[Federal Register Volume 65, Number 110 (Wednesday, June 7, 2000)]
[Notices]
[Pages 36194-36198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 42858; File No. SR-NASD-99-05]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval of Amendment Nos. 4 and 
5 to the Proposed Rule Change Relating to Margin for Exempted 
Borrowers, Good Faith Accounts, Joint Back Office Arrangements and 
Options Transactions

May 30, 2000.
    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''), 
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 
amending the margin requirements for exempted borrowers, good faith 
accounts, joint back office (``JBO'') arrangements, control and 
restricted securities, and options transactions. The NASD amended its 
proposal on June 1, 1999, July 7, 1999, July 15, 1999, October 7, 1999 
and April 11, 2000.\3\ The proposed rule change and Amendment Nos. 1, 
2, and 3 were published for comment in the Federal Register on August 
11, 1999.\4\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change, as amended. In 
addition, the Commission is publishing notice to solicit comments and 
is simultaneously approving, on an accelerated basis, Amendment Nos. 4 
and 5.
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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''); 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''); Letter from Alden S. 
Adkins, Senior Vice President and General Counsel, NASD Regulation, 
to Richard C. Strasser, Assistant Director, Division, Commission, 
dated October 7, 1999 (``Amendment No. 4''); and Letter from Alden 
S. Adkins, Senior Vice President and General Counsel, NASD 
Regulation, to Katherine A. England, Assistant Director, Division, 
Commission, dated April 11, 2000 (``Amendment No. 5''). 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 JBO provisions of NASD 
Rule 2520, the NASD will interpret the terms ``carrying and clearing 
member'' and ``carrying member'' in the same manner as the 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. Amendment No. 4 
states that the NASD will allow a six-month phase-in period for 
implementation of the proposed rule's requirements relating to JBO 
arrangements. Amendment No. 5 incorporates certain proposed 
maintenance margin requirements for non-equity securities and 
options-related requirements that are the subject of related rule 
filings by NASD Regulation and to ensure consistency with similar 
proposed changes to NYSE Rule 431.
    \4\ See Securities Exchange Act Release No. 41704 (August 4, 
1999), 64 FR 43797 (August 11, 1999).
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I. Description of the Proposal

    NASD Regulation proposes to amend NASD rule 2520, ``Margin 
Requirements,'' to revise the margin requirements for exempted 
borrowers, good faith accounts, JBO arrangements, control and 
restricted securities, and options transactions. NASD Regulation 
believes that the proposal will conform NASD Rule 2520 to recent 
changes to NYSE Rule 431 and recently adopted changes to Regulation 
T.\5\ NASD Regulation is also proposing other minor changes to 
eliminate obsolete provisions and correct errors in the text of NASD 
Rule 2520.
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    \5\ 12 CFR 220 et seq. The Board of Governors of the Federal 
Reserve System (``Federal Reserve Board'') promulgated Regulation T 
pursuant to Section 7(a) of the Exchange Act, which authorizes it to 
prescribe regulations relating to credit extensions on securities. 
See 15 U.S.C. 78g(a).
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A. Margin Requirements for Exempted Borrowers and Good Faith Accounts

    Under the recent changes to Regulation T,\6\ 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 may 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.
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    \6\ See Board of Governors of the Federal Reserve System Docket 
Nos. R-0905, R-0923, and R-0944, 63 FR 2806 (January 16, 1998).
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    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 proposal amends NASD Rule 2520(c) 
to require all accounts, including good faith accounts, to maintain 
margin as required by NASD Rule 2520.\7\ Cash accounts will continue to 
be subject only to certain specific requirements, not to the overall 
requirements of the rule.
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    \7\ See Amendment No. 1, supra note 3.
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    In addition, NASD Regulation states that the Federal Reserve Board 
established a classification of exempted borrowers which are exempt 
from Regulation T. An ``exempted borrower,'' as defined in Regulation 
T, is a broker-dealer ``a substantial portion of whose business 
consists of transactions with persons other than brokers or dealers.'' 
\8\ The proposal codifies this exemption

[[Page 36195]]

from Regulation T by excluding ``exempted borrowers,'' as defined in 
Regulation T, from the definition of ``customer'' in NASD Rule 
2520(a)(3), except for the proprietary account of a broker-dealer 
carried by a member pursuant to NASD Rule 2520(e)(6). Thus, proprietary 
accounts of an introducing member that are carried or cleared by 
another member will remain subject to the equity requirements of NASD 
Rule 2520(e)(6).
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    \8\ 12 CFR 220.2.
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B. Amendments To Provide for Joint Back Office Arrangements

1. Background
    Section 220.7(c) of Regulation T \9\ allows special margin 
treatment for broker-dealers without clearing operations, known as 
``JBO participants,'' who invest in a ``clearing and servicing'' \10\ 
broker-dealer, known as a ``JBO-broker.'' Under Regulation T, the JBO 
participants are not treated as ``customers'' \11\ of the JBO broker.
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    \9\ 12 CFR 220.7(c).
    \10\ Regulation T does not define the term ``clearing and 
servicing.'' However, Regulation T describes a JBO broker as a 
clearing and servicing firm.
    \11\ The term ``customer'' is defined in section 220.2 of 
Regulation T.
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    As part of a periodic review of its regulations, in 1995 the 
Federal Reserve Board proposed an amendment to Regulation T relating to 
JBO arrangements.\12\ The Federal Reserve Board stated that the 
proposed amendment was prompted by the concerns of several stock 
exchanges that JBO brokers were extending credit to JBO participants 
far in excess of their ownership interests in the JBO broker.\13\ Under 
the proposed amendment, the favorable margin treatment for a JBO 
arrangement would have been conditioned on the JBO participant's 
ownership interest in the JBO broker being related to the amount of 
business transacted through the JBO arrangement.
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    \12\ Board of Governors of the Federal Reserve System Docket No. 
R-0772 (June 21, 1995), 60 FR 33763 (June 29, 1995).
    \13\ Id.
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    After Congress enacted the National Securities Market Improvement 
Act of 1996 (``NSMIA''),\14\ the Federal Reserve Board stated that it 
decided not to adopt its proposed amendment to Regulation T relating to 
JBO arrangements.\15\ Instead, the Federal Reserve Board stated that it 
``believes it is appropriate to rely on the authority of the JBO's 
examining authority to ensure the reasonableness of JBO arrangements 
under its supervision.'' \16\
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    \14\ National Securities Markets Improvement Act of 1996, Pub. 
L. 104-209, 110 Stat. 3416 (October 11, 1996).
    \15\ Board of Governors of the Federal Reserve System Docket No. 
R-0772 (April 24, 1996), 61 FR 20386 (May 6, 1996).
    \16\ Id.
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2. Original Filing and Amendments Nos. 1-4
    NASD Regulation proposes to amend NASD Rule 2520(e)(6) to provide 
for JBO arrangements established pursuant to section 220.7 of 
Regulation T. Under the proposal, either a carrying and clearing or 
carrying broker would be permitted to be a JBO broker.\17\ A JBO broker 
would be required to: (1) Provide written notification to the NASD 
prior to establishing a JBO arrangement; (2) maintain minimum tentative 
net capital \18\ of $25 million as computed under the Net Capital Rule 
or minimum net capital \19\ of $7 million if it is engaged in the 
primary business of clearing options market maker accounts; \20\ (3) 
maintain a written risk analysis methodology for assessing the amount 
of credit extended to each JBO participant; and (4) deduct from its net 
capital each JBO participant's haircut requirement under the Net 
Capital Rule in excess of the equity maintained in the JBO 
participant's account.
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    \17\ See Letter from Scott Holz, Counsel, Federal Reserve Board, 
to Raymond J. Hennessey, Vice President, NYSE, dated April 16, 1999 
(stating that a carrying firm may be considered a clearing and 
servicing firm within the meaning of the JBO provisions of 
Regulation T).
    \18\ The term ``tentative net capital'' generally refers to net 
capital before haircuts and undue concentration charges on 
proprietary securities and options positions. Haircuts are specified 
percentages of the market value of a broker-dealer's proprietary 
securities by which a broker-dealer must reduce its net worth under 
Exchange Act Rule 15c3-1 (the ``Net Capital Rule'').
    \19\ The term ``net capital'' is defined under the Net Capital 
Rule and is generally calculated by deducting illiquid assets from a 
firm's ``net worth,'' as determined under Generally Accepted 
Accounting Principles (GAAP), adding to that amount properly 
subordinated debt under Appendix D of the Net Capital Rule, and 
further deducting haircuts from securities held in the firm's 
proprietary accounts.
    \20\ Under the proposal, the clearance of options market maker 
accounts would be deemed a broker-dealer's primary business if a 
minimum of 60% of the aggregate deductions in its ratio of gross 
options market maker deductions to net capital (including gross 
deductions for JBO participant accounts) are options market maker 
deductions. Subparagraph (c)(2)(x) of the Net Capital Rule limits 
the amount of specialist and market maker options positions a firm 
may guarantee, endorse or carry to a ratio of 10 to one of options 
market maker and specialist deductions to net capital. In addition, 
subparagraph (a)(6) of the Net Capital Rule exempts an option market 
maker and specialist from the haircut provisions of the Net Capital 
Rule provided that, among other things, the firm maintains an 
account liquidating equity equal to the percentage described in 
subparagraph (a)(6)(iii)(A) of the Net Capital Rule.
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    If a JBO broker's tentative net capital or net capital, whichever 
applies, falls below the prescribed requirement, the JBO broker must 
(1) promptly notify the NASD in writing of the deficiency; and (2) 
resolve the net capital deficiency within three business days. If a JBO 
broker fails to correct a net capital deficiency within three business 
days it would not be permitted to accept new transactions through the 
JBO arrangement.
    A JBO participant must be a registered broker-dealer subject to the 
Net Capital Rule and must maintain an ownership interest in its JBO 
broker in accordance with Regulation T. The JBO participant must 
maintain in the JBO arrangement a minimum of $1 million in liquidating 
equity, exclusive of the JBO participant's ownership interest in the 
JBO broker required under Regulation T. If a JBO participant's 
liquidating equity falls below $1 million, it must cure the deficiency 
within five business days or lose its JBO participant status. Unless 
the JBO participant was an ``exempted borrower,'' \21\ a JBO 
participant that lost its JBO participant status would become subject 
to the margin requirements prescribed for customers in Regulation T and 
other maintenance margin requirements under NASD Rule 2520.\22\
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    \21\ The term ``exempted borrower'' is defined in section 220.2 
of Regulation T. NASD Rule 2520(a)(3), as revised by the current 
proposal, specifically excludes an exempted borrower from its 
definition of customer.
    \22\ See Amendment No. 5, supra note 3.
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    NASD Regulation will allow a six-month phase-in period for 
implementation of the requirements relating to JBO arrangements. NASD 
Regulation believes that the six-month phase-in will allow sufficient 
time for members and member organizations to comply with the new 
capital and risk analysis requirements and to implement new or make 
changes to existing arrangements or systems.\23\
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    \23\ See Amendment No. 4, supra note 3.
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3. Amendment No. 5
    Amendment No. 5 proposed to incorporate a related rule change (the 
``Exempt Account Proposal'') into the current proposal.\24\ Under the 
Exempt Account Proposal, a broker-dealer's maintenance margin 
requirement would be reduced below the haircut requirement under the 
Net Capital Rule for certain non-equity securities held in

[[Page 36196]]

an exempt account. Under Amendment No. 5 to the current proposal, a JBO 
broker would be permitted to alternatively deduct from its net capital 
the difference between a JBO participant's account equity and the 
maintenance margin requirement under the Exempt Account Proposal, as 
opposed to the haircut requirement under the Net Capital Rule 
originally proposed. The NASD stated that this amendment would 
establish consistency by incorporating the most recent maintenance 
margin requirements of the Exempt Account Proposal into the JBO 
filing.\25\
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    \24\ In the Exempt Account Proposal (File No. SR-NASD-00-08), 
the NASD proposes to amend NASD Rule 2520(e)(2)(F) and to adopt NASD 
Rule 2520(e)(2)(G) to revise the margin requirements for certain 
non-equity securities held in ``exempt accounts,'' as defined in the 
proposal. The NASD filed the Exempt Account Proposal with the 
Commission on March 3, 2000. To date, the Commission has not taken 
action on the Exempt Account Proposal. Accordingly, this order does 
not approve the Exempt Account Proposal or its application to the 
margin requirements contained in this filing.
    \25\ See Amendment No. 5, supra note 3.
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C. Reduced Margin for Specialist, Market Maker, and Broker-Dealer 
Accounts

    NASD Rules 2520(e)(5) and (e)(6) currently require a carrying 
broker-dealer to deduct from its net capital the difference between the 
equity maintained in the account of a specialist, market maker or 
broker-dealer and the required maintenance margin under NASD Rule 2520. 
The NASD proposes to amend subparagraphs (e)(5) and (e)(6) to require 
the carrying broker-dealer to deduct from its net capital the 
difference between the equity maintained in the account of a 
specialist, market maker or broker-dealer and the required haircut in 
accordance with the Net Capital Rule.\26\
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    \26\ For example, in the case of a long position in an equity 
security, the proposal would require a carrying broker to compute 
its net capital deduction for deficient specialist, market maker and 
broker-dealer accounts based on the 15% haircut requirement of 
paragraph (c)(2)(vi)(J) of the Net Capital Rule, rather than the 25% 
maintenance margin requirement of NASD Rule 2520(c)(1).
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D. Control and Restricted Securities

    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 represented. However, the NASD believes that 
the provision unintentionally penalizes a customer for maintaining a 
position that exceeds the collateral necessary to cover his margin 
loan. To eliminate this unintended penalty, the proposed rule excludes 
``excess securities'' from the concentration reduction calculation. The 
proposal defines ``excess securities'' as 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%. 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%.
    In addition, the proposed rule change expands the exception in 
paragraph (e)(8) to include all restricted securities that are then 
saleable, including affiliate securities, pursuant to SEC Rules 144(k), 
145(d)(2), or 145(d)(3). Accordingly, those customer-owned, restricted 
securities that are then saleable can be sold under SEC Rule 144(k) 
would be subject to the same maintenance margin requirements that 
presently apply to ordinary stock (25%).

E. Amendments to Margin Rules Governing Options Transactions

    NASD Regulation is proposing to amend NASD Rule 2520(f)(2) to add 
subparagraphs (L) and (M)(i), which are identical to current provisions 
in NYSE Rule 431(f)(2)(L) and (f)(2)(M)(i).\27\ Proposed NASD Rule 
2520(f)(2)(L) will allow a customer to designate which security 
position in an account will be utilized to cover the requested margin 
at the time the option order is entered, provided the member offers 
such a service. Proposed NASD Rule 2520(f)(2)(M)(i) will permit options 
transactions in customer cash accounts if the transaction is 
permissible under section 220.8 of Regulation T.
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    \27\ In Amendment No. 5, NASD Regulation revised its proposal to 
delete proposed subparagraph (f)(2)(M)(ii). On March 31, 2000, NASD 
Regulation filed a revised version of proposed subparagraph 
(f)(2)(M)(ii) in File No. SR-NASD-00-15. The Commission has not 
taken action on that proposal.
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II. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule change, as amended, is consistent with the Exchange Act 
and the rules and regulations under the Exchange Act applicable to a 
national securities association. In particular, the Commission believes 
that the proposed rule change is consistent with section 15A(b)(6) of 
the Exchange Act,\28\ which requires the rules of an association be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and to protect 
investors and the public interest.\29\
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    \28\ 15 U.S.C. 78o-3(b)(6).
    \29\ In approving the proposed rule changes, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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A. Exempted Borrowers and Good Faith Accounts

    The Commission finds that it is reasonable for the NASD to amend 
NASD Rule 2520(c) to apply the existing maintenance margin requirements 
of NASD Rule 2520 to transactions in ``good faith'' accounts permitted 
under Regulation T. Although transactions permitted in a good faith 
account will not be subject to the initial margin requirements, payment 
requirements and liquidation time frames of Regulation T, as the NASD 
notes, transaction in a good faith account may raise the same safety 
and soundness concerns with regard to maintenance margin as do 
transactions in margin accounts. Accordingly, the Commission believes 
that applying the maintenance margin requirements of NASD Rule 2520(c) 
to transactions in a good faith account will protect investors and the 
public interest and help to maintain fair and orderly markets by 
ensuring that good faith accounts contain adequate margin reserves. The 
Commission notes that it approved a similar change to NYSE Rule 
431(c).\30\
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    \30\ See Securities Exchange Act Release No. 40529 (October 7, 
1998), 63 FR 55567 (October 16, 1998) (``1998 Order'').
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    In addition, the Commission believes it is reasonable for the NASD 
to amend the definition of ``customer'' in NASD Rule 2520(a)(3) to 
codify the NASD's position that exempted borrowers, as defined under 
Regulation T, will remain exempt from the requirements of NASD Rule 
2520, except for the proprietary accounts of a broker-dealer carried by 
a member pursuant to NASD Rule 2520(e)(6). The Commission believes that 
it is reasonable for the NASD to continue to apply the equity 
requirements of NASD Rule 2520(e)(6) to the proprietary accounts of 
broker-dealers that qualify as ``exempted borrowers'' under Regulation 
T and that are carried by another NASD member. By continuing to apply 
the equity requirements of NASD Rule 2520(e)(6) to these proprietary 
accounts, the Commission believes that the proposal will help to ensure 
that these accounts contain adequate margin, thereby protecting 
investors and the public interest. The Commission notes that it 
approved an identical change to the definition of ``customer'' in NYSE 
Rule 431(a)(2).\31\
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    \31\ See 1998 Order, supra note 29.
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B. JBO Provisions

    The Commission believes that NASD Regulation has proposed 
reasonable

[[Page 36197]]

capital and equity requirements for JBO brokers and JBO participants. 
The Commission also believes that the proposed rule change fulfills the 
Federal Reserve Board's mandate for the SROs to provide rules that 
``ensure the reasonableness of JBO arrangements.'' \32\
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    \32\ See Board of Governors of the Federal Reserve System Docket 
No. R-0772 (April 24, 1996), 61 FR 20386 (May 6, 1996).
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    With respect to JBO brokers, the Commission believes that it is 
reasonable for the Association to require a JBO broker to: (1) Provide 
written notification to the Association prior to establishing a JBO 
arrangement; (2) provide prompt written notification to the Association 
if its tentative net capital or net capital, whichever applies, falls 
below the prescribed requirements; (3) resolve any net capital 
deficiency within three business days or not be permitted to accept 
additional transactions through the JBO arrangement; (4) maintain a 
written risk analysis methodology for assessing the amount of credit 
extended to each JBO participant; and (5) deduct from its net capital 
each JBO participant's haircut requirement in excess of the equity 
maintained in the JBO participant's account.\33\ In addition, the 
Commission believes that it is reasonable for the Association to 
require a JBO broker to maintain a minimum of $25 million in tentative 
net capital or $7 million in net capital if the JBO broker's primary 
business is clearing options market maker accounts. The Commission also 
believes that it is reasonable to deem a broker-dealer's primary 
business to be the clearance of options market maker accounts if a 
minimum of 60% of its aggregate deductions in its ratio of gross 
options market maker deductions to net capital (including gross 
deductions for JBO participant accounts) are options market maker 
deductions.
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    \33\ To date, the Commission has not taken action on the NASD's 
Exempt Account Proposal. Accordingly, this order does not approve 
the Exempt Account Proposal or its application to the margin 
amendments contained in this filing.
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    In addition, the Commission believes that it is reasonable for the 
NASD to require a JBO broker to immediately notify the NASD if its 
tentative net capital or net capital, whichever applies, falls below 
the prescribe minimum levels. The Commission also believes that it is 
reasonable for a JBO broker to be subject to the equity capital 
withdrawal restrictions of paragraph (e) of the Net Capital Rule and 
the prohibitions against the reduction, prepayment, and repayment of 
subordination debt of paragraph (b) of Appendix D of the Net Capital 
Rule, as if the firm's net capital would be below the minimum standards 
specified by those sections.
    The Commission believes that the $7 million net capital requirement 
for JBO brokers is a reasonable response to the need for a capital 
cushion for the fluctuations in net capital resulting from the daily 
changes in JBO participant accounts and would avoid unnecessary and 
inadvertent violations of the net capital requirements at the times 
when a firm's capital needs are more volatile, such as the week that 
options expire or during severe market stresses.
    The Commission believes that it is reasonable for the Association 
to require a JBO broker to be either a clearing and carrying, clearing, 
or carrying firm in accordance with the requirements under Regulation T 
and the Federal Reserve Board's applicable interpretations.
    With respect to JBO participants, the Commission believes that it 
is reasonable for the Association to require a JBO participant to: (1) 
Be a registered broker-dealer subject to the Net Capital Rule; (2) 
maintain an ownership interest in the JBO Broker in accordance with 
Regulation T; and (3) maintain a minimum liquidating equity of $1 
million in the JBO arrangement. The Commission also believes that it is 
reasonable to require a JBO participant whose liquidating equity falls 
below the required $1 million to deposit the deficiency within five 
business days or lose its JBO participant status and become subject to 
the customer margin account requirements under Regulation T and the 
other NASD maintenance margin requirements.
    The Commission believes that the requirement of $1 million equity 
in the account is not unreasonable, considering the lack of regular 
maintenance margin requirements and the substantial leverage that would 
be obtained by the JBO participant.
    The Commission believes that it is important for the Association to 
be adequately prepared to implement and monitor the revised rules. 
Therefore, the Commission believes that it is appropriate to permit 
firms to allow a six-month phase-in of these new rules relating to JBO 
arrangements.

C. Reduced Margin for Specialist, Market Maker and Broker-Dealer 
Accounts

    The Commission believes that it is reasonable to require a broker-
dealer to deduct from its net capital the difference between the equity 
maintained in the account of a specialist, market maker and broker-
dealer and the required haircut in accordance with the Net Capital 
Rule.\34\ The Commission believes that it is appropriate and equitable 
for SROs to require the same maintenance margin requirements for 
specialist, market maker and broker-dealer accounts as JBO participant 
accounts.
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    \34\ As noted above, this order does not approve NASD's Exempt 
Account Proposal on its application to the margin requirements 
contained in this filing.
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D. Concentration Provisions for Control and Restricted Securities

    The Commission believes that it is reasonable for the NASD to 
permit a firm to deduct the amount of its customers' excess control and 
restricted securities in determining if a concentration of control and 
restricted securities exists for purposes of deducting from its net 
capital any margin deficiencies in a customer's account under 
subparagraph (e)(8)(B)(i) of NASD Rule 2520. Excess securities includes 
securities by which a customer's 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 those securities, assuming a 50% margin requirement.
    The Commission notes that the current concentration provisions for 
control and restricted securities appear to be inappropriate because 
they impose stricter requirements on accounts that have more control 
and restricted securities than necessary to collateralize a credit 
extension. By limiting the determination of whether a concentration of 
control and restricted securities exists to two times the credit 
extension, the proposal would subject these securities to a greater 
margin requirement based only on financed control and restricted 
securities. The Commission believes that this is a reasonable and 
appropriate margin requirement.
    The Commission also believes that it is reasonable for the NASD to 
exempt affiliate securities from the margin provisions relating to 
control and restricted securities provided that the securities 
otherwise meet the requirements of subparagraph (e)(8)(D), including 
that: (1) The securities are considered then saleable under Securities 
Act Rule 144(k), Securities Act Rule 145(d)(2) or Securities Act Rule 
145(d)(3); and (2) the issuer is current in its filings pursuant to the 
continuous disclosure system under the Act.
    The Commission notes that its interpretations under Securities Act

[[Page 36198]]

Rule 144(k) may, under certain circumstances, permit a broker-dealer to 
sell control and restricted securities of an affiliate in default 
without regard to the volume and other restrictions imposed on 
affiliates, In addition, subparagraph (d)(3)(iv) of Securities Act Rule 
144 permits a broker-dealer to ``tack'' the ownership period of an 
affiliate in default to its own for purposes of determining if the time 
conditions of Securities Act Rule 144(k) are met. Accordingly, the 
Commission believes that it is appropriate for affiliate securities, 
which otherwise meet the requirements subparagraph (e)(8)(D), to be 
exempt from the maintenance margin rules for control and restricted 
securities.

E. Amendments to Margin Rules Governing Options Transactions

    The NASD proposes to amend Rule 2520(f)(2) to add subsections (L) 
and (M)(i). Section 2520(f)(2)(L) incorporates the provisions currently 
contained in Regulation T regarding ``exclusive designation'' that 
allow a customer to designate which security position in an account is 
to be utilized to cover the required margin at the time an option order 
is entered, provided the member organization offers such a service. 
This section merely incorporates existing provisions of Regulation T 
into the NASD rule and, accordingly, is reasonable. The Commission 
notes that it approved an identical change to NYSE Rule 431.\35\
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    \35\ See Securities Exchange Act Release No. 38708 (June 2, 
1997), 62 FR 31650 (June 10, 1997) (``1997 Order'').
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    Further, proposed NASD Rule 2520(f)(2)(M)(i) does not raise new 
regulatory issues because it incorporates those provisions of 
Regulation T that allow certain defined options-related transactions to 
be maintained in a cash account. The Commission notes that it approved 
a similar change to NYSE Rule 431.\36\
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    \36\ See 1997 Order, supra note 34. As discussed above, NASD 
Regulation withdrew proposed NASD Rule 2520(f)(2)(m)(ii) from the 
proposal.
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F. Accelerated Approval of Amendment Nos. 4 and 5

    The Commission finds good cause for approving Amendment Nos. 4 and 
5 prior to the thirtieth day after the date of publication of notice of 
filing therefore in the Federal Register. Amendment No. 4 proposes a 
six-month phase-in of the rule changes relating to JBO arrangements. 
The Commission believes that this amendment is necessary because it is 
important for the NASD and its members to be adequately prepared to 
implement and monitor the new rules relating to JBO arrangements. 
Amendment No. 5 clarifies the proposal by incorporating references to 
the Exempt Account Proposal, and deleting a proposed change to NASD 
Rule 2520(f)(2)(m)(ii), which has been superseded by a change to 
subparagraph (f)(2)(m)(ii) proposed in File No. SR-NASD-00-15. 
Accordingly, the Commission finds it is consistent with sections 
6(b)(5) and 19(b) of the Exchange Act to approve Amendment Nos. 4 and 5 
on an accelerated basis.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 4 and 5, including whether 
Amendment Nos. 4 and 5 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 submissions, 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 persons, 
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, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should appropriately refer to SR-NASD-99-05.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\37\ that the proposed rule change, SR-NASD-99-05, as 
amended, is approved.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14252 Filed 6-6-00; 8:45 am]
BILLING CODE 8010-01-M