04-4121. Self Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Accelerated Approval of Proposed Rule Change to Amend NASD Rule 2370 Relating to Certain Lending Arrangements Between Registered Persons and ...

February 18, 2004.

On January 9, 2004, the National Association of Securities Dealers, Inc. (“NASD” or “Association”) 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 proposed rule change to amend NASD Rule 2370. Specifically, NASD proposed to exempt lending arrangements between family members as well as lending arrangements between registered persons and a financial institution or other entity or person regularly engaged in the business of providing credit, financing, or loans from the rule's notice and approval requirements and to indicate that the scope of the rule is limited to lending arrangements between registered persons and their own customers, rather than any customer of the firm. The proposed rule change was published for comment in the Federal Register on January 23, 2004.^[3] The Commission received no comment letters on the proposal.

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 association,^[4] and, in particular, the requirements of section 15A(b)(6) of the Act,^[5] which, among other things, requires 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. The Commission believes that the proposed rule change should allow NASD members to allocate supervisory and compliance resources to those loans where a potential for substantial abuse exists. The Commission notes that the proposed rule change only removes lending arrangements for which NASD believes the potential for misconduct is minimal from the rule's notice and approval process and that NASD members may continue to prohibit all lending arrangements between registered persons and customers altogether. The Commission also notes that NASD may bring a disciplinary action against a registered person who has entered into an unethical lending arrangement with a customer under NASD Rule 2110.

Furthermore, the Commission finds good cause for approving the proposed rule change prior to the thirtieth day after notice of the publication in the Federal Register. The Commission believes that acceleration of the approval of this proposal should allow NASD members to immediately focus on lending arrangements covered by amended NASD Rule 2370. Accordingly, the Commission finds good cause, consistent with section 19(b)(2) of the Act,^[6] to approve the proposed rule change on an accelerated basis.

It is therefore ordered, pursuant to section 19(b)(2) of the Act^[7] , that the proposed rule change (File No. SR-NASD-2004-05) is hereby approved on an accelerated basis.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[8]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 49081 (January 14, 2004), 69 FR 3410.

4.  In approving this proposed rule change, the Commission notes that it has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

5.  15 U.S.C. 78 o-3(b)(6).

6.  15 U.S.C. 78s(b)(2).

7.  15 U.S.C. 78s(b)(2).

8.  17 CFR 200.30-3(a)(12).