[Federal Register Volume 70, Number 142 (Tuesday, July 26, 2005)]
[Notices]
[Pages 43204-43206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3928]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52059; File No. SR-NASD-2005-58]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Relating to the Reporting of Data to Clearing Firms by 
Correspondent Firms

July 19, 2005.
    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 May 2, 2005, 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 July 14, 
2005, NASD filed Amendment No. 1 to the proposed rule change.\3\ 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    \3\ Amendment No. 1, which replaced and superseded the original 
filing in its entirety, clarifies which piggybacking arrangements 
will be subject to the rule and modifies certain rule language to 
conform with other terms used in NASD rules.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rule 3150 and Rule 3230 governing 
the reporting of data to clearing firms by correspondent firms. Below 
is the text of the proposed rule change. Proposed new language is in 
italics; proposed deletions are in brackets.
* * * * *
3150. Reporting Requirements for Clearing Firms
    (a) No change.
    (b) Each member that is a clearing firm is required to report 
prescribed data to NASD under this Rule in such a manner as to enable 
NASD to distinguish between data pertaining to all proprietary and 
customer accounts of an introducing member and data pertaining to all 
proprietary and customer accounts of any member for which the 
introducing member is acting as an intermediary in obtaining clearing 
services from a clearing firm. The reporting requirements of this 
paragraph (b) shall apply to the

[[Page 43205]]

proprietary and customer accounts of members that have established an 
intermediary clearing arrangement with an introducing member on or 
after [insert effective date of this paragraph (b)].
    [(b)](c) Pursuant to the Rule 9600 Series, 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.
* * * * *
3230. Clearing Agreements
    (a) through (g) No change.
    (h) All clearing agreements shall require each introducing member 
to maintain its proprietary and customer accounts and the proprietary 
and customer accounts of any member for which it is acting as an 
intermediary in obtaining clearing services from the clearing firm in 
such a manner as to enable the clearing firm and NASD to identify data 
belonging to the proprietary and customer accounts of each member. The 
requirements of this paragraph (h) shall apply to intermediary clearing 
arrangements between a member and an introducing member that are 
established on or after [insert effective date of this paragraph (h)].
* * * * *

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
    By way of background, some NASD members choose not to contract for 
clearing services directly with a clearing firm. The reasons vary. For 
example, the member may not do a sufficient business to satisfy 
clearing firm financial and other requirements to support a separate 
clearing agreement. In such cases, a member may contract for clearing 
services with an introducing, or intermediary, firm that, in turn, 
contracts directly with a clearing firm for clearing services. Members 
that contract for clearing services with an introducing firm are often 
referred to as ``piggybacking'' firms, or ``piggybackers.'' Under this 
arrangement, only the introducing firm has a contractual arrangement 
with the clearing firm, which clears for both the introducing firm and 
the introducing firm's piggybacking firms. Under current practice, the 
intermediary firm may assign account numbers to the piggybacker's 
accounts (both proprietary and customer accounts) that do not identify 
them to the clearing firm as belonging to a piggybacking firm. For 
example, the introducing firm may assign account numbers that identify 
these accounts as branch offices of the introducing firm.
    Although these piggybacking arrangements may satisfy the business 
needs of the parties--the clearing firm, the introducing firm, and the 
piggybacking firm--they impede NASD regulatory programs and may cause 
problems for the clearing firm. For example, under Rule 3150, clearing 
firms are required to report certain data to NASD for purposes of the 
surveillance component of its National Examination Program (``NEP''). 
In fulfilling its reporting obligation under Rule 3150, a clearing firm 
whose clients include introducing firms that have contracted with 
piggybackers may be reporting the combined data of the introducing firm 
and its piggybackers as only belonging to the introducing firm. In such 
cases, NASD staff is not able to distinguish between data belonging to 
the introducing firm and data belonging to the piggybacking firm(s) for 
purposes of conducting surveillance.
    This inability to separate out the data can, and already has, 
become a serious issue where the intermediary firm goes into SIPC 
(``Securities Investor Protection Corporation'') liquidation. If the 
data from the intermediary and piggybacking firms are not 
distinguishable, the clearing firm will be unable to facilitate the 
orderly transfer of accounts without doing time-intensive research and 
creating a special program to separate accounts belonging to the 
introducing firm and its piggybacker(s).
    To resolve these issues, NASD is proposing to adopt amendments to 
Rule 3150 (governing reporting requirements for clearing firms) and 
Rule 3230 (governing clearing agreements) that would permit regulators 
and clearing firms to distinguish between data belonging to an 
introducing firm and data belonging to its piggybacker(s). The proposed 
amendments to Rule 3150 would require clearing firms to report data to 
NASD about each piggybacking firm separately from the introducing 
firm's data. The proposed requirements would apply to the data 
pertaining to the proprietary and customer accounts of piggybacking 
firms only if the piggybacking relationship with the introducing firm 
was established on or after the effective date of this proposed rule 
change.
    The proposed amendments to Rule 3230 would require introducing 
firms to maintain data in such a way as to enable NASD and the clearing 
firm to be able to identify the data pertaining to the proprietary and 
customer accounts of the introducing firm and the data pertaining to 
the proprietary and customer accounts of any piggybacking firm. These 
proposed rule changes will enable NASD staff to surveil data reported 
by piggybacking firms as part of its NEP Surveillance program and 
facilitate any future SIPC liquidations. The requirements of the 
proposed rule change would apply only to the data belonging to the 
proprietary and customer accounts of any piggybacking firm only if the 
piggybacking relationship was established on or after the effective 
date of the proposed rule change.\4\
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    \4\ NASD understands that requiring firms to convert existing 
accounts would potentially burden customers as the clearing firm may 
need to issue new account numbers and, as applicable, new debit 
cards, checking accounts, and passwords issued in connection with 
the accounts. Accordingly, the piggybacking firms would have to 
advise these customers in writing that they would be getting new 
account numbers, and why, and would need to change their records to 
reflect new customer account numbers. Further, NASD understands that 
some clearing firms would have to convert such existing accounts to 
accounts under the customers' names manually, entry by entry. Other 
data, such as cost basis information, also might have to be manually 
transferred to the new accounts. Accordingly, while NASD recognizes 
that there is some risk in not being able to surveil data belonging 
to accounts held by firms who are currently in piggybacking clearing 
relationships, it does not believe that the regulatory benefit in 
requiring such conversion would outweigh the expense and 
inconvenience to customers and firms.
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    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 60 days following 
Commission approval. NASD is proposing an effective date of 180 days 
following Commission approval. This will give members time to make 
necessary changes to their systems.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which

[[Page 43206]]

requires, among other things, that NASD 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 giving regulators and clearing 
firms the ability to determine whether data being reported to clearing 
firms belongs to an introducing firm or a piggybacking firm. The 
proposed rule change will enable NASD staff to more clearly identify 
data being reported to NASD for purposes of NASD's NEP Surveillance 
and, in those instances where an introducing firm enters a SIPC 
liquidation, will help to facilitate an orderly liquidation.

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

    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 Exchange 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 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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2005-58 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

    All submissions should refer to File Number SR-NASD-2005-58. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of NASD. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-NASD-2005-58 and 
should be submitted on or before August 16, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
Jill M. Peterson,
Assistant Secretary.
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    \5\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E5-3928 Filed 7-22-05; 8:45 am]
BILLING CODE 8010-01-P