[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47059-47061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23767]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40372; File No. SR-NASD-98-52]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. Relating to Supervision of Correspondence
August 27, 1998.
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 July 24, 1998, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association''), through its wholly-owned subsidiary,
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 the NASDR. The NASDR has designated the portion of the
proposal relating to the extension of the effective date as one
constituting a stated policy, practice, or interpretation with respect
to the meaning of an existing rule under Section 19(b)(3)(A)(i) of the
Act,\3\ which renders the rule effective upon the Commission's receipt
of this filing. On August 26, 1998, the NASDR submitted Amendment No. 1
to the proposed rule change.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(i).
\4\ See Letter from Mary N. Revell, Associate General Counsel,
NASDR, to Katherine A. England, Assistant Director, Division of
Market Regulation, Commission, dated August 24, 1998 (``Amendment
No. 1''). In Amendment No. 1, NASDR proposes to replace the word
``should'' in the text of the proposed rule with the word ``must''
to clarify that NASD member firms are required to develop written
procedures for the review of incoming, non-electronic correspondence
directed to registered representatives for purposes of identifying
and handling customer complaints and funds.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NASDR is proposing to amend NASD Rule 3010 to state that firms
must \5\ review incoming, non-electronic correspondence to identify
customer complaints and funds. Below is the text of the proposed rule
change. Proposed
[[Page 47060]]
new language is italicized, proposed deletions are in brackets.
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\5\ See Amendment No. 1, supra note 4.
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CONDUCT RULES
Rule 3010. Supervision
(a) through (c) No change
(d) Review of Transactions and Correspondence
(1) No Change
(2) Review of correspondence. Each member shall develop written
procedures that are appropriate to its business, size, structure, and
customers for the review of incoming and outgoing written and
electronic correspondence with the public relating to its investment
banking or securities business. The procedures must include review of
incoming, non-electronic correspondence directed to registered
representatives for purposes of properly identifying and handling
customer complaints and funds. Where such procedures for the review of
correspondence do not require [pre-use] 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.
(3) No change
(e) through (g) 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, the 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. The 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
1. Purpose
In December 1997, the SEC approved rule amendments and a Notice to
Members that were designed to allow firms to develop flexible
supervisory procedures for the review of correspondence with the
public.\6\ The amendments were intended to recognize the growing use of
electronic communications such as ``e-mail'' while still providing for
effective supervision. Notice to Members 98-11, issued in January 1998,
announced approval of the rule amendments, the effective date of the
new rules, and provided guidance to firms on how to implement these
rules. Subsequent to SEC approval of the amendments, but before the
amended rules went into effect, the SEC received 14 comment letters
objecting to certain provisions in the new rules, primarily from
members in the insurance industry.\7\ The commenters primarily objected
to a provision in Notice to Members 98-11, which states that firms will
be required to review all incoming correspondence received in non-
electronic format directed to registered representatives and related to
a member's investment banking or securities business. The NASDR added
this provision to Notice to Members 98-11 to address two regulatory
concerns raised by the SEC: (1) Ensuring that firms capture all
customer complaints; and (2) preventing registered representatives from
taking cash or checks out of customer letters.
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\6\ See Securities Exchange Act Release No. 39510 (December 31,
1997) 63 FR 1131 (January 8, 1998).
\7\ See Letters from Carl B. Wilkerson, American Council of Life
Insurance, to Jonathan G. Katz, Secretary, SEC, dated January 9,
1998 and January 29, 1998; Beverly A. Byrne, BenefitsCorp Equities,
Inc., to Jonathan G. Katz, Secretary, SEC, dated January 26, 1998;
Michael S. Martin, The Equitable Life Assurance Society of the
United States, to Jonathan G. Katz, SEC, dated January 29, 1998;
Janet G. McCallen, International Association for Financial Planning,
to Jonathan G. Katz, Secretary, SEC, dated February 13, 1998; W.
Thomas Boulter, Jefferson Pilot Financial, to Jonathan G. Katz,
Secretary, SEC, dated January 28, 1998; Leonard M. Bakal,
Metropolitan Life Insurance Company and MetLife Securities, Inc., to
Jonathan G. Katz, Secretary, SEC, dated January 28, 1998; Michael L.
Kerley, MML Investors Services, Inc. to Secretary, SEC, dated
January 26, 1998; Mark D. Johnson, The National Association of Life
Underwriters, to Jonathan G. Katz, Secretary, SEC, dated February 5,
1998; Theodore Mathas, NYLIFE Securities, to Jonathan G. Katz,
Secretary, SEC, dated January 16, 1998 and January 29, 1998; Beverly
A. Byrne, One Orchard Equities, Inc., to Jonathan G. Katz,
Secretary, SEC, dated January 26, 1998; Dodie Kent, Pruco Securities
Corporation, to Jonathan G. Katz, Secretary, SEC, dated January 29,
1998; and James T. Bruce, Wiley, Rein & Fielding, on behalf of the
Electronic Messaging Association, to Jonathan G. Katz, SEC, dated
January 30, 1998.
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The commenters stated that it will be very difficult or impossible
for a registered principal to conduct a pre-distribution review of all
incoming, non-electronic correspondence, particularly correspondence
received by registered representatives in small, one- or two-person
offices. In response to these concerns, the effective date of the
requirement to review all incoming, non-electronic correspondence was
delayed to allow the NASDR and member firms time to develop and
implement alternative, workable procedures for the review of incoming,
non-electronic correspondence that addresses the regulatory concerns
about preventing misappropriation of customer funds and diversion of
customer complaints.\8\ The rule amendments and all other provisions in
the Notice became effective on April 7, 1998.\9\
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\8\ See Securities Exchange Act Release Nos. 39665 (February 13,
1998) 63 FR 9032 (February 23, 1998); 39866 (April 14, 1998) 63 FR
19778 (April 21, 1998); and 40178 (July 7, 1998) 63 FR 37911 (July
14, 1998).
\9\ See Securities Exchange Act Release No. 39866, supra note 8.
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NASD Rule 3010(d)(2) currently requires each member to develop
written policies and procedures for review of correspondence with the
public relating to its investment banking or securities business
tailored to its structure and the nature and size of its business and
customers. The NASDR proposes to amend the rule to state that these
procedures must include review of incoming, non-electronic
correspondence directed to registered representatives for purposes of
properly identifying and handling customer complaints and funds. This
proposed amendment will clarify that firms must develop supervisory
procedures that specifically address the regulatory concerns identified
by the SEC.
The Notice to Members will provide guidance on how to implement the
proposed rule change. In particular, the Notice states that, in
conducting reviews of incoming non-electronic correspondence to
identify customer complaints and funds, where the office structure
permits review of all correspondence, members should designate a
registered or associated person to open and review correspondence. The
designated person must not be supervised or under the control of the
registered person whose correspondence is opened and reviewed.
Unregistered persons who have received sufficient training to enable
them to identify complaints and checks would be permitted to review
correspondence. These guidelines are designed to correspond to
procedures currently followed by many large, multi-service firms.
Where the office structure does not permit this arrangement, the
Notice states that the firm would have to employ alternative procedures
reasonably designed to assure adequate handling of complaints and
checks. Procedures that could be adopted include the following:
Forwarding incoming correspondence related to the firm's
investment banking or securities
[[Page 47061]]
business to an Office of Supervisory Jurisdiction (OSJ) or a branch
manager for review on a weekly basis;
Maintenance of a separate log for all checks received and
products sold, which is forwarded to the supervising branch on a weekly
basis;
Communication to clients that informs them that questions
and complaints can be sent directly to the compliance department and
provides them with the compliance department's address and phone
number; and
Branch examination verification that the procedures are
being followed.
The Notice also states that, regardless of the method used for
initial review of incoming, non-electronic correspondence, as with
other types of correspondence, Rule 3010(d)(1) would still require
review by a registered principal of some of each registered
representative's correspondence with the public relating to the
member's investment banking or securities business.
Notice to Members 98-11 stated that firms would be required to
review all incoming correspondence received in non-electronic format
directed to registered representatives and related to a member's
investment banking or securities business. The NASDR proposes to
replace this requirement with the rule amendment and guidance contained
in this proposed rule change. The Notice that will be issued when this
proposed rule is approved will state that the requirement set forth in
Notice to Members 98-11 is no longer applicable and has been superseded
by the amendment to Rule 3010(d)(2) and the guidance provided in the
Notice.
As discussed above, the effective date of the provision in Notice
to Members 98-11 stating that members must review ``all incoming
correspondence received in non-electronic format directed to registered
representatives and related to a member's investment banking or
securities business'' has been delayed to allow the NASDR and member
firms time to develop and implement alternative, workable procedures
for the review of such correspondence. The delay in the effective date
of this provision is scheduled to expire on September 30, 1998.\10\ To
ensure continuity of the regulatory requirements applicable to member
firms, the NASDR proposes an extension of the effective date of this
provision until this proposed rule change has been approved and has
been made effective.
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\10\ See Securities Exchange Act Release No. 41078, supra note
8.
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2. Statutory Basis
The NASDR believes the proposed rule change is consistent with
Section 15A(b)(6) of the Act,\11\ which requires, among other things,
that the Association's 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. The NASD believes that reviewing incoming, non-
electronic correspondence to identify customer complaints and funds is
consistent with this requirement.
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\11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASDR does not believe that the proposed rule change will
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
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
With respect to the proposal to extend the effective date of the
provision in Notice to Members 98-11 regarding the review of incoming,
non-electronic correspondence: The foregoing rule change constitutes a
stated policy, practice, or interpretation with respect to the meaning,
administration or enforcement of an existing rule of the Association
and, therefore, has become effective pursuant to Section 19(b)(3)(A) of
the Act \12\ and subparagraph (e) of Rule 19b-4 thereunder.\13\
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 19b-4(e).
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At any time within 60 days of the filing of this portion of the
rule change, the Commission may summarily abrogate such rule change if
it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
With respect to the substantive provisions of the proposed rule
change: Within 35 days of the date of the 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 is approved.
IV. Solicitation of Comments
Interested person 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. Persons making written
submission 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, 450 Fifth Street, NW, Washington
DC. Copies of such filing also will be available for inspection and
copying at the NASD. All submissions should refer to File No. SR-NASD-
98-52 and should be submitted by September 24, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23767 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M
