[Federal Register: August 13, 2003 (Volume 68, Number 156)]
[Notices]
[Page 48421-48429]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13au03-136]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48298; File No. SR-NASD-2002-162]
Self-Regulatory Organizations; Notice of Filing of Amendment Nos.
1 and 2 to Proposed Rule Change by National Association of Securities
Dealers, Inc. Relating to Supervisory Control Amendments
August 7, 2003.
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 November 4, 2002, the National Association of Securities Dealers,
Inc. (``NASD''), filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change. The proposed rule
change was published for comment in the Federal Register on November
27, 2002.\3\ On August 5, 2003, the NASD filed Amendment No. 1 to the
proposed rule change.\4\ On August 7, 2003, the NASD filed Amendment
No. 2 to the proposed rule change.\5\ Amendment Nos. 1 and 2 are
described in Items I, II, and III below, which Items have been prepared
by NASD. The Commission is publishing this notice to solicit comments
on Amendment Nos. 1 and 2 to 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\ See Securities Exchange Act Release No. 46859 (November 20,
2002), 67 FR 70990.
\4\ Amendment No. 1 replaces and supercedes the original filing
in its entirety.
\5\ See letter from Patrice M. Gliniecki, Senior Vice President
and Deputy General Counsel, NASD, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated August 7,
2003 (``Amendment No. 2''). In Amendment No. 2, among other things,
NASD clarified the term ``heightened supervision'' as the term is
used in proposed NASD Rule 3012, and the term ``heightened
inspection procedures'' as that term is used in proposed NASD Rule
3010.
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[[Page 48422]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to adopt new NASD Rule 3012 and amend other rules
regarding the supervisory and supervisory control procedures of member
firms. Below is the amended text of the proposed rule change. Proposed
new language is in italics; proposed deletions are in brackets.
* * * * *
2510. Discretionary Accounts
(a) through (c) No change.
(d) Exceptions
This Rule shall not apply to:
(1) discretion as to the price at which or the time when an order
given by a customer for the purchase or sale of a definite amount of a
security shall be executed, except that the authority to exercise time
and price discretion will be considered to be in effect only until the
end of the business day on which the customer granted such discretion,
absent a specific, written contrary indication signed and dated by the
customer. This limitation shall not apply to time and price discretion
exercised for orders effected with or for an institutional account, as
defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled
instructions issued on a ``not-held'' basis;
(2) No Change.
Any exercise of time and price discretion must be reflected on the
customer order ticket.
* * * * *
3010. Supervision
(a) Supervisory System
Each member shall establish and maintain a system to supervise the
activities of each registered representative and associated person that
is reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable NASD Rules [the Rules of this
Association]. Final responsibility for proper supervision shall rest
with the member. A member's supervisory system shall provide, at a
minimum, for the following:
(1) through (7) No change.
[(8) Each member shall designate and specifically identify to the
Association one or more principals who shall review the supervisory
system, procedures, and inspections implemented by the member as
required by this Rule and take or recommend to senior management
appropriate action reasonably designed to achieve the member's
compliance with applicable securities laws and regulations, and with
the Rules of this Association.]
(b) No change.
(c) Internal Inspections
(1) Each member shall conduct a review, at least annually, of the
businesses in which it engages, which review shall be reasonably
designed to assist in detecting and preventing violations of, and
achieving compliance with, applicable securities laws and regulations,
and with applicable NASD rules [the Rules of this Association]. Each
member shall review the activities of each office, which shall include
the periodic examination of customer accounts to detect and prevent
irregularities or abuses [and at least an annual inspection of each
office of supervisory jurisdiction].
(A) Each member shall inspect at least annually every office of
supervisory jurisdiction and any branch office that supervises one or
more non-branch locations. [Each branch office of the member shall be
inspected according to a cycle which shall be set forth in the firm's
written supervisory and inspection procedures.]
(B) Each member shall inspect at least every three years every
branch office that does not supervise one or more non-branch locations.
In establishing how often to inspect each non-supervisory branch office
[such cycle], the firm shall [give consideration to] consider whether
the nature and complexity of the securities activities for which the
location is responsible, the volume of business done, and the number of
associated persons assigned to the location require the non-supervisory
branch office to be inspected more frequently than every three years.
The non-supervisory branch office examination cycle and an explanation
of the factors the member used in determining the frequency of the
examinations in the cycle shall be set forth in the member's written
supervisory and inspection procedures.
(C) Each member shall inspect on a regular periodic schedule every
non-branch location. In establishing such schedule, the firm shall
consider the nature and complexity of the securities activities for
which the location is responsible and the nature and extent of contact
with customers. The schedule and an explanation regarding how the
member determined the frequency of the examination schedule shall be
set forth in the member's written supervisory and inspection
procedures.
Each member shall retain a written record of the dates upon which
each review and inspection is conducted.
(2) An office inspection and review by a member pursuant to
paragraph (c)(1) must be reduced to a written report and kept on file
by the member for a minimum of three years, unless the inspection is
being conducted pursuant to paragraph (c)(1)(C) and the regular
periodic schedule is longer than a three-year cycle, in which case the
report must be kept on file at least until the next inspection report
has been written. The written inspection report must also include,
without limitation, the testing and verification of the member's
policies and procedures, including supervisory policies and procedures
in the following areas:
(A) Safeguarding of customer funds and securities;
(B) Maintaining books and records;
(C) Supervision of customer accounts serviced by branch office
managers;
(D) Transmittal of funds between customers and registered
representatives and between customers and third parties;
(E) Validation of customer address changes; and
(F) Validation of changes in customer account information.
(3) An office inspection by a member pursuant to paragraph (c)(1)
may not be conducted by the branch office manager or any person within
that office who has supervisory responsibilities or by any individual
who is supervised by such person(s). A member must have in place
procedures that are reasonably designed to provide heightened office
inspections if the person conducting the inspection reports to the
branch office manager's supervisor or works in an office supervised by
the branch manager's supervisor and the branch office manager generates
20% or more of the income of the branch office manager's supervisor.
For the purposes of this subsection only, the term ``heightened
inspection'' shall mean those inspection procedures that are designed
to avoid conflicts of interest that serve to undermine complete and
effective inspection because of the economic, commercial, or financial
interests that the branch manager's supervisor holds in the associated
persons and businesses being inspected.
* * * * *
(g) Definitions
(1) No change.
(2) (A) ``Branch Office'' means any location identified by any
means to the public or customers as a location at which the member
conducts an investment banking or securities business, excluding:
(A) through (D) renumbered as (i) through (iv).
[[Page 48423]]
(B) Notwithstanding the exclusions provided in paragraph (2)(A),
any location that is responsible for supervising the activities of
persons associated with the member at one or more non-branch locations
of the member is considered to be a branch office.
(3) No change.
3012. Supervisory Control System
(a) General Requirements
(1) Each member shall designate and specifically identify to NASD
one or more principals who shall establish, maintain, and enforce a
system of supervisory control policies and procedures that (A) test and
verify that the member's supervisory procedures are reasonably designed
with respect to the activities of the member and its registered
representatives and associated persons, to achieve compliance with
applicable securities laws and regulations, and with applicable NASD
rules and (B) create additional or amend supervisory procedures where
the need is identified by such testing and verification. The designated
principal or principals must submit to the member's senior management
no less than annually, a report detailing each member's system of
supervisory controls, the summary of the test results and significant
identified exceptions, and any additional or amended supervisory
procedures created in response to the test results.
(2) The establishment, maintenance, and enforcement of written
supervisory control policies and procedures pursuant to paragraph (a)
shall include:
(A) procedures that are reasonably designed to review and supervise
the customer account activity conducted by the member's branch office
mangers, sales managers, regional or district sales managers, or any
person performing a similar supervisory function. A person who is
senior to the producing manager must perform such supervisory reviews.
However, if a member does not conduct a public business, or has a
capital requirement of $5,000 or less, or employs 10 or fewer
representatives, and its business is conducted in a manner necessitated
by a limitation of resources that includes fewer than two layers of
supervisory personnel, a person in another office who is in the same or
similar position to the producing manager may conduct the supervisory
reviews, provided that the person in the same or similar position does
not have supervisory responsibility over the activity being reviewed,
reports to his supervisor his supervision and review of the producing
manager, and has not performed a review of the producing manager in the
last two years;
(B) procedures that are reasonably designed to review and monitor
the following activities:
(i) all transmittals of funds (e.g., wires or checks, etc.) or
securities from customers and third party accounts (i.e., a transmittal
that would result in a change of beneficial ownership); from customer
accounts to outside entities e.g., banks, investment companies, etc.);
from customer accounts to locations other than a customer's primary
residence (e.g., post office, ``in care of'' accounts, alternate
address, etc.); and between customers and registered representatives,
including the hand-delivery of checks;
(ii) customer changes of address and the validation of such changes
of address; and
(iii) customer changes of investment objectives and the validation
of such changes of investment objectives.
The policies and procedures established pursuant to paragraph
(a)(2)(B) must include a means or method of customer confirmation,
notification, or follow-up that can be documented; and
(C) procedures that are reasonably designed to provide heightened
supervision over the activities of each producing manager who is
responsible for generating 20% or more of the income of the producing
manager's supervisor. For the purposes of this subsection only, the
term ``heightened supervision'' shall mean those supervisory procedures
that evidence supervisory activities that are designed to avoid
conflicts of interest that serve to undermine complete and effective
supervision because of the economic, commercial, or financial interests
that the supervisor holds in the associated persons and businesses
being supervised.
(b) Dual Member
Any member in compliance with substantially similar requirements of
the New York Stock Exchange, Inc. shall be deemed to be in compliance
with the provisions of this Rule.
* * * * *
3110. Books and Records
(a) through (b) No change.
(c) Customer Account Information
(1) through (3) No change.
(4) For purposes of this Rule [and], and Rule 2510 the term
``institutional account'' shall mean the account of:
(A) through (C) No change.
(d) Changes in Account Name or Designation
Before any customer order is executed, there must be placed upon
the memorandum for each transaction, the name or designation of the
account (or accounts) for which such order is to be executed. No change
in such account name(s) (including related accounts) or designation(s)
(including error accounts) shall be made unless the change has been
authorized by a member or a person(s) designated under the provisions
of NASD rules. Such person must, prior to giving his or her approval of
the account designation change, be personally informed of the essential
facts relative thereto and indicate his or her approval of such change
in writing on the order or other similar record of the member. The
essential facts relied upon by the person approving the change must be
documented in writing and preserved for a period of not less than three
years, the first two years in an easily accessible place, as the term
``easily accessible place'' is used in SEC Rule 17a-4.
For purposes of this paragraph (d), a person(s) designated under
the provisions of NASD rules to approve account name or designation
changes must pass a qualifying principal examination appropriate to the
business of the firm.
* * * * *
IM-3110. Customer Account Information
(a) through (h) No Change.
(i) Holding of Customer Mail
Upon the written instructions of a customer, a member may hold mail
for a customer who will not be at his or her usual address for the
period of his or her absence, but (A) not to exceed two months if the
member is advised that such customer will be on vacation or traveling
or (B) not to exceed three months if the customer is going abroad.
* * * * *
9610. Application
(a) Where To File
A member seeking an exemption from Rule 1021, 1022, 1070, 2210,
2320, 2340, 2520, 2710, 2720, 2810, 2850, 2851, 2860, Interpretive
Material 2860-1, 3010(b)(2), 3020, 3210, 3230, 3350, 8211, 8212, 8213,
11870, or 11900, Interpretive Material 2110-1, or Municipal Securities
Rulemaking Board Rule G-37 shall file a written application with the
appropriate department or staff of NASD [the Association] and provide a
copy of the
[[Page 48424]]
application to the Office of General Counsel of NASD [Regulation].
(b) through (c) 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 original 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
a. Background. On November 4, 2002, NASD filed with the Commission
proposed rule change SR-NASD-2002-162. The rule change proposed new
NASD Rule 3012 to require members to develop general and specific
supervisory control procedures that independently test and verify and
modify, where necessary, the members' supervisory procedures. In
addition, the rule change proposed amendments to: (1) NASD Rule 3010(c)
to require that office inspections be conducted by independent persons
and include, at a minimum, the testing and verification of certain
supervisory procedures; \6\ (2) NASD Rule 3110 to expand upon a
members' supervisory and recordkeeping requirements with respect to
changes in customer account name or designation in connection with
order executions; (3) NASD IM-3110 to provide guidance regarding when a
member may hold mail for a customer who will be absent for a period of
time; (4) NASD Rule 2510(d) to clarify the time limit on time-and-price
discretionary authority; and (5) NASD Rule 9610 to incorporate into
NASD Procedural Rules the ability of members to request an exemption
from amended NASD Rule 3010(c).
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\6\ NASD has filed with the Commission a separate proposed rule
change to Rule 3010(g)(2) that addresses other situations where a
location of a member may be considered a ``branch office'' and
affects only the content of what is now being renumbered as
paragraph (2)(A) of Rule 3010(g). See SR-NASD-2003-104. If the SEC
approves the proposed rule change in No. SR-NASD-2003-104 prior to
approving the rule change proposed in this filing, NASD will file an
amendment to this proposal updating the rule language in the new
Rule 3010(g)(2). Alternatively, if the SEC approves the proposed
rule change in this rule filing prior to approving the proposed rule
change in SR-NASD-2003-104, NASD will file an amendment to SR-NASD-
2003-104 reflecting the changes set forth in this filing.
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The Commission received 72 comment letters in response to the
Federal Register publication of SR-NASD-2002-162.\7\ The comments
submitted to the Commission are summarized and responded to by issue
below. Additional proposed rule changes are also discussed below.
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\7\ List of comment letters has been prepared as Exhibit 2.
Exhibit 2 is available in the Commission's Public Reference Room.
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b. General Comments on the Rule Change. Many commenters stated that
the effective enforcement of existing supervisory rules should be
sufficient to protect investors.\8\ These commenters frequently added
that they viewed the proposed rules as an overreaction to the
Gruttadauria case, which involved a producing branch manager who
misappropriated millions of dollars in customer funds over a 15-year
period. The commenters stated that the Gruttadauria case was not a
result of inadequate supervisory systems but, instead, was a case of a
single individual intent on defrauding customers.\9\
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\8\ 1st Global, Inc., Stephen Batman, CEO (12/18/02); AIG
Advisor Group, Inc., Bridget M. Gaughan, EVP (12/30/02); Cambridge
Investment Research, Inc., Terry L. Lister, General Counsel (12/20/
02); Charles Schwab & Co., Inc., Selwyn J. Noteliovitz, SVP (2/25/
03); Clark/Bardes Financial Services, Inc., Kevin Ballou, President
(3/17/03); Commonwealth Financial Network, Peter T. Wheeler,
President (12/17/02); CUNA Brokerage Services, Inc., Marcia L.
Martin, President (12/19/02); FFP Securities, Inc., Craig A.
Junkins, President/CEO (12/18/02); First Allied Securities, Inc.,
Adam Antoniades, President/COO (12/18/02); Invest Financial
Corporation, Lynn R. Niedermeier, President/CEO (12/17/02);
Investment Centers of America, Inc., Greg Gunderson, President (12/
16/02); Lesko Securities, Inc., Charles Lesko, Jr., President (12/
18/02); Mutual Service Corp., Dennis S. Kaminski, EVP/CAO (12/18/
02); MWA Financial Services, Robert M. Roth, President (12/18/02);
Princor Financial Services Corp., Minoo Spellerberg, Compliance
Officer (12/16/02); Rhodes Securities, Inc., Sandra T. Masek, EVP/
COO (12/17/02); Securities America, Inc., Bryan R. Hill, President
(12/16/02); Securities Industry Association, Self-Regulation and
Supervisory Practices Group, Christopher R. Franke, Chairman--Self-
Regulation and Supervisory Practices Committee (12/18/02);
Transamerica Financial Advisors, Inc., Sandy Brown, President/COO
(12/16/02); United Planners' Financial Services of America, Thomas
H. Oliver, President, CEO, (12/13/02); USAllianz Securities, Inc.,
Michael D. Burns, CCO (12/16/02); Waterstone Financial Group, Inc.,
Thomas A. Hopkins, Chairman, (12/16/02); World Group Securities,
Inc., Leesa M. Easley, Chief Legal Officer (12/19/02).
\9\ Id.; see also Associated Securities Corp., Neal K. Nakagiri,
President/CEO (12/19/02); AXA Advisors, John M. Lefferts, President
(12/18/02); Cadaret, Grant & Co., Arthur F. Grant, President (12/17/
02); Commonwealth Financial Network, Peter T. Wheeler, President
(12/17/02); Equity Services, Inc., Gregory D. Teese, VP (12/18/02);
Linsco/Private Ledger, Corp., James F. McGuire, SVP & CCO (1/16/03);
National Society of Compliance Professionals, Inc., Joan Hinchman,
Executive Director, President & CEO (1/8/03); Pacific Select
Distributors, Inc., John L. Dixon, President (12/18/02).
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While NASD understands industry concerns that regulators not
overreact to one case of violative conduct, NASD does not view the
proposed rule change as a reaction to any particular legal or
regulatory event. Rather, NASD believes that the proposed rule change
is designed to enhance the current rules and examination efforts by
specifically requiring members to establish adequate supervisory
control systems. NASD also believes that the proposed rule change will
strengthen its ability to fulfill its ongoing obligation to protect
investors.
A majority of the commenters also suggested that implementing the
proposed rule change would require firms to hire a large number of
additional personnel to conduct the supervisory activities required by
the proposed rules, thereby placing a significant financial burden on
firms.\10\ Many commenters believed that this cost would destroy the
business model of independent contractors located in
[[Page 48425]]
small branch offices.\11\ One commenter suggested that the proposed
rule change be adopted in the form of ``principles for effective
supervision'' or ``best practices'' that could be tailored to various
business models rather than rules that would apply to all firms.\12\
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\10\ 1st Global, Inc., Stephen Batman, CEO (12/18/02); AIG
Advisor Group, Inc., Bridget M. Gaughan, EVP (12/30/02); American
Express Financial Advisors, Inc., Beth E. Weimer, VP & CCO (1/17/
03); Cambridge Investment Research, Inc., Terry L. Lister, General
Counsel (12/20/02); Clark/Bardes Financial Services, Inc., Kevin
Ballou, President (3/17/03); CUNA Brokerage Services, Inc., Marcia
L. Martin, President (12/19/02); Equity Services, Inc., Gregory D.
Teese, VP (12/18/02); FFP Securities, Inc., Craig A. Junkins,
President/CEO (12/18/02); Financial Network Investment Corp., Jack
R. Handy, Jr., President (12/13/02); First Allied Securities, Inc.,
Adam Antoniades, President/COO (12/18/02); IFG Network Securities,
Inc., R. Jack Conley, President/CEO (12/18/02); Invest Financial
Corporation, Lynn R. Niedermeier, President/CEO (12/17/02);
Investment Centers of America, Inc., Greg Gunderson, President (12/
16/02); John Hancock Financial Services, Inc., Robert H. Watts, SVP/
CCO, (12/17/02) & Another Letter (1/16/03) (additional comments);
Lesko Securities, Inc., Charles Lesko, Jr., President (12/18/02);
Linsco/Private Ledger, Corp., James F. McGuire, SVP & CCO (1/16/03);
Locust Street Securities, Inc., Jacqueline C. Conley, VP, Compliance
(12/13/02); Multi-Financial Securities Corp., Patrick H. McEvoy,
President/CEO (12/16/02); Mutual Service Corp., Dennis S. Kaminski,
EVP/CAO (12/18/02); MWA Financial Services, Robert M. Roth,
President (12/18/02); PrimeVest Financial Services, Inc., Kevin P.
Maas, VP, (No Date on Letter); Princor Financial Services Corp.,
Minoo Spellerberg, Compliance Officer (12/16/02); Rhodes Securities,
Inc., Sandra T. Masek, EVP/COO (12/17/02); Securities America, Inc.,
Bryan R. Hill, President (12/16/02); Transamerica Financial
Advisors, Inc., Sandy Brown, President/COO (12/16/02); United
Planners' Financial Services of America, CEO (12/13/02); USAllianz
Securities, Inc., Michael D. Burns, CCO (12/16/02); Vestax
Securities Corp., R. Jack Conley, President/CEO (12/17/02);
Washington Square Securities, Inc., Tom K. Rippberger, VP/CCO (No
Date on Letter); Waterstone Financial Group, Inc., Thomas A.
Hopkins, Chairman, (12/16/02).
\11\ Associated Securities Corp., Neal K. Nakagiri, President/
CEO (12/19/02); AXA Advisors, John M. Lefferts, President (12/18/
02); Mutual Service Corp., Dennis S. Kaminski, EVP/CAO (12/18/02);
Pacific Select Distributors, Inc., John L. Dixon, President (12/18/
02); Securities Industry Association, Self-Regulation and
Supervisory Practices Group, Christopher R. Franke, Chairman--Self-
Regulation and Supervisory Practices Committee (12/18/02); Woodbury
Financial Services, Inc., Michael G. Brennan, Associate Counsel/
Assistant Secretary (12/18/02).
\12\ 1st Global, Inc., Stephen Batman, CEO (12/18/02);
Securities Industry Association, Self-Regulation and Supervisory
Practices Group, Christopher R. Franke, Chairman--Self-Regulation
and Supervisory Practices Committee (12/18/02).
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NASD does not agree that the proposed rule change should be adopted
in the form of ``principles or best practices.'' NASD believes that the
degree of authority carried by the proposed rules is necessary to
encourage the conduct intended by the rule changes. However, as
discussed in detail below, NASD agrees that greater flexibility is
needed in certain respects to account for variations in members'
business models.
i. Comments on Proposed NASD Rule 3012 (Supervisory Controls) and
Proposed Changes. As originally proposed, NASD Rule 3012 requires that
each member establish supervisory control procedures that (a) test and
verify that the member's supervisory procedures are reasonably designed
to comply with the federal securities laws and regulations and NASD
rules and (b) amend the supervisory procedures where testing and
verification identifies the need to do so. NASD Rule 3012 also requires
that the supervisory control procedures be performed by persons who are
``independent'' from those activities being tested and verified and the
persons who directly supervise those activities.
In addition, NASD Rule 3012 requires that written policies and
procedures to administer the supervisory controls specifically address
transmittals of funds between accounts, changes of customers'
addresses, and changes in customers' investment objectives. These
designated policies and procedures must include a means or method of
customer confirmation, notification, or follow-up that can be
documented.
Many commenters requested clarification regarding who would be
sufficiently ``independent'' to perform the supervisory control
procedures required under proposed NASD Rule 3012.\13\ A large number
of commenters contended that restricting senior supervisory personnel
from performing and/or overseeing the review of a firm's supervisory
control procedures could compromise the quality of the review. The
commenters stated that the alternative approach of assigning someone
from another division of the firm, such as Marketing or Operations, to
perform the review could result in a supervisory review that is less
sensitive to compliance requirements.\14\ At least one commenter stated
that the ``independence'' requirement in NASD Rule 3012 appears to
refer to someone outside of the firm.\15\
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\13\ 1st Global, Inc., Stephen Batman, CEO (12/18/02); AIG
Advisor Group, Inc., Bridget M. Gaughan, EVP (12/30/02); Cambridge
Investment Research, Inc., Terry L. Lister, General Counsel (12/20/
02); Charles Schwab & Co., Inc., Selwyn J. Noteliovitz, SVP (2/25/
03); Clark/Bardes Financial Services, Inc., Kevin Ballou, President
(3/17/03); Commonwealth Financial Network, Peter T. Wheeler,
President (12/17/02); CUNA Brokerage Services, Inc., Marcia L.
Martin, President (12/19/02); FFP Securities, Inc., Craig A.
Junkins, President/CEO (12/18/02); First Allied Securities, Inc.,
Adam Antoniades, President/COO (12/18/02); Invest Financial
Corporation, Lynn R. Niedermeier, President/CEO (12/17/02);
Investment Centers of America, Inc., Greg Gunderson, President (12/
16/02); Lesko Securities, Inc., Charles Lesko, Jr., President (12/
18/02); Midland National Life Insurance, P.M. Phalen, Assistant Vice
President (12/17/02); MML Investors Services, Inc., Michael L.
Kerley, VP/Chief Legal Officer (12/17/02); Mutual Service Corp.,
Dennis S. Kaminski, EVP/CAO (12/18/02); MWA Financial Services,
Robert M. Roth, President (12/18/02); Princor Financial Services
Corp., Minoo Spellerberg, Compliance Officer (12/16/02); Rhodes
Securities, Inc., Sandra T. Masek, EVP/COO (12/17/02); Securities
America, Inc., Bryan R. Hill, President (12/16/02); Securities
Industry Association, Self-Regulation and Supervisory Practices
Group, Christopher R. Franke, Chairman `` Self-Regulation and
Supervisory Practices Committee (12/18/02); United Planners''
Financial Services of America, President, CEO (12/13/02); USAllianz
Securities, Inc., Michael D. Burns, CCO (12/16/02); Waterstone
Financial Group, Inc., Thomas A. Hopkins, Chairman, (12/16/02);
World Group Securities, Inc., Leesa M. Easley, Chief Legal Officer
(12/19/02).
\14\ 21st Century Financial Services, Inc., Charles Mazziotti,
President (12/17/02); AIG Advisor Group, Inc., Bridget M. Gaughan,
EVP (12/30/02); Brookstreet Securities Corporation, Stanley C.
Brooks, President, CEO (12/4/02); Cambridge Investment Research,
Inc., Terry L. Lister, General Counsel (12/20/02); CUNA Brokerage
Services, Inc., Marcia L. Martin, President (12/19/02); Duerr
Financial Corporation, William Partin, President (11/27/02); Eagle
One Investments, LLC, Steven J. Svoboda, President (12/16/02);
Financial Network Investment Corp., Jack R. Handy, Jr., President
(12/13/02); Financial Northeastern Companies, Dominick Del Duca, CCO
(12/12/02); First Allied Securities, Inc., Adam Antoniades,
President/COO (12/18/02); First Heartland Capital, Inc., Julius J.
Anderson, Vice President (12/27/02); FMN Capital Corporation, David
W. Schofield, Director of Operations and Compliance 12/18/02); IFG
Network Securities, Inc., R. Jack Conley, President/CEO (12/18/02);
Invest Financial Corporation, Lynn R. Niedermeier, President/CEO
(12/17/02); Investment Centers of America, Inc., Greg Gunderson,
President (12/16/02); Iron Street Securities Inc., Robert L. Hamman,
President (12/24/02); JKR & Company, Inc., J. Kemp Richardson,
President (12/10/02); John Hancock Financial Services, Inc., Robert
H. Watts, SVP/CCO, (12/17/02) & Another Letter (1/16/03) (additional
comments); Kyson & Co., Kao Sheng Lin, President (11/25/02); Lesko
Securities, Inc., Charles Lesko, Jr., President (12/18/02); Liberty
Life Securities, LLC, John T. Treece, President (1/15/03); Locust
Street Securities, Inc., Jacqueline C. Conley, VP, Compliance (12/
13/02); Main Street Securities, LLC, David L. Meckenstock, VP/CCO
(12/13/02); Monitor Capital, Inc., Hsiao-wen, President (11/25/02);
Multi-Financial Securities Corp., Patrick H. McEvoy, President/CEO
(12/16/02); Mutual Securities, Inc., William L. Sabol, President
(11/26/02); Mutual Service Corp., Dennis S. Kaminski, EVP/CAO (12/
18/02); MWA Financial Services, Robert M. Roth, President (12/18/
02); National Planning Corporation, M. Shawn Dreffein, President
(12/2/02); Pacific West Securities, Inc., Philip A. Pizelo,
President (1/14/03); PrimeVest Financial Services, Inc., Kevin P.
Maas, VP, Director of Compliance (no date); Princor Financial
Services Corp., Minoo Spellerberg, Compliance Officer (12/16/02);
Quest Securities, Inc., Robert J. Schoen, President (11/22/02);
Rhodes Securities, Inc., Sandra T. Masek, EVP/COO (12/17/02); Rhodes
Securities, Inc., Sandra T. Masek, EVP/COO (12/17/02); Securities
America, Inc., Bryan R. Hill, President (12/16/02); The Leaders
Group, Inc., Z. Jane Riley, Compliance Officer (12/13/02);
Transamerica Financial Advisors, Inc., Sandy Brown, President/COO
(12/16/02); United Planners' Financial Services of America, Thomas
H. Oliver, President/CEO (12/13/02); USAllianz Securities, Inc.,
Michael D. Burns, CCO (12/16/02); Vestax Securities Corp., R. Jack
Conley, President/CEO (12/17/02); Washington Square Securities,
Inc., Tom K. Rippberger, VP/CCO (no date on letter); Waterstone
Financial Group, Inc., Thomas A. Hopkins, Chairman, (12/16/02);
Wharton Equity Corp., Malcom A. Morrison, President (1/10/03); World
Group Securities, Inc., Leesa M. Easley, Chief Legal Officer (12/19/
02); World Trade Financial Corporation, Rod P. Michel, President
(12/31/02).
\15\ See Woodbury Financial Services, Inc., Michael G. Brennan,
Associate Counsel/Assistant Secretary (12/18/02).
---------------------------------------------------------------------------
NASD agrees with commenters' concerns and is amending proposed NYSE
Rule 3012 to eliminate the requirement that persons establishing,
maintaining, and enforcing supervisory control policies and procedures
be ``independent.'' The proposed rule now will require that a member
designate and specifically identify to NASD one or more principals who
will establish, maintain, and enforce supervisory control procedures
that will test and verify that the members' supervisory procedures are
sufficient and create additional or amend supervisory procedures where
the need is identified by such testing and verification. Of course,
NASD expects that the designated principals will test and verify the
adequacy of the supervisory control procedures in a manner that is
independent of a member's countervailing business considerations.
Importantly, as stated in proposed NYSE Rule 3012, these policies
and procedures must include procedures that are reasonably designed to
review and supervise the customer account activity conducted by the
member's branch office managers, sales managers,
[[Page 48426]]
regional or district sales managers, or any person performing a similar
supervisory function. Proposed NYSE Rule 3012 provides that a person
who is senior to the producing manager must perform these supervisory
reviews; however, if a member does not conduct a public business, or
has a capital requirement of $5,000 or less, or employs ten or fewer
representatives, and its business is conducted in a manner necessitated
by a limitation of resources that includes fewer than two layers of
supervisory personnel, a person in another office who is in the same or
similar position to the producing manager may conduct the supervisory
review, provided that the person does not have supervisory
responsibility over the activity being reviewed, reports to his
supervisor his supervision and review of the producing manager, and has
not performed a review of the producing manager in the last two years.
The supervisory policies and procedures required under proposed
Rule 3012 also must include procedures reasonably designed to provide
heightened supervision over the activities of each producing manager
who is responsible for generating 20% or more of the income of the
producing manager's supervisor. The proposed rule does not mandate the
contents of such heightened supervisory procedures, in recognition of
the fact that such procedures will vary depending on the business
models and needs of each particular member. In establishing such
heightened supervisory procedures, however, members should consider
such elements as unannounced supervisory reviews, an increased number
of supervisory reviews by different reviewers within a certain period,
a broader scope of activities reviewed, and/or having one or more
principals approve the supervisory review of such producing managers.
These examples are meant to illustrate the type of procedures a member
may want to include in its heightened supervisory procedures and are
not meant to be an exclusive or exhaustive list of heightened
supervisory procedures a member may need to put in place. NASD believes
that proposed Rule 3012, as amended herein, should allow members
sufficient flexibility to create the supervisory control procedures
mandated by the rule without creating undue burdens and costs.
Several commenters mentioned that the requirements in proposed NASD
Rule 3012 to test and verify a member's supervisory procedures and make
any changes identified through the testing and verification procedures
appear to be substantially similar to NASD Rule 3010(a)(8), which
requires a member to review the supervisory system and make any
appropriate changes. Commenters stated that it would be redundant to
require a member to conduct two separate, yet very similar, reviews of
the member's supervisory procedures to determine if changes need to be
made.\16\
---------------------------------------------------------------------------
\16\ Clark/Bardes Financial Services, Inc., Kevin Ballou,
President (3/17/03); Financial Network Investment Corp., Jack R.
Handy, Jr., President (12/13/02); Financial Northeastern Companies,
Dominick Del Duca, CCO (12/12/02); IFG Network Securities, Inc., R.
Jack Conley, President/CEO (12/18/02); Locust Street Securities,
Inc., Jacqueline C. Conley, VP, Compliance (12/13/02); MML Investors
Services, Inc., Michael L. Kerley, VP/Chief Legal Officer (12/17/
02); Multi-Financial Securities Corp., Patrick H. McEvoy, President/
CEO (12/16/02); PrimeVest Financial Services, Inc., Kevin P. Maas,
VP, Director of Compliance (no date on letter); Vestax Securities
Corp., R. Jack Conley, President/CEO (12/17/02); Washington Square
Securities, Inc., Tom K. Rippberger, VP/CCO.
---------------------------------------------------------------------------
NASD is aware of the similarity of the two supervisory review
requirements. Accordingly, NASD is amending the proposed rule change to
combine the two supervisory review requirements into proposed NASD Rule
3012 and eliminate NASD Rule 3010(a)(8) altogether.
One commenter stated that proposed NASD Rule 3012's requirement
that specific supervisory controls be in place to address the
transmittal of funds between accounts, changes of customers' addresses,
and changes in customers' investment objectives should apply only to
retail customer activity and not to institutional customer activity. An
institutional exemption is sought because much of that business is done
on a delivery-versus-payment or receipt-versus-payment basis or via
prime brokerage arrangements that involve system and controls that are
markedly different from retail account servicing.\17\ NASD, however,
believes that it is reasonable and appropriate that regulatory
oversight in the sensitive areas designated in proposed NASD Rule 3012
extend to institutional account activity.
---------------------------------------------------------------------------
\17\ 1st Global, Inc., Stephen Batman, CEO (12/18/02);
Securities Industry Association, Self-Regulation and Supervisory
Practices Group, Christopher R. Franke, Chairman--Self-Regulation
and Supervisory Practices Committee (12/18/02).
---------------------------------------------------------------------------
NASD is retaining NASD Rule 3012's originally proposed provision
that any member in compliance with substantially similar requirements
of the New York Stock Exchange, Inc. (``NYSE'') shall be deemed to be
in compliance with NASD Rule 3012. NASD believes that this provision
helps promote consistency between NASD's and the NYSE's supervisory
control requirements.
ii. Comments on NASD Rule 3010 (Supervision) and Proposed Changes.
As originally proposed, the changes to NASD Rule 3010 require that
office inspections be conducted by a person who is ``independent'' from
the activities being performed at the office and the people providing
supervision to that office. In addition, office inspections must
include, without limitation, the testing and verification of the
member's supervisory policies and procedures in the areas of:
Safeguarding customer funds and securities; maintaining books and
records; supervision of customer accounts serviced by branch office
managers; transmittal of funds between customers and registered
representatives and between customers and third parties; validation of
customer address changes; and validation of changes in customer account
information.
Many commenters requested clarification regarding who would be
sufficiently ``independent'' to conduct the office inspections required
in NASD Rule 3010.\18\ At least one commenter stated that the
``independence'' requirement in NASD Rule 3010 appears to refer to
someone within the firm who does not receive compensation based on
sales.\19\ Many commenters stated that the ``independence'' requirement
in NASD Rule 3010(c)
[[Page 48427]]
would severely reduce the number of principals eligible to conduct
branch exams and would put enormous pressure on home office exam
personnel to conduct more office inspections.\20\ Commenters suggested
that if home office exam personnel had to conduct more office
inspections, the audit cycle would have to be extended to multiple-year
durations and the quality of the audits would decline.\21\
---------------------------------------------------------------------------
\18\ 1st Global, Inc., Stephen Batman, CEO; AIG Advisor Group,
Inc., Bridget M. Gaughan, EVP (12/30/02); Cambridge Investment
Research, Inc., Terry L. Lister, General Counsel (12/20/02); Charles
Schwab & Co., Inc., Selwyn J. Noteliovitz, SVP (2/25/03); Clark/
Bardes Financial Services, Inc., Kevin Ballou, President (3/17/03);
Commonwealth Financial Network, Peter T. Wheeler, President (12/17/
02); CUNA Brokerage Services, Inc., Marcia L. Martin, President (12/
19/02); FFP Securities, Inc., Craig A. Junkins, President/CEO (12/
18/02); First Allied Securities, Inc., Adam Antoniades, President/
COO (12/18/02); Invest Financial Corporation, Lynn R. Niedermeier,
President/CEO (12/17/02); Investment Centers of America, Inc., Greg
Gunderson, President (12/16/02); Lesko Securities, Inc., Charles
Lesko, Jr., President (12/18/02); Midland National Life Insurance,
P.M. Phalen, Assistant Vice President (12/17/02); MML Investors
Services, Inc., Michael L. Kerley, VP/Chief Legal Officer (12/17/
02); Mutual Service Corp., Dennis S. Kaminski, EVP/CAO (12/18/02);
MWA Financial Services, Robert M. Roth, President (12/18/02);
Princor Financial Services Corp., Minoo Spellerberg, Compliance
Officer (12/16/02); Rhodes Securities, Inc., Sandra T. Masek, EVP/
COO (12/17/02); Securities America, Inc., Bryan R. Hill, President
(12/16/02); Securities Industry Association, Self-Regulation and
Supervisory Practices Group, Christopher R. Franke, Chairman--Self-
Regulation and Supervisory Practices Committee (12/18/02); United
Planners' Financial Services of America, Thomas H, President, CEO
(12/13/02); USAllianz Securities, Inc., Michael D. Burns, CCO (12/
16/02); Waterstone Financial Group, Inc., Thomas A. Hopkins,
Chairman, (12/16/02); World Group Securities, Inc., Leesa M. Easley,
Chief Legal Officer (12/19/02).
\19\ See Woodbury Financial Services, Inc., Michael G. Brennan,
Associate Counsel/Assistant Secretary (12/18/02).
\20\ 1st Global, Inc., Stephen Batman, CEO (12/18/02); AIG
Advisor Group, Inc., Bridget M. Gaughan, EVP (12/30/02); American
Express Financial Advisors, Inc., Beth E. Weimer, VP & CCO (1/17/
03); Cambridge Investment Research, Inc., Terry L. Lister, General
Counsel (12/20/02); Clark/Bardes Financial Services, Inc., Kevin
Ballou, President (3/17/03); CUNA Brokerage Services, Inc., Marcia
L. Martin, President (12/19/02); Equity Services, Inc., Gregory D.
Teese, VP (12/18/02); FFP Securities, Inc., Craig A. Junkins,
President/CEO (12/18/02); Financial Network Investment Corp., Jack
R. Handy, Jr., President (12/13/02); First Allied Securities, Inc.,
Adam Antoniades, President/COO (12/18/02); IFG Network Securities,
Inc., R. Jack Conley, President/CEO (12/18/02); Invest Financial
Corporation, Lynn R. Niedermeier, President/CEO (12/17/02);
Investment Centers of America, Inc., Greg Gunderson, President (12/
16/02); John Hancock Financial Services, Inc., Robert H. Watts, SVP/
CCO, (12/17/02); Lesko Securities, Inc., Charles Lesko, Jr.,
President (12/18/02); Linsco/Private Ledger, Corp., James F.
McGuire, SVP & CCO (1/16/03); Locust Street Securities, Inc.,
Jacqueline C. Conley, VP, Compliance (12/13/02); Multi-Financial
Securities Corp., Patrick H. McEvoy, President/CEO (12/16/02);
Mutual Service Corp., Dennis S. Kaminski, EVP/CAO (12/18/02); MWA
Financial Services, Robert M. Roth, President (12/18/02); PrimeVest
Financial Services, Inc., Kevin P. Maas, VP, Director of Compliance
(No Date on Letter); Princor Financial Services Corp., Minoo
Spellerberg, Compliance Officer (12/16/02); Rhodes Securities, Inc.,
Sandra T. Masek, EVP/COO (12/17/02); Securities America, Inc., Bryan
R. Hill, President (12/16/02); Transamerica Financial Advisors,
Inc., Sandy Brown, President/COO (12/16/02); United Planners'
Financial Services of America, Thomas H. Oliver, President/CEO (12/
13/02); USAllianz Securities, Inc., Michael D. Burns, CCO (12/16/
02); Vestax Securities Corp., R. Jack Conley, President/CEO (12/17/
02); Washington Square Securities, Inc., Tom K. Rippberger, VP/CCO
(No Date on Letter); Waterstone Financial Group, Inc., Thomas A.
Hopkins, Chairman, (12/16/02).
\21\ 21st Century Financial Services, Inc., Charles Mazziotti,
President (12/17/02); AIG Advisor Group, Inc., Bridget M. Gaughan,
EVP (12/30/02); Brookstreet Securities Corporation, Stanley C.
Brooks, President, CEO (12/4/02); Cambridge Investment Research,
Inc., Terry L. Lister, General Counsel (12/20/02); Clark/Bardes
Financial Services, Inc., Kevin Ballou, President (3/17/03); CUNA
Brokerage Services, Inc., Marcia L. Martin, President (12/19/02);
Duerr Financial Corporation, William Partin, President (11/27/02);
Eagle One Investments, LLC, Steven J. Svoboda, President (12/16/02);
FFP Securities, Inc., Craig A. Junkins, President/CEO (12/18/02);
Financial Network Investment Corp., Jack R. Handy, Jr., President
(12/13/02); First Allied Securities, Inc., Adam Antoniades,
President/COO (12/18/02); First Heartland Capital, Inc., Julius J.
Anderson, Vice President; (12/27/02); FMN Capital Corporation, David
W. Schofield, Director of Operations (12/18/02); IFG Network
Securities, Inc., R. Jack Conley, President/CEO (12/18/02); Invest
Financial Corporation, Lynn R. Niedermeier, President/CEO (12/17/
02); Investment Centers of America, Inc., Greg Gunderson, President
(12/16/02); Iron Street Securities Inc., Robert L. Hamman, President
(12/24/02); JKR & Company, Inc., J. Kemp Richardson, President (12/
10/02); Kyson & Co., Kao Sheng Lin, President (11/25/02); Lesko
Securities, Inc., Charles Lesko, Jr., President (12/18/02); Liberty
Life Securities, LLC, John T. Treece, President (1/15/03); Locust
Street Securities, Inc., Jacqueline C. Conley, VP, Compliance (12/
13/02); Main Street Securities, LLC, David L. Meckenstock, VP/CCO
(12/13/02); Monitor Capital, Inc., Hsiao-wen, President (11/25/02);
Multi-Financial Securities Corp., Patrick H. McEvoy, President/CEO
(12/16/02); Mutual Securities, Inc., William L. Sabol, President
(11/26/02); Mutual Service Corp., Dennis S. Kaminski, EVP/CAO (12/
18/02); MWA Financial Services, Robert M. Roth, President (12/18/
02); National Planning Corporation, M. Shawn Dreffein, President
(12/2/02); Pacific West Securities, Inc., Philip A. Pizelo,
President (1/14/03); PrimeVest Financial Services, Inc., Kevin P.
Maas, VP, Director of Compliance (no date); Princor Financial
Services Corp., Minoo Spellerberg, Compliance Officer (12/16/02);
Quest Securities, Inc., Robert J. Schoen, President (11/22/02);
Rhodes Securities, Inc., Sandra T. Masek, EVP/COO (12/17/02);
Securities America, Inc., Bryan R. Hill, President (12/16/02); The
Leaders Group, Inc., Z. Jane Riley, Compliance Officer and/CEO (12/
13/02); Transamerica Financial Advisors, Inc., Sandy Brown,
President/COO (12/16/02); United Planners' Financial Services of
America, Thomas H. Oliver, President/CEO (12/13/02); USAllianz
Securities, Inc., Michael D. Burns, CCO (12/16/02); Vestax
Securities Corp., R. Jack Conley, President/CEO (12/17/02);
Washington Square Securities, Inc., Tom K. Rippberger, VP/CCO (no
date on letter); Waterstone Financial Group, Inc., Thomas A.
Hopkins, Chairman, (12/16/02); Wharton Equity Corp., Malcom A.
Morrison, President (1/10/03); World Group Securities, Inc., Leesa
M. Easley, Chief Legal Officer (12/19/02); World Trade Financial
Corporation, Rod P. Michel, President (12/31/02).
---------------------------------------------------------------------------
In response to commenters' concerns, NASD is amending Rule 3010 to
replace the proposed ``independence'' requirement with a prohibition
that an office inspection cannot be conducted by a branch office
manager or any person within that office who has supervisory
responsibilities or by any individual who is supervised by such
person(s). In addition, members must establish heightened inspection
procedures in situations where the person conducting the inspection
either works in an office supervised by the branch office manager's
supervisor or reports to the branch office manager's supervisor and the
branch office manager generates 20% or more of the supervisor's income.
The proposed rule does not mandate the contents of such heightened
inspection procedures, in recognition of the fact that such procedures
will vary depending on the business models and needs of each particular
member. In establishing such heightened inspection procedures, however,
members should consider such elements as unannounced office
inspections, increased frequency of inspections, a broader scope of
activities inspected, and/or having one or more principals review and
approve the office's inspections. These examples are meant to
illustrate the type of procedures a member may want to include in its
heightened inspection procedures and are not meant to be an exclusive
or exhaustive list of heightened inspection procedures a member may
need to put in place. NASD believes that this proposed rule change
should allow members sufficient flexibility to assign personnel to
conduct office inspections without creating undue burdens and costs.
Because NASD has removed the ``independence'' requirement regarding
inspections conducted pursuant to NASD Rule 3010(c), NASD is removing
the provision in NASD Rule 3010(c) that would have allowed members to
seek an exemption from the independence requirement in NASD Rule
3010(c) subject to specified terms and conditions. NASD is also
removing NASD Rule 3010(c) from the list of rules in NASD Rule 9610(a)
from which a member can seek an exemption.
Many commenters argued that the current supervisory system, which
allows Office of Supervisory Jurisdiction (``OSJ'') managers to conduct
office inspections of branch and satellite offices should be retained
because it was both effective and cost efficient.\22\ Commenters noted
that OSJ managers are the most familiar with registered representatives
and activities located at particular offices, and therefore, are the
most qualified to perform the periodic inspections. In addition, OSJ
managers' auditing of branch and satellite offices serves to reinforce
their accountability for the registered representatives' actions.\23\
---------------------------------------------------------------------------
\22\ Id.
\23\ Id.
---------------------------------------------------------------------------
As stated previously, the proposed change to NASD Rule 3010 has
eliminated the proposed ``independence'' requirement with a prohibition
that an office inspection cannot be conducted by a branch office
manager or any person within that office who has supervisory
responsibilities or by any individual who is supervised by such
person(s). This structure allows OSJ managers to conduct office
inspections in any location where the OSJ manager is senior to the
office's branch manager. In addition, NASD is amending NASD Rule 3010
to codify previous NASD guidance that non-supervisory branch offices be
inspected every three years and that all non-branch locations be
inspected periodically.\24\
---------------------------------------------------------------------------
\24\ See NASD Notice to Members 98-38 (May 1998); NASD Notice to
Members 99-45 (June 1999).
---------------------------------------------------------------------------
iii. Comments on Changes to NASD Rule 2510 (Discretionary Accounts)
and Proposed Changes. As originally
[[Page 48428]]
proposed, changes to NASD Rule 2510(d)(1) require that time and price
discretionary authority be limited to the day it is granted, absent
written authorization to the contrary. Several commenters argued that
the one-day time and price discretionary authority should be limited
only to retail accounts and that NASD should craft an exemption for
institutional accounts.\25\ Commenters argue that large orders for
institutional accounts are ``worked'' over one or more days on a Good-
Till-Cancelled/Not-Held basis.
---------------------------------------------------------------------------
\25\ A.G. Edwards & Sons, Inc., Brian C. Underwood, SVP (12/18/
02); Charles Schwab & Co., Inc., Selwyn J. Noteliovitz, SVP (2/25/
03); National Society of Compliance Professionals, Inc., Joan Ht &
CEO (1/8/03); Securities Industry Association, Self-Regulation and
Supervisory Practices Group, Christopher R. Franke, Chairman--Self-
Regulation and Supervisory Practices Committee (12/18/02).
---------------------------------------------------------------------------
NASD believes that a general institutional exemption is
inappropriate. However, in response to commenters' concerns, NASD is
amending NASD Rule 2510 to clarify that written authorization need not
be obtained for the exercise of time and price discretion beyond the
day a customer grants such discretion for orders effected with or for
an institutional account, as that term is defined in NASD Rule
3110(c)(4), that are exercised pursuant to valid Good-Till-Cancelled
instructions issued on a ``not held'' basis. NASD is also making a
technical amendment to NASD Rule 3110(c)(4) to include a reference to
the definition's applicability to NASD Rule 2510.
Commenters requested that NASD clarify that the requirement to
obtain written instructions for the exercise of time and price
discretion beyond the business day it was granted allows customers to
issue general ``standing'' instructions, rather than issuing written
instructions on an order-by-order basis.\26\
---------------------------------------------------------------------------
\26\ National Society of Compliance Professionals, Inc., Joan
Hinchman, Executive Director, President & CEO (1/8/03); Securities
Industry Association, Self-Regulation and Supervisory Practices
Group, Christopher R. Franke, Chairman--Self-Regulation and
Supervisory Practices Committee (12/18/02).
---------------------------------------------------------------------------
The current text of NASD Rule 2510(d) clearly limits the exercise
of time and price discretion to ``the purchase or sale of a definite
amount of a specified security. * * *'' Any written authorization
granting time and price discretion must comply with this established,
trade-specific standard. Customers who wish to grant more extensive
discretionary authority to their registered representatives may do so
pursuant to a fully executed trading authorization.
iv. Comments on NASD Rule 3110 (Books and Records). As originally
proposed, changes to NASD Rule 3110 require that, before a customer
order is executed, the account name or designation must be placed upon
the memorandum for each transaction. In addition, only a designated
person may approve any changes in account names or designations. The
designated person also must document the essential facts relied upon in
approving the changes and maintain the record in a central location.
The designated person must pass a qualifying principal examination
appropriate to the business of the firm before he or she can approve
these changes.
One commenter stated that its clerical staff is responsible for
making changes to account names or designations and that requiring a
principal to authorize the changes and be informed of the surrounding
facts would place undue burden and cost upon the firm.\27\
---------------------------------------------------------------------------
\27\ Midland National Life Insurance, P.M. Phalen, Assistant
Vice President (12/17/02).
---------------------------------------------------------------------------
NASD understands the concerns that the proposed rule changes may
place additional costs and burdens upon members. However, NASD believes
that account names and designations are material information that must
be protected from possible fraudulent activity. Requiring a principal
to authorize the change and be aware of the surrounding facts for the
change is a relatively low-cost method of protecting this information.
The same commenter stated that the requirement that a name or
account designation be placed on ``each transaction'' is impractical
for the administration of a variable life or variable annuity policy
because dozens of transactions involving expense and insurance charges
automatically occur each month for the multitude of funds associated
with each policy.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
NASD proposed this rule change to promote consistency with the
SEC's books and records rules. Specifically, SEC Rule 17a-3(a)(6)
requires that a memorandum of each brokerage order identify, among
other things, the account for which the order was entered.\29\ NASD
expects that members, regardless of the type of securities business
they engage in, will comply with this requirement in the same manner
that they comply with the SEC's books and records requirements.
---------------------------------------------------------------------------
\29\ 17 CFR 240.17a-3(a)(6).
---------------------------------------------------------------------------
At least one commenter requested clarification regarding whether a
firm may avoid duplicate records by maintaining the ``Account
Designation Change'' documentation ``in the location whether the
determination and approval occurs,'' rather than in the central
location of the ``Home Office.''\30\
---------------------------------------------------------------------------
\30\ See A.G. Edwards & Sons, Inc., Brian C. Underwood, SVP (12/
18/02).
---------------------------------------------------------------------------
NASD does not believe that the new account designation change
recordkeeping requirement should be unduly complicated or burdensome
for members. Accordingly, NASD has amended the proposed rule change to
require members to preserve these records in a manner substantially
similar to the record retention requirements of SEC Rule 17a-4.\31\
Specifically, the proposed rule change requires members to preserve
account designation change documentation for a period of not less than
three years, with the documentation preserved for the first two years
in an easily accessible place, as the term ``easily accessible place''
is used in SEC Rule 17a-4. This proposed change will not only allow
members to use existing recordkeeping systems to meet this requirement,
but it will enable members to make the account designation change
documentation promptly available if requested by NASD examination
staff. It also promotes consistency with NASD Rule 3110's existing
mandate that members' recordkeeping format, medium, and retention
periods comply with SEC Rule 17a-4 requirements.
---------------------------------------------------------------------------
\31\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------
v. Comments on IM-3110 (Customer Account Information). As
originally proposed, changes to IM-3110 would permit a member, upon a
customer's written instructions, to hold mail for a customer who will
not be at his or her usual address for the period of his or her
absence, but not to exceed (A) two months if the member is advised that
the customer will be on vacation or traveling or (B) three months if
the customer is going abroad.
At least one commenter stated that a member would have to impose
additional recordkeeping and administrative controls to avoid lost or
misplaced mail in situations where a customer that travels frequently
looks to a member to provide custody of his or her mail.\32\ If a
member provides this service to its customers, NASD understands that
the member may have to put in place additional procedures to comply
with the limitations set forth in this rule. However, the rule will
help to ensure that members that do hold mail for customers who are
away from their usual addresses, do so only pursuant to the customers'
written instructions and
[[Page 48429]]
for a specified, relatively short period of time. Thus, there is a
reduced likelihood of risk that customers would not receive account
statements or other account documentation at their usual addresses. In
addition, the rule will help to ensure that customers provide the firms
with which they do business current address information, insofar as a
firm will not be permitted to hold mail indefinitely.
---------------------------------------------------------------------------
\32\ John Hancock Financial Services, Inc., Robert H. Watts,
SVP/CCO (12/17/02) & additional comments (1/16/03).
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vi. Comments on the Effective Date of the Rule Change. At least one
commenter has requested that the effective date of any new requirements
be delayed for 6 to 9 months after the approval date.\33\ In response,
NASD is proposing to establish an effective date of six months from SEC
approval of the proposed rule change to allow members sufficient time
to address any necessary procedural or system changes.
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\33\ Pacific Select Distributors, Inc., John L. Dixon, President
(12/18/02).
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vii. Comments on the Insufficient Comment Process. Many commenters
criticized NASD for not publishing the proposed rule changes for
comment prior to filing them with the SEC, stating that the initial
comment period that followed the filing date was insufficient for
everyone who wanted to comment to submit their comments in a timely
manner. Commenters requested additional time to submit further comments
on the proposed rule changes.\34\
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\34\ AIG Advisor Group, Inc., Bridget M. Gaughan, EVP (12/30/
02); Commonwealth Financial Network, Peter T. Wheeler, President
(12/17/02); CUNA Brokerage Services, Inc., Marcia L. Martin,
President (12/19/02); FFP Securities, Inc., Craig A. Junkins,
President/CEO (12/18/02); First Allied Securities, Inc., Adam
Antoniades, President/COO (12/18/02); Invest Financial Corporation,
Lynn R. Niedermeier, President/CEO (12/17/02); Investment Centers of
America, Inc., Greg Gunderson, President (12/16/02); Lesko
Securities, Inc., Charles Lesko, Jr., President (12/18/02); Mutual
Service Corp., Dennis S. Kaminski, EVP/CAO (12/18/02); Pacific
Select Distributors, Inc., John L. Dixon, President (12/18/02);
Princor Financial Services Corp., Minoo Spellerberg, Compliance
Officer (12/16/02); Rhodes Securities, Inc., Sandra T. Masek, EVP/
COO (12/17/02); Securities America, Inc., Bryan R. Hill, President
(12/16/02); Transamerica Financial Advisors, Inc., Sandy Brown,
President/COO (12/16/02); United Planners' Financial Services of
America, Thomas H. Oliver, President/CEO (12/13/02); USAllianz
Securities, Inc., Michael D. Burns, CCO (12/16/02); Waterstone
Financial Group, Inc., Thomas A. Hopkins, Chairman (12/16/02).
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In response to earlier requests for additional time to submit
comments on the proposed rule changes, the initial comment period was
extended an additional 30 days. In addition, it is our understanding
that the SEC will be publishing the new proposed rule changes for
comment to allow concerned parties to submit their comments on the
proposed changes described herein.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\35\ which requires, among
other things, that NASD'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. NASD believes that the proposed rule change is
designed to accomplish these ends by requiring members to establish
more extensive supervisory and supervisory control procedures to
monitor customer account activities of its employees and thereby reduce
the potential for customer fraud and theft.
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\35\ 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, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The SEC received 72 written comment letters. NASD's response to
those comment letters is discussed in Section II above.
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 Amendment Nos. 1 and 2, including whether the
amendments are consistent with the act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. 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 NASD. All submissions should refer to File No. SR-
NASD-2002-162 and should be submitted by September 3, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20601 Filed 8-8-03; 8:45 am]
BILLING CODE 8010-01-P