations under Article 
III, Section 2(a) and, upon the approval of the Interpretation, 
members' compliance with the Interpretation.\103\ The Commission 
expects the NASD to extend its examinations to members' compliance with 
the Interpretation once it becomes effective.
---------------------------------------------------------------------------

    \103\ See Securities Exchange Act Release No. 36973, supra note 
14, at 38.
---------------------------------------------------------------------------

    Finally, the Commission finds good cause for approving Amendment 
Nos. 4 and 5 to the proposed rule change prior to the thirtieth day 
after the date of publication of notice of filing thereof. The 
Exchange's proposal was published in the Federal Register for the full 
statutory period.\104\ Amendment No. 4 merely clarifies the new 
numbering of the NASD Manual and proposes to apply Section 50, Article 
III, to transactions in exempted securities (except municipals). The 
NASD's adoption of reporting requirements in Section 50, Article III, 
was the product of a review by the NASD and the New York Stock 
Exchange, which was undertaken because of concerns on the part of the 
Commission and others over the frequency and severity of sales 
practices abuses.\105\ The Commission approved NASD adoption of Section 
50, Article III stating that the reporting requirements will provide 
important regulatory information that will assist in the detection and 
investigation of sales practice violations. Therefore, the Commission 
believes that applying this provision to transactions in exempted 
securities, including government securities, other than municipals is 
consistent with Congress' mandate to the NASD to extend its sales 
practice standards and other rules to address abusive and manipulative 
practices in the government securities market. Moreover, Amendment No. 
5 merely clarifies and reminds members that its rules requiring members 
to adhere to just and equitable principles of trade apply to conduct 
that may violate the Fair Prices and Commissions provision and the 
Mark-Up Policy. The Commission believes that this clarification is not 
substantive because the rule requiring that members adhere to just and 
equitable principles of trade would have applied to such conduct 
regardless of this clarification. Based on the above, the Commission 
finds that there is good cause, consistent with Section 6(b)(5) of the 
Act, to accelerate approval of Amendment Nos. 4 and 5.
---------------------------------------------------------------------------

    \104\ See Securities Exchange Act Release Nos. 36383 and 36973, 
supra notes 9 and 14.
    \105\ See Securities Exchange Act Release No. 36211 (Sept. 8, 
1995) 60 FR 48182.
---------------------------------------------------------------------------

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 4 and 5. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street N.W., Washington, 
D.C. 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 at the Commission's Public Reference Section, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-NASD-95-39 and 
should be submitted by September 17, 1996.

VII. Conclusion

    In conclusion, the Commission believes that the NASD's proposal to 
impose the Rules of Fair Practice to transactions in exempted 
securities other than municipals, and to provide further guidance to 
members on their suitability obligations in Section 2, Article III when 
making recommendations to institutional customers is consistent with 
the purposes of the Act and the GSAA. Especially with respect to the 
proposed suitability Interpretation, the NASD has undergone an 
extensive consultative process, whereby interested parties were able to 
participate in the development of the Interpretation. The Commission 
believes that the suitability Interpretation is a reasoned approach to 
the concept of suitability, which fosters an environment for dialogue 
between broker-dealers and customers regarding the nature of their 
relationship, and, therefore, should promote the protection of 
investors.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\106\ that the proposed rule change (SR-NASD-95-39) is approved.

    \106\ 15 U.S.C. 78s(b)(2).

---------------------------------------------------------------------------

[[Page 44114]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\107\
---------------------------------------------------------------------------

    \107\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.

                 Exhibit 1.--Old-to-New Conversion Chart                
------------------------------------------------------------------------
                Former provision                        New number      
------------------------------------------------------------------------
By-Laws........................................  Unchanged              
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
Schedules to the by-laws:                                               
  Schedule A...................................  Unchanged              
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
  Schedule C...................................  1000                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
II. Registration of Principals.................  1020                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
(2) Categories of Principal Registration.......  1022                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
VI. Persons Exempt from Registration...........  1060                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
Rules of fair practice.........................  Titled deleted         
Article I:                                                              
  Adoption and application.....................  0110                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
4. Effect on Transactions in Exempted            0114                   
 Securities.                                                            
5. Applicability...............................  0115                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
                                                                        
                              CONDUCT RULES                             
                                                                        
                   Article III--Rules of Fair Practice                  
1. Business Conduct of Members.................  2110                   
  Interpretation on Execution of Retail          2320                   
   Transactions in the Over-the-Counter Market.                         
  Interpretation on Prompt Receipt and Delivery  3370                   
   of Securities.                                                       
  Interpretation on Forwarding of Proxy and      2260                   
   Other Materials.                                                     
  Interpretation on ``Free-Riding and            IM-2110-1              
   Withholding''.                                                       
  Interpretation on Trading Ahead of Customer    IM-2110-2              
   Limit Orders.                                                        
  Interpretation on Front Running Policy.......  IM-2110-3              
  Interpretation on Trading Ahead of Research    IM-2110-4              
   Reports.                                                             
2. Recommendations to Customers................  2310                   
  Policy on Fair Dealing with Customers........  IM-2310-2              
3. Charges for Services Performed..............  2430                   
4. Fair Prices and Commissions.................  2440                   
  Interpretation on NASD Mark-Up Policy........  IM-2240                
5. Publication of Transactions and Quotations..  3310                   
  Interpretation on Manipulative and Deceptive   IM-3310                
   Quotations.                                                          
6. Offers at Stated Prices.....................  3320                   
  Policy with Respect to Firmness of Quotations  IM-3320                
7. Disclosure of Price in Selling Agreements...  2770                   
8. Securities Taken in Trade...................  2730                   
  Interpretation on Safe Harbor and Presumption  IM-2730                
   of Compliance.                                                       
9. Use of Information Obtained in Fiduciary      3120                   
 Capacity.                                                              
10. Influencing or Rewarding Employees of        3060                   
 Others.                                                                
11. Payment Designed to Influence Market         3330                   
 Prices, Other than Paid Advertising.                                   
12. Disclosure on Confirmations................  2230                   
  Explanation on ``Third Market Confirmations''  IM-2230                
13. Disclosure of Control......................  2240                   
14. Disclosure of Participation or Interest in   2250                   
 Primary or Secondary Distribution.                                     
15. Discretionary Accounts.....................  2510                   
16. Offering ``At the Market''.................  2760                   
17. Solicitation of Purchases on an Exchange to  2780                   
 Facilitate a Distribution of Securities.                               
18. Use of Fraudulent Devices..................  2120                   
19. Customers' Securities or Funds.............  2330                   
    Explanation of Paragraph (d) of Section 19.  IM-2330                
20. Installment or Partial Payment Sales.......  2450                   

[[Page 44115]]

                                                                        
21. Books and Records..........................  3110                   
22. Disclosure of Financial Condition..........  2270                   
  Resolution on Requirements of Members to       2910                   
   Furnish Recent Financial Statement to Other                          
   Members.                                                             
23. Net Prices to Persons Not in Investment      2410                   
 Banking or Securities Business.                                        
24. Selling Concessions........................  2740                   
  Interpretation on Services in Distribution...  IM-2740                
25. Dealing with Non-Members...................  2420                   
  Interpretation on Transactions Between         IM-2420-1              
   Members and Non-Members.                                             
26. Investment Companies.......................  2830                   
27. Supervision................................  3010                   
28. Transactions for or by Associated Persons..  3050                   
29. Variable Contracts of an Insurance Company.  2820                   
30. Margin Accounts............................  2520                   
31. Securities ``Failed to Receive'' and         3210                   
 ``Failed to Deliver''.                                                 
32. Fidelity Bonds.............................  3020                   
33. Options....................................  2860                   
  Interpretation on Opening Accounts for         IM-2860-2              
   Options Customers.                                                   
34. Direct Participation Programs..............  2810                   
35. Communications with the Public.............  2210                   
  Guidelines Regarding Communications with the   IM-2210-1              
   Public about Collateralized Mortgage                                 
   Obligations (CMOs).                                                  
  Guidelines Regarding Communications with the   M-2210-2               
   Public about Variable Life Insurance and                             
   Variable Annuities.                                                  
  Guidelies for the Use of Rankings in           M-2210-3               
   Investment Companies Advertisements and                              
   Sales Literature.                                                    
35A. Options Communications with the Public....  2220                   
36. Transactions with Related Persons..........  2750                   
  Interpretation on Transactions with Related    IM-2750                
   Persons.                                                             
37. [Reserved].................................                         
38. Regulation of Activities of Members          3130                   
 Experiencing Financial and/or Operational                              
 Difficulties.                                                          
  Explanation on Restrictions on a Member's      IM-3130                
   Activity.                                                            
39. Approval of Change in Exempt Status under    3140                   
 SEC Rule 15c3-3.                                                       
40. Private Securities Transactions............  3040                   
41. Short-Interest Reporting...................  3360                   
42. Prohibition on Transactions During Trading   3340                   
 Halts.                                                                 
43. Outside Business Activities................  3030                   
44. The Corporate Financing Rule...............  2710                   
45. Customer Account Statements................  2340                   
46. Adjustment of Open Orders..................  3220                   
47. Clearing Agreements........................  3230                   
48. Short Sale Rule............................  3350                   
  Interpretation on Short Sale Rule............  IM-3350                
49. Primary Nasdaq Market Maker Standards......  4612                   
50. Reporting Requirements.....................  3070                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
                                                                        
                 COMPLAINTS INVESTIGATIONS AND SANCTIONS                
                                                                        
                         Article IV--Complaints                         
1. Availability to Customer of Certificate, By-  8110                   
 Laws, Rules and Code of Procedure.                                     
2. Complaints by Public Against Members for      8120                   
 Violations of Rules.                                                   
3. Complaints by District Business Conduct       8130                   
 Committees.                                                            
4. Complaints by the Board of Governors........  8140                   
5. Reports and Inspection of Books for Purpose   8210                   
 of Investigating Complaints.                                           
  Resolution on Suspension of Members for        8220                   
   Failure to Furnish Information Duly                                  
   Requested.                                                           
                                                                        
                          Article V--Penalties                          
1. Sanctions for Violation of the Rules........  8310                   
  Interpretation on the Effect of a Suspension   IM-8310-1              
   or Revocation of the Registration, if Any,                           
   of a Person Associated with a Member or the                          
   Barring of a Person from Further Association                         
   with a Member.                                                       
  Resolution on Notice to Membership and Press   IM-8310-2              
   of Suspensions, Expulsions, Revocations, and                         
   Monetary Sanctions and Release of Certain                            
   Information Regarding Disciplinary History                           
   of Members and Their Associated Persons.                             
2. Payment of Fines, Other Monetary Sanctions,   8320                   
 or Costs.                                                              
3. Costs of Proceedings........................  8330                   
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
Code of procedure..............................  9000                   
Article II:                                                             
  Disciplinary Actions by District Business      9200                   
   Conduct Committees, The Market Surveillance                          
   Committee and Others.                                                
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
10. Acceptance, Waiver and Consent, Minor Rule   9217                   
 Violations And Summary Complaint Procedures.                           
                                                                        

[[Page 44116]]

                                                                        
*                  *                  *                  *              
                  *                  *                  *               
Appendix:                                                               
  Violations Appropriate For Disposition Under   IM-9217                
   the Minor Rule Violations Plan.                                      
------------------------------------------------------------------------

[FR Doc. 96-21757 Filed 8-26-96; 8:45 am]
BILLING CODE 8010-01-M