[Federal Register Volume 62, Number 94 (Thursday, May 15, 1997)]
[Notices]
[Pages 26841-26843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12748]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38591; File No. SR-NASD-96-46]


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

May 9, 1997.

I. Introduction

    On March 17, 1997,\1\ the National Association of Securities 
Dealers Regulation, Inc. (``NASDR'') submitted to the Securities and 
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934

[[Page 26842]]

(``Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to 
amend Rule 8210 of the Procedural Rules of the National Association of 
Securities Dealers, Inc. (``NASD'' or ``Association'') to request that 
members provide regulatory information in electronic form and to 
establish electronic submission programs for regularly filed regulatory 
information. A notice of the proposed rule change appeared in the 
Federal Register on April 8, 1997.\4\ The Commission received no 
comment letters concerning the proposed rule change. The Commission is 
approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ On December 17, 1996, the NASDR filed the proposed rule 
change with the Commission. However, Amendment No. 1, which modified 
the rule language, replaced the original rule filing. See Amendment 
No. 1, from Joan C. Conley, Secretary, NASD Regulation, Inc., to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, SEC, dated March 17, 1997.
    \2\ 15 U.S.C. 78s(b)(1) (1988).
    \3\ 17 CFR 240.19b-4 (1995).
    \4\ Securities Exchange Act Release No. 38468 (April 2, 1997); 
62 FR 16884 (April 8, 1997).
---------------------------------------------------------------------------

    The proposed rule change addresses an NASDR rule that requires 
members to maintain records of compliance so that information will be 
available to NASDR staff for on-site examination. 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 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.

II. Description of the Proposal

    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 the form of electronic media, as the electronic 
format merely retains the written record. Thus, NASDR is 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).
    The NASDR 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. Programs for 
electronic submissions have already been established for filing of 
members' FOCUS Reports, Blue Sheet Reports, Short Interest Reports, 
Form U-4 and U-5 with the Central Registration Depository (``CRD'').\5\ 
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.
---------------------------------------------------------------------------

    \5\ 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, but the revised Forms U-4 and U-5 
are not being used at this time. See Securities Exchange Act Rel. 
No. 37439 (July 15, 1996); 61 FR 37950 (July 22, 1996).
---------------------------------------------------------------------------

III. Discussion

    The Commission believes that the proposed rule change is consistent 
with the Act and the rules and regulations promulgated thereunder.\6\ 
Specifically, the Commission believes that approval of the proposed 
rule change is consistent with Sections 15A(b)(6) \7\ and 15A(b)(7) \8\ 
of the Act. Consistent with Section 15A(b)(6), the proposal should 
improve NADSAD's ability to monitor its members' compliance with its 
rules, those of the Commission and of the MSRB, thus possibly detecting 
fraudulent and manipulative acts and practices before they seriously 
harm investors and the public interest. Consistent with Section 
15A(b)(7), the speed of receipt of information should enable the NASDAR 
to detect violations rapidly and discipline accordingly.
---------------------------------------------------------------------------

    \6\ In approving the rule, the Commission has considered the 
proposal's impact on efficiency, competition and capital formation, 
consistent with Section 3 of the Act. 15 U.S.C. 78c(f) (1996).
    \7\ Section 15A(b)(6) requires the Commission to determine that 
a registered national securities association's rules are designated 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market 
and a national market system, and to protect investors and the 
public interest.
    \8\ Section 15A(b)(7) requires that the rules of the Association 
provide that its members and persons associated with its members be 
appropriately disciplined for violation of the rules of the MSRB or 
the rules of the Association.
---------------------------------------------------------------------------

    The proliferation of securities transactions and attendant increase 
in volume has increased the need for rapid computer-based 
(``electronic'') technology. According to the NASDR, most of its 
members currently maintain their trading records in electronic, rather 
than hard copy form. Surveys conducted by the Association indicate that 
most members store their primary trading records in some from of 
electronic storage media.\9\ To the extent that members stores their 
important trading records in electronic storage media, the Commission 
agrees that allowing Association members to electronically disseminate 
this information in response to inquiries will both increase 
examination efficiency and eliminate costs associated with providing 
electronically maintained information to examine in hard copy form.
---------------------------------------------------------------------------

    \9\ See, e.g., Survey and Analysis Concerning the Redesign of 
the Short Position Reporting System and the Electronic Submission 
Mechanism, submitted by Suzanne E. Rothwell, Associate General 
Counsel, NASD Regulation, Inc., to Katherine A. England, Assistant 
Director, Division of Market Regulation, SEC, dated March 25, 1997.
---------------------------------------------------------------------------

    As the Association continue to increase services to its membership 
and enhance its ability to surviel for regulatory compliance through 
the use of computer-based technology, the Commission agrees that it 
should establish electronic submission programs for information 
required to be submitted by members on a regular basis, upon approval 
by the Commission. Similar programs have been established for which 
members are currently submitting information electronically.\10\ The 
Commission supports these programs and believers they provide a 
framework for future programs. The Commission believes that 
implementing such programs will benefit the Association and its members 
as any delays associated with paper submission will be decreased and 
any errors detected can be easily corrected.
---------------------------------------------------------------------------

    \10\ See supra note 5.
---------------------------------------------------------------------------

IV. Conclusion

    For the above reasons, the Commission believes that the proposed 
rule change is consistent with the

[[Page 26843]]

provisions of the Act, and in particular with Sections 15A(b)(6) and 
15A(b)(7).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NASD-96-46) be, and hereby 
is approved.

    \11\ 15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12748 Filed 5-14-97; 8:45 am]
BILLING CODE 8010-01-M