Document ID: SEC-2006-0439-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-04-04T04:00Z

[Federal Register: April 4, 2006 (Volume 71, Number 64)]
[Notices]               
[Page 16849-16850]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ap06-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53562; File No. SR-NASD-2006-005]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Expand the 
Scope of NASD Rule 2440 and Interpretive Material 2440 Relating to Fair 
Prices and Commissions To Apply to All Securities Transactions

March 29, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 19, 2006, 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 NASD. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes to expand the scope of NASD Rule 2440 (Fair Prices 
and Commissions) and Interpretive Material (``IM'') 2440 relating to 
fair prices and commissions to apply to all securities transactions, 
whether executed over-the-counter (``OTC'') or on an exchange. The text 
of the proposed rule change is below. Proposed new language is in 
italics; proposed deletions are in brackets.

2440. Fair Prices and Commissions

    In [''over-the-counter''] securities transactions, whether in 
``listed'' or ``unlisted'' securities, if a member buys for his own 
account from his customer, or sells for his own account to his 
customer, he shall buy or sell at a price which is fair, taking into 
consideration all relevant circumstances, including market conditions 
with respect to such security at the time of the transaction, the 
expense involved, and the fact that he is entitled to a profit; and if 
he acts as agent for his customer in any such transaction, he shall not 
charge his customer more than a fair commission or service charge, 
taking into consideration all relevant circumstances, including market 
conditions with respect to such security at the time of the 
transaction, the expense of executing the order and the value of any 
service he may have rendered by reason of his experience in and 
knowledge of such security and the market therefor.

IM-2440. Mark-Up Policy

    The question of fair mark-ups or spreads is one which has been 
raised from the earliest days of the Association. No definitive answer 
can be given and no interpretation can be all-inclusive for the obvious 
reason that what might be considered fair in one transaction could be 
unfair in another transaction because of different circumstances. In 
1943, the Association's Board adopted what has become known as the ``5% 
Policy'' to be applied to transactions executed for customers. It was 
based upon studies demonstrating that the large majority of customer 
transactions were effected at a mark-up of 5% or less. The Policy has 
been reviewed by the Board of Governors on numerous occasions and each 
time the Board has reaffirmed the philosophy expressed in 1943. 
Pursuant thereto, and in accordance with Article VII, Section 1(a)(ii) 
of the By-Laws, the Board has adopted the following interpretation 
under Rule 2440.
    It shall be deemed a violation of Rule 2110 and Rule 2440 for a 
member to enter into any transaction with a customer in any security at 
any price not reasonably related to the current market price of the 
security or to charge a commission which is not reasonable.
    (a) through (b) No change.
    (c) Transactions to Which the Policy is Applicable.
    The policy applies to all securities[ handled in the over-the-
counter market], whether oil royalties or any other security, in the 
following types of transactions:
    (1) through (5) No change.
    (d) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. 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
    NASD Rule 2440 generally requires NASD members, in any OTC 
transaction with or for a customer, to charge only fair commissions or 
charges, and to buy or sell securities only at fair prices.\3\ 
Specifically, NASD Rule 2440 provides, in part, that a member is 
required to buy or sell a security at a fair price to customers, 
``taking into consideration all relevant circumstances, including 
market conditions with respect to such security at the time of the 
transaction, the expense involved, and the fact that he is entitled to 
a profit * * *'' and if the member acts as agent, the member will not 
``charge his customer more than a fair commission or service charge, 
taking into consideration all relevant circumstances, including market 
conditions with respect to such security at the time of the 
transaction, the expense of executing the order and the value of any 
service he may have rendered by reason of his experience in and 
knowledge of such security and the market therefore.'' The related 
Mark-Up Policy, IM-2440, provides additional guidance on mark-ups and 
fair pricing of securities transactions with customers and states that 
it is inconsistent with just and equitable principles of trade under 
NASD Rule 2110 for a member to enter into any transaction with a 
customer in any security at any price not reasonably related to the 
current market price of the security or to charge a commission that is 
not reasonable.
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    \3\ See NASD Rule 2440.
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    NASD Rule 2440 and IM-2440 apply only to OTC transactions. There is 
no NASD rule that specifically addresses commissions or mark-ups (and 
mark-downs) for non-OTC transactions (i.e., exchange transactions). 
Although the language of NASD Rule 2440 and IM-2440 specifically limits 
their application

[[Page 16850]]

to OTC transactions, NASD has taken the position that a broker-dealer 
charging excessive compensation in a transaction with a customer 
executed on an exchange violates NASD Rule 2110, which requires that a 
member must, in the conduct of its business, ``observe high standards 
of commercial honor and just and equitable principles of trade.'' \4\
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    \4\ See NASD Rule 2110. See also Atlanta-One, Inc. v. SEC, 100 
F.3d 105, 107 n.1 (9th Cir. 1996), which states ``[a]lthough [Rule 
2440 and IM-2440] deals with the appropriate level of compensation 
in retail transactions in the over-the-counter market, the [rule] 
provides guidance by analogy as to appropriate commissions for 
exchange transactions.''
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    To further clarify members' obligations to charge fair commissions 
and mark-ups (or mark-downs), NASD is proposing to amend NASD Rule 2440 
and IM-2440 to apply these provisions expressly to all securities 
transactions, whether they occur in the OTC market or on an 
exchange.\5\ NASD believes that commission and mark-up (mark-down) 
requirements should be uniform and not vary based solely on where the 
transaction occurs. Therefore, a member that charges unfair and 
excessive commissions or mark-ups (mark-downs) in any customer 
transaction, whether it is an OTC or exchange transaction, would 
violate NASD Rule 2440 and IM-2440.\6\
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    \5\ Currently, NASD Rule 2440 and IM-2440 do not apply to 
transactions in municipal securities and exempt securities, and this 
would not be changed by the proposal. See NASD Rule 0116. See also 
Sections 3(a)(12) and 3(a)(29) of the Act. It is important to note, 
however, that Municipal Securities Rulemaking Board (``MSRB'') Rule 
G-30, Prices and Commissions, applies to transactions in municipal 
securities, and requires a municipal securities dealer engaging in a 
transaction with a customer, as a principal, to buy or sell 
securities at an aggregate price that is ``fair and reasonable,'' 
or, as an agent, to charge a commission or service charge that is 
not more than a ``fair and reasonable amount.'' See MSRB Rule G-30.
    \6\ The proposed amendments would expand the scope of NASD Rule 
2440 and IM-2440 to include all securities transactions with or for 
a customer only. The proposal would not alter the fact that NASD 
Rule 2440 and IM-2440 do not apply to member-to-member transactions.
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    Should the Commission approve the proposed rule change, NASD will 
implement the proposed rule change upon SEC approval. NASD will 
announce the approval in a Notice to Members to be published no later 
than 30 days following Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\7\ which requires, among 
other things, that NASD rules be designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and, in general, protect investors and the public interest. 
NASD believes that the proposed rule change will deter members from 
charging their customers unfair, unreasonable, or excessive mark-ups or 
commissions for effecting securities transactions, and will thereby 
promote investor protection.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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, 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 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 NASD consents, the Commission will:
    (A) By order approve 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-NASD-2006-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2006-005. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 also will be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NASD-2006-005 and should be submitted on or before April 25, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-4822 Filed 4-3-06; 8:45 am]

BILLING CODE 8010-01-P