[Federal Register Volume 63, Number 111 (Wednesday, June 10, 1998)]
[Notices]
[Pages 31819-31820]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15418]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40065; File No. SR-NASD-98-33]


Self-Regulatory Organizations; Notice of Proposed Rule Change and 
Amendment 1 Thereto by the National Association of Securities Dealers, 
Inc., Relating to Exemptions From Fidelity Bonding Requirements

June 3, 1998.
    Pursuant to Seciton 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 20, 1998, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), 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, Inc. (``NASD Regulation''). By letter dated may 27, 
1998, the Association filed Amendment 1 to the proposal with the 
Commission.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) (1994).
    \2\ 17 CFR 240.19b-4 (1997).
    \3\ Amendment 1 revised the last sentence of proposed new 
paragraph (c)(4) of Rule 3020. See Letter from Elliott R. Curzon, 
Assistant Chief Counsel, NASD Regulation, to Lisa Henderson, 
Attorney SEC, dated May 27, 1998.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend rule 3020 of the Conduct 
Rules of the NASD to grant to the staff authority to adjust the 
fidelity bond required of a member in certain circumstances upon a 
showing of good cause, either conditionally or unconditionally. Below 
is the text of the proposed rule change. Proposed new language is in 
italics.

3020. Fidelity Bonds

* * * * *
    (c) Annual Review of Coverage
* * * * *
    (4) Any member subject to the requirements of this paragraph (c) 
may apply for an exemption from the requirements of this paragraph (c). 
The application shall be made pursuant to Rule 9610 of the Code of 
Procedure. The exemption may be granted upon a showing of good cause, 
including a substantial change in the circumstances or nature of the 
member's business that results in a lower net capital requirement. The 
NASD may issue an exemption subject to any condition or limitation or 
limitation upon a member's bonding coverage that is deemed necessary to 
protect the public and serve the purposes of this Rule.

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 NASD 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. 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
    Rule 3020 specifies that members are required to maintain fidelity 
bonds to insure against certain losses and the potential effect of such 
losses on firm capital. The rule applies to all members with employees 
who are required to join the Securities Investor Protection Corporation 
and who are not covered by the requirements of a national securities 
exchange. The amount of coverage a member is required to maintain is 
linked to the member's net capital requirements under SEC Rule 15c3-
1.\4\
---------------------------------------------------------------------------

    \4\ 17 CFR 240.15c3-1 (1997).
---------------------------------------------------------------------------

    Under paragraph (c) of Rule 3020, each member is required to make 
an annual review of the adequacy of the member's fidelity bond coverage 
and is required to maintain coverage that is adequate to cover the 
member's highest

[[Page 31820]]

net capital requirement during the preceding 12 months. NASD Regulation 
staff have received several requests from members asking for a waiver 
or interpretation to relieve the member from this requirement in 
certain circumstances. For example, if a full-service member changed 
its business by divesting itself of clearing responsibilities so that 
it no longer holds customer funds or securities, it would still be 
required to maintain bond coverage that is based on the higher net 
capital requirement that applied during the preceding year. Currently, 
Rule 3020 does not permit the staff to provide any relief to the 
member.
    NASD Regulation is proposing to amend Rule 3020 to permit the staff 
to exempt a member from the requirements of the rule in circumstances 
similar to those described above and upon a showing of good cause. This 
authority will permit the staff to adjust the fidelity bond 
requirements applicable to a member to better tailor the requirements 
to changes in a member's business. In addition, the proposed rule 
change will also permit the staff to include conditions in an exemption 
to ensure that any subsequent increase in capital requirements is 
accompanied by a corresponding increase in coverage.
    The rule change applies a ``good cause'' standard that will require 
a member to demonstrate that a modification from the bonding 
requirement is justified by the level of loss exposure that may be 
expected from the member. NASD Regulation notes that the fidelity 
bonding premiums are set for certain net capital thresholds on the 
basis of loss experience. The premiums are changed from time to time to 
reflect changes in loss experience and to ensure that sufficient funds 
are available to pay any losses reported to the insurer. In addition, 
generally losses incurred in a prior year are reported against the 
firm's current year. NASD Regulation intends to apply this authority 
only where it is clear that an exemption will not have any unintended 
impact on the insurance pool, and the modified coverage would 
adequately protect the member against potential losses.
    Request for exemption would be considered under recently adopted 
Procedures for Exemption in the 9600 Series of Rules in the Code of 
Procedure. Under the procedures, the staff issues written 
determinations that are subject to review by the National Adjudicatory 
Council.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\5\ in 
that the proposed amendments are designed to accommodate members whose 
financial circumstances have changed so that they could obtain an 
exemption from maintaining fidelity bond coverage at higher previous 
levels if they can show that there is no regulatory reason for the 
higher coverage required by Rule 3020, without otherwise compromising 
investor protection.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any 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, Participants or Others

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    (A) by order approved such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 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, NW, Washington, 
DC 20549. 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-98-33 and should be submitted by July 1, 
1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15418 Filed 6-9-98; 8:45 am]
BILLING CODE 8010-01-M