[Federal Register Volume 63, Number 91 (Tuesday, May 12, 1998)]
[Notices]
[Pages 26240-26241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12458]


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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\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
    \3\ Letter 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.
    \4\ See Securities Exchange Act Release No. 39326 (Nov. 14, 
1997), 62 FR 62385 (Nov. 21, 1997); see also infra text surrounding 
note 7.
    \5\ See 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.
    \6\ See 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.
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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\
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    \7\ Release No. 34-39539, supra note 5.
    \8\ See Amendment No. 1, supra note 3. The membership vote was 
1,884 in favor, 876 against. Id.
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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.
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    \9\ A firm would be able to access only its own Member 
Questionnaire; the information would be password-protected to 
prevent any public access.
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    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 noted\11\ 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\
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    \10\ See Letter from Marc B. Horin, National Compliance 
Consultants to Secretary, Commission, dated January 30, 1998.
    \11\ Id.
    \12\ Amendment No. 1, supra note 3 at 2.
    \13\ Id.
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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

[[Page 26241]]

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\
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    \14\ See Securities Exchange Act Release No. 39326 (Nov. 14, 
1997), 62 FR 62385 (Nov. 21, 1997).
    \15\ See 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.
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    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\
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    \16\ Letter from Marc B. Horin, National Compliance Consultants 
to Secretary, Commission, dated January 30, 1998.
    \17\ See Amendment No. 1, supra note 3 at 2.
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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\
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    \18\ 15 U.S.C. 78s(b)
    \19\ 15 U.S.C. 78o-3.
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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 cost-effective 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.
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    \20\ See supra text accompanying note 12.
    \21\ See 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'').
    \22\ See Amendment No. 1, supra note 3 at 2.
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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 self-
regulatory 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.
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    \23\ See SEC Order, supra note 15.
    \24\ Id.
    \25\ Telephone call from Mary Dunbar, Office of General Counsel, 
NASD Regulation to Mandy Cohen, Office of Market Supervision, 
Commission dated May 5, 1998.
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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.
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    \26\ 15 U.S.C. Sec. 78o-3.
    \27\ 15 U.S.C. Sec. 78c(f).
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    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.

    \28\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12458 Filed 5-11-98; 8:45 am]
BILLING CODE 8010-01-M