[Federal Register Volume 62, Number 179 (Tuesday, September 16, 1997)]
[Notices]
[Pages 48689-48691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24542]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39043; File No. SR-NASD-97-10]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the National Association
of Securities Dealers, Inc. Relating to the Distribution of Information
Concerning the Availability of the NASD's Public Disclosure Program
September 10, 1997.
I. Introduction
On February 11, 1997, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') submitted to the Securities
and Exchange Commission (``SEC'' or ``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposal to adopt NASD Rule 2280,
``Investor Education and Protection,'' which will require certain NASD
members to provide customers with the following items of information in
[[Page 48690]]
writing not less than once every calendar year: (1) The NASD Regulation
(``NASDR'') Public Disclosure Program (``Program'') hotline number; (2)
the NASDR web site address; and (3) a statement regarding the
availability to the customer of an investor brochure that includes
information describing the Program.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on February 25, 1997.\3\ Two comment letters were received
regarding the proposal.\4\ On July 31, 1997, the NASD amended its
proposal.\5\ This order approves the NASD's proposal, as amended.
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\3\ See Securities Exchange Act Release No. 39291 (February 14,
1997), 62 FR 8477.
\4\ See Letter from Daniel D. McConnell, Executive Vice
President, PFS Investments, Inc., to Jonathan G. Katz, Secretary,
SEC (May 14, 1997) (``PFS Letter''); Letter from Michael A. Kerley,
Vice President and Chief Legal Officer, MML Investors Services,
Inc., to Jonathan G. Katz, Secretary, SEC (March 14, 1997) (``MML
Letter'').
\5\ See Letter from Craig L. Landauer, NASDR, to Katherine A.
England, Assistant Director, Division of Market Regulation
(``Division''), SEC (July 31, 1997) (``Amendment No. 1''). Amendment
No. 1 exempts from the requirements of the proposal NASD members
that do not carry customer accounts and do not hold customer funds
or securities.
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II. Description of the Proposal
Under the NASDR's Program, NASDR provides certain information
regarding the disciplinary history of NASD members and their associated
persons in response to written inquiries, electronic inquiries or
telephonic inquiries via NASDR's toll-free telephone listing. At the
request of the Honorable Edward J. Markey, the General Accounting
Office (``GAO'') in 1995 reviewed the effectiveness of the toll-free
telephone information service that the NASDR uses to disseminate
information under the Program. In its report reviewing the Program, the
GAO recommended that NASDR publicize and educate investors about the
availability of information through the Program.\6\ Specifically, the
GAO recommended that NASDR ``explore other ways of publicizing the
hotline to a wider audience of investors, such as including the hotline
number on account-opening documents or account statements, and making
disciplinary-related information directly available to investors
through the Internet.'' \7\
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\6\ See GAO, NASD Telephone Hotline: Enhancements Could Help
Investors Be Better Informed About Brokers' Disciplinary Records
(August 1996) (``GAO Report'').
\7\ Id. at 18.
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NASD Rule 2280(a) will require NASD members that carry customer
accounts to provide customers with the following items of information
in writing not less than once every calendar year: (1) The NASDR
Program hotline number; (2) the NASDR web site address; and (3) a
statement regarding the availability to the customer of an investor
brochure that includes information describing the Program. NASD members
may include the required information on customer account statements or
in another type of publication. Under NASD Rule 2280(b), members that
do not carry customer accounts and do not hold customer funds or
securities are exempt from the requirements of NASD Rule 2280(a).\8\
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\8\ See Amendment No. 1, supra note 5.
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III. Summary of Comments
Two comment letters were received regarding the filing.\9\ Both
commenters are introducing brokers that do not carry customer accounts
or hold customer funds or securities. The commenters stated that
because they do not provide customer account statements or correspond
directly with their customers, compliance with the proposal would
require a special annual mailing that would impose significant costs on
their firms. In particular, MML argued that it would spend
approximately $1 million annually to comply with the proposal.\10\ In
response to the commenters' concerns, the NASD indicated that it would
advise the commenters that they could comply with the proposal by
providing information about the Program to the customer at the time of
the customer's purchase.\11\ Amendment No. 1, which exempts from the
rule brokers that do not carry customer accounts and do not hold
customer funds or securities, supersedes the NASD's June 18 Letter.
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\9\ See PFS Letter and MML Letter, supra note 4.
\10\ See MML Letter, supra note 4.
\11\ See Letter from Craig L. Landauer, Associate General
Counsel, NASDR, to Katherine A. England, Assistant Director,
Division, SEC (June 18, 1997) (``June 18 Letter'').
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IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the NASD, and, in particular, with the
requirements of Section 15A(b)(6) \12\ and 15A(i).\13\ Section
15A(b)(6) requires, in part, that the rules of a national securities
association be designed to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest. Section
15A(i) requires the NASD to: (1) Establish and maintain a toll-free
telephone listing to receiving inquiries regarding disciplinary actions
involving the NASD's members and their associated persons; and (2)
promptly respond to such inquiries in writing. By requiring broker-
dealers that carry customer accounts to provide customers, at least
once each calendar year, with written information regarding the NASDR
Program hotline number, the NASDR's web site address, and a statement
regarding the availability of an investor brochure describing the
Program, the proposal will help to publicize the availability of the
NASDR's Program and may increase investor use of the Program. As a
result of increased investor use of the Program, a greater number of
investors will obtain information about the disciplinary histories of
NASD members and their associated persons. This information will help
investors determine whether to conduct, or to continue to conduct,
business with a NASD member or associated person of the member.
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\12\ 15 U.S.C. 78o-3(b)(6) (1988).
\13\ 15 U.S.C. 78o-3(i) (1988 & Supp. 1992). In approving the
rule, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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The Commission finds that Amendment No. 1 to the proposal is
reasonable and consistent with the Act. Amendment No. 1 exempts from
the proposal brokers that do not carry customer accounts and do not
hold customer funds or securities. The Commission believes that it is
reasonable to exempt such brokers from the proposal because, according
to the commenters, the proposal's requirements would impose significant
costs on such brokers. In addition, the Commission understands that the
customers of brokers that do not carry customer accounts and do not
hold customer funds or securities will receive the information required
under the proposal from a clearing broker or from the broker that
carries the customer's account.\14\
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\14\ Telephone conversation among John Ramsey, NASDR, and Craig
Landauer, Associate General Counsel, NASDR, and Katherine England,
Assistant Director, Division, Commission, and Yvonne Fraticelli,
Attorney, Division, Commission, on September 9, 1997.
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The Commission finds good cause for approving Amendment No. 1 the
proposal prior to the 30th day after the date of publication of notice
of filing thereof in the Federal Register. Specifically, the Commission
finds that Amendment No. 1 strengthens the NASD's proposal by ensuring
that the proposal does not impose prohibitive expenses on broker-
dealers that do not carry customer accounts and do not hold customer
funds or securities.
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No.
[[Page 48691]]
1. Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 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 at the Commission's Public
Reference Room. Copies of the filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-97-10 and should be
submitted by October 7, 1997.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-NASD-97-10), as amended, is
approved.
\15\ 15 U.S.C. 78s(b)(2).
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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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24542 Filed 9-15-97; 8:45 am]
BILLING CODE 8010-01-M
