[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Notices]
[Pages 43797-43802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20636]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41704; File No. SR-NASD-99-05]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2 and 3 to the Proposed Rule Change by the 
National Association of Securities Dealers, Inc. Relating to Margin for 
Exempted Borrowers, Good Faith Accounts, Joint Back Office Arrangements 
and Options Transactions

August 4, 1999.
    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 January 19, 1999, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), 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 NASD Regulation. NASD Regulation amended 
its proposal on June 1, 1999, July 7, 1999, and July 15, 1999.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Alden S. Adkins, Senior Vice President and 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated June 1, 1999 (``Amendment No. 1''); Letter from Alden S. 
Adkins, Senior Vice President and General Counsel, NASD Regulation, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated July 7, 1999 (``Amendment No. 2''); and Letter from Alden S. 
Adkins, Senior Vice President and General Counsel, NASD Regulation, 
to Richard C. Strasser, Assistant Director, Division, Commission, 
dated July 15, 1999 (``Amendment No. 3''). Amendment No. 1 conforms 
several provisions of NASD Rule 2520 to New York Stock Exchange 
(``NYSE'') Rule 431. Among other things, Amendment No. 1 indicates 
that, for purposes of the joint back office provisions of NASD Rule 
2520, the NASD will interpret the terms ``carrying and clearing 
member'' and ``carrying member'' in the same manner as NYSE. 
Amendment No. 1 also provides additional information regarding the 
proposed changes to the provisions of NASD Rule 2520 governing 
control and restricted securities. Amendment Nos. 2 and 3 make 
technical changes to the text of NASD Rule 2520.
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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 amend NASD Rule 2520, ``Margin 
Requirements,'' to revise the margin requirements for exempted 
borrowers, good faith accounts, joint back office arrangements and 
options transactions. The text of the proposed rule change is as 
follows (additions are italicized; deletions are bracketed):

2520. Margin Requirements

(a) Definitions

    For purposes of this paragraph, the following terms shall have the 
meanings specified below:
* * * * *
    (3) The term ``customer'' means any person for whom securities are 
purchased or sold or to whom securities are purchased or sold whether 
on a regular way, when issued, delayed or future delivery basis. it 
will also include any person for whom securities are held or carried 
and to or for whom a member extends, arranges or maintains any credit. 
The term will not include the following: (A) a broker or dealer from 
whom a security has been purchased or to whom a security has been sold 
for the account of the member or its customers [.], or (B) and 
``exempted borrower'' as defined by Regulation T of the Board of 
Governors of the Federal Reserve System (``Regulation T''), except for 
the proprietary account of a broker-dealer carried by a member pursuant 
to paragraph (e)(6) of this Rule.

(b) Initial Margin

    For the purpose of effecting new securities transactions and 
commitments, the customer shall be required to deposit margin in cash 
and/or securities in the account which shall be at least the greater 
of:
    (1) the amount specified in Regulation T[of the Boad of Governors 
of the Federal Reserve System]; or
* * * * *
    Withdrawals of cash or securities may be made from any account 
which has as debit balance, ``short'' position or commitments, provided 
it is in compliance with Regulation T [of the Board of Governors of the 
Federal Reserve System] and after such withdrawal the equity in the 
account is at least the greater of $2,000 or an amount sufficient to 
meet the maintenance margin requirements of this paragraph.

(c) Maintenance Margin

    The margin which must be maintained in [margin] all \4\ accounts of 
customers, except for cash accounts subject to other provisions of this 
rule, shall be as follows:
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    \4\ See Amendment No. 1, supra note 3.
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* * * * *
    [(5) In the case of securities listed on the Emerging Company 
Marketplace of the America Stock Exchange (AMEX), 100 percent of the 
market value in cash, of each security held ``long'' in the account, 
unless the AMEX determines that the security satisfies the criteria 
enumerated in Sections 220.17(a) and (b) of Regulation T of the Board 
of Governors of the Federal Reserve System for inclusion and continued 
inclusion on the List of OTC Margin Stocks, except for the requirement 
relating to the number of dealers in Sections 220.17(a)(1) and (b)(1)].
* * * * *

(e) Exceptions to Rule

    The foregoing requirements of this [paragraph] Rule \5\ are subject 
to the following exceptions:
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    \5\ See Amendment No. 2, supra note 3.
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* * * * *
(2) Exempted Securities, Marginable Corporate Debt Securities and 
Baskets
* * * * *
(C) Non-Convertible Corporate Debt Securities
    On any positions in non-convertible corporate debt securities, 
which are listed or traded on a registered national securities exchange 
or quality as an ``OTC margin bond,'' as defined in Section 220.2(t) of 
Regulation T [of the Board of Governors of the Federal Reserve System], 
the margin to be maintained shall be 20 percent of the current market 
value or 7 percent of the principal amount, whichever amount is 
greater, except on mortgage related securities as defined in Section 
3(a)(41) of the Act the margin to be maintained for an exempt account 
shall be 5 percent of the current market value. For purposes of this 
subparagraph, and exempt account shall be defined as a member, non-
member broker/dealer, ``designated account'' or any person having net 
tangible assets of at least sixteen million dollars.
* * * * *
(3) Joint Accounts in Which the Carrying Member or a Partner or 
Stockholder Therein Has an Interest
    In the case of a joint account carried by a member in which such 
member, or

[[Page 43798]]

any partner, or stockholder (other than a holder of freely transferable 
stock) of such member participates with others, each participant other 
than the carrying members shall maintain an equity with respect to such 
interest pursuant to the margin provisions of this paragraph as if such 
interest were in a separate account.
    Pursuant to the Rule 9600 Series, the Association may grant an 
exemption from the provisions of paragraph (e)(3), if the account is[:]
    [(A)] confined exclusively to transactions and positions in 
exempted securities[;].
    [(B) maintained as a Market Functions Account conforming to the 
conditions of Section 220.12(e) (Odd-lot dealers) of Regulation T of 
the Board of Governors of the Federal Reserve System; or]
    [C) maintained as a Market Functions Account conforming to the 
conditions of Section 220.12(c) (Underwritings and Distributions) of 
Regulation T of the Board of Governors of the Federal Reserve System 
and each other participant margins his share of such account on such 
basis as the Association may prescribe.] \6\
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    \6\ See Amendment No. 1, supra note 3.
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* * * * *
(5) Specialists' and Market Makers' Accounts
    (A) A member many carry the account of an ``approved specialist or 
market maker,'' which account is limited to specialist or market making 
transactions, upon a margin basis which is satisfactory to both 
parties. The amount of any deficiency between the equity in the account 
and the [margin required by the other provisions of this paragraph and 
the] haircut requirements pursuant to SEC Rule 15c3-1 shall be charged 
against the member's net capital when computing net capital under SEC 
Rule 15c3-1.
    For the purpose of this subparagraph, the term ``approved 
specialist or market maker'' means either:
    (i) a specialist or market maker, who is deemed a specialist for 
all purposes under the Act and who is registered pursuant to the rules 
of a national securities exchange; or
    (ii) an OTC market maker or third market maker, who meets the 
requirements of Section 220.7.(g)(5)[12(d) of Regulation T [of the 
Board of Governors of the Federal Reserve System].
    (B) In the case of joint account carried by a member in accordance 
with subparagraph (i) above in which the member participates, the 
equity maintained in the account by the other participants may be in 
any amount which is mutually satisfactory. The amount of any deficiency 
between the equity maintained in the account by the other participants 
and their proportionate share of the [margin required by the other 
provisions of this paragraph] the haircut requirements pursuant to SEC 
Rule 15c3-1 shall be charged against the member's net capital when 
computing net capital under SEC Rule 15c3-1.
(6) Broker/Dealer Accounts
    (A) A member may carry the proprietary account to another broker/
dealer, which is registered with the Commission, upon a margin basis 
which is satisfactory to both parties, provided the requirements of 
Regulation T [of the Board Governors of the Federal Reserve System] are 
adhered to and the account is not carried in a deficit equity 
condition. The amount of any deficiency between the equity maintained 
in the account and the [margin required by the other provisions of this 
paragraph] haircut requirements pursuant to SEC Rule 15c3-1 shall be 
charged against the member's net capital when computing net capital 
under SEC Rule 15c3-1.
    (B) Joint Back Office Arrangements
An arrangement may be established between two or more registered 
broker-dealers pursuant to Regulation T Section 220.7, to form a joint 
back office (``JBO'') arrangement for carrying and clearing or carrying 
accounts or participating broker-dealers. Members must provide written 
notification to the Association prior to establishing a JBO 
arrangement.
    (i) A carrying and clearing, or carrying member must:
    a. maintain a minimum tentative net capital of $25 million as 
computed pursuant to SEC Rule 15c3-1, except that a member whose 
primary business consists of the clearance of options market-maker 
accounts may carry JBO accounts provided that it maintains a minimum 
net capital of $7 million as computed pursuant to SEC Rule 15c3-1. In 
addition, the member must include in its ratio of gross options market 
maker haircuts required by the provisions of SEC Rule 15c3-1 gross 
deductions for JBO participant accounts. Clearance of option market 
maker accounts shall be deemed a broker-dealer's primary business if a 
minimum of 60% of the aggregate deductions in the above ratio are 
options market maker deductions. In the event that a carrying and 
clearing, or a carrying member's tentative net capital, or net capital, 
respectively, has fallen below the above requirements, the firm shall: 
(a) promptly notify the Association in writing of such deficiency, (b) 
take appropriate action to resolve such deficiency within three 
consecutive business days, or not permit any new transactions to be 
entered into pursuant to the JBO arrangement;
    b. maintain a written risk analysis methodology for assessing the 
amount of credit extended to participating broker/dealers which shall 
be made available to the Association on request; and
    c. deduct from net capital haircut requirements pursuant to SEC 
Rule 15c3-1 amounts in excess of the equity maintained in the accounts 
of participating broker/dealers.
    (ii) A participating broker/dealer must:
    a. be a registered broker/dealer subject to the SEC's net capital 
requirements;
    b. maintain an ownership interest in the carrying/clearing member 
organization pursuant to Regulation T of the Federal Reserve Board, 
section 220.11; and
    c. maintain a minimum liquidating equity of $1 million in the JBO 
arrangement exclusive of the ownership interest established in (ii)(b) 
above. When the minimum liquidating equity decreases below the $1 
million requirement, the participant must deposit an amount sufficient 
to eliminate this deficiency within 5 business days or be subject to 
margin requirements pursuant to the other provisions of this Rule.\7\
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    \1\ NASD Regulation agreed to revise NASD Rule 2520(e)(6)(B) to: 
(1) Replace a period at the end of NASD Rule 2520(e)(6)(B)(i)(a) 
with a semi-colon; and (2) revise NASD Rule 2520(e)(6)(B)(ii)(c) to 
refer to the preceding paragraph as (ii)(b) rather than (2). 
Telephone conservation between Elliott R. Curzon, Assistant General 
Counsel, NASD Regulation, and Yvonne Fraticelli, Special Counsel, 
Division, Commission, on July 19, 1999.
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(7) Nonpurpose Credit
    In a nonsecurities credit account, a member may extend and maintain 
nonpurpose credit to or for any customer without collateral or on any 
collateral whatever, provided,
    (A) the account is recorded separately and confined to the 
transactions and relations specifically authorized by Regulation T [of 
the Board of Governors of the Federal Reserve System];
* * * * *
    The term ``nonpurpose credit'' means an extension of credit other 
than ``purpose credit'' as defined in Section 220.2[(u)] of Regulation 
T [of the Board of Governors of the Federal Reserve System].

[[Page 43799]]

(8) Shelf-Registered, Control and Restricted Securities
* * * * *
    (B) Control and Restricted Securities--The equity in accounts of 
customers for control securities and other restricted securities of 
issuers who continue to maintain a consistent history of filing annual 
and periodic reports in timely fashion pursuant to the formal 
continuous disclosure system under the Act, which are subject to Rule 
144 or 145(d) under the Securities Act of 1933, shall be 40 percent of 
the current market value of such securities ``long'' in the account, 
provided the member:
    (i) in computing net capital, deducts any margin deficiencies in 
customers' accounts based upon a margin requirement as specified in 
subparagraph (c)(ii) below for such securities and values only that 
amount of such securities which are then salable under Rule 144 or 
145(d) under the Securities Act of 1933 in conformity with all of the 
applicable terms and conditions thereof, for purposes of determining 
such deficiencies; and
* * * * *
    (C) Additional Requirements on Shelf-Registered Securities and 
Control and Restrict Securities--A member extending credit on shelf-
registered, control and other restricted securities in margin accounts 
of customers shall be subject to the following additional requirements:
    (i) The Association may at any time require reports from members 
showing relevant information as to the amount of credit extended on 
shelf-registered, control and restricted securities and the amount, if 
any, deducted from net capital due to such security positions.
    (ii) Concentration Reduction. A concentration exists whenever the 
aggregate position in control and restricted securities of any one 
issue, excluding excess securities (as defined below), \8\ exceeds:
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    \8\ See Amendment No. 1, supra note 3.
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    a. 10 percent of the outstanding shares or
    b. 100 percent of the average weekly volume during the preceding 
three-month period. Where a concentration exists, for purposes of 
computing subparagraph (B)(i) above, the margin requirement on such 
securities shall be, based on the greater of (ii) a or b, above, as 
specified below:

------------------------------------------------------------------------
                                   or, Percent of
 Percent of outstanding shares     average weekly     Margin requirement
                                       volume
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Up to 10 percent...............  Up to 100 percent.  25 percent.
Over 10 percent and under 15     Over 100 percent    30 percent.
 percent.                         and under 200
                                  percent.
15 percent and under 20 percent  Over 200 percent    45 percent.
                                  and under 300
                                  percent.
20 percent and under 25 percent  300 percent and     60 percent.
                                  under 400 percent.
25 percent and under 30 percent  400 percent and     75 percent.
                                  under 500 percent.
30 percent and above...........  500 percent and     100 percent.
                                  above.
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    For purposes of this sub-paragraph (e)(8)(C)(ii), ``excess 
securities'' shall mean the amount of securities, if any, by which the 
aggregate position in control and restricted securities of any one 
issue exceeds the aggregate amount of securities that would be required 
to support the aggregate credit extended on such control and restricted 
securities if the applicable margin requirement were 50%.
    (D) Restricted Securities--Securities either:
    (i) [held by non-affiliates of the issuer which are] then salable 
[by non-affiliate] pursuant to the terms and conditions of Rule 144(k) 
under the Securities Act of 1993, or
    (ii) [which have been acquired by non-affiliates of the issuer in 
connection with Rule 145(a) transaction under the Securities Act of 
1933 which are] then salable [by such non-affiliate] pursuant to the 
terms and conditions of Rule 145 (d)(2) or (d)(3) under such Act,

shall not be subject to the provisions of this subparagraph [H] (e)(8), 
provided that the issuer continues to maintain a consistent history of 
filing annual and periodic reports in timely fashion pursuant to the 
formal continuous disclosure system under the Act.\9\
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    \9\ See Amendment No. 1, supra note 3.
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(f) Other Provisions

* * * * *
(2) Puts, Calls and Other Options
* * * * *
(H)
* * * * *
(iv)
* * * * *
    In the case of a put on an option contract (including a put on a 
broad index stock group), the letter of guarantee must certify that the 
guarantor holds for the account of the customer as security for the 
letter, cash or cash equivalents which have an aggregate market value, 
computed as at the close of business on the day the put is written, of 
not less than 100 percent of the aggregate exercise price of the put 
and that the guarantor will promptly pay the member the exercise 
settlement amount (in the case of a put on a broad index stock group) 
or the aggregate exercise price (in the case of any other put on an 
option contract) in the event the account is assigned an exercise 
notice. Cash equivalents shall mean those instruments referred to in 
Section 220.2 of Regulation T [of the Board of Governors of the Federal 
Reserve System.]
* * * * *
    (L) Exclusive designation--A customer may designate at the time an 
option order is entered which security position held in the account is 
to serve in lieu of the required margin, if such service is offered by 
the member; or the customer may have a standing agreement with the 
member as to the method to be used for determining on any given day 
which security position will be used in lieu of the margin to support 
an option transaction. Any security held in the account which serves in 
lieu of the required margin for a short put or short call shall be 
unavailable to support any other option transaction in the account.
    (M) Cash account transactions--A member may make option 
transactions in a customer's cash account, providing:
    (i) The transaction is permissible under Regulation T, Section 
220.8; or
    (ii) The transaction is a debit put spread in listed broad-based 
index options with European-style exercise comprised of a long put(s) 
coupled with a short put(s) overlying the same broad-based index with 
an equivalent underlying aggregate index value and the short put(s) and 
long put(s) expire simultaneously, and the strike price of

[[Page 43800]]

the long put(s) exceed the strike price of the short put(s).
* * * * *
(3) ``When Issued'' and ``When Distributed'' Securities
(A) Margin Accounts
* * * * *
    When an account has a ``short'' position in a ``when issued'' 
security and there are held in the account securities upon which the 
``when issued'' security may be issued, such ``short'' position shall 
be marked to the market and the balance in the account shall for the 
purpose of this [paragraph (c)] Rule \10\ be adjusted for any 
unrealized loss in such ``short'' position.
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    \10\ See Amendment No. 3, supra note 3.
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(B) Cash Accounts
* * * * *
    The provisions of this subparagraph [(B)](f)(3) shall not apply to 
any position resulting from contracts on a ``when issued'' basis in a 
security:
* * * * *
(6) Time Within Which Margin or ``Mark to Market'' Must Be Obtained
    The amount of margin or ``mark to market'' required by any 
provision of [this paragraph (c)] this Rule shall be obtained as 
promptly as possible and in any event within fifteen business days from 
the date such deficiency occurred, unless the Association has 
specifically granted the member additional time.
(7) Practice of Meeting Regulation T Margin Calls by Liquidation 
Prohibited
    When a ``margin call,'' as defined in Section 220.2[(1)] of 
Regulation T [of the Board of Governors of the Federal Reserve System], 
is required in a customer's account, no member shall permit a customer 
to make a practice of either deferring the deposit of cash or 
securities beyond the time when such transactions would ordinarily be 
settled or cleared, or meeting the margin required by the liquidation 
of the same or other commitments in the account.
* * * * *
(8) Special Initial and Maintenance Margin Requirements
* * * * *
(B) Day-Trading
    The term ``day-trading'' means the purchasing and selling of the 
same security on the same day. A ``day-trader'' is any customer whose 
trading shows a pattern of day-trading. Whenever day-trading occurs in 
a customer's margin account the margin to be maintained shall be the 
margin on the ``long'' or ``short'' transaction, whichever occurred 
first, as required pursuant to the other provisions of this Rule. When 
day-trading occurs in the account of a ``day-trader'' the margin to be 
maintained shall be the margin on the ``long'' or ``short'' 
transaction, whichever occurred first, as required by Regulation T [of 
the Board of Governors of the Federal Reserve System] or as required 
pursuant to the other provisions of this Rule, whichever amount is 
greater.
* * * * *
(9) Free-Riding in Cash Accounts Prohibited
    No member shall permit a customer (other than a broker/dealer or a 
``designated account'') to make a practice, directly or indirectly, of 
effecting transactions in a cash account where the cost of securities 
purchased is met by the sale of the same securities. No member shall 
permit a customer to make a practice of selling securities with them in 
a cash account which are to be received against payment from another 
broker/dealer where such securities were purchased and are not yet paid 
for. A member transferring an account which is subject to a Regulation 
T 90-day freeze to another member firm shall inform the receiving 
member of such 90-day freeze. The provisions of Section 220.8(c) of 
Regulation T [of the Board of Governors of the Federal Reserve System] 
dictate the prohibitions and exceptions against customers' free-riding. 
Members may apply to the Association in writing for waiver of a 90-day 
freeze not exempted by Regulation T.
* * * * *

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 Association 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 Association 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
    NASD Regulation is proposing to adopt amendments to the provisions 
of NASD Rule 2520 relating to exempted borrowers, good faith accounts, 
joint back office (``JBO'') arrangements and options transactions to 
conform NASD Rule 2520 to recent changes to NYSE Rule 431 and recently 
adopted changes to Regulation T promulgated by the Board of Governors 
of the Federal Reserve System (``Federal Reserve Board''). NASD 
Regulation is also proposing other minor changes to eliminate obsolete 
provisions and correct errors in the text of NASD Rule 2520.
    Margin Requirements for Exempted Borrowers and Good Faith Accounts. 
Under the recent changes to Regulation T, the Federal Reserve Board has 
created a new category of account called the ``good faith account'' to 
replace the ``non-purpose,'' ``arbitrage,'' and ``government 
securities'' accounts. In the good faith account, a customer can 
purchase certain securities (exempted and non-equity securities, and 
money market and exempted securities mutual funds) on ``good faith'' 
margin (the amount of margin specified by the creditor in the exercise 
of sound credit judgment) or the margin specified by the regulatory 
authority, whichever is greater. Regulation T no longer specifies 
initial margin, payment and liquidation time frames for transactions in 
these securities in a good faith account. NASD Regulation believes that 
these changes to Regulation T represent a continuing philosophical 
shift away from government mandated credit regulation and toward 
greater reliance on industry self-regulation and risk assessment.
    NASD Regulation believes that transactions in good faith accounts 
raise the same safety and soundness questions as transactions in cash 
and margin accounts. Accordingly, the proposed amendments require all 
accounts (except for cash accounts) to maintain margin as required by 
NASD Rule 2520. Cash accounts will continue to be subject only to 
certain specific requirements, not to the overall requirements of the 
rule.
    In addition, NASD Regulation states that the Federal Reserve Board 
exempted a class of borrowers called ``exempted borrowers'' (broker-
dealers that do substantial public business) from the requirements of 
Regulation T. The proposed amendments to NASD Rule 2520 will recognize 
the exemption

[[Page 43801]]

adopted by the Federal Reserve Board by codifying the exemption in the 
definition of ``customer'' in paragraph 2520(a)(3). However, the 
proposed amendments will require that the proprietary accounts of an 
introducing member that are carried or cleared by another member remain 
subject to the equity requirements of 2520(e)(6), which prohibit a 
member from carrying a proprietary account in a deficit equity 
condition and require the difference between the account equity and the 
margin required by NASD Rule 2520 to be deducted from the member's net 
capital.\11\
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    \11\ According to NASD Regulation, under the National Securities 
Markets Improvement Act of 1996 (``NSMIA''), the Federal Reserve 
Board no longer has the authority to regulate credit for the market 
making transactions of a registered market maker (transactional 
exemption); however, broker-dealers that are not market makers and 
that do not qualify as exempted borrowers because they do not meet 
the Regulation T definition are treated like ordinary customers for 
purposes of Regulation T initial margin. Currently, NASD Rule 2520 
permits good faith maintenance margin for broker-dealer's market 
making and proprietary accounts. See Rule 2520(e)(5) and (e)(6). 
This good faith maintenance margin standard will not be changed 
under the proposed amendments.
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    Amendments to Provide for Joint Back Office Arrangements.\12\ NASD 
Regulation is also proposing amendments to provide for JBO arrangements 
established pursuant to Section 220.7 of Regulation T. A JBO 
arrangement is one in which the creditor is a carrying and clearing 
broker-dealer or a carrying broker-dealer \13\ owned jointly or 
individually by other creditors. The amendments would require members, 
prior to establishing a JBO arrangement, to notify the Association. In 
addition, a carrying and clearing broker-dealer or a carrying broker-
dealer in a JBO arrangement must maintain minimum net capital of $25 
million. If a carrying and clearing broker-dealer or a clearing broker-
dealer only clears options market-maker accounts, it must maintain 
minimum net capital of $7 million.
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    \12\ The Chicago Board Options Exchange, the Chicago Stock 
Exchange, the NYSE, the Philadelphia Stock Exchange, and the Pacific 
Exchange have filed similar proposed rule changes with the 
Commission relating to JBOs. Notices of the exchanges' JBO proposals 
have been published for comment. See Securities Exchange Act Release 
Nos. 39418 (December 10, 1997), 62 FR 66154 (December 17, 1997) 
(File No. SR-CBOE-97-58); 40384 (August 31, 1998), 63 FR 48286 
(September 9, 1998) (File No. SR-CHX-98-12); 39497 (December 29, 
1997), 63 FR 899 (January 7, 1998) (File No. SR-NYSE-97-28); 39680 
(February 18, 1998), 63 FR 9622 (February 25, 1998) (File No. SR-
PCX-97-49); and 39419 (December 10, 1997), 62 FR 66169 (December 17, 
1997) (File No. SR-PHLX-97-56).
    \13\ Like the NASD's current proposal, the NYSE's JBO proposal 
permits ``carrying and clearing'' broker-dealers and ``carrying'' 
broker-dealers to establish JBOs. The NYSE sought and obtained 
interpretative guidance from the Federal Reserve Board of Governors 
indicating that a broker-dealer that would carry the accounts of JBO 
participants on its books but would not itself clear the JBO 
participants' accounts would be a ``clearing and servicing broker'' 
for purposes of Section 220.7(c) of Regulation T and, accordingly, 
would be permitted to establish a JBO. See Letter from Scott Holz, 
Counsel, Federal Reserve Board of Governors, to Raymond J. Hennessy, 
Vice President, Member Firm Regulation, NYSE, dated April 16, 1999 
(``April 16 Letter''). NASD Regulation understands that the NYSE 
uses the terms ``clearing member'' and ``carrying member'' to refer 
to two distinct forms of activity engaged in by certain firms. In 
addition, NASD Regulation agrees with the interpretation set forth 
in the April 16 Letter and intends for the terms ``carrying and 
clearing member'' and ``clearing member'' to have the same meaning 
in NASD Rule 2520 as they have in NYSE Rule 431. NASD Regulation 
states that it intends for NASD Rule 2520 to be substantially 
identical to NYSE Rule 431 to minimize confusion regarding margin 
requirements for NASD members who are also NYSE members. 
Accordingly, NASD Regulation intends that, unless otherwise 
specifically noted or where the language of NASD Rule 2520 differs 
substantively from NYSE Rule 431, the two rules are to be read and 
interpreted in the same manner. See Amendment No. 1, supra note 3.
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    A carrying and clearing broker-dealer or a carrying broker-dealer 
in a JBO arrangement must include in its ratio of gross options market 
maker haircuts for net capital purposes the gross deductions of JBO 
participant accounts. In the event that a carrying and clearing broker-
dealer or a carrying broker-dealer's tentative net capital or net 
capital falls below the requirements, the broker-dealer must notify the 
Association of the deficiency and resolve the deficiency within three 
business days. If the deficiency is not resolved, the broker-dealer may 
not permit any new transactions under the JBO arrangement. In addition, 
a carrying and clearing broker-dealer or a carrying broker-dealer in a 
JBO arrangement must maintain a written risk analysis methodology for 
assessing credit extensions and deduct the excess equity of 
participating broker-dealers from its net capital haircuts.
    A participating broker-dealer must be registered as a broker-
dealer, maintain an ownership interest in the carrying and clearing 
broker-dealer or the carrying broker-dealer, and have a liquidating 
equity of $1 million in the JBO arrangement, exclusive of its ownership 
interest in the carrying and clearing broker-dealer or the carrying 
broker-dealer.
    Control and Restricted Securities. Currently, the ``Concentration 
Reduction'' provision in NASD Rule 2520(e)(8)(C)(ii) is designed to 
impose increasing margin requirements for customer positions in control 
and restricted securities based upon the percent of outstanding shares 
or the percent of average weekly volume that the position represents. 
The effect of the provision, however, is to impose a margin requirement 
on the entire position, rather than on part of the position that 
actually collateralizes the loan extended to the customer. Thus, the 
customer is penalized for maintaining a position that exceeds the 
collateral necessary to cover his margin loan. To eliminate this 
unintended penalty, the proposed rule change adds language excluding 
``excess securities'' from the concentration reduction calculation. The 
proposal defines ``excess securities'' as the amount of securities by 
which the aggregate position in control and restricted securities of 
any one issue would be required to support the aggregate credit 
extended on such control and restricted securities if the applicable 
margin requirement was 50% percent. Thus, under the proposed rule 
change, the concentration reduction calculation will be performed on an 
aggregate position that is only as large as the collateral necessary to 
support a margin loan of 50% percent.
    In addition, the proposed rule change expands the exception in 
paragraph (e)(8) to include all restricted securities that can be sold 
pursuant to SEC Rules 144(k), 145(d)(2), or 145(d)(3). Currently, only 
those restricted securities that can be sold by non-affiliates of the 
issuer pursuant to SEC Rules 144(k), 145(d)(2), or 145(d)(3) are 
excepted from paragraph (e)(8). Thus, in the event of a customer 
default, members will be permitted to sell certain restricted 
securities pursuant to SEC Rule 144(k) without being subject to the 
requirements of NASD Rule 2520. Accordingly, those customer-owned, 
restricted securities that can be sold under SEC Rule 144(k) would be 
subject to the same maintenance margin requirements that presently 
apply to ordinary stock (25%).
    Amendments to Margin Rules governing Options Transactions. NASD 
Regulation is proposing to amend paragraph (f)(2) to add subparagraphs 
(L) and (M), which are identical to current provisions in NYSE Rule 
431, to permit customers to designate securities positions to margin 
options trades, and to permit options transactions in customer cash 
accounts to the extent the transaction is permissible under Regulation 
T, or that has certain other specific characteristics.
    Amendments to Conform to Changes to Regulation T. NASD Regulation 
is also proposing to amend NASD Rule 2520 to conform references to 
Regulation T to the amendment to

[[Page 43802]]

Regulation T recently adopted by the Federal Reserve Board.
    Miscellaneous Amendments. NASD Regulation is proposing to eliminate 
paragraph (c)(5) prescribing maintenance margin for American Stock 
Exchange Emerging Company Marketplace securities because the Emerging 
Company Marketplace no longer exists. NASD Regulation is also proposing 
to eliminate paragraphs (e)(3)(B) and (C) because Section 220.12 of 
Regulation T was deleted under the recent amendments to Regulation 
T.\14\
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    \14\ Telephone conversation between Elliott R. Curzon, Assistant 
General Counsel, NASD Regulation, and Anitra Casssas, Division, 
Commission, on July 8, 1999.
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2. Statutory Basis
    The Association believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, which 
requires, among other things, that the rules of an Association 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Association does not believe that the proposed rule change will 
impose 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

    Within 35 days 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 it reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying a the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-99-05 and should 
be submitted by September 1, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20636 Filed 8-10-99; 8:45 am]
BILLING CODE 8010-01-M