[Federal Register Volume 71, Number 128 (Wednesday, July 5, 2006)]
[Notices]
[Pages 38194-38196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-10434]



[[Page 38194]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54051; File No. SR-NASD-2006-070]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
Safe Harbor for Business Expansions

June 27, 2006.
    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 June 2, 2006, 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. 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.
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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 Interpretative Material 1011-1 
(Safe Harbors for Business Expansions) (``NASD IM-1011-1'') to limit 
the types of violations of NASD Rule 2110 (Standards of Commercial 
Honor and Principles of Trade) that would result in a member being 
ineligible to use the safe harbor for business expansions and to make 
certain technical changes. Below is the text of the proposed rule 
change. Proposed new language is in italics; proposed deletions are in 
[brackets]. IM-1011-1. Safe Harbor[s] for Business Expansions
    This interpretive material concerns the types of business 
expansions that will not require a member to submit a Rule 1017 
application to obtain NASD's [Regulation's] approval of the expansion. 
This safe harbor applies to: (1) Firms that do not have a membership 
agreement, and (2) firms that have a membership agreement that does not 
contain a restriction on the factors listed below.
    The safe harbor is not available to a member that has a membership 
agreement that contains a specific restriction as to one or more of the 
factors listed below. In that case, the agreement takes precedence 
because NASD [Regulation] has determined that a particular restriction 
should apply as to one or more of the factors, and NASD [Regulation] 
has issued a decision with a rationale for that restriction. Similarly, 
the safe harbor also does not apply if the member has a membership 
agreement that permits expansion beyond the limits set forth below 
(e.g., an Applicant requests and obtains approval for ten registered 
representatives in the first six months with an additional ten 
registered representatives in the next year); in such case, [the 
Department] NASD has specifically considered the firm's expansion plans 
and approved them.
    The safe harbor is not available to any member that has 
disciplinary history. For purposes of this Interpretation, 
``disciplinary history'' means a finding of a violation by the member 
or a principal of the member in the past five years by the Securities 
and Exchange Commission, a self-regulatory organization, or a foreign 
financial regulatory authority of one or more of the following 
provisions (or a comparable foreign provision) or rules or regulations 
thereunder: violations of the types enumerated in Section[s] 
15(b)(4)(E) [and 15(c)] of the Securities Exchange Act of 1934; Section 
15(c) of the Securities Exchange Act of 1934; Section 17(a) of the 
Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; NASD 
Rules 2110 (only if the finding of a violation is for unauthorized 
trading, churning, conversion, material misrepresentations or omissions 
to a customer, front-running, trading ahead of research reports or 
excessive markups), 2120, 2310, 2330, 2440, 3010 (failure to supervise 
only), 3310, and 3330; and MSRB Rules G-19, G-30, and G-37(b) & (c).
    For those firms to which the safe harbor is available, the 
following types of expansions are presumed not to be a material change 
in business operations and therefore do not require a Rule 1017 
application. For any expansion beyond these limits, a member should 
contact its district office prior to implementing the change to 
determine whether the proposed expansion requires an application under 
Rule 1017. Expansions in each area are measured on a rolling 12-month 
basis; members are required to keep records of increases in personnel, 
offices, and markets to determine whether they are within the safe 
harbor.
    ``Associated Persons involved in sales'' includes all Associated 
Persons, whether or not registered, who are involved in sales 
activities with public customers, including sales assistants and cold 
callers, but excludes clerical, back office, and trading personnel who 
are not involved in sales activities.

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                                         Safe Harbor--Increase Permitted
 Number of Associated Persons Involved    Within One Year Period Without
                in Sales                      Rule 1017 Application
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1-10...................................  10 persons.
11 or more.............................  10 persons or a 30 percent
                                          increase, whichever is
                                          greater.
Number of Offices (registered or
 unregistered):
1-5....................................  3 offices.
6 or more..............................  3 offices or a 30 percent
                                          increase, whichever is
                                          greater.
Number of Markets Made:
1-10...................................  10 markets.
11 or more.............................  10 markets or a 30 percent
                                          increase, whichever is
                                          greater.
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* * * * *

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.

[[Page 38195]]

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

1. Purpose
    NASD Rule 1017 (Application for Approval of Change in Ownership, 
Control, or Business Operations) requires that a member submit an 
application to NASD for approval prior to, among other things, making a 
``material change in business operations,'' which is defined in NASD 
Rule 1011.\3\ NASD IM-1011-1 creates a safe harbor for certain types of 
expansions that are presumed not to be a ``material change in business 
operations'' and therefore do not require NASD approval.\4\ This 
provides members with greater certainty regarding which expansions 
require approval and eliminates unnecessary applications for approval 
of business changes.
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    \3\ A ``material change in business operations'' is defined in 
NASD Rule 1011(i) and includes, but is not limited to: removing or 
modifying a membership agreement restriction; market making, 
underwriting, or acting as a dealer for the first time; and adding 
business activities that require a higher minimum net capital under 
SEC Rule 15c3-1.
    \4\ The safe harbor permits within a one year period (1) an 
increase of 10 persons if the firm has 10 or less associated persons 
in sales, or an increase of 10 persons or a 30 percent increase, 
whichever is greater, if the firm has 11 or more associated persons 
in sales; (2) an increase of 3 offices if the firm has 5 or less 
offices, or an increase of 3 offices or a 30 percent increase, 
whichever is greater, if the firm has 6 or more offices; and (3) an 
increase of 10 markets to be made if the firm makes 10 or less 
markets, or an increase of 10 markets or a 30 percent increase, 
whichever is greater, if the firm makes 11 or more markets.
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    However, the safe harbor in NASD IM-1011-1 is not available to any 
member that, among other things, has a ``disciplinary history'' as 
defined in NASD IM-1011-1.\5\ For purposes of NASD IM-1011-1, 
disciplinary history means a finding of a violation by a member or a 
principal of the member in the past five years by the SEC, a self-
regulatory organization, or a foreign financial regulatory authority of 
one or more specified provisions (or comparable foreign provisions) or 
rules or regulations thereunder,\6\ including NASD Rule 2110.\7\
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    \5\ The safe harbor is also generally not available to members 
with membership agreements that contain certain restrictions on 
number of personnel, offices, and markets that may be made.
    \6\ The applicable provisions are sections 15(b)(4)(E) and 15(c) 
of the Securities Exchange Act of 1934; section 17(a) of the 
Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; 
NASD Rules 2110, 2120 (Use of Manipulative, Deceptive or Other 
Fraudulent Devices), 2310 (Recommendations to Customers 
(Suitability)), 2330 (Customers' Securities or Funds), 2440 (Fair 
Prices and Commissions), 3010 (Supervision-failure to supervise 
only), 3310 (Publication of Transactions and Quotations), and 3330 
(Payment Designed to Influence Market Prices, Other than Paid 
Advertising); and MSRB Rules G-19, G-30 and G-37(b) and (c).
    \7\ NASD Rule 2110 requires that ``a member, in the conduct of 
his business, shall observe high standards of commercial honor and 
just and equitable principles of trade.''
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    When a member or individual is charged with violating an NASD rule, 
NASD frequently charges a violation of NASD Rule 2110 as part of NASD's 
action (in both settled and litigated matters).\8\ Thus, the inclusion 
of NASD Rule 2110 in NASD IM-1011-1, without any limitation, often 
results in members being ineligible to use the safe harbor if they (or 
any of their principals) have violated any other NASD rule, which was 
not the intended effect. Rather, the safe harbor specifically included 
a finite list of rules, the violation of which would preclude the 
member from using the safe harbor, and was not intended to capture 
violations of all NASD rules.
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    \8\ See Joseph Abbondante, Securities Exchange Act Release No. 
53066 (January 6, 2006) at 36 (``It is well settled that a violation 
of a rule promulgated by the SEC or by NASD also violates NASD 
Conduct Rule 2110.'').
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    Accordingly, with respect to violations of NASD Rule 2110, NASD 
proposes amendments to NASD IM-1011-1 that would deem a member 
ineligible to use the safe harbor only where the finding of a violation 
of NASD Rule 2110 by the member or a principal of the member raises 
significant investor protection issues by involving unauthorized 
trading, churning, conversion, material misrepresentations or omissions 
to a customer, front-running, trading ahead of research reports or 
excessive markups.\9\ Therefore, a member would not be eligible to rely 
on the safe harbor for material changes in business operations if the 
member or any of its principals have been found, within the past five 
years, to have violated NASD Rule 2110 in the context of one or more of 
these enumerated activities (or to have violated any of the other rules 
specified in NASD IM-1011-1).
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    \9\ The proposed limits on violations of NASD Rule 2110 mirror 
the limits on NASD Rule 2110 with respect to the public release of 
disciplinary complaints. See NASD IM-8310-2 (Release of Disciplinary 
and Other Information Through BrokerCheck) and the related Notice to 
Members 97-42 (July 1997).
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    In addition, NASD proposes to make a technical correction to the 
rule text with respect to the inclusion of section 15(b)(4)(E) of the 
Act in the list of rules the violation of which would preclude a member 
from relying on the safe harbor under NASD IM-1011-1. Section 
15(b)(4)(E) of the Act lists the willful violations that will result in 
the statutory disqualification of a broker or dealer under the Federal 
securities laws. A member or principal of a member is not able to 
violate this section per se. Accordingly, the proposed rule change 
clarifies that a member would be ineligible to use the safe harbor in 
the event that a member or any of its principals has been found to have 
engaged in one or more violations of the type specified in section 
15(b)(4)(E) of the Act in the past five years.
    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. The effective date will be 30 days following 
publication of the Notice to Members announcing Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A of the Act,\10\ in general, and with section 
15A(b)(6) of the Act,\11\ which 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 limiting the types of violations of NASD Rule 2110 that constitute 
``disciplinary history'' for purposes of NASD IM-1101-1 will allow 
additional firms to be able to rely on the safe harbor consistent with 
the original intent of the IM, while at the same time continuing to 
ensure investor protection by deeming a member ineligible to use the 
safe harbor where the violation of NASD Rule 2110 by the member or a 
principal presents significant investor protection issues.
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    \10\ 15 U.S.C. 78o-3.
    \11\ 15 U.S.C. 78o3(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.

[[Page 38196]]

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 NASD consents, the Commission will:
    (A) By order approve such proposed rule change 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-2006-070 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

    All submissions should refer to File Number SR-NASD-2006-070. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the 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-2006-070 and should be submitted on or before July 
26, 2006.

    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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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-10434 Filed 7-3-06; 8:45 am]
BILLING CODE 8010-01-P