[Federal Register Volume 68, Number 172 (Friday, September 5, 2003)]
[Notices]
[Pages 52806-52807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22656]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48242; File No. SR-NASD-2003-92]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval To a Proposed Rule Change To 
Adopt NASD Rule 2370 To Govern Certain Lending Arrangements Between 
Registered Persons and Customers

August 29, 2003.

I. Introduction

    On June 11, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt NASD Rule 2370 which 
would prohibit registered persons from borrowing money from or lending 
money to a customer unless the member has written procedures allowing 
such lending arrangements consistent with the rule, the loan falls 
within one of five prescribed permissible types of lending 
arrangements, and the member pre-approves the loan in writing. The 
proposed rule change was published for comment in the Federal Register 
on July 2, 2003.\3\ The Commission received two comment letters on the 
proposal.\4\ In addition, NASD submitted a response to comments.\5\ 
This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48093 (June 26, 
2003), 68 FR 39608.
    \4\ See letters to Jonathan G. Katz, Secretary, Commission, from 
Christine A. Bruenn, President, Maine Securities Administrator, 
North American Securities Administrators Association, Inc. 
(``NASAA''), dated July 23, 2003, (``NASAA Letter''); and Michael C. 
Herndon, Director, Public and Governmental Affairs, Certified 
Financial Planner Board of Standards, Inc. (``CFP''), dated July 23, 
2003 (``CFP Letter'').
    \5\ See letter to Katherine A. England, Assistant Director, 
Division of Market Regulation, Commission, from Shirley H. Weiss, 
Associate General Counsel, NASD, dated July 29, 2003 (``NASD 
Letter'')
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    Under the proposal, registered persons would be prohibited from 
borrowing money from or lending money to a customer unless the member 
has written procedures allowing such lending arrangements consistent 
with the proposal, the loan falls within one of five permissible types 
of lending arrangements, and the member pre-

[[Page 52807]]

approves the loan in writing. The five types of permissible lending 
arrangements are: (1) The customer is a member of the registered 
person's immediate family (as defined in the proposed rule); (2) the 
customer is in the business of lending money; (3) the customer and the 
registered person are both registered persons of the same firm; (4) the 
lending arrangements is based on a personal relationship outside of the 
broker-customer relationship; or (5) the lending arrangement is based 
on a business relationship outside of the broker-customer relationship.

III. Summary of Comments

    As noted above, the Commission received two comment letters on the 
proposed rule change.\6\ CFP supported the proposal because it would 
more closely regulate lending arrangements between registered persons 
and customers.\7\ NASAA did not explicitly support or oppose the 
proposed rule change. However, NASAA endorsed further restrictions on 
loans between registered persons and customers.\8\ According to NASAA, 
lending arrangements that occur outside standard commercial channels 
can be problematic. Further, the potential for conflict is particularly 
great when business associates enter into loan arrangements outside the 
normal business relationship. NASAA referred to its Statement of Policy 
that prohibits ``the practice of lending or borrowing money or 
securities from a customer.'' \9\
---------------------------------------------------------------------------

    \6\ See supra note 4.
    \7\ See CFP Letter.
    \8\ See NASAA Letter.
    \9\ Id.
---------------------------------------------------------------------------

    In its response letter, NASD stated that proposed NASD Rule 2370 
would give its members the ability to prohibit all lending arrangements 
between their registered persons and customers.\10\ However, if 
permitted, proposed NASD Rule 2370 would establish strict conditions 
under which such lending arrangements could take place. Firms would be 
required to have written procedures in place evidencing their customer 
loan policy and loans would be limited to five permissible types of 
arrangements, which NASD staff identified as arrangements that might 
not be problematic because of the relationship between the registered 
person and the customer. In addition, according to NASD, proposed NASD 
Rule 2370 provides additional safeguards by establishing a notice and 
approval requirement. Thus, under proposed NASD Rule 2370, registered 
persons would be required to give their firms prior notice of a loan, 
and firms would be required to pre-approve each loan in writing. These 
requirements would enable a member, to the extent it permitted these 
loan arrangements, to assess the nature of each proposed arrangement 
and decide whether to approve it. They also would enhance NASD's 
ability to review these arrangements during the examination process.
---------------------------------------------------------------------------

    \10\ See NASD Letter.
---------------------------------------------------------------------------

IV. Discussion

    After careful consideration of the proposed rule change, the 
comment letters, and NASD's response, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities association \11\ and, in particular, the requirements of 
Section 15A of the Act \12\ and the rules and regulations thereunder. 
Specifically, the Commission believes that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act,\13\ which, among other 
things, requires 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.
---------------------------------------------------------------------------

    \11\ In approving this proposed rule change, the Commission 
notes that it has considered its impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    While the Commission appreciates the concern raised by NASAA, the 
Commission believes that NASD has proposed sufficient safeguards that 
would enable members to proscribe customer-broker loans and to monitor 
and control lending arrangements, if permitted, through the notice and 
approval process. To the extent that a member decides to permit lending 
arrangements with customers in the limited circumstances allowed by the 
proposed rule, the rule would also require members to have written 
procedures to monitor such arrangements. As a result, the Commission 
also believes that the proposed rule change should enhance NASD's 
ability to monitor loans, when permitted, between registered persons 
and their customers.
    The Commission notes that the safeguards provided under the rule, 
including bringing disciplinary actions for violations of the rule, are 
in addition to the general powers that NASD has to bring a disciplinary 
action against a registered person who has entered into an unethical 
lending arrangement with a customer under NASD Rule 2110. For example, 
the notice requirement would place an affirmative obligation on 
registered persons that could be separately charged in a disciplinary 
action if not followed. Lastly, the Commission notes that this proposal 
has no affect on the application of Regulation T to such lending 
arrangements.\14\
---------------------------------------------------------------------------

    \14\ See 12 CFR 220.
---------------------------------------------------------------------------

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposal 
is consistent with the requirements of the Act and rules and 
regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-NASD-2003-92) is 
approved.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12)
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-22656 Filed 9-4-03; 8:45 am]
BILLING CODE 8010-01-M