[Federal Register Volume 65, Number 229 (Tuesday, November 28, 2000)]
[Notices]
[Pages 70852-70854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30195]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43580; File No. SR-NASD-00-58]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to Member Firm 
Transactions With Association Employees

November 17, 2000.

    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 September 25, 2000, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to adopt new NASD Rule 3090 relating to 
member firm transactions with NASD employees. Proposed new language is 
italicized.
* * * * *

3090. Transactions Involving Association and American Stock Exchange 
Employees

    (a) When a member has actual notice that an Association or American 
Stock Exchange employee has a financial interest in, or controls 
trading in, an account, the member shall promptly obtain and implement 
an instruction from the employee directing that duplicate account 
statements be provided by the member to the Association.
    (b) No member shall directly or indirectly make any loan of money 
or securities to any Association or American Stock Exchange employee. 
Provided, however, that this prohibition does not apply to loans made 
in the context of disclosed, routine banking and brokerage agreements, 
or loans that are clearly motivated by a personal or family 
relationship.
    (c) Notwithstanding the annual dollar limitation set forth in 
Conduct Rule 3060(a), no member shall directly or indirectly give, or 
permit to be given, anything of more than nominal value to any 
Association or American Stock Exchange employee who has responsibility 
for a regulatory matter that involves the member. For purposes of this 
subsection, the term ``regulatory matter'' includes, but is not limited 
to, examinations, disciplinary proceedings, membership applications, 
listing applications, delisting proceedings, and dispute-resolution 
proceedings that involve the member.
* * * * *

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 III 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
    The NASD Code of Conduct imposes detailed ethics and conflict-of-
interest requirements on Association employees (i.e., employees of the 
NASD and all of its subsidiary and affiliated companies). The NASD is 
proposing a new rule, NASD Conduct Rule 3090, that will impose parallel 
requirements on NASD members in their dealings with Association and 
American Stock Exchange (``Amex'') employees.\3\
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    \3\ The Amex, whose employees are subject to the NASD Code of 
Conduct as of October 2000, filed a rule proposal (No. SR-Amex-00-
23) to adopt Amex Rule 417, which is virtually identical to proposed 
NASD Rule 3090. Securities Exchange Act Release No. 43468 (October 
20, 2000), 65 FR 65034 (October 31, 2000); Securities Exchange Act 
Release No. 43587 (November 17, 2000).
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    Proposed NASD Rule 3090 addresses three areas: (1) Providing 
duplicate statements for brokerage accounts in which Association or 
Amex employees have a financial interest or can control trading; (2) 
loans by NASD members to Association or Amex employees; and (3) gifts 
by NASD members to Association or Amex employees.

[[Page 70853]]

    a. Employees' Brokerage Accounts. The NASD Code of Conduct imposes 
significant restriction on employees' investments. Among other things, 
employees may not own stock of broker/dealers or companies that derive 
more than 25% of their gross revenues from broker/dealer activities, or 
stock purchased as part of an initial public offering.\4\ The NASD 
reviews duplicate statements for employees' brokerage accounts to 
ensure that employees have abided by these restrictions. NASD 
Regulation represents that New NASD Rule 3090(a) will help ensure that 
an NASD member receives and implements an instruction to send duplicate 
account statements to the NASD whenever the member has actual notice 
that an Association or Amex employee has a financial interest in, or 
controls trading in, an account. Currently, NASD employees are required 
to request the broker/dealers with which they maintain accounts to send 
duplicate account statements to the NASD. However, NASD rules currently 
do not impose a corresponding obligation on NASD members to obtain and 
implement such an instruction.
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    \4\ NASD Code of Conduct, Section VIII, Paragraph E.
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    In administering the NASD Code of Conduct, the NASD routinely runs 
exception reports to determine whether duplicate statements are being 
received for all reported employee accounts. Employees for whom the 
NASD has not received duplicate account statements are reported to 
their department heads for follow-up. Each time exception reports are 
run, numerous employee accounts are listed as delinquent. In following 
up on such accounts, the NASD has frequently encountered instances in 
which NASD employees have repeatedly instructed their broker/dealer in 
writing that duplicate statements are to be sent to the NASD, but the 
broker/dealer has failed to implement the instruction. In addition, 
there have been instances in which broker/dealers have refused to 
implement the instruction on the ground that they were not required to 
do so.
    When employees' duplicate statement instructions are not 
implemented, the NASD has no means of monitoring trading in employee 
accounts. Currently, there is no rule that specifically requires member 
firms to implement such instructions. NASD Regulation believes that new 
NASD Rule 3090(a) will remedy this deficiency by imposing on member 
firms an affirmative obligation to promptly obtain and implement a 
duplicate statement instruction when they have actual notice that an 
Association or Amex employee has a financial interest in, or controls 
trading in, an account. The information necessary to give members such 
actual notice is already included on the new account forms used by most 
broker/dealers, and on a standardized duplicate instruction form that 
Association and Amex employees can provide to their broker/dealers.
    NASD Regulations believes that new NASD Rule 3090(a) imposes 
requirements that are analogous to those that other self-regulatory 
organizations already impose (e.g., New York Stock Exchange Rule 407). 
In addition, NASD Regulation believes that the proposed requirements 
are similar to those currently imposed by NASD Rule 3050, which applies 
when an NASD member firm carries an account for a person associated 
with another broker/dealer.
    NASD Regulation represents that new NASD Rule 3090(a) would work as 
follows with respect to new accounts: When a new account form indicates 
that an NASD employee has an interest in a proposed new account, the 
NASD member firm would instruct the employee to obtain a duplicate 
instruction form (available on the NASD's corporate Intranet), complete 
the form, and provide it to the member before the account is opened. 
The NASD expects that most employees will anticipate this request and 
provide the member with the instruction at the time they seek to open 
the account. It would not be necessary for NASD officials to issue a 
letter authorizing the opening of each account.
    With respect to existing accounts, new NASD Rule 3090(a) 
contemplates that Association and Amex employees will use the above-
referenced duplicate instruction form to give NASD members actual 
notice of their interest in an existing account. A member receiving 
such a form would be expected to promptly implement the duplicate 
statement instruction.
    NASD Regulation represents that the proposed rule would apply 
prospectively to new accounts, and to those existing accounts as to 
which an NASD member has actual notice that an Association or Amex 
employee has financial interest or controls trading. NASD members will 
not be required to review existing accounts to identify those in which 
Association or Amex employees may have an interest or control trading.
    b. Loans to Employees. NASD Regulation represents that new NASD 
Rule 3090(b) is intended to implement an SEC staff recommendation that 
the NASD adopt a rule prohibiting NASD members from making loans to 
Association or Amex employees outside routine brokerage or banking 
relationships.\5\ The NASD Code of Conduct already prohibits employees 
from accepting loans from NASD members, Nasdaq issuers, or any person 
with whom the NASD transacts business.\6\ NASD Regulation believes that 
new NASD Rule 3090(b) will simply prevent NASD members from making 
loans to employees. Consistent with existing NASD Code of Conduct 
provisions, the prohibition on loans would not apply to loans that are 
clearly motivated by a family or personal relationship. Thus, for 
example, a registered representative would not be precluded from making 
a personal loan to an adult child who works at the NASD or Amex.
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    \5\ See Letter from Lori Richards, Director, OCIE, SEC, to 
Richard Syron, Chairman and Chief Executive Officer, Amex, November 
6, 1998.
    \6\ NASD Code of Conduct, Section IX, Paragraph C.3.
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    c. Gifts to Employees. NASD Regulation represents that new NASD 
Rule 3090(c) also implements an SEC staff recommendation.\7\ The 
proposed rule change will parallel NASD Code of Conduct provisions that 
permit employees to accept business gifts with an aggregate annual 
value of $100 when no conflict of interest exists, but prohibit 
employees from accepting a business gift or courtesy from persons 
involved in regulatory matters in which the employee is involved.\8\ 
Specifically, the proposed amendment will state that, notwithstanding 
NASD Rule 3060(a) (which generally permits NASD members to give 
business gifts with an aggregate annual value of $100 to employees of 
others), members may not give business gifts or courtesies of more than 
nominal value to an Association or Amex employee who has responsibility 
for a specific regulatory matter that involves the member. A 
``regulatory matter'' would encompass such matters as examinations, 
disciplinary proceedings, membership applications, listing 
applications, delisting proceedings, and dispute-resolution proceedings 
involving a member. The proposed rule would permit members to give 
items of nominal value to employees responsible for regulatory matters 
affecting the member, NASD Regulation represents that, for example, a 
member would be permitted to offer minor refreshments, such as a soft 
drink or coffee, to NASD Regulation employees conducting an on-site 
examination.
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    \7\ Id.
    \8\ NASD Code of Conduct, Section IX.

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[[Page 70854]]

2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of section 15A(b)(6) of the Act,\9\ 
which requires, among other things, that the Association's rules 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. Specifically, the NASD 
believes that, by assisting the NASD in ensuring employee compliance 
with NASD ethical standards, the proposed rule change serves the public 
interest.
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    \9\ 15 U.S.C. 78o(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
impose 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

    NASD Regulation did not solicit or receive written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Interested persons are invited to submit written data, views, and 
arguments, concerning the foregoing, including whether the proposed 
rule change is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying 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 Exchange. All submissions should refer to File 
No. SR-NASD-00-58 and should be submitted by December 19, 2000.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association,\10\ and in 
particular, the requirements of section 15A(b)(6) \11\ of the Act, 
because it is designed to foster cooperation and coordination with 
persons engaged in processing information with respect to securities, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78o-3(b)(6).
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    The proposed rule change is based upon recommendations made by SEC 
staff to the SROs. The amendments to the rules are designed to promote 
a high level of professional and personal ethical conduct by NASD 
members and employees and to ensure that NASD members and employees do 
not place their own personal and financial interests above the 
regulatory interests of the NASD. The proposal also helps to bring the 
NASD's conflict of interest and ethical conduct provisions in line with 
those of the NASD Code of Conduct and the Amex (a subsidiary of the 
NASD) and helps eliminate any confusion regarding the application of 
these provisions to employees of both self-regulatory organizations.
    The Commission finds good cause for approving the proposed rule 
change (SR-NASD-00-58) prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The Commission 
approved a proposal by the Amex to adopt Amex Rule 417, which is 
virtually identical to new NASD Rule 3090.\12\
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    \12\ See Securities Exchange Act Release No. 43587 (November 17, 
2000) (Order approving SR-Amex-00-23).
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NASD-00-58) is hereby 
approved on an accelerated basis.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-30195 Filed 11-27-00; 8:45 am]
BILLING CODE 8010-01-M