[Federal Register Volume 63, Number 234 (Monday, December 7, 1998)]
[Notices]
[Pages 67496-67499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32400]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40723; File No. SR-NASD-98-52]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1
Thereto and Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 2 to the Proposed Rule Change Relating to Supervision of
Correspondence
November 30, 1998.
I. Introduction
On July 24, 1998, the National Association of Securities Dealers,
Inc. (``NASD'') or ``Association''), through its wholly-owned
subsidiary, the NASD Regulation, Inc. (``NASDR''), submitted to the
Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend NASD Rule 3010 to state that firms must review incoming, written
correspondence to identify customer complaints and funds. On August 26,
1998, the NASDR submitted Amendment No. 1 to the proposed rule
change.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Mary N. Revell, Associate General Counsel,
NASDR, to Katherine A. England, Assistant Director, Division of
Market Regulation (``Division''), 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.''
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The proposed rule change, as amended, was published for comment in
the Federal Register on September 3, 1998.\4\ Four comment letters were
received on the proposal.\5\ On November 12, 1998, the NASDR filed
Amendment No. 2 to the proposed rule change.\6\ The Commission solicits
comments on Amendment No. 2 from interested persons. This order
approves the proposed rule change and Amendment No. 1 thereto and
approves Amendment No. 2 to the proposed rule change on an accelerated
basis.
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\4\ See Securities Exchange Act Release No. 40372 (August 27,
1998), 63 FR 47059..
\5\ See Letters to Jonathan G. Katz, Secretary, Commission, from
Michael L. Kerley, Vice President and Chief Legal Officer, MML
Investors Services, Inc., dated September 18, 1998 (``MML Letter'');
Theodore A. Mathas, President NYLIFE Securities, dated September 23,
1998 (``NYLSEC Letter''); Janet G. McCallen, Executive Director,
International Association for Financial Planing, dated September 23,
1998 (``IAFP Letter''); and Joseph P. Savage, Assistant Counsel,
Investment Company Institute, dated September 24, 1998 (``ICI
Letter'').
\6\ See Letter from Mary N. Revell, Associate General Counsel,
NASDR, to Katherine A. England, Assistant Director, Division,
Commission, dated November 12, 1998 (Amendment No. 2''). In
Amendment No. 2, in addition to making several technical amendments,
the NASDR addresses the issues raised in the comment letters. The
NASDR proposes to revise its draft Notice to Members to clarify
that: (1) registered representatives can forward opened mail; (2)
maintenance of a log should be only for ``securities'' products; and
(3) customers should be informed that they can contact a central
office of the member firm for any reason, including to file a
complaint. The NASDR also proposes to specifically state that member
firms have a legal right to review incoming, written correspondence.
Finally, the NASDR proposes to change the effective date of the new
amendments to 60 days following publication of its Notice to
Members.
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II. Background and Description of the Proposal
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.\7\ 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 by the
[[Page 67497]]
NASD 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 Commission approval of the
amendments, but before the amended rules went into effect, the
Commission received 14 comment letters, primarily from members in the
insurance industry, objecting to certain provisions in the new
rules.\8\ The commenters primarily objected to a provision in Notice to
Member 98-11 which states that firms will be required to review all
incoming, written correspondence 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 Commission: (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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\7\ See Securities Exchange Act Release No. 39510 (December 31,
1997) 63 FR 1131 (January 8, 1998).
\8\ See Letters to Jonathan G. Katz, Secretary, Commission, from
Carl B. Wilkerson, American Council of Life Insurance, dated January
9, 1998 and January 29, 1998; Beverly A. Byrne, BenefitsCorp
Equities, Inc., dated January 26, 1998; Michael S. Martin, The
Equitable Life Assurance Society of the United States, dated January
29, 1998; Janet G. McCallen, International Association for Financial
Planning, dated February 13, 1998; W. Thomas Boulter, Jefferson
Pilot Financial, dated January 28, 1998; Leonard M. Bakal,
Metropolitan Life Insurance Company and MetLife Securities, Inc.,
dated January 28, 1998; Michael L. Kerley, MML Investors Services,
Inc. dated January 26, 1998; Mark D. Johnson, The National
Association of Life Underwriters, dated February 5, 1998; Theodore
Mathas, NYLIFE Securities, dated January 16, 1998 and January 29,
1998; Beverly A. Byrne, One Orchard Equities, Inc., dated January
26, 1998; Dodie Kent, Pruco Securities Corporation, dated January
29, 1998; and James T. Bruce, Wiley, Rein & Fielding, on behalf of
the Electronic Messaging Association, dated January 30, 1998.
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The commenters stated that it would be very difficult or impossible
for a registered principal to conduct a pre-distribution review of all
incoming, written 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, written correspondence was delayed to allow the
NASDR and member firms time to develop and implement alternative,
workable procedures for the review of incoming, written correspondence
that addresses the regulatory concerns about preventing
misappropriation of customer funds and diversion of customer
complaints.\9\ The rule amendments and all other provisions in the
Notice became effective on April 7, 1998.\10\
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\2\ 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).
\10\ See Securities Exchange Act Release No. 39866, supra note
9.
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NASDR 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, written correspondence
directed to registered representatives and related to the member's
investment banking or securities business to properly identify and
handle customer complaints, funds, and securities. This proposed
amendment will clarify that firms must develop supervisory procedures
that specifically address the regulatory concerns identified by the
Commission.
The accompanying Notice to Members will provide guidance on how to
implement the proposed rule change.\11\ In particular, the Notice
states that, in conducting reviews of incoming, written 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 prior
to use or distribution to identify customer complaints and funds. 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.
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\11\ 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.
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Where the office structure does not permit the review of
correspondence prior to use or distribution, 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:
After opening his or her own mail, the registered
representative can forward incoming, written correspondence related to
the firm's investment banking or securities 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
securities products sold, which is forwarded to the supervising branch
on a weekly basis;
Communication to clients that they can contact the broker/
dealer directly for any matter, including the filing of a complaint and
provides them with an address and phone number of a central office of
the broker/dealer for this purpose; 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, written 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.
III. Summary of Comments
The Commission received four comment letters on the proposed rule
change.\12\ Two of the commenters generally opposed the proposal; \13\
two of the commenters generally supported the proposal.\14\ The
commenters opposing the proposal believe that any possible benefits of
the proposal are outweighed by the associated burdens.\15\
Specifically, the proposal's opponents believe that even if a member
firm's business structure permits the review of incoming, written
correspondence prior to use or distribution, NASD Rule 3010 should not
require such review.\16\ Instead, member firms should be permitted the
flexibility to design their own procedures to identify customer
complaints and funds.\17\ The NASDR has not modified its proposal in
response to these comments.
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\12\ See note 5, supra.
\13\ See NYLSEC Letter and ICI Letter, supra note 5.
\14\ See MML Letter and IAFP Letter, supra note 5.
\15\ See NYLSEC Letter and ICI Letter, supra note 5.
\16\ Id.
\17\ Id.
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One commenter also recommends that NASDR should eliminate the
``requirements'' to forward correspondence and logs to a reviewer on a
weekly basis and instead, to permit review on a regular basis.\18\ In
response, the NASDR notes that its proposed Notice to Members does not
establish ``requirements'' for those member firms with office
structures that do not permit
[[Page 67498]]
review of all incoming correspondence.\19\ Instead, the proposed Notice
to Members provides several examples of alternative procedures that
member firms might employ to assure adequate handling of customer
complaints and funds.
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\18\ See NYLSEC Letter, supra note 5.
\19\ See Amendment No. 2, supra note 6.
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One commenter requests that if the proposal is adopted, the
effective date of the amendments should be postponed for six months to
provide member firms with sufficient time to implement the additional
requirements.\20\ The NASDR declines to postpone the effective date of
the amendments for six months, noting that member firms have been on
notice since the issuance of NASD's Notice to Members 98-11 in January
1998 that some type of review of incoming, written correspondence would
be required. To provide member firms with some time to implement the
required changes, the NASDR proposes to change the effective date of
the new amendments to 60 days following publication of the Notice to
Members announcing Commission approval of the proposal.\21\
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\20\ See NYLSEC Letter, supra note 5.
\21\ See Amendment No. 2, supra note 6.
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In addition, one commenter suggests that the rule specify that if a
member firm doesn't normally receive written correspondence directed to
register representatives, the member should not have to develop
procedures to address such correspondence.\22\ The NASDR has not
modified its proposal in response to this comment.
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\22\ See ICI Letter, supra note 5.
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One commenter requests that the NASDR specifically state that
member firms have a legal right to review incoming mail, to parallel a
similar statement made by the New York Stock Exchange.\23\ In response,
the NASDR proposes to revise its draft Notice to Members to include
such a statement.\24\
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\23\ See MML Letter, supra note 5.
\24\ See Amendment No. 2, supra note 6.
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Another commenter recommends that the NASDR clarify in the examples
provided in its Notice to Members that: (1) Registered representatives
can forward opened mail; (2) maintenance of a log should be only for
``securities'' products; and (3) customers should be informed that they
can contact a central office of the member firm for any reason,
including to file a complaints.\25\ The NASDR proposes to revise its
draft Notice to Members to implement the commenter's
recommendations.\26\
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\25\ See IAFP Letter, supra note 5.
\26\ See Amendment No. 2, supra note 6.
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IV. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\27\ Specifically, the Commission believes the proposal is
consistent with the requirements of Section 15A(b)(6) of the Act \28\
in that it is designed to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest. The
Commission believes that the proposal, which clarifies member firms'
responsibilities with respect to the review of incoming, written
correspondence, is designed to protect existing and prospective
customers by ensuring that customer complaints and customer funds and
securities are handled properly.
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\27\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\28\ 15 U.S.C. 78o-3(b)(6).
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The NASDR proposes to amend NASD Rule 3010 to require that member
firms' written procedures regarding the review of correspondence must
include a review of incoming, written correspondence directed to
registered representatives to properly identify and handle customer
complaints and to ensure that customer funds and securities are handled
in accordance with firm procedures. In its draft Notice to Members, the
NASDR explains that the method used in conducting such reviews will
depend on the firm's particular office structure. Where the office
structure permits review of all correspondence, the NASDR will require
that member firms designate an individual to open and review such
correspondence prior to use or distribution to identify customer
complaints and funds. The Commission agrees that wherever practicable,
prior review of incoming, written correspondence should be mandated, to
protect customer interests and possibly, reduce member firms' potential
liability.
The Commission recognizes, however, that there may be circumstances
in which such prior review of incoming, written correspondence is not
practical. In such cases, the Commission believes that the NASDR's
proposal to require member firms to employ alternative procedures
reasonable designed to assure adequate handling of customer complaints,
funds, and securities is reasonable. The Commission believes that
member firms that do not require prior review of all incoming, written
correspondence should require, at a minimum, some combination of those
alternative procedures provided by the NASDR as an example, or similar
procedures, rather than relying on only one alternative procedure. The
Commission believes that employing more than one alternative procedure
should serve to provide additional assurances that incoming, written
correspondence is handled appropriately.
The Commission notes that the proposal requires the review by a
registered principal of some of each registered representative's
correspondence with the public relating to the member firm's investment
banking or securities business, regardless of the method used for the
initial review of incoming, written correspondence. The Commission
believes that this requirement should ensure that appropriate persons
within the firm will undertake to supervise the activities of the
firm's registered representatives. The Commission expects that in the
event that the firm learns of any suspect activities on the part of any
of its registered representatives, the firm will commence a more
thorough review of that representative's activities, including his/her
correspondence with the public.
The Commissions finds good cause for approving proposed Amendment
No. 2 prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. In Amendment No. 2,
the NASDR addresses the concerns raised in the four comment letters
received by the Commission on this proposal. Amendment No. 2 modifies
the original filing and the accompanying draft Notice to Members only
slightly, in response to specific comments raised by interested
parties. Specifically, Amendment No. 2 clarifies that member firms have
the legal right to review incoming written correspondence and that the
rules apply to the member firms' investment banking and securities
business. As the modifications proposed in Amendment No. 2 are
reasonable and do not significantly alter the original proposal, the
Commission believes that Amendment No. 2 raises no issues of regulatory
concern. Accordingly, the Commission believes that it is consistent
with Section 15A(b)(6) of the Act \29\ to approve Amendment No. 2 to
the proposed rule change on an accelerated basis.
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\29\ 15 U.S.C. 78o-3(b)(6).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views and
[[Page 67499]]
arguments concerning Amendment No. 2, including whether Amendment No. 2
is consistent with the Act. 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, 450 Fifth Street, NW, Washington, DC 20549.
Copies of all such filings will also be available for inspection and
copying at the principal office of the NASD. All submissions should
refer to File No. SR-NASD-98-52 and should be submitted by December 28,
1998.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\30\ that the proposed rule change (SR-NASD-98-52), as amended, is
approved.
\30\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32400 Filed 12-4-98; 8:45 am]
BILLING CODE 8010-01-M