47858 Federal Register / Vol. 62, No. 176 / Thursday, September 11, 1997 / Notices

4 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

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

5 15 U.S.C. 78s(b)(2).

6 17 CFR 200.30–3(a)(12).

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

2On August 27, 1997, the NASD Regulation

amended its NTM attached as Exhibit A to this

notice. See letter from Mary N. Revell, Associate

General Counsel, NASD Regulation, Inc., to

Katherine A. England, Assistant Director, Division

of Market Regulation, SEC, dated August 26, 1997.

3The Board of Governors reviewed the proposed

rule change at its meeting on August 7, 1997. See

letter from Mary N. Revell, Assistant General

Counsel, NASD Regulation, Inc., to Katherine A.

England, Assistant Director, Division of Market

Regulation, SEC, dated August 11, 1997.

4See Securities Exchange Act Release No. 37182,

May 9, 1996; 61 FR 24644, May 15, 1996,

(Commission’s interpretation concerning the

delivery of the information through electronic

media in satisfaction of broker-dealer and transfer

agent requirements to deliver information under the

Act and the rules thereunder) (‘‘May 1996

Release’’).

5See Securities Act Release No. 7233, Oct. 6,

1995; 60 FR 53458, Oct. 13, 1995, (Commission’s

interpretation concerning the use of electronic

media as a means of delivering information

required to be disseminated pursuant to the

Securities Act of 1933, the Securities Exchange Act

of 1934, and the Investment Company Act of 1940).

securities, and to remove impediments

to and perfect the mechanism of a free

and open market.4

The NASD is proposing to delete the

eligibility criteria contained in the

definition of ‘‘qualified independent

underwriter’’ in NASD Rule 2720,

which requires a qualified independent

underwriter to have recorded net

income in three of the five years

immediately preceding the offering. Due

to the important investor protections

provided by qualified independent

underwriters, the Commission agrees

with the NASD’s assessment that

qualified independent underwriters

should meet certain standards as

prescribed by the NASD in Rule 2720,

however, the Commission believes the

requirement that a qualified

independent underwriter have had net

income in three of the previous five

years immediately preceding an offering

does not specifically indicate a

member’s ability to act as a qualified

independent underwriter. The

Commission believes that other factors,

including a member’s actual experience

in underwriting, may be more

significant in determining eligibility as

a qualified independent underwriter. In

its proposed rule change, the NASD

noted that the Hearing Subcommittees

of the NADS’s Corporate Financing

Committee have granted the majority of

requests received seeking an exemption

from the proposed qualified

independent underwriter net income

requirement, relying instead, on

members’ extensive underwriting

experience managing or co-managing

public offerings to compensate for any

lack of ongoing profitability.

The Commission recognizes that the

net income requirement, in some

instances, may serve as an effective

measure for qualified independent

underwriters. However, the Commission

also notes that a deficiency in net

income may be the result of various

situations, many of which are not

directly connected to the profitability of

a member’s underwriting activities.

Indeed, in its filing, the NASD noted

that one national broker-dealer failed

the net income requirement due to its

settlement of sales practice abuses in

connection with the distribution of

noncorporate securities, an activity

unrelated to its ability to serve as a

qualified independent underwriter.

The Commission believes that the

participation of a qualified independent

underwriter assures the public of the

independence of the pricing and due

diligence functions in a situation where

a member is participating in an offering

where such member has a conflict of

interest. Because of the important

investor protections provided by

qualified independent underwriters in

such an instance, the Commission

believes certain criteria must be met to

assure the credibility of those acting as

qualified independent underwriters.

The Commission believes the

elimination of the net income

requirement is appropriate, as such

requirement does not appropriately

reflect a member’s ability to act as a

qualified independent underwriter. The

Commission further believes the

remaining standards provided in NASD

Rule 2720 are more relevant in assessing

a member’s qualifications in the

capacity as a qualified independent

underwriter.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations

thereunder applicable to the NASD, and

in particular Section 15A(b)(6).

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,5 that the

proposed rule change (File No. SR–

NASD–97–45) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24137 Filed 9–10–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39025; File No. SR–NASD–

97–57]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

National Association of Securities

Dealers, Inc. Relating to the Electronic

Delivery of Information Between

Members and Their Customers

September 5, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

July 30, 1997,2 the National Association

of Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) 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, Inc.

(‘‘NASD Regulation’’ or ‘‘NASDR’’).3

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASDR has filed a Notice to Members

(‘‘NTM’’) setting forth the policy of

NASDR applicable to the electronic

delivery of information between

members and their customers.

II. Self-Regulatory Organization’s

Statement of the Purpose of and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NASDR 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. NASDR 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

The Commission, in Release Nos. 34–

37182 4 and 33–723,5 set forth

guidelines establishing a framework

under which broker-dealers and others

may use electronic media as an
Federal Register / Vol. 62, No. 176 / Thursday, September 11, 1997 / Notices 47859

6 In the May 1966 Release, the Commission stated

that broker-dealers should be cognizant of their

responsibilities to prevent, and the potential

liability associated with, unauthorized transactions

when ‘‘receiving’’ or ‘‘obtaining’’ electronic

responses from their customers. The Commission

therefore requests comment on what types of

security measures broker-dealers employ or will

employ to reasonably assure themselves that the

responses they receive electronically from

customers are authentic. See, e.g., NASD Rules

3110(g) (2) and (3), (requiring members to obtain

written customer authorization before obtaining a

check drawn on a customer’s account), attached as

Exhibit A.

7Section 15A(b)(6) requires that the rules of the

Association 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.

1See Securities Exchange Act Release No. 37182,

May 9, 1996; 61 FR 24644 (May 15, 1996) (May

1996 Release). The release also contained a list of

current Rules to which broker-dealers apply the

guidance provided in the interpretation.

2See Securities Act Release No. 7233, Oct. 6,

1995; 60 FR 53458 (October 13, 1995) (October 1995

Release).

alternative to paper-based media to

satisfy delivery obligations under

federal securities laws. The Commission

also indicated in the releases that an

electronic communication from a

customer to a broker-dealer generally

would satisfy the requirements for

written consent or acknowledgment

under these laws.

The NTM, attached as Exhibit A,

establishes NASD Regulation policy

regarding the use by members of

electronic media to electronically

transmit documents that they are

required or permitted to furnish to

customers under Association rules and

to receive electronic communications

from customers.6 The Notice states that

use of electronic media is permitted

provided members comply with the

standards contained in the Commission

releases. The Notice summarizes these

standards, which address, among other

things, notice, access, evidence to show

delivery, communication of personal

financial information, and consent.

The Notice also contains a list of

current Association rules that require or

permit communications between

members and their customers for which

electronic delivery may be used in

accordance with the standards

contained in the Commission releases.

The Notice states that electronic

delivery also may be used for a new rule

or an amendment to an existing Rule

that requires or permits

communications between members and

their customers unless NASDR specifies

otherwise at the time of adoption of the

rule or amendment.

NASDR believes that use of electronic

media to satisfy delivery requirements

under Association rules will be

beneficial to both members and their

customers, particularly when conducted

in accordance with Commission

standards.

2. Statutory Basis

The proposed rule change is

consistent with the requirements of

Section 15A(b)(6).7 The NASDR believes

that providing standards that allow

members to effectively and efficiently

supply required documents to

customers is consistent with this

requirement.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASDR 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

Written comments were neither

solicited nor received. The proposed

rule change was reviewed by the

NASDR Executive and Membership

Committees. The members of these

Committees were in favor of the

proposed rule change.

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.

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. 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 the file

number in the caption above and should

be submitted by October 2, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

Exhibit A—NASD Notice to Members

Electronic Delivery of Information Between

Members and Their Customers

Executive Summary

This Notice sets forth the policy of NASD

Regulation, Inc. (NASD Regulation)

applicable to electronic delivery of

information between members and their

customers as required or permitted by

National Association of Securities Dealers

(NASD) Rules.

Discussion

Background

On May 9, 1996, the Securities and

Exchange Commission (SEC or Commission)

issued an interpretive release publishing its

views on the use of electronic media by

broker-dealers for delivery of information.1

The SEC stated that broker-dealers and others

may satisfy their delivery obligations under

federal securities laws by using electronic

media as an alternative to paper-based media

within the framework established in its

October 1995 interpretive release on the use

of electronic media for delivery purposes.2

The SEC also indicated that an electronic

communication from a customer to a brokerdealer generally would satisfy the

requirements for written consent or

acknowledgment under the federal securities

laws.

NASD Regulation will permit members

that wish to electronically transmit

documents that they are required or

permitted to furnish to customers under

NASD Rules to do so, provided they adhere

to the standards contained in the SEC

Releases summarized below. Members also

may receive electronic communications from

customers. Members are urged to review the

May 1996 and October 1995 Releases in their

entirety to ensure they comply with all

aspects of the SEC’s electronic delivery

requirements.

SEC Releases

According to the standards established by

the SEC, broker-dealers may use electronic

media to satisfy their delivery obligations,

provided the electronic communication

satisfies the following principles:
47860 Federal Register / Vol. 62, No. 176 / Thursday, September 11, 1997 / Notices

3The SEC stated that the ability to download the

document or print from the electronic medium

would be sufficient to satisfy this need.

4See May 1996 Release, n.17.

5The SEC described an informed consent as one

that specifies the electronic medium or source

through which the information will be delivered

and the period during which the consent will be

effective, and describes the information that will be

delivered using such means. Except where manual

consent is required under the Penny Stock Rules

(see discussion infra), broker-dealers may obtain

consents either manually or electronically. See May

1996 Release, n.23.

6The SEC, however, cautioned broker-dealers

that they should be aware of their responsibilities

to prevent unauthorized transactions. In this regard,

the Commission stated its belief that broker-dealers

should have reasonable assurance that the response

received from a customer is authentic. The SEC also

will continue to require broker-dealers to obtain the

manual signature of customers on certain disclosure

documents required under the Penny Stock Rules.

See May 1996 Release, nn.23, 29, & 50.

Notice: The electronic communication

should provide timely and adequate notice to

customers that the information is available

electronically. If necessary, broker-dealers

should consider supplementing the

electronic communication with another

communication that would provide notice

similar to that provided by delivery in paper

through the postal mail that information has

been sent that the recipient may wish to

review.

Access: Customers who are provided

information through electronic delivery

should have access to that information

substantially equivalent to that which would

be provided if the information were delivered

in paper form (i.e., the electronically

transmitted document must convey all

material and required information). For

instance, if a paper document is required to

present information in a certain order, then

the information delivered electronically

should be in substantially the same order.

The use of a particular electronic medium

should not be so burdensome that intended

recipients cannot effectively access the

information provided. A recipient should

have the opportunity to retain the

information through the selected medium or

have ongoing access equivalent to personal

retention.3 Also, as a matter of policy, the

SEC believes that a person who has a right

to receive a document under the federal

securities laws and chooses to receive it

electronically should be provided with a

paper version of the document if consent to

receive documents electronically is revoked

or upon specific request.4

Evidence to Show Delivery: Broker-dealers

must have reason to believe that

electronically delivered information will

result in the satisfaction of the delivery

requirements under the federal security laws.

Broker-dealers should consider the need to

establish procedures to ensure that

applicable delivery obligations are met, and

should take reasonable precautions to ensure

that information transmitted using either

electronic or paper media is delivered as

intended. Broker-dealers may be able to

evidence satisfaction of delivery obligations,

for example, by:

(1) Obtaining the intended recipient’s

informed consent 5 to delivery through a

specified electronic medium, and ensuring

that the recipient has appropriate notice and

access;

(2) Obtaining evidence that the intended

recipient actually received the information,

such as by an electronic mail return-receipt

or by confirmation that the information was

accessed, downloaded, or printed; or

(3) Disseminating information through

certain facsimile methods.

The SEC also made the following

statements regarding the communication of

personal financial information (e.g.,

confirmations and account statements).

Confidentiality and Security: Brokerdealers sending personal financial

information through electronic means or in

paper form should take reasonable

precautions to ensure the integrity,

confidentiality, and security of that

information. Broker-dealers transmitting

personal financial information electronically

must tailor those precautions to the medium

used in order to ensure that the information

is reasonably secure from tampering or

alteration.

Consent: Prior to delivering personal

financial information electronically, the

broker-dealer must notify the intended

recipient that the information will be

delivered electronically and obtain the

recipient’s informed consent. The customer’s

consent may be made either by a manual

signature or by electronic means.

The SEC also stated that an electronic

communication from a customer to a brokerdealer will satisfy requirements under certain

Commission Rules to receive or obtain

written customer consent or

acknowledgment.6 Further, the SEC

reminded broker-dealers that they must

reasonably supervise firm personnel to

prevent violations, and suggested that firms

should evaluate the need for systems and

procedures to deter or detect misconduct by

firm personnel in connection with the

delivery of information, whether by

electronic or paper means.

The SEC release stated that the above

standards are intended to permit brokerdealers to comply with their delivery

obligations under the federal securities laws

when using electronic media. While

compliance with the guidelines is not

mandatory for the electronic delivery of nonrequired information that, in some cases, is

being provided voluntarily to customers,

NASD Regulation believes adherence to the

guidelines should be considered, especially

with respect to documents furnished

pursuant to agreements or other specific

arrangements with customers.

Conclusion

A list of current NASD Conduct Rules,

Marketplace Rules, and Procedural Rules that

require or permit communications between

members and their customers for which

electronic delivery may be used in

accordance with the standards set forth in the

SEC May 1996 and October 1995 Releases is

set forth below. The summary of delivery

obligations provided is intended for reference

only, and is not intended to be a statement

of all requirements under the Rules listed.

NASD Regulation believes this list is

complete. The interpretation set forth in this

Notice also will apply to a new Rule or an

amendment to an existing Rule that requires

or permits communications between

members and their customers unless NASD

Regulation specifies otherwise at the time of

adoption of the Rule or amendment.

NASD Rules That Require or Permit

Delivery of Information Between Firms and

Customers

Conduct Rules

Rule 2210(d)(2)(B) (i), (ii), and (iv)

(Communications with the Public; Standards

Applicable to Communications with the

Public; Specific Standards;

Recommendations) requires a member to

disclose certain ‘‘conflicts of interest’’

situations, if applicable, when making a

recommendation; requires a member to

provide, or offer to furnish upon request to

the customer, available investment

information to support a recommendation;

and allows a member to offer to furnish a list

of all recommendations made within the past

year or over longer periods of time.

Rule 2220(d)(2)(D)(i) (Options

Communications with the Public; Standards

Applicable to Communications with the

Public; Specific Standards) requires a

member to state in sales literature pertaining

to options that supporting documentation for

any claims, comparisons, recommendations,

statistics, or other technical data will be

supplied upon request.

Rule 2230 (Confirmations) requires a

member at or before the completion of each

transaction to give or send to a customer

written notification disclosing the member’s

role and other facts in connection with the

transaction. In addition, if the member was

acting as a broker for the customer, the

member must disclose from whom the

security was purchased or to whom it was

sold or the fact that such information will be

furnished upon request of the customer.

IM–2230 (‘‘Third Market’’ Confirmations)

requires a member that acts as a broker for

customers in listed securities in the ‘‘third

market’’ to provide certain disclosures in a

legend on the confirmation to the customer.

Rule 2240 (Disclosure of Control

Relationship with Issuer) requires a member

who has a control relationship with the

issuer of the security being purchased or sold

to provide written disclosure of the

relationship to the customer at or before the

completion of the transaction.

Rule 2250 (Disclosure of Participation or

Interest in Primary or Secondary

Distribution) requires a member to provide

written disclosure to the customer at or

before completion of a transaction in a

primary or secondary distribution of the

security, if the member is participating or has

an interest in the distribution.

Rule 2260 (Forwarding of Proxy and Other

Materials) requires a member to forward

proxy materials, annual reports, information

statements, and other material to each

beneficial owner of shares of a stock held by

the member.

Rule 2270(a) (Disclosure of Financial

Condition to Customers) requires that, upon
Federal Register / Vol. 62, No. 176 / Thursday, September 11, 1997 / Notices 47861

request, a member must make available to

inspection by any bona fide regular customer

financial condition information disclosed in

its most recent balance sheet.

Rule 2310 (a) and (b) (Recommendations to

Customers (Suitability)) requires a member to

make a suitability determination based on

information disclosed by the customer as to

his other security holdings and his financial

situation and need and requires a member to

make reasonable efforts to obtain specified

information concerning non-institutional

customers.

IM–2310–2(e) (Fair Dealing with Customers

with Regard to Derivative Products or New

Financial Products) requires a member to

make every effort to make customers aware

of the pertinent information regarding certain

products. To meet this obligation, members

may deliver written documents to the

customer under certain circumstances.

Rule 2330(c) (Customers’ Securities or

Funds; Authorization to Lend) requires a

member to obtain from a customer a written

authorization permitting the lending of

securities carried by the member.

Rule 2330(f)(2) (D) and (G) (Customer’s

Securities or Funds; Sharing in Accounts;

Extent Permissible) requires that a

compensation arrangement to share profits in

an account must be set forth in a written

agreement executed by the customer and the

member, and that the member must disclose

to the customer all material information

relating to the arrangement, including the

method of compensation and potential

conflicts of interest that may result from the

compensation formula.

Rule 2340(a) (Customer Account

Statements) requires delivery of a statement

of account containing a description of any

securities positions, money balances, or

account activity to each customer whose

account had a security position, money

balance, or account activity during the period

since the last statement was sent to the

customer (See May 1996 Release which

covers confirmations of transactions pursuant

to Securities Exchange Act Rule 10b–10).

Rule 2510(b) (Discretionary Accounts;

Authorization and Acceptance of Account)

requires the customer’s prior written

authorization before a member may exercise

discretionary power in a customer’s account.

Rule 2510(d) (Discretionary Accounts;

Exceptions) allows an exception from the

requirements of the rule under certain

circumstances for members utilizing negative

response letters for bulk exchanges of net

asset value of money market mutual funds.

Rule 2710(c)(8)(A) (Corporate Financing

Rule—Underwriting Terms and

Arrangements; Underwriting Compensation

and Arrangements; Conflicts of Interest)

requires disclosure of conflicts of interest and

the name of the qualified independent

underwriter assuming the role of pricing the

offering and conducting due diligence.

Rule 2720 (d) and (h) (Distributions of

Securities of Members and Affiliates—

Conflicts of Interest; Disclosure and Periodic

Reports) requires a member to make certain

disclosures in the registration statement,

offering circular, or similar document and

requires a member that makes a distribution

to the public of its securities pursuant to this

Rule to send to each of its shareholders or

investors: (1) quarterly, a summary statement

of its operations and (2) annually,

independently audited and certified financial

statements.

Rule 2720(k) (Distributions of Securities of

Members and Affiliates—Conflicts of Interest;

Suitability) requires a member underwriting

an issue of securities where a conflict of

interest exists to make a suitability

determination based on information

furnished concerning the customer’s

investment objectives, financial situation,

and needs.

Rule 2720(l) (Distributions of Securities of

Members and Affiliates—Conflicts of Interest;

Discretionary Accounts) requires specific

written approval of the customer prior to

execution in a discretionary account of a

transaction in securities issued by a member

or an affiliate of a member, or by a company

with which a member has a conflict of

interest.

Rule 2730(b) (Securities Taken in Trade)

defines the term ‘‘taken in trade’’ as a

purchase by a member as principal, or as

agent for the account of another, of a security

from a customer pursuant to an agreement or

understanding that the customer purchase

securities from the member which are part of

a fixed price offering.

Rule 2810(b)(2) (Direct Participation

Programs; Requirements; Suitability) requires

a member to obtain information from a

participant concerning his investment

objectives, other investments, financial

situation, and needs before making a

recommendation.

Rule 2810(b)(3)(D) (Direct Participation

Programs; Requirements; Disclosure) requires

that prior to executing a purchase transaction

in a direct participation program, a member

must inform the prospective participant of all

pertinent facts relating to the liquidity and

marketability of the program during the term

of the investment.

Rule 2830(n) (Investment Company

Securities; Disclosure of Deferred Sales

Charges) requires, in addition to the

disclosures required by Rule 2230, additional

disclosure on written confirmations if the

transaction involves the purchase of shares of

any investment company that imposes a

deferred sales charge on redemption. In

addition, a specified legend on the

confirmation is required.

Rule 2845 (Discretionary Accounts)

requires a customer’s prior written

authorization for trading of warrants in a

discretionary account, pursuant to the

requirements of Options Rule 2860(b)(18).

Rule 2848 (Communications with the

Public and Customers Concerning Index

Warrants, Currency Index Warrants, and

Currency Warrants). The requirements of

Rule 2220(d)(2)(D)(i) apply to

communications to the public and customers

concerning warrants. Rule 2848, therefore,

requires the member to state in its sales

literature that supporting documentation for

any claims on behalf of the warrants will be

supplied upon request.

Rule 2860(b)(11) (Options; Requirements;

Delivery of Current Disclosure Document)

requires delivery of the appropriate Options

Clearing Corporation disclosure document to

each customer at or prior to the time the

customer’s account is approved for options

trading. Thereafter, delivery must be made to

each customer of amendments or revisions to

the disclosure document.

Rule 2860(b)(12) (Options; Requirements;

Confirmations) requires members to

promptly furnish customers with a written

confirmation of each transaction in option

contracts.

Rule 2860(b)(15) (Options; Requirements;

Statements of Account) requires a member to

send monthly statements to options account

holders.

Rule 2860(b)(16)(A) (Options;

Requirements; Opening of Accounts:

Approval Required) prohibits a member from

accepting an options order from a customer

or from approving a customer’s account for

options trading unless the broker-dealer has

furnished to the customer the appropriate

options disclosure document(s).

Rule 2860(b)(16)(B) (Options;

Requirements; Opening of Accounts;

Diligence in Opening Accounts) requires a

member to exercise due diligence to ascertain

the essential facts relative to a customer

before approving a customer’s account for

options trading.

Rule 2860(b)(16)(C) (Options;

Requirements; Opening of Accounts:

Verification of Customer Background and

Financial Information) requires that

background and financial information on

every new options account natural person

customer be sent to the customer for

verification within fifteen days after the

account is approved for options trading.

Rule 2860(b)(16)(D) (Options;

Requirements; Opening of Accounts; Account

Agreement) requires a member to obtain from

the customer a written agreement that the

customer is aware of and agrees to be bound

by the NASD Rules applicable to the trading

of option contracts within fifteen days after

a customer’s account has been approved for

trading of options contracts.

Rule 2860(b)(16)(E)(v) (Options;

Requirements; Opening of Accounts:

Uncovered Short Option Contracts) requires

that a short written description of the risks

inherent in writing uncovered short option

transactions must be furnished to applicable

customers.

IM–2860–2 (Diligence in Opening Options

Accounts)

Paragraph (a) requires members to seek to

obtain certain information at a minimum

with respect to options customers who are

natural persons in order to fulfill their

obligations under Rule 28860(b)(16)(b).

Paragraph (c) recommends that members

consider utilizing a standard account

approval form so as to ensure the receipt of

all required information.

Paragraph (e) states that the requirements

of Rule 2860(b)(16)(C), regarding initial and

subsequent verification of customer

background and financial information, can be

satisfied by sending to the customer the

information required in paragraphs (a)(1)

through (a)(6) of IM–2860–2 and providing

the customer with an opportunity to correct

or complete the information.

Rule 2860(b)(18)(A) (Options;

Requirements; Discretionary Accounts;
47862 Federal Register / Vol. 62, No. 176 / Thursday, September 11, 1997 / Notices

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

2The Commission has modified the text of the

summaries submitted by NSCC.

3See Securities Exchange Act Release No. 37616

(August 28, 1996), 61 FR 46887 (order approving

proposed rule changes riled by MBSCC, GSCC, and

ISCC seeking authority to enter into limited crossguaranty agreements).

4Such priority schedule may be amended by later

limited cross-guaranty agreements with other

entities by delivery of an amended priority

schedule to the counterparty.

5Securities Exchange Act Release No. 33548

(January 31, 1994), 59 FR 5638 (order approving

proposed rule change). The proposed rule change

incorporated the limited guaranty provisions into

NSCC’s rules and approved NSCC’s limited crossguaranty agreement with The Depository Trust

Company.

Authorization and Approval) requires the

written authorization of a customer before a

member may exercise any discretionary

power with respect to trading an options

contract in a customer account.

Rule 2860(b)(19) (Options; Requirements;

Suitability) prohibits a member from

recommending an options transaction unless

the member has reasonable grounds to

believe based on the information furnished

by the customer that the recommended

transaction is not unsuitable for the

customer.

Rule 2860(b)(23)(C)(i) (Options;

Requirements; Tendering Procedures for

Exercise of Options; Allocation of Exercise

Assignment Notices) requires notification to

customers of the method used to allocate

exercise notices to its customers’ accounts.

Rule 3110(c) (Books and Records;

Customer Account Information) requires

members to obtain specified customer

information.

Rule 3110(f)(3) (Books and Records;

Requirements when Using Predispute

Arbitration Agreements with Customers)

requires that a copy of the agreement

containing a predispute arbitration clause

must be given to the customer, who must

acknowledge receipt on the agreement or on

a separate document.

Rule 3110(g)(2) and (3) (Books and

Records; Telemarketing Requirements)

requires members to obtain written customer

authorization before obtaining a check drawn

on a customer’s account.

Rule 3230(d) (Clearing Agreements)

requires notification upon the opening of an

account to each customer whose account is

introduced on a full disclosed basis of the

existence of the clearing or carrying

agreement.

Marketplace Rules: The Nasdaq Stock Market

Rules

Rule 4643 (Customer Confirmations)

prohibits members from effecting

transactions in Nasdaq SmallCap Market

securities unless, at or before completion of

the transaction, the member gives or sends

the customer written notification disclosing

specified information.

Procedural Rules: Compliants, Investigations

and Sanctions

Rule 8110 (Availability to Customers of

Certificate, By-Laws and Rules) requires a

member to provide customer access to copies

of the NASD Certificate of Incorporation, ByLaws, and Rules.

Procedural Rules: Uniform Practice Code

Rule 11860(a)(3) and (4) (Acceptance and

Settlement of COD Orders) requires a

member to deliver to the customer a

confirmation, or all relevant data customarily

contained in a confirmation not later than the

close of business on the next business day

after any such execution and to obtain an

agreement from the customer to furnish

instructions regarding the receipt or delivery

of the securities involved in the transaction.

Rule 11870(c) (Customer Account Transfer

Contracts; Transfer Instructions): customers

must be informed of the conditions for

account transfer and must authorize the

transfer.

* * * * *

Questions concerning this Notice may be

directed to Mary Revell, Assistant General

Counsel, NASD Regulation, at (202) 728–

8203.

[FR Doc. 97–24140 Filed 9–10–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39020; File No. SR–NSCC–

97–11]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Notice of Filing and Order

Granting Accelerated Approval of

Proposed Rule Change Relating to

Limited Cross-Guaranty Agreements

September 4, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

September 3, 1997, the National

Securities Clearing Corporation

(‘‘NSCC’’) filed with the Securities and

Exchange Commission (‘‘Commission’’)

the proposed rule change as described

in Items I and II below, which items

have been prepared primarily by NSCC.

The Commission is publishing this

notice and order to solicit comments

from interested persons and to grant

accelerated approval of the proposed

rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The purpose of the proposed rule

change is to obtain Commission

approval of the limited cross-guaranty

agreements between NSCC and each of

the International Securities Clearing

Corporation (‘‘ISCC’’), the Government

Securities Clearing Corporation

(‘‘GSCC’’), and the MBS Clearing

Corporation (‘‘MBSCC’’).

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NSCC 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. NSCC has prepared

summaries, set forth in sections A, B,

and C below, of the most significant

aspects of such statements.2

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of the proposed rule

change is to obtain Commission

approval of the limited cross-guaranty

agreements between NSCC and each of

ISCC, GSCC, and MBSCC. NSCC

represents that the limited crossguaranty agreements are substantially

similar to the form of limited crossguaranty agreement previously

approved by the Commission in filings

made by GSCC, ISCC, and MBSCC.3

The limited cross-guaranty

agreements between the clearing agency

counterparties provide a guarantee that

can be invoked in the event of a default

of a common member. The guarantee is

applicable only to the extent that the

common member has unsatisfied

obligations at one clearing agency and

excess resources at another clearing

agency. The guarantee is limited to the

amount of the defaulting common

member’s resources remaining at the

guaranteeing clearing agency. The

agreements also set forth each clearing

agency’s priority structure with respect

to the order in which it will make

guaranty payments to other clearing

agencies with which it has entered into

a limited cross-guaranty agreement.4

The agreements also provide that

demand for payment must be made

within six months of the suspension of

the common member.

NSCC amended its rules in File No.

SR–NSCC–93–07 to accommodate

limited cross-guaranty agreements.5

NSCC Rule 25 provides that in addition

to a member’s other obligations to NSCC

under its rules, each member is

obligated to NSCC for an amount equal

to any guaranty payment NSCC is

required to make to a cross-guaranty

party pursuant to the terms of any

clearing agency cross-guaranty

agreement.

NSCC believes that the proposed rule

change is consistent with the

requirements of Section 17A of the Act

because it promotes the safeguarding of