[Federal Register Volume 68, Number 205 (Thursday, October 23, 2003)]
[Notices]
[Pages 60750-60755]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26743]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48651; File No. SR-NASD-2003-07]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To Amend 
Rules 1011, 1014 and 1017

October 17, 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 January 17, 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.\3\ 
On September 17, 2003, NASD filed Amendment No. 1 to the proposed rule 
change.\4\ On October 16, 2003, NASD filed Amendment No. 2 to the 
proposed rule change.\5\ 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\ Commission staff made certain typographical changes to this 
Notice with the consent of NASD. Telephone conversation between 
Kosha K. Dalal, Assistant General Counsel, NASD, and Andrew Shipe, 
Special Counsel, Division of Market Regulation (``Division''), 
Commission, September 23, 2003.
    \4\ See letter from Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katherine England, Assistant Director, Division of Market 
Regulation, Commission, dated September 16, 2003.
    \5\ See letter from Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katherine England, Assistant Director, Division of Market 
Regulation, Commission, dated October 15, 2003.
---------------------------------------------------------------------------

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

    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

1010. Membership Proceedings

1011. Definitions

    (a) No Change.
    (b) ``Associated Person''
    [The term ``Associated Person'' means: (1) A natural person 
registered under the Rules of the Association; or (2) a sole 
proprietor, partner, officer, director, branch manager, or other 
natural person occupying a similar status or performing similar 
functions who will be or is anticipated to be

[[Page 60751]]

associated with the Applicant, or a natural person engaged in the 
investment banking or securities business who will be or is anticipated 
to be directly or indirectly controlling or controlled by the 
Applicant, whether or not any such person is registered or exempt from 
registration under the NASD By-Laws or the Rules of the Association.]
    The term ``Associated Person'' means: (1) A natural person 
registered under NASD Rules; or (2) a sole proprietor, or any partner, 
officer, director, branch manager of the Applicant, or any person 
occupying a similar status or performing similar functions; (3) any 
company, government or political subdivision or agency or 
instrumentality of a government controlled by or controlling the 
Applicant; (4) any employee of the Applicant, except any person whose 
functions are solely clerical or ministerial; (5) any person directly 
or indirectly controlling the Applicant whether or not such person is 
registered or exempt from registration under NASD By-Laws or NASD 
Rules; (6) any person engaged in investment banking or securities 
business controlled directly or indirectly by the Applicant whether 
such person is registered or exempt from registration under NASD By-
Laws or NASD Rules; or (7) any person who will be or is anticipated to 
be a person described in (1) through (6) above.
    (c) through (n)--No Change.
* * * * *

1014. Department Decision

    (a) Standards for Admission
    After considering the application, the membership interview, other 
information and documents provided by the Applicant, other information 
and documents obtained by the Department, and the public interest and 
the protection of investors, the Department shall determine whether the 
Applicant meets each of the following standards:
    (1) through (2)--No Change.
    (3) The Applicant and its Associated Persons are capable of 
complying with the federal securities laws, the rules and regulations 
thereunder, and [the] NASD Rules [of the Association], including 
observing high standards of commercial honor and just and equitable 
principles of trade. In determining whether this standard is met, the 
Department [may] shall take into consideration whether:
    (A) a state or federal authority or self-regulatory organization 
has taken permanent or temporary adverse action with respect to a 
registration or licensing determination regarding the Applicant or an 
Associated Person;
    (B) an Applicant's or Associated Person's record reflects a sales 
practice event, a pending arbitration, or a pending private civil 
action;
    (C) an Applicant or Associated Person is the subject of a pending, 
adjudicated, or settled regulatory action or investigation by the 
Commission, the Commodity Futures Trading Commission, a federal, state, 
or foreign regulatory agency, or a self-regulatory organization; [a 
pending,] an adjudicated, or settled investment-related private civil 
action for damages or an injunction; or a criminal action (other than a 
minor traffic violation) that is pending, adjudicated, or that has 
resulted in a guilty or no contest plea; or an Applicant, its control 
persons, principals, registered representatives, other Associated 
Persons, any lender of 5% or more of the Applicant's net capital, and 
any other member with respect to which these persons were a control 
person or a 5% lender of its net capital is subject to unpaid 
arbitration awards, other adjudicated customer awards, or unpaid 
arbitration settlements;
    (D) an Associated Person was terminated for cause or permitted to 
resign after an investigation of an alleged violation of a federal or 
state securities law, a rule or regulation thereunder, a self-
regulatory organization rule, or industry standard of conduct;
    (E) a state or federal authority or self-regulatory organization 
has imposed remedial action, such as special training, continuing 
education requirements, or heightened supervision, on an Associated 
Person; and
    (F) a state or federal authority or self-regulatory organization 
has provided information indicating that the Applicant or an Associated 
Person otherwise poses a threat to public investors.
    (4) The Applicant has established all contractual or other 
arrangements and business relationships with banks, clearing 
corporations, service bureaus, or others necessary to:
    (A) initiate the operations described in the Applicant's business 
plan, considering the nature and scope of operations and the number of 
personnel; and
    (B) comply with the federal securities laws, the rules and 
regulations thereunder, and [the] NASD Rules [of the Association].
    (5) The Applicant has or has adequate plans to obtain facilities 
that are sufficient to:
    (A) initiate the operations described in the Applicant's business 
plan, considering the nature and scope of operations and the number of 
personnel; and
    (B) comply with the federal securities laws, the rules and 
regulations thereunder, and [the] NASD Rules [of the Association].
    (6)-(7) No Change.
    (8) The applicant has financial controls to ensure compliance with 
the federal securities laws, the rules and regulations thereunder, and 
[the] NASD Rules [of the Association].
    (9) No Change.
    (10) The Applicant has a supervisory system, including written 
supervisory procedures, internal operating procedures (including 
operational and internal controls), and compliance procedures designed 
to prevent and detect, to the extent practicable, violations of the 
federal securities laws, the rules and regulations thereunder, and 
[the] NASD Rules [of the Association]. In evaluating the adequacy of a 
supervisory system, the Department shall consider the overall nature 
and scope of the Applicant's intended business operations and shall 
consider whether:
    (A) the number, location, experience, and qualifications of 
supervisory personnel are adequate in light of the number, location, 
experience, and qualifications of persons to be supervised; the Central 
Registration Depository record or other disciplinary history of 
supervisory personnel and persons to be supervised; and the number and 
locations of the offices that the Applicant intends to open and the 
nature and scope of business to the conducted at each office;
    (B) the Applicant has identified specific Associated Persons to 
supervise and discharge each of the functions in the Applicant's 
business plan, and to supervise each of the Applicant's intended 
offices, whether or not such offices are required to be registered 
under [the] NASD Rules [of the Association];
    (C) the Applicant has identified the functions to be performed by 
each Associated Person and has adopted procedures to assure the 
registration with NASD [the Association] and applicable states of all 
persons whose functions are subject to such registration 
requirements[.];
    (D) each Associated Person identified in the business plan to 
discharge a supervisory function has at least one year of direct 
experience or two years of related experience in the subject area to be 
supervised;
    (E) the Applicant will solicit retail or institutional business;
    (F) the Applicant will recommend securities to customers;

[[Page 60752]]

    (G) the location or part-time status of a supervisor or principal 
will affect such person's ability to be an effective supervisor;
    (H) the Applicant should be required to place one or more 
Associated Persons under heightened supervision pursuant to Notice to 
Members 97-19;
    (I) any remedial action, such as special training or continuing 
education requirements or heightened supervision, has been imposed on 
an Associated Person by a state or federal authority or self-regulatory 
organization; and
    (J) any other condition that will have material impact on the 
Applicant's ability to detect and prevent violations of the federal 
securities laws, the rules and regulations thereunder, and [the] NASD 
Rules [of the Association].
    (11) No Change.
    (12) The Applicant has completed a training needs assessment and 
has a written training plan that complies with the continuing education 
requirements imposed by the federal securities laws, the rules and 
regulations thereunder, and [the] NASD Rules [of the Association].
    (13) NASD [The Association] does not possess any information 
indicating that the Applicant may circumvent, evade, or otherwise avoid 
compliance with the federal securities laws, the rules and regulations 
thereunder, or [the] NASD Rules [of the Association].
    (14) The application and all supporting documents otherwise are 
consistent with the federal securities laws, the rules and regulations 
thereunder, and [the] NASD Rules [of the Association].
    (b) Granting or Denying Application
    (1) In reviewing an application for membership, the Department 
shall consider whether the Applicant and its Associated Persons meet 
each of the standards in paragraph (a). Where the Department determines 
that the Applicant or its Associated Persons are the subject of any of 
the events set forth in Rule 1014(a)(3)(A) and (C) through (E), a 
presumption exists that the application should be denied. The Applicant 
may overcome the presumption by demonstrating that it can meet each of 
the standards in paragraph (a), notwithstanding the existence of any of 
the events set forth in Rule 1014(a)(3)(A) and (C) through (E).
    (2) [(1)] If the Department determines that the Applicant meets 
each of the standards in paragraph (a), the Department shall grant the 
application for membership.
    (3) [(2)] If the Department determines that the Applicant does not 
meet one or more of the standards in paragraph (a) in whole or in part, 
the Department shall:
    (A) grant the application subject to one or more restrictions 
reasonably designed to address a specific financial, operational, 
supervisory, disciplinary, investor protection, or other regulatory 
concern based on the standards for admission in Rule 1014(a); or
    (B) deny the application.
    (c)-(d) No Change.
    (e) Service and Effectiveness of Decision
    The Department shall serve its decision and the membership 
agreement on the Applicant in accordance with Rule 1012. The decision 
shall become effective upon service and shall remain in effect during 
the pendency of any review until a decision constituting final action 
of NASD [the Association] is issued under Rule 1015 or 1016, unless 
otherwise directed by the National Adjudicatory Council, the NASD 
Board, or the Commission.
    (f) No Change.
    (g) Final Action
    Unless the Applicant files a written request for a review under 
Rule 1015, the Department's decision shall constitute final action by 
NASD [the Association].
* * * * *

1017. Applications for Approval of Change in Ownership, Control, or 
Business Operations

    (a) Events Requiring Application
    A member shall file an application for approval of any of the 
following changes to its ownership, control, or business operations:
    (1) a merger of the member with another member, unless both are 
members of the New York Stock Exchange, Inc. or the surviving entity 
will continue to be a member of the New York Stock Exchange, Inc.;
    (2) a direct or indirect acquisition by the member of another 
member, unless the acquiring member is a member of the New York Stock 
Exchange, Inc.;
    (3)[a] direct or indirect acquisitions or transfers of 25% or more 
in the aggregate [substantially all] of the member's assets or any 
asset, business or line of operation that generates revenues comprising 
25% or more in the aggregate of the member's earnings measured on a 
rolling 36-month basis, unless both the seller and acquirer are members 
[the acquirer is a member] of the New York Stock Exchange, Inc.;
    (4) a change in the equity ownership or partnership capital of the 
member that results in one person or entity directly or indirectly 
owning or controlling 25 percent or more of the equity or partnership 
capital; or
    (5) a material change in business operations as defined in Rule 
1011(i).
    (b)-(f) No Change.
    (g) Department Decision
    (1) The Department shall consider the application, the membership 
interview, other information and documents provided by the Applicant or 
obtained by the Department, the public interest, and the protection of 
investors. In rendering a decision on an application submitted under 
Rule 1017(a), the Department shall consider whether the Applicant and 
its Associated Persons meet each of the standards in Rule 1014(a). 
Where the Department determines that the Applicant or its Associated 
Persons are the subject of any of the events set forth in Rule 
1014(a)(3)(A) and (C) through (E), a presumption exists that the 
application should be denied. The Applicant may overcome the 
presumption by demonstrating that it can meet each of the standards in 
Rule 1014(a), notwithstanding the existence of any of the events set 
forth in Rule 1014(a)(3)(A) and (C) through (E).
    (A) In rendering a decision on an application for approval of a 
change in ownership or control, or an application for approval of a 
material change in business operations that does not involve 
modification or removal of a membership agreement restriction, the 
Department shall determine if the Applicant would continue to meet the 
standards in Rule 1014(a) upon approval of the application.
    (B) In rendering a decision on an application requesting the 
modification or removal of a membership agreement restriction, the 
Department shall consider whether the maintenance of the restriction is 
appropriate in light of:
    (i) the standards set forth in Rule 1014;
    (ii) the circumstances that gave rise to the imposition of the 
restriction;
    (iii) the Applicant's operations since the restriction was imposed;
    (iv) any change in ownership or control or supervisors and 
principals; and
    (v) any new evidence submitted in connection with the application.
    (2)-(4) No Change.
    (h) Service and Effectiveness of Decision
    The Department shall serve its decision on the Applicant in 
accordance with Rule 1012. The decision shall become effective upon 
service and shall remain in effect during the pendency of any review 
until a decision constituting final action of NASD [the Association] is 
[served] issued under Rule 1015 or 1016, unless otherwise directed by 
the

[[Page 60753]]

National Adjudicatory Council, the NASD Board, or the Commission.
    (i) Request for Review; Final Action
    An Applicant may file a written request for review of the 
Department's decision with the National Adjudicatory Council pursuant 
to Rule 1015. The procedures set forth in Rule 1015 shall apply to such 
review, and the National Adjudicatory Council's decision shall be 
subject to discretionary review by the NASD Board pursuant to Rule 
1016. If the Applicant does not file a request for review, the 
Department's decision shall constitute final action by NASD [the 
Association].
    (j)-(k) No Change.
* * * * *

I. 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 membership application and membership continuation processes 
have played an important role in investor protection by helping to 
ensure that new members and members that make a material change to 
their business comply or continue to comply with rigorous standards. 
Rule 1014, which sets forth the standards used when reviewing new 
member and continuing member applications, specifically requires NASD 
to consider the public interest and protection of investors when 
reviewing applications.
    Recently, there has been an increase in company restructurings, 
including the selling of company assets. Asset transfer applications 
filed pursuant to Rule 1017 are often time-sensitive and may be the 
first step in a member's withdrawal from the securities business. While 
asset transfers often serve legitimate business purposes, they also can 
raise customer protection issues. NASD has encountered several 
instances where the effect of a member attempting to restructure by 
transferring assets is to insulate the member and its owners from 
responsibility for payment of pending or unpaid arbitrations. Some 
firms may choose to transfer their assets without a corresponding 
transfer of their liabilities. Because the corporate format used by 
many firms insulates the owners from liabilities of the firm, a 
customer with an award or judgment against the firm may only be able to 
be paid from the firm's assets. Thus an asset transfer may transform 
the firm from an operating business that can generate value over time 
to a shell holding the firm's liquidated value, leaving behind 
customers with arbitration claims pending against, or arbitration 
awards unsatisfied by, a firm.
    In light of the customer protection concerns raised in the 
application process, NASD is proposing a rule change that would clarify 
and expand NASD's authority to identify and respond to changes in a 
firm that may not account for pending arbitrations and customer claims.

1. Review of Material Transfer of Member's Assets

    Applications submitted pursuant to Rule 1017 provide NASD with the 
opportunity to review member transactions that can materially adversely 
affect current and former customers. Rule 1017(a)(3) requires a member 
to submit an application upon the acquisition of substantially all of 
the member's assets. However, this may potentially eliminate from 
NASD's review a member's piecemeal sale of its assets that, while not 
``substantially all'' in amount, may nevertheless have a material 
impact on the operations or profitability of the selling member.
    The proposed rule change would clarify that Rule 1017(a)(3) applies 
to transfers as well as to sales of a firm's assets, including sales 
and transfers of assets to an affiliated entity. The proposed rule 
change also would broaden the scope of Rule 1017(a)(3). In Notice to 
Members 02-54 (August 2002), which NASD issued to solicit comment on 
the proposed membership application rules, the proposal set forth in 
the Notice required members to submit applications prior to the 
transfer of a material amount of the member's assets or prior to the 
transfer of any asset, business or line of operation that generates 
revenues comprising a material portion of the selling member's 
earnings. Based on the comments received in response to the Notice, as 
discussed further in Item II C, below, NASD has revised the proposed 
rule change to include a more objective standard based on the 
percentage of assets transferred. The revised proposed rule change 
would require members to submit applications prior to the sale or 
transfer of 25% or more of the member's assets or any asset, business 
or line of operation that generates revenues of 25% or greater of the 
selling member's earnings over a rolling 36-month period. The 36-month 
period would be measured backwards from the date that the member 
initially notifies NASD of its intent to sell or transfer assets by 
submitting an application pursuant to Rule 1017.\6\
---------------------------------------------------------------------------

    \6\ In situations where NASD does not receive notice, the 36-
month period will be measured from the date when notice was due. See 
Rule 1017(c)(1).
---------------------------------------------------------------------------

2. Clarification of Members Required to Submit Applications

    Because of concerns that a selling member's customers may be left 
unprotected following an asset transfer, the seller's situation should 
be reviewed in connection with all such transactions. Rule 1017(a) 
currently exempts selling members from the requirement to submit 
applications if the acquiring firm is a member of the NYSE. The 
proposed rule change would require all non-NYSE selling members to 
submit an application regardless of whether the acquiring firm is a 
NYSE member. The proposed rule change is not intended to put applicants 
through duplicative approval processes where the transaction is 
otherwise subject to adequate customer protection safeguards. Rather, 
in requiring an application regardless of whether the acquirer is a 
member of the NYSE, NASD will be assured of receiving notice and will 
be in a position to target particular aspects of the transaction for 
additional review, if necessary.

3. Consideration of Arbitrations in Application Process

    To encourage compliance with the terms of arbitration and other 
adjudicated customer awards, the proposed rule change would amend Rule 
1014(a)(3) to include as specific factors in the consideration of both 
new and continuing member applications unpaid arbitration awards, other 
adjudicated customer awards against an applicant and other persons that 
may have significant control or influence over the applicant, including 
its controlling persons, principals, registered representatives, other 
Associated Persons, any lender of 5% or more of the applicant's net 
capital, and any other member with respect to which these persons were 
a controlling person or a 5% lender of its net capital. Currently, NASD 
Rule 2110 would apply to efforts by a firm and its owners to unfairly 
prejudice customers seeking

[[Page 60754]]

relief in arbitration proceedings and thus this is a cognizable factor 
in membership decisions. The proposed rule change would more explicitly 
make this part of the membership decisional criteria.

4. Burden of Proof

    NASD has seen instances where an applicant (both new member and 
change of ownership/control) has a disciplinary history of some concern 
that falls short of a statutory disqualification. Many of these cases 
involve applications from closely held firms where, even if the broker/
dealer establishes heightened supervisory procedures, the influence of 
the control person on the small broker/dealer may overcome the 
supervisory structures. Rule 1014(a)(3) requires NASD to determine 
whether an applicant and its associated persons ``are capable of 
complying with'' federal securities laws and the rules of NASD. A 
variety of specific events, including past and current disciplinary 
actions and customer claims, are among the considerations referenced in 
the rule.
    To further enhance NASD's authority under Rule 1014(a) to consider 
the impact of an applicant's past behavior, the proposed rule change 
would create a rebuttable presumption that the application should be 
denied when any of the events enumerated in Rule 1014(a)(3)(A) and (C) 
through (E) are present. An Applicant may overcome the presumption by 
demonstrating to the Department that it can meet each of the standards 
in Rule 1014(a). In determining whether an Applicant has overcome the 
presumption, NASD staff will consider the Applicant's submission in 
light of the specific standards of Rule 1014(a), the public interest, 
protection of investors, and NASD's responsibility to provide a fair 
procedure in accordance with its membership rules. The rebuttable 
presumption would not create new standards for admission, but would 
merely clarify that applicants with certain regulatory history must 
affirmatively demonstrate that they should be allowed admission.

5. Applicability of Rule to Non-Natural Persons

    The proposed rule change would amend Rule 1011 to amend the 
definition of ``Associated Person'' to, among other things, include a 
reference to non-natural controlling persons in light of the fact that 
NASD's current definition of ``associated persons'' does not encompass 
non-natural persons. The amended definition would apply to the entire 
Rule 1010 Series and provide for consistency in the membership 
application process. NASD may consider in the future whether to expand 
the definition of ``associated persons'' more generally to include non-
natural persons.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, \7\ which require, 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 the proposed rule change will 
improve its ability to detect and prevent conduct that can be harmful 
to public investors.
---------------------------------------------------------------------------

    \7\ 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, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The proposed rule change was published for comment in NASD Notice 
to Members 02-54 (August 2002). Seven comments were received in 
response to the Notice.\8\ Of the seven comment letters received, six 
were in favor of the proposed rule change and the seventh, while not 
opposed to the proposed rule change, expressed concerns that the 
proposed rule change would not be able to accomplish its objectives. 
The commenter expressed doubts about NASD's ability to monitor asset 
transfers and further believed that the amendments may be unnecessary 
as a plaintiff's attorney often had other means to recover 
judgments.\9\ A summary of the comments received is set forth below.
---------------------------------------------------------------------------

    \8\ See comment letters from Anonymous, dated September 13, 
2002; Anonymous, dated September 18, 2002; Anderson Corporate 
Finance, LLC, dated August 28, 2002; Associated Securities Corp., 
dated September 11, 2002; Canaccord Capital Corporation, USA, dated 
September 20, 2002; Kirk Securities Corporation, dated September 17, 
2002; and Rhodes Securities, Inc. dated September 16, 2002.
    \9\ See comment letter from Associated Securities Corp., dated 
September 11, 2002.
---------------------------------------------------------------------------

Review of Material Transfer of Member's Assets
    Five of the commenters supported the proposal to require firms to 
submit an application prior to the transfer of a material amount of the 
member's assets or prior to the transfer of any asset, business or line 
of operation that generates revenues comprising a material portion of 
the selling member's earnings.\10\ While supporting the proposal, one 
commenter noted that the proposed rule change should only apply to full 
service firms with specified minimum revenues, and not to advisory 
firms that do not handle customer accounts, cash or have retail 
customers.\11\ While not opposing the proposal, another commenter 
questioned whether NASD would be able to monitor these types of asset 
transfers and noted that requiring reviews of these types of 
transactions might force a firm into liquidation.\12\
---------------------------------------------------------------------------

    \10\ See comment letters from Anonymous, dated September 18, 
2002; Anderson Corporate Finance, LLC, dated August 28, 2002; 
Canaccord Capital Corporation, USA, dated September 20, 2002; Kirk 
Securities Corporation, dated September 17, 2002; and Rhodes 
Securities, Inc., dated September 16, 2002.
    \11\ See comment letter from Anonymous, dated September 13, 
2002.
    \12\ See comment letter from Associated Securities Corp., dated 
September 11, 2002.
---------------------------------------------------------------------------

    All six commenters who responded to the question of whether 
materiality should be more clearly defined agreed that the Rules should 
include a more specific definition of materiality.\13\ One commenter 
stated that a more specific plain English standard would help prevent 
confusion and errors.\14\ A second commenter suggested a minimum of 15% 
and a maximum of 25% standard.\15\ A third commenter noted that while a 
more specific standard would help ensure compliance, a standard that is 
too specific might make it easier for people to circumvent the rule. 
This same commenter also suggested that the definition of materiality 
include a time component as well as a percentage component to address 
concerns of ``piecemeal'' transfers (e.g., X% or greater if no other 
transfer has occurred within the last Y years or X/Y% if any such 
transfer has occurred within the last Y years).\16\ As described in 
Item II A of this Notice, in response to the comments received, NASD 
has revised

[[Page 60755]]

its proposed rule change to include a more specific definition of 
materiality.
---------------------------------------------------------------------------

    \13\ See comment letters from Anonymous, dated September 13, 
2002; Anonymous, dated September 18, 2002; Anderson Corporate 
Finance, LLC, dated August 28, 2002; Canaccord Capital Corporation, 
USA, dated September 20, 2002; Kirk Securities Corporation, dated 
September 17, 2002; and Rhodes Securities, Inc., dated September 16, 
2002.
    \14\ See comment letter from Canaccord Capital Corporation, USA, 
dated September 20, 2002.
    \15\ See comment letter from Kirk Securities Corporation, dated 
September 17, 2002.
    \16\ See comment letter from Anderson Corporate Finance, LLC, 
dated August 28, 2002.
---------------------------------------------------------------------------

    Of the six commenters who responded, five commenters thought that 
NASD should review other types of transactions not currently included 
in Rule 1014 or the rule proposal.\17\ One commenter believed that NASD 
should review all types of transactions commonly used to avoid 
liability and regulation, \18\ and a second commenter thought that the 
rule should be broad enough to allow NASD to review any transaction 
that could have an adverse effect on the payment of arbitration awards 
and other customer claims.\19\ One commenter did not think NASD should 
review other types of transactions.\20\ NASD has determined not to 
expand its review to other types of transactions. Not only does the 
proposed rule change capture a much broader range of identifiable 
transactions that can cause potential customer harm, but there are also 
other means to capture violations outside of the membership application 
process. However, NASD may consider reviewing other types of 
transactions if it determines that any such transactions particularly 
raise investor protection issues.
---------------------------------------------------------------------------

    \17\ See comment letters from Anonymous, dated September 18, 
2002; Anderson Corporate Finance, LLC, dated August 28, 2002; 
Canaccord Capital Corporation, USA, dated September 20, 2002; Kirk 
Securities Corporation, dated September 17, 2002; and Rhodes 
Securities, Inc., dated September 16, 2002.
    \18\ See comment letter from Kirk Securities Corporation, dated 
September 17, 2002.
    \19\ See comment letter from Anderson Corporate Finance, LLC, 
dated August 28, 2002.
    \20\ See comment letter from Anonymous, dated September 13, 
2002.
---------------------------------------------------------------------------

A. Clarification of Members Required To Submit Applications

    With respect to the proposal to require all non-NYSE selling 
members to submit an application to NASD regardless of whether the 
buyer is an NYSE member, a slight majority of the commenters supported 
the proposal. Of the six commenters who responded, four commenters 
supported the proposal.\21\ One commenter believed this type of review 
would help regulators better coordinate among themselves.\22\ Two 
commenters opposed this proposal.\23\ One commenter believed that an 
NASD review should depend upon the types of assets and scope of the 
transactions.\24\
---------------------------------------------------------------------------

    \21\ See comment letters from Anonymous, dated September 18, 
2002; Anderson Corporate Finance, LLC, dated August 28, 2002; Kirk 
Securities Corporation, dated September 17, 2002; and Rhodes 
Securities, Inc., dated September 16, 2002.
    \22\ See comment letter from Kirk Securities Corporation, dated 
September 17, 2002.
    \23\ See comment letters from Anonymous, dated September 13, 
2002; and Canaccord Capital Corporation, USA, dated September 20, 
2002.
    \24\ See comment letter from Canaccord Capital Corporation, USA, 
dated September 20, 2002.
---------------------------------------------------------------------------

B. Burden of Proof

    All the commenters supported the proposal that applicants bear the 
burden of proof to demonstrate that they should be approved for 
membership despite the presence of a regulatory history. Six of the 
commenters also responded to whether it is appropriate to impose the 
burden of proof for pending matters such as pending investigations and 
arbitrations.\25\ Of the six who responded, five thought it was 
appropriate to extend the language to pending investigations and 
arbitrations.\26\ One commenter thought it was inappropriate.\27\
---------------------------------------------------------------------------

    \25\ See comment letters from Anonymous, dated September 13, 
2002; Anonymous, dated September 18, 2002; Anderson Corporate 
Finance, LLC, dated August 28, 2002; Canaccord Capital Corporation, 
USA, dated September 20, 2002; Kirk Securities Corporation, dated 
September 17, 2002; and Rhodes Securities, Inc., dated September 16, 
2002.
    \26\ See comment letters from Anonymous, dated September 13, 
2002; Anonymous, dated September 18, 2002; Anderson Corporate 
Finance, LLC, dated August 28, 2002; Canaccord Capital Corporation, 
USA, dated September 20, 2002; and Kirk Securities Corporation, 
dated September 17, 2002.
    \27\ See comment letter from Anderson Corporate Finance, LLC, 
dated August 28, 2002.
---------------------------------------------------------------------------

Expansion of Scope of Rule 1014 To Include Non-Natural Persons
    All six commenters who responded to the proposal to expand Rule 
1014 to include non-natural persons supported the proposal.\28\ One 
commenter noted that the proposed rule change would clarify any 
confusion.\29\
---------------------------------------------------------------------------

    \28\ See comment letters from Anonymous, dated September 13, 
2002; and Canaccord Capital Corporation, USA, dated September 20, 
2002.
    \29\ See comment letter from Anderson Corporate Finance, LLC, 
dated August 28, 2002.
---------------------------------------------------------------------------

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 proposal 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 the NASD. All 
submissions should refer to File No. SR-NASD-2003-07 and should be 
submitted by November 13, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12)

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26743 Filed 10-22-03; 8:45 am]
BILLING CODE 8010-01-P