Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Principal Pre-Use Approval of Member Correspondence to 25 or More Existing Retail Customers Within a 30 Calendar-Day Period, 43831-43833 [E6-12443]

Download as PDF Federal Register / Vol. 71, No. 148 / Wednesday, August 2, 2006 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.20 J. Lynn Taylor, Assistant Secretary. [FR Doc. E6–12430 Filed 8–1–06; 8:45 am] and filed Amendment No. 2 to the proposed rule change.6 This order approves the proposed rule change, as amended. II. Description of the Proposed Rule Change BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54217; File No. SR–NASD– 2006–011) Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Principal Pre-Use Approval of Member Correspondence to 25 or More Existing Retail Customers Within a 30 Calendar-Day Period July 26, 2006. I. Introduction On January 27, 2006, the National Association of Securities Dealers, Inc. (‘‘NASD’’), 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 amend NASD Rule 2211 (‘‘Institutional Sales Material and Correspondence’’) to require principal pre-use approval of member correspondence to 25 or more existing retail customers within a 30 calendar-day period. On February 13, 2006, NASD filed Amendment No. 1 to the proposed rule change. The proposed rule change was published for comment in the Federal Register on February 28, 2006.3 The Commission received five comments on the proposal, as amended.4 On June 29, 2006, NASD submitted a response to the comments 5 20 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 53333 (February 17, 2006), 71 FR 10090. 4 See comment letters to Nancy M. Morris, Secretary, Commission, from Caroline B. Austin, CEO, Evolve Securities, Inc., dated March 7, 2006 (‘‘Evolve Letter’’); Dorothy M. Donohue, Associate Counsel, Investment Company Institute, dated March 17, 2006 (‘‘ICI Letter’’); Tim Kelly, Partner, Field Supervision, Edward D. Jones & Co., LP, dated March 20, 2006 (‘‘Edward D. Jones Letter’’); Jack R. Handy, Jr., President and CEO, Financial Network Investment Corporation, dated March 21, 2006 (‘‘FNIC Letter’’); and Dale E. Brown, CAE, Executive Director & CEO, Financial Services Institute, dated March 21, 2006 (‘‘FSI Letter’’). 5 See letter from Philip A. Shaikun, Associate Vice President and Associate General Counsel, NASD, to Katherine England, Assistant Director, Division, Commission, dated June 29, 2006 (‘‘NASD Response Letter’’). wwhite on PROD1PC61 with NOTICES 1 15 VerDate Aug<31>2005 16:40 Aug 01, 2006 Jkt 208001 In 2003, as part of NASD’s modernization of its advertising rules, the SEC approved the adoption of NASD Rule 2211, which included an amended definition of ‘‘correspondence.’’ 7 The definition of correspondence includes any written letter or electronic mail message distributed by a member to one or more of its existing retail customers and to fewer than 25 prospective retail customers within a 30 calendar-day period.8 Previously, ‘‘correspondence’’ included any written or electronic communication prepared for delivery to a single current or prospective customer, and not for dissemination to multiple customers or the general public. The definition of correspondence is significant in several respects. Firms generally are not required to have a registered principal approve correspondence prior to use, nor are they required to file correspondence with the NASD Advertising Regulation Department (‘‘Department’’).9 In addition, correspondence is subject to fewer content restrictions than advertisements and sales literature. NASD noted that it amended the definition in order to provide firms with more flexibility regarding the supervision of certain emails and form letters. NASD further noted, however, that it understands that many firms continue to require registered principal pre-use approval of some correspondence. 6 Amendment No. 2 made clarifying changes to the proposed rule text, thus it is a technical amendment and is not subject to notice and comment. 7 See Securities Exchange Act Release No. 47820 (May 9, 2003), 68 FR 27116 (May 19, 2003). 8 NASD has clarified that, for purposes of its rules governing member communications with the public, it views instant messaging in the same manner in which it views traditional electronic mail messages. Accordingly, instant messaging may qualify as correspondence or sales literature, depending upon the facts and circumstances. See Notice to Members 03–33 (July 2003). 9 NASD Rule 3010(d)(2) requires each member to develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing correspondence with the public relating to its investment banking or securities business. Where such procedures do not require review of all correspondence prior to use or distribution, they must provide for the education and training of associated persons as to the firm’s procedures governing correspondence, documentation of the education and training, and surveillance and follow-up to ensure that the procedures are implemented and adhered to. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 43831 Proposed Amendment NASD indicated that it has found that some member correspondence to multiple existing customers raises the same regulatory concerns as member advertisements and sales literature. However, members are not currently required to have such correspondence approved by a principal prior to use or to file it with the Department. As a result, NASD is proposing to amend Rule 2211 to require registered principal pre-use approval of any non-clerical correspondence 10 sent to 25 or more existing retail customers within any 30 calendar-day period. NASD stated that non-clerical correspondence with such a wide distribution often will constitute a solicitation to purchase or sell a security or to use a brokerage service. NASD is not proposing to require that this correspondence be filed with the Department or that it be subject to all of the content standards of the advertising rules. A firm may, however, choose to file this correspondence with the Department to better ensure that it complies with applicable standards, particularly when the correspondence promotes the firm’s products or services. NASD indicated that it will announce the effective date of the proposed rule change in a Notice to Members to be published no later than 30 days following Commission approval. The effective date will be 90 days following publication of the Notice to Members announcing Commission approval. III. Summary of Comments and NASD’s Response As noted above, the Commission received five comments on the proposal,11 to which NASD has filed a response letter.12 Two commenters supported the proposal, without reservation.13 One of these commenters, in expressing its ‘‘unqualified support’’ for the proposal, noted that the proposal is consistent with recently-announced NASD communications policies, as well as the policies of other self-regulatory organizations, and that the proposal gives firms discretion with regard to their internal supervisory procedures ‘‘without sacrificing customer 10 In Amendment No. 2, in response to comments on the original proposal, NASD clarified that registered principal pre-use approval would only be required for correspondence that ‘‘makes any financial or investment recommendation or otherwise promotes a product or service of the member.’’ 11 11 See supra note 4. 12 12 See NASD Response Letter, supra note 5. 13 13 See Edward D. Jones Letter and ICI Letter, supra note 4. E:\FR\FM\02AUN1.SGM 02AUN1 43832 Federal Register / Vol. 71, No. 148 / Wednesday, August 2, 2006 / Notices protections.’’ 14 The other commenter commended NASD for furthering the interests of investors without being unnecessarily burdensome.15 Three commenters expressed reservations regarding the proposal.16 Two of the commenters asserted that NASD has not provided sufficient justification for the proposal, which they believe will impose significant burdens on the industry.17 These commenters argued that NASD should provide data to document the pervasiveness of the problem it is attempting to address by adopting the proposed amendments.18 One of these commenters pointed out that the current rules seem sufficient to detect and prevent abuse.19 The same commenter argued that the proposal would interfere with members’ ability to allocate compliance resources efficiently, which could lead to, among other things, delay of important client communications or draining of assets that could be directed towards areas of greater compliance concern.20 The other commenter argued that NASD did not properly analyze the resulting burdens of the proposal on the industry and has provided no explanation of what occurred in the relatively short period since NASD Rule 2211 was adopted to justify the proposed change.21 Another commenter stated that the proposal is not in and of itself necessarily a bad idea or outrageously burdensome but that the Commission should examine the body of rules collectively, rather than individual rules, in order to understand the true burden of compliance.22 Two commenters suggested that the proposed pre-use approval only be required for firms that are found to display ‘‘risky broker/dealer behavior’’ 23 or to violate 14 14 See Edward D. Jones Letter, supra note 4. See ICI Letter, supra note 4. 16 See Evolve Letter, FNIC Letter and FSI Letter, supra note 4. 17 See FNIC Letter and FSI Letter, supra note 4. 18 Id. 19 See FSI Letter, supra note 4. This commenter also argued that NASD’s assertion that many firms already require principal pre-use approval of correspondence is unsupported and noted that many of its members do not currently require principal pre-use approval of correspondence. Id. 20 Id. 21 See FNIC Letter, supra note 4. This commenter further noted that the lack of justification for the proposal is especially troubling given that NASD is not proposing to require members to submit correspondence covered by the proposed rule to the Department. The commenter argued that the policy is inconsistent with NASD’s assertion that such correspondence raises the same issues as advertisements and sales literature. Id. 22 See Evolve Letter, supra note 4. 23 Id. This commenter further suggested that corrective behavior could be implemented in specific divisions of larger firms, rather than the entire firm. Id. wwhite on PROD1PC61 with NOTICES 15 15 VerDate Aug<31>2005 16:40 Aug 01, 2006 Jkt 208001 the current requirements.24 One of these commenters asserted that principal preuse approval burdens ‘‘good people’’ who follow the rules without changing the behavior of ‘‘bad people.’’æ25 The other commenter suggested a 12-month pre-use approval requirement for firms violating the current requirements, which would then terminate unless the firm committed further violations, at which point NASD could impose more severe sanctions.26 In its response letter, NASD reiterated that it believes that correspondence sent to large numbers of existing retail customers, particularly correspondence intended to promote a member’s products or services, raises many of the same issues as advertising and sales literature, which is subject to approval.27 NASD argued that the commenters did not show why the risks raised by such correspondence differ from those raised by advertisements or sales literature. Furthermore, NASD disputed assertions that the problem must be pervasive in order for NASD to adopt new rules; rather, it argued, a better approach is to try to anticipate problems before they occur. Two commenters pointed out problems with pre-use approval of email.28 One argued that, as a result of pre-use approval, financial advisors will not be able to quickly communicate critical information to their clients.29 The commenter further argued that the proposal, if implemented, could lead its members to curtail the use of email by registered representatives, in order to avoid the expense of complying with the proposal.30 The other commenter indicated that members might have to require pre-use approval of all email messages since they will not be able to easily monitor which messages require pre-use approval.31 In response, NASD stated that such arguments were ‘‘unpersuasive’’ in that the commenters suggested that current NASD rules do not require principal pre-use approval of any emails. As NASD noted, the current rules require pre-use approval of emails sent to 25 or more prospective retail customers within a 30 calendar-day period, since such emails are considered sales literature. Therefore, NASD noted, the proposed rule change would merely add FSI Letter, supra note 4. Evolve Letter, supra note 4. 26 See FSI Letter, supra note 4. 27 The Commission notes that advertising and sales literature are subject to pre-use approval. 28 See FNIC Letter and FSI Letter, supra note 4. 29 See FSI Letter, supra note 4. 30 Id. 31 See FNIC Letter, supra note 4. to the categories of email requiring preuse approval. One commenter also claimed that the exclusion for clerical or ministerial correspondence ‘‘lacks clarity’’ and that NASD should make clear whether its intent is to have the proposal relate to correspondence addressing securities products.32 This commenter noted that if the exclusion is not clear, all correspondence will have to be preapproved, which could create issues for making timely communications.33 In its response letter, NASD indicated that it is amending the proposed rule change to require pre-use approval of correspondence only if it ‘‘makes any financial or investment recommendation or otherwise promotes a product or service of the member,’’34 rather than requiring pre-use approval of correspondence that is ‘‘not solely and exclusively clerical or ministerial in nature.’’ NASD further clarified that principal pre-use approval would not be required for correspondence concerning clerical or ministerial matters, such as dividend notices or changes in office hours, or for correspondence that does not promote a product or service of the member, such as emails including only market commentary. NASD did note, however, that all correspondence must be supervised by members in accordance with NASD Rule 3010(d). IV. Discussion After careful consideration of the proposed rule change, the comment letters and NASD’s response to the comments, the Commission finds that the proposed rule change, as amended, is consistent with the Act and the rules and regulations thereunder applicable to a national securities association.35 Specifically, the Commission believes that the proposal is consistent with Section 15A(b)(6) of the Act36 in that it is 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 by requiring additional supervision of correspondence by broker-dealers. The Commission notes that NASD has represented that many firms require registered principal pre-use approval of some correspondence, even though not required by NASD rules. In addition, NASD carved out correspondence that 24 See 25 See PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 32 Id. 33 Id. 34 See Amendment No. 2. approving this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 36 15 U.S.C. 78o-3(b)(6). 35 In E:\FR\FM\02AUN1.SGM 02AUN1 Federal Register / Vol. 71, No. 148 / Wednesday, August 2, 2006 / Notices does not make any financial or investment recommendation or otherwise promote a product or service of the member from coverage of the rule and did not require correspondence covered by the rule to be filed with the Department. The Commission believes that requiring pre-use approval by a principal of correspondence sent to 25 or more existing retail customers within any 30 calendar-day period appropriately balances the needs of members to contact existing customers without being unduly burdened against the goal of having communications with retail customers that are fair and balanced. The Commission is not persuaded by the commenters’ arguments that pre-use approval of emails is not workable given that pre-use approval is already required for certain emails.37 The Commission commends NASD for attempting to address problems with correspondence, rather than waiting for additional inappropriate materials to reach retail customers. Finally, the Commission believes that NASD’s proposed amendment to the rule text adequately addresses concerns that the proposed rule change lacks clarity. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,38 that the proposed rule change (SR–NASD–2006– 011), as amended, is approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.39 J. Lynn Taylor, Assistant Secretary. [FR Doc. E6–12443 Filed 8–1–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54223; File No. SR–NYSE– 2006–43] Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change To Amend Section 902.02 of the Listed Company Manual To Exempt Companies Transferring From NYSE Arca From Initial Listing Fees and the Annual Fee for the Year of Such Transfer July 26, 2006. On June 7, 2006, the New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘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 amend Section 902.02 of its Listed Company Manual to provide that there shall be no initial listing and no prorated annual fee payable with respect to the first partial calendar year of listing for any company listed on NYSE Arca, Inc. (‘‘NYSE Arca’’) that transfers the listing of its primary class of common shares to the Exchange. The Commission published notice of the proposal in the Federal Register on June 26, 2006.3 The Commission received no comments on the proposal. The Commission has reviewed carefully the proposed rule change and finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange 4 and, in particular, the requirements of Section 6 of the Act 5 and the rules and regulations thereunder. The Commission finds specifically that the proposed rule change is consistent with Sections 6(b)(4) 6 and 6(b)(5) of the Act,7 which require that an exchange have rules that provide for the equitable allocation of reasonable dues, fees and other charges among its members and other persons using its facilities, and are designed to remove impediments to and perfect the mechanism of a free and open market and a national market system and are not designed to permit unfair 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 54008 (June 16, 2006), 71 FR 36370. 4 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 5 15 U.S.C. 78f. 6 15 U.S.C. 78f(b)(4). 7 15 U.S.C. 78f(b)(5). wwhite on PROD1PC61 with NOTICES 2 17 37 For example, emails sent to 25 or more prospective retail customers within a 30 calendarday period currently require principal pre-use approval. See NASD Response Letter, supra note 5. 38 Id. 39 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 16:40 Aug 01, 2006 Jkt 208001 PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 43833 discrimination between issuers. The Commission believes that the fee waiver is reasonable, given the NYSE’s representation that its review of companies transferring from NYSE Arca to the Exchange will be less costly than the review of a transfer from other selfregulatory organizations. While the Commission understands that the Exchange will rely on the baseline review of any NYSE Arca listed company performed by NYSE Regulation, the Commission notes that the Exchange must conduct a thorough regulatory review of companies transferring from NYSE Arca to the Exchange to ensure that the Exchange can independently confirm that such companies qualify for listing on the Exchange. The Commission also believes the proposed waiver may enhance competition by making NYSE Arca a more attractive listing venue and a viable alternative to listing on Nasdaq. It is therefore ordered, pursuant to Section 19(b)(2) of the Act ,8 that the proposed rule change (SR–NYSE–2006– 43) be, and it hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9 J. Lynn Taylor, Assistant Secretary. [FR Doc. E6–12427 Filed 8–1–06; 8:45 am] BILLING CODE 8010–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration # 10482 and # 10481] Massachusetts Disaster Number MA– 00006 Small Business Administration. Amendment 2. AGENCY: ACTION: SUMMARY: This is an amendment of the Presidential declaration of a major disaster for the Commonwealth of Massachusetts ( FEMA–1642–DR), dated 05/25/2006. Incident: Severe Storms and Flooding. Incident Period: 05/12/2006 through 05/23/2006. Effective Date: 07/24/2006. Physical Loan Application Deadline Date: 08/07/2006. EIDL Loan Application Deadline Date: 02/26/2007. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, National Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, 8 15 9 17 E:\FR\FM\02AUN1.SGM U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 02AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 148 (Wednesday, August 2, 2006)]
[Notices]
[Pages 43831-43833]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-12443]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54217; File No. SR-NASD-2006-011)


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving a Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto Relating to Principal Pre-Use Approval of Member 
Correspondence to 25 or More Existing Retail Customers Within a 30 
Calendar-Day Period

July 26, 2006.

I. Introduction

    On January 27, 2006, the National Association of Securities 
Dealers, Inc. (``NASD''), 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 amend NASD Rule 2211 
(``Institutional Sales Material and Correspondence'') to require 
principal pre-use approval of member correspondence to 25 or more 
existing retail customers within a 30 calendar-day period. On February 
13, 2006, NASD filed Amendment No. 1 to the proposed rule change. The 
proposed rule change was published for comment in the Federal Register 
on February 28, 2006.\3\ The Commission received five comments on the 
proposal, as amended.\4\ On June 29, 2006, NASD submitted a response to 
the comments \5\ and filed Amendment No. 2 to the proposed rule 
change.\6\ This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53333 (February 17, 
2006), 71 FR 10090.
    \4\ See comment letters to Nancy M. Morris, Secretary, 
Commission, from Caroline B. Austin, CEO, Evolve Securities, Inc., 
dated March 7, 2006 (``Evolve Letter''); Dorothy M. Donohue, 
Associate Counsel, Investment Company Institute, dated March 17, 
2006 (``ICI Letter''); Tim Kelly, Partner, Field Supervision, Edward 
D. Jones & Co., LP, dated March 20, 2006 (``Edward D. Jones 
Letter''); Jack R. Handy, Jr., President and CEO, Financial Network 
Investment Corporation, dated March 21, 2006 (``FNIC Letter''); and 
Dale E. Brown, CAE, Executive Director & CEO, Financial Services 
Institute, dated March 21, 2006 (``FSI Letter'').
    \5\ See letter from Philip A. Shaikun, Associate Vice President 
and Associate General Counsel, NASD, to Katherine England, Assistant 
Director, Division, Commission, dated June 29, 2006 (``NASD Response 
Letter'').
    \6\ Amendment No. 2 made clarifying changes to the proposed rule 
text, thus it is a technical amendment and is not subject to notice 
and comment.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    In 2003, as part of NASD's modernization of its advertising rules, 
the SEC approved the adoption of NASD Rule 2211, which included an 
amended definition of ``correspondence.'' \7\ The definition of 
correspondence includes any written letter or electronic mail message 
distributed by a member to one or more of its existing retail customers 
and to fewer than 25 prospective retail customers within a 30 calendar-
day period.\8\ Previously, ``correspondence'' included any written or 
electronic communication prepared for delivery to a single current or 
prospective customer, and not for dissemination to multiple customers 
or the general public.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 47820 (May 9, 2003), 
68 FR 27116 (May 19, 2003).
    \8\ NASD has clarified that, for purposes of its rules governing 
member communications with the public, it views instant messaging in 
the same manner in which it views traditional electronic mail 
messages. Accordingly, instant messaging may qualify as 
correspondence or sales literature, depending upon the facts and 
circumstances. See Notice to Members 03-33 (July 2003).
---------------------------------------------------------------------------

    The definition of correspondence is significant in several 
respects. Firms generally are not required to have a registered 
principal approve correspondence prior to use, nor are they required to 
file correspondence with the NASD Advertising Regulation Department 
(``Department'').\9\ In addition, correspondence is subject to fewer 
content restrictions than advertisements and sales literature. NASD 
noted that it amended the definition in order to provide firms with 
more flexibility regarding the supervision of certain emails and form 
letters. NASD further noted, however, that it understands that many 
firms continue to require registered principal pre-use approval of some 
correspondence.
---------------------------------------------------------------------------

    \9\ NASD Rule 3010(d)(2) requires each member to develop written 
procedures that are appropriate to its business, size, structure, 
and customers for the review of incoming and outgoing correspondence 
with the public relating to its investment banking or securities 
business. Where such procedures do not require review of all 
correspondence prior to use or distribution, they must provide for 
the education and training of associated persons as to the firm's 
procedures governing correspondence, documentation of the education 
and training, and surveillance and follow-up to ensure that the 
procedures are implemented and adhered to.
---------------------------------------------------------------------------

Proposed Amendment

    NASD indicated that it has found that some member correspondence to 
multiple existing customers raises the same regulatory concerns as 
member advertisements and sales literature. However, members are not 
currently required to have such correspondence approved by a principal 
prior to use or to file it with the Department. As a result, NASD is 
proposing to amend Rule 2211 to require registered principal pre-use 
approval of any non-clerical correspondence \10\ sent to 25 or more 
existing retail customers within any 30 calendar-day period. NASD 
stated that non-clerical correspondence with such a wide distribution 
often will constitute a solicitation to purchase or sell a security or 
to use a brokerage service.
---------------------------------------------------------------------------

    \10\ In Amendment No. 2, in response to comments on the original 
proposal, NASD clarified that registered principal pre-use approval 
would only be required for correspondence that ``makes any financial 
or investment recommendation or otherwise promotes a product or 
service of the member.''
---------------------------------------------------------------------------

    NASD is not proposing to require that this correspondence be filed 
with the Department or that it be subject to all of the content 
standards of the advertising rules. A firm may, however, choose to file 
this correspondence with the Department to better ensure that it 
complies with applicable standards, particularly when the 
correspondence promotes the firm's products or services.
    NASD indicated that it will announce the effective date of the 
proposed rule change in a Notice to Members to be published no later 
than 30 days following Commission approval. The effective date will be 
90 days following publication of the Notice to Members announcing 
Commission approval.

III. Summary of Comments and NASD's Response

    As noted above, the Commission received five comments on the 
proposal,\11\ to which NASD has filed a response letter.\12\ Two 
commenters supported the proposal, without reservation.\13\ One of 
these commenters, in expressing its ``unqualified support'' for the 
proposal, noted that the proposal is consistent with recently-announced 
NASD communications policies, as well as the policies of other self-
regulatory organizations, and that the proposal gives firms discretion 
with regard to their internal supervisory procedures ``without 
sacrificing customer

[[Page 43832]]

protections.'' \14\ The other commenter commended NASD for furthering 
the interests of investors without being unnecessarily burdensome.\15\
---------------------------------------------------------------------------

    \11\ 11 See supra note 4.
    \12\ 12 See NASD Response Letter, supra note 5.
    \13\ 13 See Edward D. Jones Letter and ICI Letter, supra note 4.
    \14\ 14 See Edward D. Jones Letter, supra note 4.
    \15\ 15 See ICI Letter, supra note 4.
---------------------------------------------------------------------------

    Three commenters expressed reservations regarding the proposal.\16\ 
Two of the commenters asserted that NASD has not provided sufficient 
justification for the proposal, which they believe will impose 
significant burdens on the industry.\17\ These commenters argued that 
NASD should provide data to document the pervasiveness of the problem 
it is attempting to address by adopting the proposed amendments.\18\ 
One of these commenters pointed out that the current rules seem 
sufficient to detect and prevent abuse.\19\ The same commenter argued 
that the proposal would interfere with members' ability to allocate 
compliance resources efficiently, which could lead to, among other 
things, delay of important client communications or draining of assets 
that could be directed towards areas of greater compliance concern.\20\ 
The other commenter argued that NASD did not properly analyze the 
resulting burdens of the proposal on the industry and has provided no 
explanation of what occurred in the relatively short period since NASD 
Rule 2211 was adopted to justify the proposed change.\21\ Another 
commenter stated that the proposal is not in and of itself necessarily 
a bad idea or outrageously burdensome but that the Commission should 
examine the body of rules collectively, rather than individual rules, 
in order to understand the true burden of compliance.\22\ Two 
commenters suggested that the proposed pre-use approval only be 
required for firms that are found to display ``risky broker/dealer 
behavior'' \23\ or to violate the current requirements.\24\ One of 
these commenters asserted that principal pre-use approval burdens 
``good people'' who follow the rules without changing the behavior of 
``bad people.''[rparb]\25\ The other commenter suggested a 12-month 
pre-use approval requirement for firms violating the current 
requirements, which would then terminate unless the firm committed 
further violations, at which point NASD could impose more severe 
sanctions.\26\
---------------------------------------------------------------------------

    \16\ See Evolve Letter, FNIC Letter and FSI Letter, supra note 
4.
    \17\ See FNIC Letter and FSI Letter, supra note 4.
    \18\ Id.
    \19\ See FSI Letter, supra note 4. This commenter also argued 
that NASD's assertion that many firms already require principal pre-
use approval of correspondence is unsupported and noted that many of 
its members do not currently require principal pre-use approval of 
correspondence. Id.
    \20\ Id.
    \21\ See FNIC Letter, supra note 4. This commenter further noted 
that the lack of justification for the proposal is especially 
troubling given that NASD is not proposing to require members to 
submit correspondence covered by the proposed rule to the 
Department. The commenter argued that the policy is inconsistent 
with NASD's assertion that such correspondence raises the same 
issues as advertisements and sales literature. Id.
    \22\ See Evolve Letter, supra note 4.
    \23\ Id. This commenter further suggested that corrective 
behavior could be implemented in specific divisions of larger firms, 
rather than the entire firm. Id.
    \24\ See FSI Letter, supra note 4.
    \25\ See Evolve Letter, supra note 4.
    \26\ See FSI Letter, supra note 4.
---------------------------------------------------------------------------

    In its response letter, NASD reiterated that it believes that 
correspondence sent to large numbers of existing retail customers, 
particularly correspondence intended to promote a member's products or 
services, raises many of the same issues as advertising and sales 
literature, which is subject to approval.\27\ NASD argued that the 
commenters did not show why the risks raised by such correspondence 
differ from those raised by advertisements or sales literature. 
Furthermore, NASD disputed assertions that the problem must be 
pervasive in order for NASD to adopt new rules; rather, it argued, a 
better approach is to try to anticipate problems before they occur.
---------------------------------------------------------------------------

    \27\ The Commission notes that advertising and sales literature 
are subject to pre-use approval.
---------------------------------------------------------------------------

    Two commenters pointed out problems with pre-use approval of 
email.\28\ One argued that, as a result of pre-use approval, financial 
advisors will not be able to quickly communicate critical information 
to their clients.\29\ The commenter further argued that the proposal, 
if implemented, could lead its members to curtail the use of email by 
registered representatives, in order to avoid the expense of complying 
with the proposal.\30\ The other commenter indicated that members might 
have to require pre-use approval of all email messages since they will 
not be able to easily monitor which messages require pre-use 
approval.\31\
---------------------------------------------------------------------------

    \28\ See FNIC Letter and FSI Letter, supra note 4.
    \29\ See FSI Letter, supra note 4.
    \30\ Id.
    \31\ See FNIC Letter, supra note 4.
---------------------------------------------------------------------------

    In response, NASD stated that such arguments were ``unpersuasive'' 
in that the commenters suggested that current NASD rules do not require 
principal pre-use approval of any emails. As NASD noted, the current 
rules require pre-use approval of emails sent to 25 or more prospective 
retail customers within a 30 calendar-day period, since such emails are 
considered sales literature. Therefore, NASD noted, the proposed rule 
change would merely add to the categories of email requiring pre-use 
approval.
    One commenter also claimed that the exclusion for clerical or 
ministerial correspondence ``lacks clarity'' and that NASD should make 
clear whether its intent is to have the proposal relate to 
correspondence addressing securities products.\32\ This commenter noted 
that if the exclusion is not clear, all correspondence will have to be 
pre-approved, which could create issues for making timely 
communications.\33\
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    \32\ Id.
    \33\ Id.
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    In its response letter, NASD indicated that it is amending the 
proposed rule change to require pre-use approval of correspondence only 
if it ``makes any financial or investment recommendation or otherwise 
promotes a product or service of the member,''\34\ rather than 
requiring pre-use approval of correspondence that is ``not solely and 
exclusively clerical or ministerial in nature.'' NASD further clarified 
that principal pre-use approval would not be required for 
correspondence concerning clerical or ministerial matters, such as 
dividend notices or changes in office hours, or for correspondence that 
does not promote a product or service of the member, such as emails 
including only market commentary. NASD did note, however, that all 
correspondence must be supervised by members in accordance with NASD 
Rule 3010(d).
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    \34\ See Amendment No. 2.
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IV. Discussion

    After careful consideration of the proposed rule change, the 
comment letters and NASD's response to the comments, the Commission 
finds that the proposed rule change, as amended, is consistent with the 
Act and the rules and regulations thereunder applicable to a national 
securities association.\35\ Specifically, the Commission believes that 
the proposal is consistent with Section 15A(b)(6) of the Act\36\ in 
that it is 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 by requiring 
additional supervision of correspondence by broker-dealers. The 
Commission notes that NASD has represented that many firms require 
registered principal pre-use approval of some correspondence, even 
though not required by NASD rules. In addition, NASD carved out 
correspondence that

[[Page 43833]]

does not make any financial or investment recommendation or otherwise 
promote a product or service of the member from coverage of the rule 
and did not require correspondence covered by the rule to be filed with 
the Department. The Commission believes that requiring pre-use approval 
by a principal of correspondence sent to 25 or more existing retail 
customers within any 30 calendar-day period appropriately balances the 
needs of members to contact existing customers without being unduly 
burdened against the goal of having communications with retail 
customers that are fair and balanced.
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    \35\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \36\ 15 U.S.C. 78o-3(b)(6).
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    The Commission is not persuaded by the commenters' arguments that 
pre-use approval of emails is not workable given that pre-use approval 
is already required for certain emails.\37\ The Commission commends 
NASD for attempting to address problems with correspondence, rather 
than waiting for additional inappropriate materials to reach retail 
customers. Finally, the Commission believes that NASD's proposed 
amendment to the rule text adequately addresses concerns that the 
proposed rule change lacks clarity.
---------------------------------------------------------------------------

    \37\ For example, emails sent to 25 or more prospective retail 
customers within a 30 calendar-day period currently require 
principal pre-use approval. See NASD Response Letter, supra note 5.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule change (SR-NASD-2006-011), as amended, 
is approved.
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    \38\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-12443 Filed 8-1-06; 8:45 am]
BILLING CODE 8010-01-P

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