Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change To Amend the Safe Harbor for Business Expansions, 38194-38196 [E6-10434]
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Federal Register / Vol. 71, No. 128 / Wednesday, July 5, 2006 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54051; File No. SR–NASD–
2006–070]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing of
Proposed Rule Change To Amend the
Safe Harbor for Business Expansions
June 27, 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 June 2,
2006, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASD is proposing to amend NASD
Interpretative Material 1011–1 (Safe
Harbors for Business Expansions)
(‘‘NASD IM–1011–1’’) to limit the types
of violations of NASD Rule 2110
(Standards of Commercial Honor and
Principles of Trade) that would result in
a member being ineligible to use the safe
harbor for business expansions and to
make certain technical changes. Below
is the text of the proposed rule change.
Proposed new language is in italics;
proposed deletions are in [brackets].
IM–1011–1. Safe Harbor[s] for Business
Expansions
This interpretive material concerns
the types of business expansions that
will not require a member to submit a
Rule 1017 application to obtain NASD’s
[Regulation’s] approval of the
expansion. This safe harbor applies to:
(1) Firms that do not have a membership
agreement, and (2) firms that have a
membership agreement that does not
contain a restriction on the factors listed
below.
The safe harbor is not available to a
member that has a membership
agreement that contains a specific
restriction as to one or more of the
factors listed below. In that case, the
agreement takes precedence because
NASD [Regulation] has determined that
a particular restriction should apply as
to one or more of the factors, and NASD
[Regulation] has issued a decision with
a rationale for that restriction. Similarly,
the safe harbor also does not apply if the
member has a membership agreement
that permits expansion beyond the
limits set forth below (e.g., an Applicant
requests and obtains approval for ten
registered representatives in the first six
months with an additional ten
registered representatives in the next
year); in such case, [the Department]
NASD has specifically considered the
firm’s expansion plans and approved
them.
The safe harbor is not available to any
member that has disciplinary history.
For purposes of this Interpretation,
‘‘disciplinary history’’ means a finding
of a violation by the member or a
principal of the member in the past five
years by the Securities and Exchange
Commission, a self-regulatory
organization, or a foreign financial
regulatory authority of one or more of
the following provisions (or a
Safe Harbor—Increase Permitted Within One Year Period Without Rule
1017 Application
Number of Associated Persons Involved in Sales
1–10 ..........................................................................................................
11 or more ................................................................................................
Number of Offices (registered or unregistered):
1–5 ............................................................................................................
6 or more ..................................................................................................
Number of Markets Made:
1–10 ..........................................................................................................
11 or more ................................................................................................
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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
1 15
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19:34 Jul 03, 2006
2 17
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10 persons.
10 persons or a 30 percent increase, whichever is greater.
3 offices.
3 offices or a 30 percent increase, whichever is greater.
10 markets.
10 markets or a 30 percent increase, whichever is greater.
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,
U.S.C. 78s(b)(1).
PO 00000
comparable foreign provision) or rules
or regulations thereunder: violations of
the types enumerated in Section[s]
15(b)(4)(E) [and 15(c)] of the Securities
Exchange Act of 1934; Section 15(c) of
the Securities Exchange Act of 1934;
Section 17(a) of the Securities Act of
1933; SEC Rules 10b–5 and 15g–1
through 15g–9; NASD Rules 2110 (only
if the finding of a violation is for
unauthorized trading, churning,
conversion, material misrepresentations
or omissions to a customer, frontrunning, trading ahead of research
reports or excessive markups), 2120,
2310, 2330, 2440, 3010 (failure to
supervise only), 3310, and 3330; and
MSRB Rules G–19, G–30, and G–37(b) &
(c).
For those firms to which the safe
harbor is available, the following types
of expansions are presumed not to be a
material change in business operations
and therefore do not require a Rule 1017
application. For any expansion beyond
these limits, a member should contact
its district office prior to implementing
the change to determine whether the
proposed expansion requires an
application under Rule 1017.
Expansions in each area are measured
on a rolling 12-month basis; members
are required to keep records of increases
in personnel, offices, and markets to
determine whether they are within the
safe harbor.
‘‘Associated Persons involved in
sales’’ includes all Associated Persons,
whether or not registered, who are
involved in sales activities with public
customers, including sales assistants
and cold callers, but excludes clerical,
back office, and trading personnel who
are not involved in sales activities.
and C below, of the most significant
aspects of such statements.
CFR 240.19b–4.
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Federal Register / Vol. 71, No. 128 / Wednesday, July 5, 2006 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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NASD Rule 1017 (Application for
Approval of Change in Ownership,
Control, or Business Operations)
requires that a member submit an
application to NASD for approval prior
to, among other things, making a
‘‘material change in business
operations,’’ which is defined in NASD
Rule 1011.3 NASD IM–1011–1 creates a
safe harbor for certain types of
expansions that are presumed not to be
a ‘‘material change in business
operations’’ and therefore do not require
NASD approval.4 This provides
members with greater certainty
regarding which expansions require
approval and eliminates unnecessary
applications for approval of business
changes.
However, the safe harbor in NASD
IM–1011–1 is not available to any
member that, among other things, has a
‘‘disciplinary history’’ as defined in
NASD IM–1011–1.5 For purposes of
NASD IM–1011–1, disciplinary history
means a finding of a violation by a
member or a principal of the member in
the past five years by the SEC, a selfregulatory organization, or a foreign
financial regulatory authority of one or
more specified provisions (or
comparable foreign provisions) or rules
3 A ‘‘material change in business operations’’ is
defined in NASD Rule 1011(i) and includes, but is
not limited to: removing or modifying a
membership agreement restriction; market making,
underwriting, or acting as a dealer for the first time;
and adding business activities that require a higher
minimum net capital under SEC Rule 15c3–1.
4 The safe harbor permits within a one year
period (1) an increase of 10 persons if the firm has
10 or less associated persons in sales, or an increase
of 10 persons or a 30 percent increase, whichever
is greater, if the firm has 11 or more associated
persons in sales; (2) an increase of 3 offices if the
firm has 5 or less offices, or an increase of 3 offices
or a 30 percent increase, whichever is greater, if the
firm has 6 or more offices; and (3) an increase of
10 markets to be made if the firm makes 10 or less
markets, or an increase of 10 markets or a 30
percent increase, whichever is greater, if the firm
makes 11 or more markets.
5 The safe harbor is also generally not available
to members with membership agreements that
contain certain restrictions on number of personnel,
offices, and markets that may be made.
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19:34 Jul 03, 2006
Jkt 205001
or regulations thereunder,6 including
NASD Rule 2110.7
When a member or individual is
charged with violating an NASD rule,
NASD frequently charges a violation of
NASD Rule 2110 as part of NASD’s
action (in both settled and litigated
matters).8 Thus, the inclusion of NASD
Rule 2110 in NASD IM–1011–1, without
any limitation, often results in members
being ineligible to use the safe harbor if
they (or any of their principals) have
violated any other NASD rule, which
was not the intended effect. Rather, the
safe harbor specifically included a finite
list of rules, the violation of which
would preclude the member from using
the safe harbor, and was not intended to
capture violations of all NASD rules.
Accordingly, with respect to
violations of NASD Rule 2110, NASD
proposes amendments to NASD IM–
1011–1 that would deem a member
ineligible to use the safe harbor only
where the finding of a violation of
NASD Rule 2110 by the member or a
principal of the member raises
significant investor protection issues by
involving unauthorized trading,
churning, conversion, material
misrepresentations or omissions to a
customer, front-running, trading ahead
of research reports or excessive
markups.9 Therefore, a member would
not be eligible to rely on the safe harbor
for material changes in business
operations if the member or any of its
principals have been found, within the
past five years, to have violated NASD
Rule 2110 in the context of one or more
of these enumerated activities (or to
6 The applicable provisions are sections
15(b)(4)(E) and 15(c) of the Securities Exchange Act
of 1934; section 17(a) of the Securities Act of 1933;
SEC Rules 10b–5 and 15g–1 through 15g–9; NASD
Rules 2110, 2120 (Use of Manipulative, Deceptive
or Other Fraudulent Devices), 2310
(Recommendations to Customers (Suitability)), 2330
(Customers’ Securities or Funds), 2440 (Fair Prices
and Commissions), 3010 (Supervision-failure to
supervise only), 3310 (Publication of Transactions
and Quotations), and 3330 (Payment Designed to
Influence Market Prices, Other than Paid
Advertising); and MSRB Rules G–19, G–30 and G–
37(b) and (c).
7 NASD Rule 2110 requires that ‘‘a member, in the
conduct of his business, shall observe high
standards of commercial honor and just and
equitable principles of trade.’’
8 See Joseph Abbondante, Securities Exchange
Act Release No. 53066 (January 6, 2006) at 36 (‘‘It
is well settled that a violation of a rule promulgated
by the SEC or by NASD also violates NASD
Conduct Rule 2110.’’).
9 The proposed limits on violations of NASD Rule
2110 mirror the limits on NASD Rule 2110 with
respect to the public release of disciplinary
complaints. See NASD IM–8310–2 (Release of
Disciplinary and Other Information Through
BrokerCheck) and the related Notice to Members
97–42 (July 1997).
PO 00000
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38195
have violated any of the other rules
specified in NASD IM–1011–1).
In addition, NASD proposes to make
a technical correction to the rule text
with respect to the inclusion of section
15(b)(4)(E) of the Act in the list of rules
the violation of which would preclude
a member from relying on the safe
harbor under NASD IM–1011–1. Section
15(b)(4)(E) of the Act lists the willful
violations that will result in the
statutory disqualification of a broker or
dealer under the Federal securities laws.
A member or principal of a member is
not able to violate this section per se.
Accordingly, the proposed rule change
clarifies that a member would be
ineligible to use the safe harbor in the
event that a member or any of its
principals has been found to have
engaged in one or more violations of the
type specified in section 15(b)(4)(E) of
the Act in the past five years.
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. The effective
date will be 30 days following
publication of the Notice to Members
announcing Commission approval.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of section 15A of the Act,10 in general,
and with section 15A(b)(6) of the Act,11
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 limiting the types of
violations of NASD Rule 2110 that
constitute ‘‘disciplinary history’’ for
purposes of NASD IM–1101–1 will
allow additional firms to be able to rely
on the safe harbor consistent with the
original intent of the IM, while at the
same time continuing to ensure investor
protection by deeming a member
ineligible to use the safe harbor where
the violation of NASD Rule 2110 by the
member or a principal presents
significant investor protection issues.
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.
10 15
11 15
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U.S.C. 78o–3.
U.S.C. 78o3(b)(6).
05JYN1
38196
Federal Register / Vol. 71, No. 128 / Wednesday, July 5, 2006 / Notices
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 NASD 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.
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 the 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–2006–070 and
should be submitted on or before July
26, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.12
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6–10434 Filed 7–3–06; 8:45 am]
BILLING CODE 8010–01–P
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
rwilkins on PROD1PC63 with NOTICES
• 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–2006–070 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54053; File No. SR–NASD–
2003–168]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing of
Amendment Nos. 4 and 5 to the
Proposed Rule Change Relating to the
Release of Information Through NASD
BrokerCheck
19:34 Jul 03, 2006
Jkt 205001
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
In response to comments on the
Notice, NASD proposes additional
amendments to NASD Interpretive
Material 8310–2 (‘‘IM–8310–2’’) 5
regarding disclosures through NASD
BrokerCheck.6 The discussion section of
this notice focuses on the changes made
in Amendment Nos. 4 and 5.7 The text
of the proposed rule change, as
amended by Amendment Nos. 4 and 5,
is available on NASD’s Web site
(https://www.nasd.com), at NASD’s
principal office, and at the
Commission’s Public Reference Room.
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, as amended, and
discussed any comments it received on
the proposed rule change, as amended.
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.
June 27, 2006.
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 June 6,
2006 and June 22, 2006, the National
• Send paper comments in triplicate
Association of Securities Dealers, Inc.
to Nancy M. Morris, Secretary,
(‘‘NASD’’) filed with the Securities and
Securities and Exchange Commission,
Exchange Commission (‘‘Commission’’)
Station Place, 100 F Street, NE.,
Amendment Nos. 4 and 5, respectively,
Washington, DC 20549–1090.
to the proposed rule change as
All submissions should refer to File
described in Items I, II, and III below,
Number SR–NASD–2006–070. This file
which Items have been prepared by
number should be included on the
NASD. The proposed rule change,
subject line if e-mail is used. To help the
incorporating Amendment Nos. 1, 2,
Commission process and review your
and 3, was published for comment in
comments more efficiently, please use
the Federal Register on June 30, 2005.3
only one method. The Commission will
The Commission received eight
post all comments on the Commission’s
comment letters in response to the
Internet Web site (https://www.sec.gov/
Notice.4 The Commission is publishing
rules/sro.shtml). Copies of the
submission, all subsequent
12 17 CFR 200.30–3(a)(12).
amendments, all written statements
1 15 U.S.C. 78s(b)(1).
with respect to the proposed rule
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 51915
change that are filed with the
(June 23, 2005), 70 FR 37880 (‘‘Notice’’).
Commission, and all written
4 See letters from Barry Augenbraun, Senior Vice
communications relating to the
President and Corporate Secretary, Raymond James
proposed rule change between the
Financial, Inc., dated July 8, 2005; Joseph D.
Commission and any person, other than Fleming, Managing Director and Chief Compliance
Officer, Piper Jaffray & Co., dated July 13, 2005;
those that may be withheld from the
VerDate Aug<31>2005
this notice to solicit comments on the
proposed rule change, as amended by
Amendment Nos. 4 and 5, from
interested persons.
PO 00000
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Ronald C. Long, Senior Vice President, Regulatory
Policy and Administration, Wachovia Securities,
LLC, dated July 18, 2005; Mario Di Trapani,
President, Association of Registration Management,
dated July 19, 2005 (‘‘ARM Letter’’); John S.
Simmers, CEO, ING Advisors Network, dated July
19, 2005 (‘‘ING Letter’’); Coleman Wortham III,
President and CEO, Davenport & Company LLC,
dated July 20, 2005; Jill Gross, Director of Advocacy
and Rosario M. Patane, Student Intern, Pace
Investor Rights Project, dated July 21, 2005; and Ira
Hammerman, Senior Vice President and General
Counsel, Securities Industry Association, dated July
27, 2005 (‘‘SIA Letter’’). NASD submitted a
response to comments on June 6, 2006. See letter
from Richard E. Pullano, Associate Vice President
& Chief Counsel, Registration and Disclosure,
NASD, to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, dated
June 6, 2006 (‘‘NASD Response to Comments’’). The
NASD Response to Comments is available on the
Commission’s Web site (https://www.sec.gov/rules/
sro.shtml).
5 NASD also proposes to make non-substantive
technical changes to the proposed rule language,
including the text of Interpretive Material 8310–3,
in Amendment Nos. 4 and 5. In Amendment No.
5, NASD also clarifies that the implementation date
for the proposed rule change would be no later than
90 days following Commission approval.
6 In December 2003, NASD announced that its
Public Disclosure Program would thereafter be
known as ‘‘NASD BrokerCheck.’’
7 For an explanation of the Notice, see Securities
Exchange Act Release No. 51915, supra note 3.
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]]>Agencies
[Federal Register Volume 71, Number 128 (Wednesday, July 5, 2006)]
[Notices]
[Pages 38194-38196]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-10434]
[[Page 38194]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54051; File No. SR-NASD-2006-070]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Amend the
Safe Harbor for Business Expansions
June 27, 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 June 2, 2006, 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to amend NASD Interpretative Material 1011-1
(Safe Harbors for Business Expansions) (``NASD IM-1011-1'') to limit
the types of violations of NASD Rule 2110 (Standards of Commercial
Honor and Principles of Trade) that would result in a member being
ineligible to use the safe harbor for business expansions and to make
certain technical changes. Below is the text of the proposed rule
change. Proposed new language is in italics; proposed deletions are in
[brackets]. IM-1011-1. Safe Harbor[s] for Business Expansions
This interpretive material concerns the types of business
expansions that will not require a member to submit a Rule 1017
application to obtain NASD's [Regulation's] approval of the expansion.
This safe harbor applies to: (1) Firms that do not have a membership
agreement, and (2) firms that have a membership agreement that does not
contain a restriction on the factors listed below.
The safe harbor is not available to a member that has a membership
agreement that contains a specific restriction as to one or more of the
factors listed below. In that case, the agreement takes precedence
because NASD [Regulation] has determined that a particular restriction
should apply as to one or more of the factors, and NASD [Regulation]
has issued a decision with a rationale for that restriction. Similarly,
the safe harbor also does not apply if the member has a membership
agreement that permits expansion beyond the limits set forth below
(e.g., an Applicant requests and obtains approval for ten registered
representatives in the first six months with an additional ten
registered representatives in the next year); in such case, [the
Department] NASD has specifically considered the firm's expansion plans
and approved them.
The safe harbor is not available to any member that has
disciplinary history. For purposes of this Interpretation,
``disciplinary history'' means a finding of a violation by the member
or a principal of the member in the past five years by the Securities
and Exchange Commission, a self-regulatory organization, or a foreign
financial regulatory authority of one or more of the following
provisions (or a comparable foreign provision) or rules or regulations
thereunder: violations of the types enumerated in Section[s]
15(b)(4)(E) [and 15(c)] of the Securities Exchange Act of 1934; Section
15(c) of the Securities Exchange Act of 1934; Section 17(a) of the
Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; NASD
Rules 2110 (only if the finding of a violation is for unauthorized
trading, churning, conversion, material misrepresentations or omissions
to a customer, front-running, trading ahead of research reports or
excessive markups), 2120, 2310, 2330, 2440, 3010 (failure to supervise
only), 3310, and 3330; and MSRB Rules G-19, G-30, and G-37(b) & (c).
For those firms to which the safe harbor is available, the
following types of expansions are presumed not to be a material change
in business operations and therefore do not require a Rule 1017
application. For any expansion beyond these limits, a member should
contact its district office prior to implementing the change to
determine whether the proposed expansion requires an application under
Rule 1017. Expansions in each area are measured on a rolling 12-month
basis; members are required to keep records of increases in personnel,
offices, and markets to determine whether they are within the safe
harbor.
``Associated Persons involved in sales'' includes all Associated
Persons, whether or not registered, who are involved in sales
activities with public customers, including sales assistants and cold
callers, but excludes clerical, back office, and trading personnel who
are not involved in sales activities.
------------------------------------------------------------------------
Safe Harbor--Increase Permitted
Number of Associated Persons Involved Within One Year Period Without
in Sales Rule 1017 Application
------------------------------------------------------------------------
1-10................................... 10 persons.
11 or more............................. 10 persons or a 30 percent
increase, whichever is
greater.
Number of Offices (registered or
unregistered):
1-5.................................... 3 offices.
6 or more.............................. 3 offices or a 30 percent
increase, whichever is
greater.
Number of Markets Made:
1-10................................... 10 markets.
11 or more............................. 10 markets or a 30 percent
increase, whichever is
greater.
------------------------------------------------------------------------
* * * * *
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.
[[Page 38195]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASD Rule 1017 (Application for Approval of Change in Ownership,
Control, or Business Operations) requires that a member submit an
application to NASD for approval prior to, among other things, making a
``material change in business operations,'' which is defined in NASD
Rule 1011.\3\ NASD IM-1011-1 creates a safe harbor for certain types of
expansions that are presumed not to be a ``material change in business
operations'' and therefore do not require NASD approval.\4\ This
provides members with greater certainty regarding which expansions
require approval and eliminates unnecessary applications for approval
of business changes.
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\3\ A ``material change in business operations'' is defined in
NASD Rule 1011(i) and includes, but is not limited to: removing or
modifying a membership agreement restriction; market making,
underwriting, or acting as a dealer for the first time; and adding
business activities that require a higher minimum net capital under
SEC Rule 15c3-1.
\4\ The safe harbor permits within a one year period (1) an
increase of 10 persons if the firm has 10 or less associated persons
in sales, or an increase of 10 persons or a 30 percent increase,
whichever is greater, if the firm has 11 or more associated persons
in sales; (2) an increase of 3 offices if the firm has 5 or less
offices, or an increase of 3 offices or a 30 percent increase,
whichever is greater, if the firm has 6 or more offices; and (3) an
increase of 10 markets to be made if the firm makes 10 or less
markets, or an increase of 10 markets or a 30 percent increase,
whichever is greater, if the firm makes 11 or more markets.
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However, the safe harbor in NASD IM-1011-1 is not available to any
member that, among other things, has a ``disciplinary history'' as
defined in NASD IM-1011-1.\5\ For purposes of NASD IM-1011-1,
disciplinary history means a finding of a violation by a member or a
principal of the member in the past five years by the SEC, a self-
regulatory organization, or a foreign financial regulatory authority of
one or more specified provisions (or comparable foreign provisions) or
rules or regulations thereunder,\6\ including NASD Rule 2110.\7\
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\5\ The safe harbor is also generally not available to members
with membership agreements that contain certain restrictions on
number of personnel, offices, and markets that may be made.
\6\ The applicable provisions are sections 15(b)(4)(E) and 15(c)
of the Securities Exchange Act of 1934; section 17(a) of the
Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9;
NASD Rules 2110, 2120 (Use of Manipulative, Deceptive or Other
Fraudulent Devices), 2310 (Recommendations to Customers
(Suitability)), 2330 (Customers' Securities or Funds), 2440 (Fair
Prices and Commissions), 3010 (Supervision-failure to supervise
only), 3310 (Publication of Transactions and Quotations), and 3330
(Payment Designed to Influence Market Prices, Other than Paid
Advertising); and MSRB Rules G-19, G-30 and G-37(b) and (c).
\7\ NASD Rule 2110 requires that ``a member, in the conduct of
his business, shall observe high standards of commercial honor and
just and equitable principles of trade.''
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When a member or individual is charged with violating an NASD rule,
NASD frequently charges a violation of NASD Rule 2110 as part of NASD's
action (in both settled and litigated matters).\8\ Thus, the inclusion
of NASD Rule 2110 in NASD IM-1011-1, without any limitation, often
results in members being ineligible to use the safe harbor if they (or
any of their principals) have violated any other NASD rule, which was
not the intended effect. Rather, the safe harbor specifically included
a finite list of rules, the violation of which would preclude the
member from using the safe harbor, and was not intended to capture
violations of all NASD rules.
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\8\ See Joseph Abbondante, Securities Exchange Act Release No.
53066 (January 6, 2006) at 36 (``It is well settled that a violation
of a rule promulgated by the SEC or by NASD also violates NASD
Conduct Rule 2110.'').
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Accordingly, with respect to violations of NASD Rule 2110, NASD
proposes amendments to NASD IM-1011-1 that would deem a member
ineligible to use the safe harbor only where the finding of a violation
of NASD Rule 2110 by the member or a principal of the member raises
significant investor protection issues by involving unauthorized
trading, churning, conversion, material misrepresentations or omissions
to a customer, front-running, trading ahead of research reports or
excessive markups.\9\ Therefore, a member would not be eligible to rely
on the safe harbor for material changes in business operations if the
member or any of its principals have been found, within the past five
years, to have violated NASD Rule 2110 in the context of one or more of
these enumerated activities (or to have violated any of the other rules
specified in NASD IM-1011-1).
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\9\ The proposed limits on violations of NASD Rule 2110 mirror
the limits on NASD Rule 2110 with respect to the public release of
disciplinary complaints. See NASD IM-8310-2 (Release of Disciplinary
and Other Information Through BrokerCheck) and the related Notice to
Members 97-42 (July 1997).
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In addition, NASD proposes to make a technical correction to the
rule text with respect to the inclusion of section 15(b)(4)(E) of the
Act in the list of rules the violation of which would preclude a member
from relying on the safe harbor under NASD IM-1011-1. Section
15(b)(4)(E) of the Act lists the willful violations that will result in
the statutory disqualification of a broker or dealer under the Federal
securities laws. A member or principal of a member is not able to
violate this section per se. Accordingly, the proposed rule change
clarifies that a member would be ineligible to use the safe harbor in
the event that a member or any of its principals has been found to have
engaged in one or more violations of the type specified in section
15(b)(4)(E) of the Act in the past five years.
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. The effective date will be 30 days following
publication of the Notice to Members announcing Commission approval.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A of the Act,\10\ in general, and with section
15A(b)(6) of the Act,\11\ 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 limiting the types of violations of NASD Rule 2110 that constitute
``disciplinary history'' for purposes of NASD IM-1101-1 will allow
additional firms to be able to rely on the safe harbor consistent with
the original intent of the IM, while at the same time continuing to
ensure investor protection by deeming a member ineligible to use the
safe harbor where the violation of NASD Rule 2110 by the member or a
principal presents significant investor protection issues.
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\10\ 15 U.S.C. 78o-3.
\11\ 15 U.S.C. 78o3(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.
[[Page 38196]]
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 NASD 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-2006-070 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2006-070. 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 the 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-2006-070 and should be submitted on or before July
26, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-10434 Filed 7-3-06; 8:45 am]
BILLING CODE 8010-01-P
