[Federal Register Volume 63, Number 91 (Tuesday, May 12, 1998)]
[Notices]
[Pages 26240-26241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12458]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39958; File No. SR-NASD-97-92]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed By-Law Amendment Requiring
Members to Update Firm Contact Information Electronically, to Maintain
Electronic Mail Account and for Other Purposes
May 5, 1998.
On December 19, 1997, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule
change pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ The filing was
thereafter amended on April 22, 1998.\3\ In this filing, as amended,
the Association proposed amendments to the NASD By-laws, to require
members to communicate with the Association electronically. Under this
proposal, members will be required to set up and maintain an electronic
mail account and must update their firm contact information through the
Internet. In addition, the Association has included a technical
amendment to the composition of the NASD National Nominating
Committees, correcting a misprint from an earlier filing.\4\ Notice of
the proposal was published in the Federal Register on January 16, 1998
(``Notice'').\5\ The Commission received three comment letters on the
filing.\6\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4
\3\ Letter from T. Grant Callery, Senior Vice President and
General Counsel, NASD to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission dated April 22, 1998. The
amendment provides the members' vote and responses to the comment
letters. It is technical in nature and therefore not subject to a
notice and comment requirement.
\4\ See Securities Exchange Act Release No. 39326 (Nov. 14,
1997), 62 FR 62385 (Nov. 21, 1997); see also infra text surrounding
note 7.
\5\ See Securities Exchange Act Release No. 39539 (January 12,
1998), 63 FR 2709 (January 16, 1998) (File No. SR-NASD-97-92).
Amendment No. 1 to the proposed rule filing was filed on April 22,
1998. See supra note 3.
\6\ See Letter from Marc B. Horin, National Compliance
Consultants to Secretary, Commission, dated January 23, 1998; Letter
from John B. Simmon, Morris Group Inc. to Secretary, Commission,
dated January 22, 1998; and Letter from Marc B. Horin, National
Compliance Consultants to Secretary, Commission, dated January 30,
1998.
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I. Introduction and Background
On August 5, 1997, the Membership Committee of the NASD Regulation,
Inc. (``NASD Regulation'') Board of Directors recommended requiring
each member's executive representative to maintain an Internet
electronic mail account for communication with the NASD and to update
firm contact information via NASD Regulation's Internet web site.
Following approval by the NASD Regulation Board of Directors and the
NASD Board of Governors, the Notice was filed with the Commission and
published in the Federal Register.\7\ When polled on this proposal, as
required by the NASD By-laws, the NASD membership voted more than two
to one in favor of requiring maintenance of electronic mail
accounts.\8\
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\7\ Release No. 34-39539, supra note 5.
\8\ See Amendment No. 1, supra note 3. The membership vote was
1,884 in favor, 876 against. Id.
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II. Description of the Proposal
A. Electronic Mail Accounts and Updating of Member Information
The Proposal promotes Internet use by the Association and its
members as a communication tool. As revised, the NASD By-laws will
require each member to acquire and maintain an Internet electronic mail
address on behalf of its executive representative before January 1,
1999.
In addition to maintaining electronic mail accounts, members will
also be required to update firm contact information electronically. In
its filing, the NASD maintained that the present method of collecting
firm contact information (which is used for member balloting,
compliance purposes and targeting key individuals for informational
mailings, etc.) through physical filing of an NASD Member Firm
Questionnaire (``Member Questionnaire'') needs improvement. There are
significant problems with current procedures. First, information is
often stale, because members rarely update the filings. Second, the
Member Questionnaire information, which is currently stored and made
available through the Central Registration Depository or ``CRD,'' is
not readily available for use in other computer programs and systems.
Finally, the planned system enhancements to the CRD do not contemplate
inclusion of Member Questionnaire data. Using the new electronic
mailboxes, the NASD intends to transmit e-mail reminders to members to
update their Membership Questionnaires on a periodic basic. Member
firms can then easily access their respective Member Questionnaire via
the NASD Regulation Web Site for updating.\9\ The Association has
indicated that information provided in this manner is more readily
interfaced to the internal NASD Regulation systems requiring the data.
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\9\ A firm would be able to access only its own Member
Questionnaire; the information would be password-protected to
prevent any public access.
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The three comment letters received by the Commission on this rule
filing all react negatively to required use of the Internet and
electronic mail accounts. The main objections relate to the costs
involved in setting up and maintaining such services. One commentator
suggested that the decision to maintain an electronic mail account
should be discretionary, rather than mandatory.\10\ Concerns about lack
of member of NASD control over the Internet and internet functionality,
reliability, access, integrity and security were also noted\11\ The
Association's response argues that the minimal costs involved in
connecting to the Internet (as little as ten dollars a month for an
account and less than one thousand dollars for a computer and modem)
are ``reasonable in light of the tremendous benefits that electronic
mail and Internet communication will bring to the membership.''\12\ The
NASD also stressed its belief that all, rather than some, members
should have an electronic mail account, to ``strive for uniformity of
notice and enable speedy and relatively inexpensive communication with
all members.''\13\
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\10\ See Letter from Marc B. Horin, National Compliance
Consultants to Secretary, Commission, dated January 30, 1998.
\11\ Id.
\12\ Amendment No. 1, supra note 3 at 2.
\13\ Id.
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B. Technical Amendment to Nominating Committee Composition
The NASD also proposes a technical amendment to Article VII,
Section 9(b) of the NASD By-Laws. In November, 1997, the Commission
approved a comprehensive revision to the Association By-Laws,
implementing a
[[Page 26241]]
more streamlined corporate structure.\14\ When voted on by the NASD
members prior to Commission approval, however, Article VII, Section
9(b) incorrectly stated that the number of Industry committee members
on the National Nominating Committee should equal or exceed the number
of Non-Industry committee members. The terms ``Industry'' and ``Non-
Industry'' had been transposed. By Commission order, the National
Nominating Committee must have an equal or greater number of Non-
Industry participants.\15\
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\14\ See Securities Exchange Act Release No. 39326 (Nov. 14,
1997), 62 FR 62385 (Nov. 21, 1997).
\15\ See Securities Exchange Act Release No. 37538 (Aug. 8,
1996) (SEC Order Instituting Public Proceedings Pursuant to Section
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and
Imposing Remedial Sanctions, In the Matter of National Association
of Securities Dealers, Inc., Administrative Proceeding File No. 3-
9056) (``SEC Order'' The SEC Order includes fourteen Undertakings
adopted by the Association to remediate the problems identified in
the order.
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Only one commentator addressed this portion of the proposal. This
writer questioned numerical inconsistencies within the amendment.\16\
In its response, the NASD pointed out that the commentator incorrectly
assumed that the terms ``Non-Industry member'' and ``Public Member''
were synonymous. Since they are not (because Public members are a
subset of Non-Industry members) there is no inconsistency.\17\
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\16\ Letter from Marc B. Horin, National Compliance Consultants
to Secretary, Commission, dated January 30, 1998.
\17\ See Amendment No. 1, supra note 3 at 2.
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III. Discussion
As discussed below, the Commission has determined at this time to
approve the Association's proposal. The standard by which the
Commission must evaluate a proposed rule change is set forth in Section
19(b) of the Act. The Commission must approve a proposed NASD rule
change if it finds that the proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
govern the NASD.\18\ In evaluating a given proposal, the Commission
examines the record before it and all relevant factors and necessary
information. In addition, Section 15A of the Act establishes specific
standards for NASD rules against which the Commission must measure the
proposal.\19\
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\18\ 15 U.S.C. 78s(b)
\19\ 15 U.S.C. 78o-3.
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A. Electronic Mail Accounts and Updating of Member Information
The Commission has determined to approve the Association's proposal
requiring members to acquire and maintain the ability to communicate
electronically. Use of the Internet as a business tool is expanding
rapidly. As a general matter, it is becoming widely recognized as an
efficient and cost-effective means of communication in the business
world. Specifically, use of electronic mailboxes is expected to
facilitate timely communications between the Association and its
members, the more rapid distribution of NASD information, notices, and
publications, and reduction or elimination of printed publications.
Overall, the enhanced use of electronic communications should result in
significant cost savings to the Association without significant
disadvantage to the member. Moreover, as noted above, the costs
involved in obtaining and maintaining Internet service are minimal.\20\
According to research conducted by the Association, any phone line in
the United States can support Internet service.\21\ Finally, the
Commission agrees with the Association that ``concerns over the lack of
NASD control over the Internet as well as its integrity, security, and
functionality also exist for other modes of communication, such as the
United States mail. In many cases, Internet communication is more
desirable given its speed, timely notice of undeliverable mail, and
accessibility 24 hours a day.'' \22\ Since the proposal complies with
the requirements of Sections 15A and 19(b)(2) of the Act, and the
advantages clearly outweigh any disadvantages, the Commission is
approving the filing.
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\20\ See supra text accompanying note 12.
\21\ See E-Mail from Mary Dunbar, Office of General Counsel,
NASD to Mandy Cohen, Office of Market Supervision, Commission dated
April 30, 1998 (indicating that ``NASD Regulation staff conferred
with MCI, which informed NASD Regulation that modems were widely
available that are capable of providing Internet access via any
telephone line used in the United States'').
\22\ See Amendment No. 1, supra note 3 at 2.
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b. Composition of National Nominating Committee
The Commission will also approve the adjustments to the composition
of the National Nominating Committee at this time. This is necessary to
ensure that membership in the National Nominating Committee conforms to
the requirements of the SEC Order and related Undertakings issued in
August 1996.\23\ Based on the Commission's specific findings in the SEC
Order, the Association agreed to ``implement and maintain at least
fifty percent independent public and non-industry membership in its
Board of Governors, the Board(s) of Governors or Directors of all of
its subsidiaries and affiliates that exercise or have delegated self-
regulatory functions, and * * * . the National Nominating Committee.''
\24\ For the past several months, the Association has maintained
compliance with both the SEC Order and the misprinted effective
language by maintaining a equally balanced committee.\25\ Revising the
language to correct the misprint will allow the Association to
introduce additional Non-Industry members, which furthers the intent of
the SEC Order and other related Commission proceedings.
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\23\ See SEC Order, supra note 15.
\24\ Id.
\25\ Telephone call from Mary Dunbar, Office of General Counsel,
NASD Regulation to Mandy Cohen, Office of Market Supervision,
Commission dated May 5, 1998.
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IV. Conclusion
The Commission believes that the proposed rule change is consistent
with the Act, and, particularly, with Section 15A thereof.\26\ In
approving the proposal, the Commission has considered its impact on
efficiency, competition, and capital formation.\27\ In particular, the
electronic mail accounts and updating proposal promotes procedures that
are cost-efficient and will promote the fair and efficient operation of
the Association and conduct of its self-regulatory responsibilities. In
addition, adjustment of the National Nominating Committee composition
is important, to conform the language to the intent of the Association
and the Commission when originally approved. This change will help to
ensure a fair representation of NASD members in the selection of
Association Directors and Governors and administration of its affairs
and provide an appropriate number of Governors or Directors that are
representative of issuers and investors and not associated with a
member of the Association, a broker, or a dealer.
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\26\ 15 U.S.C. Sec. 78o-3.
\27\ 15 U.S.C. Sec. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-NASD-97-92), including
Amendment No. 1 thereto, is approved.
\28\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12458 Filed 5-11-98; 8:45 am]
BILLING CODE 8010-01-M