[Federal Register Volume 69, Number 71 (Tuesday, April 13, 2004)]
[Notices]
[Pages 19586-19591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49537; File Nos. SR-NASD-2002-108 and SR-NYSE-2002-35]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. and New York Stock Exchange, Inc.; Order Approving 
Proposed Rule Changes Relating to Business Continuity Planning of 
Members and Notice of Filing and Order Granting Accelerated Approval of 
NASD Amendment Nos. 6, 7, and 8

April 7, 2004.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(''Act'') \1\ and Rule 19b-4 thereunder,\2\ the National Association of 
Securities Dealers, Inc. (``NASD'') on August 7, 2002, and the New York 
Stock Exchange, Inc. (``NYSE'') on August 16, 2002, filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') proposed 
rule changes that would require every member to establish and maintain 
a business continuity plan (``BCP'') and to provide either NASD or 
NYSE, as appropriate, with certain emergency contact information. On 
September 9, 2002, the Commission published notice of both proposals in 
the Federal Register (``Original Notices'').\3\ The Commission received 
four comments in response to the Original Notices.\4\ Thereafter, NASD 
and NYSE submitted amendments to their respective proposals, which 
contained their responses to the comment letters.\5\ The Commission 
published notice of the amended proposals in the Federal Register 
(``Second Notices'').\6\ The Commission received four comment letters 
in response to the Second Notices.\7\ Subsequently, NYSE submitted a 
fourth amendment \8\ and NASD submitted its fourth and fifth 
amendments, which amended the proposals as published in the Second 
Notices and responded to the comments received in response to the 
Second Notices.\9\ The Commission published notice of these amendments 
on September 26, 2003 (``Third Notices'').\10\ The Commission received 
14 comments in response to the Third Notices.\11\ On February 10, 2004, 
NASD submitted a sixth amendment, which responded to the issues raised 
by the commenters in response to the Third Notice.\12\ NASD submitted 
its seventh and eight amendments on March 23, 2004, and April 5, 2004, 
respectively, which made minor changes to its proposal.\13\ Finally, on 
March 24, 2004,

[[Page 19587]]

NYSE submitted a letter responding to the issues raised by the 
commenters in response to the Third Notice.\14\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 46443 (August 30, 
2002), 67 FR 57264 (File No. SR-NYSE-2002-35); and 46444 (August 30, 
2002), 67 FR 57257 (File No. SR-NASD-2002-108).
    \4\ One commenter submitted a single letter that addressed both 
Original Notices. See letter from Melvyn Musson, Business Continuity 
Planning Manager, Edward D. Jones & Co., to Jonathan G. Katz, 
Secretary, SEC, dated September 30, 2002 (``Edward Jones 1''). A 
second commenter submitted two letters that addressed each proposal 
separately. See letters from Jerry W. Klawitter, Securities Industry 
Association (``SIA'') Business Continuity Planning Committee and 
Bond Market Association (``BMA'') Business Continuity Management 
Council, to Margaret H. McFarland, Deputy Secretary, SEC, dated 
September 30, 2002 (collectively, ``SIA/BMA 1''). A third commenter 
submitted a letter that addressed only the NASD Original Notice. See 
letter from Frances M.. Stadler, Deputy Senior Counsel, Investment 
Company Institute, to Jonathan G. Katz, Secretary, SEC, dated 
September 30, 2002 (``ICI'').
    \5\ See letters from Brian J. Woldow, Office of General Counsel, 
NASD, to Katherine A. England, Division of Market Regulation 
(``Division''), SEC, dated December 11, 2002 (``NASD Amendment No. 
1''); January 8, 2003 (``NASD Amendment No. 2''); and February 19, 
2003 (``NASD Amendment No. 3''). See also letters from Darla C. 
Stuckey, Corporate Secretary, NYSE, to Nancy Sanow, Division, SEC, 
dated January 10, 2003 (``NYSE Amendment No. 1''); March 6, 2003 
(``NYSE Amendment No. 2''); and March 26, 2003 (``NYSE Amendment No. 
3''). NYSE Amendment No. 3 incorporated and superceded NYSE 
Amendments No. 1 and 2.
    \6\ See Securities Exchange Act Release Nos. 47441 (March 4, 
2003), 68 FR 11432 (March 10, 2003) (noticing Amendments No. 1, 2, 
and 3 of NASD proposal); and 48502 (March 27, 2003), 68 FR 16334 
(April 3, 2003) (noticing Amendment No. 3 of NYSE proposal).
    \7\ Two commenters addressed only the NASD Second Notice. See 
letters from Melvyn Musson, Business Continuity Planning Manager, 
Edward D. Jones & Co., to Jonathan G. Katz, Secretary, SEC, dated 
March 28, 2003 (``Edward Jones 2''); Thomas K. Heard, Associate Vice 
President & Director of Contingency Planning, A.G. Edwards & Sons, 
Inc., to Jonathan G. Katz, Secretary, SEC, dated March 31, 2003 
(``A.G. Edwards''). One commenter submitted separate letters to each 
of the NASD and NYSE Second Notices. See letters from Jerry W. 
Klawitter, SIA Business Continuity Planning Committee and BMA 
Business Continuity Management Council, to Jonathan G. Katz, 
Secretary, SEC, dated March 31, 2003 (responding to NASD Second 
Notice); Jerry W. Klawitter, SIA Business Continuity Planning 
Committee and BMA Business Continuity Management Council, to 
Jonathan G. Katz, Secretary, SEC, dated April 24, 2003 (responding 
to NYSE Second Notice) (collectively, ``SIA/BMA 2'').
    \8\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Katherine A. England, Division, SEC, dated September 11, 2003 
(``NYSE Amendment No. 4'').
    \9\ See letters from Brian J. Woldow, Office of General Counsel, 
NASD, to Katherine A. England, Division, SEC, dated September 3, 
2003 (''NASD Amendment No. 4'') and September 16, 2003 (``NASD 
Amendment No. 5'').
    \10\ See Securities Exchange Act Release Nos. 48502 (September 
17, 2003), 68 FR 55691 (NYSE); and 48503 (September 17, 2003), 68 FR 
55686 (NASD).
    \11\ One comment letter addressed the Third Notices of both the 
NASD and the NYSE. See letter from Jerry W. Klawitter, SIA Business 
Continuity Committee, to Jonathan G. Katz, Secretary, SEC, dated 
October 16, 2003 (``SIA 3''). Eight comment letters were nearly 
identical and addressed only the NASD Third Notice. See letters from 
Jack R. Handy, Jr., President & CEO, Financial Network Investment 
Corporation, dated October 14, 2003; Patrick H. McEvoy, President/
CEO, IFG Network Securities, Inc., undated but received by the 
Commission on October 15, 2003; Patrick H. McEvoy, President/CEO, 
Multi-Financial Securities Corporation, undated but received by the 
Commission on October 15, 2003; Patrick H. McEvoy, President/CEO, 
Vestax Securities Corporation, undated but received by the 
Commission on October 15, 2003; Ronald R. Barhorst, President, ING 
Financial Advisers, LLC, undated but received by the Commission on 
October 16, 2003; Karl Lindberg, President, Locust Street Securities 
Inc., undated but received by the Commission on October 16, 2003; 
Kevin P. Maas, Chief Compliance Officer, PrimeVest Financial 
Services, undated but received by the Commission on October 15, 
2003; Barbara Stewart, President, Washington Square Securities, 
Inc., undated but received by the Commission on October 15, 2003, to 
Secretary, SEC (collectively, ``Joint Commenters''). Three 
additional comment letters addressed only the NASD Third Notice. See 
letters from Henry H. Hopkins, Vice President and Chief Legal 
Counsel, and John R. Gilner, Vice President & Associate Legal 
Counsel, T. Rowe Price Investment Services, Inc., to Jonathan G. 
Katz, Secretary, SEC, dated October 16, 2003 (``T. Rowe Price''); 
Joseph H. Moglia, CEO, Ameritrade Holding Corporation, to Margaret 
H. McFarland, Deputy Secretary, SEC, dated October 17, 2003 
(``Ameritrade''); W. Thomas Boulter, Vice President & Chief 
Compliance Officer, Jefferson Pilot Securities Corporation, to 
Jonathan G. Katz, Secretary, SEC, dated October 17, 2003 
(``Jefferson Pilot''). One commenter submitted separate but nearly 
identical letters to both the NASD Third Notice and the NYSE Third 
Notice. See letters from Barry S. Augenbraun, Senior Vice President 
and Corporate Secretary, Raymond James Financial, Inc., to Jonathan 
G. Katz, Secretary, SEC, dated October 16, 2003 (collectively, 
``Raymond James'').
    \12\ See letter from Brian J. Woldow, Office of General Counsel, 
NASD, to Katherine A. England, Division, SEC, dated February 10, 
2004 (''NASD Amendment No. 6'').
    \13\ See letters from Shirley H. Weiss, Associate General 
Counsel, NASD, to Katherine A. England, Division, SEC, dated March 
23, 2004 (``NASD Amendment No. 7''), and April 5, 2004 (``NASD 
Amendment No. 8'').
    \14\ See letter from Darla C. Stuckey, Corporate Secretary, 
NYSE, to Katherine A. England, Division, SEC, dated March 23, 2004 
(``NYSE Response Letter'').
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    This order approves the NASD and NYSE proposals, as amended, and 
approves NASD Amendment Nos. 6, 7, and 8 on an accelerated basis. In 
addition, the Commission solicits comment from interested persons on 
NASD Amendment Nos. 6, 7, and 8.

II. Description of the Proposals

    Proposed NASD Rule 3510(a) and proposed NYSE Rule 446(a) set forth 
a basic requirement for NASD and NYSE members and member organizations 
to create, maintain, review, and update a written BCP that identifies 
procedures relating to an emergency or significant business disruption. 
Under the proposed rules, members' BCPs ``must be reasonably designed 
to enable the member to meet its existing obligations to customers'' 
and address members' existing relationships with other broker-dealers 
and counter-parties. A member of NASD or NYSE is required to make its 
BCP available to its respective self-regulatory organization (``SRO'') 
upon request.\15\
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    \15\ See proposed NASD Rule 3510(a) and proposed NYSE Rule 
446(a).
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    Proposed NASD Rule 3510(b) and proposed NYSE Rule 446(b) require 
each member to update its BCP in the event of any material change to 
the member's operations, structure, business, or location. In addition, 
the proposed rules require every member to conduct, at a minimum, an 
annual review of its BCP to determine whether any modifications are 
necessary in light of changes to the member's operations, structure, 
business, or location.
    Both proposed rules require that a BCP be approved by the member. 
Proposed NASD Rule 3510(d) requires a member of senior management, who 
must be a registered principal, to approve a BCP and be responsible for 
conducting the annual review. Proposed NYSE Rule 446(g) requires a 
senior officer, as defined in NYSE Rule 351(e), to approve and review 
the BCP on an annual basis.
    The proposed rules set forth the elements that a BCP must address, 
if applicable,\16\ which shall be tailored to the size and needs of the 
member.\17\ Specifically, each BCP must address data back-up and 
recovery (hard copy and electronic); mission critical systems; \18\ 
financial and operational assessments; \19\ alternate communications 
between customers and the member; alternate communications between the 
member and its employees; alternate physical location of employees; 
\20\ critical business constituent, bank, and counterparty impact; 
regulatory reporting; communications with regulators; and how the 
member will assure customers' prompt access to their funds and 
securities in the event that the member determines that it is unable to 
continue its business. Finally, if a member relies on another entity 
for any of the required elements, the BCP must address the relationship 
with the third party.\21\
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    \16\ The proposed rules provide that if an element is not 
applicable to a member the BCP must contain the rationale as to why 
such element is not included in the BCP. See proposed NASD Rule 
3510(c) and proposed NYSE Rule 446(b).
    \17\ See proposed NASD Rule 3510(c) and proposed NYSE Rule 
446(c).
    \18\ NASD and NYSE proposed substantively the same definition 
for ``mission critical system.'' The proposed rules define ``mission 
critical system'' as any system that is necessary, depending on the 
nature of a member's business, to ensure prompt and accurate 
processing of securities transactions, including, but not limited 
to, order taking, order entry, execution, comparison, allocation, 
clearance and settlement of securities transactions, the maintenance 
of customer accounts, access to customer accounts and the delivery 
of funds and securities. See proposed NASD Rule 3510(f)(1) and 
proposed NYSE Rule 446(e).
    \19\ NASD and NYSE proposed substantively the same definition 
for ``financial and operation assessment.'' As defined, a 
``financial and operational assessment'' means a set of written 
procedures that allows a member to identify changes in its 
operational, financial, and credit risk exposure. See proposed NASD 
Rule 3510(f)(2) and proposed NYSE Rule 446(f).
    \20\ NASD's added this element in its Amendment No. 8. 
Therefore, under the final proposals, NASD and NYSE will require 
their members to address the exact same aspects of business 
continuity.
    \21\ NASD and NYSE stated that this provision would permit a 
member that is a subsidiary of another entity to satisfy its 
obligations under the rules by participation in a corporate-wide BCP 
of the parent, even if the parent were not itself a member. However, 
the parent company's BCP would be required to comply with the 
requirements of the BCP rule and would have to be available to NASD 
and/or NYSE (as appropriate) upon request.
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    Proposed NASD Rule 3510(e) and proposed NYSE Rule 446(d) each 
require a member to disclose to its customers how its BCP addresses the 
possibility of a future significant business disruption and how the 
member plans to respond to events of varying scope. Such disclosure, at 
a minimum, must be made in writing to customers at account opening, 
posted on the member's Web site (if the member maintains a Web site), 
and mailed to customers upon request. As proposed, an NASD or NYSE 
member would not be required to disclose its actual plan. Instead, the 
member would be required to disclose only a summary of how its BCP 
addressed the possibility of significant business disruptions and 
generally how the member planned to respond.
    Proposed NASD Rule 3520(a) requires each member to report to NASD 
emergency contact information, which includes the designation of two 
emergency contact persons.\22\ The emergency contact persons must be 
members of senior management and registered principals. Proposed NASD 
Rule 3520(b) requires members to promptly update emergency contact 
information in the event of a material change and requires the member's 
Executive Representative, or his or her designee, to review and update 
such emergency contact information within 17 days after the end of each 
calendar quarter.
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    \22\ NASD originally proposed to require certain additional 
emergency information, such as location of books and records 
(including back-up locations), clearance and settlement information, 
identification of key banking relationships, and alternative 
communication plans for investors. In its Amendment No. 8, NASD 
withdrew this portion of the proposal and deleted the words ``Among 
other things'' from proposed NASD Rule 3520(a).
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    Proposed NYSE Rule 446(g) requires a member or member organization 
to designate one or more emergency contact persons who must be senior 
officers of the firm; to provide the name, title, mailing address, e-
mail address, telephone number, and fax number of such person(s); and 
to notify NYSE promptly of any change in such designations.
    NASD proposes that the effectiveness of its new rules be calculated 
from the date of publication of the Commission's approval order, with 
different effective dates for clearing firms and introducing firms. 
Each NASD-member clearing firm must establish a BCP, as required under 
proposed NASD Rule 3510, within 120 days of the publication of the 
Commission's approval order. An NASD-member introducing firm must 
establish a BCP, as required under proposed NASD Rule 3510, within 150 
days of the publication of the Commission's approval order. All NASD 
members (both clearing and introducing firms) must designate their 
emergency contact persons, as required in proposed NASD Rule 3520, 
within 60 days of publication of the Commission's approval order. NYSE 
proposes that its rule will take effect 120 days after Commission 
approval.
    Finally, NASD proposes to offer an optional repository service for 
its members' BCPs. In its Amendment No. 8, however, NASD stated that 
this online repository service would be operated through an outside 
vendor and that any NASD members wishing to use

[[Page 19588]]

this service would pay a monthly fee directly to the repository.

III. Summary of Comments

    In total, the Commission received 22 comment letters on the 
proposed rule changes.\23\ Generally, the commenters supported the 
proposed new rules.\24\ As noted above, NASD and NYSE generally 
addressed the issues raised in the comment letters received in response 
to the Original Notices and the Second Notices in subsequent 
amendments.\25\ These amendments, including NASD's and NYSE's responses 
to the comment letters, were published by the Commission in the Federal 
Register.\26\ In response to the Third Notices, the Commission received 
14 comment letters.\27\ NASD and NYSE submitted responses to the issues 
raised in the comments letters the Commission received in response to 
the Third Notices.\28\ The issues raised by the commenters in response 
to the Third Notices and NASD and NYSE responses are summarized below.
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    \23\ See supra notes 4, 7 and 11.
    \24\ See Ameritrade, Edward Jones 1, ICI, Jefferson Pilot, Joint 
Commenters, Raymond James, and SIA/BMA 1.
    \25\ See supra notes 5, 8, and 9 and accompanying text.
    \26\ See supra notes 6 and 10.
    \27\ See supra note 11.
    \28\ See supra notes 12 and 14.
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A. Meeting Existing Obligations to Customers

    In the Third Notices, NASD and NYSE amended their respective 
proposals to provide that the procedures set forth in a BCP should be 
reasonably designed to enable a member to meet its existing obligations 
to customers and address existing relationships with other broker-
dealers and counter-parties. A majority of commenters \29\ advocated 
returning to the language published in the Second Notices, which stated 
that each member's plan must be ``reasonably designed to enable the 
member to continue its business.'' Specifically, the Joint Commenters 
argued that the phrase ``meet its existing obligation to customers'' 
was vague and did not adequately clarify that a member would not be 
required to continue its business. They also argued that the phrase 
``address their existing relationships with other broker-dealers and 
counter-parties'' did not stipulate what level of detail would be 
required in the BCP and appeared to add new requirements to the BCP 
rather than clarifying that a member would not be required to stay in 
business.
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    \29\ See Ameritrade and Joint Commenters.
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    NASD and NYSE, in response, declined to amend their proposals as 
suggested. In explaining their decision not to amend this provision of 
the proposed rules, NASD and NYSE noted the following statement made by 
the Commission:
    The decision by a broker-dealer to risk capital or provide 
brokerage services on an ongoing basis is, in essence, a matter of 
business judgment. Given the competitive nature of the securities 
business, however, the Commission expects there to be incentives for 
broker-dealers to be prepared to participate in the markets following a 
wide-scale disruption as soon as the markets' trading facilities become 
available.\30\
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    \30\ Business Continuity Planning for Trading Markets, 
Securities Exchange Act Release No. 48545 (September 25, 2003), 68 
FR 56656, 56658 (October 1, 2003) (``Policy Statement'').
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    In its Amendment No. 4, NASD stated that it did not intend members 
to interpret its rule to require them to continue their business in the 
event of a significant business disruption. NYSE stated that it 
believed that further amendment was not warranted because its position 
that members are not required to continue its business is clear and 
that this position is consistent with the Commission's Policy 
Statement.

B. Plan Elements

1. Critical Business Constituent, Banks, and Counter-Party Impact
    In responding to the Third Notices, one commenter commended the 
revision to limit the scope of this provision to ``critical'' counter-
parties.\31\ However, the commenter requested that NASD and NYSE 
communicate any criteria that they develop to define such critical 
relationships at the earliest opportunity. Another commenter argued 
that the proposal appeared to impose on members the ``impossible 
requirement'' of addressing how they would remedy the possible failure 
of industry-wide systems on which all parties must rely, such as the 
Depository Trust Company.\32\ Several commenters argued that because 
the terms are not defined the intent of the rule language was vague and 
ambiguous.\33\ Finally, one commenter recommended that NASD and NYSE 
should use the same rule language to avoid confusion.\34\
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    \31\ See SIA 3.
    \32\ See Raymond James.
    \33\ See Joint Commenters.
    \34\ See SIA 3.
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    In its Amendment No. 6, NASD responded that it believed that 
members should be responsible for identifying those relationships that 
it deems critical for purposes of complying with the rule. NASD, 
however, did state that it would consider, based on its experience with 
the rule following its adoption, whether to enumerate specific 
relationships that it views critical to all members. In addition, NASD 
amended its proposal to read ``critical business constituent, bank, and 
counter-party impact'' so that it is identical to the NYSE proposal.
2. Customer Access to Funds and Securities
    As noted above, proposed NASD Rule 3510(c)(9) and proposed NYSE 
446(c)(10) requires a member's BCP to address ``[h]ow the member will 
assure customers'' prompt access to their funds and securities in the 
event that the member determines that it is unable to continue its 
business.'' This new language was published in the Third Notices. NASD 
and NYSE stated that this new category should help to ensure that, if a 
member is unable to continue its business following a significant 
business disruption, customers could access their funds or securities 
held through the member.
    In response to the Third Notices, one commenter argued that the 
obligations placed on a firm under the proposed rules might conflict 
with the obligations of the firm imposed by the Securities Investor 
Protection Corporation (``SIPC'').\35\ NASD and NYSE stated that they 
did not believe that the provisions conflict with SIPC rules and did 
not intend for the proposed rule change to have any effect on a 
member's obligations under such rules. The new provisions require a 
member only to address how it would assure such access. NASD and NYSE 
continued that, if a member believed that SIPC rules might affect a 
member's response to this subsection, the member should address SIPC 
rules in its BCP. Finally, NASD and NYSE noted that a member could not 
rely on SIPC membership, by itself, to satisfy its obligations under 
the proposed rules, because SIPC involvement in the liquidation of a 
broker-dealer is limited to SIPC's authority under the Securities 
Investor Protection Act of 1970.
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    \35\ See id.
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C. Disclosure

    In the Third Notices, NASD and NYSE proposed that members disclose 
to their customers how their BCPs address a future significant business 
disruption. Several commenters argued that the disclosure provision 
would be burdensome and costly.\36\ The Joint Commenters, for example, 
maintained

[[Page 19589]]

that the cost of delivering the summary BCP to customers at account 
opening outweighed any benefits. The Joint Commenters also noted that a 
customer receives large amounts of information at account opening and, 
``as more information is added, the import of the information becomes 
lost and the customer becomes increasingly frustrated with the account 
opening process.'' Another commenter echoed that ``providing a summary 
that is not easily understood will lead to customer confusion.'' \37\ 
This commenter argued that ``deficient business continuity plans by 
member firms can be detected and deterred sufficiently through the 
regulatory audit process'' rather than through public disclosure. In 
the alternative, the commenter recommended that it would be sufficient 
for a firm to post its summary BCP on its Web site and provide it on 
demand rather than to provide it to every customer at account 
opening.\38\ Another commenter--noting that it had identified over 200 
mission critical functions in its various departments and developed a 
response plan for each of these functions--argued that it would be 
impossible to summarize these plans in any meaningful way.\39\
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    \36\ See Jefferson Pilot, Joint Commenters, and Raymond James.
    \37\ See Jefferson Pilot.
    \38\ See id.
    \39\ See Raymond James.
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    Two comments raised concerns about disclosing potentially 
confidential and proprietary information.\40\ One commenter also argued 
that a firm might be subject to liability for breach of contract or 
misrepresentation if it determined to vary a course of action from what 
was disclosed in its summary BCP in order to react more appropriately 
in a recovery situation.\41\
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    \40\ See Ameritrade and Joint Commenters.
    \41\ See Ameritrade.
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    In their responses, NASD and NYSE stated that they continued to 
believe that this requirement was necessary to enable customers to make 
educated decisions about whether to place their funds and securities at 
a specific broker-dealer. NASD and NYSE also stated that they believe 
that these provisions would encourage members to create adequate 
contingency plans. In response to one commenter's concern about 
disclosing confidential and proprietary information, NYSE stated that a 
member would be required only to summarize the manner in which its BCP 
addresses the possibility of significant business disruptions. NASD and 
NYSE reiterated that members would not be required to disclose the 
specific location of any back-up facilities, any proprietary 
information contained in the plan, or the parties with whom the member 
has back-up arrangements.
    In order to make the disclosure meaningful, NASD and NYSE stated 
that, when addressing events of varying scope, a member should: (1) 
Provide specific scenarios of varying severity (e.g., a firm-only 
business disruption, a disruption to a single building, a disruption to 
a business district, a city-wide disruption and a regional disruption); 
(2) state whether it plans to continue business during that scenario 
and, if so, its planned recovery time; and (3) provide general 
information on its intended response. Furthermore, NASD and NYSE stated 
that the disclosure requirement was necessary to enable customers to 
make educated decisions about whether to place their funds and 
securities at a specific firm. Finally, in response to the liability 
concern, NASD and NYSE stated that a member could include in its BCP 
cautionary language to the effect that the plan was subject to 
modification, that an updated plan would be promptly posted on the 
member's website, and that customers also could obtain an updated plan 
by requesting a written copy by mail. Plans also can be flexible enough 
to provide for individualized responses to various events.

D. Emergency Contact Information

    In response to the NASD Third Notice, one commenter asserted that 
NASD's discussion in its Amendment No. 4 suggests that the Executive 
Representative should have the authority to make potentially time 
sensitive decisions on behalf of the firm, which may conflict with the 
governing charter of many member firms.\42\ In its Amendment No. 6, 
however, NASD stated it ``in no way sought to alter the scope of 
authority of a member's Executive Representative to make these types of 
decisions.''
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    \42\ See SIA 3.
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E. Implementation

    In response to the Second Notices, one commenter recommended that 
the proposed rules should become effective 360 days from the 
publication of the final rules in the Federal Register.\43\ After the 
Third Notices, this commenter reiterated its view that the proposed 
implementation schedule was too aggressive, suggesting instead that 
NASD and NYSE should follow the Commission's implementation dates for 
trading markets set forth in the Policy Statement.\44\ NASD and NYSE 
both responded that they do not believe that this comparison is 
appropriate. The Policy Statement sets forth the Commission's view that 
self regulatory organizations (``SROs'') that operate trading markets 
and electronic communications networks (``ECNs'') should, among other 
things, plan to resume trading operations by the next business day in 
response to a wide-scale business disruption. The current proposals 
require a member only to create and maintain a BCP that is reasonably 
designed to meet the member's obligations to its customers and that 
addresses certain enumerated areas. NYSE also noted that many firms, as 
a matter of best practices, have already established BCPs. Therefore, 
NASD and NYSE declined to amend the effective dates.
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    \43\ See SIA/BMA 2.
    \44\ See SIA 3.
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IV. Discussion

    One of the critical ``lessons learned'' from the events of 
September 11, 2001, is the need for more rigorous business continuity 
planning in the financial services industry. Since September 11, the 
resilience of the U.S. securities markets has been a matter of 
principal concern to the Commission and to other regulators. In April 
2003, for example, the Commission--together with the Office of the 
Comptroller of the Currency and the Board of Governors of the Federal 
Reserve System--issued an Interagency Paper on Sound Practices to 
Strengthen the Resilience of the U.S. Financial System,\45\ which noted 
that, ``because of the interdependent nature of the U.S. financial 
markets, all financial firms have a role in improving the overall 
resilience of the financial system. It therefore is appropriate for all 
financial firms to review their business continuity plans * * * ''.\46\
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    \45\ Securities Exchange Act Release No. 47638 (April 7, 2003), 
68 FR 17809 (April 11, 2003) (``Interagency Paper'').
    \46\ The Interagency Paper sets forth sound practices for 
business continuity planning for the clearance and settlement 
systems of the U.S. financial markets.
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     Subsequently, the Commission issued the Policy Statement,\47\ 
which set forth the Commission's view that SROs that operate trading 
markets and ECNs should apply certain basic principles in their 
business continuity planning within a specified timeframe. 
Specifically, the Commission stated that it expected each SRO market 
and ECN, among other things, to have a BCP that anticipates the 
resumption of trading no later than the next business day following a 
wide-scale business disruption, and that this generally requires 
geographic diversity between primary and back-up sites. In the Policy

[[Page 19590]]

Statement, the Commission declined to establish new regulatory 
requirements for non-ECN broker-dealers but did state:
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    \47\ See supra note .
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    The establishment of a next-business day resumption goal for the 
SRO Markets and ECNs should serve as a useful resumption benchmark for 
securities firms as well. The decision by a broker-dealer to risk 
capital or provide brokerage services on an ongoing basis is, in 
essence, a matter of business judgment. Given the competitive nature of 
the securities business, however, the Commission expects there to be 
incentives for broker-dealers to be prepared to participate in the 
markets following a wide-scale disruption as soon as the markets' 
trading facilities become available.\48\
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    \48\ Policy Statement, 68 FR at 56658.
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    With their respective proposals, NASD and NYSE are taking an 
important step in setting forth business continuity planning 
requirements for broker-dealers that allow for flexibility and the 
exercise of business judgment, yet at the same time assure that 
investors have sufficient information to evaluate the level of a firm's 
BCP and, in any event, that all customers have prompt access to their 
funds and securities. For the reasons discussed below, the Commission 
finds that the proposed rule changes, as amended, are consistent with 
the requirements of the Act and the regulations thereunder.\49\ In 
particular, the Commission believes that NASD's proposal is consistent 
with Section 15A(b)(6) of the Act \50\ which requires, among other 
things, that the rules of a national securities association be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and in general to protect investors and the public interest. 
The Commission also believes that NYSE's proposal is consistent with 
Section 6(b)(5) of the Act \51\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
in general to protect investors and the public interest.
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    \49\ In approving these proposals, the Commission considered the 
proposed rules' impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \50\ 15 U.S.C. 78o-3(b)(6).
    \51\ 15 U.S.C. 78f(b)(5).
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    The proposed rules will require member firms to establish written 
plans that address general areas of business continuity. Requiring 
every NASD and NYSE member to address how it would handle business 
disruptions of varying scope is an important first step in reducing the 
impact of any such disruptions. Although no plan can reasonably be 
expected to mitigate the effects of every crisis, a firm that has a BCP 
meeting the requirements of the proposed rules should be in a much 
better position to respond to a significant event. Furthermore, 
implementation of the proposed rules by all NASD and NYSE members 
collectively should reduce the adverse systemic consequences of a 
disruption that affects multiple firms in a particular area. Therefore, 
the Commission believes that the new rules should enhance the 
resilience of the U.S. financial markets generally.
    The Commission agrees with the approach taken by the SROs to allow 
each member the flexibility to tailor its BCP to the nature, type, and 
scope of its business. The new rules require each member's BCP, at a 
minimum, to address various aspects of business continuity planning. 
Thus, the new rules envisage a planning process but do not--except with 
respect to customer access to funds and securities, described below--
dictate the content of the plans that result from that process. For 
example, although a member firm would be required in its plan to 
address its mission critical systems and the back-up for such systems, 
the rules do not require a member to take specific actions such as 
establishing a back-up facility or obtaining a specified amount of 
redundant telecommunications capacity.
    The Commission believes that NASD and NYSE have identified 
important elements that must be addressed in each member's BCP. While 
the new rules are primarily procedures-based rather than standards-
based, they include an important provision to encourage NASD and NYSE 
members to develop thoughtful and robust plans: An obligation to 
disclose a summary of their BCPs to their customers. This obligation 
should harness market forces to improve the emergency preparedness of 
particular firms as well as the securities industry as a whole. The 
information contained in these public disclosures will allow individual 
customers (and potential customers) to compare the emergency 
preparedness of a broker-dealer to that of its competitors and help 
them to decide where to place their funds and securities. While the new 
rules establish few minimum standards that the BCP of every NASD or 
NYSE member must meet, a customer will be in a much better position to 
evaluate whether a particular firm's emergency preparedness meets his 
or her expectations.
    The summary of the member's BCP that is disclosed to customers 
should include a discussion of how the broker-dealer intends to respond 
to events of varying scope (e.g., a firm-only disruption, a disruption 
to a single building, a disruption to a business district, a city-wide 
disruption, and a regional disruption); whether the broker-dealer 
intends to continue its business during each scenario and, if so, the 
planned recovery time; and how the broker-dealer intends to respond to 
each scenario. This requirement should give the summary BCP a basic 
framework against which it can readily be compared to other BCPs. The 
Commission believes that it is important for customers to understand 
the capabilities and plans of the NASD or NYSE member with which they 
choose to do business, and this disclosure should provide investors 
with such information.
    Although the new NASD and NYSE rules are fundamentally process-
based, every member is required to include one element in its BCP: A 
discussion of how the member will assure its customers' prompt access 
to their funds and securities in the event that the member is unable to 
operate. A broker-dealer that holds funds and securities on behalf of 
its customers is acting as the customers' agent. The Commission 
believes that it is reasonable and consistent with the Act for NASD and 
NYSE to require that a member address how it will assure customers' 
access to their funds and securities even if the member cannot operate 
or determines that it is not economically feasible to continue its 
business during or after a significant business disruption. The 
Commission expects that a discussion of this subject will appear on the 
summary BCP, as a likely concern of any customer is how to recover 
funds and securities if the broker-dealer is incapacitated.
    The Commission believes that it is reasonable and consistent with 
the Act for NASD and NYSE to require each member to designate emergency 
contact persons and to provide NASD and NYSE (as appropriate) with 
emergency contact information for such persons. This information should 
facilitate efforts to coordinate efforts between NASD or NYSE and its 
members to resume operations after a significant business disruption. 
The Commission also

[[Page 19591]]

believes that it is reasonable and consistent with the Act for NASD and 
NYSE to require each member to review and update its BCPs and its 
emergency contact information in the manner and at the times specified 
in the new rules.
    The Commission believes that the implementation timeframes proposed 
by NASD and NYSE are reasonable and consistent with the Act. In 
particular, the Commission believes that it is reasonable for NASD to 
grant its NASD-member introducing firms 30 days more than NASD-member 
clearing firms, as introducing firms may need to incorporate the 
business recovery strategies of their clearing firms into their own 
plans.
    The Commission believes that it is reasonable for NASD to arrange 
with an outside vendor to serve as a repository for its members' BCPs. 
Use of this service would be voluntary and subject to a monthly fee 
payable by a member directly to the repository. The Commission believes 
that this service may be beneficial to members during emergency 
situations. Specifically, it will enable a member to get a copy of its 
BCP even if its offices are not accessible.
    Pursuant to Section 19(b)(2) of the Act,\52\ the Commission finds 
good cause for approving NASD Amendment Nos. 6, 7, and 8 prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register. These amendments make only minor revisions to the 
rule text that clarify the NASD proposal and do not alter its 
substance. In addition, the Commission believes that NASD's proposal 
should be approved, as amended by Amendments Nos. 6, 7, and 8, at the 
same time as the NYSE proposal to provide consistent regulation among 
NASD and NYSE members. Accordingly, the Commission believes that good 
cause exists to approve Amendment Nos. 6, 7, and 8 on an accelerated 
basis.
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    \52\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comments on NASD Amendment Nos. 6, 7, and 8

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether NASD Amendment 
Nos. 6, 7, and 8 are 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-2002-108. The 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 NASD. All submissions 
should refer to the File No. SR-NASD-2002-108 and should be submitted 
by May 4, 2004.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\53\ that the proposed rule changes (SR-NASD-2002-108 and SR-NYSE-
2002-35), as amended, are approved.
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    \53\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8324 Filed 4-12-04; 8:45 am]
BILLING CODE 8010-01-P