[Federal Register Volume 62, Number 67 (Tuesday, April 8, 1997)]
[Notices]
[Pages 16884-16886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8929]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38468; File No. SR-NASD-96-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASD Regulation, Inc. Relating to the Submission of 
Information in Electronic Form

April 2, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 
17, 1997,\1\ NASD Regulation, Inc. (``NASDR'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASDR. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ On December 17, 1996, the NASDR filed the proposed rule 
change with the Commission. However, Amendment No. 1, modifying the 
rule language, replaces the original rule filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDR is proposing to amend Rule 8210 of the Procedural Rules of 
the National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') to permit the NASD to request that members provide 
regulatory information in electronic form (where the member maintains 
its records in electronic form) and to establish electronic submission 
programs for regularly filed regulatory information. Below is the text 
of the proposed rule change. Proposed new language is in italics.

 Procedural Rules

8000. Complaints, Investigations and Sanctions
* * * * *
8200. Investigations
8210. Reports and Inspection of Books for Purpose of Investigating 
Complaints
    (a) For the purpose of any investigation, or determination as to 
filing a complaint or any hearing of any complaint against any member 
of the Association or any person associated with a member made or held 
in accordance with the Rule 9000 Series, or made or held by another 
domestic or foreign self-regulatory organization, association, 
securities or contract market or regulator of such markets, with whom 
the Association has entered into an agreement providing for the 
exchange of information and other forms of material assistance solely 
for market surveillance, investigative, enforcement or other regulatory 
purposes, any District Business Conduct Committee, the Market 
Surveillance Committee, or the Board of Governors, or any duly 
authorized member or members of any such Committees or Board or any 
duly authorized agent or agents of any such Committee or Board shall 
have the right:
    (1) to require any member of the Association, person associated 
with a member, or person no longer associated with a member when such 
person is subject to the Association's jurisdiction to report, either 
informally or on the record, orally or in writing or electronically (if 
the requested information is maintained in electronic form) with regard 
to any matter involved in any such investigation or hearing, and
    (2) to investigate the books, records and accounts of any such 
member or person with relation to any matter involved in any such 
investigation or hearing.
    (b) No such member or person shall fail to make any report as 
required in this Rule, or fail to permit any inspection of books, 
records and accounts as may be validly called for under this Rule. Any 
notice requiring an electronic, oral, or written report or calling for 
an inspection of books, records and accounts pursuant to this Rule 
shall be deemed to have been received by the member or person to whom 
it is directed by the mailing thereof to the last known address of such 
member or person as reflected on the Association's records.
    (c) In carrying out its responsibilities under this paragraph, the 
Association may, as approved by the Commission, establish programs for 
the submission of information to the Association on a regular basis 
through a direct or indirect electronic interface between the 
Association and members.
* * * * *

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

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

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

    (a) Various NASD and SEC rules require members to maintain records 
of compliance so that information will be available to NASD staff for 
on-site examination. In addition, members are required by NASD and SEC 
rules to submit certain information to the NASD on a regular basis or 
on request. The various rules and regulations of the Municipal 
Securities Rulemaking Board (``MSRB'') also impose recordkeeping 
requirements on members of the Association. Rule 8210 of the 
Association's Conduct Rules (formerly, Article IV, Section 5 of the 
Rules of Fair Practice) requires members to respond to any NASD request 
for information for the purpose of any investigation or determination 
as to the filing of a

[[Page 16885]]

complaint or any hearing of a complaint and to submit such information 
``orally or in writing.'' This provision covers the Association's 
request for investigatory information in the context of an individual 
examination or investigation of a member firm and also covers the 
Association's programs for the receipt of regular reports from members.
    Amendment to Obtain Information in Electronic Form--In recent 
years, members have increasingly maintained their trading records in 
computer-based technology (``electronic'') rather than hard copy form, 
particularly as the rapidly expanding volume of securities transactions 
has required the speed of electronic processing. At this time, most 
members store their primary trading records in some form of electronic 
storage media.\2\ Such electronic storage capability is provided either 
in-house or through a service bureau. Relatively few members maintain 
their records only in manual form.
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    \2\ The Association's findings are based on technology surveys 
conducted of the membership in connection with establishing 
electronic submission programs with respect to the filing of FOCUS 
Reports, Blue Sheet Reports, Short Interest Reports, Forms U-4 and 
U-5, and Free-Riding and Withholding Questionnaires, which 
electronic submission programs are more fully discussed below.
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    With respect to the Association's conduct of an individual 
examination or investigation of a member firm's trading activities, the 
NASD has previously requested such information in hard copy or 
``written'' form, even where the member stored the information in 
electronic form.\3\ In these cases, members provide a hard copy print 
of the electronically stored data or the examining staff reviews 
electronic data displayed on-line to transfer the information to hard 
copy. To the extent that members store their important trading records 
in electronic storage media, many members have indicated that they 
prefer that the staff of the NASD accept such trading information in 
that form because of increased cost efficiencies.\4\ The SEC has 
recently announced policies that clarify when and in what manner 
members are permitted to store the books and records required by SEC 
rules in electronic form.\5\ NASDR is, moreover, currently engaged in a 
long-term initiative that will permit examining staff to utilize 
current computer-based technology in the course of conducting an 
examination of a member firm to analyze larger numbers of securities 
transactions than can be achieved using current manual methodology.\6\
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    \3\ Submission of information ``orally,'' as permitted by the 
Interpretation, is generally limited to situations where Association 
staff engage in a conversation with the member and information is 
elicited from the member in the course of the conversation.
    \4\ Providing an electronic copy of part or all of 
electronically stored information is less costly to the member in 
terms of personnel time and computer time than providing a hard copy 
printout or arranging for examining staff to review information on-
line. The cost and time-saving advantages for broker-dealers of 
storing information in electronic media is recognized by the 
Commission in Securities Exchange Act Release No. 38245, Feb. 5, 
1997; 62 FR 6469, Feb. 12, 1997.
    \5\ See, Securities Exchange Act Release No. 38245, Feb. 5, 
1997; 62 FR 6469, Feb. 12, 1997.
    \6\ See, advice to the SEC regarding the electronic program for 
the Free-Riding and Withholding Questionnaire in correspondence 
dated March 1, and August 2, 1996 and announced in Notice to Members 
96-18 (March 1996).
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    The Association believes that the current provision of Rule 8210 
that permits the Association to request that a member or a person 
associated with a member report ``in writing,'' covers information 
stored by a member in a form of electronic media, as the electronic 
format merely retains the written record. The NASDR is, however, 
proposing to amend Rule 8210 to provide specifically that a member may 
be required to submit a report in electronic form where the member 
maintains the information in that manner. The proposed rule change 
would amend subparagraph (a)(1) to require ``* * * any member of the 
Association, person associated with a member, or person no longer 
associated with a member when such person is subject to the 
Association's jurisdiction to report, either informally or on the 
record, orally or in writing or electronically (if the requested 
information is maintained in electronic form) with regard to any matter 
involved in any such investigation or hearing * * *'' and would amend 
subparagraph (b) to insert the word ``electronic'' in the provision 
regarding the receipt of any notice requiring a report (emphasis 
provided). NASDR believes that this action will both increase 
examination efficiency and will eliminate the costs borne by members in 
providing electronically maintained information in hard copy to NASDR 
examiners. Consequently, the potential for human error and delay 
attendant with paper submission will be decreased.
    Amendment to Establish Electronic Submission Programs--The NASD has 
also worked with the membership over many years to develop procedures 
for the electronic submission of periodic reports or other frequently 
requested investigatory data that would otherwise be submitted in 
written form in order to better fulfill its regulatory responsibilities 
under the federal securities laws. Such programs for electronic 
submissions have already been established for filing of members' FOCUS 
Reports, Blue Sheet Reports, Short Interest Reports, Forms U-4 and U-5 
with Central Registration Depository (``CRD'').\7\
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    \7\ The FOCUS Filing Plan was approved in Securities Exchange 
Act Rel. No. 29105 (April 18, 1991); 56 FR 19131 (April 25, 1991). 
The Short Interest Reporting requirement was permanently approved in 
Securities Exchange Act Rel. No. 23482 (July 30, 1986); 51 FR 28472 
(Aug. 7, 1986). The Blue Sheet Reporting Plan was approved in 
Securities Exchange Act Rel. No. 26539 (Feb. 13, 1989); 54 FR 7318 
(Feb. 17, 1989). The Central Registration Depository electronic 
filing requirements were approved in Securities Exchange Act Rel. 
No. 37439 (July 15, 1996); 61 FR 37950 (July 22, 1996).
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    As the Association continues to increase its services to the 
membership and enhance its ability to surveil for regulatory compliance 
through the use of computer-based technology, it is important that 
NASDR be able to establish electronic submission programs for 
information required to be submitted by members on a regular basis. In 
recent discussions with the membership on this issue, members indicated 
they preferred to submit frequently filed information electronically 
because of assurance of receipt (in comparison to the mails) and the 
ability to amend a previously-submitted filing if an error is 
subsequently discovered. The Association is, therefore, proposing to 
amend Rule 8210 to add new paragraph (c) to provide general authority 
for the Association to establish programs for the submission of 
information on a regular basis through direct or indirect electronic 
interface between the Association and members, upon approval by the 
Commission.
    (b) The NASD believes that the proposed rule change is consistent 
with the provisions of Sections 15A(b)(6),\8\ and 15A(b)(7),\9\ of the 
Act.\10\ The proposed rule change will permit the NASD to request that 
members provide regulatory information in electronic form (where the 
member maintains its records in electronic form) and to establish 
electronic submission programs for regularly filed regulatory 
information, upon Commission approval. The proposed rule will also 
assist the Association in preventing

[[Page 16886]]

fraudulent and manipulative acts and practices, in promoting just and 
equitable principles of trade, in protecting investors and the public 
interest, and in appropriately disciplining members for violations of 
its rules, the rules and regulations of the Commission, and the rules 
of the MSRB.
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    \8\ Section 15A(b)(6) requires the Association to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade and to protect investors and the 
public interest.
    \9\ Section 15A(b)(7) requires that the rules of the Association 
provide that its members and persons associated with its members 
shall be appropriately disciplined for violation of the rules of the 
MSRB or the rules of the Association.
    \10\ 15 U.S.C. Sec. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:

A. by order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by April 29, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8929 Filed 4-7-97; 8:45 am]
BILLING CODE 8010-01-M