Document ID: SEC-2007-0693-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc
Posted Date: 2007-05-16T04:00Z

[Federal Register: May 16, 2007 (Volume 72, Number 94)]
[Notices]               
[Page 27606-27608]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16my07-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55737; File No. SR-NASD-2006-124]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Amendment Nos. 1 and 2 to, and Order 
Granting Accelerated Approval of, a Proposed Rule Change as Modified by 
Amendment Nos. 1 and 2 To Require the Provision of Certain Information 
About the Securities Investor Protection Corporation to Customers

May 10, 2007.

I. Introduction

    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 the National Association of Securities Dealers, Inc. (``NASD'') 
has filed Amendment Nos. 1 and 2 to the proposed rule change, which, as 
amended, would adopt proposed NASD Rule 2342 to require NASD members, 
except those excluded from membership in the Securities Investor 
Protection Corporation (``SIPC'') or who sell only investments 
ineligible for SIPC protection, to provide new customers, and all 
customers annually, with certain information about SIPC. This order 
provides notice of and solicits comments from interested persons on the 
proposed rule change as modified by Amendment Nos. 1 and 2, and 
approves the proposed rule change as amended on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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II. Description of the Proposal

    NASD filed the proposed rule change with the Securities and 
Exchange Commission (the ``Commission'') on November 9, 2006. The 
Commission published the proposal for comment in the Federal Register 
on December 13, 2006.\3\ The Commission received nine comments in 
response to the Notice.\4\ On February 7, 2007, NASD filed Amendment 
No. 1 to the proposed rule change, which also responded to the 
comments.\5\ The Commission received one comment in response to 
Amendment No. 1.\6\ All of the comments received by the Commission 
regarding the proposed rule change are available on the Commission's 
Internet Web site (http://www.sec.gov/rules/sro.shtml). On April 19, 

2007, NASD filed Amendment No. 2 to the proposed rule change, which 
also responded to the comment on the proposed rule change as modified 
by Amendment No. 1.\7\
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    \3\ See Securities Exchange Act Release No. 54871 (December 5, 
2006), 71 FR 74970 (December 13, 2006) (SR-NASD-2006-124) 
(``Notice'').
    \4\ See e-mail from Frederick G. Ferrara, Chief Compliance 
Office, Panattoni Securities, Inc. dated December 20, 2006 
(``Ferrara 1''); e-mail from Philip C. McMorrow, President, Cantella 
Co., Inc. dated December 21, 2006 (``McMorrow''); e-mail from E.C. 
Blitz dated December 22, 2006 (``Blitz''); letter from Kenneth M. 
Cherrier, Chief Compliance Officer, Fintegra, to Nancy M. Morris, 
Secretary, Commission, dated December 22, 2006 (``Cherrier''); e-
mail from Michael A. Pagano, 1st Global Capital Corp. dated December 
22, 2006 (``Pagano''); e-mail from Christine E. Saccente, Vice 
President, Chief Compliance Officer, Operations Manager, Maxwell 
Noll Inc. dated December 27, 2006 (``Saccente''); e-mail from 
William R. Sykes, Sykes Financial Services LLC dated December 28, 
2006 (``Sykes''); e-mail from John Harris, Chief Executive Officer, 
BondMart, Inc. dated December 30, 2006 (``Harris''); letter from 
Noland Cheng, Chairman, SIFMA Operations Committee, to Nancy M. 
Morris, Secretary, Commission, dated January 12, 2007 (``Cheng'').
    \5\ Amendment No. 1 modified the text of proposed Rule 2342.
    \6\ See e-mail from Frederick G. Ferrara, Chief Compliance 
Officer, Panattoni Securities, Inc. dated February 13, 2007 
(``Ferrara 2'')
    \7\ Amendment No. 2 further modified the text of proposed Rule 
2342 and proposed changing the effective date of the rule change.
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    NASD filed the proposed rule change to adopt proposed NASD Rule 
2342, which would require NASD members to advise all new customers, in 
writing, at the opening of an account, and all customers at least once 
each year that they may obtain information about SIPC, including the 
SIPC brochure, by contacting SIPC, and to provide such customers with 
SIPC's telephone number and Web site address. Amendment No. 1 proposed 
that firms that are excluded from membership in SIPC pursuant to 
Section 3(a)(2)(A)(i) through (iii) of the Securities Investor 
Protection Act of 1970 (``SIPA'') and that are not SIPC members be 
exempt from the requirements of proposed Rule 2342. Amendment No. 2 
proposed to exempt firms whose business consists exclusively of the 
sale of investments that are ineligible for SIPC protection from the 
requirements of proposed Rule 2342. Below is the text of the proposed 
rule change, as modified by Amendment Nos. 1 and 2. Proposed new 
language is in italics.

2000. BUSINESS CONDUCT

* * * * *

2300. Transactions with Customers

* * * * *

2342. SIPC Information

    All members, except those members: (a) that pursuant to Section 
3(a)(2)(A)(i) through (iii) of the Securities Investor Protection Act 
of 1970 (SIPA) are excluded from membership in the Securities Investor 
Protection Corporation (SIPC) and that are not SIPC members; and (b) 
whose business consists exclusively of the sale of investments that are 
ineligible for SIPC protection, shall advise all new customers, in 
writing, at the opening of an account, that they may obtain information 
about SIPC, including the SIPC brochure, by contacting SIPC, and also 
shall provide the Web site address and telephone number of SIPC. In 
addition, such members shall provide all customers with the same 
information, in writing, at least once each year. In cases where both 
an introducing firm and clearing firm service an account, the firms may 
assign these requirements to one of the firms.

III. Summary of Comments on the Proposal and Amendment No. 1

    Two commenters supported the proposed rule change. One believed 
that the disclosure required by proposed NASD Rule 2342 would remind 
clients that they are buying a product that is not directly 
underwritten or supported by a bank or covered by the Federal Deposit 
Insurance Corporation (``FDIC'').\8\ Another believed that public 
customers would benefit from broader dissemination of information about 
SIPC.\9\
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    \8\ See Cherrier.
    \9\ See Cheng.
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    Seven commenters generally opposed the proposed rule change.\10\ 
Five questioned the need for disseminating the information that would 
be required by proposed Rule 2342.\11\ Two suggested that the proposed 
rule be revised to mandate that firms include on their Web sites a link 
to SIPC's Web site.\12\ One questioned whether investors need, or are 
interested in, information about SIPC, suggested that investors are 
unlikely to read the proposed disclosure, and questioned the cost of 
implementing it.\13\ Another stated that customers will be made

[[Page 27607]]

aware of SIPC at such time as they need the coverage.\14\
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    \10\ See Ferrara 1; McMorrow; Blitz; Pagano; Saccente; Sykes; 
Harris.
    \11\ See McMorrow; Blitz; Pagano; Saccente; Sykes; Harris.
    \12\ See Pagano; Saccente.
    \13\ See Pagano.
    \14\ See Sykes.
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    In its response to these comments included with Amendment No. 1, 
NASD stated that, as noted in its initial rule filing, the genesis of 
the proposal was a U.S. General Accounting Office (``GAO'') \15\ report 
in which the GAO made recommendations to the Commission and SIPC about 
ways to improve the information available to the public about SIPC and 
SIPA.\16\ Among other things, the GAO recommended that self-regulatory 
organizations (``SROs'') explore ways to encourage broader 
dissemination of the SIPC brochure to customers so that they can become 
more aware of the scope of SIPA's coverage. NASD further stated that, 
after consulting with its members regarding the costs of providing 
customers with a copy of the SIPC brochure, NASD determined that the 
most cost-effective way of making customers aware of the SIPC brochure 
was to provide them with the information they would need to obtain a 
copy of the brochure, i.e., by giving them SIPC's address and telephone 
number so they could call or write SIPC to order a copy of the 
brochure, and by giving them SIPC's Web site address so they could read 
the SIPC brochure online. NASD believes that requiring firms to provide 
customers with SIPC's address, telephone number and Web site at account 
opening and yearly thereafter would help to further educate customers 
regarding SIPC and encourage customers to review the SIPC brochure.
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    \15\ The GAO has since been renamed the Government 
Accountability Office.
    \16\ See GAO, Securities Investor Protection: Steps Needed to 
Better Disclose SIPC Policies to Investors, GAO-01-653 (May 25, 
2001).
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    Two commenters believed that introducing firms should not be 
subject to proposed Rule 2342.\17\ In response, NASD stated that it 
believed these commenters' concerns were addressed by a provision in 
the proposed rule that would allow firms, where both an introducing 
firm and clearing firm service an account, to assign the requirements 
of proposed Rule 2342 to one of the firms.
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    \17\ See Blitz; Pagano.
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    Five commenters believed that, as initially proposed, Rule 2342 
would apply too broadly. One of these commenters believed that 
institutional customers should be exempt from the proposed rule.\18\ 
Two of these commenters believed that NASD members that are exempt from 
membership in SIPC or from carrying SIPC coverage should be exempt from 
the proposed rule.\19\ Another believed that firms selling only 
investment products that are ineligible for SIPC protection should be 
exempt from the proposed rule.\20\
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    \18\ See Cheng.
    \19\ See Cherrier; Sykes.
    \20\ See Ferrara 1.
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    In response to these comments, NASD stated, ``SIPA excludes certain 
categories of registered brokers and dealers from membership in SIPC, 
including `persons whose business as a broker or dealer consists 
exclusively of * * * the distribution of shares of registered open end 
investment companies or unit investment trusts * * * the sale of 
variable annuities * * * the business of insurance, or * * * the 
business of rendering investment advisory services to one or more 
registered investment companies or insurance company separate 
accounts.' '' \21\ NASD further stated that SIPA provides that all 
other persons registered as brokers or dealers under Section 15(b) of 
the Securities Exchange Act of 1934 \22\ are required to be members of 
SIPC. NASD believed that firms that are required to be SIPC members 
should also be required to make the disclosures required by proposed 
NASD Rule 2342, regardless of the products currently being sold. 
Therefore, NASD did not propose to exempt any SIPC members from the 
requirements of proposed NASD Rule 2342.
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    \21\ See Amendment No. 1 (citing 15 U.S.C. 78ccc(a)(2)(A)).
    \22\ 15 U.S.C. 78o(b).
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    However, NASD agreed with the commenters who believed that NASD 
members that are excluded from membership in SIPC should not be subject 
to the proposed rule, and, in Amendment No. 1, proposed to exclude from 
the requirements of proposed NASD Rule 2342 any member that is excluded 
from membership in SIPC.
    One commenter believed that institutional customer accounts should 
be exempt from the proposed rule's disclosure requirements on the 
grounds that institutional customers are sophisticated investors that 
are well aware of SIPC and the protections it affords.\23\ This 
commenter stated that institutional customers generally settle 
transactions in delivery versus payment/receive versus payment (``DVP/
RVP'') accounts, and that most of them were likely to opt out of 
receiving quarterly customer account statements under NASD Rule 2340. 
This commenter also stated that receiving the disclosures that would be 
required by proposed Rule 2342 annually from each broker-dealer through 
which an institution executes transactions would create a flood of 
unnecessary and redundant disclosures that institutional customers 
would simply discard.
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    \23\ See Cheng.
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    In response, NASD stated that it believed the benefit to 
institutional investors of receiving the SIPC disclosures at account 
opening and yearly thereafter outweighs any inconvenience that might be 
incurred. NASD stated that although many institutional investors are 
likely to be sophisticated investors, there are those that are not, and 
that, to the extent the required disclosures may make institutional 
investors more aware of SIPC and the protections it affords, NASD 
believed that the dissemination of the required information would be 
worthwhile. Therefore, NASD determined not to exempt institutional 
investors from the requirements of proposed Rule 2342.
    After NASD filed Amendment No. 1, one commenter submitted a second 
letter, in which he further contended that firms that are SIPC members 
but that only sell investment products that are ineligible for SIPC 
protection may violate Article 11, Section 4(g)(2) of the SIPC By-Laws 
(Advertisement of Membership) if they are not exempt from the 
requirements of proposed Rule 2342.\24\ In response to this comment, 
NASD agreed that proposed Rule 2342 should not require members whose 
business consists exclusively of the sale of investments that are 
ineligible for SIPC protection to distribute SIPC's contact information 
to their customers pursuant to proposed Rule 2342. Accordingly, in 
Amendment No. 2, NASD modified proposed Rule 2342 to exempt from the 
rule's requirements members whose business consists exclusively of the 
sale of investments that are ineligible for SIPC protection.
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    \24\ See Ferrara 2.
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IV. Discussion and Commission's Findings

    NASD has requested that the Commission find good cause pursuant to 
Section 19(b)(2) of the Act \25\ for approving the proposed rule change 
prior to the 30th day after publication in the Federal Register. NASD 
also proposed an effective date of 180 days following Commission 
approval, in order to give member firms sufficient time to make changes 
to their customer documentation and systems. After careful 
consideration, the Commission finds that the proposed rule change is 
consistent with the Act, and in particular, with Section 15A(b)(6) of 
the

[[Page 27608]]

Act,\26\ which provides, among other things, that NASD rules must be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and in general, to protect investors and the 
public interest.\27\ The Commission believes that NASD has adequately 
responded to concerns about the proposed rule change raised by 
commenters, and that the proposed rule change is consistent with the 
provision of the Exchange Act noted above. In particular, proposed NASD 
Rule 2342 should help to improve investors' awareness of SIPC's 
policies and practices, and the scope of coverage available under SIPA.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    Pursuant to Section 19(b)(2) of the Act,\28\ the Commission finds 
good cause for approving the proposed rule change before the thirtieth 
day after the date of publication of notice of filing thereof. 
Accelerating approval and delaying the effective date of the proposed 
rule change will give NASD additional time to notify its members about 
the requirements of the proposed rule and help to ensure that firms 
have sufficient time to efficiently make the changes to their customer 
documentation and systems needed to comply with the rule.
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    \28\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment Nos. 1 and 2, 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 Number SR-NASD-2006-124 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-124. 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 the File 
Number SR-NASD-2006-124 and should be submitted on or before June 6, 
2007.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASD-2006-124), as modified 
by Amendment Nos. 1 and 2, be, and it here is, approved on an 
accelerated basis, and shall be effective 180 days following the date 
of this order.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-9433 Filed 5-15-07; 8:45 am]

BILLING CODE 8010-01-P