Federal Register / Vol. 66, No. 38 / Monday, February 26, 2001 / Notices 11623

11 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 43030 (July

12, 2000), 65 FR 45414.

4Letter from Alden S. Adkins, Senior Vice

President and General Counsel, NASD Regulation,

to Katherine A. England, Assistant Director,

Division of Market Regulation, Commission, dated

January 30, 2001 (‘‘Amendment No. 1’’).

Amendment No. 1 amends NASD Rule 2330(f)(2) to

clarify that the rule applies to members or persons

associated with members that act as investment

advisers, whether or not registered as such, and to

add a cross-reference to Rule 205–3 of the

Investment Advisers Act of 1940 (‘‘Advisers Act’’).

Amendment No. 1 also states that NASD Regulation

will notify its members of amendments to Rule

205–3 within 90 days through a Notice to Members.

5See Investment Advisers Act Release No. 1731

(July 15, 1998), 63 FR 39022 (July 21, 1998).

quantities at each price, which in turn

would result in fewer automatic

executions. The Commission believes

that the proposed rule change may help

to alleviate this concern by eliminating

the pending auto-stop function. The

Commission believes that the removal of

this provision will help to ensure that

demand for automatic execution

continues to be satisfied.

The Commission believes that the

proposal is consistent with the

protection of investors and the public

interest and therefore finds good cause

for approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice thereof in the

Federal Register. The proposed rule

change is designed to permit the

Exchange to continue, with a minimum

of disruption to trading operations, its

transition to quoting in decimals, which

began in all Exchange listed securities

on January 29, 2001, and is scheduled

to begin in certain Nasdaq securities on

March 12, 2001. In addition, the

Commission notes that the proposed

rule change is being approved on a pilot

basis only, through July 9, 2001. In light

of these factors, the Commission finds

good cause to approve the proposed rule

change on an accelerated basis.

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 20549–0609. Copies of

the submissions, 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 filings will also be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to the File No.

SR–CHX–01–03 and should be

submitted by March 19, 2001.

V. Conclusion

It is Therefore Ordered, pursuant to

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

proposed rule change (SR–CHX–01–03)

is approved through July 9, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–4596 Filed 2–23–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43973; File No. SR–NASD–

99–42]

Self-Regulatory Organizations; Order

Approving a Proposed Rule Change

and Notice of Filing and Order

Granting Accelerated Approval of

Amendment No. 1 Thereto by the

National Association of Securities

Dealers, Inc. Relating to Performance

Fee Arrangements

February 15, 2001.

I. Introduction

On September 2, 1999, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly owned subsidiary, NASD

Regulation, Inc. (‘‘NASD Regulation’’),

submitted to the Securities and

Exchange Commission (‘‘Commission’’),

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a

proposed rule change relating to

performance fee arrangements.

The Federal Register published the

proposed rule change for comment on

July 21, 2000.3 The Commission

received no comments on the proposed

rule change. On January 31, 2001, the

Association submitted an amendment to

the proposed rule change.4 This order

approves the proposed rule change and

grants accelerated approval to

Amendment No. 1. The Commission is

also soliciting comment on Amendment

No. 1 to the proposed rule change.

II. Description of the Proposed Rule

Change

NASD Rule 2330(f) prohibits members

and persons associated with members

from sharing in customer account

profits and gains except under certain

conditions. Subparagraph (f)(1)(A)

permits sharing in customer account

profits and gains where the firm has

authorized it and the sharing is

proportionate to the member’s or

associated person’s contributions to the

account. Subparagraph (f)(2) permits,

under certain conditions, members or

registered representatives to charge a

performance fee (an advisory fee based

on a percentage of the capital gains or

capital appreciation of an account).

Currently, NASD Rule 2330(f)(2)

permits the receipts of a performance

fee only if: (i) The member or associated

person reasonably believes that the

customer account meets certain

minimum net worth ($1,000,000) or

amount invested ($500,000)

requirements; (ii) the member or

associated person obtains the prior

written authorization of the arrangement

from the member carrying the account;

(iii) the member or associated person

reasonably believes that the customer is

able to understand the compensation

arrangement and its risks; (iv) the

compensation agreement is in writing;

(v) the member or associated person

reasonably believes that the agreement

is an arm’s length agreement; (vi) the

compensation formula takes into

account realized and accrued gains and

losses over a period of at least one year;

and (vii) the member discloses all

material information relating to the

agreement, including method of

compensation and potential conflicts of

interest.

According to NASD Regulation, the

requirements of NASD Rule 2330(f)(2)

have always closely tracked the

requirements of Rule 205–3 under the

Advisers Act. However, effective August

20, 1998, the Commission amended

Rule 205–3 to provide greater flexibility

in structuring performance fee

arrangements with clients who are

financially sophisticated or have the

resources to obtain sophisticated

financial advice regarding these

arrangements.5 Because the NASD had

incorporated the requirements of Rule

205–3 into NASD Rule 2330(f)(2), when

the Commission amended Rule 205–3,

NASD Rule 2330(f)(2) was no longer

consistent with Rule 205–3.

In order to restore consistency, the

proposed rule change would permit

members and their associated persons

11624 Federal Register / Vol. 66, No. 38 / Monday, February 26, 2001 / Notices

6Telephone conversation between Alden S.

Adkins, Senior Vice President and General Counsel,

NASD Regulation, and Katherine A. England,

Assistant Director, Commission (October 27, 2000).

7See Amendment No. 1, supra note 4.

8 In approving the proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

9 15 U.S.C. 78o–3(b)(6).

10 15 U.S.C. 78o–3(b)(6).

11 15 U.S.C. 78s(b).

12 15 U.S.C. 78s(b)(2).

13 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 43505

(November 1, 2000), 65 FR 67030.

4 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

5 15 U.S.C. 78f(b)(5).

that act as investment advisers to share

in customer account profits and gains

subject to the provisions of Rule 205–3

under the Advisers Act. The NASD

amended Rule 2330(f)(2), to eliminate

the conditions set forth in the rule and

to incorporate the terms of Rule 205–3,

as may be amended from time to time.

The NASD stated that this approach

represents a decision by the Board to

incorporate whatever performancebased standard the Commission may

adopt from time to time.6 Thus, in the

future, the proposed rule will conform

to any subsequent amendments by the

Commission to Rule 205–3. NASD

Regulation will notify its members of

any subsequent amendments to Rule

205–3 in a Notice to Members within 90

days of the amendment.7

III. Discussion

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,8 and, in particular, the

requirements of Section 15A(b)(6) of the

Act.9 The Commission believes that

proposed rule change should continue

to ensure that NASD members enter into

performance fee arrangements only with

clients who are financially sophisticated

or have the resources to obtain

sophisticated financial advice regarding

performance fee arrangements. The

Commission also believes that crossreferencing Advisers Act Rule 205–3,

rather than duplicating the specific

provisions of Rule 205–3 in NASD Rule

2330(f)(2), will ensure that NASD Rule

2330(f)(2) remains consistent with

Advisers Act Rule 205–3. The

Commission notes that otherwise,

NASD members acting as investment

advisers might be subject to conflicting

rules on the same subject. Finally, the

Commission believes that NASD

Regulation’s commitment to issue a

Notice to Members within 90 days of

any amendments to Advisers Act Rule

205–3 should ensure that members

remain aware of the requirements for

performance fee arrangements.

The Commission finds good cause for

approving Amendment No. 1 to the

proposed rule change prior to the

thirtieth day after publication in the

Federal Register. The Commission notes

that Amendment No. 1 clarifies that the

proposal applies to members acting as

investment advisers and crossreferences Advisers Act Rule 205–3. The

Commission believes that Amendment

No. 1 will make the requirements of

NASD Rule 2330(f)(2) more clear and,

therefore, should help to ensure that

members comply with the rule.

Accordingly, the Commission finds

good cause to accelerate approval of

Amendment No. 1 to the proposed rule

change, consistent with Sections

15A(b)(6) 10 and 19(b) 11 of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether Amendment No. 1 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 in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to the File No.

SR–NASD–99–42 and should be

submitted by March 19, 2001.

V. Conclusion

For the foregoing reasons, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act and the rules

and regulations thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,12 that the

amended proposed rule change (SR–

NASD–99–42) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–4594 Filed 2–23–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43975; File No. SR–PCX–

00–27]

Self-Regulatory Organizations; Order

Approving a Proposed Rule Change by

the Pacific Exchange, Inc. Relating to

Options Trade Reporting

February 16, 2001.

I. Introduction

On August 5, 2000, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’), pursuant

to Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’) 1 and Rule

19b–4 thereunder,2 a proposed rule

change relating to the reporting of

options transactions. The proposed rule

change was published for comment in

the Federal Register on November 8,

2000.3 The Commission received no

comments on the proposal. This order

approves the proposal.

II. Description of the Proposal

The PCX proposes to adopt new PCX

Rule 6.69(a) to require all Exchange

members and member organizations

who are required to report trades either

directly to the Options Price Reporting

Authority (‘‘OPRA’’) or to another party

responsible for reporting trades to

OPRA, to immediately report all trades

to the Exchange for dissemination to

OPRA within 90 seconds.

Currently, Commentary .01 to

Exchange Rule 6.69 states that trades

must be immediately reported at the

time of execution. The Exchange

proposes to require immediate trade

reporting, and in any event, no later

than 90 seconds following execution.

The Exchange also proposes to amend

PCX Rule 10.13 to include violations of

proposed Rule 6.69(a) in the Exchange’s

minor Rule Plan.

III. Discussion

The Commission finds that the

proposal is consistent with the

requirements of the Act.4 In particular,

the Commission finds that the proposed

rule change furthers the objectives of

Section 6(b)(5),5 in that it is designed to

prevent fraudulent and manipulative

acts and practices, to promote just and