59972 Federal Register / Vol. 69, No. 193 / Wednesday, October 6, 2004 / Notices 

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See letter from Patricia Albrecht, Assistant 

General Counsel, NASD, to Katherine A. England, 

Assistant Director, Division of Market Regulation, 

Commission, dated September 23, 2004 

(‘‘Amendment No. 1’’).

4See Exchange Act Release No. 49883, 69 FR 

35092 (June 23, 2004) (order approving NASD’s 

proposed rule change); Exchange Act Release No. 

49882 (June 17, 2004), 69 FR 35108 (June 23, 2004) 

(order approving NYSE’s proposed rule change).

reproduction contractor will copy 

documents for a fee.

Dated at Rockville, Maryland this 30th day 

of September 2004. 

For the Nuclear Regulatory Commission. 

Daniel M. Gillen, 

Deputy Director , Decommissioning 

Directorate, Division of Waste Management 

and Environmental Protection, Office of 

Nuclear Material Safety and Safeguards.

[FR Doc. 04–22403 Filed 10–5–04; 8:45 am] 

BILLING CODE 7590–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

Proposed Collection; Comment 

Request 

Upon written request, copies available 

from: Securities and Exchange 

Commission, Office of Filings and 

Information Services, Washington, DC 

20549.

Extension: 

Rule 54, SEC File No. 270–376, OMB 

Control No. 3235–0427.

Notice is hereby given that, pursuant 

to the Paperwork Reduction Act of 1995 

(44 U.S.C. 3501 et seq.), the Securities 

and Exchange Commission 

(‘‘Commission’’) is soliciting comments 

on the collection of information 

summarized below. The Commission 

plans to submit this existing collection 

of information to the Office of 

Management and Budget for extension 

and approval. 

Sections 32 and 33 of the Public 

Utility Holding Company Act of 1935, 

as amended (‘‘Act’’), and rules 53 and 

54 under the Act, permit, among other 

things, utility holding companies 

registered under the Act to make direct 

or indirect investments in exempt 

wholesale generators (‘‘EWGs’’) and 

foreign utility companies (‘‘FUCOs’’), as 

defined in sections 32 and 33 of the Act, 

respectively, without the prior approval 

of the Commission, if certain conditions 

are met. Rules 53 and 54 do not create 

a reporting burden for respondents. Rule 

53 does, however, contain 

recordkeeping and retention 

requirements. As required by Congress, 

the Commission mandates the 

maintenance of certain books and 

records identifying investments in and 

earnings from all subsidiary EWGs or 

FUCOs in order to measure their 

financial effect on the registered 

systems. 

The Commission estimates that the 

total annual recordkeeping and record 

retention burden under rules 53 will be 

a total of 290 hours (10 hours per 

respondent × 29 respondents = 290 

burden hours). It is estimated that there 

will be no burden hours associated with 

rule 54. 

These estimates of average burden 

hours are made solely for the purposes 

of the Paperwork Reduction Act and are 

not derived from a comprehensive or 

even a representative survey or study of 

the costs of SEC rules and forms. 

Written comments are invited on: (1) 

Whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

agency, including whether the 

information will have practical utility; 

(2) the accuracy of the agency’s estimate 

of the burden of the collection of 

information; (3) ways to enhance the 

quality, utility, and clarity of the 

information collected; and (4) ways to 

minimize the burden of the collection of 

information on respondents, including 

through the use of automated collection 

techniques or other forms of information 

technology. Consideration will be given 

to comments and suggestions submitted 

in writing within 60 days of this 

publication. 

Please direct your written comments 

to R. Corey Booth, Director/Chief 

Information Officer, Office of 

Information Technology, Securities and 

Exchange Commission, 450 5th Street, 

NW., Washington, DC 20549.

Dated: September 28, 2004. 

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. E4–2498 Filed 10–5–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50477; File No. SR–NASD–

2004–116] 

Self-Regulatory Organizations; Notice 

of Filing and Order Granting 

Accelerated Approval to Proposed 

Rule Change and Amendment No. 1 by 

National Association of Securities 

Dealers, Inc. Relating to Supervisory 

Control and Inspection Procedures 

September 30, 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 August 2, 

2004, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’), filed 

with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by NASD. On 

September 23, 2004, NASD submitted 

Amendment No. 1 to the proposed rule 

change.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change and Amendment 

No. 1 from interested persons. For the 

reasons discussed below, the 

Commission is granting accelerated 

approval to the proposed rule change, as 

modified by Amendment No. 1.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASD is proposing to amend NASD 

Rules 3010 and 3012, with the intention 

of aligning certain supervisory control 

and inspection requirements with the 

corresponding supervisory control and 

inspection requirements in New York 

Stock Exchange (‘‘NYSE’’) Rule 342.19 

and NYSE Interpretation Handbook 

provision 342(a)(b)/03. NASD is also 

proposing several amendments to NASD 

Rule 22510, relating to discretionary 

accounts, that NASD states are nonsubstantive and technical. The SEC 

approved these rules in their current 

form on June 17, 2004.4 Below is the 

text of the proposed rule change, as 

modified by Amendment No. 1. 

Proposed new language is in italics; 

proposed deletions are in brackets.

* * * * *

2510. Discretionary Accounts 

(a) through (c) No Change. 

(d) Exceptions 

This Rule shall not apply to: 

(1) discretion as to the price at which 

or the time when an order given by a 

customer for the purchase or sale of a 

definite amount of a security shall be 

executed, except that the authority to 

exercise time and price discretion will 

be considered to be in effect only until 

the end of the business day on which 

the customer granted such discretion, 

absent a specific, written contrary 

indication signed and dated by the 

customer. This limitation shall not 

apply to time and price discretion 

exercised [for orders effected with or 

for] in an institutional account, as 

defined in Rule 3110(c)(4), pursuant to 

valid Good-Till-Cancelled instructions 

issued on a ‘‘not-held’’ basis. Any 

exercise of time and price discretion 

Federal Register / Vol. 69, No. 193 / Wednesday, October 6, 2004 / Notices 59973

must be reflected on the [customer] 

order ticket. 

(2) No Change.

* * * * *

3010. Supervision 

(a) through (b) No change. 

(c) Internal Inspections 

(1) through (2) No change. 

(3) An office inspection by a member 

pursuant to paragraph (c)(1) may not be 

conducted by the branch office manager 

or any person within that office who has 

supervisory responsibilities or by any 

individual who is directly or indirectly

supervised by such person(s). However, 

if a member is so limited in size and 

resources that it cannot comply with 

this limitation (e.g., a member [with] 

has only one office or a member with a 

business model where small or singleperson offices report directly to an office 

of supervisory jurisdiction manager who 

is also considered the offices’ branch 

office manager), the member may have 

a principal who has the requisite 

knowledge to conduct an office 

inspection perform the inspections. The 

member, however, must document in 

the office inspection reports the factors 

it has relied upon in determining that it 

is so limited in size and resources that 

it has no other alternative than to 

comply in this manner. 

A member must have in place 

procedures that are reasonably designed 

to provide heightened office inspections 

if the person conducting the inspection 

reports to the branch office manager’s 

supervisor or works in an office 

supervised by the branch manager’s 

supervisor and the branch office 

manager generates 20% or more of the 

revenue of the business units supervised 

by the branch office manager’s 

supervisor. For the purposes of this 

subsection only, the term ‘‘heightened 

inspection’’ shall mean those inspection 

procedures that are designed to avoid 

conflicts of interest that serve to 

undermine complete and effective 

inspection because of the economic, 

commercial, or financial interests that 

the branch manager’s supervisor holds 

in the associated persons and business 

being inspected. In addition, for the 

purpose of this section only, when 

calculating the 20% threshold, all of the 

revenue generated by or credited to the 

branch office or the branch office 

manager shall be attributed as revenue 

generated by the business units 

supervised by the branch office 

manager’s supervisor irrespective of a 

member’s internal allocation of such 

revenue. A member must calculate the 

20% threshold on a rolling, twelvemonth basis. 

(d) through (g) No Change.

* * * * *

3012. Supervisory Control System 

(a) General Requirements 

(1) No change. 

(2) The establishment, maintenance, 

and enforcement of written supervisory 

control policies and procedures 

pursuant to paragraph (a) shall include: 

(A) procedures that are reasonably 

designed to review and supervise the 

customer account activity conducted by 

the member’s branch office managers, 

sales managers, regional or district sales 

managers, or any person performing a 

similar supervisory function.

(i) A person who is either senior to, 

or otherwise independent of, the 

producing manager must perform such 

supervisory reviews. For purposes of 

this Rule, an ‘‘otherwise independent’’

person: may not report either directly or 

indirectly to the producing manager 

under review; must be situated in an 

office other than the office of the 

producing manager; must not otherwise 

have supervisory responsibility over the 

activity being reviewed (including not 

being directly compensated based in 

whole or in part on the revenues 

accruing for those activities); and must 

alternate such review responsibility with 

another qualified person every two years 

or less. [However, if a member (i) does 

not conduct a public business, (ii) or has 

a capital requirement of $5,000 or less, 

or (iii) employs 10 or fewer 

representatives and, in the case of (i) 

through (iii), its business is conducted 

in a manner necessitated by a limitation 

of resources that includes fewer than 

two layers of supervisory personnel, a 

person in another office of the member 

who is in the same or similar position 

to the producing manager may conduct 

the supervisory reviews, provided that 

the person in the same or similar 

position does not have supervisory 

responsibility over the activity being 

reviewed, reports to his supervisor his 

supervision and review of the producing 

manager, and has not performed a 

review of the producing manager in the 

last two years.] 

(ii) If a member is so limited in size 

and resources that there is no qualified 

person senior to, or otherwise 

independent of, the producing manager 

to conduct the reviews pursuant to (i) 

above [it cannot avail itself of this 

exception] (e.g., a member [with] has

only one office or [a member with two 

offices and] an insufficient number of 

qualified personnel who can conduct 

reviews on a two-year rotation), [a 

member may have] the reviews may be 

conducted by a principal who is 

sufficiently knowledgeable of the 

member’s supervisory control procedures[ 

conduct these reviews], provided that 

the reviews are in compliance with (i) to 

the extent practicable.

(iii) A member relying on (ii) above 

must document in its supervisory 

control procedures the factors used to 

determine that complete compliance 

with all of the provisions of (i) is not 

possible and that the required 

supervisory systems and procedures in 

place with respect to any producing 

manager comply with the provisions of 

(i) above to the extent practicable. [The 

member, however, must document in its 

supervisory control procedures the 

factors it has relied upon in determining 

that its size and the resources available 

to it are so limited that the member has 

no other alternative than to comply in 

this manner.] 

(B) procedures that are reasonably 

designed to review and monitor the 

following activities: 

(i) all transmittals of funds (e.g., wires 

or checks, etc.) or securities from 

customers [and] to third party accounts 

(i.e., a transmittal that would result in 

a change of beneficial ownership); from 

customer accounts to outside entities 

(e.g., banks, investment companies, 

etc.); from customer accounts to 

locations other than a customer’s 

primary residence (e.g., post office box, 

‘‘in care of’’ accounts, alternate address, 

etc.); and between customers and 

registered representatives, including the 

hand-delivery of checks; 

(ii) through (iii) No change. 

The policies and procedures 

established pursuant to paragraph 

(a)(2)(B) must include a means or 

method of customer confirmation, 

notification, or follow-up that can be 

documented. If a member does not 

engage in all of the activities 

enumerated above, the member must 

identify those activities in which it does 

not engage in its written supervisory 

control policies and document in those 

policies and procedures that additional 

supervisory policies and procedures for 

such activities must be in place before 

the member can engage in them; and 

(C) procedures that are reasonably 

designed to provide heightened 

supervision over the activities of each 

producing manager who is responsible 

for generating 20% or more of the 

revenue of the business units supervised 

by the producing manager’s supervisor. 

For the purposes of this subsection only, 

the term ‘‘heightened supervision’’ shall 

mean those supervisory procedures that 

evidence supervisory activities that are 

designed to avoid conflicts of interest 

that serve to undermine complete and 

effective supervision because of the 

economic, commercial, or financial 

59974 Federal Register / Vol. 69, No. 193 / Wednesday, October 6, 2004 / Notices 

5See Exchange Act Release No. 49883 (June 17, 

2004, 69 FR 35092 (June 23, 2004) (order approving 

NASD’s proposed rule change); Exchange Act 

Release No. 49882 (June 17, 2004); 69 FR 35108 

(June 23, 2004) (order approving NYSE’s proposed 

rule change).

6NASD Rule 3012(a)(2)(A).

7Such a person assigned may not have 

supervisory responsibility over the activity being 

reviewed, must report to his supervisor his 

supervision and review of the producing manager, 

and may not have performed a review of the 

producing manager in the last two years.

8Such a principal must be sufficiently 

knowledgeable of the member’s supervisory control 

procedures.

9 In comparison, according to NASD, NYSE Rule 

342.19 requires that a member relying on the 

corresponding NYSE exception for members of 

limited size and resources must document the 

factors used to determine that (i) complete 

compliance with all of the provisions of NYSE’s 

general standard for supervisory reviews of 

customer account activity is not possible, and (ii) 

the member’s supervisory systems and procedures 

comply with the standard to the extent possible.

10Examples of ‘‘heightened supervisory 

procedures’’ are discussed in Exchange Act Release 

No. 49883, 69 FR 35098, and include unannounced 

supervisory reviews and an increased number of 

interests that the supervisor holds in the 

associated persons and businesses being 

supervised. In addition, for the purpose 

of this section only, when calculating 

the 20% threshold, all of the revenue 

generated by or credited to the 

producing manager or the producing 

manager’s office shall be attributed as 

revenue generated by the business units 

supervised by the producing manager’s 

supervisor irrespective of a member’s 

internal allocation of such revenue. A 

member must calculate the 20% 

threshold on a rolling, twelve-month 

basis. 

(b) No change.

* * * * *

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 

On June 17, 2004, the SEC approved 

proposed changes to NASD and NYSE 

rules generally requiring the 

establishment, maintenance, and testing 

of supervisory control procedures; 

enhanced inspection procedures; 

documentation and recordkeeping 

procedures for account name/

designation changes; limitations on 

holding customer mail; and one-day 

limit on time and price discretionary 

authority for retail customer orders.5

NASD’s and NYSE’s new requirements 

are substantially similar. NASD believes 

that similarity between the rules should 

be enhanced by conforming certain 

inspection and supervisory control 

requirements in NASD Rules 3010 and 

3012 to the corresponding requirements 

in NYSE Rule 342.19 and NYSE 

Interpretation Handbook provision 

342(a)(b)/03, as well as certain 

provisions relating to discretionary 

accounts in NASD Rule 2510(d) to the 

corresponding provisions in NYSE Rule 

408(d).

(a) NASD Rule 3010(c) (Internal 

Inspections) 

NASD Rule 3010(c)(3) prohibits a 

branch office manager, any person 

within that office who has supervisory 

responsibilities, or any individual who 

is supervised by such person from 

conducting an office inspection. In 

comparison, according to NASD, NYSE 

Interpretation Handbook provision 

342(a)(b)/03 (Annual Branch Office 

Inspection) specifies that any person 

who directly or indirectly reports to the 

branch office manager is prohibited 

from conducting an office inspection. 

NASD proposes to revise Rule 

3010(c)(3) similarly to specify that any 

individual who directly or indirectly 

supervised by the branch office manager 

is prohibited from conducting an office 

inspection. 

(b) NASD Rule 3012 (Supervisory 

Control System) 

NASD Rule 3012(a)(2)(A) requires 

members’ supervisory control policies 

and procedures to include procedures 

that are ‘‘reasonably designed to review 

and supervise the customer account 

activity conducted by the member’s 

branch office managers, sales managers, 

regional or district sales mangers, or any 

person performing a similar supervisory 

function.’’ 6 Currently, with two limited 

exceptions discussed below, the rule 

permits only a person who is senior to 

the producing manager to perform 

supervisory reviews of customer 

account activity conducted by the 

managers discussed in the rule (i.e.,

‘‘producing manager’’).

NASD Rule 3012(a)(2)(A) provides a 

limited exception from the ‘‘senior to’’

requirement if a member has fewer than 

two layers of supervisory personnel and 

(i) does not conduct a public business, 

(ii) has a capital requirement of $5,000 

or less, or (iii) employs 10 or fewer 

representatives. Members meeting these 

conditions may assign supervisory 

reviews to a person in another office 

who is in the same or similar position 

to the producing manager being 

reviewed (the ‘‘first exception’’).7

NASD Rule 3012(a)(2)(A) further 

provides that if a member is so limited 

in size and resources that it cannot meet 

even the conditions enumerated in the 

first exception, the member may assign 

a principal to conduct supervisory 

reviews (the ‘‘second exception’’).8

Under NASD Rule 3012(a)(2)(A), a 

member relying on the second exception 

must document the factors it has relied 

upon in determining that its size and 

resources are so limited that it has no 

other alternative but to comply in this 

manner.9

1. Review of Producing Manager’s 

Customer Account Activity 

NASD is proposing changes to its 

general standard for supervisory reviews 

to provide that the person reviewing a 

producing manager’s customer account 

activities may be ‘‘either senior to or 

otherwise independent of,’’ rather than 

merely senior to, that producing 

manager. This proposed modification is 

intended to make NASD Rule 

3012(a)(2)(A) more similar to NYSE 

Rule 342.19. For purposes of proposed 

NASD Rule 3012, an ‘‘otherwise 

independent’’ person may not report 

either directly or indirectly to the 

producing manager under review, must 

be situated in an office other than the 

office of the producing manager, must 

not otherwise have supervisory 

responsibility over the activity being 

reviewed (i.e., may not be directly 

compensated based in whole or in part 

on the revenues accruing from the 

activity being reviewed), and must 

alternate such review responsibility 

with another qualified person every two 

years or less. 

Under NASD Rule 3012(a)(2)(C), 

members must establish, maintain, and 

enforce heightened supervisory 

procedures over activities of each 

producing manger who generates 20% 

or more of the revenue of the business 

units supervised by the producing 

manager’s supervisor (a ‘‘20% 

producing manager’’). NASD notes that 

the review of a producing manager’s 

activities by an ‘‘otherwise 

independent’’ person would not obviate 

the need for heightened supervisory 

procedures if such procedures otherwise 

apply under NASD Rule 3012(a)(2)(C).10

Federal Register / Vol. 69, No. 193 / Wednesday, October 6, 2004 / Notices 59975

supervisory reviews by different reviewers within a 

certain period of time. 11See Amendment No. 1 (proposing to change a 

one-year rotation condition, as proposed in the 

original filing, to a two-year rotation condition).

12See letter from Marc Menchel, Executive Vice 

President and General Counsel, to Catherine 

McGuire, Chief Counsel, Division of Market 

Regulation, Commission, dated September 28, 2004.

13This change would accomplished by deleting 

the word ‘‘customer’’ from the sentence ‘‘Any 

exercise of time and price discretion must be 

reflected on the customer order ticket,’’ and, as 

proposed in Amendment No. 1, by moving the 

sentence from the end of NASD Rule 2510(d)(2), 

where it currently appears, to the end of NASD Rule 

2510(d)(1).

Moreover, as discussed above, an 

‘‘otherwise independent’’ person may 

not be directly compensated based in 

whole or in part on the revenues 

accruing from the activities being 

reviewed. Therefore, a supervisor of a 

20% producing manager would not be 

considered ‘‘otherwise independent’’

with respect to that producing manager, 

for purposes of NASD Rule 

3012(a)(2)(A).

2. Exception for Firms With Limited 

Resources 

To make NASD Rule 3012 more 

similar to NYSE Rule 342.19, NASD is 

proposing to eliminate the first 

exception to the ‘‘senior to’’ requirement 

in current NASD Rule 3012(a)(2)(A), in 

which a member that has fewer than 

two layers of supervisory personnel and 

(i) does not conduct a public business, 

(ii) has a capital requirement of $5,000 

or less, or (iii) employs 10 or fewer 

representatives, may assign a person in 

the same or similar position to the 

producing manager to conduct 

supervisory reviews, under certain 

conditions. Instead, proposed NASD 

Rule 3012(a)(2)(A)(ii) provides that a 

member ‘‘so limited in size and 

resources that there is no qualified 

person senior to, or otherwise 

independent of, the producing 

manager’’ being reviewed may assign ‘‘a 

principal who is sufficiently 

knowledgeable of the member’s 

supervisory control procedures’’ to 

conduct the supervisory reviews. An 

example of a member that could rely on 

this proposed exception is one that ‘‘has 

only one office or an insufficient 

number of qualified personnel who can 

conduct reviews on a two-year 

rotation.’’ 11 The proposed change is 

intended to provide NASD members 

with the same flexibility in structuring 

their supervisory review policies and 

procedures that NYSE members have.

NASD also is proposing to revise the 

current documentation requirements in 

NASD Rule 3012 for members that rely 

on the proposed exception so that the 

requirements are more similar to those 

of NYSE Rule 342.19. NASD members 

would be required to document in its 

supervisory control procedures the 

factors used to determine that complete 

compliance with the ‘‘either senior to or 

otherwise independent’’ standard is not 

possible, and that the procedures that 

are in place comply with the standard 

to the extent practicable. NASD believes 

that these documentation requirements 

will result in members providing in 

greater detail the factors relied upon in 

determining that they must use the 

exception rather than the general 

supervisory review standard, as well as 

how closely their policies and practices 

track the general requirements.

NASD has agreed to file a separate 

amendment to NASD Rule 3012, 

following the approval of the proposed 

exception and documentation 

requirements, to require that members 

inform NASD if they rely or intend to 

rely on the proposed exception.12

Members would inform NASD through 

reports filed on a web-based reporting 

system or other automated electronic 

platform. This manner of reporting will 

allow NASD to collect the necessary 

information quickly and efficiently and 

provide the information to the 

Commission promptly, promote 

timeliness of amendments (e.g.,

members’ changes to their use of the 

proposed exception), and allow NASD 

Member Regulation to integrate the 

information for their purposes without 

having to process manually paper 

notifications. NASD estimates that it 

should take no more than one year from 

the date this filing is approved to 

construct and bring on-line this webbased system or other electronic 

platform. NASD intends to require its 

members to begin reporting their use of 

the exception when the reporting 

system is brought on-line.

Finally, NASD is proposing several 

changes to NASD Rule 3012 to enhance 

the readability of the rule. The first set 

of proposed changes would be made to 

an example NASD provides, in 

proposed NASD Rule 3012(a)(2)(A)(ii), 

of a member that may rely on the 

proposed exception. In particular, 

NASD is proposing to remove from the 

example members with two offices but 

with insufficient resources to rely on the 

general review procedure. In addition, 

NASD Rule 3012(a)(2)(B)(i), procedures 

pertaining to transmittals of funds, 

would be revised as follows: ‘‘all 

transmittals of funds (e.g., wires or 

checks, etc.) or securities from 

customers [and] to third party accounts 

* * * from customer accounts to 

locations other than a customer’s 

primary residence (e.g., post office box

* * *).’’

(c) NASD Rule 2510 (Discretionary 

Accounts) 

NASD also is proposing to make 

certain changes to NASD Rule 2510 

(Discretionary Accounts). Currently, 

NASD Rule 2510(d)(1) does not require 

written authorization for the exercise of 

time and price discretion beyond a day 

for orders effected ‘‘with or for an 

institutional account,’’ if such discretion 

is exercised pursuant to valid Good-TilCancelled instructions issued on a notheld basis. The proposal, intended to be 

non-substantive and to enhance the 

rule’s readability, would change the 

words ‘‘with or for an institutional 

account’’ to ‘‘in an institutional 

account.’’ In addition, NASD is 

proposing to clarify that time and price 

discretion must be reflected on all order 

tickets.13

2. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions 

of section 15A(b)(6) of the Act, 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 is proposing 

these requirements to ensure that its 

members have in place standards that 

are reasonably designed to prevent 

fraudulent and manipulative acts, 

thereby protecting investors and the 

public interest. In addition, in light of 

the nature and content of these 

particular rules, NASD believes that 

NASD’s and the NYSE’s rules in this 

area should be substantially similar. 

(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. Commission’s Findings and Order 

Granting Accelerated Approval of 

Proposed Rule Change 

NASD has requested that the 

Commission find good cause pursuant 

59976 Federal Register / Vol. 69, No. 193 / Wednesday, October 6, 2004 / Notices 

14 15 U.S.C. 78s(b)(2).

15 15 U.S.C. 78o–3(b)(6).

16See Exchange Act Release No. 49883, 69 FR 

35092 (June 23, 2004) (order approving NASD’s 

proposed rule change).

17See Amendment No. 1.

to section 19(b)(2) of the Act 14 for 

approving the proposed rule change as 

amended prior to the 30th day after 

publication in the Federal Register. 

After careful review, the Commission 

finds that the proposed rule change is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to NASD, in 

particular section 15A and the rules and 

regulations thereunder. Specifically, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of section 15A(b)(6) 15 of 

the Act because it is designed to prevent 

fraudulent and manipulative acts and 

practices and to protect investors and 

the public interest. The Commission 

finds that NASD’s proposal is designed 

to accomplish these ends by requiring 

NASD members to establish supervisory 

procedures for the monitoring of 

customer account activities that 

promote independent review of their 

employees to the extent practicable.

(A) NASD Rule 3010(c) (Internal 

Inspections)

The Commission believes that the 

NASD’s proposal with respect to 

prohibiting any person who directly or 

indirectly reports to the branch office 

manager of the branch office being 

inspected should provide clearer 

guidance on who may perform internal 

inspections. The Commission believes 

that this clarification should address 

conflicts of interest and further the 

general purpose of promoting the 

detection and reporting of fraudulent 

activity in customer accounts, without 

imposing undue burdens on members.

(B) NASD Rule 3012 (Supervisory 

Control System)

NASD has proposed that persons 

‘‘either senior to or otherwise 

independent of’’ a producing manager 

would be qualified to review and 

supervise the customer account activity 

conducted by that producing manager. 

In contrast, NASD Rule 3012 currently 

permits only persons senior to a 

producing manager to conduct such 

reviews. 

The Commission believes that this 

proposed change will provide more 

flexibility for NASD members to 

conduct supervisory reviews of 

customer account activity consistent 

with that already provided to NYSE 

members under NYSE Rule 342.19. To 

the extent the rules of the NASD and 

NYSE are consistent, opportunities for 

regulatory arbitrage will be diminished, 

which should enhance compliance with 

more rigorous supervisory control 

procedures. We believe the ‘‘otherwise 

independent’’ standard as proposed by 

NASD contains adequate safeguards to 

limit the conflicts of interest of the 

person conducting the reviews, thereby 

preserving the integrity of those 

reviews. In this regard, to qualify as an 

‘‘otherwise independent’’ person, the 

reviewer may not report either directly 

or indirectly to the producing manager 

under review, must be in an office other 

than that of the producing manager, and 

must not otherwise have supervisory 

responsibility over the activity being 

reviewed. Moreover, an ‘‘otherwise 

independent’’ person may not be 

directly compensated based in whole or 

in part on the revenues accruing from 

the activities being reviewed, and must 

alternate such review responsibility 

with another qualified person every two 

years or less. 

In addition, NASD has proposed to 

revise the exceptions, intended only for 

members of limited size and resources, 

from compliance with the general 

standard for who may conduct 

supervisory reviews. In particular, 

NASD is proposing to amend NASD 

Rule 3012(a)(2)(A) to permit members 

‘‘so limited in size and resources that 

there is no qualified person senior to, or 

otherwise independent of, the 

producing manager,’’ to appoint a 

principal to conduct supervisory 

reviews, provided that the reviews are 

in compliance with the general 

supervisory standard to the extend 

practicable. The principal must be 

sufficiently knowledgeable of the 

member’s supervisory control 

procedures. The Commission believes 

that the proposal is consistent with the 

Act as an accommodation to the 

smallest NASD members that lack the 

resources to implement a full scale 

program to conduct supervisory 

reviews. Nevertheless, the Commission 

expects NASD to monitor carefully the 

use of this exception to be certain that 

only members for whom it is intended 

take advantage of it, and that this 

exception is not abused. In this regard, 

the Commission stresses the importance 

of the NASD’s agreement to file an 

amendment to NASD Rule 3012, 

following the issuance of this Order, to 

require members to provide reports to 

NASD if they rely on or intend to rely 

on this proposed exception. At a 

minimum, such reports should provide 

the number of employees of each such 

member, the member’s net capital, as 

well as its annual revenues, and would 

be made available by the NASD to the 

Commission or its staff upon request. 

The Commission believes that such a 

reporting system is essential to ensuring 

that the exception in NASD Rule 

3012(a)(2)(A)(ii) is used only by those 

firms for which it is intended (i.e., those 

with very limited resources). 

Finally, NASD has proposed to revise 

the documentation standards a member 

must satisfy when it relies on NASD 

Rule 3012(a)(2)(A)(ii), as proposed. 

Under the proposal, a member relying 

on this exception must document the 

factors used to determine that complete 

compliance with all of the provisions of 

the ‘‘either senior to or otherwise 

independent of’’ standard is not 

possible, and that the member’s 

supervisory systems and procedures 

comply with this standard to the extent 

practicable. The Commission believes 

that NASD’s proposed documentation 

requirement, in addition to the reports 

discussed above, should help to ensure 

that this exception is not abused or used 

by members other than those for which 

it is intended. 

(C) NASD Rule 2510(d) (Discretionary 

Accounts)

The Commission believes that the 

proposed changes to NASD Rule 

2510(d) are consistent with the Act. 

They generally improve the readability 

of the rule and clarify that any exercise 

of time and price discretion must be 

reflected on all order tickets. 

(D) Accelerated Approval

The Commission believes that there is 

good cause for approving the proposed 

rule change and Amendment No. 1 prior 

to the 30th day after publication in the 

Federal Register. The proposed rule 

change is amending rules that were 

approved on June 17, 2004, which 

currently have an effective date of 

December 17, 2004.16 Pursuant to the 

NASD’s request, the effective date of 

January 31, 2005 will apply to the 

proposed rule change, as modified by 

Amendment No. 1, as well as to the 

amendments made to NASD Rules 2510, 

3010, 3012, 3110, and IM 3110 that the 

Commission approved in June 2004.17

Accelerated approval of this proposed 

rule change and Amendment No. 1 will 

enable NASD to announce promptly the 

final rules, as modified, thereby 

lessening member confusion as to the 

final requirements of NASD Rules 3010 

and 3012 and permitting members to 

make the necessary changes to comply 

with them. Based on the above, the 

Commission finds good cause, 

consistent with section 15A(b)(6) and 

section 19(b)(2) of the Act, for approving 

the proposed rule change and 

Amendment No. 1 prior to the 30th day 

Federal Register / Vol. 69, No. 193 / Wednesday, October 6, 2004 / Notices 59977

18 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b-4.

3See letter from James C. Yong, Senior Vice 

President of Regulation and General Counsel, NSX, 

to Nancy Sanow, Assistant Director, Division of 

Market Regulation, Commission, dated August 9, 

2004 (‘‘Amendment No. 1’’).

4Exchange Act Release No. 50198 (August 13, 

2004), 69 FR 51739 (August 20, 2004).

5Pub. L. 107–56, 115 Stat. 272 (2001).

6 31 U.S.C. 5311, et seq.

7See, e.g., Securities Exchange Act Release No. 

45798 (April 22, 2002), 67 FR 20854 (April 26, 

2002)(order approving SR–NASD–2002–10 and SR–

NASD–2002–24).

after the date of publication of notice of 

filing thereof in the Federal Register.

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change as amended 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 rulecomments@sec.gov. Please include File 

Number SR–NASD–2004–116 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–NASD–2004–116. This rule 

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 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. 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–

2004–116 and should be submitted on 

or before October 27, 2004. 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act, that the 

proposed rule change (SR–NASD–2004–

116), as amended, be, and hereby is, 

approved.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.18

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–22441 Filed 10–6–04; 8:45 am] 

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50475; File No. SR-NSX–

2004–02] 

Self-Regulatory Organizations; 

National Stock Exchange; Order 

Approving Proposed Rule Change and 

Amendment No. 1 Thereto Relating to 

Anti-Money Laundering Compliance 

Programs 

September 30, 2004. 

I. Introduction 

A. Filing Background 

On March 5, 2004, National Stock 

Exchange (‘‘NSX’’ or ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’)1 and Rule 19b-4 thereunder,2 a 

proposed rule change to establish NSX 

Rule 5.6, Anti-Money Laundering 

Compliance Program. The proposed rule 

change prescribes the minimum 

standards required for each member 

firm’s anti-money laundering program. 

On August 9, 2004, NSX filed 

Amendment No. 1 to the proposed rule 

change.3 On August 20, 2004, notice of 

the proposed rule change was published 

in the Federal Register.4 The 

Commission received no comments on 

the proposal. For the reasons discussed 

below this order approves the proposed 

rule change.

B. USA PATRIOT Act 

In response to the events of 

September 11, 2001, President Bush 

signed into law on October 26, 2001, the 

Uniting and Strengthening America by 

Providing Appropriate Tools Required 

to Intercept and Obstruct Terrorism Act 

of 2001 (the ‘‘PATRIOT Act’’) to address 

terrorist threats through enhanced 

domestic security measures, expanded 

surveillance powers, increased 

information sharing and broadened antimoney laundering requirements.5 The 

PATRIOT Act amends, among other 

laws, the Bank Secrecy Act, as set forth 

in Title 31 of the United States Code.6

Certain provisions of Title III of the 

PATRIOT Act, also known as the 

International Money Laundering 

Abatement and Anti-Terrorist Financing 

Act of 2001 (‘‘MLAA’’), impose 

affirmative obligations on a broad range 

of financial institutions, including 

broker-dealers, specifically requiring the 

establishment of anti-money laundering 

monitoring and supervisory programs.

MLAA Section 352 requires all 

financial institutions (including brokerdealers) to establish anti-money 

laundering programs that include, at a 

minimum: (i) Internal policies, 

procedures and controls; (ii) the specific 

designation of an anti-money laundering 

compliance officer; (iii) an ongoing 

employee training program; and (iv) an 

audit function to test the anti-money 

laundering program. 

The Commission has previously 

approved several other self-regulatory 

organizations’ (‘‘SROs’’) proposals 

(including those of the NYSE and the 

NASD) to adopt rules requiring their 

members to establish anti-money 

laundering compliance programs with 

the minimum standards described 

above.7 Proposed NSX Rule 5.6 involves 

similar requirements.

II. Description of the Proposed Rule 

Change 

NSX proposes to establish NSX Rule 

5.6, Anti-Money Laundering 

Compliance Program, which requires 

NSX members to establish and 

implement anti-money laundering 

compliance programs. These anti-money 

laundering compliance programs must 

be designed to comply with Section 352 

of the PATRIOT Act. The proposed rule 

change prescribes the minimum 

standards required for each member 

firm’s anti-money laundering program. 

Under the proposal, NSX members 

must develop and implement an antimoney laundering compliance program 

reasonably designed to achieve and 

monitor compliance with the 

requirements of the Bank Secrecy Act, 

and the implementing regulations 

promulgated under that Act by the 

Department of Treasury. Each member’s 

anti-money laundering program must be 

approved, in writing, by a member of its 

senior management. The anti-money