[Federal Register: August 10, 2006 (Volume 71, Number 154)]
[Notices]
[Page 45879-45882]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au06-133]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54265; File No. SR-NASD-2006-064]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto Relating To Extension of Time Requests
August 2, 2006.
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 May 15, 2006, the National Association of Securities Dealers, Inc.
(``NASD'') 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 NASD. On May 25,
2006, NASD filed Amendment No. 1 to the proposed rule change.\3\ On
July 25, 2006, NASD filed Amendment No. 2 to the proposed rule
change.\4\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, NASD made non-substantive changes to the
discussion of the purpose of the proposed rule change.
\4\ Amendment No. 2 replaces and supersedes the original
proposed rule filing and Amendment No. 1 in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to adopt new Rule 3160 to require (1) all
clearing firm members for which NASD is the designated examining
authority (``DEA'') pursuant to Rule 17d-1 under the Act to submit to
NASD requests for extensions of time under Regulation T promulgated by
the Federal Reserve Board (``FRB''), or pursuant to Rule 15c3-3(n)
under the Act; and (2) each clearing firm member for which NASD is the
DEA to file a monthly report with NASD indicating all broker-dealers
for which it clears that have overall ratios
[[Page 45880]]
of requested extensions of time to total transactions for the month
that exceed a percentage specified by NASD. Below is the text of the
proposed rule change. Proposed new language is in italics.
* * * * *
3160. Extensions of Time Under Regulation T and SEC Rule 15c3-3
(a) When NASD is the designated examining authority pursuant to SEC
Rule 17d-1 for a member that is a clearing firm, such member must
submit requests for extensions of time as contemplated by Sections
220.4(c) and 220.8(d) of Regulation T of the Federal Reserve Board and
SEC Rule 15c3-3(n) to NASD for approval, in such format as NASD may
require.
(b) Each member that is a clearing firm for which NASD is the
designated examining authority is required to file a monthly report
with NASD in such format as NASD may require, indicating all broker-
dealers for which it clears that have overall ratios of requests for
extensions of time as contemplated by Sections 220.4(c) and 220.8(d) of
Regulation T of the Federal Reserve Board and SEC Rule 15c3-3(m) to
total transactions for the month that exceed a percentage specified by
NASD. The report is due to NASD within five (5) business days following
the end of each reporting month.
* * * * *
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 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
Background
Regulation T, issued by the Board of Governors of the Federal
Reserve System (``FRB'') pursuant to the Act, among other things,
governs the extension of credit to customers by broker-dealers for
purchasing securities.\5\ Rule 15c3-3 under the Act, among other
things, requires broker-dealers to promptly obtain and maintain
physical possession or control of customer securities and designates
periods of time within which broker-dealers must cure any deficiency by
buying-in or otherwise obtaining possession or control of the
securities.\6\ Under SEC Rule 15c3-3(n), a self-regulatory organization
(SRO) may extend certain specified periods to buy-in a security, for
one or more limited periods commensurate with the circumstances, where
the SRO: (1) Is satisfied that the broker-dealer is acting in good
faith in making the request; and (2) exceptional circumstances warrant
such action.\7\ Regulation T has a similar standard to allow an
extension of time for payment for purchases of securities.\8\ The SROs
that process extension requests, including NASD, have developed
standards and procedures for evaluating, granting, denying, and
controlling extension requests. The standards include acceptable
reasons for requesting an extension, number of extensions permitted per
reason, and special limitations and restrictions on customers.\9\
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\5\ 12 CFR 220.4(c) and 220.8(d). Regulation T provides that a
customer has one payment period (currently five business days) to
submit payment for purchases of securities in a cash account or in a
margin account.
\6\ 17 CFR 240.15c3-3.
\7\ See Rule 15c3-3(n), authorizing SROs to extend the periods
of time to buy-in a security specified in Rule 15c3-3(d)(2), (d)(3),
(h), and (m).
\8\ Under Regulation T, a firm's examining authority may grant
an extension unless the examining authority believes that the
broker-dealer is not acting in good faith or that the broker-dealer
has not sufficiently determined that exceptional circumstances
warrant such action.
\9\ See NASD Notice to Members 00-45.
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Required Submissions of Requests for Extensions of Time
Proposed NASD Rule 3160(a) would require all clearing firm members
for which NASD is the designated examining authority (``DEA'') to
submit to NASD requests for extensions of time under Regulation T and
SEC Rule 15c3-3(n). While Regulation T currently requires that
extension of time requests be directed to a broker-dealer's DEA, Rule
15c3-3(n) provides that a broker-dealer may request an extension of
time from any registered national securities exchange or a registered
national securities association.
The SEC previously approved NYSE Rule 434 requiring each firm for
which the NYSE is the DEA to submit extensions requests to the
NYSE.\10\ The SRO designated as a member's DEA has responsibility for
examining its members that are also members of another SRO for
compliance with applicable financial responsibility rules such as
Regulation T and Rule 15c3-3. Requiring a member to submit extension
requests to its DEA helps to ensure that the DEA receives complete
extension information to assist it in performing this function. Such
information, among other things, can serve as an early indicator of
operational or other difficulties. Approval of the proposed rule change
also would ensure uniform application of standards to all customers of
firms for which NASD is the DEA. For these reasons, NASD believes that
this proposed rule change would create a more effective review of
extension requests.
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\10\ See Exchange Act Release No. 34073 (May 17, 1994), 59 FR
26826 (May 24, 1994) (SR-NYSE-88-35) (SEC Order Approving Proposed
Rule Change by the NYSE Relating to Extensions of Time for Payment
of Delivery of Securities). See also NYSE Information Memo 94-22
(June 10, 1994).
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Monthly Reporting Requirement
Proposed NASD Rule 3160(b) would require each clearing firm member
for which NASD is the DEA to file a monthly report with NASD, in such
format as NASD may require, indicating all broker-dealers for which it
clears that have overall ratios of requests for extensions of time as
contemplated by Sections 220.4(c) and 220.8(d) of Regulation T of the
Federal Reserve Board and SEC Rule 15c3-3(m) to total transactions for
the month that exceed a percentage specified by NASD.\11\ The monthly
report will require clearing firms subject to proposed Rule 3160(b) to
identify, among other things: (1) The broker-dealer's name; (2) the
number of transactions by the broker-dealer for the month; (3) the
number of extension requests for the month; and (4) the ratio of the
number of extensions requested to total transactions. Under the
proposal, NASD would require that the reports be submitted no later
than five business days following the end of each reporting month. For
months when no broker-dealer exceeds the criteria, the clearing firm
would submit a report indicating such.
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\11\ Rule 15c3-3(m) (Completion of Sell Orders on Behalf of
Customers) requires that if a security sold long by a customer has
not been delivered within 10 business days after the settlement
date, the broker-dealer must either buy the customer in or apply for
and receive an extension from the SRO.
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Consistent with the NYSE's program,\12\ NASD anticipates
restricting
[[Page 45881]]
the number of Regulation T and Rule 15c3-3(m) extension requests to 1%
of total transactions for the month for clearing firms and 3% of total
transactions for the month for introducing firms.\13\ NASD currently is
able to compute the ratio of extensions requested to transactions for
clearing firms based on information provided in the extension requests
and FOCUS report data; however, NASD would use the information
submitted by the clearing firms in the new monthly report to monitor
introducing firms' compliance with the anticipated 3% threshold. NASD
is creating a new template within its existing electronic filing
platform to permit clearing firms to submit the required electronic
reports regarding their introducing firms' extension requests.
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\12\ See Exchange Act Release No. 28726 (December 28, 1990), 56
FR 540 (January 7, 1991) (SR-NYSE-89-24) (SEC Order Approving NYSE
Proposed Rule Change Relating to Reporting of Extensions of Time for
Payment/Delivery of Securities by Correspondent Broker-Dealers);
NYSE Information Memoranda 98-09 (March 5, 1998) and 94-22 (June 10,
1994); see also NYSE Information Memorandum 05-78 (October 12, 2005)
(establishing pilot for reporting additional fields for extension
requests).
\13\ NASD anticipates requiring clearing firms to identify in
the monthly report those introducing firms that have overall ratios
exceeding 2% consistent with NYSE requirements, notwithstanding that
the proposed limitations for introducing firms would not be
triggered until the ratio exceeds 3%. The 2% threshold would provide
NASD with an ``early warning'' notice as to the concentrations of
extensions for these introducing firms. In the event NASD adjusts
the 1% or 3% thresholds for imposing limitations, or the 2% filing
threshold, in the future, it would advise members of the new
parameters in a Notice to Members.
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To the extent that firms exceed the proposed threshold limits, NASD
will inform them that their ability to receive extensions for their
customers will be stopped for a 90-day period if such firm does not
reduce the number of subsequent requests below the applicable limit by
the next reporting period.\14\ NASD also intends to direct clearing
firm members to impose limits on introducing firms only where the
introducing firm engages in 25 or more transactions per month. NASD
believes that these limits are appropriate in light of the standard set
forth in Regulation T and Rule 15c3-3 that extensions of time may only
be granted under ``exceptional circumstances.'' \15\
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\14\ For example, if an introducing firm exceeds the applicable
threshold for the month of January, its clearing firm would report
that fact to NASD by February 5. NASD would advise the introducing
firm that it had exceeded its threshold and that it must reduce the
number of subsequent requests below the limit by the end of
February. If the introducing firm exceeds the applicable threshold
for the month of February, its clearing firm would report that fact
to NASD by March 5 and the 90-day suspension would start at that
time.
\15\ In the event NASD adjusts these parameters in the future,
it will advise its members by means of a Notice to Members.
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NASD will announce the effective date of the proposed rule change
in a Notice to Members to be published no later than 60 days following
Commission approval. To give members sufficient time to make necessary
changes to their systems that may be required to comply with proposed
Rule 3160, the effective date will be at least 60 days following
publication of the Notice to Members announcing Commission
approval.\16\
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\16\ NASD also filed for immediate effectiveness a proposed rule
change to amend Section 8 of Schedule A to NASD's By-Laws to
increase the service charge for processing extension requests to
$4.00 per request. The effective date of the service charge increase
was July 1, 2006. See Exchange Act Release No. 53982 (June 14,
2006), 71 FR 35720 (June 21, 2006) (Notice of Filing and Immediate
Effectiveness of SR-NASD-2006-063).
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2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\17\ 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 will
further ensure that firms are complying with financial responsibility
rules and preventing the excessive use of credit for the purchase or
carrying of securities.
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\17\ 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, as amended, or
(B) Institute proceedings to determine whether the proposed rule
change, as amended, should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an E-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2006-064 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2006-064. This file
number should be included on the subject line if E-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 also will be available for inspection and copying at the
principal office of NASD. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-NASD-2006-064 and should be submitted on or before August 31, 2006.
[[Page 45882]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-13007 Filed 8-9-06; 8:45 am]
BILLING CODE 8010-01-P