26240 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 / Notices

3 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4

3Letter from T. Grant Callery, Senior Vice

President and General Counsel, NASD to Katherine

A. England, Assistant Director, Division of Market

Regulation, Commission dated April 22, 1998. The

amendment provides the members’ vote and

responses to the comment letters. It is technical in

nature and therefore not subject to a notice and

comment requirement.

4See Securities Exchange Act Release No. 39326

(Nov. 14, 1997), 62 FR 62385 (Nov. 21, 1997); see

also infra text surrounding note 7.

5See Securities Exchange Act Release No. 39539

(January 12, 1998), 63 FR 2709 (January 16, 1998)

(File No. SR–NASD–97–92). Amendment No. 1 to

the proposed rule filing was filed on April 22, 1998.

See supra note 3.

6See Letter from Marc B. Horin, National

Compliance Consultants to Secretary, Commission,

dated January 23, 1998; Letter from John B.

Simmon, Morris Group Inc. to Secretary,

Commission, dated January 22, 1998; and Letter

from Marc B. Horin, National Compliance

Consultants to Secretary, Commission, dated

January 30, 1998.

7Release No. 34–39539, supra note 5.

8See Amendment No. 1, supra note 3. The

membership vote was 1,884 in favor, 876 against.

Id.

9A firm would be able to access only its own

Member Questionnaire; the information would be

password-protected to prevent any public access.

10See Letter from Marc B. Horin, National

Compliance Consultants to Secretary, Commission,

dated January 30, 1998.

11 Id.

12Amendment No. 1, supra note 3 at 2.

13 Id.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.3

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–12456 Filed 5–11–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39958; File No. SR–NASD–

97–92]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed By-Law Amendment

Requiring Members to Update Firm

Contact Information Electronically, to

Maintain Electronic Mail Account and

for Other Purposes

May 5, 1998.

On December 19, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder.2 The filing was

thereafter amended on April 22, 1998.3

In this filing, as amended, the

Association proposed amendments to

the NASD By-laws, to require members

to communicate with the Association

electronically. Under this proposal,

members will be required to set up and

maintain an electronic mail account and

must update their firm contact

information through the Internet. In

addition, the Association has included a

technical amendment to the

composition of the NASD National

Nominating Committees, correcting a

misprint from an earlier filing.4 Notice

of the proposal was published in the

Federal Register on January 16, 1998

(‘‘Notice’’).5 The Commission received

three comment letters on the filing.6

I. Introduction and Background

On August 5, 1997, the Membership

Committee of the NASD Regulation, Inc.

(‘‘NASD Regulation’’) Board of Directors

recommended requiring each member’s

executive representative to maintain an

Internet electronic mail account for

communication with the NASD and to

update firm contact information via

NASD Regulation’s Internet web site.

Following approval by the NASD

Regulation Board of Directors and the

NASD Board of Governors, the Notice

was filed with the Commission and

published in the Federal Register.7

When polled on this proposal, as

required by the NASD By-laws, the

NASD membership voted more than two

to one in favor of requiring maintenance

of electronic mail accounts.8

II. Description of the Proposal

A. Electronic Mail Accounts and

Updating of Member Information

The Proposal promotes Internet use

by the Association and its members as

a communication tool. As revised, the

NASD By-laws will require each

member to acquire and maintain an

Internet electronic mail address on

behalf of its executive representative

before January 1, 1999.

In addition to maintaining electronic

mail accounts, members will also be

required to update firm contact

information electronically. In its filing,

the NASD maintained that the present

method of collecting firm contact

information (which is used for member

balloting, compliance purposes and

targeting key individuals for

informational mailings, etc.) through

physical filing of an NASD Member

Firm Questionnaire (‘‘Member

Questionnaire’’) needs improvement.

There are significant problems with

current procedures. First, information is

often stale, because members rarely

update the filings. Second, the Member

Questionnaire information, which is

currently stored and made available

through the Central Registration

Depository or ‘‘CRD,’’ is not readily

available for use in other computer

programs and systems. Finally, the

planned system enhancements to the

CRD do not contemplate inclusion of

Member Questionnaire data. Using the

new electronic mailboxes, the NASD

intends to transmit e-mail reminders to

members to update their Membership

Questionnaires on a periodic basic.

Member firms can then easily access

their respective Member Questionnaire

via the NASD Regulation Web Site for

updating.9 The Association has

indicated that information provided in

this manner is more readily interfaced

to the internal NASD Regulation

systems requiring the data.

The three comment letters received by

the Commission on this rule filing all

react negatively to required use of the

Internet and electronic mail accounts.

The main objections relate to the costs

involved in setting up and maintaining

such services. One commentator

suggested that the decision to maintain

an electronic mail account should be

discretionary, rather than mandatory.10

Concerns about lack of member of

NASD control over the Internet and

internet functionality, reliability, access,

integrity and security were also noted11

The Association’s response argues that

the minimal costs involved in

connecting to the Internet (as little as

ten dollars a month for an account and

less than one thousand dollars for a

computer and modem) are ‘‘reasonable

in light of the tremendous benefits that

electronic mail and Internet

communication will bring to the

membership.’’12 The NASD also

stressed its belief that all, rather than

some, members should have an

electronic mail account, to ‘‘strive for

uniformity of notice and enable speedy

and relatively inexpensive

communication with all members.’’13

B. Technical Amendment to Nominating

Committee Composition

The NASD also proposes a technical

amendment to Article VII, Section 9(b)

of the NASD By-Laws. In November,

1997, the Commission approved a

comprehensive revision to the

Association By-Laws, implementing a
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 / Notices 26241

14See Securities Exchange Act Release No. 39326

(Nov. 14, 1997), 62 FR 62385 (Nov. 21, 1997).

15See Securities Exchange Act Release No. 37538

(Aug. 8, 1996) (SEC Order Instituting Public

Proceedings Pursuant to Section 19(h)(1) of the

Securities Exchange Act of 1934, Making Findings

and Imposing Remedial Sanctions, In the Matter of

National Association of Securities Dealers, Inc.,

Administrative Proceeding File No. 3–9056) (‘‘SEC

Order’’ The SEC Order includes fourteen

Undertakings adopted by the Association to

remediate the problems identified in the order.

16Letter from Marc B. Horin, National

Compliance Consultants to Secretary, Commission,

dated January 30, 1998.

17See Amendment No. 1, supra note 3 at 2.

18 15 U.S.C. 78s(b)

19 15 U.S.C. 78o–3.

20See supra text accompanying note 12.

21See E-Mail from Mary Dunbar, Office of

General Counsel, NASD to Mandy Cohen, Office of

Market Supervision, Commission dated April 30,

1998 (indicating that ‘‘NASD Regulation staff

conferred with MCI, which informed NASD

Regulation that modems were widely available that

are capable of providing Internet access via any

telephone line used in the United States’’).

22See Amendment No. 1, supra note 3 at 2.

23See SEC Order, supra note 15.

24 Id.

25Telephone call from Mary Dunbar, Office of

General Counsel, NASD Regulation to Mandy

Cohen, Office of Market Supervision, Commission

dated May 5, 1998.

26 15 U.S.C. § 78o–3.

27 15 U.S.C. § 78c(f).

28 15 U.S.C. § 78s(b)(2).

20 17 CFR 200.30–3(a)(12).

more streamlined corporate structure.14

When voted on by the NASD members

prior to Commission approval, however,

Article VII, Section 9(b) incorrectly

stated that the number of Industry

committee members on the National

Nominating Committee should equal or

exceed the number of Non-Industry

committee members. The terms

‘‘Industry’’ and ‘‘Non-Industry’’ had

been transposed. By Commission order,

the National Nominating Committee

must have an equal or greater number of

Non-Industry participants.15

Only one commentator addressed this

portion of the proposal. This writer

questioned numerical inconsistencies

within the amendment.16 In its

response, the NASD pointed out that the

commentator incorrectly assumed that

the terms ‘‘Non-Industry member’’ and

‘‘Public Member’’ were synonymous.

Since they are not (because Public

members are a subset of Non-Industry

members) there is no inconsistency.17

III. Discussion

As discussed below, the Commission

has determined at this time to approve

the Association’s proposal. The

standard by which the Commission

must evaluate a proposed rule change is

set forth in Section 19(b) of the Act. The

Commission must approve a proposed

NASD rule change if it finds that the

proposal is consistent with the

requirements of the Act and the rules

and regulations thereunder that govern

the NASD.18 In evaluating a given

proposal, the Commission examines the

record before it and all relevant factors

and necessary information. In addition,

Section 15A of the Act establishes

specific standards for NASD rules

against which the Commission must

measure the proposal.19

A. Electronic Mail Accounts and

Updating of Member Information

The Commission has determined to

approve the Association’s proposal

requiring members to acquire and

maintain the ability to communicate

electronically. Use of the Internet as a

business tool is expanding rapidly. As a

general matter, it is becoming widely

recognized as an efficient and costeffective means of communication in

the business world. Specifically, use of

electronic mailboxes is expected to

facilitate timely communications

between the Association and its

members, the more rapid distribution of

NASD information, notices, and

publications, and reduction or

elimination of printed publications.

Overall, the enhanced use of electronic

communications should result in

significant cost savings to the

Association without significant

disadvantage to the member. Moreover,

as noted above, the costs involved in

obtaining and maintaining Internet

service are minimal.20 According to

research conducted by the Association,

any phone line in the United States can

support Internet service.21 Finally, the

Commission agrees with the Association

that ‘‘concerns over the lack of NASD

control over the Internet as well as its

integrity, security, and functionality

also exist for other modes of

communication, such as the United

States mail. In many cases, Internet

communication is more desirable given

its speed, timely notice of undeliverable

mail, and accessibility 24 hours a

day.’’ 22 Since the proposal complies

with the requirements of Sections 15A

and 19(b)(2) of the Act, and the

advantages clearly outweigh any

disadvantages, the Commission is

approving the filing.

b. Composition of National Nominating

Committee

The Commission will also approve

the adjustments to the composition of

the National Nominating Committee at

this time. This is necessary to ensure

that membership in the National

Nominating Committee conforms to the

requirements of the SEC Order and

related Undertakings issued in August

1996.23 Based on the Commission’s

specific findings in the SEC Order, the

Association agreed to ‘‘implement and

maintain at least fifty percent

independent public and non-industry

membership in its Board of Governors,

the Board(s) of Governors or Directors of

all of its subsidiaries and affiliates that

exercise or have delegated selfregulatory functions, and * * * . the

National Nominating Committee.’’ 24 For

the past several months, the Association

has maintained compliance with both

the SEC Order and the misprinted

effective language by maintaining a

equally balanced committee.25 Revising

the language to correct the misprint will

allow the Association to introduce

additional Non-Industry members,

which furthers the intent of the SEC

Order and other related Commission

proceedings.

IV. Conclusion

The Commission believes that the

proposed rule change is consistent with

the Act, and, particularly, with Section

15A thereof.26 In approving the

proposal, the Commission has

considered its impact on efficiency,

competition, and capital formation.27 In

particular, the electronic mail accounts

and updating proposal promotes

procedures that are cost-efficient and

will promote the fair and efficient

operation of the Association and

conduct of its self-regulatory

responsibilities. In addition, adjustment

of the National Nominating Committee

composition is important, to conform

the language to the intent of the

Association and the Commission when

originally approved. This change will

help to ensure a fair representation of

NASD members in the selection of

Association Directors and Governors

and administration of its affairs and

provide an appropriate number of

Governors or Directors that are

representative of issuers and investors

and not associated with a member of the

Association, a broker, or a dealer.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,28 that the

proposed rule change (SR–NASD–97–

92), including Amendment No. 1

thereto, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.29

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–12458 Filed 5–11–98; 8:45 am]

BILLING CODE 8010–01–M