[Federal Register Volume 62, Number 179 (Tuesday, September 16, 1997)]
[Notices]
[Pages 48689-48691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24542]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39043; File No. SR-NASD-97-10]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the National Association 
of Securities Dealers, Inc. Relating to the Distribution of Information 
Concerning the Availability of the NASD's Public Disclosure Program

September 10, 1997.

I. Introduction

    On February 11, 1997, 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 proposal to adopt NASD Rule 2280, 
``Investor Education and Protection,'' which will require certain NASD 
members to provide customers with the following items of information in

[[Page 48690]]

writing not less than once every calendar year: (1) The NASD Regulation 
(``NASDR'') Public Disclosure Program (``Program'') hotline number; (2) 
the NASDR web site address; and (3) a statement regarding the 
availability to the customer of an investor brochure that includes 
information describing the Program.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on February 25, 1997.\3\ Two comment letters were received 
regarding the proposal.\4\ On July 31, 1997, the NASD amended its 
proposal.\5\ This order approves the NASD's proposal, as amended.
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    \3\ See Securities Exchange Act Release No. 39291 (February 14, 
1997), 62 FR 8477.
    \4\ See Letter from Daniel D. McConnell, Executive Vice 
President, PFS Investments, Inc., to Jonathan G. Katz, Secretary, 
SEC (May 14, 1997) (``PFS Letter''); Letter from Michael A. Kerley, 
Vice President and Chief Legal Officer, MML Investors Services, 
Inc., to Jonathan G. Katz, Secretary, SEC (March 14, 1997) (``MML 
Letter'').
    \5\ See Letter from Craig L. Landauer, NASDR, to Katherine A. 
England, Assistant Director, Division of Market Regulation 
(``Division''), SEC (July 31, 1997) (``Amendment No. 1''). Amendment 
No. 1 exempts from the requirements of the proposal NASD members 
that do not carry customer accounts and do not hold customer funds 
or securities.
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II. Description of the Proposal

    Under the NASDR's Program, NASDR provides certain information 
regarding the disciplinary history of NASD members and their associated 
persons in response to written inquiries, electronic inquiries or 
telephonic inquiries via NASDR's toll-free telephone listing. At the 
request of the Honorable Edward J. Markey, the General Accounting 
Office (``GAO'') in 1995 reviewed the effectiveness of the toll-free 
telephone information service that the NASDR uses to disseminate 
information under the Program. In its report reviewing the Program, the 
GAO recommended that NASDR publicize and educate investors about the 
availability of information through the Program.\6\ Specifically, the 
GAO recommended that NASDR ``explore other ways of publicizing the 
hotline to a wider audience of investors, such as including the hotline 
number on account-opening documents or account statements, and making 
disciplinary-related information directly available to investors 
through the Internet.'' \7\
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    \6\ See GAO, NASD Telephone Hotline: Enhancements Could Help 
Investors Be Better Informed About Brokers' Disciplinary Records 
(August 1996) (``GAO Report'').
    \7\ Id. at 18.
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    NASD Rule 2280(a) will require NASD members that carry customer 
accounts to provide customers with the following items of information 
in writing not less than once every calendar year: (1) The NASDR 
Program hotline number; (2) the NASDR web site address; and (3) a 
statement regarding the availability to the customer of an investor 
brochure that includes information describing the Program. NASD members 
may include the required information on customer account statements or 
in another type of publication. Under NASD Rule 2280(b), members that 
do not carry customer accounts and do not hold customer funds or 
securities are exempt from the requirements of NASD Rule 2280(a).\8\
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    \8\ See Amendment No. 1, supra note 5.
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III. Summary of Comments

    Two comment letters were received regarding the filing.\9\ Both 
commenters are introducing brokers that do not carry customer accounts 
or hold customer funds or securities. The commenters stated that 
because they do not provide customer account statements or correspond 
directly with their customers, compliance with the proposal would 
require a special annual mailing that would impose significant costs on 
their firms. In particular, MML argued that it would spend 
approximately $1 million annually to comply with the proposal.\10\ In 
response to the commenters' concerns, the NASD indicated that it would 
advise the commenters that they could comply with the proposal by 
providing information about the Program to the customer at the time of 
the customer's purchase.\11\ Amendment No. 1, which exempts from the 
rule brokers that do not carry customer accounts and do not hold 
customer funds or securities, supersedes the NASD's June 18 Letter.
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    \9\ See PFS Letter and MML Letter, supra note 4.
    \10\ See MML Letter, supra note 4.
    \11\ See Letter from Craig L. Landauer, Associate General 
Counsel, NASDR, to Katherine A. England, Assistant Director, 
Division, SEC (June 18, 1997) (``June 18 Letter'').
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NASD, and, in particular, with the 
requirements of Section 15A(b)(6) \12\ and 15A(i).\13\ Section 
15A(b)(6) requires, in part, that the rules of a national securities 
association be designed to prevent fraudulent and manipulative acts and 
practices and to protect investors and the public interest. Section 
15A(i) requires the NASD to: (1) Establish and maintain a toll-free 
telephone listing to receiving inquiries regarding disciplinary actions 
involving the NASD's members and their associated persons; and (2) 
promptly respond to such inquiries in writing. By requiring broker-
dealers that carry customer accounts to provide customers, at least 
once each calendar year, with written information regarding the NASDR 
Program hotline number, the NASDR's web site address, and a statement 
regarding the availability of an investor brochure describing the 
Program, the proposal will help to publicize the availability of the 
NASDR's Program and may increase investor use of the Program. As a 
result of increased investor use of the Program, a greater number of 
investors will obtain information about the disciplinary histories of 
NASD members and their associated persons. This information will help 
investors determine whether to conduct, or to continue to conduct, 
business with a NASD member or associated person of the member.
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    \12\ 15 U.S.C. 78o-3(b)(6) (1988).
    \13\ 15 U.S.C. 78o-3(i) (1988 & Supp. 1992). In approving the 
rule, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission finds that Amendment No. 1 to the proposal is 
reasonable and consistent with the Act. Amendment No. 1 exempts from 
the proposal brokers that do not carry customer accounts and do not 
hold customer funds or securities. The Commission believes that it is 
reasonable to exempt such brokers from the proposal because, according 
to the commenters, the proposal's requirements would impose significant 
costs on such brokers. In addition, the Commission understands that the 
customers of brokers that do not carry customer accounts and do not 
hold customer funds or securities will receive the information required 
under the proposal from a clearing broker or from the broker that 
carries the customer's account.\14\
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    \14\ Telephone conversation among John Ramsey, NASDR, and Craig 
Landauer, Associate General Counsel, NASDR, and Katherine England, 
Assistant Director, Division, Commission, and Yvonne Fraticelli, 
Attorney, Division, Commission, on September 9, 1997.
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    The Commission finds good cause for approving Amendment No. 1 the 
proposal prior to the 30th day after the date of publication of notice 
of filing thereof in the Federal Register. Specifically, the Commission 
finds that Amendment No. 1 strengthens the NASD's proposal by ensuring 
that the proposal does not impose prohibitive expenses on broker-
dealers that do not carry customer accounts and do not hold customer 
funds or securities.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No.

[[Page 48691]]

1. 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 Room. Copies of the filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to File No. SR-NASD-97-10 and should be 
submitted by October 7, 1997.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NASD-97-10), as amended, is 
approved.

    \15\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24542 Filed 9-15-97; 8:45 am]
BILLING CODE 8010-01-M