[Federal Register Volume 63, Number 76 (Tuesday, April 21, 1998)]
[Notices]
[Pages 19778-19780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10420]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39866; File No. SR-NASD-98-31]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. To Implement the Effective Date of Recently-
Approved Amendments to Rules 3010 and 3110

April 14, 1998.
    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 April 7, 1998, the NASD Regulation, Inc. (``NASDR'') 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 the NASDR. The NASDR

[[Page 19779]]

has designated this proposal as one constituting a stated policy, 
practice, or interpretation with respect to the meaning of an existing 
rule under Section 19(b)(3)(A)(i) of the Act,\3\ which renders the rule 
effective upon the Commission's receipt of this filing. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASDR is proposing to implement the effective date of recently-
approved amendments to the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') Rules 3010, ``Supervision,'' and 
3110, ``Books and Records.''

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the 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. The 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
    A proposed rule change to amend NASD Rules 3010 and 3110 was filed 
with the Commission on April 11, 1997.\4\ The purpose of the amendments 
was to allow firms to develop flexible procedures for the review of 
correspondence with the public. In that filing, the NASDR stated that 
it would make the proposed rule change effective within 45 days of 
Commission approval. Amendment No. 1, containing a draft Notice to 
Members to be issued following approval of the proposed rule change, 
was filed with the Commission on December 1, 1997.\5\ The Notice to 
Members described the new rules and provided guidance to NASD members 
on the implementation of the new rules. The Commission approved the 
proposed rule change and Amendment No. 1 to the proposed rule change on 
December 31, 1997.\6\ Notice to Members 98-11 announced approval of the 
proposed rule change and stated that the amendments to Rules 3010 and 
3110 would be effective on February 15, 1998.
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    \4\ The proposed rule change (SR-NASD-97-24) was published for 
comment in the Federal Register on May 2, 1997. See Securities 
Exchange Act Release No. 38548 (April 25, 1997) 62 FR 24147.
    \5\ See Letter from Mary N. Revell, Associate General Counsel, 
NASDR, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated December 1, 1997 (``Amendment 
No. 1'').
    \6\ See Securities Exchange Act Release No. 39510 (December 31, 
1997) 63 FR 1131 (January 8, 1998) (``Release No. 39510'').
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    Subsequent to approval of the proposed rule change by the SEC, 
several commenters filed letters with the SEC raising issues regarding 
Amendment No. 1 to the proposed rule change and its accompanying Notice 
to Members.\7\ The NASDR, believing that the letters raise important 
issues that should be fully addressed before the effectiveness of the 
rule change, filed a proposed rule change to postpone the effective 
date of the amendments to Rules 3010 and 3110 approved in Release No. 
39510.\8\
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    \7\ See Letters from Carl B. Wilkerson, American Council of Life 
Insurance, to Jonathan G. Katz, Secretary, SEC, dated January 9, 
1998 and January 29, 1998; Beverly A. Byre, BenefitsCorp Equities, 
Inc., to Jonathan G. Katz, Secretary, SEC, dated January 26, 1998; 
Michael S. Martin, The Equitable Life Assurance Society of the 
United States, to Jonathan G. Katz, SEC, dated January 29, 1998; 
Janet G. McCallen, International Association for Financial Planning, 
to Jonathan G. Katz, Secretary, SEC, dated February 13, 1998; W. 
Thomas Boulter, Jefferson Pilot Financial, to Jonathan G. Katz, 
Secretary, SEC, dated January 28, 1998; Leonard M. Bakal, 
Metropolitan Life Insurance Company and MetLife Securities, Inc., to 
Jonathan G. Katz, Secretary, SEC, dated January 28, 1998; Michael L. 
Kerley, MML Investors Services, Inc. to Secretary, SEC, dated 
January 26, 1998; Mark D. Johnson, The National Association of Life 
Underwriters, to Jonathan G. Katz, Secretary, SEC, dated February 5, 
1998; Theodore Mathas, NYLIFE Securities, to Jonathan G. Katz, 
Secretary, SEC, dated January 16, 1998 and January 29, 1998; Beverly 
A. Byrne, One Orchard Equities, Inc., to Jonathan G. Katz, 
Secretary, SEC, dated January 26, 1998; Dodie Kent, Pruco Securities 
Corporation, to Jonathan G. Katz, Secretary, SEC, dated January 29, 
1998; and James T. Bruce, Wiley, Rein & Fielding, on behalf of the 
Electronic Messaging Association, to Jonathan G. Katz, Secretary, 
SEC, dated January 30, 1998.
    \8\ The proposed rule change (SR-NASD-98-10) became effective on 
filing. See Securities Exchange Act Release No. 39665 (February 13, 
1998) 63 FR 9032 (February 23, 1998).
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    The concerns raised by the commenters include issues concerning the 
effect of the rules on the review of incoming correspondence and the 
scope of the obligation of member firms to control the use of 
electronic communications systems that registered persons use to 
communicate with their customers. After considering these issues, the 
NASDR proposes to implement the amendments to Rules 3010 and 3110 
approved in Release No. 39510 immediately, including the requirements 
set forth in Notice to Members 98-11, with the exception of the 
provision in the Notice stating that members must review ``all incoming 
correspondence received in non-electronic format directed to registered 
representatives and related to a member's investment banking or 
securities business.'' The NASDR proposes to delay the effective date 
of this provision until July 7, 1998. Extension of the effective date 
for this provision will allow the NASDR a further opportunity to 
consider comments on this issue. Prior to this effective date, however, 
members will be required to review and report customer complaints as 
required by Rule 3070(a)(2); keep and preserve all written customer 
complaints as required by Rule 3110(d); and establish procedures for 
the review of incoming and outgoing written and electronic 
correspondence consistent with new Rules 3010(d)(1) and (2).
    Among other things, the NASDR proposes to make effective 
immediately that portion of the Notice of Members that states that 
members' supervisory policies and procedures must:

prohibit registered representatives and other employees' use of 
electronic correspondence to the public unless such communications 
are subject to supervisory and review procedures developed by the 
firm. For example, NASDR would expect members to prohibit 
correspondence with customers from employees' home computers or 
through third party systems unless the firm is capable of monitoring 
such communications.

In response to comments received regarding this provision in the 
Notice, the NASDR wishes to point out that the Notice to Members does 
not establish any new obligation that is not already encompassed by 
Rule 3010's requirement that firms supervise the activities of their 
associated persons and registered representatives to ensure compliance 
with applicable securities laws and regulations and NASD rules and 
merely provides guidance to members on how they can comply with Rule 
3010. Furthermore, the Notice to Members does not prohibit the use of 
such systems or dictate the use of a particular system. The Notice only 
points out that firms should prohibit correspondence with customers 
through electronic communication systems unless the firm is capable of 
supervising the communications. In developing procedures for the review 
of correspondence, each firm must determine how it will review 
different types of correspondence, including electronic correspondence. 
If the firm determines that it can subject correspondence to customers 
through

[[Page 19780]]

electronic communication systems to appropriate supervision and review, 
the firm can allow employees to correspond with customers through such 
systems.
2. Statutory Basis
    The NASDR believes the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\9\ which requires, among other things, 
that the Association's rules must 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. The NASD believes that implementing the effective date 
of the new rules with the exception of the requirement to review all 
incoming non-electronic correspondence is consistent with these 
requirements.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDR does not believe that the proposed rule change will impose a 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participation or Others

    Written comments were neither solicited nor received.

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

    The foregoing rule change constitutes a stated policy, practice, or 
interpretation with respect to the meaning, administration or 
enforcement of an existing rule of the Association and, therefore, has 
become effective pursuant to Section 19(b)(3)(A) of the Act \10\ and 
subparagraph (e) of rule 19b-4 thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 19b-4(e).
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    At any time within 60 days of the filing of such 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submission 
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, 450 Fifth Street, N.W., Washington, 
D.C. Copies of such filing also will be available for inspection and 
copying at the NASD. All submissions should refer to File No. SR-NASD-
98-31 and should be submitted by May 12, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10420 Filed 4-20-98; 8:45 am]
BILLING CODE 8010-01-M