[Federal Register Volume 64, Number 175 (Friday, September 10, 1999)]
[Notices]
[Pages 49261-49263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41820; File No. SR-NASD-99-35]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the Definition of ``Person Associated with a Member''

September 1, 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 August 3, 1999, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') 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 the 
Association. 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

    The NASD is proposing to amend the definition of ``person 
associated with a member'' in the By-Laws of the NASD, NASD Regulation, 
Inc. (``NASD Regulation''), and The Nasdaq Stock Market, Inc. 
(``Nasdaq''). The text of the proposed rule change is set forth below. 
Additions are italicized and deletions are bracketed.
* * * * *
BY-LAWS OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
ARTICLE I DEFINITIONS
* * * * *
    (ee) ``person associated with a member'' or ``associated person of 
a member'' means: (1) a natural person who is registered or has applied 
for registration under the Rules of the Association; [or] (2) a sole 
proprietor, partner, officer, director, or branch manager of a member, 
or [a] other natural person occupying a similar status or performing 
similar functions, or a natural person engaged in the investment 
banking or securities business who is directly or indirectly 
controlling or controlled by a member, whether or not any such person 
is registered or exempt from registration with the NASD under these By-
Laws or the Rules of the Association; or \3\ (3) for purposes of Rule 
8210, any other person listed in Schedule A of Form BD of a member;
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    \3\ The NASD has approved the substitution of the word ``or'' in 
place of the word ``and'' in the proposed text here as it appeared 
in the NASD's original filing, to make clear that item (3) 
represents an alternative meaning of ``associated person.'' 
Telephone conversation between Mary Dunbar, Associate General 
Counsel, NASD Regulation, and Gordon Fuller, Special Counsel, and 
Ira L. Brandriss, Attorney, Division of Market Regulation, 
Commission (August 11, 1999).
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* * * * *
    The NASD proposes conforming changes to Article I(y) of the NASD 
Regulation By-Laws and Article I(r) of the Nasdaq By-Laws, 
respectively.
* * * * *

[[Page 49262]]

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 NASD 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 NASD 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 NASD proposes two amendments to the definition of ``person 
associated with a member'' in Article I of the NASD By-Laws, and 
conforming amendments to the NASD Regulation and Nasdaq By-Laws. The 
term is currently defined to include: (1) a natural person registered 
under the Rules of the Association; or (2) a sole proprietor, partner, 
officer, director, or branch manager of a member, or a natural person 
occupying a similar status or performing similar functions, or a 
natural person engaged in the investment banking or securities business 
who is directly or indirectly controlling or controlled by a member, 
whether or not any such person is registered or exempt from 
registration with the NASD under the By-Laws or the Rules of the 
Association.
    Two issues have arisen with respect to the definition. The first 
issue is whether the definition should be expanded to apply to certain 
owners of members. Currently, the definition only includes owners who 
are natural persons engaged in the member's investment banking or 
securities business and who have a direct or indirect ``control'' 
relationship with the member.\4\ While the NASD does not believe that 
the definition of associated person should include all owners and 
thereby subject them to all NASD rules, the NASD would like to amend 
the definition with what it views as a modest and incremental expansion 
to give the staff authority to require the provision of information and 
testimony under Rule 8210 (``the Rule'') from any person--including a 
natural person or corporate or other entity--who holds a five percent 
or greater interest in a member firm, regardless of whether they 
``control'' the member firm or are actively engaged in its securities 
or investment banking business.
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    \4\ The By-Laws do not define the term ``control.'' Form BD 
defines ``control'' as the ``power, directly or indirectly, to 
direct the management or policies of a company, whether through 
ownership of securities, by contract, or otherwise. Any person that 
* * * directly or indirectly has the right to vote 25% or more of a 
class of voting securities or has the power to sell or direct the 
sale of 25% or more of a class of voting securities; or * * * in the 
case of a partnership, has the right to receive upon dissolution, or 
has contributed 25% or more of the capital, is presumed to control 
that company.''
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    The NASD can identify such owners because members must list them in 
Schedule A of Form BD, which is filed with the NASD and the Commission. 
For example, if the member is a corporation, the member generally must 
list each shareholder that directly owns five percent or more of a 
class of a voting security of the member. If the member is a 
partnership, the member must list all general partners and those 
limited and special partners that have contributed, or have the right 
to receive upon dissolution, five percent or more of the partnership's 
capital. Members have a continuing obligation to update Schedule A.
    The NASD is not recommending any change to the Rule itself, which 
is one for the staff's primary tools for carrying out its regulatory 
responsibilities. The Rule authorizes the staff, for the purpose of an 
investigation, complaint, examination, or proceeding authorized by the 
NASD By-Laws or rules, to require a member or associated person to 
provide information or testimony. The Rule also authorizes the staff to 
inspect and copy the books, records, and accounts of such member or 
person with respect to any matter involved in the investigation, 
complaint, examination, or proceeding. The proposed amendment to the 
definition of associated person would permit the staff to direct a Rule 
8210 request to any owner--individual, corporate, partnership, trust, 
or otherwise--listed in Schedule A of Form BD, whether or not such 
owner controls the member firm. The NASD does not believe that it is 
necessary at this time to apply any other NASD rules to this group of 
owners or to amend Rule 8210; however, an owner who falls within the 
associated person definition but fails to comply with a Rule 8210 
request may be disciplined by the NASD.
    The second issue involves an anomaly between the By-Law definition 
of the term ``person associated with a member'' and a Form U-4, which 
is the application form for registration that must be signed by the 
prospective registered person. The Form U-4 states that by signing the 
Form, the applicant is subject to the jurisdiction of the NASD and any 
state in which he is applying for registration. However, the current 
definition of ``associated person'' in the By-Laws does not address 
applicants for registration. The NASD proposes that the By-Law should 
be made expressly consistent with the Form U-4 in this respect.
    Finally, the word ``other'' is inserted into subsection 2 of the 
definition to clarify that the subsection describes only natural 
persons.
    The NASD proposes to make the rule change effective for all members 
within 45 days after Commission approval. The effective date will be 
announced at least 15 days in advance in a Notice To Members.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) \5\ of the Act, which requires, 
among other things, that the Association's rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. The NASD believes that the proposed 
rule change will help it obtain necessary information to conduct its 
regulatory investigations and proceedings and clarify its jurisdiction 
over applicants for registration.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or

[[Page 49263]]

    (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 proposed rule 
change 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 in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal offices of the 
NASD. All submissions should refer to File No. SR-NASD-99-35 and should 
be submitted by October 1, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23611 Filed 9-9-99; 8:45 am]
BILLING CODE 8010-01-M