[Federal Register Volume 65, Number 229 (Tuesday, November 28, 2000)]
[Notices]
[Pages 70852-70854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30195]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43580; File No. SR-NASD-00-58]
Self Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to Member Firm
Transactions With Association Employees
November 17, 2000.
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 September 25, 2000, 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 (``Commission'') the proposed rule
change as described in Items I and II 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.
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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
NASD Regulation proposes to adopt new NASD Rule 3090 relating to
member firm transactions with NASD employees. Proposed new language is
italicized.
* * * * *
3090. Transactions Involving Association and American Stock Exchange
Employees
(a) When a member has actual notice that an Association or American
Stock Exchange employee has a financial interest in, or controls
trading in, an account, the member shall promptly obtain and implement
an instruction from the employee directing that duplicate account
statements be provided by the member to the Association.
(b) No member shall directly or indirectly make any loan of money
or securities to any Association or American Stock Exchange employee.
Provided, however, that this prohibition does not apply to loans made
in the context of disclosed, routine banking and brokerage agreements,
or loans that are clearly motivated by a personal or family
relationship.
(c) Notwithstanding the annual dollar limitation set forth in
Conduct Rule 3060(a), no member shall directly or indirectly give, or
permit to be given, anything of more than nominal value to any
Association or American Stock Exchange employee who has responsibility
for a regulatory matter that involves the member. For purposes of this
subsection, the term ``regulatory matter'' includes, but is not limited
to, examinations, disciplinary proceedings, membership applications,
listing applications, delisting proceedings, and dispute-resolution
proceedings that involve the member.
* * * * *
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 III below. NASD Regulation 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 Code of Conduct imposes detailed ethics and conflict-of-
interest requirements on Association employees (i.e., employees of the
NASD and all of its subsidiary and affiliated companies). The NASD is
proposing a new rule, NASD Conduct Rule 3090, that will impose parallel
requirements on NASD members in their dealings with Association and
American Stock Exchange (``Amex'') employees.\3\
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\3\ The Amex, whose employees are subject to the NASD Code of
Conduct as of October 2000, filed a rule proposal (No. SR-Amex-00-
23) to adopt Amex Rule 417, which is virtually identical to proposed
NASD Rule 3090. Securities Exchange Act Release No. 43468 (October
20, 2000), 65 FR 65034 (October 31, 2000); Securities Exchange Act
Release No. 43587 (November 17, 2000).
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Proposed NASD Rule 3090 addresses three areas: (1) Providing
duplicate statements for brokerage accounts in which Association or
Amex employees have a financial interest or can control trading; (2)
loans by NASD members to Association or Amex employees; and (3) gifts
by NASD members to Association or Amex employees.
[[Page 70853]]
a. Employees' Brokerage Accounts. The NASD Code of Conduct imposes
significant restriction on employees' investments. Among other things,
employees may not own stock of broker/dealers or companies that derive
more than 25% of their gross revenues from broker/dealer activities, or
stock purchased as part of an initial public offering.\4\ The NASD
reviews duplicate statements for employees' brokerage accounts to
ensure that employees have abided by these restrictions. NASD
Regulation represents that New NASD Rule 3090(a) will help ensure that
an NASD member receives and implements an instruction to send duplicate
account statements to the NASD whenever the member has actual notice
that an Association or Amex employee has a financial interest in, or
controls trading in, an account. Currently, NASD employees are required
to request the broker/dealers with which they maintain accounts to send
duplicate account statements to the NASD. However, NASD rules currently
do not impose a corresponding obligation on NASD members to obtain and
implement such an instruction.
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\4\ NASD Code of Conduct, Section VIII, Paragraph E.
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In administering the NASD Code of Conduct, the NASD routinely runs
exception reports to determine whether duplicate statements are being
received for all reported employee accounts. Employees for whom the
NASD has not received duplicate account statements are reported to
their department heads for follow-up. Each time exception reports are
run, numerous employee accounts are listed as delinquent. In following
up on such accounts, the NASD has frequently encountered instances in
which NASD employees have repeatedly instructed their broker/dealer in
writing that duplicate statements are to be sent to the NASD, but the
broker/dealer has failed to implement the instruction. In addition,
there have been instances in which broker/dealers have refused to
implement the instruction on the ground that they were not required to
do so.
When employees' duplicate statement instructions are not
implemented, the NASD has no means of monitoring trading in employee
accounts. Currently, there is no rule that specifically requires member
firms to implement such instructions. NASD Regulation believes that new
NASD Rule 3090(a) will remedy this deficiency by imposing on member
firms an affirmative obligation to promptly obtain and implement a
duplicate statement instruction when they have actual notice that an
Association or Amex employee has a financial interest in, or controls
trading in, an account. The information necessary to give members such
actual notice is already included on the new account forms used by most
broker/dealers, and on a standardized duplicate instruction form that
Association and Amex employees can provide to their broker/dealers.
NASD Regulations believes that new NASD Rule 3090(a) imposes
requirements that are analogous to those that other self-regulatory
organizations already impose (e.g., New York Stock Exchange Rule 407).
In addition, NASD Regulation believes that the proposed requirements
are similar to those currently imposed by NASD Rule 3050, which applies
when an NASD member firm carries an account for a person associated
with another broker/dealer.
NASD Regulation represents that new NASD Rule 3090(a) would work as
follows with respect to new accounts: When a new account form indicates
that an NASD employee has an interest in a proposed new account, the
NASD member firm would instruct the employee to obtain a duplicate
instruction form (available on the NASD's corporate Intranet), complete
the form, and provide it to the member before the account is opened.
The NASD expects that most employees will anticipate this request and
provide the member with the instruction at the time they seek to open
the account. It would not be necessary for NASD officials to issue a
letter authorizing the opening of each account.
With respect to existing accounts, new NASD Rule 3090(a)
contemplates that Association and Amex employees will use the above-
referenced duplicate instruction form to give NASD members actual
notice of their interest in an existing account. A member receiving
such a form would be expected to promptly implement the duplicate
statement instruction.
NASD Regulation represents that the proposed rule would apply
prospectively to new accounts, and to those existing accounts as to
which an NASD member has actual notice that an Association or Amex
employee has financial interest or controls trading. NASD members will
not be required to review existing accounts to identify those in which
Association or Amex employees may have an interest or control trading.
b. Loans to Employees. NASD Regulation represents that new NASD
Rule 3090(b) is intended to implement an SEC staff recommendation that
the NASD adopt a rule prohibiting NASD members from making loans to
Association or Amex employees outside routine brokerage or banking
relationships.\5\ The NASD Code of Conduct already prohibits employees
from accepting loans from NASD members, Nasdaq issuers, or any person
with whom the NASD transacts business.\6\ NASD Regulation believes that
new NASD Rule 3090(b) will simply prevent NASD members from making
loans to employees. Consistent with existing NASD Code of Conduct
provisions, the prohibition on loans would not apply to loans that are
clearly motivated by a family or personal relationship. Thus, for
example, a registered representative would not be precluded from making
a personal loan to an adult child who works at the NASD or Amex.
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\5\ See Letter from Lori Richards, Director, OCIE, SEC, to
Richard Syron, Chairman and Chief Executive Officer, Amex, November
6, 1998.
\6\ NASD Code of Conduct, Section IX, Paragraph C.3.
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c. Gifts to Employees. NASD Regulation represents that new NASD
Rule 3090(c) also implements an SEC staff recommendation.\7\ The
proposed rule change will parallel NASD Code of Conduct provisions that
permit employees to accept business gifts with an aggregate annual
value of $100 when no conflict of interest exists, but prohibit
employees from accepting a business gift or courtesy from persons
involved in regulatory matters in which the employee is involved.\8\
Specifically, the proposed amendment will state that, notwithstanding
NASD Rule 3060(a) (which generally permits NASD members to give
business gifts with an aggregate annual value of $100 to employees of
others), members may not give business gifts or courtesies of more than
nominal value to an Association or Amex employee who has responsibility
for a specific regulatory matter that involves the member. A
``regulatory matter'' would encompass such matters as examinations,
disciplinary proceedings, membership applications, listing
applications, delisting proceedings, and dispute-resolution proceedings
involving a member. The proposed rule would permit members to give
items of nominal value to employees responsible for regulatory matters
affecting the member, NASD Regulation represents that, for example, a
member would be permitted to offer minor refreshments, such as a soft
drink or coffee, to NASD Regulation employees conducting an on-site
examination.
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\7\ Id.
\8\ NASD Code of Conduct, Section IX.
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[[Page 70854]]
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of section 15A(b)(6) of the Act,\9\
which requires, among other things, that the Association's rules 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. Specifically, the NASD
believes that, by assisting the NASD in ensuring employee compliance
with NASD ethical standards, the proposed rule change serves the public
interest.
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\9\ 15 U.S.C. 78o(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation 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
NASD Regulation did not solicit or receive written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
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, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying at the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-NASD-00-58 and should be submitted by December 19, 2000.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities association,\10\ and in
particular, the requirements of section 15A(b)(6) \11\ of the Act,
because it is designed to foster cooperation and coordination with
persons engaged in processing information with respect to securities,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\10\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78o-3(b)(6).
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The proposed rule change is based upon recommendations made by SEC
staff to the SROs. The amendments to the rules are designed to promote
a high level of professional and personal ethical conduct by NASD
members and employees and to ensure that NASD members and employees do
not place their own personal and financial interests above the
regulatory interests of the NASD. The proposal also helps to bring the
NASD's conflict of interest and ethical conduct provisions in line with
those of the NASD Code of Conduct and the Amex (a subsidiary of the
NASD) and helps eliminate any confusion regarding the application of
these provisions to employees of both self-regulatory organizations.
The Commission finds good cause for approving the proposed rule
change (SR-NASD-00-58) prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. The Commission
approved a proposal by the Amex to adopt Amex Rule 417, which is
virtually identical to new NASD Rule 3090.\12\
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\12\ See Securities Exchange Act Release No. 43587 (November 17,
2000) (Order approving SR-Amex-00-23).
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It Is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-NASD-00-58) is hereby
approved on an accelerated basis.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-30195 Filed 11-27-00; 8:45 am]
BILLING CODE 8010-01-M