[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No. SR-NASD-98-30 which has been withdrawn.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