[Federal Register Volume 68, Number 147 (Thursday, July 31, 2003)]
[Notices]
[Pages 44980-44984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19494]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48227; File No. SR-NASD-2003-74]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment Nos. 1 and 2 Thereto by the National 
Association of Securities Dealers, Inc. Regarding the Regulation of 
Activities of Members Experiencing Financial and/or Operational 
Difficulties

July 25, 2003.
    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 April 16, 2003, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. On June 17, 
2003, NASD submitted Amendment No. 1 to the proposed rule change.\3\ On 
July 9, 2003, NASD submitted Amendment No. 2 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Shirley H. Weiss, Associate General Counsel, 
Office of General Counsel, Regulatory Policy and Oversight, NASD, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated June 17, 2003 
(``Amendment No. 1''). In Amendment No. 1, NASD proposed the 
following changes: (i) to revise NASD Rules 3130(e) and 3131(e) to 
state that the Department of Member Regulation may issue a notice to 
members that are not in compliance with applicable net capital 
requirements set forth in SEC Rule 15c3-1 or Section 402.2 of the 
rules of the Treasury Department, as applicable, directing such 
member to suspend all business operations, but that the obligation 
to suspend all business operations arises from the SEC Rule 15c3-1 
or Section 402.2 of the rules of the Treasury Department, as 
applicable, and not from the notice issued by the Department of 
Member Regulation; (ii) to add new Rules 3130(f) and 3131(f) to 
provide that any notice directing a member to limit or suspend its 
business operations will be issued by the Department of Member 
Regulation pursuant to Rule 9412; and (iii) to make certain non-
substantive technical changes to correct the rule language and the 
markings indicating changes thereto.
    \4\ See letter from Shirley H. Weiss, Associate General Counsel, 
Office of General Counsel, Regulatory Policy and Oversight, NASD, to 
Katherine A. England, Assistant Director, Division, Commission, 
dated July 8, 2003 (``Amendment No. 2''). In Amendment No. 2, NASD 
proposed the following changes: (i) to revise NASD Rule 9412 to 
delete a reference to the Department of Member Regulation; (ii) to 
change a reference in NASD Rule 9415(d); and (iii) to delete 
subparagraph (g) of NASD Rule 9160. The Commission notes that 
Amendment No. 2 contains a typographical error with regards to the 
reference to NASD Rule 9515(k)(2) in the letter. The reference 
should be to NASD Rule 9413(k)(2), as set forth in the proposed rule 
text. The Commission notes further that in Amendment No. 2, NASD 
incorrectly states that it is amending NASD Rule 9412. Amendment No. 
2 makes no additional changes to NASD Rule 9412. Telephone 
conversation between Shirley H. Weiss, Associate General Counsel, 
Office of General Counsel, Regulatory Policy and Oversight, NASD, 
and Ann E. Leddy, Attorney, Division, Commission (July 21, 2003).
---------------------------------------------------------------------------

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

    NASD is proposing to amend NASD Rules 3130, 3131 and the Rule 9410 
Series to expand NASD's authority to take expedited action against all 
member firms with capital deficiencies and to permit NASD to suspend a 
member that operates for any period of time with inadequate net 
capital. In addition, NASD proposes to delete subparagraph (g) of NASD 
Rule 9160 because the Department of Member Regulation staff does not 
participate as an adjudicator in a Rule 9410 decision.
    The text of the proposed rule change is set forth below. Proposed 
new language is in italics; proposed deletions are in [brackets].\5\
---------------------------------------------------------------------------

    \5\ The Commission has included proposed rule language set forth 
in the original filing that NASD inadvertently omitted from 
Amendment No. 2. Telephone conversation between Shirley H. Weiss, 
Associate General Counsel, Office of General Counsel, Regulatory 
Policy and Oversight, NASD, and Ann E. Leddy, Attorney, Division, 
Commission (July 17, 2003).
---------------------------------------------------------------------------

* * * * *
3130. Regulation of Activities of Members Experiencing Financial and/or 
Operational Difficulties
    (a) Application--For the purposes of this Rule, the term ``member'' 
shall be limited to any NASD member [of the Association who] that is 
not designated to another self-regulatory organization by the 
Commission for financial responsibility pursuant to Section 17 of the 
Act and SEC Rule 17d-1 thereunder. Further, the term shall not be 
applicable to any member [who] that is [subject to paragraphs 
(a)(2)(iv), (a)(2)(v) or (a)(2)(vi) of SEC Rule 15c3-1, or is otherwise 
exempt from the provisions of said rule or is] subject to Rule 3131.
    (b) Each member subject to SEC Rule 15c3-1 shall comply with the 
net capital requirements prescribed therein and with the provisions of 
this Rule.
    [(b)](c) A member, when so directed by [the Association] NASD, 
shall not expand its business during any period in which:
    (1) Any of the following conditions continue to exist, or have 
existed, for more than 15 consecutive business days:

[[Page 44981]]

    (A) A firm's net capital is less than 150 percent of its net 
capital minimum requirement or such greater percentage thereof as may 
from time to time be prescribed by [the Association] NASD;
    (B) If subject to the aggregate indebtedness requirement under SEC 
Rule 15c3-1, a firm's aggregate indebtedness is more than 1,000 per 
centum of its net capital;
    (C) If, in lieu of paragraph [(b)](c)(1)(B) above, the specified 
percentage of the aggregate debit items in the Formula for 
Determination of Reserve Requirements for Brokers and Dealers under SEC 
Rule 15c3-3 (the alternative net capital requirement) is applicable, a 
firm's net capital is less than 5 percent of the aggregate debit items 
thereunder; or
    (D) The deduction of capital withdrawals including maturities of 
subordinated debt scheduled during the next six months would result in 
any one of the conditions described in subparagraph (A), (B) or (C).
    (2) [The Association] NASD restricts the member for any other 
financial or operational reason.
    [(c)](d) A member, when so directed by [the Association] NASD, 
shall forthwith reduce its business:
    (1) to a point [enabling its available capital to comply with the 
standards] at which the member would not be subject to a prohibition 
against expansion of its business as set forth in paragraph 
[(b)](c)(1)(A), (B) or (C) of this Rule if any of the following 
conditions continue to exist, or have existed, for more than [fifteen 
(15)] 15 consecutive business days:
    (A) A firm's net capital is less than 125 percent of its net 
capital minimum requirement or such greater percentage thereof as may 
from time to time be prescribed by [the Association] NASD;
    (B) No Change.
    (C) If, in lieu of paragraph [(c)](d)(1)(B) above, the specified 
percentage of the aggregate debit items in the Formula for 
Determination of Reserve Requirements for Brokers and Dealers, under 
SEC Rule 15c3-3 (the alternative net capital requirement) is 
applicable, a firm's net capital is less than 4 percent of the 
aggregate debit items thereunder; or
    (D) If the deduction of capital withdrawals including maturities of 
subordinated debt scheduled during the next six months would result in 
any one of the conditions described in paragraph [(c)](d)(1)(A), (B) or 
(C) of this Rule.
    (2) As required by [the Association] NASD when it restricts a 
member for any other financial or operational reason.
    (e) A member shall suspend all business operations during any 
period of time when the member is not in compliance with applicable net 
capital requirements as set forth in SEC Rule 15c3-1. The Department of 
Member Regulation may issue a notice to such member directing it to 
suspend all business operations; however, the member's obligation to 
suspend all business operations arises from its obligations under SEC 
Rule 15c3-1 and is not dependent on any notice that may be issued by 
the Department of Member Regulation.
    (f) Any notice directing a member to limit or suspend its business 
operations shall be issued by the Department of Member Regulation 
pursuant to Rule 9412.
* * * * *
3131. Regulation of Activities of Section 15C Members Experiencing 
Financial and/or Operational Difficulties
    (a) Application--For the purposes of this Rule, the term ``member'' 
shall be limited to any member of [the Association] NASD registered 
with the Commission pursuant to Section 15C of the Act that is not 
designated to another self-regulatory organization by the Commission 
for financial responsibility pursuant to Section 17 of the Act and Rule 
17d-1 thereunder. [Further, the term shall not be applicable to any 
member that is subject to Section 402.2(c) of the rules of the Treasury 
Department, or is otherwise exempt from the provisions of said rule].
    (b) Each member subject to Section 402.2 of the rules of the 
Treasury Department shall comply with the capital requirements 
prescribed therein and with the provisions of this Rule.
    [(b)](c) A member, when so directed by [the Association] NASD, 
shall not expand its business during any period in which:
    (1) Any of the following conditions continue to exist, or have 
existed, for more than [fifteen (15)] 15 consecutive business days:
    (A) A firm's liquid capital is less than 150 percent of the total 
haircuts or such greater percentage thereof as may from time to time be 
prescribed by [the Association] NASD.
    (B) through (C) No Change.
    (2) [The Association] NASD restricts the member for any other 
financial or operational reason.
    [(c)] (d) A member, when so directed by [the Association] NASD, 
shall forthwith reduce its business:
    (1) To a point [enabling its available capital to comply with the 
standards] at which the member would not be subject to a prohibition 
against expansion of its business as set forth in subparagraphs 
[(b)](c)(1)(A), (B), or (C) of this Rule if any of the following 
conditions continue to exist, or have existed, for more than [fifteen 
(15)] 15 consecutive business days:
    (A) A firm's liquid capital is less than 125 percent of total 
haircuts or such greater percentage thereof as may from time to time be 
prescribed by [the Association] NASD.
    (B) through (C) No Change.
    (2) As required by [the Association] NASD when it restricts a 
member for any other financial or operational reason.
    (e) A member shall suspend all business operations during any 
period of time when the member is not in compliance with applicable net 
capital requirements as set forth in Section 402.2 of the rules of the 
Treasury Department. The Department of Member Regulation may issue a 
notice to such member directing it to suspend all business operations; 
however, the member's obligation to suspend all business operations 
arises from its obligations under Section 402.2 of the rules of the 
Treasury Department and is not dependent on any notice that may be 
issued by the Department of Member Regulation.
    (f) Any notice directing a member to limit or suspend its business 
operations shall be issued by the Department of Member Regulation 
pursuant to Rule 9412.
* * * * *
9160. Recusal or Disqualification
    No person shall participate as an Adjudicator in a matter governed 
by the Code as to which he or she has a conflict of interest or bias, 
or circumstances otherwise exist where his or her fairness might 
reasonably be questioned. In any such case the person shall recuse 
himself or herself, or shall be disqualified as follows:
    (a) through (f) No change.
    [(g) NASD Regulation Staff as Adjudicator]
    [The President of NASD Regulation shall have authority to order the 
disqualification of a member of the staff of the Department of Member 
Regulation participating in a Rule 9410 Series decision.]
* * * * *
9400. [LIMITATION] PROCEDURES FOR ACTIONS TAKEN UNDER RULES 3130 AND 
3131
* * * * *
Rule 9412. Notice [of Limitations]
    The Department of Member Regulation may issue a notice directing

[[Page 44982]]

a member to [limit] restrict its business activities, either by 
limiting or ceasing to conduct those activities, if the Department of 
Member Regulation has reason to believe that [any] a condition 
specified in Rule 3130 or Rule 3131 exists. The notice shall specify 
the grounds on which such [action is being taken] restrictions are 
being imposed, the nature of the [limitations] restrictions to be 
imposed, the effective date of the restrictions [limitations], a 
fitting sanction that will be imposed if the member fails to comply 
with any [the] restrictions [limitations] set forth in the notice, and 
the conditions for terminating such [limitations] restrictions. The 
effective date of the [limitations] restrictions shall be at least 
seven days after the date of service of the notice. The notice also 
shall inform the member that it may request a hearing before the 
[Department of Member Regulation] Office of Hearing Officers under Rule 
9413. The Department of Member Regulation shall serve the notice by 
facsimile or overnight courier.
9413. Hearing Panel Review
(a) Request for a Hearing
    A member subject to a notice issued under Rule 9412 may file a 
written request for hearing before a Hearing Panel with the Office of 
Hearing Officers. The request shall state the specific grounds for 
withdrawing or modifying any of the [limitations] restrictions 
specified in the notice. The request shall be filed pursuant to Rules 
9135, 9136, and 9137 within five days after service of the notice under 
Rule 9412. The member may withdraw its request at any time by filing a 
written notice with the Office of Hearing Officers pursuant to Rules 
9135, 9136, and 9137. The time limits set forth herein are to be 
strictly construed and cannot be modified except for good cause shown.
(b) No Change
(c) Stay
    Unless otherwise ordered by the NASD Board Executive Committee, the 
[initiation of a review under this paragraph shall stay the decision of 
the Department of Member Regulation or an uncontested notice until a 
decision constituting final action of the Association is issued] 
request for a hearing shall stay the effective date of the notice.
(d) through (h) No Change
(i) Evidence Not Admitted
    Evidence that is proffered but not admitted during the hearing 
shall not be part of the record, but shall be retained by the custodian 
of the record until the date when [the Association's] NASD's decision 
becomes final or, if applicable, upon the conclusion of any review by 
the Commission or the federal courts.
(j) Failure to Request Hearing
    If a member does not request a hearing under paragraph (a), the 
[limitations] restrictions specified in the notice shall become 
effective on the date specified in the notice. Unless the Executive 
Committee calls the notice for review under Rule 9415, the 
[limitations] restrictions specified in the notice shall remain in 
effect until the Department of Member Regulation reduces or removes the 
[limitations] restrictions pursuant to Rule 9417(b).
(k) Decision
    (1) Within seven days after the hearing, the Hearing Panel shall 
issue a written decision approving, modifying, or withdrawing the 
[limitations] restrictions specified in the notice. If the decision 
imposes [limitations] restrictions, the decision shall state the 
grounds for the [limitations] restrictions, the conditions for 
terminating such [limitations] restrictions, and provide for a fitting 
sanction to be imposed under Rule 9416 if the member fails to comply 
with the [limitations] restrictions. The Office of Hearing Officers 
shall promptly serve the decision by facsimile or overnight courier 
pursuant to Rules 9132 and 9134. The [limitations] restrictions imposed 
shall become effective upon service of the decision.
(2) Contents of Decision
    The decision shall include:
    (A) a description of the Department of Member Regulation's 
[decision] notice, including its rationale;
    (B) a description of the principal issues regarding the imposition 
of [limitations] restrictions raised in the review and a statement 
supporting the disposition of such issues;
(C) No Change
    (D) a statement of whether the Department of Member Regulation's 
[decision] notice is affirmed, modified, or reversed, and a rationale 
therefor; and
    (E) if any restrictions [limitations] are imposed:
    (i) a description of the [limitations] restrictions and a statement 
describing a fitting sanction that will be imposed under Rule 9416 if 
the member fails to comply with any of the [limitations] restrictions; 
and
    (ii) the conditions for terminating the [limitations] restrictions.
(l) Issuance of Decision After Expiration of Call for Review Period
    The Hearing Panel shall provide its proposed written decision to 
the NASD Board Executive Committee. The NASD Board Executive Committee 
may call the proceeding for review pursuant to Rule 9415. If the NASD 
Board Executive Committee does not call the proceeding for review, the 
proposed written decision of the Hearing Panel shall constitute the 
final action of [the Association] NASD.
(m) Ex Parte Communications
    The prohibitions against ex parte communications in Rule 9143 shall 
become effective under the Rule 9410 Series when [Association] NASD 
staff has knowledge the NASD Board Executive Committee intends to 
review a decision on its own motion under this Rule.
9414. No change
9415. Discretionary Review by the NASD Board Executive Committee
(a) through (c) No Change
(d) Decision of NASD Board Executive Committee, Including Remand
    After review, the NASD Board Executive Committee may affirm, 
modify, or reverse the proposed written decision of the Hearing Panel. 
Alternatively, the NASD Board Executive Committee may remand the 
proceeding with instructions. The NASD Board Executive Committee shall 
prepare a written decision that includes all of the elements described 
in Rule [9414(k)(2)] 9413(k)(2).
(e) Issuance of Decision
    The NASD Board Executive Committee shall issue and serve its 
written decision on the member and the Department of Member Regulation 
pursuant to Rules 9132 and 9134. The decision shall be effective upon 
service. The decision shall constitute the final action of [the 
Association] NASD, unless the NASD Board Executive Committee remands 
the proceeding.
9416. Enforcement of Sanctions
(a) Order
    If the Department of Member Regulation determines that a member has 
failed to comply with any [limitations] restrictions imposed by a 
decision or an effective notice under the Rule 9410 Series that has not 
been stayed, the Department of Member Regulation shall issue an order 
imposing the sanctions set forth in the decision or notice and 
specifying the effective date and time of such

[[Page 44983]]

sanctions. The Department of Member Regulation shall serve the order on 
the member by facsimile or overnight courier.
(b) through (c) No Change
(d) Decision
    Within four days after the hearing, the Hearing Panel shall affirm, 
modify, or reverse the order issued under paragraph (a). The Office of 
Hearing Officers shall serve the decision on the member pursuant to 
Rules 9132 and 9134. The decision shall become effective upon service 
and shall constitute final action of [the Association] NASD.
9417. Additional [Limitations] Restrictions; Reduction or Removal of 
[Limitations] Restrictions
(a) Additional [Limitations] Restrictions
    If a member continues to experience financial or operational 
difficulty specified in Rule 3130 or 3131, notwithstanding an effective 
notice or decision under the Rule 9410 Series, the Department of Member 
Regulation may impose additional [limitations] restrictions by issuing 
a notice under Rule 9412. The notice shall state that the member may 
apply for relief from the additional [limitations] restrictions by 
filing a written application for a hearing under Rule 9413 and that the 
procedures in Rules 9413 through 9416 shall be applicable. An 
application for a hearing also shall include a detailed statement of 
the member's objections to the additional [limitations] restrictions.
(b) Reduction or Removal of [Limitations] Restrictions
    If the Department of Member Regulation determines that any 
[limitations] restrictions previously imposed under the Rule 9410 
Series should be reduced or removed, the Department of Member 
Regulation shall serve a written notice on the member pursuant to Rules 
9132 and 9134.
9418. Application to Commission for Review
    The right to have any action taken by [the Association] NASD 
pursuant to this Rule Series reviewed by the Commission is governed by 
Section 19 of the Act. The filing of an application for review shall 
not stay the effectiveness of the action taken by [the Association] 
NASD, unless the Commission otherwise orders.
9419. Other Action Not Foreclosed
    Action by [the Association] NASD under the Rule 9410 Series shall 
not foreclose action by [the Association] NASD under any other Rule.
* * * * *

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

Background

    Currently, NASD can take expedited action against a member when its 
Department of Member Regulation has reason to believe that the member 
maintains inadequate capital levels given the scope and nature of the 
firm's business. However, NASD is currently limited to taking action 
with respect to only those firms that must maintain a minimum net 
capital of greater than $50,000 and can only issue notices (and 
institute an expedited proceeding when these notices are contested) 
requiring that such firms either limit their business or not expand 
their business in order to maintain appropriate net capital levels. 
Further, NASD's current rules do not address the capacity of NASD to 
suspend a firm from business on an expedited basis when it fails to 
maintain minimum net capital.\6\
---------------------------------------------------------------------------

    \6\ NASD Rule 9512 (``Summary Proceedings'') is available to 
address severe financial or operational difficulties. However, 
because this procedure allows NASD to suspend a member before a 
hearing is held, and requires authorization from the Board of 
Governors, NASD represents that it is reserved for the most serious 
of circumstances and generally would be inappropriate to address 
most instances of net capital deficiencies.
---------------------------------------------------------------------------

    NASD believes that enhanced tools are required to enable it to 
better address any situation where a member is not satisfying 
applicable capital requirements. Accordingly, NASD proposes amendments 
to Rules 3130, 3131 and the Rule 9410 Series as described below. These 
amendments would (i) expand NASD's authority to take expedited action 
against all member firms with capital deficiencies, (ii) permit NASD to 
suspend a member that operates for any period of time with inadequate 
net capital, and (iii) make non-substantive clarifications to the 
language of the rules. In addition, NASD proposes to delete 
subparagraph (g) of NASD Rule 9160 because the Department of Member 
Regulation staff does not participate as an adjudicator in a Rule 9410 
decision.

Current NASD Rules Regarding Members Experiencing Financial 
Difficulties

    NASD Rules 3130 and 3131 regulate the activities of members that 
are (1) required to maintain net capital in excess of $50,000; and (2) 
experiencing certain financial and/or operational deficiencies.\7\ 
These rules provide that NASD may prescribe certain remedial courses of 
action for members experiencing financial or operational deficiencies, 
such as requiring them to limit their activities. NASD's Rule 9410 
Series provides a procedural framework for actions taken under these 
provisions. Pursuant to the Rule 9410 Series, a member experiencing 
financial and operational difficulties as described in Rules 3130 and 
3131 receives a notice of limitations describing the grounds for the 
notice, the effective date of the limitations described in the notice, 
and a fitting sanction that will be imposed if the member fails to 
comply with the limitations set forth in the notice. The member then 
has five days from the date of service of the notice to request a 
hearing. If a hearing is not requested, the limitations prescribed in 
the notice become effective at least seven days after the date of 
service of the notice. Following the hearing, if one is requested, any 
remedial action ordered by the Hearing Panel becomes effective. If a 
member does not comply with the limitations described in any effective 
notice or remedial action imposed by the Hearing Panel, NASD staff may 
order the sanction set forth in the notice or specified in the Hearing 
Panel decision against the member. The member has the opportunity to 
request a second hearing if such sanctions are ordered.
---------------------------------------------------------------------------

    \7\ Rule 15c3-1 under the Act requires that firms maintain 
certain specified levels of net capital. 17 CFR 240.15c3-1. Section 
402.2 of the Treasury Department rules contains liquid capital 
requirements for government securities broker/dealers. 17 CFR 402.2. 
NASD represents that it does not set net capital requirements, but 
enforces these provisions as part of its regulatory function. 
However, NASD Rules 3130 and 3131 effectively allow NASD to require 
net capital and liquid capital requirements in excess of those 
respective capital requirements stated above.

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

[[Page 44984]]

Application of Rules to All Member Firms

    NASD Rules 3130 and 3131 generally provide that NASD may direct a 
member not to expand its business or to reduce its business if certain 
conditions are present for a period of 15 consecutive business days or 
more. NASD Rule 3130 exempts member firms with net capital requirements 
of $50,000 or less; NASD Rule 3131 exempts government securities member 
firms with liquid capital requirements of $50,000 or less.
    NASD believes that these provisions should apply to all member 
firms regardless of their minimum capital requirements. NASD believes 
that, because capital compliance is fundamental to operating a broker-
dealer, every firm that operates with inadequate capital poses a risk 
to other members and the investing public, and NASD believes that it 
should be able to take prompt action against any member that operates 
with inadequate capital. Accordingly, NASD proposes amendments to 
expand the scope of Rules 3130 and 3131 to include members with capital 
requirements of $50,000 or less.

Suspension of Members for Net Capital Violations

    As described above, NASD Rules 3130 and 3131 allow NASD to require 
a member to take certain remedial actions if it is experiencing certain 
financial and/or operational deficiencies. The remedial actions could 
impose limitations on a member's business operations such that the 
member complies with net capital requirements applicable to the 
member's reduced business operations. However, in certain instances, 
NASD notes that a member may be operating with capital that is so 
inadequate that no limitation on its business activities could be 
imposed that would bring the firm into capital compliance. 
Alternatively, a member firm that is not in compliance with capital 
requirements may have such minimal operations that NASD could impose no 
meaningful limitation on the member's operations. As a result, NASD is 
proposing to expand the remedies available to it to address capital 
violations. Specifically, NASD proposes amendments that would require a 
member to suspend its business operations for any period of time during 
which it is not in compliance with applicable net capital requirements.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that NASD rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. Specifically, NASD believes that the proposed rule 
change is intended to ensure that investors, the securities industry 
and the general public are not put at risk by members operating 
securities businesses without appropriate levels of capital.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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.

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
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying 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-2003-74 and should be submitted by August 21, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-19494 Filed 7-30-03; 8:45 am]
BILLING CODE 8010-01-P