[Federal Register Volume 64, Number 175 (Friday, September 10, 1999)]
[Notices]
[Pages 49261-49263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23611]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41820; File No. SR-NASD-99-35]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to the Definition of ``Person Associated with a Member''
September 1, 1999.
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 August 3, 1999, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') 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 the
Association. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NASD is proposing to amend the definition of ``person
associated with a member'' in the By-Laws of the NASD, NASD Regulation,
Inc. (``NASD Regulation''), and The Nasdaq Stock Market, Inc.
(``Nasdaq''). The text of the proposed rule change is set forth below.
Additions are italicized and deletions are bracketed.
* * * * *
BY-LAWS OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
ARTICLE I DEFINITIONS
* * * * *
(ee) ``person associated with a member'' or ``associated person of
a member'' means: (1) a natural person who is registered or has applied
for registration under the Rules of the Association; [or] (2) a sole
proprietor, partner, officer, director, or branch manager of a member,
or [a] other natural person occupying a similar status or performing
similar functions, or a natural person engaged in the investment
banking or securities business who is directly or indirectly
controlling or controlled by a member, whether or not any such person
is registered or exempt from registration with the NASD under these By-
Laws or the Rules of the Association; or \3\ (3) for purposes of Rule
8210, any other person listed in Schedule A of Form BD of a member;
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\3\ The NASD has approved the substitution of the word ``or'' in
place of the word ``and'' in the proposed text here as it appeared
in the NASD's original filing, to make clear that item (3)
represents an alternative meaning of ``associated person.''
Telephone conversation between Mary Dunbar, Associate General
Counsel, NASD Regulation, and Gordon Fuller, Special Counsel, and
Ira L. Brandriss, Attorney, Division of Market Regulation,
Commission (August 11, 1999).
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* * * * *
The NASD proposes conforming changes to Article I(y) of the NASD
Regulation By-Laws and Article I(r) of the Nasdaq By-Laws,
respectively.
* * * * *
[[Page 49262]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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. The 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
The NASD proposes two amendments to the definition of ``person
associated with a member'' in Article I of the NASD By-Laws, and
conforming amendments to the NASD Regulation and Nasdaq By-Laws. The
term is currently defined to include: (1) a natural person registered
under the Rules of the Association; or (2) a sole proprietor, partner,
officer, director, or branch manager of a member, or a natural person
occupying a similar status or performing similar functions, or a
natural person engaged in the investment banking or securities business
who is directly or indirectly controlling or controlled by a member,
whether or not any such person is registered or exempt from
registration with the NASD under the By-Laws or the Rules of the
Association.
Two issues have arisen with respect to the definition. The first
issue is whether the definition should be expanded to apply to certain
owners of members. Currently, the definition only includes owners who
are natural persons engaged in the member's investment banking or
securities business and who have a direct or indirect ``control''
relationship with the member.\4\ While the NASD does not believe that
the definition of associated person should include all owners and
thereby subject them to all NASD rules, the NASD would like to amend
the definition with what it views as a modest and incremental expansion
to give the staff authority to require the provision of information and
testimony under Rule 8210 (``the Rule'') from any person--including a
natural person or corporate or other entity--who holds a five percent
or greater interest in a member firm, regardless of whether they
``control'' the member firm or are actively engaged in its securities
or investment banking business.
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\4\ The By-Laws do not define the term ``control.'' Form BD
defines ``control'' as the ``power, directly or indirectly, to
direct the management or policies of a company, whether through
ownership of securities, by contract, or otherwise. Any person that
* * * directly or indirectly has the right to vote 25% or more of a
class of voting securities or has the power to sell or direct the
sale of 25% or more of a class of voting securities; or * * * in the
case of a partnership, has the right to receive upon dissolution, or
has contributed 25% or more of the capital, is presumed to control
that company.''
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The NASD can identify such owners because members must list them in
Schedule A of Form BD, which is filed with the NASD and the Commission.
For example, if the member is a corporation, the member generally must
list each shareholder that directly owns five percent or more of a
class of a voting security of the member. If the member is a
partnership, the member must list all general partners and those
limited and special partners that have contributed, or have the right
to receive upon dissolution, five percent or more of the partnership's
capital. Members have a continuing obligation to update Schedule A.
The NASD is not recommending any change to the Rule itself, which
is one for the staff's primary tools for carrying out its regulatory
responsibilities. The Rule authorizes the staff, for the purpose of an
investigation, complaint, examination, or proceeding authorized by the
NASD By-Laws or rules, to require a member or associated person to
provide information or testimony. The Rule also authorizes the staff to
inspect and copy the books, records, and accounts of such member or
person with respect to any matter involved in the investigation,
complaint, examination, or proceeding. The proposed amendment to the
definition of associated person would permit the staff to direct a Rule
8210 request to any owner--individual, corporate, partnership, trust,
or otherwise--listed in Schedule A of Form BD, whether or not such
owner controls the member firm. The NASD does not believe that it is
necessary at this time to apply any other NASD rules to this group of
owners or to amend Rule 8210; however, an owner who falls within the
associated person definition but fails to comply with a Rule 8210
request may be disciplined by the NASD.
The second issue involves an anomaly between the By-Law definition
of the term ``person associated with a member'' and a Form U-4, which
is the application form for registration that must be signed by the
prospective registered person. The Form U-4 states that by signing the
Form, the applicant is subject to the jurisdiction of the NASD and any
state in which he is applying for registration. However, the current
definition of ``associated person'' in the By-Laws does not address
applicants for registration. The NASD proposes that the By-Law should
be made expressly consistent with the Form U-4 in this respect.
Finally, the word ``other'' is inserted into subsection 2 of the
definition to clarify that the subsection describes only natural
persons.
The NASD proposes to make the rule change effective for all members
within 45 days after Commission approval. The effective date will be
announced at least 15 days in advance in a Notice To Members.
2. Statutory Basis
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) \5\ of the Act, which requires,
among other things, that the Association's rules must be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest. The NASD believes that the proposed
rule change will help it obtain necessary information to conduct its
regulatory investigations and proceedings and clarify its jurisdiction
over applicants for registration.
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\5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve such proposed rule change, or
[[Page 49263]]
(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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of the filing will also be
available for inspection and copying at the principal offices of the
NASD. All submissions should refer to File No. SR-NASD-99-35 and should
be submitted by October 1, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23611 Filed 9-9-99; 8:45 am]
BILLING CODE 8010-01-M