Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices 13601

12 15 U.S.C. 78f(b)(5). 13 15 U.S.C. 78s(b)(2). 14 In approving this proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f). 15See supra note 11.

16 15 U.S.C. 78s(b)(2).

17 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 (‘‘Division’’), Commission, dated

February 2, 2001 (‘‘Amendment No. 1’’). In

Amendment No. 1 the NASD provided the final

ballot summary of the membership vote regarding

the proposed amendments to the NASD By-Laws,

indicating that the NASD membership approved the

proposed amendments.

4Letter from T. Grant Callery, Senior Vice

President and General Counsel, NASD, to Katherine

A. England, Assistant Director, Division,

Commission, dated February 23, 2001

(‘‘Amendment No. 2’’). In Amendment No. 2 the

NASD amended proposed Article VII, Section

10(a)(ii) of the By-Laws to state ‘‘(ii) in the case of

petitions in support of more than one person,

petitions in support of the nominations of such

persons duly executed by ten percent of the

members.’’

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 CBOE. All

submissions should refer to File No.

SR–CBOE–01–03 and should be

submitted by March 27, 2001.

V. Commission’s Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

After careful review, 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 exchange and, in particular,

the requirements of Section 6 of the Act.

Among other provisions, section 6(b)(5)

of the Act requires that the rules of an

exchange be designed to foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating securities

transactions; remove impediments to

and perfect the mechanism of a free and

open market and a national securities

system; and protect investors and the

public interest.12

Pursuant to section 19(b)(2) 13 of the

Act, the Commission finds good cause

for approving the proposed rule change

prior to the 30th day after the date of

publication of notice thereof in the

Federal Register.14 The Commission

believes that granting accelerated

approval will provide the CBOE will

flexibility to compete for order flow

with other exchanges immediately.15

While increasing the maximum order

size limit from seventy-five to one

hundred contracts for automatic

execution eligibility by itself does not

raise concerns under the Act, the

Commission believes that this increase

raises collateral issues that the CBOE

will need to monitor and address.

Increasing the maximum order size for

particular option classes will make a

larger number of option orders eligible

for RAES. These orders may benefit

from greater speed of execution, but at

the same time create greater risks for

market maker participants. Market

makers signed onto RAES will be

exposed to the financial risks associated

with larger-sized orders being routed

through the system for automatic

execution at the displayed price. When

the market for the underlying security

changes rapidly, it may take a few

moments for the related option’s price

to reflect that change. In the interim,

customers may submit orders that try to

capture the price differential between

the underlying security and the option.

The larger the orders accepted through

RAES, the greater the risk market

makers must be willing to accept. The

Commission does not believe that,

because the CBOE’s appropriate FPC

determines to approve orders as large as

one hundred as eligible for RAES, the

FPC or any other CBOE committee or

officials should disengage RAES more

frequently by, for example, declaring a

‘‘fast’’ market. Disengaging RAES can

negatively affect investors by making it

slower and less efficient to execute their

option orders. It is the Commission’s

view that the CBOE, when increasing

the maximum size of orders that can be

sent through their respective automatic

execution systems, should not

disadvantage all customers—the vast

majority of whom enter orders for less

than one hundred contracts—by making

their automatic execution systems less

reliable.

It Is Therefore Ordered, pursuant to

section 19(b)(2) of the Act,16 that the

proposed change (SR–CBOE–01–03) is

hereby approved on an accelerated

basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.17

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–5330 Filed 3–5–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44004; File No. SR–NASD–

01–06]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Amending the NASD ByLaws

February 26, 2001.

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 December

17, 1999, the National Association of

Securities Dealers, Inc. (‘‘NASD’’) 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 NASD. The

NASD submitted Amendment No. 1 on

February 5, 2001,3 and Amendment No.

2 on February 26, 2001.4 The

Commission is publishing this notice, as

amended, to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing to amend its

By-Laws to address several corporate

governance issues, including the

treatment of staff Governors for

purposes of Industry/Non-Industry

balancing on the NASD’s Board of

Governors (the ‘‘Board’’); the role of the

National Nominating Committee

(‘‘NNC’’) in contested elections; the

petition process by which individuals

and slates can be included in the

election process; the industry

classifications that must be represented

on the Board; and other clarifying

amendments, including the addition of

13602 Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices

certain definitions. Additionally, the

amendments reflect the new NASD

corporate structure, including the

impending separation of The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’) and

NASD and the creation of NASD

Dispute Resolution, Inc., a wholly

owned subsidiary of the NASD.

Below is the text of the proposed rule

change, as amended. Proposed new

language is in italics; proposed

deletions are in brackets.

By-Laws of the National Association of

Securities Dealers, Inc.

Article I—Definitions

(n) ‘‘Industry Director’’ means a

Director of the NASD Regulation Board

or [Nasdaq] NASD Dispute Resolution

Board (excluding the Presidents) who:

(1) is or has served in the prior three

years as an officer, director, or employee

of a broker or dealer, excluding an

outside director or a director not

engaged in the day-to-day management

of a broker or dealer; (2) is an officer,

director (excluding an outside director),

or employee of an entity that owns more

than ten percent of the equity of a

broker or dealer, and the broker or

dealer accounts for more than five

percent of the gross revenues received

by the consolidated entity; (3) owns

more than five percent of the equity

securities of any broker or dealer, whose

investments in brokers or dealers exceed

ten percent of his or her net worth, or

whose ownership interest otherwise

permits him or her to be engaged in the

day-to-day management of a broker or

dealer; (4) provides professional

services to brokers or dealers, and such

services constitute 20 percent or more of

the professional revenues received by

the Director or 20 percent or more of the

gross revenues received by the

Director’s firm or partnership; (5)

provides professional services to a

director, officer, or employee of a

broker, dealer, or corporation that owns

50 percent or more of the voting stock

of a broker or dealer, and such services

relate to the director’s, officer’s, or

employee’s professional capacity and

constitute 20 percent or more of the

professional revenues received by the

Director or 20 percent or more of the

gross revenues received by the

Director’s firm or partnership; or (6) has

a consulting or employment

relationship with or provides

professional services to the NASD,

NASD Regulation, NASD Dispute

Resolution, Nasdaq, or Amex (and any

predecessor), or has had any such

relationship or provided any such

services at any time within the prior

three years;

(o) ‘‘Industry Governor’’ or ‘‘Industry

committee member’’ means a Governor

(excluding the Chief Executive Officer

[and Chief Operating Officer of the

NASD, the Presidents of NASD

Regulation and Nasdaq, and the Chief

Executive Officer of Amex)] of the

NASD and the President of NASD

Regulation) or committee member who:

(1) is or has served in the prior three

years as an officer, director[,] or

employee of a broker or dealer,

excluding an outside director or a

director not engaged in the day-to-day

management of a broker or dealer; (2) is

an officer, director (excluding an

outside director), or employee of an

entity that owns more than ten percent

of the equity of a broker or dealer, and

the broker or dealer accounts for more

than five percent of the gross revenues

received by the consolidated entity; (3)

owns more than five percent of the

equity securities of any broker or dealer,

whose investments in brokers or dealers

exceed ten percent of his or her net

worth, or whose ownership interest

otherwise permits him or her to be

engaged in the day-to-day management

of a broker or dealer; (4) provides

professional services to brokers or

dealers, and such services constitute 20

percent or more of the professional

revenues received by the Governor or

committee member or 20 percent or

more of the gross revenues received by

the Governor’s or committee member’s

firm or partnership; (5) provides

professional services to a director,

officer, or employee of a broker, dealer,

or corporation that owns 50 percent or

more of the voting stock of a broker or

dealer, and such services relate to the

director’s, officer’s, or employee’s

professional capacity and constitute 20

percent or more of the professional

revenues received by the Governor or

committee member or 20 percent or

more of the gross revenues received by

the Governor’s or committee member’s

firm or partnership; (6) is a Floor

Governor; or (7) has a consulting or

employment relationship with or

provides professional services to the

NASD, NASD Regulation, NASD

Dispute Resolution, Nasdaq or Amex

(and any predecessor), or has had any

such relationship or provided any such

services at any time within the prior

three years;

(v) ‘‘NASD Dispute Resolution’’

means NASD Dispute Resolution, Inc.;

(w) ‘‘Nasdaq’’ means The Nasdaq

Stock Market, Inc.;

[(w) ‘‘Nasdaq Board’’ means the Board

of Directors of Nasdaq;

(x) ‘‘Nasdaq Listing and Hearing

Review Council’’ means a body

appointed pursuant to Article V of the

Nasdaq By-Laws;

[(y)] (x) ‘‘NASD Regulation’’ means

NASD Regulation, Inc.;

[(z)] (y) ‘‘NASD Regulation Board’’

means the Board of Directors of NASD

Regulation;

[(aa)] (z) ‘‘National Adjudicatory

Council’’ means a body appointed

pursuant to Article V of the NASD

Regulation By-Laws;

[(bb)] (aa) ‘‘National Nominating

Committee’’ means the National

Nominating Committee appointed

pursuant to Article VII, Section 9 of

these By-Laws;

[(cc)] (bb) ‘‘Non-Industry Director’’

means a Director of the NASD

Regulation Board or [Nasdaq] NASD

Dispute Resolution Board (excluding the

Presidents of NASD Regulation and

[Nasdaq)] NASD Dispute Resolution)

who is: (1) a Public Director; (2) an

officer or employee of an issuer of

securities listed on Nasdaq or Amex, or

traded in the over-the-counter market;

or (3) any other individual who would

not be an Industry Director;

[(dd)] (cc) ‘‘Non-Industry Governor’’

or ‘‘Non-Industry committee member’’

means a Governor (excluding the Chief

Executive Officer and [Chief Operating

Officer] any other officer of the NASD

[and], the [Presidents] President of

NASD Regulation [and Nasdaq], any

Floor Governor, and the Chief Executive

Officer of Amex) or committee member

who is: (1) a Public Governor or

committee member; (2) an officer or

employee of an issuer of securities listed

on Nasdaq or Amex, or traded in the

over-the-counter market; or (3) any other

individual who would not be an

Industry Governor or committee

member;

[(ee)] (dd) ‘‘person associated with a

member’’ or ‘‘associated person of a

member’’ means: (1) a natural person

who is registered or has applied for

registration under the Rules of the

Association; (2) a sole proprietor,

partner, officer, director, or branch

manager of a member, or other natural

person occupying a similar status or

performing similar functions, or a

natural person engaged in the

investment banking or securities

business who is directly or indirectly

controlling or controlled by a member,

whether or not any such person is

registered or exempt from registration

with the NASD under these By-Laws or

the Rules of the Association; and (3) for

purposes of Rule 8210, any other person

listed in Schedule A of Form BD of a

member;

[(ff)] (ee) ‘‘Public Director’’ means a

Director of the NASD Regulation Board

or [Nasdaq Board] NASD Dispute

Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices 13603

Resolution who has no material

business relationship with a broker or

dealer or the NASD, NASD Regulation,

NASD Dispute Resolution, or Nasdaq;

[(gg)] (ff) ‘‘Public Governor’’ or

‘‘Public committee member’’ means a

Governor or committee member who

has no material business relationship

with a broker or dealer or the NASD,

NASD Regulation, NASD Dispute

Resolution, or Nasdaq;

[(hh)] (gg) ‘‘registered broker, dealer,

municipal securities broker or dealer, or

government securities broker or dealer’’

means any broker, dealer, municipal

securities broker or dealer, or

government securities broker or dealer

which is registered with the

Commission under the Act; [and

[(ii)] (hh) ‘‘Rules of the Association’’

or ‘‘Rules’’ means the numbered rules

set forth in the NASD Manual beginning

with the Rule 0100 Series, as adopted by

the Board pursuant to these By-Laws, as

hereafter amended or supplemented[.];

[(jj)] (ii) ‘‘Floor Governor’’ or ‘‘Amex

Floor Governor’’ means a Floor

Governor of Amex elected pursuant to

Article II, Section .01(a) of the Amex ByLaws;

[(kk)] ‘‘Nasdaq-Amex’’ means NasdaqAmex Market Group, Inc.;

[(ll)] (ii) ‘‘Amex’’ means American

Stock Exchange LLC; and

[(mm)] (kk) ‘‘Amex Board’’ means the

Board of Governors of Amex[;].

Article IV—Membership

Application for Membership

Sec. 1. (a) Application for

membership in the NASD, properly

signed by the applicant, shall be made

to the NASD via electronic process or

such other process as the NASD may

prescribe, on the form to be prescribed

by the NASD, and shall contain:

(1) an agreement to comply with the

federal securities laws, the rules and

regulations thereunder, the rules of the

Municipal Securities Rulemaking Board

and the Treasury Department, the ByLaws of the NASD, NASD Regulations,

and [Nasdaq] NASD Dispute Resolution,

the Rules of the Association, and all

rulings, orders, directions, and

decisions issued and sanctions imposed

under the Rules of the Association;

Article V—Registered Representatives

and Associated Persons

Application for Registration

Sec. 2. (a) Application by any person

for registration with the NASD, properly

signed by the applicant, shall be made

to the NASD via electronic process or

such other process as the NASD may

prescribe, on the form to be prescribed

by the NASD and shall contain:

(1) an agreement to comply with the

federal securities laws, the rules and

regulations thereunder, the rules of the

Municipal Securities Rulemaking Board

and the Treasury Department, By-Laws

of the NASD, NASD Regulation, and

[Nasdaq] NASD Dispute Resolution, the

Rules of the Association, and all rulings,

orders, directions, and decisions issued

and sanctions imposed under the Rules

of the Association; and

Article VI—Dues, Assessments, and

Other Charges

Power of the NASD to Fix and Levy

Assessments

Sec. 1. The NASD shall prepare an

estimate of the funds necessary to defray

reasonable expenses of administration

in carrying on the work of the NASD

each fiscal year, and on the basis of such

estimate, shall fix and levy the amount

of admission fees, dues, assessments,

and other charges to be paid by

members of the NASD and issuers and

any other persons using any facility or

system which the NASD, NASD

Regulation[, or Nasdaq] or NASD

Dispute Resolution operates or controls.

Fees, dues, assessments, and other

charges shall be called and payable as

determined by the NASD from time to

time; provided, however, that such

admission fees, dues, assessments, and

other charges shall be equitably

allocated among members and issuers

and any other persons using any facility

or system which the NASD operates or

controls. The NASD may from time to

time make such changes or adjustments

in such fees, dues, assessments, and

other charges as it deems necessary or

appropriate to assure equitable

allocation of due among members. In

the event of termination of membership

or the extension of any membership to

a successor organization during any

fiscal year for which an assessment has

been levied and become payable, the

NASD may make such adjustment in the

fees, dues, assessments, or other charges

payable by any such member or

successor organization or organizations

during such fiscal years as it deems fair

and appropriate in the circumstances.

Article VII—Board of Governors

Powers and Authority of Board

Sec. 1. (a) The Board shall be the

governing body of the NASD and,

except as otherwise provided by

applicable law, the Restated Certificate

of Incorporation, or these By-Laws, shall

be vested with all powers necessary for

the management and administration of

the affairs of the NASD and the

promotion of the NASD’s welfare,

objects, and purposes. In the exercise of

such powers, the Board shall have the

authority to:

(c) To the fullest extent permitted by

applicable law, the Restated Certificate

of Incorporation, and these By-Laws, the

NASD may delegate any power of the

NASD or the Board to a committee

appointed pursuant to Article IX,

Section 1, the NASD Regulation Board,

the [Nasdaq] NASD Dispute Resolution

Board, or NASD staff in a manner not

inconsistent with the Delegation Plan.

Authority to Take Action Under

Emergency or Extraordinary Market

Conditions

Sec. 3. The Board, or such person or

persons as may be designated by the

Board, in the event of an emergency or

extraordinary market conditions, shall

have the authority to take any action

regarding:

(a) the trading in or operation of the

over-the-counter securities market, the

operation of any automated system

owned or operated by the NASD[,] or

NASD Regulation, [or Nasdaq,] and the

participation in any such system of any

or all persons or the trading therein of

any or all securities; and

Composition and Qualifications of the

Board

Sec. 4. (a) The Board shall consist of

no fewer than 17 nor more than 27

Governors, comprising (i) the Chief

Executive [Officer and the Chief

Operating] Officer of the NASD, [the

Presidents of NASD Regulation and

Nasdaq,] (ii) if the Board of Governors

determines, from time to time, in its sole

discretion, that the appointment of a

second officer of the NASD to the Board

of Governors is advisable, a second

officer of the NASD, (iii) the President

of NASD Regulation, (iv) the Chair of

the National Adjudicatory Council, (v)

the Chief Executive Officer [of Amex]

and one Floor Governor of Amex, and

(vi) no fewer than [16] 12 and no more

than [28] 22 Governors elected by the

members of the NASD. The Governors

elected by the members of the NASD

shall include a representative of an

issuer of investment company shares or

an affiliate of such an issuer, a

representative of an insurance company,

[and a Nasdaq issuer] a representative of

a national retail firm, a representative of

a regional retail or independent

financial planning member firm, a

representative of a firm that provides

clearing services to other NASD

members, and a representative of an

NASD member having not more than

150 registered persons. [A majority of

the] The number of Non-Industry

Governors shall [be Non-] exceed the

number of Industry Governors. If the

13604 Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices

[Board consists of 23 Governors, at least

five shall be] number of Industry and

Non-Industry Governors is 15 to 17, the

Board shall include at least four Public

Governors. If the [Board consists of 24

to 27 Governors, at least six shall be]

number of Industry and Non-Industry

Governors is 18 to 19, the Board shall

include at least five Public Governors. If

the [Board consists of 28 to 31

Governors, at least seven shall be Public

Governors. If the Board consists of 32 to

35 Governors, at least eight shall be]

number of Industry and Non-Industry

Governors is 20–25, the Board shall

include at least six Public Governors.

Term of Office of Governors

Sec.5. (a) The Chief Executive Officer

and [the Chief Operating Officer], if

appointed, the second officer of the

NASD, the [Presidents] President of

NASD Regulation [and Nasdaq], and the

Chief Executive Officer of Amex shall

serve as Governors until a successor is

elected, or until death, resignation, or

removal (or, in addition, in the case of

a second officer of the NASD, until the

Board of Governors, in its sole

discretion, determines that such

appointment is no longer advisable).

(d) The Governors elected by the

members of the NASD shall be divided

into three classes and hold office for a

term of no more than three years, such

term to be fixed by the Board at the time

of the nomination or certification of

each such Governor, or until a successor

is duly elected and qualified, or until

death, resignation, disqualification, or

removal. A Governor elected by the

members of the NASD may not serve

more than two consecutive terms. If a

Governor is elected by the Board to fill

a term of less than one year, the

Governor may serve up to two

consecutive terms following the

expiration of the Governor’s initial term.

The term of office of Governors of the

first class shall expire at the January

1999 Board meeting, of the second-class

one year thereafter, and of the thirdclass two years thereafter. At each

annual election, commencing January

1999, Governors shall be elected for a

term of three years to replace those

whose terms expire.

Filling of Vacancies

Sec. 7. If [a] an elected Governor

position becomes vacant, whether

because of death, disability,

disqualification, removal, or resignation,

the National Nominating Committee

shall nominate, and the Board shall

elect by majority vote of the remaining

Governors then in office, a person

satisfying the classification (Industry,

Non-Industry, or Public Governor) for

the governorship as provided in Section

4 to fill such vacancy, except that if the

remaining term of office for the vacant

Governor position is not more than six

months, no replacement shall be

required. If the remaining term of office

for the vacant Governor position is more

than one year, the Governor elected by

the Board to fill such position shall

stand for election in the next annual

election pursuant to this Article.

The National Nominating Committee

Sec. 9. (a) The National Nominating

Committee shall nominate and, in the

event of a contested election, may, as

described in Section 11(b), support:

Industry, Non-Industry, and Public

Governors for each vacant or new

Governor position on the NASD Board

for election by the membership;

Industry, Non-Industry, and Public

Directors for each vacant or new

position on the NASD Regulation Board

and the [Nasdaq] NASD Dispute

Resolution Board for election by the

[Board;] stockholder; and Industry, NonIndustry, and Public members for each

vacant or new position on the National

Adjudicatory Council for appointment

by the NASD Regulation Board [; and

Industry and Non-Industry members for

each vacant or new position on the

Nasdaq Listing and Hearing Review

Council for appointment by the Nasdaq

Board].

(d) Members of the National

Nominating Committee shall be

appointed annually by the Board and

may be removed only by majority vote

of the whole Board, after appropriate

notice, for refusal, failure, neglect, or

inability to discharge such member’s

duties. [The NASD Regulation Board

and the Nasdaq Board each shall

propose two candidates to the NASD

Board for appointment to the National

Nominating Committee.]

Procedure for Nomination of Governors

Sec. 10. Prior to a meeting of members

pursuant to Article XXI for the election

of Governors, the NASD shall notify the

members of the names of each nominee

selected by the National Nominating

Committee for each governorship up for

election, the classification of

governorship (Industry, Non-Industry,

or Public Governor) for which the

nominee is nominated, the

qualifications of each nominee, and

such other information regarding each

nominee as the National Nominating

Committee deems pertinent. A person

who has not been so nominated may be

included on the ballot for the election

of Governors if: (a) within [30] 45 days

after the date of such notice [in 1997, or

within 45 days after the date of such

notice in 1998 and thereafter], such

person presents to the Secretary of the

NASD (i) in the case of petitions solely

in support of such person, petitions in

support of his or her nomination duly

executed by three percent of the

members, and no member shall endorse

more than one such nominee, or (ii) in

the case of petitions in support of one

or more persons, petitions in support of

the nominations of such persons duly

executed by ten percent of the members;

and (b) the Secretary certifies that (i) the

petitions are duly executed by the

Executive Representatives of the

requisite number of members[;], and (ii)

the person satisfies the classification

(Industry, Non-Industry, or Public

Governor) of the governorship to be

filled, based on such information

provided by the person as is reasonably

necessary to make the certification. The

Secretary shall not unreasonably

withhold or delay the certification.

Upon certification, the election shall be

deemed a contested election. After the

certification of a contested election or

the expiration of time for contesting an

election under this Section, the

Secretary shall deliver notice of a

meeting of members pursuant to Article

XXI, Section 3(a).

Communication of Views

Sec. 11. (a) The NASD, the Board, [the

National Nominating Committee,] a

committee appointed pursuant to

Article IX, Section 1, and NASD staff

shall not take any position publicly or

with a member or person associated

with or employed by a member with

respect to any candidate in a contested

election or nomination held pursuant to

these By-Laws or the NASD Regulation

By-Laws. A Governor or a member of

any committee (other than the National

Nominating Committee [or any other

committee]) may communicate his or

her views with respect to any candidate

if such Governor or committee member

acts solely in his or her individual

capacity and disclaims any intention to

communicate in any official capacity on

behalf of the NASD, the NASD Board, or

any committee (other than the National

Nominating Committee [, or any other

committee]). Except as provided herein,

any candidate and his or her

representatives may communicate

support for the candidate to a member

or person associated with or employed

by a member.

(b) In a contested election, the

National Nominating Committee may

support its nominees under this Article

by sending to NASD members eligible to

vote up to two mailings of materials, in

the manner set forth in Article VII,

Section 12, in support of its nominees.

Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices 13605

In addition to such two mailings, in the

event of mailings and or other

communications to the NASD members

by or on behalf of a candidate by

petition in a contested election, the

National Nominating Committee may

respond in-kind, but shall not take a

position unresponsive, to the contesting

candidate’s communications.

Election of Governors

Sec. 13. Governors that are to be

elected by the members shall be elected

by a plurality of the votes of the

members of the NASD present in person

or represented by proxy at the annual

meeting of the NASD and entitled to

vote thereat. The annual meeting of the

NASD shall be on such date and at such

place as the Board shall designate

pursuant to Article XXI. Any Governor

so elected must be nominated by the

National Nominating Committee or

certified by the Secretary pursuant to

Section 10.

Maintenance of Compositional

Requirements of the Board

Sec. 14. Each elected Governor shall

update the information submitted under

Section 9(e) regarding his or her

classification as an Industry, NonIndustry, or Public Governor at least

annually and upon request of the

Secretary of the NASD, and shall report

immediately to the Secretary any change

in such classification.

Article VIII—Officers, Agents, and

Employees

Resignation and Removal of Officers

Sec. 6. (b) Any officer of the NASD

may be removed, with or without cause,

by resolution adopted by a majority of

the Governors then in office at any

regular or special meeting of the Board

or by a [written] consent [signed]

adopted by all of the Governors then in

office in accordance with applicable

law. Such removal shall be without

prejudice to the contractual rights of the

affected officer, if any, with the NASD.

Article IX—Committees

Appointment

Sec. 1. Subject to Article VII, Section

1(c), the Board may appoint such

committees or subcommittees as it

deems necessary or desirable, and it

shall fix their powers, duties, and terms

of office. Any such committee or

subcommittee consisting solely of one

or more Governors, to the extent

provided by these By-Laws or by

resolution of the Board, shall have and

may exercise all powers and authority of

the Board in the management of the

business and affairs of the NASD. Any

committee having the authority to

exercise the powers and authority of the

Board shall have a percentage of NonIndustry committee members at least as

great as the percentage of Non-Industry

Governors on the Board and a

percentage of Public committee

members at least as great as the

percentage of Public Governors on the

Board.

Executive Committee

Sec. 4. (b) The Executive Committee

shall consist of no fewer than six and no

more than nine Governors. The

Executive Committee shall include the

Chief Executive Officer of the NASD, at

least one Director of NASD Regulation,

[at least one Director of Nasdaq,] at least

one Governor of Amex, and at least two

Governors who are not members of

either the NASD Regulation Board[, the

Nasdaq Board, or the Amex Board. The

number of Directors of the NASD

Regulation Board and the number of

Directors of the Nasdaq Board serving

on the Executive Committee shall be

equal at all times.] or the Amex Board.

The Executive Committee shall have a

percentage of Non-Industry committee

members at least as great as the

percentage of Non-Industry Governors

on the whole Board and a percentage of

Public committee members at least as

great as the percentage of Public

Governors on the whole Board.

Article X—Compensation of Board and

Committee Members

Sec. 1. The Board may provide for

reasonable compensation of the Chair of

the Board, the Governors, and the

members of any committee. The Board

may also provide for reimbursement of

reasonable expenses incurred by such

persons in connection with the business

of the NASD, including those expenses

incurred in connection with the support

of a candidate or candidates by the

National Nominating Committee in

contested elections in accordance with

the By-Laws.

Article XIII—Powers of Board To

Impose Sanctions

Sec. 1. The Board is hereby

authorized to impose appropriate

sanctions applicable to members,

including censure, fine, suspension, or

expulsion from membership,

suspension or bar from being associated

with all members, limitation of

activities, functions, and operations of a

member, or any other fitting sanction,

and to impose appropriate sanctions

applicable to persons associated with

members, including censure, fine,

suspension or barring a person

associated with a member from being

associated with all members, limitation

of activities, functions, and operations

of a person associated with a member,

or any other fitting sanction, for:

(b) violation by a member or a person

associated with a member of any of the

terms, conditions, covenants, and

provisions of the By-Laws of the NASD,

NASD Regulation, or [Nasdaq] NASD

Dispute Resolution, the Rules of the

Association, or the federal securities

laws, including the rules and

regulations adopted thereunder, the

rules of the Municipal Securities

Rulemaking Board, and the rules of the

Treasury Department;

Article XV—Limitation of Powers

Conflicts of Interest

Sec. 4. (b) No contract or transaction

between the NASD and one or more of

its Governors or officers, or between the

NASD and any other corporation,

partnership, association, or other

organization in which one or more of its

Governors or officers are directors or

officers, or have a financial interest,

shall be void or voidable solely for this

reason if: (i) the material facts pertaining

to such Governor’s or officer’s

relationship or interest and the contract

or transaction are disclosed or are

known to the Board or the committee,

and the Board or committee in good

faith authorizes the contract or

transaction by the affirmative vote of a

majority of the disinterested Governors,

even though the disinterested governors

be less than a quorum; or (ii) the

material facts are disclosed or become

known to the Board or committee after

the contract or transaction is entered

into, and the Board or committee in

good faith ratifies the contract or

transaction by the affirmative vote of a

majority of the disinterested Governors

even though the disinterested governors

be less than a quorum. Only

disinterested Governors may be counted

in determining the presence of a

quorum at the portion of a meeting of

the Board or of a committee that

authorizes the contract or transaction.

This subsection shall not apply to any

contract or transaction between the

NASD and [:] NASD Regulation,

[Nasdaq-Amex, Nasdaq] NASD Dispute

Resolution, or Amex.

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

13606 Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices

rule change. The text of these

statemenets may be examined at the

places specified in Item IV below. The

NASD 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

According to the NASD, the proposed

rule change has several significant

purposes. First, the NASD Board of

Governors has both Industry and NonIndustry members and is required by the

By-Laws to have a majority of NonIndustry Governors. In 1998, the NASD

affected a substantial corporate

restructuring which included the

acquisition of the American Stock

Exchange LLC (‘‘Amex’’). As part of this

restructuring, the NASD moved to an

overlapping Board structure whereby all

members of the NASD Regulation, Inc.

(‘‘NASDR’’) and Nasdaq Boards became

members of the NASD Board. As a result

of the 1998 restructuring, the number of

Governors serving on the Board by

virtue of their status as staff increased

to five (the NASD Chief Executive

Officer, the NASD Chief Operating

Officer, the Presidents of NASDR and

Nasdaq and the Chairman of Amex). In

accordance with current NASD ByLaws, these five Governors have

counted as Industry Governors for

balancing purposes. With this current

composition and classification of staff

Governors, the only realistic manner for

NASD to satisfy its obligation to ensure

fair representation of all relevant

constituencies has been to increase the

number of Industry seats on the Boards,

and, in order to maintain the required

absolute majority of Non-Industry/

Public seats on the Board, increase in

the number of Non-Industry seats as

well. These increases have made it

extremely difficult for the NASD Board

to be small enough to function with

optimum efficiency while still satisfying

NASD’s obligation to ensure fair

representation of the relevant

constituencies.

To improve the efficiency of the

Board while maintaining fair

representation of the relevant

constituents, the Association has

determined to reclassify the NASD CEO

and president of NASDR Governor

positions as ‘‘neutral’’ Governors; that

is, neither Industry nor Non-Industry

Governors. The reclassification of these

Governor positions as ‘‘neutral’’ is

consistent with the neutrality

classification other Self-Regulatory

Organizations assign to their Board staff

members and allows the two Industry

seats the staff occupy to now be

available to Industry candidates elected

by the NASD membership.

Second, the proposed By-Law

amendments allow limited National

Nominating Committee participation in

contested elections. Under the current

By-Laws, the NASD, NASD staff, the

NNC and other corporate committees

are prohibited from taking a position in

contested elections. As a result of this

prohibition, in contested elections the

NNC has been unable to explain the

reasons a NNC nominated candidate is

worthy of support, and has been unable

to respond to statements made by other

candidates or parties about the NNC

nominees. The NNC’s current inability

to support its candidates in contested

elections is a deterrent to qualified

individuals accepting nominations. To

remedy this, the NASD is proposing to

allow the NNC to provide limited

support to NNC nominated candidates.

Specifically, the NASD will allow the

NNC to distribute two mailings to NASD

voting members in support of its

candidates. The NASD will also allow

the NNC to respond in-kind to vote

solictations and additional mailings by

other candidates. By limiting NNC’s

additional support to ‘‘responsiveness’’,

the NASD will allow the NNC to

support its candidates but not allow the

NNC to unilaterally wage an electoral

campaign on behalf of those candidates.

Next, the NASD elected to revise the

NASD By-Laws with regard to inclusion

on the ballot by petition. Under the

current ballot by petition process,

Industry candidates seeking nomination

by petition can ‘‘coattail’’ other Industry

and/or Non-Industry candidates in the

same petition-gathering process. This

process essentially allows the creation

of a ‘‘slate’’ through the use of a single

set of petitions signed by three percent

of the membership. The NASD

determined to continue to allow the

nomination by petition of an individual

signed by three percent of NASD’s

voting members and to permit each

member to endorse only one such

nominee. Under the revised

amendments, the NASD specifically

recognizes the validity of slate petitions,

but requires that the slate be endorsed

by ten percent of NASD’s voting

members. The NASD’s adoption of

separate thresholds for petition

candidates and slate petitions is

reasonable given the size and diversity

of NASD’s membership.

Fourth, to more accurately represent

the full range of relevant industry

constituents, the NASD proposes

representation by three additional

industry segments: a national retail firm,

a regional retail or independent

financial planning member firm and a

clearing firm. These segments are in

addition to required representation by

an investment company, an insurance

affiliate and a small firm. The Board

will periodically adopt resolutions

establishing the criteria for national and

regional firm representatives in

accordance with changes in the industry

structure and demographics.

Finally, to set forth the new NASD

corporate structure and the change in

the NASD-Nasdaq relationship, the

NASD determined to make several

technical changes to the By-Laws

reflecting the current corporate

structure. The changes primarily consist

of adding references to the newly

formed NASD Dispute Resolutions

subsidiary and deleting references to

Nasdaq.

Summary of Amendments

By-Laws of the NASD

Article I. Definitions

New definitions have been added, and

the terms Industry, Non-Industry and

Public ‘‘Director’’ ‘‘Governor’’ and

‘‘committee member’’ have been

amended, to reflect the new corporate

structure, namely, the inclusion of

NASD Dispute Resolution within the

family of companies and the changed

NASD-Nasdaq relationship.

Article IV. Membership

Application for Membership

Section 1 has been amended to reflect

the new corporate structure, namely, the

inclusion of NASD Dispute Resolution

within the family of companies and the

changed NASD-Nasdaq relationship.

Article V. Registered Representatives

and Associated Persons

Application for Registration

Section 2 has been amended to reflect

the new corporate structure, namely, the

inclusion of NASD Dispute Resolution

within the family of companies and the

changed NASD-Nasdaq relationship.

Article VI. Dues, Assessments, and

Other Charges

Power of the NASD to Fix and Levy

Assessments

Section 1 has been amended to reflect

the new corporate structure, namely, the

inclusion of NASD Dispute Resolution

within the family of companies and the

changed NASD-Nasdaq relationship.

Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices 13607

5 15 U.S.C. 78o(b)(4).

Article VII. Board of Governors

Powers and Authority of Board

Section 1 has been amended to reflect

the new corporate structure, namely, the

inclusion of NASD Dispute Resolution

within the family of companies and the

changed NASD-Nasdaq relationship.

Authority to Take Action Under

Emergency or Extraordinary Market

Conditions

Section 3 has been amended to reflect

the new corporate structure, namely, the

inclusion of NASD Dispute Resolution

within the family of companies and the

changed NASD-Nasdaq relationship.

Composition and Qualifications of the

Board

Section 4 has been amended to adjust

the overall Board composition to no

fewer than 17 nor more than 27

Governors, including no more than four

staff Governors. This section has also

been amended to require representation

by three additional industry segments: a

national retail firm, a regional retail or

independent financial planning member

firm and a clearing services firm.

Finally, this section has been amended

to allow the Board, by resolution, to

specify the criteria for representatives of

national retail and regional retail or

independent financial planning firms.

Term of Office of Governors

Section 5 has been amended to reflect

the changed NASD-Nasdaq relationship

and to recognize the Board’s discretion

in limiting the term of a second NASD

officer serving as a Governor.

Filing of Vacancies

Section 7 has been amended by

clarifying that the provision applies to

elected Governor positions.

The National Nominating Committee

Section 9 has been amended to

specify that the NNC may support

Governors in contested elections. This

section has also been amended to reflect

the new corporate structure and to

eliminate the requirement that NASDR

and Nasdaq propose two candidates

each to the NASD Board for

appointment to the NNC.

Procedure for Nomination of Governors

Section 10 has been amended to allow

nomination by petition for individual

ballots by three percent of NASD voting

membership, to limit voting members

from endorsing more than one

individual nominee, and to allow

nomination by petition for slates by ten

percent of the NASD voting

membership.

Communication of Views

Section 11 has been amended to detail

the NNC’s limited support of NNC

nominees.

Election of Governors

Section 13 has been amended by

clarifying that the provision applies to

elected Governor positions.

Maintenance of Compositional

Requirements of the Board

Section 14 has been amended by

clarifying that the provision applies to

elected Governor positions.

Article VIII. Officers, Agents, and

Employees

Resignation and Removal of Officers

Section 6 has been amended to allow

the Board to remove an officer of the

NASD by a resolution adopting by a

majority of Governors or a consent

adopted by all Governors.

Article IX. Committees

Appointment

Section 1 has been amended to ensure

that the Industry/Non-Industry balance

of any committee given powers of the

Board reflects the same balance of the

Board.

Executive Committee

Section 4 has been amended to ensure

balanced committee representation and

to reflect the changed NASD-Nasdaq

relationship.

Article X. Compensation of Board and

Committee Members

Section 1 of this Article has been

amended to allow member

reimbursement of expenditures related

to the limited NNC nominee support in

contested elections.

Article XIII. Powers of Board to Impose

Sanctions

Section 1 has been amended to reflect

the new corporate structure, namely, the

inclusion of NASD Dispute Resolution

within the family of companies and the

changed NASD-Nasdaq relationship.

2. Statutory Basis

The NASD believes that the proposed

rule change, as amended, is consistent

with the provisions of Section 15A(b)(4)

of the Act,5 which requires, among other

things, that the Association’s rules must

be designed to assure a fair

representation of its members in the

administration of its affairs. The NASD

believes that the proposed rule change,

as amended, enhances the Association’s

ability to assure fair representation on

the NASD Board of its members.

(i) Proposed Changes to NASD Board

Composition. NASD believes that the

reservation of Board seats for three

additional specific industry segments, a

national retail firm, a regional retail firm

or independent financial planning

member and a clearing firm, assures the

ongoing participation in the governance

of the NASD by these important

segments of NASD membership. The

reclassification of two staff Governor

positions as neutral allows for a smaller,

more efficient Board without

compromising either the fair

representation of NASD members or an

appropriate balance of Industry and

Non-Industry members.

(ii) Proposed Changes to NASD Board

Elections. The NASD believes that the

proposed changes, as amended, to the

election procedures will foster a fair and

vigorous NASD Board election process.

The proposed changes reflect two

enhancements. First, the amendments

set clear and fair thresholds for petitions

by ballot for individuals and slates.

Second, the NNC will be able to respond

in-kind in support of NNC nominated

candidates and, as a result, NASD

members will be better informed about

the candidates and issues arising in

contested elections.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD 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.

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 Action

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 self-regulatory

organization consents, the Commission

will:

A. By order approve the proposed rule

change, as amended, or

B. Institute proceedings to determine

whether the proposed rule change, as

amended, should be disapproved.

13608 Federal Register / Vol. 66, No. 44 / Tuesday, March 6, 2001 / Notices

6 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. 42343

(January 14, 2000), 65 FR 4005.

4Securities Exchange Act Release No. 42418

(February 11, 2000), 65 FR 8461.

5The NYSE and NASD rule proposals were the

result of deliberations by the 431 Committee, which

convenes regularly on margin issues. The

Committee is generally comprised of NYSE and

NASD staff, attorneys from the NYSE’s outside

counsel, the Board of Governors of the Federal

Reserve System, and representatives from several

clearing firms and broker-dealers. See letter from

Alden Adkins, Senior Vice President and General

Counsel, NASD, to Katherine England, Assistant

Director, Division of Market Regulation

(‘‘Division’’), Commission, dated October 3, 2000

(‘‘NASD Response to Comments’’).

6See letter from James Buck, Senior Vice

President, NYSE, to Nancy Sanow, Assistant

Director, Division, Commission, dated September 8,

2000 (‘‘Amendment No. 1 to the NYSE Proposal’’).

The amendment clarified that the proposed ‘‘knows

or has a reasonable basis to believe’’ standard not

only applies in the situation where a customer

seeks to open an account, but also in the case where

he or she seeks to resume day trading in an existing

account. For further discussion of the ‘‘knows or

has a reasonable basis to believe’’ standard, see

infra, Section II, ‘‘Description of the Proposed Rule

Changes.’’

7See letter from Alden Adkins, Senior Vice

President and General Counsel, NASD, to Katherine

England, Assistant Director, Division, Commission,

dated October 3, 2000 (‘‘Amendment No. 1 to the

NASD Proposal’’). The amendment: (1) Deleted a

provision relating to a 90-day period in which a day

trader could be designated as a Pattern Day Trader;

(2) clarified that the proposed ‘‘knows or has a

reasonable basis to believe’’ standard would apply

not only where a customer seeks to open an

account, but also where a customer seeks to resume

day trading in an existing account; (3) clarified that

a two-day funds deposit requirement would apply

only to customers who have been designated

Pattern Day Traders; and (4) extended from 30 days

to six months the proposed period for

implementing the proposed rule change.

8Some commenters sent letters in response to

both the NYSE and NASD rule proposals. The

public files for the NYSE and NASD rule proposals,

including all comment letters received on the

proposals and a List of Commenters that was

prepared by Commission staff, are located at the

Commission’s Public Reference Room, 450 Fifth

Street, NW., Washington, DC 20549–0609. See

infra, footnote 28.

9See letter from James Buck, Senior Vice

President and Secretary, NYSE, to Nancy Sanow,

Assistant Director, Division, Commission, dated

September 20, 2000 (‘‘NYSE Response to

Comments’’).

10NASD Response to Comments.

11Since trading securities on margin permits a

customer to purchase securities valued at an

amount greater than the equity available to his or

her account, an increase in the value of those

securities yields a higher return on equity than is

possible if the size of the customer’s purchases is

limited to his or her available equity. On the other

hand, trading securities on margin also makes it

possible for a customer to generate losses that

exceed his or her available equity.

12 15 U.S.C. 78g(a).

13 12 CFR 220 et seq. Regulation T ‘‘imposes,

among other things, obligations, initial margin

requirements, and payment rules on securities

transactions.’’ 12 CFR 220.1(a).

14The definition of ‘‘margin equity security’’

includes any equity security (as defined in Section

3(a)(11) of the Act) which is registered or has

unlisted trading privileges on a national securities

exchange or the Nasdaq Market. 12 CFR 220.2.

15 12 CFR 220.12(a).

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change, as amended, 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 at

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 File No.

SR–NASD–01–06 and should be

submitted by March 27, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–5329 Filed 3–5–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44009; File Nos. SR–NYSE–

99–47 and SR–NASD–00–03]

Self-Regulatory Organizations; New

York Stock Exchange, Inc., and

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Changes Relating to

Margin Requirements for Day Trading;

Notice of Filing and Order Granting

Accelerated Approval of Amendments

No. 1 to Each Proposed Rule Change

February 27, 2001.

I. Introduction

On December 13, 1999, the New York

Stock Exchange, Inc. (‘‘NYSE’’ 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 proposal to amend NYSE

Rule 431, Margin Requirements. The

proposed rule change would establish

margin requirements for day trading in

customer accounts of the Exchange’s

member organizations. On January 25,

2000, the NYSE rule proposal was

published for public comment in the

Federal Register.3

On January 13, 2000, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’), through its wholly owned

subsidiary, NASD Regulation, Inc., also

filed a proposed rule change to establish

day trading margin requirements by

amending NASD Rule 2520, Margin

Requirements. On February 18, 2000,

the NASD proposal was published for

comment in the Federal Register.4

Although the NYSE and NASD rule

proposals were substantially similar,

they diverged on certain issues.5 To

reconcile the differences between, and

provide for uniform application of, the

two proposals, the NYSE and NASD

each filed amendments to their

respective proposals. The NYSE filed its

amendment on September 8, 2000.6 The

NASD filed its amendment on October

3, 2000.7 The Commission received 49

letters regarding the NASD proposal and

214 letters regarding the NYSE

proposal.8 The NYSE provided a

response to comments on September 20,

2000.9 The NASD filed its response to

comments on October 3, 2000.10 This

order approves the NYSE and NASD

rule change proposals, as amended.

II. Description of the Proposed Rule

Changes

A. Margin Trading and Regulation

Trading securities on margin involves

the use of credit to finance securities

purchases. A margin transaction takes

place where a customer purchases a

security in reliance on an extension of

credit (i.e., a loan) from his or her

broker-dealer. Use of a margin loan

increases both the customer’s potential

return on investment and his or her

financial risk.11

Section 7(a) of the Act grants

authority to the Board of Governors of

the Federal Reserve System (‘‘Federal

Reserve’’) to regulate the use of margin

credit in order to prevent the excessive

use of credit for the purchase or carrying

of securities.12 Pursuant to this

authority, the Federal Reserve

promulgated Regulation T13 to govern

extensions of credit by brokers and

dealers. Regulation T contains ‘‘initial’’

margin requirements, which limit the

amount of credit that can be extended

by a broker-dealer on certain securities

transactions. Briefly, Regulation T

generally allows broker-dealers to