[Federal Register Volume 62, Number 234 (Friday, December 5, 1997)]
[Notices]
[Pages 64421-64422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31844]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39356; File No. SR-NASD-97-57]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by National Association of Securities Dealers Inc. Relating to 
the Electronic Delivery of Information Between Members and Their 
Customers

November 25, 1997.

I. Introduction

    On July 30, 1997,\1\ the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') submitted to the Securities 
and Exchange Commission (``SEC'' or ``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \2\ 
and Rule 19b-4 thereunder,\3\ a proposed rule change setting forth the 
policy of NASD Regulation, Inc. (``NASD Regulation'' of ``NASDR'') 
regarding electronic delivery of information between members and their 
customers. A notice of the proposed rule change appeared in the Federal 
Register on September 11, 1997.\4\ The Commission received one comment 
letter addressing the proposed rule change.\5\ This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ On August 27, 1997, the NASD amended the exhibit attached to 
the rule filing. 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.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ Securities Exchange Act Release No. 39025 (September 5, 
1997); 62 FR 47858.
    \5\ Letter from Joseph P. Savage, Assistant Counsel, Investment 
Company Institute, to Jonathan G. Katz, Secretary, SEC, dated 
October 2, 1997 (``ICI Letter'').
---------------------------------------------------------------------------

II. Description of Proposal

    The Association filed with the Commission a Notice of Members 
(``NTM'') which establishes the NASDR's policy regarding electronic 
delivery of information between members and their customers. The NASDR 
policy will allow members to use 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. The NTM states that use of electronic 
media is permitted provided members comply with certain guidelines 
outlined in Commission Release Nos. 34-37182 \6\ and 33-7233.\7\ In 
these releases, the Commission addresses the procedural aspects of how 
broker-dealers and others may satisfy their delivery obligations under 
federal securities laws by using electronic media as an alternative to 
paper-based media provided that they comply with certain prescribed 
requirements.
---------------------------------------------------------------------------

    \6\ See, Securities Exchange Act Release No. 37182, May 9, 1996; 
61 FR 24644, May 15, 1996, (Commission's interpretation concerning 
the delivery of information through electronic media in satisfaction 
of broker-dealer and transfer agent requirements to deliver 
information under the Act and the rules thereunder).
    \7\ See, 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).
---------------------------------------------------------------------------

    The NTM summarizes the Commission procedures, which address, among 
other things, content, notice, access, evidence to show delivery, and 
communication of personal financial information, and consent. The NTM 
also lists 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 policy established in the NTM will also apply 
to 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.

III. Summary of Comments

    The Commission received one comment letter addressing this 
proposal.\8\ While the ICI Letter generally supports the NASDR's NTM, 
it recommends certain additions to the list of NASD rules contained in 
the NTM,\9\ and responds to a request for comment issued in the 
notice.\10\
---------------------------------------------------------------------------

    \8\ See supra note 5.
    \9\ ICI Letter at pp. 2-3.
    \10\ See supra note 4, at p. 47859, n.6.
---------------------------------------------------------------------------

    The additional rules that ICI believes should be added to the list 
of NASD rules contained in the NTM are: Rule 2210 (d) and (f); IM-2210-
3; Rule 2830(d); Rule 2830(k)(7); Rule 2830(l)(1)(C); and Rule 
3010(g)(2).\11\ ICI believes that Rules 2210(d), 2210(f) and IM-2210-3, 
which outline standards for when members communicate with the public, 
should be included to confirm that their disclosure and other 
requirements may be satisfied using electronic media where the 
communication itself is made through

[[Page 64422]]

electronic media.\12\ Rule 2830 applies to the activities of members in 
connection with investment company securities.\13\ ICI notes that Rules 
2830(d), 2830(k)(7), and 2830(l)(1)(C), which apply to sales charges, 
execution of investment company portfolio transactions, and dealer 
concessions, respectively, should be included in the NTM to confirm 
that electronic disclosure meets the requirements in these rules in the 
case of a prospectus that is delivered electronically.\14\ Concerning 
Rule 3010(g)(2), which defines the term ``branch office,'' ICI believes 
that the NTM should clarify the requirements of the rule may be 
satisfied through electronic delivery of sales material.\15\
---------------------------------------------------------------------------

    \11\ ICI Letter, p. 3.
    \12\ Id.
    \13\ See NASD Manual, Conduct Rules, Rule 2830, p. 4621.
    \14\ ICI Letter, p. 3.
    \15\ Id.
---------------------------------------------------------------------------

    In its response, the NASDR does not agree that these rules should 
be added to the NTM.\16\ According to the NASDR, ``the rules the ICI 
suggests adding to the NTM do not specifically address the delivery of 
information between broker/dealers and customers, but instead concern 
substantive obligations that arise under NASD rules regardless of 
whether information is submitted in electronic or non-electronic 
form.'' \17\ Notwithstanding its decision to exclude the rules from the 
NTM, the NASDR agrees that the disclosure requirements of Rules 
2210(d), 2210(f), IM-2210-3, and 3010(g)(2) may be satisfied using 
electronic media where the communication itself is made 
electronically.\18\ The NASDR also agrees that the disclosure 
requirements of Rules 2830(d), 2830(d)(4), 2830(k)(7), and 
2830(l)(1)(C) may be met if the prospectus is electronically 
delivered.\19\
---------------------------------------------------------------------------

    \16\ Letter from Mary N. Revell, Associate General Counsel, NASD 
Regulation, Inc., to Katherine England, Assistant Director, SEC, 
dated November 13, 1997 (``NASDR Letter''), p. 2.
    \17\ Id. at p. 2.
    \18\ Id.
    \19\ Id. at pp. 2-3.
---------------------------------------------------------------------------

    In the notice, the Commission requested 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.\20\ According to ICI, while no formal survey 
of its membership was conducted, one member has indicated that it 
requires each customer who wishes to communicate electronically 
regarding his or her securities account, provide his or her social 
security number, customer account number, and personal identification 
number before electronic access to the account will be allowed.\21\ For 
certain institutional clients, another member uses a security system 
which includes encryption technology and a password requirement.\22\
---------------------------------------------------------------------------

    \20\ See supra note 10.
    \21\ ICI Letter at p. 2.
    \22\ Id.
---------------------------------------------------------------------------

    The Commission reiterates its concern that adequate security 
measures must be implemented by members to protect customers' personal 
financial information and to prevent unauthorized transactions when 
``receiving'' or ``obtaining'' electronic responses from their 
customers. The Commission recognizes that the security measures 
instituted will vary depending on the computer's hardware and software 
capabilities, as well as, on the information being sent or received. 
However, an effort should be made to secure customers' information, as 
the two ICI members have done, by developing procedures and improving 
technology, when feasible.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
promulgated thereunder. Specifically, the Commission believes that 
approval of the proposed rule change is consistent with Section 
15A(b)(6) \23\ of the Act.\24\ Pursuant to Section 15A(b)(6), the 
proposed rule change benefits the public, because it not only allows 
customers easy and efficient access to account information, but also 
requires an evaluation of systems and procedures by members to ensure 
that the privacy of personal information is maintained. In using the 
Commission's releases as a guide,\25\ the Association has established a 
uniform policy concerning electronic delivery of information which 
should allow members and member organizations to satisfy their delivery 
obligations under the federal securities laws and the Association's 
rules. This uniform policy should simplify compliance by members and 
member organizations and aid the Association in monitoring the same.
---------------------------------------------------------------------------

    \23\ Section 15A(b)(6) requires the Commission to determine that 
an Association's rules are designed to prevent fraudulent acts and 
practices, to promote just and equitable principles of trade, and, 
in general, to protect investors and the public interest.
    \24\ Pursuant to Section 3(f) of the Act, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. Sec. 78c(f).
    \25\See supra notes 6 and 7.
---------------------------------------------------------------------------

    For the above reasons, the Commission believes that the proposed 
rule change is consistent with the provisions of the Act, and in 
particular with Section 15A(b)(6).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-NASD-97-57) be, and hereby 
is approved.

    \26\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31844 Filed 12-4-97; 8:45 am]
BILLING CODE 8010-01-M