Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63589

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

2 17 CFR 240.19b–4.

3See Letter from John M. Ramsay, Deputy

General Counsel, NASD Regulation, to Katherine A.

England, Assistant Director, Division of Market

Regulation, Commission, dated November 19, 1997

(‘‘Amendment No. 1’’). In Amendment No. 1, the

NASD Regulation amended the proposal to: (1) Add

a sentence to the rule relating to the responsibility

of introducing members to notify clearing members

of the specific reports needed by the introducing

members to supervise its business; (2) clarify that

failure to provide such notification would violate

not only the proposed rule but also, the

Association’s supervisory rules; and (3) delete a

series of questions directed to readers of the

proposal. Commission staff has incorporated the

changes set forth in Amendment No. 1 into the

notice.

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–97–79 and should be

submitted by December 22, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc 97–31392 Filed 11–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39349; File No. SR–NASD–

97–96]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 by the National

Association of Securities Dealers, Inc.

To Amend Its Rule 3230 Relating to

Clearing Agreements

November 21, 1997.

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

Securities Exchange Act of 1934

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

notice is hereby given that on October

14, 1997, the 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

November 20, 1997, 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 proposes to amend

the National Association of Securities

Dealers, Inc.’s (‘‘NASD’’ or

‘‘Association’’) Rule 3230 to: (1)

establish standards for the disposition of

written customer complaints received

by clearing firms about introducing

member firms relating to their functions

and responsibilities under the clearing

agreement; (2) govern how exception

reports are made available to

introducing firms and retained by

clearing firms; and (3) permit

introducing firms to write checks on

their clearing firm’s account. Below is

the text of the proposed rule change.

Proposed new language is in italics;

proposed deletions are in brackets.

3230. Clearing Agreements

(a) All clearing or carrying agreements

entered into by a member, except where

any party to the agreement is also

subject to a comparable rule of a

national securities exchange, shall

specify the respective functions and

responsibilities of each party to the

agreement and shall, at a minimum,

specify the responsibility of each party

with respect to each of the following

matters:

(1) Opening, approving and

monitoring customer accounts;

(2) Extension of credit;

(3) Maintenance of books and records;

(4) Receipt and delivery of funds and

securities;

(5) Safeguarding of funds and

securities;

(6) Confirmations and statements;

(7) Acceptance of orders and

execution of transactions;

(8) Whether, for purposes of the

Commissioner’s financial responsibility

rules adopted under the Act, and the

Securities Investor Protection Act, as

amended, and regulations adopted

thereunder, customers are customers of

the clearing number; and

(9) the requirement to provide

customer notification under paragraph

[(d)](g) of this Rule.

(b)(1) In order for the introducing

member to carry out its functions and

responsibilities under the agreement,

each clearing member must forward

promptly any written customer

complaint received by the clearing

member regarding the introducing

member or its associated persons

relating to functions and responsibilities

allocated to the introducing member

under the agreement directly to: (A) the

introducing member; and (B) the

introducing member’s examining

authority designated under Section 17

of the Act (‘‘DEA’’) (or, if none, to its

appropriate regulatory agency or

authority). The clearing or carrying

agreement must specifically direct and

authorize the clearing member to do so.

(2) The clearing member must also

notify the customer, in writing, that it

has received the complaint, and that the

complaint has been forwarded to the

introducing member and to the

introducing member’s DEA (or, if none,

to its appropriate regulatory agency or

authority). This written notice to the

customer must also contain a statement

that reads substantially as follows:

‘‘Please be aware that you retain the

right, at your discretion, to transfer your

account to another broker/dealer of your

choice.’’

(c)(1) A clearing member, when it

enters into a clearing agreement, must

immediately, and annually thereafter,

provide the introducing member a list or

description of all reports (exception and

other types of reports) which it offers to

the introducing member to assist the

introducing member in supervising its

activities, monitoring its customer

accounts, and carrying out its functions

and responsibilities under the clearing

agreement. The introducing member

must notify promptly the clearing

member, in writing, of those specific

reports by the clearing member that the

introducing member requires to

supervise and monitor its customer

accounts.

(2) The clearing member must retain

as part of its books and records required

to be maintained under the Act and the

Association’s rules, copies of the reports

requested by or provided to the

introducing member. For purposes of

this Rule, the clearing member will be in

compliance with the requirements of

this paragraph it if retains the data from

which the original report was produced,

provided, the clearing member can, at

the request of the DEA, either (A)

recreate the report; or (B) provide the

data and the data formatting that was

used to prepare the report.

(3) Each year, no later than July 31,

the clearing member must notify in

writing the introducing member’s chief

executive and compliance officers of the

reports offered to the introducing

member and the reports requested by or

supplied to the introducing member

during the previous year ending June 30.

The clearing member must also provide

a copy of the notice to the introducing

member’s DEA.

(4) The clearing member must

provide, at the request of the

introducing member’s DEA, any reports

(or, if the reports are not available,

information or data from which the
63590 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

4See Securities Exchange Act Release No. 39200

(October 3, 1997) 62 FR 53369 (October 10, 1997)

(noticing File No. SR–NYSE–97–25).

reports could have been prepared) that

were offered to the introducing member

but which the introducing member did

not request.

(d) The clearing or carrying agreement

may permit the introducing member to

issue negotiable instruments directly to

the introducing member’s customers

using instruments for which the clearing

member is the maker or drawer. The

clearing member may not grant the

introducing member the authority to

issue negotiable instruments until the

introducing member has notified the

clearing member in writing that it has

established, and will maintain and

enforce, supervisory procedures with

respect to the issuance of such

instruments.

[(b)](e) Whenever a clearing member

designated to the Association for

oversight pursuant to Section 17 of the

Act, or a rule of the Commission

adopted thereunder, amends any of its

clearing or carrying agreements with

respect to any item enumerated in

subparagraphs (a)(1) through (a)(9) or

enters into a new clearing or carrying

agreement with an introducing member,

the clearing member shall submit the

agreement to the Association for review

and approval.

[(c)](f) Whenever an introducing

member designated to the Association

for oversight pursuant to Section 17 of

the Act, or a rule of the Commission

adopted thereunder, amends its clearing

or carrying agreement with a clearing

member designated to another selfregulatory organization for oversight

with respect to any item enumerated in

subparagraphs (a)(1) through (a)(9)

enters into a new clearing agreement

with another clearing member, the

introducing member shall submit the

agreement to its local Association

district office for review.

[(d)](g) Each customer whose account

is introduced on a fully disclosed basis

shall be notified in writing upon the

opening of his account of the existence

of the clearing or carrying agreement.

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

Recent concerns about questionable

sales practices and potentially

fraudulent activity by certain

introducing firms, and the handling of

customer complaints about those firms

by their clearing firms, caused the staffs

of NASD Regulation and the New York

Stock Exchange, Inc. (‘‘NYSE’’) to

examine the relationship between

clearing firms and their client

introducing firms. The examination

resulted in proposals to amend the

NASD’s and NYSE’s Rules relating to

the content and approval of clearing

agreements to specify requirements for

handling customer complaints, for

providing, requesting and retaining

exception reports, and for issuing

checks. The NYSE’s proposal to amend

their Rule 382 has been filed with the

Commission.4 The NASD believes its

proposal to amend Rule 3230 discussed

below is consistent with the current

NYSE proposal to amend NYSE Rule

382.

While the Board of Directors of NASD

Regulation (‘‘Board’’) approved the

proposed rule in recognition of the

importance of maintaining consistency

with the NYSE’s proposal, the Board

expressed strong concerns regarding the

proposal, including those relating to two

particular issues. First, the Board

expressed concern that the proposed

rules not change or be interpreted as

changing the fundamental nature of the

relationship between introducing and

clearing firms, or otherwise affect rights,

responsibilities or liabilities of the

introducing or clearing firm under law

or contract. Other than to establish

limited requirements to enable the

introducing member to carry out its

responsibilities under its clearing or

carrying agreement with the clearing

member, the proposals are not intended

to change the fundamental nature of the

relationship between introducing and

clearing firms, or otherwise affect any

existing rights, responsibilities or

liabilities under law or contract.

Second, the Board expressed concern

that the requirement that the customer

be notified by the clearing firm that he

or she has the right to transfer his or her

account to another firm may unfairly

single out a particular category of

complaints, create an unfair implication

that each such complaint would warrant

the customer’s transferring his account,

or otherwise operate inappropriately to

distinguish this class of complaints from

others. In recognition of the importance

of maintaining consistency with the

NYSE’s proposal, the NASD requests

that the SEC defer approval of the

NYSE’s proposal until the NASD and

the SEC have had an opportunity to

consider comments in response to the

publication for comment of the NASD

proposal in the Federal Register.

Description of Proposed Rule Change

Customer Complaints. It is generally

the practice of clearing firms to forward

to introducing firms customer

complaints they receive relating to

matters that are the responsibility of the

introducing firm. Under NASD Rule

3070, a member is required to report to

the Association any written customer

complaint against it involving

allegations of theft or misappropriation

of funds or securities or of forgery.

Recently, however, there have been

instances where introducing firms may

not have complied in a timely manner

with the requirements of Rule 3070

when their clearing firms forwarded

customer complaints to them. Thus, the

Association does not get the reports in

a timely manner and NASD Regulation

staff is not aware of the customer

complaints until long after the fact.

Since there is no mechanism other than

Rule 3070 designed to provide this

information to NASD Regulation, such

late reporting undermines the purpose

of Rule 3070, which is to provide NASD

Regulation with early warning

indicators to generate a regulatory

response to problems. In addition,

receipt by clearing firms of large

numbers of complaints regarding

introducing firms may be indicative of

sales practice problems requiring

prompt regulatory attention.

To address this concern, proposed

new paragraph (b) states that when a

clearing firm receives a customer

complaint about an introducing firm

relating to the functions and

responsibilities of the introducing firm,

the clearing firm must forward the

complaint to the introducing firm and

send a copy of the complaint to the

introducing firm’s DEA. The

requirement may provide an early

warning to the DEA of potential

problems at introducing firms. The

proposed amendment also provides that

the clearing agreement must expressly

direct and authorize the clearing firm to

forward the complaint to the

introducing firm and send a copy of the

complaint to the introducing firm’s

DEA.
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63591

5 15 U.S.C. 78o–3(b)(6).

In addition, the proposed rule

provides that the clearing firm must

notify the customer in writing that the

complaint was received, and was

forwarded to the introducing firm and to

the introducing firm’s DEA. This

requirement will serve to alert the

customer that the complaint has been

received and forwarded to the

appropriate entity (the introducing firm)

for a response, and that the introducing

firm’s regulator has also been made

aware of the customer’s complaint. This

written notice to the customer must also

contain a statement that reads

substantially as follows: ‘‘Please be

aware that you retain the right, at your

discretion, to transfer your account to

another broker/dealer of your choice.’’

The requirement that the complaints

be forwarded to the appropriate DEA is

intended to provide notice to the DEAs

of the types of complaints that are being

received and to provide information that

may be useful for examining or

investigating particular conduct. It is

not intended, however, to result in an

investigation of each, or any proportion,

of complaints that are received by the

DEA.

Exception Reports. All NASD member

firms are required under NASD and

federal regulations to establish,

maintain and enforce supervisory

systems and procedures that are

designed to address all areas of a

member’s business. A key aspect of

these supervisory procedures is

exception and other compliance reports

that a member creates to help meet these

supervisory responsibilities. In a fully

disclosed clearing arrangement, the

clearing member generally provides

exception reports that are available to

assist the introducing member in

carrying out its supervisory obligations.

In addition, officers and managers of

introducing members should be on

notice of the reports and information

that were available to them in meeting

their supervisory and monitoring

obligations. Paragraph (c) of the

proposed amendment addresses these

issues.

Proposed new paragraph (c)(1)

requires the clearing firm to provide its

introducing firm, both at the

commencement of the introducing/

clearing arrangement and annually

thereafter, a list or description of all

exception or other reports which it

offers to introducing firms to assist the

introducing firm in supervising its

activities, monitoring its accounts and

carrying out its functions and

responsibilities under the clearing

agreement. Proposed new paragraph

(c)(1) also requires the introducing

member to notify promptly the clearing

member, in writing, of those specific

reports offered by the clearing member

that the introducing member requires to

supervise and monitor its customer

accounts. Failure to provide notification

would not only be a violation of this

rule, but also of Rule 3010, which

requires that members establish and

maintain proper supervisory systems.

Even though the language of the

proposed amendment requires the

clearing firm to provide the introducing

firm with a list or description of reports

that it will provide, the staff recognizes

that some clearing firms do not create

such reports, but rather provide data

and data formatting software to their

introducing clients that allow the

introducing firms to prepare their own

reports. The proposal would permit

compliance with the provision where

clearing firms communicate with their

introducing firms about the data and

data formatting which they make

available so that the introducing firms

can determine which reports they will

create in order to meet their supervisory

and monitoring needs.

Paragraph (c)(2) requires the clearing

firm to retain as part of its books and

records, copies of any reports requested

or provided to the introducing firm. The

provision permits a clearing firm to

meet the requirement if it retains the

data that was used to prepare the report

but only if the clearing member, at the

request of the DEA, can recreate the

report or provide the data and data

formatting that was used to prepare the

report. Similarly, if the clearing firm

provided data and report formatting to

the introducing firm, the clearing firm

could provide the data and data

formatting that was provided to the

introducing firm to the DEA to fulfill

this requirement.

Paragraph (c)(3) requires the clearing

member, immediately after entering into

the clearing agreement, to notify the

introducing member’s chief executive

and compliance officers of the reports

that it offers to the introducing member,

and the reports requested by or supplied

to the introducing firm. The clearing

member must provide this notice each

year thereafter as of June 30, to be

provided no later than the following

July 31.

Finally, paragraph (c)(4) requires the

clearing member, at the request of the

introducing member’s DEA, to provide

to the DEA reports that were offered to

the introducing member but which the

introducing member did not request. As

with the record retention provision in

paragraph (c)(2), this requirement may

be met if the clearing member retains

the data from which the original report

was produced and then either recreates

the report or provides the data and data

formatting that was used to prepare the

report.

Check Writing. Under proposed new

Paragraph (d), the clearing agreement

may permit the introducing firm to issue

checks to the introducing firm’s

customers that are drawn on the

clearing member’s account upon written

representation from the introducing firm

that it has established, and will

maintain and enforce, supervisory

procedures with respect to the issuance

of negotiable instruments. This rule is

intended to protect customers by clearly

establishing that the clearing member

will be the maker or drawer of such

instruments and, therefore, liable for

any mistakes or fraud by the introducing

firm in the making or drawing of the

check. This provision is intended to

establish that clearing firms are liable to

the introducing firm’s customer if the

introducing firm misuses the authority

and, thereby, to protect the customer

with the clearing member’s funds.

2. Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

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

the Act,5 which require that the

Association adopt and amend its rules

to promote just and equitable principles

of fair trade, and generally provide for

the protection of investors and the

public interest in that the proposed rule

change is designed to establish

standards for the disposition of written

customer complaints about introducing

member firms, govern how exception

reports are made available to

introducing firms and retained by

clearing firms, and permit introducing

firms to write checks on their clearing

firm’s account.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation does not believe 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

Comments were neither solicited or

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

this notice in the Federal Register or
63592 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

6 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3The Commission notes that it previously

approved the portion of the proposed rule filing

making permanent the Near Neighbor, Capital

Utilization and Rule 103A pilot programs for

measuring specialist performance. See Securities

Exchange Act Release No. 38150 (January 10, 1997),

62 FR 2704 (January 17, 1997). This order approves

the remaining portion of the proposed rule change

to adopt a new specialist performance measure,

‘‘adjusted stabilization.’’

4Amendment No. 1 states that the new

performance measure, adjusted stabilization, will be

solely for use by the Allocation Committee, and that

the information will be provided to the Allocation

Committee on a one-year pilot basis. See letter from

James E. Buck, Senior Vice President, NYSE, to

Michael Walinskas, Senior Special Counsel, Market

Regulation, Commission, dated October 22, 1997.

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. In

addition to any other issues that the

public may wish to address, the

Commission specifically requests

comments on the following questions:

General

Will the respective obligations

imposed on clearing and introducing

firms by the proposal help introducing

firms and regulators better address sales

practice problems?

To what extent would the proposal

discourage either introducing or

clearing firms from agreeing to enter

into new clearing relationships, or to

renew existing ones, or affect the degree

of care employed when entering into

such a relationship?

Customer Complaints

How quickly are customer complaints

that are directed to clearing firms and

that concern introducing firms or their

associated persons currently forwarded

to introducing firms? What proportion

of these complaints concerns matters

identified in NASD Rule 3070(a)(2), i.e.,

allegations of theft or misappropriation

of funds or securities, or of forgery?

What other types of complaints

typically are received?

Why in general are complaint letters

addressed to clearing firms rather than

introducing firms, when they concern

conduct of the introducing firms? Please

address the extent to which this occurs

because of confusion by customers over

the relative responsibilities of the firms

based on the contacts with the

customer, such as confirmations, or for

other reasons, e.g., the failure to receive

a response from the introducing firm?

Should the requirements of the

proposed rule regarding customer

complaints apply equally to complaints

against a clearing firm sent by a

customer to an introducing firm with

whom the clearing firm has a clearing

agreement?

Presently, copies of customer

complaints that are received by

securities firms are not required to be

forwarded to the SEC or any selfregulatory organization (‘‘SRO’’). Rather,

the firms are required to submit

summaries of complaints to their SRO.

To the extent that this requirement is

imposed, should clearing firms be

required to send summaries or actual

complaint letters to the SROs?

Will the requirement that, upon the

clearing firm’s receipt of a customer

complaint, the customer be notified by

the clearing firm that he or she has the

right to transfer his or her account to

another firm serve a useful purpose, in

informing customers that they are not

tied to the introducing broker in the

case of sales problems? Does it create an

unfair implication that each such

complaint would warrant the customer’s

transferring his account, or otherwise

unfairly tarnish the introducing firm?

To the extent that this type of

information is useful to investors, does

it make sense to provide this notice only

in the circumstances identified?

Exception Reports

What compliance or cost burdens

would result from the requirement that

clearing firms retain copies of exception

reports or data that is provided to

introducing firms? To what extent is

this data now stored, and for how long?

What are the relative costs and

benefits of the requirements for annual

reports to the executive and compliance

officers of introducing firms as to the

exception reports that were offered and

supplied? Is it feasible for the clearing

firm to provide reports to the DEAs that

the introducing firm did not request?

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 at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the above-mentioned selfregulatory organization. All submissions

should refer to File No. SR–NASD–97–

76 and should be submitted by

December 22, 1997.

For the Commission, by the Division of

Market Regulations, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31393 Filed 11–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39344; File No. SR–NYSE–

96–34]

Self-Regulatory Organizations; New

York Stock Exchange, Inc.; Order

Granting Approval to Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval to

Amendment No. 1 to Proposed Rule

Change To Adopt a New Specialist

Performance Measure

November 21, 1997.

I. Introduction

On December 3, 1996, the New York

Stock Exchange, Inc. (‘‘NYSE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission

(‘‘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

adopt a new specialist performance

measure.3

Notice of the proposed rule change,

together with the substance of the

proposal, was published for comment in

Securities Exchange Act Release No.

38150 (January 10, 1997), 62 FR 2704

(January 17, 1997). No comments were

received on the proposal. The Exchange

filed Amendment No. 1 to the proposed

rule change on October 23, 1997.4

II. Description

The Exchange proposes to add on a

one-year pilot basis, solely for use by

the Allocation Committee in evaluating

specialist performance, the concept of