Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to Taping Rule “Opt Out” and Exemption Provisions, 17134-17137 [E5-1479]

Download as PDF 17134 Federal Register / Vol. 70, No. 63 / Monday, April 4, 2005 / Notices call amount of $1,000. Upon review, FICC has determined that the minimum margin deficiency call amount creates unnecessary operational burdens and allocation of resources for a collection of margin calls that FICC believes is insubstantial from a risk perspective. On average, the MBSD makes 17 margin calls per day of which approximately five are for amounts under $250,000. FICC seeks to harmonize the rules of its two divisions, the Government Securities Division (‘‘GSD’’) and Mortgage-Backed Securities Division (‘‘MSBD’’), wherever prudent and possible. The rules of the GSD provide for a minimum Clearing Fund deficiency call amount for margin requirement increases of the lesser of $250,000 or 25 percent of the value of the member’s collateral deposits.3 Under the proposed rule, the minimum margin deficiency call amount for MBSD participants would be the lesser of $250,000 or 25 percent of the value of a participant’s margin deposit. FICC believes this would eliminate the operational burdens associated with the collection of de minimis margin amounts and would harmonize the rules of FICC’s two divisions.4 FICC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act 5 and the rules and regulations thereunder applicable to FICC because it allows for a less burdensome application of its margin call process without presenting material risk to FICC or its participants. As such, FICC believes the proposed rule assures the safeguarding of securities and funds that are in the custody and control of FICC or for which it is responsible. (B) Self-Regulatory Organization’s Statement on Burden on Competition FICC does not believe that the proposed rule change will have any impact or impose any burden on competition. (C) Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule change have not yet been solicited or received. FICC will notify 3 There is no minimum amount for deficiency calls where the subject member is subject to enhanced monitoring on what is known as the ‘‘watch list.’’ 4 As proposed and consistent with the applicable GSD rule, a minimum amount would not apply to deficiency calls where the subject participant is on the ‘‘watch list.’’ 5 15 U.S.C. 78q–1. VerDate jul<14>2003 15:19 Apr 01, 2005 Jkt 205001 the Commission of any written comments received by FICC. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within thirty-five 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 ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding; or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve such proposed rule change or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, 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 (https://www.sec.gov/ rules/sro.shtml) or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FICC–2005–06 on the subject line. Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filings also will be available for inspection and copying at the principal office of FICC and on FICC’s Web site, https://www.ficc.com. 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–FICC– 2005–06 and should be submitted on or before April 25, 2005. For the Commission by the Division of Market Regulation, pursuant to delegated authority.6 Margaret H. McFarland, Deputy Secretary. [FR Doc. E5–1476 Filed 4–1–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51434; File No. SR–NASD– 2005–033] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to Taping Rule ‘‘Opt Out’’ and Exemption Provisions March 24, 2005. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 Paper Comments notice is hereby given that on March 22, • Send paper comments in triplicate 2005, the National Association of to Jonathan G. Katz, Secretary, Securities Dealers, Inc. (‘‘NASD’’) filed Securities and Exchange Commission, with the Securities and Exchange 450 Fifth Street, NW., Washington, DC Commission (‘‘Commission’’) the 20549–0609. proposed rule change as described in All submissions should refer to File Items I, II, and III below, which Items Number SR–FICC–2005–06. This file have been prepared by NASD. The number should be included on the Commission is publishing this notice to subject line if e-mail is used. To help the solicit comments on the proposed rule Commission process and review your change from interested persons. comments more efficiently, please use only one method. The Commission will I. Self-Regulatory Organization’s post all comments on the Commission’s Statement of the Terms of Substance of the Proposed Rule Change Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the NASD is filing a proposed rule change submission, all subsequent to amend paragraph (L) of NASD Rule amendments, all written statements 3010(b)(2) (‘‘Taping Rule’’ or ‘‘Rule’’) to with respect to the proposed rule (1) require member firms that are change that are filed with the seeking an exemption from the Rule to Commission, and all written submit their exemption requests to communications relating to the NASD within 30 days of receiving proposed rule change between the notice from NASD or obtaining actual Commission and any person, other than knowledge that they are subject to the those that may be withheld from the provisions of the Rule and (2) clarify public in accordance with the provisions of 5 U.S.C. 552, will be 6 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). available for inspection and copying in 2 17 CFR 240.19b–4. the Commission’s Public Reference PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 E:\FR\FM\04APN1.SGM 04APN1 Federal Register / Vol. 70, No. 63 / Monday, April 4, 2005 / Notices that firms that trigger application of the Taping Rule for the first time can elect to either avail themselves of the onetime ‘‘opt out provision’’ or seek an exemption from the Rule, but they may not seek both options. Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in brackets. * * * * * 3010. Supervision (a) No Change. (b) Written Procedures. (1) No Change. (2) Tape recording of conversations. (A) Each member that either is notified by NASD [Regulation] or otherwise has actual knowledge that it meets one of the criteria in paragraph (b)(2)(H) relating to the employment history of its registered persons at a Disciplined Firm as defined in paragraph (b)(2)(J) shall establish, maintain, and enforce special written procedures for supervising the telemarketing activities of all of its registered persons. (B) The member must establish and implement the supervisory procedures required by this paragraph within 60 days of receiving notice from NASD [Regulation] or obtaining actual knowledge that it is subject to the provisions of this paragraph. A member that meets one of the criteria in paragraph (b)(2)(H) for the first time may reduce its staffing levels to fall below the threshold levels within 30 days after receiving notice from NASD [Regulation] pursuant to the provisions of paragraph (b)(2)(A) or obtaining actual knowledge that it is subject to the provisions of the paragraph, provided the firm promptly notifies the Department of Member Regulation, NASD [Regulation], in writing of its becoming subject to the Rule. Once the member has reduced its staffing levels to fall below the threshold levels, it shall not rehire a person terminated to accomplish the staff reduction for a period of 180 days. On or prior to reducing staffing levels pursuant to this paragraph, a member must provide the Department of Member Regulation, NASD [Regulation] with written notice, identifying the terminated person(s). (C) No Change. (D) The member shall establish reasonable procedures for reviewing the tape recordings made pursuant to the requirements of this paragraph to ensure compliance with applicable securities laws and regulations and applicable rules of [the Association] NASD. The procedures must be appropriate for the VerDate jul<14>2003 15:19 Apr 01, 2005 Jkt 205001 member’s business, size, structure, and customers. (E) through (F) No Change. (G) By the 30th day of the month following the end of each calendar quarter, each member firm subject to the requirements of this paragraph shall submit to [the Association] NASD a report on the member’s supervision of the telemarketing activities of its registered persons. (H) No Change. (I) For purposes of this Rule, the term ‘‘registered person’’ means any person registered with [the Association] NASD as a representative, principal, or assistant representative pursuant to the Rule 1020, 1030, 1040, and 1110 Series or pursuant to Municipal Securities Rulemaking Board (‘‘MSRB’’) Rule G–3. (J) through (K) No Change. (L) Pursuant to the Rule 9600 Series, [the Association] NASD may in exceptional circumstances, taking into consideration all relevant factors, exempt any member unconditionally or on specified terms and conditions from the requirements of this paragraph. A member seeking an exemption must file a written application pursuant to the Rule 9600 Series within 30 days after receiving notice from NASD or obtaining actual knowledge that it meets one of the criteria in paragraph (b)(2)(H). A member that meets one of the criteria in paragraph (b)(2)(H) for the first time may elect to reduce its staffing levels pursuant to the provisions of paragraph (b)(2)(B) or, alternatively, to seek an exemption pursuant to paragraph (b)(2)(L), as appropriate; such a member may not seek relief from the Rule by both reducing its staffing levels pursuant to paragraph (b)(2)(B) and requesting an exemption. (3) through (4) No Change. (c) 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, 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. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 17135 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose According to the NASD, the Taping Rule, which has been in effect since 1998, is designed to ensure that members with a significant number of registered persons that previously were employed by firms that have been expelled from membership or have had their registration revoked for sales practice violations (‘‘Disciplined Firms’’) have proper supervisory procedures in place relating to telemarketing activities to prevent fraudulent and improper sales practices or other customer harm. Under the Rule, member firms that hire a specified number of registered persons from Disciplined Firms must establish, maintain, and enforce special written procedures for supervising the telemarketing activities of all their registered persons. Such procedures must include tape-recording all telephone conversations between such firms’ registered persons and both existing and potential customers. The Rule provides firms up to 60 days from the date they receive notice from NASD or obtain actual knowledge that they are subject to the provisions of the Rule to establish and implement the required supervisory procedures, including installing taping systems. Such firms also are required to review the tape recordings, maintain appropriate records, and file quarterly reports with NASD. The Taping Rule permits member firms that become subject to the Rule for the first time a one-time opportunity to adjust their staffing levels to fall below the prescribed threshold levels and thus avoid application of the Rule (often referred to as the ‘‘opt out provision’’). A firm that elects this one-time option must reduce its staffing levels to fall below the applicable threshold levels within 30 days after receiving notice from NASD or obtaining actual knowledge that it is subject to the provisions of the Rule. Once a firm has made the reductions, the firm is not permitted to rehire the terminated individuals for at least 180 days. NASD also has the authority to grant exemptions from the Rule in ‘‘exceptional circumstances.’’ In reviewing exemption requests, NASD generally has required a firm to establish that it has alternative procedures to assure supervision at a level functionally equivalent to a taping system. The Rule currently is silent on the time frame for submitting an E:\FR\FM\04APN1.SGM 04APN1 17136 Federal Register / Vol. 70, No. 63 / Monday, April 4, 2005 / Notices exemption request. However, because a firm has a total of 60 days from the date it receives notice from NASD or obtains actual knowledge that it is subject to the provisions of the Rule to implement the required supervisory procedures, a firm implicitly has that 60-day period to submit an exemption request. A firm that submits an exemption request is not required to establish and implement the required supervisory procedures, including the taping system (i.e., such requirements are ‘‘tolled’’) while the staff is reviewing the request and during the course of any subsequent appeals to NASD’s National Adjudicatory Council (‘‘NAC’’). NASD tolls the Taping Rule’s requirements during the exemption appeal process primarily due to the significant costs involved with installing a taping system and the possibility that the staff or NAC will grant the exemption. At the same time, it has been NASD’s experience that firms often wait until the 60th day (or shortly before) to request the exemption, which, assuming the exemption is not granted, only further prolongs the establishment and implementation of the required supervisory procedures. To reduce these possible delays in implementation of the Taping Rule requirements, NASD is proposing to amend NASD Rule 3010(b)(2)(L) to require firms that are seeking an exemption from the provisions of the Rule to submit their exemption requests to NASD within 30 days of receiving notice from NASD or obtaining actual knowledge that they are subject to the provisions of the Rule. NASD believes that specifying a time frame for submitting an exemption request is consistent with the investor protection concerns that the Rule is intended to address, in particular given that the requirement to establish and implement the appropriate supervisory procedures is tolled upon the submission of an exemption request. Moreover, based on NASD’s experience, 30 days would provide ample time for firms to decide whether to seek an exemption and to submit their requests to NASD. Some firms also have inquired whether they could elect to use the ‘‘opt out’’ while simultaneously seeking an exemption, with the goal being that the firm would be granted an exemption and be able to immediately rehire the persons whose employment was terminated as part of the ‘‘opt out’’ (rather than waiting the requisite 180 days). It is NASD’s belief, however, that firms should not be able to pursue these two alternatives simultaneously. NASD believes that a core purpose of the ‘‘opt out provision’’ is to provide relief to VerDate jul<14>2003 15:19 Apr 01, 2005 Jkt 205001 those firms that may have inadvertently or unintentionally become subject to the Taping Rule for the first time due, for example, to sudden turnover among registered persons or other events beyond the firm’s control. In contrast, exemptions, which are granted only in ‘‘exceptional circumstances,’’ are for those situations where the firm has demonstrated that it has supervisory procedures that are equivalent to a taping system or is otherwise in a truly unique situation. NASD believes it would be inconsistent with the purposes of these two provisions to permit a firm to pursue both options with NASD, either simultaneously or one after the other. For instance, NASD believes that it would be inconsistent with the purposes of these provisions for a firm that chooses to submit an exemption request pursuant to NASD Rule 3010(b)(2)(L) and is denied the exemption to then employ the NASD Rule 3010(b)(2)(B) ‘‘opt out’’ as its second option. Therefore, NASD also is proposing to amend NASD Rule 3010(b)(2)(L) to clarify that firms that trigger application of the Taping Rule for the first time must elect to either avail themselves of the one-time ‘‘opt out provision’’ (i.e., make the staff adjustment to fall below the thresholds of the Rule) or seek an exemption from the Rule, but they may not elect to do both. Accordingly, under the proposed rule change, firms that become subject to the Taping Rule for the first time would have 30 days to decide on one option and may pursue only that option. Finally, NASD no longer refers to itself or its subsidiary, NASD Regulation, Inc., using its full corporate name, ‘‘the Association,’’ ‘‘the NASD,’’ or ‘‘NASD Regulation.’’ Instead, NASD uses the name ‘‘NASD’’ unless otherwise appropriate for corporate or regulatory reasons. Accordingly, the proposed rule change replaces, as a technical change, several references to ‘‘Association’’ and ‘‘NASD Regulation’’ in NASD Rule 3010(b)(2) with the name ‘‘NASD.’’ NASD will announce the effective date of the proposed rule change in a Notice to Members (‘‘NtM’’) to be published no later than 60 days following Commission approval. The effective date will be 30 days following publication of the NtM announcing Commission approval. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,3 which PO 00000 3 15 U.S.C. 78o–3(b)(6). Frm 00087 Fmt 4703 Sfmt 4703 requires, among other things, that NASD 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 ensure that members with a significant number of registered persons from Disciplined Firms have proper supervisory procedures over telemarketing activities to prevent fraudulent and improper sales practices or other customer harm, and will ensure that members use the ‘‘opt out’’ and exemption provisions in a manner that is consistent with the intent of the Rule. 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 Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve such proposed rule change; or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASD–2005–033 on the subject line. E:\FR\FM\04APN1.SGM 04APN1 Federal Register / Vol. 70, No. 63 / Monday, April 4, 2005 / Notices Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. All submissions should refer to File Number SR–NASD–2005–033. 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 (https://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 the File Number SR–NASD–2005–033 and should be submitted on or before April 25, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.4 Margaret H. McFarland, Deputy Secretary. [FR Doc. E5–1479 Filed 4–1–05; 8:45 am] BILLING CODE 8010–01–P 4 17 CFR 200.30–3(a)(12). VerDate jul<14>2003 15:19 Apr 01, 2005 Jkt 205001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51438; File No. SR–NYSE– 2004–32] Self-Regulatory Organizations; Order Approving a Proposed Rule Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. Relating to NYSE Liquidity QuoteSM March 28, 2005. I. Introduction On June 24, 2004, the New York Stock Exchange, Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’)1 and Rule 19b–4 thereunder,2 a proposed rule change to include additional display requirements to the existing terms and conditions pursuant to which vendors may distribute to their customers NYSE Liquidity QuoteSM information. On July 16, 2004, the NYSE filed Amendment No. 1 to the proposed rule change.3 The proposed rule change, as amended, was published for public comment in the Federal Register on July 27, 2004.4 The Commission has received one comment letter on the proposed rule change 5 and two responses from the NYSE.6 This order approves the proposed rule change, as amended. II. Background The NYSE Liquidity Quote represents aggregated Exchange trading interest at a specific price interval below the NYSE best bid (in the case of a liquidity bid) or at a specific price interval above the NYSE best offer (in the case of a liquidity offer). The specific price interval above or below the NYSE best bid and offer (‘‘BBO’’), as well as the minimum size of the liquidity bid or U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (‘‘Division’’), SEC, dated July 16, 2004 (‘‘Amendment No. 1’’). In Amendment No. 1, the NYSE clarified that the entire proposed Exhibit C represented new text. 4 Securities Exchange Act Release No. 50040 (July 20, 2004), 69 FR 44701. 5 See letters from Thomas F. Secunda, Bloomberg, L.P. (‘‘Bloomberg’’) to Annette L. Nazareth, Director, Division, SEC, (‘‘Bloomberg Letter) dated July 7, 2004; and Jonathan G. Katz, Secretary, SEC, dated August 13, 2004. The letter dated August 13, 2004 merely resubmitted the July 7, 2004 Bloomberg Letter for Commission consideration. 6 See letter from Mary Yeager, Assistant Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC (‘‘NYSE Response Letter’’) dated November 11, 2004, and letter from Ronald Jordan, Senior Vice President, Market Data, NYSE, to Kelly Riley, SEC, dated January 26, 2005 (‘‘NYSE 2nd Response Letter’’). PO 00000 1 15 2 17 Frm 00088 Fmt 4703 Sfmt 4703 17137 offer, is established by the specialist in the subject security. Liquidity bids and offers include orders on the limit order book, trading interest of brokers in the trading crowd, and the specialist’s dealer interest, at prices ranging from the best bid (offer) to the liquidity bid (liquidity offer). NYSE distributes Liquidity Quote data as part of its OpenBook data feed service 7 and requires recipients to execute existing NYSE vendor agreements and subscriber agreements. Specifically, in order for a vendor to receive NYSE Liquidity Quote data from the Exchange for redistribution to its customers or subscribers, the Exchange requires the vendor to enter into its standard form of ‘‘Agreement for Receipt and Use of Market Data’’ (i.e., ‘‘Consolidated Vendor Form’’). According to the Exchange, the Consolidated Vendor Form is the same form that vendors must execute to receive market data under the Consolidated Tape Association (‘‘CTA’’) Plan and the Consolidated Quotation (‘‘CQ’’) Plan. The Exchange describes the Consolidated Vendor Form as a generic, one-size-fits-all agreement that consists of a standard set of basic provisions that apply to all data recipients and accommodates a number of different types of market data, a number of different means of receiving access to market data, and a number of different uses of market data. Because the Consolidated Vendor Form is not specific to types and uses of certain market data, paragraph 19(a) of the Consolidated Vendor Form provides that ‘‘Exhibit C, if any, contains additional provisions applicable to any non-standard aspects of Customer’s Receipt and Use of Market Data.’’ Accordingly, NYSE has drafted a proposed Liquidity Quote Exhibit C to provide certain display requirements for Liquidity Quote data. In the original approval order, the Commission conditionally approved NYSE Liquidity Quote 8 because the Commission had substantial concerns about the display restrictions NYSE had drafted in its Exhibit C to the Consolidated Vendor Form for Liquidity Quote.9 Specifically, as originally 7 See Securities Exchange Act Release No. 45138 (December 7, 2001) 66 FR 66491 (December 14, 2001). 8 See Securities Exchange Act Release No. 47614 (April 2, 2003), 68 FR 17140 (April 8, 2003) (SR– NYSE–2002–55) (‘‘April Order’’). 9 The NYSE did not file the original Exhibit C to the Consolidated Vendor Form for Liquidity Quote with the Commission. However, as described above, the Commission did consider the terms of the original Liquidity Quote Exhibit C and the issues E:\FR\FM\04APN1.SGM Continued 04APN1

Agencies

[Federal Register Volume 70, Number 63 (Monday, April 4, 2005)]
[Notices]
[Pages 17134-17137]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-1479]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51434; File No. SR-NASD-2005-033]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Taping Rule ``Opt Out'' and Exemption Provisions

March 24, 2005.
    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 March 22, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as 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 the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is filing a proposed rule change to amend paragraph (L) of 
NASD Rule 3010(b)(2) (``Taping Rule'' or ``Rule'') to (1) require 
member firms that are seeking an exemption from the Rule to submit 
their exemption requests to NASD within 30 days of receiving notice 
from NASD or obtaining actual knowledge that they are subject to the 
provisions of the Rule and (2) clarify

[[Page 17135]]

that firms that trigger application of the Taping Rule for the first 
time can elect to either avail themselves of the one-time ``opt out 
provision'' or seek an exemption from the Rule, but they may not seek 
both options. Below is the text of the proposed rule change. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *
3010. Supervision
    (a) No Change.
    (b) Written Procedures.
    (1) No Change.
    (2) Tape recording of conversations.
    (A) Each member that either is notified by NASD [Regulation] or 
otherwise has actual knowledge that it meets one of the criteria in 
paragraph (b)(2)(H) relating to the employment history of its 
registered persons at a Disciplined Firm as defined in paragraph 
(b)(2)(J) shall establish, maintain, and enforce special written 
procedures for supervising the telemarketing activities of all of its 
registered persons.
    (B) The member must establish and implement the supervisory 
procedures required by this paragraph within 60 days of receiving 
notice from NASD [Regulation] or obtaining actual knowledge that it is 
subject to the provisions of this paragraph.
    A member that meets one of the criteria in paragraph (b)(2)(H) for 
the first time may reduce its staffing levels to fall below the 
threshold levels within 30 days after receiving notice from NASD 
[Regulation] pursuant to the provisions of paragraph (b)(2)(A) or 
obtaining actual knowledge that it is subject to the provisions of the 
paragraph, provided the firm promptly notifies the Department of Member 
Regulation, NASD [Regulation], in writing of its becoming subject to 
the Rule. Once the member has reduced its staffing levels to fall below 
the threshold levels, it shall not rehire a person terminated to 
accomplish the staff reduction for a period of 180 days. On or prior to 
reducing staffing levels pursuant to this paragraph, a member must 
provide the Department of Member Regulation, NASD [Regulation] with 
written notice, identifying the terminated person(s).
    (C) No Change.
    (D) The member shall establish reasonable procedures for reviewing 
the tape recordings made pursuant to the requirements of this paragraph 
to ensure compliance with applicable securities laws and regulations 
and applicable rules of [the Association] NASD. The procedures must be 
appropriate for the member's business, size, structure, and customers.
    (E) through (F) No Change.
    (G) By the 30th day of the month following the end of each calendar 
quarter, each member firm subject to the requirements of this paragraph 
shall submit to [the Association] NASD a report on the member's 
supervision of the telemarketing activities of its registered persons.
    (H) No Change.
    (I) For purposes of this Rule, the term ``registered person'' means 
any person registered with [the Association] NASD as a representative, 
principal, or assistant representative pursuant to the Rule 1020, 1030, 
1040, and 1110 Series or pursuant to Municipal Securities Rulemaking 
Board (``MSRB'') Rule G-3.
    (J) through (K) No Change.
    (L) Pursuant to the Rule 9600 Series, [the Association] NASD may in 
exceptional circumstances, taking into consideration all relevant 
factors, exempt any member unconditionally or on specified terms and 
conditions from the requirements of this paragraph. A member seeking an 
exemption must file a written application pursuant to the Rule 9600 
Series within 30 days after receiving notice from NASD or obtaining 
actual knowledge that it meets one of the criteria in paragraph 
(b)(2)(H). A member that meets one of the criteria in paragraph 
(b)(2)(H) for the first time may elect to reduce its staffing levels 
pursuant to the provisions of paragraph (b)(2)(B) or, alternatively, to 
seek an exemption pursuant to paragraph (b)(2)(L), as appropriate; such 
a member may not seek relief from the Rule by both reducing its 
staffing levels pursuant to paragraph (b)(2)(B) and requesting an 
exemption.
    (3) through (4) No Change.
    (c) 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, 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
    According to the NASD, the Taping Rule, which has been in effect 
since 1998, is designed to ensure that members with a significant 
number of registered persons that previously were employed by firms 
that have been expelled from membership or have had their registration 
revoked for sales practice violations (``Disciplined Firms'') have 
proper supervisory procedures in place relating to telemarketing 
activities to prevent fraudulent and improper sales practices or other 
customer harm.
    Under the Rule, member firms that hire a specified number of 
registered persons from Disciplined Firms must establish, maintain, and 
enforce special written procedures for supervising the telemarketing 
activities of all their registered persons. Such procedures must 
include tape-recording all telephone conversations between such firms' 
registered persons and both existing and potential customers. The Rule 
provides firms up to 60 days from the date they receive notice from 
NASD or obtain actual knowledge that they are subject to the provisions 
of the Rule to establish and implement the required supervisory 
procedures, including installing taping systems. Such firms also are 
required to review the tape recordings, maintain appropriate records, 
and file quarterly reports with NASD.
    The Taping Rule permits member firms that become subject to the 
Rule for the first time a one-time opportunity to adjust their staffing 
levels to fall below the prescribed threshold levels and thus avoid 
application of the Rule (often referred to as the ``opt out 
provision''). A firm that elects this one-time option must reduce its 
staffing levels to fall below the applicable threshold levels within 30 
days after receiving notice from NASD or obtaining actual knowledge 
that it is subject to the provisions of the Rule. Once a firm has made 
the reductions, the firm is not permitted to rehire the terminated 
individuals for at least 180 days.
    NASD also has the authority to grant exemptions from the Rule in 
``exceptional circumstances.'' In reviewing exemption requests, NASD 
generally has required a firm to establish that it has alternative 
procedures to assure supervision at a level functionally equivalent to 
a taping system. The Rule currently is silent on the time frame for 
submitting an

[[Page 17136]]

exemption request. However, because a firm has a total of 60 days from 
the date it receives notice from NASD or obtains actual knowledge that 
it is subject to the provisions of the Rule to implement the required 
supervisory procedures, a firm implicitly has that 60-day period to 
submit an exemption request. A firm that submits an exemption request 
is not required to establish and implement the required supervisory 
procedures, including the taping system (i.e., such requirements are 
``tolled'') while the staff is reviewing the request and during the 
course of any subsequent appeals to NASD's National Adjudicatory 
Council (``NAC'').
    NASD tolls the Taping Rule's requirements during the exemption 
appeal process primarily due to the significant costs involved with 
installing a taping system and the possibility that the staff or NAC 
will grant the exemption. At the same time, it has been NASD's 
experience that firms often wait until the 60th day (or shortly before) 
to request the exemption, which, assuming the exemption is not granted, 
only further prolongs the establishment and implementation of the 
required supervisory procedures.
    To reduce these possible delays in implementation of the Taping 
Rule requirements, NASD is proposing to amend NASD Rule 3010(b)(2)(L) 
to require firms that are seeking an exemption from the provisions of 
the Rule to submit their exemption requests to NASD within 30 days of 
receiving notice from NASD or obtaining actual knowledge that they are 
subject to the provisions of the Rule. NASD believes that specifying a 
time frame for submitting an exemption request is consistent with the 
investor protection concerns that the Rule is intended to address, in 
particular given that the requirement to establish and implement the 
appropriate supervisory procedures is tolled upon the submission of an 
exemption request. Moreover, based on NASD's experience, 30 days would 
provide ample time for firms to decide whether to seek an exemption and 
to submit their requests to NASD.
    Some firms also have inquired whether they could elect to use the 
``opt out'' while simultaneously seeking an exemption, with the goal 
being that the firm would be granted an exemption and be able to 
immediately rehire the persons whose employment was terminated as part 
of the ``opt out'' (rather than waiting the requisite 180 days). It is 
NASD's belief, however, that firms should not be able to pursue these 
two alternatives simultaneously. NASD believes that a core purpose of 
the ``opt out provision'' is to provide relief to those firms that may 
have inadvertently or unintentionally become subject to the Taping Rule 
for the first time due, for example, to sudden turnover among 
registered persons or other events beyond the firm's control. In 
contrast, exemptions, which are granted only in ``exceptional 
circumstances,'' are for those situations where the firm has 
demonstrated that it has supervisory procedures that are equivalent to 
a taping system or is otherwise in a truly unique situation. NASD 
believes it would be inconsistent with the purposes of these two 
provisions to permit a firm to pursue both options with NASD, either 
simultaneously or one after the other. For instance, NASD believes that 
it would be inconsistent with the purposes of these provisions for a 
firm that chooses to submit an exemption request pursuant to NASD Rule 
3010(b)(2)(L) and is denied the exemption to then employ the NASD Rule 
3010(b)(2)(B) ``opt out'' as its second option.
    Therefore, NASD also is proposing to amend NASD Rule 3010(b)(2)(L) 
to clarify that firms that trigger application of the Taping Rule for 
the first time must elect to either avail themselves of the one-time 
``opt out provision'' (i.e., make the staff adjustment to fall below 
the thresholds of the Rule) or seek an exemption from the Rule, but 
they may not elect to do both. Accordingly, under the proposed rule 
change, firms that become subject to the Taping Rule for the first time 
would have 30 days to decide on one option and may pursue only that 
option.
    Finally, NASD no longer refers to itself or its subsidiary, NASD 
Regulation, Inc., using its full corporate name, ``the Association,'' 
``the NASD,'' or ``NASD Regulation.'' Instead, NASD uses the name 
``NASD'' unless otherwise appropriate for corporate or regulatory 
reasons. Accordingly, the proposed rule change replaces, as a technical 
change, several references to ``Association'' and ``NASD Regulation'' 
in NASD Rule 3010(b)(2) with the name ``NASD.''
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members (``NtM'') to be published no later than 60 days 
following Commission approval. The effective date will be 30 days 
following publication of the NtM announcing Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\3\ which requires, among 
other things, that NASD 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 
ensure that members with a significant number of registered persons 
from Disciplined Firms have proper supervisory procedures over 
telemarketing activities to prevent fraudulent and improper sales 
practices or other customer harm, and will ensure that members use the 
``opt out'' and exemption provisions in a manner that is consistent 
with the intent of the Rule.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, 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 (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2005-033 on the subject line.

[[Page 17137]]

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.

All submissions should refer to File Number SR-NASD-2005-033. 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 (https://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 the File 
Number SR-NASD-2005-033 and should be submitted on or before April 25, 
2005. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
---------------------------------------------------------------------------

    \4\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1479 Filed 4-1-05; 8:45 am]
BILLING CODE 8010-01-P
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