Federal Register / Vol. 62, No. 234 / Friday, December 5, 1997 / Notices 64421

7 17 CFR 200.30–3(a)(12) (1989).

1On 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.

4Securities Exchange Act Release No. 39025

(September 5, 1997); 62 FR 47858.

5Letter from Joseph P. Savage, Assistant Counsel,

Investment Company Institute, to Jonathan G. Katz,

Secretary, SEC, dated October 2, 1997 (‘‘ICI Letter’’).

6See, 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).

7See, 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).

8See supra note 5.

9 ICI Letter at pp. 2–3.

10See supra note 4, at p. 47859, n.6.

11 ICI Letter, p. 3.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

No written comments were either

solicited or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The proposed rule change has become

effective upon filing pursuant to Section

19(b)(3)(A) of the Act and subparagraph

(e) of Rule 19b–4 thereunder, in that the

proposal establishes or changes a due,

fee, or other charge. At any time within

60 days of the filing of such proposed

rule change, the Commission may

summarily abrogate such rule change if

it appears to the Commission that such

action is necessary or appropriate in the

public interest, for the protection of

investors, or otherwise in furtherance of

the purposes of the Act.

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 at

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–97–82 and should be

submitted by December 29, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31843 Filed 12–4–97; 8:45 am]

BILLING CODE 8010–01–M

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.

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.

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

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
64422 Federal Register / Vol. 62, No. 234 / Friday, December 5, 1997 / Notices

12 Id.

13See NASD Manual, Conduct Rules, Rule 2830,

p. 4621.

14 ICI Letter, p. 3.

15 Id.

16Letter 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.

20See supra note 10.

21 ICI Letter at p. 2.

22 Id.

23Section 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.

24Pursuant 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. § 78c(f).

25See supra notes 6 and 7.

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

27 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2On November 17, 1997, NASD Regulation filed

Amendment No. 1 with the Commission. In

Amendment No. 1, the NASD clarified that firms

will be required to establish procedures required by

the Rule when either information supplied by

NASD Regulation or the firm’s actual knowledge

indicates that it is the subject of the Rule, and

added a new provision defining the term,

‘‘registered person,’’ and moving the definition of

a ‘‘disciplined firm’’ to a different location in the

Rule for ease of reference. See Letter from Mary N.

Revell, Associate General Counsel, NASD, to

Katherine A. England, Assistant Director, Office of

Market Supervision, Division of Market Regulation

(November 17, 1997).

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

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

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

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.

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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.27

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31844 Filed 12–4–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39361; File No. SR–NASD–

97–69]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to Tape

Recording of Conversations

November 26, 1997.

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

Securities Exchange Act of 1934

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

September 12, 1997, as amended on

November 17, 1997,2 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. 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

NASD Regulation is proposing to

amend National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) Rule 3010 to require tape

recording of conversations where

members hire more than a specified

percentage of registered persons from

certain firms that have been expelled or