[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Notices]
[Pages 39333-39334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19443]


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SECURITIES AND EXCHANGE COMMISSION

[(Release No. 34-40200; File No. SR-NASD-98-33)]


Self-Regulatory Organizations; National Association of 
Securities, Dealers, Inc.; Order Granting Approval to Proposed Rule 
Change and Amendment 1 Thereto Relating to Exemptions From Fidelity 
Bonding Requirements

July 14, 1998.

I. Introduction

    On April 20, 1998, 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

[[Page 39334]]

Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder \2\ to 
grant authority to NASD staff to adjust the fidelity bond required of a 
member in certain circumstances. By letter dated May 27, 1998, the 
Association filed Amendment 1 to the proposed rule change.\3\ The 
proposed rule change and Amendment 1 were published for comment in the 
Federal Register on June 10, 1998.\4\ No comments were received. This 
order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1) (1994).
    \2\ 17 CFR 240.19b-4 (1997).
    \3\ Amendment 1 revised the last sentence of proposed new 
paragraph (c)(4) of Rule 3020. See Letter from Elliott R. Curzon, 
Assistant Chief Counsel, NASD Regulation, to Lisa Henderson, 
Attorney, SEC, dated May 27, 1998.
    \4\ Securities Exchange Act Release No. 40065 (June 3, 1998), 63 
FR 31819.
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II. Description of the Proposal

    Rule 3020 of the Conduct Rules of the NASD specifies that members 
are required to maintain fidelity bonds to insure against certain 
losses and the potential effect of such losses on firm capital. The 
rule applies to all members with employees who are required to join the 
Securities Investor Protection Corporation and who are not covered by 
the fidelity bond requirements of a national securities exchange. The 
amount of coverage a member is required to maintain is linked to the 
member's net capital requirements under Rule 15c3-1 under the Act.\5\ 
Under paragraph (c) of Rule 3020, each member must annually review the 
adequacy of its fidelity bond coverage and maintain coverage that is 
adequate to cover its highest net capital requirement during the 
preceding 12 months. For example, even if a full-service member divests 
its clearing business, so that it no longer holds customer funds or 
securities, it would still be required to maintain bond coverage that 
is based on the higher net capital requirement that applied during the 
preceding year.
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    \5\ 17 CFR 240.15c-1 (1997).
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    The proposed rule change would amend Rule 3020 to permit staff of 
NASD Regulation, Inc., (``NASD Regulation'') to adjust the fidelity 
bond requirements to reflect changes in a member's business. Requests 
for exemption would be considered under recently adopted Procedures for 
Exemption in the 9600 Series of Rules in the Code of Procedure. Under 
the procedures, NASD Regulation staff issues written determinations 
that are subject to review by the National Adjudicatory Council.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 15A(b)(6) of the Act,\6\ which 
provides, among other things, that the rules of a national securities 
association be designed to protect investors and the public 
interest.\7\ The Commission believes that the proposed rule change will 
allow members to be relieved from maintaining unnecessarily high 
fidelity bond coverage without compromising investor protection.
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    \6\ 15 U.S.C. 78f(b)(6).
    \7\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The rule change applies a ``good cause'' standard that will require 
a member to demonstrate that a modification from the bonding 
requirement is justified by the level of loss exposure that may be 
expected from the member. The premiums are changed from time to time to 
reflect changes in loss experience and to ensure that sufficient funds 
are available to pay any losses reported to the insurer. NASD 
Regulation represents that it will apply this authority only where it 
is clear that an exemption will not have any unintended impact on the 
insurance pool, and the modified coverage will adequately protect the 
member against potential losses. In addition, the proposed rule change 
will permit NASD Regulation staff to include conditions in an exemption 
to ensure that any subsequent increase in capital requirements is 
accompanied by a corresponding increase in coverage.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-NASD-98-33) is approved.

    \8\ 15 U.S.C. 78s(b)(2).
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    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-19443 Filed 7-21-98; 8:45 am]
BILLING CODE 8010-01-M