[Federal Register Volume 62, Number 67 (Tuesday, April 8, 1997)]
[Notices]
[Pages 16884-16886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8929]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38468; File No. SR-NASD-96-46]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASD Regulation, Inc. Relating to the Submission of
Information in Electronic Form
April 2, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March
17, 1997,\1\ NASD Regulation, Inc. (``NASDR'') 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 NASDR. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ On December 17, 1996, the NASDR filed the proposed rule
change with the Commission. However, Amendment No. 1, modifying the
rule language, replaces the original rule filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDR is proposing to amend Rule 8210 of the Procedural Rules of
the National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') to permit the NASD to request that members provide
regulatory information in electronic form (where the member maintains
its records in electronic form) and to establish electronic submission
programs for regularly filed regulatory information. Below is the text
of the proposed rule change. Proposed new language is in italics.
Procedural Rules
8000. Complaints, Investigations and Sanctions
* * * * *
8200. Investigations
8210. Reports and Inspection of Books for Purpose of Investigating
Complaints
(a) For the purpose of any investigation, or determination as to
filing a complaint or any hearing of any complaint against any member
of the Association or any person associated with a member made or held
in accordance with the Rule 9000 Series, or made or held by another
domestic or foreign self-regulatory organization, association,
securities or contract market or regulator of such markets, with whom
the Association has entered into an agreement providing for the
exchange of information and other forms of material assistance solely
for market surveillance, investigative, enforcement or other regulatory
purposes, any District Business Conduct Committee, the Market
Surveillance Committee, or the Board of Governors, or any duly
authorized member or members of any such Committees or Board or any
duly authorized agent or agents of any such Committee or Board shall
have the right:
(1) to require any member of the Association, person associated
with a member, or person no longer associated with a member when such
person is subject to the Association's jurisdiction to report, either
informally or on the record, orally or in writing or electronically (if
the requested information is maintained in electronic form) with regard
to any matter involved in any such investigation or hearing, and
(2) to investigate the books, records and accounts of any such
member or person with relation to any matter involved in any such
investigation or hearing.
(b) No such member or person shall fail to make any report as
required in this Rule, or fail to permit any inspection of books,
records and accounts as may be validly called for under this Rule. Any
notice requiring an electronic, oral, or written report or calling for
an inspection of books, records and accounts pursuant to this Rule
shall be deemed to have been received by the member or person to whom
it is directed by the mailing thereof to the last known address of such
member or person as reflected on the Association's records.
(c) In carrying out its responsibilities under this paragraph, the
Association may, as approved by the Commission, establish programs for
the submission of information to the Association on a regular basis
through a direct or indirect electronic interface between the
Association and members.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASDR 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. NASDR 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
(a) Various NASD and SEC rules require members to maintain records
of compliance so that information will be available to NASD staff for
on-site examination. In addition, members are required by NASD and SEC
rules to submit certain information to the NASD on a regular basis or
on request. The various rules and regulations of the Municipal
Securities Rulemaking Board (``MSRB'') also impose recordkeeping
requirements on members of the Association. Rule 8210 of the
Association's Conduct Rules (formerly, Article IV, Section 5 of the
Rules of Fair Practice) requires members to respond to any NASD request
for information for the purpose of any investigation or determination
as to the filing of a
[[Page 16885]]
complaint or any hearing of a complaint and to submit such information
``orally or in writing.'' This provision covers the Association's
request for investigatory information in the context of an individual
examination or investigation of a member firm and also covers the
Association's programs for the receipt of regular reports from members.
Amendment to Obtain Information in Electronic Form--In recent
years, members have increasingly maintained their trading records in
computer-based technology (``electronic'') rather than hard copy form,
particularly as the rapidly expanding volume of securities transactions
has required the speed of electronic processing. At this time, most
members store their primary trading records in some form of electronic
storage media.\2\ Such electronic storage capability is provided either
in-house or through a service bureau. Relatively few members maintain
their records only in manual form.
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\2\ The Association's findings are based on technology surveys
conducted of the membership in connection with establishing
electronic submission programs with respect to the filing of FOCUS
Reports, Blue Sheet Reports, Short Interest Reports, Forms U-4 and
U-5, and Free-Riding and Withholding Questionnaires, which
electronic submission programs are more fully discussed below.
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With respect to the Association's conduct of an individual
examination or investigation of a member firm's trading activities, the
NASD has previously requested such information in hard copy or
``written'' form, even where the member stored the information in
electronic form.\3\ In these cases, members provide a hard copy print
of the electronically stored data or the examining staff reviews
electronic data displayed on-line to transfer the information to hard
copy. To the extent that members store their important trading records
in electronic storage media, many members have indicated that they
prefer that the staff of the NASD accept such trading information in
that form because of increased cost efficiencies.\4\ The SEC has
recently announced policies that clarify when and in what manner
members are permitted to store the books and records required by SEC
rules in electronic form.\5\ NASDR is, moreover, currently engaged in a
long-term initiative that will permit examining staff to utilize
current computer-based technology in the course of conducting an
examination of a member firm to analyze larger numbers of securities
transactions than can be achieved using current manual methodology.\6\
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\3\ Submission of information ``orally,'' as permitted by the
Interpretation, is generally limited to situations where Association
staff engage in a conversation with the member and information is
elicited from the member in the course of the conversation.
\4\ Providing an electronic copy of part or all of
electronically stored information is less costly to the member in
terms of personnel time and computer time than providing a hard copy
printout or arranging for examining staff to review information on-
line. The cost and time-saving advantages for broker-dealers of
storing information in electronic media is recognized by the
Commission in Securities Exchange Act Release No. 38245, Feb. 5,
1997; 62 FR 6469, Feb. 12, 1997.
\5\ See, Securities Exchange Act Release No. 38245, Feb. 5,
1997; 62 FR 6469, Feb. 12, 1997.
\6\ See, advice to the SEC regarding the electronic program for
the Free-Riding and Withholding Questionnaire in correspondence
dated March 1, and August 2, 1996 and announced in Notice to Members
96-18 (March 1996).
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The Association believes that the current provision of Rule 8210
that permits the Association to request that a member or a person
associated with a member report ``in writing,'' covers information
stored by a member in a form of electronic media, as the electronic
format merely retains the written record. The NASDR is, however,
proposing to amend Rule 8210 to provide specifically that a member may
be required to submit a report in electronic form where the member
maintains the information in that manner. The proposed rule change
would amend subparagraph (a)(1) to require ``* * * any member of the
Association, person associated with a member, or person no longer
associated with a member when such person is subject to the
Association's jurisdiction to report, either informally or on the
record, orally or in writing or electronically (if the requested
information is maintained in electronic form) with regard to any matter
involved in any such investigation or hearing * * *'' and would amend
subparagraph (b) to insert the word ``electronic'' in the provision
regarding the receipt of any notice requiring a report (emphasis
provided). NASDR believes that this action will both increase
examination efficiency and will eliminate the costs borne by members in
providing electronically maintained information in hard copy to NASDR
examiners. Consequently, the potential for human error and delay
attendant with paper submission will be decreased.
Amendment to Establish Electronic Submission Programs--The NASD has
also worked with the membership over many years to develop procedures
for the electronic submission of periodic reports or other frequently
requested investigatory data that would otherwise be submitted in
written form in order to better fulfill its regulatory responsibilities
under the federal securities laws. Such programs for electronic
submissions have already been established for filing of members' FOCUS
Reports, Blue Sheet Reports, Short Interest Reports, Forms U-4 and U-5
with Central Registration Depository (``CRD'').\7\
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\7\ The FOCUS Filing Plan was approved in Securities Exchange
Act Rel. No. 29105 (April 18, 1991); 56 FR 19131 (April 25, 1991).
The Short Interest Reporting requirement was permanently approved in
Securities Exchange Act Rel. No. 23482 (July 30, 1986); 51 FR 28472
(Aug. 7, 1986). The Blue Sheet Reporting Plan was approved in
Securities Exchange Act Rel. No. 26539 (Feb. 13, 1989); 54 FR 7318
(Feb. 17, 1989). The Central Registration Depository electronic
filing requirements were approved in Securities Exchange Act Rel.
No. 37439 (July 15, 1996); 61 FR 37950 (July 22, 1996).
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As the Association continues to increase its services to the
membership and enhance its ability to surveil for regulatory compliance
through the use of computer-based technology, it is important that
NASDR be able to establish electronic submission programs for
information required to be submitted by members on a regular basis. In
recent discussions with the membership on this issue, members indicated
they preferred to submit frequently filed information electronically
because of assurance of receipt (in comparison to the mails) and the
ability to amend a previously-submitted filing if an error is
subsequently discovered. The Association is, therefore, proposing to
amend Rule 8210 to add new paragraph (c) to provide general authority
for the Association to establish programs for the submission of
information on a regular basis through direct or indirect electronic
interface between the Association and members, upon approval by the
Commission.
(b) The NASD believes that the proposed rule change is consistent
with the provisions of Sections 15A(b)(6),\8\ and 15A(b)(7),\9\ of the
Act.\10\ The proposed rule change will permit the NASD to request that
members provide regulatory information in electronic form (where the
member maintains its records in electronic form) and to establish
electronic submission programs for regularly filed regulatory
information, upon Commission approval. The proposed rule will also
assist the Association in preventing
[[Page 16886]]
fraudulent and manipulative acts and practices, in promoting just and
equitable principles of trade, in protecting investors and the public
interest, and in appropriately disciplining members for violations of
its rules, the rules and regulations of the Commission, and the rules
of the MSRB.
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\8\ Section 15A(b)(6) requires the Association to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade and to protect investors and the
public interest.
\9\ Section 15A(b)(7) requires that the rules of the Association
provide that its members and persons associated with its members
shall be appropriately disciplined for violation of the rules of the
MSRB or the rules of the Association.
\10\ 15 U.S.C. Sec. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The 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
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 the self-regulatory organization 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by April 29, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8929 Filed 4-7-97; 8:45 am]
BILLING CODE 8010-01-M
