[Federal Register Volume 69, Number 51 (Tuesday, March 16, 2004)]
[Notices]
[Pages 12388-12390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5842]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49383; File No. SR-NASD-2004-014]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by National 
Association of Securities Dealers, Inc. to Adopt Interpretative 
Material 3150 to Establish Exemptions From the Reporting Requirements 
of NASD Rule 3150

March 9, 2004.
    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 27, 2004, 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 February 20, 
2004, NASD amended the proposed rule change.\3\ NASD filed the proposal 
pursuant to Section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(1)\5\ 
thereunder, in that the proposed rule change constitutes a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
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 Shirley H. Weiss, Associate General Counsel, 
Office of General Counsel, Regulatory Policy and Oversight, NASD, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, Commission, dated February 20, 2004 (``Amendment No. 
1''). In Amendment No. 1, NASD made technical corrections and minor 
language revisions to the filing. For purposes of calculating the 
60-day abrogation period, the Commission considers the period to 
have commenced on February 20, 2004, the date NASD filed Amendment 
No. 1. see 15 U.S.C. 78s(b)(3)(C).
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to adopt Interpretative Material 3150 (``IM-
3150'') to establish exemptions from the reporting requirements of NASD 
Rule 3150. The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
3150. Reporting Requirements For Clearing Firms
    (a) Each member that is a clearing firm or self-clearing firm shall 
be required to report to [the Association] NASD in such format as [the 
Association] NASD may require, prescribed data pertaining to the member 
and any member broker-dealer for which it clears. A clearing firm or 
self-clearing firm may enter into an agreement with a third party 
pursuant to which the third party agrees to fulfill the obligations of 
a clearing firm or self-clearing firm under this Rule. Notwithstanding 
the existence of such an agreement, each clearing firm or self-clearing 
firm remains responsible for complying with the requirements of this 
Rule.
    (b) Pursuant to the Rule 9600 Series, [the Association] NASD may in 
exceptional and unusual circumstances, taking into consideration all 
relevant factors, exempt a member or class of members, unconditionally 
or on specified terms, from any or all of the provisions of this Rule 
that it deems appropriate.

IM-3150. Exemptive Relief

    (a) Upon written request for exemptive relief pursuant to the Rule 
9600 Series, NASD generally will grant an exemption from the reporting 
requirements of Rule 3150 to a self-clearing firm that:
    (1) derives, on an annualized basis, at least 85 percent of its 
revenue from transactions in fixed income securities;
    (2) conducts an institutional business that settles transactions on 
an RVP/DVP basis, provided that such exemption from reporting shall 
apply only with respect to such institutional business unless NASD 
determines that any other remaining business otherwise qualifies for an 
exemption under this IM-3150 or is de minimis in nature; or
    (3) does not execute transactions for customers or otherwise hold 
customer accounts or act as an introducing broker with respect to 
customer accounts (e.g., that engages solely in proprietary trading, or 
that conducts business only with other broker-dealers or any other non-
customer counter-parties).
    (b) Upon written request for exemptive relief pursuant to the Rule 
9600 Series, NASD also generally will grant an exemption to a clearing 
firm with respect to one or more of the introducing firms for which it 
clears if the introducing firm meets one of the above-stated grounds 
for exemptive relief.
    (c) Any clearing or self-clearing firm that, due to a change in the 
facts pertaining to the operation and nature of its business, or the 
operation and nature of the business of a firm for which it clears, as 
applicable, no longer qualifies for an exemption previously granted by 
NASD from the reporting requirements of Rule 3150 must promptly report 
such change in circumstances to NASD, Department of Member Regulation, 
and commence compliance with the reporting requirements of Rule 3150.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD Rule 3150(a) requires each clearing firm (both those that are 
self-clearing and those that clear for other firms) to report to NASD, 
on a daily basis, and in a format determined by NASD, prescribed data 
pertaining to the member and any member broker-dealer for which it 
clears. This data is reported into NASD's electronic surveillance 
system, which identifies member ``exceptions'' based on historical and 
current comparisons of member data. The exceptions trigger follow-up 
reviews and possible member examinations. As provided in NASD Rule 
3150(b), NASD may, in exceptional and unusual circumstances, taking 
into consideration all relevant factors, exempt a member or class of 
members, unconditionally or on specified terms, from any or all of the 
provisions of

[[Page 12389]]

NASD Rule 3150 that it deems appropriate.
    NASD initially notified its members of the availability of certain 
exemptions in a letter dated June 20, 2002,\6\ in which NASD stated 
that it would exempt the following classes of self-clearing members 
from the filing requirements of NASD Rule 3150:
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    \6\ NASD has published this letter on the NASD Web site at 
http://www.nasdr.com/insite_mem_letters.asp.
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    1. members that derive the preponderance of their revenue for the 
last two calendar years from fixed income securities;
    2. members that conduct an institutional business and that settle 
transactions on an RVP/DVP basis;
    3. members that conduct no traditional retail securities business.
    Based on these classes and NASD's current regulatory needs, 
proposed IM-3150 would establish three classes of self-clearing members 
that may be exempt from the reporting requirements of NASD Rule 
3150(a).
    Under proposed IM-3150(a)(1), NASD generally would exempt self-
clearing firms that are primarily engaged in transactions in fixed 
income securities. Proposed IM-3150(a)(1) replaces the term 
``preponderance of their revenue'' set forth in the June 20, 2002 
letter with the phrase ``at least 85 percent of its revenue'' and 
eliminates the requirement that members must have derived at least 85 
percent of their revenue for the last two calendar years from fixed 
income securities. Instead, to qualify for this exemption, members must 
be able to ascertain that transactions in fixed income securities 
account for at least 85 percent of their annual revenue. Annualizing 
the 85 percent requirement allows firms to average their fixed income 
business over one year and takes into account daily, weekly, and 
monthly fluctuations in a firm's sources of revenue. Proposed IM-
3150(a)(1) further clarifies that members must have derived at least 85 
percent of their revenue from transactions in fixed income securities. 
These changes are consistent with the exemptions NASD staff has granted 
under this standard pursuant to the June 20, 2002 letter.
    Under proposed IM-3150(a)(2), NASD generally would continue to 
exempt the institutional business of self-clearing firms that settle on 
an RVP/DVP basis. With respect to any other remaining business of such 
self-clearing firms, NASD will determine whether that business 
otherwise qualifies for an exemption under IM-3150 or is sufficiently 
de minimis as to not require reporting under NASD Rule 3150.
    NASD is proposing to modify the language of the exemption 
pertaining to ``members that conduct no traditional retail securities 
business'' in order to clarify the types of firms that might qualify 
for this exemption. Accordingly, proposed IM-3150(a)(3) would create an 
exemption for firms that do not execute transactions for customers or 
otherwise hold customer accounts or act as an introducing broker with 
respect to customer accounts (e.g., engage solely in proprietary 
trading, or conduct business only with other broker-dealers).
    Additionally, under proposed IM-3150(b), NASD may grant an 
exemption to a clearing firm with respect to one or more of the 
introducing firms for which it clears if the introducing firm falls 
within one of the three proposed classes. Proposed IM-3150 continues to 
require members to request all exemptions from NASD Rule 3150(a) in 
writing pursuant to the Rule 9600 Series, including possible exemptions 
under proposed IM-3150. Members that do not fall within one or more of 
the three enumerated classes set forth in proposed IM-3150 are not 
precluded from requesting an exemption from NASD Rule 3150(a), pursuant 
to Rule 3150(b) and the Rule 9600 Series, if they believe their 
business activities justify such a request.
    NASD is currently reviewing the electronic surveillance system's 
data requirements in view of current regulatory developments. Among 
other things, NASD will be reassessing whether firms that primarily 
conduct an institutional business should be exempted from the reporting 
requirements of NASD Rule 3150. In the event NASD seeks to amend or 
rescind the classes of firms for which exemptions from NASD Rule 3150 
generally will be available under proposed IM-3150, NASD will file a 
proposed rule change to amend IM-3150. Additionally, in the event there 
is a change in the facts pertaining to a self-clearing firm's business 
such that the firm would no longer qualify for an exemption granted by 
NASD under IM-3150, the exemption is revoked under IM-3150(c), and the 
affected self-clearing firm must notify the Department of Member 
Regulation and commence reporting under NASD Rule 3150.\7\
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    \7\ It is the position of NASD that any exemptive letter granted 
may be rendered a nullity when the material facts upon which such 
exemptive letter is premised have changed or are otherwise 
determined to be false. In view of the fact that NASD processes the 
information collected under NASD Rule 3150 for use in effectuating 
its examination program, NASD believes it is important to expressly 
state this position in the rule and require affected self-clearing 
broker-dealers to notify the Department of Member Regulation of the 
lapse of any exemption under IM-3150 because of a disqualifying 
change in the material facts.
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    In addition, the proposed rule change replaces several references 
to ``the Association'' in the text of the proposed rule change with 
``NASD.'' NASD no longer refers to itself using its full corporate name 
or ``the Association.'' Instead, NASD uses ``NASD'' unless otherwise 
appropriate for corporate or regulatory reasons.\8\
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    \8\ Telephone conversation between Shirley H. Weiss, Associate 
General Counsel, Office of General Counsel, Regulatory Policy and 
Oversight, NASD, and Sheila D. Swartz, Attorney, Division of Market 
Regulation, Commission (March 2, 2004).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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 the proposed rule change is 
designed to accomplish these ends by publishing the grounds upon which 
NASD generally will exempt self-clearing and clearing firms from the 
reporting requirements of NASD Rule 3150(a).
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    \9\ 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 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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposal has become effective pursuant to Section 
19(b)(3)(A) of the Act,\10\ and Rule 19b-4(f)(1)\11\ thereunder, in 
that it constitutes a stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
rule.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is

[[Page 12390]]

necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2004-014. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review 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 number SR-NASD-2004-014 and should be 
submitted by April 6, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-5842 Filed 3-15-04; 8:45 am]
BILLING CODE 8010-01-P