[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47059-47061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23767]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40372; File No. SR-NASD-98-52]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to Supervision of Correspondence

August 27, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 24, 1998, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly-owned subsidiary, 
NASD Regulation, Inc. (``NASDR''), 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 the NASDR. The NASDR has designated the portion of the 
proposal relating to the extension of the effective date as one 
constituting a stated policy, practice, or interpretation with respect 
to the meaning of an existing rule under Section 19(b)(3)(A)(i) of the 
Act,\3\ which renders the rule effective upon the Commission's receipt 
of this filing. On August 26, 1998, the NASDR submitted Amendment No. 1 
to the proposed rule change.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ See Letter from Mary N. Revell, Associate General Counsel, 
NASDR, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated August 24, 1998 (``Amendment 
No. 1''). In Amendment No. 1, NASDR proposes to replace the word 
``should'' in the text of the proposed rule with the word ``must'' 
to clarify that NASD member firms are required to develop written 
procedures for the review of incoming, non-electronic correspondence 
directed to registered representatives for purposes of identifying 
and handling customer complaints and funds.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASDR is proposing to amend NASD Rule 3010 to state that firms 
must \5\ review incoming, non-electronic correspondence to identify 
customer complaints and funds. Below is the text of the proposed rule 
change. Proposed

[[Page 47060]]

new language is italicized, proposed deletions are in brackets.
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    \5\ See Amendment No. 1, supra note 4.
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CONDUCT RULES

Rule 3010. Supervision

    (a) through (c) No change
    (d) Review of Transactions and Correspondence
    (1) No Change
    (2) Review of correspondence. Each member shall develop written 
procedures that are appropriate to its business, size, structure, and 
customers for the review of incoming and outgoing written and 
electronic correspondence with the public relating to its investment 
banking or securities business. The procedures must include review of 
incoming, non-electronic correspondence directed to registered 
representatives for purposes of properly identifying and handling 
customer complaints and funds. Where such procedures for the review of 
correspondence do not require [pre-use] review of all correspondence 
prior to use or distribution, they must include provision for the 
education and training of associated persons as to the firm's 
procedures governing correspondence; documentation of such education 
and training; and surveillance and follow-up to ensure that such 
procedures are implemented and adhered to.
    (3) No change
    (e) through (g) No change

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 NASDR 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. The NASDR 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. Purpose
    In December 1997, the SEC approved rule amendments and a Notice to 
Members that were designed to allow firms to develop flexible 
supervisory procedures for the review of correspondence with the 
public.\6\ The amendments were intended to recognize the growing use of 
electronic communications such as ``e-mail'' while still providing for 
effective supervision. Notice to Members 98-11, issued in January 1998, 
announced approval of the rule amendments, the effective date of the 
new rules, and provided guidance to firms on how to implement these 
rules. Subsequent to SEC approval of the amendments, but before the 
amended rules went into effect, the SEC received 14 comment letters 
objecting to certain provisions in the new rules, primarily from 
members in the insurance industry.\7\ The commenters primarily objected 
to a provision in Notice to Members 98-11, which states that firms will 
be required to review all incoming correspondence received in non-
electronic format directed to registered representatives and related to 
a member's investment banking or securities business. The NASDR added 
this provision to Notice to Members 98-11 to address two regulatory 
concerns raised by the SEC: (1) Ensuring that firms capture all 
customer complaints; and (2) preventing registered representatives from 
taking cash or checks out of customer letters.
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    \6\ See Securities Exchange Act Release No. 39510 (December 31, 
1997) 63 FR 1131 (January 8, 1998).
    \7\ See Letters from Carl B. Wilkerson, American Council of Life 
Insurance, to Jonathan G. Katz, Secretary, SEC, dated January 9, 
1998 and January 29, 1998; Beverly A. Byrne, BenefitsCorp Equities, 
Inc., to Jonathan G. Katz, Secretary, SEC, dated January 26, 1998; 
Michael S. Martin, The Equitable Life Assurance Society of the 
United States, to Jonathan G. Katz, SEC, dated January 29, 1998; 
Janet G. McCallen, International Association for Financial Planning, 
to Jonathan G. Katz, Secretary, SEC, dated February 13, 1998; W. 
Thomas Boulter, Jefferson Pilot Financial, to Jonathan G. Katz, 
Secretary, SEC, dated January 28, 1998; Leonard M. Bakal, 
Metropolitan Life Insurance Company and MetLife Securities, Inc., to 
Jonathan G. Katz, Secretary, SEC, dated January 28, 1998; Michael L. 
Kerley, MML Investors Services, Inc. to Secretary, SEC, dated 
January 26, 1998; Mark D. Johnson, The National Association of Life 
Underwriters, to Jonathan G. Katz, Secretary, SEC, dated February 5, 
1998; Theodore Mathas, NYLIFE Securities, to Jonathan G. Katz, 
Secretary, SEC, dated January 16, 1998 and January 29, 1998; Beverly 
A. Byrne, One Orchard Equities, Inc., to Jonathan G. Katz, 
Secretary, SEC, dated January 26, 1998; Dodie Kent, Pruco Securities 
Corporation, to Jonathan G. Katz, Secretary, SEC, dated January 29, 
1998; and James T. Bruce, Wiley, Rein & Fielding, on behalf of the 
Electronic Messaging Association, to Jonathan G. Katz, SEC, dated 
January 30, 1998.
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    The commenters stated that it will be very difficult or impossible 
for a registered principal to conduct a pre-distribution review of all 
incoming, non-electronic correspondence, particularly correspondence 
received by registered representatives in small, one- or two-person 
offices. In response to these concerns, the effective date of the 
requirement to review all incoming, non-electronic correspondence was 
delayed to allow the NASDR and member firms time to develop and 
implement alternative, workable procedures for the review of incoming, 
non-electronic correspondence that addresses the regulatory concerns 
about preventing misappropriation of customer funds and diversion of 
customer complaints.\8\ The rule amendments and all other provisions in 
the Notice became effective on April 7, 1998.\9\
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    \8\ See Securities Exchange Act Release Nos. 39665 (February 13, 
1998) 63 FR 9032 (February 23, 1998); 39866 (April 14, 1998) 63 FR 
19778 (April 21, 1998); and 40178 (July 7, 1998) 63 FR 37911 (July 
14, 1998).
    \9\ See Securities Exchange Act Release No. 39866, supra note 8.
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    NASD Rule 3010(d)(2) currently requires each member to develop 
written policies and procedures for review of correspondence with the 
public relating to its investment banking or securities business 
tailored to its structure and the nature and size of its business and 
customers. The NASDR proposes to amend the rule to state that these 
procedures must include review of incoming, non-electronic 
correspondence directed to registered representatives for purposes of 
properly identifying and handling customer complaints and funds. This 
proposed amendment will clarify that firms must develop supervisory 
procedures that specifically address the regulatory concerns identified 
by the SEC.
    The Notice to Members will provide guidance on how to implement the 
proposed rule change. In particular, the Notice states that, in 
conducting reviews of incoming non-electronic correspondence to 
identify customer complaints and funds, where the office structure 
permits review of all correspondence, members should designate a 
registered or associated person to open and review correspondence. The 
designated person must not be supervised or under the control of the 
registered person whose correspondence is opened and reviewed. 
Unregistered persons who have received sufficient training to enable 
them to identify complaints and checks would be permitted to review 
correspondence. These guidelines are designed to correspond to 
procedures currently followed by many large, multi-service firms.
    Where the office structure does not permit this arrangement, the 
Notice states that the firm would have to employ alternative procedures 
reasonably designed to assure adequate handling of complaints and 
checks. Procedures that could be adopted include the following:
     Forwarding incoming correspondence related to the firm's 
investment banking or securities

[[Page 47061]]

business to an Office of Supervisory Jurisdiction (OSJ) or a branch 
manager for review on a weekly basis;
     Maintenance of a separate log for all checks received and 
products sold, which is forwarded to the supervising branch on a weekly 
basis;
     Communication to clients that informs them that questions 
and complaints can be sent directly to the compliance department and 
provides them with the compliance department's address and phone 
number; and
     Branch examination verification that the procedures are 
being followed.
    The Notice also states that, regardless of the method used for 
initial review of incoming, non-electronic correspondence, as with 
other types of correspondence, Rule 3010(d)(1) would still require 
review by a registered principal of some of each registered 
representative's correspondence with the public relating to the 
member's investment banking or securities business.
    Notice to Members 98-11 stated that firms would be required to 
review all incoming correspondence received in non-electronic format 
directed to registered representatives and related to a member's 
investment banking or securities business. The NASDR proposes to 
replace this requirement with the rule amendment and guidance contained 
in this proposed rule change. The Notice that will be issued when this 
proposed rule is approved will state that the requirement set forth in 
Notice to Members 98-11 is no longer applicable and has been superseded 
by the amendment to Rule 3010(d)(2) and the guidance provided in the 
Notice.
    As discussed above, the effective date of the provision in Notice 
to Members 98-11 stating that members must review ``all incoming 
correspondence received in non-electronic format directed to registered 
representatives and related to a member's investment banking or 
securities business'' has been delayed to allow the NASDR and member 
firms time to develop and implement alternative, workable procedures 
for the review of such correspondence. The delay in the effective date 
of this provision is scheduled to expire on September 30, 1998.\10\ To 
ensure continuity of the regulatory requirements applicable to member 
firms, the NASDR proposes an extension of the effective date of this 
provision until this proposed rule change has been approved and has 
been made effective.
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    \10\ See Securities Exchange Act Release No. 41078, supra note 
8.
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2. Statutory Basis
    The NASDR believes the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\11\ which requires, among other things, 
that the Association's rules must be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The NASD believes that reviewing incoming, non-
electronic correspondence to identify customer complaints and funds is 
consistent with this requirement.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASDR does not believe that the proposed rule change will 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    With respect to the proposal to extend the effective date of the 
provision in Notice to Members 98-11 regarding the review of incoming, 
non-electronic correspondence: The foregoing rule change constitutes a 
stated policy, practice, or interpretation with respect to the meaning, 
administration or enforcement of an existing rule of the Association 
and, therefore, has become effective pursuant to Section 19(b)(3)(A) of 
the Act \12\ and subparagraph (e) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 19b-4(e).
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    At any time within 60 days of the filing of this portion of the 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
    With respect to the substantive provisions of the proposed rule 
change: Within 35 days of the date of the publication of this notice in 
the Federal Register or within such longer period (i) as the Commission 
may designate up to 90 days of such date if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the self-regulatory organization consents, the Commission 
will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be is approved.

IV. Solicitation of Comments

    Interested person are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submission 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, 450 Fifth Street, NW, Washington 
DC. Copies of such filing also will be available for inspection and 
copying at the NASD. All submissions should refer to File No. SR-NASD-
98-52 and should be submitted by September 24, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23767 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M