[Federal Register Volume 63, Number 109 (Monday, June 8, 1998)]
[Notices]
[Pages 31255-31258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15079]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40048; File No. SR-NASD-98-35]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change of Proposed Rule
Change by National Association of Securities Dealers., Inc, Concerning
Books and Records Requirements
May 29, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on May 14, 1998, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Assocation''), 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 NASD Regulation, Inc. (``NASD Regulation'').\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to grant accelerated
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1) (1994).
\2\ 17 CFR 240.19b-4 (1997).
\3\ This proposal rule change replaces proposed rule change File
No. SR-NASD-98-30 which has been withdrawn. Letter from John M.
Ramsay, Vice President and Deputy General Counsel, NASD Regulation,
to Katherine A. England, Assistant Director, Division of Market
Regulation, SEC, dated May 7, 1998. The proposed rule change was
originally filed on May 7, 1998, but required a technical amendment
to clarify the effective date. Letter from John M. Ransay, Vice
President and Deputy General Counsel, NASD Regulation to Katherine
A. England, Assistant Director, Division of Market Regulation, SEC,
dated May 14, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend Rule 3110 (the ``Books and
Records Rule'') of the Conduct Rules of the NASD to: (1) amend the
definition of ``institutional account'' to include the accounts of
investment advisers that under the National Securities Markets
Improvements Act of 1996 \4\ and new rules adopted by the SEC, are now
[[Page 31256]]
required to register with the states; and (2) exclude certain customer
accounts from the requirement to obtain certain tax and employment
information from the customer. Below is the text of the proposed rule
change. Proposed new language is italicized; proposed deletions are
bracketed.
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\4\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
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3100. BOOKS AND RECORDS, AND FINANCIAL CONDITION
3110. Books and Records
(a) Requirements
Each member shall keep and preserve books, accounts, records,
memoranda, and correspondence in conformity with all applicable laws,
rules, regulations and statements of policy promulgated thereunder and
with the Rules of this statements of policy promulgated thereunder and
with the Rules of this Association.
* * * * *
(c) Customer Account Information
Each member shall maintain accounts opened after January 1, 1991 as
follows:
(1) for each account, each member shall maintain the following
information:
(A) customer's name and residence;
(B) whether customer is of legal age;
(C) signature of the registered representative introducing the
account and signature of the member or partner, officer, or manager who
accepts the account; and
(D) if the customer is a corporation, partnership, or other legal
entity, the names of any persons authorized to transact business on
behalf of the entity;
(2) for each account, other than an institutional account, and
accounts in which investments are limited to transactions in [money
market funds] open-end investment company shares that are not
recommended by the member or its associated persons, each member shall
also make reasonable efforts to obtain, prior to the settlement of the
initial transaction in the account, the following information to the
extent it is applicable to the account:
(A) customer's tax identification or Social Security number;
(B) occupation of customer and name and address of employer; and
(C) whether customer is an associated person of another member;
(3) for discretionary accounts, in addition to compliance with
subparagraphs (1) and (2) above, and Rule 2510(b) of these Rules, the
member shall:
(A) obtain the signature of each person authorized to exercise
discretion in the account;
(B) record the date such discretion is granted; and
(C) in connection with exempted securities other than municipals,
record the age or approximate age of the customer; and
(4) for purposes of this Rule and Rule 2310 the term
``institutional account'' shall mean the account of:
(A) a bank, savings and loan association, insurance company, or
registered investment company;
(B) an investment adviser registered either with the Securities and
Exchange Commission under Section 203 of the Investment Advisers Act of
1940 or with a state securities commission (or any agency or office
performing like functions); or
(C) any other entity (whether a natural person, corporation,
partnership, trust or otherwise) with total assets of at least $50
million.
* * * * *
ii. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD 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. NASD Regulation 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
1. Background
The Books and Records Rule requires members to obtain certain
information for all accounts. In addition, the Rule requires that for
accounts other than institutional accounts and accounts limited to
money market funds members must make reasonable attempts to obtain: (i)
a customer's tax identification or social security number; (ii) a
customer's occupation and the name and address of the employer; and
(iii) information about whether the customer is an associated person of
another member (``Retail Customer Information''). An ``institutional
account'' is defined in the Rule to include the account of an
investment adviser registered with the SEC.
a. Accounts of Registered Investment Advisers. The National
Securities Markets Improvement Act of 1996 \5\ and new rules recently
adopted by the SEC under the Investment Advisers Act of 1940
(``Advisers Act'') \6\ allocate regulatory oversight of investment
advisers between the SEC and the states. Under the new rules,
investment advisers to registered investment companies and investment
advisers with assets under management of at least $25 million generally
will register exclusively with the SEC. Most other investment advisers
will register exclusively with the states.
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\5\ Pub. L. 104-290, 110 Stat. 3416 (1996).
\6\ 15 U.S.C. 80b (1994).
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The Books and Records Rule provides that for purposes of both the
Books and Records Rule and NASD Conduct Rule 2310 (``Suitability
Rule''), the term ``institutional account'' includes the account of an
investment adviser registered with the SEC.
Consequently, advisory accounts that were considered to be
``institutional accounts'' when the Retail Customer Information
provision in the Books and Records Rule was adopted now are technically
excluded from the definition because they have migrated to state
regulation.
b. Accounts Limited to Mutual Fund Shares. At its meeting on
February 23, 1998, the Investment Companies Committee, a standing
committee of the NASD Regulation Board of Directors, considered a
proposal by the NASD Regulation staff to amend the Books and Records
Rule to exclude directly marketed mutual funds from the obligation to
obtain Retail Customer Information. The Committee concurred with the
NASD Regulation staff's conclusion that the requirement to obtain
Retail Customer Information is burdensome and largely unnecessary as it
applies to members who distribute directly marketed mutual funds and
other unsolicited accounts that are limited to mutual fund shares and
for which no recommendations are made. A primary purpose of obtaining
Retail Customer Information is to help a member evaluate the
suitability of a recommendation. Consequently, the same regulatory
requirement does not apply with respect to accounts that are limited to
mutual funds and for which no recommendations are made. Members would
continue to be required to make reasonable efforts to obtain Retail
Customer Information for retail accounts that are not subject to these
limitations. At its meeting on March 19, 1998, the NASD Regulation
Board of Directors approved proposed changes to amend NASD Conduct Rule
3110 and authorized the filing of the proposed rule change with the
SEC.
[[Page 31257]]
2. Purpose
a. Institutional Account Definition. The Books and Records Rule
requires members to maintain certain information for all retail and
institutional customer accounts. For retail accounts that are not
limited to money market funds, members also must make reasonable
efforts to obtain Retail Customer Information. Members do not have to
seek this information with respect to their institutional accounts.
Similarly, the Suitability Rule requires members to make reasonable
efforts to obtain certain information, such as the customer's financial
status and investment objectives, from retail customers prior to the
execution of a transaction. IM-2310-3 describes members' suitability
obligation in making recommendations to institutional customers. The
primary considerations under IM-2310-3 include the customer's
capability to evaluate risk independently and the extent to which
individual judgment is exercised when making investment decisions.
The proposed rule change would continue to treat the state-
regulated advisory accounts as ``institutional accounts'' for purposes
of the Books and Records Rule and the Suitability Rule. The proposed
rule change also would amend the Books and Records Rule to take into
account the bifurcation of investment advisers regulation between the
SEC and the states by changing the definition of ``institutional
account'' to include both investment advisers required to register with
the SEC and those required to register with the states.
b. Accounts Limited to Transactions in Mutual Fund Shares. The
requirement in the Books and Records Rule to obtain customer employment
information was designed to assist members in making suitable
recommendations. This information is unnecessary for those accounts
that are limited to mutual fund transactions that are not recommended
by the member or its associated persons. With regard to the requirement
in the Books and Records Rule to obtain a customer's tax identification
or social security number, the tax laws already impose obligations on
funds to obtain this information.\7\ Finally, the requirement to
determine whether a customer is an associated person of another member
also is unnecessary because NASD Conduct Rule 3050, which provides the
obligations of executing members when the member knows that a person
associated with an employing member has an interest in an account,
expressly excludes accounts that are limited to transactions in mutual
fund shares.
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\7\ If a customer refuses to provide tax identification, IRS
rules require a fund to withhold 31% of all redemptions or
distributions.
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Of course members would be free to request Retail Customer
Information from their customers to meet any other regulatory
obligations that may exist.
3. Basis
NASD Regulations believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act, which
require, among other things, that the Association's rules be designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanism of a free and open market, and, in general, to
protect investors and the public interest. NASD Regulation believes the
proposed amendments to the Books and Records Rule that eliminate
requirements to obtain Retail Customer Information for institutional
accounts and accounts that are limited to mutual fund shares and for
which no recommendations are made are consistent with these principles.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed rule change will not 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
Comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
NASD Regulation has requested that the Commission find good cause
pursuant to Section 19(b)(2) for approving the proposed rule change
prior to the 30th day after publication in the Federal Register.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act.\8\ 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 this
filing will also be available for inspection and copying at the NASD.
All submissions should refer to File No. SR-NASD-98-35 and should be
submitted June 29, 1998.
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\8\ In reviewing this proposal, the Commission has considered
the proposed rule change's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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V. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of Section 15A(b)(6) of the Act and the rules and
regulations thereunder which require, among other things, that the
Association's rules be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market, and, in general,
to protect investors and the public interest. The Commission believes
that the proposed rule change is consistent with the Act in that the
proposed rule change protects investors and the public interest by
preserving the current operation of the Books and Records Rule with
respect to institutional accounts registered with the states. The
proposed rule change also facilitates transactions in securities by
eliminating requirements to obtain Retail Customer Information for
institutional accounts and accounts that are limited to mutual fund
shares for which no recommendations are made.
The Commission also finds good cause for approving the proposed
rule change prior to the 30th day after publication of notice of filing
thereof to ensure that the proposed rule change appropriately preserves
the current operation of the Books and Records Rule and the Suitability
Rule with respect to institutional accounts. The Commission believes,
therefore, that granting accelerated approval of the proposed
[[Page 31258]]
rule change is appropriate and consistent with the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change, SR-NASD-97-35 be, and hereby is,
approved on an accelerated basis.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12) (1997).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15079 Filed 6-5-98; 8:45 am]
BILLING CODE 8010-01-M