Document ID: SEC-2006-1543-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of  Securities Dealers, Inc.
Posted Date: 2006-11-29T05:00Z

[Federal Register: November 29, 2006 (Volume 71, Number 229)]
[Notices]               
[Page 69161-69162]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no06-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54811; File No. SR-NASD-2006-066]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 
Thereto To Allow Certain Institutional Customers To Elect Not To 
Receive Account Statements

November 22, 2006.
    On May 23, 2006, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed amendment to NASD rule 2340 (Customer Account 
Statements). On August 17, 2006, NASD filed Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as amended by 
Amendment No. 1, was published for comment in the Federal Register on 
October 16, 2006.\4\ The Commission received one comment on the 
proposal.\5\ This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, NASD proposed to partially amend the 
text of proposed amended Rule 2340.
    \4\ See Exchange Act Release No. 54566 (Oct. 3, 2006), 71 FR 
60784 (Oct. 16, 2006).
    \5\ See letter from Noland Cheng, Chairman, Operations 
Committee, Securities Industry and Financial Markets Association 
(``SIFMA''), to Nancy M. Morris, Secretary, Commission, dated 
November 3, 2006 (``SIFMA letter'') (available for review on the 
Commission's Web site at http://www.sec.gov/comments/sr-nasd-2006-066/nasd2006066-1.pdf
).

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[[Page 69162]]

I. Description

    The proposed amendment to NASD Rule 2340 would allow institutional 
customers with Delivery versus Payment/Receive versus Payment (``DVP/
RVP'') accounts to elect not to receive quarterly account 
statements.\6\ A DVP/RVP account is an arrangement whereby payment for 
securities purchased is made to the selling customer's agent/and or 
delivery of securities sold is made to the buying customer's agent in 
exchange for payment at the time of settlement, usually in the form of 
cash.
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    \6\ The proposed rule change is similar to a rule change 
proposed by the New York Stock Exchange, Inc. (now known as New York 
Stock Exchange LLC). See Securities Exchange Act Release No. 53826 
(May 18, 2006), 71 FR 30211 (May 25, 2006).
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    Rule 2340, in pertinent part, requires any member that conducts a 
general securities business and also carries customer accounts or holds 
customer funds or securities to send account statements to customers at 
least once each calendar quarter. The statement of account must contain 
a description of any securities positions, money balances, or account 
activity, and must be sent to each customer whose account had a 
security position, money balance, or account activity during the time 
since the last statement was sent.
    The proposed amendment would provide relief from this requirement 
with regard to customer accounts that are carried solely for the 
purpose of DVP/RVP transactions. NASD states that account statements 
for DVP/RVP accounts (chiefly institutional accounts) generally do not 
reflect any cash balance or security position at the end of a quarter, 
and that DVP/RVP customers generally rely on trade runs or customer 
confirmations issued pursuant to Rule 10b-10 under the Exchange Act for 
transaction-related information.
    The proposed amendment would relieve members from the obligation to 
send quarterly statements to customers with DVP/RVP accounts if: (1) 
The customer's account is carried solely for the purpose of execution 
on a DVP/RVP basis; (2) all transactions in the account are handled on 
a DVP/RVP basis in conformity with Rule 11860;\7\ (3) there are no 
securities or cash positions in the account at the end of the quarter 
(other than positions of a temporary nature, such as those arising from 
fails to receive or deliver, errors, questioned trades, dividend or 
bond interest entries and other similar transactions); (4) the customer 
consents to the suspension in writing and the member maintains such 
consents in a manner consistent with NASD Rule 3110 and Rule 17a-4 
under the Exchange Act;\8\ (5) the member undertakes to provide any 
particular statement or statements to the customer promptly upon 
request; and (6) the member undertakes to promptly reinstate the 
delivery of such statements to the customer upon request. The proposed 
rule change specifies that Rule 2340 does not qualify or condition the 
obligations of a member under Rule 15c3-2 under the Exchange Act 
concerning quarterly notices of free credit balances on statements.\9\ 
The proposed rule change would also define ``DVP/RVP account'' for 
purposes of Rule 2340.\10\ Finally, the proposed rule change includes a 
technical amendment that would replace the reference to ``the 
Association'' in paragraph (e) of Rule 2340 with ``NASD.''
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    \7\ Prior to accepting an order in a DVP/RVP account, a member 
must comply with Rule 11860, which requires, among other things, 
that the member obtain certain information from the customer, 
including the name and address of the agent and the account number 
of the customer on file with the agent.
    \8\ Under NASD Rule 3110(a), NASD members are, among other 
things, required to make and preserve books and records as 
prescribed by Rule 17a-3 under the Exchange Act. Rule 3110(a) also 
states that the recordkeeping format, medium, and retention period 
must comply with Rule 17a-4 under the Exchange Act. Rule 17a-4 
specifies the manner in which broker-dealers must maintain the 
records created in accordance with Rule 17a-3, and certain other 
records produced by broker-dealers, and the required retention 
periods for these records.
    \9\ Rule 15c3-2 under the Exchange Act requires broker-dealers 
to provide each of their customers for whom a free credit balance is 
carried, not less frequently than once every three months, a written 
statement informing the customer of the amount due to the customer, 
and written notice that the funds are not segregated and may be used 
in the broker-dealer's business operations, and that the funds are 
payable on the customer's demand.
    \10\ Proposed Rule 2340(d)(6) would define a ``DVP/RVP account'' 
as ``an arrangement whereby payment for securities purchased is made 
to the selling customer's agent and/or delivery of securities sold 
is made to the buying customer's agent in exchange for payment at 
time of settlement, usually in the form of cash.''
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II. Summary of Comments

    The Commission received one comment on the proposal, which was 
supportive, did not suggest any changes to the proposal, and did not 
require a response from NASD.\11\
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    \11\ See SIFMA letter, footnote 5, supra.
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III. Discussion and Findings

    The Commission finds that the proposed rule change is consistent 
with the Act, and in particular, with section 15A(b)(6) of the Act,\12\ 
which requires, among other things, that NASD rules 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 national 
market system, and in general, to protect investors and the public 
interest. The Commission believes that the proposed rule change, as 
amended, should remove impediments to and perfect the mechanisms of a 
free and open market and national market system by removing an 
unnecessary and potentially costly obligation on firms to deliver 
quarterly account statements to DVP/RVP customers. At the same time, 
the proposal maintains certain investor protections (i.e., requiring 
NASD members to obtain affirmative consent to the suspension of 
quarterly account statements, preserving the ability of customers to 
obtain particular statements upon request and to resume receipt of 
statements promptly upon request, and precluding member organizations 
from unilaterally terminating delivery of such statements). The 
Commission therefore believes the proposal is consistent with the 
Exchange Act.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\13\ that the proposed rule change (SR-NASD-2006-066) be, and hereby 
is, approved,\14\ effective immediately.\15\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \15\ NASD initially requested that the effective date of the 
proposed rule change be 30 days following NASD's publication, within 
60 days of the Commission's approval of the rule change, of a Notice 
to Members announcing the rule change. NASD withdrew its request to 
delay effectiveness of the proposal in a telephone conversation 
between Shirley Weiss, Associate General Counsel, NASD, and Brice 
Prince, Special Counsel, Division of Market Regulation, Commission, 
on November 21, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-20217 Filed 11-28-06; 8:45 am]

BILLING CODE 8011-01-P