36860 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

7 15 U.S.C. 78f(b)(5).

8 15 U.S.C. 78k–1.

9 In approving this proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

10Section 11A(a)(1)(C)(v) of the Act.

11NYSE Approval Order at 30179.

12 15 U.S.C. 78s(b)(2).

13 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3This 19b–4 filing, represents Amendment No. 1

to File No. SR–NASD–99–67.

Act 7 which requires, among other

things, that the rules of an exchange be

designed to promote just and equitable

principles of trade, to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system and, in

general, to protect investors and the

public interest, and Section 6(b)(8),

which requires that the rules of an

exchange not impose any burden on

competition not necessary or

appropriate in furtherance of the Act.

The rescission of the Exchange’s offboard trading restrictions is also

consistent with Section 11A of the Act 8

which sets forth the findings and

objectives that are to guide the

Commission in its oversight of the

national market system. Specifically,

rescinding the off-board trading

restrictions will help further the

national market system objective in

Section 11A(a)(1)(C)(i) to assure the

economically efficient execution of

securities transactions, and in Section

11A(a)(1)(C)(ii) to assure fair

competition between exchange markets

and markets other than exchange

markets.9

As discussed more fully in the NYSE

Approval Order, the existence of offboard trading restrictions can no longer

be justified in an age when advancing

technology and expanding trading

volume are introducing new

competitive challenges for the U.S.

securities markets, both at home and

abroad. Off-board trading rules such as

Articles VIII, Exchange Rule 9 directly

restrict a certain type of market center

competition—competition between

exchange markets and markets other

than exchange markets. Their rescission

today eliminates an inappropriate

regulatory burden on competition that

runs contrary to the objectives set forth

in the Act.

Off-board trading restrictions have

been justified on the basis that they

promote the interaction of investors’

orders without participation by a

dealer—indeed an objective set forth in

the Act.10 The Commission believes,

however, that whatever beneficial effect

off-board trading restrictions such as

Article VIII, Exchange Rule 9 may have

in enhancing the interaction of investors

orders can no longer justify their

anticompetitive nature. To the extent

off-board trading rules enhance order

interaction, they do so in an undesirable

way—by attempting a direct restriction

on competition. Such attempts are never

wholly successful and typically only

distort, rather than eliminate,

competition and introduce unnecessary

costs ultimately borne by investors.

The outcome of competition between

market centers should depend on which

market centers are most able to serve

investors interests by providing the

highest quality trading services at the

lowest possible prices; the

Commission’s regulatory task is

removing unwarranted regulatory

barriers to competition between market

centers. As stated in the NYSE Approval

Order, the rescission of off-board trading

rules is ‘‘intended solely to free the

forces of competition and allow

investors interest to control the success

or failure of individual market

centers.’’ 11 The same rationale and

motivation support the Commission’s

action today.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,12 that the

proposed rule change (SR–CHX–99–28)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to

delegated authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14727 Filed 6–9–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42885; File No. SR–NASD–

99–67]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 Thereto by NASD

Regulation, Inc. Relating to

Amendments to Membership Rules

June 1, 2000.

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

Securities Exchange Act of 1934 (‘‘Act’’

or ‘‘Exchange Act’’),1 and Rule 19b–4

thereunder,2 notice is hereby given that

on November 2, 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’’)

the proposed rule change as described

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

have been prepared by NASD

Regulation. On May 1, 2000, the NASD

Regulation filed Amendment No. 1 to

the proposed rule change.3 The

Commission is publishing this notice to

solicit comments on the proposed rule

change, as amended, from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation is proposing to

amend the Rule 1010 Series, which

concerns member admission. Additions

are italicized; deletions are [bracketed].

1010. Membership Proceedings

1011. Definitions

Unless otherwise provided, terms

used in the Rule 1010 Series shall have

the meaning as defined in Rule 0120.

(a) ‘‘Applicant’’

The term ‘‘Applicant’’ means a person

[or entity] that applies for membership

in the Association under Rule 1013[,] or

a member that files an application [to

remove or modify a restriction under

Rule 1017, or files a notice and

application for continuance in

membership under Rule 1018] for

approval of a change in ownership,

control, or business operations under

Rule 1017. 

(b) ‘‘Associated Person’’

The term ‘‘Associated Person’’ means:

(1) a natural person registered under the

Rules of the Association; or (2) a sole

proprietor, partner, officer, director,

branch manager, or other natural person

occupying a similar status or performing

similar functions who will be or is

anticipated to be associated with the

Applicant, or a natural person engaged

in the investment banking or securities

business who will be or is anticipated

to be directly or indirectly controlling or

controlled by the Applicant, whether or

not any such person is registered or

exempt from registration under the

NASD By-Laws or the Rules of the

Association.

(c) ‘‘Department’’

The term ‘‘Department’’ means the

Department of Member Regulation of

NASD Regulation.

(d) ‘‘Director’’

The term ‘‘Director’’ means a member

of the NASD Regulation Board.

(e) ‘‘district’’

The term ‘‘district’’ means a district

established by the NASD Regulation

Board.

(f) ‘‘district office’’

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36861

The term ‘‘district office’’ means an

office of NASD Regulation located in a

district.

(g) ‘‘Governor’’

The term ‘‘Governor’’ means a

member of the NASD Board.

(h) ‘‘Interested Association Staff’’

The term ‘‘Interested Association

Staff’’ means an employee who directly

participates in a decision under Rule

1014[,] or 1017, [or 1018,] an employee

who directly supervises an employee

with respect to such decision, an

employee who conducted an

investigation or examination of a

member that files an application under

Rule 1017 [or a notice and application

under Rule 1018], the District Director

for the relevant district, and the head of

the Department.

(i) ‘‘material change in business

operations’’ 

The term ‘‘material change in

business operations’’ includes, but is not

limited to: 

(1) removing or modifying a

membership agreement restriction; 

(2) market making, underwriting, or

acting as a dealer for the first time; and

(3) adding business activities that

require a higher minimum net capital

under SEC Rule 15c3–1. 

[(i)](j) ‘‘NASD Board’’

The term ‘‘NASD Board’’ means the

Board of Governors of the NASD.

[(j)](k) ‘‘NASD Regulation Board’’

The term ‘‘NASD Regulation Board’’

means the Board of Directors of NASD

Regulation.

(l) ‘‘principal place of business’’ 

The term ‘‘principal place of

business’’ means the executive office

from which the sole proprietor or the

officers, partners, or managers of the

Applicant direct, control, and

coordinate the activities of the

Applicant, unless the Department

determines that the principal place of

business is where: (1) the largest number

of Associated Persons of the Applicant

are located; or (2) the books and records

necessary to provide information and

data to operate the business and comply

with applicable rules are located. 

[(k)](m) ‘‘sales practice [violations]

event’’

The term ‘‘sales practice [violations]

event’’ means any [conduct directed at

or involving a customer that would

constitute a violation of any Rule in the

Rule 2000 or 3000; any provision of the

Act, Securities Exchange Act of 1934; or

any state statute prohibiting fraudulent

conduct in connection with the offer,

sale, or purchase of a security or in

connection with the rendering of

investment advice] customer complaint,

arbitration, or civil litigation that has

been reported to the Central Registration

Depository, currently is required to be

reported to the Central Registration

Depository, or otherwise has been

reported to the Association. 

[(l)](n) ‘‘Subcommittee’’

The term ‘‘Subcommittee’’ means a

subcommittee of the National

Adjudicatory Council that is constituted

pursuant to Rule 1015 to conduct a

review of a Department decision issued

under the Rule 1010 Series.

IM–1011–1. Safe Harbors 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

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 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: 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, 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.

Safe Harbor-Number of Increase Permitted Within One Year Period

Without Rule 1017 Application

Number of Associated Persons Involved in Sales

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.

36862 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

1012. General Provisions

(a) [Service of Notices and Decisions;]

Filing by Applicant or Service by the

Association

[A notice or a decision issued by the

Association under the Rule 1010 Series

with respect to an application shall be

served promptly by first-class mail on

the Applicant or its counsel, unless a

Rule specifies a different method of

service. Service by the Association or

filing by an Applicant by mail shall be

deemed complete upon mailing. Service

by the Association or filing by an

Applicant by commercial courier or

facsimile shall be deemed complete on

the date specified in the written

confirmation of receipt.]

(1) An Applicant may file an

application or any document or

information requested under the Rule

1010 Series by first-class mail, overnight

courier, or hand delivery. If the

Department and the Applicant agree,

the Applicant also may file a requested

document or information by facsimile. 

(2) The Association shall serve a

notice or decision issued under the Rule

1010 Series by first-class mail on the

Applicant or its counsel, unless a Rule

specifies a different method of service. 

(3) Service by the Association or filing

by an Applicant shall be deemed

complete as follows: 

(A) Service or filing by first-class mail

shall be deemed complete on the date

of postmark; 

(B) Service or filing by overnight

courier shall be deemed complete on the

date of delivery to the overnight courier

as specified in the airbill; 

(C) Service or filing by hand delivery

shall be deemed complete on the date

of receipt as evidenced by a date stamp;

and 

(D) Service or filing by facsimile shall

be deemed complete on the date

specified in the document and on the

written confirmation of transmission.

(b) Lapse of Application

(1) Absent a showing of good cause,

an application filed under Rule 1013 or

1017 shall lapse if an Applicant fails to: 

(A) respond fully within 60 days after

service of an initial written request for

information or documents under Rule

1013, within 30 days after service of an

initial written request for information or

documents under Rule 1017, within 30

days after service of a subsequent

written request for information or

documents under Rule 1013 or 1017, or

within such other time period agreed to

by the Department and the Applicant; 

(B) appear at or otherwise participate

in a scheduled membership interview

pursuant to Rule 1013(b) or 1017(f); or

(C) file an executed membership

agreement under Rule 1014(d) or Rule

1017(g)(4) within 25 days after service of

the agreement, or within such other

period agreed to by the Department and

the Applicant.

(2) If an Applicant wishes to continue

to seek membership or approval of a

change in ownership, control, or

business operations, then the Applicant

shall be required to submit a new

application and fee under Rule 1013 or

1017, respectively. The Association

shall not refund any fee for a lapsed

application. 

[(b)] (c) Ex Parte Communications

(1) The prohibitions against ex parte

communications shall become effective

when Association staff has knowledge

that an Applicant intends to file a

written request for review by the

National Adjudicatory Council under

Rule 1015. 

[(1)] (2) Unless on notice and

opportunity for an Applicant and

Interested Association Staff to

participate, or to the extent required for

the disposition of ex parte matters as

authorized by the Rules of the

Association:

(A) an Applicant, a counsel or

representative of an Applicant, or an

Interested Association Staff shall not

make or knowingly cause to be made an

ex parte communication relevant to the

merits of a membership proceeding

under the Rule 1010 Series to a

Governor, a member of the National

Adjudicatory Council or a

Subcommittee thereof, or an Association

employee who is participating or

advising in a decision of such a person

with respect to that proceeding; and

(B) a Governor, a member of the

National Adjudicatory Council or a

Subcommittee thereof, or an Association

employee who is participating or

advising in the decision of such a

person with respect to a membership

proceeding shall not make or knowingly

cause to be made to an Applicant, a

counsel or representative of the

Applicant, or an Interested Association

Staff an ex parte communication

relevant to the merits of that proceeding.

[(2)] (3) A Governor, a member of the

National Adjudicatory Council or a

Subcommittee thereof, or an Association

employee participating or advising in

the decision of such a person, who

receives, makes, or knowingly causes to

be made a communication prohibited by

this paragraph shall place in the record

of the membership proceeding:

(A) all such written communications;

(B) memoranda stating the substance

of all such oral communications; and

(C) all written responses and

memoranda stating the substance of all

oral responses to all such

communications.

[(3) The prohibitions against ex parte

communications shall become effective

when Association staff has knowledge

that an Applicant intends to file a

written request for review by the

National Adjudicatory Council under

Rule 1015.]

[(c)] (d) Recusal or Disqualification

A Governor or a member of the

National Adjudicatory Council or a

Subcommittee thereof shall not

participate in a matter governed by the

Rule 1010 Series as to which that person

has a conflict of interest or bias, or if

circumstances otherwise exist where his

or her fairness might reasonably be

questioned. In such a case, the person

shall recuse himself or shall be

disqualified as follows:

(1) The Chair of the NASD Board shall

have authority to direct the

disqualification of a Governor, and a

majority of the Governors of the NASD

Board excluding the Chair shall have

authority to direct the disqualification

of the Chair of the NASD Board.

(2) The Chair of the National

Adjudicatory Council shall have

authority to direct the disqualification

of a member of the National

Adjudicatory Council or a member of a

Subcommittee appointed pursuant to

Rule 1015, and the Vice Chair of the

National Adjudicatory Council shall

have authority to direct the

disqualification of the Chair of the

National Adjudicatory Council.

[(d)] (e) Computation of Time

(1) Calendar Day

In the Rule 1010 Series, ‘‘day’’ means

calendar day.

(2) Formula

In computing a period of time under

the Rule 1010 Series, the day of the act,

event, default, or lapse from which the

period of time designated begins to run

shall not be included. The last day of

the period so computed shall be

included unless it is a Saturday,

Sunday, or Federal holiday, in which

event the period runs until the end of

the next day that is not a Saturday,

Sunday, or Federal holiday.

Intermediate Saturdays, Sundays, and

Federal holidays shall be excluded from

the computation when the period

prescribed is ten days or less.

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36863

1013. New Member Application [and

Membership] and Interview

(a) Filing of Application

(1) Where To File

[Each Applicant for Association

membership shall file its application in

two parts. The first part of the

application shall be filed with the

Membership Department and shall

include the following documents:]

An Applicant for Association

membership shall file its application

with the Department of Member

Regulation at the district office in the

district in which the Applicant intends

to have its principal place of business as

defined in Rule 1011(l). 

(2) Contents

The application shall include: 

(A) an original signed and notarized

paper Form BD, with applicable

schedules;

(B) an original signed paper Form U–

4 for each Associated Person who is

required to be registered under the

Rules of the Association;

(C) an original NASD-approved

fingerprint card for each Associated

Person who will be subject to SEC Rule

17f–2;

(D) a new member assessment report;

[(E) a new member firm contact

questionnaire; and]

[(F)] (E) a check for the appropriate

fee[.];

[(2) The second part of the application

shall be filed with the Department of

Member Regulation at the district office

in the district in which the Applicant

intends to have its principal place of

business and shall include the following

information and documents:]

[(A)] (F) a detailed business plan [, in

a form prescribed by the Association,]

that adequately and comprehensively

describes all material aspects of the

business that will be, or are reasonably

anticipated to be, performed at and after

the initiation of business operations,

including future business expansion

plans, if any, and includes:

(i) a trial balance, balance sheet,

supporting schedules, and computation

of net capital, each of which has been

prepared as of a date that is within 30

days before the filing date of the

application;

(ii) a monthly projection of income

and expenses, with a supporting

rationale, for the first twelve months of

operations;

(iii) an organizational chart;

(iv) [a list of] the intended [locations]

location of [all offices,] the Applicant’s

principal place of business and all other

offices, if any, whether or not such

offices would be required to be

registered under the Rules of the

Association, and the names of the

persons who will be in charge of each

office;

(v) a list of the types of securities to

be offered and sold and the types of

retail or institutional customers to be

solicited;

(vi) a description of the methods and

media to be employed to develop a

customer base and to offer and sell

products and services to customers,

including the use of the Internet,

telephone solicitations, seminars, or

mailings;

(vii) a description of the business

facilities and a copy of any proposed or

final lease;

(viii) the number of markets to be

made, if any, the type and volatility of

the products, and the anticipated

maximum inventory positions;

(ix) any plan to enter into contractual

commitments, such as underwritings or

other securities-related activities;

(x) any plan to distribute or maintain

securities products in proprietary

positions, and the risks, volatility,

degree of liquidity, and speculative

nature of the products; [and]

(xi) any other activity that the

Applicant may engage in that

reasonably could have a material impact

on net capital within the first twelve

months of business operations; and

(xii) a description of the

communications and operational

systems the Applicant will employ to

conduct business with customers or

other members and the plans and

procedures the Applicant will employ to

ensure business continuity, including:

system capacity to handle the

anticipated level of usage; contingency

plans in the event of systems or other

technological or communications

problems or failures that may impede

customer usage or firm order entry or

execution; system redundancies;

disaster recovery plans; system security;

disclosures to be made to potential and

existing customers who may use such

systems; and supervisory or customer

protection measures that may apply to

customer use of, or access to, such

systems; 

[(B) a copy of the Applicant’s most

recent Form BD;]

[(C)](G) a copy of any decision or

order by a federal or state authority or

self-regulatory organization taking

permanent or temporary adverse action

with respect to a registration or

licensing determination regarding the

Applicant or an Associated Person;

[(D)](H) a list of all Associated

Persons[, the most recent Form U–4 and

Form U–5 for each Associated Person,

any other document that discloses the

disciplinary history of each Associated

Person, and a list of any other persons

or entities that will exercise control

with respect to the Applicant’s

business];

[(E)](I) documentation of any of the

following events, unless the event has

been reported to the Central Registration

Depository: 

(i) a regulatory action against or

investigation of the Applicant or an

Associated Person by the Commission,

the Commodity Futures Trading

Commission, a federal, state, or foreign

regulatory agency, or a self-regulatory

organization that is pending,

adjudicated, or settled;

(ii) an investment-related civil action

for damages or an injunction against the

Applicant or an Associated Person that

is pending, adjudicated, or settled;

(iii) an investment-related customer

complaint or arbitration [involving sales

practice violations, theft,

misappropriation, conversion, or breach

of fiduciary duty, against the Applicant

or an Associated Person that is pending,

settled, or has resulted in an award or

judgment] that is required to be reported

on Form U–4; [and]

(iv) a criminal action (other than a

minor traffic violation) against the

Applicant or an Associated Person that

is pending, adjudicated, or that has

resulted in a guilty or no contest plea;

and

[(F)](v) a copy of any document

evidencing a termination for cause or a

permitted resignation after investigation

of an alleged violation of a federal or

state securities law, a rule or regulation

thereunder, a self-regulatory

organization rule, or an industry

standard of conduct;

[(G)](J) a description of any remedial

action, such as special training [or],

continuing education requirements, or

heightened supervision, imposed on an

Associated Person by a state or federal

authority or self-regulatory organization;

[(H)](K) a written acknowledgment

that heightened supervisory procedures

and special educational programs may

be required pursuant to Notice To

Members 97–19 for an Associated

Person whose record[s] reflects[:

(i)] disciplinary actions [involving] or

sales practice [violations] events;

[(ii) customer complaints; or

(iii) arbitrations that were resolved

adversely to the Associated Person;]

[(I)](L) a copy of final or proposed

contracts with banks, clearing entities,

or service bureaus, and a general

description of any other final or

proposed contracts;

[(J)](M) a description of the nature and

source of Applicant’s capital with

supporting documentation, including a

36864 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

list of all persons or entities that have

contributed or plan to contribute

financing to the Applicant’s business,

the terms and conditions of such

financing arrangements, the risk to net

capital presented by the Applicant’s

proposed business activities, and any

arrangement for additional capital

should a business need arise;

[(K)](N) a description of the financial

controls to be employed by the

Applicant;

[(L)](O) a description of the

Applicant’s supervisory system and a

copy of its written supervisory

procedures, internal operating

procedures (including operational and

internal controls), internal inspections

plan, written approval process, and

qualifications investigations required by

Rule 3010;

[(M)](P) a description of the number,

experience, and qualifications of

supervisors and principals and the

number, experience, and qualifications

of persons to be supervised by such

personnel, the other responsibilities of

the supervisors and principals with the

Applicant, their full-time or part-time

status, any business activities that the

supervisors or principals may engage in

outside of their association with the

Applicant, the hours per week devoted

to such activities, and an explanation of

how a part-time supervisor or principal

will be able to discharge his or her

designated functions on a part-time

basis;

[(N)](Q) a description of Applicant’s

proposed recordkeeping system;

[(O)](R) a copy of the Applicant’s

written training plan to comply with

Firm Element continuing education

requirements described in Rule 1120(b),

including the name of the Associated

Person responsible for implementation;

and

(P) [a copy of the documents

described in paragraph (a)(1)] a Web

CRD entitlement request form and a

Member Contact Questionnaire user

access request form. 

(3) Electronic Filings [The Applicant

shall file both parts of the application

simultaneously by commercial courier.

The application shall be deemed

received on the date specified in the

written confirmation of receipt

generated by the commercial courier for

the delivery of the second part of the

application to the district office.] Upon

approval of the Applicant’s Web CRD

entitlement request form, the Applicant

shall submit any amendments to its

Forms BD or U–4, any additional Forms

U–4, and any Form U–5 electronically

via Web CRD. Upon approval of the

Applicant’s membership, the Applicant

shall submit any amendments to its

Member Contact Questionnaire

electronically. 

(4) Rejection Of Application That Is

Not Substantially Complete 

If the Department determines within

30 days after the filing of an application

that the application is not substantially

complete, the Department may reject the

application and deem it not to have

been filed. In such case, within the 30

day period, the Department shall serve

a written notice on the Applicant of the

Department’s determination and the

reasons therefor. The Association shall

refund the application fee, less $350,

which shall be retained by the

Association as a processing fee. If the

Applicant determines to continue to

seek membership, the Applicant shall

submit a new application and fee under

this Rule.

(5) Request For Additional Documents

Or Information 

Within 30 days after the [receipt]

filing of an application, the Department

shall [determine whether the

application is complete and, if not, shall

request] serve an initial request for any

additional information or documents

necessary to render a decision on the

application. The Department may

[request] serve subsequent requests for

additional information or documents at

any time during the membership

application process.

[(5)] Unless otherwise agreed by the

Department and the Applicant, the

Applicant shall file any additional

information and documents with the

Department within 60 days after service

of the Department’s initial request and

30 days after service of any subsequent

request.

[(b) Lapse of Application]

[(1) Absent a showing of good cause,

an application for membership shall

lapse if an Applicant fails to:

(A) respond fully within 60 days after

an initial request for information or

documents, within 30 after any

subsequent request, or within such

other time period agreed to by the

Department and the Applicant;

(B) appear at or otherwise participate

in a scheduled membership interview

pursuant to paragraph (c); or

(C) return an executed membership

agreement under Rule 1014(c) within 25

days after service of the agreement.]

[(2) The lapse of an application shall

require an Applicant continuing to seek

membership to submit a new

application under paragraph (a).]

[(c)](b) Membership Interview

(1) Requirement for Interview

Before the Department [issues a]

serves its decision on an application for

new membership in the Association, the

Department shall conduct a membership

interview with a representative or

representatives of the Applicant.

(2) Service of Notice

At least seven days before the

membership interview, the Department

shall serve on the Applicant a written

notice that specifies the date and time

of the interview and the representative

or representatives of the Applicant who

are required to participate in the

interview. The Department shall serve

the notice by facsimile or [commercial]

overnight courier. The Applicant and

the Department may agree to a shorter

or longer period for notice or a different

method of service under this

subparagraph.

(3) Time

Unless the Department directs

otherwise for good cause shown, a

membership interview shall be

scheduled to occur within 90 days after

the [receipt] filing of an application or

within 60 days after the [receipt] filing

of all additional information or

documents requested, whichever is

later.

(4) Place

Unless the Department and the

Applicant otherwise agree, the

membership interview shall be

conducted in the district office for the

district in which the Applicant has or

intends to have its principal place of

business.

(5) Updated Financial Documents

On or before the date of the

membership interview, the Applicant

shall file an updated trial balance,

balance sheet, supporting schedules,

and computation of net capital. The

Applicant shall prepare such

documents as of a date that is within 45

days before the date of the membership

interview, unless the Applicant and the

Department agree on a longer period.

The Applicant shall promptly notify the

Department in writing of any material

adverse change in its financial

condition that occurs before a decision

constituting final action of the

Association is served on the Applicant.

[(5)](6) Review of Standards for

Admission

During the membership interview, the

Department shall review the application

and the standards for admission to

membership with the Applicant’s

representative or representatives.

[(6)](7) Information From Other

Sources

During the membership interview, the

Department shall provide to the

Applicant’s representative or

representatives any information or

document that the Department has

obtained from the Central Registration

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36865

Depository or a source other than the

Applicant and upon which the

Department intends to base its decision

under Rule 1014. If the Department

receives such information or document

after the membership interview or

decides to base its decision on such

information after the membership

interview, the Department shall

promptly serve the information or

document and an explanation thereof on

the Applicant.

1014. Department Decision

(a) Standards for Admission

After considering the application, the

membership interview, other

information and documents provided by

the Applicant, other information and

documents obtained by the Department,

and the public interest and the

protection of investors, the Department

shall determine whether the Applicant

meets each of the following standards:

(1) The application and all supporting

documents are complete and accurate.

(2) The Applicant and its Associated

Persons have all licenses and

registrations required by state and

federal authorities and self-regulatory

organizations.

(3) The Applicant and its Associated

Persons are capable of complying with

the federal securities laws, the rules and

regulations thereunder, and the Rules of

the Association, including observing

high standards of commercial honor and

just and equitable principles of trade. In

determining whether this standard is

met, the Department may take into

consideration whether:

(A) a state or federal authority or selfregulatory organization has taken

permanent or temporary adverse action

with respect to a registration or

licensing determination regarding the

Applicant or an Associated Person;

(B) an Applicant’s or Associated

Person’s record[s] reflects[: (i)

disciplinary actions involving sales

practice violations; (ii) customer

complaints; or (iii) arbitrations that were

resolved adversely to the Applicant or

Associated Person] a sales practice

event;

(C) an Applicant or Associated Person

is the subject of a pending, adjudicated,

or settled regulatory action or

investigation by the Commission, the

Commodity Futures Trading

Commission, a federal, state, or foreign

regulatory agency, or a self-regulatory

organization; a pending, adjudicated, or

settled investment-related civil action

for damages or an injunction; [an

investment-related customer complaint

or arbitration alleging sales practice

violations, theft, misappropriation,

conversion, or breach of fiduciary duty

that is pending, settled, or has resulted

in an award or judgment;] or a criminal

action (other than a minor traffic

violation) that is pending, adjudicated,

or that has resulted in a guilty or no

contest plea;

(D) an Associated Person was

terminated for cause or permitted to

resign after an investigation of an

alleged violation of a federal or state

securities law, a rule or regulation

thereunder, a self-regulatory

organization rule, or industry standard

of conduct;

(E) a state or federal authority or selfregulatory organization has imposed a

remedial action, such as special training

[or], continuing education requirements,

or heightened supervision, on an

Associated Person; and

(F) a state or federal authority or selfregulatory organization has provided

information indicating that the

Applicant or an Associated Person

otherwise poses a threat to public

investors.

(A) The Applicant has established all

contractual or other arrangements and

business relationships with banks,

clearing corporations, service bureaus,

or others necessary to:

a. initiate the operations described in

the Applicant’s business plan,

considering the nature and scope of

operations and the number of personnel;

and

b. comply with the federal securities

laws, the rules and regulations

thereunder, and the Rules of the

Association.

(5) The Applicant has or has adequate

plans to obtain facilities that are

sufficient to:

(B) initiate the operations described in

the Applicant’s business plan,

considering the nature and scope of

operations and the number of personnel;

and

(C) comply with the federal securities

laws, the rules and regulations

thereunder, and the Rules of the

Association.

(6) The communications and

operational systems that the Applicant

intends to employ for the purpose of

conducting business with customers and

other members are adequate and

provide reasonably for business

continuity in each area set forth in Rule

1013(a)(2)(F)(xii);

[(6)](7) The Applicant is capable of

maintaining a level of net capital in

excess of the minimum net capital

requirements set forth in SEC Rule

15c3–1 adequate to support the

Applicant’s intended business

operations on a continuing basis, based

on information [that is current within 30

days before the membership interview]

filed under Rule 1013(b)(5). The

Department may impose a reasonably

determined higher net capital

requirement for the initiation of

operations after considering:

(A) the amount of net capital

sufficient to avoid early warning level

reporting requirements, such as SEC

Rule 17a–11;

(B) the amount of capital necessary to

meet expenses net of revenues for at

least twelve months, based on reliable

projections agreed to by the Applicant

and the Department;

(C) any planned market making

activities, the number of markets to be

made, the type and volatility of

products, and the anticipated maximum

inventory positions;

(D) any plan to enter into other

contractual commitments, such as

underwritings or other securities-related

activities;

(E) any plan to distribute or maintain

securities products in proprietary

positions, and the risks, volatility,

degree of liquidity, and speculative

nature of the products; and

(F) any other activity that the

Applicant will engage in that reasonably

could have a material impact on net

capital within the first twelve months of

business operations.

[(7)](8) The Applicant has financial

controls to ensure compliance with the

federal securities laws, the rules and

regulations thereunder, and the Rules of

the Association.

[(8)](9) The Applicant has

compliance, supervisory, operational,

and internal control practices and

standards that are consistent with

practices and standards regularly

employed in the investment banking or

securities business, taking into account

the nature and scope of Applicant’s

proposed business.

[(9)](10) The Applicant has a

supervisory system, including written

supervisory procedures, internal

operating procedures (including

operational and internal controls), and

compliance procedures designed to

prevent and detect, to the extent

practicable, violations of the federal

securities laws, the rules and

regulations thereunder, and the Rules of

the Association. In evaluating the

adequacy of a supervisory system, the

Department shall consider the overall

nature and scope of the Applicant’s

intended business operations and shall

consider whether:

(A) the number, location, experience,

and qualifications of supervisory

personnel are adequate in light of the

number, location, experience, and

qualifications of persons to be

36866 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

supervised; the [disciplinary history of

such] Central Registration Depository

record or other disciplinary history of

supervisory personnel and persons to be

supervised; [any criminal, civil,

administrative, or arbitration actions or

written customer complaints against

such persons;] and the number and

locations of the offices that the

Applicant intends to open and the

nature and scope of business to be

conducted at each office;

(B) the Applicant has identified

specific Associated Persons to supervise

and discharge each of the functions in

Applicant’s business plan, and to

supervise each of the Applicant’s

intended offices, whether or not such

offices are required to be registered

under the Rules of the Association;

(C) the Applicant has identified the

functions to be performed by each

Associated Person and has adopted

procedures to assure the registration

with the Association and applicable

states of all persons whose functions are

subject to such registration

requirements.

[(C)](D) each Associated Person

identified in the business plan to

discharge a supervisory function [in the

business plan] has at least one year of

direct experience or two years of related

experience in the subject area to be

supervised;

[(D)](E) the Applicant will solicit

retail or institutional business;

[(E)](F) the Applicant will recommend

securities to customers;

[(F)](G) the location or part-time

status of a supervisor or principal will

affect such person’s ability to be an

effective supervisor;

[(G)](H) [the records of an Associated

Person reflect: (i) disciplinary actions

involving sales practice violations; (ii)

customer complaints; or (iii) arbitrations

that were resolved adversely to the

Associated Person] the Applicant

should be required to place one or more

Associated Persons under heightened

supervision pursuant to Notice to

Members 97–19;

[(H)](I) any remedial action, such as

special training or continuing education

requirements or heightened supervision,

has been imposed on an Associated

Person by a state or federal authority or

self-regulatory organization; and

[(I)](J) any other condition that will

have a material impact on the

Applicant’s ability to detect and prevent

violations of the federal securities laws,

the rules and regulations thereunder,

and the Rules of the Association.

[(10)](11) The Applicant has a

recordkeeping system that enables

Applicant to comply with federal, state,

and self-regulatory organization

recordkeeping requirements and a staff

that is sufficient in qualifications and

number to prepare and preserve

required records.

[(11)](12) The Applicant has

completed a training needs assessment

and has a written training plan that

complies with the continuing education

requirements imposed by the federal

securities laws, the rules and

regulations thereunder, and the Rules of

the Association.

[(12)](13) The Association does not

possess any information indicating that

the Applicant may circumvent, evade,

or otherwise avoid compliance with the

federal securities laws, the rules and

regulations thereunder, or the Rules of

the Association.

[(13)](14) The application and all

supporting documents otherwise are

consistent with the federal securities

laws, the rules and regulations

thereunder, and the Rules of the

Association.

(b) Granting or Denying Application

(1) If the Department determines that

the Applicant meets each of the

standards in paragraph (a), the

Department shall grant the application

for membership.

(2) If the Department determines that

the Applicant does not meet one or

more of the standards in paragraph (a)

in whole or in part, the Department

[may] shall:

(A) grant the application subject to

one or more restrictions reasonably

designed to address a specific financial,

operational, supervisory, disciplinary,

investor protection, or other regulatory

concern based on the standards for

admission in Rule 1014(a); or

(B) deny the application.

[(c) Submission of Membership

Agreement

If the Department grants an

application, with or without restriction,

the Applicant’s approval for

membership shall be contingent upon

the Applicant’s submission of a written

membership agreement, satisfactory to

the Department, undertaking to:

(1) engage only in the business set

forth in the business plan and the

membership agreement;

(2) abide by any restriction specified

in the Department’s decision;

(3) obtain the Department’s prior

approval of the removal or modification

of such a restriction pursuant to Rule

1017; and

(4) notify and obtain the Department’s

approval of a change in ownership or

control or a material change in business

operations pursuant to Rule 1018.

The Applicant shall not waive the right

to file a written request for review under

Rule 1015 by executing a membership

agreement under this paragraph.]

[(d)](c) Decision

(1) Time

The Department shall [issue] serve a

written decision on the membership

application within 30 days after the

conclusion of the membership interview

or after the [submission] filing of

additional information or documents,

whichever is later.

(2) Content

If the Department denies the

application, the decision shall explain

in detail the reason for denial,

referencing the applicable standard or

standards in paragraph (a). If the

Department grants the application

subject to restrictions, the decision shall

explain in detail the reason for each

restriction, referencing the applicable

standard or standards in paragraph (a)

upon which the restriction is based and

identify the specific financial,

operational, supervisory, disciplinary,

investor protection, or other regulatory

concern that the restriction is designed

to address and the manner in which the

restriction is reasonably designed to

address the concern.

(3) Failure to [Issue] Serve Decision

If the Department fails to [issue] serve

a decision within 180 days after

[receipt] the filing of an application or

such later date as the Department and

the Applicant have agreed in writing,

the Applicant may file a written request

with the NASD Board requesting that

the NASD Board direct the Department

to [issue] serve a decision. Within seven

days after [receipt] the filing of such a

request, the NASD Board shall direct the

Department to serve its written decision

immediately or to show good cause for

an extension of time. If the Department

shows good cause for an extension of

time, the NASD Board may extend the

180 day time limit by not more than 90

days.

(d) Submission of Membership

Agreement

If the Department grants an

application, with or without restriction,

the Applicant’s approval for

membership shall be contingent upon

the Applicant’s filing of an executed

written membership agreement,

satisfactory to the Department,

undertaking to: 

(1) abide by any restriction specified

in the Department’s decision; and

(2) obtain the Department’s approval

of a change in ownership, control, or

business operations pursuant to Rule

1017, including the modification or

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36867

removal of a membership agreement

restriction.

The Applicant shall not waive the right

to file a written request for review under

Rule 1015 by executing a membership

agreement under this paragraph.

(e) Service and Effectiveness of Decision

The Department shall serve its

decision and the membership agreement

on the Applicant in accordance with

Rule 1012. The decision shall become

effective upon service and shall remain

in effect during the pendency of any

review until a decision constituting

final action of the Association is issued

under Rule 1015 or 1016, unless

otherwise directed by the National

Adjudicatory Council, the NASD Board,

or the Commission.

(f) Effectiveness of Restriction

A restriction imposed under this Rule

shall remain in effect and bind the

Applicant and all successors to the

ownership or control of the Applicant

unless:

(1) removed or modified by [the

Department under Rule 1017] a decision

constituting final action of the

Association issued under Rule 1015,

1016, or 1017;

[(2) removed or modified by a

decision constituting final action of the

Association issued under Rule 1015 or

1016;] or

[(3)](2) stayed by the National

Adjudicatory Council, the NASD Board,

or the Commission.

(g) Final Action

Unless the Applicant files a written

request for a review under Rule 1015,

the Department’s decision shall

constitute final action by the

Association.

1015. Review by National Adjudicatory

Council

(a) Initiation of Review by Applicant

[(1) Request by Applicant]

Within 25 days after service of a

decision under Rule 1014[,] or 1017 [or

1018], an Applicant may file a written

request for review with the National

Adjudicatory Council. A request for

review shall state with specificity why

the Applicant believes that the

Department’s decision is inconsistent

with the membership standards set forth

in Rule 1014, or otherwise should be set

aside, and state whether a hearing is

requested. The Applicant

simultaneously shall [send] file by firstclass mail a copy of the request to the

district office where the Applicant filed

its [membership] application.

[(2) Notice by National Adjudicatory

Council

A decision issued under Rule 1014,

1017, or 1018 shall be subject to a call

for review by any member of the

National Adjudicatory Council or the

Review Subcommittee defined in Rule

9120 within 30 days after service of the

decision. If the National Adjudicatory

Council calls a decision for review, a

written notice of review shall be served

promptly on the Applicant by first-class

mail. The written notice of review shall

state the specific grounds for the review

and whether a hearing is directed. If a

decision is called for review by any

member of the National Adjudicatory

Council or the Review Subcommittee,

the decision shall be reviewed by the

National Adjudicatory Council. The

National Adjudicatory Council

simultaneously shall send by first-class

mail a copy of the notice to the district

office where the Applicant filed its

membership application.]

(b) Transmission of Documents

Within ten days after [receipt] the

filing of a request for [or notice of]

review, the Department shall:

(1) transmit to the National

Adjudicatory Council copies of all

documents that were considered in

connection with the Department’s

decision and an index to the documents;

and

(2) serve on the Applicant a copy of

such documents (other than those

documents originally submitted by

Applicant) and a copy of the index.

(c) Membership Application Docket

The Department shall promptly

record in the Association’s membership

application docket each request for [or

notice of] review filed with the National

Adjudicatory Council under this Rule

and each material subsequent event,

filing, and change in the status of a

membership proceeding.

(d) Appointment of Subcommittee

The National Adjudicatory Council or

the Review Subcommittee defined in

Rule 9120 shall appoint a Subcommittee

to participate in the review. The

Subcommittee shall be composed of at

least two members. One member shall

be a current member of the National

Adjudicatory Council. The remaining

member or members shall be current or

past Directors or past Governors.

(e) Powers of Subcommittee

If a hearing is requested [or directed],

the Subcommittee shall conduct the

hearing. If a hearing is not requested,

the Subcommittee may serve a notice

directing that a hearing be held. If a

hearing is not requested or directed, the

Subcommittee shall conduct its review

on the basis of the record developed

before the Department and any written

submissions made by the Applicant or

the Department in connection with the

request for review.

(f) Hearing

(1) Notice

If a hearing is requested or directed,

the hearing shall be held within 45 days

after the [receipt] filing of the request [or

service of the notice by] with the

National Adjudicatory Council or

service of the notice by the

Subcommittee. The National

Adjudicatory Council shall [send] serve

written notice of the date and time of

the hearing to the Applicant by

facsimile or [commercial] overnight

courier not later than 14 days before the

hearing.

(2) Counsel

The Applicant and the Department

may be represented by counsel at a

hearing conducted pursuant to this

Rule.

(3) Evidence

Formal rules of evidence shall not

apply to a hearing under this Rule. Not

later than five days before the hearing,

the Applicant and the Department shall

exchange copies of their proposed

hearing exhibits and witness lists and

provide copies of the same to the

National Adjudicatory Council. If the

Applicant or the Department fails to

provide copies of its proposed hearing

exhibits or witness list within such

time, the Subcommittee shall exclude

the evidence or witnesses from the

proceeding, unless the Subcommittee

determines that good cause is shown for

failure to comply with the production

date set forth in this subparagraph.

(4) Transcript

The hearing shall be recorded and a

transcript prepared by a court reporter.

A transcript of the hearing shall be

available for purchase from the court

reporter at prescribed rates. The

Applicant, the Department, or a witness

may seek to correct the transcript. A

proposed correction of the transcript

shall be submitted to the Subcommittee

within a reasonable period of time

prescribed by the Subcommittee. Upon

notice to the Applicant and the

Department, the Subcommittee may

direct the correction to the transcript as

requested or sua sponte.

[(5) Failure to Appear at Hearing]

[If an Applicant fails to appear at a

hearing for which it has notice, the

National Adjudicatory Council may

dismiss the request for review as

abandoned, and the decision of the

Department shall become the final

action of the Association. Upon a

showing of good cause, the National

36868 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

Adjudicatory Council may withdraw a

dismissal entered pursuant to this

subparagraph.]

(g) Additional Information, Briefs

At any time during its consideration,

the Subcommittee or the National

Adjudicatory Council may direct the

Applicant or the Department to [submit]

file additional information [and to file]

or briefs. Any additional information or

brief [submitted] filed shall be provided

to all parties before the National

Adjudicatory Council renders its

decision.

(h) Abandonment of Request for Review

If an Applicant fails to specify the

grounds for its request for review under

Rule 1015(a)(1), appear at a hearing for

which it has notice, or file information

or briefs as directed, the National

Adjudicatory Council or the Review

Subcommittee may dismiss the request

for review as abandoned, and the

decision of the Department shall

become the final action of the

Association. Upon a showing of good

cause, the National Adjudicatory

Council or the Review Subcommittee

may withdraw a dismissal entered

pursuant to this paragraph.

[(h)](i) Subcommittee Recommendation

The Subcommittee shall present a

recommended decision in writing to the

National Adjudicatory Council within

60 days after the date of the hearing

held pursuant to paragraph (f), and not

later than seven days before the meeting

of the National Adjudicatory Council at

which the membership proceeding shall

be considered.

[(i)](j) Decision

(1) Proposed Written Decision

After considering all matters

presented in the review and the

Subcommittee’s recommended written

decision, the National Adjudicatory

Council may affirm, modify, or reverse

the Department’s decision or remand

the membership proceeding with

instructions. The National Adjudicatory

Council shall prepare a proposed

written decision pursuant to

subparagraph (2).

(2) Contents

The decision shall include:

(A) a description of the Department’s

decision, including its rationale;

(B) a description of the principal

issues raised in the review;

(C) a summary of the evidence on

each issue; and

(D) a statement whether the

Department’s decision is affirmed,

modified, or reversed, and a rationale

therefor that references the applicable

standards in Rule 1014.

(3) Issuance of Decision After

Expiration of Call for Review Periods

The National Adjudicatory Council

shall provide its proposed written

decision to the NASD Board. The NASD

Board may call the membership

proceeding for review pursuant to Rule

1016. If the NASD Board does not call

the membership proceeding for review,

the proposed written decision of the

National Adjudicatory Council shall

become final. The National

Adjudicatory Council shall serve the

Applicant with a written notice

specifying the date on which the call for

review period expired and stating that

the final written decision will be served

within 15 days after such date. The

National Adjudicatory Council shall

serve its final written decision within 15

days after the date on which the call for

review period expired. The decision

shall constitute the final action of the

Association for purposes of SEC Rule

19d–3, unless the National Adjudicatory

Council remands the membership

proceeding.

(4) Failure to Issue Decision

If the National Adjudicatory Council

fails to serve its final written decision

within the time prescribed in

subparagraph (3), the Applicant may file

a written request with the NASD Board

requesting that the NASD Board direct

the National Adjudicatory Council to

serve its decision immediately or to

show good cause for an extension of

time. Within seven days after [receipt]

the filing of such a request, the NASD

Board shall direct the National

Adjudicatory Council to serve its

written decision immediately or to show

good cause for an extension of time. If

the National Adjudicatory Council

shows good cause for an extension of

time, the NASD Board may extend the

15 day time limit by not more than 15

days.

1016. Discretionary Review by NASD

Board

(a) Call for Review by Governor

A Governor may call a membership

proceeding for review by the NASD

Board if the call for review is made

within the period prescribed in

[sub]paragraph [(2)](b).

(b) 15 Day Period; Waiver

A Governor shall make his or her call

for review at the next meeting of the

NASD Board that is at least 15 days after

the date on which the NASD Board

receives the proposed written decision

of the National Adjudicatory Council.

By unanimous vote of the NASD Board,

the NASD Board may shorten the period

to less than 15 days. By an affirmative

vote of the majority of the NASD Board

then in office, the NASD Board may,

during the 15 day period, vote to extend

the period to more than 15 days.

(c) Review At Next Meeting

If a Governor calls a membership

proceeding for review within the time

prescribed in paragraph (b), the NASD

Board shall review the membership

proceeding not later than the next

meeting of the NASD Board. The NASD

Board may order the Applicant and the

Department to file briefs in connection

with review proceedings pursuant to

this paragraph.

(d) Decision of NASD Board, Including

Remand

After review, the NASD Board may

affirm, modify, or reverse the proposed

written decision of the National

Adjudicatory Council. Alternatively, the

NASD Board may remand the

membership proceeding with

instructions. The NASD Board shall

prepare a written decision that includes

all of the elements described in Rule

1015[(i)(2)](j)(2).

(e) Issuance of Decision

The NASD Board shall serve its

written decision on the Applicant

within 15 days after the meeting at

which it conducted its review. The

decision shall constitute the final action

of the Association for purposes of SEC

Rule 19d–3, unless the NASD Board

remands the membership proceeding.

1017. [Removal or Modification of

Business Restriction] Application for

Approval of Change in Ownership,

Control, or Business Operations

(a) Events Requiring Application

[A member of the Association may

seek modification or removal of a

restriction on its business activities

imposed pursuant to the Rule 1010

Series by filing a written application

with the Department at the district

office for the district in which the

member’s principal place of business is

located. The application shall present

facts showing that the circumstances

that gave rise to the restriction have

changed and state with specificity why

the restriction should be modified or

removed in light of the standards set

forth in Rule 1014 and the articulated

rationale for the imposition of the

restriction. A copy of the decision and

membership agreement pertaining to

such restriction shall be appended to

the application.]

A member shall file an application for

approval of any of the following changes

to its ownership, control, or business

operations:

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36869

(1) a merger of the member with

another member, unless both are

members of the New York Stock

Exchange, Inc. or the surviving entity

will continue to be a member of the New

York Stock Exchange, Inc.;

(2) a direct or indirect acquisition by

the member of another member, unless

the acquiring member is a member of

the New York Stock Exchange, Inc.;

(3) a direct or indirect acquisition of

substantially all of the member’s assets,

unless the acquirer is a member of the

New York Stock Exchange, Inc.; 

(4) a change in the equity ownership

or partnership capital of the member

that results in one person or entity

directly or indirectly owning or

controlling 25 percent or more of the

equity or partnership capital; or 

(5) a material change in business

operations as defined in Rule 1011(i). 

(b) Filing and Content of Application

(1) The member shall file the

application with the Department at the

district office in the district in which the

member’s principal place of business is

located. If the application involves a

merger between members with principal

places of business in two or more

districts, the application shall be filed

and processed by the district office

wherein the surviving firm’s principal

place of business will be located.

(2) The application shall describe in

detail the change in ownership, control,

or business operations and include a

business plan, pro forma financials, an

organizational chart, and written

supervisory procedures reflecting the

change.

(A) If the application requests

approval of a change in ownership or

control, the application also shall

include the names of the new owners,

their percentage of ownership, and the

sources of their funding for the purchase

and recapitalization of the member.

(B) If the application requests the

removal or modification of a

membership agreement restriction, the

application also shall:

(i) present facts showing that the

circumstances that gave rise to the

restriction have changed; and

(ii) state with specificity why the

restriction should be modified or

removed in light of the standards set

forth in Rule 1014 and the articulated

rationale for the imposition of the

restriction.

(C) If the application requests

approval of an increase in Associated

Persons involved in sales, offices, or

markets made, the application shall set

forth the increases in such areas during

the preceding 12 months.

(c) Effecting Change and Imposition of

Interim Restrictions

(1) A member shall file an application

for approval of a change in ownership

or control at least 30 days prior to such

change. A member may effect a change

in ownership or control prior to the

conclusion of the proceeding, but the

Department may place new interim

restrictions on the member based on the

standards in Rule 1014, pending final

Department action.

(2) A member may file an application

to remove or modify a membership

agreement restriction at any time. An

existing restriction shall remain in effect

during the pendency of the proceeding.

(3) A member may file an application

for approval of a material change in

business operations, other than the

modification or removal of a restriction,

at any time, but the member may not

effect such change until the conclusion

of the proceeding, unless the

Department and the member otherwise

agree.

(d) Rejection Of Application That Is Not

Substantially Complete

If the Department determines within

30 days after the filing of an application

that the application is not substantially

complete, the Department may reject the

application and deem it not to have

been filed. In such case, within the 30

day period, the Department shall serve

a written notice on the Applicant of the

Department’s determination and the

reasons therefor. If the Applicant

determines to continue to apply for

approval of a change in ownership,

control, or business operations, the

Applicant shall submit a new

application under this Rule.

[(b)](e) Request for Additional

Documents and Information

Within 30 days after the [receipt]

filing of an application [to remove or

modify a restriction], the Department

shall [determine whether the

application is complete, and if not,

shall] serve a request for any additional

information or documents necessary to

render a decision [under paragraph (e)]

on the application. The Department may

serve subsequent requests for additional

information or documents at any time

during the application process. Unless

otherwise agreed by the Department and

the Applicant, the Applicant shall file

any additional information and

documents with the Department within

30 days after service of a request.

[(c) Lapse]

[(1) Absent a showing of good cause,

an application to modify or remove a

restriction shall lapse if an Applicant

fails to:

(A) respond fully within 30 days after

a request for information or documents;

(B) appear at or otherwise participate

in a scheduled membership interview

pursuant to paragraph (d); or

(C) return an executed membership

agreement under paragraph (e)(4) within

25 days after service of the agreement.

(2) The lapse of an application shall

require the Applicant to submit a new

application to modify or remove a

restriction under paragraph (a).]

[(d)](f) Membership Interview

(1) The Department may require the

Applicant to participate in a

membership interview within 30 days

after the [receipt] filing of the

application, or if the Department

requests additional information or

documents, within 30 days after the

filing of the additional information or

documents by the Applicant.

(2) At least seven days before the

membership interview, the Department

shall serve on the Applicant a written

notice that specifies the date and time

of the interview and [the representative

or representatives of the Applicant]

persons who are required to participate

in the interview. The Department shall

serve the notice by facsimile or

[commercial] overnight courier. The

Applicant and the Department may

agree to a shorter or longer period for

notice or a different method of service.

(3) Unless the Department and the

Applicant otherwise agree, the

membership interview shall be

conducted in the district office for the

district in which the Applicant has its

principal place of business.

(4) During the membership interview,

the Department shall review the

application and the considerations for

the Department’s decision set forth in

paragraph [(e)(1)](g)(1). The Department

shall provide to the Applicant’s

representative or representatives any

information or document that the

Department has obtained from the

Central Registration Depository or a

source other than the Applicant and

upon which the Department intends to

base its decision under paragraph

[(e)](g). If the Department receives such

information or document after the

membership interview or decides to

base its decision on such information

after the membership interview, the

Department shall promptly serve the

information or document and an

explanation thereof on the Applicant.

[(e)](g) Department Decision

(1) [In evaluating an application

submitted under paragraph (a)] The

36870 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

Department shall consider the

application, the membership interview,

other information and documents

provided by the Applicant or obtained

by the Department, the public interest,

and the protection of investors.

(A) In rendering a decision on an

application for approval of a change in

ownership or control, or an application

for approval of a material change in

business operations that does not

involve modification or removal of a

membership agreement restriction, the

Department shall determine if the

Applicant would continue to meet the

standards in Rule 1014(a) upon

approval of the application.

(B) In rendering a decision on an

application requesting the modification

or removal of a membership agreement

restriction, the Department shall

consider whether maintenance of the

restriction is appropriate in light of:

[(A)](i) the standards set forth in Rule

1014;

[(B)](ii) the circumstances that gave

rise to the imposition of the restriction;

[(C)](iii) the Applicant’s operations

since the restriction was imposed;

[(D)] (iv) [a] any change in ownership

or control or supervisors and principals;

and

[(E)](v) any new evidence submitted

in connection with the application.

(2) The Department shall [issue] serve

a written decision on the application

within 30 days after the conclusion of

the membership interview or the

[submission] filing of additional

information or documents, whichever is

later. If the Department does not require

the Applicant to participate in a

membership interview or request

additional information or documents,

the Department shall [issue] serve a

written decision within 45 days after the

[receipt] filing of the application under

paragraph (a). The decision shall state

whether the application [to modify or

remove the restriction] is granted or

denied in whole or in part, and shall

provide a rationale for the Department’s

decision, referencing the applicable

standard in Rule 1014.

(3) If the Department fails to [issue]

serve a decision within 180 days after

[receipt] filing of an application or such

later date as the Department and the

Applicant have agreed in writing, the

Applicant may file a written request

with the NASD Board requesting that

the NASD Board direct the Department

to issue a decision. Within seven days

after [receipt] the filing of such a

request, the NASD Board shall direct the

Department to issue a written decision

immediately or to show good cause for

an extension of time. If the Department

shows good cause for an extension of

time, the NASD Board may extend the

time limit for issuing a decision by not

more than 30 days.

(4) If the Department [modifies or

removes a restriction on the Applicant’s

business activities, the] approves an

application under this Rule in whole or

part, the Department shall require an

Applicant to file an executed

membership agreement [submitted

under Rule 1014 shall be modified

accordingly].

[(f)](h) Service and Effectiveness of

Decision

The Department shall serve its

decision on the Applicant in accordance

with Rule 1012. The decision shall

become effective upon service and shall

remain in effect during the pendency of

any review until a decision constituting

final action of the Association is

[issued] served under Rule 1015 or

1016, unless otherwise directed by the

National Adjudicatory Council, the

NASD Board, or the Commission.

[(g)](i) Request for Review; Final Action

An Applicant may file a written

request for review of the Department’s

decision with the National Adjudicatory

Council pursuant to Rule 1015. The

procedures set forth in Rule 1015 shall

apply to such review, and the National

Adjudicatory Council’s decision shall be

subject to discretionary review by the

NASD Board pursuant to Rule 1016. If

the Applicant does not file a request for

a review, the Department’s decision

shall constitute final action by the

Association.

[(h)](j) Removal or Modification of

Restriction on Department’s Initiative

The Department shall modify or

remove a restriction on its own

initiative if the Department determines

such action is appropriate in light of the

considerations set forth in paragraph

[(e)(1)](g)(1). The Department shall

notify the member in writing of the

Department’s determination and inform

the member that it may apply for further

modification or removal of a restriction

by filing an application under paragraph

(a).

(k) Lapse or Denial of Application for

Approval of Change in Ownership

If an application for approval of a

change in ownership lapses, or is denied

and all appeals are exhausted or

waived, the member shall, no more than

60 days after the lapse or exhaustion or

waiver of appeal:

(1) submit a new application;

(2) unwind the transaction; or

(3) file a Form BDW.

For the protection of investors, the

Department may shorten the 60 day

period. For good cause shown by the

member, the Department may lengthen

the 60 day period. The Department shall

serve written notice on the Applicant of

any change in the 60-day period and the

reasons therefor. During the 60-day or

other imposed period, the Department

may continue to place interim

restrictions on the member for the

protection of investors.

[1018. Change in Ownership, Control, or

Operations]

[(a) Notice

At least 30 days prior to the

occurrence of any of the following

changes in ownership, control, or

operations, a member shall file a written

notice and application for continuance

in membership with the Department at

the district office in the district in

which the member’s principal place of

business is located:

(1) a merger of the member with

another member;

(2) an acquisition by the member of

another member;

(3) an acquisition of substantially all

of the member’s assets;

(4) a change in the equity ownership

or partnership capital of the member

that results in one person or entity

owning or controlling 25 percent or

more of the equity or partnership

capital; or

(5) a material change in the member’s

business operations.]

[(b) Review and Imposition of Interim

Restrictions

The Department shall review a change

in ownership, control, or operations

described in paragraph (a) prior to the

change taking effect. The Department

may maintain existing restrictions on

the member’s business activities and

place new interim restrictions on the

member based on the standards in Rule

1014, pending final Department action.]

[(c) Request for Information

Within 30 days after receipt of the

notice and application under paragraph

(a), the Department shall request any

additional information or documents

necessary to render a decision under

paragraph (f). Unless otherwise agreed

by the Department and the Applicant,

the Applicant shall file such additional

information or documents with the

Department within 30 days after the

Department’s request. The Department

may request additional information and

documents at any time during the

application process; unless the

Applicant and the Department agree

otherwise, the Applicant shall file such

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36871

information or documents within 30

days after the Department’s request.]

[(d) Lapse

(1) Absent a showing of good cause,

an application for continuance in

membership shall lapse if an Applicant

fails to:

(A) respond fully within 30 days after

a request for information or documents;

(B) appear at or otherwise participate

in a scheduled membership interview

pursuant to paragraph (e); or

(C) return an executed membership

agreement under paragraph (g) within

25 days after service of the agreement.

(2) The lapse of an application shall

require the Applicant to submit a new

application under paragraph (a).]

[(e) Membership Interview

(1) The Department may require the

Applicant to participate in a

membership interview. The

membership interview shall be held

within 30 days after the receipt of the

application, or if the Department

requests additional information or

documents, within 30 days after the

filing of such additional information or

documents by the Applicant.

(2) At least seven days before the

membership interview, the Department

shall serve on the Applicant a written

notice that specifies the date and time

of the interview and the representative

or representatives of the Applicant who

are required to participate in the

interview. The Department shall serve

the notice by facsimile or commercial

courier. The Applicant and the

Department may agree to a shorter or

longer period for notice or a different

method of service.

(3) Unless the Department and the

Applicant otherwise agree, the

membership interview shall be

conducted in the district office for the

district in which the Applicant has or

intends to have its principal place of

business.

(4) During the membership interview,

the Department shall review the

application and the considerations for

the Department’s decision set forth in

paragraph (f). The Department shall

provide to the Applicant’s

representative or representatives any

information or document that the

Department has obtained from the

Central Registration Depository or a

source other than the Applicant and

upon which the Department intends to

base its decision under paragraph (f). If

the Department receives such

information or document after the

membership interview or decides to

base its decision on such information

after the membership interview, the

Department shall promptly serve the

information or document and an

explanation thereof on the Applicant.]

[(f) Department Decision

(1) In evaluating an application

submitted under paragraph (a), the

Department shall consider whether the

Applicant continues to meet the

standards set forth in Rule 1014 in light

of the change in ownership, control, or

operations, and whether current

restrictions, if any, or new restrictions

are necessary for the Applicant to

continue to meet such standards.

(2) The Department shall issue a

written decision within 30 days after the

membership interview or the

submission of additional information or

documents, whichever is later. If the

Department does not require the

Applicant to participate in a

membership interview or submit

additional information or documents,

the Department shall issue a written

decision within 45 days after receipt of

an application under paragraph (a). The

decision shall state the terms for

continuance in NASD membership,

whether current restrictions, if any, are

maintained or new restrictions are

imposed, and shall provide a rationale

for the Department’s decision,

referencing the applicable standard in

Rule 1014.

(3) If the Department fails to issue a

decision within 180 days after receipt of

an application or such later date as the

Department and the Applicant have

agreed in writing, the Applicant may

file a written request with the NASD

Board requesting that the NASD Board

direct the Department to issue a

decision. Within seven days after

receipt of such a request, the NASD

Board shall direct the Department to

issue a written decision immediately or

to show good cause for an extension of

time. If the Department shows good

cause for an extension of time, the

NASD Board may extend the time limit

for issuing a decision by not more than

30 days.]

[(g) Submission of Membership

Agreement

The Department may condition

approval of an application for

continuance in membership on the

Applicant’s submission of a new written

membership agreement pursuant to Rule

1014(c).]

[(h) Service and Effectiveness of

Decision

The Department shall serve its

decision on the Applicant in accordance

with Rule 1012. The decision shall

become effective upon service and shall

remain in effect during the pendency of

any review until a decision constituting

final action of the Association is issued

under Rule 1015 or 1016, unless

otherwise directed by the National

Adjudicatory Council, the NASD Board,

or the Commission.]

[(i) Request for Review; Final Action

An Applicant may file a written

request for review of the Department’s

decision with the National Adjudicatory

Council pursuant to Rule 1015. The

procedures set forth in Rule 1015 shall

apply to such a review, and the National

Adjudicatory Council’s decision shall be

subject to discretionary review by the

NASD Board pursuant to Rule 1016. If

the Applicant does not file a request for

review, the Department’s action shall

constitute the final action of the

Association.]

1018. Stay of Application During

Pendency of Criminal or Other

Proceeding

(a) The Department may stay an

application filed under Rule 1013 or

1017 if:

(1) a state or federal authority files

criminal charges against the Applicant

or a principal or proposed principal of

the Applicant;

(2) the Commission files a complaint

or a request for injunctive relief against

the Applicant or a principal or proposed

principal of the Applicant; or

(3) the Association, another selfregulatory organization, or a state files

a disciplinary complaint against the

Applicant or a principal or proposed

principal of an Applicant alleging a

violation of a law or rule listed in IM–

1011–1 (or a comparable state law, rule,

or regulation). 

In such case, the application shall be

stayed during the pendency of the

proceeding. If the Department has

imposed interim restrictions under Rule

1017(c), the restrictions shall remain in

effect during the stay.

(b) If the Applicant or principal or

proposed principal prevails in the

proceeding, the stay shall be lifted

automatically.

(c) If there is a material change in the

circumstances that gave rise to the stay,

the Applicant may file a written request

with the Department to lift the stay. The

Department shall serve a written

response on the Applicant within 14

days after the filing of the request by the

Applicant. If the Department denies the

request, the Applicant may file a written

request for review with the National

Adjudicatory Council. The National

Adjudicatory Council or the Review

Subcommittee shall serve a written

36872 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

4Members of the Committee are: Faith Colish,

New York, New York; Linda Lerner, All-Tech

Investment Group, Inc., Montvale, New Jersey;

Brian T. Shea, Pershing, Jersey City, New Jersey;

Theodore W. Urban, Ferris, Baker & Watts,

Incorporated, Washington, D.C.; and Richard P.

Woltman, Spelman & Co., Inc., San Diego,

California. Mr. Urban chairs the Committee.

5NASD Regulation included removing or

modifying a restriction in this definition to effect

the consolidation of current Rules 1017 and 1018.

The rationale for the consolidation is set forth in the

section titled ‘‘Proposed Rule 1017,’’ below.

response on the Applicant within 30

days.

1019. Application to Commission for

Review

No change.

* * * * *

Rule 1140. Electronic Filing Rules

(a) Filing Requirement

Except as provided in Rule 1013(a)(2),

all [All] forms required to be filed by the

By-Laws shall be filed through an

electronic process or such other process

the Association may prescribe to the

Central Registration Depository.

* * * * *

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 Regulation 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 Regulation 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

NASD Regulation proposes to amend

the Rule 1010 Series, which governs

NASD membership. NASD Regulation

staff worked with the Member

Admission Review Committee

(Committee), 4 an ad-hoc committee

convened in August 1998, to develop

the proposed changes. The purpose of

the proposed rule change is to

streamline the Rules and make them

more efficient while preserving their

investor protection function.

The most significant changes are as

follows:

• reorganizing and consolidating

some of the current rules to make them

easier to use;

• clarifying the rules and policies that

apply to business expansions by—

• adopting a policy of building

expansion plans into membership

agreements,

• defining in the rules what kinds of

‘‘material changes in business

operations’’ require a member to file an

application for approval with NASD

Regulation, and

• providing a safe harbor for modest

expansions that will not require an

application,

which together are intended to provide

more even-handed treatment among

members for various business

expansions, provide more certainty

regarding which expansions require

approval, and eliminate unnecessary

applications;

• permitting the staff to stay

membership applications if a firm or

one of its principals is the subject of a

disciplinary action;

• permanently rescinding the

National Adjudicatory Council’s

authority to review membership

decisions that are not appealed by an

Applicant;

• simplifying administrative

procedures for submitting an

application and calculating the various

time limits that apply to the process;

and

• permitting the staff to reject

immediately applications that are not

substantially complete.

A detailed explanation of the

proposed rule change follows.

a. Proposed Rule 1011

The definition of ‘‘Associated Person’’

is amended to clarify that it includes

only natural persons.

The term ‘‘material change in

business operations’’ is defined for the

first time. The definition is significant

because it triggers a requirement for a

member to apply to the district office for

approval of the change under proposed

Rule 1017. The term is defined to

include removing or modifying a

membership agreement restriction;5

market making, underwriting, or acting

as a dealer for the first time; or adding

business activities that require a higher

minimum net capital.

NASD Regulation does not believe

that it is possible to develop an

exhaustive definition of the term

‘‘material change in business

operations.’’ If a change in a member’s

business falls outside of the definition,

or the safe harbor described below (e.g.,

because it exceeded the safe harbor

limits or the member has disciplinary

history), then the member may contact

the district office to determine if the

district would deem the change to be

material. A member is not required to

contact the district office if the member

believes the change is not material.

However, if the staff later determines

that the change is indeed material, then

the member potentially could be subject

to disciplinary action for failure to file

an application under proposed Rule

1017.

Proposed Interpretive Material 1011–

1 (IM–1011–1) is added to create a safe

harbor for certain changes that are

presumed not to be material and

therefore do not require a member to

submit an application for approval of

the change. The safe harbor would not

be available to members that have a

‘‘disciplinary history.’’ The term

‘‘disciplinary history’’ shall mean a

finding of a violation by the member or

a principal of the member in the past

five years by the Commission, a selfregulatory organization, or a foreign

financial regulatory authority of one or

more of the following provisions (or

comparable foreign provisions) or rules

or regulations thereunder: Sections

15(b)(4)(E) and 15(c) of the Act (failure

to supervise; fraud and manipulation);

Section 17(a) of the Securities Act of

1933 (fraudulent interstate transactions);

Exchange Act 10b–5 (fraud and

manipulation), and 15g–1 through 15g–

9 (penny stock rules); NASD Rules 2110

(just and equitable principles of trade),

2120 (fraud and manipulation), 2310

(suitability), 2330 (protection of

customer securities and funds), 2440

(fair prices and commissions), 3010

(failure to supervise only), 3310

(manipulative and deceptive

quotations), and 3330 (payments to

influence market prices); and MSRB

Rules G–19 (suitability), G–30 (prices

and commissions), and G–37(b) and (c)

(political contributions).

The term ‘‘principal place of

business’’ is defined for the first time.

An Applicant’s principal place of

business determines which district

office will process its application.

‘‘Principal place of business’’ means the

location where the officers, partners, or

managers direct and control the

activities of the Applicant, unless NASD

Regulation staff designates a different

location. That location may be where

the largest number of associated persons

are located or where the books and

records are kept. This definition is

designed to prevent an Applicant from

trying to select a particular district

office to process its application through

its designation of a principal place of

business.

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36873

6NASD Regulation is not proposing any change

to the definition of sales practice violation on the

Form U–4.

7See, e.g., proposed Rules 1013(a)(5), (b)(1), and

1014(c)(3).

8See Exchange Act Release No. 41594 (July 2,

1999), 64 FR 37586 (July 12, 1999).

NASD Regulation proposes to

redefine ‘‘sales practice violations’’ as

‘‘sales practice event’’ because the

definition includes not only proven

violations, but also unproven

allegations.6 The proposed definition

includes any customer complaint,

arbitration, or civil litigation that has

been or is required to be reported to the

Central Registration Depository (‘‘CRD’’)

or otherwise is required to be reported

to the Association (e.g., via Rule 3070).

The terms ‘‘Applicant’’ and

‘‘Interested Association Staff’’ are

amended to make them consistent with

other rule changes.

b. Proposed Rule 1012

NASD Regulation proposes to amend

the service and filing provisions to

permit additional methods of delivery

and to use consistent terminology for

calculating deadlines. The term

‘‘commercial courier’’ is replaced with

‘‘overnight courier’’ to clarify that

Applicants and NASD Regulation staff

may use the overnight delivery service

offered by the United States Post Office.

NASD Regulation interprets the term

‘‘overnight courier’’ to refer to any entity

that regularly provides such overnight

delivery services, such as Federal

Express, DHL, or the United States Post

Office. Use of the term ‘‘overnight

courier’’ is not intended to imply that

only actual overnight delivery may be

used under the Rule. Overnight delivery

should be used if it is available.

However, if overnight delivery is not

available for a particular location, the

Applicant or NASD Regulation staff may

use the most rapid delivery option

available (e.g., two day service) from the

overnight courier and still be in

compliance with the proposed Rule.

Throughout the proposed rules, the

term ‘‘file’’ is used uniformly to refer to

submissions by an Applicant, and the

term ‘‘serve’’ is used uniformly to refer

to delivery of requests, decisions, and

the like by the Association; other

terminology, such as ‘‘issuance’’ or

‘‘receipt’’ is deleted.7 These changes

provide greater clarity in calculating

deadlines in accordance with proposed

Rule 1012(a).

The lapse of application provisions

are consolidated and moved from Rules

1013(b), 1017(c), and 1018(d) to

proposed Rule 1012(b) for ease of

reference. The lapse rule, which is

discussed in greater detail in the next

section, permits the staff to discontinue

processing an application if an

Applicant does not timely provide

requested information or documents.

The only changes to the lapse rule are

to permit the staff and the Applicant to

agree on a submission date for the

membership agreement, rather than

requiring that all agreements be

submitted within 25 days, and clarify

that fees are not refunded for lapsed

applications.

The subparagraphs of Rule 1012(c) are

reordered for ease of reading.

c. Proposed Rule 1013

One of the major changes to this Rule

is to simplify application submission

procedures. Currently, this Rule

requires Applicants to submit their

applications in two parts. Part One,

which includes primarily forms and fees

(e.g., the initial Forms BD and U–4), is

sent directly to the CRD in Rockville,

Maryland, for processing. Part Two,

which includes all remaining

documents required for member

admission, is sent to the district office

that will review the application. At the

time the rule was adopted, the staff

thought it would be more efficient to

send each part to the location where it

would be processed. In practice, this has

created problems when both parts of the

application are not submitted at the

same time, or one or both parts are

incomplete, making it difficult to

determine when the application should

be treated as filed and when the staff

should begin reviewing it. The

application filing date is critical because

the 180-day limitation placed on the

staff for rendering a decision on the

application is measured from this date.

To alleviate these problems, NASD

Regulation recommends one point of

entry for the entire application, the

district office. District staff will review

the entire application to determine if it

is substantially complete. If so, they will

forward any documents that need to go

to CRD and continue processing the

application.

NASD Regulation proposes a new rule

for dealing with applications that are

not substantially complete at the time of

submission. Currently, the staff does not

have any authority to refuse to begin

processing an inadequately prepared

application. Instead, they attempt to

begin processing such an application by

sending a request for further

information to the Applicant. If the

Applicant does not timely provide the

requested information, then the rules

permit the staff to ‘‘lapse’’ the

application. The staff then notifies the

Applicant that the application has

lapsed, all fees are forfeited, and the

Applicant is required to start over with

the application process if it still wants

to become an NASD member. These

procedures can consume as much as 90

days and a considerable amount of staff

and Applicant resources, but still result

in a rejected application.

Under the proposed rule, if an

application is so deficient upon initial

submission that the staff cannot begin

processing it (e.g., it is missing major

components of the application, such as

written supervisory procedures or a

business plan), then the staff may reject

the application. The staff would have no

more than 30 days after submission to

do this, and would be required to

provide reasons for its action in writing.

NASD Regulation proposes a $350

processing fee for the rejection of an

application that is not substantially

complete. NASD Regulation considered

but rejected defining the term

‘‘substantially complete’’ because the

determination will vary depending on

the type and complexity of the proposed

business, among other things. The lapse

rules will still apply to those situations

where an Applicant stops providing

information in the middle of the

application process.

Rule 1013 also is simplified by

removing requirements for Applicants

to submit information that has already

been submitted to CRD. The district staff

has full access to CRD and can obtain

the information they need directly from

it. This change will make the

application process simpler for

Applicants by eliminating duplicative

submissions to NASD Regulation.

Under the proposed Rule 1013(a)(2),

an Applicant will continue to submit

only its initial Forms BD and U–4 in

paper along with the rest of the

application. The Applicant also will

submit a Web CRD entitlement request

form with its application. Under

proposed Rule 1013(a)(3), upon

approval of the Web CRD entitlement

request form by NASD Regulation, the

Applicant must make all subsequent

Form filings and amendments

electronically via Web CRDsm. A

conforming change is proposed for Rule

1140. This process will be in conformity

with Commission requirements for the

submission of Form BD and

amendments to it.8 Similarly, the initial

Member Contact Questionnaire and user

access request form also are submitted

on paper; upon approval of a

membership application, the member

may update the Member Contact

Questionnaire electronically.

The proposed rule adds new

requirements for Applicants to submit

information concerning their ability to

36874 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

9NASD Regulation also wishes to provide some

guidance on how it treats unadjudicated violations

under Rule 1014. The Rule permits the staff to

consider unadjudicated violations as part of a

decision on a membership application. In most

cases, an unadjudicated violation by itself will not

result in a restriction or a denial, but depending on

the circumstances, may require heightened

supervision. However, a particularly egregious

allegation, e.g., a criminal charge involving a large

number of customers, may cause the staff to

consider a restriction or denial.

10 In 1984, the SEC approved a codification of the

NASD’s member admission procedures, which

included a requirement that any restriction on a

member’s business be included in a membership

agreement executed by the member. See Exchange

Act Release No. 21159 (July 20, 1984), 49 FR 30268

(July 27, 1984) (File No. SR–NASD–82–24). Thus,

a member admitted before 1984 or a member

admitted without any restriction from 1984 to 1997

may not have a membership agreement. In 1997,

NASD Regulation began requiring all new members

to execute a membership agreement, regardless of

whether NASD Regulation imposed any restriction.

See NASD Rule 1014(c); Exchange Act Release. No.

38908 (Aug. 7, 1997), 62 FR 43385 (Aug. 13, 1997)

(File No. SR–NASD–97–28).

ensure business continuity, including

information about the capacity of their

communications and operational

systems, contingency plans, disaster

recovery plans, and the like. NASD

Regulation also proposes a new

standard for admission that requires that

such systems, plans, and procedures be

adequate in proposed Rule 1014(a)(6).

The staff would not be required to

investigate the adequacy themselves;

rather, the Applicant would certify that

the systems, plans, and procedures are

adequate for the Applicant’s business.

The Applicant may self-certify or may

rely on a third party (e.g., a vendor of

such a system) to provide the

certification if the Applicant so chooses.

NASD Regulation also wishes to

clarify that under Rule 1013(b)(4), the

Applicant and the staff may agree to

hold the membership interview at the

Applicant’s place of business.

Rule 1013 is amended by adding new

subparagraph (b)(5) to require

Applicants to provide updated financial

information at the time of their

membership interview.

d. Proposed Rule 1014

NASD Regulation proposes few

changes with respect to the standards

for admission. NASD Regulation

proposes a new standard with respect to

business continuity, as described above.

NASD Regulation also proposes that the

Applicant’s supervisory procedures

must specifically include procedures to

ensure proper registrations are obtained

by the firm. All other changes to the

standards for admission are conforming

changes.9

NASD Regulation also considered the

requirement of Rule 1014(a)(9)(C) that

prospective supervisors have at least

one year of direct experience or at least

two years of related experience in the

subject area to be supervised. NASD

Regulation believes that this

requirement should continue to be

imposed and has published interpretive

guidance on this subject in How To

Become A Member, which is available at

www.nasdr.com/4700_toc.htm. NASD

Regulation does not believe that

supervisory experience requirements

should be increased.

Rule 1014(c), which concerns the

submission of membership agreements,

is amended by deleting the requirement

that any member with a membership

agreement obtain approval from NASD

Regulation of any change in business

outside the terms of the agreement.

NASD Regulation believes that this

provision is too restrictive, particularly

for firms with no disciplinary history.

The provision also puts members with

a membership agreement at a

disadvantage vis-aacute;-vis members

that do not have a membership

agreement.10 Therefore, this provision is

deleted. When the proposed rule change

becomes effective, to ensure that

members are treated equally, NASD

Regulation will permit members that are

eligible for the safe harbor to use it, even

if their membership agreement includes

a general requirement to obtain approval

from NASD Regulation of any change in

business outside the terms of the

agreement. When NASD Regulation

examines a member, it will update the

membership agreement to reflect the

new rule. As part of the proposed rule

change, paragraphs 1014(c) and (d) also

are reordered for ease of reading.

In addition, upon adoption of the

proposed rules, NASD Regulation will

begin including business expansions

plans in membership agreements to the

extent practicable.

e. Proposed Rule 1015

Under current Rule 1015, the NAC or

the Review Subcommittee may call for

review a district decision on a

membership application, even if the

Applicant does not appeal the decision.

NASD Regulation considered at length

whether a procedure or policy could be

developed to implement this provision

effectively, but ultimately determined

that it is unworkable. NASD Regulation

has temporarily suspended calls for

review of membership decisions and

proposes to delete this provision

altogether for the reasons set forth in

Exchange Act Release No. 41311 (Apr.

20, 1999), 64 FR 20347 (Apr. 26, 1999)

(File SR–NASD–99–15).

NASD Regulation believes that the

oversight function envisioned for the

call for review provision, which has

proved to be unworkable, is performed

through a variety of other existing

mechanisms. The Home Office of the

Member Regulation Department

employs a full time Membership

Manager to coordinate and oversee the

national program. Part of the manager’s

responsibility includes a quality control

function. This function is carried out in

several ways: maintenance of a

Membership Procedures Manual;

periodic advice memoranda sent to

District Office staff (‘‘MAP Bulletins’’);

regularly scheduled telephone

conferences with District Office staff to

discuss procedural and substantive

issues arising in the program; and

periodic training sessions for new and

incumbent staff. To supplement these

tools, Member Regulation’s Office of

Quality Assurance conducts periodic

peer reviews of the membership

admission program, most recently in

1998 and 1999. The purpose of these

peer reviews was to assess the District

Offices’ application of the membership

rules and procedures. The reviews

included an examination of 265 files in

recently-issued membership decisions.

The reviews included spot checks of

source documents to confirm the facts

underlying the decisions. In addition,

peer reviews of the membership

program will be conducted in the future.

NASD Regulation also proposes a new

paragraph (h) for dismissing appeals

that are abandoned by an applicant,

which includes failing to appear at a

hearing as set forth in current Rule

1015(f)(5), among other things.

f. Proposed Rule 1017

Current Rule 1017, which addresses

applications for removal or modification

of a business restriction, and Rule 1018,

which addresses applications for

approval of changes in ownership,

control, or operations, are consolidated

in proposed Rule 1017. Sometimes a

member initiates business changes that

involve both rules, which creates

confusion as to which rule should be

used. Therefore, NASD Regulation

proposes to consolidate these rules to

make them easier for staff and

applicants to use and to eliminate any

confusion that may arise from

overlapping provisions.

This consolidation is achieved in part

by defining the term ‘‘material change in

business operations’’ in proposed Rule

1011(i) to include the removal or

modification of a business restriction.

All material changes in business

operations would trigger a review under

proposed Rule 1017. Members should

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36875

11A lapsed Applicant may propose the same

owners; a denied Applicant must propose new

owners.

12 15 U.S.C. 78o–3(b)(6).

13 15 U.S.C. 78o–3(b)(8).

note that a ‘‘restriction’’ is specifically

labeled as such in the membership

agreement, and NASD Regulation issues

a decision that states the rationale for

the restriction.

A restriction is distinct from other

limitations that a member may set forth

in its business plan that may be recited

as part of the ‘‘Business Activities’’

section of a membership agreement. For

example, an applicant may include in

its business plan that it intends to have

10–20 registered representatives and

make markets in no more than 10

stocks. If the NASD approves the

application, these self-imposed

limitations, which have been considered

as part of the application, may be

included in the ‘‘Business Activities’’

section of the membership agreement.

These types of limitations are not

considered ‘‘restrictions’’ under the

Rules because they are not imposed by

NASD Regulation, and therefore NASD

Regulation does not have to include a

rationale for them in the decision in the

application. Under the proposed Rules,

a member that has such limitations in

its membership agreement may expand

beyond those limitations to the extent

permitted in the safe harbor in IM–

1011–1.

In contrast, for example, NASD

Regulation may specifically restrict the

number of markets a member makes

because NASD Regulation determines

and issues a decision stating that the

member cannot adequately supervise a

large number of markets. In such a case,

the restricted member cannot take

advantage of the safe harbor in proposed

Rule 1011 and must apply under

proposed Rule 1017 to lift the

restriction.

Another type of change that triggers

an application under proposed Rule

1017 is a change in the equity

ownership or partnership capital of the

member that results in one person or

entity owning or controlling 25 percent

or more of the equity or partnership

capital. NASD Regulation wishes to

clarify that a group of individuals acting

in concert to obtain control of 25

percent or more of the equity or

partnership capital of a member will be

deemed to be an ‘‘entity’’ under the

Rule, and as such, trigger the

requirement to submit an application to

obtain approval of the ownership

change.

NASD Regulation proposes to

discontinue its review of certain

changes. Under proposed Rule 1017,

NASD Regulation would discontinue

review of member mergers and

acquisitions that are reviewed by the

New York Stock Exchange, thereby

eliminating duplication by selfregulatory organizations.

Proposed Rule 1017 also sets forth for

the first time what type of information

should be included in an application

and the content of the staff’s decision on

an application under this Rule. The

Rule also clarifies when the application

should be filed and what changes can be

effected prior to obtaining NASD

Regulation’s approval.

NASD Regulation proposes a new

paragraph (k) to clarify what happens if

a change in ownership application

lapses or is denied. The proposed rule

change provides that if the ownership

change application lapses or is denied,

then the member has a fixed period of

time to submit a new application,11

unwind the transaction, or file a Form

BDW. Of course, as under the current

rules, a member could continue to

operate with the approved owners if the

transaction has not closed. The

Department may shorten the 60-day

period for the protection of investors or

lengthen it upon good cause shown by

the Applicant. The Department may

continue to place interim restrictions on

the member during the 60-day (or other

imposed) period. NASD Regulation’s

practice has been to inform Applicants

of these options, but not impose

particular deadlines. The purpose of the

proposed rule change is to provide more

structure to this process and ensure that

members who do not timely obtain

approvals of ownership changes are not

doing business with the public.

As part of its review of the Rule 1010

Series, NASD Regulation considered

whether the time frames in Rule 1017

could be shortened so that the overall

process would be completed in 90 days.

NASD Regulation determined not to

shorten the time frames at this time

because other rule revisions (e.g.,

defining material change in operations

and listing the documents required for

the application), should speed up

processing of applications. NASD

Regulation also intends to publish on its

Web site further guidance to members

on what types of documents and

information the staff will require if a

member requests approval to engage in

certain specialized areas of the

securities or investment banking

business. NASD Regulation believes that

these changes should be given a chance

to work before any time frames are

shortened. NASD Regulation will

reconsider the issue one year after the

rule revisions have become effective and

more information is available about the

processing time for applications.

g. Proposed Rule 1018

NASD Regulation proposes to adopt a

new NASD Rule 1018, which would

permit the staff to stay a membership

application under NASD Rule 1013 or

1017 if a state or federal authority files

criminal charges against the Applicant

or a principal or proposed principal of

the Applicant; the SEC files a complaint

or a request for injunctive relief against

the Applicant or a principal or proposed

principal of the Applicant; or the NASD,

another self-regulatory organization, or a

state files a complaint alleging a

violation of one of the laws or rules

listed in IM–1011–1 (or a comparable

state provision).

Under the proposed rule, the stay

would be lifted automatically if the

Applicant prevailed in the disciplinary

action. The staff also would be

authorized to lift the stay if

circumstances changed. If the staff

denied the request to lift the stay, the

Applicant could appeal to the National

Adjudicatory Council.

2. Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

the provisions of Section 15A(b)(6) of

the Act,12 which requires, among other

things, that the Association’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.

Section 15A(b)(8) of the Act 13 requires

that a national securities association

establish rules providing a fair

procedure for the denial of membership

in such association. NASD Regulation

believes that the proposed rule change

is consistent with these sections because

it provides better notice to applicants

about the various requirements of the

application process, simplifies and

clarifies the rules, and better protects

investors by circumscribing expansions

by members with disciplinary histories

and by permitting the Association in

certain circumstances to stay

applications by members who are

subject to disciplinary action. The

proposed rule change also provides

better notice to applicants whose change

in ownership is denied by informing

them of their options once the denial is

final.

36876 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices

14 In the Matter of Sierra Nevada Securities, Inc.,

Exchange Act Release No. 41330, 1999 SEC LEXIS

833, Apr. 26, 1999.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation 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.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The proposed rule change was

published for comment in NASD Notice

to Members 99–67. Two comments were

received in response to the Notice.

The commenters raised several issues.

One commenter, the Jeffrey Matthews

Financial Group LLC, stated that the

staff has been given too much time to

review an Applicant’s submission and

request additional information. As part

of its deliberations on the proposed

rules, NASD Regulation considered

shortening certain deadlines. NASD

Regulation determined not to shorten

the time frames at this time because

other rule revisions (e.g., defining

material change in operations and

listing the documents required for the

application) should speed up processing

of applications. NASD Regulation also

has provided additional guidance to

members on what types of documents

and information the staff will require if

a member requests approval to engage in

certain specialized areas of the

securities or investment banking

business. This guidance is posted at

www.nasdr.com/cmlappsl1.htm.

NASD Regulation concluded that these

changes should be given a chance to

work before any time frames are

shortened. NASD Regulation will

reconsider the issue one year after the

rule revisions have become effective and

more information is available about the

processing time for applications. In the

meantime, NASD Regulation will make

every effort to respond promptly and

within the time limits to each

submission of information.

This same commenter also suggested

that a member should be permitted to

add business activities without approval

from NASD Regulation if the revenues

from the activity are less than five

percent of total revenue. Certain types of

business expansions (adding a limited

numbers of sales personnel, offices, and

markets) are permitted under the

proposed safe harbor. After further

consideration of this comment by the

Board, NASD Regulation determined to

revise the definition of material change

in business operations as proposed in

Notice To Members 99–67 so that the

definition would not apply to adding

any new type of business, but only to

adding market making, underwriting, or

acting as a dealer for the first time.

The California Association of

Independent Broker-Dealers (‘‘CAIBD’’)

also submitted a comment letter. CAIBD

stated that: (1) the staff has too much

discretion in determining whether a

member should be permitted to expand;

(2) NASD Regulation does not need to

ask for lease arrangement information or

descriptions of communications and

operations systems; (3) supervisory

experience should not be required; (4)

membership interviews should be

waived in certain circumstances; (5) a

list of persons to be registered should

not be required; and (6) an Applicant

should not be required to describe the

volatility of its products.

First, NASD Regulation does not

believe that the staff has too much

discretion in rendering a decision on a

member’s application to expand its

business. Indeed, the criteria for

approval of membership applications is

set forth in detail in Rule 1014. To the

extent a decision on an application is

denied in whole or in part or approved

subject to restrictions, the rules require

that the reason for the denial or

imposition of restrictions be specifically

explained, referencing the applicable

standard for membership upon which

the decision is based.

Furthermore, as part of its proposal,

NASD Regulation is creating a safe

harbor that will permit members to

undertake certain types of business

expansions without obtaining NASD

Regulation approval. NASD Regulation

believes that it is appropriate to

continue exercising discretion in

reviewing expansions outside of the safe

harbor because such expansions could

be material.

Second, NASD Regulation has

routinely required Applicants to

provide information about their lease

arrangements. This permits NASD

Regulation to verify certain aspects of an

application. For example, an Applicant

that proposed to have a very small

number of registered persons in most

cases would lease space commensurate

with staffing. If that Applicant instead

leased a very large space, NASD

Regulation would most likely request

further information about the business

purpose for the lease and to ensure that

the Applicant was not planning an

unapproved expansion. Likewise, if an

applicant proposed to employ a large

number of associated people in a

relatively small space, NASD Regulation

would question the Applicant’s ability

to support the number of personnel

proposed from both a supervisory and

operational standpoint.

Third, NASD Regulation determined

that it should begin asking Applicants

for information about their ability to

ensure business continuity, including

information about the capacity of their

communications and operational

systems, contingency plans, disaster

recovery plans, and the like. The staff

would not be required to investigate the

adequacy themselves; rather, the

applicant would certify that the

systems, plans, and procedures are

adequate for the applicant’s business.

The applicant may rely on a third party

(e.g., a vendor of such a system) to

provide the certification if the applicant

so chooses. This review will be less

extensive in the case of an introducing

broker-dealer that is relying on the

systems of a clearing broker.

Fourth, NASD Regulation staff, as

well as the NAC and the District

Committees, have expressed the view

that the experience requirement for

supervisors is appropriate. In some

cases, NASD Regulation has

appropriately denied membership or a

business expansion application where

the Applicant has not demonstrated any

experience in the proposed business

line.14 NASD Regulation believes that

this experience requirement serves an

important investor protection function.

Fifth, NASD Regulation believes that

membership interviews are essential for

new member Applicants under NASD

Rule 1013. The in-person interview

plays an important role in determining

whether the Applicant and its

principals are knowledgeable about the

legal and regulatory requirements of

operating a broker-dealer and can

demonstrate that they are capable of

complying with all laws and

regulations, as required by the

membership standard in proposed

NASD Rule 1014(a)(3). Interviews with

a current member applying to remove a

restriction or expand its business are not

required by the rules, but may be held

at the election of staff under proposed

NASD Rule 1017.

Sixth, a list of prospective registered

persons is also essential to rendering a

decision under proposed Rule 1014.

NASD Regulation must check the

disciplinary history of all such persons

in determining whether an Applicant

meets the standards set forth in

proposed Rule 1014(a)(3) and (10).

Finally, NASD Regulation believes

taking the volatility of a firm’s products

into consideration is necessary in order

to assess a firm’s ability to maintain an

adequate net capital level under

Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36877

15 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 42660

(April 10, 2000), 65 FR 21052.

4Securities Exchange Act Release No. 42460

(February 25, 2000), 65 FR 11618 (March 3, 2000)

(File No. SR–Amex–00–05); Securities Exchange

Act Release No. 42459 (February 25, 2000), 65 FR

11619 (March 3, 2000) (File No. SR–CHX–99–28);

Securities Exchange Act Release No. 42458

(February 25, 2000), 65 FR 11628 (March 3, 2000)

(File No. SR–Phlx–00–12); Securities Exchange Act

Release No. 42661 (April 10, 2000), 65 FR 20497

(April 17, 2000) (File No. SR–BSE–00–02).

5The New York Stock Exchange was first to

submit a proposed rule change rescinding its offboard trading rule, Rule 390. Securities Exchange

Act Release No. 42450 (February 23, 2000), 65 FR

10577 (February 28, 2000) (‘‘NYSE Release’’).

On May 5, 2000, the Commission approved the

New York Stock Exchange’s proposed rule change

to rescind Rule 390. Securities Exchange Act

Release No. 34–42758 (May 5, 2000), 65 FR 30175

(May 10, 2000) (‘‘NYSE Approval Order’’).

In the NYSE Release, the Commission also

solicited the public’s views on a broad range of

issues related to market fragmentation—the trading

of orders in multiple locations without interaction

of those orders. The period for public comment on

market fragmentation expired on May 12, 2000. The

Commission currently is reviewing the comments

submitted in response to the NYSE Release.

6 15 U.S.C. 78f(b)(5).

7 15 U.S.C. 78k–1.

Exchange Act Rule 15c3–1 and the

adequacy of the firm’s procedures for

supervising its financial and operational

functions.

NASD Regulation requested, but did

not receive, comment on several issues

in NTM 99–67. NASD Regulation has

determined to retain the safe harbor

numbers as proposed in the Notice.

However, NASD Regulation has

determined that the definition of

disciplinary history should be amended

to include violations by officers or

principals of the member. NASD

Regulation also has determined that

restrictions in a membership agreement

should not automatically sunset after a

fixed period (e.g., five years) if the

applicant does not have any

disciplinary history; instead, restrictions

will continue to be individually

reviewed. Finally, NASD Regulation

determined that it should clarify what

happens if a change in ownership is

denied and has proposed Rule 1017(k)

to address this situation.

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 self-regulatory

organization 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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–99–67 and should be

submitted by July 3, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14718 Filed 6–9–00; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42890; File No. SR–PCX–

00–11]

Self-Regulatory Organizations; Pacific

Exchange, Inc.; Order Approving

Proposed Rule Change To Rescind

Rules 5.43–5.49, and Modify Rule

5.5(b), Relating to the Exchange’s OffBoard Trading Restrictions

June 1, 2000.

I. Introduction

On March 26, 2000, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’)

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 to rescind Rules

5.43–5.49, the Exchange’s off-board

trading rules, and to make a conforming

change to Rule 5.5(b). The proposed rule

change was published for comment in

the Federal Register on April 19, 2000.3

Similar proposed rule changes filed by

the American Stock Exchange, Chicago

Stock Exchange, the Philadelphia Stock

Exchange, and the Boston Stock

Exchange had already been published

for public comment.4 The Commission

received no comments on any of these

proposals. Today, in separate orders, the

Commission is approving the proposed

rule changes to rescind off-board trading

rules filed by the exchanges noted

above.5

II. Description of the Proposal

Exchange Rules 5.43–5.49 restrict a

member’s ability to effect transactions in

Exchange-listed securities off a national

securities exchange. In the proposing

release, the Exchange stated that ‘‘once

the Commission approves the NYSE’s

proposal to rescind its off-board trading

restrictions, the Exchange’s off-board

trading restrictions will no longer be

necessary or appropriate.’’ Therefore,

the Exchange proposed to rescind Rules

5.43–5.49, and to make a conforming

change to Rule 5.5(b).

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange. In particular, the Commission

finds the proposed rule change is

consistent with Section 6(b)(5) of the

Act 6 which requires, among other

things, that the rules of an exchange be

designed to promote just and equitable

principles of trade, to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system and, in

general, to protect investors and the

public interest, and Section 6(b)(8),

which requires that the rules of an

exchange not impose any burden on

competition not necessary or

appropriate in furtherance of the Act.

The rescission of the Exchange’s offboard trading restrictions is also

consistent with Section 11A of the Act 7

which sets forth the findings and

objectives that are to guide the

Commission in its oversight of the

national market system. Specifically,

rescinding the off-board trading

restrictions will help further the

national market system objective in

Section 11A(a)(1)(C)(i) to assure the