[Federal Register Volume 67, Number 138 (Thursday, July 18, 2002)]
[Notices]
[Pages 47412-47426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18142]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46186; File No. SR-NASD-2002-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASD Relating to NASD Rules 1022, 1032, 2210, 3010, 3370, IM-
1022-1, and IM-1022-2 and new Rules 2865 and IM-2210-7.

July 11, 2002.
    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 March 22, 2002, NASD \3\ 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 were prepared by 
NASD. On June 25, 2002, NASD filed Amendment No. 1 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ At the time of filing, the National Association of 
Securities Dealers, Inc. was acting through its wholly owned 
subsidiary, NASD Regulation, Inc. Since that time, the National 
Association of Securities Dealers, Inc. has been officially renamed 
``NASD,'' and its wholly owned subsidiary, NASD Regulation, Inc., 
has been collapsed into NASD.
    \4\ See letter form Patrice M. Glinieki, Vice President and 
Deputy General Counsel, NASD, to Katherine England, Assistant 
Director, Division of Market Regulation, Commission, dated June 25, 
2002.
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I. Self-Regulatory Organization's Statement Of The Terms Of Substance 
Of The Proposed Rule Change

    The proposed rule change will adopt new rules and amend existing 
rules to prepare for the trading of security futures. Specifically, the 
proposed rule change: (1) Amends Rule 1022 (Categories of Principal 
Registration), Interpretive Material 1022-1 (Registered Options 
Principals), Interpretive Material 1022-2 (Limited Principal-General 
Securities Sales Supervisor), and Rule 1032 (Categories of 
Representative Registration) to expand several registration categories 
to include engaging in and supervising security futures transactions; 
(2) amends Interpretive Material 2110-3 (Front Running Policy) to add 
block trading in single stock futures to the prohibition against front 
running; (3) amends Rule 2210 (Communications with the Public) and 
creates new Interpretive Material 2210-7 (Guidelines for Communications 
with the Public Regarding Security Futures) to regulate communications 
with the public regarding security futures; (4) amends Interpretive 
Material 2310-2 (Fair Dealing with Customers) to refer to new proposed 
Rule 2865 regarding security futures sales practices; (5) creates new 
Rule 2865 to regulate security futures sales practices; (6) amends Rule 
3010(b)(2) (the Taping Rule) to recognize the ability of futures 
regulators to expel a member for futures-related sales practice 
violations; (7) amends Rule 3010(e) (Supervision) to require firms to 
check the backgrounds of job applicants who have previously worked in 
the futures industry; (8) amends Rule 3050 (Transactions for or by 
Associated Persons) to require associated persons to notify their 
member firm when they open certain futures accounts; and (9) amends 
Rule 3370 (Prompt Receipt and Delivery of Securities) to extend to 
security futures. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
[brackets].
* * * * *

[[Page 47413]]

1000. Membership, Registration and Qualification Requirements

* * * * *

1020. Registration of Principals

* * * * *

1022.Categories of Principal Registration

    (a)-(e) No change.
(f) Registered Options and Security Futures Principals
    (1) Every member of the Association [which] that is engaged in, or 
[which] that intends to engage in transactions in security futures or 
put or call options with the public shall have at least one Registered 
Options and Security Futures Principal who shall have satisfied the 
requirements of this subparagraph. As to options transactions, each 
[such] member shall also designate a Senior Registered Options 
Principal and a Compliance Registered Options Principal in accordance 
with the provisions of Rule 2860(b)(20) and identify such persons to 
the Association. [A member which has a Registered Options Principal 
qualified in either put or call options shall not engage in both put 
and call option transactions until such time as it has a Registered 
Options Principal qualified in both such options.] Every person engaged 
in the management of the day-to-day options or security futures 
activities of a member shall also be registered as a Registered Options 
and Security Futures Principal. [In the event any Registered Options 
Principal ceases to act in such capacity, such fact shall be reported 
promptly to the Association together with a brief statement of the 
reasons therefor.]
    (2) Each person required by subparagraph (f)(1) [hereof] to be a 
Registered Options and Security Futures Principal shall pass the 
appropriate Qualification Examination for Registered Options and 
Security Futures Principal, or an equivalent examination acceptable to 
NASD [Corporation], for the purpose of demonstrating an adequate 
knowledge of options and security futures trading generally, the Rules 
of the Association applicable to trading of option and security futures 
contracts and the rules of registered clearing agencies for options and 
security futures [the Options Clearing Corporation], and be registered 
as such before engaging in the duties or accepting the responsibilities 
of a Registered Options and Security Futures Principal.
    [(3) A person shall not qualify as a Registered Options Principal 
for both put and call options unless he has passed an examination 
testing him with respect to both put and call options.]
    (3)[(4)] Each person required to register and qualify as a 
Registered Options and Security Futures Principal must, prior to or 
concurrent with such registration, be or become qualified pursuant to 
the Rule 1030 Series, as either a General Securities Representative or 
a Limited Representative--Corporate Securities and [also be or become 
qualified pursuant to Rule 1032(d) as] a Registered Options and 
Security Futures Representative.
    (4)[(5)] A person registered solely as a Registered Options and 
Security Futures Principal shall not be qualified to function in a 
principal capacity with responsibility over any area of business 
activity not prescribed in subparagraph (1) [hereof].
    (5)[(6)] Any person who is registered with NASD as a Registered 
Options and Security Futures Principal may not supervise security 
futures activities unless such person has, prior to December 31, 2006, 
completed a firm-element continuing education requirement that 
addresses security futures and a principal's responsibilities for 
security futures. After a revised examination that includes security 
futures products is offered, a person associated with a member that 
passes such a revised Qualification Examination for Registered Options 
and Security Futures Principal (or any other examination covering 
security futures that is acceptable to NASD) is not required to 
complete a firm-element continuing education requirement that addresses 
security futures and a principal's responsibilities for security 
futures to supervise activities in such products, except as otherwise 
required by Rule 1120 generally or by the member firm.
(g) Limited Principal--General Securities Sales Supervisor
    (1)-(2) No change
    (g)(3) Any person who is registered with NASD as a Limited 
Principal--General Securities Sales Supervisor may not act in a limited 
principal capacity with regard to security futures products unless such 
person has, prior to December 31, 2006, completed a firm-element 
continuing education requirement that addresses security futures and a 
principal's responsibilities for security futures. After a revised 
examination that includes security futures products is offered, a 
person associated with a member that passes such a revised 
Qualification Examination for Limited Principal--General Securities 
Sales Supervisor (or any other examination covering security futures 
that is acceptable to NASD) is not required to complete a firm-element 
continuing education requirement that addresses security futures and a 
principal's responsibilities for security futures to supervise such 
products, except as otherwise required by Rule 1120 generally or by the 
member firm.

IM-1022-1. Registered Options and Security Futures Principals

    Members having a single Registered Options and Security Futures 
Principal are required promptly to notify the Association in the event 
such person is terminated, resigns, becomes incapacitated or is 
otherwise unable to perform the duties of an Options and Security 
Futures Principal.
    Following receipt of such notification, the Association will 
require members to agree, in writing, to refrain from engaging in any 
options- or security futures-related activities [which] that would 
necessitate the prior or subsequent approval of an Options and Security 
Futures Principal including, among other things, the opening of new 
options or security futures accounts or the execution of discretionary 
orders for option or security futures contracts until such time as a 
new Registered Options and Security Futures Principal has been 
qualified.
    Members failing to qualify a new Registered Options and Security 
Futures Principal within two weeks following the loss of their sole 
Registered Options and Security Futures Principal, or by the earliest 
available date for administration of the [Series 4] Registered Options 
and Security Futures Principal examination, whichever is longer, shall 
be required to cease doing an options and security futures business; 
provided, however, they may effect closing transactions in options and 
offsetting transactions in security futures [in order] to reduce or 
eliminate existing open options or security futures positions in their 
own account as well as the accounts of their customers.

IM-1022-2. Limited Principal--General Securities Sales Supervisor

    Limited Principal--General Securities Sales Supervisor is an 
alternate category of registration designed to lessen the qualification 
burdens on principals of general securities firms who supervise sales. 
Without this category of limited registration, such principals could be 
required to separately qualify pursuant to the rules of the NASD, MSRB, 
NYSE and the options exchanges. While persons may continue to 
separately qualify with all relevant self-regulatory organizations, the 
Limited Principal--

[[Page 47414]]

General Securities Sales Supervisor Examination permits qualification 
as a supervisor of sales of all securities by one examination. Persons 
registered as Limited Principals--General Securities Sales Supervisor 
may also qualify in any other category of principal registration. 
Persons who are already qualified in one or more categories of 
principal registration may supervise sales activities of all securities 
by also qualifying as Limited Principals--General Securities Sales 
Supervisor.
    Functions that may be performed by Limited Principals--General 
Securities Sales Supervisors. Any person required to be registered as a 
principal who supervises sales activities in corporate, municipal and 
option securities, investment company products, variable contracts, 
[and] direct participation programs, and security futures may be 
registered solely as a Limited Principal--General Securities [Sale] 
Sales Supervisor. In addition to branch office managers, other persons 
such as regional and national sales managers may also be registered 
solely as Limited Principals--General Securities Sales Supervisor as 
long as they supervise only sales activities. Qualification as a 
General Securities Representative is a prerequisite for registration as 
a Limited Principal--General Securities Sales Supervisor.
* * * * *

1032. Categories of Representative Registration

(a) General Securities Representative
    (1) No change
    (2)(A)-(D) No change
    (2)(E) A person who is registered with NASD as a General Securities 
Representative may not act as a General Securities Representative with 
regard to security futures products unless such person has, prior to 
December 31, 2006, completed a firm-element continuing education 
requirement that addresses security futures products. After a new 
examination that includes security futures products is offered, a 
person associated with a member who passes such a revised Qualification 
Examination for General Securities Representative (or any other 
examination covering security futures that is acceptable to NASD) is 
not required to complete a firm-element continuing education 
requirement that addresses security futures to act as a General 
Securities Representative with regard to such products, except as 
otherwise required by Rule 1120 generally or by the member firm. Once 
the new examination that includes security futures becomes available, 
persons seeking to become a General Securities Representative will be 
required to pass such revised examination (or any other examination 
covering security futures that is acceptable to NASD) to act as a 
General Securities Representative with regard to security futures 
products. Only persons registered as a General Securities 
Representative prior to the time that the new examination is available, 
will be eligible to use a firm-element continuing education program in 
lieu of passing the revised examination or module to engage in a 
security futures business.
    (a)(2)(E)-(I) Renumbered accordingly
    (a)(3) A person registered as a General Securities Representative 
shall not be qualified to function as a Registered Options and Security 
Futures Representative unless he or she is also qualified and 
registered as such pursuant to the provisions of paragraph (d) 
[hereof].
    (b) and (c) No change
(d) Limited Representative--Options and Security Futures
    (1) Each person associated with a member who is included within the 
definition of a representative as defined in Rule 1031 may register 
with the Association as a Limited Representative--Options and Security 
Futures if:
    (A) such person's activities in the investment banking or 
securities business of the member involve the solicitation or sale of 
option or security futures contracts, including option contracts on 
government securities as that term is defined in Section 3(a)(42)(D) of 
the Act, for the account of a broker, dealer or public customer; and
    (B) such person passes an appropriate qualification examination for 
Limited Representative--Options and Security Futures.
    (2) Each person seeking to register and qualify as a Limited 
Representative--Options and Security Futures must, concurrent with or 
before such registration may become effective, become registered 
pursuant to the Rule 1032 Series, either as a Limited Representative--
Corporate Securities or Limited Representative--Government Securities.
    (3) A person registered as a Limited Representative--Options and 
Security Futures shall not be qualified to function in any area not 
described in subparagraph (1)(A) [hereof].
    (4) Any person who is registered with NASD as a Limited 
Representative--Options and Security Futures may not act as a limited 
representative with regard to security futures products unless such 
person has, prior to December 31, 2006, completed a firm-element 
continuing education requirement that addresses security futures. After 
a new examination that includes security futures products is offered, a 
person associated with a member who passes such a revised Qualification 
Examination for Limited Representative--Options and Security Futures 
(or any other examination covering security futures that is acceptable 
to NASD) is not required to complete a firm-element continuing 
education requirement that addresses security futures to act as a 
limited representative with regard to such products, except as 
otherwise required by Rule 1120 generally or by the member firm.
    (e)-(h) No change
* * * * *

1060. Persons Exempt From Registration

* * * * *
    (4) persons associated with a member whose functions are related 
solely and exclusively to:
    (A) effecting transactions on the floor of a national securities 
exchange and who are registered as floor members of such exchange;
    (B) transaction in municipal securities; [or]
    (C) transactions in commodities; or
    (D) transactions in security futures, provided that any such person 
is registered with a registered futures association.
* * * * *

IM-2110-3. Front Running Policy

* * * * *
    (a) an order to buy or sell an option or a security future when 
such member or person associated with a member causing such order to be 
executed has material, non-public market information concerning an 
imminent block transaction in the underlying security, or when a 
customer has been provided such material, non-public market information 
by the member or any person associated with a member; or
    (b) an order to buy or sell an underlying security when such member 
or person associated with a member causing such order to be executed 
has material, non-public market information concerning an imminent 
block transaction in an option or a security future overlying that 
security, or when a customer has been provided such material, non-
public market information by the member or any person associated with a 
member; prior to the time information concerning the block

[[Page 47415]]

transaction has been made publicly available.
* * * * *
    These prohibitions also do not include situations in which a member 
or person associated with a member receives a customer's order of block 
size relating to both an option and the underlying security or both a 
security future and the underlying security. In such cases, the member 
and person associated with a member may position the other side of one 
or both components of the order. However, in these instances, the 
member and person associated with a member would not be able to cover 
any resulting proprietary position(s) by entering an offsetting order 
until information concerning the block transaction involved has been 
made publicly available.
    The application of this front running policy is limited to 
transactions that are required to be reported on the last sale 
reporting systems administered by Nasdaq, Consolidated Tape Association 
(CTA), or Option Price Reporting Authority (OPRA). The front running 
policy also applies to security futures transactions regardless of 
whether such products are reported pursuant to such systems. 
Information as to a block transaction shall be considered to be 
publicly available when it has been disseminated via the tape or high 
speed communications line of one of those systems, a similar system of 
a national securities exchange under Section 6 of the Act, an 
alternative trading system under Regulation ATS, or by [of] a third-
party news wire service.
    A transaction involving 10,000 shares or more of an underlying 
security, or options or security futures covering such number of shares 
is generally deemed to be a block transaction, although a transaction 
of less than 10,000 shares could be considered a block transaction in 
appropriate cases. A block transaction that has been agreed upon does 
not lose its identity as such by arranging for partial executions of 
the full transaction in portions which themselves are not of block size 
if the execution of the full transaction may have a material impact on 
the market. In this situation, the requirement that information 
concerning the block transaction be made publicly available will not be 
satisfied until the entire block transaction has been completed and 
publicly reported.
* * * * *

2210. Communications with the Public

    (a) No change
    (b) Approval and Recordkeeping
    (1) Each item of advertising and sales literature shall be approved 
by signature or initial, prior to use or filing with the Association, 
by a registered principal of the member. This requirement may be met, 
only with respect to corporate debt and equity securities that are the 
subject of research reports as the term is defined in Rule 472 of the 
New York Stock Exchange, by the signature or initial of a supervisory 
analyst approved pursuant to Rule 344 of the New York Stock Exchange. 
This requirement may be met, only with respect to advertising and sales 
literature concerning security futures, by the signature or initial of 
a Registered Options and Security Futures Principal.
    (b)(2) and (c)(1) No change
    (c)(2) Advertisements concerning collateralized mortgage 
obligations, advertisements concerning security futures, and 
advertisements and sales literature concerning registered investment 
companies (including mutual funds, variable contracts and unit 
investment trusts) that include or incorporate rankings or comparisons 
of the investment company with other investment companies where the 
ranking or comparison category is not generally published or is the 
creation, either directly or indirectly, of the investment company, its 
underwriter or an affiliate, shall be filed with the 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 
changed by the Association, shall be withheld from publication or 
circulation until any changes specified by the Association have been 
made or, if expressly disapproved, until the advertisement has been 
refiled for, and has received, Association approval. The member must 
provide with each filing the actual or anticipated date of first use. 
Any member filing any investment company advertisement or sales 
literature pursuant to this paragraph shall include a copy of the data, 
ranking or comparison on which the ranking or comparison is based.
    (c)(3)-(c)(9) No Change
    (d)(1) No Change
    (d)(2)(A) No Change
    (B)(i)a. that the member usually makes a market in the securities 
being recommended, or in the underlying security if the recommended 
security is an option or security future, or that the member or 
associated persons will sell to or buy from customers on a principal 
basis;
    (B)(i)b. that the member and/or its officers or partners own 
options, security futures, rights or warrants to purchase any of the 
securities of the issuer whose securities are recommended, unless the 
extent of such ownership is nominal;
    (B)(i)c. No Change
    (B)(ii)-(B)(iv) No Change
* * * * *

IM-2210-7. Guidelines for Communications with the Public Regarding 
Security Futures

(a) Association Approval Requirements and Review Procedures

    (1) As set forth in paragraph (c)(2) of Rule 2210, all 
advertisements concerning security futures shall be submitted to the 
Advertising/Investment Companies Regulation Department of NASD at least 
ten days prior to use for approval and, if changed by NASD, shall be 
withheld from circulation until any changes specified by NASD have been 
made or, in the event of disapproval, until the advertisement has been 
refiled for, and has received, Association approval.
    (2) The requirements of this paragraph (a) shall not be applicable 
to:
    (A) advertisements submitted to another self-regulatory 
organization having comparable standards pertaining to such 
advertisements, and
    (B) advertisements in which the only reference to security futures 
is contained in a listing of the services of a member organization.

(b) Disclosure Statement

    (1) All communications concerning security futures shall be 
accompanied or preceded by the security futures risk disclosure 
statement unless they meet the following requirements:
    (A) Such communications shall be limited to general descriptions of 
the security futures being offered.
    (B) Such communications shall contain contact information for 
obtaining a copy of the security futures risk disclosure statement.
    (C) Such communications shall not contain recommendations or past 
or projected performance figures, including annualized rates of return.
    (2) Communications concerning security futures that meet the 
requirements of subparagraph (1) may have the following 
characteristics:
    (A) the text of the communication may contain a brief description 
of security futures, including a statement that identifies registered 
clearing agencies for security futures. The text may also contain a 
brief description of the general attributes and method of operation of 
the security exchange or notice-registered securities exchange on which 
such security futures are traded, including a discussion of how a 
security future is priced;

[[Page 47416]]

    (B) the communication may include any statement required by any 
state law or administrative authority; and
    (C) advertising designs and devices, including borders, scrolls, 
arrows, pointers, multiple and combined logos and unusual type faces 
and lettering as well as attention-getting headlines and photographs 
and other graphics may be used, provided such material is not 
misleading.

(c) Recordkeeping

    Consistent with paragraph (b)(2) of Rule 2210, a member shall keep 
a separate file of all advertisements and sales literature concerning 
security futures, including the name(s) of the person(s) who prepared 
them and approved their use for a period of three years from the date 
of each use. In addition, members shall meet the same recordkeeping 
requirements for all correspondence concerning security futures. In the 
case of sales literature concerning security futures, a member shall 
record the source of any recommendation contained therein.

(d) Specific Standards

    (1) The special risks attendant to security futures transactions 
and the complexities of certain security futures investment strategies 
shall be reflected in any communications that discuss the uses or 
advantages of security futures. Any statement referring to the 
potential opportunities or advantages presented by security futures 
shall be balanced by a statement of the corresponding risks. The risk 
statement shall reflect the same degree of specificity as the statement 
of opportunities, and broad generalities should be avoided.
    (2) Security futures communications shall include a warning to the 
effect that security futures are not suitable for all investors and 
such communications shall not contain suggestions to the contrary.
    (3) Security futures communications shall state that supporting 
documentation for any claims (including any claims made on behalf of 
security futures programs or the security futures expertise of sales 
persons), comparisons, recommendations, statistics or other technical 
data, will be supplied upon request.
    (4) No cautionary statements or caveats, often called hedge 
clauses, may be used in communications with the public if they are not 
legible, are misleading, or are inconsistent with the content of the 
material.
    (5) Statements suggesting the certain availability of a secondary 
market for security futures shall not be made.

(e) Projections

    Notwithstanding the provisions of Rule 2210(d)(2)(N), security 
futures sales literature and correspondence may contain projected 
performance figures (including projected annualized rates of return), 
provided that:
    (1) all such sales literature and correspondence must be 
accompanied or preceded by the security futures risk disclosure 
statement;
    (2) no suggestion of certainty of future performance is made;
    (3) parameters relating to such performance figures are clearly 
established;
    (4) all relevant costs, including commissions, fees, and interest 
charges (as applicable) are disclosed and reflected in the projections;
    (5) such projections are plausible and are intended as a source of 
reference or a comparative device to be used in the development of a 
recommendation;
    (6) all material assumptions made in such calculations are clearly 
identified;
    (7) the risks involved in the proposed transactions are also 
disclosed; and
    (8) in communications relating to annualized rates of return, that 
such returns are not based upon any less than a sixty-day experience; 
any formulas used in making calculations are clearly displayed; and a 
statement is included to the effect that the annualized returns cited 
might be achieved only if the parameters described can be duplicated 
and that there is no certainty of doing so.

(f) Historical Performance

    Security futures sales literature and correspondence may feature 
records and statistics that portray the performance of past 
recommendations or of actual transactions, provided that:
    (1) all such sales literature and correspondence must be 
accompanied or preceded by the security futures risk disclosure 
statement;
    (2) any such portrayal is done in a balanced manner, and consists 
of records or statistics that are confined to a specific ``universe'' 
that can be fully isolated and circumscribed and that covers at least 
the most recent 12-month period;
    (3) such communications include the date of each initial 
recommendation or transaction, the price of each such recommendation or 
transaction as of such date, and the date and price of each 
recommendation or transaction at the end of the period or when 
liquidation was suggested or effected, whichever was earlier; provided 
that if the communications are limited to summarized or averaged 
records or statistics, in lieu of the complete record there may be 
included the number of items recommended or transacted, the number that 
advanced and the number that declined, together with an offer to 
provide the complete record upon request;
    (4) such communications disclose all relevant costs, including 
commissions, fees, and daily margin obligations (as applicable);
    (5) whenever such communications contain annualized rates of 
return, such communications shall disclose all material assumptions 
used in the process of annualization;
    (6) an indication is provided of the general market conditions 
during the period(s) covered, and any comparison made between such 
records and statistics and the overall market (e.g., comparison to an 
index) is valid;
    (7) such communications state that the results presented should not 
and cannot be viewed as an indicator of future performance; and
    (8) a principal qualified to supervise security futures activities 
determines that the records or statistics fairly present the status of 
the recommendations or transactions reported upon and so initials the 
report.

(g) Security Futures Programs

    In communications regarding a security futures program (i.e., an 
investment plan employing the systematic use of one or more security 
futures strategies), the cumulative history or unproven nature of the 
program and its underlying assumptions shall be disclosed.

(h) Standard Forms of Worksheets

    Such worksheets must be uniform within a member firm. If a member 
has adopted a standard form of worksheet for a particular security 
futures strategy, nonstandard worksheets for that strategy may not be 
used.

(i) Recordkeeping

    Communications that portray performance of past recommendations or 
actual transactions and completed worksheets shall be kept at a place 
easily accessible to the sales office for the accounts or customers 
involved.
* * * * *

IM-2310-2. Fair Dealing With Customers

    (a)(1) to (e) (opening paragraph) No change
(e)(1) Security Futures
    Members must comply with the Rules, regulations and procedures 
applicable

[[Page 47417]]

to security futures contained in Rule 2865.
    (e)(1) and (e)(2) are renumbered as (e)(2) and (e)(3) respectively.
* * * * *

2865. Security Futures

    (a) For purposes of this Rule, the term ``security future'' shall 
have the definition specified in Section 3(a)(55) of the Act.

(b) Requirements

(1) General

    (A) Applicability--This Rule shall be applicable to the trading of 
security futures.
    (B) Paragraphs (12) and (15) shall apply only to security futures 
carried in securities accounts.
    (C) Except to the extent that specific provisions in this Rule 
govern, or unless the context otherwise requires, the provisions of the 
By-Laws and Rules and all other interpretations and policies of the 
Board of Governors shall also be applicable to the trading of security 
futures.

(2) Definitions

    (A) The terms ``Beneficial Owner,'' ``Control,'' and ``Controls,'' 
``Is Controlled by'' or ``Is Under Common Control With'' shall have the 
same meanings as in Rule 2860.
    (B) The term ``principal qualified to supervise security futures 
activities'' means a Registered Options and Security Futures Principal 
who, consistent with Rule 1022, has either completed a firm-element 
continuing education requirement that addresses security futures and a 
principal's responsibilities for security futures or has passed a 
revised qualification examination for Registered Options and Security 
Futures Principals that covers security futures, or a Limited 
Principal--General Securities Sales Supervisor who, consistent with 
Rule 1022, has either completed a firm-element continuing education 
requirement that addresses security futures and a principal's 
responsibilities for security futures or has passed a revised 
qualification examination for Limited Principal--General Securities 
Sales Supervisor.
    (3)-(7) Reserved

(8) Restrictions on Security Futures Transactions

    NASD may impose from time to time such restrictions on security 
futures transactions that it determines are necessary in the interest 
of maintaining a fair and orderly market in security futures, or in the 
underlying securities covered by such security futures, or otherwise 
necessary in the public interest or for the protection of investors. 
During the period of any such restriction, no member shall effect any 
security futures transaction in contravention of such restriction.
    (9)-(10) Reserved

(11) Delivery of Security Futures Risk Disclosure Statement

    (A) Every member shall deliver the current security futures risk 
disclosure statement to each customer at or prior to the time such 
customer's account is approved for trading security futures. 
Thereafter, each new or revised security futures risk disclosure 
statement shall be distributed to every customer having an account 
approved for such trading or, in the alternative, shall be distributed 
not later than the time a confirmation of a transaction is delivered to 
each customer who enters into a security futures transaction. NASD will 
advise members when a new or revised current security futures risk 
disclosure statement is available.
    (B) Where a broker or dealer enters its orders with another member 
in a single omnibus account, the member holding the account shall take 
reasonable steps to assure that such broker or dealer is furnished 
reasonable quantities of the current security futures risk disclosure 
statement.
    (C) Where an introducing broker or dealer enters orders for its 
customers with, or clears transactions through, a member on a fully 
disclosed basis and that member carries the accounts of such customers, 
the responsibility for delivering the current security futures risk 
disclosure statement as provided in this paragraph (b)(11) shall rest 
with the member carrying the accounts. However, such member may rely 
upon the good faith representation of the introducing broker or dealer 
that the current security futures risk disclosure statement has been 
delivered in compliance with paragraph (b)(11).

(12) Confirmations

    Every member shall promptly furnish to each customer a written 
confirmation of each transaction in security futures for such 
customer's account. Each such confirmation shall show the market on 
which the security futures position was executed, whether the security 
futures position is a long or short position, the underlying security 
or narrow-based index, the expiration date, the quantity of the 
underlying security or narrow-based index, the number of security 
futures contracts, the amount of initial and maintenance margin 
required, the commission, the trade and settlement dates, whether the 
transaction was a purchase or a sale transaction, whether the 
transaction was an opening or offsetting transaction, and whether the 
transaction was effected on a principal or agency basis.

(13)-(14) Reserved

(15) Statements of Account

    (A) Statements of account showing security and money positions, 
entries, interest charges, and any special charges that have been 
assessed against such account during the period covered by the 
statement shall be sent no less frequently than once every month to 
each customer in whose account there has been an entry during the 
preceding month with respect to a security futures contract and 
quarterly to all customers having an open security futures position or 
money balance. Interest charges and any special charges assessed during 
the period covered by the statement need not be specifically delineated 
if they are otherwise accounted for on the statement and have been 
itemized on transaction confirmations. With respect to security futures 
customers having a general (margin) account, such statements shall also 
provide the mark-to-market price and market value of each security 
futures position and other security positions in the general (margin) 
account, the total market value of all positions in the account, the 
outstanding debit or credit balance in the account, and the general 
(margin) account equity. The statements shall bear a legend stating 
that further information with respect to commissions and other charges 
related to the execution of security futures transactions has been 
included in confirmations of such transactions previously furnished to 
the customer, and that such information will be made available to the 
customer promptly upon request. The statements shall also bear a legend 
requesting the customer promptly to advise the member of any material 
change in the customer's investment objectives or financial situation.
    (B) For purposes of this subparagraph (15), general (margin) 
account equity shall be computed by subtracting the total of the 
``short'' security values and any debit balance from the total of the 
``long'' security values and any credit balance.

(16) Opening of Accounts

(A) Approval Required

    No member or person associated with a member shall accept an order 
from a customer to purchase or sell a security future, or approve the 
customer's

[[Page 47418]]

account for the trading of security futures, unless the broker or 
dealer furnishes or has furnished to the customer the appropriate 
security futures risk disclosure statement and the customer's account 
has been approved for security futures trading in accordance with the 
provisions of subparagraphs (B) through (D) hereof.

(B) Diligence in Opening Accounts

    In approving a customer's account for security futures trading, a 
member or any person associated with a member shall exercise due 
diligence to ascertain the essential facts relative to the customer, 
the customer's financial situation and investment objectives. Members 
shall establish specific minimum net equity requirements for initial 
approval and maintenance of customers' security futures accounts. Based 
upon such information, a principal qualified to supervise security 
futures activities shall specifically approve or disapprove in writing 
the customer's account for security futures trading. For account 
approvals, the written record shall include the reasons for approval.
    (i) With respect to security futures customers who are natural 
persons, members shall seek to obtain the following information at a 
minimum (information shall be obtained for all participants in a joint 
account):
    a. Investment objectives (e.g., safety of principal, income, 
growth, trading profits, or speculation);
    b. Employment status (name of employer, self-employed, or retired);
    c. Estimated annual income from all sources;
    d. Estimated net worth (exclusive of family residence);
    e. Estimated liquid net worth (cash, securities, or other);
    f. Marital status and number of dependents;
    g. Age; and,
    h. Investment experience and knowledge (e.g., number of years, 
size, frequency and type of transactions) for futures, commodities, 
options, stocks, bonds, and other financial instruments.
    (ii) In addition, a customer's account records shall contain the 
following information, if applicable:
    a. Source or sources of background and financial information 
(including estimates) concerning the customer;
    b. Discretionary authorization agreement on file, name, 
relationship to customer, and experience of person holding trading 
authority;
    c. Date disclosure document(s) furnished to customer;
    d. Name of registered representative;
    e. Name of principal approving account and date of approval; and
    f. Dates of verification of currency of account information.
    (iii) Members should consider using a standard account approval 
form to ensure the receipt of all the required information.
    (iv) Refusal of a customer to provide any of the information 
specified in subparagraph (i) shall be so noted on the customer's 
records at the time the account is opened. Information provided shall 
be considered together with the other information available in 
determining whether to approve the account for security futures 
trading.
    (v) A record of the information obtained pursuant to this 
subparagraph (B) and of the approval or disapproval of each account 
shall be maintained by the member as part of its records in accordance 
with paragraph (b)(17) herein.

(C) Verification of Customer Background and Financial Information

    For every natural person whose account has been approved for 
security futures trading, the background and financial information upon 
which the account was approved shall be sent to the customer for 
verification within fifteen days (15) after the customer's account has 
been approved for security futures trading. This verification 
requirement shall not apply if the background and financial information 
is included in the customer's account agreement or if the member has 
previously verified the customer's information in connection with an 
options account. A copy of the background and financial information on 
file with a member also shall be sent to the customer for verification 
within fifteen (15) days after the member becomes aware of any material 
change in the customer's financial situation.
    Members shall satisfy the initial and subsequent verification of 
customer background and financial information by sending to the 
customer the information required in paragraph (B)(i)(a) through (i)(f) 
hereof, as contained in the member's records and providing the customer 
with an opportunity to correct or complete the information. In all 
cases, absent advice from the customer to the contrary, the information 
will be deemed to be verified.

(D) Account Agreement

    Within fifteen (15) days after a customer's account has been 
approved for security futures trading, a member shall obtain from the 
customer a written agreement that the customer is aware of and agrees 
to be bound by the Rules of NASD applicable to the trading of security 
futures and, that the customer has received a copy of the current 
security futures risk disclosure statement. In addition, the customer 
should indicate on such written agreement that the customer is aware of 
and agrees not to violate applicable security futures position limits.

(17) Maintenance of Records

    (A) In addition to the requirements of Rule 3110, every member 
shall maintain and keep current a separate central log, index, or other 
file for all security futures-related complaints, through which these 
complaints can easily be identified and retrieved. The central file 
shall be located at the principal place of business of the member or 
such other principal office as shall be designated by the member. At a 
minimum, the central file shall include: (i) identification of 
complainant; (ii) date complaint was received; (iii) identification of 
registered representative servicing the account; (iv) a general 
description of the matter complained of; and (v) a record of what 
action, if any, has been taken by the member with respect to the 
complaint. For purposes of this subparagraph, the term ``security 
futures-related complaint'' shall mean any written statement by a 
customer or person acting on behalf of a customer alleging a grievance 
arising out of or in connection with security futures. Each security 
futures-related complaint received by a branch office of a member shall 
be forwarded to the office in which the separate, central file is 
located not later than 30 days after receipt by the branch office that 
is the subject of the complaint. A copy of every security futures-
related complaint shall also be maintained at the branch office that is 
the subject of the complaint.
    (B) Background and financial information of customers who have been 
approved for security futures trading shall be maintained at both the 
branch office servicing the customer's account and the principal 
supervisory office having jurisdiction over that branch office. Copies 
of account statements of security futures customers shall also be 
maintained at both the branch office supervising the accounts and the 
principal supervisory office having jurisdiction over that branch for 
the most recent six-month period. With respect solely to the above-
noted record retention requirements applicable to principal supervisory 
offices, however, the customer information and account statements may 
be maintained at a location other than the principal supervisory office 
if such documents and information are readily accessible

[[Page 47419]]

and promptly retrievable. Other records necessary to the proper 
supervision of accounts shall be maintained at a place easily 
accessible both to the branch office servicing the customer's account 
and to the principal supervisory office having jurisdiction over that 
branch office.

(18) Discretionary Accounts

(A) Authorization and Approval

    (i) No member or person associated with a member shall exercise any 
discretionary power with respect to trading in security futures in a 
customer's account, or accept orders for security futures for an 
account from a person other than the customer, except in compliance 
with the provisions of Rule 2510 and unless:
    a. The written authorization of the customer required by Rule 2510 
shall specifically authorize security futures trading in the account; 
and
    b. the account shall have been accepted in writing by a principal 
qualified to supervise security futures activities.
    (ii) When analyzing an account to determine if it should be 
approved for security futures trading, a principal qualified to 
supervise security futures activities shall have a reasonable basis for 
believing that the customer was able to understand and bear the risk of 
the strategies or transactions proposed, and shall maintain a record of 
the basis for such determination. Each discretionary order shall be 
approved and initialed on the day entered by the branch office manager 
or other principal qualified to supervise security futures activities, 
provided that if the branch officer is not a principal qualified to 
supervise security futures activities, such approval shall be confirmed 
within a reasonable time by a principal qualified to supervise security 
futures activities. Each discretionary order shall be identified as 
discretionary on the order at the time of entry. Discretionary accounts 
shall receive frequent appropriate supervisory review. The provisions 
of this subparagraph (18) shall not apply to discretion as to the price 
at which or the time when an order given by a customer for the purchase 
or sale of a definite number of security futures contracts in a 
specified security shall be executed.

(B) Record of Transactions

    A record shall be made of every transaction in security futures 
contracts in respect to which a member or person has exercised 
discretionary authority, clearly reflecting such fact and indicating 
the name of the customer, the designation and number of the security 
futures contracts, the price of the contract, and the date and time 
when such transaction was effected.

(C) Security Futures Programs

    Where the discretionary account uses security futures programs 
involving the systematic use of one or more security futures 
strategies, the customer shall be furnished with a written explanation 
of the nature and risks of such programs.

(19) Suitability

    (A) No member or person associated with a member shall recommend to 
any customer any transaction or trading strategy for the purchase or 
sale of a security future unless such member or person associated with 
the member has reasonable grounds to believe upon the basis of 
information furnished by the customer after reasonable inquiry by the 
member or person associated with the member concerning the customer's 
investment objectives, financial situation and needs, and any other 
information known by the member or associated person, that the 
recommended transaction or trading strategy is not unsuitable for the 
customer.
    (B) No member or person associated with a member shall recommend to 
a customer a transaction in any security future unless the person 
making the recommendation has a reasonable basis for believing, at the 
time of making the recommendation, that the customer has such knowledge 
and experience in financial matters that the customer may reasonably be 
expected to be capable of evaluating the risks of the recommended 
transaction, and is financially able to bear the risks of the 
recommended position in the security future.

(20) Reserved

(21) Violation of By-Laws and Rules of NASD or a Registered Clearing 
Agency

    (A) In Association disciplinary proceedings, a finding of violation 
of any provision of the rules, regulations, or by-laws of a registered 
clearing agency under Section 17A(b)(8) of the Act by any member or 
person associated with a member engaged in security futures 
transactions cleared by such registered clearing agency, may be deemed 
to be conduct inconsistent with just and equitable principles of trade 
and a violation of Rule 2110.
    (B) In Association disciplinary proceedings, a finding of violation 
of any provision of the Rules, regulations or By-Laws of NASD by any 
member or person associated with a member engaged in security futures 
transactions may be deemed to be conduct inconsistent with just and 
equitable principles of trade and a violation of Rule 2110.

(22)-(23) Reserved

(24) Security Futures Transactions and Reports by Market Makers in 
Listed Securities

    Every member that is an off-board market maker in a security listed 
on a national securities exchange shall report to NASD in accordance 
with such procedures as may be prescribed by the Board of Governors, 
transactions involving 50 or more security futures contracts on such 
listed securities that are either directly for the benefit of (A) the 
member or (B) any employee, partner, officer, or director of the member 
who, by virtue of his or her position with the member, is directly 
involved in the purchase or sale of the underlying security for the 
firm's proprietary account(s) or is directly responsible for 
supervision of such persons; or who by virtue of his or her position in 
the firm, is authorized to, and regularly does, obtain information on 
the proprietary account(s) of the member in which the underlying 
security is traded. This subparagraph shall apply to all security 
futures transactions including those executed on an exchange to which 
the member may belong.

(25) Trading Ahead of Customer Orders

    Every member shall exercise due care to avoid trading ahead of a 
customer's security futures order. A member must exercise the due care 
required by this subsection when the member has gained knowledge of or 
reasonably should have gained knowledge of the customer's order prior 
to the transmission to a securities exchange of the member's order for 
a proprietary account, or for any account in which it or any person 
associated with it is directly or indirectly interested.
* * * * *

3010. Supervision

    (a) No change
    (b)(1)-(b)(2)(ix) No change
    (b)(2)(x) For purposes of this Rule, the term ``disciplined firm'' 
means either a member that, in connection with sales practices 
involving the offer, purchase, or sale of any security, has been 
expelled from membership or participation in any securities industry 
self-regulatory organization or is subject to an order of the 
Securities and Exchange Commission revoking its registration as a 
broker/dealer; or a futures commission merchant or introducing broker 
that has been

[[Page 47420]]

formally charged by either the Commodity Futures Trading Commission or 
a registered futures association with deceptive telemarketing practices 
or promotional material relating to security futures, those charges 
have been resolved, and the futures commission merchant or introducing 
broker has been closed down and permanently barred from the futures 
industry as a result of those charges; or a futures commission merchant 
or introducing broker that, in connection with sales practices 
involving the offer, purchase, or sale of security futures is subject 
to an order of the Securities and Exchange Commission revoking its 
registration as a broker or dealer.
    (b)(2)(xi) No change
    (c)-(d) No change
(e) Qualifications Investigated
    Each member shall have the responsibility and duty to ascertain by 
investigation the good character, business repute, qualifications, and 
experience of any person prior to making such a certification in the 
application of such person for registration with this Association. 
Where an applicant for registration has previously been registered with 
NASD, the member shall review [obtain from the Central Registration 
Depository or from the applicant] a copy of the Uniform Termination 
Notice of Securities Industry Registration (Form U-5) filed with the 
Association by such person's most recent previous NASD member employer, 
together with any amendments thereto that may have been filed pursuant 
to Article V, Section 3 of the Association's By-Laws. The member shall 
review [obtain] the Form U-5 as required by this Rule no later than 
sixty (60) days following the filing of the application for 
registration or demonstrate to the Association that it has made 
reasonable efforts to comply with the requirement. [A member receiving 
a Form U-5 pursuant to this Rule shall review] In conducting its review 
of the Form U-5 and any amendments thereto, a member [and] shall take 
such action as may be deemed appropriate.
    Where an applicant for registration has been previously registered 
with a registered futures association (``RFA'') member that is or has 
been registered as a broker/dealer pursuant to Section 15(b)(11) of the 
Act (``notice-registered broker/dealer'') with the SEC to trade 
security futures, the member shall review a copy of the Notice of 
Termination of Associated Person (Form 8-T) filed with the RFA by such 
person's most recent previous RFA member employer, together with any 
amendments thereto. The member shall review the Form 8-T as required by 
this Rule no later than sixty (60) days following the filing of the 
application for registration or demonstrate to NASD that it has made 
reasonable efforts to comply with the requirement. In conducting its 
review of a Form 8-T and any amendments, a member shall take such 
action as may be deemed appropriate.
    (f) and (g) No change
* * * * *

3050. Transactions for or by Associated Persons

    (a)-(c) No change
    (d) Obligations of Associated Persons Concerning an Account with a 
Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other 
Financial Institution.
    A person associated with a member who opens a securities account or 
places an order for the purchase or sale of securities with a broker/
dealer that is registered pursuant to Section 15(b)(11) of the Act 
(``notice-registered broker/dealer''), a domestic or foreign investment 
adviser, bank, or other financial institution, except a member, shall:
    (1) notify his or her employer member in writing, prior to the 
execution of any initial transactions, of the intention to open the 
account or place the order; and
    (2) upon written request by the employer member, request in writing 
and assure that the notice-registered broker/dealer, investment 
adviser, bank, or other financial institution provides the employer 
member with duplicate copies of confirmations, statements, or other 
information concerning the account or order; provided, however, that if 
an account subject to this paragraph (d) was established prior to a 
person's association with a member, the person shall comply with this 
paragraph promptly after becoming so associated.
* * * * *

3370. Prompt Receipt and Delivery of Securities

    (a) No change
    (b) Sales
    (1) No change
    (2) ``Short Sales''
(A) Customer short sales
    No member or person associated with a member shall accept a 
``short'' sale order for any customer in any security unless the member 
or person associated with a member makes an affirmative determination 
that the member will receive delivery of the security from the customer 
or that the member can borrow the security on behalf of the customer 
for delivery by settlement date. This requirement shall not apply, 
however, to transactions in corporate debt securities or transactions 
in security futures, as defined in Section 3(a)(55) of the Act.
(B) Proprietary Short Sales
    No member shall effect a ``short'' sale for its own account in any 
security unless the member or person associated with a member makes an 
affirmative determination that the member can borrow the securities or 
otherwise provide for delivery of the securities by the settlement 
date. This requirement will not apply to transactions in corporate debt 
securities, to transactions in security futures, as defined in Section 
3(a)(55) of the Act, to bona fide market making transactions by a 
member in securities in which it is registered as a Nasdaq market 
maker, to bona fide market maker transactions in non-Nasdaq securities 
in which the market maker publishes a two-sided quotation in an 
independent quotation medium, or to transactions [which] that result in 
fully hedged or arbitraged positions.
    (3)-(4) No change
    (5)(A)(i) through (iii) No change
    (iv) Short a security and long a single stock future of the 
underlying security.
    Example: Long 1 single stock future of MNOP.
     With the circumstances as above (and assuming a contract 
size of 100) 100 shares would be exempt.
     Even if the expiration date for the single stock future 
was more than 90 calendar days, 100 shares would be exempt.
* * * * *

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 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 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 Commodity Futures Modernization Act of 2000 (``CFMA'')

[[Page 47421]]

authorizes the trading of futures on individual stocks and narrow-based 
stock indices. Under the CFMA, security futures are defined as 
``securities'' under section 3(a)(10) of the Exchange Act. As a result, 
NASD is modifying existing rules that cover securities and developing 
new rules to accommodate these new securities products.\5\
---------------------------------------------------------------------------

    \5\ NASD also has filed a proposed rule change to add NASD Rule 
3115 and to amend NASD Rule 3340 to establish record-keeping 
requirements for Alternative Trading Systems (``ATSs'') that trade 
security futures, and to require ATSs to coordinate trading halts 
with markets trading the underlying securities and markets trading 
related securities. (SR-NASD-2001-47). See Securities Exchange Act 
Release No. 44623 (July 30, 2001), 66 FR 41076 (August 6, 2001).
---------------------------------------------------------------------------

    The regulatory framework established by the CFMA for the markets 
and intermediaries trading security futures provides the SEC and 
Commodity Futures Trading Commission (``CFTC'') with joint 
jurisdiction. Broker/dealers that wish to conduct a business in 
security futures are required to notice register as Futures Commission 
Merchants (``FCMs'') or Introducing Brokers (``IBs'') with the CFTC.\6\ 
Similarly, FCMs and IBs that wish to conduct a business in security 
futures are required to notice register as broker/dealers with the 
SEC.\7\ FCMs and IBs that are notice-registered with the SEC do not, 
however, need to become members of NASD. NASD's proposed rules on 
security futures apply only to NASD members.
a. Security Futures Rule
---------------------------------------------------------------------------

    \6\ 66 FR 43227 (August 17, 2001).
    \7\ Securities Exchange Act Release No. 44730 (August 21, 2001), 
66 FR 45138 (August 27, 2001).
---------------------------------------------------------------------------

    One of the underpinnings of the CFMA is that the regulation of 
security futures should be comparable to the regulation of options.\8\ 
NASD and the National Futures Association (``NFA'') \9\ are required 
under the CFMA to develop rules regulating activity in security 
futures.\10\
---------------------------------------------------------------------------

    \8\ For example, the CFMA establishes that margin requirements 
for security futures be consistent with comparable option contracts 
and that listing standards for security futures be no less 
restrictive than comparable listing standards for options traded on 
a national securities exchange or a national securities association. 
See Sections 7(c)(2) and 6(h)(3)(C) of the Act, 15 U.S.C. 78g(c)(2), 
78f(h)(3)(C).
    \9\ The NFA is currently the only registered futures association 
under the Commodity Exchange Act (``CEA''). Under the CFMA, the NFA, 
as a registered futures association is a limited-purpose national 
securities association. The function of a limited-purpose national 
securities association is limited to carrying out the purposes of 
the securities laws applicable to securities futures and to 
regulating the activities of its members that have notice-registered 
with the SEC to trade security futures. See Section 15A(k) of the 
Act, 15 U.S.C. 78o-3(k).
    \10\ Sales practice rules for security futures, and specifically 
the suitability rule, are subject to the CFMA's requirement that the 
NFA's rules on these subjects be reasonably comparable to NASD's 
rules. Section 15A(k)(2)(B)(i) of the Act, 15 U.S.C. 78o-
3(k)(2)(B)(i). NASD believes that it is important for NASD's and the 
NFA's rules to be comparable in these areas.
---------------------------------------------------------------------------

    The proposed securities futures rule, Rule 2865, is based 
principally upon NASD's options rule, Rule 2860.\11\ For purposes of 
clarity, NASD has styled the rule as a separate, stand-alone rule from 
its options rule; however, to facilitate compliance by member firms 
that are familiar with NASD's options rule, NASD has maintained the 
same structure and, where possible, much of the same rule text.
---------------------------------------------------------------------------

    \11\ The Commission published a group of new NFA rules and 
amendments to NFA rules governing security futures on September 27, 
2001. See Securities Exchange Act Release No. 44823 (September 20, 
2001), 66 FR 49439 (September 27, 2001). The NFA's rules also were 
modeled after NASD's options rules. In developing NASD's security 
futures rule, we have sought to adopt requirements that are 
consistent with those of the NFA to avoid regulatory disparity 
between firms subject to the jurisdiction of the NFA and NASD.
---------------------------------------------------------------------------

    In reviewing NASD's options rule and the security futures rules of 
the NFA, NASD determined that it was not necessary to replicate every 
provision in the options rules for security futures. Certain concepts 
for options are not relevant for security futures. For example, 
provisions pertaining to the ``exercise'' of options were not carried 
forward into the security futures rule because security futures are not 
``exercised'' as options are. NASD also has eliminated sections 
pertaining to ``Transactions with Issuers'' and ``Restricted Stock,'' 
and have not included provisions concerning position limits and the 
reporting of security futures positions, which will instead be 
addressed by each exchange or market trading security futures, as 
appropriate.
    NASD's security futures rule applies to all NASD member firms. Many 
of these members will be broker/dealers that notice register with the 
CFTC as an FCM or IB. Other members will be fully registered with both 
the SEC and CFTC (``fully registered firms''). In a joint notice of 
proposed rulemaking,\12\ the SEC and CFTC requested comment on whether 
the application of the customer account statement and confirmation 
rules should depend on the type of account in which security futures 
are held (e.g., in a securities account at a broker/dealer, or a 
futures account at an FCM).\13\ The proposed rule change adopts what 
appears to be the resolution of this issue--namely, that the customer 
account statement and confirmation rules will apply based upon the type 
of account used for the security futures. Thus, the paragraphs of the 
security futures rule pertaining to customer account statements and 
confirmations apply only to security futures held in securities 
accounts. Fully registered firms that hold security futures in an FCM 
account would follow the rules of the CFTC addressing customer account 
statements and confirmations.
---------------------------------------------------------------------------

    \12\ Securities Exchange Act Release No. 44854 (September 25, 
2001), 66 FR 50768 (October 4, 2001).
    \13\ Id. at 50791.
---------------------------------------------------------------------------

Liquidation of Positions and Restrictions on Access

    NASD proposes provisions on liquidation of positions and 
restrictions on access that are substantively similar to those in 
NASD's options rule.

Restrictions on Security Futures Transactions

    NASD proposes restrictions on security futures transactions that 
are substantively similar to those in NASD's options rule.

Delivery of Security Futures Risk Disclosure Statement

    The proposed rule change requires every member to deliver the 
security futures risk disclosure statement to each customer at or prior 
to the time such customer's account is approved for trading security 
futures. In general, the requirements for delivery of the security 
futures risk disclosure statement are comparable to the requirements 
for the delivery of the options disclosure document. The security 
futures risk disclosure statement will discuss the risks of security 
futures; will describe how security futures trade; and will address 
margin for security futures, effects of leverage, settlement 
procedures, customer account protections, and tax consequences.

Confirmations

    The proposed rule change requires each member promptly to furnish 
each customer with a written confirmation of each security futures 
transaction. The proposed rule change also specifies the items that 
must be included on the confirmation. In general, the provisions 
addressing confirmations of security futures transactions are 
comparable to the provisions currently in place for options.

Discretionary Accounts

    The proposed rule change adopts discretionary account procedures 
for security futures that are comparable to those for options. Notably, 
as with options, the procedures require that the written authorization 
of the customer required by NASD Rule 2510 specifically authorize 
security futures

[[Page 47422]]

trading in the account. The implication of this requirement is that all 
discretionary accounts, even those that are permitted to trade options, 
cannot trade security futures unless a new written discretionary 
account authorization specifically authorizing trading of security 
futures is on file. Although there are many similarities between 
options and security futures, NASD does not believe that existing 
discretionary account authorizations should be expanded to include 
these new products. While NASD recognizes requiring new discretionary 
account forms specifically authorizing trading in security futures may 
be of some burden to firms, NASD believes that customer protections 
achieved by such a requirement outweigh the burden. NASD notes that the 
NFA does not require discretionary accounts to have specific written 
authorization to trade security futures; however, NASD also notes that 
the discretionary accounts under the NFA's jurisdiction are already 
specifically authorized to trade other types of futures.

Statements of Account

    The proposed rule change requires members to deliver a customer 
account statement no less frequently than each month where there has 
been an entry during the preceding month with respect to a security 
futures contract and quarterly to all customers that have an open 
security futures position or money balance. The proposed customer 
account statement provision is comparable to the existing provision for 
options.

Opening of Accounts

    NASD proposes an account opening rule that contains specific 
procedures that a member must follow to approve a customer account to 
trade security futures. These procedures include review by an 
appropriately qualified principal (a Registered Options and Security 
Futures Principal or a Limited Principal--General Securities Sales 
Supervisor), specific guidance as to what information the member must 
ask the customer to provide, and a requirement for the member to 
furnish its customer with the security futures risk disclosure 
statement at or before the time that the member accepts an order from 
the customer to purchase or sell a security future. These account-
opening procedures are similar to existing procedures for options.

Suitability

    The proposed rule change includes a suitability rule that employs a 
heightened suitability standard that is similar to NASD's suitability 
standard for options.\14\ This heightened standard recognizes that 
security futures carry a higher degree of risk to a customer than many 
other securities products. Specifically, under the proposed rule 
change, if an associated person recommends a security futures 
transaction, the proposed suitability rule imposes the additional 
requirement that the associated person have a reasonable basis for 
believing ``that the customer has such knowledge and experience in 
financial matters that the customer may reasonably be expected to be 
capable of evaluating the risks of the recommended transaction, and is 
financially able to bear the risks of the recommended position in the 
security future.''\15\ NASD believes that the proposed suitability rule 
will require associated persons of broker/dealers to consider carefully 
whether to recommend a security futures transaction to a customer. In 
addition, NASD has expanded the security futures suitability standard 
to address trading strategies as well as individual trades. The 
expansion of the suitability standard to include a recommended 
``trading strategy'' makes the proposed rule change consistent with the 
suitability standard for security futures adopted by the NFA.\16\
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    \14\ See NASD Rule 2860(b)(19). In addition, we propose to add a 
cross-reference in the Fair Dealing with Customers Interpretative 
Material, IM-2310-2, which relates to NASD's suitability rule. The 
cross-reference will refer readers to the suitability provision of 
NASD's new security futures rule.
    \15\ See Proposed NASD Rule 2860(b)(19).
    \16\ NFA Rule 2-30(j)(4).
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Security Futures Transactions and Reports by Market Makers in Listed 
Securities

    NASD proposes a provision addressing security futures transactions 
and reports by market makers in listed securities that is comparable to 
the existing provision for options. This provision requires members 
that are off-board market makers in securities listed on a national 
securities exchange to regularly report security futures transactions 
involving 50 or more contracts on such listed securities that are for 
the benefit of a member that is an off-board market maker in such 
securities or are for the benefit of certain associated persons of such 
a member.

Trading Ahead

    The proposed rule change requires members to exercise due care to 
avoid trading ahead of customer orders in the same security futures 
contract. The proposed provision imposes an obligation on members not 
to trade ahead of customer security futures orders in a proprietary 
account or in any account in which the member or an associated person 
has an interest. The prohibition against trading ahead applies only to 
customer orders of which the member is aware or reasonably should be 
aware.
    This provision is based on the NFA's Interpretive Notice regarding 
obligations to customers and other market participants.\17\ The NFA's 
Interpretive Notice gives two examples of when a firm would reasonably 
not be aware of a customer's order: (1) When a customer's order 
originates in a different branch office than the firm's proprietary 
order, and (2) when the firm's trading department does not have access 
to information about customer orders. NASD believes that these two 
situations are also examples of when a firm would not violate the 
proposed NASD rule. Moreover, these two examples are not exhaustive. 
NASD anticipates that there are additional situations in which a firm 
reasonably would not be aware of a customer's order and therefore the 
firm would not violate the rule if it transmits a proprietary order to 
a securities exchange before a customer's order. NASD cannot enumerate 
all such situations at this time because, among other things, they may 
depend on the trading rules of a securities exchange that trades 
security futures.
---------------------------------------------------------------------------

    \17\ National Futures Association Manual, ] 9041 (Vol. 7, No. 2, 
2001); <http://www.nfa.futures.org/ compliance/manual/M11Interp--
41.html.
---------------------------------------------------------------------------

b. Advertising Rule for Security Futures
    NASD proposes amendments to the rule governing communications with 
the public, Rule 2210 (``Advertising Rule'') to address security 
futures. The amendments, which are primarily contained in proposed 
Interpretive Material, establish advertising standards that are similar 
but not identical to the standards for options. The proposed rule 
change bases the security futures advertising provisions on the general 
advertising rule because NASD believes it will be easier for members to 
follow a modification of the general advertising rule rather than 
referring to a stand-alone security futures advertising rule.
    Contrary to the requirement that a principal approves 
advertisements and sales literature under Rule 2210(b), however, the 
proposed rule specifies that advertisements and sales literature 
concerning security futures must be approved by a Registered Options 
and Security Futures Principal (Series 4). In particular, a General 
Securities Principal (Series 24) is not authorized to

[[Page 47423]]

approve advertisements and sales literature concerning security 
futures.
    The proposed rule contains a pre-use filing requirement for 
advertisements concerning security futures.\18\ As with the pre-use 
filing requirements for options communications, a member must file its 
security futures advertisements with NASD's Advertising/Investment 
Companies Regulation Department (``Department'') at least 10 days 
before the member can use the communication.\19\ Under the proposed 
rule change, the Department will review the advertisement and will 
either approve it, disapprove it, or specify changes that the firm must 
make to use the communication.
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    \18\ Although many of the provisions of the proposed advertising 
rule for security futures are similar to the options advertising 
rule, the definitions of ``options advertisement,'' ``educational 
material,'' and ``sales literature'' differ from the definitions 
that will apply to security futures. Because the security futures 
rule will follow NASD's general advertising rule, the definition of 
``advertisement'' is essentially material that is disseminated via 
mass media channels. See NASD Rule 2210(a)(1). ``Sales literature'' 
is defined to include circulars, research reports, market letters, 
performance reports or summaries, form letters, telemarketing 
scripts, seminar texts, and reprints or excerpts of any other 
advertisement, sales literature, or published article that is 
distributed or made generally available to customers or the public. 
See NASD Rule 2210(a)(2).
    \19\ In particular circumstances, the Department may allow a 
shorter period than 10 days for its review.
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    The proposed rule restricts the content of communications, which 
includes advertisements, sales literature, and correspondence that are 
not accompanied or preceded by the security futures risk disclosure 
statement. Such communications may not contain statements of historical 
performance or projections. In addition, communications must be limited 
to general descriptions of security futures. These restrictions are 
similar to the advertising restrictions for options.
    The proposed rule requires three specific disclosures about 
security futures. First, if the communication refers to the potential 
advantages of security futures, the communication must balance the 
mention of advantages with a reference, in the same degree of 
specificity, about the corresponding risks. This requirement of a 
closely balanced presentation of advantages and risks is a more 
exacting standard than is contained in NASD's general standard for 
communications with the public, which prohibits exaggerated, 
unwarranted, or misleading statements. See NASD Rule 2210(d)(1)(B). 
Second, the communication must include a warning that security futures 
are not suitable for all investors. NASD believes that the riskiness of 
security futures and the high leverage involved in these products makes 
security futures unsuitable for many investors. Third, the proposed 
rule requires that communications state that, upon request, the firm 
will provide documents that support any claims, comparisons, 
recommendations, statistics, or other technical data used in the 
communication. All three of these disclosure requirements are similar 
to the requirements for options communications.\20\
---------------------------------------------------------------------------

    \20\ See NASD Rules 2220(d)(2)(A)(i), (ii), 2220(d)(2)(D)(i).
---------------------------------------------------------------------------

    Because security futures communications will be subject to NASD's 
general advertising rule, several general and specific standards will 
apply to security futures communications. Exaggerated, unwarranted, or 
misleading statements about security futures are not allowed. 
Communications must be based on principles of fair dealing and good 
faith and should provide a sound basis for evaluating the facts in 
regard to any security future. Moreover, no material fact or 
qualification may be omitted if the omission, in the light of the 
context of the material presented, would cause the communication to be 
misleading. Communications with the public cannot contain promises of 
specific results, exaggerated or unwarranted claims or unwarranted 
superlatives, opinions for which there is no reasonable basis, or 
forecasts of future events that are unwarranted.
    If a communication with the public makes a recommendation, the 
member must have a reasonable basis for the recommendation and must 
disclose, if applicable, several facts about its financial holdings in 
the issuer of a security related to its recommendation.
    The proposed rule change contains requirements for sales literature 
or correspondence that contain projections or historical performance 
information. These sections are similar to provisions in the options 
advertising rule and also are substantially similar to the NFA's 
requirement regarding communications with the public for security 
futures.\21\
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    \21\ NFA Rule 2-29(j)(12). See Securities Exchange Act Release 
No. 44823 (September 20, 2001) 66 FR 49439 (September 27, 2001).
---------------------------------------------------------------------------

c. Qualifications of Registered Persons
    The securities industry has a wide array of qualification 
examinations that registered persons can take to qualify to engage in 
various aspects of the securities business. To accommodate the 
introduction of security futures, NASD proposes a rule change to modify 
several registration categories. In general, where a registration 
category permits an individual to engage in an options business, NASD 
has modified the category to permit security futures. As part of this 
change, NASD is working with other self-regulatory organizations to 
develop new and revised qualification examinations that will test 
applicants on security futures-related topics. NASD anticipates that 
the new and revised qualification examinations will be completed six 
months after retail trading in security futures commences.
    The proposed rule change broadens the following qualifications 
categories to include security futures activities:
     Registered Options Principal (Series 4) becomes Registered 
Options and Security Futures Principal \22\
---------------------------------------------------------------------------

    \22\ The proposed rule change also deletes a few outdated 
concepts from the provisions of Rule 1022(f). These deletions are 
unrelated to security futures.
---------------------------------------------------------------------------

     Limited Principal--General Securities Sales Supervisor 
(Series 9/10)
     General Securities Representative (Series 7) \23\
---------------------------------------------------------------------------

    \23\ Specifically, a Series 43 examination will be offered for 
registered representatives wishing to engage in a security futures 
business. Once the Series 43 is developed, new applicants will 
choose to take only the Series 7, or, if they intend to engage in 
security futures business, the Series 7 and Series 43 examination. 
After the Series 43 examination is developed, persons taking only 
the Series 7 will not be permitted to engage in a security futures 
business. Completing a firm-element continuing education program 
will be an option available only for persons that are registered as 
a general securities representative before the Series 43 examination 
becomes available.
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     Limited Representative--Options (Series 42) becomes 
Limited Representative-Options and Security Futures.\24\
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    \24\ The Series 42 examination has alternative prerequisite 
examinations, the Limited Representative--Corporate Securities or 
Limited Representative--Government Securities examinations.
---------------------------------------------------------------------------

    For persons who currently are registered in one of these 
registration categories, or who become registered in one of these 
registration categories prior to the implementation of new examinations 
addressing security futures, NASD is instituting a firm-element 
continuing education requirement. NASD will require each registered 
person (or persons that take certain qualification examinations prior 
to such examinations being updated to include security futures 
questions) to complete a firm-element continuing education program on 
security futures prior to conducting a business in security futures. 
NASD will, pursuant to NASD Rule 1120(b)(4), specify the content of the 
continuing education program.\25\
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    \25\ NASD has not previously specified the content of firm-
element continuing education and does not intend to do so in the 
future absent extraordinary circumstances. The introduction of 
security futures in the United States, however, presents 
extraordinary circumstances because these products have been banned 
from trading here for more than 19 years. Under these circumstances, 
NASD has concluded that using its authority set forth in Rule 
1120(b)(4) to specify content of the firm element is appropriate.

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[[Page 47424]]

    NASD's proposal, in effect, allows Registered Options Principals, 
Limited Principals--General Securities Sales Supervisors, General 
Securities Representatives, and Limited Representatives--Options to be 
``grandfathered'' so that they will not be required to retake any 
expanded qualification examinations to sell or supervise security 
futures products. The ``grandfathering'' privilege will be limited to 
associated persons who are registered as Series 4, 7, 9/10, or 42.
    As an alternative to continuing education, or because registered 
personnel will be expanding the scope of their securities business, 
NASD anticipates that certain existing registrants may take revised 
qualification examinations covering security futures. NASD has modified 
the registration categories to provide it with the flexibility to 
accept, for certain registration categories, other examinations that 
address security futures. For example, if a person has passed the 
Series 7 and subsequently takes the revised Series 3 (containing 
questions on security futures), NASD does not believe that it should be 
necessary for such person to complete a firm-element continuing 
education program as a prerequisite to engaging in a security futures 
business. In that case, the successful completion of the revised Series 
3 demonstrates proficiency in security futures products. Once revised 
examinations are developed, NASD will announce in a Notice to Members 
or other publication the examinations that can be used to demonstrate 
proficiency in security futures for each registration category. In 
response to the SEC staff's request that NASD establish a sunset date, 
NASD has selected December 31, 2006 as a sunset date for the continuing 
education provisions. After that date, registrants who have passed a 
qualifications examination that does not include security futures, and 
who have not already completed a firm-element continuing education 
program on security futures, will be required to retake an examination 
to function in a registration category with respect to security 
futures.
    In addition, NASD has amended Rule 1060(a) to exempt from 
registration with NASD persons associated with a member whose functions 
are related solely and exclusively to transactions in security futures, 
provided that such persons are registered with a registered futures 
association. The proposed rule change recognizes that certain persons 
in a firm that is fully registered as a broker/dealer and either an FCM 
or IB, who presently engage solely in a commodities business, will seek 
to expand their activities into security futures. The proposed rule 
change is necessary to avoid having such person be required to register 
with NASD as a representative . NASD believes that so long as such 
individuals are registered with a registered futures association, and 
such person's securities activities are limited solely to security 
futures, there should be no additional requirement for such persons to 
register with NASD. As a result of this change, for example, a person 
who is a Series 3 registered person with the NFA will not be required 
to take the Series 7 or Series 62 simply because such person intends to 
engage in a security futures business.
d. Short Sale Restrictions
    The CFMA exempts transactions in security futures from the short 
sale provisions of Section 10(a) of the Exchange Act.\26\ To harmonize 
NASD's rules with the amended short sale provision in the Exchange Act, 
NASD proposes to amend the affirmative determination provisions of NASD 
Rule 3370.\27\ Rule 3370 generally requires an NASD member, prior to 
accepting a short sale order from a customer in any security, to make 
an affirmative determination that the member can borrow or otherwise 
provide for delivery of the security by the settlement date. NASD 
proposes to amend the affirmative determination requirement to exempt 
security futures from the application of the rule.\28\ The proposed 
amendment would eliminate a member's affirmative determination 
obligation with respect to any short sale of a security future.
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    \26\ See Section 10(a)(2) of the Act; 15 U.S.C. 78j(a)(2).
    \27\ For Nasdaq National Market securities, NASD's rules 
currently include an additional short sale restriction: the bid 
test. See NASD Rule 3350(a). We believe that the bid test has no 
application to security futures, and we are not proposing any 
amendments to Rule 3350.
    \28\ Currently, the affirmative determination requirement of 
Rule 3370 does not apply to options transactions.
---------------------------------------------------------------------------

    NASD further proposes to amend the definition of ``bona fide fully 
hedged'' positions to include certain long single stock futures 
positions in connection with short positions in the underlying stock. 
The amendment will treat long single stock futures positions similar to 
in-the-money call options, which are included in the categories of bona 
fide fully hedged positions.
e. Taping Requirement of the Supervision Rule
    NASD Rule 3010(b)(2) (the ``Taping Rule'') requires certain NASD 
members to tape record ``all telephone conversations between the 
member's registered persons and both existing and potential customers'' 
\29\ and maintain other special written procedures for supervising the 
telemarketing activities of all of its registered persons. NASD members 
become subject to the Taping Rule if a certain percentage of their 
registered persons have been employed by a disciplined firm within the 
last three years. The Taping Rule prevents registered persons who have 
been employed by disciplined firms from clustering together at a 
different firm. A disciplined firm is one that, in connection with 
sales practices involving the offer, purchase, or sale of any security, 
has been expelled from NASD membership, expelled from any other 
securities industry SRO, or is subject to an order of the SEC revoking 
its registration as a broker/dealer.
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    \29\ Rule 3010(b)(2)(iii). NASD has pending with the Commission 
a separate proposed rule change to Rule 3010(b)(2) that, among other 
changes, would permit firms that become subject to the Taping Rule a 
one-time opportunity to adjust their staffing level to fall below 
the prescribed threshold levels and thus avoid application of the 
Taping Rule. See Securities Exchange Act Release No. 46067 (June 12, 
2002), 67 FR 41561 (June 18, 2002).
---------------------------------------------------------------------------

    In the futures industry, the NFA's taping rule requires NFA members 
that have a certain percentage of associated persons who have been 
employed by disciplined firms to tape record telephone conversations 
between associated persons and customers. The NFA has a three-fold 
definition of a disciplined firm that includes the following: (1) The 
firm has been formally charged by either the CFTC or NFA with deceptive 
telemarketing practices or promotional material; (2) the charges have 
been resolved; and (3) the firm has been closed down and permanently 
barred from the industry as a result of those charges.\30\
---------------------------------------------------------------------------

    \30\ NFA Rule 2-9: Enhanced Supervisory Requirements--
Interpretive Notice.
---------------------------------------------------------------------------

    NASD proposes to broaden the scope of its Taping Rule to include 
FCMs and IBs that will be selling security futures within the group of 
intermediaries that can potentially meet the definition of a 
disciplined firm. The proposed rule change borrows the NFA's definition 
of a disciplined firm and adds it to NASD's existing definition.

[[Page 47425]]

f. Qualifications of Job Applicants
    NASD Rule 3010(e) provides that members have a responsibility to 
investigate the good character, business repute, qualifications, and 
experience of a job applicant before the member applies to register 
that applicant with NASD. When the job applicant previously has been 
registered with NASD, the member must obtain a copy of the applicant's 
Uniform Termination Notice of Securities Industry Registration (Form U-
5) that was filed by the applicant's most recent member employer.
    NASD proposes to add a requirement that would apply when a job 
applicant has been most recently employed by an FCM or an IB that is 
registered to trade securities futures, meaning the FCM or IB has 
notice-registered with the SEC pursuant to section 15(b)(11) of the 
Act.\31\ In such a case, the hiring firm would be required to review a 
copy of CFTC Form 8-T, Notice of Termination of Associated Person, NFA 
Associate, Branch Office Manager, Designated Supervisor or Principal. 
The Form 8-T asks for the same types of information as does the Form U-
5.
---------------------------------------------------------------------------

    \31\ Securities Exchange Act Release No. 44730, 66 FR 45138 
(August 27, 2001).
---------------------------------------------------------------------------

    The purpose of this proposed amendment is to modify an NASD 
member's obligation to review a job applicant's employment experience 
to include an applicant's experience while with a notice-registered 
broker/dealer. An individual's experience at such a firm may bear on 
his or her fitness to be sponsored by an NASD member. NASD anticipates 
that NASD members will be able to review the CFTC Form 8-T by 
requesting it from the applicant or the applicant's previous employer.
    NASD is also amending Rule 3010(e) to provide members with greater 
flexibility in complying with its requirements. Currently, Rule 3010(e) 
requires members to obtain actual copies of the Form U-5 and 
amendments. When NASD replaced the Legacy Central Registration 
Depository (``CRD'') system with Web CRDsm in August 1999, 
members received the ability to review Form U-5s and amendments via an 
internet connection. The Web CRD system allows members, with the 
applicant's consent, to review the Form U-5 by using a pre-hire search 
function. The proposed rule change recognizes the ability of members to 
use the advanced functionality of Web CRD to review Form U-5s. Members, 
however, will be expected to be able to demonstrate compliance with the 
Rule.
g. Front Running Policy
    NASD's front running policy, IM-2110-3, prohibits members and 
associated persons from trading options or an underlying security when 
they have material, non-public market information concerning an 
imminent block transaction in the underlying security or in the 
overlying option. The front running policy applies to member's 
proprietary accounts, accounts in which a member or an associated 
person has an interest, discretionary accounts, and--when the member or 
a person associated with a member shares material, non-public market 
information with a customer--the customer's account.
    NASD proposes to amend the front running policy to include security 
futures by having the rule apply to security futures in the same manner 
that it applies to options. For example, when a member has material, 
non-public market information concerning an imminent block transaction 
in a stock, the member will not be able to trade the single-stock 
future overlying that stock in its proprietary account, other accounts 
in which it has an interest, or discretionary accounts. The purpose of 
this proposed amendment is to prohibit broker/dealers from trading 
security futures at a profit when they have material, non-public market 
information concerning a stock or from trading a stock at a profit when 
they have material, non-public market information concerning a security 
future. Once the material, non-public market information has been made 
publicly available, however, the restrictions of the front running 
policy will no longer apply.
h. Transactions for or by Associated Persons
    NASD Rule 3050 requires associated persons who seek to open 
accounts or place securities orders with an NASD firm that is not their 
employer to notify both their employer firm and the executing firm 
before they engage in such actions. This rule allows NASD firms to 
monitor the securities activities of their employees for the purpose of 
complying with several securities laws and regulations. NASD proposes 
to broaden the scope of the rule to require associated persons to 
notify their employer firm when they open an account with an FCM or IB 
that is registered to trade security futures.

2. Statutory Basis

    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act, which requires, among other 
things, that NASD'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. NASD believes that these rule changes are necessary to 
implement the requirements of the CFMA and to establish new regulations 
that allow broker/dealers, FCMs, and IBs to trade security futures 
consistent with the CFMA.

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

    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, as amended.

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
    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 proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, SEC, 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

[[Page 47426]]

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 NASD. All submissions should refer to File No. SR-
NASD-2002-40 and should be submitted by August 8, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18142 Filed 7-17-02; 8:45 am]
BILLING CODE 8010-01-P