[Federal Register Volume 64, Number 182 (Tuesday, September 21, 1999)]
[Notices]
[Pages 51165-51170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24493]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41875; File No. SR-NASD-99-41]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Opening of Day-Trading Accounts

September 14, 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 20, 1999, the National Association of Securities Dealers, 
Inc. (``NASD''), 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. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend the 2300 Series of the Rules 
of the NASD to include new Rule 2360 and Rule 2361 regarding the 
opening of day-trading accounts. Below is the text of the proposed rule 
change. Proposed new language is in italics.

Rule 2360. Approval Procedures for Day-Trading Accounts

    (a) No member that is promoting a day-trading strategy, directly or 
indirectly, shall open an account for or on behalf of a non-
institutional customer, unless, prior to opening the account, the 
member has furnished to the customer the risk disclosure

[[Page 51166]]

statement set forth in Rule 2361 and has:
    (1) approved the customer's account for a day-trading strategy in 
accordance with the procedures set forth in paragraph (b) and prepared 
a record setting forth the basis on which the member has approved the 
customer's account; or
    (2) received from the customer a written agreement that the 
customer does not intend to use the account for the purpose of engaging 
in a day-trading strategy, except that the member may not rely on such 
agreement if the member knows that the customer intends to use the 
account for the purpose of engaging in a day-trading strategy.
    (b) In order to approve a customer's account for a day-trading 
strategy, a member shall have reasonable grounds for believing that the 
day-trading strategy is appropriate for the customer. In making this 
determination, the member shall exercise reasonable diligence to 
ascertain the essential facts relative to the customer, including his 
or her financial situation, tax status, prior investment and trading 
experience, and investment objectives.
    (c) If a member that is promoting a day-trading strategy opens an 
account for a non-institutional customer in reliance on a written 
agreement from the customer pursuant to paragraph (a)(2) and, following 
the opening of the account, knows that the customer is using the 
account for a day-trading strategy, then the member shall be required 
to approve the customer's account for a day-trading strategy in 
accordance with paragraph (a)(1) as soon as practicable, but in no 
event later than 10 days following the date that such member knows that 
the customer is using the account for such a strategy.
    (d) Any record or written statement prepared or obtained by a 
member pursuant to this rule shall be preserved in accordance with Rule 
3110(a).
    (e) For purposes of this rule, the term ``day-trading strategy'' 
means an overall trading strategy characterized by the regular 
transmission by a customer of intra-day orders to effect both purchase 
and sale transactions in the same security or securities.
    (f) For purposes of this rule, the term ``non-institutional 
customer'' means a customer that does not qualify as an ``institutional 
account'' under Rule 3110(c)(4).

Rule 2361. Day-Trading Risk Disclosure Statement

    (a) Except as provided in paragraph (b), no member that is 
promoting a day-trading strategy, directly or indirectly, shall open an 
account for or on behalf of a non-institutional customer unless, prior 
to opening the account, the member has furnished to the customer, in 
writing or electronically, the following disclosure statement:
    You should consider the following points before engaging in a day-
trading strategy. For purposes of this notice, a ``day-trading 
strategy'' means a strategy characterized by the regular transmission 
by a customer of intra-day orders to effect both purchase and sale 
transactions in the same security or securities.
     Day trading can be extremely risky. Day trading generally 
is not appropriate for someone of limited resources and limited 
investment or trading experience and low risk tolerance. You should be 
prepared to lose all of the funds that you use for day trading. In 
particular, you should not fund day-trading activities with retirement 
savings, student loans, second mortgages, emergency funds, funds set 
aside for purposes such as education or home ownership, or funds 
required to meet your living expenses.
     Be cautious of claims of large profits from day trading. 
You should be wary of advertisements or other statements that emphasize 
the potential for large profits in day trading. Day trading can also 
lead to large and immediate financial losses.
     Day trading requires knowledge of securities markets. Day 
trading requires in-depth knowledge of the securities markets and 
trading techniques and strategies. In attempting to profit through day 
trading, you must compete with professional, licensed traders employed 
by securities firms. You should have appropriate experience before 
engaging in day trading.
     Day trading requires knowledge of a firm's operations. You 
should be familiar with a securities firm's business practices, 
including the operations of the firm's order execution systems and 
procedures.
     Day trading may result in your paying large commissions. 
Day trading may require you to trade your account aggressively, and you 
may pay commissions on each trade. The total daily commissions that you 
pay on your trades may add to your losses or significantly reduce your 
earnings.
     Day trading on margin or short selling may result in 
losses beyond your initial investment. When you day trade with funds 
borrowed from a firm or someone else, you can lose more than the funds 
you originally placed at risk. A decline in the value of the securities 
that are purchased may require you to provide additional funds to the 
firm to avoid the forced sale of those securities or other securities 
in your account. Short selling as part of your day-trading strategy 
also may lead to extraordinary losses, because you may have to purchase 
a stock at a very high price in order to cover a short position.
    (b) In lieu of providing the disclosure statement specified in 
paragraph (a), a member that is promoting a day-trading strategy may 
provide to the customer, in writing or electronically, prior to opening 
the account, an alternative disclosure statement, provided that:
    (1) The alternative disclosure statement shall be substantially 
similar to the disclosure statement specified in paragraph (a); and
    (2) The alternative disclosure statement shall be filed with the 
Association's Advertising Department (Department) for review at least 
10 days prior to use (or such shorter period as the Department may 
allow in particular circumstances) for approval and, if changes are 
recommended by the Association, shall be withheld from use until any 
changes specified by the Association have been made or, if expressly 
disapproved, until the alternative disclosure statement has been 
refiled for, and has received, Association approval. The member must 
provide with each filing the anticipated date of first use.
    (c) For purposes of this rule, the term ``day-trading strategy'' 
shall have the meaning provided in Rule 2360(e).
    (d) For purposes of this rule, the term ``non-institutional 
customers'' means a customer that does not qualify as an 
``institutional account'' under Rule 3110(c)(4).

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.

[[Page 51167]]

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

1. Purpose
Introduction
    Certain brokerage firms focus primarily, or even exclusively, on 
promoting day-trading strategies to individuals. These firms generally 
advertise on the Internet and elsewhere as ``day-trading'' firms or 
otherwise promote their execution and other services as desirable for 
``serious'' or ``professional'' traders. In addition, many of these 
firms offer training on day-trading techniques, as well as provide 
computer facilities and software packages specifically designed to 
support and accommodate day trading.
    Day trading, however, raises unique investor protection concerns. 
In general, day traders seek to profit from very small movements in the 
price of a security. Such a strategy often requires aggressive trading 
of a brokerage account. As a result, day trading generally requires a 
significant amount of capital, a sophisticated understanding of 
securities markets and trading techniques, and high risk tolerance. 
Even experienced day traders with in-depth knowledge of the securities 
markets may suffer severe and unexpected financial losses.
The Proposal in Special Notice to Members 99-32
    To address investor protection concerns arising from day-trading 
activities, on April 15, 1999, NASD Regulation issued Special Notice to 
Members 99-32 soliciting comment on proposed rules regarding approval 
procedures for day-trading accounts. The proposal set forth in the 
Notice required a firm that had recommended an intra-day trading 
strategy to an individual to approve the individual's account for day 
trading. The proposal also required the firm, as part of the account 
approval process, to determine that the strategy was appropriate for 
the customer and to provide a disclosure statement to the customer 
discussing the risks associated with day-trading activities. As further 
discussed below, NASD Regulation received 39 comment letters in 
response to Special Notice to Members 99-32.
The Revised Proposed Rule Change
    Based on the comments received in response to the Notice and input 
provided by the various NASD standing-committees, NASD Regulation has 
revised the proposed rule change concerning the opening of day-trading 
accounts. The proposed rule change, similar to its predecessor in 
Notice to Members 99-32, focuses on disclosing the basic risks of 
engaging in a day-trading strategy and assessing the appropriateness of 
day-trading strategies for individuals.
    In particular, the proposed rule change would require a firm that 
is promoting a day-trading strategy, directly or indirectly, to deliver 
a specified risk disclosure statement to a non-institutional customer 
prior to opening an account for the customer. In addition, the firm 
would be required to (1) approve the customer's account for day trading 
or (2) obtain a written agreement from the customer stating that the 
customer does not intend to use the account for day-trading activities. 
A firm would not be permitted to rely on the written agreement from the 
customer if the firm knows that the customer intends to use the account 
for day trading. In addition, if a firm knows that a customer who 
provided such an agreement is engaging in a day-trading strategy, the 
firm would be required to approve the account for day trading.
    As part of the account approval process, a firm would be required 
to have reasonable grounds for believing that the day-trading strategy 
is appropriate for the customer. In making this determination, the firm 
would be required to exercise reasonable diligence to ascertain the 
essential facts relative to the customer, including his or her 
financial situation, tax status, prior investment and trading 
experience, and investment objectives. The firm also would be required 
to prepare a record setting forth the basis on which the firm has 
approved the customer's account. Any record or written statement 
prepared or obtained by the firm pursuant to the proposed rule change 
would have to be preserved in accordance with NASD Rule 3110(a).
Requirement To Approve the Account for Day Trading
Elimination of the Term ``Recommend''
    As noted above, the proposal articulated in Notice to Members 99-32 
applied to firms that had recommended an intra-day trading strategy to 
individual investors. Many commenters raised serious concerns with the 
proposal's use of the term ``recommend.'' While the proposed rules did 
not define ``recommendation'' in the context of day trading, Notice to 
Members 99-32 provided general guidance on the types of activities that 
would constitute a recommendation in this context. The Notice stated 
that in general, a member would be recommending a day-trading strategy 
for purposes of the proposed rules if it affirmatively promoted day 
trading through advertising, training seminars, or direct outreach 
programs, and an individual engaged in day trading in response to those 
solicitations.
    Many commenters voiced concerns that the Notice adopted an overly 
broad view of ``recommendation,'' and feared that this broader view 
would be applied in other contexts. In particular, these commenters 
were concerned that advertisements or other promotions alone would be 
deemed to trigger a firm's duty to customers under the NASD's general 
suitability rule, Rule 2310. In this regard, one commenter stated its 
belief that the historical understanding that a recommendation is a 
specific communication from a broker to a customer at a specific time 
must be maintained. A second commenter suggested that the rules include 
a clear statement that ``recommendation'' for purposes of the rules 
shall mean ``recommendation'' as that term is commonly used throughout 
NASD rules, other Notices to Members, and NASD interpretative letters. 
This same commenter believed the rules should explicitly state that 
advertising does not constitute a recommendation for purposes of the 
proposed rules.
    Several commenters suggested specific interpretations of the term 
``recommendation'' in the day-trading context. For instance, one 
commenter expressed the view that the types of conduct that constituted 
``recommending'' involved actively reaching out to the investing public 
with the goal of reaping financial benefits from the recommendation 
being made. The commenter also believed that the definition of 
recommendation should expressly exclude conduct such as solely 
operating a Web site that provided general financial information and 
news. A second commenter suggested exempting from the proposed rules 
those Internet-based firms that do not provide individualized 
instructions or guidance with respect to day trading, and that do not 
promote or endorse particular investment strategies to customers on an 
individual basis. Many commenters, after addressing issues raised by 
the proposal's use of the term ``recommendation,'' suggested that the 
proposal be limited to a risk disclosure requirement.
    In contrast, several commenters believed that the proposed rules 
should apply to a broader scope of firms and firm activities, such as 
to any firm that permits or accepts intra-day trading transactions. In 
this regard, one commenter opined that all firms

[[Page 51168]]

promoting, advertising, recommending, or providing their customers with 
the opportunity to day trade should be required to comply with the 
rules. Another commenter suggested that the proposed rules should apply 
to all firms that promote or advertise day-trading activities or that 
have more than a certain percentage of day-trading accounts.
    After considering the comments, NASD Regulation has revised the 
proposed rule change to apply to those firms that are ``promoting a 
day-trading strategy.'' This revision should address commenters' 
concerns that the interpretation of the term ``recommendation'' in the 
day-trading context could obfuscate use of the term in the general 
suitability area. By using the concept of ``promoting a day-trading 
strategy,'' the proposed rule change also would more clearly apply to 
those situations where a member firm either solicits a person on an 
individual basis or advertises to the general public.
    NASD Regulation has determined not to define ``promoting a day-
trading strategy'' for purposes of the proposed rule change. However, 
NASD Regulation believes that the promotion by a member of efficient 
execution services or lower execution costs based on multiple trades 
alone would not trigger the requirements under the proposed rule 
change. In addition, merely providing general investment research or 
advertising the high quality or prompt availability of such general 
research would not constitute the promotion of day trading under the 
proposal. Similarly, merely having a Web site that provides general 
financial information or news or that allows the multiple entry of 
intra-day purchases and sales of the same securities would not 
constitute the promotion of day trading.
    However, a member would be subject to the proposed rule change if 
it affirmatively promotes day-trading activities or strategies through 
advertising, training seminars, or direct outreach programs. For 
instance, a firm generally would be subject to the proposed rule change 
if its advertisements address the benefits of day trading, rapid-fire 
trading, or momentum trading, or encourage persons to trade or profit 
like a professional trader. A firm also would be subject to the 
proposed rule change if it promotes its day-trading services through a 
third party. Moreover, the fact that many of a firm's customers are 
engaging in a day-trading strategy would be relevant in determining 
whether a firm has promoted itself in this way.
    Notably, while the proposed rule change does not define the term 
``promoting a day-trading strategy,'' firms could submit their 
advertisements to NASD Regulation's Advertising Department for review 
and guidance on whether the content of the advertisement constitutes 
such activity for purposes of the rule change. As a result, the 
proposed rule change, as revised, should both limit concerns about any 
effect of the proposal on the NASD's general suitability rule and allow 
firms to better determine whether a particular advertisement would 
trigger the rule prior to publication or distribution of the 
advertisement.
Persons Covered by the Proposed Rules
    Comments also were varied regarding whether any proposed day-
trading rules should reach a broader range of customers. One commenter 
stated that the application of the rules should not be limited to 
natural persons, but should include ``non-institutional customers'' as 
defined by NASD Rules. This commenter noted that many day traders have 
opened accounts under partnership or corporate names and that these 
customers typically are no more sophisticated than customers who open 
accounts in their own names. Several commenters also believed that all 
existing customers should be covered by day-trading rules or, at a 
minimum, receive a risk disclosure statement. One individual suggested 
that any proposed day-trading rules should apply to all new day-trading 
accounts, rather than to new customers.
    In response to commenter's concerns, NASD Regulation has determined 
to revise the proposal to apply to all non-institutional customers. For 
purposes of the proposed rule change, the term ``non-institutional 
customer'' would mean a customer that does not qualify as an 
``institutional account'' under NASD Rule 3110(c)(4). Rule 3110(c)(4) 
defines ``institutional account'' to mean the account of (1) a bank, 
savings and loan association, insurance company, or registered 
investment company; (2) an investment adviser registered either with 
the SEC under Section 203 of the Investment Advisers Act of 1940 or 
with a state securities commission (or agency or office performing like 
functions); or (3) any other entity (whether a natural person, 
corporation, partnership, trust, or otherwise) with total assets of at 
least $50 million. Applying the proposed rule change to non-
institutional customers would ensure that most individuals would be 
covered by the proposed rule change, regardless of whether they engage 
in day-trading activities in their own name or in the name of a 
corporation or partnership. As revised, the proposed rule change would 
not apply to an existing customer unless the customer opens a new 
account at a firm that is promoting a day-trading strategy.
Accounts Used For Purposes Other Than Day-Trading Activities
    As an alternative to approving an account for a day-trading 
strategy, the proposed rule change would permit a firm that is 
promoting a day-trading strategy to obtain from the customer a written 
agreement that the customer does not intend to use the account for the 
purposes of day trading (``other-use agreement''). In addition, the 
firm would be required to provide a risk disclosure statement to the 
customer even if the firm obtains an other-use agreement. A firm would 
not be permitted to rely on an other-use agreement if it knows that the 
customer intends to use the account for day trading. Moreover, if a 
firm opens an account for a customer in reliance on an other-use 
agreement, but later knows that the customer is using the account for 
day-trading activities, then the firm would be required to approve the 
customer's account for day trading in accordance with the rule as soon 
as practicable, but in no event later than ten days from the date of 
discovery.
Elements To Consider in Making Appropriateness Determinations
    Commenters also suggested additional elements that a firm should 
consider in order to assess the appropriateness of a day-trading 
strategy for an individual. For example, several commenters believed 
that firms should be required to determine the source of funds that an 
individual intends to use for day-trading activities. Other commenters, 
however, voiced concerns that any such requirement would be an invasion 
of privacy or questioned why this requirement would not apply to all 
types of brokerage accounts. One individual believed that all persons 
should be required to meet a minimum net worth standard in order to 
engage in day trading.
    After considering the comments, NASD Regulation has revised the 
proposed rule change to require a firm that is promoting a day-trading 
strategy to have reasonable grounds for believing that the strategy is 
appropriate for the customer and to exercise reasonable diligence to 
ascertain the essential facts relative to the customer. The proposed 
rule change continues to require a firm to review the customer's 
financial situation, prior investment and trading experience, and 
investment objectives. A firm also would be expressly required

[[Page 51169]]

to review the customer's tax status. The proposed rule change, however, 
would not require firms to determine the source of funds, primarily 
because of concerns with defining the scope of any such obligation and 
the risks of imposing disproportionate burdens on firms.
Definition of an Intra-Day Trading Strategy
    The proposal set forth in Notice to Members 99-32 defined ``intra-
day trading strategy'' to mean ``an overall trading strategy 
characterized by the regular transmission by a customer of multiple 
intra-day electronic orders to effect both purchase and sale 
transactions in the same security or securities.'' Several commenters 
suggested a broader definition of the term. For example, one commenter 
stated that the term should include a person who regularly makes only 
one buy and one sale of a particular security or group of securities on 
a daily basis. A second commenter believed that the term should include 
short-term trading strategies that could occur over, for example, a 
two-day period. Another commenter suggested that the definition include 
any offer and sale of the same security if the offer and sale are 
accomplished prior to settlement.
    In contrast, one commenter emphasized its belief that the long-
standing historical definition of a day trader requires a pattern of 
day trades, noting that there are legitimate reasons to buy and sell a 
single security in a single day that are not premised on a day-trading 
strategy. This commenter suggested that the proposal apply only when a 
clearly defined and easily identified pattern of activity exists over a 
considerable period of time. Another commenter expressed a general view 
that the definition of day trading lacked sufficient clarity, and 
raised a series of questions regarding the scope of the term, including 
whether it should include the transmission of orders in a non-
electronic environment.
    In light of the comments, NASD Regulation has revised the proposed 
definition of ``day-trading strategy'' to mean ``an overall trading 
strategy characterized by the regular transmission by a customer of 
intra-day orders to effect both purchase and sale transactions in the 
same security or securities.'' NASD Regulation believes that the 
revised definition would include those instances where an individual 
regularly transmits one or more purchase and sale (i.e., ``round-
trip'') transactions in a single day. In addition, although as a 
practical matter, day trading typically requires electronic delivery of 
orders, the proposed definition of ``day-trading strategy'' has been 
revised to include orders transmitted by non-electronic means, such as 
by telephone.
Requirement To Provide Day-Trading Risk Disclosure Statement
    As discussed above, the proposed rule change would require a firm 
that is promoting a day-trading strategy to deliver a disclosure 
statement to the customer discussing the unique risks posed by day 
trading. The disclosure statement would include several factors that a 
customer should consider before engaging in day trading, including that 
the customer should be prepared to lose all of the funds that he or she 
uses for day trading and that day trading on margin may result in 
losses beyond the initial investment. The firm would be permitted to 
develop an alternative risk disclosure statement, provided that the 
alternative statement was substantially similar to the mandated 
statement and was filed with, and approved by, NASD Regulation's 
Advertising Department.
    Many commenters agreed that customers should receive additional 
information on the risks of day trading or other on-line trading 
activities. One commenter suggested that firms be required to provide a 
risk disclosure statement to all new individual customers, rather than 
limit dissemination to individuals to whom firms have recommended a 
day-trading strategy. In contrast, another commenter believed that it 
was more effective for the NASD to provide risk disclosures to 
potential customers in an educational atmosphere, such as the NASD's 
Web site. Some commenters suggested specific revisions to the proposed 
risk disclosure statement. In this regard, one commenter proposed that 
the statement include the language from the text of the Notice that day 
trading generally would not be appropriate for someone of limited 
resources and limited investment or trading experience and low risk 
tolerance. Another commenter expressed concern that the suggestion in 
the disclosure statement that persons inquire as to a firm's capacity 
to permit customers to engage in day trading might place an unrealistic 
obligation on the customer.
    Comments generally were divided as to whether customers should be 
required to acknowledge receipt of the disclosure statement. One 
commenter believed that a firm should be able to provide a copy of the 
statement on its Web site or in an initial mailing to the customer at 
the time of account opening. The commenter stated that the document was 
a disclosure of risks and not an agreement between the parties. Another 
commenter asserted that firms should have flexibility in deciding 
whether to require a customer to sign the statement. In contrast, one 
commenter emphasized that requiring customers to acknowledge receipt of 
the statement would protect both the customer and the firm. In 
addition, one individual suggested that the proposed rules require 
customers to sign the statement and to wait three days prior to trading 
to allow for additional reflection and consideration.
    After considering the comments, NASD Regulation has modified the 
proposed rule change to require firms promoting a day-trading strategy 
to deliver the risk disclosure statement to all non-institutional 
customers prior to opening an account for such customers. NASD 
Regulation is not recommending that all firms be required to 
disseminate the disclosure statement to all new customers because the 
benefits of such a requirement are unclear. However, NASD Regulation 
will continue to monitor the growth of day-trading activities to 
determine whether, in the future, such a requirement might be 
justified. In addition, NASD Regulation encourages all firms, 
particularly firms that provide on-line trading capability, to provide 
the mandated risk disclosure statement or a substantially similar 
disclosure statement to their customers.
    The disclosure statement also has been revised to include the 
additional key point that day trading generally is not appropriate for 
persons of limited resources and limited investment or trading 
experience and low risk tolerance. The provision in the proposed 
statement that an individual should confirm that a firm has adequate 
capacity to support day-trading activities has been deleted, in light 
of concerns that the provision might place undue burdens on the 
customer.
Comments Suggesting No or Minimal Regulatory Response
    Those commenters that opposed any action in the area of day trading 
generally questioned why day-trading activities merited special 
regulation. For example, two commenters emphasized that many 
investments were risky and generally believed that the proposed rules 
inappropriately targeted day-trading firms. Some commenters also 
suggested that the proposed rules were paternalistic. Another commenter 
raised concerns that the proposal unfairly suggested to investors that 
on-line trading is somehow less scrupulous and more risky than trading 
through a traditional broker-dealer. This commenter also believed that 
the

[[Page 51170]]

existing regulatory framework provides ample means to combat abuses 
associated with day trading. In addition, one commenter generally 
stated that it was premature to attempt regulation of day-trading 
practices. Several individual commenters, in opposing regulation of day 
trading, emphasized the benefits of electronic trading and their 
ability to protect themselves.
    As noted above, however, NASD Regulation believes that the proposed 
rule change focuses on the promotion of trading strategies that present 
very high risk to individuals and, as revised, should be easier for 
firms to apply to their activities. Firms that are actively promoting a 
day-trading strategy should be responsible for assessing whether the 
strategy is appropriate for an individual who opens a day-trading 
account at that firm. These firms also should be required to disclose 
the risks of engaging in a day-trading strategy to an individual prior 
to opening an account for that individual.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act \3\ in that the proposed 
rule change is 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. NASD Regulation 
believes that the proposed rule change codifying the obligation of 
firms promoting day-trading strategies to disclose the risk of these 
strategies to non-institutional customers and to determine whether the 
strategy is appropriate for a customer will help to protect investors 
and the public interest in an increasingly more sophisticated trading 
environment.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

(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

    The proposed rule change was published for comment in NASD Special 
Notice to Members 99-32 (April 15, 1999). The comment period expired on 
May 31, 1999. Thirty-nine comment letters were received in response to 
the Notice. Copies of the comment letters and a brief summary of the 
comment letters have been provided to the Commission. Of the 39 comment 
letters received, approximately 13 were in favor of the proposed rule 
change, 8 supported risk disclosure only, 12 were opposed to the 
proposed rule change, and 6 expressed no opinion or addressed broader 
issues.

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
    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. In addition, the Commission seeks 
comment on the following specific issues: (1) whether the proposal 
should cover existing day-trading accounts; (2) whether the proposed 
definition of ``day-trading strategy'' is appropriate; (3) whether the 
proposed risk disclosure statement is adequate; and (4) whether the 
firm should be required to obtain a customer's acknowledgment of 
receipt of the risk disclosure document.
    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 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-99-41 and should be 
submitted by October 12, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
---------------------------------------------------------------------------

    \4\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24493 Filed 9-20-99; 8:45 am]
BILLING CODE 8010-01-M