[Federal Register Volume 63, Number 234 (Monday, December 7, 1998)]
[Notices]
[Pages 67499-67501]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32401]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40718; File No. SR-NASD-98-96]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Correcting Cross-References in 
Rules to NASD By-Laws

November 30, 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 November 19, 1998, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned regulatory 
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD Regulation. 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.
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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 correct cross-references in the 
NASD Rules to the NASD By-Laws. The text of the proposed rule change is 
set forth below. Proposed new language is italicized; proposed 
deletions are in brackets.
Rule 0112. Effective Date
    The Rules shall become effective as provided in Section 1 of 
Article [XII] XI of the By-Laws.
Rule 0120. Definitions
* * * * *
    (i) ``Member''
    The term ``member'' means any individual, partnership, corporation 
or other legal entity admitted to membership in the Association under 
the provisions of Articles [II and] III and IV of the By-Laws.
* * * * *
Rule 1060. Persons Exempt from Registration
    (a) No change.
    (b) No change.
    (1) the member firm has assured itself that the nonregistered 
foreign person who will receive the compensation (the ``finder'') is 
not required to register in the U.S. as a broker/dealer nor is subject 
to a disqualification as defined in Article [II] III, Section 4 of the 
Association's By-Laws, and has further assured itself that the 
compensation arrangement does not violate applicable foreign law;
* * * * *
Rule 1100. Foreign Associates
    (a) No change.
    (b) No change.
    (1) Such person is not subject to any of the prohibitions to 
registration with the Association contained in Article [II] III, 
Section 4 of the By-Laws of the Association.
* * * * *
    (c) In the event of the termination of the employment of a Foreign 
Associate, the member must notify the Association immediately by filing 
a notice of termination as required by Article [IV] V, Section 3 of the 
By-Laws.
* * * * *
IM-2110-4. Trading Ahead of Research Reports
* * * * *
    In accordance with Article VII, Section 1(a)[(2)](ii) of the NASD 
By-Laws, the Association's Board of Governors has approved the 
following interpretation of Rule 2110.
* * * * *
IM-2210-4. Limitations on Use of Association's Name
    (a) Use of Association Name
    Members may indicate membership in the Association in conformity 
with Article [XVI] XV, Section 2 of the NASD By-Laws in one or more of 
the following ways:
* * * * *
IM-2420-1. Transactions Between Members and Non-Members \1\
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    \1\ Text of note unchanged.
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    (a) Non-members of the Association.
* * * * *
    (4) Broker or Dealer Registration Revoked by SEC
    Revocation by the Commission of an Association member's 
registration as a broker or dealer automatically terminates the 
membership of such broker or dealer in the Association as of the 
effective date of such order. Under Article [II] III, Section 4 of the 
By-Laws of the Corporation, a firm whose registration as a broker or 
dealer is revoked is thereby disqualified for membership in the 
Association, and from the effective date of such order, the membership 
of such broker or dealer in the Association is discontinued. Thereafter 
such broker or dealer is a non-member of the Association.
    (5) Membership Resigned or Canceled
    The membership of a broker or dealer in the Association is 
automatically terminated when the Association accepts the resignation 
of such member or cancels its membership in the Association under the 
provisions of Article [II] III, Section 3; Article [III] IV, Section 5; 
or Article [XIV] XIII, Section 1, of the By-Laws. After the date of 
acceptance by the Association of the resignation of such member or the 
date of cancellation of membership by the Association, such broker or 
dealer is a non-member of the Association.
* * * * *
IM-2420-2. Continuing Commissions Policy
* * * * *

[[Page 67500]]

    Under no circumstances shall payment of any kind be made by a 
member to any person who is not eligible for membership in the 
Association or eligible to be associated with a member because of any 
disqualification, as set forth in Article [II] III of the Association's 
By-Laws, such as revocation, expulsion, or suspension still in effect.
* * * * *
IM-2440. Mark-Up Policy \3\
    The question of fair mark-ups or spreads is one which has been 
raised from the earliest days of the Association. No definitive answer 
can be given and no interpretation can be all-inclusive for the obvious 
reason that what might be considered fair in one transaction could be 
unfair in another transaction because of different circumstances. In 
1943, the Association's Board adopted what has become known as the ``5% 
Policy'' to be applied to transactions executed for customers. It was 
based upon studies demonstrating that the large majority of customer 
transactions were effected at a mark-up of 5% or less. The Policy has 
been reviewed by the Board of Governors on numerous occasions and each 
time the Board has reaffirmed the philosophy expressed in 1943. 
Pursuant thereto, and in accordance with Article VII, Section 
1(a)[(2)](ii) of the By-Laws, the Board has adopted the following 
interpretation under Rule 2440.
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    \3\ In SR-NASD-97-61, which has been published for comment by 
the Commission, NASD Regulation proposed to renumber IM-2440 as IM-
2440-1. See Securities Exchange Act Release No. 40511 (Sept. 30, 
1998), 63 FR 54169 (Oct. 8, 1998).
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* * * * *
Rule 3010. Supervision
* * * * *
    (e) Qualifications Investigated
    Each member shall have the responsibility and duty to ascertain by 
investigation the good character, business repute, qualifications, and 
experience of any person prior to making such a certification in the 
application of such person for registration with this Association. 
Where an applicant for registration has previously been registered with 
the Association, the member shall obtain from the Firm Access Query 
System (FAQS) or from the applicant a copy of the Uniform Termination 
Notice of Securities Industry Registration (Form U-5) filed with the 
Association by such person's most recent previous NASD member employer, 
together with any amendments thereto that may have been filed pursuant 
to Article [IV]V, Section 3 of the Association's By-Laws. The member 
shall obtain the Form U-5 as required by this Rule no later than sixty 
(60) days following the filing of the application for registration or 
demonstrate to the Association that it has made reasonable efforts to 
comply with the requirement. A member receiving a Form U-5 pursuant to 
this Rule shall review the Form U-5 and any amendments thereto and 
shall take such action as may be deemed appropriate.
* * * * *
6120. Participation in ACT
    (a) Mandatory Participation for Clearing Agency Members
    (1) Pursuant to Article VII, Section 1(a)[(6) and (7)](vi) and 
(vii) of the By-Laws participation in ACT is mandatory for all brokers 
that are members of a clearing agency registered with the Commission 
pursuant to Section 17A of the Act, and for all brokers that have a 
clearing arrangement with such a broker.
* * * * *
10101. Matters Eligible for Submission
    This Code of Arbitration Procedure is prescribed and adopted 
pursuant to Article VII, Section 1(a)[(4)](iv) of the By-Laws of the 
Association for the arbitration of any dispute, claim, or controversy 
arising out of or in connection with the business of any member of the 
Association, or arising out of the employment or termination of 
employment of associated person(s) with any member, with the exception 
of disputes involving the insurance business of any member which is 
also an insurance company.
 * * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation 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. Purpose
    The purpose of the proposed rule change is to correct cross-
references to the NASD By-Laws in Rules 0112, 0120, 1060, 1100, 3010, 
6120, and 10101 and Interpretive Material 2110-4, 2210-4, 2420-1, 2420-
2, and 2440. In late 1997, the Commission approved substantial 
amendments to the NASD's corporate documents that were designed to: (1) 
implement a corporate restructuring developed in 1997; (2) comply with 
the SEC's August 8, 1996 Order making certain findings and imposing 
remedial sanctions,\4\ and (3) implement certain recommendations found 
in the Report of the NASD Select Committee on Structure and Governance 
to the NASD Board of Governors.\5\ A number of articles and sections 
were added or removed from the NASD By-Laws, resulting in the need to 
renumber the By-Laws. A substantial number of corrections to By-Law 
cross-references in the NASD Rules were made in the rule filing that 
substantially amended the NASD's corporate documents. The purpose of 
the proposed rule change is to completer the corrections of the cross-
references to the currently approved By-Laws so that all of the NASD 
Rules conform to the By-Laws.\6\
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    \4\ Report and Appendix to Report Pursuant to Section 21(a) of 
the Securities Exchange Act of 1934 Regarding the NASD and the 
Nasdaq Stock Market (August 8, 1996) and Securities Exchange Act 
Release No. 37538 (August 8, 1996) (SEC Order Instituting Public 
Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange 
Act of 1934, Making Findings and Imposing Remedial Sanctions, In the 
Matter of National Association of Securities Dealers, Inc.)
    \5\ In November 1994, the NASD Board of Governors appointed the 
Select Committee on Structure and Governance to review the NASD's 
corporate governance structure and to recommend changes to enable 
the NASD to meet its regulatory and business obligations.
    \6\ The Commission recently approved other changes to the NASD 
By-Laws. See Securities Exchange Act Release No. 40615 (Oct. 28, 
1998), 63 FR 59614 (Nov. 4, 1998). None of these changes require 
corrections to the cross-references in the NASD Rules.
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2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\7\ 
which requires, 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, and, in general, to 
protect investors and the public interest. The

[[Page 67501]]

proposed rule change simply corrects cross-references to the NASD By-
Laws in the NASD Rules and would not result in a substantive change in 
any rule.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
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

    Written comments were neither solicited nor received.

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

    The proposed rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A)(i) of the Act,\8\ and Rule 19b-4(e)(1) \9\ 
thereunder, in that it is designated by the NASD as constituting a 
stated policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule. At any time within 
60 days of the filing of such 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.\10\
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    \8\ 15 U.S.C. 78s(b)(3)(A)(i).
    \9\ 17 CFR 240.19b-4(e)(1).
    \10\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the foregoing 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 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to File No. SR-NASD-98-86 and should be 
submitted by December 28, 1998.
    It is therefore ordered, pursuant to Section 19(b)(2) \11\ of the 
Act, that the proposed rule change be, and hereby is, approved.

    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32401 Filed 12-4-98; 8:45 am]
BILLING CODE 8010-01-M