[Federal Register Volume 68, Number 241 (Tuesday, December 16, 2003)]
[Notices]
[Pages 70059-70066]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30987]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48897; File No. SR-NASD-2003-104]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the National Association 
of Securities Dealers, Inc. Relating to Proposed New Uniform Definition 
of ``Branch Office'' Under NASD Rule 3010(g)(2)

December 9, 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 July 2, 2003, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by NASD. On October 21, 
2003, NASD amended the proposed rule change.\3\ On December 8, 2003, 
NASD amended 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\ See letter from Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated October 21, 2003 
(``Amendment No. 1''). In Amendment No. 1, NASD restated the 
proposed rule change in its entirety.
    \4\ See letter from Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division, 
Commission, dated December 8, 2003 (``Amendment No. 2''). In 
Amendment No. 2, NASD revised the proposed rule change (i) to insert 
the word ``associated'' into subparagraph (g)(2)(B)(i) of Rule 3010; 
(ii) to correct a cross-reference in subparagraph (g)(2)(C) of Rule 
3010; and (iii) to correct punctuation in subparagraph (g)(3) of 
Rule 3010. In addition, in Amendment No. 2, NASD revised the 
discussion of the purpose of the proposed rule change (i) to remove 
a discussion regarding the Economic Advisory Board and references 
thereto, and (ii) to clarify a statement regarding the ``branch 
office'' definition proposed by The New York Stock Exchange (the 
``NYSE'') and its position with respect to such definition.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD filed the proposed rule change with the Commission (1) to 
amend NASD Rule 3010(g)(2) to revise the definition of the term 
``branch office'; and (2) to adopt IM-3010-1 to provide guidance on 
factors to be considered by a member firm in conducting internal 
inspections of offices. NASD represents that the purpose of the 
proposed rule change is to facilitate the creation of a branch office 
registration system through the Central Registration Depository 
(``CRD'')[reg] to provide a more efficient, centralized 
method for members and associated persons to register branch office 
locations as required by the rules and regulations of states and self-
regulatory organizations, including NASD. NASD expects centralized 
registration of such locations would provide efficiency, clarity, and 
costs savings to members. NASD believes that the creation of a uniform 
registration system for branch offices through CRD[reg] also 
would allow NASD and other securities regulators to effectively examine 
such locations to further investor protections.
    In addition, NASD represents that the proposed rule change is part 
of NASD's rule modernization initiative to streamline and update NASD 
Rules while preserving investor protections. The proposed definition 
establishes a broader national standard and is the product of a 
coordinated effort among regulators to reduce inconsistencies in the 
definitions used by the Commission, NASD, the NYSE, and state 
securities regulators in identifying locations where broker/dealers 
conduct securities or investment banking business. The proposed rule 
change is set forth below. Proposed new language is in italics; 
proposed deletions are in [brackets].
* * * * *

3000. Responsibilites Relating to Associated Persons, Employees, and 
Others' Employees

3010. Supervision

    (a) through (f) No change.

[[Page 70060]]

(g) Definitions
    (1) No Change.
    (2) [``Branch Office'' means any location identified by any means 
to the public or customers as a location at which the member conducts 
an investment banking or securities business, excluding:]
    [(A) any location identified in a telephone directory line listing 
or on a business card or letterhead, which listing, card, or letterhead 
also sets forth the address and telephone number of the branch office 
or OSJ of the firm from which the person(s) conducting business at the 
non-branch locations are directly supervised;]
    [(B) any location referred to in a member advertisement, as this 
term is defined in Rule 2210, by its local telephone number and/or 
local post office box provided that such reference may not contain the 
address of the non-branch location and, further, that such reference 
also sets forth the address and telephone number of the branch office 
or OSJ of the firm from which the person(s) conducting business at the 
non-branch location are directly supervised; or]
    [(C) any location identified by address in a member's sales 
literature, as this term is defined in Rule 2210, provided that the 
sales literature also sets forth the address and telephone number of 
the branch office or OSJ of the firm from which the person(s) 
conducting business at the non-branch locations are directly 
supervised.]
    [(D) any location where a person conducts business on behalf of the 
member occasionally and exclusively by appointment for the convenience 
of customers, so long as each customer is provided with the address and 
telephone number of the branch office or OSJ of the firm from which the 
person conducting business at the non-branch location is directly 
supervised.]
    A ``branch office'' is any location where one or more associated 
persons of a member regularly conduct the business of effecting any 
transactions in, or inducing or attempting to induce the purchase or 
sale of, any security, or that is held out as such, excluding:
    (A) Any location that is established solely for customer service 
and/or back office type functions where no sales activities are 
conducted and that is not held out to the public as a branch office;
    (B) Any location that is the associated person's primary residence; 
provided that
    (i) Only one associated person, or multiple associated persons who 
reside at that location and are members of the same immediate family, 
conduct business at the location;
    (ii) The location is not held out to the public as an office and 
the associated person does not meet with customers at the location;
    (iii) Neither customer funds nor securities are handled at that 
location;
    (iv) The associated person is assigned to a designated branch 
office, and such designated branch office is reflected on all business 
cards, stationery, advertisements and other communications to the 
public by such associated person;
    (v) The associated person's correspondence and communications with 
the public are subject to the firm's supervision in accordance with 
Rule 3010;
    (vi) Electronic communications (e.g., e-mail) are made through the 
member's electronic system;
    (vii) All orders are entered through the designated branch office 
or an electronic system established by the member that is reviewable at 
the branch office;
    (viii) Written supervisory procedures pertaining to supervision of 
sales activities conducted at the residence are maintained by the 
member; and
    (ix) A list of the residence locations are maintained by the 
member;
    (C) Any location, other than a primary residence, that is used for 
securities business for less than 30 business days in any one calendar 
year, provided the member complies with the provisions of paragraph 
(B)(ii) through (viii) above;
    (D) Any office of convenience, where associated persons 
occasionally and exclusively by appointment meet with customers, which 
is not held out to the public as an office; *
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    \*\ Where such office of convenience is located on bank 
premises, signage necessary to comply with applicable federal and 
state laws, rules, and regulations and applicable rules and 
regulations of NASD, other self-regulatory organizations, and 
securities or banking regulators may be displayed and shall not be 
deemed ``holding out'' for purposes of this section.
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    (E) Any location that is used primarily to engage in non-securities 
activities and from which the associated person(s) effects no more than 
25 securities transactions in any one calendar year; provided that any 
advertisement or sales literature identifying such location also sets 
forth the address and telephone number of the location from which the 
associated person(s) conducting business at the non-branch locations 
are directly supervised; or
    (F) The Floor of a registered national securities exchange where a 
member conducts a direct access business with public customers; and
    (G) A temporary location established in response to the 
implementation of a business continuity plan.
    The term ``business day'' as used in Rule 3010(g)(2) shall not 
include any partial business day provided that the associated person 
spends at least four hours on such business day at his or her 
designated branch office during the hours that such office is normally 
open for business.
    [(3) A member may substitute a central office address and telephone 
number for the supervisory branch office or OSJ locations referred to 
in paragraph (g)(2) above provided it can demonstrate to the 
Association's District Office having jurisdiction over the member that 
it has in place a significant and geographically dispersed supervisory 
system appropriate to its business and that any investor complaint 
received at the central site is provided to and resolved in conjunction 
with the office or offices with responsibility over the non-branch 
business location involved in the complaint.]

IM-3010-1--Standards for Reasonable Review

    In fulfilling its obligations pursuant to Rule 3010(c), each member 
must conduct a review, at least annually, of the businesses in which it 
engages, which review must be reasonably designed to assist in 
detecting and preventing violations of and achieving compliance with 
applicable securities laws and regulations and with NASD Rules. Each 
member shall establish and maintain supervisory procedures that must 
take into consideration, among other things, the firm's size, 
organizational structure, scope of business activities, number and 
location of offices, the nature and complexity of products and services 
offered, the volume of business done, the number of associated persons 
assigned to a location, whether a location has a principal on-site, 
whether the office is a non-branch location, the disciplinary history 
of registered representatives or associated persons, etc. The 
procedures established and the reviews conducted must provide that the 
quality of supervision at remote offices is sufficient to assure 
compliance with applicable securities laws and regulations and with 
NASD Rules. With respect to a non-branch location where a registered 
representative engages in securities activities, a member must be 
especially diligent in establishing procedures and conducting 
reasonable reviews. Based on the factors outlined above, members may 
need to impose reasonably designed supervisory procedures for certain 
locations and/or

[[Page 70061]]

may need to provide for more frequent reviews of certain locations.
* * * * *

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, as 
amended, 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
    While NASD believes that its current branch office definition 
effectively meets its regulatory objectives, NASD appreciates that a 
uniform branch office definition would create a broader national 
standard that would minimize compliance burdens for members. Adoption 
of the proposed branch office definition by NASD and state securities 
administrators would facilitate the creation of a centralized branch 
office registration system through the CRD[reg], and provide 
efficiency, clarity, and costs savings to members.
    Currently, there is no uniform approach among regulators for 
classifying locations from which registered representatives regularly 
conduct the business of effecting transactions in securities. The 
Commission, the NYSE, and state securities regulators all define the 
term ``branch office'' (or similar term) differently; and the term has 
different significance based on who classifies it. As a result, a 
member must comply with multiple definitions in each jurisdiction in 
which it conducts a securities business. This requires tracking 
numerous definitions, filing multiple forms to register and/or renew 
registration of such locations, meeting various deadlines, and 
continually monitoring each jurisdiction for changes in rules or 
procedures.
    NASD member firms are currently required to complete Schedule E to 
the Form BD (``Schedule E'') to register or report branch offices to 
the Commission, NASD, and with particular state(s) in which they 
conduct a securities business that requires branch office registration. 
While Schedule E does capture certain data with respect to branch 
offices, NASD represents that both its staff and state regulators 
believe that Schedule E does not adequately fulfill their regulatory 
needs. For example, Schedule E does not link an individual registered 
representative with a particular branch office; this can make it 
difficult for state regulators to track down individual persons during 
examinations. In addition, member firms have said that Schedule E is a 
burdensome and time-consuming method by which to register branch 
offices. Since numerous states have varying branch office definitions, 
members must understand and comply with the requirements in each 
individual state. Further, updates or amendments to Schedule E do not 
update or amend an individual registered representative's Form U-4. 
Currently, a firm must amend these forms separately and there is no 
method to alert firms or regulators if the information on the two forms 
differs. NASD believes that the proposed branch office registration 
system through CRD'' would alleviate most, if not all, of these 
concerns.
    As a result, NASD has been working with the North American 
Securities Administrators Association (``NASAA''), and the NYSE to 
reduce the inconsistencies that currently exist among the various ways 
in which locations are defined in order to increase the utility of 
CRD'' as a central branch office registration system for NASD, other 
self-regulatory organizations, and states. NASD staff has held numerous 
meetings with other regulators over the past three years with the 
purpose of achieving this goal. NASD represents that these meetings 
ultimately proved successful as the parties have reached agreement on a 
core proposed uniform definition which largely tracks the Commission's 
definition of ``office'' in the books and records rules, Rule 17a-3 and 
Rule 17a-4 (the ``Books and Records Rules'') under the Act.\5\
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    \5\ 17 CFR 240.17a-3 and 17 CFR 240.17a-4.
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    The proposed definition would contain several exceptions from 
branch office registration. The single difference to a common 
definition among regulators concerns the registration of certain 
primary residences as branch offices `` NASD and NASAA support a 
primary residence exception that provides for limitations on the 
activities (e.g., no holding out of the residence as a place to conduct 
securities business, and no handling of funds or securities at the 
location), that can be performed at a primary residence without 
triggering branch office registration. The NYSE, however, believes that 
under no circumstances should associated persons be permitted to engage 
in securities activities for more than 50 business days annually from 
their primary residences without requiring members to register such 
residences as branch offices.\6\
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    \6\ See Securities Exchange Act Release No. 46888 (November 22, 
2002), 67 FR 72257 (December 4, 2002) (SR-NYSE-2002-34).
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Current Definition
    NASD currently defines a branch office as any location identified 
by any means to the public or customers as a location at which the 
member conducts an investment banking or securities business. The 
definition provides that the following activities would not be deemed 
``holding out'' and, therefore, would not trigger registration of the 
location as a branch office: (1) A location identified in a telephone 
directory, business card, or letterhead; (2) a location referred to in 
a member advertisement; (3) a location identified in a member's sales 
literature; and (4) any location where a person conducts business on 
behalf of the member only occasionally; provided, in each case, the 
phone number and address of the branch office or Office of Supervisory 
Jurisdiction (``OSJ'') that supervises the location is also identified. 
NASD designates locations from which associated persons work as either 
branch offices or unregistered locations. This designation primarily 
affects the supervisory responsibilities of, and the fees paid by, 
members. An office that is designated a ``branch office'' under NASD 
rules must pay an annual registration fee and have a branch manager on 
site. A branch office is further classified as an OSJ if any one of the 
following enumerated activities occurs at the location: order 
execution, maintenance of customer funds and securities, final approval 
of new accounts and advertisements, review of customer orders, and 
supervision of associated persons at other branch offices. NASD 
represents that an office that is designated an OSJ must have a 
registered principal on-site and be inspected on an annual basis.\7\
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    \7\ NASD Rule 3010(c) provides that each branch office shall be 
inspected according to a cycle set forth in the firm's written 
supervisory and inspection procedures.
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Proposed Uniform Branch Office Definition
    The core definition in the proposed uniform definition largely 
tracks the

[[Page 70062]]

Commission's Books and Records Rules' definition of ``office.'' \8\ The 
proposed rule change does not alter or affect the obligations of a firm 
to comply with the minimum requirements of the Books and Records Rules 
which specifies the records broker/dealers must make, and how long 
those records and other documents relating to a broker/dealer's 
business must be kept.\9\
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    \8\ 17 CFR 240.17a-3 and 17 CFR 240.17a-4.
    \9\ 17 CFR 240.17a-3 and 17 CFR 240.17a-4.
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    The proposed rule change would define a ``branch office'' as any 
location where one or more associated persons of a member regularly 
conduct the business of effecting any transactions in, or inducing or 
attempting to induce the purchase or sale of, any security, or that is 
held out as such.
    The proposed rule change would exclude from registration as a 
branch office: (1) A location that operates as a back office; (2) a 
representative's primary residence provided it is not held out to the 
public and certain other conditions are satisfied; (3) a location, 
other than the primary residence, that is used for less than 30 
business days annually for securities business, is not held out to the 
public as an office, and satisfies certain of the conditions set forth 
in the primary residence exception; (4) a location of convenience used 
occasionally and by appointment; (5) a location used primarily for non-
securities business and from which less than 25 securities transactions 
are effected annually; (6) the floor of an exchange; and (7) a 
temporary location used as part of a business continuity plan.
    In developing the proposed definition, NASD understands the need to 
provide reasonable exceptions from branch office registration that take 
into account technological innovations and current business practices 
without compromising the need for investor protection. NASD believes 
the proposed exceptions from branch office registration are practically 
based while still containing important safeguards and limitations to 
protect investors. For example, the exception from branch office 
registration for customer service/back office locations would require 
that no sales activities would be able to be conducted from such 
locations and such locations would not be able to be held out to the 
public.
    Further, the primary residence exception contains significant 
safeguards, including that: the location cannot be held out to the 
public; only one associated person or associated persons who are 
members of the same immediate family and reside at the location may 
conduct business at such location; the associated person does not meet 
with customers at the location; neither customer funds nor securities 
are handled at that location; the associated person must be assigned to 
a designated branch office; and such branch office is used on all 
business cards, stationery, advertisements, and other communications to 
the public; the associated person's correspondence and communications 
with the public are subject to the firm's supervision; electronic 
communications are made through the firm's system; all orders are 
entered through the designated branch office or an electronic system 
established by the member and reviewable at such location; written 
supervisory procedures pertaining to supervision of sales activities 
conducted at the residence are maintained by the member; and the member 
maintains a list of the locations. These limitations closely track the 
limitations on the use of a private residence in the Commission's Books 
and Records Rules which provide that a broker/dealer is not required to 
maintain records at an office that is a private residence if only one 
associated person (or multiple associated persons if members of the 
same family) regularly conducts business at the office, the office is 
not held out to the public as an office, and neither customer funds nor 
securities are handled at the office.\10\
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    \10\ 17 CFR 240.17a-4(k).
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    As noted above, in addition to these limitations on the primary 
residence exception, the NYSE believes that if an associated person 
works primarily from home, such location should be registered as a 
branch office.\11\ Given the different business models used by NASD 
members that are not also NYSE members, NASD concluded that the 50-
business day limitation on the use of a primary residence would not be 
practical for small firms and independent dealers, and would not 
provide any added regulatory benefit. NASD represents that NASAA 
representatives have committed to recommending to their members (state 
securities regulators) adoption of the proposed branch office 
definition outlined in this rule filing (thus omitting the 50-business 
day limitation).\12\
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    \11\ See NYSE Response to Comments to File No. SR-NYSE-2002-34, 
dated March 27, 2003.
    \12\ Letter dated April 17, 2003, from Christine A. Bruenn, 
NASAA President, to Marc Menchel, Senior Vice President and General 
Counsel, Regulatory Policy and Oversight, NASD. NASAA has stated 
that it supports the proposed uniform definition of ``branch 
office'' proposed herein and has stated that it will encourage its 
members (state securities administrators) to adopt the proposed 
uniform definition.
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    NASD reached its conclusions as to the significant negative impact 
of the 50-business day requirement on members, without any added 
corresponding regulatory benefit or investor protection, after 
considering comments received in response to NASD Notice to Members 02-
52. As discussed below, numerous firms asserted that the 50-business 
day requirement in the primary residence exception to the branch office 
definition would be burdensome, time consuming, and difficult to 
enforce. NASD concluded that limited member compliance resources could 
be more effectively directed to supervising activities at all 
locations, rather than tracking the number of days and hours an 
associated person works from his or her primary residence. NASD 
strongly believes that the numerous other safeguards that would need to 
be satisfied to qualify for the primary residence exception serve its 
regulatory needs and protect investors.
    The proposed definition also would exempt from branch office 
registration a temporary location, other than a primary residence, that 
is used for securities business less than 30-business days in any 
calendar year. The limitations on the use of a primary residence 
described above also would apply to use of a temporary location for 
conducting securities business.\13\ For purposes of calculating the 
number of days for this exception, the proposed rule provides that a 
``business day'' would not include any partial business day provided 
that the associated person spends at least four hours on such business 
day at his or her designated branch office during normal business 
hours.
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    \13\ For purposes of satisfying condition (a) to the temporary 
location exception, an associated person would be deemed to 
``reside'' at such temporary location.
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    In exempting offices of convenience from branch office 
registration, NASD believes that it again has imposed important 
safeguards for the public. At such offices of convenience, associated 
persons would be limited to meeting customers occasionally and 
exclusively by appointment, and the location would not be permitted to 
be held out to the public as a branch office. The proposed rule notes, 
however, that where such office of convenience is located on bank 
premises, signage necessary to comply with applicable federal and state 
laws, rules and regulations, and applicable rules and regulations of 
NASD, other self-regulatory organizations, and securities or banking 
regulators would

[[Page 70063]]

be able to be displayed and would not be deemed ``holding out'' for 
purposes of this section. Such necessary signage generally is intended 
to prevent confusing customers who might otherwise believe that 
traditional riskless investments, such as deposits, are being offered 
by associated persons at such offices on bank premises. In addition, 
other than meeting customers at these offices of convenience, all other 
functions of the associated person would be conducted and supervised 
through the designated branch office.
    The proposed rule also exempts from branch office registration any 
location that is primarily used to engage in non-securities activities 
(e.g., insurance) and from which the associated person effects no more 
than 25 securities transactions in any one calendar year; provided that 
advertisements or sales literature identifying such location also set 
forth locations from which the associated person is directly 
supervised. In addition, such securities activities would be conducted 
through and supervised by the associated person's designated branch 
office.
Proposed IM-3010-1 (Standards for Reasonable Review)
    Certain state securities regulators have expressed concern about 
their ability to cite members for violating the inspection and review 
standards set forth in NASD Rule 3010(c) where a registered person 
operates from his or her primary residence. They asked NASD staff to 
review the requirements of Rule 3010(c) and consider clarifying the 
standards.
    NASD staff believes that Rule 3010(c) is an industry benchmark, 
imposing high standards regarding supervisory obligations and, 
therefore, should not be amended. As an alternative to amending Rule 
3010(c), NASD is proposing new interpretive material, IM-3010-1 
(Standards for Reasonable Review). Proposed IM-3010-1 emphasizes the 
requirement that members already have to establish reasonable 
supervisory procedures and conduct reviews of locations taking into 
consideration, among other things, the firm's size, organizational 
structure, scope of business activities, number and location of 
offices, the nature and complexity of products and services offered, 
the volume of business done, the number of associated persons assigned 
to a location, whether a location has a principal on-site, whether the 
office is a non-branch location, and the disciplinary history of the 
registered person.\14\ The proposed interpretive material notes that 
members would be required to be especially diligent in establishing 
procedures and conducting reasonable reviews with respect to non-branch 
locations. NASD represents that the proposed interpretive material 
incorporates guidance previously issued on this matter by NASD.
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    \14\ NASD has filed a proposed rule change with Commission that 
seeks to adopt new Rule 3012 and amend other rules regarding the 
supervisory and supervisory control procedures of member firms. As 
part of such rule filing, Rule 3010(a) would be amended to provide 
that members must inspect (i) at least annually every office of 
supervisory jurisdiction and any branch office that supervises one 
or more branch locations; (ii) at least every three years every 
branch office that does not supervise one or more non-branch 
locations; and (iii) on a regular periodic schedule every non-branch 
location. The rule filing is pending. See Securities Exchange Act 
Release No. 48298 (August 7, 2003), 68 FR 48421 (August 13, 2003) 
(SR-NASD-2002-162).
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Development of Branch Office Registration System Through 
CRD[reg]
    NASD operates the CRD[reg] system pursuant to policies 
developed jointly with NASAA. NASD works with the Commission, NASAA, 
other members of the regulatory community, and member firms to 
establish policies and procedures reasonably designed to ensure that 
information submitted to and maintained on the CRD[reg] 
system is accurate and complete. Currently, members with numerous 
offices must register with each individual state that requires 
registration (including annual renewals). Failure of members to timely 
register offices with a specific jurisdiction can result in significant 
sanctions; for example, in at least one jurisdiction, failure to timely 
register (or renew registration) can result in the possible rescission 
of all trades originated at that location. A uniform branch office 
definition would establish a broader national standard that would 
facilitate the development of a branch office registration system 
through the CRD[reg]. NASD believes this approach would 
provide efficiency, clarity and cost savings to members and aid 
securities regulators in conducting regular examinations of such 
locations to further investor protections. NASD represents that members 
have strongly supported the use of CRD[reg] to register 
branch offices because of the enormous potential time and liability 
savings.\15\
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    \15\ See Item 5 below for a summary of comment letters received 
in response to Notice to Members 02-52 (August 2002).
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    As part of the initiative, NASD expects to seek Commission approval 
to amend Form U-4 to require members to disclose, but not register, all 
non-branch locations.\16\ Further, NASD expects that the system would 
include a requirement that a branch office list any other names 
(``doing business as'' or ``DBAs'') under which it may operate.
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    \16\ NASD staff is working with NASAA to identify the level of 
activities that would trigger this reporting requirement.
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    NASD expects to develop a new branch office registration form to 
collect data on each branch office. The new form also would require 
members to designate registered representatives to specific branch 
offices. NASD staff expects the system would include certain 
efficiencies; for example, when a member enters amendments to Form U-4, 
the system would automatically update corresponding items on the 
proposed new branch office registration form and vice versa.
    NASD believes that it would take up to one year to develop a 
centralized registration system for branch offices and expects to have 
the system live by mid-2004.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\17\ in 
general, and with Section 15A(b)(6) of the Act,\18\ in particular, 
which requires, among other things, that NASD's rules must 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 a uniform 
definition would better serve the securities industry, regulators, and 
the public by creating a broader national standard that would allow for 
central registration of branch offices with NASD through the 
CRD[reg] system. In addition, NASD represents that the 
proposed new interpretive material summarizes guidance previously 
issued on this matter by NASD.
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    \17\ 15 U.S.C. 78o-3.
    \18\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change, as amended, 
would 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

    A version of the proposed rule change, which included the 50-
business day requirement in the primary

[[Page 70064]]

residence exception, was published for comment in NASD Notice to 
Members 02-52 (August 2002) (``NtM 02-52''). The text of the proposed 
rule change is available at the principal office of NASD, and at the 
Commission. NASD sought comment on whether the proposed uniform 
definition would: (1) Provide clarity on when a location is required to 
be registered as a branch office; (2) provide a cost savings to firms 
as a result of centralized registration of locations through the 
CRD[reg] system; (3) minimize regulatory compliance burdens; 
(4) significantly affect the number of locations that a firm is 
required to register; and (5) adequately address evolving business 
practices based on technological innovations. Additionally, NASD sought 
comment on whether the proposed exceptions to the branch office were 
appropriate.
    NtM 02-52 provided members and other interested parties with a 
checklist of seven questions that they could use to respond to the 
request for comment in addition to, or in lieu of, sending written 
comments. NASD noted that the checklist did not cover all aspects of 
the proposal, and it encouraged commenters to provide written comments, 
as necessary. NASD extended the comment period from September 20, 2002 
to October 21, 2002 and received a total of 137 comments in response to 
NtM 02-52. A list of commenters and copies of the comment letters 
received in response to NtM 02-52 is available at the principal office 
of NASD, and at the Commission.
    NASD represents that seventy-eight of the 137 responses to NtM 02-
52 consisted solely of written comments (i.e., did not complete the 
checklist of seven questions provided). The remaining 59 commenters 
responded to the checklist either in whole or in part. A significant 
percentage of the commenters identified themselves as member firms or 
registered representatives associated with NASD member firms. NASD 
represents that an overwhelming number of the commenters favored the 
creation of a uniform definition of the term ``branch office'' that 
would permit centralized registration of locations through 
CRD[reg]. NASD has summarized the key comments below.
    An overwhelming majority of the commenters were in favor of NASD 
providing centralized registration of branch offices through the 
CRD[reg] system.\19\ Commenters stated that a uniform 
definition of branch office would greatly simplify their compliance 
obligations and that a uniform method of registering locations through 
CRD[reg] would be welcome.\20\ One commenter said that the 
current environment in which they are required to track numerous state 
definitions of ``branch office,'' fill out different forms to register 
locations as branch offices, comply with varying supervisory 
requirements for such offices and spend significant amounts of 
administrative time and energy complying is a very frustrating process 
and that the present situation is in dire need of immediate change.\21\ 
However, numerous commenters expressed concern that a central 
registration system, while an improvement, could be too costly.
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    \19\ See, e.g., Allmerica Financial comment letter, dated August 
28, 2002; Assist Investment Management Co., Inc. comment letter, 
dated October 18, 2002; Anderson LeNeave & Co. comment letter, dated 
September 13, 2002; B. Riley & Co. comment letter, dated September 
10, 2002; BB&T Investment Services, Inc. comment letter, dated 
September 18, 2002; Carillon Investments, Inc. comment letter, dated 
September 16, 2002; Empire Securities Corporation of Southern 
California comment letter, dated September 17, 2002; GWR 
Investments, Inc. comment letter, dated October 25, 2002; Investment 
Centers of America, Inc. comment letter, dated August 30, 2002; 
Lesko Securities, Inc. comment letter, dated September 18, 2002; 
Packerland Brokerage Services, Inc. comment letter, dated September 
9, 2002; Paradigm Equities, Inc. comment letter, dated October 18, 
2002; Presidio Financial Services, Inc. comment letter, dated 
October 3, 2002; Private Portfolio, Inc. comment letter, dated 
August 22, 2002; Raike Financial Group, Inc. comment letter, dated 
September 9, 2002; Securian Financial Services, Inc. comment letter, 
dated September 6, 2002; and Triad Advisors, Inc. comment letter, 
dated September 20, 2002.
    \20\ See, e.g., Associated Securities Corp. comment letter dated 
September 13, 2002; Horace Mann Investors, Inc. comment letter, 
dated September 20, 2002; Securian Financial Services, Inc. comment 
letter, dated September 6, 2002; and T. Rowe Price Investment 
Securities, Inc. comment letter, dated September 19, 2002.
    \21\ See The O.N. Equity Sales Company comment letter, dated 
October 21, 2002.
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    Commenters expressed concern about the impact of the proposed 
definition on the supervisory systems of their firms and related 
registration costs.\22\ Commenters stated that the proposed definition 
would significantly increase registration fees and supervisory 
obligations of members.\23\ Several commenters stated that the proposed 
definition would cause offices currently registered as branch offices 
to become OSJs since NASD Rule 3010(g)(1)(G) defines an OSJ as any 
office that supervises the activities of persons associated with other 
branch offices. Supervisors at these new OSJs would have to become 
registered principals.\24\ Other commenters noted that smaller offices 
in smaller communities may elect to shut down their securities business 
and restrict themselves to related fields in which they may now be 
involved, such as insurance and tax preparation--this would mean less 
access to the financial system for people in these communities.\25\
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    \22\ See, e.g., Mission Securities comment letter, dated 
September 17, 2002; and Oak Tree Securities comment letter, dated 
September 20, 2002.
    \23\ See, e.g., Lesko Securities, Inc. comment letter, dated 
September 18, 2002; National Planning Holdings, Inc. comment letter, 
dated September 3, 2002; National Association of Independent Broker/
Dealers comment letter, dated September 7, 2002; and Transamerica 
Financial Advisors comment letter, dated September 16, 2002.
    \24\ See, e.g., Granite Securities, LLC comment letter, dated 
September 20, 2002; Equity Services, Inc. comment letter, dated 
September 19, 2002; and Lincoln Financial Advisors, Corp. comment 
letter, dated October 17, 2002.
    \25\ See, e.g., AM&M Investment Brokers comment letter, dated 
September 23, 2002.
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    In addition, commenters were concerned that the proposed definition 
would significantly increase the number of branch offices they would 
have to register. Commenters stated that they have between 0 and 225 
branch offices currently registered but could have between 0 and 3,400 
registered branch offices under the proposed uniform definition (based 
on a proposed definition that includes a 50-business day restriction in 
the primary residence exception). One commenter stated that with such 
definition, the firm would go from 1 to 700 registered branch 
offices.\26\ A second commenter stated that they would go from 658 
registered branch offices to over 1,000 registered branch offices if 
the proposed definition is applied to its unregistered offices and 
residential offices.\27\
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    \26\ See Horace Mann Investors, Inc. comment letter, dated 
September 20, 2002.
    \27\ See Lincoln Financial Services, Inc. comment letter, dated 
October 17, 2002.
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    Several commenters stated that any costs savings resulting from 
centralized registration of branch offices through CRD[reg] 
would be greatly outweighed by the substantial increases in costs 
caused by having to register hundreds of remote locations as branch 
offices.\28\ Commenters generally were concerned that the proposed 
branch office definition (including the 50-business day limitation in 
the primary residence exception) would greatly increase their costs. 
These increased costs would include NASD and state registration fees, 
state corporation income tax filings, Fidelity bond coverage premiums, 
personnel time and travel expenses for inspections, and the hiring of 
more staff for supervision. A few commenters offered cost increase 
estimates ranging from $3,000 to $450,000 and elaborated on the reasons

[[Page 70065]]

for such increases.\29\ Several commenters said that they could not 
accurately gauge cost increases until they know how states will amend 
their definitions. Several commenters suggested that NASD consider 
reducing its registration fees so that the rule change is revenue 
neutral for NASD and the financial burden on firms is minimized.\30\ 
Commenters stated that they would realize certain cost efficiencies 
through centralized registration, provided the states also adopted the 
proposed definition.\31\ NASD believes that the removal of the 50-
business day requirement from the primary residence exception would 
alleviate some of the burdens that the original proposal raised 
regarding members' supervisory systems.
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    \28\ See, e.g., Transamerica Financial Advisors comment letter, 
dated September 16, 2002; and Horace Mann Investors, Inc. comment 
letter, dated September 20, 2002.
    \29\ See, e.g., Signator Investors, Inc. comment letter, dated 
October 16, 2002; and Granite Securities, LLC comment letter, dated 
September 20, 2002.
    \30\ See, e.g., Equity Services, Inc. comment letter, dated 
September 19, 2002; 1st Global Securities, Inc. comment letter, 
dated September 4, 2002; Moloney Securities Co., Inc. comment 
letter, dated October 19, 2002; Safeco Investment Services, Inc. 
comment letter, dated October 11, 2002; State Farm Insurance 
Companies comment letter, dated October 18, 2002; Sunset Financial 
Services comment letter, dated October 21, 2002; and The O.N. Equity 
Sales Company comment letter, dated October 15, 2002.
    \31\ See, e.g., The O.N. Equity Sales Company comment letter, 
dated October 15, 2002; and Metropolitan Life Insurance Company 
comment letter, dated September 30, 2002.
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    As noted earlier, the proposed definition as set forth in NtM 02-52 
provided an exception from branch office registration for a primary 
residence that is used for securities business for less than 50-
business days in any one calendar year and that satisfies, among other 
things, conditions similar to those found in the Commission's Books and 
Records Rules definition for ``office.'' An overwhelming majority of 
the commenters stated that they could not support the proposed 
definition with a 50-business day requirement because it would be too 
burdensome, time consuming, and difficult to enforce.\32\ Commenters 
argued that no added investor protection would be gained for this 
restriction.\33\ Commenters stated that branch office registration 
should be based on the types of activities conducted at a location and 
not based on the number of days logged at a given location.\34\ In 
addition, several commenters stated that they view the proposal to be 
unenforceable because just as firms are unable to track the number of 
times representatives are involved in securities transactions for their 
clients from a certain location, NASD will similarly be unable to track 
such usage.\35\
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    \32\ See, e.g., Empire Securities Corporation of Southern 
California comment letter, dated September 17, 2002; INVEST 
Financial Corporation comment letter, dated September 4, 2002; and 
Securian Financial Services, Inc. comment letter, dated September 6, 
2002.
    \33\ See, e.g., Securities Industry Association comment letter, 
dated October 21, 2002; and International Money Management Group, 
Inc. comment letter, dated September 26, 2002.
    \34\ See, e.g., AM&M Investment Brokers comment letter, dated 
September 23, 2002.
    \35\ See Keystone Capital Corporation comment letter, dated 
September 7, 2002; and XCU Capital Corporation comment letter, dated 
September 16, 2002.
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    Commenters, small firms in particular, stated that tracking the 50-
business day requirement would introduce a tremendous compliance 
burden.\36\ Commenters said the 50-business day limitation would 
require firms to closely monitor where work has been performed and for 
how long, and such monitoring would be prone to error. Commenters 
stated that the proposed definition provides sufficient restrictions on 
the use of a primary residence office and, so long as the activities 
are substantially limited (e.g., no holding out of the residence as a 
place to conduct securities business, and no handling of funds or 
securities at the location) and the location is properly supervised, 
the number of days logged at such residential location should not 
trigger registration of such location as a branch office.\37\ 
Commenters also stated that the resulting increase in supervisory costs 
would cause firms to act contrary to all employment trends by 
prohibiting people from working outside the office.
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    \36\ See, e.g., Pashley Financial comment letter, dated 
September 23, 2002; and Vasiliou & Company, Inc. comment letter, 
dated October 1, 2002.
    \37\ See, e.g., GWR Investments, Inc. comment letter, dated 
October 25, 2002; and A.G. Edwards, Inc. comment letter, dated 
October 11, 2002.
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    Commenters also noted that elimination of the 50-business day 
restriction would be consistent with the Books and Records Rules. They 
asserted that since the Books and Records Rules do not require records 
to be kept at these sites for examinations, there should be no reason 
to register a representative's primary residence regardless of the 
number of days it is used for securities business, provided the other 
conditions to the exception are satisfied.\38\
---------------------------------------------------------------------------

    \38\ See, e.g., Securian Financial Services, Inc. comment 
letter, dated September 6, 2002; and A.G. Edwards & Sons, Inc. 
comment letter, dated October 11, 2002.
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    Based on the comments to NtM 02-52, NASD is proposing to retain the 
definition described in NtM 02-52, without the 50-business day 
restriction contained in the primary residence exception. The 
elimination of the 50-business day requirement contained in the primary 
residence exception should mitigate the additional registration and 
supervisory burdens on firms that would result from the proposed rule 
change. In addition, NASD believes these modifications would not 
disrupt the business model used by many NASD member firms.
    Commenters also expressed concern that the temporary location 
exception in the proposed definition is too restrictive. The proposed 
definition provides an exception from branch office registration for a 
location, other than a primary residence, that is used for securities 
business less than 30 business days in any one calendar year and that 
satisfies the other conditions set forth in the primary residence 
exception. Certain commenters asked that the 30-business day limitation 
be eliminated for many of the same reasons described above with respect 
to the 50-business day requirement in the primary residence exception. 
NASD, however, believes that limiting the number of days such location 
can be used is consistent with the intent of this exception. The 
exception from registration is for a temporary location, as opposed to 
a primary residence, and a bright-line test of what constitutes 
``temporary'' is intended to make the application of this exception 
consistent.
    Commenters also sought clarification as to the application of the 
office of convenience exception. The proposed definition provides an 
exception from branch office registration for any office of 
convenience, where associated persons occasionally and exclusively by 
appointment meet with customers, and that is not held out to the 
public. Commenters sought clarification on whether this exception 
applies to associated persons generally or is limited strictly to bank 
circuit riders.\39\ In numerous discussions with members and others, 
NASD has made clear that this exception is applicable to all members 
that satisfy the conditions, not just bank circuit riders.
---------------------------------------------------------------------------

    \39\ See, e.g., BB&T Investment Services, Inc. comment letter, 
dated September 18, 2002.
---------------------------------------------------------------------------

    Commenters also raised concerns about the non-securities business 
location exception. The proposed definition provides an exception from 
branch office registration for any location that is used primarily to 
engage in non-securities activities and from which the associated 
person(s) effects no more than 25 securities transactions in any one 
calendar year so long as the address/phone number of the supervising 
office is set forth on all

[[Page 70066]]

advertisements. Commenters said that the non-securities business 
exception, which limits securities activities to no more than 25 
securities transactions annually, is vague and that the threshold 
number is too low.\40\ Commenters asked that the number of securities 
transactions allowed in any one-year be increased, or that certain 
systematic (automatic) payments not count towards the 25 securities 
transactions limit.\41\ In this regard, NASD intends to provide 
interpretive guidance to members on a case-by-case basis regarding 
specific application of the exception.
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    \40\ See, e.g., Northwestern Mutual Investment Services, LLC 
comment letter, dated September 20, 2002; and Carillon Investments, 
Inc. comment letter, dated September 16, 2002.
    \41\ See, e.g., Equity Services, Inc. comment letter, dated 
September 19, 2002.
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    Commenters also stated that the proposed rule is not in step with 
the prevalent use of modern communications technology to effect 
transactions from remote locations because it continues to use a 
``bricks and mortar'' approach to the definition.\42\ Commenters stated 
that modern communications technology, such as mobile telephones, 
laptop computers, and personal digital assistants (PDAs), is 
diminishing the need for branch offices to be in a physical location. 
With such technology, registered representative can effect transactions 
anywhere. These commenters asserted that consumers and investors now 
accept such means of conducting business and the proposed definition is 
outdated.\43\ Several commenters also stated that the proposal, which 
would require the listing of branch office locations, including primary 
residences, might invade the privacy of registered representatives. The 
commenters stated that addresses of primary residence offices should 
not be made publicly available.\44\
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    \42\ See, e.g., Associated Securities Corporation comment 
letter, dated September 13, 2002.
    \43\ See, e.g., Lincoln Financial Advisors comment letter, dated 
October 17, 2002; and Source Capital Group comment letter, dated 
September 19, 2002.
    \44\ See, e.g., Keystone Capital Corporation comment letter, 
dated September 7, 2002; Mission Securities Corporation comment 
letter, dated September 17, 2002; and West America Securities Corp. 
comment letter, dated September 17, 2002; and National Planning 
Holdings, Inc. comment letter, dated September 3, 2002.
---------------------------------------------------------------------------

    Based on the comments to NtM 02-52, NASD is proposing changes to 
the original proposal as described above. NASD believes that these 
modifications would address a majority of concerns raised by commenters 
to the original proposal. Overall, NASD believes that the proposed 
definition would establish a broader national standard for classifying 
such locations and would provide administrative and cost efficiencies 
to members through the creation of a centralized registration system on 
CRD[reg]. In addition, NASD believes that the proposed rule 
change would allow regulators to effectively monitor and audit 
locations and the activities conducted there without compromising 
investor protection. Each exception to the proposed branch office 
definition contains important safeguards and limitations. In 
particular, the primary residence exception contains the same 
safeguards provided in the Commission's Books and Records Rules 
exception for private residences (which also does not contain any 
restrictions on the number of business days an associated person may 
operate from his or her residence). NASD determined to remove the 50-
business day requirement from the primary residence exception because 
NASD believes it does not serve any added regulatory benefit and, 
instead, imposes substantial costs and burdens to the industry. Based 
on the extensive comments from the industry, NASD, on balance, does not 
believe that the costs of such provision outweigh the benefits.
    NASD would announce the effective date of the proposed definition 
of the term ``branch office'' in a Notice to Members. NASD expects the 
effective date of the proposed rule change would correspond with the 
commencement date of the centralized branch office registration system 
on CRD[reg].

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, as amended, or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, 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. In particular, the 
Commission seeks commenters' specific views on the primary residence 
exception and the divergent proposals by NASD and the NYSE with respect 
to the NYSE's proposed annual 50-business day limitation on engaging in 
securities activities from a primary residence.
    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Comments may also be submitted 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. SR-NASD-2003-104. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, comments should be sent in hardcopy or by e-mail but not 
by both methods. 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-2003-104 and should be submitted by January 6, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30987 Filed 12-15-03; 8:45 am]
BILLING CODE 8010-01-P