Document ID: SEC-2006-0250-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Security Dealers, Inc.
Posted Date: 2006-02-28T05:00Z

[Federal Register: February 28, 2006 (Volume 71, Number 39)]
[Notices]               
[Page 10090-10093]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28fe06-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53333; File No. SR-NASD-2006-011]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to Principal Pre-Use Approval of Member 
Correspondence to 25 or More Existing Retail Customers Within a 30 
Calendar-Day Period

February 17, 2006.
    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 January 27, 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. On 
February 13, 2006, NASD filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 to SR-NASD-2006-011 replaced and superseded 
the original rule filing filed on January 27, 2006 in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rule 2211 to require principal pre-
use approval of member correspondence to 25 or more existing retail 
customers within a 30 calendar-day period. Below is the text of the 
proposed rule change. Proposed new language is italicized; proposed 
deletions are in [brackets].
2211. Institutional Sales Material and Correspondence
    (a) No Change.
    (b) Approval and Recordkeeping
    (1) Registered Principal Approval
    (A) Correspondence. Correspondence need not be approved by a 
registered principal prior to use, [but] unless such correspondence is 
distributed to 25 or more existing retail customers within any 30 
calendar-day period and is not solely and exclusively clerical or 
ministerial in nature. All correspondence is subject to the supervision 
and review requirements of Rule 3010(d).
    (B) No Change.
    (2) No Change.
    (c) through (e) 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 and 
discussed any comments it received on 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

Definition of ``Correspondence''

    In 2003, the SEC approved as part of NASD's modernization of its 
advertising rules the creation of new Rule 2211, which included an 
amended definition of ``correspondence.'' The amended definition of 
correspondence includes any written letter or electronic mail message 
distributed by a firm to one or more of its existing retail customers 
and to fewer than 25 prospective retail customers within a 30 calendar-
day period.\4\ Previously, ``correspondence'' included any written or 
electronic communication prepared for delivery to a single current or 
prospective customer, and not for dissemination to multiple customers 
or the general public.
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    \4\ NASD has clarified that, for purposes of its rules governing 
member communications with the public, NASD views instant messaging 
in the same manner in which it views traditional electronic mail 
messages. Accordingly, instant messaging may qualify as 
correspondence or sales literature, depending upon the facts and 
circumstances. See Notice to Members 03-33 (July 2003).
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    The definition of correspondence is significant in several 
respects. Firms generally are not required to have a registered 
principal approve correspondence prior to use, nor are they required to 
file correspondence with the NASD Advertising Regulation

[[Page 10091]]

Department (``Department'').\5\ In addition, correspondence is subject 
to fewer content restrictions than advertisements and sales literature.
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    \5\ NASD Rule 3010(d)(2) requires each member to develop written 
procedures that are appropriate to its business, size, structure, 
and customers for the review of incoming and outgoing correspondence 
with the public relating to its investment banking or securities 
business. Where such procedures do not require review of all 
correspondence prior to use or distribution, they must include 
provision for the education and training of associated persons as to 
the firm's procedures governing correspondence, documentation of 
such education and training, and surveillance and follow-up to 
ensure that such procedures are implemented and adhered to.
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    NASD amended the definition in order to provide firms with more 
flexibility regarding the supervision of certain e-mails and form 
letters. However, NASD understands that many firms continue to require 
registered principal pre-use approval of some correspondence.
    NASD has found that some member correspondence to multiple existing 
customers raises the same regulatory concerns as member advertisements 
and sales literature, despite the fact that it is not required to be 
filed with NASD or approved by a principal prior to use. In contrast, 
had these types of form letters been sent to at least 25 prospective 
retail customers, such correspondence would have required both 
registered principal pre-use approval and filing with the Department. 
As a result, NASD believes it no longer should apply the principal pre-
use approval requirement differently to non-clerical correspondence 
sent to prospective and existing retail customers.

Proposed Amendment

    NASD is proposing to amend Rule 2211 to require registered 
principal pre-use approval of any non-clerical correspondence sent to 
25 or more existing retail customers within any 30 calendar-day period. 
Non-clerical correspondence with such a wide distribution often will 
constitute a solicitation to purchase or sell a security or to use a 
brokerage service. Registered principal pre-use approval would better 
ensure that this material complies with applicable standards of the 
advertising rules before reaching current or prospective customers. 
Since many firms already require registered principal pre-use approval 
of such correspondence, NASD believes the benefits of the proposed 
requirement outweigh any additional burden on members.
    NASD does not propose to require that this correspondence be filed 
with the Department or that it be subject to all of the content 
standards of the advertising rules. NASD recognizes that correspondence 
with existing retail customers may not require the same level of 
investor protection as correspondence to prospective retail customers. 
Of course, a firm may choose to file this correspondence with the 
Department to better ensure that it complies with applicable standards, 
particularly when the correspondence promotes the firm's products or 
services.
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 30 days following 
Commission approval. The effective date will be 90 days following 
publication of the Notice to Members announcing 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,\6\ which requires, among 
other things, that NASD rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that requiring that a principal approve 
prior to use any non-clerical correspondence that is sent to 25 or more 
existing retail customers will protect investors and the public 
interest. In particular, this proposed rule change will help prevent 
fraudulent or misleading communications from reaching a widespread 
retail audience by requiring principals to review non-clerical 
correspondence sent to a large number of investors prior to use.
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    \6\ 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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The proposed rule change was published for comment in NASD Notice 
to Members 05-27 (April 2005). NASD received eleven comments in 
response to the Notice.\7\
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    \7\ Letter from Association of Registration Management (``ARM'') 
dated May 25, 2005; Letter from Cutter & Company, Inc. (``Cutter''), 
dated May 27, 2005; Letter from Frank Dealy dated April 21, 2005; 
Letter from Edward D. Jones & Co., LP (``Edward Jones''), dated May 
27, 2005; Letter from the Financial Services Institute (``FSI'') 
dated May 27, 2005; Letter from Fintegra, LLC (``Fintegra''), dated 
April 14, 2005; Letter from Investment Company Institute (``ICI'') 
dated May 27, 2005; Letter from Jefferson Pilot Securities 
Corporation (``Jefferson Pilot'') dated May 27, 2005; Letter from 
Krieger-Campbell, Incorporated (``Krieger-Campbell'') dated May 20, 
2005; Letter from UBS Financial Services Inc. (``UBS'') dated May 
27, 2005; and Letter from Wulff, Hansen & Co. (``Wulff Hansen'') 
dated April 14, 2005.
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    There were two primary comments on the proposal. First, several 
commenters inquired as to what type of principal registration would be 
required to approve correspondence prior to use. Second, a number of 
commenters argued that the proposal should not require principal pre-
use approval for correspondence that is solely clerical or ministerial 
in nature.\8\ There were also a number of other miscellaneous questions 
and comments regarding the proposal.
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    \8\ The version of the proposed rule change that was published 
for comment in Notice to Members 05-27 did not contain an exception 
from the principal pre-use approval requirement for correspondence 
that is solely and exclusively clerical or ministerial in nature.
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Principal Qualifications

    The proposed rule would require a registered principal to approve 
prior to use any correspondence that is distributed to 25 or more 
existing retail customers within any 30 calendar-day period. Notice to 
Members 05-27 did not indicate, however, whether a particular principal 
registration would be required in order to fulfill this duty. ARM, 
Edward Jones and UBS inquired as to whether, among other principal 
exams, a Limited Principal--General Securities Sales Supervisor 
(formerly Series 8 and now Series 9/10) could perform this function 
under the proposed rule. In particular, ARM and UBS noted that NASD 
does not accept the General Securities Sales Supervisor exam as 
satisfying the principal qualification requirement for approval of 
advertisements under Rule 2210.\9\
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    \9\ See Rule 1022(g)(2)(C)(iii).
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    Commenters also noted that while branch managers often possess only 
the General Securities Sales Supervisors principal registration and are 
not registered as General Securities Principals (Series 24), they 
typically supervise correspondence as required by Rule 3010. Commenters 
argued that a branch manager is best qualified to supervise 
correspondence at the branch office level and that to require these 
branch managers to obtain a General Securities Principal registration 
would be enormously burdensome.
    NASD agrees that the General Securities Sales Supervisor 
registration category is sufficient to meet the proposal's requirements 
for pre-use

[[Page 10092]]

approval of correspondence sent to 25 or more existing retail customers 
within a 30 calendar-day period. NASD already interprets Rule 3010 to 
permit General Securities Sales Supervisors to supervise correspondence 
in accordance with that rule's provisions. Accordingly, NASD would 
interpret the proposed rule change to permit a General Securities Sales 
Supervisor (formerly Series 8 and now Series 9/10) to approve 
correspondence prior to use.

Administrative and Clerical Correspondence

    Edward Jones and Wulff Hansen both commented that, if NASD intends 
to go forward with the proposal, the principal pre-use approval 
requirement should not apply to correspondence that is solely of an 
administrative, service or clerical nature. Similarly, the FSI and 
Jefferson Pilot argue that the principal pre-use approval requirements 
should not apply to correspondence unless it contains a recommendation 
to buy or sell a security or service. In support of this change, 
commenters argued that there is little need for heightened investor 
protection measures when correspondence concerns such matters as 
reorganization notices, stock dividend details, notices of office 
closings or extended hours, and the like. Edward Jones pointed out that 
the New York Stock Exchange employs a content-oriented definition of 
``sales literature.''\10\ Wulff Hansen also noted that NASD Rule 1060 
does not require registration for persons associated with a member 
whose functions are solely and exclusively clerical and ministerial.
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    \10\ See NYSE Rule 472.10(5) (defining sales literature as any 
written or electronic communication ``discussing or promoting the 
products, services, and facilities offered by a member or member 
organization'').
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    NASD agrees that correspondence the content of which is solely 
clerical or ministerial does not raise the same investor protection 
issues as correspondence that is non-administrative in nature, such as 
correspondence that promotes a member product or service. Accordingly, 
NASD has modified the proposed rule language to exclude from the 
principal pre-use approval requirement correspondence that is solely 
and exclusively clerical or ministerial in nature.

Other Comments

    The ICI supported the proposal on the ground that it strikes a 
reasonable regulatory balance by requiring principal approval for some 
correspondence without placing an undue burden on members by requiring 
the filing of correspondence with the Department. Fintegra noted that 
it supports the proposal as long as members are not required to file 
correspondence with NASD. NASD confirms that the proposal would not 
impose new filing requirements for correspondence.
    Cutter noted that NASD has taken the position under Rule 2711 that 
a communication that is distributed to 15 or more persons and includes 
an analysis of equity securities of individual companies or industries, 
and that provides information reasonably sufficient upon which to base 
an investment decision, is deemed to be a research report. Cutter 
argued that, if the proposed principal pre-use approval requirement is 
adopted, the numerical thresholds for determining when principal pre-
use approval is required under Rule 2211 and when a communication is 
deemed a research report under Rule 2711 should be the same (i.e., 25 
or more persons).
    While NASD recognizes different numerical thresholds for different 
rules may present a compliance challenge, Rule 2211 serves a different 
purpose than Rule 2711. In addition, the 15-person threshold under Rule 
2711 was derived from SEC Regulation Analyst Certification, which also 
deals with research reports. Moreover, NASD has not proposed to amend 
Rule 2711 as part of this rule filing.
    Cutter, the FSI and Jefferson Pilot all commented that, if there is 
a problem with misleading correspondence to retail customers, a better 
approach would be to require heightened supervision for firms that have 
a history of correspondence compliance problems. The FSI argued that 
the burdens that the proposal would impose on members do not justify 
its adoption. Similarly, Krieger-Campbell commented that the proposal 
could have unintended consequences, such as holding up member 
communications regarding a Regulation D private placement offering. 
Additionally, Edward Jones and Jefferson Pilot argued that the current 
correspondence definition has not been in place long enough to justify 
requiring principal pre-use approval for correspondence sent to 25 or 
more existing retail customers.
    While NASD recognizes that there are other possible approaches to 
address potentially misleading correspondence and that the proposal may 
impose additional compliance costs on some members, NASD believes that 
requiring principal pre-use approval of correspondence sent to 25 or 
more existing retail customers is a more proactive and effective means 
of preventing the distribution of potentially misleading correspondence 
to large numbers of customers. In addition, the current rule and the 
heightened supervision approach do not address the investor protection 
dichotomy that exists between current and prospective retail customers.
    The FSI and Jefferson Pilot argued that the proposal would inhibit 
the transmission of time-sensitive e-mails to existing retail 
customers, such as those alerting customers of significant market news. 
NASD believes that these types of communications, which often urge 
customers to buy or sell securities on a short-term basis, are 
precisely the types of communications that require principal review. 
Accordingly, NASD does not favor amending the proposal for this reason.
    The FSI also states in its comment letter that ``NASD staff has 
advised the Institute that they will not interpret the proposed rule as 
written'' and instead will apply the rule only to form letters and 
other correspondence with identical content sent by one or more 
registered representatives in the same office. This comment is 
misguided. The rule proposal is intended to apply to any non-clerical 
correspondence, including emails, sent to 25 or more existing customers 
over a 30-calendar-day period, and NASD intends to enforce the rule 
accordingly if approved in its current form.

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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

[[Page 10093]]

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-2006-011 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-2006-011. 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-2006-011 and should be submitted on or before March 21, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-2766 Filed 2-27-06; 8:45 am]

BILLING CODE 8010-01-P