[Federal Register Volume 64, Number 110 (Wednesday, June 9, 1999)]
[Notices]
[Pages 31024-31028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14576]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41468; File No. SR-NASD-97-76]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Amendment No. 1 Thereto and Notice of Filing and Order Granting 
Accelerated Approval to Amendment Nos. 2 and 3 to Proposed Rule Change 
To Amend Its Rule 3230 Relating to Clearing Agreements

June 2, 1999.

I. Introduction

    On October 14, 1997, the NASD Regulation, Inc. (``NASDR'') 
submitted to the Securities and Exchange Commission (``Commission'') on 
behalf of the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), 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 3230 to 
monitor the activities of introducing firms that are parties to 
clearing agreements. On November 20, 1997, NASDR filed 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 John M. Ramsay, Deputy General Counsel, 
NASDR, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated November 19, 
1997 (``Amendment No. 1'').
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    The proposed rule change, as amended, was published for comment in 
the Federal Register on December 1, 1997.\4\ Three comment letters were 
received on the proposal.\5\ On August 18, 1998, the NASDR submitted

[[Page 31025]]

Amendment No. 2 to the Commission.\6\ On November 18, 1998, the NASDR 
submitted Amendment No. 3 to the Commission.\7\ This order approves the 
proposed rule change and Amendment No. 1 and approves Amendment Nos. 2 
and 3 on an accelerated basis.
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    \4\ See Securities Exchange Act Release No. 39349 (November 21, 
1997), 62 FR 63589.
    \5\ See Letters to Jonathan Katz, Secretary, Commission, from 
Alan G. Bower, Senior Vice President and Managing Counsel, Smith 
Barney, Inc., dated December 15, 1997 (``Smith Barney''); Henry H. 
Hopkins, Managing Director and Legal Counsel, and David Oestreicher, 
Associate Legal Counsel, T. Rowe Price Associates, Inc., dated 
December 19, 1997 (``T. Rowe Price''); and Thomas J. Berthel, 
Chairman, Local Firms Committee, Edward Schlitzer, Chairman, 
Clearing Firms Committee, and Thomas A. Franko, Ad Hoc Clearing 
Subcommittee, Securities Industry Association, dated December 29, 
1997 (``SIA'').
    \6\ See Letter from John M. Ramsay, Vice President and Deputy 
General Counsel, NASDR, to Katherine A. England, Assistant Director, 
Division, Commission, dated August 18, 1998 (``Amendment No. 2''). 
In Amendment No. 2, the NASDR responds to the comment letters 
received by the Commission and proposes to amend its filing to: (1) 
Delete the proposed requirement that, in response to customer 
complaints, the clearing firm must notify customers of their right 
to transfer their accounts; (2) delete the proposed requirement that 
the clearing firm provide, upon request of the introducing firm's 
Designated Examining Authority, reports that were offered to, but 
declined by, the introducing firm; (3) provide the NASD with the 
discretion to permit exemptions from the proposed customer complaint 
and exception report requirements for good cause shown; (4) modify 
its language relating to the issuance of negotiation instruments; 
and (5) conform the proposal to that of the New York Stock Exchange 
(``NYSE'') by specifying an as of date for the required annual 
notice of exception reports.
    \7\ See Letter from Alden S. Adkins, Senior Vice President and 
General Counsel, NASDR, to Katherine A. England, Assistant Director, 
Division, Commission, dated November 12, 1998 (``Amendment No. 3''). 
In Amendment No. 3, the NASDR proposes to amend the proposed rule 
language to limit the proposed exemption for good cause shown to 
instances in which the introducing firm is an affiliated entity of 
the carrying organization. The NASDR also proposes to amend NASD 
rule 9610(a) to add Rule 3230 to the list of rules for which 
exemptions are available.
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II. Description of the Proposal

    The NASDR proposes to revise NASD Rule 3230 to enhance the ability 
of the Association and other securities self-regulatory organizations 
(``SROs'') to monitor the activities of introducing firms that are 
parties to clearing agreements. NASD Rule 3230 governs the contractual 
agreements, known as clearing agreements, between a clearing firm and 
an introducing firm, that allocate certain functions and 
responsibilities associated with the clearing of, and transactions in, 
customer accounts. Generally, the proposed amendments to NASD Rule 3230 
would provide for increased monitoring of customer complaints regarding 
introducing firms, require specific procedures for introducing firms 
requesting reports offered by clearing firms, and address procedures 
and responsibilities of introducing firms that are permitted to issue 
negotiable instruments of the clearing firms.
    Specifically, the proposal, as amended, would require a clearing 
firm to provide promptly any written customer complaint it receives 
regarding the introducing firm to the introducing firm and the 
introducing firm's Designated Examining Authority (``DEA''). In 
addition, the proposal would require that the clearing firm notify the 
customer who submitted the written complaint in writing that the 
complaint was received and that it was provided to the introducing firm 
and the DEA. As initially proposed, the clearing firm would also have 
been required, in response to customer complaints, to inform customers 
of their right to transfer their accounts to another broker-dealer. As 
discussed further below, this provision was subsequently deleted from 
the proposal in response to comment letters received by the 
Commission.\8\
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    \8\ See Amendment No. 2, supra note 6.
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    The proposal also would require the clearing firm to provide to 
each of its introducing firms, at the beginning of the agreement and 
annually thereafter, a list of all exception and other reports that it 
offers to assist its introducing firms in supervising and monitoring 
their customer accounts.\9\ The proposal would require each introducing 
firm to notify its clearing firm of those specific reports offered that 
should be provided to the firm.\10\
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    \9\ As initially proposed, the clearing firm would have been 
required to provide, upon request of the introducing firm's DEA, 
reports that were offered to the introducing firm, but which the 
introducing firm declined. This provision was subsequently deleted 
from the proposal. See Amendment No. 2, supra note 6.
    \10\ In addition, the clearing firm would be required to retain 
and preserve copies of the specific reports requested by or supplied 
to the introducing firm or have the capability to: (1) Recreate 
copies of reports provided, or (2) make available the report format 
and data elements provided in the original reports necessary to 
recreate the original reports.
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    In addition, the proposal would require the clearing firm to 
provide written notice, on an annual basis within 30 days of July 1 of 
each year (i.e., between June 1 and July 31), to the introducing firm's 
Chief Executive Officer, Compliance Officer, and DEA, of the list of 
reports offered to the introducing firm and to specify those reports 
actually requested or supplied as of the report date.\11\
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    \11\ Under the original proposal, the clearing firm would have 
been required to notify the introducing firm and the introducing 
firm's DEA of exception and other reports offered or supplied to, or 
requested by, the introducing firm during the previous year. The 
NASDR now proposes to conform its proposal to that of the NYSE by 
clarifying that the requisite notice must be made as of a specific 
date, rather than during the course of the year. See Amendment No. 
2, supra note 6.
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    The proposal, as amended, would grant the NASD the discretion, upon 
a showing of good cause, to grant exemptions from the requirements 
relating to the handling of customer complaints and the provision of 
exception reports in instances where the introducing firm is an 
affiliated entity of the clearing firm.\12\ The Association also 
proposes to amend NASD rule 9610(a) to add Rule 3230 to the list of 
rules for which exemptions are available.\13\
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    \12\ See Amendment No. 2, supra note 6; see also Amendment No. 
3, supra note 7.
    \13\ See Amendment No. 3, supra note 7.
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    Finally, the proposal addresses those agreements that allow 
introducing firms to issue negotiable instruments (e.g., checks) to 
their customers, for which the clearing firm is the maker or drawer. 
The proposed rule provides that the introducing firm must represent to 
the clearing firm that it has supervisory procedures in place, which it 
enforces and which are satisfactory to the clearing firm,\14\ with 
respect to the issuance of such instruments.
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    \14\ To conform its proposal to that of the NYSE, the NASD 
proposes to require that the introducing firm's supervisory 
procedures, with respect to the issuance of negotiable instruments 
for which the clearing firm is maker or drawer, are ``satisfactory 
to the carrying organization.'' See Amendment No. 2, supra note 6.
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III. Summary of Comments

    The Commission received three comment letters on the proposed rule 
change.\15\ As discussed further below, the commenters generally 
supported the proposed amendments to NASD Rule 3230; however, they 
recommended a number of modifications to the proposal.
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    \15\ See note 5, supra.
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A. Customer Complaints

    One commenter stated that the proposed requirement that clearing 
firms must forward customer complaints may be unnecessary since NASD 
Rule 3070 already requires the reporting of customer complaints.\16\ 
The NASDR declined to amend its proposal in response to this comment 
because the requirements differ and serve different purposes. 
Specifically, NASD Rule 3070 requires statistical reporting, while the 
proposal would require copies of the actual reports to be forwarded.
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    \16\ See T. Rowe Price Letter, supra note 5.
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    Two commenters recommended the deletion of the proposed requirement 
that the clearing firm notify complaining customers in writing that 
they have the right to transfer their accounts to another broker-
dealer.\17\ These commenters expressed concerns that the proposed 
requirement could be misleading as it could create the perception that 
the subject of the customer's complaint necessarily warranted a 
transfer.\18\ For example, one commenter pointed out that the proposed 
statement ``might well cause

[[Page 31026]]

the customer to infer wrongdoing and take his or her business 
elsewhere, regardless of the merit of the complaint or the underlying 
circumstances * * *'' \19\ In response, the NASDR proposes to delete 
the provision that requires that customers be notified of their right 
to transfer their accounts to another broker-dealer, noting that 
investor education initiatives may more effectively accomplish the 
objectives of the proposed requirements.\20\
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    \17\ See Letters from T. Rowe Price and SIA, supra note 5.
    \18\ Id.
    \19\ See SIA Letter, supra note 5 (incorporation by reference 
Letter to Jonathan Katz, Secretary, Commission, from Thomas J. 
Berthel, Chairman, Local Firms Committee, Edward Schlitzer, 
Chairman, Clearing Firms Committee, and Thomas A. Franko, Ad Hoc 
Clearing Subcommittee, Securities Industry Association, dated 
November 3, 1997, on File No. SR-NYSE-97-25).
    \20\ See Amendment No. 2,  supra note 6.
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B. Exception Reports

    One commenter recommended that the proposal should require clearing 
firms to produce and make available certain basic reports to their 
introducing firms, rather than to require clearing firms to provide 
notices of the reports that are offered to their introducing firms.\21\ 
The NASDR declined to amend its proposal in response to this comment, 
noting that ``firms generally have wide latitude to tailor clearing 
arrangements to individual business situations, and there is not 
industry standard for such arrangements or for the exception and other 
reports made available pursuant to such arrangements.'' \22\
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    \21\ See T. Rowe Price Letter, supra note 5.
    \22\ See Amendment No. 2, supra note 6.
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    One commenter recommended that the NASDR conform its proposed rule 
language to that of the NYSE by specifying that the proposed 
notification requirements apply to reports offered, requested or 
supplied as of a specific date, because it would not be feasible for 
clearing firms to track all of the various reports that introducing 
firms may have been offered, requested or received over the course of a 
year.\23\ In response, the NASDR proposes to amend its proposed rule 
language to require clearing firms to notify the introducing firms and 
the introducing firm's DEA of exception and other reports offered or 
supplied to, or requested by, the introducing firms as of a specific 
date, rather than through the course of the year.\24\
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    \23\ See SIA Letter, supra note 5.
    \24\ See Amendment No. 2, supra note 6.
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    The same commenter also opposed the proposed requirement that, upon 
the request of the introducing firm's DEA, the clearing firm must 
provide reports that were offered to the introducing firm, but which 
the introducing firm declined to receive.\25\ This commenter noted that 
compliance with this proposed requirement may be impossible, or, at a 
minimum, burdensome to the clearing firm.\26\ In response, the NASDR 
proposes to delete this proposed requirement.\27\
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    \25\ SeeSIA Letter, supra, note. 5.
    \26\ Id.
    \27\ See Amendment No. 2, supra note 6.
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C. Exemption for Good Cause Shown

    One commenter expressed concerns that the proposed provisions 
relating to customer complaints and exception reports would be 
unnecessary in situations in which clearing firms were already 
performing these compliance functions for their introducing firm 
subsidiaries.\28\ In response to this comment, the NASDR proposes to 
amend its filing to allow the Association to grant an exemption from 
the customer complaint and exception report provisions in instances 
where the introducing firm is an affiliated entity of the clearing 
firm.\29\
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    \28\ See Smith Barney Letter, supra note 5.
    \29\ See Amendment No. 2, supra note 6.
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D. Negotiable Instruments

    One commenter expressed concerns about the NASDR's description of 
the proposed provisions relating to negotiable instruments, noting that 
the NASDR's interpretation ``is misleading in that it implies that the 
[clearing firm] could be liable for the acts of the [introducing firm] 
independent of the [clearing firm's] obligations as maker or drawer.'' 
\30\ In response, the NASDR proposes to amend its discussion in the 
proposal to clarify that the proposal ``simply requires introducing 
firms to establish clear safeguards and procedures that are 
satisfactory to the clearing member when the introducing member issues 
checks to customers drawn to the clearing member's account'' \31\
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    \30\ See SIA Letter, supra note 5.
    \31\ See Amendment No. 2, supra note 6.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 15A of the Act \32\ and the rules and 
regulations thereunder applicable to a national securities 
association.\33\ The Commission believes that the proposed rule change 
is consistent with and furthers the objectives of Section 15A(b)(6) of 
the Act,\34\ in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and, in general, to protect investors and the 
public interest.
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    \32\ 15 U.S.C. 78o-3.
    \33\ In approving this rule, the Commission considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \34\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change, by assisting 
the NASD to better monitor the activities of introducing brokers, 
should help to prevent fraudulent and manipulative acts and practices. 
The proposal and the companion proposal submitted by the NYSE \35\ 
represent an important step toward addressing recent concerns about 
questionable sales practices and potentially fraudulent activity 
engaged in by some introducing firms.\36\ The Commission expects that 
the proposed rules, by establishing procedures for the handling of 
customer complaints, the offer and receipt of exception reports, and 
the introducing firm's issuance of negotiable instruments of the 
clearing firm, should assist the SROs in their regulatory efforts. In 
addition, by requiring clearing firms to provide to their introducing 
firms copies of customer complaints and lists of available exception 
reports, the proposal should help introducing firms to better monitor 
their customer accounts.
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    \35\ The Commission is simultaneously approving the NYSE's 
amended proposal, File No. SR-NYSE-97-25.
    \36\ The Commission encourages the NASD, the NYSE, and others to 
continue to consider additional measures focusing on introducing and 
clearing firm processes that would assist in detecting and deterring 
fraudulent and manipulative activities.
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A. Customer Complaints

    The proposed customer complaint provisions of the proposal would 
require clearing firms to provide any written customer complaint they 
receive regarding the introducing firm to the introducing firm and the 
introducing firm's DEA. In addition, the proposal would require that 
the customer who submitted the written complaint be notified in writing 
by the clearing firm that the complaint was received and that it was 
provided to the introducing firm and the DEA.
    The Commission believes the proposed requirements relating to the 
handling of customer complaints received by clearing firms are 
reasonable. These procedures should enhance the ability of introducing 
firms and their DEAs to monitor complaints. In particular, DEAs and 
firms should be better able to identify patterns of complaints to 
determine, for example, whether there is a problem with the firm's 
supervisory procedures, operations, or an individual registered

[[Page 31027]]

representative. The Commission notes one commenter's concern that the 
proposal is duplicative because existing NASD Rule 3070(c) requires 
member firms to report to the Association statistical and summary 
information regarding customer complaints.\37\ The Commission, however, 
believes that because this proposal would require the submission of a 
copy of the actual complaint to the DEA, the proposed reporting 
requirements supplement, rather than duplicate, the existing reporting 
requirements.
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    \37\ See T. Rowe Price, supra note 5.
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    Moreover, the Commission agrees with the commenters that the 
notification provisions, initially proposed, which required clearing 
firms to advise complaining customers of their right to transfer their 
accounts, could have created the perception that the subject of the 
customer's complaint warranted a transfer. Many customer complaints 
relate to operational issues, such as delayed dividend checks, and are 
easily resolved by the firm. The Commission believes that broader 
investor education initiatives designed to inform investors of their 
rights would more effectively achieve the same objectives without 
creating the possibility of unnecessary confusion. The Commission is 
working with the SROs on educational initiatives in this area. 
Accordingly, the Commission believes that the Association's proposal to 
delete the proposed notification provision is appropriate.

B. Exception Reports

    The proposal also would require clearing firms to provide a list of 
all reports that are offered to their introducing firms and would 
require each introducing firm to provide its clearing firm with a list 
of specific reports requested. The proposal further would require 
clearing firms to provide to their introducing firms and their 
introducing firm's DEA written annual notice, within 30 days of July 1, 
of the list of reports offered to each introducing firm and to specify 
those reports actually requested or supplied as of the report date.
    Exception and other reports are important in the monitoring and 
supervision of customer accounts, from both a risk management and 
customer services perspective. For example, reports that flag unusual 
account activity or possible unauthorized trades may allow for early 
detection and correction of potential problems with a firm's 
supervisory procedures, operations, or an individual registered 
representative. The Commission therefore believes that the 
Association's proposal will enhance the firm's supervisory procedures 
and give DEAs more information to identify potential weaknesses at 
individual firms.
    The Commission disagrees with the comment that the Association's 
rules should dictate certain basic reports that every introducing 
broker should receive.\38\ The Commission is concerned that because an 
industry standard has not been established at this time, encouraging 
the NASD to establish a list of ``basic'' reports would likely result 
in many introducing brokers obtaining no more than that minimum, 
despite the fact that a particular introducing firm may need more 
comprehensive information. That being said, however, the Commission 
notes that it is the responsibility of each introducing firm to obtain 
from its clearing firm or elsewhere all relevant information that the 
introducing firm requires to adequately supervise and monitor its 
operations, including the handling of customers' accounts.
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    \38\ See T. Rowe Price Letter, supra note 5.
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    The Commission believes that the Association's proposal to amend 
the rule language to require clearing firms to provide the requisite 
notification regarding exception and other reports offered, supplied 
to, or requested by the introducing firm as of a specific date, rather 
than through the course of the year, is reasonable. The Commission also 
supports the NASDR's proposed deletion of the requirement that, at the 
request of the introducing firm's DEA, the clearing firm must provide 
reports that were offered to the introducing firm, but which the 
introducing firm declined to receive.
    The Commission believes that these revisions to the original 
proposal should not diminish the value of the proposed amendments to 
NASD Rule 3230 as a supervisory tool. Information regarding reports 
available and those reports requested as of a specific date should 
assist both the introducing firm in assessing its prospective needs and 
the introducing firm's DEA in its regulatory efforts. Even without a 
reporting requirement, the DEA will still be able to determine which 
reports were made available to the introducing firm, and which were not 
requested. In addition, the Commission notes that both of these 
proposed revisions to the Association's original filing seek to conform 
the NASD's proposal to that submitted by the NYSE. The Commission 
believes that uniformity between the NASD's and the NYSE's rules in 
this area should ease the compliance burden on introducing firms and 
their clearing brokers alike, as well as enhance the usefulness of the 
rules for the firms' respective DEAs.
    Finally, the Commission notes that the proposed requirements 
relating to exception reports apply to all clearing firm/introducing 
firm relationships, regardless of the manner in which the data is 
transmitted from the clearing firm to the introducing firm. Therefore, 
the proposed rules are equally applicable to clearing agreements that 
provide for the transmission from the clearing firm to the introducing 
firm of raw data, rather than information organized in a formatted 
report. Under either scenario, the Commission expects the introducing 
firm to determine what information is needed for the proper supervision 
of its customer accounts, and to have the ability to use the data 
provided by its clearing firm in its supervisory efforts.

C. Exemption for Good Cause Shown

    The NASD is proposing to include an exemption from the customer 
complaint and exception report provisions of the proposal for those 
situations in which clearing firms are already performing these 
compliance functions for their introducing firm affiliates. The 
Commission believes that it is reasonable for the Association to have 
the authority to grant such an exemption in the limited circumstances 
in which the introducing firm is an affiliated entity of the clearing 
firm to avoid duplication of efforts.

D. Negotiable Instruments

    The Commission believes that the proposed procedures to be followed 
by introducing firms that issue negotiable instruments for which the 
clearing firm is the maker or drawer are reasonable. Specifically, the 
Commission believes that it is appropriate for the introducing firm to 
be required to represent to the clearing firm that it has supervisory 
procedures in place, which it enforces, and which are satisfactory to 
the clearing firm. A clearing firm that finds that its introducing firm 
does not have minimal safeguards and procedures for the issuance of 
checks drawn on the clearing firm's account should, at a minimum, 
reexamine its relationship with the introducing firm. The Commission 
views the proposed requirement as a supplement to, rather than a 
replacement for, any other obligation or legal liability of the 
clearing firm as maker or drawer of the instrument.\39\
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    \39\ See e.g., NASD Guide to Rule Interpretations 1996, p. 75, 
Ability of a (k)(2)(ii) Broker/Dealer to Write Checks on Behalf of 
the Clearing Firm, see also Amendment No. 2, supra note 6.

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[[Page 31028]]

    The Commission finds good cause for approving proposed Amendment 
Nos. 2 and 3 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 modifies the original filing in response to specific 
comments raised in three comment letters. Specifically, Amendment No. 2 
deletes the proposed rule language requiring clearing firms to include 
in their responses to customer complaints a statement regarding the 
customer's right to transfer the account to another broker-dealer. As 
discussed above, the Commission believes that alternative investor 
education initiatives should inform public customers of their rights 
without raising the possibility of customer confusion regarding whether 
the clearing firm believes such action is warranted. Amendment No. 2 
also adds a good cause exclusion from certain provisions of the 
proposed rule in certain circumstances. In Amendment No. 2, the NASDR 
also proposes several amendments to conform its proposed rule language 
to that proposed by the NYSE. In Amendment No. 3, the NASDR limits the 
proposed good cause exemption to situations in which the introducing 
firm is an affiliated entity of the clearing firm. As the modifications 
proposed in Amendment Nos. 2 and 3 are reasonable and do not 
significantly alter the original proposal, the Commission believes that 
Amendment Nos. 2 and 3 raise no new issues of regulatory concern. 
Accordingly, the Commission believes that it is consistent with Section 
6 of the Act \40\ to approve Amendment Nos. 2 and 3 to the proposed 
rule change on an accelerated basis.
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    \40\ 15 U.S.C. 78f.
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 2 and 3, including whether 
Amendment Nos. 2 and 3 are 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 20549-0609. 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 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-97-76 and should be submitted by June 30, 1999.

VI. Conclusion

    The Commission believes that the proposal, as amended, should 
significantly assist the efforts of introducing firms and their DEAs to 
fulfill their supervisory responsibilities. Specifically, the 
Commission believes that, by ensuring that clearing firms provide 
introducing firms with important information about their customers' 
accounts and by requiring that the introducing firms have in place 
supervisory procedures with respect to their issuance of negotiable 
instruments, the proposed rules should enhance good business practices 
by introducing firms. Further, by requiring that introducing firms 
receive copies of customer complaints and exception and other reports 
about their customers' accounts, the proposal should assist introducing 
firms in more quickly identifying and addressing potential problems 
with their supervisory procedures, operations, or an individual 
registered representative. This should reduce the risks to both the 
firm and its customers from questionable sales practices and 
potentially fraudulent activity.
    In addition, the Commission believes that the proposal should also 
assist the regulatory efforts of the introducing firms' DEAs. 
Specifically, the Commission believes that the proposal may allow 
earlier detection by an introducing firm's DEA of potentially 
fraudulent activity, which will benefit investors and the public. 
Therefore, the Commission finds the approval of the proposed rule 
change, as amended, is consistent with the requirements of the Act 
applicable to a national securities association, and in particular, 
with the requirements of Section 15A(b)(6) of the Act \41\ and the 
rules and regulations thereunder.
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    \41\ 15 U.S.C. 78o-3.
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-NASD-97-76) is approved, as 
amended.

    \42\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-14576 Filed 6-8-99; 8:45 am]
BILLING CODE 8010-01-M