36194 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

12SEC Rule 11Ac1–1(a)(8), 17 CFR 240.11Ac1–

1(a)(8).

13 15 U.S.C. 78k–1 and 78o–3(b)(6).

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

15 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Alden S. Adkins, Senior Vice

President and General Counsel, NASD Regulation,

to Katherine A. England, Assistant Director,

Division of Market Regulation (‘‘Division’’),

Commission, dated June 1, 1999 (‘‘Amendment No.

1’’); Letter from Alden S. Adkins, Senior Vice

President and General Counsel, NASD Regulation,

to Katherine A. England, Assistant Director,

Division, Commission, dated July 7, 1999

(‘‘Amendment No. 2’’); Letter from Alden S.

Adkins, Senior Vice President and General Counsel,

NASD Regulation, to Richard C. Strasser, Assistant

Director, Division, Commission, dated July 15, 1999

(‘‘Amendment No. 3’’); Letter from Alden S.

Adkins, Senior Vice President and General Counsel,

NASD Regulation, to Richard C. Strasser, Assistant

Director, Division, Commission, dated October 7,

1999 (‘‘Amendment No. 4’’); and Letter from Alden

S. Adkins, Senior Vice President and General

Counsel, NASD Regulation, to Katherine A.

England, Assistant Director, Division, Commission,

dated April 11, 2000 (‘‘Amendment No. 5’’).

Amendment No. 1 conforms several provisions of

NASD rule 2520 to New York Stock Exchange

(‘‘NYSE’’) Rule 431. Among other things,

Amendment No. 1 indicates that, for purposes of

the JBO provisions of NASD Rule 2520, the NASD

will interpret the terms ‘‘carrying and clearing

member’’ and ‘‘carrying member’’ in the same

manner as the NYSE. Amendment No. 1 also

provides additional information regarding the

proposed changes to the provisions of NASD Rule

2520 governing control and restricted securities.

Amendment Nos. 2 and 3 make technical changes

to the text of NASD Rule 2520. Amendment No. 4

states that the NASD will allow a six-month phasein period for implementation of the proposed rule’s

requirements relating to JBO arrangements.

Amendment No. 5 incorporates certain proposed

maintenance margin requirements for non-equity

securities and options-related requirements that are

the subject of related rule filings by NASD

Regulation and to ensure consistency with similar

proposed changes to NYSE Rule 431.

4See Securities Exchange Act Release No. 41704

(August 4, 1999), 64 FR 43797 (August 11, 1999).

5 12 CFR 220 et seq. The Board of Governors of

the Federal Reserve System (‘‘Federal Reserve

Board’’) promulgated Regulation T pursuant to

Section 7(a) of the Exchange Act, which authorizes

it to prescribe regulations relating to credit

extensions on securities. See 15 U.S.C. 78g(a). 6See Board of Governors of the Federal Reserve

System Docket Nos. R–0905, R–0923, and R–0944,

63 FR 2806 (January 16, 1998).

7See Amendment No. 1, supra note 3.

8 12 CFR 220.2.

market makers.12 The NASD’s current

rules capture only those ATSs that meet

the definition of ECN. Therefore, the

Commission believes that it is necessary

to amend these rules to capture those

ATSs that do not meet the definition of

ECN.

Accordingly, the Commission finds

that the proposal is consistent with

sections 11A(a)(1)(C) and section

15A(b)(6) 13 because it will permit

Nasdaq to incorporate ATS orders into

the Nasdaq quote montage and provide

NASD members with the ability to

access these orders. In addition, to limit

market disruptions caused by locked or

crossed markets, the proposal will

require members that submit orders to

ATSs and ATSs, in certain

circumstances, to take reasonable

measures before locking or crossing a

market. Finally, the amendments will

incorporate into the NASD’s rules the

new obligations imposed on ECNs by

Regulation ATS.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,14 that the

proposed rule change (SR–NASD–99–

49) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14251 Filed 6–6–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 42858; File No. SR–NASD–99–

05]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change and Notice of

Filing and Order Granting Accelerated

Approval of Amendment Nos. 4 and 5

to the Proposed Rule Change Relating

to Margin for Exempted Borrowers,

Good Faith Accounts, Joint Back

Office Arrangements and Options

Transactions

May 30, 2000.

On January 19, 1999, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly-owned subsidiary, NASD

Regulation, Inc. (‘‘NASD Regulation’’),

filed with the Securities and Exchange

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

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 amending the

margin requirements for exempted

borrowers, good faith accounts, joint

back office (‘‘JBO’’) arrangements,

control and restricted securities, and

options transactions. The NASD

amended its proposal on June 1, 1999,

July 7, 1999, July 15, 1999, October 7,

1999 and April 11, 2000.3 The proposed

rule change and Amendment Nos. 1, 2,

and 3 were published for comment in

the Federal Register on August 11,

1999.4 The Commission received no

comment letters on the proposal. This

order approves the proposed rule

change, as amended. In addition, the

Commission is publishing notice to

solicit comments and is simultaneously

approving, on an accelerated basis,

Amendment Nos. 4 and 5.

I. Description of the Proposal

NASD Regulation proposes to amend

NASD rule 2520, ‘‘Margin

Requirements,’’ to revise the margin

requirements for exempted borrowers,

good faith accounts, JBO arrangements,

control and restricted securities, and

options transactions. NASD Regulation

believes that the proposal will conform

NASD Rule 2520 to recent changes to

NYSE Rule 431 and recently adopted

changes to Regulation T.5 NASD

Regulation is also proposing other

minor changes to eliminate obsolete

provisions and correct errors in the text

of NASD Rule 2520.

A. Margin Requirements for Exempted

Borrowers and Good Faith Accounts

Under the recent changes to

Regulation T,6 the Federal Reserve

Board has created a new category of

account called the ‘‘good faith account’’

to replace the ‘‘non-purpose,’’

‘‘arbitrage,’’ and ‘‘government

securities’’ accounts. In the good faith

account, a customer may purchase

certain securities (exempted and nonequity securities, and money market and

exempted securities mutual funds) on

‘‘good faith’’ margin (the amount of

margin specified by the creditor in the

exercise of sound credit judgment) or

the margin specified by the regulatory

authority, whichever is greater.

Regulation T no longer specifies initial

margin, payment and liquidation time

frames for transactions in these

securities in a good faith account.

NASD Regulation believes that

transactions in good faith accounts raise

the same safety and soundness

questions as transactions in cash and

margin accounts. Accordingly, the

proposal amends NASD Rule 2520(c) to

require all accounts, including good

faith accounts, to maintain margin as

required by NASD Rule 2520.7 Cash

accounts will continue to be subject

only to certain specific requirements,

not to the overall requirements of the

rule.

In addition, NASD Regulation states

that the Federal Reserve Board

established a classification of exempted

borrowers which are exempt from

Regulation T. An ‘‘exempted borrower,’’

as defined in Regulation T, is a brokerdealer ‘‘a substantial portion of whose

business consists of transactions with

persons other than brokers or dealers.’’ 8

The proposal codifies this exemption

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices 36195

9 12 CFR 220.7(c).

10Regulation T does not define the term ‘‘clearing

and servicing.’’ However, Regulation T describes a

JBO broker as a clearing and servicing firm.

11The term ‘‘customer’’ is defined in section

220.2 of Regulation T.

12Board of Governors of the Federal Reserve

System Docket No. R–0772 (June 21, 1995), 60 FR

33763 (June 29, 1995).

13 Id.

14National Securities Markets Improvement Act

of 1996, Pub. L. 104–209, 110 Stat. 3416 (October

11, 1996).

15Board of Governors of the Federal Reserve

System Docket No. R–0772 (April 24, 1996), 61 FR

20386 (May 6, 1996).

16 Id.

17See Letter from Scott Holz, Counsel, Federal

Reserve Board, to Raymond J. Hennessey, Vice

President, NYSE, dated April 16, 1999 (stating that

a carrying firm may be considered a clearing and

servicing firm within the meaning of the JBO

provisions of Regulation T).

18The term ‘‘tentative net capital’’ generally refers

to net capital before haircuts and undue

concentration charges on proprietary securities and

options positions. Haircuts are specified

percentages of the market value of a broker-dealer’s

proprietary securities by which a broker-dealer

must reduce its net worth under Exchange Act Rule

15c3–1 (the ‘‘Net Capital Rule’’).

19The term ‘‘net capital’’ is defined under the Net

Capital Rule and is generally calculated by

deducting illiquid assets from a firm’s ‘‘net worth,’’

as determined under Generally Accepted

Accounting Principles (GAAP), adding to that

amount properly subordinated debt under

Appendix D of the Net Capital Rule, and further

deducting haircuts from securities held in the firm’s

proprietary accounts.

20Under the proposal, the clearance of options

market maker accounts would be deemed a brokerdealer’s primary business if a minimum of 60% of

the aggregate deductions in its ratio of gross options

market maker deductions to net capital (including

gross deductions for JBO participant accounts) are

options market maker deductions. Subparagraph

(c)(2)(x) of the Net Capital Rule limits the amount

of specialist and market maker options positions a

firm may guarantee, endorse or carry to a ratio of

10 to one of options market maker and specialist

deductions to net capital. In addition, subparagraph

(a)(6) of the Net Capital Rule exempts an option

market maker and specialist from the haircut

provisions of the Net Capital Rule provided that,

among other things, the firm maintains an account

liquidating equity equal to the percentage described

in subparagraph (a)(6)(iii)(A) of the Net Capital

Rule.

21The term ‘‘exempted borrower’’ is defined in

section 220.2 of Regulation T. NASD Rule

2520(a)(3), as revised by the current proposal,

specifically excludes an exempted borrower from

its definition of customer.

22See Amendment No. 5, supra note 3.

23See Amendment No. 4, supra note 3.

24 In the Exempt Account Proposal (File No. SR–

NASD–00–08), the NASD proposes to amend NASD

Rule 2520(e)(2)(F) and to adopt NASD Rule

2520(e)(2)(G) to revise the margin requirements for

certain non-equity securities held in ‘‘exempt

accounts,’’ as defined in the proposal. The NASD

filed the Exempt Account Proposal with the

Commission on March 3, 2000. To date, the

Commission has not taken action on the Exempt

Account Proposal. Accordingly, this order does not

approve the Exempt Account Proposal or its

application to the margin requirements contained in

this filing.

from Regulation T by excluding

‘‘exempted borrowers,’’ as defined in

Regulation T, from the definition of

‘‘customer’’ in NASD Rule 2520(a)(3),

except for the proprietary account of a

broker-dealer carried by a member

pursuant to NASD Rule 2520(e)(6).

Thus, proprietary accounts of an

introducing member that are carried or

cleared by another member will remain

subject to the equity requirements of

NASD Rule 2520(e)(6).

B. Amendments To Provide for Joint

Back Office Arrangements

1. Background

Section 220.7(c) of Regulation T9

allows special margin treatment for

broker-dealers without clearing

operations, known as ‘‘JBO

participants,’’ who invest in a ‘‘clearing

and servicing’’ 10 broker-dealer, known

as a ‘‘JBO-broker.’’ Under Regulation T,

the JBO participants are not treated as

‘‘customers’’ 11 of the JBO broker.

As part of a periodic review of its

regulations, in 1995 the Federal Reserve

Board proposed an amendment to

Regulation T relating to JBO

arrangements.12 The Federal Reserve

Board stated that the proposed

amendment was prompted by the

concerns of several stock exchanges that

JBO brokers were extending credit to

JBO participants far in excess of their

ownership interests in the JBO broker.13

Under the proposed amendment, the

favorable margin treatment for a JBO

arrangement would have been

conditioned on the JBO participant’s

ownership interest in the JBO broker

being related to the amount of business

transacted through the JBO arrangement.

After Congress enacted the National

Securities Market Improvement Act of

1996 (‘‘NSMIA’’),14 the Federal Reserve

Board stated that it decided not to adopt

its proposed amendment to Regulation

T relating to JBO arrangements.15

Instead, the Federal Reserve Board

stated that it ‘‘believes it is appropriate

to rely on the authority of the JBO’s

examining authority to ensure the

reasonableness of JBO arrangements

under its supervision.’’ 16

2. Original Filing and Amendments Nos.

1–4

NASD Regulation proposes to amend

NASD Rule 2520(e)(6) to provide for

JBO arrangements established pursuant

to section 220.7 of Regulation T. Under

the proposal, either a carrying and

clearing or carrying broker would be

permitted to be a JBO broker.17 A JBO

broker would be required to: (1) Provide

written notification to the NASD prior

to establishing a JBO arrangement; (2)

maintain minimum tentative net

capital 18 of $25 million as computed

under the Net Capital Rule or minimum

net capital 19 of $7 million if it is

engaged in the primary business of

clearing options market maker

accounts; 20 (3) maintain a written risk

analysis methodology for assessing the

amount of credit extended to each JBO

participant; and (4) deduct from its net

capital each JBO participant’s haircut

requirement under the Net Capital Rule

in excess of the equity maintained in the

JBO participant’s account.

If a JBO broker’s tentative net capital

or net capital, whichever applies, falls

below the prescribed requirement, the

JBO broker must (1) promptly notify the

NASD in writing of the deficiency; and

(2) resolve the net capital deficiency

within three business days. If a JBO

broker fails to correct a net capital

deficiency within three business days it

would not be permitted to accept new

transactions through the JBO

arrangement.

A JBO participant must be a registered

broker-dealer subject to the Net Capital

Rule and must maintain an ownership

interest in its JBO broker in accordance

with Regulation T. The JBO participant

must maintain in the JBO arrangement

a minimum of $1 million in liquidating

equity, exclusive of the JBO

participant’s ownership interest in the

JBO broker required under Regulation T.

If a JBO participant’s liquidating equity

falls below $1 million, it must cure the

deficiency within five business days or

lose its JBO participant status. Unless

the JBO participant was an ‘‘exempted

borrower,’’ 21 a JBO participant that lost

its JBO participant status would become

subject to the margin requirements

prescribed for customers in Regulation

T and other maintenance margin

requirements under NASD Rule 2520.22

NASD Regulation will allow a sixmonth phase-in period for

implementation of the requirements

relating to JBO arrangements. NASD

Regulation believes that the six-month

phase-in will allow sufficient time for

members and member organizations to

comply with the new capital and risk

analysis requirements and to implement

new or make changes to existing

arrangements or systems.23

3. Amendment No. 5

Amendment No. 5 proposed to

incorporate a related rule change (the

‘‘Exempt Account Proposal’’) into the

current proposal.24 Under the Exempt

Account Proposal, a broker-dealer’s

maintenance margin requirement would

be reduced below the haircut

requirement under the Net Capital Rule

for certain non-equity securities held in

36196 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

25See Amendment No. 5, supra note 3.

26For example, in the case of a long position in

an equity security, the proposal would require a

carrying broker to compute its net capital deduction

for deficient specialist, market maker and brokerdealer accounts based on the 15% haircut

requirement of paragraph (c)(2)(vi)(J) of the Net

Capital Rule, rather than the 25% maintenance

margin requirement of NASD Rule 2520(c)(1).

27 In Amendment No. 5, NASD Regulation revised

its proposal to delete proposed subparagraph

(f)(2)(M)(ii). On March 31, 2000, NASD Regulation

filed a revised version of proposed subparagraph

(f)(2)(M)(ii) in File No. SR–NASD–00–15. The

Commission has not taken action on that proposal.

28 15 U.S.C. 78o–3(b)(6).

29 In approving the proposed rule changes, the

Commission has considered the proposal’s impact

on efficiency, competition, and capital formation.

15 U.S.C. 78c(f).

30See Securities Exchange Act Release No. 40529

(October 7, 1998), 63 FR 55567 (October 16, 1998)

(‘‘1998 Order’’).

31See 1998 Order, supra note 29.

an exempt account. Under Amendment

No. 5 to the current proposal, a JBO

broker would be permitted to

alternatively deduct from its net capital

the difference between a JBO

participant’s account equity and the

maintenance margin requirement under

the Exempt Account Proposal, as

opposed to the haircut requirement

under the Net Capital Rule originally

proposed. The NASD stated that this

amendment would establish consistency

by incorporating the most recent

maintenance margin requirements of the

Exempt Account Proposal into the JBO

filing.25

C. Reduced Margin for Specialist,

Market Maker, and Broker-Dealer

Accounts

NASD Rules 2520(e)(5) and (e)(6)

currently require a carrying brokerdealer to deduct from its net capital the

difference between the equity

maintained in the account of a

specialist, market maker or brokerdealer and the required maintenance

margin under NASD Rule 2520. The

NASD proposes to amend

subparagraphs (e)(5) and (e)(6) to

require the carrying broker-dealer to

deduct from its net capital the

difference between the equity

maintained in the account of a

specialist, market maker or brokerdealer and the required haircut in

accordance with the Net Capital Rule.26

D. Control and Restricted Securities

The ‘‘Concentration Reduction’’

provision in NASD Rule

2520(e)(8)(C)(ii) is designed to impose

increasing margin requirements for

customer positions in control and

restricted securities based upon the

percent of outstanding shares or the

percent of average weekly volume that

the position represented. However, the

NASD believes that the provision

unintentionally penalizes a customer for

maintaining a position that exceeds the

collateral necessary to cover his margin

loan. To eliminate this unintended

penalty, the proposed rule excludes

‘‘excess securities’’ from the

concentration reduction calculation.

The proposal defines ‘‘excess securities’’

as the amount of securities, if any, by

which the aggregate position in control

and restricted securities of any one issue

exceeds the aggregate amount of

securities that would be required to

support the aggregate credit extended on

such control and restricted securities if

the applicable margin requirement were

50%. Thus, under the proposed rule

change, the concentration reduction

calculation will be performed on an

aggregate position that is only as large

as the collateral necessary to support a

margin loan of 50%.

In addition, the proposed rule change

expands the exception in paragraph

(e)(8) to include all restricted securities

that are then saleable, including affiliate

securities, pursuant to SEC Rules 144(k),

145(d)(2), or 145(d)(3). Accordingly,

those customer-owned, restricted

securities that are then saleable can be

sold under SEC Rule 144(k) would be

subject to the same maintenance margin

requirements that presently apply to

ordinary stock (25%).

E. Amendments to Margin Rules

Governing Options Transactions

NASD Regulation is proposing to

amend NASD Rule 2520(f)(2) to add

subparagraphs (L) and (M)(i), which are

identical to current provisions in NYSE

Rule 431(f)(2)(L) and (f)(2)(M)(i).27

Proposed NASD Rule 2520(f)(2)(L) will

allow a customer to designate which

security position in an account will be

utilized to cover the requested margin at

the time the option order is entered,

provided the member offers such a

service. Proposed NASD Rule

2520(f)(2)(M)(i) will permit options

transactions in customer cash accounts

if the transaction is permissible under

section 220.8 of Regulation T.

II. Discussion

For the reasons discussed below, the

Commission finds that the proposed

rule change, as amended, is consistent

with the Exchange Act and the rules and

regulations under the Exchange Act

applicable to a national securities

association. In particular, the

Commission believes that the proposed

rule change is consistent with section

15A(b)(6) of the Exchange Act,28 which

requires the rules of an association be

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, and to protect investors and the

public interest.29

A. Exempted Borrowers and Good Faith

Accounts

The Commission finds that it is

reasonable for the NASD to amend

NASD Rule 2520(c) to apply the existing

maintenance margin requirements of

NASD Rule 2520 to transactions in

‘‘good faith’’ accounts permitted under

Regulation T. Although transactions

permitted in a good faith account will

not be subject to the initial margin

requirements, payment requirements

and liquidation time frames of

Regulation T, as the NASD notes,

transaction in a good faith account may

raise the same safety and soundness

concerns with regard to maintenance

margin as do transactions in margin

accounts. Accordingly, the Commission

believes that applying the maintenance

margin requirements of NASD Rule

2520(c) to transactions in a good faith

account will protect investors and the

public interest and help to maintain fair

and orderly markets by ensuring that

good faith accounts contain adequate

margin reserves. The Commission notes

that it approved a similar change to

NYSE Rule 431(c).30

In addition, the Commission believes

it is reasonable for the NASD to amend

the definition of ‘‘customer’’ in NASD

Rule 2520(a)(3) to codify the NASD’s

position that exempted borrowers, as

defined under Regulation T, will remain

exempt from the requirements of NASD

Rule 2520, except for the proprietary

accounts of a broker-dealer carried by a

member pursuant to NASD Rule

2520(e)(6). The Commission believes

that it is reasonable for the NASD to

continue to apply the equity

requirements of NASD Rule 2520(e)(6)

to the proprietary accounts of brokerdealers that qualify as ‘‘exempted

borrowers’’ under Regulation T and that

are carried by another NASD member.

By continuing to apply the equity

requirements of NASD Rule 2520(e)(6)

to these proprietary accounts, the

Commission believes that the proposal

will help to ensure that these accounts

contain adequate margin, thereby

protecting investors and the public

interest. The Commission notes that it

approved an identical change to the

definition of ‘‘customer’’ in NYSE Rule

431(a)(2).31

B. JBO Provisions

The Commission believes that NASD

Regulation has proposed reasonable

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices 36197

32See Board of Governors of the Federal Reserve

System Docket No. R–0772 (April 24, 1996), 61 FR

20386 (May 6, 1996).

33To date, the Commission has not taken action

on the NASD’s Exempt Account Proposal.

Accordingly, this order does not approve the

Exempt Account Proposal or its application to the

margin amendments contained in this filing.

34As noted above, this order does not approve

NASD’s Exempt Account Proposal on its

application to the margin requirements contained in

this filing.

capital and equity requirements for JBO

brokers and JBO participants. The

Commission also believes that the

proposed rule change fulfills the Federal

Reserve Board’s mandate for the SROs

to provide rules that ‘‘ensure the

reasonableness of JBO arrangements.’’ 32

With respect to JBO brokers, the

Commission believes that it is

reasonable for the Association to require

a JBO broker to: (1) Provide written

notification to the Association prior to

establishing a JBO arrangement; (2)

provide prompt written notification to

the Association if its tentative net

capital or net capital, whichever

applies, falls below the prescribed

requirements; (3) resolve any net capital

deficiency within three business days or

not be permitted to accept additional

transactions through the JBO

arrangement; (4) maintain a written risk

analysis methodology for assessing the

amount of credit extended to each JBO

participant; and (5) deduct from its net

capital each JBO participant’s haircut

requirement in excess of the equity

maintained in the JBO participant’s

account.33 In addition, the Commission

believes that it is reasonable for the

Association to require a JBO broker to

maintain a minimum of $25 million in

tentative net capital or $7 million in net

capital if the JBO broker’s primary

business is clearing options market

maker accounts. The Commission also

believes that it is reasonable to deem a

broker-dealer’s primary business to be

the clearance of options market maker

accounts if a minimum of 60% of its

aggregate deductions in its ratio of gross

options market maker deductions to net

capital (including gross deductions for

JBO participant accounts) are options

market maker deductions.

In addition, the Commission believes

that it is reasonable for the NASD to

require a JBO broker to immediately

notify the NASD if its tentative net

capital or net capital, whichever

applies, falls below the prescribe

minimum levels. The Commission also

believes that it is reasonable for a JBO

broker to be subject to the equity capital

withdrawal restrictions of paragraph (e)

of the Net Capital Rule and the

prohibitions against the reduction,

prepayment, and repayment of

subordination debt of paragraph (b) of

Appendix D of the Net Capital Rule, as

if the firm’s net capital would be below

the minimum standards specified by

those sections.

The Commission believes that the $7

million net capital requirement for JBO

brokers is a reasonable response to the

need for a capital cushion for the

fluctuations in net capital resulting from

the daily changes in JBO participant

accounts and would avoid unnecessary

and inadvertent violations of the net

capital requirements at the times when

a firm’s capital needs are more volatile,

such as the week that options expire or

during severe market stresses.

The Commission believes that it is

reasonable for the Association to require

a JBO broker to be either a clearing and

carrying, clearing, or carrying firm in

accordance with the requirements under

Regulation T and the Federal Reserve

Board’s applicable interpretations.

With respect to JBO participants, the

Commission believes that it is

reasonable for the Association to require

a JBO participant to: (1) Be a registered

broker-dealer subject to the Net Capital

Rule; (2) maintain an ownership interest

in the JBO Broker in accordance with

Regulation T; and (3) maintain a

minimum liquidating equity of $1

million in the JBO arrangement. The

Commission also believes that it is

reasonable to require a JBO participant

whose liquidating equity falls below the

required $1 million to deposit the

deficiency within five business days or

lose its JBO participant status and

become subject to the customer margin

account requirements under Regulation

T and the other NASD maintenance

margin requirements.

The Commission believes that the

requirement of $1 million equity in the

account is not unreasonable,

considering the lack of regular

maintenance margin requirements and

the substantial leverage that would be

obtained by the JBO participant.

The Commission believes that it is

important for the Association to be

adequately prepared to implement and

monitor the revised rules. Therefore, the

Commission believes that it is

appropriate to permit firms to allow a

six-month phase-in of these new rules

relating to JBO arrangements.

C. Reduced Margin for Specialist,

Market Maker and Broker-Dealer

Accounts

The Commission believes that it is

reasonable to require a broker-dealer to

deduct from its net capital the

difference between the equity

maintained in the account of a

specialist, market maker and brokerdealer and the required haircut in

accordance with the Net Capital Rule.34

The Commission believes that it is

appropriate and equitable for SROs to

require the same maintenance margin

requirements for specialist, market

maker and broker-dealer accounts as

JBO participant accounts.

D. Concentration Provisions for Control

and Restricted Securities

The Commission believes that it is

reasonable for the NASD to permit a

firm to deduct the amount of its

customers’ excess control and restricted

securities in determining if a

concentration of control and restricted

securities exists for purposes of

deducting from its net capital any

margin deficiencies in a customer’s

account under subparagraph (e)(8)(B)(i)

of NASD Rule 2520. Excess securities

includes securities by which a

customer’s aggregate position in control

and restricted securities of any one issue

exceeds the aggregate amount of

securities that would be required to

support the aggregate credit extended on

those securities, assuming a 50% margin

requirement.

The Commission notes that the

current concentration provisions for

control and restricted securities appear

to be inappropriate because they impose

stricter requirements on accounts that

have more control and restricted

securities than necessary to collateralize

a credit extension. By limiting the

determination of whether a

concentration of control and restricted

securities exists to two times the credit

extension, the proposal would subject

these securities to a greater margin

requirement based only on financed

control and restricted securities. The

Commission believes that this is a

reasonable and appropriate margin

requirement.

The Commission also believes that it

is reasonable for the NASD to exempt

affiliate securities from the margin

provisions relating to control and

restricted securities provided that the

securities otherwise meet the

requirements of subparagraph (e)(8)(D),

including that: (1) The securities are

considered then saleable under

Securities Act Rule 144(k), Securities

Act Rule 145(d)(2) or Securities Act

Rule 145(d)(3); and (2) the issuer is

current in its filings pursuant to the

continuous disclosure system under the

Act.

The Commission notes that its

interpretations under Securities Act

36198 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

35See Securities Exchange Act Release No. 38708

(June 2, 1997), 62 FR 31650 (June 10, 1997) (‘‘1997

Order’’).

36See 1997 Order, supra note 34. As discussed

above, NASD Regulation withdrew proposed NASD

Rule 2520(f)(2)(m)(ii) from the proposal.

37 15 U.S.C. 78s(b)(2).

38 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter to Jack Drogin, Senior Special

Counsel, Division of Market Regulation,

Commission, from Robert E. Aber, Senior Vice

President and General Counsel, Nasdaq, dated April

7, 2000 (‘‘Amendment No. 1’’). Amendment No. 1

clarifies that the proposed time frame for gaining

compliance with the continued inclusion market

capitalization standards applies to issuers listed on

both the Nasdaq SmallCap Market and the Nasdaq

National Market. In addition, Amendment No. 1

clarifies that the method for regaining compliance

with the continued inclusion requirement for the

number of market makers set forth in Rule

4310(c)(8)(A) applies to issuers listed on both The

Nasdaq SmallCap Market and the Nasdaq National

Market. Finally, Amendment No. 1 makes certain

technical corrections to the proposed rule change. 4See Letter to Jack Drogin, Senior Special

Counsel, Division of Market Regulation,

Commission, from Robert E. Aber, Senior Vice

President and General Counsel, Nasdaq, dated April

25, 2000 (‘‘Amendment No. 2’’). Amendment No. 2

clarifies that Rule 4310(c)(8)(C) is being amended to

specify time frames for determining when an issuer

is non-compliant or has regained compliance with

the Association’s market capitalization standards.

Amendment No. 2 also clarifies that the NASD’s

Rule 4300 series contains the qualification

requirements for all securities included in The

Nasdaq Stock Market while the Rule 4400 Series

sets forth additional requirements for those

securities designated for the Nasdaq National

Market.

Rule 144(k) may, under certain

circumstances, permit a broker-dealer to

sell control and restricted securities of

an affiliate in default without regard to

the volume and other restrictions

imposed on affiliates, In addition,

subparagraph (d)(3)(iv) of Securities Act

Rule 144 permits a broker-dealer to

‘‘tack’’ the ownership period of an

affiliate in default to its own for

purposes of determining if the time

conditions of Securities Act Rule 144(k)

are met. Accordingly, the Commission

believes that it is appropriate for

affiliate securities, which otherwise

meet the requirements subparagraph

(e)(8)(D), to be exempt from the

maintenance margin rules for control

and restricted securities.

E. Amendments to Margin Rules

Governing Options Transactions

The NASD proposes to amend Rule

2520(f)(2) to add subsections (L) and

(M)(i). Section 2520(f)(2)(L) incorporates

the provisions currently contained in

Regulation T regarding ‘‘exclusive

designation’’ that allow a customer to

designate which security position in an

account is to be utilized to cover the

required margin at the time an option

order is entered, provided the member

organization offers such a service. This

section merely incorporates existing

provisions of Regulation T into the

NASD rule and, accordingly, is

reasonable. The Commission notes that

it approved an identical change to NYSE

Rule 431.35

Further, proposed NASD Rule

2520(f)(2)(M)(i) does not raise new

regulatory issues because it incorporates

those provisions of Regulation T that

allow certain defined options-related

transactions to be maintained in a cash

account. The Commission notes that it

approved a similar change to NYSE Rule

431.36

F. Accelerated Approval of Amendment

Nos. 4 and 5

The Commission finds good cause for

approving Amendment Nos. 4 and 5

prior to the thirtieth day after the date

of publication of notice of filing

therefore in the Federal Register.

Amendment No. 4 proposes a six-month

phase-in of the rule changes relating to

JBO arrangements. The Commission

believes that this amendment is

necessary because it is important for the

NASD and its members to be adequately

prepared to implement and monitor the

new rules relating to JBO arrangements.

Amendment No. 5 clarifies the proposal

by incorporating references to the

Exempt Account Proposal, and deleting

a proposed change to NASD Rule

2520(f)(2)(m)(ii), which has been

superseded by a change to subparagraph

(f)(2)(m)(ii) proposed in File No. SR–

NASD–00–15. Accordingly, the

Commission finds it is consistent with

sections 6(b)(5) and 19(b) of the

Exchange Act to approve Amendment

Nos. 4 and 5 on an accelerated basis.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment Nos.

4 and 5, including whether Amendment

Nos. 4 and 5 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. Copies of

the submissions, 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 persons, 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, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the NASD. All submissions

should appropriately refer to SR–

NASD–99–05.

IV. Conclusion

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Exchange Act,37

that the proposed rule change, SR–

NASD–99–05, as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.38

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14252 Filed 6–6–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42876; File No. SR–NASD–

99–69]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Clarifying Certain Listing

Standards of the Nasdaq Stock Market,

Inc.

May 31, 2000.

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 November

22, 1999, the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) through its wholly

owned subsidiary, The Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’), 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 Nasdaq. The Association

submitted Amendments No. 1 3 and No.

2 4 to the proposed rule change on April

10, 2000, and April 2000, respectively.

The Commission is publishing this

notice to solicit comments on the

proposed rule change, as amended, from

interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Nasdaq has filed with the

Commission a proposed rule change to