[Federal Register Volume 68, Number 250 (Wednesday, December 31, 2003)]
[Notices]
[Pages 75681-75682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32179]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48969; File No. SR-NASD-2003-07]


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

December 22, 2003.
    On January 17, 2003, the National Association of Securities 
Dealers, Inc. (``NASD''), filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NASD Rules 1011, 1014 
and 1017. On September 17, 2003, NASD filed Amendment No. 1 to the 
proposed rule change.\3\ On October 16, 2003, NASD filed Amendment No. 
2 to the proposed rule change.\4\ Notice of the proposed rule change, 
as amended, was published for comment in the Federal Register on 
October 23, 2003.\5\ No comments were received on the proposed rule 
change. This order approves the proposed rule change.
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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 England, Assistant Director, Division of Market 
Regulation, Commission, dated September 16, 2003.
    \4\ See letter from Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katherine England, Assistant Director, Division of Market 
Regulation, Commission, dated October 15, 2003.
    \5\ See Securities Exchange Act Release No. 48651 (October 17, 
2003), 68 FR 60750 (``Notice'').
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    In brief, NASD would amend certain of its rules that govern 
applications for NASD membership and applications for approval of 
changes in business structure by NASD members. Currently, NASD Rule 
1014 delineates certain factors, such as pending or past regulatory 
actions, that NASD may consider in assessing an applicant's ability to 
comply with applicable law and regulations, NASD rules, and just and 
equitable principles of trade. Furthermore, Rule 1017 requires existing 
NASD members to apply to NASD for approval of continued membership in 
the event of certain changes to their ownership, control or business 
operations. In reviewing such applications, NASD staff also considers 
the factors listed in Rule 1014. NASD asserts that it has proposed 
these changes in order to strengthen its ability to protect investors 
with pending claims, awards or judgments against NASD members, and to 
otherwise detect and prevent misconduct.
    Accordingly, NASD would modify Rule 1017(a)(3) regarding when a 
member must request approval of a disposition of assets. The rule 
currently requires an NASD member to file an application for an 
``acquisition of substantially all of the member's assets, unless the 
acquiring member is a member of the New York Stock Exchange, Inc. 
[NYSE].'' NASD would amend Rule 1017(a)(3) in three ways. First, it 
would add that transfers of a firm's assets, and not only acquisitions, 
would require approval. Second, NASD would require approval of a 
transfer unless both parties to the transaction, and not just the 
acquiring party, are members of the NYSE. Third, NASD would change the 
amount of a transfer that requires a request for approval from 
``substantially all'' of the member's assets to ``25% or more in the 
aggregate 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.''
    NASD would also modify the factors listed in Rule 1014 that it 
considers in reviewing applications for membership and continued 
membership by adding pending arbitrations or civil actions against the 
applicant, as well as unpaid arbitration awards, or other adjudicated 
customer awards against the applicant and other persons who may have 
significant control or influence over the applicant. Such other persons 
would include the applicant's 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 the applicant's net capital.
    In addition, NASD's proposal would provide for a rebuttable 
presumption that an application for membership or continued membership 
should be denied when an analysis of the applicant's history reveals 
any one of the negative events enumerated in Rule 1014(a)(3)(A), (C), 
(D) and (E).\6\ An applicant could overcome this presumption by 
demonstrating that it could nevertheless meet NASD's membership 
standards.
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    \6\ See Notice, 68 FR at 60751.
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    Finally, for purposes of its rules governing the above-described 
application processes, NASD would amend its definition of ``Associated 
Person.'' The term, as defined in Rule 1011(b), would be amended to 
bring

[[Page 75682]]

non-natural controlling persons within the scope of its coverage.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association.\7\ 
Specifically, the Commission finds that the proposal is consistent with 
section 15A(b)(6) of the Act,\8\ which requires, among other things, 
that NASD's rules be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest. The 
Commission believes that the amendments should improve NASD's ability 
to ensure that its membership is not likely to engage in conduct that 
may be harmful to public investors.
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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that NASD's proposed changes to Rule 1017 
are proper. First, the adoption of a defined quantitative measure of 
the amount of assets transferred that will require an application for 
approval should provide a greater degree of clarity to NASD members 
such that they may more readily anticipate when it will be necessary to 
file an application. The Commission also notes that the changes to Rule 
1017 should result in its application to a broader range of 
transactions, in that applications for approval will now be required 
for any form of asset transfer, and not only acquisitions, and will be 
required except where both parties are members of the NYSE. This should 
enhance the NASD's ability to ensure that such transactions do not 
result in a member or its owners insulating itself or themselves from 
the responsibility to pay existing or potential customer claims.
    The Commission believes that NASD's codification of a rebuttable 
presumption to deny an application for membership or continued 
membership where the applicant's history reflects any of the negative 
events specified in Rule 1014(a)(3)(A) and (C) through (E) is also 
proper. The Commission notes that this presumption should provide 
additional guidance to applicants as to how such events will be 
assessed in considering an applicant's ability to comply with NASD's 
membership standards. Moreover, the change should serve to provide 
notice to potential applicants of the consequences of misconduct, and 
thereby discourage it. The Commission also notes that the presumption 
may be overcome if the applicant can demonstrate that it is otherwise 
capable of meeting NASD's membership standards. The Commission believes 
that, because NASD is a member organization charged with the protection 
of investors and the public interest, it is fair to require applicants 
to show why membership should be granted, notwithstanding any prior 
history of misconduct.
    As a further measure to encourage compliance with arbitration or 
other awards, and to deny entry to those who disregard them, NASD has 
proposed to amend Rule 1014(a)(3) to add pending arbitrations or civil 
actions to the list of factors considered in deciding whether to grant 
membership or continued membership. Further, NASD would add the 
existence of unpaid arbitration awards or settlements, or other 
adjudicated customer awards, to the factors listed in Rule 1014(a)(3) 
that would trigger the presumption against granting approval of 
membership or continued membership. NASD would consider this factor not 
only in reviewing the member's application, but also in reviewing its 
control persons and other persons who, by virtue of other arrangements 
or capital structure, exercise control over the applicant. The 
Commission believes that these changes are appropriate because such 
matters may demonstrate an applicant's ability or willingness to comply 
with the Act, the regulations of the Commission and the rules of NASD. 
Moreover, the new provisions should provide incentive to NASD members, 
potential NASD members, and persons that control NASD members to comply 
with arbitration or other awards.
    Finally, the Commission believes that NASD's expansion of the 
definition of ``Associated Person,'' for purposes of its membership 
rules, to include non-natural persons is proper. The Commission 
believes the inclusion of such persons should permit NASD to examine a 
broader range of entities that potentially control an applicant, and 
thereby ensure that its ability to assess the applicant and the 
applicant's business history are not unnecessarily restricted.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-NASD-2003-07) be, 
and it hereby is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-32179 Filed 12-30-03; 8:45 am]
BILLING CODE 8010-01-P