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					NATIONAL ASSOCIATION                              OF     SECURITIES DEALERS (NASD)
[RULES 0100-3420]
                                         *
Gildardo Michel-Garcia, Esq.




                                       TABLE OF CONTENT


0100. GENERAL PROVISIONS ........................................................................ 7
0110. Adoption and Application of Rules ........................................................... 7
      0111. Adoption of Rules........................................................................... 7
      0112. Effective Date................................................................................. 7
      0113. Interpretation.................................................................................. 7
      0114. Effect on Transactions in Municipal Securities ............................... 7
      0115. Applicability .................................................................................... 7
0120. Definitions................................................................................................ 8
      0121. Definitions in NASD By-Laws ......................................................... 9
0130. Delegation, Authority and Access .......................................................... 10

1000. MEMBERSHIP, REGISTRATION AND QUALIFICATION
REQUIREMENTS ............................................................................................. 10
          IM-1000-1. Filing of Misleading Information as to Membership or
          Registration............................................................................................ 10
          IM-1000-2. Status of Sole Proprietors and Registered Representatives
          Serving in the Armed Forces.................................................................. 10
          IM-1000-3. Failure to Register Personnel............................................... 11
          IM-1000-4. Branch Offices and Offices of Supervisory Jurisdiction ........ 11
1010. Membership Proceedings ...................................................................... 11
      1011. Definitions .................................................................................... 11
      IM-1011-1. Safe Harbors for Business Expansions ................................ 12
      1012. General Provisions....................................................................... 14
      1013. New Member Application and Interview ....................................... 16
*
       Gildardo Michel Garcia is an associate with the global law firm of Clifford Chance Rogers & Wells,
       LLP in New York and a member of the Inter-American Affairs Committee of the Bar Association of the
       City of New York. Mr. Michel Garcia’s practice focuses on transactional corporate and U.S. securities
       laws with an emphasis on international corporate finance, private equity and international M&A. Mr.
       Michel-Garcia’s experience includes: (i) representing issuers and underwriters in registered, Reg.
       S/Rule 144A or Reg. D debt and equity offerings by companies in the U.S., Canada, Venezuela,
       Argentina, Mexico, France, Spain and the Netherlands; (ii) advising on domestic and international
       mergers and acquisitions and private equity transactions involving companies in the United States,
       Mexico, France, Spain, the Bahamas, El Salvador, Argentina, the Dominican Republic, the British
       Virgin Islands, Switzerland, the Netherlands, Egypt, Kuwait, Bahrain, and Saudi Arabia; (iii) advising
       depositary banks in the establishment of Global/American Depositary Receipt programs; and (iv)
       creating and serving as counsel to registered investment companies regarding various domestic
       compliance and corporate issues.
NASD [Rules 0100-3420]                                                                                       2


         1014. Department Decision.................................................................... 20
         1015. Review by National Adjudicatory Council ..................................... 25
         1016. Discretionary Review by NASD Board.......................................... 28
         1017. Application for Approval of Change in Ownership, Control, or
         Business Operations.............................................................................. 29
         1018. Removed ..................................................................................... 33
         1019. Application to Commission for Review ......................................... 33
1020. Registration of Principals ....................................................................... 33
      1021. Registration Requirements........................................................... 33
      1022. Categories of Principal Registration ............................................. 35
      IM-1022-1. Registered Options Principals.............................................. 40
      IM-1022-2. Limited Principal–General Securities Sales Supervisor ........ 41
1030. Registration of Representatives ............................................................. 42
      1031. Registration Requirements........................................................... 42
      1032. Categories of Representative Registration ................................... 42
1040. Registration of Assistant Representatives–Order Processing................. 47
      1041. Registration Requirements........................................................... 47
      1042. Restrictions .................................................................................. 47
1060. Persons Exempt from Registration......................................................... 48
1070. Qualification Examinations and Waiver of Requirements ....................... 49
1080. Confidentiality of Examinations .............................................................. 50
1090. Foreign Members................................................................................... 50
1100. Foreign Associates ................................................................................ 50
1110. Registration of Government Securities Principals and Representatives . 51
      1111. Registration of Principals.............................................................. 51
      1112. [Reserved.]................................................................................... 52
      1113. Persons Exempt From Registration.............................................. 52
1120. Continuing Education Requirements ...................................................... 52
1130. Reliance on Current Membership List .................................................... 55
1140. Electronic Filing Rules ........................................................................... 55

2000. BUSINESS CONDUCT.......................................................................... 56
2100. GENERAL STANDARDS....................................................................... 56
2110. Standards of Commercial Honor and Principles of Trade....................... 56
      IM-2110-1. “Free-Riding and Withholding” ............................................. 57
      IM-2110-2. Trading Ahead of Customer Limit Order............................... 68
      IM-2110-3. Front Running Policy............................................................ 71
      IM-2110-4. Trading Ahead of Research Reports.................................... 72
      IM-2110-5. Anti-Intimidation/Coordination .............................................. 73
      IM-2110-6. Confirmation of Callable Common Stock.............................. 74
2120. Use of Manipulative, Deceptive or Other Fraudulent Devices ................ 74

2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC ............. 74
NASD [Rules 0100-3420]                                                                                               3


2210. Communications with the Public ............................................................ 74
          IM-2210-1. Communications with the Public About Collateralized
          Mortgage Obligations (CMOs)................................................................ 84
          IM-2210-2. Communications with the Public About Variable Life Insurance
          and Variable Annuities ........................................................................... 89
          IM-2210-3. Use of Rankings in Investment Companies Advertisements
          and Sales Literature............................................................................... 92
          IM-2210-4. Limitations on Use of Association’s Name ........................... 95
          IM-2210-5. Requirements for the Use of Bond Mutual Fund Volatility
          Ratings .................................................................................................. 96
          2211. Telemarketing .............................................................................. 97
2220. Options Communications with the Public ............................................... 98
2230. Confirmations....................................................................................... 103
      IM-2230. “Third Market” Confirmations................................................. 104
2240. Disclosure of Control Relationship with Issuer ..................................... 104
2250. Disclosure of Participation or Interest in Primary or Secondary
      Distribution........................................................................................... 105
2260. Forwarding of Proxy and Other Materials............................................. 105
      IM-2260. Suggested Rates of Reimbursement..................................... 107
2270. Disclosure of Financial Condition to Customers ................................... 108
2280. Investor Education and Protection ....................................................... 108

2300. TRANSACTIONS WITH CUSTOMERS ............................................... 109
2310. Recommendations to Customers (Suitability)....................................... 109
      IM-2310-1. Possible Application of SEC Rules 15g-1 through 15g-9.... 109
      IM-2310-2. Fair Dealing with Customers .............................................. 109
      IM-2310-3. Suitability Obligations to Institutional Customers................ 112
2320. Best Execution and Interpositioning ..................................................... 114
2330. Customers’ Securities or Funds ........................................................... 116
      IM-2330. Segregation of Customers’ Securities ................................... 118
2340. Customer Account Statements............................................................. 118
2350. Broker/Dealer Conduct on the Premises of Financial Institutions ......... 120
2360. Approval Procedures for Day-Trading Accounts .................................. 122
      2361. Day-Trading Risk Disclosure Statement..................................... 123
2400. COMMISSIONS, MARK-UPS AND CHARGES................................... 125
2410. Net Prices to Persons Not in Investment Banking or Securities
      Business .............................................................................................. 125
2420. Dealing with Non-Members.................................................................. 126
      IM-2420-1. Transactions Between Members and Non-Members.......... 127
      IM-2420-2. Continuing Commissions Policy ......................................... 130
2430. Charges for Services Performed .......................................................... 131
2440. Fair Prices and Commissions............................................................... 131
NASD [Rules 0100-3420]                                                                                         4


          IM-2440. Mark-Up Policy...................................................................... 131
2450. Installment or Partial Sales .................................................................. 134
2460. Payments for Market Making ............................................................... 134

2500. SPECIAL ACCOUNTS ........................................................................ 135
2510. Discretionary Accounts ........................................................................ 135
2520. Margin Requirements........................................................................... 136
      2521. Margin Requirements - Exception for Certain Members ............. 159
      2522. Definitions Related to Options Transactions............................... 160
      IM-2522. Computation of elapsed days................................................ 160
2700. SECURITIES DISTRIBUTIONS........................................................... 170
2710. Corporate Financing Rule - Underwriting Terms and Arrangements .... 170
2720. Distribution of Securities of Members and Affiliates —
      Conflicts of Interest .............................................................................. 187
2730. Securities Taken in Trade .................................................................... 197
      IM-2730. Safe Harbor and Presumption of Compliance ....................... 198
2740. Selling Concessions, Discounts and Other Allowances........................ 201
      IM-2740. Services in Distribution.......................................................... 202
2750. Transactions with Related Persons...................................................... 204
      IM-2750. Transactions with Related Persons ....................................... 205
2760. Offerings “At the Market”...................................................................... 205
2770. Disclosure of Price in Selling Agreements............................................ 205
2780. Solicitation of Purchases on an Exchange to Facilitate a Distribution of
      Securities............................................................................................. 205

2800. SPECIAL PRODUCTS ........................................................................ 206
2810. Direct Participation Programs............................................................... 206
2820. Variable Contracts of an Insurance Company ...................................... 220
2830. Investment Company Securities........................................................... 223
      IM-2830-1. “Breakpoint” Sales ............................................................. 234
      IM-2830-2. Maintaining the Public Offering Price ................................. 235
2840. Trading in Index Warrants, Currency Index Warrants, and Currency
      Warrants .............................................................................................. 236
      2841. General ...................................................................................... 236
      2842. Definitions .................................................................................. 236
      2843. Account Approval ....................................................................... 237
      2844. Suitability ................................................................................... 237
      2845. Discretionary Accounts............................................................... 238
      2846. Supervision of Accounts............................................................. 238
      2847. Customer Complaints................................................................. 238
      2848. Communications with the Public and Customers Concerning
      Index Warrants, Currency Index Warrants, and Currency Warrants..... 238
NASD [Rules 0100-3420]                                                                                          5


          2849. Maintenance of Records ............................................................ 238
2850. Position Limits...................................................................................... 239
      2851. Exercise Limits........................................................................... 239
      2852. Reporting Requirements ............................................................ 240
      2853. Liquidation of Index Warrant Positions ....................................... 240
      2854. Trading Halts or Suspensions .................................................... 241
2860. Options ................................................................................................ 241
      IM-2860-1. Position Limits.................................................................... 264
      IM-2860-2. Diligence in Opening Options Accounts ............................. 264
2870. Nasdaq Index Options ......................................................................... 265
      2871. Definitions .................................................................................. 265
      2872. Nasdaq Index Option Services Available.................................... 270
      2873. Registration, Qualification and Other General Requirements
      Applicable to All Nasdaq Index Options Market Makers ....................... 270
      2874. Character of Index Options Quotations Entered Into the Nasdaq
      Index Options Service by All Nasdaq Index Options Market Makers .... 273
      2875. Commitment Rules Applicable to Options Market Makers in
      Nasdaq Index Options ......................................................................... 274
      2876. Sanctions Applicable to Nasdaq Index Options Market Makers.. 275
      2877. Requirements Applicable to Nasdaq Index Options Order
      Entry Firms .......................................................................................... 276
      2878. Transaction Reporting and Other Reporting Requirements ........ 277
      2879. Authorization of Nasdaq Index Option Market Making................ 278
2880. Nasdaq Index Option Contracts Authorized for Trading ....................... 279
      2881. Series of Nasdaq Index Options for Trading............................... 279
      2882. Unit of Trading ........................................................................... 280
      2883. Suspension of Authorization of Nasdaq Index Option
      Contracts ............................................................................................. 280
      2884. Trade Comparison Procedures for Nasdaq Index Options ......... 280
      2885. Clearance and Settlement Procedures for Nasdaq Index
      Options ................................................................................................ 282

2900. RESPONSIBILITIES TO OTHER BROKERS OR DEALERS.............. 283
2910. Disclosure of Financial Condition to Other Members............................ 283

3000. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS,
      EMPLOYEES, AND OTHERS’ EMPLOYEES...................................... 283
3010. Supervision .......................................................................................... 283
3020. Fidelity Bonds ...................................................................................... 289
3030. Outside Business Activities of an Associated Person........................... 291
3040. Private Securities Transactions of an Associated Person..................... 291
3050. Transactions for or by Associated Persons .......................................... 293
3060. Influencing or Rewarding Employees of Others ................................... 294
3070. Reporting Requirements ...................................................................... 295
NASD [Rules 0100-3420]                                                                                         6


3080. Disclosure to Associated Persons When Signing Form U-4 ................. 296

3100. BOOKS AND RECORDS, AND FINANCIAL CONDITION .................. 297
3110. Books and Records.............................................................................. 297
      IM-3110. Customer Account Information.............................................. 299
3120. Use of Information Obtained in Fiduciary Capacity............................... 301
      3121. Custodian of the Record............................................................. 302
3130. Regulation of Activities of Members Experiencing Financial and/or
      Operational Difficulties ......................................................................... 302
      IM-3130. Restrictions on a Member’s Activity....................................... 303
      3131. Regulation of Activities of Section 15C Members Experiencing
      Financial and/or Operational Difficulties ............................................... 305
3140. Approval of Change in Exempt Status Under SEC Rule 15c3-3........... 306

3200. SETTLEMENTS .................................................................................... 307
3210. Securities “Failed to Receive” and “Failed to Deliver”........................... 307
3220. Adjustment of Open Orders ................................................................. 307
3230. Clearing Agreements ........................................................................... 309

3300. TRADING ............................................................................................ 311
3310. Publication of Transactions and Quotations ......................................... 311
      IM-3310. Manipulative and Deceptive Quotations ................................ 311
3320. Offers at Stated Prices......................................................................... 312
      IM-3320. Firmness of Quotations ......................................................... 312
3330. Payment Designed to Influence Market Prices, Other than Paid
      Advertising ........................................................................................... 313
3340. Prohibition on Transactions During Trading Halts ................................ 313
3350. Short Sale Rule.................................................................................... 313
      IM-3350. Short Sale Rule..................................................................... 318
3360. Short-Interest Reporting....................................................................... 320
3370. Prompt Receipt and Delivery of Securities ........................................... 321
3380. SelectNet Service ................................................................................ 324

3400. COMPUTER SYSTEMS ...................................................................... 325
3410. Mandatory Year 2000 Testing .............................................................. 325
3420. Mandatory Decimal Pricing Testing...................................................... 325
    NASD [Rules 0100-3420]                                                             7


    0100. GENERAL PROVISIONS

    0110. Adoption and Application of Rules
    0111. Adoption of Rules
1          The following provisions are adopted pursuant to Article VII, Section 1, of
    the By-Laws of the Corporation.
    0112. Effective Date
2          The Rules shall become effective as provided in Section 1 of Article XI of
    the By-Laws.
    [Amended by SR-NASD-98-86 eff. Nov. 19, 1998.]
    0113. Interpretation
3           The Rules shall be interpreted in such manner as will aid in effectuating
    the purposes and business of the Association, and so as to require that all
    practices in connection with the investment banking and securities business shall
    be just, reasonable and not unfairly discriminatory.
           Cross Reference – Resolution under Article XI, Section 4, of the By-Laws:
           Interpretations and Explanations
    0114. Effect on Transactions in Municipal Securities
4           The Rules shall not be construed to apply to contracts made prior to the
    effective date of the Rules or to transactions in Municipal securities (as defined in
    Section 3(a)(29) of the Act).
    [Amended by SR-NASD-95-39 eff. Aug. 20, 1996.]
    0115. Applicability
5           (a) These Rules shall apply to all members and persons associated with a
    member. Persons associated with a member shall have the same duties and
    obligations as a member under these Rules.
6           (b) A member or person associated with a member, who has been
    expelled, canceled or revoked from membership or from registration or who has
    been barred from being associated with all members, shall cease to have any
    privileges of membership or registration. A member or person associated with a
    member who has been suspended from membership or registration shall also
    cease to have any privileges of membership or registration other than those
    under the Code of Procedure as set forth in the Rule 9000 Series or insurance
    programs sponsored by the Association. In neither case shall such a member or
    person associated with a member be entitled to recover any admission fees,
    dues, assessments or other charges paid to the Association.
           Cross Reference — IM-8310-1, Effect of a Suspension, Revocation or
           Bar.
7          (c) A member or person associated with a member who has been
    suspended from membership or from registration shall be considered as a non-
    member during the period of suspension for purposes of applying the provisions
    of these Rules which govern dealings between members and non-members.
     NASD [Rules 0100-3420]                                                                8


     However, such member or person associated with a member shall have all of the
     obligations imposed by the rules of the Corporation.
     Selected Notices to Members: 87-53, 88-96.
     [Amended by SR-NASD-95-39 eff. Aug. 20, 1996.]

     0120. Definitions
8           When used in these Rules, unless the context otherwise requires:
9         “Act” — The term “Act” means the Securities Exchange Act of 1934, as
     amended.
10        “Association” — The term “Association” means, collectively, the NASD,
     NASD Regulation, and Nasdaq.
11          “By-Laws” — The term “By-Laws” means the By-Laws of the Corporation.
12         “Code of Procedure” — The term “Code of Procedure” means the
     procedural rules contained in the Rule 9000 Series.
13         “Commission” — The term “Commission” means the Securities and
     Exchange Commission (SEC), established pursuant to the Act.
14          “Completion of the Transaction” — The term “the completion of the
     transaction” means:
            (1) In the case of a customer who purchases a security through or from a
            member, except as provided in subparagraph (2), the time when such
            customer pays the member any part of the purchase price, or, if payment
            is effected by a bookkeeping entry, the time when such bookkeeping
            entry is made by the member for any part of the purchase price;
            (2) In the case of a customer who purchases a security through or from a
            member and who makes payment therefor prior to the time when
            payment is requested or notification is given that payment is due, the time
            when such member delivers the security to or into the account of such
            customer;
            (3) In the case of a customer who sells a security through or to a member,
            except as provided in subparagraph (4), if any security is not in the
            custody of the member at the time of sale, the time when the security is
            delivered to the member, and if the security is in the custody of the
            member at the time of sale, when the member transfers the security from
            the account of such customer;
            (4) In the case of a customer who sells a security through or to a member
            and who delivers such security to such member prior to the time when
            delivery is requested or notification is given that delivery is due, the time
            when such member makes payment to or into the account of such
            customer.
15          “Customer” — The term “customer” shall not include a broker or dealer.
16           “Fixed Price Offering” — The term “fixed price offering” means the
     offering of securities at a stated public offering price or prices, all or part of which
     securities are publicly offered in the United States or any territory thereof,
     whether or not registered under the Securities Act of 1933, except that the term
     NASD [Rules 0100-3420]                                                              9


     does not include offerings of “exempted securities” or “municipal securities” as
     those terms are defined in Sections 3(a)(12) and 3(a)(29), respectively, of the Act
     or offerings of redeemable securities of investment companies registered
     pursuant to the Investment Company Act of 1940 which are offered at prices
     determined by the net asset value of the securities.
17          “Member” — The term “member” means any individual, partnership,
     corporation or other legal entity admitted to membership in the Association under
     the provisions of Articles III and IV of the By-Laws.
18          “NASD” — The term “NASD” means NASD, Inc.
19          “Nasdaq” — The term “Nasdaq” means The Nasdaq Stock Market, Inc.
20         “NASD Regulation” — The term “NASD Regulation” means NASD
     Regulation, Inc.
21           “National Adjudicatory Council” — The term “National Adjudicatory
     Council” means the committee of the Board of Directors of NASD Regulation
     which may be authorized and directed to act for the Board of Directors of NASD
     Regulation in a manner consistent with the By-Laws of NASD Regulation, the
     Rules of the Association, and the Delegation Plan with respect to (1) an appeal
     or review of a disciplinary proceeding; (2) a statutory disqualification decision; (3)
     a review of a membership proceeding; (4) a review of an offer of settlement, a
     letter of acceptance, waiver, and consent, and a minor rule violation plan letter;
     (5) the exercise of exemptive authority; and (6) such other proceedings or actions
     authorized by the Rules of the Association.
22          “Person” — The term “person” shall include any natural person,
     partnership, corporation, association, or other legal entity.
23           “Rules” or “Rules of the Association” — The term “Rules” or “Rules of the
     Association” means the numbered rules set forth in the NASD Manual beginning
     with the Rule 0100 Series, as adopted by the Board of Governors of the NASD
     pursuant to the By-Laws of the NASD, as hereafter amended or supplemented.
24          “Selling Group” — The term “selling group” means any group formed in
     connection with a public offering, to distribute all or part of an issue of securities
     by sales made directly to the public by or through members of such selling group,
     under an agreement which imposes no financial commitment on the members of
     such group to purchase any such securities except as they may elect to do so.
25           “Selling Syndicate” — The term “selling syndicate” means any syndicate
     formed in connection with a public offering, to distribute all or part of an issue of
     securities by sales made directly to the public by or through participants in such
     syndicate under an agreement which imposes a financial commitment upon
     participants in such syndicate to purchase any such securities.
     [Amended by SR-NASD-97-28 eff: 8/7/97; amended by SR-NASD-98-86 eff.
     Nov. 19, 1998; amended by SR-NASD-98-57 eff. March 26, 1999.]
     0121. Definitions in NASD By-Laws
26          Unless the context otherwise requires, or unless otherwise defined in
     these Rules, terms used in the Rules and interpretive material, if defined in the
     NASD By-Laws, shall have the meaning as defined in the NASD By-Laws.
     NASD [Rules 0100-3420]                                                           10


     [Amended by SR-NASD-97-28 eff: 8/7/97.]

     0130. Delegation, Authority and Access
27           (a) The National Association of Securities Dealers, Inc., delegates to its
     subsidiaries (NASD Regulation, Inc. and The Nasdaq Stock Market, Inc., herein-
     after “Subsidiaries”) the authority to act on behalf of the Association as set forth
     in a Plan of Allocation and Delegation adopted by the Board of Governors and
     approved by the Commission pursuant to its authority under the Act.
28           (b) Notwithstanding any delegation of authority to the Subsidiaries
     pursuant to this Rule, the staff, books, records and premises of the Subsidiaries
     are the staff, books, records and premises of the Association subject to oversight
     pursuant to the Act, and all officers, directors, employees and agents of the
     Subsidiaries are the officers, directors, employees and agents of the Association
     for purposes of the Act.
     [Adopted by SR-NASD-96-16 eff. Apr. 11, 1996.]

     1000. MEMBERSHIP,  REGISTRATION                      AND       QUALIFICATION
           REQUIREMENTS

     IM-1000-1. Filing of Misleading Information as to Membership or
     Registration
29           The filing with the Association of information with respect to membership
     or registration as a Registered Representative which is incomplete or inaccurate
     so as to be misleading, or which in any way tend to mislead, or the failure to
     correct such filing after notice thereof, may be deemed to be conduct inconsistent
     with just and equitable principles of trade and when discovered may be sufficient
     cause for appropriate disciplinary action.
     IM-1000-2. Status of Sole Proprietors and Registered Representatives
     Serving in the Armed Forces
30           Any registered Representative of a member who volunteers or is called
     into the Armed Forces of the United States shall be placed, after proper notifica-
     tion to the Executive Office, upon inactive status and need not be re-registered
     by such member upon his return to active employment with the member.
31           Any member (Sole Proprietor) who temporarily closes his business by
     reason of volunteering or being called into the Armed Forces of the United
     States, shall be placed, after proper notification to the Executive Office, on
     inactive status until his return to active participation in the investment banking
     and securities industries.
32          A Registered Representative who is placed on inactive status as set forth
     above shall not be included within the definition of “Personnel” for purposes of
     the dues or assessments as provided in Article VI of the By-Laws.
33           Any member placed on inactive status as set forth above shall not be
     required to pay dues or assessments during the pendency of such inactive status
     and shall not be required to pay an admission fee upon return to active
     participation in the investment banking and securities business.
     NASD [Rules 0100-3420]                                                            11


     IM-1000-3. Failure to Register Personnel
34           The failure of a member to register an employee, who should be so
     registered, as a Registered Representative may be deemed to be conduct
     inconsistent with just and equitable principles of trade and when discovered may
     be sufficient cause for appropriate disciplinary action.
     IM-1000-4. Branch Offices and Offices of Supervisory Jurisdiction
35            Each member is under a duty to insure that its membership application
     with the Association is kept current at all times by supplementary amendments to
     its original application and that any offices other than the main office are properly
     designated and registered, if required, with the Association.
36           Each member must designate to the Association those offices of
     supervisory jurisdiction, including the main office, and must register those offices
     which are deemed to be branch offices in accordance with the standards set forth
     in Rule 3010.
     [Amended by NASD-98-46 eff. July 9, 1998.]
     Selected Notices to Members: 85-48, 87-14, 87-53, 88-90, 88-96.

     1010. Membership Proceedings
     1011. Definitions
37         Unless otherwise provided, terms used in the Rule 1010 Series shall have
     the meaning as defined in Rule 0120.
38          “Applicant” — The term “Applicant” means a person that applies for
     membership in the Association under Rule 1013 or a member that files an
     application for approval of a change in ownership, control, or business operations
     under Rule 1017.
39           “Associated Person” — The term “Associated Person” means: (1) a
     natural person registered under the Rules of the Association; or (2) a sole
     proprietor, partner, officer, director, branch manager, or other natural person
     occupying a similar status or performing similar functions who will be or is
     anticipated to be associated with the Applicant, or a natural person engaged in
     the investment banking or securities business who will be or is anticipated to be
     directly or indirectly controlling or controlled by the Applicant, whether or not any
     such person is registered or exempt from registration under the NASD By-Laws
     or the Rules of the Association.
40        “Department” — The term “Department” means the Department of
     Member Regulation of NASD Regulation.
41         “Director” — The term “Director” means a member of the NASD
     Regulation Board.
42         “district” — The term “district” means a district established by the NASD
     Regulation Board.
43         “district office” — The term “district office” means an office of NASD
     Regulation located in a district.
44          “Governor” — The term “Governor” means a member of the NASD Board.
     NASD [Rules 0100-3420]                                                           12


45          “Interested Association Staff” — The term “Interested Association Staff”
     means an employee who directly participates in a decision under Rule 1014 or
     1017, an employee who directly supervises an employee with respect to such
     decision, an employee who conducted an investigation or examination of a
     member that files an application under Rule 1017, the District Director for the
     relevant district, and the head of the Department.
46          “material change in business operations” — The term “material change in
     business operations” includes, but is not limited to:
            (1) removing or modifying a membership agreement restriction;
            (2) market making, underwriting, or acting as a dealer for the first time;
            and
            (3) adding business activities that require a higher minimum net capital
            under SEC Rule 15c3-1;
47           “NASD Board” — The term “NASD Board” means the Board of Governors
     of the NASD.
48          “NASD Regulation Board” — The term “NASD Regulation Board” means
     the Board of Directors of NASD Regulation.
49           “principal place of business” — The term “principal place of business”
     means the executive office from which the sole proprietor or the officers, part-
     ners, or managers of the Applicant direct, control, and coordinate the activities of
     the Applicant, unless the Department determines that the principal place of
     business is where: (1) the largest number of Associated Persons of the Applicant
     are located; or (2) the books and records necessary to provide information and
     data to operate the business and comply with applicable rules are located.
50          “sales practice event” — The term “sales practice event” means any
     customer complaint, arbitration, or civil litigation that has been reported to the
     Central Registration Depository, currently is required to be reported to the
     Central Registration Depository, or otherwise has been reported to the
     Association.
51         “Subcommittee” — The term “Subcommittee” means a subcommittee of
     the National Adjudicatory Council that is constituted pursuant to Rule 1015 to
     conduct a review of a Department decision issued under the Rule 1010 Series.
     [Adopted by SR-NASD-82-24 eff. July 20, 1984; amended by SR-NASD-91-45
     eff. Feb. 1, 1992; amended by SR-NASD-94-14 eff. July 20, 1994; amended by
     SR-NASD-97-28 eff. Aug. 7, 1997; amended by SR-NASD-97-81 eff. Jan. 16,
     1998; amended by SR-NASD-00-67 eff. Nov. 15, 2000.]
     IM-1011-1. Safe Harbors for Business Expansions
52           This interpretive material concerns the types of business expansions that
     will not require a member to submit a Rule 1017 application to obtain NASD
     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.
53         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
     NASD [Rules 0100-3420]                                                            13


     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 repre-
     sentatives in the first six months with an additional ten registered representatives
     in the next year); in such case, the Department has specifically considered the
     firm’s expansion plans and approved them.
54           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: 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, 2310, 2330, 2440, 3010 (failure to supervise only), 3310, and
     3330; and MSRB Rules G-19, G-30, and G-37(b) & (c).
55           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.
56            “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.
     Number of Associated Persons Involved in Sales
     Safe Harbor – Increase Permitted Within One Year Period Without 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
     [Adopted by SR-NASD-99-67 eff. Nov. 15, 2000.]
     NASD [Rules 0100-3420]                                                          14


     1012. General Provisions
            (a)    Filing by Applicant or Service by the Association
57            (1) An Applicant may file an application or any document or information
     requested under the Rule 1010 Series by first-class mail, overnight courier, or
     hand delivery. If the Department and the Applicant agree, the Applicant also may
     file a requested document or information by facsimile.
58           (2) The Association shall serve a notice or decision issued under the Rule
     1010 Series by first-class mail on the Applicant or its counsel, unless a Rule
     specifies a different method of service.
59         (3) Service by the Association or filing by an Applicant shall be deemed
     complete as follows:
            (A) Service or filing by first-class mail shall be deemed complete on the
            date of postmark;
            (B) Service or filing by overnight courier shall be deemed complete on the
            date of delivery to the overnight courier as specified in the airbill;
            (C) Service or filing by hand delivery shall be deemed complete on the
            date of receipt as evidenced by a date stamp; and
            (D) Service or filing by facsimile shall be deemed complete on the date
            specified in the document and on the written confirmation of transmission.
            (b)    Lapse of Application
60          (1) Absent a showing of good cause, an application filed under Rule 1013
     or 1017 shall lapse if an Applicant fails to:
            (A) respond fully within 60 days after service of an initial written request
            for information or documents under Rule 1013, within 30 days after
            service of an initial written request for information or documents under
            Rule 1017, within 30 days after service of a subsequent written request
            for information or documents under Rule 1013 or 1017, or within such
            other time period agreed to by the Department and the Applicant;
            (B) appear at or otherwise participate in a scheduled membership
            interview pursuant to Rule 1013(b) or 1017(f); or
            (C) file an executed membership agreement under Rule 1014(d) or Rule
            1017(g)(4) within 25 days after service of the agreement, or within such
            other period agreed to by the Department and the Applicant.
61          (2) If an Applicant wishes to continue to seek membership or approval of
     a change in ownership, control, or business operations, then the Applicant shall
     be required to submit a new application and fee under Rule 1013 or 1017,
     respectively. The Association shall not refund any fee for a lapsed application.
            (c)    Ex Parte Communications
62           (1) The prohibitions against ex parte communications shall become
     effective when Association staff has knowledge that an Applicant intends to file a
     written request for review by the National Adjudicatory Council under Rule 1015.
     NASD [Rules 0100-3420]                                                            15


63          (2) Unless on notice and opportunity for an Applicant and Interested
     Association Staff to participate, or to the extent required for the disposition of ex
     parte matters as authorized by the Rules of the Association:
            (A) an Applicant, a counsel or representative of an Applicant, or an
            Interested Association Staff shall not make or knowingly cause to be
            made an ex parte communication relevant to the merits of a membership
            proceeding under the Rule 1010 Series to a Governor, a member of the
            National Adjudicatory Council or a Subcommittee thereof, or an Associa-
            tion employee who is participating or advising in a decision of such a
            person with respect to that proceeding; and
            (B) a Governor, a member of the National Adjudicatory Council or a
            Subcommittee thereof, or an Association employee who is participating or
            advising in the decision of such a person with respect to a membership
            proceeding shall not make or knowingly cause to be made to an
            Applicant, a counsel or representative of the Applicant, or an Interested
            Association Staff an ex parte communication relevant to the merits of that
            proceeding.
64          (3) A Governor, a member of the National Adjudicatory Council or a Sub-
     committee thereof, or an Association employee participating or advising in the
     decision of such a person, who receives, makes, or knowingly causes to be
     made a communication prohibited by this paragraph shall place in the record of
     the membership proceeding:
            (A) all such written communications;
            (B) memoranda stating the substance of all such oral communications;
            and
            (C) all written responses and memoranda stating the substance of all oral
            responses to all such communications.
            (d)     Recusal or Disqualification
65          A Governor or a member of the National Adjudicatory Council or a
     Subcommittee thereof shall not participate in a matter governed by the Rule 1010
     Series as to which that person has a conflict of interest or bias, or if circums-
     tances otherwise exist where his or her fairness might reasonably be questioned.
     In such a case, the person shall recuse himself or shall be disqualified as follows:
            (1) The Chair of the NASD Board shall have authority to direct the
            disqualification of a Governor, and a majority of the Governors of the
            NASD Board excluding the Chair shall have authority to direct the
            disqualification of the Chair of the NASD Board.
            (2) The Chair of the National Adjudicatory Council shall have authority to
            direct the disqualification of a member of the National Adjudicatory
            Council or a member of a Subcommittee appointed pursuant to Rule
            1015, and the Vice Chair of the National Adjudicatory Council shall have
            authority to direct the disqualification of the Chair of the National
            Adjudicatory Council.
            (e)     Computation of Time
66          (1) Calendar Day — In the Rule 1010 Series, “day” means calendar day.
     NASD [Rules 0100-3420]                                                           16


67          (2) Formula — In computing a period of time under the Rule 1010 Series,
     the day of the act, event, default, or lapse from which the period of time
     designated begins to run shall not be included. The last day of the period so
     computed shall be included unless it is a Saturday, Sunday, or Federal holiday,
     in which event the period runs until the end of the next day that is not a Saturday,
     Sunday, or Federal holiday. Intermediate Saturdays, Sundays, and Federal
     holidays shall be excluded from the computation when the period prescribed is
     ten days or less.
     [Adopted by SR-NASD-82-24 eff. July 20, 1984; amended by SR-NASD-94-14
     eff. July 20, 1994; amended by SR-NASD-97-28 eff. Aug. 07, 1997; amended by
     SR-NASD-97-81 eff. Jan. 16, 1998; amended by SR-NASD-99-67 eff. Nov. 15,
     2000.]
     1013. New Member Application and Interview
            (a)     Filing of Application
            (1) Where To File
68           An Applicant for Association membership shall file its application with the
     Department of Member Regulation at the district office in the district in which the
     Applicant intends to have its principal place of business as defined in Rule
     1011(l).
            (2) Contents
69          The application shall include:
            (A) an original signed and notarized paper Form BD, with applicable
            schedules;
            (B) an original signed paper Form U-4 for each Associated Person who is
            required to be registered under the Rules of the Association;
            (C) an original NASD-approved fingerprint card for each Associated
            Person who will be subject to SEC Rule 17f-2;
            (D) a new member assessment report;
            (E) a check for the appropriate fee;
            (F) a detailed business plan that adequately and comprehensively
            describes all material aspects of the business that will be, or are
            reasonably anticipated to be, performed at and after the initiation of
            business operations, including future business expansion plans, if any,
            and includes:
                    (i) a trial balance, balance sheet, supporting schedules, and
            computation of net capital, each of which has been prepared as of a date
            that is within 30 days before the filing date of the application;
                   (ii) a monthly projection of income and expenses, with a supporting
            rationale, for the first twelve months of operations;
                   (iii) an organizational chart;
                  (iv) the intended location of the Applicant’s principal place of
            business and all other offices, if any, whether or not such offices would be
NASD [Rules 0100-3420]                                                             17


       required to be registered under the Rules of the Association, and the
       names of the persons who will be in charge of each office;
              (v) a list of the types of securities to be offered and sold and the
       types of retail or institutional customers to be solicited;
             (vi) a description of the methods and media to be employed to
       develop a customer base and to offer and sell products and services to
       customers, including the use of the Internet, telephone solicitations,
       seminars, or mailings;
             (vii) a description of the business facilities and a copy of any
       proposed or final lease;
                (viii) the number of markets to be made, if any, the type and
       volatility of the products, and the anticipated maximum inventory
       positions;
             (ix) any plan to enter into contractual commitments, such as
       underwritings or other securities-related activities;
              (x) any plan to distribute or maintain securities products in proprie-
       tary positions, and the risks, volatility, degree of liquidity, and speculative
       nature of the products;
              (xi) any other activity that the Applicant may engage in that
       reasonably could have a material impact on net capital within the first
       twelve months of business operations; and
              (xii) a description of the communications and operational systems
       the Applicant will employ to conduct business with customers or other
       members and the plans and procedures the Applicant will employ to
       ensure business continuity, including: system capacity to handle the
       anticipated level of usage; contingency plans in the event of systems or
       other technological or communications problems or failures that may
       impede customer usage or firm order entry or execution; system redun-
       dancies; disaster recovery plans; system security; disclosures to be made
       to potential and existing customers who may use such systems; and
       supervisory or customer protection measures that may apply to customer
       use of, or access to, such systems;
       (G) a copy of any decision or order by a federal or state authority or self-
       regulatory organization taking permanent or temporary adverse action
       with respect to a registration or licensing determination regarding the
       Applicant or an Associated Person;
       (H) a list of all Associated Persons;
       (I) documentation of any of the following events, unless the event has
       been reported to the Central Registration Depository:
               (i) a regulatory action against or investigation of the Applicant or
       an Associated Person by the Commission, the Commodity Futures
       Trading Commission, a federal, state, or foreign regulatory agency, or a
       self-regulatory organization that is pending, adjudicated, or settled;
NASD [Rules 0100-3420]                                                            18


              (ii) an investment-related civil action for damages or an injunction
       against the Applicant or an Associated Person that is pending,
       adjudicated, or settled;
              (iii) an investment-related customer complaint or arbitration that is
       required to be reported on Form U-4;
              (iv) a criminal action (other than a minor traffic violation) against
       the Applicant or an Associated Person that is pending, adjudicated, or
       that has resulted in a guilty or no contest plea; and
              (v) a copy of any document evidencing a termination for cause or a
       permitted resignation after investigation of an alleged violation of a federal
       or state securities law, a rule or regulation thereunder, a self-regulatory
       organization rule, or an industry standard of conduct;
       (J) a description of any remedial action, such as special training,
       continuing education requirements, or heightened supervision, imposed
       on an Associated Person by a state or federal authority or self-regulatory
       organization;
       (K) a written acknowledgment that heightened supervisory procedures
       and special educational programs may be required pursuant to Notice To
       Members 97-19 for an Associated Person whose record reflects
       disciplinary actions or sales practice events;
       (L) a copy of final or proposed contracts with banks, clearing entities, or
       service bureaus, and a general description of any other final or proposed
       contracts;
       (M) a description of the nature and source of Applicant’s capital with
       supporting documentation, including a list of all persons or entities that
       have contributed or plan to contribute financing to the Applicant’s
       business, the terms and conditions of such financing arrangements, the
       risk to net capital presented by the Applicant’s proposed business
       activities, and any arrangement for additional capital should a business
       need arise;
       (N) a description of the financial controls to be employed by the Applicant;
       (O) a description of the Applicant’s supervisory system and a copy of its
       written supervisory procedures, internal operating procedures (including
       operational and internal controls), internal inspections plan, written
       approval process, and qualifications investigations required by Rule 3010;
       (P) a description of the number, experience, and qualifications of supervi-
       sors and principals and the number, experience, and qualifications of
       persons to be supervised by such personnel, the other responsibilities of
       the supervisors and principals with the Applicant, their full-time or part-
       time status, any business activities that the supervisors or principals may
       engage in outside of their association with the Applicant, the hours per
       week devoted to such activities, and an explanation of how a part-time
       supervisor or principal will be able to discharge his or her designated
       functions on a part-time basis;
       (Q) a description of Applicant’s proposed record-keeping system;
     NASD [Rules 0100-3420]                                                          19


            (R) a copy of the Applicant’s written training plan to comply with Firm
            Element continuing education requirements described in Rule 1120(b),
            including the name of the Associated Person responsible for implemen-
            tation; and
            (S) a Web CRD entitlement request form and a Member Contact
            Questionnaire user access request form.
            (3) Electronic Filings
70          Upon approval of the Applicant’s Web CRD entitlement request form, the
     Applicant shall submit any amendments to its Forms BD or U-4, any additional
     Forms U-4, and any Form U-5 electronically via Web CRD. Upon approval of the
     Applicant’s membership, the Applicant shall submit any amendments to its
     Member Contact Questionnaire electronically.
             (4) Rejection Of Application That Is Not Substantially Complete
71           If the Department determines within 30 days after the filing of an applica-
     tion that the application is not substantially complete, the Department may reject
     the application and deem it not to have been filed. In such case, within the 30-
     day period, the Department shall serve a written notice on the Applicant of the
     Department’s determination and the reasons therefor. The Association shall
     refund the application fee, less $350, which shall be retained by the Association
     as a processing fee. If the Applicant determines to continue to seek membership,
     the Applicant shall submit a new application and fee under this Rule.
            (5) Request For Additional Documents Or Information
72          Within 30 days after the filing of an application, the Department shall
     serve an initial request for any additional information or documents necessary to
     render a decision on the application. The Department may serve subsequent
     requests for additional information or documents at any time during the member-
     ship application process.
73           Unless otherwise agreed by the Department and the Applicant, the
     Applicant shall file any additional information and documents with the Depart-
     ment within 60 days after service of the Department’s initial request and 30 days
     after service of any subsequent request.
            (b)     Membership Interview
             (1) Requirement for Interview
74           Before the Department serves its decision on an application for new
     membership in the Association, the Department shall conduct a membership
     interview with a representative or representatives of the Applicant.
             (2) Service of Notice
75           At least seven days before the membership interview, the Department
     shall serve on the Applicant a written notice that specifies the date and time of
     the interview and the representative or representatives of the Applicant who are
     required to participate in the interview. The Department shall serve the notice by
     facsimile or overnight courier. The Applicant and the Department may agree to a
     shorter or longer period for notice or a different method of service under this
     subparagraph.
     NASD [Rules 0100-3420]                                                             20


            (3) Time
76          Unless the Department directs otherwise for good cause shown, a mem-
     bership interview shall be scheduled to occur within 90 days after the filing of an
     application or within 60 days after the filing of all additional information or
     documents requested, whichever is later.
             (4) Place
77           Unless the Department and the Applicant otherwise agree, the member-
     ship interview shall be conducted in the district office for the district in which the
     Applicant has or intends to have its principal place of business.
             (5) Updated Financial Documents
78           On or before the date of the membership interview, the Applicant shall file
     an updated trial balance, balance sheet, supporting schedules, and computation
     of net capital. The Applicant shall prepare such documents as of a date that is
     within 45 days before the date of the membership interview, unless the Applicant
     and the Department agree on a longer period. The Applicant shall promptly notify
     the Department in writing of any material adverse change in its financial condition
     that occurs before a decision constituting final action of the Association is served
     on the Applicant.
            (6) Review of Standards for Admission
79          During the membership interview, the Department shall review the
     application and the standards for admission to membership with the Applicant’s
     representative or representatives.
             (7) Information From Other Sources
80           During the membership interview, the Department shall provide to the
     Applicant’s representative or representatives any information or document that
     the Department has obtained from the Central Registration Depository or a
     source other than the Applicant and upon which the Department intends to base
     its decision under Rule 1014. If the Department receives such information or
     document after the membership interview or decides to base its decision on such
     information after the membership interview, the Department shall promptly serve
     the information or document and an explanation thereof on the Applicant.
     [Adopted by SR-NASD-82-24 eff. July 20, 1984; amended by SR-NASD-94-14
     eff. July 20, 1994; amended by SR-NASD-97-28 eff. Aug. 07, 1997; amended by
     SR-NASD-97-81 eff. Jan. 16, 1998; amended by SR-NASD-99-67 eff. Nov. 15,
     2000.]
     1014. Department Decision
            (a)     Standards for Admission
81            After considering the application, the membership interview, other infor-
     mation and documents provided by the Applicant, other information and docu-
     ments obtained by the Department, and the public interest and the protection of
     investors, the Department shall determine whether the Applicant meets each of
     the following standards:
82          (1) The application and all supporting documents are complete and
     accurate.
     NASD [Rules 0100-3420]                                                             21


83           (2) The Applicant and its Associated Persons have all licenses and
     registrations required by state and federal authorities and self-regulatory
     organizations.
84          (3) The Applicant and its Associated Persons are capable of complying
     with the federal securities laws, the rules and regulations thereunder, and the
     Rules of the Association, including observing high standards of commercial
     honor and just and equitable principles of trade. In determining whether this
     standard is met, the Department may take into consideration whether:
            (A) a state or federal authority or self-regulatory organization has taken
            permanent or temporary adverse action with respect to a registration or
            licensing determination regarding the Applicant or an Associated Person;
            (B) an Applicant’s or Associated Person’s record reflects a sales practice
            event;
            (C) an Applicant or Associated Person is the subject of a pending, adjudi-
            cated, or settled regulatory action or investigation by the Commission, the
            Commodity Futures Trading Commission, a federal, state, or foreign
            regulatory agency, or a self-regulatory organization; a pending, adjudica-
            ted, or settled investment-related civil action for damages or an injunction;
            or a criminal action (other than a minor traffic violation) that is pending,
            adjudicated, or that has resulted in a guilty or no contest plea;
            (D) an Associated Person was terminated for cause or permitted to resign
            after an investigation of an alleged violation of a federal or state securities
            law, a rule or regulation thereunder, a self-regulatory organization rule, or
            industry standard of conduct;
            (E) a state or federal authority or self-regulatory organization has imposed
            a remedial action, such as special training, continuing education require-
            ments, or heightened supervision, on an Associated Person; and
            (F) a state or federal authority or self-regulatory organization has provided
            information indicating that the Applicant or an Associated Person other-
            wise poses a threat to public investors.
85           (4) The Applicant has established all contractual or other arrangements
     and business relationships with banks, clearing corporations, service bureaus, or
     others necessary to: (A) initiate the operations described in the Applicant’s
     business plan, considering the nature and scope of operations and the number of
     personnel; and (B) comply with the federal securities laws, the rules and
     regulations thereunder, and the Rules of the Association.
86           (5) The Applicant has or has adequate plans to obtain facilities that are
     sufficient to: (A) initiate the operations described in the Applicant’s business plan,
     considering the nature and scope of operations and the number of personnel;
     and (B) comply with the federal securities laws, the rules and regulations there-
     under, and the Rules of the Association.
87          (6) The communications and operational systems that the Applicant
     intends to employ for the purpose of conducting business with customers and
     other members are adequate and provide reasonably for business continuity in
     each area set forth in Rule 1013(a)(2)(F)(xii);
     NASD [Rules 0100-3420]                                                           22


88          (7) The Applicant is capable of maintaining a level of net capital in excess
     of the minimum net capital requirements set forth in SEC Rule 15c3-1 adequate
     to support the Applicant’s intended business operations on a continuing basis,
     based on information filed under Rule 1013(b)(5). The Department may impose a
     reasonably determined higher net capital requirement for the initiation of
     operations after considering:
            (A) the amount of net capital sufficient to avoid early warning level
            reporting requirements, such as SEC Rule 17a-11;
            (B) the amount of capital necessary to meet expenses net of revenues for
            at least twelve months, based on reliable projections agreed to by the
            Applicant and the Department;
            (C) any planned market making activities, the number of markets to be
            made, the type and volatility of products, and the anticipated maximum
            inventory positions;
            (D) any plan to enter into other contractual commitments, such as
            underwritings or other securities-related activities;
            (E) any plan to distribute or maintain securities products in proprietary
            positions, and the risks, volatility, degree of liquidity, and speculative
            nature of the products; and
            (F) any other activity that the Applicant will engage in that reasonably
            could have a material impact on net capital within the first twelve months
            of business operations.
89           (8) The Applicant has financial controls to ensure compliance with the
     federal securities laws, the rules and regulations thereunder, and the Rules of the
     Association.
90           (9) The Applicant has compliance, supervisory, operational, and internal
     control practices and standards that are consistent with practices and standards
     regularly employed in the investment banking or securities business, taking into
     account the nature and scope of Applicant’s proposed business.
91           (10) The Applicant has a supervisory system, including written super-
     visory procedures, internal operating procedures (including operational and inter-
     nal controls), and compliance procedures designed to prevent and detect, to the
     extent practicable, violations of the federal securities laws, the rules and regula-
     tions thereunder, and the Rules of the Association. In evaluating the adequacy of
     a supervisory system, the Department shall consider the overall nature and
     scope of the Applicant’s intended business operations and shall consider
     whether:
            (A) the number, location, experience, and qualifications of supervisory
            personnel are adequate in light of the number, location, experience, and
            qualifications of persons to be supervised; the Central Registration
            Depository record or other disciplinary history of supervisory personnel
            and persons to be supervised; and the number and locations of the
            offices that the Applicant intends to open and the nature and scope of
            business to be conducted at each office;
     NASD [Rules 0100-3420]                                                           23


            (B) the Applicant has identified specific Associated Persons to supervise
            and discharge each of the functions in Applicant’s business plan, and to
            supervise each of the Applicant’s intended offices, whether or not such
            offices are required to be registered under the Rules of the Association;
            (C) the Applicant has identified the functions to be performed by each
            Associated Person and has adopted procedures to assure the registration
            with the Association and applicable states of all persons whose functions
            are subject to such registration requirements.
            (D) each Associated Person identified in the business plan to discharge a
            supervisory function has at least one year of direct experience or two
            years of related experience in the subject area to be supervised;
            (E) the Applicant will solicit retail or institutional business;
            (F) the Applicant will recommend securities to customers;
            (G) the location or part-time status of a supervisor or principal will affect
            such person’s ability to be an effective supervisor;
            (H) the Applicant should be required to place one or more Associated
            Persons under heightened supervision pursuant to Notice to Members
            97-19;
            (I) any remedial action, such as special training or continuing education
            requirements or heightened supervision, has been imposed on an
            Associated Person by a state or federal authority or self-regulatory
            organization; and
            (J) any other condition that will have a material impact on the Applicant’s
            ability to detect and prevent violations of the federal securities laws, the
            rules and regulations thereunder, and the Rules of the Association.
92          (11) The Applicant has a record-keeping system that enables Applicant to
     comply with federal, state, and self-regulatory organization record-keeping
     requirements and a staff that is sufficient in qualifications and number to prepare
     and preserve required records.
93           (12) The Applicant has completed a training needs assessment and has a
     written training plan that complies with the continuing education requirements
     imposed by the federal securities laws, the rules and regulations thereunder, and
     the Rules of the Association.
94           (13) The Association does not possess any information indicating that the
     Applicant may circumvent, evade, or otherwise avoid compliance with the federal
     securities laws, the rules and regulations thereunder, or the Rules of the
     Association.
95          (14) The application and all supporting documents otherwise are
     consistent with the federal securities laws, the rules and regulations thereunder,
     and the Rules of the Association.
            (b)     Granting or Denying Application
96          (1) If the Department determines that the Applicant meets each of the
     standards in paragraph (a), the Department shall grant the application for
     membership.
      NASD [Rules 0100-3420]                                                            24


97           (2) If the Department determines that the Applicant does not meet one or
      more of the standards in paragraph (a) in whole or in part, the Department shall:
             (A) grant the application subject to one or more restrictions reasonably
             designed to address a specific financial, operational, supervisory, discipli-
             nary, investor protection, or other regulatory concern based on the
             standards for admission in Rule 1014(a); or
             (B) deny the application.
             (c)     Decision
              (1) Time
98            The Department shall serve a written decision on the membership
      application within 30 days after the conclusion of the membership interview or
      after the filing of additional information or documents, whichever is later.
              (2) Content
99            If the Department denies the application, the decision shall explain in
      detail the reason for denial, referencing the applicable standard or standards in
      paragraph (a). If the Department grants the application subject to restrictions, the
      decision shall explain in detail the reason for each restriction, referencing the
      applicable standard or standards in paragraph (a) upon which the restriction is
      based and identify the specific financial, operational, supervisory, disciplinary,
      investor protection, or other regulatory concern that the restriction is designed to
      address and the manner in which the restriction is reasonably designed to
      address the concern.
              (3) Failure to Serve Decision
100           If the Department fails to serve a decision within 180 days after the filing
      of an application or such later date as the Department and the Applicant have
      agreed in writing, the Applicant may file a written request with the NASD Board
      requesting that the NASD Board direct the Department to serve a decision.
      Within seven days after the filing of such a request, the NASD Board shall direct
      the Department to serve its written decision immediately or to show good cause
      for an extension of time. If the Department shows good cause for an extension of
      time, the NASD Board may extend the 180 day time limit by not more than 90
      days.
               (d) Submission of Membership Agreement
101            If the Department grants an application, with or without restriction, the
      Applicant’s approval for membership shall be contingent upon the Applicant’s
      filing of an executed written membership agreement, satisfactory to the Depart-
      ment, undertaking to:
             (1) abide by any restriction specified in the Department’s decision; and
             (2) obtain the Department’s approval of a change in ownership, control, or
             business operations pursuant to Rule 1017, including the modification or
             removal of a membership agreement restriction.
102          The Applicant shall not waive the right to file a written request for review
      under Rule 1015 by executing a membership agreement under this paragraph.
      NASD [Rules 0100-3420]                                                            25


               (e)    Service and Effectiveness of Decision
103           The Department shall serve its decision and the membership agreement
      on the Applicant in accordance with Rule 1012. The decision shall become
      effective upon service and shall remain in effect during the pendency of any
      review until a decision constituting final action of the Association is issued under
      Rule 1015 or 1016, unless otherwise directed by the National Adjudicatory
      Council, the NASD Board, or the Commission.
               (f)    Effectiveness of Restriction
104          A restriction imposed under this Rule shall remain in effect and bind the
      Applicant and all successors to the ownership or control of the Applicant unless:
               (1) removed or modified by a decision constituting final action of the
               Association issued under Rule 1015, 1016, or 1017; or
               (2) stayed by the National Adjudicatory Council, the NASD Board, or the
               Commission.
               (g)    Final Action
105          Unless the Applicant files a written request for a review under Rule 1015,
      the Department’s decision shall constitute final action by the Association.
      [Amended by SR-NASD-97-28 eff. Aug. 7, 1997; amended by SR-NASD-97-81
      eff. Jan. 16, 1998; amended by SR-NASD-99-67 eff. Nov. 15, 2000.]
      1015. Review by National Adjudicatory Council
               (a)    Initiation of Review by Applicant
106          Within 25 days after service of a decision under Rule 1014 or 1017, an
      Applicant may file a written request for review with the National Adjudicatory
      Council. A request for review shall state with specificity why the Applicant
      believes that the Department’s decision is inconsistent with the membership
      standards set forth in Rule 1014, or otherwise should be set aside, and state
      whether a hearing is requested. The Applicant simultaneously shall file by first-
      class mail a copy of the request to the district office where the Applicant filed its
      application.
               (b)    Transmission of Documents
107            Within ten days after the filing of a request for review, the Department
      shall:
               (1) transmit to the National Adjudicatory Council copies of all documents
               that were considered in connection with the Department’s decision and an
               index to the documents; and
               (2) serve on the Applicant a copy of such documents (other than those
               documents originally submitted by Applicant) and a copy of the index.
               (c)    Membership Application Docket
108           The Department shall promptly record in the Association’s membership
      application docket each request for review filed with the National Adjudicatory
      Council under this Rule and each material subsequent event, filing, and change
      in the status of a membership proceeding.
      NASD [Rules 0100-3420]                                                            26


             (d)     Appointment of Subcommittee
109          The National Adjudicatory Council or the Review Subcommittee defined
      in Rule 9120 shall appoint a Subcommittee to participate in the review. The Sub-
      committee shall be composed of two or more persons who shall be current or
      past members of the National Adjudicatory Council or former Directors or
      Governors.
             (e)     Powers of Subcommittee
110          If a hearing is requested, the Subcommittee shall conduct the hearing. If a
      hearing is not requested, the Subcommittee may serve a notice directing that a
      hearing be held. If a hearing is not requested or directed, the Subcommittee shall
      conduct its review on the basis of the record developed before the Department
      and any written submissions made by the Applicant or the Department in
      connection with the request for review.
             (f)     Hearing
              (1) Notice
111           If a hearing is requested or directed, the hearing shall be held within 45
      days after the filing of the request with the National Adjudicatory Council or
      service of the notice by the Subcommittee. The National Adjudicatory Council
      shall serve written notice of the date and time of the hearing to the Applicant by
      facsimile or overnight courier not later than 14 days before the hearing.
             (2) Counsel
112          The Applicant and the Department may be represented by counsel at a
      hearing conducted pursuant to this Rule.
               (3) Evidence
113            Formal rules of evidence shall not apply to a hearing under this Rule. Not
      later than five days before the hearing, the Applicant and the Department shall
      exchange copies of their proposed hearing exhibits and witness lists and provide
      copies of the same to the National Adjudicatory Council. If the Applicant or the
      Department fails to provide copies of its proposed hearing exhibits or witness list
      within such time, the Subcommittee shall exclude the evidence or witnesses from
      the proceeding, unless the Subcommittee determines that good cause is shown
      for failure to comply with the production date set forth in this subparagraph.
             (4) Transcript
114          The hearing shall be recorded and a transcript prepared by a court
      reporter. A transcript of the hearing shall be available for purchase from the court
      reporter at prescribed rates. The Applicant, the Department, or a witness may
      seek to correct the transcript. A proposed correction of the transcript shall be
      submitted to the Subcommittee within a reasonable period of time prescribed by
      the Subcommittee. Upon notice to the Applicant and the Department, the Sub-
      committee may direct the correction to the transcript as requested or sua sponte.
             (g)     Additional Information, Briefs
115            At any time during its consideration, the Subcommittee or the National
      Adjudicatory Council may direct the Applicant or the Department to file additional
      information or briefs. Any additional information or brief filed shall be provided to
      all parties before the National Adjudicatory Council renders its decision.
      NASD [Rules 0100-3420]                                                             27


             (h)     Abandonment of Request for Review
116           If an Applicant fails to specify the grounds for its request for review under
      Rule 1015(a)(1), appear at a hearing for which it has notice, or file information or
      briefs as directed, the National Adjudicatory Council or the Review Subcommittee
      may dismiss the request for review as abandoned, and the decision of the
      Department shall become the final action of the Association. Upon a showing of
      good cause, the National Adjudicatory Council or the Review Subcommittee may
      withdraw a dismissal entered pursuant to this paragraph.
             (i)     Subcommittee Recommendation
117          The Subcommittee shall present a recommended decision in writing to
      the National Adjudicatory Council within 60 days after the date of the hearing
      held pursuant to paragraph (f), and not later than seven days before the meeting
      of the National Adjudicatory Council at which the membership proceeding shall
      be considered.
             (j)     Decision
             (1) Proposed Written Decision
118          After considering all matters presented in the review and the Sub-
      committee’s recommended written decision, the National Adjudicatory Council
      may affirm, modify, or reverse the Department’s decision or remand the member-
      ship proceeding with instructions. The National Adjudicatory Council shall
      prepare a proposed written decision pursuant to subparagraph (2).
             (2) Contents
119          The decision shall include:
             (A) a description of the Department’s decision, including its rationale;
             (B) a description of the principal issues raised in the review;
             (C) a summary of the evidence on each issue; and
             (D) a statement whether the Department’s decision is affirmed, modified,
             or reversed, and a rationale therefor that references the applicable
             standards in Rule 1014.
              (3) Issuance of Decision After Expiration of Call for Review Periods
120           The National Adjudicatory Council shall provide its proposed written
      decision to the NASD Board. The NASD Board may call the membership
      proceeding for review pursuant to Rule 1016. If the NASD Board does not call
      the membership proceeding for review, the proposed written decision of the
      National Adjudicatory Council shall become final. The National Adjudicatory
      Council shall serve the Applicant with a written notice specifying the date on
      which the call for review period expired and stating that the final written decision
      will be served within 15 days after such date. The National Adjudicatory Council
      shall serve its final written decision within 15 days after the date on which the call
      for review period expired. The decision shall constitute the final action of the
      Association for purposes of SEC Rule 19d-3, unless the National Adjudicatory
      Council remands the membership proceeding.
              (4) Failure to Issue Decision
121           If the National Adjudicatory Council fails to serve its final written decision
      within the time prescribed in subparagraph (3), the Applicant may file a written
      NASD [Rules 0100-3420]                                                          28


      request with the NASD Board requesting that the NASD Board direct the National
      Adjudicatory Council to serve its decision immediately or to show good cause for
      an extension of time. Within seven days after the filing of such a request, the
      NASD Board shall direct the National Adjudicatory Council to serve its written
      decision immediately or to show good cause for an extension of time. If the
      National Adjudicatory Council shows good cause for an extension of time, the
      NASD Board may extend the 15 day time limit by not more than 15 days.
      [Adopted by SR-NASD-90-54 eff. Jan. 9, 1991; amended by SR-NASD-97-28 eff.
      Aug. 7, 1997; amended by SR-NASD-97-81 eff. Jan. 16, 1998; amended by SR-
      NASD-99-76 eff. Sept. 11, 2000; amended by SR-NASD-99-67 eff. Nov. 15,
      2000.]
      Selected Notice to Members: 00-56.
      1016. Discretionary Review by NASD Board
             (a)     Call for Review by Governor
122          A Governor may call a membership proceeding for review by the NASD
      Board if the call for review is made within the period prescribed in paragraph (b).
             (b)     15-Day Period; Waiver
123           A Governor shall make his or her call for review at the next meeting of the
      NASD Board that is at least 15 days after the date on which the NASD Board
      receives the proposed written decision of the National Adjudicatory Council. By
      unanimous vote of the NASD Board, the NASD Board may shorten the period to
      less than 15 days. By an affirmative vote of the majority of the NASD Board then
      in office, the NASD Board may, during the 15-day period, vote to extend the
      period to more than 15 days.
             (c)     Review At Next Meeting
124          If a Governor calls a membership proceeding for review within the time
      prescribed in paragraph (b), the NASD Board shall review the membership
      proceeding not later than the next meeting of the NASD Board. The NASD Board
      may order the Applicant and the Department to file briefs in connection with
      review proceedings pursuant to this paragraph.
             (d)     Decision of NASD Board, Including Remand
125          After review, the NASD Board may affirm, modify, or reverse the
      proposed written decision of the National Adjudicatory Council. Alternatively, the
      NASD Board may remand the membership proceeding with instructions. The
      NASD Board shall prepare a written decision that includes all of the elements
      described in Rule 1015(j)(2).
             (e)     Issuance of Decision
126           The NASD Board shall serve its written decision on the Applicant within
      15 days after the meeting at which it conducted its review. The decision shall
      constitute the final action of the Association for purposes of SEC Rule 19d-3,
      unless the NASD Board remands the membership proceeding.
      [Adopted by SR-NASD-97-28 eff. Aug. 7, 1997; amended by SR-NASD-97-81
      eff. Jan. 16, 1998; amended by SR-NASD-99-67 eff. Nov. 15, 2000.]
      NASD [Rules 0100-3420]                                                            29


      1017. Application for Approval of Change in Ownership, Control, or
            Business Operations
             (a)     Events Requiring Application
127         A member shall file an application for approval of any of the following
      changes to its ownership, control, or business operations:
             (1) a merger of the member with another member, unless both are
             members of the New York Stock Exchange, Inc. or the surviving entity will
             continue to be a member of the New York Stock Exchange, Inc.;
             (2) a direct or indirect acquisition by the member of another member,
             unless the acquiring member is a member of the New York Stock
             Exchange, Inc.;
             (3) a direct or indirect acquisition of substantially all of the member’s
             assets, unless the acquirer is a member of the New York Stock
             Exchange, Inc.;
             (4) a change in the equity ownership or partnership capital of the member
             that results in one person or entity directly or indirectly owning or
             controlling 25 percent or more of the equity or partnership capital; or
             (5) a material change in business operations as defined in Rule 1011(i).
             (b)     Filing and Content of Application
128            (1) The member shall file the application with the Department at the
      district office in the district in which the member’s principal place of business is
      located. If the application involves a merger between members with principal
      places of business in two or more districts, the application shall be filed and
      processed by the district office wherein the surviving firm’s principal place of
      business will be located.
129           (2) The application shall describe in detail the change in ownership,
      control, or business operations and include a business plan, pro forma financials,
      an organizational chart, and written supervisory procedures reflecting the
      change.
             (A) If the application requests approval of a change in ownership or
             control, the application also shall include the names of the new owners,
             their percentage of ownership, and the sources of their funding for the
             purchase and recapitalization of the member.
             (B) If the application requests the removal or modification of a
             membership agreement restriction, the application also shall:
                    (i) present facts showing that the circumstances that gave rise to
             the restriction have changed; and
                     (ii) state with specificity why the restriction should be modified or
             removed in light of the standards set forth in Rule 1014 and the
             articulated rationale for the imposition of the restriction.
             (C) If the application requests approval of an increase in Associated
             Persons involved in sales, offices, or markets made, the application shall
             set forth the increases in such areas during the preceding 12 months.
      NASD [Rules 0100-3420]                                                           30


             (c)     Effecting Change and Imposition of Interim Restrictions
130          (1) A member shall file an application for approval of a change in
      ownership or control at least 30 days prior to such change. A member may effect
      a change in ownership or control prior to the conclusion of the proceeding, but
      the Department may place new interim restrictions on the member based on the
      standards in Rule 1014, pending final Department action.
131           (2) A member may file an application to remove or modify a membership
      agreement restriction at any time. An existing restriction shall remain in effect
      during the pendency of the proceeding.
132          (3) A member may file an application for approval of a material change in
      business operations, other than the modification or removal of a restriction, at
      any time, but the member may not effect such change until the conclusion of the
      proceeding, unless the Department and the member otherwise agree.
             (d)     Rejection Of Application That Is Not Substantially Complete
133           If the Department determines within 30 days after the filing of an applica-
      tion that the application is not substantially complete, the Department shall reject
      the application and deem it not to have been filed. In such case, within the 30-
      day period, the Department shall serve a written notice on the Applicant of the
      Department’s determination and the reasons therefor. If the Applicant determines
      to continue to apply for approval of a change in ownership, control, or business
      operations, the Applicant shall submit a new application under this Rule.
             (e)     Request for Additional Documents and Information
134          Within 30 days after the filing of an application, the Department shall
      serve a request for any additional information or documents necessary to render
      a decision on the application. The Department may serve subsequent requests
      for additional information or documents at any time during the application
      process. Unless otherwise agreed by the Department and the Applicant, the
      Applicant shall file any additional information and documents with the Depart-
      ment within 30 days after service of a request.
             (f)     Membership Interview
135           (1) The Department may require the Applicant to participate in a member-
      ship interview within 30 days after the filing of the application, or if the Depart-
      ment requests additional information or documents, within 30 days after the filing
      of the additional information or documents by the Applicant.
136           (2) At least seven days before the membership interview, the Department
      shall serve on the Applicant a written notice that specifies the date and time of
      the interview and persons who are required to participate in the interview. The
      Department shall serve the notice by facsimile or overnight courier. The Applicant
      and the Department may agree to a shorter or longer period for notice or a
      different method of service.
137          (3) Unless the Department and the Applicant otherwise agree, the
      membership interview shall be conducted in the district office for the district in
      which the Applicant has its principal place of business.
138          (4) During the membership interview, the Department shall review the
      application and the considerations for the Department’s decision set forth in
      NASD [Rules 0100-3420]                                                              31


      paragraph (g)(1) with the Applicant’s representative or representatives. The
      Department shall provide to the Applicant’s representative or representatives any
      information or document that the Department has obtained from the Central
      Registration Depository or a source other than the Applicant and upon which the
      Department intends to base its decision under paragraph (g). If the Department
      receives such information or document after the membership interview or
      decides to base its decision on such information after the membership interview,
      the Department shall promptly serve the information or document and an
      explanation thereof on the Applicant.
             (g)     Department Decision
139           (1) The Department shall consider the application, the membership
      interview, other information and documents provided by the Applicant or obtained
      by the Department, the public interest, and the protection of investors.
             (A) In rendering a decision on an application for approval of a change in
             ownership or control, or an application for approval of a material change
             in business operations that does not involve modification or removal of a
             membership agreement restriction, the Department shall determine if the
             Applicant would continue to meet the standards in Rule 1014(a) upon
             approval of the application.
             (B) In rendering a decision on an application requesting the modification
             or removal of a membership agreement restriction, the Department shall
             consider whether maintenance of the restriction is appropriate in light of:
                    (i) the standards set forth in Rule 1014;
                      (ii) the circumstances that gave rise to the imposition of the
             restriction;
                    (iii) the Applicant’s operations since the restriction was imposed;
                    (iv) any change in ownership or control or supervisors and
             principals; and
                    (v) any new evidence submitted in connection with the application.
140           (2) The Department shall serve a written decision on the application
      within 30 days after the conclusion of the membership interview or the filing of
      additional information or documents, whichever is later. If the Department does
      not require the Applicant to participate in a membership interview or request
      additional information or documents, the Department shall serve a written deci-
      sion within 45 days after the filing of the application under paragraph (a). The
      decision shall state whether the application is granted or denied in whole or in
      part, and shall provide a rationale for the Department’s decision, referencing the
      applicable standard in Rule 1014.
141           (3) If the Department fails to serve a decision within 180 days after filing
      of an application or such later date as the Department and the Applicant have
      agreed in writing, the Applicant may file a written request with the NASD Board
      requesting that the NASD Board direct the Department to issue a decision.
      Within seven days after the filing of such a request, the NASD Board shall direct
      the Department to issue a written decision immediately or to show good cause
      for an extension of time. If the Department shows good cause for an extension of
      NASD [Rules 0100-3420]                                                             32


      time, the NASD Board may extend the time limit for issuing a decision by not
      more than 30 days.
142           (4) If the Department approves an application under this Rule in whole or
      part, the Department may require an Applicant to file an executed membership
      agreement.
             (h)     Service and Effectiveness of Decision
143           The Department shall serve its decision on the Applicant in accordance
      with Rule 1012. The decision shall become effective upon service and shall
      remain in effect during the pendency of any review until a decision constituting
      final action of the Association is served under Rule 1015 or 1016, unless other-
      wise directed by the National Adjudicatory Council, the NASD Board, or the
      Commission.
             (i)     Request for Review; Final Action
144          An Applicant may file a written request for review of the Department’s
      decision with the National Adjudicatory Council pursuant to Rule 1015. The
      procedures set forth in Rule 1015 shall apply to such review, and the National
      Adjudicatory Council’s decision shall be subject to discretionary review by the
      NASD Board pursuant to Rule 1016. If the Applicant does not file a request for a
      review, the Department’s decision shall constitute final action by the Association.
             (j)     Removal or Modification of Restriction on Department’s Initiative
145           The Department shall modify or remove a restriction on its own initiative if
      the Department determines such action is appropriate in light of the considera-
      tions set forth in paragraph (g)(1). The Department shall notify the member in
      writing of the Department’s determination and inform the member that it may
      apply for further modification or removal of a restriction by filing an application
      under paragraph (a).
             (k)     Lapse or Denial of Application for Approval of Change in
                     Ownership
146          If an application for approval of a change in ownership lapses, or is
      denied and all appeals are exhausted or waived, the member shall, no more than
      60 days after the lapse or exhaustion or waiver of appeal:
             (1) submit a new application;
             (2) unwind the transaction; or
             (3) file a Form BDW.
147           For the protection of investors, the Department may shorten the 60-day
      period. For good cause shown by the member, the Department may lengthen the
      60-day period. The Department shall serve written notice on the Applicant of any
      change in the 60-day period and the reasons therefor. During the 60-day or other
      imposed period, the Department may continue to place interim restrictions on the
      member for the protection of investors.
      [Adopted by SR-NASD-97-28 eff. Aug. 7, 1997; amended by SR-NASD-97-81
      eff. Jan. 16, 1998; amended by SR-NASD-99-67 eff. Nov. 15, 2000.]
      NASD [Rules 0100-3420]                                                             33


      1018. Removed
      [Adopted by SR-NASD-97-28 eff. Aug. 7, 1997; amended by SR-NASD-97-81
      eff. Jan. 16, 1998; Removed at SR-NASD-99-67 eff. Nov. 15, 2000.]
      1019. Application to Commission for Review
148          A person aggrieved by final action of the Association under the Rule 1010
      Series may apply for review by the Commission pursuant to Section 19(d)(2) of
      the Act. The filing of an application for review shall not stay the effectiveness of a
      decision constituting final action of the Association, unless the Commission
      otherwise orders.
      [Adopted by SR-NASD-97-28 eff. Aug. 7, 1997.]
      Selected Notices to Members: 91-11, 92-2, 94-22

      1020. Registration of Principals
      1021. Registration Requirements
             (a)     All Principals Must Be Registered
149           All persons engaged or to be engaged in the investment banking or
      securities business of a member who are to function as principals shall be
      registered as such with the Association in the category of registration appropriate
      to the function to be performed as specified in Rule 1022. Before their
      registration can become effective, they shall pass a Qualification Examination for
      Principals appropriate to the category of registration as specified by the Board of
      Governors. A member shall not maintain a principal registration with the Associa-
      tion for any person (1) who is no longer active in the member’s investment
      banking or securities business, (2) who is no longer functioning as a principal, or
      (3) where the sole purpose is to avoid the examination requirement prescribed in
      paragraph (c). A member shall not make application for the registration of any
      person as principal where there is no intent to employ such person in the
      member’s investment banking or securities business. A member may, however,
      maintain or make application for the registration as a principal of a person who
      performs legal, compliance, internal audit, or similar responsibilities for the
      member or a person engaged in the investment banking or securities business of
      a foreign securities affiliate or subsidiary of the member.
             (b)     Definition of Principal
150            Persons associated with a member, enumerated in subparagraphs (1)
      through (5) hereafter, who are actively engaged in the management of the
      member’s investment banking or securities business, including supervision,
      solicitation, conduct of business or the training of persons associated with a
      member for any of these functions are designated as principals. Such persons
      shall include:
             (1) Sole Proprietors
             (2) Officers
             (3) Partners
             (4) Managers of Offices of Supervisory Jurisdiction, and
             (5) Directors of Corporations.
      NASD [Rules 0100-3420]                                                          34


             (c)     Requirements for Examination on Lapse of Registration
151           Any person whose registration has been revoked pursuant to Rule 8310
      or whose most recent registration as a principal has been terminated for a period
      of two or more years immediately preceding the date of receipt by the Associa-
      tion of a new application shall be required to pass a Qualification Examination for
      Principals appropriate to the category of registration as specified in Rule 1022
      hereof.
             (d)     Application for Principal Status
152            (1) Any person associated with a member as a Registered Represen-
      tative whose duties are changed by the member so as to require registration in
      any principal classification shall be allowed a period of 90 calendar days
      following the change in his duties during which to pass the appropriate Qualifi-
      cation Examination for Principals. Upon elevation, the member shall submit to the
      Association an elevation form designated by the Board of Governors and the
      applicable fees. In no event may a person function as a Principal beyond the
      initial 90 calendar day period following the change in his duties without having
      successfully passed the appropriate Qualification Examination.
153          (2) Any person not presently associated with a member as a Registered
      Representative seeking registration as a Principal shall submit the appropriate
      application for registration and the required registration and examination fees.
      Such person shall be allowed a period of ninety days after all applicable
      prerequisites are fulfilled to pass the appropriate Qualification Examination for
      Principals. In no event may a person previously unregistered in any capacity
      applying for principal status function as a Principal until fully qualified.
154           (3) If an applicant does not take the examination within the ninety
      calendar day period or if the applicant fails the examination, a new principal
      elevation form and examination fee shall be required.
             (e)     Requirement of Two Registered Principals for New Applicants for
                     Membership
155           (1) An applicant for membership in the Association, except a sole
      proprietorship, shall have at least two officers or partners who are qualified to
      become registered as principals with respect to each aspect of the applicant’s
      investment banking and securities business pursuant to the provisions of Rule
      1022(a), (d) and (e), whichever are applicable, before it shall be admitted to
      membership.
156           (2) Pursuant to the Rule 9600 Series, the Association may waive the
      provisions of subparagraph (1) in situations that indicate conclusively that only
      one person associated with an applicant for membership should be required to
      register as a principal.
157          (3) In addition to the provisions of subparagraph (1) above, an applicant
      for membership, if the nature of its business so requires, shall have at least one
      person qualified for registration pursuant to Rule 1022(b), (c) and (f).
      [Amended by SR-NASD-78-16 eff. May 30, 1979; amended by SR-NASD-89-15
      eff. June 8, 1989; amended by SR-NASD-89-53 eff. Aug. 28, 1990; amended by
      SR-NASD-97-28 eff: 8/7/97.]
      NASD [Rules 0100-3420]                                                            35


      1022. Categories of Principal Registration
             (a)     General Securities Principal
158            (1) Each person associated with a member who is included within the
      definition of principal in Rule 1021, shall be required to register with the Associa-
      tion as a General Securities Principal and shall pass an appropriate Qualification
      Examination before such registration may become effective unless his activities
      are so limited as to qualify him for one or more of the limited categories of
      principal registration specified hereafter. A person whose activities in the invest-
      ment banking or securities business are so limited is not, however, precluded
      from attempting to become qualified for registration as a General Securities
      Principal, and if qualified, may become so registered. Each person seeking to
      register and qualify as a General Securities Principal must, prior to or concurrent
      with such registration, become registered, pursuant to the Rule 1030 Series,
      either as a General Securities Representative or as a Limited Representative–
      Corporate Securities.
159           (2) A Limited Representative–Corporate Securities seeking registration as
      General Securities Principal who will have supervisory responsibility over the
      conduct of business in investment company and variable contracts products
      and/or direct participation programs as defined herein must, prior to or concurrent
      with registration as a General Securities principal, become registered pursuant to
      the Rule 1030 Series hereof, as a Limited Representative–Investment Company
      and Variable Contracts Products and/or a Limited Representative–Direct
      Participation Programs.
160           (3) Except as provided in Rule 1021(c), a person who was registered with
      the Association as a Principal or a Financial Principal, shall not be required to
      pass a Qualification Examination for General Securities Principal and shall be
      qualified as a General Securities Principal.
161           (4) A person registered solely as a General Securities Principal shall not
      be qualified to function as a Limited Principal–Financial and Operations unless
      he is also qualified and registered as such pursuant to paragraph (b).
162           (5) A person registered solely as a General Securities Principal shall not
      be qualified to function as a Registered Options Principal unless he is also
      qualified and registered as such pursuant to the provisions of paragraph (f).
163           (6) A person qualified solely as a General Securities Principal shall not be
      qualified to be registered as a Limited Principal–General Securities Sales
      Supervisor unless he is also qualified and registered as such pursuant to the
      provisions of paragraph (g)(1).
             (b)     Limited Principal–Financial and Operations
164           (1) Every member of the Association, unless exempted by subparagraph
      (4), shall designate as Limited Principal–Financial and Operations those persons
      associated with it, at least one of whom shall be its chief financial officer, who
      performs the duties described in subparagraph (b)(2) hereof. Each person
      associated with a member who performs such duties shall be required to register
      as a Limited Principal–Financial and Operations with the Association and shall
      pass an appropriate Qualification Examination before such registration may
      become effective.
      NASD [Rules 0100-3420]                                                           36


165          (2) The term “Limited Principal–Financial and Operations” shall mean a
      person associated with a member whose duties include:
             (A) final approval and responsibility for the accuracy of financial reports
             submitted to any duly established securities industry regulatory body;
             (B) final preparation of such reports;
             (C) supervision of individuals who assist in the preparation of such
             reports;
             (D) supervision of and responsibility for individuals who are involved in
             the actual maintenance of the member’s books and records from which
             such reports are derived;
             (E) supervision and/or performance of the member’s responsibilities
             under all financial responsibility rules promulgated pursuant to the
             provisions of the Act;
             (F) overall supervision of and responsibility for the individuals who are
             involved in the administration and maintenance of the member’s back
             office operations; or
             (G) any other matter involving the financial and operational management
             of the member.
166           (3) Except as provided in Rule 1021(c), a person designated pursuant to
      the provisions of subparagraph (1) hereof shall not be required to take the
      Limited Principal–Financial and Operations Examination and shall be qualified for
      registration as a Limited Principal–Financial and Operations if:
             (A) such person had been performing the functions of a Limited Principal–
             Financial and Operations as defined in subparagraph (2) hereof on or
             before September 1, 1972; or
             (B) such person was registered with the Association as a Financial
             Principal.
167          (4) Pursuant to the Rule 9600 Series, the Association may exempt a
      member or an applicant for membership in the Association from the requirement
      to have a Limited Principal–Financial and Operations if:
             (A) it has been expressly exempted by the Commission from SEC Rule
             15c3-1(b)(1)(iii);
             (B) it is subject to the provisions of SEC Rule 15c3-1(a)(2) or to Section
             402.2(c) of the rules of the Treasury Department.
168           (5) A person registered solely as a Limited Principal–Financial and
      Operations shall not be qualified to function in a principal capacity with responsi-
      bility over any area of business activity not prescribed in subparagraph (2)
      hereof.
             (c)     Limited Principal–Introducing      Broker/Dealer    Financial    and
                     Operations
169           (1) Every member of the Association, which is operating pursuant to the
      provisions of SEC Rule 15c3-1(a)(2)(i) or (vi) and to the provisions of SEC Rule
      15c3-3(k)(2)(ii), shall designate as Limited Principal–Introducing Broker/Dealer
      NASD [Rules 0100-3420]                                                           37


      Financial and Operations those persons associated with it, as least one of whom
      shall be its chief financial officer, who perform the duties described in paragraph
      (2), hereof. Each person associated with a member who performs such duties
      shall be required to register as a Limited Principal–Introducing Broker/Dealer
      Financial and Operations with the Association and shall pass an appropriate
      Qualification Examination before such registration may become effective.
170          (2) The term “Limited Principal–Introducing Broker/Dealer Financial and
      Operations” shall mean a person associated with a member whose duties
      include:
             (A) final approval and responsibilities for the accuracy of financial reports
             submitted to any duly established securities industry regulatory body;
             (B) final preparation of such reports;
             (C) supervision of individuals who assist in the preparation of such
             reports;
             (D) supervision of and responsibility for individuals who are involved in
             the actual maintenance of the member’s books and records from which
             such reports are derived;
             (E) supervision and/or performance of the member’s responsibilities
             under all financial responsibility rules promulgated pursuant to the
             provisions of the Act;
             (F) overall supervision of and responsibility for the individuals who are
             involved in the administration and maintenance of the member’s back
             office operations; or
             (G) any other matter involving the financial and operational management
             of the member.
171           (3) Except as provided in Rule 1021(c), a person designated pursuant to
      the provisions of subparagraph (1) hereof, shall not be required to take the
      Limited Principal–Introducing Broker/Dealer Financial and Operations Examina-
      tion and shall be qualified for registration as a Limited Principal–Introducing
      Broker/Dealer Financial and Operations if such a person is qualified to be
      registered or is registered as a Limited Principal–Financial and Operations as
      defined in paragraph (2) hereof.
172           (4) A person registered solely as a Limited Principal–Introducing
      Broker/Dealer Financial and Operations shall not be qualified to function in a
      principal capacity with responsibility over any area of business activity not
      prescribed in subparagraph (2), hereof. Such person shall not be qualified to
      function in a principal capacity at a member unless such member operates under
      subparagraph (1), hereof.
             (d)     Limited Principal–Investment Company and Variable Contracts
                     Products
173            (1) Each person associated with a member who is included within the
      definition of principal in Rule 1021, may register with the Association as a Limited
      Principal–Investment Company and Variable Contracts Products if:
      NASD [Rules 0100-3420]                                                               38


             (A) his activities in the investment banking and securities business are
             limited to the solicitation, purchase and/or sale of:
                    (i) redeemable securities of companies registered pursuant to the
             Investment Company Act of 1940;
                    (ii) securities of closed-end companies registered pursuant to the
             Investment Company Act of 1940 during the period of original distribution
             only; and,
                     (iii) variable contracts and insurance premium funding programs
             and other contracts issued by an insurance company except contracts
             which are exempt securities pursuant to Section 3(a)(8) of the Securities
             Act of 1933;
             (B) he is registered, pursuant to Rule 1030 Series, as either a General
             Securities Representative or a Limited Representative–Investment
             Company and Variable Contracts Products; and
             (C) he passes an appropriate Qualification Examination for Limited
             Principal–Investment Company and Variable Contracts Products.
174           (2) A person registered solely as a Limited Principal–Investment
      Company and Variable Contracts Products shall not be qualified to function in a
      principal capacity with responsibility over any area of business activity not
      prescribed in subparagraph (1) hereof.
             (e)     Limited Principal–Direct Participation Programs
175            (1) Each person associated with a member who is included within the
      definition of principal in Rule 1021 may register with the Association as a Limited
      Principal-Direct Participation Program if:
             (A) his activities in the investment banking and securities business are
             limited solely to the equity interests in or the debt of direct participation
             programs as defined in subparagraph (2) hereof;
             (B) he is registered pursuant to the Rule 1030 Series, as either a General
             Securities Representative or a Limited Representative–Direct Participa-
             tion Programs; and
             (C) he passes an appropriate Qualification Examination for Limited
             Principal–Direct Participation Programs.
176           (2) For purposes of the Rule 1000 Series, “direct participation programs”
      shall mean programs which provide for flow-through tax consequences regard-
      less of the structure of the legal entity or vehicle for distribution including, but not
      limited to, oil and gas programs, cattle programs, condominium securities, Sub-
      chapter S corporate offerings and all other programs of a similar nature, regard-
      less of the industry represented by the program, or any combination thereof.
      Excluded from this definition are real estate investment trusts, tax qualified
      pension and profit sharing plans pursuant to Sections 401 and 403(a) of the
      Internal Revenue Code (Code) and individual retirement plans under Section 408
      of the Code, tax sheltered annuities pursuant to the provisions of Section 403(b)
      of the Code and any company including separate accounts registered pursuant
      to the Investment Company Act of 1940. Also excluded from this definition is any
      program for which quotations are displayed on Nasdaq or which is listed on a
      NASD [Rules 0100-3420]                                                            39


      registered national securities exchange or any program for which an application
      for quotation on Nasdaq or listing on a registered national securities exchange
      has been made.
177            (3) A person registered solely as a Limited Principal–Direct Participation
      Programs shall not be qualified to function in a principal capacity with responsibi-
      lity over any area of business activity not prescribed in subparagraph (1) hereof.
             (f)     Registered Options Principals
178           (1) Every member of the Association which is engaged in, or which
      intends to engage in transactions in put or call options with the public shall have
      at least one Registered Options Principal who shall have satisfied the require-
      ments of this subparagraph. Each such member shall also designate a Senior
      Registered Options Principal and a Compliance Registered Options Principal in
      accordance with the provisions of Rule 2860(b)(20) and identify such persons to
      the Association. A member which has a Registered Options Principal qualified in
      either put or call options shall not engage in both put and call option transactions
      until such time as it has a Registered Option Principal qualified in both such
      options. Every person engaged in the management of the day-to-day activities of
      a member shall also be registered as a Registered Options Principal. In the event
      any Registered Options Principal ceases to act in such capacity, such fact shall
      be reported promptly to the Association together with a brief statement of the
      reasons therefor.
179          (2) Each person required by subparagraph (f)(1) hereof to be a
      Registered Options Principal shall pass the appropriate Qualification Examination
      for Registered Options Principal, or an equivalent examination acceptable to the
      Corporation, for the purpose of demonstrating an adequate knowledge of options
      trading generally, the Rules of the Association applicable to trading of option
      contracts and the rules of the Options Clearing Corporation, and be registered as
      such before engaging in the duties or accepting the responsibilities of a
      Registered Options Principal.
180          (3) A person shall not qualify as a Registered Options Principal for both
      put and call options unless he has passed an examination testing him with
      respect to both put and call options.
181           (4) Each person required to register and qualify as a Registered Options
      Principal must, prior to or concurrent with such registration, be or become quali-
      fied pursuant to the Rule 1030 Series, as either a General Securities Represen-
      tative or a Limited Representative–Corporate Securities and also be or become
      qualified pursuant to Rule 1032(d) as a Registered Options Representative.
182          (5) A person registered solely as a Registered Options Principal shall not
      be qualified to function in a principal capacity with responsibility over any area of
      business activity not prescribed in subparagraph (1) hereof.
             (g)     Limited Principal–General Securities Sales Supervisor
183            (1) Each person associated with a member who is included in the
      definition of principal in Rule 1021 may register with the Association as a Limited
      Principal–General Securities Sales Supervisor if:
             (A) his supervisory responsibilities in the investment banking and securi-
             ties business are limited to the securities sales activities of a member,
      NASD [Rules 0100-3420]                                                                40


             including the training of sales and sales supervisory personnel and the
             maintenance of records of original entry and/or ledger accounts of the
             member required to be maintained in branch offices by SEC record
             keeping rules;
             (B) he is registered pursuant to the Rule 1030 series as a General
             Securities Representative; and
             (C) he is qualified to be so registered by passing an appropriate
             examination.
184          (2) A person registered in this category solely on the basis of having
      passed the Qualification Examination for Limited Principal–General Securities
      Sales Supervisor shall NOT be qualified to:
             (A) be registered in any other category of principal registration;
             (B) be included for purposes of the principal numerical requirements of
             Rule 1021(e)(1); or
             (C) perform for a member any or all of the following activities:
                     (i) supervision of the origination and structuring of underwritings;
                     (ii) supervision of market making commitments;
                     (iii) final approval of advertisements as these are defined in Rule
             2210;
                     (iv) supervision of the custody of firm or customer funds and/or
             securities for purposes of SEC Rule 15c3-3; or
                     (v) supervision of overall compliance with financial responsibility
             rules for broker/dealers promulgated pursuant to the provisions of the Act.
      [Amended by SR-NASD-77-23 eff. Nov. 15, 1978; amended by SR-NASD-78-16
      eff. May 30, 1979; amended by SR-NASD-80-01 eff. June 26, 1980; amended by
      SR-NASD-81-13 eff. Dec. 7, 1981; amended by SR-NASD-84-30 eff. Jan. 23,
      1985; amended by SR-NASD-88-27 eff. Aug. 25, 1988; amended by SR-NASD-
      89-24 eff. Aug. 24, 1989; amended by SR-NASD-91-65 eff. Mar. 4, 1992;
      Amended by SR-NASD-95-39 eff. Aug. 20, 1996; amended by SR-NASD-97-28
      eff: 8/7/97.]
      IM-1022-1. Registered Options Principals
185          Members having a single Registered Options Principal are required
      promptly to notify the Association in the event such person is terminated, resigns,
      becomes incapacitated or is otherwise unable to perform the duties of an Options
      Principal.
186            Following receipt of such notification, the Association will require
      members to agree, in writing, to refrain from engaging in any options-related
      activities which would necessitate the prior or subsequent approval of an Options
      Principal including, among other things, the opening of new options accounts or
      the execution of discretionary orders for option contracts until such time as a new
      Registered Options Principal has been qualified.
187         Members failing to qualify a new Registered Options Principal within two
      weeks following the loss of their sole Registered Options Principal, or by the
      NASD [Rules 0100-3420]                                                          41


      earliest available date for administration of the Series 4 Options Principal
      examination, whichever is longer, shall be required to cease doing an options
      business; provided, however, they may effect closing transactions in order to
      reduce or eliminate existing open options positions in their own account as well
      as the accounts of their customers.
      [Adopted by SR-NASD-79-15 eff. Feb. 22, 1980.]
      IM-1022-2. Limited Principal–General Securities Sales Supervisor
188           Limited Principal–General Securities Sales Supervisor is an alternate
      category of registration designed to lessen the qualification burdens on principals
      of general securities firms who supervise sales. Without this category of limited
      registration, such principals could be required to separately qualify pursuant to
      the rules of the NASD, MSRB, NYSE and the options exchanges. While persons
      may continue to separately qualify with all relevant self-regulatory organizations,
      the Limited Principal–General Securities Sales Supervisor Examination permits
      qualification as a supervisor of sales of all securities by one examination.
      Persons registered as Limited Principals–General Securities Sales Supervisor
      may also qualify in any other category of principal registration. Persons who are
      already qualified in one or more categories of principal registration may supervise
      sales activities of all securities by also qualifying as Limited Principals–General
      Securities Sales Supervisor.
189           Functions that may be performed by Limited Principals–General Securi-
      ties Sales Supervisors. Any person required to be registered as a principal who
      supervises sales activities in corporate, municipal and option securities, invest-
      ment company products, variable contracts and direct participation programs
      may be registered solely as a Limited Principal–General Securities Sale Super-
      visor. In addition to branch office managers, other persons such as regional and
      national sales managers may also be registered solely as Limited Principals–
      General Securities Sales Supervisor as long as they supervise only sales activi-
      ties. Qualification as a General Securities Representative is a prerequisite for
      registration as a Limited Principal–General Securities Sales Supervisor.
190           Functions that may not be performed by Limited Principals–General
      Securities Sales Supervisors. Certain functions may not be performed by
      persons registered solely as Limited Principal–General Securities Sales
      Supervisor. These include supervisory responsibility for the origination and
      structuring of underwritings, market-making, final approval of advertising, custody
      of firm or customer funds and/or securities for purposes of SEC Rule 15c3-3 and
      overall compliance with financial responsibility rules for broker/dealers. Persons
      responsible for any of these activities are still required to qualify in the
      appropriate categories of principal registration. Moreover, persons qualified only
      as Limited Principals–General Securities Sales Supervisor are not included for
      purposes of the two principal requirements of Rule 1021(e)(1).
      [Amended eff. May 30, 1979; Feb. 28, 1980; May 15, 1980; Aug. 1, 1980; June 1,
      1981; Dec. 7, 1981; July 26, 1984; May 20, 1988; Aug. 25, 1988; July 17, 1989;
      Aug. 24, 1989; Jan. 4, 1990; Aug. 28, 1990; Mar. 11, 1992.]
      NASD [Rules 0100-3420]                                                          42


      1030. Registration of Representatives
             Cross References — IM-2420-2, Continuing Commissions Policy —
             IM-8310-1, Effect of Suspension, Revocation or Bar
      1031. Registration Requirements
             (a)     All Representatives Must Be Registered
191           All persons engaged or to be engaged in the investment banking or
      securities business of a member who are to function as representatives shall be
      registered as such with the Association in the category of registration appropriate
      to the function to be performed as specified in Rule 1032. Before their registra-
      tion can become effective, they shall pass a Qualification Examination for
      Representatives appropriate to the category of registration as specified by the
      Board of Governors. A member shall not maintain a representative registration
      with the Association for any person (1) who is no longer active in the member’s
      investment banking or securities business, (2) who is no longer functioning as a
      representative, or (3) where the sole purpose is to avoid the examination require-
      ment prescribed in paragraph (c). A member shall not make application for the
      registration of any person as representative where there is no intent to employ
      such person in the member’s investment banking or securities business. A
      member may, however, maintain or make application for the registration as a
      representative of a person who performs legal, compliance, internal audit, or
      similar responsibilities for the member, or a person who performs administrative
      support functions for registered personnel, or a person engaged in the invest-
      ment banking or securities business of a foreign securities affiliate or subsidiary
      of the member.
             (b)     Definition of Representative
192           Persons associated with a member, including assistant officers other than
      principals, who are engaged in the investment banking or securities business for
      the member including the functions of supervision, solicitation or conduct of
      business in securities or who are engaged in the training of persons associated
      with a member for any of these functions are designated as representatives.
             (c)     Requirement for Examination on Lapse of Registration
193           Any person whose registration has been revoked pursuant to Rule 8310
      or whose most recent registration as a representative or principal has been
      terminated for a period of two (2) or more years immediately preceding the date
      of receipt by the Association of a new application shall be required to pass a
      Qualification Examination for Representatives appropriate to the category of
      registration as specified in Rule 1032.
      [Amended by SR-NASD-80-01 eff. June 26, 1980; amended by SR-NASD-89-15
      eff. June 8, 1989; amended by SR-NASD-89-53 eff. Aug. 28, 1990.]
             Cross Reference — IM-8310-1, Effect of Suspension, Revocation, or Bar
      1032. Categories of Representative Registration
             (a)     General Securities Representative
194            (1) Each person associated with a member who is included within the
      definition of a Representative in Rule 1031, shall be required to register with the
      NASD [Rules 0100-3420]                                                            43


      Association as a General Securities Representative and shall pass an appro-
      priate Qualification Examination before such registration may become effective
      unless his activities are so limited as to qualify him for one or more of the limited
      categories of representative registration specified hereafter. A person whose
      activities in the investment banking or securities business are so limited is not,
      however, precluded from attempting to become qualified for registration as a
      General Securities Representative, and if qualified, may become so registered.
195          (2) Except as provided in Rule 1031(c):
             (A) Any person who was registered with the Association as a Represen-
             tative prior to September 1, 1974, shall be qualified to be registered with
             the Association as a General Securities Representative.
             (B) A person who applied for registration as a Representative prior to
             September 1, 1974, and who become registered as a Representative
             prior to April 1, 1975 by virtue of having passed the Qualification Exami-
             nation for Representatives (Test Series 1) shall be qualified to be
             registered as a General Securities Representative.
             (C) A person who applied for registration as a Representative on or after
             September 1, 1974, or who registered as a Representative on or after
             April 1, 1975 by virtue of having passed the Qualification Examination for
             Registered Representatives (Test Series 1) shall be qualified to be regis-
             tered only as a Limited Representative-Investment Company and Varia-
             ble Contracts Products and as a Limited Representative–Direct
             Participation Programs as defined in paragraph (b) and (c) hereof.
             (D) A person who was registered as a Registered Representative after
             September 1, 1974 by virtue of having passed the General Securities
             Representative Examination (Test Series 7) shall be qualified to be
             registered as a General Securities Representative.
             (E) A person who was registered as a Registered Representative for Sale
             of Variable Contracts Only shall be qualified to be registered as a Limited
             Representative–Investment Company and Variable Contracts Products.
             (F) A person registered and in good standing with The Securities and
             Futures Authority and having passed the Modified General Securities
             Representative Qualification Examination for United Kingdom Represen-
             tatives shall be qualified to be registered as a General Securities Repre-
             sentative except that such person’s activities in the investment banking or
             securities business may not involve the solicitation, purchase and/or sale
             of municipal securities as defined in Section 3(a)(29) of the Act.
             (G) A person presently registered and in good standing as a represen-
             tative with any Canada stock exchange, or with a securities regulator of
             any Canada Province or Territory, or with the Investment Dealers Asso-
             ciation of Canada, and who has completed the training course of the
             Canadian Securities Institute, and who has passed the Canada Module of
             the General Securities Registered Representative Examination, shall be
             qualified to be registered as a General Securities Representative except
             that such person’s activities may not involve the solicitation, purchase
             and/or sale of municipal securities as defined in Section 3(a)(29) of the
             Act.
      NASD [Rules 0100-3420]                                                             44


             (H) A person presently registered and in good standing as a represen-
             tative with any Japan stock exchange, or with any Japan Securities
             Dealers Association, and who has passed the Japan Module of the
             General Securities Registered Representative Examination, shall be qua-
             lified to be registered as a General Securities Representative except that
             such person’s activities may not involve the solicitation, purchase and/or
             sale of municipal securities as defined in Section 3(a)(29) of the Act.
196           (3) A person registered as a General Securities Representative shall not
      be qualified to function as a Registered Options Representative unless he is also
      qualified and registered as such pursuant to the provisions of paragraph (d)
      hereof.
             (b)    Limited Representative-Investment          Company      and    Variable
                    Contracts Products
197            (1) Each person associated with a member who is included within the
      definition of a representative in Rule 1031 may register with the Association as a
      Limited Representative–Investment Company and Variable Contracts Products if:
             (A) his activities in the investment banking or securities business are
             limited solely to those activities enumerated in Rule 1022(d)(1), and
             (B) he passes an appropriate Qualification Examination for Limited
             Representative–Investment Company and Variable Contracts Products.
198          (2) A person qualified solely as a Limited Representative–Investment
      Company and Variable Contracts Products shall not be qualified to function as a
      representative in any area not prescribed in paragraph (b)(1)(A) hereof.
             (c)    Limited Representative–Direct Participation Programs
199            (1) Each person associated with a member who is included within the
      definition of a representative in Rule 1031 may register with the Association as a
      Limited Representative–Direct Participation Programs if:
             (A) his activities in the investment banking or securities business are
             limited solely to the solicitation, purchase and/or sale of equity interests in
             or debt of direct participation programs as defined in Rule 1022(e)(2), and
             (B) he passes an appropriate Qualification Examination for Limited
             Representative–Direct Participation Programs.
200          (2) A person qualified solely as a Limited Representative–Direct Participa-
      tion Programs shall not be qualified to function in any area not prescribed by
      subparagraph (1) hereof.
             (d)    Limited Representative–Options
201            (1) Each person associated with a member who is included within the
      definition of a representative as defined in Rule 1031 may register with the
      Association as a Limited Representative–Options if:
             (A) such person’s activities in the investment banking or securities
             business of the member involve the solicitation or sale of option contracts,
             including option contracts on government securities as that term is
             defined in Section 3(a)(42)(D) of the Act, for the account of a broker,
             dealer or public customer; and
      NASD [Rules 0100-3420]                                                              45


             (B) such person passes an appropriate qualification examination for
             Limited Representative–Options.
202           (2) Each person seeking to register and qualify as a Limited Represen-
      tative–Options must, concurrent with or before such registration may become
      effective, become registered pursuant to the Rule 1032 Series, either as a
      Limited Representative–Corporate Securities or Limited Representative–Govern-
      ment Securities.
203           (3) A person registered as a Limited Representative–Options shall not be
      qualified to function in any area not prescribed by subparagraph (1)(A) hereof.
             (e)     Limited Representative–Corporate Securities
204            (1) Each person associated with a member who is included within the
      definition of a representative in Rule 1031 may register with the Association as a
      Limited Representative–Corporate Securities if:
             (A) Such person’s activities in the investment banking or securities busi-
             ness involve the solicitation, purchase, and/or sale of a “security,” as that
             term is defined in Section 3(a)(10) of the Act, and do not include such
             activities with respect to the following securities unless such person is
             separately qualified and registered in the category or categories of
             registration related to these securities:
                    (i) Municipal securities as defined in Section 3(a)(29) of the Act;
                    (ii) Option securities as defined in Rule 2860;
                    (iii) Redeemable securities of companies registered pursuant to
             the Investment Company Act of 1940, except for money market funds;
                     (iv) Variable contracts of insurance companies registered pursuant
             to the Securities Act of 1933; and/or
                    (v) Direct Participation Programs as defined in Rule 1022(e)(1)(A).
             (B) Such person passes an appropriate qualification examination for
             Limited Representative–Corporate Securities.
205           (2) A person qualified solely as a Limited Representative–Corporate
      Securities shall not be qualified to function in any area not prescribed by
      subparagraph (1) hereof.
             (f)     Limited Representative–Equity Trader
206            (1) Each person associated with a member who is included within the
      definition of a representative as defined in Rule 1031 must register with the
      Association as a Limited Representative–Equity Trader if, with respect to tran-
      sactions in equity, preferred or convertible debt securities effected otherwise than
      on a securities exchange, such person is engaged in proprietary trading, the
      execution of transactions on an agency basis, or the direct supervision of such
      activities, other than any person associated with a member whose trading
      activities are conducted principally on behalf of an investment company that is
      registered with the Commission pursuant to the Investment Company Act of 1940
      and that controls, is controlled by or is under common control, with the member.
      NASD [Rules 0100-3420]                                                         46


207          (2) Before registration as a Limited Representative–Equity Trader as
      defined in subparagraph (1) hereof may become effective, an applicant must:
             (A) be registered pursuant to Rule 1032, either as a General Securities
             Representative or a Limited Representative–Corporate Securities; and
             (B) pass an appropriate Qualification Examination for Limited Represen-
             tative–Equity Trader. Any person who was performing any of the activities
             described in paragraph (f)(1) above on or prior to May 1, 1998 and who
             has filed an application to take this examination by August 31, 1998, must
             pass the examination by October 1, 2000. Any person who is eligible for
             this extended qualification period and who fails this examination during
             the 29-month time period commencing on May 1, 1998 and ending on
             October 1, 2000 must wait thirty (30) days from the date of failure to take
             the examination again. Any person, other than a person who is eligible for
             the extended qualification period, who files an application to take this
             qualification examination after May 1, 1998, must pass this examination
             before conducting such activities as described in paragraph (f)(1) above.
             In no event may a person who is eligible for the extended qualification
             period function as an Equity Trader beyond the 29-month period without
             having successfully passed the appropriate qualification examination.
             (g)    Limited Representative–Government Securities
208            (1) Each person associated with a member who is included within the
      definition of a representative as defined in Rule 1031 may register with the
      Association as a Limited Representative–Government Securities if:
             (A) such person’s activities in the investment banking or securities busi-
             ness involve the solicitation, purchase or sale of “government securities,”
             as that term is defined in Section 3(a)(42)(A) through (C) of the Act, for
             the account of a broker, dealer or public customer, and
             (B) such person passes an appropriate qualification examination for
             Limited Representative–Government Securities.
209           (2) A person registered solely as a Limited Representative–Government
      Securities shall not be qualified to function in any area not prescribed by
      subparagraph (1)(A) hereof.
210           (3) A person who has been performing the functions of a Limited
      Representative–Government Securities on or before April 1, 1996, may register
      as such without first meeting the requirement of subparagraph (1)(B) above
      unless:
             (A) such person is currently subject to a statutory disqualification as
             defined in Section 3(a)(39) of the Act or
             (B) during the past ten years before the effective date of that requirement
             was the subject of a suspension or fine of $5,000 or more by the
             Association, the Securities and Exchange Commission, the Commodity
             Futures Trading Commission, state securities commission, foreign finan-
             cial regulatory authority, or any other regulatory organization responsible
             for the investment banking or securities business.
      NASD [Rules 0100-3420]                                                           47


      [Amended by SR-NASD-80-01 eff. June 26, 1980; amended by SR-NASD-88-27
      eff. Aug. 25, 1988; amended by SR-NASD-90-46 eff. Aug. 28, 1990; amended by
      SR-NASD-91-65 eff. Mar. 4, 1992; amended by SR-NASD-96-04 eff. Feb. 9,
      1996; amended by SR-NASD-96-13 eff. Apr. 12, 1996; amended by SR-NASD-
      97-21 eff. April 1, 1998; amended by SR-NASD-97-23 which replaced Rule 1112
      with Rule 1032(g) eff. April 1, 1998; amended by SR-NASD-98-43 eff. June 12,
      1998; amended by SR-NASD-00-25 eff. April 26, 2000.]
      Selected Notices to Members: 87-76, 88-38, 88-49, 88-50, 89-49, 89-78, 90-69,
      92-20; 98-16, 98-17; 00-27.

      1040. Registration of Assistant Representatives–Order Processing
      1041. Registration Requirements
             (a)     All Assistant    Representatives–Order      Processing    Must    Be
                     Registered
211          All persons associated with a member who are to function as Assistant
      Representatives–Order Processing shall be registered with the Association.
      Before their registrations can become effective, they shall pass a Qualification
      Examination for Assistant Representatives–Order Processing as specified by the
      Board of Governors.
             (b)     Definition of Assistant Representative–Order Processing
212          Persons associated with a member who accept unsolicited customer
      orders for submission for execution by the member are designated as Assistant
      Representatives–Order Processing.
             (c)     Requirement for Examination on Lapse of Registration
213          Any persons whose most recent registration as an Assistant Represen-
      tative–Order Processing has been terminated for a period of two or more years
      immediately preceding the date of receipt by the Association of a new application
      shall be required to pass a Qualification Examination for Assistant Represen-
      tative–Order Processing.
      [Amended by SR-NASD-88-26 eff. June 12, 1989.]
      1042. Restrictions
             (a)     Prohibited Activities
214           An Assistant Representative–Order Processing may not solicit transac-
      tions or new accounts on behalf of the member, render investment advice, make
      recommendations to customers regarding the appropriateness of securities tran-
      sactions, or effect transactions in securities markets on behalf of the member.
      Persons registered in this category may not be registered concurrently in any
      other capacity.
             (b)     Compensation
215           Members may only compensate Assistant Representatives–Order
      Processing on an hourly wage or salaried basis and may not in any way, directly
      or indirectly, relate their compensation to the number or size of transactions
      effected for customers. This provision shall not prohibit persons registered in this
      NASD [Rules 0100-3420]                                                           48


      capacity from receiving bonuses or other compensation based on a member’s
      profit sharing plan or similar arrangement.
             (c)    Supervision
216          The activities of Assistant Representatives–Order Processing may only
      be conducted at a business location of the member that is under the direct
      supervision of an appropriately registered principal.
      [Amended by SR-NASD-88-26 eff. June 12, 1989.]

      1060. Persons Exempt from Registration
217           The following persons associated with a member are not required to be
      registered with the Association:
             (1) persons associated with a member whose functions are solely and
             exclusively clerical or ministerial;
             (2) persons associated with a member who are not actively engaged in
             the investment banking or securities business;
             (3) persons associated with a member whose functions are related solely
             and exclusively to the member’s need for nominal corporate officers or for
             capital participation; and
             (4) persons associated with a member whose functions are related solely
             and exclusively to:
                    (A) effecting transactions on the floor of a national securities
                    exchange and who are registered as floor members with such
                    exchange;
                    (B) transactions in municipal securities, except as provided in Rule
                    1110 hereof, or
                    (C) transactions in commodities.
218           Member firms, and persons associated with a member, may pay to non-
      registered foreign persons transaction-related compensation based upon the
      business of customers they direct to member firms if the following conditions are
      met:
             (1) the member firm has assured itself that the non-registered foreign
             person who will receive the compensation (the “finder”) is not required to
             register in the U.S. as a broker/dealer nor is subject to a disqualification
             as defined in Article III, Section 4 of the Association’s By-Laws, and has
             further assured itself that the compensation arrangement does not violate
             applicable foreign law;
             (2) the finders are foreign nationals (not U.S. citizens) or foreign entities
             domiciled abroad;
             (3) the customers are foreign nationals (not U.S. citizens) or foreign
             entities domiciled abroad transacting business in either foreign or U.S.
             securities;
      NASD [Rules 0100-3420]                                                           49


             (4) customers receive a descriptive document, similar to that required by
             Rule 206(4)-3(b) of the Investment Advisers Act of 1940, that discloses
             what compensation is being paid to finders;
             (5) customers provide written acknowledgment to the member firm of the
             existence of the compensation arrangement and that such acknowledg-
             ment is retained and made available for inspection by the Association;
             (6) records reflecting payments to finders are maintained on the member
             firm’s books and actual agreements between the member firm and
             persons compensated are available for inspection by the Association; and
             (7) the confirmation of each transaction indicates that a referral or finders
             fee is being paid pursuant to an agreement.
      [Amended by SR-NASD-80-01 eff. June 26, 1980; amended by SR-NASD-88-12
      eff. Nov. 2, 1988; amended by SR-NASD-94-51 eff. Feb. 15, 1995; amended by
      SR-NASD-95-39 eff. Aug. 20, 1996; amended by SR-NASD-98-86 eff. Nov. 19,
      1998.]
      Selected Notices to Members: 95-37.

      1070. Qualification Examinations and Waiver of Requirements
219          (a) Qualification Examinations specified in this Rule 1000 Series shall
      consist of a series of questions based upon topics contained in study outlines
      provided by the Association, a list of which is available from the Qualifications &
      Examination Department.
220           (b) Examinations shall be given at such times and places and under such
      conditions as shall be prescribed by the Board of Governors and shall be graded
      according to the procedure prescribed by the Board.
221           (c) Examination results shall be reported to member firms on a pass/fail
      basis only and may be accompanied by an analysis of the candidate’s per-
      formance on the examination. Passing scores assigned to each examination
      series shall be determined by the Board of Governors, or its designee.
222           (d) An applicant cannot receive assistance while taking the examination.
      Each applicant shall certify to the Board of Governors that no assistance was
      given to or received by him during the examination.
223           (e) Pursuant to the Rule 9600 Series, the Association may, in exceptional
      cases and where good cause is shown, waive the applicable Qualification
      Examination and accept other standards as evidence of an applicant’s qualifica-
      tions for registration. Advanced age, physical infirmity or experience in fields
      ancillary to the investment banking or securities business will not individually of
      themselves constitute sufficient grounds to waive a Qualification Examination.
224           (f) Any person associated with a member who fails to pass a qualification
      examination prescribed by the Association shall be permitted to take the exami-
      nation again after either a period of 30 calendar days has elapsed from the date
      of the prior examination or the next administration of an examination adminis-
      tered on a monthly basis, except that any person who fails to pass an examina-
      tion three or more times in succession shall be prohibited from again taking such
      examination either until a period of 180 calendar days has elapsed from the date
      NASD [Rules 0100-3420]                                                           50


      of such person’s last attempt to pass the examination or until the sixth
      subsequent administration of an examination administered on a monthly basis.
      [Amended by SR-NASD-89-14 eff. June 8, 1989; amended by SR-NASD-97-28
      eff: 8/7/97.]
      Selected Notices to Members: 89-52, 90-1.

      1080. Confidentiality of Examinations
225           The Association considers all of its Qualification Examinations to be
      highly confidential. The removal from an examination center, reproduction, dis-
      closure, receipt from or passing to any person, or use for study purposes of any
      portion of such Qualification Examination, whether of a present or past series, or
      any other use which would compromise the effectiveness of the Examinations
      and the use in any manner and at any time of the questions or answers to the
      Examinations are prohibited and are deemed to be a violation of Rule 2110.
      [Adopted eff. Sept. 1, 1972; amended eff. July 26, 1984; June 12, 1989.]

      1090. Foreign Members
226           A member which does not maintain an office in the United States respon-
      sible for preparing and maintaining financial and other reports required to be filed
      with the Commission and the Association must:
             (a) prepare all such reports, and maintain a general ledger chart of
             account and any description thereof, in English and U.S. dollars;
             (b) reimburse the Association for any expenses incurred in connection
             with examinations of the member to the extent that such expenses
             exceed the cost of examining a member located within the continental
             United States in the geographic location most distant from the District
             Office of appropriate jurisdiction;
             (c) ensure the availability of an individual fluent in English and knowled-
             geable in securities and financial matters to assist representatives of the
             Association during examinations; and
             (d) utilize, either directly or indirectly, the services of a broker/dealer
             registered with the Commission, a bank or a clearing agency registered
             with the Commission located in the United States in clearing all tran-
             sactions involving members of the Association, except where both parties
             to a transaction agree otherwise.
      [Adopted by SR-NASD-82-17 eff. Apr. 11, 1983.]

      1100. Foreign Associates
227            (a) All persons associated with a member who are designated as Foreign
      Associates shall be required to be registered but shall be exempt from the
      requirement to pass a Qualification Examination. Persons associated with a
      member shall be designated as Foreign Associates if they meet the following
      criteria:
             (1) They are not citizens, nationals, or residents of the United States or
             any of its territories or possessions;
      NASD [Rules 0100-3420]                                                            51


             (2) They will conduct all of their securities activities in areas outside the
             jurisdiction of the United States and they will not engage in any securities
             activities with or for any citizen, national or resident of the United States.
228           (b) Prior to the time the exemption provided for in paragraph (a) hereof
      may become effective, the member desiring to employ any such person must file
      with the Association a form designated “Application for Classification as a
      Foreign Associate” for each such person and must certify that such person meets
      the criteria of paragraph (a), as well as that:
             (1) Such person is not subject to any of the prohibitions to registration
             with the Association contained in Article III, Section 4 of the By-Laws of
             the Association;
             (2) Service of process for any proceeding instituted by the Association in
             respect to such person may be sent to an address designated by the
             member.
229           (c) In the event of the termination of the employment of a Foreign
      Associate, the member must notify the Association immediately by filing a notice
      of termination as required by Article V, Section 3 of the By-Laws.
      [Amended by SR-NASD-94-51 eff. Feb. 15, 1995; amended by SR-NASD-98-86
      eff. Nov. 19, 1998.]
      Selected Notices to Members: 83-72, 85-48, 88-24, 94-06, 95-37.
             Cross References — Schedule A, Resolution: Fees for Registered
             Representatives — IM-1000-1, Filing of Misleading Information as to
             Membership or Registration

      1110. Registration of Government Securities Principals and Repre-
            sentatives
      1111. Registration of Principals
230           All persons associated with a member not previously registered as a
      principal who are to function as government securities principals shall be
      registered as such with the Association.
             (a)    Definition of Government Securities Principal
231          Persons associated with a member who are:
             (1) engaged in the management or supervision of the member’s govern-
             ment securities business, including:
                    (A) underwriting, trading or sales of government securities;
                     (B) financial advisory or consultant services for issuers in connec-
             tion with the issuance of government securities;
                    (C) research or investment advice, other than general economic
             information or advice, with respect to government securities in connection
             with the activities described in (A) and (B) above;
                  (D) activities other than those specifically mentioned that involve
             communication, directly or indirectly, with public investors in government
      NASD [Rules 0100-3420]                                                            52


             securities in connection with the activities described in (A) and (B) above;
             or
             (2) are responsible for supervision of:
                   (A) the processing and clearance activities with respect to govern-
             ment securities; or
                    (B) the maintenance of records involving any of the activities
             described in paragraph (a)(1) above; are designated as principals.
             (b)     Notification of Principal Status
232           A member shall promptly notify the Association of the assumption by an
      individual not previously registered with the member as a principal on the form
      designated by the Board of Governors accompanied by the applicable fees.
      [Adopted by SR-NASD-88-12 eff. Nov. 2, 1988.]
      1112. [Reserved.]
      [Adopted by SR-NASD-88-12 eff. Nov. 2, 1988; SR-NASD-97-23 replaced Rule
      1112 with Rule 1032(g) eff. April 1, 1998.]
      1113. Persons Exempt From Registration
233           Persons associated with a member whose functions are exclusively cleri-
      cal or ministerial are not required to register with the Association.
      [Adopted by SR-NASD-88-12 eff. Nov. 2, 1988.]

      1120. Continuing Education Requirements
234           This Rule prescribes requirements regarding the continuing education of
      certain registered persons subsequent to their initial qualification and registration
      with the Association. The requirements shall consist of a Regulatory Element and
      a Firm Element as set forth below.
             (a)     Regulatory Element
              (1) Requirements
235           No member shall permit any registered person to continue to, and no
      registered person shall continue to, perform duties as a registered person unless
      such person has complied with the requirements of paragraph (a) hereof.
236           (A) Each registered person shall complete the Regulatory Element on
      three occasions, after the occurrence of their second registration anniversary
      date and every three years thereafter, or as otherwise prescribed by the Associa-
      tion. On each occasion, the Regulatory Element must be completed within 120
      days after the person’s registration anniversary date. A person’s initial registra-
      tion date shall establish the cycle of anniversary dates for purposes of this Rule.
      The content of the Regulatory Element shall be determined by the Association
      and shall be appropriate to either the registered representative or principal status
      of person subject to the Rule.
237           (B) Persons Exempted from the Rule — Persons who have been conti-
      nuously registered for more than 10 years on July 1, 1998, shall be exempt from
      participation in the Regulatory Element programs for registered representatives,
      provided such persons have not been subject within the last ten years to any
      NASD [Rules 0100-3420]                                                           53


      disciplinary action as enumerated in paragraph (a)(3). A person who has been
      continuously registered as a principal for more than ten years on July 1, 1998,
      shall be exempt from participation in the Regulatory Element programs for regis-
      tered principals, provided such person has not been subject within the last ten
      years to any disciplinary action as enumerated in paragraph (a)(3). In the event
      that a registered representative or principal who was exempt from participation in
      Regulatory Element programs subsequently becomes the subject of a discipli-
      nary action as enumerated in paragraph (a)(3), such person shall be required to
      satisfy the requirements of the Regulatory Element as if the date of such
      disciplinary action is such person’s initial registration date with the Association.
238           (C) Persons who have been currently registered for 10 years or less as of
      July 1, 1998, shall participate in the Regulatory Element within 120 days after the
      occurrence of the second registration anniversary date, or every third year
      thereafter, whichever anniversary date first applies.
              (2) Failure to Complete
239            Unless otherwise determined by the Association, any registered persons
      who have not completed the Regulatory Element within the prescribed time
      frames will have their registrations deemed inactive until such time as the requi-
      rements of the program have been satisfied. Any person whose registration has
      been deemed inactive under this Rule shall cease all activities as a registered
      person and is prohibited from performing any duties and functioning in any
      capacity requiring registration. A registration that is inactive for a period of two
      years will be administratively terminated. A person whose registration is so
      terminated may reactivate the registration only by reapplying for registration and
      meeting the qualification requirements of the applicable provisions of the Rule
      1020 Series and the Rule 1030 Series. The Association may, upon application
      and a showing of good cause, allow for additional time for a registered person to
      satisfy the program requirements.
              (3) Re-entry into Program
240           Unless otherwise determined by the Association, a registered person will
      be required to re-enter the Regulatory Element and satisfy all of its requirements
      in the event such person:
             (A) is subject to any statutory disqualification as defined in Section
             3(a)(39) of the Act;
             (B) is subject to suspension or to the imposition of a fine of $5,000 or
             more for violation of any provision of any securities law or regulation, or
             any agreement with or rule or standard of conduct of any securities
             governmental agency, securities self-regulatory organization, or as
             imposed by any such regulatory or self-regulatory organization in
             connection with a disciplinary proceeding; or
             (C) is ordered as a sanction in a disciplinary action to re-enter the
             continuing education program by any securities governmental agency or
             self-regulatory organization.
241           Re-entry shall commence with initial participation within 120 days of the
      registered person becoming subject to the statutory disqualification, in the case
      of (A) above, or the disciplinary action becoming final, in the case of (B) and (C)
      NASD [Rules 0100-3420]                                                           54


      above. The date of the disciplinary action shall be treated as such person’s initial
      registration with the Association.
             (4) Re-association in a Registered Capacity
242          Any registered person who has terminated association with a member
      and who has, within two years of the date of termination, become re-associated
      in a registered capacity with a member shall participate in the Regulatory
      Element at such intervals that may apply (second anniversary and every three
      years thereafter) based on the initial registration anniversary date rather than
      based on the date of re-association in a registered capacity.
              (5) Definition of Registered Person
243           For purposes of this Rule, the term “registered person” means any person
      registered with the Association as a representative, principal or assistant
      representative pursuant to the Rule 1020, 1030, 1040, and 1110 Series.
             (b)     Firm Element
              (1) Persons Subject to the Firm Element
244           The requirements of this subparagraph shall apply to any person
      registered with a member who has direct contact with customers in the conduct
      of the member’s securities sales, trading and investment banking activities, and
      to the immediate supervisors of such persons (collectively, “covered registered
      persons”). “Customer” shall mean any natural person and any organization, other
      than another broker or dealer, executing securities transactions with or through
      or receiving investment banking services from a member.
              (2) Standards for the Firm Element
245           (A) Each member must maintain a continuing and current education
      program for its covered registered persons to enhance their securities knowl-
      edge, skill, and professionalism. At a minimum, each member shall at least
      annually evaluate and prioritize its training needs and develop a written training
      plan. The plan must take into consideration the member’s size, organizational
      structure, and scope of business activities, as well as regulatory developments
      and the performance of covered registered persons in the Regulatory Element. If
      a member’s analysis establishes the need for supervisory training for persons
      with supervisory responsibilities, such training must be included in the member’s
      training plan.
246           (B) Minimum Standards for Training Programs — Programs used to
      implement a member’s training plan must be appropriate for the business of the
      member and, at a minimum must cover the following matters concerning
      securities products, services and strategies offered by the member:
             (i) General investment features and associated risk factors;
             (ii) Suitability and sales practice considerations; and
             (iii) Applicable regulatory requirements.
247           (C) Administration of Continuing Education Program — A member must
      administer its continuing education programs in accordance with its annual
      evaluation and written plan and must maintain records documenting the content
      of the programs and completion of the programs by covered registered persons.
      NASD [Rules 0100-3420]                                                            55


             (3) Participation in the Firm Element
248          Covered registered persons included in a member’s plan must take all
      appropriate and reasonable steps to participate in continuing education programs
      as required by the member.
              (4) Specific Training Requirements
249           The Association may require a member, individually or as part of a larger
      group, to provide specific training to its covered registered persons in such areas
      as the Association deems appropriate. Such a requirement may stipulate the
      class of covered registered persons for which it is applicable, the time period in
      which the requirement must be satisfied and, where appropriate, the actual
      training content.
      [Adopted by SR-NASD-94-72 eff. July 1, 1995; amended by SR-NASD-95-22 eff.
      July 1, 1995; amended by SR-NASD-98-03 eff. July 1, 1998.]
      Selected Notices to Members: 94-59, 95-13, 95-35.

      1130. Reliance on Current Membership List
250          The Secretary of the Association shall furnish every member of the
      Association a list of all members of the Association, and shall currently keep
      every member advised, by amendments to the list or otherwise, of all new
      members and of all suspensions and cancellations of membership. Each
      member shall be responsible for providing such information to its offices and
      associated persons as appropriate. For the purpose of complying with pertinent
      Rules, a member shall be entitled to rely on the information provided by the
      Association.
      [Amended eff. Sept. 19, 1989.]
      Selected Notices to Members: 89-47, 89-71.
             Cross Reference — By-Laws, Article III, Sec. 4 — IM-8310-2, Release of
             Disciplinary Information

      1140. Electronic Filing Rules
             (a)     Filing Requirement
251           Except as provided in Rule 1013(a)(2), all forms required to be filed by
      Article IV, Sections 1, 7, and 8, and Article V, Sections 2 and 3, of the By-Laws
      shall be filed through an electronic process or such other process the Association
      may prescribe to the Central Registration Depository.
             (b)     Supervisory Requirements
252           (1) In order to comply with the supervisory procedures requirement in
      Rule 3010, each member shall identify a Registered Principal(s) or corporate
      officer(s) who has a position of authority over registration functions, to be respon-
      sible for supervising the electronic filing of appropriate forms pursuant to this
      Rule.
253          (2) The Registered Principal(s) or corporate officer(s) who has or have
      the responsibility to review and approve the forms filed pursuant to this Rule shall
      be required to acknowledge, electronically, that he is filing this information on
      behalf of the member and the member’s associated persons.
      NASD [Rules 0100-3420]                                                             56


             (c)     Form U-4 Filing Requirements
254          (1) Initial and transfer electronic application filings shall be based on a
      signed Form U-4 provided to the member by the applicant. As part of the
      member’s record-keeping requirements, it shall retain the applicant’s signed
      Form U-4 and make it available upon regulatory request.
255           (2) Fingerprint Cards — Upon filing an electronic Form U-4 on behalf of
      an applicant for registration, a member shall promptly submit a fingerprint card
      for the applicant. NASD Regulation may make a registration effective pending
      receipt of the fingerprint card. If a member fails to submit a fingerprint card within
      30 days after NASD Regulation receives the electronic Form U-4, the person’s
      registration shall be deemed inactive. In such case, NASD Regulation shall notify
      the member that the person must immediately cease all activities requiring
      registration and is prohibited from performing any duties and functioning in any
      capacity requiring registration. NASD Regulation shall administratively terminate
      a registration that is inactive for a period of two years. A person whose registra-
      tion is administratively terminated may reactivate the registration only by re-
      applying for registration and meeting the qualification requirements of the appli-
      cable provisions of the Rule 1020 Series and the Rule 1030 Series. Upon appli-
      cation and a showing of good cause, the Association may extend the 30-day
      period.
             (d)     Form U-5 Filing Requirements
256            Initial filings and amendments of Form U-5 shall be submitted electro-
      nically. As part of the member’s record-keeping requirements, it shall make such
      records available upon regulatory request.
             (e)     Third Party Filing
257           A member may employ a third party to file the required forms electro-
      nically on its behalf.
      [Adopted by SR-NASD-96-21 on July 15, 1996; amended and implemented by
      SR-NASD-99-28 eff. Aug. 16, 1999; amended by SR-NASD-99-67 eff. Nov. 15,
      2000.]
      Selected Notices to Members 99-56, 99-63.

      2000. BUSINESS CONDUCT

      2100. GENERAL STANDARDS

      2110. Standards of Commercial Honor and Principles of Trade
258        A member, in the conduct of his business, shall observe high standards of
      commercial honor and just and equitable principles of trade.
             Cross References — IM-1000-1, Filing of Misleading Information as to
             Membership or Registration — IM-1000-3, Failure to Register Personnel
             — IM-2110-1, “Free-Riding and Withholding” — IM-2110-2, Trading
             Ahead of Customer Limit Order — IM-2110-3, Front Running Policy —
             IM-2110-4, Trading Ahead of Research Reports — IM-2110-5, Anti-
             Intimidation/Coordination — IM-2230, “Third Market” Confirmations — IM-
      NASD [Rules 0100-3420]                                                           57


             2310-2, Fair Dealing with Customers — IM-2440, Mark-Up Policy — IM-
             2830-1, “Breakpoint” Sales — IM-3310, Manipulative and Deceptive
             Quotations — IM-3320, Firmness of Quotations — IM-10100, Failure to
             Act Under Provisions of Code of Arbitration Procedure — IM-11110,
             Refusal to Abide by Rulings of the Committee
259          Selected SEC Decisions
                    ·   Albert P. Fosha, SEC Rel. No. 34-22815 (1986).
                    ·   C. Brock Lippitt, Thomas M. Svalberg and Gerald B.
                        Fitzgerald, SEC Rel. No. 34-23495 (1986).
                    ·   Robert J. Jautz, SEC Rel. No. 34-24346 (1987).
                    ·   Robert S.C. Peterson, Inc. and Robert S.C. Peterson, SEC
                        Rel. No. 34-24688 (1987).
                    ·   Rita Delaney, SEC Rel. No. 34-25119 (1987).
                    ·   Gary D. Cohee, SEC Rel. No. 34-25210 (1987).
                    ·   Traiger Energy Investments and Michael A. Traiger, SEC Rel.
                        No. 34-25306 (1988).
                    ·   E.F. Hutton & Co., Inc. (n/k/a) Shearson Lehman Hutton, Inc.,
                        SEC Rel. No. 34-25587 (1988).
                    ·   Stephen M. Carter, SEC Rel. No. 34-26264 (1988).
                    ·   Cosse International Securities, Inc. and Charles B. Cosse,
                        SEC Rel. No. 34-26424 (1989).
                    ·   L.C. Thomas and Stephen V. Wallace, SEC Rel. No. 34-26530
                        (1989).
                    ·   Stanley D. Gardenswartz, SEC Rel. No. 34-27194 (1989).
                    ·   Walter Capital Corp. and Frank R. Grillo, SEC Rel. No. 34-
                        27536 (1989).
      IM-2110-1. “Free-Riding and Withholding”
             (a)     Introduction
260           (1) This interpretation is based upon the premise that members have an
      obligation to make a bona fide public distribution at the public offering price of
      securities of a public offering which trade at a premium in the secondary market
      whenever such secondary market begins (a “hot issue”) regardless of whether
      such securities are acquired by the member as an underwriter, as a selling group
      member, or from a member participating in the distribution as an underwriter or a
      selling group member, or otherwise. The failure to make a bona fide public
      distribution when there is a demand for an issue can be a factor in artificially
      raising the price. Thus, the failure to do so, especially when the member may
      have information relating to the demand for the securities or other factors not
      generally known to the public, is inconsistent with high standards of commercial
      honor and just and equitable principles of trade and leads to an impairment of
      public confidence in the fairness of the investment banking and securities
      business. Such conduct is, therefore, in violation of Rule 2110 and this interpre-
      tation thereof which establishes guidelines in respect to such activity.
261          (2) As in the case of any other interpretation issued by the Association,
      the implementation thereof is a function of the NASD Regulation staff and the
      NASD Regulation Board of Directors. Thus, the interpretation will be applied to a
      given factual situation by NASD Regulation staff, subject to oversight by the
      Board, with staff soliciting input from individuals active in the investment banking
      NASD [Rules 0100-3420]                                                           58


      and securities business. In making such interpretations, staff and the Board will
      construe this interpretation to effectuate its overall purpose to assure a public
      distribution of securities for which there is a public demand.
262           (3) The Board of Governors has determined that it shall not be considered
      a violation of this interpretation if a member which makes an allocation to a
      restricted person or account of an offering that trades at a premium in the
      secondary market, cancels the trade for such restricted person or account, prior
      to the end of the first business day following the date on which secondary market
      trading commences and reallocates such security at the public offering price to a
      non-restricted person or account.
263          (4) This interpretation will not apply to government securities as defined in
      Section 3(a)(42) of the Act.
264            (5) The NASD Regulation staff, upon written request, may, taking into
      consideration all relevant factors, provide an exemption either unconditionally or
      on specified terms from any or all of the provisions of this interpretation upon a
      determination that such exemption is consistent with the purposes of the interpre-
      tation, the protection of investors, and the public interest. A member may appeal
      a decision issued by NASD Regulation staff to the National Adjudicatory Council
      pursuant to the Code of Procedure.
             (b)     Violations of Rule 2110
265           Except as provided herein, it shall be inconsistent with high standards of
      commercial honor and just and equitable principles of trade and a violation of
      Rule 2110 for a member, or a person associated with a member, to fail to make a
      bona fide public distribution at the public offering price of securities of a public
      offering which trade at a premium in the secondary market whenever such
      secondary market begins regardless of whether such securities are acquired by
      the member as an underwriter, a selling group member or from a member
      participating in the distribution as an underwriter or selling group or otherwise.
      Therefore, it shall be a violation of Rule 2110 for a member, or a person
      associated with a member, to:
             (1) Continue to hold any of the securities so acquired in any of the
             member’s accounts;
             (2) Sell any of the securities to any officer, director, general partner,
             employee or agent of the member or of any other broker/dealer, or to a
             person associated with the member or with any other broker/dealer, or to
             a member of the immediate family of any such person; provided however,
             that:
                     (A) This prohibition shall not apply to a person in a limited regis-
             tration category as that term is defined below;
                     (B) The prohibition shall not apply to sales to a member of the
             immediate family of a person associated with a member who is not
             supported directly or indirectly to a material extent by such person if the
             sale is by a broker/dealer other than that employing the restricted person
             and the restricted person has no ability to control the allocation of the hot
             issue.
      NASD [Rules 0100-3420]                                                              59


266          (3) Sell any of the securities to a person who is a finder in respect to the
      public offering or to any person acting in a fiduciary capacity to the managing
      underwriter, including, among others, attorneys, accountants and financial
      consultants, or to any other person who is supported directly or indirectly, to a
      material extent, by any person specified in this subparagraph.
267            (4) Sell any securities to any senior officer of a bank, savings and loan
      institution, insurance company, investment company, investment advisory firm or
      any other institutional type account (including, but not limited to, hedge funds,
      investment partnerships, investment corporations, or investment clubs), domestic
      or foreign, or to any person in the securities department of, or to any employee or
      any other person who may influence or whose activities directly or indirectly
      involve or are related to the function of buying or selling securities for any bank,
      savings and loan institution, insurance company, investment company, invest-
      ment advisory firm, or other institutional type account, domestic or foreign, or to
      any other person who is supported directly or indirectly, to a material extent, by
      any person specified in this subparagraph.
268         (5) Sell any securities to any account in which any person specified under
      subparagraphs (1), (2), (3) or (4) hereof has a beneficial interest; provided,
      however, a member may sell part of its securities acquired as described above
      to:
                     (A) persons enumerated in subparagraphs (3) or (4) hereof; and
                    (B) members of the immediate family of persons enumerated in
             subparagraph (2) hereof, provided that such person enumerated in
             subparagraph (2) does not contribute directly or indirectly to the support
             of such member of the immediate family; and
                    (C) any account in which any person specified under sub-
             paragraph (3) or (4) or subparagraph (5)(B) has a beneficial interest;
             if the member is prepared to demonstrate that the securities were sold to
             such persons in accordance with their normal investment practice, that
             the aggregate of the securities so sold is insubstantial and not dispro-
             portionate in amount as compared to sales to members of the public and
             that the amount sold to any one of such persons is insubstantial in
             amount.
269             (6) Sell any of the securities, at or above the public offering price, to any
      other broker/dealer; provided, however, a member may sell all or part of the
      securities acquire as described above to another member broker/dealer upon
      receipt from the latter in writing of assurance that such purchase would be made
      to fill orders for bona fide public customers, other than those enumerated in sub-
      paragraphs (1), (2), (3), (4) or (5) above, at the public offering price as an
      accommodation to them and without compensation for such.
270           (7) Sell any of the securities to any domestic bank, domestic branch of a
      foreign bank, trust company or other conduit for an undisclosed principal unless:
             (A) An affirmative inquiry is made of such bank, trust company or other
             conduit as to whether the ultimate purchasers would be persons enume-
             rated in subparagraphs (1) through (5) hereof and receives satisfactory
             assurance that the ultimate purchasers would not be such persons, and
      NASD [Rules 0100-3420]                                                             60


            that the securities would not be sold in a manner inconsistent with the
            provisions of subparagraph (6) hereof; otherwise, there shall be a rebutta-
            ble presumption that the ultimate purchasers were persons enumerated in
            subparagraphs (1) through (5) hereof or that the securities were sold in a
            manner inconsistent with the provisions of subparagraph (6) hereof;
            (B) A recording is made on the order ticket, or its equivalent, or on some
            other supporting document, of the name of the person to whom the
            inquiry was made at the bank, trust company or other conduit as well as
            the substance of what was said by that person and what was done as a
            result thereof;
            (C) The order ticket, or its equivalent, is initialed by a registered principal
            of the member; and
            (D) Normal supervisory procedures of the member provide for a close
            follow-up and review of all transactions entered into with the referred to
            domestic bank, trust companies or other conduits for undisclosed
            principals to assure that the ultimate recipients of securities so sold are
            not persons enumerated in subparagraphs (1) through (6) hereof.
271          (8) Sell any of the securities to a foreign broker/dealer or bank unless:
             (A) In the case of a foreign broker/dealer or bank which is participating in
             the distribution as an underwriter, the agreement among underwriters
             contains a provision which obligates the said foreign broker/dealer or
             bank not to sell any of the securities which it receives as a participant in
             the distribution to persons enumerated in subparagraphs (1) through (5)
             above, or in a manner inconsistent with the provisions of subparagraph
             (6) hereof; or
             (B) In the case of sales to a foreign broker/dealer or bank which is not
             participating in the distribution as an underwriter, the selling member:
                    (i) makes an affirmative inquiry of such foreign broker/dealer or
             bank as to whether the ultimate purchasers would be persons enume-
             rated in subparagraphs (1) through (5) hereof and receives satisfactory
             assurance that the ultimate purchasers of the securities so purchased
             would not be such persons, and that the securities would not be sold in a
             manner inconsistent with the provisions of subparagraph (6) hereof;
                    (ii) a recording is made on the order ticket, or its equivalent, or
             upon some other supporting document, of the name of the person to
             whom the inquiry was made at the foreign broker/dealer or bank as well
             as the substance of what was said by that person and what was done as
             a result thereof; and
                    (iii) the order ticket, or its equivalent, is initialed by a registered
             principal of the member.
             (C) The obligations imposed upon members in their dealings with foreign
             broker/dealers or banks by subparagraph (8)(B) can be fulfilled by having
             this foreign broker/dealer or bank to which sales falling within the scope of
             this interpretation are made, execute Form FR-1, or a reasonable fac-
             simile thereof. This form, which gives a blanket assurance from the
             foreign broker/dealer or bank that no sales will be made in contravention
      NASD [Rules 0100-3420]                                                          61


             of the provisions of this interpretation, can be obtained at any District
             Office of the Association or at the Executive Office. The acceptance of an
             executed Form FR-1, or other written assurance, by a member must in all
             instances be made in good faith. Thus, if a member knows or should have
             known of facts which are inconsistent with the representations received,
             such will not operate to satisfy the obligations imposed upon him by this
             subparagraph.
272           (9) Sell any of the securities to any person, or to a member of the imme-
      diate family of such person who is supported directly or indirectly to a material
      extent by such person, who owns or has contributed capital to a broker/dealer,
      other than solely a limited business broker/dealer as defined in paragraph (c) of
      this interpretation, or the account in which any such person has a beneficial
      interest, provided, however, that:
             (A) The prohibition shall not apply to any person who directly or indirectly
             owns any class of equity securities of, or who has made a contribution of
             capital to, a member, and whose ownership or capital interest is passive
             and is less than 10% of the equity or capital of a member, as long as:
                     (i) such person purchases hot issues from a person other than the
             member in which it has such passive ownership and such person is not in
             a position by virtue of its passive ownership interest to direct the alloca-
             tion of hot issues, or
                    (ii) such member’s shares or shares of a parent of such member
             are publicly traded on an exchange or Nasdaq.
             (B) This prohibition shall not apply to sales to the account of any person
             restricted under this subparagraph (9) established for the benefit of bona
             fide public customers, including insurance company general, separate
             and investment accounts, and bank trust accounts.
             (C) For purposes of this subparagraph (9), any person with an equity
             ownership or capital interest in an entity that maintains an investment in a
             member shall be deemed to have a percentage interest in the member
             equal to the percentage interest of the entity in the member multiplied by
             the percentage interest of such person in such entity.
             (c)     Limited Business Broker/Dealer
273           The restrictions placed on associated persons pursuant to paragraph
      (b)(2) shall not apply to persons associated with Association members engaged
      solely in the purchase or sale of either investment company/variable contracts
      securities or direct participation program securities.
             (d)     Issuer-Directed Securities
274           Employees and directors of an issuer, a parent of an issuer, a subsidiary
      of an issuer, or any other entity which controls or is controlled by an issuer, or
      potential employees and directors resulting from an intended merger, acquisition,
      or other business combination of an issuer otherwise subject to this interpretation
      in paragraphs (b)(2) through (9) may purchase securities that are part of a public
      offering that are specifically directed by the issuer to such persons; provided,
      however, that in the case of an offering of securities for which a bona fide
      independent market does not exist, such securities shall not be sold, transferred,
      NASD [Rules 0100-3420]                                                           62


      assigned, pledged, or hypothecated for a period of three months following the
      effective date of the offering.
             (e)     Stand-By Purchasers
275          Securities purchased pursuant to a stand-by arrangement shall not be
      subject to the provisions of the interpretation if the following conditions are met:
             (1) The stand-by agreement is disclosed in the prospectus;
             (2) The stand-by arrangement is the subject of a formal written agree-
             ment;
             (3) The managing underwriter represents in writing that it was unable to
             find any other purchasers for the securities; and
             (4) The securities purchased shall be restricted from sale or transfer for a
             period of three months.
             (f)     Investment Partnerships and Corporations
276           (1) A member may not sell a hot issue to the account of any investment
      partnership or corporation, domestic or foreign (except companies registered
      under the Investment Company Act of 1940 or foreign investment companies as
      defined herein) including but not limited to hedge funds, investment clubs, and
      other like accounts unless the member complies with either of the following
      alternatives:
             (A) prior to the execution of the transaction, the member has received
             from the account a current list of the names and business connections of
             all persons having any beneficial interest in the account, and if such
             information discloses that any person restricted under this interpretation
             has a beneficial interest in such account, any sale of securities to such
             account must be consistent with the provisions of this interpretation, or
             (B) prior to the execution of the transaction, the member has obtained a
             copy of a written representation from counsel admitted to practice law
             before the highest court of any state or the account’s independent certi-
             fied public accountant stating that such counsel or accountant reasonably
             believes that no person with a beneficial interest in the account is a
             restricted person under this interpretation and stating that, in providing
             such representation, counsel or accountant:
                    (i) has reviewed and is familiar with this interpretation;
                    (ii) has reviewed a current list of all persons with a beneficial
             interest in the account supplied by the account manager;
                     (iii) has reviewed information supplied by the account manager
             with respect to each person with a beneficial interest in the account,
             including the identity, the nature of employment, and any other business
             connections of such persons; and
                    (iv) has requested and reviewed other documents and other
             pertinent information and made inquiries of the account manager and
             received responses thereto, if counsel or the accountant determines that
             such further review and inquiry are necessary and relevant to determine
             the correct status of such persons under the interpretation.
      NASD [Rules 0100-3420]                                                            63


277           (2) The member shall maintain a copy of the names and business
      connections of all persons having any beneficial interest in the account or a copy
      of the current written representation in its files for at least three years following
      the member’s last sale of a new issue to the account, depending upon which of
      the above requirements the member elects to follow. For purposes of this
      paragraph (f) and the certification required pursuant to paragraph (l)(6), a list or
      written representation shall be deemed to be current if it is based upon the status
      of the account as of a date not more than 18 months prior to the date of the
      transaction.
278         (3) An employee benefits plan qualified under the Employee Retirement
      Income Security Act shall be deemed restricted under this interpretation in
      accordance with the following provisions:
             (A) Any plan sponsored by a broker/dealer is restricted;
             (B) Any plan sponsored by an entity that is not involved in financial
             services activities is not restricted whether or not any plan participants
             may be restricted;
             (C) Any plan sponsored by an entity that is engaged in financial services
             activities, including but not limited to, banks, insurance companies, invest-
             ment advisers, or other money managers, is not restricted, provided that
             the plan permits participation by a broad class of participants and is not
             designed primarily for the benefit of restricted persons.
             (g)     Beneficial Interest
279           The term beneficial interest means not only ownership interests, but every
      type of direct financial interest of any persons enumerated in paragraph (b)(1)
      through (4) in such account; provided, however, that no restricted person shall be
      deemed to have a beneficial interest in an account receiving a hot issue as a
      result of ownership of an interest in an investment partnership or corporation, or
      similar type account (“investment entity”), if the following conditions are met:
             (1) The investment entity establishes a separate brokerage account, with
             a separate identification number, for its new-issue purchases. At the end
             of each fiscal year, the general partner, or similarly situated party, will
             certify in writing to its independent certified public accountants that:
                     (A) all hot issues purchased by the investment entity were placed
             in this new-issue account; and
                   (B) that the participants in the new-issue account are not restricted
             persons under this interpretation.
             (2) Prior to the execution of the initial hot-issue transaction, the invest-
             ment entity’s accountant or attorney will provide a written representation
             that complies with paragraph (f).
             (3) As part of its audit procedure for the investment entity, the inde-
             pendent certified public accountant will confirm in writing to the invest-
             ment entity that all allocations for the new-issue account were made in
             accordance with the provisions of the applicable investment entity agree-
             ment that restricts participation in hot-issue purchases.
      NASD [Rules 0100-3420]                                                             64


             (4) The investment entity will maintain in its files copies of the certifica-
             tions, representations, and confirmations referred to in subparagraphs (1),
             (2) and (3) above for at least three years following the last purchase of a
             hot issue for the new-issue account.
             (5) The investment entity will accept investment funds from other invest-
             ment entities if such other accounts provide the same documentation and
             assurances described in subparagraphs (1), (2), (3) and (4) above that
             restricted persons will not participate in the purchase of hot issues.
             (6) The certifications and documents required in subparagraphs (1), (2)
             and (3) above shall be provided to the member holding such account at
             such time as these certifications and documents are filed with the invest-
             ment entity and its independent certified public accountant and, the
             member shall make such documentation available to the Association
             upon request.
             (h)     Venture Capital Investors
280           This interpretation shall not prohibit the sale of hot issues in an initial
      public offering to a person restricted under the interpretation or to an account in
      which such restricted person has a beneficial interest (a “Venture Capital
      Investor”) if the following conditions are met:
             (1) The Venture Capital Investor has held an ownership interest in the
             company issuing the hot-issue securities for a period of one year prior to
             the effective date of the public offering;
             (2) The acquisition of the hot-issue securities in the public offering does
             not increase the percentage equity ownership of the Venture Capital
             Investor in the company above that the Venture Capital Investor held
             three months prior to the filing of the registration statement in connection
             with the offering;
             (3) The Venture Capital Investor received no special terms in connection
             with the purchase; and
             (4) The securities purchased shall be restricted from sale or transfer for a
             period of three months following the conclusion of the offering.
             (i)     Violations by Recipient
281           In those cases where a member or person associated with a member has
      been the recipient of securities of a public offering to the extent that such violated
      the interpretation, the member or person associated with a member shall be
      deemed to be in violation of Rule 2110 and this interpretation as well as the
      member who sold the securities since their responsibility in relation to the public
      distribution is equally as great as that of the member selling them. In those cases
      where a member or a person associated with a member has caused, directly or
      indirectly, the distribution of securities to a person falling within the restrictive
      provisions of this interpretation the member or person associated with a member
      shall also be deemed to be in violation of Rule 2110. Receipt by a member or a
      person associated with a member of securities of a hot issue which is being
      distributed by an issuer itself without the assistance of an underwriter and/or
      selling group is also intended to be subject to the provisions of this interpretation.
      NASD [Rules 0100-3420]                                                              65


             (j)     Violations by Registered Representative Executing Transaction
282            The obligation which members have to make a bona fide public distribu-
      tion at the public offering price of securities of a hot issue is also an obligation of
      every person associated with a member who causes a transaction to be
      executed. Therefore, where sales are made by such persons in a manner incon-
      sistent with the provisions of this interpretation, such persons associated with a
      member will be considered equally culpable with the member for the violations
      found taking into consideration the facts and circumstances of the particular case
      under consideration.
             (k)     Disclosure
283           The fact that a disclosure is made in the prospectus or offering circular
      that a sale of securities would be made in a manner inconsistent with this
      interpretation does not take the matter out of its scope. In sum, therefore, dis-
      closure does not affect the proscriptions of this interpretation.
             (l)     Explanation of Terms
284          The following explanation of terms is provided for the assistance of
      members. Other words which are defined in the By-Laws and Rules shall, unless
      the context otherwise requires, have the meaning as defined therein.
              (1) Public Offering
285           The term public offering shall mean any primary or secondary distribution
      of securities made pursuant to a registration statement or offering circular
      including exchange offers, rights offerings, offerings made pursuant to a merger
      or acquisition, straight debt offerings, offerings pursuant to SEC Rule 504, and all
      other securities distributions of any kind whatsoever, except any offering made
      pursuant to an exemption from registration under Sections 4(1), 4(2), or 4(6) of
      the Securities Act of 1933, as amended, or pursuant to Rule 504 if the securities
      are “restricted securities” under SEC Rule 144(a)(3), Rule 505, or Rule 506
      adopted under the Securities Act of 1933, as amended. The term public offering
      shall exclude exempted securities as defined in Section 3(a)(12) of the Act, and
      debt securities (other than debt securities convertible into common or preferred
      stock) and financing instrument-backed securities that are rated by a nationally
      recognized statistical rating organization in one of its four highest generic rating
      categories. The term public offering shall exclude secondary offerings by an
      issuer, or any security holder of the issuer, of actively-traded securities.
              (2) Immediate Family
286           The term immediate family shall include parents, mother-in-law or father-
      in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-
      law or daughter-in-law, and children. In addition, the term shall include any other
      person who is supported, directly or indirectly, to a material extent by the
      member, person associated with the member or other person specified in
      paragraph (b)(2) above.
              (3) Normal Investment Practice
287           Normal investment practice shall mean the history of investment of a
      restricted person in an account or accounts maintained by the restricted person.
      Usually the previous one-year period of securities activity is the basis for
      determining the adequacy of a restricted person’s investment history. Where
      warranted, however, a longer or shorter period may be reviewed. It is the
      NASD [Rules 0100-3420]                                                            66


      responsibility of the registered representative effecting the allocation, as well as
      the member, to demonstrate that the restricted person’s investment history
      justifies the allocation of hot issues. Copies of customer account statements or
      other records maintained by the registered representative or the member may be
      utilized to demonstrate prior investment activity. In analyzing a restricted person’s
      investment history the Association believes the following factors should be
      considered:
             (A) The frequency of transactions in the account or accounts during that
             period of time. Relevant in this respect are the nature and size of
             investments.
             (B) A comparison of the dollar amount of previous transactions with the
             dollar amount of the hot-issue purchase. If a restricted person purchases
             $1,000 of a hot issue and his account revealed a series of purchases and
             sales in $100 amounts, the $1,000 purchase would not appear to be
             consistent with the restricted person’s normal investment practice.
             (C) The practice of purchasing mainly hot issues would not constitute a
             normal investment practice. The Association does, however, consider as
             contributing to the establishment of a normal investment practice, the
             purchase of new issues which are not hot issues as well as secondary
             market transactions.
              (4) Disproportionate
288           (A) In respect to the determination of what constitutes a disproportionate
      allocation, the Association uses a guideline of 10% of the member’s participation
      in the issue, however acquired. It should be noted, however, that the 10% factor
      is merely a guideline and is one of a number of factors which are considered in
      reaching determinations of violations of the interpretation on the basis of
      disproportionate allocations. These other factors include, among other things:
             (i) the size of the participation;
             (ii) the offering price of the issue;
             (iii) the amount of securities sold to restricted accounts; and
             (iv) the price of the securities in the after-market.
289           (B) It should be noted that disciplinary action has been taken against
      members for violations of the interpretation where the allocations made to
      restricted accounts were less than 10% of the member’s participation. The 10%
      guideline is applied as to the aggregate of the allocations.
290           (C) Notwithstanding the above, a normal unit of trading (100 shares or 10
      bonds) will in most cases not be considered a disproportionate allocation
      regardless of the amount of the member’s participation. This means that if the
      aggregate number of shares of a member’s participation which is allocated to
      restricted accounts does not exceed a normal unit of trading, such allocation will
      in most cases not be considered disproportionate. For example, if a member
      receives 500 shares of a hot issue, he may allocate 100 shares to a restricted
      account even though such allocation represents 20% of the member’s participa-
      tion. Of course, all of the remaining shares would have to be allocated to un-
      restricted accounts and all other provisions of the interpretation would have to be
      satisfied. Specifically, the allocation would have to be consistent with the normal
      NASD [Rules 0100-3420]                                                           67


      investment practice of the account to which it was allocated and the member
      would not be permitted to sell to restricted persons who were totally prohibited
      from receiving hot issues.
              (5) Insubstantiality
291           This requirement is separate and distinct from the requirements relating
      to disproportionate allocations and normal investment practice. In addition, this
      term applies both to the aggregate of the securities sold to restricted accounts
      and to each individual allocation. In other words, there could be a substantial
      allocation to an individual account in violation of the interpretation and yet be no
      violation on that ground as to the total number of shares allocated to all accounts.
      The determination of whether an allocation to a restricted account or accounts is
      substantial is based upon, among other things, the number of shares allocated
      and/or the dollar amount of the purchase.
              (6) Foreign Investment Company
292           The term foreign investment company shall include any fund company
      organized under the laws of a foreign jurisdiction, which has provided to the
      member a written certification prepared by counsel admitted to practice law
      before the highest court of any state of the United States or such foreign juris-
      diction, or by an independent certified public accountant licensed to practice in
      any state of the United States or such foreign jurisdiction, that states that:
             (A) the fund has 100 or more investors;
             (B) the fund is listed on a foreign exchange or authorized for sale to the
             public by a foreign regulatory authority;
             (C) no more than 5% of the fund assets are to be invested in the
             securities being offered; and,
             (D) any person owning more than 5% of the shares of the fund is not a
             restricted person as described in paragraphs (b)(1), (2), (3), (4) or (9) of
             this interpretation.
              (7) Actively-traded securities
293           (A) Actively-traded securities means securities that have an ADTV value
      of at least $1 million and are issued by an issuer whose common equity
      securities have a public float value of at least $150 million.
294           (B) “ADTV” means the worldwide average daily trading volume, during the
      two full calendar months immediately preceding, or any 60 consecutive calendar
      days ending within the 10 calendar days preceding, the filing of the registration
      statement; or, if there is no registration statement or if the distribution involves
      the sale of securities on a delayed basis pursuant to Securities Act Rule 415, two
      full calendar months immediately preceding, or any consecutive 60 calendar
      days ending within the 10 calendar days preceding, the determination of the
      offering price.
             (m)     Sales by Issuers in Conversion Offerings
            (1) Definitions
295         For purposes of this paragraph, the following terms shall have the
      meanings stated:
      NASD [Rules 0100-3420]                                                             68


             (A) “Conversion offering” shall mean any offering of securities made as
             part of a plan by which a savings and loan association or other organiza-
             tion converts from a mutual to a stock form of ownership.
             (B) “Eligible purchaser” shall mean a person who is eligible to purchase
             securities pursuant to the rules of the Federal Home Loan Bank Board or
             other governmental agency or instrumentality having authority to regulate
             conversion offerings.
              (2) Conditions for Exemption
296           This interpretation shall not apply to a sale of securities by the issuer on a
      non-underwritten basis to any person who would otherwise be prohibited or
      restricted from purchasing a hot-issue security if all of the conditions of this sub-
      paragraph are satisfied.
297          (A) Sales to Members, Associated Persons of Members and Certain
      Related Persons: If the purchaser is a member, person associated with a
      member, member of the immediate family of any such person to whose support
      such person contributes, directly or indirectly, or an account in which a member
      or person associated with a member has a beneficial interest:
             (i) the purchaser shall be an eligible purchaser;
             (ii) the securities purchased shall be restricted from sale or transfer for a
             period of three months following the conclusion of the offering; and
             (iii) the fact of purchase shall be reported in writing to the member where
             the person is associated within one day of payment.
298           (B) Sales to Other Restricted Persons: If the purchaser is not a person
      specified in subparagraph (2)(A) above, and is an eligible purchaser pursuant to
      subparagraph (1)(B), the conditions of subparagraph (2)(A) shall not apply to
      such purchaser.
      [Adopted eff. Nov. 1, 1970; amended eff. Jan. 11, 1972, Mar. 21, 1972, Dec. 1,
      1973, June 1, 1983, July 16, 1983; Sept. 25, 1986; Aug. 29, 1988; amended by
      SR-NASD-94-15 eff. Dec. 7, 1994; amended by SR-NASD-95-39 eff. Aug. 20,
      1996; amended by SR-NASD-97-95 eff. Aug. 17, 1998; amended by SR-NASD-
      99-02 eff. Dec. 7, 1999.]
      Selected Notices to Members: 83-26, 83-68, 86-26, 86-73, 87-69, 88-85, 88-93,
      93-40, 93-67, 94-40, 94-58, 95-07, 95-27.
      IM-2110-2. Trading Ahead of Customer Limit Order
             (a)     General Application
299           To continue to ensure investor protection and enhance market quality, the
      Association’s Board of Governors is issuing an interpretation to the Rules of the
      Association dealing with member firms’ treatment of their customer limit orders in
      Nasdaq securities. This interpretation, which is applicable from 9:30 a.m. to 6:30
      p.m. Eastern Time, will require members acting as market makers to handle their
      customer limit orders with all due care so that market makers do not “trade
      ahead” of those limit orders. Thus, members acting as market makers that
      handle customer limit orders, whether received from their own customers or from
      another member, are prohibited from trading at prices equal or superior to that of
      the limit order without executing the limit order. Such orders shall be protected
      NASD [Rules 0100-3420]                                                                69


      from executions at prices that are superior but not equal to that of the limit order.
      In the interests of investor protection, the Association is eliminating the so-called
      disclosure “safe harbor” previously established for members that fully disclosed
      to their customers the practice of trading ahead of a customer limit order by a
      market-making firm.
300          Rule 2110 of the Association’s Rules states that:
301          A member, in the conduct of his business, shall observe high standards
             of commercial honor and just and equitable principles of trade.
302          Rule 2320, the Best Execution Rule, states that:
303          In any transaction for or with a customer, a member and persons
             associated with a member shall use reasonable diligence to ascertain the
             best inter-dealer market for the subject security and buy or sell in such a
             market so that the resultant price to the customer is as favorable as
             possible to the customer under prevailing market conditions.
304         Interpretation: The following interpretation of Rule 2110 has been
      approved by the Board:
305          A member firm that accepts and holds an unexecuted limit order from its
             customer (whether its own customer or a customer of another member)
             in a Nasdaq security and that continues to trade the subject security for
             its own market-making account at prices that would satisfy the
             customer’s limit order, without executing that limit order, shall be deemed
             to have acted in a manner inconsistent with just and equitable principles
             of trade, in violation of Rule 2110, provided that, until September 1, 1995,
             customer limit orders in excess of 1,000 shares received from another
             member firm shall be protected from the market maker’s executions at
             prices that are superior but not equal to that of the limit order, and
             provided further, that a member firm may negotiate specific terms and
             conditions applicable to the acceptance of limit orders only with respect
             to limit orders that are: (a) for customer accounts that meet the definition
             of an “institutional account” as that term is defined in Rule 3110(c)(4); or
             (b) 10,000 shares or more, unless such orders are less than $100,000 in
             value. Nothing in this interpretation, however, requires members to
             accept limit orders from any customer.
306          By rescinding the safe harbor position and adopting this interpretation,
             the Association wishes to emphasize that members may not trade ahead
             of their customer limit orders in their market-making capacity even if the
             member had in the past fully disclosed the practice to its customers prior
             to accepting limit orders. The Association believes that, pursuant to Rule
             2110, members accepting and holding unexecuted customer limit orders
             owe certain duties to their customers and the customers of other member
             firms that may not be overcome or cured with disclosure of trading
             practices that include trading ahead of the customer’s order. The terms
             and conditions under which institutional account or appropriately sized
             customer limit orders are accepted must be made clear to customers at
             the time the order is accepted by the firm so that trading ahead in the
             firm’s market making capacity does not occur. For purposes of this
             interpretation, a member that controls or is controlled by another member
             shall be considered a single entity so that if a customer’s limit order is
             accepted by one affiliate and forwarded to another affiliate for execution,
             the firms are considered a single entity and the market making unit may
             not trade ahead of that customer’s limit order.
      NASD [Rules 0100-3420]                                                           70


307           The Association also wishes to emphasize that all members accepting
      customer limit orders owe those customers duties of “best execution” regardless
      of whether the orders are executed through the member’s market making
      capacity or sent to another member for execution. As set out above, the Best
      Execution Rule requires members to use reasonable diligence to ascertain the
      best inter-dealer market for the security and buy or sell in such a market so that
      the price to the customer is as favorable as possible under prevailing market
      conditions. The Association emphasizes that order entry firms should continue to
      routinely monitor the handling of their customers’ limit orders regarding the
      quality of the execution received.
             (b)     Exclusion for Limit Orders that are Marketable at Time of Receipt
308            The Association has previously recognized the functional equivalency of
      marketable limit orders and market orders. Accordingly, it has adopted the
      following interpretation. IM-2110-2 shall not apply to a customer limit order if the
      limit order is marketable at the time it is received by a market maker. These
      orders shall be treated as market orders for purposes of determining execution
      priority; however, these orders must continue to be executed at their limit price or
      better.
309           The exclusion for marketable customer limit orders from the general
      application of IM-2110-2 is limited solely to customer limit orders that are
      marketable when received by a market maker. If a customer limit order is not
      marketable when received by a market maker, the limit order must be accorded
      the full protections of IM-2110-2. In addition, if the limit order was marketable
      when received and then becomes non-marketable, once the limit order becomes
      non-marketable it must be accorded the full protections of IM-2110-2.
310           The following scenario illustrates the application of the exclusion. The
      market in XYZ stock is 25 bid - 25 1/16 ask, the volume of trading in XYZ stock is
      extremely active, and Market Maker A (“MMA”) has a queue of market orders to
      buy and sell. Assume the following order receipt scenario. Each sell market order
      in the queue is for 1,000 shares and there are no special conditions attached to
      the orders. MMA then receives a customer limit order to sell 1,000 shares at 25.
      The customer limit order is marketable at the time it is received by MMA. MMA
      hits another market maker’s bid at 25 for 1,000 shares. Normally, IM-2110-2
      would require that the customer limit order be executed before the market orders
      in the queue. However, because the marketable limit order and the market orders
      should be treated as functionally equivalent in determining execution priority, the
      marketable customer limit order shall not be given execution priority over the
      market orders that were already in the queue. When the limit order is executed,
      however, it must be executed at the limit price or better.
311          In addition, if in the scenario just described the limit order does not get
      executed and the inside market in XYZ becomes 24 7/16 bid, the market maker
      would have to protect the limit order as required by IM 2110-2 if the market
      maker trades at the limit order price or better.
      [Adopted by SR-NASD-93-58 eff. July 7, 1994; amended by SR-NASD-94-62 eff.
      June 21, 1995 ; amended by SR-NASD-99-44 eff. Sept. 10, 1999; amended by
      SR-NASD-99-57 eff. Oct. 25, 1999.]
      Selected Notices to Members: 95-43, 95-67.
      NASD [Rules 0100-3420]                                                           71


      IM-2110-3. Front Running Policy
312           It shall be considered conduct inconsistent with just and equitable
      principles of trade for a member or person associated with a member, for an
      account in which such member or person associated with a member has an
      interest, for an account with respect to which such member or person associated
      with a member exercises investment discretion, or for certain customer accounts,
      to cause to be executed:
             (a) an order to buy or sell an option when such member or person asso-
             ciated with a member causing such order to be executed has material,
             non-public market information concerning an imminent block transaction
             in the underlying security, or when a customer has been provided such
             material non-public market information by the member or any person
             associated with a member; or
             (b) an order to buy or sell an underlying security when such member or
             person associated with a member causing such order to be executed has
             material, non-public market information concerning an imminent block
             transaction in an option overlying that security, or when a customer has
             been provided such material, non-public market information by the mem-
             ber or any person associated with a member; prior to the time information
             concerning the block transaction has been made publicly available.
313          The violative practice noted above may include transactions which are
      executed based upon knowledge of less than all of the terms of the block tran-
      saction, so long as there is knowledge that all of the material terms of the
      transaction have been or will be agreed upon imminently.
314          The general prohibitions stated above shall not apply to transactions
      executed by member participants in automatic execution systems in those
      instances where participants must accept automatic executions.
315           These prohibitions also do not include situations in which a member or
      person associated with a member receives a customer’s order of block size
      relating to both an option and the underlying security. In such cases, the member
      and person associated with a member may position the other side of one or both
      components of the order. However, in these instances, the member and person
      associated with a member would not be able to cover any resulting proprietary
      position(s) by entering an offsetting order until information concerning the block
      transaction involved has been made publicly available.
316           The application of this front running policy is limited to transactions that
      are required to be reported on the last sale reporting systems administered by
      Nasdaq, Consolidated Tape Association (CTA), or Option Price Reporting
      Authority (OPRA). Information as to a block transaction shall be considered to be
      publicly available when it has been disseminated via the tape or high speed com-
      munications line of one of those systems or of a third-party news wire service.
317            A transaction involving 10,000 shares or more of an underlying security or
      options covering such number of shares is generally deemed to be a block tran-
      saction, although a transaction of less than 10,000 shares could be considered a
      block transaction in appropriate cases. A block transaction that has been agreed
      upon does not lose its identity as such by arranging for partial executions of the
      full transaction in portions which themselves are not of block size if the execution
      NASD [Rules 0100-3420]                                                               72


      of the full transaction may have a material impact on the market. In this situation,
      the requirement that information concerning the block transaction be made
      publicly available will not be satisfied until the entire block transaction has been
      completed and publicly reported.
      [Adopted by SR-NASD-87-45 eff. Dec. 30, 1987.]
      Selected Notices to Members: 94-66.
      IM-2110-4. Trading Ahead of Research Reports
318            The Board of Governors, under its statutory obligation to protect investors
      and enhance market quality, is issuing an interpretation to the Rules regarding a
      member firm’s trading activities that occur in anticipation of a firm’s issuance of a
      research report regarding a security. The Board of Governors is concerned with
      activities of member firms that purposefully establish or adjust the firm’s inventory
      position in Nasdaq-listed securities, an exchange-listed security traded in the
      OTC market, or a derivative security based primarily on a specific Nasdaq or
      exchange-listed security in anticipation of the issuance of a research report in
      that same security. For example, a firm’s research department may prepare a
      research report recommending the purchase of a particular Nasdaq-listed
      security. Prior to the publication and dissemination of the report, however, the
      trading department of the member firm might purposefully accumulate a position
      in that security to meet anticipated customer demand for that security. After the
      firm had established its position, the firm would issue the report, and thereafter fill
      customer orders from the member firm’s inventory positions.
319           The Association believes that such activity is conduct which is incon-
      sistent with just and equitable principles of trade, and not in the best interests of
      the investors. Thus, this interpretation prohibits a member from purposefully
      establishing, creating or changing the firm’s inventory position in a Nasdaq-listed
      security, an exchange-listed security traded in the third market, or a derivative
      security related to the underlying equity security, in anticipation of the issuance of
      a research report regarding such security by the member firm.
320          Rule 2110 states that:
321          A member in the conduct of its business, shall observe high standards of
             commercial honor and just and equitable principles of trade.
322          In accordance with Article VII, Section 1(a)(ii) of the NASD By-Laws, the
      Association’s Board of Governors has approved the following interpretation of
      Rule 2110:
323          Trading activity purposefully establishing, increasing, decreasing, or
             liquidating a position in a Nasdaq security, an exchange-listed security
             traded in the over-the-counter market, or a derivative security based
             primarily upon a specific Nasdaq or exchange-listed security, in
             anticipation of the issuance of a research report in that security is
             inconsistent with just and equitable principles of trade and is a violation
             of Rule 2110.
324           For purposes of this interpretation, a “purposeful” change in the firm’s
      inventory position means any trading activities undertaken with the intent of
      altering a firm’s position in a security in anticipation of accommodating investor
      interest once the research report has been published. Hence, the interpretation
      does not apply to changes in an inventory position related to unsolicited order
      NASD [Rules 0100-3420]                                                             73


      flow from a firm’s retail or broker/dealer client base or to research done solely for
      in-house trading and not in any way used for external publication.
325           Under this interpretation, the Board recommends, but does not require,
      that member firms develop and implement policies and procedures to establish
      effective internal control systems and procedures that would isolate specific infor-
      mation within research and other relevant departments of the firm so as to
      prevent the trading department from utilizing the advance knowledge of the
      issuance of a research report. Firms that choose not to develop “Chinese Wall”
      procedures bear the burden of demonstrating that the basis for changes in
      inventory positions in advance of research reports was not purposeful.
      [Adopted by SR-NASD-95-28 eff. Aug. 15, 1995; amended by SR-NASD-98-86
      eff. Nov. 19, 1998.]
      Selected Notices to Members: 95-75.
      IM-2110-5. Anti-Intimidation/Coordination
326           The Board of Governors is issuing this interpretation to codify a long-
      standing policy. It is conduct inconsistent with just and equitable principles of
      trade for any member or person associated with a member to coordinate the
      prices (including quotations), trades, or trade reports of such member with any
      other member or person associated with a member; to direct or request another
      member to alter a price (including a quotation); or to engage, directly or indirectly,
      in any conduct that threatens, harasses, coerces, intimidates, or otherwise
      attempts improperly to influence another member or person associated with a
      member. This includes, but is not limited to, any attempt to influence another
      member or person associated with a member to adjust or maintain a price or
      quotation, whether displayed on any automated system operated by The Nasdaq
      Stock Market, Inc. (Nasdaq), or otherwise, or refusals to trade or other conduct
      that retaliates against or discourages the competitive activities of another market
      maker or market participant. Nothing in this interpretation respecting coordination
      of quotes, trades, or trade reports shall be deemed to limit, constrain, or other-
      wise inhibit the freedom of a member or person associated with a member to:
             (1) set unilaterally its own bid and ask in any Nasdaq security, the prices
             at which it is willing to buy or sell any Nasdaq security, and the quantity of
             shares of any Nasdaq security that it is willing to buy or sell;
             (2) set unilaterally its own dealer spread, quote increment, or quantity of
             shares for its quotations (or set any relationship between or among its
             dealer spread, inside spread, or the size of any quote increment) in any
             Nasdaq security;
             (3) communicate its own bid or ask, or the prices at or the quantity of
             shares in which it is willing to buy or sell any Nasdaq security to any
             person, for the purpose of exploring the possibility of a purchase or sale
             of that security, and to negotiate for or agree to such purchase or sale;
             (4) communicate its own bid or ask, or the price at or the quantity of
             shares in which it is willing to buy or sell any Nasdaq security, to any
             person for the purpose of retaining such person as an agent or subagent
             for the member or for a customer of the member (or for the purpose of
             seeking to be retained as an agent or subagent), and to negotiate for or
             agree to such purchase or sale;
      NASD [Rules 0100-3420]                                                             74


             (5) engage in any underwriting (or any syndicate for the underwriting) of
             securities to the extent permitted by the federal securities laws;
             (6) take any unilateral action or make any unilateral decision regarding
             the market makers with which it will trade and the terms on which it will
             trade unless such action is prohibited by the second and third sentences
             of this Interpretation; and
             (7) deliver an order to another member for handling,
327          provided, however, that the conduct described in (1) through (7) is
      otherwise in compliance with all applicable law.
      [Adopted by SR-NASD-97-37 eff. July 17, 1997.]
      IM-2110-6. Confirmation of Callable Common Stock
328          Any member providing a customer confirmation pursuant to SEC Rule
      10b-10 in connection with any transaction in callable common stock shall
      disclose on such confirmation that:
                     ·   The security is callable common stock; and
                     ·   A customer may contact the member for more information
                         concerning the security.
      [Adopted by SR-NASD-00-24 eff. April 25, 2000.]
      Selected Notice to Members: 00-33.

      2120. Use of Manipulative, Deceptive or Other Fraudulent Devices
329          No member shall effect any transaction in, or induce the purchase or sale
      of, any security by means of any manipulative, deceptive or other fraudulent
      device or contrivance.
             Cross Reference — IM-2310-2, Fair Dealing with Customers — IM-3310,
             Manipulative and Deceptive Quotations

      2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC

      2210. Communications with the Public
             (a)     Definitions - Communications with the public shall include:
              (1) Advertisement
330            For purposes of this Rule and any interpretation thereof, “advertisement”
      means material published, or designed for use in, a newspaper, magazine or
      other periodical, radio, television, telephone or tape recording, videotape display,
      signs or billboards, motion pictures, telephone directories (other than routine
      listings), electronic or other public media.
              (2) Sales Literature
331            For purposes of this Rule and any interpretation thereof, “sales literature”
      means any written or electronic communication distributed or made generally
      available to customers or the public, which communication does not meet the
      foregoing definition of “advertisement.” Sales literature includes, but is not limited
      to, circulars, research reports, market letters, performance reports or summaries,
      NASD [Rules 0100-3420]                                                            75


      form letters, telemarketing scripts, seminar texts, and reprints or excerpts of any
      other advertisement, sales literature or published article.
              (3) Correspondence
332           For purposes of this Rule and any interpretation thereof, “corre-
      spondence” means 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.
             Cross Reference — Rules Concerning Review and Endorsement of
             Correspondence are Found in paragraph (d) to Conduct Rule 3010.
             (b)     Approval and Record-keeping
333           (1) Each item of advertising and sales literature shall be approved by
      signature or initial, prior to use or filing with the Association, by a registered
      principal of the member. This requirement may be met, only with respect to
      corporate debt and equity securities that are the subject of research reports as
      that term is defined in Rule 472 of the New York Stock Exchange, by the
      signature or initial of a supervisory analyst approved pursuant to Rule 344 of the
      New York Stock Exchange.
334          (2) A separate file of all advertisements and sales literature, including the
      name(s) of the person(s) who prepared them and/or approved their use, shall be
      maintained for a period of three years from the date of each use.
             (c)     Filing Requirements and Review Procedures
335           (1) Advertisements and sales literature concerning registered investment
      companies (including mutual funds, variable contracts and unit investment trusts)
      not included within the requirements of paragraph (c)(2), and public direct
      participation programs (as defined in Rule 2810), and advertisements concerning
      government securities (as defined in Section 3(a)(42) of the Act) shall be filed
      with the Association’s Advertising/Investment Companies Regulation Department
      (Department) within 10 days of first use or publication by any member. The
      member must provide with each filing the actual or anticipated date of first use.
      Filing in advance of use is recommended. Members are not required to file
      advertising and sales literature which have previously been filed and which are
      used without change. Any member filing any investment company advertisement
      or sales literature pursuant to this paragraph (c) that includes or incorporates
      rankings or comparisons of the investment company with other investment
      companies shall include a copy of the ranking or comparison used in the
      advertisement or sales literature.
336           (2) Advertisements concerning collateralized mortgage obligations, and
      advertisements and sales literature concerning registered investment companies
      (including mutual funds, variable contracts and unit investment trusts) that
      include or incorporate rankings or comparisons of the investment company with
      other investment companies where the ranking or comparison category is not
      generally published or is the creation, either directly or indirectly, of the invest-
      ment company, its underwriter or an affiliate, shall be filed with the Department
      for review at least 10 days prior to use (or such shorter period as the Department
      may allow in particular circumstances) for approval and, if changed by the
      Association, shall be withheld from publication or circulation until any changes
      specified by the Association have been made or, if expressly disapproved, until
      NASD [Rules 0100-3420]                                                              76


      the advertisement has been re-filed for, and has received, Association approval.
      The member must provide with each filing the actual or anticipated date of first
      use. Any member filing any investment company advertisement or sales
      literature pursuant to this paragraph shall include a copy of the data, ranking or
      comparison on which the ranking or comparison is based.
337            (3) Sales literature concerning bond mutual funds that include or incor-
      porate bond mutual fund volatility ratings, as defined in Rule IM-2210-5, shall be
      filed with the Department for review at least 10 days prior to use (or such shorter
      period as the Department may allow in particular circumstances) for approval
      and, if changed by the Association, shall be withheld from publication or
      circulation until any changes specified by the Association have been made or, if
      expressly disapproved, until the sales literature has been re-filed for, and has
      received, Association approval. Members are not required to file advertising and
      sales literature which have previously been filed and which are used without
      change. The member must provide with each filing the actual or anticipated date
      of first use. Any member filing sales literature pursuant to this paragraph shall
      provide any supplemental information requested by the Department pertaining to
      the rating that is possessed by the member.
338           (4)(A) Each member of the Association which has not previously filed
      advertisements with the Association (or with a registered securities exchange
      having standards comparable to those contained in this rule) shall file its initial
      advertisement with the Department at least ten days prior to use and shall
      continue to file its advertisements at least ten days prior to use for a period of
      one year. The member must provide with each filing the actual or anticipated
      date of first use.
339           (4)(B) Except for advertisements related to exempted securities (as
      defined in Section 3(a)(12) of the Act), direct participation programs or invest-
      ment company securities, members subject to the requirements of paragraph
      (c)(3)(A) of this Rule may, in lieu of filing with the Association, file advertisements
      on the same basis, and for the same time periods specified in that subparagraph,
      with any registered securities exchange having standards comparable to those
      contained in this Rule.
340          (5)(A) Notwithstanding the foregoing provisions, the Department, upon
      review of a member’s advertising and/or sales literature, and after determining
      that the member has departed and there is a reasonable likelihood that the
      member will again depart from the standards of this Rule, may require that such
      member file all advertising and/or sales literature, or the portion of such
      member’s material which is related to any specific types or classes of securities
      or services, with the Department, at least ten days prior to use. The member
      must provide with each filing the actual or anticipated date of first use.
341           (5)(B) The Department shall notify the member in writing of the types of
      material to be filed and the length of time such requirement is to be in effect. The
      requirement shall not exceed one year, however, and shall not take effect until 30
      days after the member receives the written notice, during which time the member
      may request a hearing under Rule 9514, and any such hearing shall be held in
      reasonable conformity with the hearing and appeal procedures of the Rule 9510
      Series.
      NASD [Rules 0100-3420]                                                        77


342          (6) In addition to the foregoing requirements, every member’s advertise-
      ments and sales literature shall be subject to a routine spot-check procedure.
      Upon written request from the Department, each member shall promptly submit
      the material requested. Members will not be required to submit material under
      this procedure which has been previously submitted pursuant to one of the
      foregoing requirements and, except for material related to exempted securities
      (as defined in Section 3(a)(12) of the Act), direct participation programs or
      investment company securities, the procedure will not be applied to members
      who have been, within the Association’s current examination cycle subjected to a
      spot-check by a registered securities exchange or other self-regulatory
      organization using procedures comparable to those used by the Association.
343          (7) The following types of material are excluded from the foregoing filing
      requirements and (except for research reports under paragraph (G)) the
      foregoing spot-check procedures:
              (A) Advertisements or sales literature solely related to changes in a
             member’s name, personnel, location, ownership, offices, business struc-
             ture, officers or partners, telephone or teletype numbers, or concerning a
             merger with, or acquisition by, another member;
             (B) Advertisements or sales literature which do no more than identify the
             Nasdaq symbol of the member and/or of a security in which the member
             is a Nasdaq registered market maker;
             (C) Advertisements or sales literature which do no more than identify the
             member and/or offer a specific security at a stated price;
             (D) Material sent to branch offices or other internal material that is not
             distributed to the public;
             (E) Prospectuses, preliminary prospectuses, offering circulars and similar
             documents used in connection with an offering of securities which has
             been registered or filed with the Commission or any state, or which is
             exempt from such registration, except that an investment company
             prospectus published pursuant to SEC Rule 482 under the Securities Act
             of 1933 shall not be considered a prospectus for purposes of this
             exclusion;
             (F) Advertisements prepared in accordance with Section 2(10)(b) of the
             Securities Act of 1933, as amended, or any rule thereunder, such as SEC
             Rule 134, unless such advertisements are related to direct participation
             programs or securities issued by registered investment companies.
             (G) any research report concerning an investment company registered
             under the Investment Company Act of 1940, provided that:
                    (i) the report is prepared by an entity that is independent of the
             investment company, its affiliates, and the member using the report (the
             “research firm”);
                    (ii) the report’s contents have not been materially altered by the
             member using the report (except as necessary to make the report
             consistent with applicable regulatory standards);
      NASD [Rules 0100-3420]                                                           78


                   (iii) the research firm prepares and based on similar research with
             respect to a substantial number of investment companies;
                    (iv) the research firm updates and distributes reports based on its
             research of the investment company with reasonable regularity in the
             normal course of the research firm’s business;
                    (v) neither the investment company, its affiliates nor the member
             using the research report has commissioned the research used by the
             research firm in preparing the report; and
                    (vi) if a customized report was prepared at the request of the
             investment company, its affiliate or a member, then the report includes
             only information that the research firm has already compiled and
             published in another non-customized report, and does not omit informa-
             tion in that report necessary to make the customized report fair and
             balanced.
344          Although research reports meeting the above requirements are excluded
      from the foregoing filing requirements, the shall be deemed to be filed with the
      Association for purposes of Section 24(b) of the Investment Company Act of
      1940 and Rule 24b-3 of the Securities and Exchange Commission thereunder.
345           (8) Material which refers to investment company securities or direct parti-
      cipation programs, or exempted securities (as defined in Section 3(a)(12) of the
      Act), solely as part of a listing of products and/or services offered by the member,
      is excluded from the requirements of subparagraphs (1) and (2).
346          (9) Exemptions — Pursuant to the Rule 9600 Series, the Association may
      exempt a member or person associated with a member from the pre-filing
      requirements of this paragraph for good cause shown.
             (d)     Standards Applicable to Communications with the Public
              (1) General Standards
347           (A) All member communications with the public shall be based on
      principles of fair dealing and good faith and should provide a sound basis for
      evaluating the facts in regard to any particular security or securities or type of
      security, industry discussed, or service offered. No material fact or qualification
      may be omitted if the omission, in the light of the context of the material
      presented, would cause the communication to be misleading.
348           (B) Exaggerated, unwarranted or misleading statements or claims are
      prohibited in all public communications of members. In preparing such commu-
      nications, members must bear in mind that inherent in investment are the risks of
      fluctuating prices and the uncertainty of dividends, rates of return and yield, and
      no member shall, directly or indirectly, publish, circulate or distribute any public
      communication that the member knows or has reason to know contains any
      untrue statement of a material fact or is otherwise false or misleading.
349            (C) When sponsoring or participating in a seminar, forum, radio or televi-
      sion interview, or when otherwise engaged in public appearances or speaking
      activities which may not constitute advertisements, members and persons
      associated with members shall nevertheless follow the standards of paragraphs
      (d) and (f) of this Rule.
      NASD [Rules 0100-3420]                                                          79


350           (D) In judging whether a communication or a particular element of a
      communication may be misleading, several factors should be considered,
      including but not limited to:
             (i) the overall context in which the statement or statements are made. A
             statement made in one context may be misleading even though such a
             statement could be appropriate in another context. An essential test in
             this regard is the balance of treatment of risks and potential benefits;
             (ii) the audience to which the communication is directed. Different levels
             of explanation or detail may be necessary depending on the audience to
             which a communication is directed, and the ability of the member given
             the nature of the media used, to restrict the audience appropriately. If the
             statements made in a communication would be applicable only to a
             limited audience, or if additional information might be necessary for other
             audiences, it should be kept in mind that it is not always possible to
             restrict the readership of a particular communication;
             (iii) the overall clarity of the communication. A statement or disclosure
             made in an unclear manner can result in a lack of understanding of the
             statement, or in a serious misunderstanding. A complex or overly
             technical explanation may be more confusing than too little information.
             Likewise material disclosure relegated to legends or footnotes may not
             enhance the reader’s understanding of the communication.
             (2) Specific Standards
351          In addition to the foregoing general standards, the following specific
      standards apply.
352           (A) Necessary Data — Advertisements and sales literature shall contain
      the name of the member, unless such advertisements and sales literature comply
      with paragraph (f). Sales literature shall contain the name of the person or firm
      preparing the material, if other than the member, and the date on which it is first
      published, circulated or distributed. If the information in the material is not
      current, this fact should be stated.
353          (B) Recommendations
             (i) In making a recommendation in advertisements and sales literature,
             whether or not labeled as such, a member must have a reasonable basis
             for the recommendation and must disclose any of the following situations
             which are applicable:
                    a. that the member usually makes a market in the securities being
             recommended, or in the underlying security if the recommended security
             is an option, or that the member or associated persons will sell to or buy
             from customers on a principal basis;
                     b. that the member and/or its officers or partners own options,
             rights or warrants to purchase any of the securities of the issuer whose
             securities are recommended, unless the extent of such ownership is
             nominal;
                     c. that the member was manager or co-manager of a public
             offering of any securities of the recommended issuer within the last three
             years.
      NASD [Rules 0100-3420]                                                              80


             (ii) The member shall also provide, or offer to furnish upon request,
             available investment information supporting the recommendation. Recom-
             mendations on behalf of corporate equities must provide the price at the
             time the recommendation is made.
             (iii) A member may use material referring to past recommendations if it
             sets forth all recommendations as to the same type, kind, grade or classi-
             fication of securities made by a member within the last year. Longer
             periods of years may be covered if they are consecutive and include the
             most recent year. Such material must also name each security recom-
             mended and give the date and nature of each recommendation (e.g.,
             whether to buy or sell), the price at the time of the recommendation, the
             price at which or the price range within which the recommendation was to
             be acted upon, and indicate the general market conditions during the
             period covered.
             (iv) Also permitted is material which does not make any specific recom-
             mendation but which offers to furnish a list of all recommendations made
             by a member within the past year or over longer periods of consecutive
             years, including the most recent year, if this list contains all the informa-
             tion specified in subparagraph (iii). Neither the list of recommendations,
             nor material offering such list, shall imply comparable future performance.
             Reference to the results of a previous specific recommendation, including
             such a reference in a follow-up research report or market letter, is
             prohibited if the intent or the effect is to show the success of a past
             recommendation, unless all of the foregoing requirements with respect to
             past recommendations are met.
354          (C) Claims and Opinions — Communications with the public must not
      contain promises of specific results, exaggerated or unwarranted claims or
      unwarranted superlatives, opinions for which there is no reasonable basis, or
      forecasts of future events which are unwarranted, or which are not clearly labeled
      as forecasts.
355           (D) Testimonials — In testimonials concerning the quality of a firm’s
      investment advice, the following points must be clearly stated in advertisements
      or sales literature:
             (i) The testimonial may not be representative of the experience of other
             clients.
             (ii) The testimonial is not indicative of future performance or success.
             (iii) If more than a nominal sum is paid, the fact that it is a paid testimonial
             must be indicated.
             (iv) If the testimonial concerns a technical aspect of investing, the person
             making the testimonial must have knowledge and experience to form a
             valid opinion.
356           (E) Offers of Free Service — Any statement in communications with the
      public to the effect that any report, analysis, or other service will be furnished free
      or without any charge must not be made unless such report, analysis or other
      service actually is or will be furnished entirely free and without condition or
      obligation.
      NASD [Rules 0100-3420]                                                              81


357          (F) Claims for Research Facilities — No claim or implication in communi-
      cations with the public may be made for research or other facilities beyond those
      which the member actually possesses or has reasonable capacity to provide.
358          (G) Hedge Clauses — No cautionary statements or caveats, often called
      hedge clauses, may be used in communications with the public if they are mis-
      leading or are inconsistent with the content of the material.
359           (H) Recruiting Advertising — Advertisements in connection with the
      recruitment of sales personnel must not contain exaggerated or unwarranted
      claims or statements about opportunities in the investment banking or securities
      business and should not refer to specific earnings figures or ranges which are not
      reasonable under the circumstances.
360           (I) Periodic Investment Plans — Advertisements and sales literature
      should not discuss or portray any type of continuous or periodic investment plan
      without disclosing that such a plan does not assure a profit and does not protect
      against loss in declining markets. In addition, if the material deals specifically with
      the principles of dollar-cost averaging, it should point out that since such a plan
      involves continuous investment in securities regardless of fluctuating price levels
      of such securities, the investor should consider his financial ability to continue his
      purchases through periods of low price levels.
361           (J) References to Regulatory Organizations — Communications with the
      public shall not make any reference to membership in the Association or to
      registration or regulation of the securities being offered, or of the underwriter,
      sponsor, or any member or associated person, which reference could imply
      endorsement or approval by the Association or any federal or state regulatory
      body. References to membership in the Association or Securities Investors
      Protection Corporation shall comply with all applicable By-Laws and Rules
      pertaining thereto.
362            (K) Identification of Sources — Statistical tables, charts, graphs or other
      illustrations used by members in advertising or sales literature should disclose
      the source of the information if not prepared by the member.
363           (L) Claims of Tax Free/Tax Exempt Returns — Income or investment
      returns may not be characterized in communications with the public as tax free or
      exempt from income tax where tax liability is merely postponed or deferred. If
      taxes are payable upon redemption, that fact must be disclosed in advertise-
      ments and sales literature. References in advertisements and sales literature to
      tax free/tax exempt current income must indicate which income taxes apply or
      which do not unless income is free from all applicable taxes. For example, if
      income from an investment company investing in municipal bonds may be
      subject to state or local income taxes, this should be stated, or the illustration
      should otherwise make it clear that income is free from federal income tax.
364            (M) Comparisons — In making a comparison in advertisements or sales
      literature, either directly or indirectly, the member must make certain that the
      purpose of the comparison is clear and must provide a fair and balanced presen-
      tation, including any material differences between the subjects of comparison.
      Such differences may include investment objectives, sales and management
      fees, liquidity, safety, guarantees or insurance, fluctuation of principal and/or
      NASD [Rules 0100-3420]                                                          82


      return, tax features, and any other factors necessary to make such comparisons
      fair and not misleading.
365            (N) Predictions and Projections — In communications with the public
      investment results cannot be predicted or projected. Investment performance
      illustrations may not imply that gain or income realized in the past will be
      repeated in the future. However, for purposes of this Rule, hypothetical illustra-
      tions of mathematical principles are not considered projections of performance;
      e.g., illustrations designed to show the effects of dollar cost averaging, tax-free
      compounding, or the mechanics of variable annuity contracts or variable life
      policies.
             (e)     Application of SEC Rules
366           In addition to the provisions of paragraph (d) of this Rule, members’
      public communications shall conform to all applicable rules of the Commission,
      as in effect at the time the material is used.
             Cross Reference — SEC Rules Concerning Investment Company Sales
             Literature and Advertising (SEC Rules and Regulation T Tab)
             (f)     Standards Applicable to the Use and Disclosure of the Association
                     Member’s Name
367           (1) In addition to the provisions of paragraph (d) of this Rule, members’
      public communications shall conform to the following provisions concerning the
      use and disclosure of member names. The term “communication” as used herein
      shall include any item defined as either “advertising” or “sales literature” in
      paragraph (a). The term “communication” shall also include, among other things,
      business cards and letterhead.
             (2) General Standards
368          (A) Any communication used in the promotion of a member’s securities
      business must clearly and prominently set forth the name of the Association
      member. This requirement shall not apply to so-called “blind” advertisements
      used for recruiting personnel or to those communications meeting the provisions
      of paragraph (f)(3).
369           (B) If a non-member entity is named in a communication in addition to the
      member, the relationship, or lack of relationship, between the member and the
      entity shall be clear.
370          (C) If a non-member entity is named in a communication in addition to the
      member and products or services are identified, no confusion shall be created as
      to which entity is offering which products and services. Securities products and
      services shall be clearly identified as being offered by the member.
371           (D) If an individual is named in a communication containing the names of
      the member and a non-member entity, the nature of the affiliation or relationship
      of the individual with the member shall be clear.
372          (E) Communications that refer to individuals may not include, with respect
      to such individuals, references to nonexistent or self-conferred degrees or
      designations, nor may such communications make reference to bona fide
      degrees or designations in a misleading manner.
      NASD [Rules 0100-3420]                                                              83


373           (F) If a communication identifies a single company, the communication
      shall not be used in a manner which implies the offering of a product or service
      not available from the company named.
374           (G) The positioning of disclosure can create confusion even if the
      disclosures or references are entirely accurate. To avoid confusion, a reference
      to an affiliation (e.g., registered representative) shall not be placed in proximity to
      the wrong entity.
375            (H) Any reference to membership (e.g., NASD, SIPC, etc.) shall be clearly
      identified as belonging to the entity that is the actual member of the organization.
              (3) Specific Standards
376           The foregoing standards set forth in subparagraphs (1) and (2) shall apply
      to all communications unless at least one of the following special circumstances
      exists, in which case the standards set forth herein would supersede the
      standards in subparagraphs (1) and (2).
377         (A) Doing Business As — An Association member may use a fictional
      name in communications provided that the following conditions are met:
             (i) Non-Required Fictional Name. A member may voluntarily use a
             fictional name provided that the name has been filed with the Association
             and the Commission, all business is conducted under that name and it is
             the only name by which the firm is recognized.
             (ii) Required Fictional Name. If a state or other regulatory authority
             requires a member to use a fictional name, the following conditions shall
             be met:
                     a. The fictional name shall be used to conduct business only within
                     the state or jurisdiction requiring its use.
                     b. If more than one state or jurisdiction requires a firm to use a
                     fictional name, the same name shall be used in each, wherever
                     possible.
                     c. Any communication shall disclose the name of the member and
                     the fact that the firm is doing business in that state or jurisdiction
                     under the fictional name, unless the regulatory authority prohibits
                     such disclosure.
378          (B) Generic Names — An Association member may use an “umbrella”
      designation to promote name recognition, provided that the following conditions
      are met:
             (i) The name of the member shall be clearly and prominently disclosed;
             (ii) The relationship between the generic name and the member shall be
             clear; and
             (iii) There shall be no implication that the generic name is the name of a
             registered broker/dealer.
379           (C) Derivative Names — An Association member may use a derivative of
      the firm name to promote certain areas of the firm’s business, provided that the
      name of the member is clearly and prominently disclosed. Absent such
      disclosure, the following conditions must be met:
      NASD [Rules 0100-3420]                                                            84


             (i) The name used to promote a specific area of the firm’s business shall
             be a derivative of the member name; and
             (ii) The derivative name shall not be misleading in the context in which it
             is being used.
380           (D) “Division of” — An Association member firm may designate an aspect
      of its business as a division of the firm, provided that the following conditions are
      met:
             (i) The designation shall only be used by a bona fide division of the
             member. This shall include:
                     a. a division resulting from a merger or acquisition that will
                     continue the previous firm’s business; or
                     b. a functional division that conducts or will conduct one
                     specialized aspect of the firm’s business.
             (ii) The name of the member shall be clearly and prominently disclosed.
             (iii) The division shall be clearly identified as a division of the member
             firm.
381           (E) “Service of/Securities Offered Through” — An Association member
      firm may identify its brokerage service being offered through other institutions as
      a service of the member, provided that the following conditions are met:
             (i) The name of the member shall be clearly and prominently disclosed.
             (ii) The service shall be clearly identified as a service of the member firm.
382          (F) Telephone Directory Line Listings, Business Cards and Letterhead —
      All such listings, cards or letterhead shall conform to the provisions of Rule
      3010(g)(2).
      [Amended eff. Aug. 2, 1983; June 5, 1987; July 1, 1988; Nov. 28, 1988; June 26,
      1990; Mar. 27, 1991; Sept. 13, 1991; Nov. 16, 1992; amended by SR-NASD-92-
      53 eff. July 1, 1993; amended by SR-NASD-93-66 eff. Mar. 17, 1994; amended
      by SR-NASD-95-12 eff. Aug. 9, 1995; amended by SR-NASD-95-39 eff. Aug. 20,
      1996; amended by SR-NASD-97-33 eff. May 9, 1997; amended by SR-NASD-
      97-28 eff: 8/7/97; amended by SR-NASD-98-29 eff. Nov. 16, 1998; amended by
      SR-NASD-98-28 eff. July 15, 1998; amended by SR-NASD-98-57 eff. March 26,
      1999; amended by SR-NASD-98-32 eff. April 1, 2000; amended by SR-NASD-
      97-89 eff. Feb. 29, 2000.]
      Selected Notices to Members: 98-83, 00-23.
      IM-2210-1. Communications with the Public About Collateralized Mortgage
      Obligations (CMOs)
             (a)     General Considerations
383           For purposes of the following guidelines, the term “collateralized mort-
      gage obligation” (CMO) refers to a multiclass bond backed by a pool of mortgage
      pass-through securities or mortgage loans. CMOs are also known as “real estate
      mortgage investment conduits” (REMICs). As a result of the 1986 Tax Reform
      Act, most CMOs are issued in REMIC form to create certain tax advantages for
      the issuer. The term CMO and REMIC are now used interchangeably. In order to
      NASD [Rules 0100-3420]                                                           85


      prevent advertisements and sales literature regarding CMOs from being false or
      misleading, there are certain factors to be considered, including, but not limited
      to, the following:
             (1) Product Identification
384           In order to assure that investors understand exactly what security is being
      discussed, all communications concerning CMOs should clearly describe the
      product as a “collateralized mortgage obligation.” Member firms should not use
      the proprietary names for CMOs as they do not adequately identify the product.
      To prevent confusion and the possibility of misleading the reader, communica-
      tions should not contain comparisons between CMOs and any other investment
      vehicle, including Certificates of Deposit.
              (2) Educational Material
385            In order to ensure that customers are adequately informed about CMOs
      members are required to offer to customers educational material which covers
      the following matters:
             (A) A discussion of CMO characteristics as investments and their
             attendant risks;
             (B) An explanation of the structure of a CMO, including the various types
             of tranches;
             (C) A discussion of mortgage loans and mortgage securities;
             (D) Features of CMOs, including: credit quality, prepayment rates and
             average lives, interest rates (including effect on value and prepayment
             rates), tax considerations, minimum investments, transactions costs and
             liquidity;
             (E) Questions an investor should ask before investing; and
             (F) A glossary of terms that may be helpful to an investor considering an
             investment.
             (3) Safety Claims
386          A communication should not overstate the relative safety offered by the
      CMO. Although CMOs generally offer low investment risk, they are subject to
      market risk like all investment securities and there should be no implication other-
      wise. Accordingly, references to liquidity should be balanced with disclosure that,
      upon resale, an investor may receive more or less than his original investment.
              (4) Claims About Government Guarantees
387           (A) Communications should accurately depict the guarantees associated
      with CMO securities. For example, in most cases it would be misleading to state
      that CMOs are “government guaranteed” securities. A government agency issue
      could instead be characterized as government agency backed. Of course,
      private-issue CMO advertisements should not contain references to guarantees
      or backing, but may disclose the rating.
388           (B) If the CMO is offered at a premium, the communication should clearly
      indicate that the government agency backing applies only to the face value of the
      CMO, and not to any premium paid. Furthermore, communications should not
      imply that either the market value or the anticipated yield of the CMO is
      guaranteed.
      NASD [Rules 0100-3420]                                                           86


              (5) Simplicity Claims
389           CMOs are complex securities and require full, fair and clear disclosure in
      order to be understood by the investor. A communication should not imply that
      these are simple securities that may be suitable for any investor seeking high
      yields. All CMOs do not have the same characteristics and it is misleading to
      indicate otherwise. Even though two CMOs may have the same underlying
      collateral, they may differ greatly in their prepayment speed and volatility.
             (6) Claims About Predictability
390          A communication would be misleading if it indicated that the anticipated
      yield and average life of a CMO were assured. It should disclose that the yield
      and average life will fluctuate depending on the actual prepayment experience
      and changes in current interest rates.
             (b)     Print Advertising
391           (1) Educational advertising, discussing generally the features of CMOs,
      can be a very useful and informative tool in explaining these securities to the
      investing public. However, such “generic” advertising should not contain antici-
      pated yield or coupon rates.
392          (2) Advertising relating to CMOs must be filed with the Association’s
      Advertising/Investment Companies Regulation Department for review at least ten
      days prior to use, pursuant to requirements in Rule 2210.
393           (3) The Association has developed a standardized CMO advertisement.
      that provides information deemed necessary to prevent the communication from
      being misleading. Members must file the standardized CMO advertisement, ten
      days prior to its first use, with the Association’s Advertising/Investment Compa-
      nies Regulation Department.
394          (4) Members are not required to use the standardized CMO advertise-
      ment. If firms do not elect to use the standardized CMO advertisement, they
      should ensure that their advertising contains the same information and meets the
      same conditions as the standardized CMO advertisement. Members using a non-
      standardized format must file the advertisement ten days prior to first use.
395           (5) After an advertisement has been filed prior to initial use, subsequent
      use of the identical advertisement, changed only to reflect the updated informa-
      tion for the security being advertised, does not require re-filing with the Associa-
      tion. Such advertisements must be approved by a principal (or designee) and
      maintained in the member firm’s files as required by the Association’s Rules.
             (6) Standardized CMO Advertisement
396          (A) The standardized CMO advertisement contains four sections, each of
      which must be given an equal portion of space in the advertisement. The
      information in Sections 1 and 2 is required to be included in advertising for
      CMOs. The information suggested for Section 3 is optional; therefore, the
      member may elect to include any, all or none of this information in the adver-
      tisement. The information in Section 4 may be tailored to the member’s preferred
      signature. An example of the standardized CMO advertisement may be found at
      the end of these guidelines.
      NASD [Rules 0100-3420]                                                          87


      Section 1    Title - Collateralized Mortgage Obligations
                   Coupon Rate
                   Anticipated Yield/Average Life
                   Specific Tranche - Number & Class
                   Final Maturity Date
                   Underlying Collateral

      Section 2    Disclosure Statement:
                   “The yield and average life shown above consider prepayment
                   assumptions that may or may not be met. Changes in payments
                   may significantly affect yield and average life. Please contact your
                   representative for information on CMOs and how they react to
                   different market conditions.”

      Section 3    Product Features (Optional):
                   Minimum Denominations
                   Rating Disclosure
                   Agency/Government Backing
                   Income Payment Structure
                   Generic Description of Tranche (e.g., PAC, Companion)

      Section 4    Company Information:
                   Name, Address, Telephone Number, Representative’s Name,
                   Memberships

397           (B) If this standardized CMO advertisement is used, the following
      conditions must also be met:
             (i) All figures in Section 1 must be in equal type size.
             (ii) The disclosure language in Section 2 may not be altered and must be
             given equal prominence with Section 1.
             (iii) The prepayment assumption used to determine the advertised yield
             and average life must either be obtained from a nationally recognized
             service (e.g., Bloomberg, Telerate) or the member firm must be able to
             justify the assumption used. A copy of either the service’s listing for the
             CMO or the firm’s justification must be attached to the copy of the adverti-
             sement that is maintained in the firm’s advertising files in order to verify
             that the prepayment scenario advertised is reasonable and to satisfy the
             conditions for waiving the pre-use filing requirement.
             (iv) If a member intends to impose a sales charge, a reasonable sales
             charge should be reflected in the anticipated yield.
             (v) The advertisement must include language stating that the security is
             “offered subject to prior sale and price change.” This language may be
             included in any one of the four sections.
             (vi) If the bond advertised is an accrual bond, the following language
             should be included in Section 1: “This is an accrual bond and may not
             currently pay principal and interest.”
      NASD [Rules 0100-3420]                                                                 88


              (vii) If the bond is being offered at par, the advertisement may include the
              yield to maturity in Section 1.
398           (C) No additional information may be included in the standardized
      advertisement.
              (c)     Radio/Television Advertising
399           (1) Radio and television advertising alternatives are too varied to attempt
      to provide standardized formats for either medium. Such advertisements must be
      filed with the Association at least ten days prior to first use. The storyboard or
      other description should accompany the filing of a television advertisement.
400           (2) If an advertisement is filed with the Association prior to its initial use, it
      is not necessary to subsequently re-file the advertisement if the only changes are
      to update the information relating to the security being advertised. A copy of each
      advertisement should be approved by a principal (or designee) and should be
      maintained, along with a copy of the listing for the CMO or the firm’s justification,
      in the member firm’s files in accordance with Association Rules.
401          (3) The following guidelines should be followed when developing radio
      and television advertisements:
              (A) The advertisements must be preceded by the following oral
              disclaimer:
                      “The following is an advertisement for Collateralized Mortgage
                      Obligations. Contact your representative for information on CMOs
                      and how they react to different market conditions.”
              (B) The advertisements must disclose the information contained in
              Section 1 of the standardized CMO advertisement above:
                      Coupon Rate, Anticipated Yield, Average Life, Final Maturity Date,
                      Initial Issue Tranche (Number and Class), and Underlying
                      Collateral.
              (C) The advertisements must contain the following oral disclosure
              statement:
                       “The yield and average life consider prepayment assumptions that
                      may or may not be met. Changes in payments may significantly
                      affect yield and average life.”
              (D) The advertisements must state that the CMO is “offered subject to
              prior sale and price change.”
              (E) If a member intends to impose a sales charge, a reasonable sales
              charge should be reflected in the anticipated yield.
              (F) If the bond advertised is an accrual bond, the following language
              should be included:
                       “This is an accrual bond and may not currently pay principal and
                      interest.”
               (G) If the bond is being offered at par, the advertisement may include the
              yield to maturity.
      NASD [Rules 0100-3420]                                                                                   89




                           Example of Standardized CMO Advertisement (See IM-2210-1.)
                                    Collateralized Mortgage Obligations

                                                 8.50% Coupon
                                 8.75% Anticipated Yield to 10-Year Average Life
                                     FNMA 9532X, Final Maturity March 2010
                                         Collateral 100% FNMA 8.50%
       The yield and average life shown above consider prepayment assumptions that may or may not be met.
      Changes in payments may significantly affect yield and average life. Please contact your representative for
                       information on CMOs and how they react to different market conditions.

                                                 $5,000 Minimum
                                              Income Paid Monthly
                                         Implied Rating/Volatility Rating
                                           U.S. Gov’t Agency Backed
                       Generic Description (e.g., PAC, Companion, Sequential Pay Bonds)

                                                 Company Name
                                                  Contact Person
                                                      Address
                                               City, State, ZIP Code
                                                  Phone Number
                                  Offered subject to prior sale and price change.

                                                  Member SIPC

      [Adopted by SR-NASD-92-58 eff. Jan. 27, 1993; amended by SR-NASD-93-63
      eff. Nov. 9, 1993; amended by SR-NASD-93-72 eff. Dec. 17, 1993; amended by
      SR-NASD-98-29 eff. Nov. 16, 1998.]
      Selected Notices to Members: 98-83.
      IM-2210-2. Communications with the Public About Variable Life Insurance
      and Variable Annuities
402           The standards governing communications with the public are set forth in
      Rule 2210. In addition to those standards, the following guidelines must be
      considered in preparing advertisements and sales literature about variable life
      insurance and variable annuities. The guidelines are applicable to advertise-
      ments and sales literature as defined in Rule 2210, as well as individualized
      communications such as personalized letters and computer generated illustra-
      tions, whether printed or made available on-screen.
              (a)       General Considerations
             (1) Product Identification
403           In order to assure that investors understand exactly what security is being
      discussed, all communications must clearly describe the product as either a
      variable life insurance policy or a variable annuity, as applicable. Member firms
      may use proprietary names in addition to this description. In cases where the
      proprietary name includes a description of the type of security being offered,
      NASD [Rules 0100-3420]                                                           90


      there is no requirement to include a generalized description. For example, if the
      material includes a name such as the “XYZ Variable Life Insurance Policy,” it is
      not necessary to include a statement indicating that the security is a variable life
      insurance policy. Considering the significant differences between mutual funds
      and variable products, the presentation must not represent or imply that the
      product being offered or its underlying account is a mutual fund.
              (2) Liquidity
404           Considering that variable life insurance and variable annuities frequently
      involve substantial charges and/or tax penalties for early withdrawals, there must
      be no representation or implication that these are short-term, liquid investments.
      Presentations regarding liquidity or ease of access to investment values must be
      balanced by clear language describing the negative impact of early redemptions.
      Examples of this negative impact may be the payment of contingent deferred
      sales loads and tax penalties, and the fact that the investor may receive less than
      the original invested amount. With respect to variable life insurance, discussions
      of loans and withdrawals must explain their impact on cash values and death
      benefits.
              (3) Claims About Guarantees
405           Insurance companies issuing variable life insurance and variable annui-
      ties provide a number of specific guarantees. For example, an insurance
      company may guarantee a minimum death benefit for a variable life insurance
      policy or the company may guarantee a schedule of payments to a variable
      annuity owner. Variable life insurance policies and variable annuities may also
      offer a fixed investment account which is guaranteed by the insurance company.
      The relative safety resulting from such a guarantee must not be overemphasized
      or exaggerated as it depends on the claims-paying ability of the issuing
      insurance company. There must be no representation or implication that a
      guarantee applies to the investment return or principal value of the separate
      account. Similarly, it must not be represented or implied that an insurance
      company’s financial ratings apply to the separate account.
             (b)     Specific Considerations
              (1) Fund Performance Predating Inclusion in the Variable Product
406           In order to show how an existing fund would have performed had it been
      an investment option within a variable life insurance policy or variable annuity,
      communications may contain the fund’s historical performance that predates its
      inclusion in the policy or annuity. Such performance may only be used provided
      that no significant changes occurred to the fund at the time or after it became
      part of the variable product. However, communications may not include the
      performance of an existing fund for the purposes of promoting investment in a
      similar, but new, investment option (i.e., clone fund or model fund) available in a
      variable contract. The presentation of historical performance must conform to
      applicable Association and SEC standards. Particular attention must be given to
      including all elements of return and deducting applicable charges and expenses.
              (2) Product Comparisons
407           A comparison of investment products may be used provided the compari-
      son complies with applicable requirements set forth under Rule 2210. Particular
      attention must be paid to the specific standards regarding “comparisons” set forth
      in Rule 2210(d)(2)(M).
      NASD [Rules 0100-3420]                                                           91


               (3) Use of Rankings
408            A ranking which reflects the relative performance of the separate account
      or the underlying investment option may be included in advertisements and sales
      literature provided its use is consistent with the standards contained in IM-2210-
      3.
              (4) Discussions Regarding Insurance and Investment Features of
              Variable Life Insurance
409           Communications on behalf of single premium variable life insurance may
      emphasize the investment features of the product provided an adequate
      explanation of the life insurance features is given. Sales material for other types
      of variable life insurance must provide a balanced discussion of these features.
               (5) Hypothetical Illustrations of Rates of Return
410            (A) in Variable Life Insurance Sales Literature and Personalized
      Illustrations
             (i) Hypothetical illustrations using assumed rates of return may be used to
             demonstrate the way a variable life insurance policy operates. The
             illustrations show how the performance of the underlying investment
             accounts could affect the policy cash value and death benefit. These
             illustrations may not be used to project or predict investment results as
             such forecasts are strictly prohibited by the Rules. The methodology and
             format of hypothetical illustrations must be modeled after the required
             illustrations in the prospectus.
             (ii) An illustration may use any combination of assumed investment
             returns up to and including a gross rate of 12%, provided that one of the
             returns is a 0% gross rate. Although the maximum assumed rate of 12%
             may be acceptable, members are urged to assure that the maximum rate
             illustrated is reasonable considering market conditions and the available
             investment options. The purpose of the required 0% rate of return is to
             demonstrate how a lack of growth in the underlying investment accounts
             may affect policy values and to reinforce the hypothetical nature of the
             illustration.
             (iii) The illustrations must reflect the maximum (guaranteed) mortality and
             expense charges associated with the policy for each assumed rate of
             return. Current charges may be illustrated in addition to the maximum
             charges.
             (iv) Preceding any illustration there must be a prominent explanation that
             the purpose of the illustration is to show how the performance of the
             underlying investment accounts could affect the policy cash value and
             death benefit. The explanation must also state that the illustration is
             hypothetical and may not be used to project or predict investment results.
411           (B) In sales literature which includes hypothetical illustrations, member
      firms may provide a personalized illustration which reflects factors relating to the
      individual customer’s circumstances. A personalized illustration may not contain
      a rate of return greater than 12% and must follow all of the standards set forth in
      subparagraph (A), above.
412          (C) In general, it is inappropriate to compare a variable life insurance
      policy with another product based on hypothetical performance as this type of
      NASD [Rules 0100-3420]                                                           92


      presentation goes beyond the singular purpose of illustrating how the per-
      formance of the underlying investment accounts could affect the policy cash
      value and death benefit. It is permissible, however, to use a hypothetical illustra-
      tion in order to compare a variable life insurance policy to a term policy with the
      difference in cost invested in a side product. The sole purpose of this type of
      illustration would be to demonstrate the concept of tax-deferred growth as a
      result of investing in the variable product. The following conditions must be met in
      order to make this type of comparison balanced and complete:
             (i) the comparative illustration must be accompanied by an illustration
             which reflects the standards outlined in subparagraph (A), above;
             (ii) the rate of return used in the comparative illustration must be no
             greater than 12%;
             (iii) the rate of return assumed for the side product and the variable life
             policy must be the same;
             (iv) the same fees deducted from the required prospectus illustration must
             be deducted from the comparative illustration;
             (v) the side product must be illustrated using gross values which do not
             reflect the deduction of any fees; and,
             (vi) the side product must not be identified or characterized as any
             specific investment or investment type.
      [Adopted by SR-NASD-94-02 eff. Mar. 21, 1994.]
      IM-2210-3. Use of Rankings in Investment Companies Advertisements and
      Sales Literature
             (a)     Definition of “Ranking Entity”
413            For purposes of the following guidelines, the term “Ranking Entity” refers
      to any entity that provides general information about investment companies to
      the public, that is independent of the investment company and its affiliates, and
      whose services are not procured by the investment company or any of its
      affiliates to assign the investment company a ranking.
             (b)     General Prohibition
414            Members shall not use in investment company advertisements, sales
      literature or general promotional material any investment company rankings other
      than those developed and produced by entities that meet the definition of
      “Ranking Entity,” and which conform to the requirements of the guidelines herein.
             (c)     Required Disclosures
             (1) Headlines/Prominent Statements
415          (A) A headline or other prominent statement must not state or imply that
      an investment company is the best performer in a category unless it is actually
      ranked first in the category.
416          (B) Prominent disclosure of the investment company’s ranking, the total
      number of investment companies in the category, the name of the category, and
      the period on which the ranking is based (i.e., the length of the period and the
      ending date; or, the first day of the period and the ending date), must appear in
      NASD [Rules 0100-3420]                                                          93


      close proximity to any headline or other prominent statement that refers to a
      ranking.
417        (2) All advertisements and sales literature containing an investment
      company ranking must disclose, with respect to the ranking:
             (A) the name of the category (e.g., growth);
             (B) the number of investment companies in the category;
             (C) the name of the Ranking Entity;
             (D) the length of the period and the ending date, or, the first day of the
             period and the ending date;
             (E) criteria on which the ranking is based;
             (F) for investment companies which assess front-end sales loads,
             whether the ranking takes into account sales charges;
             (G) if the ranking is based on total return or the current SEC standardized
             yield, fees have been waived or expenses advanced during the period on
             which the ranking is based, and the waiver or advancement had a
             material effect on the total return or yield for that period, a statement to
             that effect; and
             (H) the publisher of the ranking data (e.g., “ABC Magazine, June 1993”).
             The disclosure required by subparagraph (A) through (D) above, must be
             set forth prominently in the body of the advertisement or sales literature.
418           (3) If the investment company ranking consists of a symbol (e.g., a star
      system) rather than a number, the advertisement or sales literature also must
      disclose the meaning of the symbol (e.g., a four-star ranking indicates that the
      fund is in the top 30% of all investment companies).
419            (4) All advertisements and sales literature containing an investment
      company ranking must disclose that past performance is no guarantee of future
      results.
             (d)     Time Periods
420            (1) Any investment company ranking set forth in an advertisement or
      sales literature must be, at a minimum, current to the most recent calendar
      quarter ended, in the case of advertising, prior to the submission for publication,
      or, in the case of sales literature, prior to use.
421          (2) Except for money market mutual funds:
              (A) advertisements and sales literature must not use any rankings other
             than rankings based on yield, based on a period of less than one year;
             (B) an investment company ranking based on total return must be
             accompanied by rankings based on total return for a one year period for
             investment companies in existence for at least one year; one and five
             year periods for investment companies in existence for at least five years,
             and one, five and ten year periods for investment companies in existence
             for at least ten years supplied by the same Ranking Entity, relating to the
             same investment category, and based on the same time period; provided
             that, if rankings for such one, five and ten year time periods are not
      NASD [Rules 0100-3420]                                                         94


             published by the Ranking Entity, then rankings representing short,
             medium and long term performance must be provided in place of rankings
             for the required time periods; and
             (C) an investment company ranking based on yield may be based only on
             the current SEC standardized yield. An investment company ranking
             based on the current SEC standardized yield must be accompanied by
             rankings based on total return for a one year period for investment
             companies in existence for at least one year; one and five year periods
             for investment companies in existence for at least five years, and one,
             five and ten year periods for investment companies in existence for at
             least ten years supplied by the same Ranking Entity relating to the same
             investment category, and based on the same time period; provided that, if
             rankings for such, one, five and ten year time periods are not published
             by the Ranking Entity, then rankings representing short, medium and long
             term performance must be provided in place of rankings for the required
             time periods.
             (e)    Categories
422          (1) The choice of category (including a subcategory of a broader
      category) on which the investment company ranking is based must be one that
      provides a sound basis for evaluating the performance of the investment
      company.
423           (2) Subject to the standards below, an investment company ranking must
      be based only on (A) a published category or subcategory created by a Ranking
      Entity or (B) a category or subcategory created by an investment company or an
      investment company affiliate, but based on the performance measurements of a
      Ranking Entity.
424            (3) When the investment company ranking is based on a subcategory, the
      advertisement or sales literature must disclose the name of the full category and
      the investment company’s ranking and the number of investment companies in
      the full category. This requirement does not apply if the subcategory is (A) based
      solely on the investment objectives of the investment companies included and
      (B) created by a Ranking Entity. This disclosure could be included in a footnote.
425           (4) The advertisement or sales literature must not use any category or
      subcategory that is based upon the investment company’s asset size (whether or
      not it has been created by a Ranking Entity).
426          (5) If an advertisement uses a category created by the investment
      company or an investment company affiliate, including a “subcategory” of a
      category established by a Ranking Entity, the advertisement must prominently
      disclose:
             (A) the fact that the investment company or its affiliate has created the
             ranking category;
             (B) the number of investment companies in the category;
             (C) the basis for selecting the category; and
             (D) the Ranking Entity that developed the research on which the ranking
             is based.
      NASD [Rules 0100-3420]                                                           95


427          (6) An advertisement or sales literature containing a headline or other
      prominent statement that proclaims an investment company ranking created by
      an investment company or its affiliate must indicate, in close proximity to the
      headline or statement, that the investment company ranking is based upon a
      category created by the investment company or its affiliate.
             (f)    Multiple Class/Two-Tier Funds
428           Investment company rankings for more than one class of investment
      company with the same portfolio must be accompanied by prominent disclosure
      of the fact that the investment companies or classes have a common portfolio.
      [Adopted by SR-NASD-93-69 eff. July 12, 1994; amended by SR-NASD-96-39
      eff. Mar. 5, 1997.]
      Selected Notices to Members: 86-41, 92-59, 93-18, 93-73, 93-76, 93-85, 93-87,
      93-96, 94-16, 94-25, 94-36, 94-60, 95-49, 95-74, 95-80.
      IM-2210-4. Limitations on Use of Association’s Name
             (a)    Use of Association Name
429           Members may indicate membership in the Association in conformity with
      Article XV, Section 2 of the NASD By-Laws in one or more of the following ways:
430            (1) A member may indicate membership in the Association in recognized
      trade directories or other similar types of business listings.
431        (2) A member may indicate membership in the Association in the
      member’s advertisements and sales literature if such use is:
             (A) separate from the regular text of the advertisement or sales literature;
             (B) in a smaller type size and with less emphasis than that used for the
             member’s name; and
             (C) carries no direct or implied indication of Association approval of any
             security or service discussed in the advertisement or sales literature.
432           (3) A confirmation form for an over-the-counter transaction may include
      the following statement: “This transaction has been executed in conformity with
      the Uniform Practice Code of the National Association of Securities Dealers,
      Inc.”.
433           (4) A member may indicate membership in the Association on the door or
      entrance way of a member’s principal office or a registered branch office in the
      following manner: “Member, National Association of Securities Dealers, Inc.” or
      “Member of the National Association of Securities Dealers, Inc.”.
             (b)    Certification of Membership
434           Upon request to the Association, a member shall be entitled to receive an
      appropriate certification of membership, which may be displayed in the principal
      office or a registered branch office of the member. The certification shall remain
      the property of the Association and shall be returned by the member upon
      request of the NASD Board or the Chief Executive Officer of the Association.
      NASD [Rules 0100-3420]                                                               96


             (c)     Fraudulent or Misleading Use Prohibited
435          A member or person associated with a member shall not use the name of
      the Association in a fraudulent or misleading manner in connection with the
      promotion or sale of any security or in connection with any other aspect of the
      member’s business or imply orally, visually, or in writing that the Association
      endorses, indemnifies, or guarantees a member’s business practices, selling
      methods, or class or type of securities offered.
             (d)     Violation of Rule 2110
436           An improper, fraudulent, or misleading use of the Association’s name by a
      member or person associated with a member shall be deemed conduct
      inconsistent with high standards of commercial honor and just and equitable
      principles of trade in violation of Rule 2110.
      [Adopted by SR-NASD-97-28 eff: 8/7/97; amended by SR-NASD-98-86 eff. Nov.
      19, 1998.]
      IM-2210-5. Requirements for the Use of Bond Mutual Fund Volatility Ratings
             (This rule will expire on August 31, 2001, unless extended or permanently
             approved by the Association at or before such date.)
             (a)     Definition of Bond Mutual Fund Volatility Ratings
437           For purposes of this Rule and any interpretation thereof, the term “bond
      mutual fund volatility rating” is a description issued by an independent third party
      relating to the sensitivity of the net asset value of a portfolio of an open-end
      management investment company that invests in debt securities to changes in
      market conditions and the general economy, and is based on an evaluation of
      objective factors, including the credit quality of the fund’s individual portfolio
      holdings, the market price volatility of the portfolio, the fund’s performance, and
      specific risks, such as interest rate risk, prepayment risk, and currency risk.
             (b)     Prohibitions on Use
438           Members and persons associated with a member may use a bond mutual
      fund volatility rating only in supplemental sales literature and only when the
      following requirements are satisfied:
439          (1) The rating does not identify or describe volatility as a “risk” rating.
440           (2) The supplemental sales literature incorporates the most recently
      available rating and reflects information that, at a minimum, is current to the most
      recently completed calendar quarter ended prior to use.
441          (3) The criteria and methodology used to determine the rating must be
      based exclusively on objective, quantifiable factors. The rating and the
      Disclosure Statement that accompanies the rating must be clear, concise, and
      understandable.
442         (4) The supplemental sales literature conforms to the disclosure require-
      ments described in paragraph (c).
443           (5) The entity that issued the rating provides detailed disclosure on its
      rating methodology to investors through a toll-free telephone number, a web site,
      or both.
      NASD [Rules 0100-3420]                                                              97


             (c)     Disclosure Requirements
444           (1) Supplemental sales literature containing a bond mutual fund volatility
      rating shall include a Disclosure Statement containing all the information required
      by this Rule. The Disclosure Statement may also contain any additional
      information that is relevant to an investor’s understanding of the rating.
445           (2) Supplemental sales literature containing a bond mutual fund volatility
      rating shall contain all current bond mutual fund volatility ratings that have been
      issued with respect to the fund. Information concerning multiple ratings may be
      combined in the Disclosure Statement, provided that the applicability of the
      information to each rating is clear.
446          (3) All bond mutual fund volatility ratings shall be contained within the text
      of the Disclosure Statement. The following disclosures shall be provided with
      respect to each such rating:
             (A) the name of the entity that issued the rating;
             (B) the most current rating and date of the current rating, with an
             explanation of the reason for any change in the current rating from the
             most recent prior rating;
             (C) a description of the rating in narrative form, containing the following
             disclosures:
                    (i) a statement that there is no standard method for assigning
             ratings;
                   (ii) a description of the criteria and methodologies used to
             determine the rating;
                     (iii) a statement that not all bond funds have volatility ratings;
                    (iv) whether consideration was paid in connection with obtaining
             the issuance of the rating;
                     (v) a description of the types of risks the rating measures (e.g.,
             short-term volatility);
                     (vi) a statement that the portfolio may have changed since the date
             of the rating; and
                    (vii) a statement that there is no guarantee that the fund will
             continue to have the same rating or perform in the future as rated.
      [Adopted by SR-NASD-97-89 eff. Feb. 29, 2000.]
      Selected Notice to Members: 00-23.
      2211. Telemarketing
447          No member or person associated with a member shall:
             (a) make outbound telephone calls to the residence of any person for the
             purpose of soliciting the purchase of securities or related services at any
             time other than between 8 a.m. and 9 p.m. local time at the called
             person’s location, without the prior consent of the person; or
             (b) make an outbound telephone call to any person for the purpose of
             soliciting the purchase of securities or related services without disclosing
      NASD [Rules 0100-3420]                                                           98


             promptly and in a clear and conspicuous manner to the called person the
             following information:
                    (1) the identity of the caller and the member firm;
                    (2) the telephone number or address at which the caller may be
             contacted; and
                     (3) that the purpose of the call is to solicit the purchase of
             securities or related services.
             (c) The prohibitions of paragraphs (a) and (b) shall not apply to telephone
             calls by any person associated with a member, or another associated
             person acting at the direction of such person for the purpose of maintain-
             ing and servicing the accounts of existing customers of the member under
             the control of or assigned to such associated person:
                     (1) to an existing customer who, within the preceding 12 months,
             has effected a securities transaction in, or made a deposit of funds or
             securities into, an account that, at the time of the transaction or the
             deposit, was under the control of or assigned to, such associated person;
                     (2) to an existing customer who previously has effected a securi-
             ties transaction in, or made a deposit of funds or securities into, an
             account that, at the time of the transaction or deposit, was under the
             control of or assigned to, such associated person, provided that such
             customer’s account has earned interest or dividend income during the
             preceding 12 months, or
                    (3) to a broker or dealer.
             (d) For the purposes of paragraph (c), the term “existing customer” means
             a customer for whom the broker or dealer, or a clearing broker or dealer
             on behalf of such broker or dealer, carries an account. The scope of this
             Rule is limited to the telemarketing calls described herein; the terms of
             this Rule shall not otherwise expressly or by implication impose on
             members any additional requirements with respect to the relationship
             between a member and a customer or between a person associated with
             a member and a customer.
      [Adopted by SR-NASD-96-28 eff. Dec. 2, 1996.]

      2220. Options Communications with the Public
             (a)     Definitions
448          For purposes of this Rule and any interpretation thereof:
449           (1) “Advertisement” shall include any material that reaches a mass
      audience through public media such as newspapers, periodicals, magazines,
      radio, television, telephone recording, motion picture, audio or video device, tele-
      communications device, billboards, signs or through written sales communica-
      tions to customers or the public that are not required to be accompanied or
      preceded by one or more current options disclosure documents.
450          (2) “Educational material” shall include any explanatory material distri-
      buted or made generally available to customers or the public that is limited to
      NASD [Rules 0100-3420]                                                           99


      information describing the general nature of the standardized options markets or
      one or more strategies.
451           (3) “Sales literature” shall include any written communication (not defined
      as an “advertisement” or as “educational material”) distributed or made generally
      available to customers or the public that contains any analysis, performance
      report, projection or recommendation with respect to options, underlying securi-
      ties or market conditions, any standard forms of worksheets, or any seminar text
      which pertains to options and which is communicated to customers or the public
      at seminars, lectures or similar such events.
             (b)     Approval by Compliance Registered Options Principal and
                     Record-keeping
452          All advertisements, sales literature (except completed worksheets), and
      educational material issued by a member or member organization pertaining to
      options shall be approved in advance by the Compliance Registered Options
      Principal or designee. Copies thereof, together with the names of the persons
      who prepared the material, the names of the persons who approved the material
      and, in the case of sales literature, the source of any recommendations
      contained therein, shall be retained by the member or member organization and
      be kept at an easily accessible place for examination by the Association for a
      period of three years.
             (c)     Association Approval Requirements and Review Procedures
453           (1) In addition to the approval required by paragraph (b) of this Rule,
      every advertisement and all educational material of a member or member
      organization pertaining to options shall be submitted to the Advertising/
      Investment Companies Regulation Department of the Association (“Department”)
      at least ten days prior to use (or such shorter period as the Association may
      allow in particular instances) for approval and, if changed or expressly dis-
      approved by the Association, shall be withheld from circulation until any changes
      specified by the Association have been made or, in the event of disapproval, until
      the advertisement or educational material has been resubmitted for, and has
      received, Association approval.
454            (2)(A) Notwithstanding the foregoing provision, the Department, upon
      review of a member’s options advertisements, educational material and/or sales
      literature, and after determining that the member will again depart from the
      standards of this Rule, may require that such member file all options advertise-
      ments, educational material and/or sales literature, or the portions of such
      member’s material that is related to any specific types or classes of securities or
      services, with the Department, at least ten days prior to use.
455          (2)(B) The Department shall notify the member in writing of the types of
      material to be filed and the length of time such requirement is to be in effect. The
      requirement shall not exceed one year, however, and shall not take effect until 30
      days after the member receives the written notice, during which time the member
      may request a hearing under Rule 9514, and any such hearing shall be in
      conformity with the hearing and appeal procedures of the Rule 9510 Series.
456           (3) In addition to the foregoing requirements, every member’s options
      advertising and sales literature shall be subject to a routine spot-check
      procedure. Upon written request from the Association, each member shall
      NASD [Rules 0100-3420]                                                           100


      promptly submit the material requested. Members will not be required to submit
      material under this procedure that has been previously submitted pursuant to one
      of the foregoing requirements.
457          (4) The requirements of this paragraph (c) shall not be applicable to:
             (A) advertisements or educational material submitted to another self-
             regulatory organization having comparable standards pertaining to such
             advertisements or educational material, and
             (B) advertisements in which the only reference to options is contained in a
             listing of the services of a member organization.
458           (5) Except as otherwise provided in subparagraphs (d)(2)(B) and (C), no
      written material respecting options may be disseminated to any person who has
      not previously or contemporaneously received one or more current options
      disclosure documents.
             (d)     Standards Applicable to Communications with the Public
             (1) General Standards
459          No member or member organization or person associated with a member
      shall utilize any advertisement, educational material, sales literature or other
      communications to any customer or member of the public concerning options
      which:
             (A) contains any untrue statement or omission of a material fact or is
             otherwise false or misleading;
             (B) contains promises of specific results, exaggerated or unwarranted
             claims, opinions for which there is no reasonable basis or forecasts of
             future events which are unwarranted or which are not clearly labeled as
             forecasts;
             (C) contains hedge clauses or disclaimers which are not legible, which
             attempt to disclaim responsibility for the content of such literature or for
             opinions expressed therein, or which are otherwise inconsistent with such
             communication; or
             (D) would constitute a prospectus as that term is defined in the Securities
             Act of 1933, unless it meets the requirements of Section 10 of said Act.
              (2) Specific Standards
460           (A) The special risks attendant to options transactions and the complexi-
      ties of certain options investment strategies shall be reflected in any advertise-
      ment, educational material or sales literature which discusses the uses or
      advantages of options. Such communications shall include a warning to the
      effect that options are not suitable for all investors. In the preparation of written
      communications respecting options, the following guidelines shall be observed:
             (i) Any statement referring to the potential opportunities or advantages
             presented by options shall be balanced by a statement of the
             corresponding risks. The risk statement shall reflect the same degree of
             specificity as the statement of opportunities, and broad generalities
             should be avoided. Thus, a statement such as “with options, an investor
             has an opportunity to earn profits while limiting his risk of loss,” should be
             balanced by a statement such as “of course, an options investor may lose
      NASD [Rules 0100-3420]                                                               101


             the entire amount committed to options in a relatively short period of
             time.”
             (ii) It shall not be suggested that options are suitable for all investors.
             (iii) Statements suggesting the certain availability of a secondary market
             for options shall not be made.
461          (B) Advertisements pertaining to options shall conform to the following
      standards:
             (i) Advertisements may only be used (and copies of the advertisements
             may be sent to persons who have not received one or more options dis-
             closure documents) if the material meets the requirements of SEC Rule
             134 under the Securities Act of 1933, as that Rule has been interpreted
             as applying to options. Under Rule 134, advertisements must be limited to
             general descriptions of the security being offered and of its issuer.
             Advertisements under this Rule shall state the name and address of the
             person from whom a current options disclosure document(s) may be
             obtained. Such advertisements may have the following characteristics:
                     a. The text of the advertisement may contain a brief description of
             such options, including a statement that the issuer of every such option is
             the Options Clearing Corporation. The text may also contain a brief des-
             cription of the general attributes and method of operation of the exchange
             or exchanges on which such options are traded and of the Options
             Clearing Corporation, including a discussion of how the price of an option
             is determined on the trading floor(s) of such exchange(s);
                     b. The advertisement may include any statement required by any
             state law or administrative authority;
                    c. Advertising designs and devices, including borders, scrolls,
             arrows, pointers, multiple and combined logos and unusual type faces
             and lettering as well as attention-getting headlines and photographs and
             other graphics may be used, provided such material is not misleading.
             (ii) The use of recommendations or of past or projected performance figu-
             res, including annualized rates of return, is not permitted in any advertise-
             ment pertaining to options.
462           (C) Educational material, including advertisements, pertaining to options
      may be used if the material meets the requirements of SEC Rule 134A under the
      Securities Act of 1933. Those requirements are as follows:
             (i) The potential risks related to options trading generally and to each
             strategy addressed are explained;
             (ii) No past or projected performance figures, including annualized rates
             of return are used;
             (iii) No recommendation to purchase or sell any option contract is made;
             (iv) No specific security is identified other than:
                    a. a security which is exempt from registration under the Act, or an
             option on such exempt security;
      NASD [Rules 0100-3420]                                                         102


                    b. an index option, including the component securities of the index;
             or
                    c. a foreign currency option; and
             (v) The material contains the name and address of a person or persons
             from whom the appropriate current Options Disclosure Document(s), as
             defined in SEC Rule 9b-1 of the Act, may be obtained.
463          (D) Sales literature pertaining to options shall conform to the following
      standards:
             (i) Sales literature shall state that supporting documentation for any
             claims (including any claims made on behalf of options programs or the
             options expertise of sales persons), comparisons, recommendations,
             statistics or other technical data, will be supplied upon request.
             (ii) Such communications may contain projected performance figures
             (including projected annualized rates of return), provided that:
                    a. no suggestion of certainty of future performance is made;
                    b. parameters relating to such performance figures are clearly
             established (e.g., to indicate exercise price of option, purchase price of
             the underlying stock and its market price, option premium, anticipated
             dividends, etc.);
                    c. all relevant costs, including commissions and interest charges (if
             applicable with regard to margin transactions) are disclosed;
                    d. such projections are plausible and are intended as a source of
             reference or a comparative device to be used in the development of a
             recommendation;
                     e. all material assumptions made in such calculations are clearly
             identified (e.g., “assume option expires,” “assume option unexercised,”
             “assume option exercised,” etc.);
                    f. the risks involved in the proposed transactions are also
             discussed; and
                     g. in communications relating to annualized rates of return, that
             such returns are not based upon any less than a 60-day experience; any
             formulas used in making calculations are clearly displayed; and a state-
             ment is included to the effect that the annualized returns cited might be
             achieved only if the parameters described can be duplicated and that
             there is no certainty of doing so.
             (iii) Such communications may feature records and statistics which
             portray the performance of past recommendations or of actual transac-
             tions, provided that:
                    a. any such portrayal is done in a balanced manner, and consists
             of records or statistics that are confined to a specific “universe” that can
             be fully isolated and circumscribed and that covers at least the most
             recent 12-month period;
      NASD [Rules 0100-3420]                                                         103


                     b. such communications include the date of each initial recommen-
             dation or transaction, the price of each such recommendation or transac-
             tion as of such date, and the date and price of each recommendation or
             transaction at the end of the period or when liquidation was suggested or
             effected, whichever was earlier; provided that if the communications are
             limited to summarized or averaged records or statistics, in lieu of the com-
             plete record there may be included the number of items recommended or
             transacted, the number that advanced and the number that declined,
             together with an offer to provide the complete record upon request;
                    c. such communications disclose all relevant costs, including
             commissions and interest charges (if applicable with regard to margin
             transactions) and, whenever annualized rates of return are used, all
             material assumptions used in the process of annualization;
                    d. an indication is provided of the general market conditions during
             the period(s) covered, and any comparison made between such records
             and statistics and the overall market (e.g., comparison to an index) is
             valid;
                    e. such communications state that the results presented should
             not and cannot be viewed as an indicator of future performance; and
                      f. a Registered Options Principal determines that the records or
             statistics fairly present the status of the recommendations or transactions
             reported upon and so initials the report.
             (iv) In the case of an options program (i.e., an investment plan employing
             the systematic use of one or more options strategies), the cumulative
             history or unproven nature of the program and its underlying assumptions
             shall be disclosed.
             (v) Standard forms of options worksheets utilized by member organiza-
             tions, in addition to complying with the requirements applicable to sales
             literature, must be uniform within a member organization.
             (vi) If a member organization has adopted a standard form of worksheet
             for a particular options strategy, nonstandard worksheets for that strategy
             may not be used.
             (vii) Communications that portray performance of past recommendations
             or actual transactions and completed worksheets shall be kept at a place
             easily accessible to the sales office for the accounts or customers
             involved.
      [Added eff. Sept. 13, 1991; amended by SR-NASD-98-57 eff. March 26, 1999.]
      Selected Notices to Members: 85-69, 86-68, 87-24, 87-43, 88-20, 88-52, 88-65,
      89-11, 91-26, 91-62, 92-56.

      2230. Confirmations
464         A member at or before the completion of each transaction with a
      customer shall give or send to such customer written notification disclosing (a)
      whether such member is acting as a broker for such customer, as a dealer for his
      own account, as a broker for some other person, or as a broker for both such
      customer and some other person; and (b) in any case in which such member is
      NASD [Rules 0100-3420]                                                                         104


      acting as a broker for such customer or for both such customer and some other
      person, either the name of the person from whom the security was purchased or
      to whom it was sold for such customer and the date and time when such
      transaction took place or the fact that such information will be furnished upon the
      request of such customer, and the source and amount of any commission or
      other remuneration received or to be received by such member in connection
      with the transaction.
      Selected Notices to Members: 89-77, 90-11, 90-63.
      IM-2230. “Third Market” Confirmations
465           Members who act as brokers for customers in transactions in listed
      securities in the “third market,” and members who make markets in such securi-
      ties, have sought clarification and uniformity regarding the disclosures to be
      made to customers in situations in which the third market firms had confirmed to
      the retailing member plus or minus a differential, e.g., “20 plus 1/8” or “20 minus
      1/8.” In some such cases the confirmation from the retailing member to the
      customer has indicated that the transaction was effected for the customer at a
      price of 20 and that the total commission paid by the customer was received by
      the retailing member, and it failed to disclose that the retailing member, in effect,
      absorbed the 1/8 differential charged by the third market firm.
466           In cases such as those described above, where the retailing member
      effects an agency transaction for his customer with a third market firm at a price
      which is in line with the then current price on the exchange plus or minus a
      differential, with the retailer absorbing the differential charged by the third market
      firm, the following legend should be used by the retailing member to insure
      adequate disclosure on the confirmation to the customer:
467           We executed this transaction for you with a dealer who confirmed to us at
      the above price, plus (in the event you purchased) or less (in the event you sold)
                     *
      a fraction of … per share. This fraction was absorbed by us out of the amount
      shown as our commission. Full details of this transaction are available upon
      request.
468           Failure to send an appropriate confirmation which conforms to the provi-
      sions hereof may involve not only conduct inconsistent with high standards of
      commercial honor and just and equitable principles of trade, but also violations of
      rules of the Commission, particularly the confirmation rule, SEC Rule 10b-10.

      2240. Disclosure of Control Relationship with Issuer
469          A member controlled by, controlling, or under common control with, the
      issuer of any security, shall, before entering into any contract with or for a
      customer for the purchase or sale of such security, disclose to such customer the
      existence of such control, and if such disclosure is not made in writing, it shall be
      supplemented by the giving or sending of written disclosure at or before the
      completion of the transaction.




      *
           The fractional amount absorbed may be shown, for example, as 1/8 or written one-eighth.
      NASD [Rules 0100-3420]                                                            105


      2250. Disclosure of Participation or Interest in Primary or Secondary
            Distribution
470           A member who is acting as a broker for a customer or for both such
      customer and some other person, or a member who is acting as a dealer and
      who receives or has promise of receiving a fee from a customer for advising such
      customer with respect to securities, shall, at or before the completion of any
      transaction for or with such customer in any security in the primary or secondary
      distribution of which such member is participating or is otherwise financially
      interested, give such customer written notification of the existence of such
      participation or interest.

      2260. Forwarding of Proxy and Other Materials
471            (a) A member has an inherent duty in carrying out high standards of
      commercial honor and just and equitable principles of trade to forward (1) all
      proxy material which is properly furnished to it by the issuer of the securities or a
      stockholder of such issuer, to each beneficial owner of shares of that issue (or
      the beneficial owner’s designated investment adviser) which are held by the
      member for the beneficial owner thereof and (2) all annual reports, information
      statements and other material sent to stockholders, which are properly furnished
      to it by the issuer of the securities to each beneficial owner of shares of that issue
      (or the beneficial owner’s designated investment adviser) which are held by the
      member for the beneficial owner thereof.
472           (b) No member shall give a proxy to vote stock which is registered in its
      name, except as required or permitted under the provisions of paragraphs (c) or
      (d) hereof, unless such member is the beneficial owner of such stock.
473            (c)(1) Whenever an issuer or stockholder of such issuer soliciting proxies
      shall timely furnish to a member:
              (A) sufficient copies of all soliciting material which such person is sending
             to registered holders, and
             (B) satisfactory assurance that he will reimburse such member for all out-
             of-pocket expenses, including reasonable clerical expenses incurred by
             such member in connection with such solicitation,
474            such member shall transmit promptly to each beneficial owner of stock of
      such issuer (or the beneficial owner’s designated investment adviser) which is in
      its possession or control and registered in a name other than the name of the
      beneficial owner, all such material furnished. Such material shall include a signed
      proxy indicating the number of shares held for such beneficial owner and bearing
      a symbol identifying the proxy with proxy records maintained by the member, and
      a letter informing the beneficial owner (or the beneficial owner’s designated
      investment adviser) of the time limit and necessity for completing the proxy form
      and forwarding it to the person soliciting proxies prior to the expiration of the time
      limit in order for the shares to be represented at the meeting. A member shall
      furnish a copy of the symbols to the person soliciting the proxies and shall also
      retain a copy thereof pursuant to the provisions of SEC Rule 17a-4 under the Act.
475          (c)(2) Notwithstanding the provisions of subparagraph (1), a member may
      give a proxy to vote any stock pursuant to the rules of any national securities
      NASD [Rules 0100-3420]                                                                      106


      exchange to which the member is also responsible provided that the records of
      the member clearly indicate which procedure it is following.
476          (c)(3) This paragraph shall not apply to beneficial owners residing outside
      of the United States of America, although members may voluntarily comply with
      the provisions hereof in respect to such persons if they so desire.
477           (d)(1) A member may give a proxy to vote any stock registered in its
      name if such member holds such stock as executor, administrator, guardian,
      trustee, or in a similar representative or fiduciary capacity with authority to vote.
478           (d)(2) A member which has in its possession or within its control stock
      registered in the name of another member and which desires to transmit signed
      proxies pursuant to the provisions of paragraph (c), shall obtain the requisite
      number of signed proxies from such holder of record.
479          (d)(3) Notwithstanding the foregoing,
                                                               1
             (A) any member designated by a named ERISA Plan fiduciary as the
             investment manager of stock held as assets of the ERISA Plan may vote
             the proxies in accordance with the ERISA Plan fiduciary responsibilities if
             the ERISA Plan expressly grants discretion to the investment manager to
             manage, acquire, or dispose of any plan asset and has not expressly
             reserved the proxy voting right for the named ERISA Plan fiduciary; and
             (B) any person registered as an investment adviser under the Investment
             Advisers Act of 1940 who exercises investment discretion pursuant to an
             advisory contract for the beneficial owner and has been designated in
             writing by the beneficial owner to vote the proxies for stock which is in the
             possession or control of the member, may vote such proxies.
480          (e)(1) A member when so requested by an issuer and upon being
      furnished with:
             (A) sufficient copies of annual reports, information statements or other
             material sent to stockholders, and
             (B) satisfactory assurance that it will be reimbursed by such issuer for all
             out-of-pocket expenses, including reasonable clerical expenses,
481          shall transmit promptly to each beneficial owner of stock of such issuer
      (or the beneficial owner’s designated investment adviser) which is in its
      possession and control and registered in a name other than the name of the
      beneficial owner of all such material furnished.
482          (e)(2) This paragraph shall not apply to beneficial owners residing outside
      of the United States of America although members may voluntarily comply with
      the provisions hereof in respect to such persons if they so desire.
483          (f) For purposes of this Rule, the term “designated investment adviser” is
      a person registered under the Investment Advisers Act of 1940 who exercises
      investment discretion pursuant to an advisory contract for the beneficial owner
      and is designated in writing by the beneficial owner to receive proxy and related

      1
           For purposes of this Rule, the term “ERISA” is an acronym for the Employee Retirement Income
           Security Act of 1974.
      NASD [Rules 0100-3420]                                                        107


      materials and vote the proxy, and to receive annual reports and other material
      sent to stock holders.
             (1) The written designation must be signed by the beneficial owner; be
             addressed to the member; and include the name of the designated
             investment adviser.
             (2) Members who receive such a written designation from a beneficial
             owner must ensure that the designated investment adviser is registered
             with the Commission pursuant to the Investment Advisers Act or 1940
             and that the investment adviser is exercising investment discretion over
             the customer’s account pursuant to an advisory contract to vote proxies
             and/or to receive proxy soliciting material, annual reports and other
             material. Members must keep records substantiating this information.
             (3) Beneficial owners have an unqualified right at any time to rescind
             designation of the investment adviser to receive materials and to vote
             proxies. The rescission must be in writing and submitted to the member.
484           (g) The Board of Governors for the guidance of members is authorized to
      establish a suggested rate of reimbursement of members for expenses incurred
      in connection with transmitting the proxy solicitation to the beneficial owners of
      the securities pursuant to paragraph (c) hereof or in transmitting information
      statements or other material to the beneficial owners of securities pursuant to
      paragraph (e) hereof.
      [Adopted eff. Jan. 2, 1969; amended eff. Mar. 31, 1974; May 1, 1980; Apr. 29,
      1986; May 30, 1986; Aug. 7, 1991, amended by SR-NASD-95-06 eff. May 5,
      1995.]
      Selected Notices to Members: 85-26, 86-35, 86-46, 91-57, 92-17, 95-45.
      IM-2260. Suggested Rates of Reimbursement
485          (a) The Board of Governors has determined that the following suggested
      rates of reimbursement for expenses incurred in forwarding proxy material,
      annual reports, information statements and other material are to be used as a
      guide by members:
             (1) Charges for Initial Proxy and/or Annual Report Mailings
             (A) 60 cents for each set of proxy material, i.e., proxy statement, form of
             proxy and annual report when mailed as a unit, plus postage, with a
             minimum of $5.00 for all sets mailed;
             (B) 20 cents for each copy, plus postage, for annual reports, which are
             mailed separately from the proxy material pursuant to the instruction of
             the person soliciting proxies.
             (2) Charges for Proxy Follow-Up Mailings
             (A) 40 cents for each set of follow-up material, plus postage, when the
             follow-up material is mailed to all beneficial owners;
             (B) 60 cents for each set of follow-up material, plus postage, when the
             follow-up material is mailed only to beneficial owners who have not
             responded to the initial mailing.
             (3) Surcharge for Proxy Solicitation
             Eighteen and one-half cents for each set of proxy material, i.e., proxy
      NASD [Rules 0100-3420]                                                      108


             statement, form of proxy and annual report when mailed as a unit, for the
             period from April 1, 1986 to March 31, 1987 as a surcharge in addition to
             the appropriate charges specified herein.
             (4) Additional Fee for Proxy Solicitation
             Six and one-half cents per shareholder name provided to the issuer
             pursuant to the issuer’s request.
             (5) Charges for Interim Report, Post Meeting Report and Other Material
             Mailings
             30 cents for each copy, plus postage, for interim reports, post meeting
             reports, or other material with a minimum of $2.00 for all sets mailed.
486          (b) Members may charge for envelopes, provided that they are not
      furnished by the person soliciting proxies.
487          (c) Members are reminded that Rule 2430 requires that any such charges
      must be reasonable. Accordingly, this is a guide and a member may request
      reimbursement of expenses at other rates after taking into consideration all
      relevant factors.

      2270. Disclosure of Financial Condition to Customers
488           (a) A member shall make available to inspection by any bona fide regular
      customer, upon request, the information relative to such member’s financial
      condition as disclosed in its most recent balance sheet prepared either in
      accordance with such member’s usual practice or as required by any state or
      federal securities laws, or any rule or regulation thereunder.
489           (b) As used in paragraph (a) of this Rule, the term “customer” means any
      person who, in the regular course of such member’s business, has cash or
      securities in the possession of such member.

      2280. Investor Education and Protection
490          (a) Each member shall, with a frequency of not less than once every
      calendar year, provide in writing to each customer the following items of
      information:
             (1) NASD Regulation Public Disclosure Program Hotline Number;
             (2) NASD Regulation Web Site Address; and
             (3) A statement as to the availability to the customer of an investor
             brochure that includes information describing the Public Disclosure
             Program.
491           (b) Notwithstanding the requirement in paragraph (a) above, any member
      that does not carry customer accounts and does not hold customer funds or
      securities is exempt from the provisions of this Rule.
      [Adopted by SR-NASD-97-10 eff. Sept. 10, 1997]
      NASD [Rules 0100-3420]                                                         109


      2300. TRANSACTIONS WITH CUSTOMERS

      2310. Recommendations to Customers (Suitability)
492           (a) In recommending to a customer the purchase, sale or exchange of
      any security, a member shall have reasonable grounds for believing that the
      recommendation is suitable for such customer upon the basis of the facts, if any,
      disclosed by such customer as to his other security holdings and as to his
      financial situation and needs.
493            (b) Prior to the execution of a transaction recommended to a non-
      institutional customer, other than transactions with customers where investments
      are limited to money market mutual funds, a member shall make reasonable
      efforts to obtain information concerning:
             (1) the customer’s financial status;
             (2) the customer’s tax status;
             (3) the customer’s investment objectives; and
             (4) such other information used or considered to be reasonable by such
             member or registered representative in making recommendations to the
             customer.
494          (c) For purposes of this Rule, the term “non-institutional customer” shall
      mean a customer that does not qualify as an institutional account” under Rule
      3110(c)(4).
      [Amended May 2, 1990 eff. for accounts opened and recommendations made
      after Jan. 1, 1991; amended by SR-NASD-95-39 eff. Aug. 20, 1996.]
      IM-2310-1. Possible Application of SEC Rules 15g-1 through 15g-9
495           Members should be aware that, effective January 1, 1990, any transac-
      tion which involves a non-Nasdaq, non-exchange equity security trading for less
      than five dollars per share may be subject to the provisions of SEC Rules 15g-1
      through 15g-9, and those Rules should be reviewed to determine if an executed
      customer suitability agreement is required.
496          Accounts opened, and recommendations made, prior to January 1, 1991
      remain subject to former Article III, Sections 2 and 21(c) of the Rules of Fair
      Practice as previously in effect, as set forth in Notice to Members 90-52 (August
      1990).
      IM-2310-2. Fair Dealing with Customers
497           (a)(1) Implicit in all member and registered representative relationships
      with customers and others is the fundamental responsibility for fair dealing. Sales
      efforts must therefore be undertaken only on a basis that can be judged as being
      within the ethical standards of the Association’s Rules, with particular emphasis
      on the requirement to deal fairly with the public.
498           (a) (2) This does not mean that legitimate sales efforts in the securities
      business are to be discouraged by requirements which do not take into account
      the variety of circumstances which can enter into the member-customer relation-
      ship. It does mean, however, that sales efforts must be judged on the basis of
      NASD [Rules 0100-3420]                                                             110


      whether they can be reasonably said to represent fair treatment for the persons
      to whom the sales efforts are directed, rather than on the argument that they
      result in profits to customers.
499          (b) District Business Conduct Committees and the Board of Governors
      have interpreted the Rules, taken disciplinary action and imposed penalties in
      many situations where members’ sales efforts have exceeded the reasonable
      grounds of fair dealing. Some practices that have resulted in disciplinary action
      and that clearly violate this responsibility for fair dealing are set forth below, as a
      guide to members:
             (1) Recommending Speculative Low-Priced Securities
             Recommending speculative low-priced securities to customers without
             knowledge of or attempt to obtain information concerning the customers’
             other securities holdings, their financial situation and other necessary
             data. The principle here is that this practice, by its very nature, involves a
             high probability that the recommendation will not be suitable for at least
             some of the persons solicited. This has particular application to high
             pressure telephone sales campaigns.
             (2) Excessive Trading Activity
             Excessive activity in a customer’s account, often referred to as “churning”
             or “overtrading.” There are no specific standards to measure excessive-
             ness of activity in customer accounts because this must be related to the
             objectives and financial situation of the customer involved.
             (3) Trading in Mutual Fund Shares
             Trading in mutual fund shares, particularly on a short-term basis. It is
             clear that normally these securities are not proper trading vehicles and
             such activity on its face may raise the question of Rule violation.
             (4) Fraudulent Activity
             (A) Numerous instances of fraudulent conduct have been acted upon by
             the Association and have resulted in penalties against members. Among
             some of these activities are:
                    (i) Fictitious Accounts — Establishment of fictitious accounts in
             order to execute transactions which otherwise would be prohibited, such
             as the purchase of hot issues, or to disguise transactions which are
             against firm policy.
                   (ii) Discretionary Accounts — Transactions in discretionary
             accounts in excess of or without actual authority from customers.
                    (iii) Unauthorized Transactions — Causing the execution of
             transactions which are unauthorized by customers or the sending of
             confirmations in order to cause customers to accept transactions not
             actually agreed upon.
                    (iv) Misuse of Customers’ Funds or Securities — Unauthorized use
             or borrowing of customers’ funds or securities.
             (B) In addition, other fraudulent activities, such as forgery, non-disclosure
             or misstatement of material facts, manipulations and various deceptions,
             have been found in violation of Association Rules. These same activities
      NASD [Rules 0100-3420]                                                         111


             are also subject to the civil and criminal laws and sanctions of federal and
             state governments.
             (5) Recommending Purchases Beyond Customer Capability
             Recommending the purchase of securities or the continuing purchase of
             securities in amounts which are inconsistent with the reasonable
             expectation that the customer has the financial ability to meet such a
             commitment.
500          (c) While most members are fully aware of the fairness required in dealing
      with customers, it is anticipated that the practices enumerated in paragraph (b),
      which are not all inclusive, will be of future assistance in the training and
      education of new personnel.
501           (d) The Commission has also recognized that brokers and dealers have
      an obligation of fair dealing in actions under the general anti-fraud provisions of
      the federal securities laws. The Commission bases this obligation on the principle
      that when a securities dealer opens his business he is, in effect, representing
      that he will deal fairly with the public. Certain of the Commission’s cases on fair
      dealing involve practices not covered in the foregoing illustrations. Usually, any
      breach of the obligation of fair dealing as determined by the Commission under
      the anti-fraud provisions of the securities laws could be considered a violation of
      the Association’s Rules.
502           (e) Fair Dealing with Customers with Regard to Derivative Products or
      New Financial Products. The Board emphasizes members’ obligations for fair
      dealing with customers when making recommendations or accepting orders for
      new financial products. As new products are introduced from time to time, it is
      important that members make every effort to familiarize themselves with each
      customer’s financial situation, trading experience, and ability to meet the risks
      involved with such products and to make every effort to make customers aware
      of the pertinent information regarding the products. Members must follow specific
      guidelines, set forth below, for qualifying the accounts to trade the products and
      for supervising the accounts thereafter.
             (1) Index Warrants
             Members are obliged to comply with the Rules, regulations and
             procedures applicable to index warrants and foreign currency warrants
             contained in the Rule 2840 Series.
             (2) Hybrid Securities and Selected Equity-Linked Debt Securities
             (“SEEDS”) Designated as Nasdaq National Market Securities Pursuant to
             the Rule 4400 Series
503           Members are obligated to comply with any Rules, regulations, or
      procedures applicable to such securities pursuant to the Rule 4420 Series, as
      well as any other applicable Rule, regulation, or procedure of the Association.
      [Amended eff. June 11, 1992; amended by SR-NASD-94-49 eff. Sept. 30, 1994;
      amended by SR-NASD-95-37 eff. Sept. 28, 1995.]
      Selected Notices to Members: 85-26, 86-35, 86-46, 91-57, 92-17, 95-45.
      NASD [Rules 0100-3420]                                                                                 112


      IM-2310-3. Suitability Obligations to Institutional Customers
              Preliminary Statement as to Members’ Obligations
504           As a result of broadened authority provided by amendments to the
      Government Securities Act adopted in 1993, the Association is extending its
      sales practice rules to the government securities market, a market with a
      particularly broad institutional component. Accordingly, the Association believes it
      is appropriate to provide further guidance to members on their suitability obliga-
      tions when making recommendations to institutional customers. The Association
      believes this interpretation is applicable not only to government securities but to
                                                  2
      all debt securities, excluding municipals. Furthermore, because of the nature
      and characteristics of the institutional customer/member relationship, the Asso-
      ciation is extending this interpretation to apply equally to the equity securities
      markets as well.
505          The Association’s suitability rule is fundamental to fair dealing and is
      intended to promote ethical sales practices and high standards of professional
      conduct. Members’ responsibilities include having a reasonable basis for
      recommending a particular security or strategy, as well as having reasonable
      grounds for believing the recommendation is suitable for the customer to whom it
      is made. Members are expected to meet the same high standards of com-
      petence, professionalism, and good faith regardless of the financial cir-
      cumstances of the customer.
506          Rule 2310(a) requires that,
507          In recommending to a customer the purchase, sale or exchange of any
             security, a member shall have reasonable grounds for believing that the
             recommendation is suitable for such customer upon the basis of the
             facts, if any, disclosed by such customer as to his other security holdings
             and as to his financial situation and needs.
508           This interpretation concerns only the manner in which a member deter-
      mines that a recommendation is suitable for a particular institutional customer.
      The manner in which a member fulfills this suitability obligation will vary depend-
      ing on the nature of the customer and the specific transaction. Accordingly, this
      interpretation deals only with guidance regarding how a member may fulfill such
                                                                      3
      “customer-specific suitability obligations” under Rule 2310(a).
509           While it is difficult to define in advance the scope of a member’s suitability
      obligation with respect to a specific institutional customer transaction recom-
      mended by a member, the Board has identified certain factors which may be
      relevant when considering compliance with Rule 2310(a). These factors are not
      intended to be requirements or the only factors to be considered but are offered
      merely as guidance in determining the scope of a member’s suitability
      obligations.


      2
           Rules for municipal securities are promulgated by the Municipal Securities Rulemaking Board.
      3
           This interpretation does not address the obligation related to suitability that requires that a member
           have “. . . a ‘reasonable basis’ to believe that the recommendation could be suitable for at least some
           customers.” In the Matter of the Application of F.J. Kaufman and Company of Virginia and Frederick J.
           Kaufman, Jr., 50 SEC 164 (1989).
      NASD [Rules 0100-3420]                                                             113


             Considerations Regarding the Scope of Members’ Obligations to
             Institutional Customers
510            The two most important considerations in determining the scope of a
      member’s suitability obligations in making recommendations to an institutional
      customer are the customer’s capability to evaluate investment risk independently
      and the extent to which the customer is exercising independent judgment in
      evaluating a member’s recommendation. A member must determine, based on
      the information available to it, the customer’s capability to evaluate investment
      risk. In some cases, the member may conclude that the customer is not capable
      of making independent investment decisions in general. In other cases, the
      institutional customer may have general capability, but may not be able to
      understand a particular type of instrument or its risk. This is more likely to arise
      with relatively new types of instruments, or those with significantly different risk or
      volatility characteristics than other investments generally made by the institution.
      If a customer is either generally not capable of evaluating investment risk or lacks
      sufficient capability to evaluate the particular product, the scope of a member’s
      customer-specific obligations under the suitability rule would not be diminished
      by the fact that the member was dealing with an institutional customer. On the
      other hand, the fact that a customer initially needed help understanding a poten-
      tial investment need not necessarily imply that the customer did not ultimately
      develop an understanding and make an independent investment decision.
511           A member may conclude that a customer is exercising independent judg-
      ment if the customer’s investment decision will be based on its own independent
      assessment of the opportunities and risks presented by a potential investment,
      market factors and other investment considerations. Where the broker-dealer has
      reasonable grounds for concluding that the institutional customer is making
      independent investment decisions and is capable of independently evaluating
      investment risk, then a member’s obligation to determine that a recommendation
                                                         4
      is suitable for a particular customer is fulfilled. Where a customer has delegated
      decision-making authority to an agent, such as an investment advisor or a bank
      trust department, this interpretation shall be applied to the agent.
512           A determination of capability to evaluate investment risk independently
      will depend on an examination of the customer’s capability to make its own
      investment decisions, including the resources available to the customer to make
      informed decisions. Relevant considerations could include: the use of one or
      more consultants, investment advisers or bank trust departments; the general
      level of experience of the institutional customer in financial markets and specific
      experience with the type of instruments under consideration; the customer’s
      ability to understand the economic features of the security involved; the
      customer’s ability to independently evaluate how market developments would
      affect the security; and the complexity of the security or securities involved.
513          A determination that a customer is making independent investment deci-
      sions will depend on the nature of the relationship that exists between the
      member and the customer. Relevant considerations could include: any written or
      oral understanding that exists between the member and the customer regarding
      the nature of the relationship between the member and the customer and the

      4
           See note 3.
      NASD [Rules 0100-3420]                                                            114


      services to be rendered by the member; the presence or absence of a pattern of
      acceptance of the member’s recommendations; the use by the customer of
      ideas, suggestions, market views and information obtained from other members
      or market professionals, particularly those relating to the same type of securities;
      and the extent to which the member has received from the customer current
      comprehensive portfolio information in connection with discussing recommended
      transactions or has not been provided important information regarding its
      portfolio or investment objectives.
514            Members are reminded that these factors are merely guidelines which will
      be utilized to determine whether a member has fulfilled its suitability obligations
      with respect to a specific institutional customer transaction and that the inclusion
      or absence of any of these factors is not dispositive of the determination of suita-
      bility. Such a determination can only be made on a case-by-case basis taking
      into consideration all the facts and circumstances of a particular member/
      customer relationship, assessed in the context of a particular transaction.
515            For purposes of this interpretation, an institutional customer shall be any
      entity other than a natural person. In determining the applicability of this interpre-
      tation to an institutional customer, the Association will consider the dollar value of
      the securities that the institutional customer has in its portfolio and/or under
      management. While this interpretation is potentially applicable to any institutional
      customer, the guidance contained herein is more appropriately applied to an
      institutional customer with at least $10 million invested in securities in the
      aggregate in its portfolio and/or under management.
      [Adopted by SR-NASD-95-39 eff. Aug. 20, 1996.]
      Selected Notices to Members: 85-26, 86-35, 86-46, 91-57, 92-17, 95-45.
      Selected SEC Decision
                     ·   Curtis I. Wilson, SEC Rel. No. 34-26425 (1989).
      2320. Best Execution and Interpositioning
516           (a) In any transaction for or with a customer, a member and persons
      associated with a member shall use reasonable diligence to ascertain the best
      inter-dealer market for the subject security and buy or sell in such market so that
      the resultant price to the customer is as favorable as possible under prevailing
      market conditions. Among the factors that will be considered in determining
      whether a member has used “reasonable diligence” are:
             (1) The character of the market for the security, e.g., price, volatility,
             relative liquidity, and pressure on available communications;
             (2) the size and type of transaction;
             (3) the number of primary markets checked;
             (4) location and accessibility to the customer’s broker/dealer of primary
             markets and quotations sources.
517           (b) In any transaction for or with a customer, no member or person
      associated with a member shall interject a third party between the member and
      the best available market except in cases where the member can demonstrate
      that to his knowledge at the time of the transaction the total cost or proceeds of
      the transaction, as confirmed to the member acting for or with the customer, was
      NASD [Rules 0100-3420]                                                           115


      better than the prevailing inter-dealer market for the security. A member’s obliga-
      tions to his customer are generally not fulfilled when he channels transactions
      through another broker/dealer or some person in a similar position, unless he can
      show that by so doing he reduced the costs of the transactions to the customer.
518          (c) When a member cannot execute directly with a market maker but
      must employ a broker’s broker or some other means in order to insure an execu-
      tion advantageous to the customer, the burden of showing the acceptable cir-
      cumstances for doing so is on the retail firm. Examples of acceptable circumstan-
      ces are where a customer’s order is “crossed” with another retail firm which has a
      corresponding order on the other side, or where the identity of the retail firm, if
      known, would likely cause undue price movements adversely affecting the cost
      or proceeds to the customer.
519           (d) Failure to maintain or adequately staff an over-the-counter order room
      or other department assigned to execute customers’ orders cannot be con-
      sidered justification for executing away from the best available market; nor can
      channeling orders through a third party as described above as reciprocation for
      service or business operate to relieve a member of his obligations. However, the
      channeling of customers’ orders through a broker’s broker or third party pursuant
      to established correspondent relationships under which executions are confirmed
      directly to the member acting as agent for the customer, such as where the third
      party gives up the name of the retail firm, are not prohibited if the cost of such
      service is not borne by the customer.
520          (e) A member through whom a retail order is channeled, as described
      above, and who knowingly is a party to an arrangement whereby the initiating
      member has not fulfilled his obligations under this Rule, will also be deemed to
      have violated this Rule.
521           (f) The obligations described in paragraphs (a) through (e) above exist not
      only where the member acts as agent for the account of his customer but also
      where retail transactions are executed as principal and contemporaneously
      offset. Such obligations do not relate to the reasonableness of commission rates,
      markups or markdowns which are governed by Rule 2440 and IM-2440.
522           (g)(1) Unless two or more priced quotations for a non-Nasdaq security (as
      defined in the Rule 6700 Series) are displayed in any inter-dealer quotation
      system that permits quotation updates on a real-time basis, in any transaction for
      or with a customer pertaining to the execution of an order in a non-Nasdaq
      security, a member or person associated with a member, shall contact and obtain
      quotations from three dealers (or all dealers if three or less) to determine the best
      inter-dealer market for the subject security.
523           (g)(2) Members that display priced quotations on a real-time basis for a
      non-Nasdaq security in tow or more quotation mediums that permit quotation
      updates on a real-time basis must display the same priced quotations for the
      security in each medium.
524           (g)(3) For purposes of this paragraph, the term “inter-dealer quotation
      system” means any system of general circulation to brokers or dealers that
      regularly disseminates quotations of identified brokers or dealers.
525         (g)(4) For purposes of this paragraph, the term “quotation medium”
      means any inter-dealer quotation system or any publication or electronic commu-
      NASD [Rules 0100-3420]                                                          116


      nications network or other device that is used by brokers or dealers to make
      known to others their interest in transactions in any security, including offers to
      buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
526           (g)(5) Pursuant to the Rule 9600 Series, the staff, for good cause shown,
      after taking into consideration all relevant factors, may exempt any transaction or
      classes of transactions, either unconditionally or on specified terms, from any or
      all of the provisions of this paragraph if it determines that such exemption is
      consistent with the purpose of this Rule, the protection of investors, and the
      public interest.
      [Interpretation adopted eff. May 1, 1968; amended by SR-NASD-97-42 eff. Oct.
      22, 1997; amended by SR-NASD-98-57 eff. March 26, 1999; amended by SR-
      NASD-00-20 eff. Nov. 24, 2000.]
      Selected Notices to Members; 99-16, 00-78.

      2330. Customers’ Securities or Funds
             (a)     Improper Use
527          No member or person associated with a member shall make improper
      use of a customer’s securities or funds.
             (b)     General Provisions
528           Every member in the conduct of its business shall adhere to the provi-
      sions of SEC Rule 15c3-3 under the Act with respect to obtaining possession and
      control of securities, and the maintenance of appropriate cash reserves. For the
      purposes of this Rule, the definitions contained in Rule 15c3-3 shall apply.
             (c)     Authorization to Lend
529           No member shall lend, either to himself or to others, securities carried for
      the account of any customer, which are eligible to be pledged or loaned unless
      such member shall first have obtained from the customer a written authorization
      permitting the lending of securities thus carried by such member.
             (d)     Segregation and Identification of Securities
530           No member shall hold securities carried for the account of any customer
      which have been fully paid for or which are excess margin securities unless such
      securities are segregated and identified by a method which clearly indicates the
      interest of such customer in those securities.
             Cross Reference — “Hypothecation of Customers’ Securities” See SEC
             Rules and Regulation T Tab
             (e)     Prohibition Against Guarantees
531         No member or person associated with a member shall guarantee a cus-
      tomer against loss in any securities account of such customer carried by the
      member or in any securities transaction effected by the member with or for such
      customer.
             (f)     Sharing in Accounts; Extent Permissible
532          (1)(A) Except as provided in paragraph (f)(2) no member or person
      associated with a member shall share directly or indirectly in the profits or losses
      NASD [Rules 0100-3420]                                                                              117


      in any account of a customer carried by the member or any other member;
      provided, however, that a member or person associated with a member may
      share in the profits or losses in such an account if (i) such member or person
      associated with a member obtains prior written authorization from the member
      carrying the account; and (ii) the member or person associated with a member
      shall share in the profits or losses in any account of such customer only in direct
      proportion to the financial contributions made to such account by either the
      member or person associated with a member.
533           (1)(B) Exempt from the direct proportionate share limitation of paragraph
      (f)(1)(A)(ii) are accounts of the immediate family of such member or person
      associated with a member. For purposes of this Rule, the term “immediate
      family” shall include parents, mother-in-law or father-in-law, husband or wife,
      children or any relative to whose support the member or person associated with
      a member otherwise contributes directly or indirectly.
534            (2) Notwithstanding the prohibition of paragraph (f)(1), a member or
      person associated with a member may receive compensation based on a share
                                                                                        5
      in profits or gains in an account if all of the following conditions are satisfied :
             (A) The member or person associated with a member seeking such
             compensation obtains prior written authorization from the member
             carrying the account;
             (B) The customer has at the time the account is opened either a net worth
             which the member or person associated with a member reasonably
             believes to be not less than $1,000,000, or the minimum amount invested
             in the account is not less than $500,000;
             (C) The member or person associated with a member reasonably
             believes the customer is able to understand the proposed method of
             compensation and its risks prior to entering into the arrangement;
             (D) The compensation arrangement is set forth in a written agreement
             executed by the customer and the member;
             (E) The member or person associated with a member reasonably
             believes, immediately prior to entering into the arrangement, that the
             agreement represents an arm’s-length arrangement between the parties;
             (F) The compensation formula takes into account both gains and losses
             realized or accrued in the account over a period of at least one year; and
             (G) The member has disclosed to the customer all material information
             relating to the arrangement including the method of compensation and
             potential conflicts of interest which may result from the compensation
             formula.

      5
           It is the position of the Division of Investment Management of the Commission that compensation
           received by a member or person associated with a member under this Rule would constitute “special
           compensation” for purposes of the exception to the definition of “investment advisor” in Section
           202(a)(11)(C) of the Investment Advisers Act of 1940 (Advisers Act). Any member or person
           associated with a member, required to be registered under the Advisers Act, or state law, who
           receives compensation based on a share of profits or capital appreciation of a customer’s account
           must comply with Section 205(l) and Rule 205-3 under the Advisers Act, or applicable state law, with
           respect to such compensation. (SEC Release 34-24355. 52 Fed. Reg. 13778, April 24, 1987).
      NASD [Rules 0100-3420]                                                          118


      [Amended eff. Feb. 7, 1985.]
      Selected Notices to Members: 83-74, 86-74, 88-55, 94-93.
      Selected SEC Decisions
                    ·   Walter C. Nathan, SEC Rel. No. 34-24569 (1987). Curtis I.
                        Wilson, SEC Rel. No. 34-26425 (1989).
      IM-2330. Segregation of Customers’ Securities
535          (a) Rule 2330(d) requires members to segregate and identify by
      customers both fully paid and “excess margin” securities. With regard to a
      customer’s account which contains only stocks, it is general practice for firms to
      segregate that portion of the stocks having a market value in excess of 140% of
      the debit balance therein. When a customer’s account contains bonds, the basis
      upon which the member is borrowing or can borrow on such bonds should be
      taken into consideration in determining the amount of securities to be
      segregated.
536           (b) Following are three general types of segregation of customers’ securi-
      ties currently in use by many firms:
             (1) Physical segregation of securities by issue, with a separate list
             showing ownership of the securities by each customer. The listing, on
             cards or other records, should reflect all changes in ownership interest.
             This method is for securities in street name (not in individual customers’
             names), but the proportionate interests of the individual customers are
             indicated by the records.
             (2) Physical segregation of securities by issue, affixing to each certificate
             a tab or other identification showing the name of the beneficial owner of
             the certificate. This may be used for shares in street name or in the
             customer’s name.
             (3) Specific segregation of all certificates of each customer in separate
             envelopes or folders, identified by customer, or by clipping the certificates
             together and identifying the customer by tab or other notation affixed to
             the segregated certificates.
537          (c) In the methods enumerated in paragraph (b), the records should note
      the dates when the securities are segregated. When such securities are not in
      the actual custody of the member, for instance, when they are in the physical
      possession of a correspondent firm, their location and the means by which they
      may be identified as belonging to each customer should be indicated on the
      books of the member carrying the customers’ accounts.

      2340. Customer Account Statements
             (a)     General
538            Each general securities member shall, with a frequency of not less than
      once every calendar quarter, send a statement of account (“account statement”)
      containing a description of any securities positions, money balances, or account
      activity to each customer whose account had a security position, money balance,
      or account activity during the period since the last such statement was sent to the
      customer.
      NASD [Rules 0100-3420]                                                            119


             (b)     DPP/REIT Securities
539           (1)(A) Voluntary Estimated Value — A general securities member may
      provide a per share estimated value for a direct participation program (“DPP”) or
      real estate investment trust (“REIT”) security on an account statement, provided
      the member meets the conditions of paragraphs (b)(2) and (3) below.
540           (1)(B) Mandatory Estimated Value — If the annual report of a DPP or
      REIT includes a per share estimated value for a DPP or REIT security that is
      held in the customer’s account or included on the customer’s account statement,
      a general securities member must include an estimated value from the annual
      report, an independent valuation service, or any other source, in the first account
      statement issued by the member thereafter, provided that the member meets the
      conditions of paragraphs (b)(2) and (3) below.
541           (2) A member may only provide a per share estimated value for a DPP or
      REIT security on an account statement if the estimated value has been
      developed from data that is as of a date no more than 18 months prior to the date
      that the statement is issued.
542         (3) If an account statement provides an estimated value for a DPP or
      REIT security, it must include:
             (A) a brief description of the estimated value, its source, and the method
             by which it was developed; and
             (B) disclosure that DPP or REIT securities are generally illiquid, and that
             the estimated value may not be realized when the investor seeks to
             liquidate the security.
543           (4) Notwithstanding the requirement in paragraph (b)(1)(B), a member
      must refrain from including a per share estimated value for a DPP or REIT
      security on an account statement if the member can demonstrate the value was
      inaccurate as of the date of the valuation or is no longer accurate as a result of a
      material change in the operations or assets of the program or trust.
544         (5) If an account statement does not provide an estimated value for a
      DPP or REIT security, it must include disclosure that:
             (A) DPP or REIT securities are generally illiquid;
             (B) the value of the security will be different than its purchase price; and
             (C) if applicable, that accurate valuation information is not available.
             (c)     Definitions
545         For purposes of this Rule, the following terms will have the stated
      meanings:
546           (1) “account activity” shall include, but not be limited to, purchases, sales,
      interest credits or debits, charges or credits, dividend payments, transfer activity,
      securities receipts or deliveries, and/or journal entries relating to securities or
      funds in the possession or control of the member.
547         (2) a “general securities member” shall refer to any member which
      conducts a general securities business and is required to calculate its net capital
      pursuant to the provisions of SEC Rule 15c3-1(a), except for paragraphs (a)(2)
      NASD [Rules 0100-3420]                                                           120


      and (a)(3). Notwithstanding the foregoing definition, a member which does not
      carry customer accounts and does not hold customer funds and securities is
      exempt from the provisions of this section.
548           (3) “direct participation program” or “direct participation program security”
      refers to the publicly issued equity securities of a direct participation program as
      defined in Rule 2810 (including limited liability companies), but does not include
      securities on deposit in a registered securities depository and settled regular
      way, securities listed on a national securities exchange or The Nasdaq Stock
      Market, or any program registered as a commodity pool with the Commodities
      Futures Trading Commission.
549           (4) “real estate investment trust” or “real estate investment trust security”
      refers to the publicly issued equity securities of a real estate investment trust as
      defined in Section 856 of the Internal Revenue Code, but does not include secu-
      rities on deposit in a registered securities depository and settled regular way or
      securities listed on a national securities exchange or The Nasdaq Stock Market.
550          (5) “annual report” means the most recent annual report of the DPP or
      REIT distributed to investors pursuant Section 13(a) of the Act.
             (d)      Exemptions
551        Pursuant to the Rule 9600 Series, the Association may exempt any
      member from the provisions of this Rule for good cause shown.
      [Adopted eff. Jan. 31, 1993; amended by SR-NASD-97-28 eff: 8/7/97; amended
      by SR-NASD-00-13 eff. April 16, 2001.]
      Selected Notices to Members: 92-60, 93-50, 94-96.

      2350. Broker/Dealer Conduct on the Premises of Financial Institutions
             (a)     Applicability
552          This section shall apply exclusively to those broker/dealer services
      conducted by members on the premises of a financial institution where retail
      deposits are taken. This section does not alter or abrogate members’ obligations
      to comply with other applicable NASD rules, regulations, and requirements, nor
      those of other regulatory authorities that may govern members operating on the
      premises of financial institutions.
             (b)     Definitions
553           (1) For purposes of this section, the term “financial institution” shall mean
      federal and state-chartered banks, savings and loan associations, savings banks,
      credit unions, and the service corporations of such institutions required by law.
554            (2) “Networking arrangement” and “brokerage affiliate arrangement” shall
      mean a contractual or other arrangement between a member and a financial
      institution pursuant to which the member conducts broker/dealer services for
      customers of the financial institution and the general public on the premises of
      such financial institution where retail deposits are taken.
555          (3) “Affiliate” shall mean a company that controls, is controlled by, or is
      under common control with, a member as defined in Rule 2720.
      NASD [Rules 0100-3420]                                                            121


556           (4) “Broker/Dealer services” shall mean the investment banking or
      securities business as defined in paragraph (p) of Article I of the By-Laws.
             (c)     Standards for Member Conduct
557             No member shall conduct broker/dealer services on the premises of a
      financial institution where retail deposits are taken unless the member complies
      initially and continuously with the following requirements:
               (1) Setting
558            Wherever practical, the member’s broker/dealer services shall be con-
      ducted in a physical location distinct from the area in which the financial
      institution’s retail deposits are taken. In all situations, members shall identify the
      member’s broker/dealer services in a manner that is clearly distinguished from
      the financial institution’s retail deposit-taking activities. The member’s name shall
      be clearly displayed in the area in which the member conducts its broker/dealer
      services.
             (2) Networking and Brokerage Affiliate Agreements
559          Networking and brokerage affiliate arrangements between a member and
      a financial institution must be governed by a written agreement that sets forth the
      responsibilities of the parties and the compensation arrangements. The member
      must ensure that the agreement stipulates that supervisory personnel of the
      member and representatives of the Securities and Exchange Commission and
      the Association will be permitted access to the financial institution’s premises
      where the member conducts broker/dealer services in order to inspect the books
      and records and other relevant information maintained by the member with
      respect to its broker/dealer services.
             (3) Customer Disclosure and Written Acknowledgment
560          At or prior to the time that a customer account is opened by a member on
      the premises of a financial institution where retail deposits are taken, the member
      shall:
561           (A) disclose, orally and in writing, that the securities products purchased
      or sold in a transaction with the member:
             (i) are not insured by the Federal Deposit Insurance Corporation (“FDIC”);
             (ii) are not deposits or other obligations of the financial institution and are
             not guaranteed by the financial institution; and
             (iii) are subject to investment risks, including possible loss of the principal
             invested; and
562          (B) make reasonable efforts to obtain from each customer during the
      account opening process a written acknowledgment of receipt of the disclosures
      required by paragraph (c)(3)(A).
              (4) Communications with the Public
563           (A) All member confirmations and account statements must indicate
      clearly that the broker/dealer services are provided by the member.
564           (B) Advertisements and sales literature that announce the location of a
      financial institution where broker/dealer services are provided by the member or
      that are distributed by the member on the premises of a financial institution must
      disclose that securities products are not insured by the FDIC; are not deposits or
      NASD [Rules 0100-3420]                                                            122


      other obligations of the financial institution and are not guaranteed by the
      financial institution; and are subject to investment risks, including possible loss of
      the principal invested. The shorter, logo format described in paragraph (c)(4)(C)
      may be used to provide these disclosures.
565          (C) The following shorter, logo format disclosures may be used by
      members in advertisements and sales literature, including material published, or
      designed for use, in radio or television broadcasts, Automated Teller Machine
      (“ATM”) screens, billboards, signs, posters, and brochures, to comply with the
      requirements of paragraph (c)(4)(B), provided that such disclosures are
      displayed in a conspicuous manner: Not FDIC Insured, No Bank Guarantee, May
      Lose Value
566             (D) As long as the omission of the disclosures required by paragraph
      (c)(4)(B) would not cause the advertisement or sales literature to be misleading
      in light of the context in which the material is presented, such disclosures are not
      required with respect to messages contained in: radio broadcasts of 30 seconds
      or less; electronic signs, including billboard-type signs that are electronic, time,
      and temperature signs and ticker tape signs, but excluding messages contained
      in such media as television, on-line computer services, or ATMs; and signs, such
      as banners and posters, when used only as location indicators.
             (5) Notifications of Terminations
567          The member must promptly notify the financial institution if any
      associated person of the member who is employed by the financial institution is
      terminated for cause by the member.
      [Adopted by SR-NASD-95-63 eff. Feb. 15, 1998.]

      2360. Approval Procedures for Day-Trading Accounts
568           (a) No member that is promoting a day-trading strategy, directly or
      indirectly, shall open an account for or on behalf of a non-institutional customer,
      unless, prior to opening the account, the member has furnished to the customer
      the risk disclosure statement set forth in Rule 2361 and has:
             (1) approved the customer’s account for a day-trading strategy in
             accordance with the procedures set forth in paragraph (b) and prepared a
             record setting forth the basis on which the member has approved the
             customer’s account; or
             (2) received from the customer a written agreement that the customer
             does not intend to use the account for the purpose of engaging in a day-
             trading strategy, except that the member may not rely on such agreement
             if the member knows that the customer intends to use the account for the
             purpose of engaging in a day-trading strategy.
569          (b) In order to approve a customer’s account for a day-trading strategy, a
      member shall have reasonable grounds for believing that the day-trading strategy
      is appropriate for the customer. In making this determination, the member shall
      exercise reasonable diligence to ascertain the essential facts relative to the
      customer, including:
             (1) Investment objectives;
      NASD [Rules 0100-3420]                                                          123


             (2) Investment and trading experience and knowledge (e.g., number of
             years, size, frequency of transactions);
             (3) Financial situation, including: estimated annual income from all
             sources, estimated net worth (exclusive of family residence), and
             estimated liquid net worth (cash, securities, other);
             (4) Tax status;
             (5) Employment status (name of employer, self-employed or retired);
             (6) Marital status and number of dependants; and
             (7) Age.
570          (c) If a member that is promoting a day-trading strategy opens an account
      for a non-institutional customer in reliance on a written agreement from the
      customer pursuant to paragraph (a)(2) and, following the opening of the account,
      knows that the customer is using the account for a day-trading strategy, then the
      member shall be required to approve the customer’s account for a day-trading
      strategy in accordance with paragraph (a)(1) as soon as practicable, but in no
      event later than 10 days following that date that such member knows that the
      customer is using the account for such a strategy.
571         (d) Any record or written statement prepared or obtained by a member
      pursuant to this rule shall be preserved in accordance with Rule 3110(a).
572           (e) For purposes of this rule, the term “day-trading strategy” means an
      overall trading characterized by the regular transmission by a customer of intra-
      day orders to effect both purchase and sale transactions in the same day security
      or securities.
573          (f) For purposes of this rule, the term “non-institutional customer” means a
      customer that does not qualify as an “institutional account” under Rule
      3110(c)(4).
574         (g) A firm will not be deemed to be “promoting a day-trading strategy” for
      purposes of this rule solely by its engaging in the following activities:
             (1) Promoting efficient execution services or lower execution costs based
             on multiple trades;
             (2) Providing general investment research or advertising the high quality
             or prompt availability of such general research; and
             (3) Having a Web site that provides general financial information or news
             or that allows the multiple entry of intra-day purchases and sales of the
             same securities.
      [Adopted by SR-NASD-99-41 eff. Oct. 16, 2000.]
      Selected Notices To Members: 00-62.
      2361. Day-Trading Risk Disclosure Statement
575           (a) Except as provided in paragraph (b), no member that is promoting a
      day-trading strategy, directly or indirectly, shall open an account for or on behalf
      of a non-institutional customer unless, prior to opening the account, the member
      has furnished to each customer, individually, in writing or electronically, the
      following disclosure statement:
NASD [Rules 0100-3420]                                                            124


      ·   You should consider the following points before engaging in a day-
          trading strategy. For purposes of this notice, a “day-trading strategy”
          means an overall trading strategy characterized by the regular
          transmission by a customer of intra-day orders to effect both purchase
          and sale transactions in the same security or securities.
      ·   Day trading can be extremely risky. Day trading generally is not
          appropriate for someone of limited resources and limited investment
          or trading experience and low risk tolerance. You should be prepared
          to lose all of the funds that you use for day trading. In particular, you
          should not fund day-trading activities with retirement savings, student
          loans, second mortgages, emergency funds, funds set aside for
          purposes such as education or home ownership, or funds required to
          meet your living expenses. Further, certain evidence indicates that an
          investment of less than $50,000 will significantly impair the ability of a
          day trader to make a profit. Of course, an investment of $50,000 or
          more will in no way guarantee success.
      ·   Be cautious of claims of large profits from day trading. You should be
          wary of advertisements or other statements that emphasize the
          potential for large profits in day trading. Day trading can also lead to
          large and immediate financial losses.
      ·   Day trading requires knowledge of securities markets. Day trading
          requires in-depth knowledge of the securities markets and trading
          techniques and strategies. In attempting to profit through day trading,
          you must compete with professional, licensed traders employed by
          securities firms. You should have appropriate experience before
          engaging in day trading.
      ·   Day trading requires knowledge of a firm’s operations. You should be
          familiar with a securities firm’s business practices, including the
          operation of the firm’s order execution systems and procedures.
          Under certain market conditions, you may find it difficult or impossible
          to liquidate a position quickly at a reasonable price. This can occur, for
          example, when the market for a stock suddenly drops, or if trading is
          halted due to recent news events or unusual trading activity. The more
          volatile a stock is, the greater the likelihood that problems may be
          encountered in executing a transaction. In addition to normal market
          risks, you may experience losses due to systems failures.
      ·   Day trading will generate substantial commissions, even if the per
          trade cost is low. Day trading involves aggressive trading, and
          generally you will pay commission on each trade. The total daily
          commissions that you pay on your trades will add to your losses or
          significantly reduce your earnings. For instance, assuming that a trade
          costs $16 and an average of 29 transactions are conducted per day,
          an investor would need to generate an annual profit of $111,360 just
          to cover commission expenses.
      ·   Day trading on margin or short selling may result in losses beyond
          your initial investment. When you day trade with funds borrowed from
          a firm or someone else, you can lose more than the funds you
          originally placed at risk. A decline in the value of the securities that are
      NASD [Rules 0100-3420]                                                           125


                 purchased may require you to provide additional funds to the firm to
                 avoid the forced sale of those securities or other securities in your
                 account. Short selling as part of your day-trading strategy also may
                 lead to extraordinary losses, because you may have to purchase a
                 stock at a very high price in order to cover a short position.
             ·   Potential Registration Requirements. Persons providing investment
                 advice for others or managing securities accounts for others may
                 need to register as either an “Investment Advisor” under the Invest-
                 ment Advisors Act of 1940 or as a “Broker” or “Dealer” under the
                 Securities Exchange Act of 1934. Such activities may also trigger
                 state registration requirements.
576           (b) In lieu of providing the disclosure statement specified in paragraph (a),
      a member that is promoting a day-trading strategy may provide to the customer,
      individually, in writing or electronically, prior to opening the account, an alter-
      native disclosure statement, provided that:
             (1) The alternative disclosure statement shall be substantially similar to
             the disclosure statement specified in paragraph (a); and
             (2) The alternative disclosure statement shall be filed with the Associa-
             tion’s Advertising Department (Department) for review at least 10 days
             prior to use (or such shorter period as the Department may allow in
             particular circumstances) for approval and, if changes are recommended
             by the Association, shall be withheld from use until any changes specified
             by the Association have been made or, if expressly disapproved, until the
             alternative disclosure statement has been re-filed for, and has received,
             Association approval. The member must provide with each filing the
             anticipated date of first use.
577         (c) For purposes of this rule, the term “day-trading strategy” shall have the
      meaning provided in Rule 2360(e).
578          (d) For purpose of this Rule, the term “non-institutional customer” means
      a customer that does not qualify as an “institutional account” under Rule
      3110(c)(4).
      [Adopted by SR-NASD-95-41 eff. Oct. 16, 2000.]
      Selected Notices to Members: 00-62.

      2400. COMMISSIONS, MARK-UPS AND CHARGES

      2410. Net Prices to Persons Not in Investment Banking or Securities
            Business
579           No member shall offer any security or confirm any purchase or sale of
      any security, from or to any person not actually engaged in the investment
      banking or securities business at any price which shows a concession, discount,
      or other allowance, but shall offer such security and confirm such purchase or
      sale at a net dollar or basis price.
             Cross Reference — IM-2420-1, Transactions Between Members and
             Non-Members
      NASD [Rules 0100-3420]                                                          126


      2420. Dealing with Non-Members
580           (a) No member shall deal with any non-member broker or dealer except
      at the same prices, for the same commissions or fees, and on the same terms
      and conditions as are by such member accorded to the general public.
581          (b) Without limiting the generality of the foregoing, no member shall:
             (1) in any transaction with any non-member broker or dealer, allow or
             grant to such non-member broker or dealer any selling concession,
             discount or other allowance allowed by such member to a member of a
             registered securities association and not allowed to a member of the
             general public;
             (2) join with any non-member broker or dealer in any syndicate or group
             contemplating the distribution to the public of any issue of securities or
             any part thereof; or
             (3) sell any security to or buy any security from any non-member broker
             or dealer except at the same price at which at the time of such transaction
             such member would buy or sell such security, as the case may be, from
             or to a person who is a member of the general public not engaged in the
             investment banking or securities business.
582           (c) Transaction with Foreign Non-Members — The provisions of para-
      graphs (a) and (b) of this Rule shall not apply to any non-member broker or
      dealer in a foreign country who is not eligible for membership in a registered
      securities association, but in any transaction with any such foreign non-member
      broker or dealer, where a selling concession, discount, or other allowance is
      allowed, a member shall as a condition of such transaction secure from such
      foreign broker or dealer an agreement that, in making any sales to purchasers
      within the United States of securities acquired as a result of such transactions, he
      will conform to the provisions of paragraphs (a) and (b) of this Rule to the same
      extent as though he were a member of the Association.
583           (d) “Non-Member Broker or Dealer” — For the purpose of this Rule, the
      term “non-member broker or dealer” shall include any broker or dealer who
      makes use of the mails or of any means or instrumentality of interstate
      commerce to effect any transaction in, or to induce the purchase or sale of, any
      security, otherwise than on a national securities exchange, who is not a member
      of any securities association registered with the Commission pursuant to Section
      15A of the Act, except a broker or dealer who deals exclusively in commercial
      paper, bankers’ acceptances or commercial bills.
584           (e) Nothing in this Rule shall be so construed or applied as to prevent any
      member of the Association from granting to any other member of any registered
      securities association any dealer’s discount, allowance, commission, or special
      terms.
      NASD [Rules 0100-3420]                                                                             127


      IM-2420-1. Transactions Between Members and Non-Members6
             (a)       Non-members of the Association
585           (1) “Member” — Rule 0120(i) defines a “member” as any individual, part-
      nership, corporation or other legal entity admitted to membership in the Asso-
      ciation. All other persons, firms or corporations, whether or not they are brokers
      or dealers, are therefore to be regarded as non-members of the Association.
586           (2) Expelled Dealer — A dealer who has been expelled from the Asso-
      ciation by order either of the Commission or the Association becomes a non-
      member of the Association from the effective date of such order.
587           (3) Suspended Dealer — A dealer who has been suspended from mem-
      bership in the Association by order either of the Commission or the Association is
      to be treated as a non-member of the Association from the effective date of such
      order and during the period of such suspension. At the termination of the
      suspension period, such dealer is automatically reinstated to membership in the
      Association.
588           (4) Broker or Dealer Registration Revoked by SEC — Revocation by the
      Commission of an Association member’s registration as a broker or dealer auto-
      matically terminates the membership of such broker or dealer in the Association
      as of the effective date of such order. Under Article III, Section 4 of the By-Laws
      of the Corporation, a firm whose registration as a broker or dealer is revoked is
      thereby disqualified for membership in the Association, and from the effective
      date of such order, the membership of such broker or dealer in the Association is
      discontinued. Thereafter such broker or dealer is a non-member of the
      Association.
589           (5) Membership Resigned or Canceled — The membership of a broker or
      dealer in the Association is automatically terminated when the Association
      accepts the resignation of such member or cancels its membership in the
      Association under the provisions of Article III, Section 3; Article IV, Section 5; or
      Article XIII, Section 1, of the By-Laws. After the date of acceptance by the
      Association of the resignation of such member or the date of cancellation of
      membership by the Association, such broker or dealer is a non-member of the
      Association.
             (b)       Transactions in “Exempted Securities”
590           Rule 2420 shall not apply to “exempted securities,” which are defined by
      Section 3(a)(12) of the Act. The Rule therefore does not apply to transactions in
      government or municipal securities if within the definition of “exempted securi-
      ties.” Members may join with non-members or with banks in a joint account,
      syndicate or group to purchase and distribute an issue of “exempted securities”
      and may trade such securities with non-members or with banks at different prices
      6
           The reader should be aware of the decision of the Commission in what is commonly called the Aetna
           proceeding partially abrogating former Article III, Section 25, Securities Exchange Act Release No.
           9632 (June 7, 1972), as well as the Commission’s decision in the Plaza Securities Corporation case,
           Securities Exchange Act Release No. 10643 (February 14, 1974) setting aside Association
           disciplinary action under former Section 25. The Commission’s order in the first case reads, in
           pertinent part, that Section 25 is partially abrogated” … to the extent that it permits or has been
           construed to permit the Association to bar a member’s receipt of commissions, concessions,
           discounts, or other allowances from non-member brokers or dealers….”
      NASD [Rules 0100-3420]                                                         128


      or on different terms and conditions than are accorded to members of the general
      public.
             (c)     Transactions on an Exchange
591           (1) An Association member may pay a commission to a member of a
      national securities exchange for executing an order upon an exchange even
      though the exchange member is not a member of the Association. Rule 2420
      does not apply to transactions upon an exchange and, therefore, does not
      prohibit such transactions.
592            (2) Where an Association member is also a member of an exchange, an
      order of the Commission or of the Association expelling or suspending the firm
      from membership in the Association will not directly affect the business of the
      firm as a member of an exchange because Rule 2420 does not apply to tran-
      sactions on the floor of an exchange. While an order of suspension or expulsion
      is in effect, the firm may continue to conduct its normal business on an exchange
      and participate in special offerings on an exchange without involving any violation
      by an Association member of Rule 2420.
             (d)     Over-the-Counter Transactions        in   Securities   Other   than
                     “Exempted Securities”
               (1) Participation in Underwriting or Selling Groups
593            An Association member may not enter into a joint account, underwriting
      or selling group, or join a syndicate or group, with any non-member broker or
      dealer or with a member of a national securities exchange, who is not also a
      member of the Association, for the purpose of acquiring and distributing an issue
      of securities. Rule 2420, paragraphs (a) and (b) would be applicable and such
      exchange member would be a “non-member broker or dealer” within the
      definition of paragraph (d) of that Rule.
              (2) Sale to Bank or Trust Company
594           An Association member, participating in the distribution of an issue of
      securities as an underwriter or in a selling group, may not allow any selling
      concession, discount or other allowance in connection with the sale of such
      securities to any bank or trust company. Under Article I, paragraphs (e) and (h),
      of the By-Laws a bank or trust company is excluded from the definition of a
      broker or dealer and therefore may not receive selling concessions, discounts or
      other allowances from an Association member under Rule 2740.
              (3) Suspended or Expelled Dealer-Group Contemplating Distribution
595           An Association member may not join any underwriting or selling group
      with a dealer who has been and is suspended from membership in the
      Association by order of the Commission or of the Association if at the time such
      group was organized, it was contemplating the distribution of an issue of
      securities to the public. A dealer who has been suspended from membership in
      the Association is to be treated as a non-member during the suspension period
      and Rule 2420(b)(2) prohibits members from joining with non-members in a
      group “contemplating the distribution to the public of any issue of securities.”
      Even though the suspension period had terminated before the time when the
      securities were to be distributed, the Rule prohibits a member from joining with a
      non-member in a group which is contemplating the distribution of an issue of
      securities at a future time.
      NASD [Rules 0100-3420]                                                           129


              (4) Dealer Suspended or Expelled After Underwriting Group Formed
596           Where a dealer is suspended or expelled from membership in the
      Association by an order of the Commission or of the Association which became
      effective after such dealer had joined an underwriting group under which each
      underwriter had severally purchased securities from the issuer, such dealer could
      thereafter during the period of suspension or expulsion accept delivery from the
      issuer of the securities which it had underwritten prior to the effective date of
      such order and pay to the issuer its commitment therefor without involving any
      violation of the Rules by members. After the effective date of such order and
      during the period of suspension or expulsion, Association members could only
      buy the securities from or sell the securities to the dealer, who was suspended or
      expelled, at the public offering price, regardless of whether the Association
      members were also members of the underwriting or selling group for the particu-
      lar issue. Rule 2420 prohibits an Association member from dealing with any non-
      member broker or dealer except at the same prices, for the same commissions
      or fees, and on the same terms and conditions as the member would deal with a
      member of the general public at the same time. Delivery of the securities by the
      issuer to the particular dealer suspended or expelled and payment therefor by
      such dealer would not involve a violation of Rule 2420 in this situation.
              (5) Dealer Suspended or Expelled After Selling Group Formed
597           Where a dealer is suspended or expelled from the Association by an
      order of the Commission or of the Association which became effective after such
      dealer had joined a selling group, members of the Association, including the
      underwriters and other selling group members, would be prohibited by Rule 2420
      from selling the securities to, or buying the securities from, such dealer at any
      price different from the public offering price. Members would not violate Rule
      2420 by accepting from such dealer, during the period such order of suspension
      or expulsion was in effect, payment of the full public offering price for the securi-
      ties allotted to such dealer. After the effective date of such order, Rule 2420
      prohibits Association members from granting or allowing to the dealer suspended
      or expelled any selling concession, discount or other allowance for the securities
      distributed by such dealer. While such order is in effect, Association members
      could only deal with such dealer at the same prices, for the same commissions,
      fees, concessions, discounts or other allowances as the Association members
      would deal at the time of the transaction with a member of the general public.
             (6) Commissions in Over-the-Counter Transactions with Non-Members
598          An Association member may not pay a commission to any non-member
      broker or dealer for executing a brokerage order for the Association member in
      the over-the-counter market. Rule 2420 requires an Association member to deal
      with non-members only on the same terms and conditions as are accorded by
      such Association member to members of the general public. On the other hand,
      Rule 2420 does not prohibit an Association member from executing over-the-
      counter an order for a non-member and charging such non-member a commis-
      sion therefore. Rule 2420 merely requires that in transactions with a non-
      member, such non-member must be dealt with at the same prices, for the same
      commissions or fees and on the same terms and conditions as are by such
      member accorded to the general public.
             (7) Members of a National Securities Exchange
599          In over-the-counter transactions in either listed or unlisted securities an
      NASD [Rules 0100-3420]                                                         130


      Association member may not buy from or sell to a member of a national
      securities exchange who is not also a member of the Association at different
      prices or on different terms or conditions that are accorded by such Association
      member to members of the general public. Such exchange member, with respect
      to such over-the-counter transactions, comes within the definition of a “non-
      member broker or dealer” in Rule 2420(d), and Rule 2420 is therefore applicable.
      For the same reason an Association member may not pay a commission to an
      exchange member, who is not also a member of the Association, for executing a
      brokerage order over-the-counter.
600           When a dealer has been and is suspended or expelled from membership
      in the Association by order of the Commission or of the Association, under Rule
      2420, during the period of such suspension or expulsion, an Association member
      may only deal with such dealer at the same prices, for the same commissions,
      fees, concessions, discounts or other allowances as the Association member
      would deal at the time of the transaction with a member of the general public.
             (8) Investment Advisory Fee
601          When an Association member has rendered an investment advisory
      service for a fee to other members and thereafter is suspended or expelled from
      membership in the Association by order of the Commission or of the Association,
      another Association member may continue to pay the fee to such investment
      adviser provided that over-the-counter transactions in securities with such invest-
      ment adviser are made only at the same price and on the same terms as the
      member would deal with the public and the fee for acting as investment adviser is
      not used as a method of avoiding the provisions of Rule 2420.
      [Amended by SR-NASD-95-39 eff. Aug. 30, 1996; amended by SR-NASD-98-86
      eff. Nov. 19, 1998.]
      IM-2420-2. Continuing Commissions Policy
602          The Board of Governors has held that the payment of continuing commis-
      sions in connection with the sale of securities is not improper so long as the
      person receiving the commissions remains a registered representative of a
      member of the Association.
603          However, payment of compensation to registered representatives after
      they cease to be employed by a member of the Association—or payment to their
      widows or other beneficiaries—will not be deemed in violation of Association
      Rules, provided bona fide contracts call for such payment.
604          Also, a dealer-member may enter into a bona fide contract with another
      dealer-member to take over and service his accounts and, after he ceases to be
      a member, to pay to him or to his widow or other beneficiary continuing commis-
      sions generated on such accounts.
605          An arrangement for the payment of continuing commissions shall not
      under any circumstances be deemed to permit the solicitation of new business or
      the opening of new accounts by persons who are not registered. Any arrange-
      ment for payment of continuing commissions must, of course, conform with any
      applicable laws or regulations.
606         This policy recognizes the validity of contracts entered into in good faith
      between employers and employees at the time the employees are registered
      NASD [Rules 0100-3420]                                                             131


      representatives of the employing members. Such a contract may vest in an
      employee the right to receive continuing compensation on business done in the
      event the employee retires and the right to designate such payments to his
      widow or other beneficiary.
607            It is not to be implied that the Board suggests that members must enter
      into contracts with registered representatives for continuing compensation. Nor
      will the Board specify or rule on the terms of such contracts.
608           The Board has also considered the question as to whether Rule 2830(c)
      requires that a sales agreement be in effect in order for a dealer-member to
      receive continuing commissions. The Board has concluded that the sales agree-
      ment requirement is intended to apply to new business, such as the sale of a
      new plan or a “wire order.” It is not intended that a sales agreement be required
      in order for a dealer to receive commissions on direct payments by existing
      clients to the fund or its agent, or on automatic dividend reinvestments. (See
      Notice to Members 74-33, Aug. 9, 1974).
609           Under no circumstances shall payment of any kind be made by a member
      to any person who is not eligible for membership in the Association or eligible to
      be associated with a member because of any disqualification, as set forth in
      Article II I of the Association’s By-Laws, such as revocation, expulsion, or
      suspension still in effect.
      [Amended by SR-NASD-98-86 eff. Nov. 19, 1998.]

      2430. Charges for Services Performed
610          Charges, if any, for services performed, including miscellaneous services
      such as collection of moneys due for principal, dividends, or interest; exchange
      or transfer of securities; appraisals, safe-keeping or custody of securities, and
      other services, shall be reasonable and not unfairly discriminatory between
      customers.

      2440. Fair Prices and Commissions
611             In “over-the-counter” transactions, whether in “listed” or “unlisted” securi-
      ties, if a member buys for his own account from his customer, or sells for his own
      account to his customer, he shall buy or sell at a price which is fair, taking into
      consideration all relevant circumstances, including market conditions with respect
      to such security at the time of the transaction, the expense involved, and the fact
      that he is entitled to a profit; and if he acts as agent for his customer in any such
      transaction, he shall not charge his customer more than a fair commission or
      service charge, taking into consideration all relevant circumstances, including
      market conditions with respect to such security at the time of the transaction, the
      expense of executing the order and the value of any service he may have
      rendered by reason of his experience in and knowledge of such security and the
      market therefor.
      IM-2440. Mark-Up Policy
612          The question of fair mark-ups or spreads is one which has been raised
      from the earliest days of the Association. No definitive answer can be given and
      no interpretation can be all-inclusive for the obvious reason that what might be
      considered fair in one transaction could be unfair in another transaction because
      NASD [Rules 0100-3420]                                                        132


      of different circumstances. In 1943, the Association’s Board adopted what has
      become known as the “5% Policy” to be applied to transactions executed for
      customers. It was based upon studies demonstrating that the large majority of
      customer transactions were effected at a mark-up of 5% or less. The Policy has
      been reviewed by the Board of Governors on numerous occasions and each time
      the Board has reaffirmed the philosophy expressed in 1943. Pursuant thereto,
      and in accordance with Article VII, Section 1(a)(ii) of the By-Laws, the Board has
      adopted the following interpretation under Rule 2440.
613          It shall be deemed a violation of Rule 2110 and Rule 2440 for a member
      to enter into any transaction with a customer in any security at any price not
      reasonably related to the current market price of the security or to charge a
      commission which is not reasonable.
      [Amended by SR-NASD-98-86 eff. Nov. 19, 1998.]
             (a)    General Considerations
614          Since the adoption of the “5% Policy” the Board has determined that:
             (1) The “5% Policy” is a guide, not a rule.
             (2) A member may not justify mark-ups on the basis of expenses which
             are excessive.
             (3) The mark-up over the prevailing market price is the significant spread
             from the point of view of fairness of dealings with customers in principal
             transactions. In the absence of other bona fide evidence of the prevailing
             market, a member’s own contemporaneous cost is the best indication of
             the prevailing market price of a security.
             (4) A mark-up pattern of 5% or even less may be considered unfair or
             unreasonable under the “5% Policy.”
             (5) Determination of the fairness of mark-ups must be based on a
             consideration of all the relevant factors, of which the percentage of mark-
             up is only one.
             (b)    Relevant Factors
615          Some of the factors which the Board believes that members and the
      Association’s committees should take into consideration in determining the fair-
      ness of a mark-up are as follows:
             (1) The Type of Security Involved — Some securities customarily carry a
             higher mark-up than others. For example, a higher percentage of mark-up
             customarily applies to a common stock transaction than to a bond tran-
             saction of the same size. Likewise, a higher percentage applies to sales
             of units of direct participation programs and condominium securities than
             to sales of common stock.
             (2) The Availability of the Security in the Market — In the case of an
             inactive security the effort and cost of buying or selling the security, or
             any other unusual circumstances connected with its acquisition or sale,
             may have a bearing on the amount of mark-up justified.
             (3) The Price of the Security — While there is no direct correlation, the
             percentage of mark-up or rate of commission generally increases as the
      NASD [Rules 0100-3420]                                                         133


             price of the security decreases. Even where the amount of money is
             substantial, transactions in lower priced securities may require more
             handling and expense and may warrant a wider spread.
             (4) The Amount of Money Involved in a Transaction — A transaction
             which involves a small amount of money may warrant a higher
             percentage of mark-up to cover the expenses of handling.
             (5) Disclosure — Any disclosure to the customer, before the transaction is
             effected, of information which would indicate (A) the amount of commis-
             sion charged in an agency transaction or (B) mark-up made in a principal
             transaction is a factor to be considered. Disclosure itself, however, does
             not justify a commission or mark-up which is unfair or excessive in light of
             all other relevant circumstances.
             (6) The Pattern of Mark-Ups — While each transaction must meet the test
             of fairness, the Board believes that particular attention should be given to
             the pattern of a member’s mark-ups.
             (7) The Nature of the Member’s Business — The Board is aware of the
             differences in the services and facilities which are needed by, and
             provided for, customers of members. If not excessive, the cost of
             providing such services and facilities, particularly when they are of a
             continuing nature, may properly be considered in determining the fairness
             of a member’s mark-ups.
             (c)    Transactions to Which the Policy is Applicable
616          The Policy applies to all securities handled in the over-the-counter
      market, whether oil royalties or any other security, in the following types of
      transactions:
             (1) A transaction in which a member buys a security to fill an order for the
             same security previously received from a customer. This transaction
             would include the so-called “riskless” or “simultaneous” transaction.
             (2) A transaction in which the member sells a security to a customer from
             inventory. In such a case the amount of the mark-up would be determined
             on the basis of the mark-up over the bona fide representative current
             market. The amount of profit or loss to the member from market apprecia-
             tion or depreciation before, or after, the date of the transaction with the
             customer would not ordinarily enter into the determination of the amount
             or fairness of the mark-up.
             (3) A transaction in which a member purchases a security from a
             customer. The price paid to the customer or the mark-down applied by
             the member must be reasonably related to the prevailing market price of
             the security.
             (4) A transaction in which the member acts as agent. In such a case, the
             commission charged the customer must be fair in light of all relevant
             circumstances.
             (5) Transactions wherein a customer sells securities to, or through, a
             broker/dealer, the proceeds from which are utilized to pay for other
             securities purchased from, or through, the broker/dealer at or about the
      NASD [Rules 0100-3420]                                                           134


             same time. In such instances, the mark-up shall be computed in the same
             way as if the customer had purchased for cash and in computing the
             mark-up there shall be included any profit or commission realized by the
             dealer on the securities being liquidated, the proceeds of which are used
             to pay for securities being purchased.
             (d)     Transactions to Which the Policy is Not Applicable
617           The Mark-Up Policy is not applicable to the sale of securities where a
      prospectus or offering circular is required to be delivered and the securities are
      sold at the specific public offering price.

      2450. Installment or Partial Sales
             (a)     Prohibition
618           No member shall take or carry any account or make a transaction for any
      customer under any arrangement which contemplates or provides for the
      purchase of any security for the account of the customer or for the sale of any
      security to the customer, where payment for the security is to be made to the
      member by the customer over a period of time in installments or by a series of
      partial payments, unless:
             (1) Member Acts as Agent — In the event such member acts as an agent
             or broker in such transaction he shall immediately, in the regular course
             of business, make an actual purchase of the security for the account of
             the customer, and shall immediately, in the regular course of business,
             take possession or control of such security and shall maintain possession
             or control thereof so long as he remains under obligation to deliver the
             security to the customer;
             (2) Member Acts as Principal — In the event such member acts as
             principal in such transaction, he shall, at the time of such transaction own
             such security and shall maintain possession or control thereof so long as
             he remains under obligation to deliver the security to the customer;
             (3) Regulation T Satisfied — The provisions of Regulation T of the
             Federal Reserve Board, if applicable to such member, are satisfied.
             (b)     Hypothecation
619           No member, whether acting as principal or agent, shall, in connection with
      any transaction referred to in this Rule, make any agreement with his customer
      under which such member shall be allowed to pledge or hypothecate any
      security involved in such transaction for any amount in excess of the indebted-
      ness of the customer to such member.

      2460. Payments for Market Making
620          (a) No member or person associated with a member shall accept any
      payment or other consideration, directly or indirectly, from an issuer of a security,
      or any affiliate or promoter thereof, for publishing a quotation, acting as market
      maker in a security, or submitting an application in connection therewith.
621          (b) The provisions of paragraph (a) shall not preclude a member from
      accepting:
      NASD [Rules 0100-3420]                                                          135


             (1) payment for bona fide services, including, but not limited to, invest-
             ment banking services (including underwriting compensation and fees);
             and
             (2) reimbursement of any payment for registration imposed by the Securi-
             ties and Exchange Commission or state regulatory authorities and for
             listing of an issue of securities imposed by a self-regulatory organization.
622         (c) For purposes of this rule, the following terms shall have the stated
      meanings:
             (1) “affiliate” shall have the same definition as used in Rule 2720 of the
             Business Conduct Rules of the Association;
             (2) “promoter” means any person who founded or organized the business
             or enterprise of an issuer, is a director or employee of an issuer, acts or
             has acted as a consultant, advisor, accountant or attorney to an issuer, is
             the beneficial owner of any of an issuer’s securities that are considered
             “restricted securities” under Rule 144, or is the beneficial owner of five
             percent (5%) or more of the public float of any class of an issuer’s securi-
             ties, and any other person with a similar interest in promoting the entry of
             quotations or market making in an issuer’s securities; and
             (3) “quotation” shall mean any bid or offer at a specified price with respect
             to a security, or any indication of interest by a member in receiving bids or
             offers from others for a security, or an indication by a member that he
             wishes to advertise his general interest in buying or selling a particular
             security.
      [Adopted by SR-NASD-97-29, eff. July 3, 1997.]

      2500. SPECIAL ACCOUNTS

      2510. Discretionary Accounts
             (a)    Excessive Transactions
623          No member shall effect with or for any customer’s account in respect to
      which such member or his agent or employee is vested with any discretionary
      power any transactions of purchase or sale which are excessive in size or
      frequency in view of the financial resources and character of such account.
             (b)    Authorization and Acceptance of Account
624           No member or registered representative shall exercise any discretionary
      power in a customer’s account unless such customer has given prior written
      authorization to a stated individual or individuals and the account has been
      accepted by the member, as evidenced in writing by the member or the partner,
      officer or manager, duly designated by the member, in accordance with Rule
      3010.
             (c)    Approval and Review of Transactions
625           The member or the person duly designated shall approve promptly in
      writing each discretionary order entered and shall review all discretionary
      accounts at frequent intervals in order to detect and prevent transactions which
      NASD [Rules 0100-3420]                                                          136


      are excessive in size or frequency in view of the financial resources and
      character of the account.
             (d)     Exceptions
626          This Rule shall not apply to:
             (1) discretion as to the price at which or the time when an order given by
             a customer for the purchase or sale of a definite amount of a specified
             security shall be executed;
             (2) bulk exchanges at net asset value of money market mutual funds
             (“funds”) utilizing negative response letters provided:
                    (A) the bulk exchange is limited to situations involving mergers and
             acquisitions of funds, changes of clearing members and exchanges of
             funds used in sweep accounts;
                    (B) the negative response letter contains a tabular comparison of
             the nature and amount of the fees charged by each fund;
                     (C) the negative response letter contains a comparative descrip-
             tion of the investment objectives of each fund and a prospectus of the
             fund to be purchased; and
                   (D) the negative response feature will not be activated until at least
             30 days after the date on which the letter was mailed.
      [Amended eff. Dec. 10, 1992.]
      Selected Notices to Members: 93-1.

      2520. Margin Requirements
             (a)     Definitions
627         For purposes of this paragraph, the following terms shall have the
      meanings specified below.
628            (1) The term “basket” shall mean a group of stocks that the Association or
      any national securities exchange designates as eligible for execution in a single
      trade through its trading facilities and that consists of stocks whose inclusion and
      relative representation in the group are determined by the inclusion and relative
      representation of their current market prices in a widely-disseminated stock index
      reflecting the stock market as a whole.
629           (2) The term “current market value” means the total cost or net proceeds
      of a security on the day it was purchased or sold or at any other time the
      preceding business day’s closing price as shown by any regularly published
      reporting or quotation service. If there is no closing price, a member organization
      may use a reasonable estimate of the market value of the security as of the close
      of business on the preceding business day.
630            (3) The term “customer” means any person for whom securities are
      purchased or sold or to whom securities are purchased or sold whether on a
      regular way, when issued, delayed or future delivery basis. It will also include any
      person for whom securities are held or carried and to or for whom a member
      organization extends, arranges or maintains any credit. The term will not include
      the following: (A) a broker or dealer from whom a security has been purchased or
      NASD [Rules 0100-3420]                                                          137


      to whom a security has been sold for the account of the member organization or
      its customers, or (B) an “exempted borrower” as defined by Regulation T of the
      Board of Governors of the Federal Reserve System (“Regulation T”), except for
      the proprietary account of a broker/dealer carried by a member pursuant to
      paragraph (e)(6) of this Rule.
631           (4) The term “designated account” means the account of a bank, trust
      company, insurance company, investment trust, state or political subdivision
      thereof, charitable or nonprofit educational institution regulated under the laws of
      the United States or any state, or pension or profit sharing plan subject to ERISA
      or of any agency of the United States or of a state or a political subdivision
      thereof.
632           (5) The term “equity” means the customer’s ownership interest in the
      account, computed by adding the current market value of all securities “long” and
      the amount of any credit balance and subtracting the current market value of all
      securities “short” and the amount of any debit balance.
633         (6) The term “exempted security” or “exempted securities” has the
      meaning as in Section 3(a)(12) of the Act.
634           (7) The term “margin” means the amount of equity to be maintained on a
      security position held or carried in an account.
635          (8) The term “person” has the meaning as in Section 3(a)(9) of the Act.
             (b)     Initial Margin
636           For the purpose of effecting new securities transactions and commit-
      ments, the customer shall be required to deposit margin in cash and/or securities
      in the account which shall be at least the greater of:
             (1) the amount specified in Regulation T; or
             (2) the amount specified in paragraph (c)(3) of this Rule; or
             (3) such greater amount as the Association may from time to time require
             for specific securities; or
             (4) equity of at least $2,000 except that cash need not be deposited in
             excess of the cost of any security purchased (this equity and cost of
             purchase provision shall not apply to “when distributed” securities in a
             cash account).
637          Withdrawals of cash or securities may be made from any account which
      has a debit balance, “short” position or commitments, provided it is in compliance
      with Regulation T and after such withdrawal the equity in the account is at least
      the greater of $2,000 or an amount sufficient to meet the maintenance margin
      requirements of this paragraph.
             (c)     Maintenance Margin
638           The margin which must be maintained in all accounts of customers,
      except for cash accounts subject to other provisions of this rule, shall be as
      follows:
             (1) 25 percent of the current market value of all securities “long” in the
             account; plus
      NASD [Rules 0100-3420]                                                            138


             (2) $2.50 per share or 100 percent of the current market value, whichever
             amount is greater, of each stock “short” in the account selling at less than
             $5.00 per share; plus
             (3) $5.00 per share or 30 percent of the current market value, whichever
             amount is greater, of each stock “short” in the account selling at $5.00 per
             share or above; plus
             (4) 5 percent of the principal amount or 30 percent of the current market
             value, whichever amount is greater, of each bond “short” in the account.
             (d) Additional Margin
639          Procedures shall be established by members to:
             (1) review limits and types of credit extended to all customers;
             (2) formulate their own margin requirements; and
             (3) review the need for instituting higher margin requirements, mark-to-
             markets and collateral deposits than are required by this paragraph for
             individual securities or customer accounts.
             (e)     Exceptions to Rule
640          The foregoing requirements of this Rule are subject to the following
      exceptions.
              (1) Offsetting “Long” and “Short” Positions
641           When a security carried in a “long” position is exchangeable or converti-
      ble within a reasonable time, without restriction other than the payment of money,
      into a security carried in a “short” position for the same customer, the margin to
      be maintained on such positions shall be 10 percent of the current market value
      of the “long” securities. When the same security is carried “long” and “short” the
      margin to be maintained on such positions shall be 5 percent of the current
      market value of the “long” securities. In determining such margin requirements
      “short” positions shall be marked to the market.
              (2) Exempted Securities, Marginable Corporate Debt Securities and
              Baskets
642           (A) Obligations of the United States — On net “long” or net “short”
      positions in obligations (including zero coupon bonds, i.e., bonds with coupons
      detached or non-interest bearing bonds) issued or guaranteed as to principal or
      interest by the United States Government or issued or guaranteed by
      corporations in which the United States has a direct or indirect interest as shall
      be designated for exemption by the Secretary of the Treasury, the margin to be
      maintained shall be the percentage of the current market value of such
      obligations as specified in the applicable category below:
      i. Less than one year to maturity                                    1 percent
      ii. One year but less than three years to maturity                   2 percent
      iii. Three years but less than five years to maturity                3 percent
      iv. Five years but less than ten years to maturity                   4 percent
      v. Ten years but less than twenty years to maturity,                 5 percent,
                                                                           or
      vi. Twenty years or more to maturity                                 6 percent
      NASD [Rules 0100-3420]                                                          139


643           Notwithstanding the above, on zero coupon bonds with five years or more
      to maturity the margin to be maintained shall not be less than 3 percent of the
      principal amount of the obligation.
644           When such obligations other than United States Treasury bills are due to
      mature in thirty calendar days or less, a member, at its discretion, may permit the
      customer to substitute another such obligation for the maturing obligation and
      use the margin held on the maturing obligation to reduce the margin required on
      the new obligation, provided the customer has given the member irrevocable
      instructions to redeem the maturing obligation.
645           (B) All Other Exempted Securities — On any positions in exempted
      securities other than obligations of the United States, the margin to be main-
      tained shall be 15 percent of the current market value or 7 percent of the
      principal amount of such obligation, whichever amount is greater.
646           (C) Non-Convertible Corporate Debt Securities — On any positions in
      non-convertible corporate debt securities, which are listed or traded on a
      registered national securities exchange or qualify as an “OTC margin bond,” as
      defined in Section 220.2(t) of Regulation T, the margin to be maintained shall be
      20 percent of the current market value or 7 percent of the principal amount,
      whichever amount is greater, except on mortgage related securities as defined in
      Section 3(a)(41) of the Act the margin to be maintained for an exempt account
      shall be 5 percent of the current market value. For purposes of this subpara-
      graph, an exempt account shall be defined as a member, non-member broker/
      dealer, “designated account” or any person having net tangible assets of at least
      sixteen million dollars.
647            (D) Baskets — Notwithstanding the other provisions of this Rule, a
      member may clear and carry basket transactions of one or more members
      registered as market makers (who are deemed specialists for purposes of
      Section 7 of the Act pursuant to the rules of a national securities exchange) upon
      a margin basis satisfactory to the concerned parties, provided all real and poten-
      tial risks in accounts carried under such arrangements are at all times adequately
      covered by the margin maintained in the account or, in the absence thereof, by
      the carrying member when computing net capital under SEC Rule 15c3-1.
648             (E) Special Provisions — Notwithstanding the foregoing in this paragraph
      (e)(2):
                (i) A member may, at its discretion, permit the use of accrued interest as
                an offset to the maintenance margin required to be maintained; and
                (ii) The Association upon written application, may permit lower margin
                requirements on a case-by-case basis.
649          (F) Cash Transactions with Customers — When a customer purchases
      an issued exempted security from or through a member in a cash account, full
      payment shall be made promptly. If, however, delivery or payment therefor is not
      made promptly after the trade date, a deposit shall be required as if it were a
      margin transaction, unless it is a transaction with a “designated account.”
650          On any position resulting from a transaction in issued exempted securities
      made for a member, or a non-member broker/dealer, or made for or with a
      “designated account,” no margin need be required and such position need not be
      NASD [Rules 0100-3420]                                                         140


      marked to the market. However, where such position is not marked to the
      market, an amount equal to the loss at the market in such position shall be
      charged against the member’s net capital as provided in SEC Rule 15c3-1.
             (3) Joint Accounts in Which the Carrying Member or a Partner or
             Stockholder Therein Has an Interest
651          In the case of a joint account carried by a member in which such member,
      or any partner, or stockholder (other than a holder of freely transferable stock
      only) of such member participates with others, each participant other than the
      carrying member shall maintain an equity with respect to such interest pursuant
      to the margin provisions of this paragraph as if such interest were in a separate
      account.
652           Pursuant to the Rule 9600 Series, the Association may grant an exemp-
      tion from the provisions of paragraph (e)(3) if the account is confined exclusively
      to transactions and positions in exempted securities.
             (4) International Arbitrage Accounts
653          International arbitrage accounts for non-member foreign brokers or
      dealers who are members of a foreign securities exchange shall not be subject to
      this paragraph. The amount of any deficiency between the equity in such an
      account and the margin required by the other provisions of this paragraph shall
      be charged against the member’s net capital when computing net capital under
      SEC Rule 15c3-1.
              (5) Specialists’ and Market Makers’ Accounts
654           (A) A member may carry the account of an “approved specialist or market
      maker,” which account is limited to specialist or market making transactions,
      upon a margin basis which is satisfactory to both parties. The amount of any
      deficiency between the equity in the account and the haircut requirements
      pursuant to SEC Rule 15c3-1 shall be charged against the member’s net capital
      when computing net capital under SEC Rule 15c3-1.
655          For the purpose of this subparagraph, the term “approved specialist or
      market maker” means either:
             (i) a specialist or market maker, who is deemed a specialist for all
             purposes under the Act and who is registered pursuant to the rules of a
             national securities exchange; or
             (ii) an OTC market maker or third market maker, who meets the
             requirements of Section 220.7(g)(5) of Regulation T.
656           (B) In the case of a joint account carried by a member in accordance with
      subparagraph (i) above in which the member participates, the equity maintained
      in the account by the other participants may be in any amount which is mutually
      satisfactory. The amount of any deficiency between the equity maintained in the
      account by the other participants and their proportionate share of the haircut
      requirements pursuant to SEC Rule 15c3-1 shall be charged against the mem-
      ber’s net capital when computing net capital under SEC Rule 15c3-1.
              (6) Broker/Dealer Accounts
657           (A) A member may carry the proprietary account of another broker/dealer,
      which is registered with the Commission, upon a margin basis which is satisfac-
      tory to both parties, provided the requirements of Regulation T are adhered to
      NASD [Rules 0100-3420]                                                        141


      and the account is not carried in a deficit equity condition. The amount of any
      deficiency between the equity maintained in the account and the haircut require-
      ments pursuant to SEC Rule 15c3-1 shall be charged against the member’s net
      capital when computing net capital under SEC Rule 15c3-1.
658           (B) Joint Back Office Arrangements — An arrangement may be
      established between two or more registered broker/dealers pursuant to
      Regulation T Section 220.7, to form a joint back office (“JBO”) arrangement for
      carrying and clearing or carrying accounts of participating broker/dealers.
      Members must provide written notification to the Association prior to establishing
      a JBO arrangement.
             (i) A carrying and clearing, or carrying member must:
                    a. maintain a minimum tentative net capital of $25 million as
             computed pursuant to SEC Rule 15c3-1, except that a member whose
             primary business consists of the clearance of options market-maker
             accounts may carry JBO accounts provided that it maintains a minimum
             net capital of $7 million as computed pursuant to SEC Rule 15c3-1. In
             addition, the member must include in its ratio of gross options market
             maker haircuts required by the provisions of SEC Rule 15c3-1 gross
             deductions for JBO participant accounts. Clearance of option market
             maker accounts shall be deemed a broker/dealer’s primary business if a
             minimum of 60% of the aggregate deductions in the above ratio are
             options market maker deductions. In the event that a carrying and
             clearing, or a carrying member’s tentative net capital, or net capital,
             respectively, has fallen below the above requirements, the firm shall: 1.
             promptly notify the Association in writing of such deficiency, 2. take
             appropriate action to resolve such deficiency within three consecutive
             business days, or not permit any new transactions to be entered into
             pursuant to the JBO arrangement;
                   b. maintain a written risk analysis methodology for assessing the
             amount of credit extended to participating broker/dealers which shall be
             made available to the Association on request; and
                     c. deduct from net capital haircut requirements pursuant to SEC
             Rule 15c3-1 amounts in excess of the equity maintained in the accounts
             of participating broker/dealers.
             (ii) A participating broker/dealer must:
                    a. be a registered broker/dealer subject to the SEC’s net capital
             requirements;
                    b. maintain an ownership interest in the carrying/clearing member
             organization pursuant to Regulation T of the Federal Reserve Board,
             Section 220.7; and
                     c. maintain a minimum liquidating equity of $1 million in the JBO
             arrangement exclusive of the ownership interest established in (ii)b.
             above. When the minimum liquidating equity decreases below the $1
             million requirement, the participant must deposit an amount sufficient to
             eliminate this deficiency within five business days or be subject to margin
      NASD [Rules 0100-3420]                                                             142


             account requirements prescribed for customers in Regulation T, and the
             margin requirements pursuant to the other provisions of this Rule.
            (7) Non-purpose Credit
659         In a non-securities credit account, a member may extend and maintain
      non-purpose credit to or for any customer without collateral or on any collateral
      whatever, provided:
             (A) the account is recorded separately and confined to the transactions
             and relations specifically authorized by Regulation T;
             (B) the account is not used in any way for the purpose of evading or
             circumventing any regulation of the Association or of the Board of
             Governors of the Federal Reserve System; and
             (C) the amount of any deficiency between the equity in the account and
             the margin required by the other provisions of this paragraph shall be
             charged against the member’s net capital as provided in SEC Rule
             15c3-1.
660          The term “non-purpose credit” means an extension of credit other than
      “purpose credit” as defined in Section 220.2 of Regulation T.
              (8) Shelf-Registered, Control and Restricted Securities
661           (A) Shelf-Registered Securities — The equity to be maintained in margin
      accounts of customers for securities which are the subject of a current and
      effective registration for a delayed offering (shelf-registered securities) shall be at
      least the amount of margin required by paragraph (c)(3) provided the member:
             (i) obtains a current prospectus in effect with the Commission, meeting
             the requirements of Section 10 of the Securities Act of 1933, covering
             such securities;
             (ii) has no reason to believe the Registration Statement is not in effect or
             that the issuer has been delinquent in filing such periodic reports as may
             be required of it with the Commission and is satisfied that such registra-
             tion will be kept in effect and that the prospectus will be maintained on a
             current basis; and
             (iii) retains a copy of such Registration Statement, including the pros-
             pectus, in an easily accessible place in its files. Shelf-registered securities
             which do not meet all the conditions prescribed above shall have no value
             for purposes of this paragraph (c). Also see subparagraph (C) below.
662           (B) Control and Restricted Securities — The equity in accounts of
      customers for control securities and other restricted securities of issuers who
      continue to maintain a consistent history of filing annual and periodic reports in
      timely fashion pursuant to the formal continuous disclosure system under the Act,
      which are subject to Rule 144 or 145(d) under the Securities Act of 1933, shall be
      40 percent of the current market value of such securities “long” in the account,
      provided the member:
             (i) in computing net capital, deducts any margin deficiencies in customers’
             accounts based upon a margin requirement as specified in subparagraph
             (C)(ii) below for such securities and values only that amount of such
             securities which are then saleable under Rule 144 or 145(d) under the
      NASD [Rules 0100-3420]                                                                       143


               Securities Act of 1933 in conformity with all of the applicable terms and
               conditions thereof, for purposes of determining such deficiencies; and
               (ii) makes volume computations necessary to determine the amount of
               securities then saleable under Rule 144 or 145(d) under the Securities
               Act of 1933 on a weekly basis or at such frequency as the member and/or
               the Association may deem appropriate under the circumstances. See also
               subparagraph (C) below.
663           (C) Additional Requirements on Shelf-Registered Securities and Control
      and Restricted Securities — A member extending credit on shelf-registered,
      control and other restricted securities in margin accounts of customers shall be
      subject to the following additional requirements:
               (i) The Association may at any time require reports from members
               showing relevant information as to the amount of credit extended on
               shelf-registered, control and restricted securities and the amount, if any,
               deducted from net capital due to such security positions.
               (ii) Concentration Reduction. A concentration exists whenever the
               aggregate position in control and restricted securities of any one issue,
               excluding excess securities (as defined below), exceeds:
                        a. 10 percent of the outstanding shares or
                       b. 100 percent of the average weekly volume during the preceding
               three-month period. Where a concentration exists, for purposes of
               computing subparagraph (B)(i) above, the margin requirement on such
               securities shall be, based on the greater of (ii).a or .b, above, as specified
               below:

                                                                                           Margin
      Percent of Outstanding Shares          or   Percent of Average Weekly Volume         Requirement
      Up to 10 percent                            Up to 100 percent                        25 percent
      Over 10 percent and under 15 percent        Over 100 percent and under 200 percent   30 percent
      15 percent and under 20 percent             200 percent and under 300 percent        45 percent
      20 percent and under 25 percent             300 percent and under 400 percent        60 percent
      25 percent and under 30 percent             400 percent and under 500 percent        75 percent
      30 percent and above                        500 percent and above                    100 percent

664           For purposes of this sub-paragraph (e)(8)(C)(ii), “excess securities” shall
      mean the amount of securities, if any, by which the aggregate position in control
      and restricted securities of any one issue exceeds the aggregate amount of
      securities that would be required to support the aggregate credit extended on
      such control and restricted securities if the applicable margin requirement were
      50%.
665            (D) Restricted Securities — Securities either:
               (i) then saleable pursuant to the terms and conditions of Rule 144(k)
               under the Securities Act of 1933, or
               (ii) then saleable pursuant to the terms and conditions of Rule 145(d)(2)
               or (d)(3) under such Act, shall not be subject to the provisions of this
      NASD [Rules 0100-3420]                                                         144


             subparagraph (e)(8), provided that the issuer continues to maintain a
             consistent history of filing annual and periodic reports in timely fashion
             pursuant to the formal continuous disclosure system under the Act.
             (f)     Other Provisions
              (1) Determination of Value for Margin Purposes
666           Active securities dealt in on a national securities exchange or OTC
      Marginable securities listed on Nasdaq shall, for margin purposes, be valued at
      current market prices. Other securities shall be valued conservatively in view of
      current market prices and the amount which might be realized upon liquidation.
      Substantial additional margin must be required in all cases where the securities
      carried in “long” or “short” positions are subject to unusually rapid or violent
      changes in value, or do not have an active market on Nasdaq or on a national
      securities exchange, or where the amount carried is such that the position(s)
      cannot be liquidated promptly.
             (2) Puts, Calls and Other Options
667          (A) Except as provided below, no put or call carried for a customer shall
      be considered of any value for the purpose of computing the margin to be
      maintained in the account of such customer.
668          (B) The issuance, guarantee or sale (other than a “long” sale) for a
      customer of a put or a call shall be considered a security transaction subject to
      paragraph (c)(2).
669           (C) For purposes of this subparagraph (6)(B), obligations issued by the
      United States Government shall be referred to as United States Government
      obligations. Mortgage pass-through obligations guaranteed as to timely payment
      of principal and interest by the Government National Mortgage Association shall
      be referred to as GNMA obligations. The terms “current market value” or “current
      market price” of an option shall mean the total cost or net proceeds of the option
      contract on the day the option was purchased or sold and at any other time shall
      be the preceding business day’s closing price of that option (times the appro-
      priate unit of trading or multiplier) as shown by any regularly published reporting
      or quotation service. The term “exercise settlement amount” shall mean the
      difference between the “aggregate exercise price” and the “aggregate current
      index value” (as such terms are defined in the pertinent By-Laws of The Options
      Clearing Corporation).
670           (D) The margin required on any put or call issued, guaranteed or carried
      “short” in a customer’s account shall be:
             (i) In the case of puts and calls issued by a registered clearing agency,
             100 percent of the current market value of the option plus the percentage
             of the current market value of the underlying security or index specified in
             column II of the chart below. Notwithstanding the margin required below,
             the minimum margin on any put or call issued, guaranteed or carried
             “short” in a customer’s account may be reduced by any “out-of-the-money
             amount” (as defined below), but shall not be less than 100 percent of the
             current market value of the option plus the percentage of the current
             market value of the underlying security or index specified in column III.
      NASD [Rules 0100-3420]                                                                                  145


                  I                     II              III                              IV
              Security or        Initial and/or      Minimum                Underlying Component Value
                Index            Maintenance          Margin
                                     Margin          Required
                                   Required
      (1)   Stock                  20 percent        10 percent     The equivalent number of shares at current
                                                                    market prices
      (2)   Industry index         20 percent        10 percent     The product of the current index group value
            stock group                                             and the applicable index multiplier
      (3)   Broad index            15 percent        10 percent     The product of the current index group value
            stock group                                             and the applicable index multiplier
      (4)   U.S. Treasury         .35 percent       1/20 percent    The underlying principal amount
            bills - 95 days or
            less to maturity
      (5)   U.S. Treasury          3 percent        1/2 percent     The underlying principal amount
            notes
      (6)   U.S. Treasury         3.5 percent       1/2 percent     The underlying principal amount
            bonds
      (7)   Foreign                4 percent        3/4 percent     The product of units per foreign currency
            currencies                                              contract and the closing spot price
      (8)   Interest Rate          10 percent        5 percent      The product of the current interest rate
                                                                    measure and the applicable multiplier.

671           For purposes hereof, “out-of-the-money amounts” are determined as
      follows:
      Option Issue                              Call                                          Put
      Stock Options        Any excess of the aggregate exercise          Any excess of the current market value of
                           price of the option over the current market   the equivalent number of shares of the
                           value of the equivalent number of shares      underlying security over the aggregate
                           of the underlying security.                   exercise price of the option.
      U.S. Treasury        Any excess of the aggregate exercise          Any excess of the current market value of
      Options              price of the option over the current market   the underlying principal amount over the
                           value of the underlying principal amount.     aggregate exercise price of the option.
      Index Stock          Any excess of the aggregate exercise          Any excess of the product of the current
      Group Options        price of the option over the product of the   index group value and the applicable
                           current index group value and the             multiplier over the aggregate exercise
                           applicable multiplier.                        price of the option.
      Foreign              Any excess of the aggregate exercise          The product of units per foreign currency
      Currency             price of the option over the product of       contract and the closing spot prices over
      Options              units per foreign currency contract and the   the aggregate price of the option.
                           closing spot prices.
      Interest Rate        Any excess of the aggregate exercise          Any excess of the product of the current
      Options              price of the option over the product of the   interest rate measure value and the
                           current interest rate measure value and       applicable multiplier over the aggregate
                           the applicable multiplier.                    exercise price of the option.

                 If the option contract provides for the delivery of obligations with different
                 maturity dates or coupon rates, the computation of the “out-of-the-money
                 amount,” if any, where required by this Rule, shall be made in such a
                 manner as to result in the highest margin requirement on the short option
                 position.
NASD [Rules 0100-3420]                                                                                  146


          (ii) In the case of puts and calls issued by a registered clearing agency
          which represent options on GNMA obligations in the principal amount of
          $100,000, 130 percent of the current market value of the option plus
          $1,500, except that the margin required need not exceed $5,000 plus the
          current market value of the option.
          (iii) In the case of puts and calls not issued by a registered clearing
          agency the percentage of the current value of the underlying component
          and the applicable multiplier, if any, specified in column II below, plus any
          “in-the-money amount” (as defined in this paragraph (f)(2)(D)(iii).)
          Notwithstanding the margin required by this subparagraph, the minimum
          margin on any put or call issued, guaranteed or carried “short” in a
          customer’s account may be reduced by any “out of the money amount”
          (as defined in paragraph (f)(2)(D)(i),) but shall not be less than the
          percentage of the current value of the underlying component and the
          applicable multiplier, if any, specified in column III below.

                 I                         II              III                        IV
           Type of Option           Initial and/or      Minimum          Underlying Component Value
                                    Maintenance          Margin
                                        Margin          Required
                                      Required
(1)   Stock and convertible              30%               10%        The equivalent number of shares at
      corporate debt securities                                       current market prices for stocks or
                                                                      the underlying principal amount for
                                                                      convertible corporate debt securities
(2)   Industry index stock group         30%               10%        The product of the current index
                                                                      group value and the applicable
                                                                      index multiplier
(3)   Broad index stock group            20%               10%        The product of the current index
                                                                      group value and the applicable
                                                                      index multiplier
(4)   U.S. Government or U.S.             5%               3%         The underlying principal amount
      Government Agency debt
      securities other than those
      exempted by Rule 3a12-7
      under the Securities
      Exchange Act of 1934*
(5)   Corporate debt securities          15%               5%         The underlying principal amount
      registered on a national
      securities exchange and
      marginable OTC corporate
      debt securities as defined
      in Regulation T Section
      220.2(t)(1)**
(6)   All other OTC options not          45%               20%        The underlying principal amount
      covered above

* Option contracts under category (4) must be for a principal amount of not less than $500,000.
** Option transactions on all other OTC margin bonds as defined in Regulation T Section 220.2(t) are not
eligible for the margin requirements as contained in this provision. Margin requirements for such securities
are to be computed pursuant to category (6).
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          For the purpose of this paragraph (f)(2)(D)(iii), “in-the-money amounts”
          are determined as follows:

Option Issue                             Call                                        Put
Stock Options       Any excess of the current market value of   Any excess of the aggregate exercise
                    the equivalent number of shares of the      price of the option over the current market
                    underlying security over the aggregate      value of the equivalent number of shares
                    exercise price of the option.               of the underlying security.
Index stock         Any excess of the product of the current    Any excess of the aggregate exercise
group options       index group value and the applicable        price of the option over the product of the
                    multiplier over the aggregate exercise      current index group value and then
                    price of the option.                        applicable multiplier.
U.S. Govern-        Any excess of the current value of the      Any excess of the aggregate exercise
ment mortgage       underlying principal amount over the        price of the option over the current value
related or corpo-   aggregate exercise price of the option.     of the underlying principal amount.
rate debt securi-
ties options

          (iv) Puts and calls not issued by a registered clearing agency and
          representing options on U.S. Government and U.S. Government Agency
          debt securities that qualify for exemption pursuant to Rule 3a12-7 under
          the Securities Exchange Act of 1934, must be for a principal amount of
          not less than $500,000, and shall be subject to the following
          requirements:
                 a. For exempt accounts, 3% of the current value of the underlying
          principal amount on thirty (30) year U.S. Treasury bonds and non-
          mortgage backed U.S. Government agency debt securities; and 2% of the
          current value of the underlying principal amount on all other U.S.
          Government and U.S. Government agency debt securities, plus any “in-
          the-money amount” (as defined in (f)(2)(D)(iii)) or minus any “out-of-the-
          money amount” (as defined in (f)(2)(D)(i)). The amount of any deficiency
          between the equity in the account and the margin required shall be
          deducted in computing the Net Capital of the member organization under
          the Exchange’s Capital Requirements on the following basis:
                    1. On any one account or group of commonly controlled accounts
                    to the extent such deficiency exceeds 5% of a member organiza-
                    tion’s tentative Net Capital (net capital before deductions on
                    securities), 100% of such excess amount, and
                    2. On all accounts combined to the extent such deficiency exceeds
                    25% of a member organization’s tentative Net Capital, 100% of
                    such excess amount, reduced by any amount already deducted
                    pursuant to (a) above.
                 b. For non-exempt accounts, 5% of the current value of the
          underlying principal amount on thirty (30) year U.S. Treasury bonds and
          non-mortgage backed U.S. Government agency debt securities; and 3%
          of the current value of the underlying principal amount on all other U.S.
          Government and U.S. Government agency debt securities, plus any “in-
          the-money amount” or minus any “out-of-the-money amount”, provided
      NASD [Rules 0100-3420]                                                           148


             the minimum margin shall not be less than 1% of the current value of the
             underlying principal amount.
672           For purposes of this subsection (f)(2)(D)(iv), an “exempt account” shall be
      defined as a member organization, non-member broker/dealer, “designated
      account”, any person having net tangible assets of at least sixteen million dollars
      or in the case of mortgage-related debt securities transactions an independently
      audited mortgage banker with both more than $1.5 million of net current assets
      (which may include 3/4 of 1% maximum allowance on loan servicing portfolios)
      and with more than $1.5 million of net worth.
673           (E)(i) Each put or call shall be margined separately and any difference
      between the current market value of the underlying component and the exercise
      price of a put or call shall be considered to be of value only in providing the
      amount of margin required on that particular put or call. Substantial additional
      margin must be required on options issued, guaranteed or carried “short” with an
      usually long period of time to expiration, or written on securities which are subject
      to unusually rapid or violent changes in value, or which do not have an active
      market, or where the securities subject to the option cannot be liquidated
      promptly.
674          (E)(ii) No margin need be required on any “covered” put or call.
675           (F)(i) Where both a put and call specify the same underlying component
      are issued by a registered clearing agency and are carried “short” for a customer,
      the amount of margin required shall be the margin on the put or call, whichever is
      greater, as required pursuant to subparagraph (f)(2)(D)(i) above, plus the current
      market value on the other option.
676           (F)(ii) Where either or both the put and call specifying the same under-
      lying component are not issued by a registered clearing agency and are issued,
      guaranteed or carried “short” for a customer by the same broker-dealer (as
      defined in subparagraph (f)(2)(G)(iii) below), the amount of margin required shall
      be the margin on the put or call, whichever is greater, as required pursuant to
      subparagraph (f)(2)(D)(iii) and (D)(iv) above, plus any unrealized loss on the
      other option. Where either or both the put or call are not issued, guaranteed or
      carried by the same broker/dealer then the put and call must be margined
      separately pursuant to subparagraph (f)(2)(D)(iii) and (D)(iv) above, however, the
      minimum margin shall not apply to the other option.
677          (F)(iii) If both a put and call for the same GNMA obligation in the principal
      amount of $100,000 are issued, guaranteed or carried “short” for a customer, the
      amount of margin required shall be the margin on the put or call, whichever is
      greater, as required pursuant to subparagraph (f)(2)(D)(ii) above, plus the current
      market value of the other option.
678           (G)(i) Where a call that is issued by a registered clearing agency is
      carried “long” for a customer’s account and the account is also “short” a call
      issued by a registered clearing agency, expiring on or before the date of expira-
      tion of the “long” listed call and specifying the same underlying component the
      margin required on the “short” call shall be the lower of:
             a. the margin required pursuant to subparagraph (f)(2)(D)(i) above; or
      NASD [Rules 0100-3420]                                                           149


             b. the amount, if any, by which the exercise price of the “long” call
             exceeds the exercise price of the “short” call.
679           (G)(ii) Where a put that is issued by a registered clearing agency is
      carried “long” for a customer’s account and the account is also “short” a put
      issued by a registered clearing agency, expiring on or before the date of expira-
      tion of the “long” listed put and specifying the same underlying component the
      margin required on the “short” put shall be the lower of:
             a. the margin required pursuant to subparagraph (iv)a. above, in the case
             of stock options, United States Government obligations, foreign currency
             options or index stock group options; or
             b. the amount, if any, by which the exercise price of the “short” put
             exceeds the exercise price of the “long” put.
680          (G)(iii)
             a. Where a call that is issued by a registered clearing agency is carried
             “long” for a customer’s account and the account is also “short” a call
             issued by a registered clearing agency, expiring on or before the date of
             expiration of the “long” listed call and written on the same GNMA obliga-
             tion in the principal amount of $100,000, the margin required on the
             “short” call shall be the lower of:
                    1. the margin required pursuant to subparagraph (f)(2)(D)(ii)
             above; or
                     2. the amount, if any, by which the exercise price of the “long” call
             exceeds the exercise price of the “short” call multiplied by the appropriate
             multiplier factor set forth below.
             b. Where a put that is issued by a registered clearing agency is carried
             “long” for a customer’s account and the account is also “short” a put
             issued by a registered clearing agency, expiring on or before the date of
             expiration of the “long” listed put and written on the same GNMA obliga-
             tion in the principal amount of $100,000, the margin required on the
             “short” put shall be the lower of:
                        1. the margin required pursuant to subparagraph (iv)b. above; or
                     2. the amount, if any, by which the exercise price of the “short” put
             exceeds the exercise price of the “long” put multiplied by the appropriate
             multiplier factor set forth below.
             c. For purposes of this subparagraph(f)(2)(G)(iii) the multiplier factor to be
             applied shall depend on the then current highest qualifying rate as
             defined by the rules of the national securities exchange or national securi-
             ties association on or through which the option is listed or traded. If the
             then current highest qualifying rate is less than 8 percent, the multiplier
             factor shall be 1; if the then current highest qualifying rate is greater than
             or equal to 8 percent but less than 10 percent, the multiplier factor shall
             be 1.2; if the then current highest qualifying rate is greater than or equal
             to 10 percent but less than 12 percent, the multiplier factor shall be 1.4; if
             the then current highest qualifying rate is greater than or equal to 12
             percent but less than 14 percent, the multiplier factor shall be 1.5; if the
      NASD [Rules 0100-3420]                                                          150


             then current highest qualifying rate is greater than or equal to 14 percent
             but less than 16 percent, the multiplier factor shall be 1.6; and if the then
             current highest qualifying rate is greater than or equal to 16 percent but
             less than or equal to 18 percent, the multiplier factor shall be 1.7. The
             multiplier factor or factors for higher qualifying rates shall be established
             by the Association as required.
681          (G)(iv)
             a. Where a call that is issued by a broker/dealer is carried “long” for a
             customer’s account and the account is also “short” a call issued by the
             same broker/dealer, expiring on or before the date of expiration of the
             “long” call and specifying the same underlying component, the margin
             required on the short “call” shall be the lower of:
                     1. the margin required pursuant to subparagraph (f)(2)(D)(iii) or
             (D)(iv) above; or
                   2. the amount, if any, by which the exercise price of the “long” call
             exceeds the exercise price of the “short” call.
             b. Where a put that is issued by a broker/dealer is carried “long” for a
             customer’s account and the account is “short” a put issued by the same
             broker/dealer, expiring on or before the date of expiration of the “long” put
             and specifying the same underlying component, the margin required on
             the “short” put shall be the lower of:
                     1. the margin required pursuant to subparagraphs (f)(2)(D)(iii) or
             (D)(iv) above; or
                   2. the amount, if any, by which the exercise price of the “short” put
             exceeds the exercise price of the “long” put.
             c. A “long” call and a “short” call or a “long” put and a “short” put are
             deemed to be issued by the same broker/dealer when either the broker/
             dealer has issued or guaranteed both options or issued or guaranteed
             one of the options and the other option was issued by a registered
             clearing agency on behalf of that broker/dealer. If the options are not
             issued by the same broker/dealer then the “short” put or the “short” call
             must be margined separately pursuant to subparagraphs (f)(2)(D)(iii) or
             (D)(iv) above.
682           (H)(i) Where a call is issued, guaranteed or carried “short” against an
      existing net “long” position in the security under option or in any security
      immediately exchangeable or convertible, other than warrants, without restriction
      including the payment of money into the security under option, no margin need
      be required on the call, provided:
             a. such net long position is adequately margined in accordance with this
             Rule and
             b. the right to exchange or convert the net “long” position does not expire
             on or before the date of expiration of the “short” call.
683          Where a put is issued, guaranteed or carried “short” against an existing
      net “short” position in the security under option, no margin need be required on
      NASD [Rules 0100-3420]                                                           151


      the put, provided such net “short” position is adequately margined in accordance
      with this Rule.
684           (H)(ii) Where a call representing stock options is issued, guaranteed or
      carried “short” against an existing net “long” position in a warrant convertible into
      the underlying security under option, margin shall be required on the call equal to
      any amount by which the conversion price of the “long” warrant exceeds the
      exercise price of the call, provided:
             a. such net long position is adequately margined in accordance with this
             paragraph (c) and
             b. the right to convert the net “long” position does not expire on or before
             the date of expiration of the “short” call. However, when a payment of
             money is required to convert the “long” warrant such warrant shall have
             no value for purposes of this Rule.
685           (H)(iii) In determining net “long” and net “short” positions, for purposes of
      subparagraphs (f)(2)(H)(i) and (ii) above, offsetting “long” and “short” positions in
      exchangeable or convertible securities (including warrants) or in the same
      security, as discussed in paragraph (c)(5)(A), shall be deducted. In computing
      margin on such an existing net security position carried against a put or call, the
      current market price to be used shall not be greater than the exercise price in the
      case of a call or less than the current market price in the case of a put and the
      required margin shall be increased by any unrealized loss.
686           (H)(iv) Where a put or call is carried “short” in the account of a customer
      against a letter of guarantee in form satisfactory to the Association and issued by
      a third party custodian bank or trust company (the guarantor), which letter of
      guarantee is held in the account at the time the put or call is written, or is
      received in the account promptly thereafter, no margin need be required on the
      put or call.
687           In the case of a call on a broad index stock group, the letter of guarantee
      must certify that the guarantor holds for the account of the customer as security
      for the letter either cash, cash equivalents, one or more qualified securities, or
      any combination thereof, having an aggregate market value, computed as at the
      close of business on the day the call is written, of not less than 100 percent of the
      aggregate current index value computed as at the same time and that the
      guarantor will promptly pay the member the exercise settlement amount in the
      event the account is assigned an exercise notice. The letter of guarantee may
      provide for substitution of qualified securities held as collateral provided that the
      substitution shall not cause the value of the qualified securities held to be
      diminished. A qualified security means an equity security, other than a warrant,
      right or option, that is traded on any national securities exchange; or any equity
      security, other than a warrant, listed in the current list of Over-the-Counter Margin
      Stocks as published by the Board of Governors of the Federal Reserve System.
688           In the case of a call on any other option contract, the letter of guarantee
      must certify that the guarantor holds for the account of the customer as security
      for the letter, the underlying security (or a security immediately convertible into
      the underlying security without the payment of money) or foreign currency and
      that the guarantor will promptly deliver to the member the underlying security or
      foreign currency in the event the account is assigned an exercise notice.
      NASD [Rules 0100-3420]                                                          152


689          In the case of a put on an option contract (including a put on a broad
      index stock group), the letter of guarantee must certify that the guarantor holds
      for the account of the customer as security for the letter, cash or cash
      equivalents which have an aggregate market value, computed as at the close of
      business on the day the put is written, of not less than 100 percent of the
      aggregate exercise price of the put and that the guarantor will promptly pay the
      member the exercise settlement amount (in the case of a put on a broad index
      stock group) or the aggregate exercise price (in the case of any other put on an
      option contract) in the event the account is assigned an exercise notice. Cash
      equivalents shall mean those instruments referred to in Section 220.2 of
      Regulation T.
690            (I) When a member issues or guarantees an option to receive or deliver
      securities or foreign currencies for a customer, such option shall be margined as
      if it were a put or call.
691           (J)(i) Registered specialists, market makers or traders — Notwithstanding
      the other provisions of this subparagraph (f)(2), a member may clear and carry
      the listed option transactions of one or more registered specialists, registered
      market makers or registered traders in options (which registered traders are
      deemed specialists for all purposes under the Act, pursuant to the rules of a
      national securities exchange) (hereinafter referred to as “specialist(s)”), upon a
      “Good Faith” margin basis satisfactory to the concerned parties, provided the
      “Good Faith” margin requirements is not less than the Net Capital haircut
      deduction of the member organization carrying the transaction pursuant to SEC
      Rule 15c3-1 under the Act. In lieu of collecting the “Good Faith” margin
      requirement, a carrying member organization may elect to deduct in computing
      its Net Capital the amount of any deficiency between the equity maintained in the
      account and the “Good Faith” margin required.
692           For purposes of this paragraph (f)(2)(J), a permitted offset position
      means, in the case of an option in which a specialist makes a market, a position
      in the underlying asset or other related assets, and in the case of other securities
      in which a specialist makes a market, a position in options overlying the securi-
      ties in which a specialist makes a market. Accordingly, a specialist in options
      may establish on a share-for-share basis, a long or short position in the securities
      underlying the options in which the specialist makes a market, and a specialist in
      securities other than options may purchase or write options overlying the securi-
      ties in which the specialist makes a market, if the account holds the following
      permitted offset positions:
             a. A short option position which is “in or at the money” and is not offset by
             a long or short option position for an equal or greater number of shares of
             the same underlying security which is “in the money”;
             b. A long option position which is “in or at the money” and is not offset by
             a long or short option position for an equal or greater number of shares of
             the same underlying security which is “in the money”;
             c. A short option position against which an exercise notice was tendered;
             d. A long option position which was exercised;
             e. A net long position in a security (other than an option) in which a
             specialist makes a market;
      NASD [Rules 0100-3420]                                                          153


             f. A net short position in a security (other than an option) in which the
             specialist makes a market; or
             g. A specified portfolio type as referred to in SEC Rule 15c3-1, including
             its appendices, or any applicable SEC staff interpretation or no-action
             position.
693         Permitted offset transactions must be effected for market making pur-
      poses such as hedging, risk reduction, re-balancing of positions, liquidation, or
      accommodations of customer orders, or other similar market making purpose.
694           For purposes of this paragraph (f)(2)(J), the term “in or at the money”
      means the current market price of the underlying security is not more than two
      standard exercise intervals below (with respect to a call option) or above (with
      respect to a put option) the exercise price of the option; the term “in the money”
      means the current market price of the underlying asset or index is not below (with
      respect to a call option) or above (with respect to a put option) the exercise price
      of the option; and, the term “overlying option” means a put option purchased or a
      call option written against a long position in an underlying asset; or a call option
      purchased or a put option written against a short position in an underlying asset.
695          (J)(ii) Securities, including options, in such accounts shall be valued
      conservatively in the light of current market prices and the amount which might
      be realized upon liquidation. Substantial additional margin must be required or
      excess net capital maintained in all cases where the securities carried:
             a. are subject to unusually rapid or violent changes in value including
             volatility in the expiration months of options;
             b. do not have an active market; or
             c. in one or more or all accounts, including proprietary accounts com-
             bined, are such that they cannot be liquidated promptly or represent
             undue concentration of risk in view of the carrying member’s net capital
             and its overall exposure to material loss.
696          (K) The Association may at any time impose higher margin requirements
      with respect to any option position(s) when it deems such higher margin
      requirements are appropriate.
697           (L) Exclusive designation — A customer may designate at the time an
      option order is entered which security position held in the account is to serve in
      lieu of the required margin, if such service is offered by the member; or the
      customer may have a standing agreement with the member as to the method to
      be used for determining on any given day which security position will be used in
      lieu of the margin to support an option transaction. Any security held in the
      account which serves in lieu of the required margin for a short put or short call
      shall be unavailable to support any other option transaction in the account.
698           (M) Cash account transactions — A member may make option transac-
      tions in a customer’s cash account, provided that the transaction is permissible
      under Regulation T, Section 220.8.
             (3) “When Issued” and “When Distributed” Securities
699          (A) Margin Accounts — The margin to be maintained on any transaction
      or net position in each “when issued” security shall be the same as if such
      NASD [Rules 0100-3420]                                                          154


      security were issued. Each position in a “when issued” security shall be margined
      separately and any unrealized profit shall be of value only in providing the
      amount of margin required on that particular position.
700           When an account has a “short” position in a “when issued” security and
      there are held in the account securities upon which the “when issued” security
      may be issued, such “short” position shall be marked to the market and the
      balance in the account shall for the purpose of this Rule be adjusted for any
      unrealized loss in such “short” position.
701          (B) Cash Accounts — On any transaction or net position resulting from
      contracts for a “when issued” security in an account other than that of a member,
      non-member broker/dealer, or a “designated account,” equity must be maintained
      equal to the margin required were such transaction or position in a margin
      account.
702          On any net position resulting from contracts for a “when issued” security
      made for or with a non-member broker/dealer, no margin need be required, but
      such net position must be marked to the market.
703          On any net position resulting from contracts for a “when issued” security
      made for a member or for or with a “designated account,” no margin need be
      required and such net position need not be marked to the market. However,
      where such net position is not marked to the market, an amount equal to the loss
      at the market in such position shall be charged against the member’s net capital
      as provided in SEC Rule 15c3-1.
704           The provisions of this subparagraph (f)(3) shall not apply to any position
      resulting from contracts on a “when issued” basis in a security:
             (i) which is the subject of a primary distribution in connection with a bona
             fide offering by the issuer to the general public for “cash,” or
             (ii) which is exempt by the Association as involving a primary distribution.
705          The term “when issued” as used herein also means “when distributed.”
              (4) Guaranteed Accounts
706            Any account guaranteed by another account may be consolidated with
      such other account and the margin to be maintained may be determined on the
      net position of both accounts, provided the guarantee is in writing and permits the
      member carrying the account, without restriction, to use the money and securities
      in the guaranteeing account to carry the guaranteed account or to pay any deficit
      therein; and provided further that such guaranteeing account is not owned
      directly or indirectly by (i) a member, or any stockholder (other than a holder of
      freely transferable stock only) in the organization carrying such account, or (ii) a
      member, or any stockholder (other than a holder of freely transferable stock only)
      therein having a definite arrangement for participating in the commissions earned
      on the guaranteed account. However, the guarantee of a limited partner or of a
      holder of non-voting stock, if based upon his resources other than his capital
      contribution to or other than his interest in a member, is not affected by the
      foregoing prohibition, and such a guarantee may be taken into consideration in
      computing margin to be maintained in the guaranteed account.
707          When one or more accounts are guaranteed by another account and the
      total margin deficiencies guaranteed by any guarantor exceeds 10 percent of the
      NASD [Rules 0100-3420]                                                          155


      member’s excess net capital, the amount of the margin deficiency being
      guaranteed in excess of 10 percent of excess net capital shall be charged
      against the member’s net capital when computing net capital under SEC Rule
      15c3-1.
             (5) Consolidation of Accounts
708          When two or more accounts are carried for a customer, the margin to be
      maintained may be determined on the net position of said accounts, provided the
      customer has consented that the money and securities in each of such accounts
      may be used to carry or pay any deficit in all such accounts.
             (6) Time Within Which Margin or “Mark to Market” Must Be Obtained
709           The amount of margin or “mark to market” required by any provision of
      this Rule shall be obtained as promptly as possible and in any event within fifteen
      business days from the date such deficiency occurred, unless the Association
      has specifically granted the member additional time.
             (7) Practice of Meeting Regulation T Margin Calls by Liquidation
             Prohibited
710           When a “margin call,” as defined in Section 220.2 of Regulation T, is
      required in a customer’s account, no member shall permit a customer to make a
      practice of either deferring the deposit of cash or securities beyond the time
      when such transactions would ordinarily be settled or cleared, or meeting the
      margin required by the liquidation of the same or other commitments in the
      account.
711          This prohibition on liquidations shall only apply to those accounts that, at
      the time of liquidation, are not in compliance with the equity to be maintained
      pursuant to the provisions of this Rule.
            (8) Special Initial and Maintenance Margin Requirements
712         (A) Notwithstanding the other provisions of this Rule, the Association
      may, whenever it shall determine that market conditions so warrant, prescribe:
             (i) higher initial margin requirements for the purpose of effecting new
             securities transactions and commitments in accounts of customers with
             respect to specific securities;
             (ii) higher maintenance margin requirements for accounts of customers
             with respect to any securities; and
             (iii) such other terms and conditions as the Association shall deem appro-
             priate relating to initial and/or maintenance margin requirements for
             accounts of customers with respect to any securities.
713           (B) Day-Trading — The term “day-trading” means the purchasing and
      selling of the same security on the same day. A “day-trader” is any customer
      whose trading shows a pattern of day-trading.
714           Whenever day-trading occurs in a customer’s margin account the margin
      to be maintained shall be the margin on the “long” or “short” transaction,
      whichever occurred first, as required pursuant to the other provisions of this Rule.
      When day-trading occurs in the account of a “day-trader” the margin to be
      maintained shall be the margin on the “long” or “short” transaction, whichever
      occurred first, as required by Regulation T or as required pursuant to the other
      provisions of this Rule, whichever amount is greater.
      NASD [Rules 0100-3420]                                                          156


715          (C) When the equity in a customer’s account, after giving consideration to
      the other provisions of this Rule, is not sufficient to meet the requirements of
      subparagraph (i) or (ii) hereof, additional cash or securities must be received into
      the account to meet any deficiency within seven business days of the trade date.
              (9) Free-Riding in Cash Accounts Prohibited
716           No member shall permit a customer (other than a broker/dealer or a
      “designated account”) to make a practice, directly or indirectly, of effecting tran-
      sactions in a cash account where the cost of securities purchased is met by the
      sale of the same securities. No member shall permit a customer to make a
      practice of selling securities with them in a cash account which are to be received
      against payment from another broker/dealer where such securities were
      purchased and are not yet paid for. A member transferring an account which is
      subject to a Regulation T 90-day freeze to another member firm shall inform the
      receiving member of such 90-day freeze.
717           The provisions of Section 220.8(c) of Regulation T dictate the prohibitions
      and exceptions against customers’ free-riding. Members may apply to the Asso-
      ciation in writing for waiver of a 90-day freeze not exempted by Regulation T.
              (10) Margin For Index/Currency Warrants
718           (A) This subparagraph (10) sets forth the minimum amount of margin
      which must be deposited and maintained in margin accounts of customers
      having positions in index warrants, currency index warrants or currency warrants
      dealt in on Nasdaq or a national securities exchange. The Association may at
      any time impose higher margin requirements in respect of such positions when it
      deems such higher margin requirements to be advisable. The initial deposit of
      margin required under this Rule must be made within five full business days after
      the date on which a transaction giving rise to a margin requirement is effected.
      The margin requirements set forth in this subparagraph (J) are applicable only to
      index warrants, currency index warrants and currency warrants listed for trading
      on Nasdaq or a national securities exchange on or after September 28, 1995.
719          (B) Definitions — The following definitions shall apply to transactions in
      index warrants, currency index warrants, and currency warrants.
             (i) The term “currency call warrant” means a warrant structured as a call
             on the underlying currency. The term “currency put warrant” means a
             warrant structured as a put on the underlying currency.
             (ii) The term “currency index call warrant” means a warrant structured as
             a call on the underlying currency index. The term “currency index put
             warrant” means a warrant structured as a put on the underlying currency
             index.
             (iii) The term “current market value” of an index warrant, currency index
             warrant or currency warrant shall mean the total cost or net proceeds of
             the transaction on the day the warrant was purchased or sold and at any
             other time shall mean the most recent closing price of that issue of
             warrants on Nasdaq, in the case of a Nasdaq-listed index warrants, or the
             exchange on which it is listed on any day with respect to which a
             determination of current market value is made.
      NASD [Rules 0100-3420]                                                           157


             (iv) The term “index call warrant” means a warrant structured as a call on
             the underlying stock index group. The term “index put warrant” means a
             warrant structured as a put on the underlying stock index group.
             (v) The term “index group value” in respect to a currency index warrant
             means the numerical index value of particular currency index multiplied
             by $1.00 U.S. or the applicable index multiplier.
             (vi) The term “index group value” in respect of an index warrant means
             the numerical index value of a particular stock index multiplied by $1.00
             U.S. or other applicable index multiplier.
             (vii) The term “numerical index value” in respect of a currency index
             warrant means the level of a particular currency index as reported by the
             reporting authority for the index.
             (viii) The term “numerical index value” in respect of an index warrant
             means the level of a particular stock index as reported by the reporting
             authority for the index.
             (ix) The term “reporting authority” in respect of a currency index warrant
             means the institution or reporting service specified in the prospectus for
             the warrant as the official source for calculating and reporting the levels of
             such currency index.
             (x) The term “reporting authority” in respect of an index warrant means
             the institution or reporting service specified in the prospectus for the
             warrant as the official source for calculating and reporting the levels of
             such stock index.
             (xi) The term “spot price” in respect of a currency warrant on a particular
             business day means the noon buying rate in U.S. dollars on such day in
             New York City for cable transfers of the particular underlying currency as
             certified for customs purposes by the Federal Reserve Bank of New York.
             (xii) The terms “stock index group,” “index warrants,” “currency warrants,”
             currency index,” and “currency index warrants” when used in reference to
             an index warrant, currency index warrant, or currency warrant shall have
             the same meanings as set forth in Rule 2842.
             (xiii) The term “strike price” in respect of an index warrant, currency index
             warrant or currency warrant means the price at which the warrant may be
             exercised in accordance with its terms.
             (xiv) The term “unit of underlying currency” in respect of a currency
             warrant means a single unit of the currency covered by the warrant.
720           (C) Except as provided in this subparagraph (J), no index warrant,
      currency index warrant or currency warrant carried for a customer shall be
      considered of any value for the purpose of computing the margin required in the
      account of such customer. Subject to the exceptions set forth in subparagraph
      (J)(v) of this Rule, the minimum margin on any currency warrant, currency index
      warrant or index warrant issued, guaranteed or carried “short” in a customer’s
      account shall be:
             (i) In the case of an index put or call warrant, 100% of the current market
             value of each such warrant plus 15% of the current index group value.
      NASD [Rules 0100-3420]                                                          158


             Such amount shall be decreased by the excess of the strike price of the
             warrant over the current index group value in the case of an index call
             warrant, or the excess of the current index group value over the strike
             price of the warrant in the case of an index put warrant; or
             (ii) In the case of a currency put or call warrant, 100% of the current
             market value of each such warrant plus 4% (or such other percentage, as
             specified by the national securities exchange listing the warrant and
             approved by the Commission on a case-by-case basis) of the product of
             the units of underlying currency per warrant and the spot price for such
             currency. The add-on percentage with respect to warrants on the German
             Mark, French Franc, Swiss Franc, Japanese Yen, British Pound,
             Australian Dollar, U.S. and European Currency Unit (“ECU”) shall be four
             percent (4%), and for the Canadian Dollar the “add-on” percentage shall
             be one percent (1%). Such amount shall be decreased by the excess of
             the strike price of the warrant over the product of the units of underlying
             currency per warrant and the spot price of the currency in the case of a
             currency call warrant, or any excess of the product of the units of
             underlying currency per warrant and the spot price over the strike price of
             the warrant in the case of a currency put warrant; or
             (iii) In the case of the currency index put or call warrants, 100% of the
             current market value of each such warrant plus a percentage, as
             specified by the national securities exchange listing the warrant and
             approved by the Commission on a case-by-case basis, of the current
             index group value. Such amount shall be decreased by the excess of the
             strike price of the warrant over the current index group value in the case
             of a currency index call warrant, or any excess of the current index group
             value over the strike price of the warrant in the case of a currency index
             put warrant.
721          Notwithstanding the foregoing:
722           (D) The minimum margin on each currency put or call warrant, currency
      index put or call warrant or index put or call warrant issued, guaranteed or carried
      “short” in a customer’s account shall be not less than 100% of the current market
      value of such warrant plus:
             (i) 10% of the current index group value in the case of an index warrant;
             (ii) .75% (.0075) (or such other percentage as specified by the national
             securities exchange listing the warrant and approved by the Commission)
             of the product of the units of underlying currency per warrant and the spot
             price of such currency, in the case of a currency warrant; or
             (iii) in the case of currency index warrants, a percentage of the current
             index group value as specified by the national securities exchange listing
             the warrant and approved by the Commission.
723           (E)(i) When a “short” position in an index call warrant, currency index call
      warrant or currency call warrant is offset by a “short” position of equivalent
      underlying value in a put warrant or a put option issued by The Options Clearing
      Corporation on the same index or currency, or a “short” position in an index put
      warrant, currency index put warrant or currency put warrant is offset by a “short”
      position of equivalent underlying value in a call warrant or a call option issued by
      NASD [Rules 0100-3420]                                                             159


      The Options Clearing Corporation on the same index or currency, the margin
      required shall be the margin on the put position or the call position, whichever is
      greater, plus the current market value of the other position.
724           (E)(ii) When a “long” position in an index call warrant, currency index call
      warrant or currency call warrant is offset by a “short” position of equivalent
      underlying value in a call warrant or a call option issued by The Options Clearing
      Corporation on the same index or currency, then, provided that the “long”
      position expires no earlier than the “short” position, the margin required shall be
      the amount, if any, by which the strike price of the “long” position exceeds the
      strike price of the “short” position.
725           (E)(iii) When a “long” position in an index put warrant, currency index put
      warrant or currency put warrant is offset with a “short” position of equivalent
      underlying value in a put warrant or a put option issued by The Option Clearing
      Corporation on the same index or currency, then, provided that the “long”
      position expires no earlier than the “short” position, the margin required shall be
      the amount, if any, by which the strike price of the “short” position exceeds the
      strike price of the “long” position.
726          (E)(iv) The margin treatment for spread positions pursuant to sub-
      paragraphs (iii)a., b., and c. above is subject to a one-year pilot program
      scheduled to begin September 28, 1995.
727            (E)(v) No margin is required in respect of a “short” position in an index call
      warrant where the customer has delivered, promptly after the warrant has been
      sold short, to the member with which such position is maintained, a Market Index
      Warrant Escrow Receipt in a form satisfactory to the Association, issued by a
      bank or trust company pursuant to specific authorization from the customer which
      certifies that the issuer of the agreement holds for the account of the customer:
             a. cash;
             b. cash equivalents;
             c. one or more qualified equity securities; or
             d. a combination thereof;
728           that such deposit has an aggregate market value, at the time the warrant
      is sold short, of not less than 100% of the aggregate current index value; and that
      the issuer will promptly pay the member sufficient funds to purchase the warrant
      sold short in the event of a buy-in.
      [Added eff. Feb. 15, 1974; amended eff. Apr. 19, 1993; amended by SR-NASD-
      93-48 eff. Mar. 8, 1994; amended by SR-NASD-95-37 eff. Sept. 28, 1995;
      Amended by SR-NASD-97-14 eff. June 10, 97; amended by SR-NASD-97-28 eff:
      8/7/97; amended by SR-NASD-99-05 eff. Aug. 21, 2000.]
      Selected Notices to Members: 88-26, 93-15, 94-24, 94-70, 95-82; 00-51.
      2521. Margin Requirements - Exception for Certain Members
729           Any member designated to another self-regulatory organization for
      oversight of the member’s compliance with applicable securities laws, rules and
      regulations, and self-regulatory organization rules under SEC Rule 17d-2 is
      exempt from the provisions of Rule 2520.
      NASD [Rules 0100-3420]                                                           160


      [Amended by SR-NASD-97-14 eff. June 10, 97.]
      2522. Definitions Related to Options Transactions
730          (a) The following definitions shall apply to the margin requirements for
      options transactions:
731            (1) Aggregate Discount Amount — The term “aggregate discount amount”
      as used with reference to a Treasury bill option contract means the principal
      amount of the underlying Treasury bill (A) multiplied by the annualized discount
      (i.e., 100 percent minus the exercise price of the option contract) and (B) further
      multiplied by a fraction having a numerator equal to the number of days to
      maturity of the underlying Treasury bill on the earliest date on which it could be
      delivered pursuant to the rules of The Options Clearing Corporation in connection
      with the exercise of the option (normally 91 or 182 days) and a denominator of
      360.
732          (2) Aggregate Exercise Price — The term “aggregate exercise price” as
      used with reference to an option contract means:
             (A) if a single stock underlies the option contract, the exercise price of the
             option contract multiplied by the number of shares of the underlying stock
             covered by such option contract;
             (B) if a Treasury bond or Treasury note underlies the option contract,
                    (i) the exercise price of the option contract multiplied by the
             principal amount of the underlying security covered by such option
             contract, plus
                    (ii) accrued interest:
                            a. on bonds (except bonds issued or guaranteed by the
                    United States Government), that portion of the interest on the
                    bonds for a full year, computed for the number of days elapsed
                    since the previous interest date on the basis of a 360-day-year.
                    Each calendar month shall be considered to be 1/12 of 360 days,
                    or 30 days, and each period from a date in one month to the same
                    date in the following month shall be considered to be 30 days.
                           b. on bonds issued or guaranteed by the United States
                    Government, that portion of the interest on the bonds for the
                    current full interest period, computed for the actual number of days
                    elapsed since the previous interest date on the basis of actual
                    number of calendar days in the current full interest period. The
                    actual elapsed days in each calendar month shall be used in
                    determining the number of days in a period.


      IM-2522. Computation of elapsed days
      The following tables are given to illustrate the method of computing the number
      of elapsed days in conformity with Rule 2522(a)(2)(B) above:
             On bonds (except bonds issued or guaranteed by the United States
             Government):
      NASD [Rules 0100-3420]                                                            161


             ·       From 1st to 30th of the same month to be figured as 29 days
             ·       From 1st to 31st of the same month to be figured as 30 days
             ·       From 1st to 1st of the following month to be figured as 30 days.
             Where interest is payable on 30th or 31st of the month:
             ·       From 30th or 31st to 1st of the following month to be figured as 1 day
             ·       From 30th or 31st to 30th of the following month to be figured as 30
                     days
             ·       From 30th or 31st to 31st of the following month to be figured as 30
                     days
             ·       From 30th or 31st to 1st of second following month, figured as 1
                     month, 1 day
             On bonds issued or guaranteed by the United States Government:
             ·       From 15th of a 28-day month to the 15th of the following month is 28
                     days
             ·       From 15th of a 30-day month to the 15th of the following month is 30
                     days
             ·       From 15th of a 31-day month to the 15th of the following month is 31
                     days.
             The six month’s interest period ending:
                 •    January 15 is 184 days        •   July 15 is 181* days
                 •    February 15 is 184 days       •   August 15 is 181* days
                 •    March 15 is 181* days         •   September 15 is 184 days
                 •    April 15 is 182* days         •   October 15 is 183 days
                 •    May 15 is 181* days           •   November 15 is 184 days
                 •    June 15 is 182* days          •   December 15 is 183 days
             * Leap Year Adds 1 day to this period.


733           (C) if a Treasury bill underlies the option contract, the difference between
      the principal amount of such Treasury bill and the aggregate discount amount;
734           (D) if an index stock group underlies the option contract, the exercise
      price of the option contract times the index multiplier; or
735           (E) if a GNMA underlies the option contract, the exercise price of the
      option contract multiplied by the nominal principal amount of the underlying
      GNMA covered by such option contract. In the case of an underlying GNMA, if
      the remaining unpaid principal balance of a GNMA delivered upon exercise of an
      option contract is a permissible variant of, rather than equal to, the nominal
      principal amount, the aggregate exercise price shall be adjusted to equal the
      product of the exercise price and such remaining unpaid principal balance, plus
      in each case the appropriate differential.
736           (3) Annualized Discount — The term “annualized discount” as used with
      reference to a Treasury bill means the percent discount from principal amount at
      which the Treasury bill may be purchased or sold, expressed as a discount for a
      term to maturity of 360 days.
      NASD [Rules 0100-3420]                                                        162


737           (4) Applicable Current Options Disclosure Document — The term
      “applicable current Options Disclosure Document” means, as to any kind of
      option, the most recent edition of the Options Disclosure Document and any
      supplement that pertains to that kind of option and that meets the requirements
      of SEC Rule 9b-1.
738           (5) Appropriate Differential — The term “appropriate differential” as used
      with reference to a GNMA option contract means a positive or negative amount
      equal to the product of:
             (A) the difference between the remaining unpaid principal balance of a
             GNMA delivered upon exercise of that contract and the nominal principal
             amount, and
             (B) the difference between the current cash market price of GNMAs
             bearing the same stated rate of interest as that borne by the GNMA
             delivered upon exercise and the exercise price.
739            (6) Broad Index Stock Group — The term “broad index stock group”
      means an index stock group of 25 or more stocks whose inclusion and relative
      representation in the group are determined by the inclusion and relative repre-
      sentation of their current market prices in a widely- disseminated stock index
      reflecting the stock market as a whole or an inter-industry sector of the stock
      market.
740          (7) Broad Index Stock Group Option (Contract) — The term “broad index
      stock group option (contract)” means an option contract on a broad index stock
      group.
741          (8) Call — The term “call” means an option contract under which the
      holder has the right, in accordance with the terms of the option, to purchase from
      The Options Clearing Corporation:
             (A) the number of shares of the underlying stock (if a single stock
             underlies the option contract);
             (B) the principal amount of the underlying security (if a Government
             security underlies the option contract);
             (C) the multiple of the current index group value of the underlying group
             (if an index stock group underlies the option contract); or
             (D) the nominal principal amount or any permissible variant of the
             underlying GNMA (if a GNMA underlies the option contract) covered by
             the option contract.
742          (9) Class (of Options) — The term “class (of options)” means all option
      contracts of the same type and kind covering the same underlying security or
      underlying stock group.
743         (10) Clearing Member — The term “clearing member” means a member
      which has been admitted to membership in The Options Clearing Corporation
      pursuant to the provisions of the rules of The Options Clearing Corporation.
744          (11) Closing Purchase Transaction — The term “closing purchase
      transaction” means an option transaction in which the purchaser’s intention is to
      NASD [Rules 0100-3420]                                                          163


      reduce or eliminate a short position in the series of options involved in such
      transaction.
745          (12) Closing Sale Transaction — The term “closing sale transaction”
      means an option transaction in which the seller’s intention is to reduce or
      eliminate a long position in the series of options involved in such transaction.
746          (13) Complement — The term “complement,” as used with reference to
      an annualized discount, means the difference between 100 percent and the
      annualized discount.
747          (14) Covered:
748           (A) The term “covered” in respect of a short position in a call option
      contract means that the writer’s obligation is secured either by a “specific
      deposit” or an “escrow deposit” meeting the conditions of Rule 610(e) or 610(h),
      respectively, of the rules of The Options Clearing Corporation, or by a letter of
      guarantee meeting the requirements of Rule 2520 (f)(2)(H)(iv) or that the writer
      holds in the same account as the short position,
             (i) on a share-for-share basis (if a single stock underlies the option
             contract),
             (ii) on the basis of a matching principal amount (if a Government security
             underlies the option contract),
             (iii) on the basis of market value (“covering” underlying stocks) or of the
             index multiplier (“covering” option contracts) (if an index stock group
             underlies the option contract), or
             (iv) on the basis of the remaining unpaid principal balance (if a GNMA
             underlies the option contract), a long position either in the underlying
             security or underlying index stock group or in an option contract of the
             same class having an expiration date on or subsequent to the expiration
             date of the option contract in such short position and having an exercise
             price equal to or less than the exercise price of the option contract in such
             short position.
749           (B) The term “covered” in respect of a short position in a put option
      contract means that the writer’s obligation is secured by a letter of guarantee
      meeting the requirements of Rule 2520(f)(2)(H)(iv) of this Rule or that the writer
      holds in the same account as the short position,
             (i) on a share-for-share basis (if a single stock underlies the option
             contract),
             (ii) on the basis of a matching principal amount (if a Government security
             underlies the option contract),
             (iii) on the basis of the index multiplier (if an index stock group underlies
             the option contract), or
             (iv) on the basis of a matching remaining unpaid principal balance (if a
             GNMA underlies the option contract), a long position in an option contract
             of the same class having an expiration date on or subsequent to the
             expiration date of the option contract in such short position and having an
      NASD [Rules 0100-3420]                                                         164


             exercise price equal to or greater than the exercise price of the option
             contract in such short position.
750           (C) In the case of a “covering” underlying GNMA, the remaining unpaid
      principal balance must be equal to, or be a permissible variant of, the nominal
      principal amount and the “covering” underlying GNMA must bear a qualifying rate
      of interest.
751           (15) Current Cash Market Price — The term “current cash market price”
      as used with reference to GNMAs means the prevailing price in the cash market
      for GNMAs bearing a particular stated rate of interest to be delivered on the next
      applicable monthly settlement date determined in the manner specified in the
      rules of The Options Clearing Corporation.
752          (16) Current Options Disclosure Document — See “Applicable Current
      Options Disclosure Document.”
753           (17) Current Index Group Value — The term “current index group value”
      means $1.00 multiplied by the current value reported for the index that is derived
      from the current market prices of the stocks in the group. When used with
      reference to the exercise of an index stock group option, the value is the last one
      reported on the day of exercise or, if the day of exercise is not a trading day, on
      the last trading day before exercise.
754          (18) Designated Rate — The term “designated rate” as used with
      reference to a GNMA option means a rate of interest of eight percent or such
      other rate as may be designated in the manner specified in the rules of The
      Options Clearing Corporation.
755         (19) Dominant Underlying Stock — The term “dominant underlying stock”
      means, when used with reference to an industry index stock group, a stock that
      accounts for 30 percent or more of the index group value.
756           (20) Exchange Option Transaction — The term “Exchange option
      transaction” means an option transaction effected on the floor of a registered
      securities exchange between or among members.
757         (21) Exchange Options Trading — The term “Exchange options trading”
      means options trading on the floor of a registered securities exchange.
758          (22) Exercise Price — The term “exercise price” in respect of an option
      contract means:
             (A) if a single stock underlies the option contract, the stated price per
             share at which the underlying stock;
             (B) if a Treasury bond or Treasury note underlies the option contract, the
             specified percentage of the principal amount at which the underlying
             Treasury security;
             (C) if a Treasury bill underlies the option contract, the specified
             complement of the annualized discount at which the underlying Treasury
             bill;
             (D) if an index stock group underlies the option contract, the specified
             index group value at which the current index group value; or
      NASD [Rules 0100-3420]                                                           165


             (E) if a GNMA underlies the option contract, the specified percentage of
             the nominal principal amount (assuming delivery of a GNMA bearing a
             stated rate of interest equal to the designated rate) at which the
             underlying GNMA; may be purchased (in the case of call) or sold (in the
             case of a put) upon the exercise of such option contract. In the case of an
             underlying GNMA, if the stated rate of interest of a GNMA delivered upon
             exercise of an option contract is a qualifying rate other than the
             designated rate, the exercise price shall be an amount which provides the
             same yield to maturity as the amount which would have been payable if
             the stated rate of interest had been equal to the designated rate
             (assuming a 30-year term and prepayment at the end of the twelfth year
             of the mortgage obligations underlying GNMAs).
759          (23) Expiration Date — The term “expiration date” in respect of an option
      contract means the date and time fixed by the rules of The Options Clearing
      Corporation for the expiration of all option contracts covering the same under-
      lying security or underlying index stock group and having the same expiration
      month as such option contract.
760           (24) Expiration Month — The term “expiration month” in respect of an
      option contract means the month and year in which such option contract expires.
761           (25) GNMA — The term “GNMA” means a mortgage pass-through
      security guaranteed as to timely payment of principal and interest by the Govern-
      ment National Mortgage Association, as described in the current standard pros-
      pectus of the Department of Housing and Urban Development covering such
      securities, bearing a stated rate of interest which is a qualifying rate. Any two or
      more separate certificates representing GNMAs bearing the same qualifying rate
      delivered in accordance with the rules of The Options Clearing Corporation upon
      exercise of an option contract shall, for purposes of this Rule, be deemed to be a
      single GNMA, having a remaining unpaid principal balance equal to the sum of
      the remaining unpaid principal balances of such separate certificates.
762         (26) GNMA Option (Contract) — The term “GNMA option (contract)”
      means an option contract on GNMAs.
763           (27) GNMA Production Rate — The term “GNMA production rate” means
      a rate of interest .50 percent below the maximum stated rate of interest on
      residential mortgages which the Federal Housing Administration is willing to
      insure and which the Veterans Administration is willing to guarantee, as it may
      vary from time to time in accordance with official announcements of changes in
      such rates made by the Federal Housing Administration.
764           (28) Government Security — The term “Government security” means a
      bond, note, bill, debenture or other evidence of indebtedness that is a direct
      obligation of, or an obligation guaranteed as to principal or interest by, the United
      States or a corporation in which the United States has a direct or indirect interest
      (except debt securities guaranteed as to timely payment of principal and interest
      by the Government National Mortgage Association).
765           (29) Government Security Option (Contract) — The term “Government
      security option (contract)” means an option contract on Government securities.
766          (30) Index Multiplier — The term “index multiplier” as used with reference
      to an index stock group option contract means the amount specified in the
      NASD [Rules 0100-3420]                                                          166


      contract by which the current index group value is to be multiplied to arrive at the
      value required to be delivered to the holder of a call or by the holder of a put
      upon valid exercise of the contract.
767          (31) Index Stock Group — The term “index stock group” means either a
      broad index stock group or an industry index stock group.
768           (32) Index Stock Group Option (Contract) — The term “index stock group
      option (contract)” means either a broad index stock group option contract or an
      industry index stock group option contract.
769            (33) Industry Index Stock Group — The term “industry index stock group”
      means an index stock group of six or more stocks whose inclusion and relative
      representation in the group are determined by the inclusion and relative repre-
      sentation of their current market prices in a widely- disseminated stock index
      reflecting a particular industry or closely-related industries.
770          (34) Industry Index Stock Group Option (Contract) — The term “industry
      index stock group option (contract)” means an option contract on an industry
      index stock group.
771           (35) Kind of Option — The term “kind of option” means either a stock
      option contract, a Government security option contract, a broad index stock
      group option contract, an industry index stock group option contract or a GNMA
      option contract.
772          (36) Long Position — The term “long position” means the number of
      outstanding option contracts of a given series of options held by a person
      (purchaser).
773           (37) Nominal Principal Amount — The term “nominal principal amount” as
      used with reference to a GNMA option means the remaining unpaid principal
      balance of GNMAs required to be delivered to the holder of a call or by the holder
      of a put upon exercise of an option without regard to any variance in the remain-
      ing unpaid principal balance permitted to be delivered upon such exercise and
      shall be $100,000 in the case of a single call or put.
774          (38) Opening Purchase Transaction — The term “opening purchase
      transaction” means an option transaction in which the purchaser’s intention is to
      create or increase a long position in the series of options involved in such
      transaction.
775          (39) Opening Writing Transaction — The term “opening writing transac-
      tion” means an option transaction in which the seller’s (writer’s) intention is to
      create or increase a short position in the series of options involved in such
      transaction.
776           (40) Option (Contract) — The term “option (contract)” means a put or a
      call issued, or subject to issuance, by The Options Clearing Corporation pursuant
      to the rules of The Options Clearing Corporation.
777           (41) Option Transaction — The term “option transaction” means a tran-
      saction for the purchase or sale of an option contract, or for the closing out of a
      long or short position in an option contract.
778          (42) Options Trading — The term “options trading” means trading in any
      option issued by The Options Clearing Corporation, whether or not of a type,
      NASD [Rules 0100-3420]                                                          167


      class or series which has been approved for trading on Nasdaq or on a national
      securities exchange.
779          (43) Outstanding — The term “outstanding” in respect of an option con-
      tract means an option contract which has been issued by The Options Clearing
      Corporation and has neither been the subject of a closing sale transaction on or
      through the facilities of, or otherwise subject to the rules of, a Participating
      Exchange or Association nor been exercised nor reached its expiration date.
780          (44) Participating Exchange (Association) — The term “Participating
      Exchange (Association)” means a national securities exchange (association)
      which has qualified for participation in The Options Clearing Corporation.
781           (45) Primary Market — The term “primary market” means (A) in respect of
      an underlying security that is principally traded on a national securities exchange,
      the principal exchange market in which the underlying security is traded and (B)
      in respect of an underlying security that is principally traded in the over-the-
      counter market, the market reflected by any widely recognized quotation dissemi-
      nation system or service (Nasdaq in the case of a Nasdaq stock).
782           (46) Public Customer of a Member Organization — The term “public
      customer of a member organization” means a customer that is not a broker or a
      dealer.
783          (47) Put — The term “put” means an option contract under which the
      holder has the right, in accordance with the terms of the option, to sell to The
      Options Clearing Corporation:
             (A) the number of shares of the underlying stock (if a single stock
             underlies the option contract);
             (B) the principal amount of the underlying security (if a Government
             security underlies the option contract);
             (C) the multiple of the current index group value of the underlying group
             (if an index stock group underlies the option contract); or
             (D) the nominal principal amount or any permissible variant of the
             underlying GNMA (if a GNMA underlies the option contract); covered by
             the option contract.
784          (48) Qualifying Rate — The term “qualifying rate” as used with reference
      to a GNMA option means any rate of interest equal to or less than the GNMA
      production rate, provided that:
             (A) in the event of any increase in the GNMA production rate, a GNMA
             issued prior to the date of any such change bearing a stated rate of
             interest equal to any such increased GNMA production rate (or any lower
             rate of interest which was not a qualifying rate on the day prior to that
             date) shall be deemed not to bear a qualifying rate until the expiration of
             45 days from the date of such increase or until after the settlement date
             for options on GNMAs following the next expiration date for any series of
             such options, whichever shall last occur unless such GNMA bears a
             stated rate of interest deemed to constitute a qualifying rate in
             accordance with subparagraph (B) below; and
      NASD [Rules 0100-3420]                                                             168


               (B) in the event of any decrease in the GNMA production rate, a GNMA
               bearing a stated rate of interest which was equal to the GNMA production
               rate (or any lower rate of interest which is not otherwise a qualifying rate)
               on the day prior to the date of any such decrease shall be deemed to
               continue to bear a qualifying rate for a period of 45 days from the date of
               such decrease or until the settlement date for options on GNMAs
               following the next expiration date for any series of such options, which-
               ever shall last occur.
785            (49) Registered Clearing Agency — The term “registered clearing
      agency” shall mean a clearing agency as defined in Section (3)(a)(23) of the Act
      that is registered with the Commission pursuant to Section 17A(b)(2) of the Act.
786          (50) Registered Options Principal — The term “Registered Options
      Principal” means a person who has qualified as a “Registered Options Principal.”
787          (51) Registered Options Representative — The term “Registered Options
      Representative” means a registered representative who has qualified as a
      “Registered Options Representative.”
788            (52) Related Security — The term “related security” means:
               (A) as used with reference to a Government security option, (i) all securi-
               ties underlying Government security options, (ii) futures contracts on such
               underlying security, and (iii) all options on such futures contracts;
               (B) as used with reference to a stock option, the underlying stock; and
               (C) as used with reference to an index stock group option, (i) all futures
               contracts on the underlying stock group or on any substantially identical
               index stock group, all options contracts on any substantially identical
               index stock group, and all options on such futures contracts, and (ii) also,
               in the case of an industry index stock group option only, all underlying
               stocks accounting for five percent or more of the current index group
               value of the underlying industry index stock group and all individual stock
               options on such underlying stocks.
789           (53) Rules of The Options Clearing Corporation — The term “rules of The
      Options Clearing Corporation” means the by-laws and the rules of The Options
      Clearing Corporation and all written interpretations thereof, as the same may be
      in effect from time to time.
790          (54) Series (of Options) — The term “series (of options)” means all option
      contracts of the same class of options having the same expiration date, exercise
      price and unit of trading.
791            (55) Shares — The term “shares” means the basic unit of issue of a
      stock.
792          (56) Short Position — The term “short position” means the number of
      outstanding option contracts of a given series of options with respect to which a
      person is obligated as a writer (seller).
793           (57) Stock — The term “stock” shall be broadly interpreted to mean any
      equity security, as defined in Section 3(a)(11) of the Act, and SEC Rule 3a11-1
      under the Act, that confers directly on the holder a present equity ownership or
      participation interest in an enterprise.
      NASD [Rules 0100-3420]                                                           169


794          (58) Stock Option (Contract) — The term “stock option (contract)” means
      an option contract on a single stock.
795          (59) Stock-Related Option (Contract) — The term “stock-related option
      (contract)” means either a stock option contract, a broad industry index stock
      group option contract or any industry index stock group option contract.
796           (60) The Options Clearing Corporation — The term “The Options Clearing
      Corporation” means The Options Clearing Corporation, a subsidiary of the
      Participating Exchanges and Association.
797           (61) Treasury Bill — The term “Treasury bill” means a Government
      security sold by the U.S. Treasury Department at a discount from principal
      amount, bearing no interest and normally having a term to maturity of not more
      than one year at the time of original issue.
798           (62) Treasury Bond — The term “Treasury bond” means a Government
      security sold by the U.S. Treasury that has been designated by the U.S. Treasury
      Department with reference to its term to maturity as a “bond” (normally confined
      to Treasury securities with a term to maturity of more than ten years at the time
      of original issue).
799           (63) Treasury Note — The term “Treasury note” means a Government
      security sold by the U.S. Treasury Department that has been designated by the
      U.S. Treasury Department with reference to its term to maturity as a “note”
      (normally confined to Treasury securities with a term to maturity of more than one
      year but not more than ten years at the time of original issue).
800          (64) Type of Option — The term “type of option” means the classification
      of an option contract as either a put or a call.
801          (65) Uncovered — The term “uncovered” in respect of a short position in
      an option contract means that the short position is not covered.
802            (66) Underlying Component — The term “underlying component” shall
      mean in the case of stock, the equivalent number of share: industry and broad
      index stock groups, the current index group value and the applicable index
      multiplier; U.S. Treasury bills, notes and bonds, the underlying principal amount;
      foreign currencies, the units per foreign currency contract; and interest rate con-
      tracts, the interest rate measure based on the yield of U.S. Treasury bills, notes
      or bonds and the applicable multiplier. The term “interest rate measure repre-
      sents, in the case of U.S. Treasury bills, the annualized discount yield of a speci-
      fic issue multiplied by ten, or in the case of long term U.S. Treasury notes and
      bonds, the average of the yield to maturity of the specific issues multiplied by ten.
803          (67) Underlying GNMA — The term “underlying GNMA” means an
      underlying security that is a GNMA.
804         (68) Underlying Government Security — The term “underlying Govern-
      ment security” means an underlying security that is a Government security.
805          (69) Underlying (Index) Stock Group — The term “underlying (index)
      stock group” as used with reference to an index stock group option contract
      means the index stock group, a multiple of the current index group value at which
      The Options Clearing Corporation is obligated to sell (in the case of a call) or
      purchase (in the case of a put) upon valid exercise of the contract.
      NASD [Rules 0100-3420]                                                            170


806          (70) Underlying Security — The term “underlying security” means:
             (A) as used with reference to an option contract other than an index stock
             group option contract, the security which The Options Clearing Corpora-
             tion is obligated to sell (in the case of a call) or purchase (in the case of a
             put) upon valid exercise of the contract; and
             (B) as used with reference to an index stock group option contract, any of
             the stocks included in the underlying index stock group.
807          (71) Underlying Stock — The term “underlying stock” means an
      underlying security that is a stock.
      [Added eff. Feb. 15, 1974; amended eff. Apr. 19, 1993; amended by SR-NASD-
      93-48 eff. Mar. 8, 1994; amended by SR-NASD-95-37 eff. Sept. 28, 1995;
      amended by SR-NASD-97-14 eff. June 10, 97.]

      2700. SECURITIES DISTRIBUTIONS

      2710. Corporate Financing Rule - Underwriting Terms and Arrangements
             (a)     Definitions
808          For purposes of this Rule, the following terms shall have the meanings
      stated below. The definitions in Rule 2720 are incorporated herein by reference.
809           (1) Issuer — The issuer of the securities offered to the public, any selling
      security holders offering securities to the public, any affiliate of the issuer or
      selling security holder, and the officers or general partners, directors, employees
      and security holders thereof.
810          (2) Net Offering Proceeds — Offering proceeds less all expenses of
      issuance and distribution.
811          (3) Offering Proceeds — Public offering price of all securities offered to
      the public, not including securities subject to any overallotment option, securities
      to be received by the underwriter and related persons, or securities underlying
      other securities.
812           (4) Participation or Participating in a Public Offering — Participation in the
      preparation of the offering or other documents, participation in the distribution of
      the offering on an underwritten, non-underwritten, or any other basis, furnishing
      of customer and/or broker lists for solicitation, or participation in any advisory or
      consulting capacity to the issuer related to the offering, but not the preparation of
      an appraisal in a savings and loan conversion or a bank offering or the prepara-
      tion of a fairness opinion pursuant to SEC Rule 13e-3.
813           (5) Underwriter and Related Persons — Includes underwriters, under-
      writer’s counsel, financial consultants and advisors, finders, members of the
      selling or distribution group, any member participating in the public offering, and
      any and all other persons associated with or related to and members of the
      immediate family of any of the aforementioned persons.
      NASD [Rules 0100-3420]                                                            171


             (b)       Filing Requirements
              (1) General
814           No member or person associated with a member shall participate in any
      manner in any public offering of securities subject to this Rule, Rule 2720 or Rule
      2810 unless documents and information as specified herein relating to the
      offering have been filed with and reviewed by the Association.
             (2) Means of Filing
815          Documents or information required by this Rule to be filed with the
                 7
      Association shall be considered to be filed only upon receipt by its Corporate
      Financing Department.
              (3) Confidential Treatment
816           The Association shall accord confidential treatment to all documents and
      information filed pursuant to this Rule and shall utilize such documents and
      information solely for the purpose of review to determine compliance with the
      provisions of applicable Association Rules or for other regulatory purposes
      deemed appropriate by the Association.
             (4) Requirement for Filing
817           (A) Unless filed by the issuer, the managing underwriter, or another
      member, a member that anticipates participating in a public offering of securities
      subject to this Rule shall file with the Association the documents and information
      with respect to the offering specified in subparagraphs (5) and (6) below no later
      than one business day after the filing of any of such documents:
             (i) with the Commission;
             (ii) with the state securities commission;
             (iii) with any other regulatory authority; or
             (iv) if not filed with any regulatory authority, at least fifteen (15) business
             days prior to the anticipated offering date.
818          (B) No offering of securities subject to this Rule shall commence unless:
             (i) the documents and information specified in subparagraphs (5) and (6)
             below have been filed with and reviewed by the Association; and
             (ii) the Association has provided an opinion that it has no objections to the
             proposed underwriting and other terms and arrangements or an opinion
             that the proposed underwriting and other terms and arrangements are
             unfair and unreasonable. If the Association’s opinion states that the
             proposed underwriting and other terms and arrangements are unfair and
             unreasonable, the member may file modifications to the proposed under-
             writing and other terms and arrangements for further review.
819          (C) Any member acting as a managing underwriter or in a similar capacity
      that has been informed of an opinion by the Association, or a determination by
      the appropriate standing committee of the Board of Governors, that the proposed
      underwriting terms and arrangements of a proposed offering are unfair or
      unreasonable, and the proposed terms and arrangements have not been

      7
           This Department is located at 9509 Key West Avenue, Rockville, MD 20850.
      NASD [Rules 0100-3420]                                                             172


      modified to conform to the standards of fairness and reasonableness, shall notify
      all other members proposing to participate in the offering of that opinion or
      determination at a time sufficiently prior to the effective date of the offering or the
      commencement of sales so the other members will have an opportunity as a
      result of specific notice to comply with their obligation not to participate in any
      way in the distribution of a public offering containing arrangements, terms and
      conditions which are unfair or unreasonable.
              (5) Documents to be Filed
820           The following documents relating to all proposed public offerings of
      securities shall be filed for review:
821          (A) Five copies of the registration statement, offering circular, offering
      memorandum, notification of filing, notice of intention, application for conversion
      and/or any other document used to offer securities to the public;
822           (B) Three copies of any proposed underwriting agreement, agreement
      among underwriters, selected dealers agreement, agency agreement, purchase
      agreement, letter of intent, consulting agreement, partnership agreement, under-
      writer’s warrant agreement, escrow agreement, and any other document which
      describes the underwriting or other arrangements in connection with or related to
      the distribution, and the terms and conditions relating thereto; and any other
      information or documents which may be material to or part of the said arrange-
      ments, terms and conditions and which may have a bearing on the Association’s
      review;
823           (C) Five copies of each pre-and post-effective amendment to the registra-
      tion statement or other offering document, one copy marked to show changes;
      and three (3) copies of any other amended document previously filed pursuant to
      subparagraphs (A) and (B) above, one copy marked to show changes; and
824          (D) Three copies of the final registration statement declared effective by
      the Commission or equivalent final offering document and a list of the members
      of the underwriting syndicate, if not indicated therein, and one copy of the
      executed form of the final underwriting documents and any other document
      submitted to the Association for review.
              (6) Information Required to be Filed
825           (A) Any person filing documents pursuant to subparagraph (4) above
      shall provide the following information with respect to the offering:
             (i) an estimate of the maximum public offering price;
             (ii) an estimate of the maximum underwriting discount or commission;
             maximum reimbursement of underwriter’s expenses, and underwriter’s
             counsel’s fees (except for reimbursement of “blue sky” fees); maximum
             financial consulting and/or advisory fees to the underwriter and related
             persons; maximum finder’s fees; and a statement of any other type and
             amount of compensation which may accrue to the underwriter and related
             persons;
             (iii) a statement of the association or affiliation with any member of any
             officer, director or security holder of the issuer in an initial public offering
             of equity securities, and with respect to any other offering provide such
      NASD [Rules 0100-3420]                                                           173


             information with respect to any officer, director or security holder of five
             percent or more of any class of the issuer’s securities, to include:
                    a. the identity of the person;
                     b. the identity of the member and whether such member is partici-
             pating in any capacity in the public offering; and
                     c. the number of equity securities or the face value of debt securi-
             ties owned by such person, the date such securities were acquired, and
             the price paid for such securities.
             (iv) a statement addressing the factors in subparagraphs (c)(4)(C) and
             (D), where applicable;
             (v) a detailed explanation of any other arrangement entered into during
             the 12-month period immediately preceding the filing of the offering,
             which arrangement provides for the receipt of any item of value and/or the
             transfer of any warrants, options, or other securities from the issuer to the
             underwriter and related persons; and
             (vi) a detailed explanation and any documents related to the modification
             of any item of underwriting compensation subsequent to the review and
             approval of such compensation by the Association.
826            (B) Any person filing documents pursuant to subparagraph (5) above
      shall file with the Association written notice that the offering has been declared
      effective or approved by the Commission or other agency no later than one
      business day following such declaration or approval or that the offering has been
      withdrawn or abandoned within three business days following the withdrawal or
      decision to abandon the offering.
              (7) Offerings Exempt from Filing
827           Notwithstanding the provisions of subparagraph (1) above, documents
      and information related to the following public offerings need not be filed with the
      Association for review, unless subject to the provisions of Rule 2720. However, it
      shall be deemed a violation of this Rule or Rule 2810, for a member to participate
      in any way in such public offerings if the underwriting or other arrangements in
      connection with the offering are not in compliance with this Rule or Rule 2810, as
      applicable:
             (A) securities offered by a corporate, foreign government or foreign
             government agency issuer which has unsecured non-convertible debt
             with a term of issue of at least four (4) years, or unsecured non-
             convertible preferred securities, rated by a nationally recognized
             statistical rating organization in one of its four (4) highest generic rating
             categories, except that the initial public offering of the equity of an issuer
             is required to be filed;
             (B) non-convertible debt securities and non-convertible preferred securi-
             ties rated by a nationally recognized statistical rating organization in one
             of its four (4) highest generic rating categories;
             (C) offerings of securities:
                    (i) registered with the Commission on registration statement Forms
             S-3 or F-3 pursuant to the standards for those Forms prior to October 21,
      NASD [Rules 0100-3420]                                                            174


             1992 and offered pursuant to SEC Rule 415 adopted under the Securities
             Act of 1933, as amended; or
                    (ii) of a foreign private issuer incorporated or organized under the
             laws of Canada or any Canadian province or territory, and is registered
             with the Commission on Form F-10 pursuant to the standards for that
             Form approved in Securities Act Release No. 6902 (June 21, 1991) and
             offered pursuant to Canadian shelf prospectus offering procedures;
             (D) securities offered pursuant to a redemption standby “firm commit-
             ment” underwriting arrangement registered with the Commission on
             Forms S-3, F-3 or F-10 (only with respect to Canadian issuers);
             (E) financing instrument-backed securities which are rated by a nationally
             recognized statistical rating organization in one of its four highest generic
             rating categories; and
             (F) exchange offers of securities where:
                    (i) the securities to be issued or the securities of the company
             being acquired are listed on The Nasdaq National Market, the New York
             Stock Exchange, or the American Stock Exchange; or
                     (ii) the company issuing securities qualifies to register securities
             with the Commission on registration statement Forms S-3, F-3, or F-10,
             pursuant to the standards for those Forms as set forth in subparagraphs
             (C)(i) and (ii) of this paragraph; and
             (G) offerings of securities by a church or other charitable institution that is
             exempt from SEC registration pursuant to Section 3(a)(4) of the
             Securities Act.
              (8) Exempt Offerings
828           Notwithstanding the provisions of subparagraph (1) above, the following
      offerings are exempt from this Rule, Rule 2720, and Rule 2810. Documents and
      information relating to the following offerings need not be filed for review:
             (A) securities exempt from registration with the Commission pursuant to
             the provisions of Sections 4(1), 4(2), or 4(6) of the Securities Act of 1933,
             as amended, or pursuant to Rule 504 if the securities are “restricted
             securities” under SEC Rule 144(a)(3), Rule 505, or Rule 506 adopted
             under the Securities Act of 1933, as amended;
             (B) securities which are defined as “exempt securities” in Section 3(a)(12)
             of the Act, as amended;
             (C) securities of “open-end” investment companies as defined in Section
             5(a)(1) of the Investment Company Act of 1940 and securities of any
             “closed-end” investment company as defined in Section 5(a)(2) of that Act
             that:
                    (i) makes periodic repurchase offers pursuant to Rule 23c-3(b)
             under of the Investment Company Act of 1940; and
                    (ii) offers its shares on a continuous basis pursuant to Rule
             415(a)(1)(xi) under the Securities Act of 1933.
             (D) variable contracts as defined in Rule 2820(b)(1);
      NASD [Rules 0100-3420]                                                            175


             (E) modified guaranteed annuity contracts and modified guaranteed life
             insurance policies, which are deferred annuity contracts or life insurance
             policies the value of which are guaranteed if held for specified periods,
             and the non-forfeiture value of which are based upon a market-value
             adjustment formula for withdrawals made before the end of any specified
             period;
             (F) offerings of municipal securities as defined in Section 3(a)(29) of the
             Act;
             (G) tender offers made pursuant to Regulation 14D adopted under the
             Act;
             (H) securities issued pursuant to a competitively bid underwriting arrange-
             ment meeting the requirements of the Public Utility Holding Company Act
             of 1935, as amended;
             (I) securities of a subsidiary or other affiliate distributed by a company in a
             spin-off or reverse spin-off or similar transaction to its existing security
             holders exclusively as a dividend or other distribution; and
             (J) securities registered with the Commission in connection with a merger
             or acquisition transaction or other similar business combination, except
             for offerings required to be filed pursuant to subparagraph (9)(I) below.
              (9) Offerings Required to be Filed
829           Documents and information relating to all other public offerings including,
      but not limited to, the following must be filed with the Association for review:
             (A) direct participation programs as defined in Rule 2810(d)(2);
             (B) mortgage and real estate investment trusts;
             (C) rights offerings;
             (D) securities exempt from registration with the Commission pursuant to
             Section 3(a)(11) of the Securities Act of 1933, as amended;
             (E) securities exempt from registration with the Commission pursuant to
             Rule 504 adopted under the Securities Act of 1933, as amended, unless
             the securities are “restricted securities” under SEC Rule 144(a)(3);
             (F) securities offered by a bank, savings and loan association, or common
             carrier even though such offering may be exempt from registration with
             the Commission;
             (G) securities offered pursuant to Regulation A or Regulation B adopted
             under the Securities Act of 1933, as amended;
             (H) exchange offers that are exempt from registration with the Commis-
             sion under Sections 3(a)(4), 3(a)(9), or 3(a)(11) of the Securities Act of
             1933 (if a member’s participation involves active solicitation activities) or
             registered with the Commission (if a member is acting as dealer-
             manager) (collectively “exchange offers”), except for exchange offers
             exempt from filing pursuant to subparagraph (7)(F) above that are not
             subject to filing by subparagraph (9)(I) below;
      NASD [Rules 0100-3420]                                                             176


             (I) any exchange offer, merger and acquisition transaction, or other
             similar corporate reorganization involving an issuance of securities that
             results in the direct or indirect public ownership of the member; and
             (J) any offerings of a similar nature that are not exempt under
             subparagraph (7) or (8) above.
              (10) Request for Underwriting Activity Report
830           Notwithstanding the availability of an exemption from filing under sub-
      paragraph (b)(7) of this Rule, a member acting as a manager (or in a similar
      capacity) of a distribution of a publicly traded subject security or reference
      security that is subject to SEC Rule 101 or an “actively-traded” security under
      SEC Rule 101 (except for a security listed on a national securities exchange)
      shall submit a request to the Corporate Financing Department for an Under-
      writing Activity Report with respect to the subject and/or reference security in
      order to facilitate compliance with SEC Rules 101, 103, or 104, and other
      distribution-related Rules of the Association. The request shall be submitted at
      the time a registration statement or similar offering document is filed with the
      Department, the SEC, or other regulatory agency or, if not filed with any regula-
      tory agency, at least two (2) business days prior to the commencement of the
      restricted period under SEC Rule 101. The request shall include a copy of the
      registration statement or similar offering document (if not previously submitted
      pursuant to subparagraph (b)(5) of this Rule). If no member is acting as
      managing underwriter of such distribution, each member that is a distribution
      participant or an affiliated purchaser shall submit a request for an Underwriting
      Activity Report, unless another member has assumed responsibility for com-
      pliance with this subparagraph. For purposes of subparagraphs (b)(11) and (12),
      SEC Rules 100, 101, 103, and 104 are rules of the Commission adopted under
      Regulation M and the following terms shall have the meanings as defined in SEC
      Rule 100: “distribution,” “distribution participant,” “reference security,” “restricted
      period,” and “subject security.”
               (11) Submission of Pricing Information
831            A member acting as a manager (or in a similar capacity) of a distribution
      of securities that are listed on a national securities exchange and considered a
      subject security or reference security that is subject to SEC Rule 101 or an
      “actively-traded” security under SEC Rule 101 or a distribution of any other secu-
      rities that are considered “actively-traded” under SEC Rule 101 shall provide
      written notice to the Market Regulation Department of NASD Regulation, Inc., no
      later than the close of business the day the offering terminates, that includes the
      date and time of the pricing of the offering, the offering price, and the time the
      offering terminated, which notice may be submitted on the Underwriting Activity
      Report.
             (c)     Underwriting Compensation and Arrangements
              (1) General
832           No member or person associated with a member shall participate in any
      manner in any public offering of securities in which the underwriting or other
      terms or arrangements in connection with or relating to the distribution of the
      securities, or the terms and conditions related thereto, are unfair or
      unreasonable.
      NASD [Rules 0100-3420]                                                            177


              (2) Amount of Underwriting Compensation
833           (A) No member or person associated with a member shall receive an
      amount of underwriting compensation in connection with a public offering which
      is unfair or unreasonable and no member or person associated with a member
      shall underwrite or participate in a public offering of securities if the underwriting
      compensation in connection with the public offering is unfair or unreasonable.
834           (B) For purposes of determining the amount of underwriting compensa-
      tion, all items of value received or to be received from any source by the
      underwriter and related persons which are deemed to be in connection with or
      related to the distribution of the public offering as determined pursuant to
      subparagraphs (3) and (4) below shall be included.
835           (C) All items of underwriting compensation shall be disclosed in the
      section on underwriting or distribution arrangements in the prospectus or similar
      document and, if the underwriting compensation includes items of compensation
      in addition to the commission or discount disclosed on the cover page of the
      prospectus or similar document, a footnote to the offering proceeds table on the
      cover page of the prospectus or similar document shall include a cross-reference
      to the section on underwriting or distribution arrangements.
836           (D) For purposes of determining the currently effective guideline on the
      maximum amount of underwriting compensation considered fair and reasonable,
      the following factors, as well as any other relevant factors and circumstances,
      shall be taken into consideration:
             (i) the offering proceeds;
             (ii) the amount of risk assumed by the underwriter and related persons,
             which is determined by:
                    a. whether the offering is being underwritten on a “firm commit-
             ment” or “best efforts” basis and
                     b. whether the offering is an initial or secondary offering; and
             (iii) the type of securities being offered.
837           (E) The maximum amount of compensation (stated as a percentage of
      the dollar amount of the offering proceeds) which is considered fair and reasona-
      ble generally will vary directly with the amount of risk to be assumed by the
      underwriter and related persons and inversely with the dollar amount of the
      offering proceeds.
              (3) Items of Compensation
838           (A) For purposes of determining the amount of underwriting compensa-
      tion received or to be received by the underwriter and related persons pursuant
      to subparagraph (2) above, the following items and all other items of value
      received or to be received by the underwriter and related persons in connection
      with or related to the distribution of the offering, as determined pursuant to
      subparagraph (4) below shall be included:
             (i) discount or commission;
             (ii) reimbursement of expenses to or on behalf of the underwriter and
             related persons;
      NASD [Rules 0100-3420]                                                            178


             (iii) fees and expenses of underwriter’s counsel (except for reimburse-
             ment of “blue sky” fees);
             (iv) finder’s fees;
             (v) wholesaler’s fees;
             (vi) financial consulting and advisory fees, whether in the form of cash,
             securities, or any other item of value;
             (vii) stock, options, warrants, and other securities, including securities
             received as underwriting compensation, for example:
                       a. in connection with a private placement of securities for the
             issuer;
                       b. for providing or arranging bridge financing for the issuer;
                       c. as a finder’s fee;
                       d. for consulting services to the issuer; and
                       e. securities purchased in a private placement made by the issuer;
             (viii) special sales incentive items in compliance with subparagraph
             (6)(B)(xi) below;
             (ix) any right of first refusal provided to the underwriter and related
             persons to underwrite or participate in future public offerings, private
             placements or other financings, which will have a compensation value of
             1% of the offering proceeds or that dollar amount contractually agreed to
             by the issuer and underwriter to waive the right of first refusal;
             (x) compensation to be received by the underwriter and related persons
             or by any person nominated by the underwriter as an advisor to the
             issuer’s board of directors in excess of that received by other members of
             the board of directors;
             (xi) commissions, expense reimbursements, or other compensation to be
             received by the underwriter and related persons as a result of the
             exercise or conversion within 12 months following the effective date of the
             offering of warrants, options, convertible securities, or similar securities
             distributed as part of the offering;
             (xii) fees of a qualified independent underwriter; and
             (xiii) compensation, including expense reimbursements, paid in the six
             months prior to the initial or amended filing of the prospectus or similar
             documents to any member or person associated with a member for a
             public offering that was not completed.
839          (B) Expenses customarily borne by an issuer, such as printing costs;
      SEC, “blue sky” and other registration fees; Association filing fees; and
      accountant’s fees, shall be excluded from underwriter’s compensation whether or
      not paid through an underwriter.
      NASD [Rules 0100-3420]                                                           179


              (4) Determination of Whether Compensation Is Received in Connection
              with the Offering
840           (A) All items of value received or to be received by the underwriter and
      related persons during the 12-month period immediately preceding the filing of
      the registration statement or similar document, and at the time of and subsequent
      to the public offering, will be examined to determine whether such items of value
      are underwriting compensation in connection with the offering and, if received
      during the 6-month period immediately preceding the filing of the registration
      statement or similar document, will be presumed to be underwriting compensa-
      tion received in connection with the offering, provided, however, that such
      presumption may be rebutted on the basis of information satisfactory to the
      Association to support a finding that the receipt of an item is not in connection
      with the offering and shall not include cash discounts or commissions received in
      connection with a prior distribution of the issuer’s securities.
841           (B) Items of value received by an underwriter and related person more
      than 12 months immediately preceding the date of filing of the registration
      statement or similar document will be presumed not to be underwriting compen-
      sation. However, items received prior to such 12-month period may be included
      as underwriting compensation on the basis of information to support a finding
      that receipt of the item is in connection with the offering.
842           (C) For purposes of determining whether any item of value received or to
      be received by the underwriter and related persons is in connection with or
      related to the distribution of the public offering, the following factors, as well as
      any other relevant factors and circumstances, shall be considered:
             (i) the length of time between the date of filing of the registration state-
             ment or similar document and:
                     a. the date of the receipt of the item of value;
                    b. the date of any contractual agreement for services for which the
             item of value was or is to be received; and
                    c. the date the performance of the service commenced, with a
             shorter period of time tending to indicate that the item is received in
             connection with the offering;
             (ii) the details of the services provided or to be provided for which the item
             of value was or is to be received;
             (iii) the relationship between the services provided or to be provided for
             which the item of value was or is to be received and:
                     a. the nature of the item of value;
                     b. the compensation value of the item; and
                     c. the proposed public offering;
             (iv) the presence or absence of arm’s length bargaining or the existence
             of any affiliate relationship between the issuer and the recipient of the
             item of value, with the absence of arm’s length bargaining or the
             presence of any affiliation tending to indicate that the item of value is
             received in connection with the offering.
      NASD [Rules 0100-3420]                                                           180


843          (D) For purposes of determining whether securities received or to be
      received by the underwriter and related persons are in connection with or related
      to the distribution of the public offering, the factors in subparagraph (C) above
      and the following factors shall be considered:
             (i) any disparity between the price paid and the offering price or the
             market price, if a bona fide independent market exists at the time of
             acquisition, with a greater disparity tending to indicate that the securities
             constitute compensation;
             (ii) the amount of risk assumed by the recipient of the securities, as
             determined by:
                    a. the restrictions on exercise and resale;
                    b. the nature of the securities (e.g., warrant, stock, or debt); and
                    c. the amount of securities, with a larger amount of readily market-
             able securities without restrictions on resale or a warrant for securities
             tending to indicate that the securities constitute compensation; and
             (iii) the relationship of the receipt of the securities to purchases by
             unrelated purchasers on similar terms at approximately the same time,
             with an absence of similar purchases tending to indicate that the
             securities constitute compensation.
844            (E) Notwithstanding the provisions of subparagraph (3)(A)(vi) above,
      financial consulting and advisory fees may be excluded from underwriting com-
      pensation upon a finding by the Association, on the basis of information satisfac-
      tory to it, that an ongoing relationship between the issuer and the underwriter and
      related person has been established at least 12 months prior to the filing of the
      registration statement or similar document or that the relationship, if established
      subsequent to that time, was not entered into in connection with the offering, and
      that actual services have been or will be rendered which were not or will not be in
      connection with or related to the offering.
              (5) Valuation of Non-Cash Compensation
845           For purposes of determining the value to be assigned to securities
      received as underwriting compensation, the following criteria and procedures
      shall be applied:
846           (A) No underwriter and related person may receive a security or a warrant
      for a security as compensation in connection with the distribution of a public
      offering that is different than the security to be offered to the public unless the
      security received as compensation has a bona fide independent market,
      provided, however, that:
             (i) in exceptional and unusual circumstances, upon good cause shown,
             such arrangement may be permitted by the Association; and
             (ii) in an offering of units, the underwriter and related persons may only
             receive a warrant for the unit offered to the public where the unit is the
             same as the public unit and the terms are no more favorable than the
             terms of the public unit.
847          (B) securities that are not options, warrants or convertible securities shall
      be valued on the basis of:
      NASD [Rules 0100-3420]                                                          181


             (i) the difference between the per security cost and either the market price
             per security on the date of acquisition, where a bona fide independent
             market exists for the security, or the proposed (and actual) public offering
             price per security;
             (ii) multiplied by the number of securities received or to be received as
             underwriting compensation;
             (iii) divided by the offering proceeds; and
             (iv) multiplied by 100.
848           (C) options, warrants or convertible securities shall be valued on the basis
      of the following formula:
             (i) the proposed (and actual) public offering price per security multiplied
             by .65 (65%);
             (ii) minus the difference between the exercise or conversion price per
             security and either the market price per security on the date of acquisi-
             tion, where a bona fide independent market exists for the security, or the
             proposed (and actual) public offering price per security;
             (iii) divided by two;
             (iv) multiplied by the number of warrants, options, and convertible securi-
             ties received or to be received as underwriting compensation;
             (v) less the total price paid for the securities;
             (vi) divided by the offering proceeds; and
             (vii) multiplied by 100.
849            (D) a lower value equal to 80% and 60% of the calculated value shall be
      assigned if securities, and where relevant, underlying securities, are or will be
      restricted from sale, transfer, assignment or other disposition for a period of one
      and two years, respectively, beyond the one-year period of restriction required by
      subparagraph (7)(A)(i) below.
             (6) Unreasonable Terms and Arrangements
850          (A) No member or person associated with a member shall participate in
      any manner in a public offering of securities after any arrangement proposed in
      connection with the public offering, or the terms and conditions relating thereto,
      has been determined to be unfair or unreasonable pursuant to this Rule or
      inconsistent with any By-Law or any Rule or regulation of the Association.
851           (B) Without limiting the foregoing, the following terms and arrangements,
      when proposed in connection with the distribution of a public offering of securi-
      ties, shall be unfair and unreasonable:
             (i) any accountable expense allowance granted by an issuer to the under-
             writer and related persons which includes payment for general overhead,
             salaries, supplies, or similar expenses of the underwriter incurred in the
             normal conduct of business;
             (ii) any non-accountable expense allowance in excess of three percent;
NASD [Rules 0100-3420]                                                           182


       (iii) any payment of commissions or reimbursement of expenses directly
       or indirectly to the underwriter and related persons prior to commence-
       ment of the public sale of the securities being offered, except a reasona-
       ble advance against out-of-pocket accountable expenses actually
       anticipated to be incurred by the underwriter and related persons, which
       advance is reimbursed to the issuer to the extent not actually incurred;
       (iv) the payment of any compensation by an issuer to a member or
       person associated with a member in connection with an offering of securi-
       ties which is not completed according to the terms of agreement between
       the issuer and underwriter, except those negotiated and paid in connec-
       tion with a transaction that occurs in lieu of the proposed offering as a
       result of the efforts of the underwriter and related persons and provided,
       however, that the reimbursement of out-of-pocket accountable expenses
       actually incurred by the member or person associated with a member
       shall not be presumed to be unfair or unreasonable under normal
       circumstances;
       (v) any “tail fee” arrangement granted to the underwriter and related
       persons that has a duration of more than two years from the date the
       member’s services are terminated, in the event that the offering is not
       completed in accordance with the agreement between the issuer and the
       underwriter and the issuer subsequently consummates a similar transac-
       tion, except that a member may demonstrate on the basis of information
       satisfactory to the Association that an arrangement of more than two
       years is not unfair or unreasonable under the circumstances.
       (vi) any right of first refusal provided to the underwriter or related persons
       to underwrite or participate in future public offerings, private placements
       or other financings which:
               a. has a duration of more than three years from the effective date
       of the offering; or
                b. has more than one opportunity to waive or terminate the right of
       first refusal in consideration of any payment or fee;
       (vii) any payment or fee to waive or terminate a right of first refusal
       regarding future public offerings, private placements or other financings
       provided to the underwriter and related persons which:
              a. has a value in excess of the greater of 1% of the offering
       proceeds in the public offering where the right of first refusal was granted
       (or an amount in excess of 1% if additional compensation is available
       under the compensation guideline of the original offering) or 5% of the
       underwriting discount or commission paid in connection with the future
       financing (including any overallotment option that may be exercised),
       regardless of whether the payment or fee is negotiated at the time of or
       subsequent to the original public offering; or
              b. is not paid in cash.
       (viii) the receipt by the underwriter and related persons of underwriting
       compensation consisting of any option, warrant or convertible security
       which:
NASD [Rules 0100-3420]                                                            183


               a. is exercisable or convertible more than five years from the
       effective date of the offering;
               b. is exercisable or convertible at a price below either the public
       offering price of the underlying security or, if a bona fide independent
       market exists for the security or the underlying security, the market price
       at the time of receipt;
              c. is not in compliance with subparagraph (5)(A) above;
             d. has more than one demand registration right at the issuer’s
       expense;
              e. has a demand registration right with a duration of more than five
       years from the effective date of the offering;
             f. has a piggyback registration right with a duration of more than
       seven years from the effective date of the offering;
              g. has anti-dilution terms designed to provide the underwriter and
       related persons with disproportionate rights, privileges and economic
       benefits which are not provided to the purchasers of the securities offered
       to the public (or the public shareholders, if in compliance with sub-
       paragraph (5)(A) above);
              h. has anti-dilution terms designed to provide for the receipt or
       accrual of cash dividends prior to the exercise or conversion of the
       security; or
              i. is convertible or exercisable or otherwise is on terms more
       favorable than the terms of the securities being offered to the public;
       (ix) the receipt by the underwriter and related persons of any item of
       compensation for which a value cannot be determined at the time of the
       offering;
       (x) when proposed in connection with the distribution of a public offering
       of securities on a “firm commitment” basis, any overallotment option
       providing for the overallotment of more than 15% percent of the amount
       of securities being offered, computed excluding any securities offered
       pursuant to the overallotment option;
       (xi) stock numerical limitation. The receipt by the underwriter and related
       persons of securities which constitute underwriting compensation in an
       aggregate amount greater than 10% of the number or dollar amount of
       securities being offered to the public, which is calculated to exclude:
              a. any securities deemed to constitute underwriting compensation;
              b. any securities issued or to be issued pursuant to an over-
       allotment option;
              c. in the case of a “best efforts” offering, any securities not actually
       sold; and
               d. any securities underlying warrants, options, or convertible
       securities which are part of the proposed offering, except where acquired
       as part of a unit;
NASD [Rules 0100-3420]                                                             184


       (xii) the receipt by a member or person associated with a member,
       pursuant to an agreement entered into at any time before or after the
       effective date of a public offering of warrants, options, convertible securi-
       ties or units containing such securities, of any compensation or expense
       reimbursement in connection with the exercise or conversion of any such
       warrant, option, or convertible security in any of the following
       circumstances:
              a. the market price of the security into which the warrant, option, or
       convertible security is exercisable or convertible is lower than the
       exercise or conversion price;
               b. the warrant, option, or convertible security is held in a discretio-
       nary account at the time of exercise or conversion, except where prior
       specific written approval for exercise or conversion is received from the
       customer;
              c. the arrangements whereby compensation is to be paid are not
       disclosed:
              1. in the prospectus or offering circular by which the warrants,
              options, or convertible securities are offered to the public, if such
              arrangements are contemplated or any agreement exists as to
              such arrangements at that time, and
              2. in the prospectus or offering circular provided to security holders
              at the time of exercise or conversion; or
              d. the exercise or conversion of the warrants, options or converti-
       ble securities is not solicited by the underwriter or related person,
       provided however, that any request for exercise or conversion will be
       presumed to be unsolicited unless the customer states in writing that the
       transaction was solicited and designates in writing the broker/dealer to
       receive compensation for the exercise or conversion;
       (xiii) for a member or person associated with a member to accept, directly
       or indirectly, any non-cash sales incentive item including, but not limited
       to, travel bonuses, prizes and awards, from an issuer or an affiliate
       thereof in excess of $100 per person per issuer annually. Notwithstanding
       the foregoing, a member may provide non-cash sales incentive items to
       its associated persons provided that no issuer, or an affiliate thereof,
       including specifically an affiliate of the member, directly or indirectly parti-
       cipates in or contributes to providing such non-cash sales incentive; or
       (xiv) for a member to participate with an issuer in the public distribution of
       a non-underwritten issue of securities if the issuer hires persons primarily
       for the purpose of distributing or assisting in the distribution of the issue,
       or for the purpose of assisting in any way in connection with the under-
       writing, except to the extent in compliance with 17 C.F.R. §240.3a4-1 and
       applicable state law.
       (xv) for a member or person associated with a member to participate in a
       public offering of real estate investment trust securities, as defined in Rule
       2340(c)(4), unless the trustee will disclose in each annual report distri-
       buted to investors pursuant to Section 13(a) of the Act a per share
      NASD [Rules 0100-3420]                                                           185


             estimated value of the trust securities, the method by which it was
             developed, and the date of the data used to develop the estimated value.
852           (C) In the event that the underwriter and related persons receive securi-
      ties deemed to be underwriting compensation in an amount constituting unfair
      and unreasonable compensation pursuant to the stock numerical limitation in
      subparagraph (B)(ix) above, the recipient shall return any excess securities to the
      issuer or the source from which received at cost and without recourse, except
      that in exceptional and unusual circumstances, upon good cause shown, a
      different arrangement may be permitted.
            (7) Restrictions on Securities
853         (A) No member or person associated with a member shall participate in
      any public offering which does not comply with the following requirements:
             (i) securities deemed to be underwriting compensation shall not be sold,
             transferred, assigned, pledged or hypothecated by any person, except as
             provided in subparagraph (B) below, for a period of one year following the
             effective date of the offering for which the securities were received.
             However, securities deemed to be underwriting compensation may be
             transferred to any member participating in the offering and the bona fide
             officers or partners thereof and securities which are convertible into other
             types of securities or which may be exercised for the purchase of other
             securities may be so transferred, converted or exercised if all securities
             so transferred or received remain subject to the restrictions specified
             herein for the remainder of the initially applicable time period;
             (ii) certificates or similar instruments representing securities restricted
             pursuant to subparagraph (i) above shall bear an appropriate legend
             describing the restriction and stating the time period for which the
             restriction is operative; and
             (iii) securities to be received by a member as underwriting compensation
             shall only be issued to a member participating in the offering and the
             bona fide officers or partners thereof.
854          (B) The provisions of subparagraph (A) notwithstanding, the transfer of
      any security by operation of law or by reason of reorganization of the issuer shall
      not be prohibited.
855           (C) Venture capital restrictions. When a member participates in the initial
      public offering of an issuer’s securities, such member or any officer, director,
      general partner, controlling shareholder or subsidiary of the member or subsidia-
      ry of such controlling shareholder or a member of the immediate family of such
      persons, who beneficially owns any securities of said issuer at the time of filing of
      the offering, shall not sell such securities during the offering or sell, transfer,
      assign or hypothecate such securities for 90 days following the effective date of
      the offering unless:
             (i) the price at which the issue is to be distributed to the public is
             established at a price no higher than that recommended by a qualified
             independent underwriter who does not beneficially own 5% or more of the
             outstanding voting securities of the issuer, who shall also participate in
             the preparation of the registration statement and the prospectus, offering
      NASD [Rules 0100-3420]                                                             186


             circular, or similar document and who shall exercise the usual standards
             of “due diligence” in respect thereto; or
             (ii) the aggregate amount of such securities held by such member and its
             related persons enumerated above would not exceed 1% of the securities
             being offered.
              (8) Conflicts of Interest
856           Proceeds directed to a member: No member shall participate in a public
      offering of an issuer’s securities where more than 10% percent of the net offering
      proceeds, not including underwriting compensation, are intended to be paid to
      members participating in the distribution of the offering or associated or affiliated
      persons of such members, or members of the immediate family of such persons,
      unless the price at which an equity issue or the yield at which a debt issue is to
      be distributed to the public is established pursuant to Rule 2720(c)(3).
857          (A) All offerings included within the scope of this subparagraph (8) shall
      disclose in the underwriting or plan of distribution section of the registration state-
      ment, offering circular or other similar document that the offering is being made
      pursuant to the provisions of this subparagraph and, where applicable, the name
      of the member acting as qualified independent underwriter, and that such
      member is assuming the responsibilities of acting as a qualified independent
      underwriter in pricing the offering and conducting due diligence.
858          (B) The provisions of this subparagraph (8) shall not apply to:
             (i) an offering otherwise subject to the provisions of Rule 2720;
             (ii) an offering of securities exempt from registration with the Commission
             under Section 3(a)(4) of the Securities Act of 1933;
             (iii) an offering of a real estate investment trust as defined in Section 856
             of the Internal Revenue Code; or
             (iv) an offering of securities subject to Rule 2810, unless the net offering
             proceeds are intended to be paid to the above persons for the purpose of
             repaying loans, advances or other types of financing utilized to acquire an
             interest in a pre-existing company.
             (d)     Exemptions
859          Pursuant to the Rule 9600 Series, the Association may exempt a member
      or person associated with a member from the provisions of this Rule for good
      cause shown.
      [Replaced Interpretation of the Board of Governors — Review of Corporate
      Financing, Art. III, Sec. 1 of the Rules of Fair Practice, which was amended eff.
      May 4, 1971; June 17, 1971; Mar. 19, 1982; May 31, 1983; Aug. 4, 1983; July 13,
      1984; Sept. 12, 1985; Mar. 1, 1986; Oct. 14, 1988; Jan. 1, 1989.]

      [Corporate Financing Rule adopted Apr. 15, 1992; amended by SR-NASD-93-45
      eff. Dec. 13, 1993; amended by SR-NASD-93-13 eff. Feb. 1, 1994; amended by
      SR-NASD-94-12 eff. Mar. 7, 1994; amended by SR-NASD-94-64 eff. Feb. 9,
      1995; amended by SR-NASD-94-61 eff. Mar. 2, 1995; amended by SR-NASD-
      95-18 eff. June 19, 1995; amended by SR-NASD-95-29 eff. Jan. 1, 1996;
      amended by SR-NASD-97-15 eff. Mar. 4, 1997; amended by SR-NASD-97-18
      NASD [Rules 0100-3420]                                                            187


      eff. Mar. 14, 1997; amended by SR-NASD-97-28 eff: 8/7/97; amended by SR-
      NASD-97-38 eff. Dec. 15, 1997; amended by SR-NASD-97-68 eff. Oct. 3, 1997;
      amended by SR-NASD-98-81 eff. Dec. 21, 1998; amended by SR-NASD-98-87
      eff. Nov. 23, 1998; amended by SR-NASD-99-01 eff. May 17, 1999; amended by
      SR-NASD-99-02 eff. Dec. 7, 1999; deleted paragraph (b)(12) October 6, 2000;
      amended by SR-NASD-00-13 eff. April 16, 2001; amended by SR-NASD-99-74
      eff. June 20, 2000.]
      Selected Notices to Members: 83-12, 83-15, 83-43, 83-44, 84-37, 85-6, 86-27,
      88-32, 88-88, 92-28, 93-84, 93-88, 94-82, 95-22, 95-73, 95-95, 97-80, 99-17, 99-
      50, 00-53.

      2720. Distribution of Securities of Members and Affiliates — Conflicts of
            Interest
             (a)     General
860           (1) No member or person associated with a member shall participate in
      the distribution of a public offering of debt or equity securities issued or to be
      issued by the member, the parent of the member, or an affiliate of the member
      and no member or parent of a member shall issue securities except in
      accordance with this Rule.
861            (2) No member or person associated with a member shall participate in
      the distribution of a public offering of debt or equity securities issued or to be
      issued by a company if the member and/or its associated persons, parent or
      affiliates have a conflict of interest with the company, as defined herein, except in
      accordance with this Rule.
862           (3) In the case of an exchange offer, merger and acquisition transaction,
      or similar corporate reorganization, this Rule shall only apply if the offering is
      described in:
             (A) Rule 2710(b)(9)(H) and the issuance of securities is by a member or
             the parent of a member; or
             (B) Rule 2710(b)(9)(I).
             (b)     Definitions
863         For purposes of this Rule, the following words shall have the stated
      meanings:
864           (1)(A) Affiliate — The term “affiliate” shall mean a company which
      controls, is controlled by or is under common control with a member;
865           (1)(B) The term “affiliate” is presumed to include, but is not limited to, the
      following for purposes of subparagraph (A), above:
             (i) a company will be presumed to control a member if the company
             beneficially owns 10% or more of the outstanding voting securities of a
             member which is a corporation, or beneficially owns a partnership interest
             in 10% or more of the distributable profits or losses of a member which is
             a partnership;
             (ii) a member will be presumed to control a company if the member and
             persons associated with the member beneficially own 10% or more of the
             outstanding voting securities of a company which is a corporation, or
      NASD [Rules 0100-3420]                                                        188


             beneficially own a partnership interest in 10% or more of the distributable
             profits or losses of a company which is a partnership;
             (iii) a company will be presumed to be under common control with a
             member if:
                    a. The same natural person or company controls both the member
             and company by beneficially owning 10% or more of the outstanding
             voting securities of a member or company which is a corporation, or by
             beneficially owning a partnership interest in 10% or more of the distribu-
             table profits or losses of a member or company which is a partnership; or
                    b. A person having the power to direct or cause the direction of the
             management or policies of the member or the company also has the
             power to direct or cause the direction of the management or policies of
             the other entity in question.
866         (C) The provisions of subparagraphs (A) and (B) hereof notwithstanding,
      none of the following shall be presumed to be an affiliate of a member for
      purposes of this Rule:
             (i) an investment company registered with the Commission pursuant to
             the Investment Company Act of 1940, as amended;
             (ii) a “separate account” as defined in Section 2(a)(37) of the Investment
             Company Act of 1940, as amended;
             (iii) a “real estate investment trust” as defined in Section 856 of the
             Internal Revenue Code;
             (iv) a “direct participation program” as defined in Rule 2810; and
             (v) a corporation, trust, partnership or other entity issuing financing
             instrument-backed securities which are rated by a nationally recognized
             statistical rating organization in one of its four highest generic rating
             categories.
867           (2) Beneficial ownership — the right to the economic benefits of a
      security.
868          (3) Bona fide independent market — a market in a security which:
             (A) is registered pursuant to the provisions of Sections 12(b) or 12(g) of
             the Act or issued by a company subject to Section 15(d) of such Act,
             unless exempt from those provisions;
             (B) has a market price as of the close of trading on the trade date
             immediately preceding filing of the registration statement or offering
             circular of five dollars or more per share, and which has traded at a price
             of five dollars or more per share in at least 20 of the 30 trading days
             immediately preceding the filing of the registration statement or offering
             circular; and
             (C) for at least 90 calendar days immediately preceding the filing of the
             registration statement or offering circular with the department:
                    (i) has been listed on and is in compliance with the requirements
             for continued listing on a national securities exchange; or
      NASD [Rules 0100-3420]                                                           189


                    (ii) has been listed on and is in compliance with the requirements
             for continued listing on The Nasdaq Stock Market and has had at least
             two bona fide independent market makers for a period of at least 30
             trading days immediately preceding the filing of the registration statement
             and the effective date of the offering; and
             (D) for the 90 calendar day period immediately preceding the filing of the
             registration statement or offering circular:
                    (i) has an aggregate trading volume of at least 500,000 shares; or
                    (ii) has outstanding a minimum of 5,000,000 publicly held shares.
869          (4) Bona fide independent market maker — a market maker which:
             (A) is registered as a Nasdaq market maker in the security to be
             distributed pursuant to this schedule;
             (B) is not an affiliate of the entity issuing securities pursuant to paragraph
             (c) of this Rule and, together with its associated persons, does not in the
             aggregate beneficially own, at the time of the filing of the registration
             statement and at the commencement of the distribution, five percent or
             more of the outstanding voting securities of such entity which is a corpo-
             ration or beneficially own a partnership interest in five percent or more of
             the distributable profits or losses of such entity which is a partnership; and
             (C) is not a recipient of any of the net proceeds of the offering.
870          (5) Common equity — the total number of shares of common stock out-
      standing without regard to class, whether voting or non-voting, convertible or
      non-convertible, exchangeable or non-exchangeable, redeemable or non-
      redeemable, as reflected on the consolidated financial statements of the
      company.
871           (6) Company — a corporation, a partnership, an association, a joint stock
      company, a trust, a fund, or any organized group of persons whether incorpo-
      rated or not; or any receiver, trustee in bankruptcy or similar official or any
      liquidating agent for any of the foregoing, in his capacity as such.
872          (7) Conflict of interest — shall be presumed to exist when:
             (A) a member and/or its associated persons, parent or affiliates in the
             aggregate beneficially own 10% or more of the outstanding subordinated
             debt of a company;
             (B) a member and/or its associated persons, parent or affiliates in the
             aggregate beneficially own 10% or more of the common equity of a
             company which is a corporation, or beneficially own a general limited or
             special partnership interest in 10% or more of the distributable profits or
             losses of a company; or
             (C) a member and/or its associated persons, parent or affiliates in the
             aggregate beneficially own 10% or more of the preferred equity of a
             company.
             (D) The provisions of paragraphs (A), (B) and (C) hereof notwithstanding,
             the conflict of interest provisions of this Rule shall not apply to:
      NASD [Rules 0100-3420]                                                             190


                  (i) an offering of securities exempt from registration with the
             Commission under Section 3(a)(4) of the Securities Act of 1933;
                   (ii) an investment company registered with the Commission
             pursuant to the Investment Company Act of 1940, as amended;
                    (iii) a “separate account” as defined in Section 2(a)(37) of the
             Investment Company Act of 1940, as amended;
                    (iv) a “real estate investment trust” as defined in Section 856 of the
             Internal Revenue Code;
                     (v) a “direct participation program” as defined in Rule 2810;
                     (vi) an offering of financing instrument-backed securities which are
             rated by a nationally recognized statistical rating organization in one of its
             four (4) highest generic rating categories;
                      (vii) an offering of a class of equity securities for which a bona fide
             independent market as defined in paragraph (b)(3) exists as of the date of
             the filing of the registration statement and as of the effective date thereof;
             and
                     (viii) an offering of a class of securities rated in one of the four
             highest generic rating categories by a nationally recognized statistical
             rating organization.
873        (8) Effective date — the date on which an issue of securities first
      becomes legally eligible for distribution to the public.
874           (9) Immediate family — parents, mother-in-law, father-in-law, husband or
      wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-
      law, and children, or any other person who is supported, directly or indirectly, to a
      material extent by an employee of, or person associated, with a member.
875           (10) Parent — any entity affiliated with a member from which member the
      entity derives 50% or more of its gross revenues or in which it employs 50% or
      more of its assets.
876          (11) Person — any natural person, partnership, corporation, association,
      or other legal entity.
877          (12) Preferred equity — the aggregate capital invested by all persons in
      the preferred securities outstanding without regard to class, whether voting or
      non-voting, convertible or non-convertible, exchangeable or non-exchangeable,
      redeemable or non-redeemable, as reflected on the consolidated financial state-
      ments of the company.
878           (13) Public director — a person elected from the general public to the
      board of directors of a member or its parent which has made a public distribution
      of an issue of its own securities. Such person shall not beneficially own five
      percent or more of the outstanding voting securities of the member or its parent
      and shall not be engaged in the investment banking or securities business or be
      an officer or employee of the member or its parent, or be a member of the
      immediate family of an employee occupying a managerial position with a
      member or its parent.
      NASD [Rules 0100-3420]                                                                              191


879            (14) Public offering — any primary or secondary distribution of securities
      made pursuant to a registration statement or offering circular including exchange
      offers, rights offerings, offerings made pursuant to a merger or acquisition,
      straight debt offerings, offerings pursuant to SEC Rule 504, and all other securi-
      ties distributions of any kind whatsoever, except any offering made pursuant to
      an exemption from registration under Sections 4(1), 4(2), or 4(6) of the Securities
      Act of 1933, as amended, or pursuant to SEC Rule 504 if the securities are
      “restricted securities” under SEC Rule 144(a)(3), SEC Rule 505, or SEC Rule
      506 adopted under the Securities Act of 1933, as amended. The term public
      offering shall exclude exempted securities as defined in Section 3(a)(12) of the
      Act.
                                                   8
880          (15) Qualified independent underwriter — a member which:
881           (A) is actively engaged in the investment banking or securities business
      and which has been so engaged, in its present form or through predecessor
      broker/dealer entities, for at least five years immediately preceding the filing of
      the registration statement;
882           (B) as of the date of the filing of the registration statement and as of the
      effective date of the offering:
             (i) if a corporation, a majority of its board of directors or, if a partnership, a
             majority of its general partners, are persons who have been actively
             engaged in the investment banking or securities business for the five-year
             period immediately preceding the filing of the registration statement;
             (ii) if a sole proprietorship, the proprietor has been actively engaged in the
             investment banking or securities business for the five-year period
             immediately preceding the filing of the registration statement;
883           (C) has actively engaged in the underwriting of public offerings of
      securities of a similar size and type for at least the five-year period immediately
      preceding the filing of the registration statement. For purposes of this sub-
      paragraph (15), the above requirement shall be satisfied if the member:
             (i) with respect to a proposed debt offering, has acted as manager or co-
             manager of public offerings of debt securities within the previous five
             years, including offerings each with gross proceeds of not less than 25%
             of the anticipated gross proceeds of the proposed offering;
             (ii) with respect to a proposed equity, has acted as manger or co-
             manager of public offerings of equity securities (or of securities converti-
             ble into equity securities) within the previous five years, including offer-
             ings each with gross proceeds of not less than 50% of the anticipated
             gross proceeds of the proposed offer;
             (iii) has acted as manager or co-manager of public offerings of securities
             within the previous five years, including offerings each with gross
             proceeds of not less than $50 million; or


      8
           In the opinion of the Association and the Commission the full responsibilities and liabilities of an
           underwriter under the Securities Act of 1933 attach to a “qualified independent underwriter”
           performing the functions called for by the provisions of paragraph (c) hereof.
      NASD [Rules 0100-3420]                                                             192


             (iv) demonstrates that it has acquired experience within the previous five
             years involving the pricing and due diligence functions comparable to that
             of a manager or co-manager of public offerings of securities in the above
             amounts;
884          (D) no person associated with the member in a supervisory capacity
      responsible for organizing, structuring or performing due diligence with respect to
      corporate public offerings of securities:
             (i) has been convicted within five years prior to the filing of the registration
             statement of a violation of the anti-fraud provisions of the federal or state
             securities laws, or any rules or regulations promulgated thereunder, in
             connection with the distribution of a registered or unregistered offering of
             securities;
             (ii) is subject to any order, judgment, or decree of any court of competent
             jurisdiction entered within five years prior to the filing of the registration
             statement permanently enjoining or restraining such person from
             engaging in or continuing any conduct or practice in violation of the anti-
             fraud provisions of the federal or state securities laws, or any rules or
             regulations promulgated thereunder in connection with the distribution of
             a registered or unregistered offering of securities; or
             (iii) has been suspended or barred from association with any member by
             an order or decision of the Commission, any state, the Association or any
             other self-regulatory organization within five years prior to the filing of the
             registration statement for any conduct or practice in violation of the anti-
             fraud provisions of the federal or state securities laws, or any rules, or
             regulations promulgated thereunder, or the anti-fraud rules of any self-
             regulatory organization in connection with the distribution of a registered
             or unregistered offering of securities; or
885           (E) is not an affiliate of the entity issuing securities pursuant to paragraph
      (c) of this Rule and does not beneficially own five percent or more of the
      outstanding voting securities, common equity, preferred equity or subordinated
      debt of such entity which is a corporation or beneficially own a partnership
      interest in five percent or more of the distributable profits or losses of such entity
      which is a partnership; and
886           (F) has agreed in acting as a qualified independent underwriter to under-
      take the legal responsibilities and liabilities of an underwriter under the Securities
      Act of 1933, specifically including those inherent in Section 11 thereof.
887           (16) Registration statement — a registration statement as defined by
      Section 2(8) of the Securities Act of 1933; notification on Form 1A filed with the
      Commission pursuant to the provisions of SEC Rule 255 under the Securities Act
      of 1933; or any other document, by whatever name known, initiating a registra-
      tion or similar process for an issue of securities which is required to be filed by
      the laws or regulations of any federal or state agency.
888           (17) Settlement — the distribution of the net proceeds from an offering to
      the issuer or selling stockholders.
889          (18) Subordinated debt — includes (A) debt of an issuer which is express-
      ly subordinate in right of payment to, or with a claim on assets subordinate to,
      NASD [Rules 0100-3420]                                                              193


      any existing or future debt of such issuer; or (B) all debt that is specified as
      subordinated at the time of issuance. Subordinated debt shall not include short-
      term debt with maturity at issuance of less than one year and secured debt and
      bank debt not specified as subordinated debt at the time of issuance.
             (c)     Participation in Distribution of Securities of Member or Affiliate
890           (1) No member shall underwrite, participate as a member of the under-
      writing syndicate or selling group, or otherwise assist in the distribution of a
      public offering of an issue of debt or equity securities issued or to be issued by
      the member or an affiliate of the member, or of a company with which the
      member or its associated persons, parent or affiliates have a conflict of interest,
      unless the member is in compliance with subparagraphs (2) and (3) below.
891           (2) In the case of a member which is a corporation, the majority of the
      board of directors, or in the case of a member which is a partnership, a majority
      of the general partners or, in the case of a member which is a sole proprietorship,
      the proprietor as of the date of the filing of the registration statement and as of
      the effective date of the offering shall have been actively engaged in the
      investment banking or securities business for the five year period immediately
      preceding the filing of the registration statement.
892           (3) If a member proposes to underwrite, participate as a member of the
      underwriting syndicate or selling group, or otherwise assist in the distribution of a
      public offering of its own or an affiliate’s securities, or of securities of a company
      with which it or its associated persons, parent or affiliates have a conflict of
      interest, one or more of the following three criteria shall be met:
             (A) the price at which an equity issue or the yield at which a debt issue is
             to be distributed to the public is established at a price no higher or yield
             no lower than that recommended by a qualified independent underwriter
             which shall also participate in the preparation of the registration statement
             and the prospectus, offering circular, or similar document and which shall
             exercise the usual standards of “due diligence” in respect thereto;
             provided, however, that:
                     (i) an offering of securities by a member which has not been
             actively engaged in the investment banking or securities business, in its
             present form or as a predecessor broker/dealer, for at least the five years
             immediately preceding the filing of the registration statement shall be
             managed by a qualified independent underwriter; and
                    (ii) the provision of this subparagraph (3) which requires that the
             price or yield of the securities be established based on the recommen-
             dation of a qualified independent underwriter shall not apply to an offering
             of equity or debt securities if:
                     a. the securities (except for the securities of a broker/dealer or its
                     parent) are issued in an exchange offer or other transaction
                     relating to a recapitalization or restructuring of a company; and
                     b. the member that is affiliated with the issuer or with which the
                     member or its associated persons, parent or affiliates have a
                     conflict of interest is not obligated to and does not provide a
      NASD [Rules 0100-3420]                                                             194


                     recommendation with respect to the price, yield, or exchange
                     value of the transaction; or
                     (iii) in any exchange offer, merger and acquisition transaction, or
             similar corporate reorganization subject to this Rule under paragraph
             (a)(3) above, the provision of this paragraph which requires that the price
             or yield of the securities be established based on the recommendation of
             a qualified independent underwriter shall not apply and, instead, the
             exchange value of the securities being offered in the transaction shall not
             be less than that recommended by a qualified independent underwriter; or
             (B) the offering is of a class of equity securities for which a bona fide
             independent market exists as of the date of the filing of the registration
             statement and as of the effective date thereof; or
             (C) the offering is of a class of securities rated BAA or better by Moody’s
             rating service or BBB or better by Standard & Poor’s rating service or
             rated in a comparable category by another rating service acceptable to
             the Association.
             (d)     Disclosure
893          (1) Any member offering its securities pursuant to this Rule shall disclose
      in the registration statement, offering circular, or similar document a date by
      which the offering is reasonably expected to be completed and the terms upon
      which the proceeds will be released from the escrow account described in
      paragraph (e)(1).
894           (2) All offerings included within the scope of this Rule shall disclose in the
      underwriting section of the registration statement, offering circular or similar
      document that the offering is being made pursuant to the provisions of this Rule,
      that the offering is either being made by a member of its own securities or those
      of an affiliate, or those of a company in which the member or its associated per-
      sons, parent or affiliates own the common stock, preferred stock or subordinated
      debt of the company, the name of the member acting as qualified independent
      underwriter, if any, and that such member is assuming the responsibilities of
      acting as a qualified independent underwriter in pricing the offering and conduct-
      ing due diligence.
             (e)     Escrow of Proceeds; Net Capital Computation
895          (1) All proceeds from an offering by a member of its securities shall be
      placed in a duly established escrow account and shall not be released therefrom
      or used by a member in any manner until the member has complied with
      subparagraph (2) hereof.
896           (2) Any member offering its securities pursuant to this Rule shall
      immediately notify the Association when the offering has been terminated and
      settlement effected and it shall file with the Association a computation of its net
      capital computed pursuant to the provisions of SEC Rule 15c3-1 under the Act
      (the net capital rule) as of the settlement date. If at such time its net capital ratio
      as so computed is more than 10:1 or, net capital fails to equal 120% of the
      minimum dollar amount required by Rule 15c3-1 or, in the event the provisions of
      Rule 15c3-1(f) are utilized in making such computation, the net capital is less
      than seven percent of aggregate debit items as computed in accordance with
      NASD [Rules 0100-3420]                                                              195


      Rule 15c3-3a, all monies received from sales of securities of the offering must be
      returned in full to the purchasers thereof and the offering withdrawn, unless the
      member has obtained from the Commission a specific exemption from the net
      capital rule. Proceeds from the sales of securities in the offering may be taken
      into consideration in computing net capital ratio for purposes of this paragraph.
             (f)     Audit Committee
897           Any member or parent of a member which makes a public offering of an
      issue of its securities shall be required to establish within twelve months of the
      effective date of said offering an audit committee composed of members of the
      board of directors (except that it shall not include the chief accounting or chief
      financial officer of the member or its parent) and the functions of the audit
      committee shall include the following:
             (1) to review the scope of the audit;
             (2) to review with the independent auditors the corporate accounting
             practices and policies and recommend to whom reports should be
             submitted within the company;
             (3) to review with the independent auditors their final report;
             (4) to review with internal and independent auditors overall accounting
             and financial controls; and
             (5) to be available to the independent auditors during the year for
             consultation purposes.
             (g)     Public Director
898          Any member or parent of a member which makes a public offering of an
      issue of its securities shall cause to be elected to its board of directors within
      twelve months of the effective date of said offering a public director who shall
      serve as a member of the audit committee.
             (h)     Periodic Reports
899           Any member which makes a distribution to the public of an issue of its
      securities pursuant to this Rule, shall send to each of its shareholders or, in the
      case of debt offerings, to each of its investors:
             (1) quarterly, a summary statement of its operations; and
             (2) annually, independently audited and certified financial statements.
             (i)     Offerings Resulting in Affiliation or Public Ownership of Member
900            If an issuer proposes to direct all or part of the proceeds from a public
      offering to a member or exchange securities by means of a public offering for an
      interest in a member, and the member is, or as a result of the proposed transac-
      tion would be, an affiliate of the issuer, or if an issuer proposes to engage in any
      offering which results in the public ownership of a member, or if an issuer
      proposes to utilize the proceeds from a public offering to become a member or
      form a broker/dealer subsidiary to become a member, or if a member proposes
      simultaneously or subsequent to a public offering to enter into a transaction with
      the issuer or an affiliate of the issuer and as a result of the transaction would be
      an affiliate of the issuer, the offering shall be subject to the provisions of this Rule
      NASD [Rules 0100-3420]                                                          196


      to the same extent as if the transaction had occurred prior to the filing of the
      offering.
             (j)     Registration Statements for Intrastate Offerings
901           Any member offering its securities pursuant to an exemption under
      Section 3(a)(11) of the Securities Act of 1933 shall disclose in the registration
      statement at a minimum that information suggested by the Commission in
      Securities Act Release No. 5222 (January 3, 1972).
             (k)     Suitability
902            Every member underwriting an issue of its securities, or securities of an
      affiliate, or the securities of a company with which it has a conflict of interest,
      pursuant to the provisions of paragraph (c) hereof, who recommends to a cus-
      tomer the purchase of a security of such an issue shall have reasonable grounds
      to believe that the recommendation is suitable for such customer on the basis of
      information furnished by such customer concerning the customer’s investment
      objectives, financial situation, and needs, and any other information known by
      such member. In connection with all such determinations, the member must
      maintain in its files the basis for its determination.
             (l)     Discretionary Accounts
903           Notwithstanding the provisions of Rule 2510, or any other provisions of
      law, a transaction in securities issued by a member or an affiliate of a member, or
      by a company with which a member has a conflict of interest shall not be
      executed by any member in a discretionary account without the prior specific
      written approval of the customer.
             (m)     Filing Requirements; Coordination with Rule 2710
904           (1) Notwithstanding the provisions of Rule 2710 relating to factors to be
      taken into consideration in determining underwriter’s compensation, the value of
      securities of a new corporate member succeeding to a previously established
      partnership or sole proprietorship member acquired by such member or person
      associated therewith, or created as a result of such reorganization, shall not be
      taken into consideration in determining such compensation.
905           (2) All offerings of securities included within the scope of this Rule shall
      be subject to the provisions of Rule 2710, and documents and filing fees relating
      to such offerings shall be filed with the Association pursuant to the provisions of
      that Rule. The responsibility for filing the required documents and fees shall be
      that of the member issuing securities, or, in the case of an issue of an affiliate,
      the managing underwriter or, if there is none, the member affiliated with the
      issuer.
906            (3) All offerings included within the scope of this Rule are required to be
      filed with the Association, with the appropriate documents and filing fee referred
      to under subparagraph (2), above, notwithstanding the fact that the offering may
      otherwise be expressly exempted from filing under the provisions of Rule 2710.
             (n)     Predominance of Rule 2720
907          If the provisions of this Rule are inconsistent with any other provisions of
      the Association’s By-Laws or Rules, or of any interpretation thereof, the provi-
      sions of this Rule shall prevail.
      NASD [Rules 0100-3420]                                                            197


             (o)     Requests for Exemption from Rule 2720
908           Pursuant to the Rule 9600 Series, the Association may in exceptional and
      unusual circumstances, taking into consideration all relevant factors, exempt a
      member unconditionally or on specified terms from any or all of the provisions of
      this Rule which it deems appropriate.
             (p)     Violation of Rule 2720
909          A violation of the provisions of this Rule shall constitute a violation of Rule
      2110, and possibly other Rules, especially Rules 2120 and 2310, as the
      circumstances of the case may indicate.
      [Amended eff. Feb. 8, 1971; Dec. 29, 1971; Sept. 1, 1972; Mar. 21, 1972; Apr. 1,
      1974; May 19, 1977; June 2, 1983; Feb. 22, 1984; Mar. 29, 1988; Oct. 24, 1988;
      Oct. 16, 1992; Jan. 28, 1993; amended by SR-NASD-94-12 eff. Mar. 7, 1994;
      amended by SR-NASD-92-46 eff. May 10, 1994; amended by SR-NASD-96-17
      eff. Aug. 15, 1996; amended by SR-NASD-97-28 eff: 8/7/97; amended by SR-
      NASD-97-45 eff. Sept. 10, 1997; amended by SR-NASD-97-38 eff. Dec. 15,
      1997; amended by SR-NASD-97-95 eff. Aug. 17, 1998; amended by SR-NASD-
      99-02 eff. Dec. 7, 1999.]
      Selected Notices to Members: 83-45, 88-33, 88-89, 88-98, 88-100, 92-58, 94-45,
      95-44.

      2730. Securities Taken in Trade
910           (a) A member engaged in a fixed price offering, who purchases or
      arranges the purchase of securities taken in trade, shall purchase the securities
      at a fair market price at the time of purchase or shall act as agent in the sale of
      such securities and charge a normal commission therefor.
911          (b) When used in this Rule:
             (1) the term “taken in trade” means        the purchase by a member as
             principal, or as agent for the account     of another, of a security from a
             customer pursuant to an agreement or       understanding that the customer
             purchase securities from the member         which are part of a fixed price
             offering.
             (2) the term “fair market price” means a price not higher than the price at
             which the securities would be purchased from the customer or from a
             similarly situated customer in the ordinary course of business by a dealer
             in such securities in transactions of similar size and having similar
             characteristics but not involving a security taken in trade.
             (3) the term “normal commission” means an amount of commission which
             the member would normally charge to that customer or a similarly
             situated customer in the ordinary course of business in transactions of
             similar size and having similar characteristics but not involving a security
             taken in trade.
912          (c) For purposes of this Rule a member shall be:
             (1) deemed, with respect to securities other than common stocks, to have
             taken such securities in trade at a fair market price when the price paid is
      NASD [Rules 0100-3420]                                                           198


             not higher than the highest independent bid for the securities at the time
             of purchase, if such bid quotations for the securities are readily available.
             (2) presumed, with respect to common stocks, to have taken such
             common stocks in trade at a fair market price when the price paid is not
             higher than the highest independent bid for the securities at the time of
             purchase, if such bid quotations for the securities are readily available.
             (3) presumed to have taken a security in trade at a price higher than a fair
             market price when the price paid is higher than the lowest independent
             offer for the securities at the time of purchase, if such offer quotations for
             the securities are readily available.
913           (d) A member, in connection with every transaction subject to this Rule,
      shall with respect to:
             (1) common stocks, which are traded on a national securities exchange or
             for which quotations are entered in an automated quotation system,
             obtain the necessary bid and offer quotations from the national securities
             exchange or from the automated quotation system; and
             (2) other securities and common stocks not included in subparagraph (1),
             above, obtain directly or with the assistance of an independent agent bid
             and offer quotations from two or more independent dealers relating to the
             securities to be taken in trade or, if such quotations are not readily
             available, exercise its best efforts to obtain such quotations with respect
             to securities having similar characteristics and of similar quality as those
             to be taken in trade.
914          (e) A member who purchases a security taken in trade shall keep or
      cause to be kept adequate records to demonstrate compliance with this Rule and
      shall preserve the records for at least 24 months after the transaction. If an
      independent agent is used for the purpose of obtaining quotations, the member
      must request the agent to identify the dealers from whom the quotations were
      obtained and the time and date they were obtained or request the agent to keep
      and maintain for at least 24 months a record containing such information.
      IM-2730. Safe Harbor and Presumption of Compliance
915           Rule 2730(c)(1) provides that, with respect to a security, other than a
      common stock, a member will be deemed to have paid the fair market price for a
      security taken in trade if the price paid is no higher than the highest independent
      bid for the securities at the time of purchase, if bid quotations are readily availa-
      ble. Rule 2730(c)(2) provides, with respect to common stock, that a member will
      be presumed to have paid no more than the fair market price for the shares of
      common stock taken in trade if the price paid for the shares of common stock
      taken in trade is no higher than the highest independent bid for such shares at
      the time of purchase, if bid quotations are readily available. The presumption of
      compliance contained in Rule 2730(c)(2) may be rebutted by the Association
      upon a showing that the price paid, in fact, exceeded the fair market price as that
      term is defined in Rule 2730(b)(2). Inasmuch as a member is presumed to have
      complied with Rule 2730 when taking common stock in trade at a price no higher
      than the highest independent bid, the Association will have a heavier burden of
      demonstrating noncompliance in such circumstances than it has in the circum-
      stances described below where there is neither a presumption of compliance nor
      NASD [Rules 0100-3420]                                                             199


      one of noncompliance. Nonetheless, the factors described below in the sections
      titled “Presumption of Noncompliance,” and “No Presumptions” will be relevant in
      determining whether the Association has rebutted the presumption. Particular
      attention will be directed to the size of the transaction and the relative liquidity of
      the position.
             Presumption of Noncompliance
916           Rule 2730(c)(3) establishes a presumption of noncompliance with Rule
      2730 if securities for which offer quotations are readily available are taken in
      trade at prices higher than the lowest independent offer. While the presumption
      in Rule 2730(c)(3) is not conclusive, it may be rebutted by the member only in an
      exceptional or unusual case. To rebut the presumption of noncompliance, all
      factors relevant to the transaction must be taken into consideration, including,
      among other things, whether a customer of a member has given an indication of
      interest to purchase the securities taken in trade at a higher price; the member’s
      pattern of trading in the securities or comparable securities at the time of the
      transaction; the member’s position in, and the availability of, the securities taken
      in trade; the size of the transaction; and the amount by which the price paid
      exceeds the lowest independent offer.
917            The several factors described in the preceding paragraph will be relevant
      to determining whether the presumption of noncompliance has been rebutted.
      The existence of only one such factor, however, will not necessarily be sufficient
      to meet the heavy burden placed on a member, though in a given case it may be
      sufficient. In any event, all facts and circumstances must be considered. For
      example, a member may be able to satisfy the burden of demonstrating that fair
      market price was paid by showing that the price paid did not exceed the price,
      less an amount equal to a normal commission on an agency transaction, at
      which a customer had given the member an indication of interest to purchase the
      securities, or that the member held a short position in the security purchased,
      that it desired to cover that short position, that the availability of the security was
      scarce and that the amount of securities taken in trade could not have been
      acquired at a lower price.
             No Presumptions
918           In instances when a member takes a security in trade at a price higher
      than the highest independent bid and not higher than the lowest independent
      offer, or when bid and offer quotations are not readily available, there shall be no
      safe harbor and there shall be neither a presumption of compliance nor one of
      noncompliance with Rule 2730. In such circumstances, whether the price paid is
      the fair market price will be determined by reference to the definition of fair
      market price in Rule 2730(b)(2).
919           Rule 2730(b)(2) states generally that fair market price is the price a dealer
      would pay for the amount of securities taken in trade if purchased from the
      customer in the ordinary course of business but not involving a security taken in
      trade. Accordingly, the price paid by a member or other dealers for the same
      security or a comparable security as that taken in trade but not in a transaction
      involving a security taken in trade will be relevant in determining compliance with
      Rule 2730. In comparing such transactions, all facts and circumstances will be
      considered, including such things as the size of the transactions being compared,
      the time of each transaction and the difference in price paid. In determining
      NASD [Rules 0100-3420]                                                          200


      whether fair market price has been paid, other relevant factors, including those
      set forth above with respect to rebutting the presumption of noncompliance, will
      also be considered.
             Quotations
920           Paragraphs (d) and (e) of Rule 2730 obligate members taking securities
      in trade to obtain and maintain records of bid and offer quotations. If the
      securities taken in trade are common stocks that are traded on a national securi-
      ties exchange or for which quotations are entered in an automated quotation
      system, the quotations must be obtained from any such exchange or automated
      quotation system at the time of purchase.
921          Quotations for all other securities must be obtained from at least two
      independent dealers at the time of purchase. While the quotations from two
      dealers in such circumstances need not be for the specific size of the transaction,
      they must be for a size corresponding generally to the amount of the securities to
      be taken in trade. Quotations relating only to an odd lot, such as those typically
      available from a dealer in bonds on a national securities exchange, will not be
      acceptable for a transaction of a size normally traded by institutions.

922          If bid and offer quotations required by Rule 2730(d) are not readily availa-
      ble and a member is able to obtain such quotations for comparable securities,
      such quotations will be treated as though they are quotations for the securities
      taken in trade in determining whether the “safe harbor” in Rule 2730(c)(1) and
      the presumptions in subparagraphs (c)(2) and (c)(3), are applicable. In such cir-
      cumstances, however, the member’s determination of what constitutes compara-
      ble securities may be challenged.
             Adequate Records
923            If the member purchases securities taken in trade at a price which is no
      higher than the lowest independent offer as determined according to Rule 2730,
      it will have kept adequate records if it records the time and date quotations were
      received, the identity of the security to which the quotations pertain, the identity
      of the dealer from whom, or the exchange or quotation system from which, the
      quotations were obtained, and the quotations furnished. If a member uses the
      services of an independent agent to obtain the quotations and the agent does not
      disclose the identity of the dealers from whom quotations were obtained, the
      member will have kept adequate records if it otherwise complies with Rule
      2730(e) and it records the time and date it received the quotations from the
      agent, the identity of the agent, and the quotations transmitted by the agent.
924          If a member takes a security in trade and pays more than the lowest
      independent offer, it will have kept adequate records if, in addition to the
      foregoing records, it keeps records of all relevant factors it considered important
      in concluding that the price paid for the securities was fair market price.
             Fair Market Price at the Time of Purchase
925           Swap transactions that are arranged before the effectiveness of a fixed
      price offering are not generally viewed as being legally consummated until
      effectiveness of the fixed price offering. Nonetheless, the fair market price of
      securities taken in trade in such situations is normally determined at the time of
      NASD [Rules 0100-3420]                                                            201


      the pricing of the fixed price offering, which occurs on the day before effective-
      ness usually in the afternoon, and the swap is arranged on the basis of that price.
      In such cases, for purposes of Rule 2730(a), the determination of the “fair market
      price at the time of purchase” of the securities to be taken in trade may be made
      as of the time of pricing of the fixed price offering. As to swaps agreed upon at a
      time after effectiveness of the offering, fair market price of the swapped securities
      must be determined as of the time the transaction is legally consummated.

      2740. Selling Concessions, Discounts and Other Allowances
926           In connection with the sale of securities which are part of a fixed price
      offering:
927           (a) A member may not grant or receive selling concessions, discounts, or
      other allowances except as consideration for services rendered in distribution
      and may not grant such concessions, discounts or other allowances to anyone
      other than a broker or dealer actually engaged in the investment banking or
      securities business; provided, however, that nothing in this Rule shall prevent
      any member from (1) selling any such securities to any person, or account
      managed by any person, to whom it has provided or will provide bona fide
      research, if the stated public offering price for such securities is paid by the
      purchaser; or (2) selling any such securities owned by him to any person at any
      net price which may be fixed by him unless prevented therefrom by agreement.
928           (b) The term “bona fide research,” when used in this Rule means advice,
      rendered either directly or through publications or writings, as to the value of
      securities, the advisability of investing in, purchasing, or selling securities, and
      the availability of securities or purchasers or sellers of securities, or analyses and
      reports concerning issuers, industries, securities, economic factors and trends,
      portfolio strategy, and performance of accounts; provided, however, that
      investment management or investment discretionary services are not bona fide
      research.
929           (c) A member who grants a selling concession, discount or other allow-
      ance to another person shall obtain a written agreement from that person that he
      will comply with the provisions of this Rule, and a member who grants such
      selling concession, discount or other allowance to a non-member broker or
      dealer in a foreign country shall also obtain from such broker or dealer a written
      agreement to comply, as though such broker or dealer were a member, with the
      provisions of Rules 2730 and 2750 and to comply with Rule 2420 as that Rule
      applies to a non-member broker/dealer in a foreign country.
930           (d) A member who receives an order from any person designating
      another broker or dealer to receive credit for the sale shall, within 30 days after
      the end of each calendar quarter, file reports with the Association containing the
      following information with respect to each fixed price offering which terminated
      during that calendar quarter: the name of the person making the designation; the
      identity of the brokers or dealers designated; the identity and amount of
      securities for which each broker or dealer was designated; the date of the
      commencement and termination of the offering and such other information as the
      Association shall deem pertinent.
931          (e) A member who is designated by its customer for the sale of securities
      shall keep, and maintain for a period of 24 months, records in such form and
      NASD [Rules 0100-3420]                                                            202


      manner to show the following information: name of customer making the
      designation; the identity and amount of securities for which the member was
      designated; the identity of the manager or managers in the offering, if any; the
      date of the commencement of the offering and such other information as the
      Association shall deem pertinent.
      [Amended eff. Jan. 27, 1989.]
      Selected Notices to Members: 88-72, 89-28.
      IM-2740. Services in Distribution
932           The proper application of Rule 2740 requires that, in connection with fixed
      price offerings, selling concessions, discounts or other allowances be paid only to
      brokers or dealers actually engaged in the investment banking or securities
      business and only as consideration for services rendered in distribution.
933           A dealer has rendered services in distribution in connection with the sale
      of securities from a fixed price offering if the dealer is an underwriter of a portion
      of that offering, has engaged in some selling effort with respect to the sale or has
      provided or agreed to provide bona fide research to the person to whom or at
      whose direction the sale is made.
934            A broker or dealer who has received or retained a selling concession,
      discount or other allowance may not grant or otherwise re-allow all or part of that
      concession, discount or allowance to anyone other than a broker or dealer
      engaged in the investment banking or securities business and only as considera-
      tion for services rendered in distribution. The improper grant or re-allowance of a
      selling concession, discount or other allowance might occur directly or indirectly
      through such devices as transactions in violation of Rule 2730, or other indirect
      means such as those described below.
935          A member granting a selling concession, discount or other allowance to
      another person is not responsible for determining whether such other person
      may be violating Rule 2740 by granting or re-allowing that selling concession,
      discount or other allowance to another person, unless the member knew, or had
      reasonable cause to know, of the violation.
             Bona Fide Research Exclusion
936           While Rule 2740 provides that a member may grant or receive selling
      concessions, discounts and other allowances only as consideration for services
      rendered in distribution and may grant such concessions, discounts or other
      allowances only to brokers or dealers actually engaged in the investment banking
      or securities business, that Rule also states that a member is not prohibited by
      Rule 2740 from selling securities at the stated public offering price to persons to
      whom it provides bona fide research. Accordingly, nothing in Rule 2740 prohibits
      a member from providing bona fide research to a customer who also purchases
      securities from fixed price offerings from the member whether or not there is an
      express or implied agreement between the member providing the research and
      the recipient that the member will be compensated for the research in cash,
      brokerage commissions, selling concessions or some other form of
      consideration.
937            The definition of bona fide research is substantially the same as the
      definition of the term research in Section 28(e)(3) of the Act, and as interpreted
      NASD [Rules 0100-3420]                                                          203


      by the Commission. Members should refer to the Commission’s interpretation in
      Securities Exchange Act Release No. 23170 (April 30, 1986) concerning the
      definition of research under Section 28(e) for guidance as well as to any interpre-
      tations of the Commission or its staff thereafter issued.
938            Moreover, while the provisions in Rule 2840 concerning bona fide
      research are intended to permit money managers to receive bona fide research
      from persons from whom securities are purchased, it is not intended to enable a
      money manager, who is also a member, to view its money management services
      as bona fide research. Accordingly, the performance of money management or
      investment discretionary services themselves are expressly excluded from the
      definition of bona fide research.
939           Another factor relating to bona fide research is that the research must be
      “provided by” the member who receives or retains the selling concession,
      discount or other allowance. Under Section 28(e) of the Act, the Commission has
      stated that the “safe harbor” provided by Section 28(e) only extends to research
      that is “provided by” the broker to whom brokerage commissions are paid. In
      determining whether the exclusion for bona fide research under Rule 2740 is
      available in any given instance, members should refer to the interpretations of
      the Commission and its staff of the similar requirement applicable to Section
      28(e).
940          Whether research is provided by the member will depend on all the facts
      and circumstances surrounding the relationship of the member and the recipient
      of the research, relying upon interpretations by the Commission and staff with
      respect to similar questions under Section 28(e). See Securities Exchange Act
      Release No. 23170 (April 30, 1986).
             Indirect Discounts
941           A member who, itself or through its affiliate, supplies another person with
      services or products which fail to qualify as bona fide research, or which, in the
      case of services or products other than bona fide research, are provided by the
      member or its affiliate to such person or others for cash or for some other agreed
      upon consideration, and also retains or receives selling concessions, discounts
      or other allowances from purchases by that person or its affiliate of securities
      from a fixed price offering is improperly granting a selling concession, discount or
      other allowance to that person unless the member or its affiliate has been, or has
      arranged and reasonably expects to be, fully compensated for such services or
      products from sources other than the selling concession, discount or allowance
      retained or received on the sale.
942           A person will be deemed to be providing services or products for cash or
      other agreed upon consideration if the service or product, or a substantially
      identical service or product, is provided to any person for cash or for some other
      agreed upon consideration. A service or product will be deemed to be provided
      for an agreed upon consideration if there is an express or implied agreement
      between the person providing the service or product and the recipient thereof
      calling for the provider of the service or product to be compensated therefor with
      an agreed upon or mutually understood source and general amount of considera-
      tion. Under such circumstances a member or its affiliate providing such service or
      product would be required to demonstrate that it was fully compensated for the
      service or product with consideration other than selling concessions, discounts or
      NASD [Rules 0100-3420]                                                            204


      other allowances received or retained on the sale of securities from fixed price
      offerings.
943          A member may show that it or its affiliate received or reasonably expects
      to receive full consideration, independent of selling concessions, discounts or
      other allowances, for providing certain services and products, by identifying the
      arrangement for the consideration (including its source and amount) and, if
      appropriate, the collection process for obtaining it.
944          In order to demonstrate that the cash or other consideration is full consi-
      deration, records of account should be kept which identify the recipient of the
      services or products, the amount of cash or other consideration paid or to be paid
      by such person or its affiliate.
945            Unless the amount of cash or other consideration agreed upon appears
      on its face to be unreasonably low, it will not be necessary for the member or its
      affiliate to demonstrate that the agreed upon price represented fair market price.
      Likewise, as long as price differentials are based on factors other than the
      customer’s willingness to purchase, or practice of purchasing, securities from the
      member out of fixed price offerings, it is not necessary, for purposes of Rule
      2740, that the member or its affiliate charge the same amount to each person to
      whom they provide the same or similar services or products.
      [Amended eff. Jan. 27, 1989.]

      2750. Transactions with Related Persons
946          (a) Except as otherwise provided in paragraph (d), hereof, no member
      engaged in a fixed price offering of securities shall sell the securities to, or place
      the securities with, any person or account which is a related person of the
      member unless such related person is itself subject to this Rule or is a non-
      member foreign broker or dealer who has entered into the agreements required
      by Rule 2740(c).
947          (b) For purposes of this Rule, a “related person” of a member includes
      any person or account which directly or indirectly owns, is owned by or is under
      common ownership with the member.
948          (c) A person owns another person or account for purposes of this Rule if
      the person directly or indirectly:
             (1) has the right to participate to the extent of more than 25% in the profits
             of the other person; or
             (2) owns beneficially more than 25% of the outstanding voting securities
             of the person.
949           (d) The prohibition contained in paragraph (a), hereof, does not apply to
      the sale of securities to, or the placement of securities in, a trading or investment
      account of a member or a related person of a member after termination of the
      fixed price offering if the member or the related person of the member has made
      a bona fide public offering of the securities. A member or a related person of a
      member is presumed not to have made a bona fide public offering for the
      purpose of this paragraph if the securities being offered immediately trade in the
      secondary market at a price or prices which are at or above the public offering
      price.
      NASD [Rules 0100-3420]                                                             205


950          Selected SEC Decisions
             ·   Robert S.C. Peterson, Inc. and Robert S.C. Peterson, SEC Rel. No.
                 34-24688 (1987).
             ·   John R. LaSalla and Andrine Guiliano, SEC Rel. No. 34-26352 (1988).
             ·   Eugene B. Connor, SEC Rel. No. 34-26999 (1989).
      IM-2750. Transactions with Related Persons
951            A member who is acting, or plans to act, as sponsor of a unit investment
      trust will not violate Rule 2750 if it accumulates securities with respect to which
      the member has acted as a syndicate member, selling group member or re-
      allowance dealer in an account of the member or related person of the member
      if, at the time of accumulation, the member in good faith intends to deposit the
      securities into the unit investment trust at the public offering price and intends to
      make a bona fide public offering of the participation units of that trust. Members
      engaged in such activity, however, will continue to be subject to IM-2110-1,
      “Free-Riding and Withholding.”
952           While Rule 2750(d) provides that a person is presumed not to have made
      a bona fide public offering if, immediately following the termination of the fixed
      price offering, the securities trade at or above the public offering price, there is no
      presumption that a person has made a bona fide public offering if, at such time,
      the securities trade below the public offering price. Whether a person has made a
      bona fide pubic offering will be determined on the basis of all relevant facts and
      circumstances.

      2760. Offerings “At the Market”
953           A member who is participating or who is otherwise financially interested in
      the primary or secondary distribution of any security which is not admitted to
      trading on a national securities exchange, shall make no representation that such
      security is being offered to a customer “at the market” or at a price related to the
      market price unless such member knows or has reasonable grounds to believe
      that a market for such security exists other than that made, created, or controlled
      by such member, or by any person for whom he is acting or with whom he is
      associated in such distribution, or by any person controlled by, controlling or
      under common control with such member.

      2770. Disclosure of Price in Selling Agreements
954           Selling syndicate agreements or selling group agreements shall set forth
      the price at which the securities are to be sold to the public or the formula by
      which such price can be ascertained, and shall state clearly to whom and under
      what circumstances concessions, if any, may be allowed.

      2780. Solicitation of Purchases on an Exchange to Facilitate a Distribution
            of Securities
955          (a) No member, participating or otherwise financially interested in the
      primary or secondary distribution of any security of any issuer, shall:
             (1) pay or offer or agree to pay, directly or indirectly, to any person any
             compensation for soliciting another to purchase any security of the same
             issuer on a national securities exchange, or for purchasing any security of
      NASD [Rules 0100-3420]                                                             206


             the same issuer on any such exchange for any account other than the
             account of the member who pays or is to pay such compensation; or
             (2) sell, offer to sell or induce an offer to buy such security, or deliver such
             security after sale, if, in connection with such distribution, such member
             has paid, or has offered or agreed to pay, directly or indirectly, to any
             person, any compensation for soliciting another to purchase any security
             of the same issuer on any national securities exchange, or for purchasing
             any security of the same issuer on any such exchange for any account
             other than the account of the member who has paid or is to pay such
             compensation.
956          (b) No member, participating or otherwise financially interested in the
      primary or secondary distribution of any security of any issuer, shall cause a
      purchase or sale of any security of the same issuer on a national securities
      exchange by paying or offering or agreeing to pay, directly or indirectly, to any
      person any compensation for soliciting another to purchase such security on any
      such exchange, or for purchasing such security on any such exchange for any
      account other than the account of the member who pays or is to pay such
      compensation.
957           (c) The provisions of this Rule shall not apply in respect to any salary paid
      by a member to any person regularly employed by him whose ordinary duties
      include the solicitation or execution of brokerage orders on a national securities
      exchange, if such salary represents only ordinary compensation for the discharge
      by such person of such duties in the regular course of his employment, and is not
      paid, in whole or in part, directly or indirectly, for the inducement by such person
      of the purchase or sale on a national securities exchange of any security of the
      issuer of the security in the primary or secondary distribution of which such
      member is participating or otherwise financially interested.

      2800. SPECIAL PRODUCTS

      2810. Direct Participation Programs
             (a)     Definitions
958         For the purposes of this Rule, the following terms shall have the stated
      meanings:
959           (1) Affiliate — when used with respect to a member or sponsor, shall
      mean any person which controls, is controlled by, or is under common control
      with, such member or sponsor and includes:
             (A) any partner, officer or director (or person performing similar functions)
             of (i) such member or sponsor, or (ii) a person which beneficially owns
             50% or more of the equity interest in, or has the power to vote 50% or
             more of the voting interest in, such member or sponsor;
             (B) any person which beneficially owns or has the right to acquire 10% or
             more of the equity interest in or has the power to vote 10% or more of the
             voting interest in (i) such member or sponsor, or (ii) a person which
             beneficially owns 50% or more of the equity interest in, or has the power
             to vote 50% or more of the voting interest in, such member or sponsor;
      NASD [Rules 0100-3420]                                                            207


             (C) any person with respect to which such member or sponsor, the
             persons specified in subparagraph (A) or (B), and the immediate families
             of partners, officers or directors (or persons performing similar functions)
             specified in subparagraph (A), or other person specified in subparagraph
             (B), in the aggregate beneficially own or have the right to acquire 10% or
             more of the equity interest or have the power to vote 10% or more of the
             voting interest;
             (D) any person an officer of which is also a person specified in sub-
             paragraph (A) or (B) and any person a majority of the board of directors of
             which is comprised of persons specified in subparagraph (A) or (B); or
             (E) any person controlled by a person or persons specified in sub-
             paragraphs (A), (B), (C), or (D).
960           (2) Cash available for distribution — cash flow less amount set aside for
      restoration or creation of reserves.
961          (3) Cash flow — cash funds provided from operations, including lease
      payments on net leases from builders and sellers, without deduction for
      depreciation, but after deducting cash funds used to pay all other expenses, debt
      payments, capital improvements and replacements.
962           (4) Direct participation program (program) — a program which provides
      for flow-through tax consequences regardless of the structure of the legal entity
      or vehicle for distribution including, but not limited to, oil and gas programs, real
      estate programs, agricultural programs, cattle programs, condominium securities,
      Subchapter S corporate offerings and all other programs of a similar nature,
      regardless of the industry represented by the program, or any combination
      thereof. A program may be composed of one or more legal entities or programs
      but when used herein and in any rules or regulations adopted pursuant hereto
      the term shall mean each of the separate entities or programs making up the
      overall program and/or the overall program itself. Excluded from this definition
      are real estate investment trusts, tax qualified pension and profit sharing plans
      pursuant to Sections 401 and 403(a) of the Internal Revenue Code and individual
      retirement plans under Section 408 of that Code, tax sheltered annuities
      pursuant to the provisions of Section 403(b) of the Internal Revenue Code, and
      any company including separate accounts, registered pursuant to the Investment
      Company Act of 1940.
963            (5) Dissenting limited partner – a person who, on the date on which
      soliciting material is mailed to investors, is a holder of a beneficial interest in a
      limited partnership that is the subject of a limited partnership rollup transaction,
      and who casts a vote against the transaction and complies with procedures
      established by the Association, except that for purposes of an exchange or
      tender offer, such person shall file an objection in writing under the Rules of the
      Association during the period in which the offer is outstanding. Such objection in
      writing shall be filed with the party responsible for tabulating the votes or tenders.
964           (6) Equity interest — when used with respect to a corporation, means
      common stock and any security convertible into, exchangeable or exercisable for
      common stock, and, when used with respect to a partnership, means an interest
      in the capital or profits or losses of the partnership.
      NASD [Rules 0100-3420]                                                                                208


965           (7) Fair market net worth — total assets computed at fair market value
      less total liabilities.
966           (8) Limited partner or investor in a limited partnership — the purchaser of
      an interest in a direct participation program that is a limited partnership who is not
      involved in the day-to-day management of the limited partnership and bears
      limited liability.
967           (9) Limited partnership — an unincorporated association that is a direct
      participation program organized as a limited partnership whose partners are one
      or more general partners and one or more limited partners, which conforms to
      the provisions of the Revised Uniform Limited Partnership Act or the applicable
      statute that regulates the organization of such partnership.
968           (10) Limited partnership rollup transaction — a transaction involving the
      combination or reorganization of one or more limited partnerships, directly or
      indirectly, in which:
             (A) some or all of the investors in any of such limited partnerships will
             receive new securities, or securities in another entity, that will be reported
             under a transaction reporting plan declared effective before January 1,
                                                                        9
             1991, by the Commission under Section 11A of the Act.
             (B) any of the investors’ limited partnership securities are not, as of the
             date of the filing, reported under a transaction reporting plan declared
             effective before January 1, 1991, by the Commission under Section 11A
                        10
             of the Act.
             (C) investors in any of the limited partnerships involved in the transaction
             are subject to a significant adverse change with respect to voting rights,
             the term of existence of the entity, management compensation, or
             investment objectives; and
             (D) any of such investors are not provided an option to receive or retain a
             security under substantially the same terms and conditions as the original
             issue. Notwithstanding the foregoing definition, a “limited partnership
             rollup transaction” does not include:
             (i) a transaction that involves only a limited partnership or partnerships
             having an operating policy or practice of retaining cash available for
             distribution and reinvesting proceeds from the sale, financing, or
             refinancing of assets in accordance with such criteria as the Commission
             determines appropriate;
             (ii) a transaction involving only limited partnerships wherein the interests
             of the limited partners are repurchased, recalled or exchanged pursuant
             to the terms of the pre-existing limited partnership agreements for
             securities in an operating company specifically identified at the time of the
             formation of the original limited partnership;


      9
           Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991 for the
           Nasdaq National Market System, the New York Stock Exchange, and the American Stock Exchange.
      10
           Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991 for the
           Nasdaq National Market System, the New York Stock Exchange, and the American Stock Exchange.
      NASD [Rules 0100-3420]                                                                                209


             (iii) a transaction in which the securities to be issued or exchanged are
             not required to be and are not registered under the Securities Act of 1933;
             (iv) a transaction that involves only issuers that are not required to
             register or report under Section 12 of the Act, both before and after the
             transaction;
             (v) a transaction, except as the Commission may otherwise provide for by
             rule for the protection of investors, involving the combination or reorgani-
             zation of one or more limited partnerships in which a non-affiliated party
             succeeds to the interests of the general partner or sponsor, if:
                    a. such action is approved by not less than 66 2/3 percent of the
             outstanding units of each of the participating limited partnerships; and
                    b. as a result of the transaction, the existing general partners will
             receive only compensation to which they are entitled as expressly
             provided for in the pre-existing partnership agreements; or
             (vi) a transaction, except as the Commission may otherwise provide for
             by rule for the protection of investors, in which the securities offered to
             investors are securities of another entity that are reported under a
             transaction reporting plan declared effective before January 1, 1991, by
                                                            11
             the Commission under Section 11A of the Act; if:
                    a. such other entity was formed, and such class of securities was
             reported and regularly traded, not less than 12 months before the date on
             which soliciting material is mailed to investors; and
                     b. the securities of that entity issued to investors in the transaction
             do not exceed 20% of the total outstanding securities of the entity,
             exclusive of any securities of such class held by or for the account of the
             entity or a subsidiary of the entity.
             (vii) a transaction involving only entities registered under the Investment
             Company Act of 1940 or any Business Development Company as defined
             in Section 2(a)(48) of that Act.
969           (11) Management fee — a fee paid to the sponsor, general partner(s),
      their affiliates, or other persons for management and administration of a direct
      participation program.
970           (12) Organization and offering expenses — expenses incurred in
      preparing a direct participation program for registration and subsequently offering
      interests in the program to the public, including all forms of compensation paid to
      underwriters, broker/dealers, or affiliates thereof in connection with the offering of
      the program.
971         (13) Participant — the purchaser of an interest in a direct participation
      program.
972          (14) Person — any natural person, partnership, corporation, association
      or other legal entity.

      11
           Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991 for the
           Nasdaq National Market System, the New York Stock Exchange, and the American Stock Exchange.
      NASD [Rules 0100-3420]                                                           210


973           (15) Prospectus — a prospectus as defined by Section 2(10) of the
      Securities Act of 1933, as amended, an offering circular as described in SEC
      Rule 256 under the Securities Act of 1933, or, in the case of an intrastate
      offering, any document utilized for the purpose of announcing the offer and sale
      of securities to the public.
974           (16) Registration statement — a registration statement as defined by
      Section 2(8) of the Securities Act of 1933, as amended, a notification on Form
      1-A filed with the Commission pursuant to the provisions of SEC Rule 255 under
      the Securities Act of 1933 and, in the case of an intrastate offering, any docu-
      ment initiating a registration or similar process for an issue of securities which is
      required to be filed by the laws or regulations of any state.
975           (17) Solicitation expenses — direct marketing expenses incurred by a
      member, in connection with a limited partnership rollup transaction such as
      telephone calls, broker/dealer fact sheets, members’ legal and other fees related
      to the solicitation, as well as direct solicitation compensation to members.
976           (18) Sponsor — a person who directly or indirectly provides management
      services for a direct participation program whether as general partner, pursuant
      to contract or otherwise.
977           (19) Transaction costs — costs incurred in connection with a limited part-
      nership rollup transaction, including printing and mailing the proxy, prospectus or
      other documents; legal fees not related to the solicitation of votes or tenders;
      financial advisory fees; investment banking fees; appraisal fees; accounting fees;
      independent committee expenses; travel expenses; and all other fees related to
      the preparatory work of the transaction, but not including costs that would have
      otherwise been incurred by the subject limited partnerships in the ordinary course
      of business or solicitation expenses.
             (b)     Requirements
             (1) Application
978          No member or person associated with a member shall participate in a
      public offering of a direct participation program or a limited partnership rollup
      transaction except in accordance with this paragraph (b).
             (2) Suitability
979          (A) A member or person associated with a member shall not underwrite
      or participate in a public offering of a direct participation program unless
      standards of suitability have been established by the program for participants
      therein and such standards are fully disclosed in the prospectus and are
      consistent with the provisions of subparagraph (B).
980           (B) In recommending to a participant the purchase, sale or exchange of
      an interest in a direct participation program, a member or person associated with
      a member shall:
             (i) have reasonable grounds to believe, on the basis of information
             obtained from the participant concerning his investment objectives, other
             investments, financial situation and needs, and any other information
             known by the member or associated person, that:
                   a. the participant is or will be in a financial position appropriate to
             enable him to realize to a significant extent the benefits described in the
      NASD [Rules 0100-3420]                                                               211


             prospectus, including the tax benefits where they are a significant aspect
             of the program;
                      b. the participant has a fair market net worth sufficient to sustain
             the risks inherent in the program, including loss of investment and lack of
             liquidity; and
                     c. the program is otherwise suitable for the participant; and
             (ii) maintain in the files of the member documents disclosing the basis
             upon which the determination of suitability was reached as to each
             participant.
981           (C) Notwithstanding the provisions of subparagraphs (A) and (B) hereof,
      no member shall execute any transaction in direct participation program in a
      discretionary account without prior written approval of the transaction by the
      customer.
982           (D) Subparagraphs (A) and (B), and, only in situations where the member
      is not affiliated with the direct participation program, subparagraph (C) shall not
      apply to:
             (i) a secondary public offering of or a secondary market transaction in a
             unit, depositary receipt, or other interest in a direct participation program
             for which quotations are displayed on Nasdaq or which is listed on a
             registered national securities exchange; or
             (ii) an initial public offering of a unit, depositary receipt or other interest in
             a direct participation program for which an application for inclusion on
             Nasdaq or listing on a registered national securities exchange has been
             approved by Nasdaq or such exchange and the applicant makes a good
             faith representation that it believes such inclusion on Nasdaq or listing on
             an exchange will occur within a reasonable period of time following the
             formation of the program.
             (3) Disclosure
983          (A) Prior to participating in a public offering of a direct participation
      program, a member or person associated with a member shall have reasonable
      grounds to believe, based on information made available to him by the sponsor
      through a prospectus or other materials, that all material facts are adequately
      and accurately disclosed and provide a basis for evaluating the program.
984          (B) In determining the adequacy of disclosed facts pursuant to
      subparagraph (A) hereof, a member or person associated with a member shall
      obtain information on material facts relating at a minimum to the following, if
      relevant in view of the nature of the program:
             (i) items of compensation;
             (ii) physical properties;
             (iii) tax aspects;
             (iv) financial stability and experience of the sponsor;
             (v) the program’s conflict and risk factors; and
             (vi) appraisals and other pertinent reports.
      NASD [Rules 0100-3420]                                                                             212


985          (C) For purposes of subparagraphs (A) or (B) hereof, a member or person
      associated with a member may rely upon the results of an inquiry conducted by
      another member or members, provided that:
              (i) the member or person associated with a member has reasonable
              grounds to believe that such inquiry was conducted with due care;
              (ii) the results of the inquiry were provided to the member or person
              associated with a member with the consent of the member or members
              conducting or directing the inquiry; and
              (iii) no member that participated in the inquiry is a sponsor of the program
              or an affiliate of such sponsor.
986           (D) Prior to executing a purchase transaction in a direct participation
      program, a member or person associated with a member shall inform the pros-
      pective participant of all pertinent facts relating to the liquidity and marketability of
      the program during the term of the investment; provided, however, that
      paragraph (b) shall not apply to an initial or secondary public offering of or a
      secondary market transaction in a unit, depositary receipt or other interest in a
      direct participation program which complies with subparagraph (2)(D).
              (4) Organization and Offering Expenses
987           (A) No member or person associated with a member shall underwrite or
      participate in a public offering of a direct participation program if the organization
      and offering expenses are not fair and reasonable, taking into consideration all
      relevant factors.
988           (B) In determining the fairness and reasonableness of organization and
      offering expenses for purposes of subparagraph (A) hereof, the arrangements
      shall be presumed to be unfair and unreasonable if:
              (i) the total amount of all items of compensation from whatever source
              payable to underwriters, broker/dealers, or affiliates thereof, which are
              deemed to be in connection with or related to the distribution of the public
              offering, exceeds currently effective compensation guidelines for direct
                                                                   12
              participation programs published by the Association;
              (ii) organization and offering expenses paid by a program in which a
              member or an affiliate of a member is a sponsor exceed currently
                                                                                   13
              effective guidelines for such expenses published by the Association;
              (iii) any compensation in connection with an offering is to be paid to
              underwriters, broker/dealers, or affiliates thereof out of the proceeds of
              the offering prior to the release of such proceeds from escrow, provided,
              however, that any such payment from sources other than proceeds of the
              offering shall be made only on the basis of bona fide transactions;
              (iv) commissions or other compensation are to be paid or awarded either
              directly or indirectly, to any person engaged by a potential investor for
      12
           A guideline for underwriting compensation of ten percent of proceeds received, plus a maximum of
           0.5% for reimbursement of bona fine due diligence expenses, was published in Notice to Members
           82-51 (October 19, 1982).
      13
           A guideline for organization and offering expenses of 15 percent of proceeds received was published
           in Notice to Members 82-51 (October 19, 1982).
      NASD [Rules 0100-3420]                                                               213


              investment advice as an inducement to such advisor to advise the pur-
              chaser of interests in a particular program, unless such person is a regis-
              tered broker/dealer or a person associated with such a broker/dealer; or
              (v) the program provides for compensation of an indeterminate nature to
              be paid to members or persons associated with members for sales of
              program units, or for services of any kind rendered in connection with or
              related to the distribution thereof, including, but not necessarily limited to,
              the following: a percentage of the management fee, a profit sharing
              arrangement, brokerage commissions, and over-riding royalty interest, a
              net profits interest, a percentage of revenues, a reversionary interest, a
              working interest, a security or right to acquire a security having an inde-
              terminate value, or other similar incentive items; provided however, that
              an arrangement which provides for continuing compensation to a member
              or person associated with a member in connection with a public offering
              shall not be presumed to be unfair and unreasonable if all of the following
              conditions are satisfied:
                     a. the continuing compensation is to be received only after each
              investor in the program has received cash distributions from the program
              aggregating an amount equal to his cash investment plus a 6%
              cumulative annual return on his adjusted investment;
                     b. the continuing compensation is to be calculated as a percentage
              of program cash distributions;
                     c. the amount of continuing compensation does not exceed three
              percent for each one percentage point that the total of all compensation
              pursuant to subparagraph (B)(i) received at the time of the offering and at
              the time any installment payment is made fall below 9%; provided,
              however, that in no event shall the amount of continuing compensation
              exceed 12% of program cash distributions; and
                      d. if any portion of the continuing compensation is to be derived
              from the limited partners’ interest in the program cash distributions, the
              percentage of the continuing compensation shall be no greater than the
              percentage of program cash distributions to which limited partners are
              entitled at the time of the payment.
989           (C) All items of compensation paid by the program directly or indirectly
      from whatever source to underwriters, brokers/dealers, or affiliates thereof,
      including, but not limited to, sales commissions, wholesaling fees, due diligence
      expenses, other underwriter’s expenses, underwriter’s counsel’s fees, securities
      or rights to acquire securities, rights of first refusal, consulting fees, finder’s fees,
      investor relations fees, and any other items of compensation for services of any
      kind or description, which are deemed to be in connection with or related to the
      public offering, shall be taken into consideration in computing the amount of
      compensation for purposes of determining compliance with the provisions of
      subparagraphs (A) and (B).
990           (D) The determination of whether compensation paid to underwriters,
      broker/dealers, or affiliates thereof is in connection with or related to a public
      offering, for purposes of this subparagraph (4), shall be made on the basis of
      such factors as the timing of the transaction, the consideration rendered, the
      NASD [Rules 0100-3420]                                                            214


      investment risk, and the role of the member or affiliate in the organization,
      management and direction of the enterprise in which the sponsor is involved.
             (i) An affiliate of a member which acts or proposes to act as a general
             partner, associate general partner, or other sponsor of a program shall be
             presumed to be bearing investment risk for purposes of this paragraph (b)
             if the affiliate:
                    a. is subject to potential liability as a general partner to the same
             extent as any other general partner;
                    b. is not indemnified against potential liability as a general partner
             to any greater or different extent than any other general partner for its
             actions or those of any other general partner;
                    c. has a net worth equal to at least 5% of the net proceeds of the
             public offering or $1.0 million, whichever is less; provided, however, that
             the computation of the net worth shall not include an interest in the
             program offered but may include net worth applied to satisfy the require-
             ments of this paragraph (b) with respect to other programs; and
             d. agrees to maintain net worth as required by subparagraph c. above
             under its control until the earlier of the removal or withdrawal of the
             affiliate as a general partner, associate general partner, or other sponsor,
             or the dissolution of the program.
             (ii) For purposes of determining the factors to be utilized in computing
             compensation derived from securities received in connection with a public
             offering, the guidelines set forth in Rule 2710 shall govern to the extent
             applicable.
991           (E) No member or person associated with a member shall directly or
      indirectly accept any non-cash compensation or sales incentive item including,
      but not limited to, travel bonuses, prizes, and awards offered or provided to such
      member or its associated persons by any sponsor, affiliate of a sponsor or
      program. Notwithstanding the foregoing, a member may provide non-cash
      compensation or sales incentive items to its associated persons provided that no
      sponsor, affiliate of a sponsor or program, including specifically an affiliate of the
      member, directly or indirectly participates in or contributes to providing such non-
      cash compensation. Further, this subparagraph shall not prohibit a person
      associated with a member from accepting any non-cash sales incentive item
      offered directly to that person by a sponsor, affiliate of a sponsor or program
      where:
             (i) the aggregate value of all such items paid by any sponsor or affiliate of
             a sponsor to each associated person during any year does not exceed
             $100.00;
             (ii) the value of all such items to be made available in connection with an
             offering is included as compensation to be received in connection with the
             offering for purposes of subparagraph (B); and
             (iii) the proposed payment or transfer of all such items is disclosed in the
             prospectus or similar offering document.
      NASD [Rules 0100-3420]                                                           215


992          (F) Subject to the limitations on direct and indirect non-cash compensa-
      tion provided under subparagraph (E), no member shall accept any cash
      compensation unless all of the following conditions are satisfied:
             (i) all compensation is paid directly to the member in cash and the distri-
             bution, if any, of all compensation to the member’s associated persons is
             controlled solely by the member;
             (ii) the value of all compensation to be paid in connection with an offering
             is included as compensation to be received in connection with the offering
             for purposes of subparagraph (B);
             (iii) arrangements relating to the proposed payment of all compensation
             are disclosed in the prospectus or similar offering document;
             (iv) the value of all compensation paid in connection with an offering is
             reflected on the books and records of the recipient member as
             compensation received in connection with the offering; and
             (v) no compensation paid in connection with an offering is directly or
             indirectly related to any non-cash compensation or sales incentive items
             provided by the member to its associated persons.
            (5) Valuation for Customer Account Statements
993         No member may participate in a public offering of direct participation
      program securities unless:
994          (A) the general partner or sponsor of the program will disclose in each
      annual report distributed to investors pursuant to Section 13(a) of the Act a per
      share estimated value of the direct participation program securities, the method
      by which it was developed, and the date of the data used to develop the
      estimated value.
               (6) Participation in Rollups
995            (A) No member or person associated with a member shall participate in
      the solicitation of votes or tenders from limited partners in connection with a
      limited partnership rollup transaction, irrespective of the form of the resulting
      entity (i.e., a partnership, real estate investment trust or corporation), unless any
      compensation received by the member:
             (i) is payable and equal in amount regardless of whether the limited
             partner votes affirmatively or negatively in the proposed limited partner-
             ship rollup transaction;
             (ii) in the aggregate, does not exceed 2% of the exchange value of the
             newly-created securities; and
             (iii) is paid regardless of whether the limited partners reject the proposed
             limited partnership rollup transaction.
996           (B) No member or person associated with a member shall participate in
      the solicitation of votes or tenders from limited partners in connection with a
      limited partnership rollup transaction unless the general partner(s) or sponsor(s)
      proposing the limited partnership rollup transaction agrees to pay all solicitation
      expenses related to the limited partnership rollup transaction, including all
      preparatory work related thereto, in the event the limited partnership rollup
      transaction is rejected.
      NASD [Rules 0100-3420]                                                            216


997          (C) No member or person associated with a member shall participate in
      any capacity in a limited partnership rollup transaction if the transaction is unfair
      or unreasonable.
             (i) A limited partnership rollup transaction will be presumed not to be
             unfair or unreasonable if the limited partnership rollup transaction
             provides for the right of dissenting limited partners:
                     a. to receive compensation for their limited partnership units based
             on an appraisal of the limited partnership assets performed by an
             independent appraiser unaffiliated with the sponsor or general partner of
             the program which values the assets as if sold in an orderly manner in a
             reasonable period of time, plus or minus other balance sheet items, and
             less the cost of sale or refinancing and in a manner consistent with the
             appropriate industry practice. Compensation to dissenting limited partners
             of limited partnership rollup transactions may be cash, secured debt
             instruments, unsecured debt instruments, or freely-tradeable securities;
             provided, however, that:
                     1. limited partnership rollup transactions which utilize debt instru-
                     ments as compensation must provide for a trustee and an
                     indenture to protect the rights of the debt holders and provide a
                     rate of interest equal to at least 120% of the applicable federal rate
                     as determined in accordance with Section 1274 of the Internal
                     Revenue Code of 1986;
                     2. limited partnership rollup transactions which utilize unsecured
                     debt instruments as compensation, in addition to the requirements
                     of subparagraph 1., must limit total leverage to 70% of the
                     appraised value of the assets;
                     3. all debt securities must have a term no greater than 8 years and
                     provide for prepayment with 80% of the net proceeds of any sale
                     or refinancing of the assets previously owned by the partnership
                     entitles subject to the limited partnership rollup transaction or any
                     part thereof; and
                     4. freely-tradeable securities utilized as compensation to
                     dissenting limited partners must be previously listed on a national
                     securities exchange or previously traded on Nasdaq prior to the
                     limited partnership rollup transaction, and the number of securities
                     to be received in return for limited partnership interests must be
                     determined in relation to the average last sale price of the freely-
                     tradeable securities in the 20-day period following the date of the
                     meeting at which the vote on the limited partnership rollup
                     transaction occurs. If the issuer of the freely-tradeable securities is
                     affiliated with the sponsor or general partner, newly issued securi-
                     ties to be utilized as compensation to dissenting limited partners
                     shall not represent more than 20% of the issued and outstanding
                     shares of that class of securities after giving effect to the issuance.
                     For purposes of the preceding sentence, a sponsor or general
                     partner is “affiliated” with the issuer of the freely-tradeable
                     securities if the sponsor or general partner receives any material
                     compensation from the issuer or its affiliates in conjunction with
NASD [Rules 0100-3420]                                                           217


              the limited partnership rollup transaction or the purchase of the
              general partner’s interest; provided, however, that nothing herein
              shall restrict the ability of a sponsor or general partner to receive
              any payment for its equity interests and compensation as other-
              wise provided by this subparagraph.
              b. to receive or retain a security with substantially the same terms
       and conditions as the security originally held. Securities received or
       retained will be considered to have the same terms and conditions as the
       security originally held if:
              1. there is no material adverse change to dissenting limited
              partners’ rights with respect to the business plan or the invest-
              ment, distribution and liquidation policies of the limited partnership;
              and
              2. the dissenting limited partners receive substantially the same
              rights, preferences and priorities as they had pursuant to the
              security originally held; or
              c. to receive other comparable rights including, but not limited to:
              1. approval of the limited partnership rollup transaction by 75% of
              the outstanding units of each of the individual participating limited
              partnerships and the exclusion of any individual limited partnership
              from the limited partnership rollup transaction which fails to reach
              the 75% threshold. The third-party appointed to tabulate votes and
              dissents pursuant to subparagraph (C)(ii)b.4. hereof shall submit
              the results of such tabulation to the Association;
              2. review of the limited partnership rollup transaction by an
              independent committee of persons not affiliated with the general
              partner(s) or sponsor. Whenever utilized, the independent
              committee:
                     A. shall be approved by a majority of the outstanding
                     securities of each of the participating partnerships;
                     B. shall have access to the books and records of the
                     partnerships;
                     C. shall prepare a report to the limited partners subject to
                     the limited partnership rollup transaction that presents its
                     findings and recommendations, including any minority
                     views;
                     D. shall have the authority to negotiate the proposed
                     transaction with the general partner or sponsor on behalf of
                     the limited partners, but not the authority to approve the
                     transaction on behalf of the limited partners;
                     E. shall not deliberate for a period longer than 60 days,
                     although extensions will be permitted if unanimously
                     agreed upon by the members of the independent
                     committee or if approved by the Association;
NASD [Rules 0100-3420]                                                           218


                      F. may be compensated and reimbursed by the limited
                      partnerships subject to the limited partnership rollup
                      transaction and shall have the ability to retain independent
                      counsel and financial advisors to represent all limited
                      partners at the limited partnerships’ expense provided the
                      fees are reasonable; and
                      G. shall be entitled to indemnification to the maximum
                      extent permitted by law from the limited partnerships
                      subject to the limited partnership rollup transaction from
                      claims, causes of action or lawsuits related to any action or
                      decision made in furtherance of their responsibilities;
                      provided, however, that general partners or sponsors may
                      also agree to indemnify the independent committee; or
              3. any other comparable rights for dissenting limited partners
              proposed by general partners or sponsors, provided, however, that
              the general partner(s) or sponsor demonstrates to the satisfaction
              of the Association or, if the Association determines appropriate, to
              the satisfaction of an independent committee, that the rights
              proposed are comparable.
       (ii) Regardless of whether a limited partnership rollup transaction is in
       compliance with subparagraph (C)(i), a limited partnership rollup
       transaction will be presumed to be unfair and unreasonable:
              a. if the general partner(s):
              1. converts an equity interest in any limited partnership(s) subject
              to a limited partnership rollup transaction for which consideration
              was not paid and which was not otherwise provided for in the
              limited partnership agreement and disclosed to limited partners,
              into a voting interest in the new entity (provided, however, an
              interest originally obtained in order to comply with the provisions of
              Internal Revenue Service Revenue Proclamation 89-12 may be
              converted);
              2. fails to follow the valuation provisions, if any, in the limited
              partnership agreements of the subject limited partnerships when
              valuing their limited partnership interests; or
              3. utilizes a future value of their equity interest in the limited
              partnership rather than the current value of their equity interest, as
              determined by an appraisal conducted in a manner consistent with
              subparagraph (C)(i)a., when determining their interest in the new
              entity;
              b. as to voting rights, if:
              1. the voting rights in the entity resulting from a limited partnership
              rollup transaction do not generally follow the original voting rights
              of the limited partnerships participating in the limited partnership
              rollup transaction; provided, however, that changes to voting rights
              may be effected if the Association determines that such changes
NASD [Rules 0100-3420]                                                         219


             are not unfair or if the changes are approved by an independent
             committee;
             2. a majority of the interests in an entity resulting from a limited
             partnership rollup transaction may not, without concurrence by the
             sponsor, general partner(s), board of directors, trustee, or similar
             governing entity, depending on the form of entity and to the extent
             not inconsistent with applicable state law, vote to:
                     A. amend the limited partnership agreement, articles of
                     incorporation or by-laws, or indenture;
                     B. dissolve the entity;
                     C. remove the general partner, board of directors, trustee
                     or similar governing entity, and elect a new general partner,
                     board of directors, trustee or similar governing entity; or
                     D. approve or disapprove the sale of substantially all of the
                     assets of the entity;
             3. the general partner(s) or sponsor(s) proposing a limited partner-
             ship rollup transaction do not provide each limited partner with a
             document which instructs the limited partner on the proper
             procedure for voting against or dissenting from the transaction; or
             4. the general partner(s) or sponsor(s) does not utilize an
             independent third party to receive and tabulate all votes and
             dissents in connection with the limited partnership rollup transac-
             tion, and require that the third party make the tabulation available
             to the general partner and any limited partner upon request at any
             time during and after voting occurs;
             c. as to transaction costs, if:
             1. transaction costs of a rejected limited partnership rollup tran-
             saction are not apportioned between general and limited partners
             of the subject limited partnerships according to the final vote on
             the proposed transaction as follows:
                     A. the general partner(s) or sponsor(s) bear all transaction
                     costs in proportion to the total number of abstentions and
                     votes to reject the limited partnership rollup transaction;
                     and
                     B. limited partners bear transaction costs in proportion to
                     the number of votes to approve the limited partnership
                     rollup transaction; or
             2. individual limited partnerships that do not approve a limited part-
             nership rollup transaction are required to pay any of the transac-
             tion costs, and the general partner or sponsor is not required to
             pay the transaction costs on behalf of the non-approving limited
             partnerships, in a limited partnership rollup transaction in which
             one or more limited partnerships determines not to approve the
             transaction, but where the transaction is consummated with
             respect to one or more approving limited partnerships; or
       NASD [Rules 0100-3420]                                                           220


                      d. as to fees of general partners, if:
                      1. general partners are not prevented from receiving both
                      unearned management fees discounted to a present value (if such
                      fees were not previously provided for in the limited partnership
                      agreement and disclosed to limited partners) and new asset-based
                      fees;
                      2. property management fees and other general partner fees are
                      inappropriate, unreasonable and more than, or not competitive
                      with, what would be paid to third parties for performing similar
                      services; or
                      3. changes in fees which are substantial and adverse to limited
                      partners are not approved by an independent committee according
                      to the facts and circumstances of each transaction.
              (c)     Exemptions
998           Pursuant to the Rule 9600 Series, the Association may exempt a member
       or person associated with a member from the provisions of this Rule for good
       cause shown.
       [Amended eff. Sept. 16, 1982; Jan. 17, 1984; July 3, 1984; Sept. 15, 1986; Jan.
       1, 1989; Jan. 13, 1989; Feb. 1, 1989; Aug. 19, 1991; June 23, 1993; amended to
       incorporate Appendix F by SR-NASD-93-48 eff. Mar. 8, 1994; amended by SR-
       NASD-93-03 eff. Nov. 1, 1994; amended by SR-NASD-95-19 eff. July 3, 1995;
       amended by SR-NASD-95-21 eff. July 11, 1995; amended by SR-NASD-97-28;
       amended by SR-NASD-00-13 eff. April 16, 2001.]
       Selected Notices to Members: 83-13, 84-28, 84-64, 85-17, 85-29, 86-66, 86-81,
       88-88, 89-16, 91-56, 91-78, 93-15, 93-44, 94-24, 94-70, 95-63, 95-64.

       2820. Variable Contracts of an Insurance Company
              (a)     Application
999           This Rule shall apply exclusively (and in lieu of Rule 2830) to the activities
       of members in connection with variable contracts, to the extent such activities are
       subject to regulation under the federal securities laws.
              (b)     Definitions
1000          (1) The term “purchase payment” as used throughout this Rule shall
       mean the consideration paid at the time of each purchase or installment for or
       under the variable contract.
1001           (2) The term “variable contracts” shall mean contracts providing for
       benefits or values which may vary according to the investment experience of any
       separate or segregated account or accounts maintained by an insurance
       company.
1002          (3) The terms “affiliated member,” “compensation,” “cash compensation,”
       “non-cash compensation” and “offeror” as used in paragraph (h) of this Rule shall
       have the following meanings:
       NASD [Rules 0100-3420]                                                        221


              (A) “Affiliated Member” shall mean a member which, directly or indirectly,
              controls, is controlled by, or is under common control with a non-member
              company.
              (B) “Compensation” shall mean cash compensation and non-cash
              compensation.
              (C) “Cash compensation” shall mean any discount, concession, fee,
              service fee, commission, asset based sales charge, loan, override, or
              cash employee benefit received in connection with the sale and
              distribution of variable contracts.
              (D) “Non-cash compensation” shall mean any form of compensation
              received in connection with the sale and distribution of variable contracts
              that is not cash compensation, including but not limited to merchandise,
              gifts and prizes, travel expenses, meals and lodging.
              (E) “Offeror” shall mean an insurance company, a separate account of an
              insurance company, an investment company that funds a separate
              account, any adviser to a separate account of an insurance company or
              an investment company that funds a separate account, a fund adminis-
              trator, an underwriter and any affiliated person (as defined in Section
              2(a)(3) of the Investment Company Act of 1940) of such entities.
              (c)    Receipt of Payment
1003           No member shall participate in the offering or in the sale of a variable
       contract on any basis other than at a value to be determined following receipt of
       payment therefor in accordance with the provisions of the contract, and, if
       applicable, the prospectus, the Investment Company Act of 1940 and applicable
       rules thereunder. Payments need not be considered as received until the
       contract application has been accepted by the insurance company, except that
       by mutual agreement they may be considered to have been received for the risk
       of the purchaser when actually received.
              (d)    Transmittal
1004           Every member who receives applications and/or purchase payments for
       variable contracts shall transmit promptly to the issuer all such applications and
       at least that portion of the purchase payment required to be credited to the
       contract.
              (e)    Selling Agreements
1005           No member who is a principal underwriter as defined in the Investment
       Company Act of 1940 may sell variable contracts through another broker/dealer
       unless (1) such broker/dealer is a member, and (2) there is a sales agreement in
       effect between the parties. Such sales agreement must provide that the sales
       commission be returned to the issuing insurance company if the variable contract
       is tendered for redemption within seven business days after acceptance of the
       contract application.
              (f)    Redemption
1006           No member shall participate in the offering or in the sale of a variable
       contract unless the insurance company, upon receipt of a request in proper form
       for partial or total redemption in accordance with the provisions of the contract
       NASD [Rules 0100-3420]                                                         222


       undertakes to make prompt payment of the amounts requested and payable
       under the contract in accordance with the terms thereof, and, if applicable, the
       prospectus, the Investment Company Act of 1940 and applicable rules there-
       under.
              (g)       Member Compensation
1007          In connection with the sale and distribution of variable contracts:
1008          (1) Except as described below, no associated person of a member shall
       accept any compensation from anyone other than the member with which the
       person is associated. This requirement will not prohibit arrangements where a
       non-member company pays compensation directly to associated persons of the
       member, provided that:
              (A) the arrangement is agreed to by the member;
              (B) the member relies on an appropriate rule, regulation, interpretive
              release, interpretive letter, or “no-action” letter issued by the Commission
              that applies to the specific fact situation of the arrangement;
              (C) the receipt by associated persons of such compensation is treated as
              compensation received by the member for purposes of the Rules of the
              Association; and
              (D) the record keeping requirement in paragraph (g)(3) is satisfied.
1009        (2) No member or person associated with a member shall accept any
       compensation from an offeror which is in the form of securities of any kind.
1010            (3) Except for items as described in subparagraphs (g)(4)(A) and (B), a
       member shall maintain records of all compensation received by the member or
       its associated persons from offerors. The records shall include the names of the
       offerors, the names of the associated persons, the amount of cash, the nature
       and, if known, the value of non-cash compensation received.
1011           (4) No member or person associated with a member shall directly or
       indirectly accept or make payments or offers of payments of any non-cash
       compensation, except as provided in this provision. Notwithstanding the provi-
       sions of paragraph (g)(1), the following non-cash compensation arrangements
       are permitted:
              (A) Gifts that do not exceed an annual amount per person fixed periodi-
                                      14
              cally by the Association and are not preconditioned on achievement of a
              sales target.
              (B) An occasional meal, a ticket to a sporting event or the theater, or
              comparable entertainment which is neither so frequent nor so extensive
              as to raise any question of propriety and is not preconditioned on
              achievement of a sales target.
              (C) Payment or reimbursement by offerors in connection with meetings
              held by an offeror or by a member for the purpose of training or education
              of associated persons of a member, provided that:


       14
            The current annual amount fixed by the Association is $100.
       NASD [Rules 0100-3420]                                                           223


                     (i) the record keeping requirement in paragraph (g)(3) is satisfied;
                     (ii) associated persons obtain the member’s prior approval to
              attend the meeting and attendance by a member’s associated persons is
              not preconditioned by the member on the achievement of a sales target
              or any other incentives pursuant to a non-cash compensation arrange-
              ment permitted by paragraph (g)(4)(D);
                      (iii) the location is appropriate to the purpose of the meeting, which
              shall mean an office of the offeror or the member, or a facility located in
              the vicinity of such office, or a regional location with respect to regional
              meetings;
                     (iv) the payment or reimbursement is not applied to the expenses
              of guests of the associated person; and
                     (v) the payment or reimbursement by the offeror is not pre-
              conditioned by the offeror on the achievement of a sales target or any
              other non-cash compensation arrangement permitted by paragraph
              (g)(4)(D).
              (D) Non-cash compensation arrangements between a member and its
              associated persons or a non-member company and its sales personnel
              who are associated persons of an affiliated member, provided that:
                      (i) the member’s or non-member’s non-cash compensation arran-
              gement, if it includes variable contract securities, is based on the total
              production of associated persons with respect to all variable contract
              securities distributed by the member;
                      (ii) the non-cash compensation arrangement requires that the
              credit received for each variable contract security is equally weighted;
                     (iii) no unaffiliated non-member company or other unaffiliated
              member directly or indirectly participates in the member’s or non-
              member’s organization of a permissible non-cash compensation arrange-
              ment; and
                     (iv) the record keeping requirement in paragraph (g)(3) is satisfied.
              (E) Contributions by a non-member company or other member to a non-
              cash compensation arrangement between a member and its associated
              persons, provided that the arrangement meets the criteria in sub-
              paragraph (g)(4)(D).
       [Sec. 29 added eff. Feb. 8, 1971; amended eff. May 1, 1976.]
       [Amended by SR-NASD-97-35 eff. Jan. 1, 1999; amended by SR-NASD-98-14
       eff. April 1, 2000.]
       Selected Notices to Members: 88-17, 91-25, 91-68, 94-67, 95-56, 97-50, 98-75,
       99-103.

       2830. Investment Company Securities
              (a)    Application
1012           This Rule shall apply exclusively to the activities of members in connec-
       tion with the securities of companies registered under the Investment Company
       NASD [Rules 0100-3420]                                                           224


       Act of 1940 (“the 1940 Act”); provided however, that Rule 2820 shall apply, in lieu
       of this Rule, to members’ activities in connection with “variable contracts” as
       defined therein.
              (b)     Definitions
1013          (1) The terms “affiliated member,” “compensation,” “cash compensation,”
       “non-cash compensation” and “offeror” as used in paragraph (l) of this Rule shall
       have the following meanings:
              (A) “Affiliated Member” shall mean a member which, directly or indirectly,
              controls, is controlled by, or is under common control with a non-member
              company.
              (B) “Compensation” shall mean cash compensation and non-cash
              compensation.
              (C) “Cash compensation” shall mean any discount, concession, fee,
              service fee, commission, asset-based sales charge, loan, override or
              cash employee benefit received in connection with the sale and
              distribution of investment company securities.
              (D) “Non-cash compensation” shall mean any form of compensation
              received in connection with the sale and distribution of investment
              company securities that is not cash compensation, including but not
              limited to merchandise, gifts and prizes, travel expenses, meals and
              lodging.
              (E) “Offeror” shall mean an investment company, an adviser to an
              investment company, a fund administrator, an underwriter and any
              affiliated person (as defined in Section 2(a)(3) of the 1940 Act) of such
              entities.
1014           (2) “Brokerage commissions,” as used in paragraph (k), shall not be
       limited to commissions on agency transactions but shall include underwriting
       discounts or concessions and fees paid to members in connection with tender
       offers.
1015           (3) “Covered account,” as used in paragraph (k), shall mean (A) any other
       investment company or other account managed by the investment adviser of
       such investment company, or (B) any other account from which brokerage
       commissions are received or expected as a result of the request or direction of
       any principal underwriter of such investment company or of any affiliated person
       (as defined in the 1940 Act) of such investment company or of such underwriter,
       or of any affiliated person of an affiliated person of such investment company.
1016          (4) “Person” shall mean “person” as defined in the 1940 Act.
1017           (5) “Prime rate,” as used in paragraph (d), shall mean the most pre-
       ferential interest rate on corporate loans at large U.S. money center commercial
       banks.
1018          (6) “Public offering price” shall mean a public offering price as set forth in
       the prospectus of the issuing company.
1019          (7) “Rights of accumulation” as used in paragraph (d), shall mean a scale
       of reducing sales charges in which the sales charge applicable to the securities
       NASD [Rules 0100-3420]                                                        225


       being purchased is based upon the aggregate quantity of securities previously
       purchased or acquired and then owned plus the securities being purchased.
1020          The quantity of securities owned shall be based upon:
              (A) The current value of such securities (measured by either net asset
              value or maximum offering price); or
              (B) Total purchases of such securities at actual offering prices; or
              (C) The higher of the current value or the total purchases of such
              securities.
1021           The quantity of securities owned may also include redeemable securities
       of other registered investment companies having the same principal underwriter.
1022          (8) “Sales charge” and “sales charges,” as used in paragraph (d), shall
       mean all charges or fees that are paid to finance sales or sales promotion
       expenses, including front-end, deferred and asset-based sales charges, exclud-
       ing charges and fees for ministerial, record-keeping or administrative activities
       and investment management fees. For purposes of this Rule, members may rely
       on the sales-related fees and charges disclosed in the prospectus of an invest-
       ment company.
              (A) An “asset-based sales charge” is a sales charge that is deducted from
              the net assets of an investment company and does not include a service
              fee.
              (B) A “deferred sales charge” is any amount properly chargeable to sales
              or promotional expenses that is paid by a shareholder after purchase but
              before or upon redemption.
              (C) A “front-end sales charge” is a sales charge that is included in the
              public offering price of the shares of an investment company.
1023          (9) “Service fees,” as used in paragraph (d), shall mean payments by an
       investment company for personal service and/or the maintenance of shareholder
       accounts.
1024            (10) The terms “underwriter,” “principal underwriter,” “redeemable secu-
       rity,” “periodic payment plan,” “open-end management investment company,” and
       unit investment trust,” shall have the same definitions used in the 1940 Act.
1025          (11) A “fund of funds” is an investment company that acquires securities
       issued by any other investment company registered under the 1940 Act in
       excess of the amounts permitted under paragraph (A) of Section 12(d)(1) of the
       1940 Act. An “acquiring company” in a fund of funds is the investment company
       that purchases or otherwise acquires the securities of another investment com-
       pany, and an “acquired company” is the investment company whose securities
       are acquired.
1026         (12) “Investment companies in a single complex” are any two or more
       companies that hold themselves out to investors as related companies for
       purposes of investment and investor services.
       NASD [Rules 0100-3420]                                                          226


              (c)     Conditions for Discounts to Dealers
1027            No member who is an underwriter of the securities of an investment
       company shall sell any such security to any dealer or broker at any price other
       than a public offering price unless such sale is in conformance with Rule 2420
       and, if the security is issued by an open-end management company or by a unit
       investment trust which invests primarily in securities issued by other investment
       companies, unless a sales agreement is in effect between the parties as of the
       date of the transaction, which agreement shall set forth the concessions to be
       received by the dealer or broker.
              (d)     Sales Charge
1028           No member shall offer or sell the shares of any open-end investment
       company, any closed-end investment company that makes periodic repurchase
       offers pursuant to Rule 23c-3(b) under the 1940 Act and offers its shares on a
       continuous basis pursuant to Rule 415(a)(1)(xi) under the Securities Act of 1933,
       or any “single payment” investment plan issued by a unit investment trust
       (collectively “investment companies”) registered under the 1940 Act if the sales
       charges described in the prospectus are excessive. Aggregate sales charges
       shall be deemed excessive if they do not conform to the following provisions:
             (1) Investment Companies Without an Asset-Based Sales Charge
1029          (A) Aggregate front-end and deferred sales charges described in the
       prospectus which may be imposed by an investment company without an asset-
       based sales charge shall not exceed 8.5% of the offering price.
1030          (B)(i) Rights of accumulation (cumulative quantity discounts) may be
       made available to any person in accordance with one of the alternative quantity
       discount schedules provided in subparagraph (C)(i) below, as in effect on the
       date the right is exercised.
1031          (B)(ii) If rights of accumulation are not made available on terms at least as
       favorable as those specified in subparagraph (C)(i) the maximum aggregate
       sales charge shall not exceed 8.0% of offering price.
1032           (C)(i) Quantity discounts, if offered, shall be made available on single
       purchases by any person in accordance with one of the following two
       alternatives:
              a. A maximum aggregate sales charge of 7.75% on purchases of $10,000
              or more and a maximum aggregate sales charge of 6.25% on purchases
              of $25,000 or more; or
              b. A maximum aggregate sales charge of 7.50% on purchases of $15,000
              or more and a maximum aggregate sales charge of 6.25% on purchases
              of $25,000 or more.
1033          (C)(ii) If quantity discounts are not made available on terms at least as
       favorable as those specified in subparagraph (C)(i) the maximum aggregate
       sales charge shall not exceed:
              a. 7.75% of offering price if the provisions of subparagraph (B) are met.
              b. 7.25% of offering price if the provisions of subparagraph (B) are not
              met.
       NASD [Rules 0100-3420]                                                      227


1034           (D) If an investment company without an asset-based sales charge pays
       a service fee, the maximum aggregate sales charge shall not exceed 7.25% of
       the offering price.
               (2) Investment Companies with an Asset-Based Sales Charge
1035           (A) Except as provided in subparagraphs (C) and (D), the aggregate
       asset-based, front-end and deferred sales charges described in the prospectus
       which may be imposed by an investment company with an asset-based sales
       charge, if the investment company has adopted a plan under which service fees
       are paid, shall not exceed 6.25% of total new gross sales (excluding sales from
       the reinvestment of distributions and exchanges of shares between investment
       companies in a single complex, between classes of an investment company with
       multiple classes of shares or between series of a series investment company)
       plus interest charges on such amount equal to the prime rate plus one percent
       per annum. The maximum front-end or deferred sales charge resulting from any
       transaction shall be 6.25% of the amount invested.
1036           (B) Except as provided in subparagraphs (C) and (D), if an investment
       company with an asset-based sales charge does not pay a service fee, the
       aggregate asset-based, front-end and deferred sales charges described in the
       prospectus shall not exceed 7.25% of total new gross sales (excluding sales from
       the reinvestment of distributions and exchanges of shares between investment
       companies in a single complex, between classes of an investment company with
       multiple classes of shares or between series of a series investment company)
       plus interest charges on such amount equal to the prime rate plus 1% per
       annum. The maximum front-end or deferred sales charge resulting from any
       transaction shall be 7.25% of the amount invested.
1037            (C) The maximum aggregate sales charge on total new gross sales set
       forth in subparagraphs (A) and (B) may be increased by an amount calculated by
       applying the appropriate percentages of 6.25% or 7.25% to total new gross sales
       which occurred after an investment company first adopted an asset-based sales
       charge until July 7, 1993 plus interest charges on such amount equal to the
       prime rate plus one percent per annum less any front-end, asset-based or
       deferred sales charges on such sales or net assets resulting from such sales.
1038           (D) The maximum aggregate sales charges of an investment company in
       a single complex, a class of shares issued by an investment company with
       multiple classes of shares or a separate series of a series investment company,
       may be increased to include sales of exchanged shares provided that such
       increase is deducted from the maximum aggregate sales charges of the invest-
       ment company, class or series which redeemed the shares for the purpose of
       such exchanges.
1039          (E) No member shall offer or sell the shares of an investment company
       with an asset-based sales charge if:
              (i) The amount of the asset-based sales charge exceeds .75 of 1% per
              annum of the average annual net assets of the investment company; or
              (ii) Any deferred sales charges deducted from the proceeds of a
              redemption after the maximum cap described in subparagraphs (A), (B),
              (C) and (D) hereof, has been attained are not credited to the investment
              company.
       NASD [Rules 0100-3420]                                                        228


              (3) Fund of Funds
1040           (A) If neither an acquiring company nor an acquired company in a fund of
       funds structure has an asset-based sales charge, the maximum aggregate front-
       end and deferred sales charges that may be imposed by the acquiring company,
       the acquired company and those companies in combination, shall not exceed the
       rates provided in paragraph (d)(1).
1041           (B) Any acquiring company or acquired company in a fund of funds
       structure that has an asset-based sales charge shall individually comply with the
       requirements of paragraph (d)(2), provided:
              (i) If the acquiring and acquired companies are in a single complex and
              the acquired fund has an asset-based sales charge, sales made to the
              acquiring fund shall be excluded from total gross new sales for purposes
              of acquired fund’s calculations under subparagraphs (d)(2)(A) through
              (d)(2)(D); and
              (ii) If both the acquiring and acquired companies have an asset-based
              sales charge:
                      a. the maximum aggregate asset-based sales charge imposed by
              the acquiring company, the acquired company and those companies in
              combination, shall not exceed the rate provided in subparagraph
              (d)(2)(E)(i); and
                     b. the maximum aggregate front-end or deferred sales charges
              shall not exceed 7.25% of the amount invested, or 6.25% if either
              company pays a service fee.
1042         (C) The rates described in subparagraphs (d)(4) and (d)(5) shall apply to
       the acquiring company, the acquired company and those companies in
       combination. The limitations of subparagraph (d)(6) shall apply to the acquiring
       company and the acquired company individually.

1043            (4) No member or person associated with a member shall, either orally or
       in writing, describe an investment company as being “no load” or as having “no
       sales charge” if the investment company has a front-end or deferred sales
       charge or its total charges against net assets to provide for sales related
       expenses and/or service fees exceed .25 of 1% of average net assets per
       annum.
1044           (5) No member or person associated with a member shall offer or sell the
       securities of an investment company if the service fees paid by the investment
       company, as disclosed in the prospectus, exceed .25 of 1% of its average annual
       net assets or if a service fee paid by the investment company, as disclosed in the
       prospectus, to any person who sells its shares exceeds .25 of 1% of the average
       annual net asset value of such shares.
1045           (6) No member or person associated with a member shall offer or sell the
       securities of an investment company if:
1046           (A) The investment     company has a deferred sales charge paid upon
       redemption that declines       over the period of a shareholder’s investment
       (“contingent deferred sales   load”), unless the contingent deferred sales load is
       calculated as if the shares    or amounts representing shares not subject to the
       NASD [Rules 0100-3420]                                                         229


       load are redeemed first, and other shares or amounts representing shares are
       then redeemed in the order purchased, provided that another order of redemp-
       tion may be used if such order would result in the redeeming shareholder paying
       a lower contingent deferred sales load; or
1047           (B) The investment company has a front-end or deferred sales charge
       imposed on shares, or amounts representing shares, that are purchased through
       the reinvestment of dividends, unless the registration statement registering the
       investment company’s securities under the Securities Act of 1933 became
       effective prior to April 1, 2000.
              (e)     Selling Dividends
1048           No member shall, in recommending the purchase of investment company
       securities, state or imply that the purchase of such securities shortly before an
       ex-dividend date is advantageous to the purchaser, unless there are specific,
       clearly described tax or other advantages to the purchaser, and no member shall
       represent that distributions of long-term capital gains by an investment company
       are or should be viewed as part of the income yield from an investment in such
       company’s securities.
              (f)     Withhold Orders
1049        No member shall withhold placing customers’ orders for any investment
       company security so as to profit himself as a result of such withholding.
              (g)     Purchase for Existing Orders
1050           No member shall purchase from an underwriter the securities of any
       open-end investment company and no member who is an underwriter of such
       securities shall purchase such securities from the issuer, except (1) for the
       purpose of covering purchase orders previously received or (2) for its own invest-
       ment. Nothing herein shall be deemed to prohibit any member from purchasing
       securities of any investment company specifically designed for short-term
       investment (e.g., money market fund).
              (h)     Refund of Sales Charge
1051           If any security issued by an open-end management investment company
       is repurchased by the issuer, or by the underwriter for the account of the issuer,
       or is tendered for redemption within seven business days after the date of the
       transaction, (1) the dealer or broker shall forthwith refund to the underwriter the
       full concession allowed to the dealer or broker on the original sale and (2) the
       underwriter shall forthwith pay to the issuer the underwriter’s share of the sales
       charge on the original sale by the underwriter and shall also pay to the issuer the
       refund which he received under subparagraph (1) when he receives it. The
       dealer or broker shall be notified by the underwriter of such repurchase or
       redemption within 10 days of the date on which the certificate or written request
       for redemption is delivered to the underwriter or issuer. If the original sale was
       made directly to the investor by the principal underwriter, the entire sales charge
       shall be paid to the issuer by the principal underwriter.
              (i)     Purchases as Principal
1052           No member who is a party to a sales agreement referred to in paragraph
       (c) shall, as principal, purchase any security issued by an open-end management
       NASD [Rules 0100-3420]                                                           230


       investment company or unit investment trust from a record holder at a price lower
       than the bid price next quoted by or for the issuer.
              (j)     Repurchase from Dealer
1053            No member who is a principal underwriter of a security issued by an
       open-end investment company or a closed-end investment company that makes
       periodic repurchase offers pursuant to Rule 23c-3(b) under the 1940 Act and
       offers its shares on a continuous basis pursuant to Rule 415(a)(1)(xi) under the
       Securities Act of 1933 shall repurchase such security, either as principal or as
       agent for the issuer, from a dealer acting as principal who is not a party to a sales
       agreement with a principal underwriter, nor from any investor, unless such dealer
       or investor is the record owner of the security so tendered for repurchase. No
       member who is a principal underwriter shall participate in the offering or in the
       sale of any such security if the issuer voluntarily redeems or repurchases its
       securities from a dealer acting as principal who is not a party to such a sales
       agreement nor from any investor, unless such dealer or investor is the record
       owner of the security so tendered for repurchase. Nothing in this paragraph shall
       relate to the compulsory redemption of any security upon presentation to the
       issuer pursuant to the terms of the security.
1054           Nothing in this Rule shall prevent any member, whether or not a party to a
       sales agreement, from selling any such security for the account of a record
       owner to the underwriter or issuer at the bid price next quoted by or for the issuer
       and charging the investor to a reasonable charge for handling the transaction,
       provided that such member discloses to such record owner that direct redemp-
       tion of the security can be accomplished by the record owner without incurring
       such charges.
              (k)     Execution of Investment Company Portfolio Transactions
1055           (1) No member shall, directly or indirectly, favor or disfavor the sale or
       distribution of shares of any particular investment company or group of invest-
       ment companies on the basis of brokerage commissions received or expected by
       such member from any source, including such investment company, or any
       covered account.
1056           (2) No member shall, directly or indirectly, demand or require brokerage
       commissions or solicit a promise of such commissions from any source as a
       condition to the sale or distribution of shares of an investment company.
1057           (3) No member shall, directly or indirectly, offer or promise to another
       member, brokerage commissions from any source as a condition to the sale or
       distribution of shares of an investment company and no member shall request or
       arrange for the direction to any member of a specific amount or percentage of
       brokerage commissions conditioned upon that member’s sales or promise of
       sales of shares of an investment company.
1058           (4) No member shall circulate any information regarding the amount or
       level of brokerage commissions received by the member from any investment
       company or covered account to other than management personnel who are
       required, in the overall management of the member’s business, to have access
       to such information.
       NASD [Rules 0100-3420]                                                          231


1059           (5) No member shall, with respect to such member’s activities as under-
       writer of investment company shares, suggest, encourage, or sponsor any
       incentive campaign or special sales effort of another member with respect to the
       shares of any investment company which incentive or sales effort is, to the
       knowledge or understanding of such underwriter-member, to be based upon, or
       financed by, brokerage commissions directed or arranged by the underwriter-
       member.
1060           (6) No member shall, with respect to such member’s retail sales or
       distribution of investment company shares:
               (A) provide to salesmen, branch managers or other sales personnel any
              incentive or additional compensation for the sale of shares of specific
              investment companies based on the amount of brokerage commissions
              received or expected from any source, including such investment compa-
              nies or any covered account. Included in this prohibition are bonuses,
              preferred compensation lists, sales incentive campaign or contests, or
              any other method of compensation which provides an incentive to sales
              personnel to favor or disfavor any investment company or group of
              investment companies based on brokerage commissions;
              (B) recommend specific investment companies to sales personnel, or
              establish “recommended,” “selected,” or “preferred” lists of investment
              companies, regardless of the existence of any special compensation or
              incentives to favor or disfavor the shares of such company or companies
              in sales efforts, if such companies are recommended or selected on the
              basis of brokerage commissions received or expected from any source;
              (C) grant to salesmen, branch managers or other sales personnel any
              participation in brokerage commissions received by such member from
              portfolio transactions of an investment company whose shares are sold
              by such member, or from any covered account, if such commissions are
              directed by, or identified with, such investment company or any covered
              account; or
              (D) use sales of shares of any investment company as a factor in
              negotiating the price of, or the amount of brokerage commissions to be
              paid on, a portfolio transaction of an investment company or of any
              covered account, whether such transaction is executed in the over-the-
              counter market or elsewhere.
1061           (7) Provided that the member does not violate any of the specific
       provisions of this paragraph (k), nothing herein shall be deemed to prohibit:
              (A) the execution of portfolio transactions of any investment company or
              covered account by members who also sell shares of the investment
              company;
              (B) a member from selling shares of, or acting as underwriter for, an
              investment company which follows a policy, disclosed in its prospectus, of
              considering sales of shares of the investment company as a factor in the
              selection of broker/dealers to execute portfolio transactions, subject to the
              requirements of best execution;
       NASD [Rules 0100-3420]                                                         232


              (C) a member from compensating its salesmen and managers based on
              total sales of investment company shares attributable to such salesmen
              or managers, whether by use of overrides, accounting credits, or other
              compensation methods, provided that such compensation is not designed
              to favor or disfavor sales of shares of particular investment companies on
              a basis prohibited by this paragraph (k).
              (l)    Member Compensation
1062          (1) Except as described below, no associated person of a member shall
       accept any compensation from anyone other than the member with which the
       person is associated. This requirement will not prohibit arrangements where a
       non-member company pays compensation directly to associated persons of the
       member, provided that:
              (A) the arrangement is agreed to by the member;
              (B) the member relies on an appropriate rule, regulation, interpretive
              release, interpretive letter, or “no-action” letter issued by the Commission
              or its staff that applies to the specific fact situation of the arrangement;
              (C) the receipt by associated persons of such compensation is treated as
              compensation received by the member for purposes of the Rules of the
              Association; and
              (D) the record-keeping requirement in paragraph (l)(3) is satisfied.
1063        (2) No member or person associated with a member shall accept any
       compensation from an offeror which is in the form of securities of any kind.
1064            (3) Except for items described in subparagraphs (l)(5)(A) and (B), a
       member shall maintain records of all compensation received by the member or
       its associated persons from offerors. The records shall include the names of the
       offerors, the names of the associated persons, the amount of cash, the nature
       and, if known, the value of non-cash compensation received.
1065           (4) No member shall accept any cash compensation from an offeror
       unless such compensation is described in a current prospectus of the investment
       company. When special cash compensation arrangements are made available
       by an offeror to a member, which arrangements are not made available on the
       same terms to all members who distribute the investment company securities of
       the offeror, a member shall not enter into such arrangements unless the name of
       the member and the details of the arrangements are disclosed in the prospectus.
       Prospectus disclosure requirements shall not apply to cash compensation
       arrangements between:
              (A) principal underwriters of the same security; and
              (B) the principal underwriter of a security and the sponsor of a unit
              investment trust which utilizes such security as its underlying investment.
1066           (5) No member or person associated with a member shall directly or
       indirectly accept or make payments or offers of payments of any non-cash
       compensation, except as provided in this provision. Notwithstanding the provi-
       sions of subparagraph (l)(1), the following non-cash compensation arrangements
       are permitted:
NASD [Rules 0100-3420]                                                             233


       (A) Gifts that do not exceed an annual amount per person fixed periodi-
                               15
       cally by the Association and are not preconditioned on achievement of a
       sales target.
       (B) An occasional meal, a ticket to a sporting event or the theater, or
       comparable entertainment which is neither so frequent nor so extensive
       as to raise any question of propriety and is not preconditioned on
       achievement of a sales target.
       (C) Payment or reimbursement by offerors in connection with meetings
       held by an offeror or by a member for the purpose of training or education
       of associated persons of a member, provided that:
                 (i) the record-keeping requirement in paragraph (l)(3) is satisfied;
              (ii) associated persons obtain the member’s prior approval to
       attend the meeting and attendance by a member’s associated persons is
       not preconditioned by the member on the achievement of a sales target
       or any other incentives pursuant to a non-cash compensation arrange-
       ment permitted by paragraph (l)(5)(D);
               (iii) the location is appropriate to the purpose of the meeting, which
       shall mean an office of the offeror or the member, or a facility located in
       the vicinity of such office, or a regional location with respect to regional
       meetings;
              (iv) the payment or reimbursement is not applied to the expenses
       of guests of the associated person; and
              (v) the payment or reimbursement by the offeror is not precon-
       ditioned by the offeror on the achievement of a sales target or any other
       non-cash compensation arrangement permitted by paragraph (l)(5)(D).
       (D) Non-cash compensation arrangements between a member and its
       associated persons or a non-member company and its sales personnel
       who are associated persons of an affiliated member, provided that:
              (i) the member’s or non-member’s non-cash compensation
       arrangement, if it includes investment company securities, is based on
       the total production of associated persons with respect to all investment
       company securities distributed by the member;
               (ii) the non-cash compensation arrangement requires that the
       credit received for each investment company security is equally weighted;
              (iii) no unaffiliated non-member company or other unaffiliated
       member directly or indirectly participates in the member’s or non-
       member’s organization of a permissible non-cash compensation arrange-
       ment; and
                 (iv) the record-keeping requirement in paragraph (l)(3) is satisfied.
       (E) Contributions by a non-member company or other member to a non-
       cash compensation arrangement between a member and its associated


15
     The current annual amount fixed by the Association is $100.
       NASD [Rules 0100-3420]                                                         234


              persons, provided that the arrangement meets the criteria in paragraph
              (l)(5)(D).
              (m)     Prompt Payment for Investment Company Shares
1067           (1) Members (including underwriters) that engage in direct retail transac-
       tions for investment company shares shall transmit payments received from
       customers for such shares, which such members have sold to customers, to
       payees (i.e., underwriters, investment companies or their designated agents) by
       (A) the end of the third business day following a receipt of a customer’s order to
       purchase such shares or by (B) the end of one business day following receipt of
       a customer’s payment for such shares, whichever is the later date.
1068          (2) Members that are underwriters and that engage in wholesale
       transactions for investment company shares shall transmit payments for invest-
       ment company shares, which such members have received from other members,
       to investment company issuers or their designated agents by the end of two
       business days following receipt of such payments.
              (n)     Disclosure of Deferred Sales Charges
1069            In addition to the requirements for disclosure on written confirmations of
       transactions contained in Rule 2230, if the transaction involves the purchase of
       shares of an investment company that imposes a deferred sales charge on
       redemption, such written confirmation shall also include the following legend: “On
       selling your shares, you may pay a sales charge. For the charge and other fees,
       see the prospectus.” The legend shall appear on the front of a confirmation and
       in, at least, 8-point type.
       [Amended eff. Feb. 8, 1971; July 15, 1973; May 1, 1976; Mar. 4, 1981; Oct. 31,
       1988; Apr. 11, 1991; July 7, 1993; amended by SR-NASD-93-42 eff. Feb. 24,
       1994; amended by SR-NASD-94-56 eff. June 7, 1995; amended by SR-NASD-
       97-35 eff. Jan. 1, 1999; amended by SR-NASD-98-14 eff. April 1, 2000;
       amended by SR-NASD-99-74 eff. June 20, 2000.]
       Selected Notices to Members: 84-40, 88-96, 89-51, 91-40, 91-68, 92-41, 93-52,
       93-82, 94-13, 94-14, 94-67, 95-36, 95-56, 97-48, 97-50, 99-103, 00-53.
       IM-2830-1. “Breakpoint” Sales
1070          The sale of investment company shares in dollar amounts just below the
       point at which the sales charge is reduced on quantity transactions so as to
       share in the higher sales charges applicable on sales below the breakpoint is
       contrary to just and equitable principles of trade.
1071          Investment company underwriters and sponsors, as well as dealers, have
       a definite responsibility in such matters and failure to discourage and to
       discontinue such practices will not be countenanced.
1072          For purposes of determining whether a sale in dollar amounts just below
       a breakpoint was made in order to share in a higher sales charge, the
       Association will consider the facts and circumstances, including, for example,
       whether a member has retained records that demonstrate that the trade was
       executed in accordance with a bona fide asset allocation program that the
       member offers to its customers:
       NASD [Rules 0100-3420]                                                              235


              ·   which is designed to meet their diversification needs and investment
                  goals; and
              ·   under which the member discloses to its customers that they may not
                  qualify for breakpoint reductions that are otherwise available.
       [Amended by SR-NASD-98-69 eff. Dec. 15, 1998]
       Selected Notice To Members: 98-98.
       IM-2830-2. Maintaining the Public Offering Price
1073          Rule 2420(a) states that:
1074          No member shall deal with any non-member broker or dealer except at
              the same prices, for the same commissions or fees, and on the same
              terms and conditions as are by such member accorded to the general
              public.
1075          Section 22(d) of the Investment Company Act of 1940 states in part that:
1076          … and, if such class of security (i.e., shares of open-end investment
              companies) is being currently offered to the public by or through an
              underwriter, no principal underwriter of such security and no dealer shall
              sell any such security to any person except a dealer, a principal
              underwriter or the issuer, except at a current public offering price
              described in the prospectus… . (emphasis added).
1077         It is apparent from this section of the statute that, in principal transactions
       between dealers and customers in shares of such open-end investment
       companies, the current public offering price must, by law, be maintained.
1078          This section of the statute taken together with Rule 2420 has been
       construed by the Board of Governors to mean that members of this Association
       must maintain the public offering price - not only to customers as required by
       law—but also to non-member brokers and dealers, inasmuch as members must
       deal with non-member brokers and dealers at the same prices, for the same
       commissions or fees, and on the same terms and conditions as such members
       accord to the general public.
1079           The following types of transactions illustrate these principles: (All sales in
       the examples below are assumed to be at less than the public offering price
       stated in the prospectus and are assumed not to raise any questions under Rule
       2830.)
1080          (a) One member sells to another member: This is a proper transaction
       under Section 22(d) and under Rule 2420.
1081          (b) One member sells through a non-member to another member: This is
       a proper transaction under Section 22(d); but the selling member is violating Rule
       2420.
1082          (c) A member sells to a customer: This is a violation of Section 22(d).
1083           (d) A member sells to a non-member: This is a proper transaction under
       Section 22(d); but it is a violation of Rule 2420, because the member may not
       treat a non-member in any manner other than he would treat the general public
       and to the general public he must, under Section 22(d), maintain the public
       offering price.
       NASD [Rules 0100-3420]                                                          236


1084         (e) One member sells to another member who acts as agent for a non-
       member: This is a proper transaction under Section 22(d); but both members
       may be violating Rule 2420, as in example (d).
1085           (f) One member sells through another member (his agent) to a non-
       member: This is a proper transaction under Section 22(d); but both members are
       violating Rule 2420.
1086         (g) One member sells to another member who acts as agent for a
       customer: This transaction violates Section 22(d).
1087            (h) One member sells through another member (his agent) to a customer:
       This is a violation of Section 22(d) by the first member and his agent may also be
       in violation of Section 22(d).
1088          (i) A customer sells to another customer through a member who acts as
       agent for either or for both customers: This is a proper transaction under Section
       22(d) and under Rule 2420.
1089           Violation of law or any Rules of the Association is also deemed to
       constitute a violation of Rule 2110.
              Cross References — “Tombstone Advertising,” SEC Rule 134, under
              SEC Rules and Regulation T Tab — Investment Company Sales
              Literature, SEC Rule 156 — Advertising by an Investment Company as
              Satisfying Requirements of Section 10, SEC Rule 482 — Sales Literature
              Deemed to be Misleading, SEC Rule 34b-1 under the Investment
              Company Act

       2840. Trading in Index Warrants, Currency Index Warrants, and Currency
              Warrants
       2841. General
1090          (a) Applicability — This Rule 2840 Series shall be applicable: (1) to the
       conduct of accounts, the execution of transactions, and the handling of orders in
       index warrants listed on The Nasdaq Stock Market (“Nasdaq”); and (2) to the
       extent appropriate unless otherwise stated herein, to the conduct of accounts,
       the execution of transactions, and the handling of orders in exchange-listed stock
       index warrants, currency index warrants, and currency warrants by members
       who are not members of the exchange on which the warrant is listed or traded.
1091          (b) Except to the extent that specific provisions in this Rule Series govern,
       or unless the context otherwise requires, the provisions of the By-Laws, Rules of
       the Association and other interpretations and policies shall also be applicable to
       transactions in index warrants, currency index warrants, and currency warrants.
1092           (c) The rules in this Rule 2840 Series are not applicable to stock index
       warrants, currency index warrants, and currency warrants listed on national
       securities exchanges prior to September 28, 1995.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2842. Definitions
1093           (a) The term “control” shall have the same meaning as the term “control”
       as set forth in Rule 2860(b)(2)(L).
       NASD [Rules 0100-3420]                                                          237


1094           (b) The term “currency index” means a group of currencies each of whose
       inclusion and relative representation in the group is determined by its inclusion
       and relative representation in a currency index.
1095           (c) The term “currency index warrants” shall mean instruments that are
       direct obligations of the issuing company, either exercisable throughout their life
       (i.e., American style) or exercisable only on their expiration date (i.e., European
       style), entitling the holder thereof to a cash settlement in U.S. dollars to the
       extent that the value of the underlying currency index has declined below (in the
       case of a put warrant) or increased above (in the case of a call warrant) the pre-
       stated cash settlement value of the underlying currency index.
1096            (d) The term “currency warrants” shall mean instruments that are direct
       obligations of the issuing company, either exercisable throughout their life (i.e.,
       American style) or exercisable only on their expiration date (i.e., European style),
       entitling the holder thereof to a cash settlement in U.S. dollars to the extent that
       the value of the underlying foreign currency has declined below (in the case of a
       put warrant) or increased above (in the case of a call warrant) the pre-stated
       cash settlement value of the underlying foreign currency. The term “foreign
       currency warrants” shall also include cross-rate currency warrants.
1097            (e) The term “index warrants” means instruments that are direct obliga-
       tions of the issuing company, either exercisable throughout their life (i.e.,
       American style) or exercisable only on their expiration date (i.e., European style),
       entitling the holder thereof to a cash settlement in U.S. dollars to the extent that
       the value of the underlying stock index group has declined below (in the case of
       a put warrant) or increased above (in the case of a call warrant) the pre-stated
       cash settlement value of the underlying stock index group.
1098           (f) The term “stock index group” means a group of stocks each of whose
       inclusion and relative representation in the group is determined by its inclusion
       and relative representation in a stock index.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2843. Account Approval
1099           No member or person associated with a member shall accept an order
       from a customer to purchase or sell an index warrant, currency index warrant, or
       currency warrant unless the customer’s account has been approved for options
       trading pursuant to 2860(b)(16).
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2844. Suitability
1100           The provisions of Rule 2860(b)(19) shall apply to recommendations by
       members and persons associated with members regarding the purchase or sale
       of index warrants, currency index warrants, or currency warrants. The term
       “option” as used therein shall be deemed to include such warrants for purposes
       of this Rule.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82].
       NASD [Rules 0100-3420]                                                         238


       2845. Discretionary Accounts
1101           Insofar as a member or person associated with a member exercises
       discretion to trade in index warrants, currency index warrants, or currency
       warrants in a customer’s account, such account shall be subject to the provisions
       of Rule 2860(b)(18). The term “option” as used therein shall be deemed to
       include such warrants for purposes of this Rule.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2846. Supervision of Accounts
1102          The provisions of Rule 2860(b)(20) shall apply to all customer accounts of
       a member in which transactions in index warrants, currency index warrants, or
       currency warrants are effected. The term “option” as used therein shall be
       deemed to include such warrants for purposes of this Rule.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2847. Customer Complaints
1103           The record-keeping requirements of Rule 2860(b)(17)(A) concerning the
       receipt and handling of customer complaints relating to options shall also apply to
       customer complaints relating to index warrants, currency index warrants, or
       currency warrants and the required records of such complaints shall be
       maintained together with the records pertaining to options related complaints,
       provided that complaints related to index warrants, currency index warrants, or
       currency warrants shall be clearly identified as such. The term “option” as used
       therein shall be deemed to include such warrants for purposes of this Rule.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2848. Communications with the Public and Customers Concerning Index
             Warrants, Currency Index Warrants, and Currency Warrants
1104          The provisions of Rule 2220 shall be applicable to communications to
       customers regarding index warrants, currency index warrants, or currency
       warrants. The term “option” as used therein shall be deemed to include such
       warrants for purposes of this Rule and the term “The Options Clearing
       Corporation” shall be deemed to mean the issuer of such warrants. Rule
       2220(c)(5) and (d)(2)(C)(v) shall also not be applicable to communications with
       the public regarding index warrants, currency index warrants, or currency
       warrants.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2849. Maintenance of Records
1105           The record-keeping provisions of Rule 2860(b)(17)(B) shall be applicable
       to customer accounts approved to trade index warrants, currency index warrants,
       or currency warrants. The term “option” as used therein shall be deemed to
       include such warrants for purposes of this Rule.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       NASD [Rules 0100-3420]                                                          239


       2850. Position Limits
1106           (a) Except with the prior written approval of the Association pursuant to
       the Rule 9600 Series for good cause shown in each instance, no member shall
       effect for any account in which such member has an interest, or for the account
       of any partner, officer, director or employee thereof, or for the account of any
       customer, a purchase or sale transaction in an index warrant listed on Nasdaq or
       on a national securities exchange if the member has reason to believe that as a
       result of such transaction the member, or partner, officer, director or employee
       thereof, or customer would, acting alone or in concert with others, directly or
       indirectly, hold or control an aggregate position in an index warrant position on
       the same side of the market, combining such index warrant position with posi-
       tions in index warrants overlying the same index on the same side of the market,
       in excess of the position limits established by the Association, in the case of
       Nasdaq-listed index warrants, or on the exchange on which the warrant is listed.
1107         (b) In determining compliance with this Rule, the position limits for
       Nasdaq-listed index warrants are as follows:
              (1) Fifteen million warrants with respect to warrants on the same stock
              index (other than the Standard & Poor’s MidCap 400 Index) with an
              original issue price of ten dollars or less.
              (2) Seven million five hundred thousand warrants, with respect to
              warrants on the Standard & Poor’s MidCap 400 Index with an original
              issue price of ten dollars or less.
              (3) For stock index warrants with an original issue price greater than $10,
              positions in these warrants must be converted to the equivalent-of
              warrants on the same index priced initially at $10 by dividing the original
              issue price of the index warrants priced above $10 by 10 and multiplying
              this number by the size of such index warrant position. After recalculating
              a warrant position pursuant to this subparagraph, such recalculated
              warrant position shall be aggregated with other warrant positions on the
              same underlying index on the same side of the market and subjected to
              the applicable position limit set forth in subparagraph (1) or (2) above. For
              example, if an investor held 100,000 Nasdaq 100 Index warrants offered
              originally at $20 per warrant, the size of this position for the purpose of
              calculating position limits would be 200,000, or 100,000 times 20/10.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82; amended by SR-
       NASD-97-28 eff: 8/7/97.]
       2851. Exercise Limits
1108          (a) Except with the prior written approval of the Association pursuant to
       the Rule 9600 Series for good cause shown, in each instance, no member or
       person associated with a member shall exercise, for any account in which such
       member or person associated with a member has an interest, or for the account
       of any partner, officer, director or employee thereof, or for the account of any
       customer, a long position in any index warrant if as a result thereof such member
       or partner, officer, director or employee thereof or customer, acting alone or in
       concert with others, directly or indirectly:
       NASD [Rules 0100-3420]                                                        240


              (1) has or will have exercised within any five consecutive business days a
              number of index warrants overlying the same index in excess of the limits
              for index warrant positions contained in Rule 2850; or
              (2) has or will have exceeded the applicable exercise limit fixed from time
              to time by an exchange for an index warrant not dealt in on Nasdaq.
1109          (b) The Association, pursuant to the Rule 9600 Series for good cause
       shown, may institute other limitations concerning the exercise of index warrants
       from time to time. Reasonable notice shall be given of each new limitation fixed
       by the Association. These exercise limitations are separate and distinct from any
       other exercise limitations imposed by the issuers of index warrants.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82; amended by SR-
       NASD-97-28 eff: 8/7/97.]
       2852. Reporting Requirements
1110            (a) Each member shall file with the Association a report with respect to
       each account in which the member has an interest, each account of a partner,
       officer, director or employee of such member, and each customer account of the
       member, which has established an aggregate position of 100,000 index warrants
       on the same side of the market in an index warrant issue listed on Nasdaq,
       combining such index warrant position with positions in index warrants overlying
       the same index on the same side of the market traded on Nasdaq or a national
       securities exchange.
1111           (b) Such report shall identify the person or persons having an interest in
       such account and shall identify separately the total number of each type of index
       warrant that comprises the reportable position in such account. The report shall
       be in such form as may be prescribed by the Association and shall be filed no
       later than the close of business on the next business day following the day on
       which the transaction or transactions necessitating the filing of such report
       occurred. Whenever a report shall be required to be filed with respect to an
       account pursuant to this Rule, the member filing such report shall file with the
       Association such additional periodic reports with respect to such account as the
       Association may from time to time prescribe.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2853. Liquidation of Index Warrant Positions
1112            (a) Whenever the Association determines that a person or group of
       persons acting in concert holds or controls an aggregate position (whether short
       or long) in index warrants overlying the same index in excess of the position
       limitations established by Rule 2850, it may, when deemed necessary or
       appropriate in the public interest and for the protection of investors, direct any
       member or all members carrying a position in index warrants overlying such
       index for such person or persons to liquidate such position or positions, or por-
       tions thereof, as expeditiously as possible and consistent with the maintenance
       of an orderly market, so as to bring such person or persons into compliance with
       the position limitations contained in Rule 2850.
1113           (b) Whenever such a directive is issued by the Association no member
       receiving notice thereof shall accept and/or execute for any person or persons
       named in such directive any order to purchase or sell short any index warrants
       NASD [Rules 0100-3420]                                                           241


       based on the same index, unless in each instance express approval therefor is
       given by the Association, or the directive is rescinded.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82.]
       2854. Trading Halts or Suspensions
1114            (a) The trading in an index warrant on Nasdaq shall be halted whenever
       the Senior Vice President for Market Surveillance, or its designee, shall conclude
       that such action is appropriate in the interests of a fair and orderly market and to
       protect investors. Among the factors that may be considered are the following:
              (1) trading has been halted or suspended in underlying stocks whose
              weighted value represents 20% or more of the index value;
              (2) the current calculation of the index derived from the current market
              prices of the stocks is not available;
              (3) other unusual conditions or circumstances detrimental to the
              maintenance of a fair and orderly market are present.
1115           (b) Trading in index warrants that has been the subject of a trading halt or
       suspension may resume if the Senior Vice President for Market Surveillance, or
       its designee, determines that the conditions which led to the halt or suspension
       are no longer present or that the interests of a fair and orderly market are served
       by a resumption of trading. In either event, the reopening may not occur until the
       Association has determined that trading in underlying stocks whose weighted
       value represents more than 50% of the index is occurring.
       [Adopted by SR-NASD-95-37 eff. Sept. 28, 1995, NTM 95-82].

       2860. Options
1116            (a) For purposes of this Rule, the term “option” shall mean any put, call,
       straddle or other option or privilege, which is a “security” as defined in Section
       2(1) of the Securities Act of 1933, as amended, but shall not include any tender
       offer, registered warrant, right, convertible security or any other option in respect
       to which the writer is the issuer of the security which may be purchased or sold
       upon the exercise of the option.
1117          (b) Requirements
              (1) General
1118          (A) Applicability — This Rule shall be applicable
              (i) to the trading of options contracts issued by The Options Clearing
              Corporation and displayed on The Nasdaq Stock Market and to the terms
              and conditions of such contracts;
              (ii) to the extent appropriate unless otherwise stated herein, to the
              conduct of accounts, the execution of transactions, and the handling of
              orders in exchange-listed options by members who are not members of
              an exchange on which the option executed is listed;
              (iii) to the extent appropriate unless otherwise stated herein, to the
              conduct of accounts, the execution of transactions, and the handling of
              orders in conventional options; and
       NASD [Rules 0100-3420]                                                        242


              (iv) other matters related to options trading.
1119            Unless otherwise indicated herein, subparagraphs (3) through (12) shall
       apply only to options displayed on Nasdaq and standardized and conventional on
       common stock and subparagraphs (13) through (24) shall apply to transactions in
       all options as defined in paragraph (a), including common stock. The position and
       exercise limits for FLEX Equity Options for members who are not also members
       of the exchange on which FLEX Equity Options trade shall be the same as the
       position and exercise limits as applicable to members of the exchange on which
       such FLEX Equity Options are traded.
1120           (B) Except to the extent that specific provisions in this Rule govern, or
       unless the context otherwise requires, the provisions of the By-Laws and Rules
       and all other interpretations and policies of the Board of Governors shall also be
       applicable to the trading of option contracts.
1121           (C) Local Time — All times are stated in this Rule in terms of the local
       time in effect in New York City (Eastern Time) or as otherwise specified.
              (2) Definitions
1122          The following terms shall, unless the context otherwise requires, have the
       stated meanings:
1123           (A) Advertisement — The term “advertisement” means material
       published, or designed for use in, a newspaper, magazine or other periodical,
       radio, telephone or tape recording, motion picture, television, videotape display,
       signs or billboards, telephone directories (other than routine listings), or other
       public media.
1124           (B) Aggregate Current Index Value — The term “aggregate current index
       value” means the value required to be delivered to the holder of a call or by the
       holder of a put (against payment of the aggregate exercise price) upon the valid
       exercise of an index option. Such value is equal to the index dollar equivalent on
       the trading day on which an exercise notice is properly tendered to The Options
       Clearing Corporation; or, if the day on which such notice is so tendered is not a
       trading day, then on the most recent trading day.
1125           (C) Aggregate Exercise Price — The term “aggregate exercise price”
       means the exercise price of an option contract multiplied by the number of units
       of the underlying security covered by such option contract.
1126           (D) Aggregate Index Option Exercise Price — The term “aggregate
       exercise price” in respect of an index option means the exercise price of such
       option times the index multiplier.
1127           (E) Aggregate Long and Aggregate Short — The terms “aggregate long”
       or “aggregate short” mean a person’s total interest as the holder or writer of
       option contracts of a particular class of options.
1128          (F) Beneficial Owner — The term “beneficial owner” means the person
       who has or shares the power to direct the voting or the disposition of securities,
       or who has or shares the right to receive or the power to direct the receipt of
       dividends or the proceeds from the sale of securities.
1129          (G) Call — The term “call” means an option contract under which the
       holder of the option has the right, in accordance with the terms of the option, to
       NASD [Rules 0100-3420]                                                           243


       purchase the number of units of the underlying security or to receive a dollar
       equivalent of the underlying index covered by the option contract. In the case of a
       “call” issued by The Options Clearing Corporation on common stock or on an
       option displayed on The Nasdaq Stock Market, it shall mean an option contract
       under which the holder of the option has the right, in accordance with the terms
       of the option, to purchase from The Options Clearing Corporation the number of
       units of the underlying security or receive a dollar equivalent of the underlying
       index covered by the option contract.
1130           (H) Class of Options — The term “class of options” means all option con-
       tracts of the same type of option covering the same underlying security or index.
1131          (I) Clearing Member — The term “clearing member” means a member of
       the Association which has been admitted to membership in The Options Clearing
       Corporation pursuant to the provisions of the rules of The Options Clearing
       Corporation.
1132           (J) Closing Purchase Transaction — The term “closing purchase transac-
       tion” means an option transaction in which the purchaser’s intention is to reduce
       or eliminate a short position in the series of options involved in such transaction.
1133           (K) Closing Sale Transaction — The term “closing sale transaction”
       means an option transaction in which the seller’s intention is to reduce or elimi-
       nate a long position in the series of options involved in such transaction.
1134          (L) Control
1135           (i) The term “control” means the power or ability of an individual or entity
       to make investment decisions for an account or accounts, or influence directly or
       indirectly the investment decisions of any person or entity who makes investment
       decisions for an account. In addition, control will be presumed in the following
       circumstances:
              a. among all parties to a joint account who have authority to act on behalf
              of the account;
              b. among all general partners to a partnership account;
              c. when a person or entity:
                    1. holds an ownership interest of 10 percent or more in an entity
              (ownership interest of less than 10 percent will not preclude aggregation),
              or
                     2. shares in 10% or more of profits and/or losses of an account;
              d. when accounts have common directors or management;
              e. where a person or entity has the authority to execute transactions in an
              account.
1136           (ii) Control, presumed by one or more of the above powers, abilities or
       circumstances, can be rebutted by proving the factor does not exist or by
       showing other factors which negate the presumption of control. The rebuttal proof
       must be submitted by affidavit and/or such other evidence as may be appropriate
       in the circumstances.
       NASD [Rules 0100-3420]                                                           244


1137           (iii) The Association will also consider the following factors in determining
       if aggregation of accounts is required:
              a. similar patterns of trading activity among separate entities;
              b. the sharing of kindred business purposes and interests;
              c. whether there is common supervision of the entities which extends
              beyond assuring adherence to each entity’s investment objectives and/or
              restrictions;
              d. the degree of contact and communication between directors and/or
              managers of separate accounts.
1138          (M) Controls, Is Controlled by or Is Under Common Control With — The
       terms “controls,” “is controlled by” and “is under common control with” shall have
       the meanings specified in SEC Rule 405 under the Securities Act of 1933.
1139          (N) Conventional Option — The term “conventional option” shall mean
       any option contract not issued, or subject to issuance, by The Options Clearing
       Corporation.
1140           (O) Covered — The term “covered” in respect of a short position in a call
       option contract means that the writer’s obligation is secured by a “specific depo-
       sit” or an “escrow deposit,” meeting the conditions of Rules 610(e) or 610(h),
       respectively, of the rules of The Options Clearing Corporation, or the writer holds
       in the same account as the short position, on a unit-for-unit basis, a long position
       either in the underlying security or in an option contract of the same class of
       options where the exercise price of the option contract in such long position is
       equal to or less than the exercise price of the option contract in such short
       position. The term “covered” in respect of a short position in a put option contract
       means that the writer holds in the same account as the short position, on a unit-
       for-unit basis, a long position in an option contract of the same class of options
       having an exercise price equal to or greater than the exercise price of the option
       contract in such short position.
1141           (P) Current Index Value — The term “current index value” means the
       level of a particular index (derived from the current market prices of the
       underlying securities in the index group) at the close of trading on any trading
       day, or any multiple or fraction thereof specified by the Association as such value
       is reported by the reporting authority.
1142           (Q) Current Prospectus — The term “current prospectus” shall mean the
       edition of the prospectus of The Options Clearing Corporation as registered
       which at the time it is to be furnished to a given customer meets the requirements
       of Section 10(a)(3) of the Securities Act of 1933.
1143          (R) Disclosure Document(s) — The term “disclosure document” or “dis-
       closure documents” shall mean those documents filed with the SEC, prepared by
       one or more options markets and meeting the requirements of SEC Rule 9b-1
       under the Act. They shall contain general explanatory information relating to the
       mechanics of buying, writing and exercising options; the risks involved, the uses
       of and market for the options; transaction costs and applicable margin require-
       ments; tax consequences of trading options; identification of the options issuer
       and the instrument underlying the options class; and the availability of the
       prospectus and the information in Part II of the registration statement.
       NASD [Rules 0100-3420]                                                          245


1144          (S) Escrow Receipt — The term “escrow receipt” means a representation
       of an issuing bank to The Options Clearing Corporation that a particular cus-
       tomer’s securities are on deposit with the bank and will be delivered upon
       exercise of the option for which the receipt is issued.
1145          (T) Exercise Price — The term “exercise price” in respect of an option
       contract means the stated price per unit at which the underlying security may be
       purchased (in the case of a call) or sold (in the case of a put) upon the exercise
       of such option contract.
1146           (U) Expiration Date — The term “expiration date” of an option contract
       issued by The Options Clearing Corporation means the day and time fixed by the
       rules of The Options Clearing Corporation for the expiration of all option contracts
       having the same expiration month as such option contract. The term “expiration
       date” of all other option contracts means the date specified thereon for such.
1147           (V) Expiration Month — The term “expiration month” in respect of an
       option contract means the month and year in which such option contract expires.
1148          (W) FLEX Equity Option — The term “FLEX Equity Option” means any
       options contract issued, or subject to issuance by, The Options Clearing Corpo-
       ration whereby the parties to the transaction have the ability to negotiate the
       terms of the contract consistent with the rules of the exchange on which the
       options contract is traded.
1149           (X) Index Dollar Equivalent — The term “index dollar equivalent” is the
       dollar amount which results when the index value is multiplied by the appropriate
       index multiplier.
1150           (Y) Index Group — The term “index group” means a group of securities
       whose inclusion and relative representation in the group is determined by the
       inclusion and relative representation of their current market values in a securities
       index specified by the Association.
1151           (Z) Index Multiplier — The term “index multiplier” as used in reference to
       an index option contract means the dollar amount (as specified by the Associa-
       tion) by which the current index value is to be multiplied to obtain the aggregate
       index value. Such term replaces the term “unit of trading” used in reference to
       other kinds of options.
1152           (AA) Index Option Exercise Price — The term “exercise price” in respect
       of an index option means the specified index value which, when multiplied by the
       index multiplier, will yield the aggregate exercise price at which the aggregate
       current index value may be purchased (in the case of a call) or sold (in the case
       of a put) upon the exercise of such option.
1153          (BB) Index Option Premium — The term “index option premium” means
       the price of each such option (expressed in points), as agreed upon by the
       purchaser and seller in such transaction, times the index multiplier and the
       number of options subject to the transaction.
1154          (CC) Long Position — The term “long position” means the number of
       outstanding option contracts of a given series of options held by a person
       (purchaser).
       NASD [Rules 0100-3420]                                                         246


1155           (DD) Member and Person Associated with a Member — The terms
       “member” and “person associated with a member” shall have the meanings as
       specified in Article I of the By-Laws of the Association.
1156          (EE) Nasdaq Market Index Option — The term “Nasdaq market index
       option” means an option contract issued by The Options Clearing Corporation
       and displayed on Nasdaq based upon an underlying index which has been
       deemed by the Commission to be a market index.
1157           (FF) Nasdaq Option Transaction — The term “Nasdaq option transaction”
       means a transaction effected by a member of the Association for the purchase or
       sale of an option contract which is displayed on The Nasdaq Stock Market or for
       the closing out of a long or short position in such option contract.
1158          (GG) Opening Purchase Transaction — The term “opening purchase
       transaction” means an option transaction in which the purchaser’s intention is to
       create or increase a long position in the series of options involved in such
       transaction.
1159          (HH) Opening Writing Transaction — The term “opening writing transac-
       tion” means an option transaction in which the seller’s (writer’s) intention is to
       create or increase a short position in the series of options involved in such
       transaction.
1160           (II) Option Transaction — The term “option transaction” means a transac-
       tion effected by a member for the purchase or sale of an option contract, or for
       the closing out of a long or short position in such option.
1161           (JJ) Options Contract — The term “options contract” means any option as
       defined in paragraph (a). For purposes of subparagraphs (3) through (12), an
       option to purchase or sell common stock shall be deemed to cover 100 shares of
       such stock at the time the contract granting such option is written. A Nasdaq
       index option shall be deemed to cover a dollar equivalent to the numerical value
       of the underlying index multiplied by the applicable index multiplier. If a stock
       option is granted covering some other number of shares, then for purposes of
       subparagraphs (3) through (12), it shall be deemed to constitute as many option
       contracts as that other number of shares divided by 100 (e.g., an option to buy or
       sell 500 shares of common stock shall be considered as five option contracts). A
       stock option contract which, when written, grants the right to purchase or sell 100
       shares of common stock shall continue to be considered as one contract
       throughout its life, notwithstanding that, pursuant to its terms, the number of
       shares which it covers may be adjusted to reflect stock dividends, stock splits,
       reverse splits, or other similar actions by the issuer of such stock.
1162           (KK) Options Trading — The term “options trading” means trading (i) in
       any option issued by The Options Clearing Corporation, and (ii) in any conventio-
       nal option.
1163           (LL) Outstanding — The term “outstanding” in respect of an option con-
       tract means an option contract which has neither been the subject of a closing
       sale transaction nor has been exercised nor reached its expiration date.
1164         (MM) Participating Organization — The term “participating organization”
       means a national securities exchange or association which has qualified for parti-
       NASD [Rules 0100-3420]                                                            247


       cipation in The Options Clearing Corporation pursuant to the provisions of Article
       VII of the By-Laws of The Options Clearing Corporation.
1165           (NN) Premium — The term “premium” means the aggregate price of the
       option contracts agreed upon between the buyer and writer/seller or their agents.
1166           (OO) Put — The term “put” means an option contract under which the
       holder of the option has the right, in accordance with the terms of the option, to
       sell the number of units of the underlying security or deliver a dollar equivalent of
       the underlying index covered by the option contract. In the case of a “put” issued
       by The Options Clearing Corporation on common stock or on an option displayed
       on The Nasdaq Stock Market, it shall mean an option contract under which the
       holder of the option has the right, in accordance with terms of the option, to sell
       to The Options Clearing Corporation the number of units of the underlying
       security covered by the option contract or to tender the dollar equivalent of the
       underlying index.
1167           (PP) Registered Nasdaq Index Options Market Maker — The term
       “registered Nasdaq index options market maker” means a member who meets
       the qualifications for such, as set forth in subparagraph (3), is willing and able to
       serve as such in connection with Nasdaq index option contracts and who is
       authorized by the Association to do so.
1168           (QQ) Rules of The Options Clearing Corporation —The term “rules of The
       Options Clearing Corporation” means the by-laws and the rules of The Options
       Clearing Corporation, and all written interpretations thereof as may be in effect
       from time to time.
1169           (RR) Sales Literature — The term “sales literature” means any notice,
       circular, report (including research report), newsletter (including market letter),
       form letter or reprint or excerpt of the foregoing or of any published article, or any
       other promotional literature designed for use with the public which material does
       not meet the definition of “advertisement.” A form letter shall include one of a
       series of identical letters, or individually typed or prepared letters which contain
       essentially identical statements or repeat the same basic theme and which are
       sent to 25 or more persons.
1170           (SS) Series of Options — The term “series of options” means all option
       contracts of the same class of options having the same exercise price and
       expiration date and which cover the same number of units of the underlying
       security or index.
1171          (TT) Short Position — The term “short position” means the number of
       outstanding option contracts of a given series of options with respect to which a
       person is obligated as a writer (seller).
1172           (UU) Spread Order — The term “spread order” means an order to buy a
       stated number of option contracts and to sell the same number of option con-
       tracts, or contracts representing the same number of units at option, of the same
       class of options.
1173          (VV) Standardized Equity Option — The term “standardized equity option”
       means any equity options contract issued, or subject to issuance by, The Options
       Clearing Corporation that is not a FLEX Equity Option.
       NASD [Rules 0100-3420]                                                           248


1174          (WW) The Options Clearing Corporation — The term “The Options
       Clearing Corporation” means The Options Clearing Corporation, the issuer of
       exchange-listed options and options displayed on The Nasdaq Stock Market.
1175          (XX) Type of Option — The term “type of option” means the classification
       of an option contract as either a put or a call.
1176          (YY) Uncovered — The term “uncovered” in respect of a short position in
       an option contract means the short position is not covered. For purposes of sub-
       paragraph (16) (Opening of Accounts), subparagraph (20) (Supervision of
       Accounts) and subparagraph (11) (Delivery of Current Disclosure Document(s)),
       the term “writing uncovered short option positions” shall include combinations
       and any other transactions which involve uncovered writing.
1177         (ZZ) Underlying Index — The term “underlying index” means an index
       upon which a Nasdaq index option contract is based.
1178          (AAA) Underlying Security — The term “underlying security” in respect of
       an option contract means the security which The Options Clearing Corporation or
       another person shall be obligated to sell (in the case of a call) or purchase (in the
       case of a put) upon the valid exercise of such option contract.
1179           (BBB) Unit — The term “unit” shall mean the smallest interest in a
       particular security which can be purchased or sold, such as one share of stock,
       one warrant, one bond, and so forth.
               (3) Position Limits
1180           (A) Stock Options — Except in highly unusual circumstances, and with
       the prior written approval of the Association pursuant to the Rule 9600 Series for
       good cause shown in each instance, no member shall effect for any account in
       which such member has an interest, or for the account of any partner, officer,
       director or employee thereof, or for the account of any customer, non-member
       broker, or non-member dealer, an opening transaction through Nasdaq, the over-
       the-counter market or on any exchange in a stock option contract of any class of
       stock options if the member has reason to believe that as a result of such tran-
       saction the member or partner, officer, director or employee thereof, or customer,
       non-member broker, or non-member dealer, would, acting alone or in concert
       with others, directly or indirectly, hold or control or be obligated in respect of an
       aggregate equity options position in excess of:
              (i) 13,500 option contracts of the put class and the call class on the same
              side of the market covering the same underlying security, combining for
              purposes of this position limit long positions in put options with short
              positions in call options, and short positions in put options with long
              positions in call options; or
              (ii) 22,500 options contracts of the put class and the call class on the
              same side of the market covering the same underlying security, providing
              that the 22,500 contract position limit shall only be available for option
              contracts on securities which underlie Nasdaq or exchange-traded
              options qualifying under applicable rules for a position limit of 22,500
              option contracts; or
              (iii) 31,500 option contracts of the put class and the call class on the
              same side of the market covering the same underlying security providing
NASD [Rules 0100-3420]                                                           249


       that the 31,500 contract position limit shall only be available for option
       contracts on securities which underlie Nasdaq or exchange-traded
       options qualifying under applicable rules for a position limit of 31,500
       option contracts; or
       (iv) 60,000 options contracts of the put and the call class on the same
       side of the market covering the same underlying security, providing that
       the 60,000 contract position limit shall only be available for option
       contracts on securities which underlie Nasdaq or exchange-traded
       options qualifying under applicable rules for a position limit of 60,000
       option contracts; or
       (v) 75,000 options contracts of the put and the call class on the same side
       of the market covering the same underlying security, providing that the
       75,000 contract position limit shall only be available for option contracts
       on securities which underlie Nasdaq or exchange-traded options qualify-
       ing under applicable rules for a position limit of 75,000 option contracts; or
       (vi) such other number of stock options contracts as may be fixed from
       time to time by the Association as the position limit for one or more
       classes or series of options provided that reasonable notice shall be given
       of each new position limit fixed by the Association.
       (vii) Equity Option Hedge Exemption
               a. The following positions, where each option contract is “hedged”
       by 100 shares of stock or securities readily convertible into or economi-
       cally equivalent to such stock, or, in the case of an adjusted option con-
       tract, the same number of shares represented by the adjusted contract,
       shall be exempted from established limits contained in subparagraphs
       (b)(3)(A)(i) through (vi) above:
              1. long call and short stock;
              2. short call and long stock;
              3. long put and long stock;
              4. short put and short stock.
              b. Except as provided in paragraph (b)(3)(A)(ix) and in the OTC
       Collar Exemption contained in paragraph (b)(3)(A)(viii), in no event may
       the maximum allowable position, inclusive of options contracts hedged
       pursuant to the equity option position limit hedge exemption in sub-
       paragraph a. above, exceed three times the applicable position limit
       established in subparagraphs (b)(3)(A)(i) through (v) with respect to
       standardized equity options, or subparagraph (b)(3)(A)(ix) with respect to
       conventional equity options.
       (viii) OTC Collar Aggregation Exemption
             a. For purposes of this paragraph (b), the term OTC collar shall
       mean a conventional equity option position comprised of short (long) calls
       and long (short) puts overlying the same security that hedge a corres-
       ponding long (short) position in that security.
NASD [Rules 0100-3420]                                                           250


               b. Notwithstanding the aggregation provisions for short (long) call
       positions and long (short) put positions contained in subparagraphs
       (b)(3)(A)(i) through (v) above, the conventional options positions involved
       in a particular OTC collar transaction need not be aggregated for position
       limit purposes, provided the following conditions are satisfied:
              1. the conventional options can only be exercised if they are in-
              the-money;
              2. neither conventional option can be sold, assigned, or transferred
              by the holder without the prior written consent of the writer;
              3. the conventional options must be European-style (i.e., only
              exercisable upon expiration) and expire on the same date;
              4. the strike price of the short call can never be less than the strike
              price of the long put; and
              5. neither side of any particular OTC collar transaction can be in-
              the-money when that particular OTC collar is established.
              6. the size of the conventional options in excess of the applicable
              basic position limit for the options established pursuant to sub-
              paragraph (b)(3)(A)(ix) must be hedged on a one-to-one basis with
              the requisite long or short stock position for the duration of the
              collar, although the same long or short stock position can be used
              to hedge both legs of the collar.
              c. For multiple OTC collars on the same security meeting the
       conditions set forth in subparagraph b. above, all of the short (long) call
       options that are part of such collars must be aggregated and all of the
       long (short) put options that are part of such collars must be aggregated,
       but the short (long) calls need not be aggregated with the long (short)
       puts.
              d. Except as provided above in subparagraphs b. and c., in no
       event may a member fail to aggregate any conventional options contract
       of the put class and the call class overlying the same equity security on
       the same side of the market with conventional option positions esta-
       blished in connection with an OTC collar.
              e. Nothing in this subparagraph (b)(3)(A)(viii) changes the applica-
       ble position limit for a particular equity security.
       (ix) Conventional Equity Options
              a. For purposes of this paragraph (b), standardized equity options
       contracts of the put class and call class on the same side of the market
       overlying the same security shall not be aggregated with conventional
       equity options contracts or FLEX Equity Options contracts overlying the
       same security on the same side of the market. Conventional equity
       options contracts of the put class and call class on the same side of the
       market overlying the same security shall be subject to a position limit
       equal to the greater of:
              1. the basic limit of 13,500 contracts, or
       NASD [Rules 0100-3420]                                                           251


                      2. any standardized equity options position limit as set forth in
                      subparagraph (b)(3)(A)(ii) through (v) for which the underlying
                      security qualifies or would be able to qualify.
                     b. In order for a security not subject to standardized equity options
              trading to qualify for an options position limit of more than 13,500
              contracts, a member must first demonstrate to the Association’s Market
              Regulation Department that the underlying security meets the standards
              for such higher options position limit and the initial listing standards for
              standardized options trading.
1181          (B) Index Options
1182           (i) Except in highly unusual circumstances, and with the prior written
       approval of the Association pursuant to the Rule 9600 Series for good cause
       shown in each instance, no member shall effect for any account in which such
       member has an interest, or for the account of any partner, officer, director or
       employee thereof, or for the account of any customer, an opening transaction in
       an option contract of any class of index options displayed on Nasdaq or dealt in
       on an exchange if the member has reason to believe that as a result of such
       transaction the member or partner, officer, director or employee thereof, or
       customer, would, acting alone or in concert with others, directly or indirectly, hold
       or control or be obligated in respect of an aggregate position in excess of position
       limits established by the Association, in the case of Nasdaq index options, or the
       exchange on which the option trades.
1183           (ii) In determining compliance with this subparagraph (3), option contracts
       on a market index displayed in Nasdaq shall be subject to a contract limitation
       fixed by the Association, which shall not be larger than the equivalent of a $300
       million position. For this purpose, a position shall be determined by the product of
       the closing index value times the index multiplier times the number of contracts
       on the same side of the market.
1184          (C) Index option contracts shall not be aggregated with option contracts
       on any stocks whose prices are the basis for calculation of the index.
1185          (D) The Association will notify the Commission at any time it approves a
       request to exceed the limits established pursuant to paragraph (b)(3).
               (4) Exercise Limits
1186           Except in highly unusual circumstances, and with the prior written
       approval of the Association pursuant to the Rule 9600 Series for good cause
       shown in each instance, no member or person associated with a member shall
       exercise, for any account in which such member or person associated with a
       member has an interest, or for the account of any partner, officer, director or
       employee thereof or for the account of any customer, non-member broker, or
       non-member dealer, any option contract if as a result thereof such member or
       partner, officer, director or employee thereof or customer, non-member broker, or
       non-member dealer, acting alone or in concert with others, directly or indirectly,
       has or will have exercised within any five consecutive business days a number of
       option contracts of a particular class of options in excess of the limits for options
       positions in paragraph (b)(3). The Association may institute other limitations
       concerning the exercise of option contracts from time to time by action of the
       NASD [Rules 0100-3420]                                                          252


       Association. Reasonable notice shall be given of each new limitation fixed by the
       Association.
               (5) Reporting of Options Positions
1187           (A)(i)a. Conventional Options — Each member shall file or cause to be
       filed with the Association a report with respect to each account in which the
       member has an interest, each account of a partner, officer, director or employee
       or such member, and each customer, non-member broker, or non-member
       dealer account, which has established an aggregate position of 200 or more
       option contracts (whether long or short) of the put class and the call class on the
       same side of the market covering the same underlying security or index,
       combining for purposes of this subparagraph long positions in put options with
       short positions in call options and short positions in put options with long
       positions in call options.
1188           (A)(i)b. Standardized Options — Each member that conducts a business
       in standardized options but is not a member of the options exchange upon which
       the standardized options are listed and traded shall file or cause to be filed with
       the Association a report with respect to each account in which the member has
       an interest, each account of a partner, officer, director or employee of such mem-
       ber, and each customer, non-member broker, or non-member dealer account,
       which has established an aggregate position of 200 or more option contracts
       (whether long or short) of the put class and the call class on the same side of the
       market covering the same underlying security or index, combining for purposes
       of this subparagraph long positions in put options with short positions in call
       options and short positions in put options with long positions in call options.
1189            (A)(ii) The reports required by this subparagraph shall identify the person
       or persons having an interest in such account and shall identify separately the
       total number of option contracts of each such class comprising the reportable
       position in such account. The reports shall be in such form as may be prescribed
       by the Association and shall be filed no later than the close of business on the
       next business day following the day on which the transaction or transactions
       requiring the filing of such report occurred. Whenever a report shall be required
       to be filed with respect to an account pursuant to this subparagraph, the member
       filing such shall file with the Association such additional periodic reports with
       respect to such account as the Association may from time to time prescribe.
1190          (B) In addition to the reports required by subparagraph (A) above, each
       member shall report promptly to the Association any instance in which such
       member has a reason to believe that a person, acting alone or in concert with
       others, has exceeded or is attempting to exceed the position limits or the
       exercise limits set forth in subparagraphs (b)(3) and (4).
              (6) Liquidation of Positions and Restrictions on Access
1191          (A) Whenever the Association determines that a person or group of
       persons acting in concert holds or controls, or is obligated in respect of, an
       aggregate position in option contracts covering any underlying security or index
       in excess of the position limitations established by paragraph (b)(3), it may, when
       deemed necessary or appropriate in the public interest and for the protection of
       investors, direct:
              (i) any member or all members carrying a position in option contracts
              covering such underlying security or index for such person or persons to
       NASD [Rules 0100-3420]                                                          253


              liquidate such position or positions, or portions thereof, as expeditiously
              as possible and consistent with the maintenance of an orderly market, so
              as to bring such person or persons into compliance with the position
              limitations contained in paragraph (b)(3);
              (ii) that such person or persons named therein not be permitted to
              execute an opening transaction, and that no member shall accept and/or
              execute for any person or persons named in such directive, any order for
              an opening transaction in any option contract, unless in each instance
              express approval therefor is given by the Association, the directive is
              rescinded, or the directive specifies another restriction appropriate under
              the circumstances.
1192           (B) Prior to the issuance of any directive provided for in subparagraph (A),
       the Association shall notify, in the most expeditious manner possible, such
       person, or group of persons of such action, the specific grounds therefor and
       provide them an opportunity to be heard thereon. In the absence of unusual
       circumstances, in the case of a directive pursuant to the provisions of sub-
       paragraph (A)(i) hereof, the hearing shall be held within one business day of
       notice. In the case of a directive pursuant to the provisions of subparagraph
       (A)(ii) hereof, the hearing shall be held as promptly as possible under the
       circumstances. In any such proceeding a record shall be kept. A determination
       by the Association after hearing or waiver of hearing, to implement such directive
       shall be in writing and shall be supported by a statement setting forth the specific
       grounds on which the determination is based. Any person aggrieved by action
       taken by the Association pursuant to this subparagraph may make application for
       review to the Commission in accordance with Section 19 of the Act.
               (7) Limit on Uncovered Short Positions
1193           Whenever the Association shall determine in light of current conditions in
       the markets for options, or in the markets for underlying securities, that there are
       outstanding a number of uncovered short positions in option contracts of a given
       class in excess of the limits established by the Association for purposes of this
       subparagraph or that a percentage of outstanding short positions in option
       contracts of a given class are uncovered, in excess of the limits established by
       the Association for purposes of this subparagraph, the Association, upon its
       determination that such action is in the public interest and necessary for the
       protection of investors and the maintenance of a fair and orderly market in the
       option contracts or underlying securities, may prohibit any further opening writing
       transactions in option contracts of that class unless the resulting short position
       will be covered, and it may prohibit the uncovering of any existing covered short
       position in option contracts of one or more series of options of that class. The
       Association may exempt transactions in Nasdaq options by registered Nasdaq
       options market makers from restrictions imposed under this subparagraph and it
       shall rescind such restrictions upon its determination that they are no longer
       appropriate.
              (8) Restrictions on Option Transactions and Exercises
1194           The Association may impose from time to time such restrictions on option
       transactions or the exercise of option contracts in one or more series of options
       of any class which it determines are necessary in the interest of maintaining a fair
       and orderly market in option contracts, or in the underlying securities covered by
       such option contracts, or otherwise necessary in the public interest or for the
       NASD [Rules 0100-3420]                                                         254


       protection of investors. During the period of any such restriction, no member shall
       effect any option transaction or exercise any option contract in contravention of
       such restriction. Notwithstanding the foregoing, during the 10 business days prior
       to the expiration date of a given series of options, no restriction established
       pursuant to this subparagraph on the exercise of option contracts shall remain in
       effect with respect to that series of options.
              (9) Rights and Obligations of Holders and Writers
1195          Subject to the provisions of subparagraphs (b)(4), (6), and (8), the rights
       and obligations of holders and writers of option contracts of any class of options
       issued by The Options Clearing Corporation shall be set forth in the rules of The
       Options Clearing Corporation.
              (10) Open Orders on “Ex-Date”
1196          Open orders for one or more option contracts of any class of options
       issued by The Options Clearing Corporation held by members prior to the effecti-
       ve date of an adjustment by The Options Clearing Corporation to the terms of a
       class of options pursuant to Article VI, Section 11 of the By-Laws of The Options
       Clearing Corporation shall be adjusted on the “ex-date” by such amount as The
       Options Clearing Corporation shall specify, unless otherwise instructed by the
       customer.
               (11) Delivery of Current Disclosure Document(s)
1197           (A) Every member shall deliver the appropriate current disclosure
       document(s) to each customer at or prior to the time such customer’s account is
       approved for trading in the category of options issued by The Options Clearing
       Corporation to which such disclosure document relates. In the case of customers
       approved for writing uncovered short options transactions, the disclosure docu-
       ment required by paragraph (b)(16) shall be in a format prescribed by the Asso-
       ciation. Thereafter, each new or revised current disclosure document(s) shall be
       distributed to every customer having an account approved for such trading or in
       the alternative, shall be distributed not later than the time a confirmation of a
       transaction is delivered to each customer who enters into a transaction in options
       issued by The Options Clearing Corporation. The Association will advise mem-
       bers when a new or revised current disclosure document meeting the require-
       ments of SEC Rule 9b-1 of the Act is available.
1198           (B) Where a broker or dealer enters his orders with another member in a
       single omnibus account, the member holding the account shall take reasonable
       steps to assure that such broker or dealer is furnished reasonable quantities of
       current disclosure documents, as requested by him in order to enable him to
       comply with the requirements of SEC Rule 9b-1 of the Act.
1199           (C) Where an introducing broker or dealer enters orders for his customers
       with, or clears transactions through, a member on a fully disclosed basis and that
       member carries the accounts of such customers, the responsibility for delivering
       the current disclosure document(s) as provided in this paragraph (b)(11) shall
       rest with the member carrying the accounts. However, such member may rely
       upon the good faith representation of the introducing broker or dealer that the
       current disclosure document(s) has been delivered in compliance with paragraph
       (b)(11).
              (12) Confirmations
1200          Every member shall promptly furnish to each customer a written confirma-
       NASD [Rules 0100-3420]                                                          255


       tion of each transaction in option contracts for such customer’s account. Each
       such confirmation shall show the type of option, the underlying security or index,
       the expiration month, the exercise price, the number of option contracts, the
       premium, the commission, the trade and settlement dates, whether the transac-
       tion was a purchase or a sale (writing) transaction, whether the transaction was
       an opening or a closing transaction, whether the transaction was effected on a
       principal or agency basis and, for other than options issued by The Options
       Clearing Corporation, the date of expiration. The confirmation shall by appro-
       priate symbols distinguish between exchange listed and Nasdaq option tran-
       sactions and other transactions in option contracts.
               (13) Transactions with Issuers
1201           No member under any circumstances shall enter a transaction for the
       sale (writing) of a call option contract for the account of any corporation which is
       the issuer of the underlying security thereof.
               (14) Restricted Stock
1202           For the purposes of covering a short position in a call option contract,
       delivery pursuant to the exercise of a put option contract, or satisfying an
       exercise notice assigned in respect of a call option contract, no member shall
       accept shares of an underlying stock, which may not be sold by the holder
       thereof except upon registration pursuant to the provisions of the Securities Act
       of 1933 or pursuant to Commission rules promulgated under the Securities Act of
       1933, unless, at the time such securities are accepted and at any later time such
       securities are delivered, applicable provisions of the Securities Act of 1933 and
       the rules thereunder have been complied with by the holder of such securities.
               (15) Statements of Account
1203           (A) Statements of account showing security and money positions, entries,
       interest charges and any special charges that have been assessed against such
       account during the period covered by the statement shall be sent no less
       frequently than once every month to each customer in whose account there has
       been an entry during the preceding month with respect to an option contract and
       quarterly to all customers having an open option position or money balance.
       Interest charges and any special charges assessed during the period covered by
       the statement need not be specifically delineated if they are otherwise accounted
       for on the statement and have been itemized on transaction confirmations. With
       respect to options customers having a general (margin) account, such state-
       ments shall also provide the mark-to-market price and market value of each
       option position and other security position in the general (margin) account, the
       total market value of all positions in the account, the outstanding debit or credit
       balance in the account, and the general (margin) account equity. The statements
       shall bear a legend stating that further information with respect to commissions
       and other charges related to the execution of option transactions has been
       included in confirmations of such transactions previously furnished to the custo-
       mer, and that such information will be made available to the customer promptly
       upon request. The statements shall also bear a legend requesting the customer
       promptly to advise the member of any material change in the customer’s invest-
       ment objectives or financial situation.
1204          (B) For purposes of this subparagraph (15), general (margin) account
       equity shall be computed by subtracting the total of the “short” security values
       NASD [Rules 0100-3420]                                                         256


       and any debit balance from the total of the “long” security values and any credit
       balance.
               (16) Opening of Accounts
1205           (A) Approval Required — No member or person associated with a mem-
       ber shall accept an order from a customer to purchase or write an option contract
       relating to an options class that is the subject of an options disclosure document,
       or approve the customer’s account for the trading of such option, unless the
       broker or dealer furnishes or has furnished to the customer the appropriate
       options disclosure document(s) and the customer’s account has been approved
       for options trading in accordance with the provisions of subparagraphs (B)
       through (D) hereof.
1206           (B) Diligence in Opening Accounts — In approving a customer’s account
       for options trading, a member or any person associated with a member shall
       exercise due diligence to ascertain the essential facts relative to the customer,
       his financial situation and investment objectives. Based upon such information,
       the branch office manager or other Registered Options Principal shall specifically
       approve or disapprove in writing the customer’s account for options trading;
       provided, that if the branch office manager is not a Registered Options Principal,
       account approval or disapproval shall within 10 business days be submitted to
       and approved or disapproved by a Registered Options Principal. A record of the
       information obtained pursuant to this subparagraph and of the approval or
       disapproval of each such account shall be maintained by the member as part of
       its permanent records in accordance with paragraph (b)(17).
1207           (C) Verification of Customer Background and Financial Information —
       The background and financial information upon which the account of every new
       options customer that is a natural person has been approved for options trading,
       unless the information is included in the customer’s account agreement, shall be
       sent to the customer for verification within 15 days after the customer’s account
       has been approved for options trading. A copy of the background and financial
       information on file with a member shall also be sent to the customer for verifica-
       tion within 15 days after the member becomes aware of any material change in
       the customer’s financial situation.
1208            (D) Account Agreement — Within 15 days after a customer’s account has
       been approved for options trading, a member shall obtain from the customer a
       written agreement that the customer is aware of and agrees to be bound by the
       Rules of the Association applicable to the trading of option contracts and, if he
       desires to engage in transactions in options issued by The Options Clearing
       Corporation, that the customer has received a copy of the current disclosure
       document(s) required to be furnished under this subparagraph (16) and that he is
       aware of and agrees to be bound by the rules of The Options Clearing Corpora-
       tion. In addition, the customer should indicate on such written agreement that he
       is aware of and agrees not to violate the position limits established pursuant to
       paragraph (b)(3) and the exercise limits established pursuant to paragraph (b)(4).
1209          (E) Uncovered Short Option Contracts — Each member transacting
       business with the public in writing uncovered short option contracts shall develop,
       implement and maintain specific written procedures governing the conduct of
       such business which shall include, at least, the following:
       NASD [Rules 0100-3420]                                                            257


              (i) Specific criteria and standards to be used in evaluating the suitability of
              a customer for writing uncovered short option transactions;
              (ii) Specific procedures for approval of accounts engaged in writing
              uncovered short option contracts, including written approval of such
              accounts by a Registered Options Principal;
              (iii) Designation of the Senior Registered Options Principal and/or Com-
              pliance Registered Options Principal as the person responsible for
              approving customer accounts that do not meet the specific criteria and
              standards for writing uncovered short option transactions and for
              maintaining written records of the reasons for every account so approved;
              (iv) Establishment of specific minimum net equity requirements for initial
              approval and maintenance of customer accounts writing uncovered short
              option transactions; and
              (v) Requirements that customers approved for writing uncovered short
              options transactions be provided with a special written statement for
              uncovered option writers approved by the Association that describes the
              risks inherent in writing uncovered short option transactions, at or prior to
              the initial writing of an uncovered short option transaction.
                (17) Maintenance of Records
1210            (A) In addition to the requirements of Rule 3110, every member shall
       maintain and keep current a separate central log, index or other file for all
       options-related complaints, through which these complaints can easily be
       identified and retrieved. The central file shall be located at the principal place of
       business of the member or such other principal office as shall be designated by
       the member. At a minimum, the central file shall include:
              (i) identification of complainant;
              (ii) date complaint was received;
              (iii) identification of registered representative servicing the account;
              (iv) a general description of the matter complained of; and
              (v) a record of what action, if any, has been taken by the member with
              respect to the complaint. For purposes of this subparagraph, the term
              “options-related complaint” shall mean any written statement by a
              customer or person acting on behalf of a customer alleging a grievance
              arising out of or in connection with options. Each options-related
              complaint received by a branch office of a member shall be forwarded to
              the office in which the separate, central file is located not later than 30
              days after receipt by the branch office that is the subject of the complaint.
              A copy of every options-related complaint shall also be maintained at the
              branch office that is the subject of the complaint.
1211           (B) Background and financial information of customers who have been
       approved for options trading shall be maintained at both the branch office ser-
       vicing the customer’s account and the principal supervisory office having jurisdic-
       tion over that branch office. Copies of account statements of options customers
       shall also be maintained at both the branch office supervising the accounts and
       the principal supervisory office having jurisdiction over that branch for the most
       NASD [Rules 0100-3420]                                                          258


       recent six-month period. With respect solely to the above-noted record retention
       requirements applicable to principal supervisory offices, however, the customer
       information and account statements may be maintained at a location other than
       the principal supervisory office if such documents and information are readily
       accessible and promptly retrievable. Other records necessary to the proper
       supervision of accounts shall be maintained at a place easily accessible both to
       the branch office servicing the customer’s account and to the principal supervi-
       sory office having jurisdiction over that branch office.
              (18) Discretionary Accounts
1212          (A)(i) Authorization and Approval — No member and no person asso-
       ciated with a member shall exercise any discretionary power with respect to
       trading in option contract in a customer’s account, or accept orders for option
       contracts for an account from a person other than the customer, except in
       compliance with the provisions of Rule 2510 and unless:
              a. The written authorization of the customer required by Rule 2510 shall
              specifically authorize options trading in the account; and
              b. the account shall have been accepted in writing by a Registered
              Options Principal.
1213           (A)(ii) The Senior Registered Options Principal shall review the acceptan-
       ce of each discretionary account to determine that the Registered Options
       Principal accepting the account had a reasonable basis for believing that the
       customer was able to understand and bear the risk of the strategies or transac-
       tions proposed, and shall maintain a record of the basis for such determination.
       Each discretionary order shall be approved and initialed on the day entered by
       the branch office manager or other Registered Options Principal, provided that if
       the branch office manager is not a Registered Options Principal, such approval
       shall be confirmed within a reasonable time by a Registered Options Principal.
       Each discretionary order shall be identified as discretionary on the order at the
       time of entry. Discretionary accounts shall receive frequent appropriate supervi-
       sory review by the Compliance Registered Options Principal. The provisions of
       this subparagraph (18) shall not apply to discretion as to the price at which or the
       time when an order given by a customer for the purchase or sale of a definite
       number of option contracts in a specified security shall be executed.
1214            (B) Record of Transactions — A record shall be made of every transac-
       tion in option contracts in respect to which a member or person associated with a
       member has exercised discretionary authority, clearly reflecting such fact and
       indicating the name of the customer, the designation and number of the option
       contracts, the premium and the date and time when such transaction was
       effected.
1215          (C) Option Programs — Where the discretionary account utilizes options
       programs involving the systematic use of one or more options strategies, the
       customer shall be furnished with a written explanation of the nature and risks of
       such programs.
              (19) Suitability
1216          (A) No member or person associated with a member shall recommend to
       any customer any transaction for the purchase or sale (writing) of an option con-
       tract unless such member or person associated therewith has reasonable
       NASD [Rules 0100-3420]                                                          259


       grounds to believe upon the basis of information furnished by such customer
       after reasonable inquiry by the member or person associated therewith con-
       cerning the customer’s investment objectives, financial situation and needs, and
       any other information known by such member or associated person, that the
       recommended transaction is not unsuitable for such customer.
1217           (B) No member or person associated with a member shall recommend to
       a customer an opening transaction in any option contract unless the person
       making the recommendation has a reasonable basis for believing, at the time of
       making the recommendation, that the customer has such knowledge and
       experience in financial matters that he may reasonably be expected to be capa-
       ble of evaluating the risks of the recommended transaction, and is financially able
       to bear the risks of the recommended position in the option contract.
                (20) Supervision of Accounts
1218            (A) Duty to Supervise; Senior Registered Options Principal — Every
       member shall develop and implement a written program providing for the diligent
       supervision of all of its customer accounts, and all orders in such accounts, to the
       extent such accounts and orders relate to options contracts, by a general partner
       (in the case of a partnership) or officer (in the case of a corporation) of the mem-
       ber who is a Registered Options Principal and who has been specifically iden-
       tified to the Association as the member’s Senior Registered Options Principal. A
       Senior Registered Options Principal, in meeting his responsibilities for supervi-
       sion of customer accounts and orders, may delegate to qualified employees
       (including other Registered Options Principals) responsibility and authority for
       supervision and control of each branch office handling transactions in option
       contracts, provided that the Senior Registered Options Principal shall have
       overall authority and responsibility for establishing appropriate procedures of
       supervision and control over such employees. Every such member shall also
       develop and implement specific written procedures concerning the manner of
       supervision of customer accounts maintaining uncovered short option positions
       and specifically providing for frequent supervisory review of such accounts.
1219           (B) Compliance Registered Options Principal — Every member shall
       designate and specifically identify to the Association a Compliance Registered
       Options Principal (CROP), who may be the Senior Registered Options Principal,
       who shall have no sales functions and who shall be responsible to review and to
       propose appropriate action to secure the member’s compliance with securities
       laws and regulations and Association Rules in respect of its options business.
       The CROP shall regularly furnish reports directly to the Compliance officer (if the
       CROP is not himself the Compliance officer) and to other senior management of
       the member. The requirement that the CROP have no sales functions shall not
       apply to a member that has received less than $1,000,000 in gross commissions
       on options business for either of the preceding two fiscal years or that currently
       has ten or fewer registered representatives.
1220           (C) Branch Offices — No branch office of a member shall transact an
       options business unless the principal supervisor of such branch office accepting
       options transactions has been qualified as either a Registered Options Principal
       or a Limited Principal-General Securities Sales Supervisor; provided that this
       requirement shall not apply to branch offices in which no more than three
       registered representatives are located, so long as the options activities of such
       NASD [Rules 0100-3420]                                                           260


       branch offices are appropriately supervised by either a Registered Options
       Principal or a Limited Principal-General Securities Sales Supervisor.
1221           (D) Headquarters Review of Accounts — Each member shall maintain at
       the principal supervisory office having jurisdiction over the office servicing cus-
       tomer accounts, or have readily accessible and promptly retrievable, information
       to permit review of each customer’s options account on a timely basis to
       determine:
              (i) the compatibility of options transactions with investment objectives and
              with the types of transactions for which the account was approved;
              (ii) the size and frequency of options transactions;
              (iii) commission activity in the account;
              (iv) profit or loss in the account;
              (v) undue concentration in any options class or classes, and
              (vi) compliance with the provisions of Regulation T of the Federal
              Reserve Board.
               (21) Violation of By-Laws and Rules of the Association or The Options
               Clearing Corporation
1222           (A) In Association disciplinary proceedings, a finding of violation of any
       provision of the rules, regulations or by-laws of The Options Clearing Corporation
       by any member or person associated with a member engaged in transactions
       involving options issued, or subject to issuance, by The Options Clearing Corpo-
       ration, may be deemed to be conduct inconsistent with just and equitable
       principles of trade and a violation of Rule 2110.
1223           (B) In Association disciplinary proceedings, a finding of violation of any
       provision of the Rules, regulations or By-Laws of the Association by any member
       engaged in option transactions may be deemed to be conduct inconsistent with
       just and equitable principles of trade and a violation of Rule 2110.
               (22) Stock Transfer Tax
1224           Any stock transfer or similar tax payable in accordance with applicable
       laws and regulations of a taxing jurisdiction upon the sale, transfer or delivery of
       securities pursuant to the exercise of an option contract shall be the responsibility
       of the seller (writer) to whom the exercise notice is assigned in the case of a call
       option contract or the exercising holder in the case of a put option contract
       except that (A) in the case of a call option contract where the incidents of the tax
       are attributable solely to the exercising holder, the member representing such
       holder or another member which acts on its behalf as a clearing member of The
       Options Clearing Corporation, the tax shall be the responsibility of the exercising
       holder, and (B) in the case of a put option contract where the incidents of the tax
       are attributable solely to the seller (writer) to whom the exercise notice is
       assigned, the member representing such seller (writer) or another member which
       acts on its behalf as a clearing member of The Options Clearing Corporation, the
       tax shall be the responsibility of such seller (writer). Each delivery of securities
       subject to such tax must be accompanied by a sales ticket stamped in
       accordance with the regulations of the State imposing such tax, or if required by
       applicable law, such tax shall be remitted by the clearing member having
       responsibility therefor to the clearing corporation through which it customarily
       NASD [Rules 0100-3420]                                                          261


       pays stock transfer taxes, in accordance with the applicable rules of such
       clearing corporation.
               (23) Tendering Procedures for Exercise of Options
1225           (A)(i) Exercise of Options Contracts — Subject to the restrictions esta-
       blished pursuant to paragraph (b)(4) hereof and such other restrictions which
       may be imposed by the Association, The Options Clearing Corporation or an
       options exchange pursuant to appropriate rules, an outstanding option contract
       issued by The Options Clearing Corporation may be exercised during the time
       period specified in the rules of The Options Clearing Corporation. An exercise
       notice may be tendered to The Options Clearing Corporation only by the clearing
       member in whose account the option contract is carried. Exercise instructions of
       their customers relating to exchange listed or Nasdaq option contracts shall not
       be accepted by members after 5:30 p.m. (Eastern Time) on the business day
       immediately prior to the expiration date of any option contract. Exercise ins-
       tructions in respect of such option contracts carried in any proprietary account of
       a member shall similarly not be accepted by any other member with whom such
       member maintains an account after 5:30 p.m. (Eastern Time) on the business
       day immediately prior to the expiration date of any option contract.
1226          (A)(ii) Notwithstanding the provisions of subparagraph (A)(i) hereof,
       members may receive and act on exercise instructions after the cut-off time for
       the acceptance of exercise instructions but prior to 5:00 p.m. (Eastern Time) on
       the expiration date of an option contract:
              a. in the case of option contracts carried in an account maintained for
              another member in which only positions of customers of such other
              member are carried;
              b. in order to remedy mistakes or errors made in good faith;
              c. to take appropriate action as the result of a failure to reconcile
              unmatched option transactions; or
              d. where extraordinary circumstances relating to a public customer’s
              ability to communicate exercise instructions to the member (or the
              member’s ability to receive exercise instructions) prior to such cut-off time
              warrant such action.
1227           (A)(iii) This subparagraph (A) is intended as a means of providing for
       relatively uniform procedures in respect of exercise instructions and not to alter
       or affect in any way the expiration times for an option which are fixed in
       accordance with the rules of The Options Clearing Corporation or any other
       provisions of an options contract, and the exercise prior to expiration of an option
       contract in contravention of this subparagraph (A) shall neither affect the validity
       of such exercise nor modify or otherwise affect any right or obligation of any
       holder or writer of any option contract of such series of options.
1228           (B) Each member shall prepare a memorandum of every exercise instruc-
       tion received from a customer showing the time such instruction was received.
       Such memoranda shall be subject to the requirements of SEC Rules 17a-3(a)(6)
       and 17a-4(b) under the Act. In the event a member receives and acts on an
       exercise instruction pursuant to an exception set forth in subparagraphs b., c. or
       d. of subparagraph (A)(ii) hereof, the member shall maintain a memorandum
       setting forth the circumstances giving rise to such exception. If the member is
       NASD [Rules 0100-3420]                                                            262


       relying on subparagraph b. or subparagraph d. as the basis for an exception, it
       shall promptly file a copy of the memorandum with the Association.
1229           (C)(i) Allocation of Exercise Assignment Notices — Each member shall
       establish fixed procedures for the allocation to customers of exercise notices
       assigned in respect of a short position in option contracts in such member’s
       customer accounts. Such allocation shall be on a “first in-first out” or automated
       random selection basis that has been approved by the Association or on a
       manual random selection basis that has been specified by the Association. Each
       member shall inform its customers in writing of the method it uses to allocate
       exercise notices to its customer’s accounts, explaining its manner of operation
       and the consequences of that system.
1230           (C)(ii) Each member shall report its proposed method of allocation to the
       Association and obtain the Association’s prior approval thereof, and no member
       shall change its method of allocation unless the change has been reported to and
       been approved by the Association. The requirements of this subparagraph (C)
       shall not be applicable to allocation procedures submitted to and approved by
       another self-regulatory organization having comparable standards pertaining to
       methods of allocation.
1231         (C)(iii) Each member shall preserve for a three-year period sufficient work
       papers and other documentary materials relating to the allocation of exercise
       assignment notices to establish the manner in which allocation of such exercise
       assignment notices is in fact being accomplished.
1232           (D) Delivery and Payment — Delivery of the shares of an underlying
       security upon the exercise of an option contract and payment of the aggregate
       exercise price in respect thereto, shall be effected in accordance with the rules of
       The Options Clearing Corporation. As promptly as practicable after the exercise
       of an option contract by a customer, the member shall require the customer to
       make full cash payment of the aggregate exercise price in the case of a call
       option contract or to deposit the underlying stock in the case of a put option
       contract, or, in either case, to make the required margin deposit in respect
       thereto if such transaction is effected in a margin account, in accordance with the
       applicable regulations of the Federal Reserve Board and Rule 2520. As promptly
       as practicable after the assignment to a customer of an exercise notice, the
       member shall require the customer to deposit the underlying stock in the case of
       a call option contract if the shares of the underlying security are not carried in the
       customer’s account, or to make full cash payment of the aggregate exercise price
       in the case of a put option contract, or, in either case, to make the required
       market deposit in respect thereof, if such transaction is effected in a margin
       account, in accordance with Rule 2520 and the applicable regulations of the
       Federal Reserve Board.
1233         (E)(i) Exercise of Nasdaq Index Option Contracts — With respect to
       Nasdaq index option contracts, clearing members are required to follow the pro-
       cedures of The Options Clearing Corporation for tendering exercise notices, and
       member organizations also are required to comply with the following procedures:
              a. A memorandum to exercise any Nasdaq index option contract issued
              or to be issued in a customer or market maker account at The Options
              Clearing Corporation must be received or prepared by the member
              organization no later than 4:10 p.m. (Eastern Time) and must be time-
       NASD [Rules 0100-3420]                                                          263


              stamped at the time it is received or prepared. Member organizations
              must accept exercise instructions until 4:10 p.m. (Eastern Time) each
              business day.
              b. A memorandum to exercise any Nasdaq index option contract issued
              or to be issued in a firm account at The Options Clearing Corporation
              must be prepared by the member organization no later than 4:10 p.m.
              (Eastern Time) and must be time-stamped at the time it is prepared.
              c. Any member or member organization that intends to submit an
              exercise notice for 25 or more contracts in the same series of Nasdaq
              index options on the same business day on behalf of an individual
              customer, registered Nasdaq options market maker or firm account must
              notify the Association of such exercises in a manner prescribed by the
              Association no later than 4:10 p.m. (Eastern Time) on that day. For
              purposes of this subparagraph (E), exercises for all accounts controlled
              by the same individual must be aggregated.
1234           (E)(ii) The provisions of subparagraphs (i) a. and b. above are not
       applicable in respect to any series of Nasdaq index options on the last day of
       trading prior to the expiration date of such series.
               (24) Options Transactions and Reports by Market Makers in Listed
               Securities
1235           Every member who is an off-board market maker in a security listed on a
       national securities exchange shall report to the Association in accordance with
       such procedures as may be prescribed by the Board of Governors, transactions
       involving 50 or more option contracts on such listed securities which are either
       directly for the benefit of (A) the member or (B) any employee, partner, officer, or
       director of the member who, by virtue of his position with the member, is directly
       involved in the purchase or sale of the underlying security for the firm’s proprie-
       tary account(s) or is directly responsible for supervision of such persons; or who
       by virtue of his position in the firm, is authorized to, and regularly does, obtain
       information on the proprietary account(s) of the member in which the underlying
       security is traded. This subparagraph shall apply to all options transactions
       including those executed on an exchange to which the member may belong.
       [Added eff. Jan. 13, 1977; amended eff. Oct. 22, 1980; Dec. 7, 1981; Dec. 15,
       1981; July 5, 1983; Aug. 2, 1983; Nov. 30, 1983; Apr. 1, 1985; Sept. 13, 1985;
       Oct., 1986; Jan. 7, 1987; June 28, 1989; Feb. 9, 1990; amended by SR-NASD-
       93-73 eff. Jan. 5, 1994; amended to include former Appendix E by SR-NASD-93-
       48 eff. Mar. 8, 1994; amended by SR-NASD-94-07 eff. Mar. 18, 1994; amended
       by SR-NASD-94-27 eff. Aug. 19, 1994; amended by SR-NASD-93-03 eff. Nov. 1,
       1994; amended by SR-NASD-94-54 eff. Apr. 20, 1995; amended by SR-NASD
       94-60 eff. June 21, 1995; amended by SR-NASD-95-56 eff. Dec. 29, 1995;
       amended by SR-NASD-95-55 eff. Jan. 22, 1996; Amended by SR-NASD-97-28
       eff: Aug. 7, 1997.; amended by SR-NASD-98-15 eff. March 19, 1998; amended
       by SR-NASD-98-92 eff. Jan. 11, 1998; amended by SR-NASD-98-23 eff. June
       12, 1998; amended by SR-NASD-98-78 eff. Dec. 21, 1998; amended by SR-
       NASD-00-36 eff. Feb. 15, 2001.]
       Selected Notices to Members: 85-18, 86-74, 89-64, 93-15, 94-24, 94-46, 95-25,
       95-47; 99-20, 01-01.
              Cross Reference — Rule 2220, Options Communications with the Public
       NASD [Rules 0100-3420]                                                          264


       IM-2860-1. Position Limits
1236           The following examples illustrate the operation of position limits
       established by Rule 2860(b)(3) (all examples assume a position limit of 4,500
       contracts and that the options are standardized options):
              (a) Customer A, who is long 4,500 XYZ calls, may at the same time be
              short 4,500 XYZ calls, since long and short positions in the same class of
              options (i.e., in calls only, or in puts only) are on opposite sides of the
              market and are not aggregated for purposes of paragraph (b)(3).
              (b) Customer B, who is long 4,500 XYZ calls, may at the same time be
              long 4,500 XYZ puts. Paragraph (b)(3) does not require the aggregation
              of long call and long put (or short call and short put) positions, since they
              are on opposite sides of the market.
              (c) Customer C, who is long 1,700 XYZ calls, may not at the same time
              be short more than 2,800 XYZ puts, since the 4,500 contract limit applies
              to the aggregation of long call and short put positions in options covering
              the same underlying security. Similarly, if Customer C is also short 1,600
              XYZ calls, he may not at the same time be long more than 2,900 puts,
              since the 4,500 contract limit applies separately to the aggregation of
              short call and long put positions in options covering the same underlying
              security.
              (d) Customer D, who is short 900,000 shares of XYZ, may be long up to
              13,500 XYZ calls, since the “hedge” exemption contained in paragraph
              (b)(3)(A)(vii) permits Customer D to establish an options position up to
              13,500 contracts in size. In this instance, 4,500 of the 13,500 contracts
              are permissible under the basic position limit contained in paragraph
              (b)(3)(A)(i) and the remaining 9,000 contracts are permissible because
              they are hedged by the 900,000 short stock position.
       [Amended by SR-NASD-98-23 eff. June 12, 1998.]
       IM-2860-2. Diligence in Opening Options Accounts
1237            (a) In fulfilling their obligations pursuant to Rule 2860(b)(16)(B), with
       respect to options customers who are natural persons, members shall seek to
       obtain the following information at a minimum (information shall be obtained for
       all participants in a joint account):
              (1) Investment objectives (e.g., safety of principal, income, growth, trading
              profits, speculation);
              (2) Employment status (name of employer, self-employed or retired);
              (3) Estimated annual income from all sources;
              (4) Estimated net worth (exclusive of family residence);
              (5) Estimated liquid net worth (cash, securities, other);
              (6) Marital status; number of dependents;
              (7) Age; and,
       NASD [Rules 0100-3420]                                                         265


              (8) Investment experience and knowledge (e.g., number of years, size,
              frequency and type of transactions) for options, stocks and bonds,
              commodities, others.
1238          (b) In addition, a customer’s account records shall contain the following
       information, if applicable:
              (1) Source or sources of background and financial information (including
              estimates) concerning the customer;
              (2) Discretionary authorization agreement on file, name, relationship to
              customer and experience of person holding trading authority;
              (3) Date disclosure document(s) furnished to customer;
              (4) Nature and types of transactions for which account is approved (e.g.,
              buying covered writing, uncovered writing, spreading, discretionary
              transactions);
              (5) Name of registered representative;
              (6) Name of ROP approving account; date of approval; and
              (7) Dates of verification of currency of account information.
1239           (c) Members should consider utilizing a standard account approval form
       so as to ensure the receipt of all the required information.
1240           (d) Refusal of a customer to provide any of the information called for in
       paragraph (a) shall be so noted on the customer’s records at the time the
       account is opened. Information provided shall be considered together with the
       other information available in determining whether and to what extent to approve
       the account for options trading.
1241           (e) The requirement of Rule 2860(b)(16)(C) for the initial and subsequent
       verification of customer background and financial information is to be satisfied by
       sending to the customer the information required in paragraph (a)(1) through
       (a)(6) hereof, as contained in the member’s records and providing the customer
       with an opportunity to correct or complete the information. In all cases, absent
       advice from the customer to the contrary, the information will be deemed to be
       verified.
       [Amended by SR-NASD-93-48 eff. Mar. 8, 1994.]

       2870. Nasdaq Index Options
       2871. Definitions
1242           (a) Aggregate Current Index Value — The term “aggregate current index
       value” means the value required to be delivered to the holder of a call or by the
       holder of a put (against payment of the aggregate exercise price) upon the valid
       exercise of an index option. Such value is equal to the index multiplier times the
       current index value on the trading day on which an exercise notice is properly
       tendered to The Options Clearing Corporation, or, if the day on which such notice
       is so tendered is not a trading day, then on the most recent trading day.
       NASD [Rules 0100-3420]                                                          266


1243          (b) Aggregate Index Option Exercise Price — The term “aggregate index
       option exercise price” in respect of an index option means the exercise price of
       such option times the index multiplier.
1244           (c) Best Bid and Asked — The term “best bid” means the best or highest
       price of all the open, active bids. The term “best asked” means the best or lowest
       (but greater than zero) price of all the open active offers.
1245          (d) Cabinet Transaction — The term “cabinet transaction” means a
       transaction in a Nasdaq index option executed at a price of $1.00 per contract for
       the purpose of opening or closing a position in an index option having a nominal
       market value.
1246           (e) Call — The term “call” means an option contract under which the
       holder of the options has the right, in accordance with the terms of the option, to
       buy a number of units of the underlying security or to receive a dollar equivalent
       of the underlying index covered by the option contract.
1247           (f) Class of Options — The term “class of options” means all option con-
       tracts of the same type of option covering the same underlying security or index.
1248          (g) Clearing Member — The term “clearing member” means a member of
       the Association which has been admitted to membership in The Options Clearing
       Corporation pursuant to the provisions of the rules of The Options Clearing
       Corporation.
1249           (h) Closing Purchase Transaction — The term “closing purchase transac-
       tion” means an option transaction in which the purchaser’s intention is to reduce
       or eliminate a short position in the series of options involved in such transaction.
1250          (i) Closing Sale Transaction — The term “closing sale transaction” means
       an option transaction in which the seller’s intention is to reduce or eliminate a
       long position in the series of options involved in such transaction.
1251           (j) Combination Order — The term “combination order” means an order to
       buy a number of call option contracts and the same number of put option
       contracts with respect to the same underlying security or index or put and call
       option contracts representing the same number of shares or units of trading at
       option, which contracts do not have both the same exercise price and expiration
       date; or an order to sell a number of call option contracts and the same number
       of put option contracts with respect to the same underlying security or index, or
       put and call option contracts representing the same number of shares, or units of
       trading at option, which contracts do not have both the same exercise price and
       expiration date (e.g., an order to buy two XYZ April 50 calls and to buy two XYZ
       July 40 puts is a combination order). In the case of adjusted option contracts, a
       combination order need not consist of the same number of put and call contracts
       if such contracts represent the same number of shares or units of trading at
       option.
1252           (k) Covered — The term “covered” in respect of a short position in a call
       option contract means that the writer’s obligation is secured by a “specific depo-
       sit” or an “escrow deposit,” meeting the conditions of Rules 610(e) or 610(h),
       respectively, of the rules of The Options Clearing Corporation, or the writer holds
       in the same account as the short position, on a unit-for-unit basis, a long position
       either in the underlying security or in an option contract of the same class of
       NASD [Rules 0100-3420]                                                          267


       options where the exercise price of the option contract in such long position is
       equal to or less than the exercise price of the option contract in such short
       position. The term “covered” in respect of a short position in a put option contract
       means that the writer holds in the same account as the short position, on a unit-
       for-unit basis, a long position in an option contract of the same class of options
       having an exercise price equal to or greater than the exercise price of the option
       contract in such short position.
1253           (l) Current Index Value — The term “current index value” means the level
       of a particular index (derived from the current market prices and capitalization of
       the underlying securities in the index group) at the close of trading on any trading
       day, or any multiple or fraction thereof specified by the Association as such value
       is reported by the reporting authority.
1254           (m) Expiration Cycle — The term “expiration cycle” means all option con-
       tracts covering the same underlying security or index having the same expiration
       month, or the time period during which such options are authorized for trading.
1255           (n) Expiration Date — The term “expiration date” of a Nasdaq option con-
       tract issued by The Options Clearing Corporation means the day and time fixed
       by the rules of The Options Clearing Corporation for the expiration of all option
       contracts having the same expiration month as such option contract.
1256           (o) Expiration Month — The term “expiration month” in respect of an
       option contract means the month and year in which such option contract expires.
1257           (p) Index Dollar Equivalent — The term “index dollar equivalent” is the
       dollar amount which results when the index value is multiplied by the appropriate
       index multiplier.
1258           (q) Index Group — The term “index group” means a group of securities,
       whose inclusion and relative representation in the group is determined by the
       inclusion and relative representation of their current market values in a widely
       disseminated securities index specified by the Association.
1259           (r) Index Multiplier — The term “index multiplier” as used in reference to
       an index option contract means the dollar amount (as specified by the Associa-
       tion) by which the current index value is multiplied to arrive at the index dollar
       equivalent. Such term replaces the term “unit of trading” used in reference to
       other kinds of options.
1260           (s) Index Option Exercise Price — The term “index option exercise price”
       in respect of an index option means the specified index value which, when
       multiplied by the index multiplier, will yield the aggregate exercise price at which
       the aggregate current index value may be purchased (in the case of a call) or
       sold (in the case of a put) upon the exercise of such option.
1261           (t) Index Option Premium — The term “index option premium” means the
       price of each such option (expressed in points), as agreed upon by the purchaser
       and seller in such transaction, times the index multiplier and the number of
       options subject to the transaction.
1262         (u) Index Underlying Security — The term “index underlying security”
       means any of the securities included in an index group underlying a class of
       Nasdaq index options.
       NASD [Rules 0100-3420]                                                        268


1263           (v) Internalized Trade Transaction — The term “Internalized Trade Tran-
       saction” or “ITT” means an OCT entered into The Nasdaq Stock Market by a
       participant containing the terms of a transaction executed by the participant as
       principal where the participant is also the order entry firm.
1264          (w) Long Position — The term “long position” means the number of
       outstanding option contracts of a given series of options held by a person
       (purchaser).
1265          (x) Nasdaq Index Option Contract — The term “Nasdaq index option
       contract” means an option contract which is authorized for quotation display on
       The Nasdaq Stock Market.
1266           (y) Nasdaq Index Options Order Entry Firm — The term “order entry firm”
       shall mean a member of the Association who is registered as an order entry firm
       for purposes of participation in the Nasdaq Index Options Service which permits
       the firm to enter options orders via Order Confirmation Transactions (OCT) or
       Internalized Trade Transaction (ITT).
1267           (z) Nasdaq Index Options Participant — The term “participant” shall mean
       either a Nasdaq index options market maker or Nasdaq index options order entry
       firm registered as such with the Association for participation in the Nasdaq Index
       Options Service.
1268           (aa) Nasdaq Index Options Service — The term “Nasdaq Index Option
       Service” or “Service” means the Service owned and operated by The Nasdaq
       Stock Market, Inc. which enables participants to report transaction in Nasdaq
       index options, to have reports of all Nasdaq index options transactions automati-
       cally forwarded to the Options Price Reporting Authority (OPRA) for dissemina-
       tion to the public and the industry, and to “lock-in” these trades by sending both
       sides to The Options Clearing Corporation for clearance and settlement; and to
       provide participants with sufficient monitoring and updating capabilities to
       participate in such trading environment.
1269          (bb) Nasdaq Market Index Option — The term “Nasdaq market index
       option” means an option contract issued by The Options Clearing Corporation
       and displayed on The Nasdaq Stock Market based upon an underlying index
       which has been deemed by the Commission to be a market index.
1270          (cc) Opening Purchase Transaction — The term “opening purchase
       transaction” means an option transaction in which the buyer’s intention is to
       create or increase a long position in the series of options involved in such
       transaction.
1271          (dd) Opening Writing Transaction — The term “opening writing transac-
       tion” means an option transaction in which the seller’s (writer’s) intention is to
       create or increase a short position in the series of options involved in such
       transaction.
1272           (ee) Options Clearing Corporation — The term “Options Clearing Corpo-
       ration” (OCC) means The Options Clearing Corporation, the issuer of options
       displayed on The Nasdaq Stock Market.
1273         (ff) Order Confirmation Transaction — The term “Order Confirmation
       Transaction” or “OCT” means a message entered into The Nasdaq Stock Market
       by an order entry firm which is directed to a market maker not simultaneously
       NASD [Rules 0100-3420]                                                            269


       acting as both a market maker and an order entry firm, which message contains
       the information specified by the Association as necessary for trade reporting
       purposes and for submission of trade detail to The Options Clearing Corporation.
1274           (gg) Outstanding — The term “outstanding” in respect of an option con-
       tract means an option contract which has neither been the subject of a closing
       sale transaction nor has been exercised nor has reached its expiration date.
1275           (hh) Put — The term “put” means an option contract under which the
       holder of the option has the right, in accordance with the terms of the option, to
       sell the number of units of the underlying security or deliver a dollar equivalent of
       the underlying index covered by the option contract.
1276           (ii) Registered Nasdaq Index Options Market Maker — The term
       “registered Nasdaq index options market maker” means a member who meets
       the qualifications for such as set forth in Rule 2873, is willing and able to serve as
       such in connection with Nasdaq index option contracts and who is authorized by
       the Association to do so.
1277           (jj) Rules of The Options Clearing Corporation — The term “rules of The
       Options Clearing Corporation” means the by-laws and the rules of The Option
       Clearing Corporation, and all written interpretations thereof as may be in effect
       from time to time.
1278           (kk) Series of Options — The term “series of options” means all option
       contracts of the same class of options having the same exercise price and expi-
       ration date and which cover the same number of units of the underlying security
       or index.
1279          (ll) Short Position — The term “short position” means the number of
       outstanding option contracts of a given series of options with respect to which a
       person is obligated as a writer (seller).
1280           (mm) Spread Order — The term “spread order” means an order to buy a
       stated number of option contracts and to sell the same number of option con-
       tracts, or contracts representing the same number of shares or units of trading at
       option in a different series of the same class of options.
1281           (nn) Straddle Order — The term “straddle order” means an order to buy a
       number of call option contracts and the same number of put option contracts with
       respect to the same underlying security or index, or put and call option contracts
       representing the same number of shares or units of trading at option, and having
       the same exercise price and expiration date; or an order to sell a number of call
       option contracts and the same number of put option contracts with respect to the
       same underlying security or index, or put and call option contracts representing
       the same number of shares or units of trading at option and having the same
       exercise price and expiration date, (e.g., an order to buy two XYZ July 50 calls
       and to buy two XYZ July 50 puts is a straddle order). In the case of adjusted
       option contracts, a straddle order need not consist of the same number of put
       and call contracts if such contracts both represent the same number of shares, or
       units of trading at option.
1282           (oo) Type of Options — The term “type of options” means the classifica-
       tion of an option contract as either a put or a call.
       NASD [Rules 0100-3420]                                                          270


1283          (pp) Uncovered — The term “uncovered” in respect of a short position in
       an option contract means the short position is not covered.
1284         (qq) Underlying Index — The term “underlying index” means an index
       upon which a Nasdaq index option contract is based.
1285           (rr) Unit of Trading — The term “unit of trading” means the number of
       units of the underlying security designated by The Options Clearing Corporation
       as the subject of a single option contract. In the absence of any other designa-
       tion, the unit of trading for a common stock is 100 shares.
       [Added eff. Sept. 13, 1985; amended by SR-NASD-94-48 eff. Nov. 2, 1994.]
       2872. Nasdaq Index Option Services Available
               (a)    Level 2 Nasdaq Index Options Service
1286           (1) Nature of Service — This service will provide the subscriber with
       access to the quotations of all of the registered Nasdaq index options market
       makers entering quotes on each of the Nasdaq index options, in addition to the
       last reported sale for each Nasdaq index option, the most recent index compu-
       tation for the underlying index, daily high and low, daily volume, time of last sale
       and inside quotations.
1287           (2) Availability — This service is available only to persons approved and
       authorized by the Association for retrieval of Nasdaq index options quotation and
       last sale data.
               (b)    Level 3 Nasdaq Index Options Service
1288          (1) Nature of Service — This service will enable a registered Nasdaq
       index options market maker to enter quotations in The Nasdaq Stock Market only
       on the Nasdaq index options as to which the Association has authorized it to
       enter quotes pursuant to the procedures set forth in Rule 2873. A subscriber to
       Level 3 Nasdaq Index Options Service shall also receive Level 2 Nasdaq Index
       Options Service.
1289           (2) Availability — Level 3 Nasdaq Index Options Service is available to
       any member which, upon application, is approved and authorized by the Asso-
       ciation to participate in The Nasdaq Stock Market as a registered Nasdaq index
       options market maker.
       [Added eff. Sept. 13, 1985; amended by SR-NASD-94-48 eff. Nov. 2, 1994.]
       2873.   Registration, Qualification and Other General Requirements
               Applicable to All Nasdaq Index Options Market Makers
1290           (a) Registration of Nasdaq Index Options Market Makers — Prior to
       acting as a market maker in Nasdaq index options, a member must make appli-
       cation to the Association on a form prescribed by the Association and become
       registered as such with it. In connection with such application, a member must
       submit to the Association such financial and other information as required by the
       Association to determine if such member meets the qualifications of a registered
       Nasdaq index options market maker specified herein. Such other information will
       include those classes and series of Nasdaq options in which such member
       desires to be registered as an index options market maker.
       NASD [Rules 0100-3420]                                                         271


1291            (b) Participation in the Nasdaq Index Options Service shall be mandatory
       for all Nasdaq index options market makers. Accordingly, a Nasdaq index options
       market maker’s registration as such shall be conditioned upon the member’s
       initial and continuing compliance with the following requirements:
              (1) execution of a Nasdaq Index Options Service participant application
              agreement with the Association;
              (2) maintenance of the physical security of the equipment located on the
              premises of the Nasdaq index options market maker to prevent the
              unauthorized entry of information into the Nasdaq Index Options Service;
              (3) acceptance and settlement of each NASD index option trade that the
              Service identifies as having been effected by such Nasdaq index options
              market maker, or if settlement is to be made through another clearing
              member, guarantee of the acceptance and settlement of such identified
              trade by the clearing member on the regularly scheduled settlement date;
              (4) membership in The Options Clearing Corporation, or a clearing
              arrangement with such member; and
              (5) compliance with all applicable rules and operating procedures of the
              Association and the Commission.
1292           (c) Nasdaq index options market makers shall be under a continuing
       obligation to inform the Association of non-compliance with any of the registration
       requirements set forth above.
1293           (d) Obligation to Honor Trades — If a Nasdaq index options market
       maker, or clearing member acting on his behalf, is reported by the Service to
       clearing at the close of any trading day, or shown by the activity reports
       generated by the Service as constituting a side of a trade, such market maker, or
       clearing member acting on his behalf, shall honor such trade on the scheduled
       settlement date.
1294           (e) Compliance with Rules and Registration Requirements — Failure by
       Nasdaq index options market makers to comply with any of the Rules or
       registration requirements applicable to the Service identified herein shall subject
       such participants to censure, fine, suspension or revocation of its registration as
       Nasdaq index options market maker and/or order entry firm or any other fitting
       penalty under the Rules of the Association.
1295           (f) Market Maker Financial Requirements — A registered Nasdaq index
       options market maker shall continuously maintain net capital of at least $50,000
       computed in accordance with the provisions of SEC Rule 15c3-1(c)(2) under the
       Act, plus $5,000 per options series up to a maximum requirement of $150,000.
1296          (g) Normal Business Hours — A registered Nasdaq index options market
       maker shall keep the Association advised as to the normal business hours during
       which it shall enter quotations. All firms should be open and active between the
       hours of 9:30 a.m. and 4:10 p.m. (Eastern Time). Nasdaq shall publish a “close
       symbol” for a registered Nasdaq index options market maker on Level 2 and
       Level 3 terminals at the close of such firm’s normal business hours.
1297         (h) Initiation of Service — Upon initial application, the registration of a
       Nasdaq index options market maker in a Nasdaq index options series shall be
       NASD [Rules 0100-3420]                                                             272


       effective at the start of business on the second business day following receipt of
       his registration application by the Association; provided, however, said registra-
       tion is accepted by the Association. If said initial registration is received for a
       Nasdaq index options series which has not previously been authorized by the
       Association, the registered Nasdaq index options market maker’s registration
       shall be effective at the start of business on the first day that the Nasdaq options
       series is authorized for quotation by the Association; provided, however, said
       registration is accepted by the Association. A Nasdaq index options market
       maker shall commence market making and participation in the Service by initially
       contacting the Nasdaq Market Operations Center to obtain authorization for the
       trading of a particular Nasdaq index options series and identifying those termi-
       nals on which the Service information is to be displayed and thereafter by an
       appropriate keyboard entry which obligates him to execute transactions for at
       least one contract at the market maker’s displayed quotations so long as the
       market maker remains active. All entries shall be made in accordance with the
       requirements set forth in the User Guide.
1298           (i)(1) Withdrawal Procedure for Nasdaq Index Options Market Makers —
       With the approval of the Association, a registered Nasdaq index options market
       maker may suspend its quotations in a Nasdaq index options series for a
       specified period of time upon a showing that it is seriously impaired in its ability to
       enter quotations, or, in the case of a contemplated financing in the underlying
       security, the presence of statutory prohibitions or restrictions, or such other
       reason acceptable to the Association.
1299           (i)(2) In the event of a malfunction in the Nasdaq index options market
       maker’s equipment rendering on-line communications with the Service inopera-
       ble, the Nasdaq index options market maker is obligated to immediately contact
       the Nasdaq Market Operations Center by telephone to request withdrawal from
       the Service. Nasdaq operational personnel will in turn enter the withdrawal notifi-
       cation from a supervisory terminal. Such manual intervention, however, will take
       a certain period of time for completion and any transaction occurring prior to the
       effectiveness of the withdrawal shall remain the responsibility of the withdrawing
       market maker.
1300          (i)(3) A registered Nasdaq index options market maker who suspends its
       quotations in a Nasdaq index options series pursuant to subparagraphs (1) and
       (2) above may not re-enter quotations in such series during the same trading day
       without the prior approval of the Association.
1301           (j) Voluntary Termination — A registered Nasdaq index options market
       maker may voluntarily terminate its registration as to any Nasdaq options series
       by withdrawing its quotations from the Service without prior approval of the
       Association, subject to the conditions set forth in Rules 2875 and 2876. Such
       Nasdaq index options market maker may, by making application to the Associa-
       tion under the procedures and requirements set forth in this Rule, re-register as a
       Nasdaq index options market maker in a Nasdaq options series in which his
       registration is terminated.
1302          (k) A Nasdaq index options market maker withdrawing option quotations
       from the Nasdaq Index Options Service for any reason has a specific obligation
       to monitor his status to assure that a withdrawal has in fact occurred. Any
       NASD [Rules 0100-3420]                                                         273


       transaction occurring prior to the effectiveness of the withdrawal shall remain the
       responsibility of the withdrawing market maker.
1303           (l) Suspension and Termination of a Registered Nasdaq Index Options
       Market Maker’s Authority to Enter Quotations by Action of the Association — The
       Association may, pursuant to provisions specified in the Code of Procedure as
       set forth in the Rule 9000 Series, suspend, condition or terminate a registered
       index options market maker’s authority to enter quotations on one or more series
       of Nasdaq index options for violations of applicable Rules of the Association.
1304           (m)(1) Termination of Service on the Failure to Promptly Pay Fines and
       Assessments — The Association, upon notice, may terminate service on any
       level of Nasdaq Index Options Service for failure of a subscriber to maintain the
       standards of availability specified in this Rule for such service or to pay the
       Service operator for services rendered.
1305          (m)(2) Any member which is a respondent in a complaint pursuant to any
       Rule of the Association is required promptly to pay any fine or costs imposed to
       the Treasurer of the Association. In the event that the respondent fails to do so,
       the Association may, after ten business days notice in writing to such res-
       pondent, suspend his authority to enter options quotations into or receive options
       quotations from Level 2 and 3 of the Nasdaq Index Options Services.
       [Added eff. Sept. 13, 1985; amended eff. Oct. 9, 1985; amended by SR-NASD-
       94-48 eff. Nov. 2, 1994.]
       2874. Character of Index Options Quotations Entered Into the Nasdaq
             Index Options Service by All Nasdaq Index Options Market Makers
1306           (a) All bids or offers for Nasdaq index options shall be for at least one
       option contract or the minimum unit of trading.
1307           (b) All bids or offers for Nasdaq index options shall be expressed in terms
       of the applicable index multiplier (e.g., a bid of five for a Nasdaq index option
       having an index multiplier of $100 shall represent a bid to pay a premium of $500
       for an option contract).
1308           (c) All bids or offers for a Nasdaq index option contract for which The
       Options Clearing Corporation has established an adjusted unit of trading in
       accordance with paragraphs (c) and (d) of Section 11 of Article VI of the OCC’s
       By-Laws shall be expressed in terms of dollars per the appropriate fractional part
       of the total securities and/or other property constituting such adjusted unit of
       trading.
1309           (d) A registered Nasdaq index options market maker who receives a buy
       or sell order must execute a trade for at least one contract at his quotation as
       they appear on the Nasdaq CRT screen at the time of receipt of any such buy or
       sell order. Each quotation entered by a registered Nasdaq index options market
       maker must be reasonably related to the prevailing market.
1310          (e) A registered Nasdaq index options market maker will be permitted to
       enter a one-sided quotation (0-1/16) with respect to those options which have no
       present market value.
1311          (f) Crossed Markets - A registered Nasdaq index options market maker
       shall not be permitted, except under extraordinary circumstances, to enter
       NASD [Rules 0100-3420]                                                             274


       quotations into the Nasdaq Index Options Service if (1) the bid quotation entered
       is greater than the ask quotation of another registered market maker in the same
       options series or (2) the asked quotation is less than the bid quotation of another
       registered market maker in the same options series.
1312          (g) Quote Spread Parameters — A registered Nasdaq index options
       market maker shall not be permitted, except under extraordinary circumstances,
       to enter index option quotations into the Nasdaq Index Options Service if the
       spread between the market maker’s bid and ask exceeds the following
       parameters:
              (1) 1/4 of $1, if the member’s bid price is $.50 or less;
              (2) 1/2 of $1, if the bid price is more than $.50 but does not exceed $10;
              (3) 3/4 of $1, if the bid price is more than $10 but does not exceed $20; or
              (4) $1, if the bid price is more than $20;
1313          providing, however, that the allowable quote spread differentials for the
       longest term options series open for trading in each option class shall be twice
       the amounts stated in subparagraphs (1) through (4) above.
1314           (h) Except under extraordinary circumstances, a registered Nasdaq index
       options market maker shall not be permitted to enter on an intra-day basis a bid
       quotation more than $1 lower and/or an offering more than $1 higher than the
       last reported transaction for the particular index option contract. However, this
       standard shall not ordinarily apply if the price per share (or other unit of trading of
       the underlying index value has changed since the last preceding transaction for
       the particular option contract, in which event a market maker may then bid no
       lower than or offer no more than $1 plus the aggregate change in the price per
       unit of trading) of the underlying index value since the time of the last preceding
       transaction for the particular index option contract. Nothing in this paragraph shall
       alter the maximum bid-ask differential established by paragraph (g) above.
1315           (i) Whenever, in the judgment of the Association, the interest of main-
       taining a fair and orderly market so requires, the Association may waive the
       requirements of paragraph (h) above on a case by case basis.
1316          (j) When unusual trading conditions exist, and the interest of maintaining
       a fair and orderly market, the Association may waive the requirements of
       paragraph (g) above in those option series 10 or more points in the money to
       allow market makers to make bid/ask differentials as wide as the quotation in the
       primary market as determined by the inside quotation displayed on Nasdaq.
       Such waiver shall not automatically carry over from one day to the next.
       [Added eff. Sept. 13, 1985; amended by SR-NASD-94-48 eff. Nov. 2, 1994.]
       2875. Commitment Rules Applicable to Options Market Makers in Nasdaq
             Index Options
1317          (a) Commitment Rule for Index Options Market Makers. A market maker
       in a Nasdaq index option, unless excused from entering quotations pursuant to
       Rule 2873(i) shall, during normal options business hours, continuously quote all
       options series in such index option through the expiration of the longest term
       index options authorized for trading at the time the member commences such
       NASD [Rules 0100-3420]                                                        275


       market making. Failure to abide by this commitment shall cause the index
       options market maker to be subject to the sanctions contained in Rule 2876.
1318          (b) The following examples illustrate the commitment rule for index option
       market makers established by this Rule.
              (1) Member A is authorized as a Nasdaq index options market maker
              prior to the expiration of January Nasdaq-100 Index® Options. Member A
              is thus obligated to continuously quote all series of Nasdaq-100 put and
              call options authorized for trading in the January, February and March
              expirations through the expiration of the March options.
              (2) Member B is authorized as a market maker in Nasdaq-100 Index®
              Options at the time these options are authorized for the Nasdaq Options
              Program, but prior to the commencement of trading in these index
              options. The first authorized expiration cycle in Nasdaq-100 Index options
              will consist of options expiring in April, May and June with trading to
              commence in March. Member B would be obligated to continuously quote
              all authorized Nasdaq-100 Index option series from the commencement
              of trading in such options in March through the expiration of June
              Nasdaq-100 Index options.
       [Added eff. Sept. 13, 1985.]
       2876. Sanctions Applicable to Nasdaq Index Options Market Makers
1319           (a) A registered Nasdaq market maker in index options whose quotation
       for any option series in which the member is a market maker is withdrawn without
       the approval of the Association shall, at or before the daily close of the Nasdaq
       Index Options Service, have its registration terminated in all Nasdaq index
       options series covering the same underlying index as that for which option
       quotations were suspended by the member, subject, however, to the re-
       registration procedures set forth in paragraph (b) below.
1320            (b) A Nasdaq index options market maker in index options whose regis-
       tration in options classes is terminated pursuant to paragraph (a) above may, by
       making application to the Association under the procedures and requirements set
       forth in Rule 2873, re-register as a Nasdaq index options market maker in any
       Nasdaq index options series in the options classes in which his registration was
       terminated pursuant to paragraph (a) above providing, however, that the
       Association shall not grant effectiveness to such registration until the near-term
       options and those in the following expiration cycle have expired.
1321         (c) The following example illustrates the sanction for index options market
       makers established by paragraph (a) above.
              (1) Market Maker A, without approval of the Association, withdraws quota-
              tions from the Nasdaq Index Options Service for a series of Nasdaq-100
              Index® options causing the member’s registration in all Nasdaq-100
              Index options series to be terminated pursuant to paragraph (a) above.
              (2) At the time Market Maker A’s registration is terminated, January,
              February and March Nasdaq-100® Index options are trading. Pursuant to
              paragraph (b), any application by member A to again register as a market
              maker in Nasdaq-100 Index® options would not be granted effectiveness
       NASD [Rules 0100-3420]                                                           276


              by the Association until the expiration of the February Nasdaq-100 Index
              options.
1322           (d) A registered market maker in Nasdaq index options who withdraws
       index options quotations from the Nasdaq Index Options Service in any options
       series without prior authorization during the 15 business days preceding the
       expiration of the near-term options on the same underlying index may be
       deemed to be in violation of Rule 2110.
       [Added eff. Sept. 13, 1985.]
       2877. Requirements Applicable to Nasdaq Index Options Order Entry
             Firms
1323           (a) Participation in the Nasdaq Index Options Service as an order entry
       firm requires current registration as such with the Association. Such registration
       shall be conditioned upon the order entry firm’s initial and continuing compliance
       with the following requirements:
              (1) Execution of a Nasdaq Index Options Service participant application
              agreement with the Association;
              (2) membership in, or a clearing arrangement with, a member of The
              Options Clearing Corporation;
              (3) compliance with all applicable rules and operating procedures of the
              Association and the Commission;
              (4) maintenance of the physical security of the equipment located on the
              premises of the Nasdaq index options order entry firm to prevent the
              unauthorized entry of information into the Nasdaq Index Options Service;
              and
              (5) acceptance and settlement of each trade that the Service identifies as
              having been effected by such Nasdaq index options order entry firm or, if
              settlement is to be made through another clearing member, guarantee of
              the acceptance and settlement of such identified trade by the clearing
              member on the regularly scheduled settlement date.
1324           (b) The registration required hereunder will apply solely to the qualifica-
       tion of a participant to participate in the Nasdaq Index Options Service. Such
       registration shall not be conditioned upon registration in any particular eligible or
       active Nasdaq index options contracts.
1325          (c) Each participant shall be under a continuing obligation to inform the
       Association of non-compliance with any of the registration requirements set forth
       above.
1326            (d) Upon the effectiveness of registration as a Nasdaq index options order
       entry firm, the participant may commence activity for entry of orders, as applica-
       ble. The operating hours of the Nasdaq Index Options Service are currently 9:30
       a.m. to 4:10 p.m. (Eastern Time), but may be modified by the Association. The
       extent of participation in Nasdaq by a Nasdaq index options order entry firm shall
       be determined solely by the firm in the exercise of its ability to enter orders into
       Nasdaq.
       NASD [Rules 0100-3420]                                                           277


1327           (e) Market orders shall not be permitted in the Nasdaq Index Options
       Service. All orders entered into the Service other than accommodation transac-
       tions shall be priced and all orders shall be directed to a specified Nasdaq index
       options market maker. Nasdaq index options order entry firms will be imme-
       diately notified on the terminal screen and printer, if requested, of the execution
       or rejection of an order entered into via OCT.
1328           (f) If a Nasdaq index options order entry firm or clearing member acting
       on his behalf, is reported by the Service to clearing at the close of any trading
       day, or shown by the activity reports generated by the Service as constituting a
       side of a Nasdaq index option trade, such order entry firm or clearing member
       acting on his behalf, shall honor such trade on the scheduled settlement date.
1329           (g) Failure by a Nasdaq index options order entry firm to comply with any
       of the Rules or registration requirements applicable to the Service identified
       herein shall subject such participant to censure, fine, suspension or revocation of
       its registration as a Nasdaq index options order entry and/or market maker firm
       or any other fitting sanction under the Rules of the Association.
       [Added eff. Sept. 13, 1985; amended eff. Oct. 9, 1985.]
       2878. Transaction Reporting and Other Reporting Requirements
1330            (a) All Nasdaq index options participants, upon becoming so registered
       and qualified, shall have access to, and be required to utilize, the Order Confir-
       mation Transaction (OCT) and Internalized Trade Transaction (ITT) trade
       reporting systems established by the Association for Nasdaq index options
       transactions. Such trade reporting systems are designed to “lock-in” all Nasdaq
       index options transactions. Thus these systems serve trade comparison and
       clearing functions as well as trade reporting functions, and require the participa-
       tion of both the order entry and the market making firms in the reporting process.
       Because these procedures, which are detailed in the User Guide, vary from
       those applying to transaction reporting in other Nasdaq securities, it is imperative
       that all Nasdaq index options participants become familiar with and comply with
       the provisions of this Rule. Failure on the part of a Nasdaq index options
       participant to comply with Nasdaq index options reporting provisions may subject
       participants to censure, fine, suspension or revocation of registration as a
       Nasdaq index options market maker and/or order entry firm or any other fitting
       sanction under the Rules of the Association.
1331            (b) Order Confirmation Transaction (OCT) — Nasdaq index options order
       entry firms shall enter an OCT into the Service promptly upon the execution of
       their order. Upon the acceptance by a market maker of an OCT, the Service shall
       automatically forward a trade report to the Options Price Reporting Authority
       (OPRA). Nasdaq index options market makers shall accept an OCT via terminal
       entry within two minutes as specified by the Association, or the OCT shall be
       “timed-out,” in which case the Service will notify the order entry firm of the market
       maker’s non-acceptance of the order. The order entry firm will also be notified if
       the market maker affirmatively rejects the order via terminal entry. If the market
       maker wishes to subsequently confirm an OCT which has been timed-out or
       rejected, a new OCT must be entered into the Service by the order entry firm with
       a late trade indicator. Once accepted, an OCT may only be canceled or corrected
       by mutual consent of the market maker and order entry firm.
       NASD [Rules 0100-3420]                                                         278


1332           (c) Unsolicited Orders — Nasdaq index options market makers are not
       obligated to accept an OCT which is unsolicited but, if they choose to do so, must
       accept the order within two minutes of its receipt as specified by the Association.
       Upon the acceptance of an unsolicited OCT order by a Nasdaq index options
       market maker, the system will automatically forward a trade report to OPRA.
       Once accepted by the market maker, the OCT may only be canceled or
       corrected with the mutual consent of the market maker and the order entry firm.
1333           (d) Internalized Trade Transaction (ITT) — Nasdaq Index Options Service
       participants shall, where appropriate, enter an ITT message into the Service
       within two minutes of the execution of an internalized trade. Upon the entry of an
       ITT message, the Service shall automatically forward a trade report to OPRA. An
       ITT may be subsequently canceled or corrected by the member.
1334           (e) A Nasdaq index options order entry firm shall transmit OCT and ITT
       for transactions in Nasdaq index options other than cabinet transactions at the
       price recorded on the trade ticket exclusive of commission, taxes or other
       charges.
1335          (f) Nasdaq index options participants may effect cabinet transactions in
       any class of options contracts authorized for trading via the Service at a price of
       $1.00 per contract, providing such price is reasonably related to the prevailing
       market for the option. In reporting cabinet transactions, participants shall
       designate these transactions as such with the appropriate indicator on OCT or
       ITT entered into the Service. Cabinet transactions will not be disseminated to
       OPRA but will be reported to OCC for clearance.
1336          (g) Weekly and/or Monthly Reports — A member shall report weekly
       and/or monthly to the Association such data on Nasdaq index options quoted in
       the Service as the Board of Governors shall require. Such report shall be on a
       form prescribed by the Association.
1337          (h) Trade Tickets — All trade tickets on transactions in Nasdaq index
       options and authorized underlying securities must indicate the time the order was
       received and the time the order was executed or canceled.
       [Added eff. Sept. 13, 1985.]
       2879. Authorization of Nasdaq Index Option Market Making
1338          (a) The Association shall not authorize index option market making in any
       options series unless, at the time such market making activity is to commence,
       there are a minimum of five registered Nasdaq index options market makers in
       the index option.
1339           (b) Once market making has commenced in any class of Nasdaq index
       options, the Association shall withdraw approval of further market making activity
       with respect to any succeeding options series to be opened in that Nasdaq index
       option if there are fewer than three registered market makers in the index option.
1340          (c) Whenever the Association shall withdraw its approval for index option
       market making activity in a particular Nasdaq index options series pursuant to
       paragraph (b) above, it shall not reinstate such market making until the provi-
       sions of paragraph (a) above have been satisfied.
       [Added eff. Sept. 13, 1985.]
       NASD [Rules 0100-3420]                                                         279


       2880. Nasdaq Index Option Contracts Authorized for Trading
1341           The Association may from time to time approve for display on Nasdaq put
       option contracts and call option contracts in respect of underlying indexes which
       have been selected by the Association and approved for trading. All such option
       contracts shall be designated as to the type of option, the underlying index, the
       expiration month and the exercise price. Only quotations in respect to option con-
       tracts in a class or series of options approved by the Association and currently
       open for display on the Service may be quoted by a registered Nasdaq index
       options market marker on the Nasdaq Index Options Service.
       [Added eff. Sept. 13, 1985.]
       2881. Series of Nasdaq Index Options for Trading
1342           (a) Nasdaq Index Options — After a particular class of index options has
       been approved for display on the Service and quotation thereon by registered
       Nasdaq index options market makers, the Association shall from time to time
       open for trading series of options therein. Prior to the opening of trading in any
       series of options the Association shall fix the expiration month and exercise price
       of options contracts included in each such series.
              (1) Expiration Months — At the commencement of trading in a particular
              class of Nasdaq index options, series of options having three different
              expiration months will normally be opened. Such expirations shall occur in
              consecutive months. The first such expiration will occur in the month
              following the month in which such options are introduced, the second
              expiration will occur in the month following the first, and the third
              expiration will occur in the month following the second. Additional series
              of index options of the same class may be opened for trading at or about
              the time a prior series expires and the expiration month of each such
              series will normally be approximately three months following the opening
              of such series.
              (2) Exercise Prices — The procedures for fixing the exercise or strike
              price of each series of index options opened for trading shall be as
              follows:
                     (A) Strike prices shall be fixed at an index value which is an
              integer.
                     (B) Regardless of the value of an index, the interval between strike
              prices will be $5.00.
                      (C) New series of index option contracts may be added up to the
              fifth business day prior to expiration.
                      (D) When new series of index option contracts within a new
              expiration cycle are opened for trading, two strike prices above and two
              strike prices below the current index value may be added.
                      (E) When the value of the index underlying a class of index options
              reaches a strike price, the Association may add one or more additional
              strike prices such that there are at least two strike prices above and two
              strike prices below the strike price which has been reached.
       NASD [Rules 0100-3420]                                                            280


                     (F) In unusual market conditions, the Association may add additio-
              nal series of index option contracts up to three strike prices above and
              three strike prices below the current index price.
1343             (b) Specification Adjustments — The unit of trading and the exercise price
       initially established for index option contracts of a particular series are subject to
       adjustment in accordance with the rules of The Options Clearing Corporation.
       When such adjustment(s) have been determined, announcement thereof shall be
       made by the Association and, effective as of the time specified in such
       announcement, the adjusted unit of trading and the adjusted exercise price shall
       be applicable with respect to all subsequent transactions in such series.
1344          (c) Contract Adjustments — Index option contracts shall be subject to
       adjustments in accordance with the rules of The Options Clearing Corporation.
1345          (d) Puts and Calls — When calls are first opened for trading on an
       underlying index stock group, the Association may open a series of puts
       corresponding to each series of calls open or to be opened for trading on the
       same underlying index stock group.
       [Added eff. Sept. 13, 1985.]
       2882. Unit of Trading
1346           The unit of trading in each series of options displayed on the Service shall
       be the unit of trading established by The Options Clearing Corporation pursuant
       to the rules of The Options Clearing Corporation.
       [Added eff. Sept. 13, 1985.]
       2883. Suspension of Authorization of Nasdaq Index Option Contracts
1347          (a) The Association shall have the authority to suspend trading in Nasdaq
       index option contracts by either one or more market maker or all market makers
       where it deems it necessary and appropriate:
              (1) to prevent fraudulent and manipulative acts and practices;
              (2) to promote just and equitable principles of trade; or
              (3) to prevent excessive speculation and promote the likelihood of a
              competitive and orderly market.
1348          (b) The Association shall suspend trading in Nasdaq index options
       contracts by all market makers:
              (1) if the underlying index is not being computed or disseminated; or
              (2) if trading is halted or suspended in underlying stocks that collectively
              contribute (A) 20% of the current index group value (in the case of index
              stock groups comprised of more than 50 stocks); and (B) 10% of the
              current index group value (in the case of index stock groups comprised of
              50 or fewer stocks).
       [Added eff. Sept. 13, 1985.]
       2884. Trade Comparison Procedures for Nasdaq Index Options
1349           (a) Scope and Applicability — All transactions in Nasdaq index options
       shall be reported to the Association pursuant to reporting procedures established
       NASD [Rules 0100-3420]                                                          281


       by the Association. The Association shall report all compared transactions to The
       Options Clearing Corporation for clearance and settlement. All compared tran-
       sactions in Nasdaq options which are cleared and settled through the facilities of
       The Options Clearing Corporation shall be subject to the rules of The Options
       Clearing Corporation.
1350           (b) Responsibility of Clearing Members — Every member which is a
       member of The Options Clearing Corporation (a “clearing member”) shall be
       responsible for the clearance and settlement of every Nasdaq index option
       transaction to which it is a party and for each Nasdaq index option transaction of
       a member for which it acts as correspondent and/or clearing agent pursuant to
       agreement. Unless specifically authorized by The Options Clearing Corporation,
       no member shall be permitted to have more than one such agreement with a
       clearing member in effect at any time.
1351          (c) Reporting of Clearing Information
              (1) Filing of Trade Information — Each Nasdaq index option participant
              shall individually report each transaction in a Nasdaq index option, for
              which it has a responsibility to report, each business day to the Associa-
              tion via OCT or ITT in the manner specified by the Association.
              (2)(A) The Association will provide each Nasdaq index options participant
              with the opportunity to review on trade date OCT and ITT transactions to
              which the participant is a party.
              (2)(B) All OCT orders which are accepted by the contra party and all ITT
              which have not been canceled shall be considered to be compared
              trades, i.e., trades where the trade information agrees as to the identity of
              the other party to the transaction, the type of option contract, the
              underlying index, the exercise price, the expiration month, the number of
              options contracts, the amount of the premium, the designation of the
              parties as purchaser and writer, respectively, and the trade date, if other
              than the date of submission.
1352          (3) Verification of Nasdaq Index Options Transactions — Each participant
       shall promptly review each OCT or ITT execution report received and report
       corrected trade information to the Association as soon as possible, but in any
       event, not later than the hour which shall be from time to time prescribed by the
       Association. It shall be the sole responsibility of participants to review the
       accuracy of all reports promptly upon receipt, and the Association shall not
       assume any responsibility for reviewing such reports for accuracy or for making
       any corrections not reported by a participant.
1353          (4) Reporting of Compared Trades to The Options Clearing Corporation—
       On each business day, at or prior to such time as may be prescribed by The
       Options Clearing Corporation, the Association shall furnish The Options Clearing
       Corporation a report of each clearing member’s compared trades as reported to
       the Association on that day. Only those trades which have been confirmed by
       both parties shall be furnished by the Association to The Options Clearing
       Corporation, and the Association shall assume no responsibility with respect to
       any unaccepted order nor for any delays or errors in the reporting of trades.
       [Added eff. Sept. 13, 1985.]
       NASD [Rules 0100-3420]                                                         282


       2885. Clearance and Settlement Procedures for Nasdaq Index Options
1354           (a)(1) Failure to Pay Premium — Whenever The Options Clearing
       Corporation shall reject a Nasdaq index option transaction because of the failure
       of a clearing member acting on behalf of the purchaser to pay the premium due
       thereon as required by the rules of The Options Clearing Corporation, the
       member acting as or on behalf of the seller (writer) shall have the right either to
       cancel the transaction by giving notices thereof to the defaulting clearing member
       or to enter into either a new opening writing transaction or closing sale transac-
       tion, as the case may be, in respect of the same Nasdaq index option contract
       that was the subject of the rejected Nasdaq index option transaction, charging
       any loss resulting therefrom (including any commissions paid or payable in
       connection with such new transaction) to the defaulting clearing member. Such
       action shall be taken on the day the Nasdaq index option transaction was
       rejected by The Options Clearing Corporation, unless the Association shall
       extend such time.
1355          (a)(2) In the event the rejected transaction involves a Nasdaq index
       option contract of a series in which trading has been terminated or suspended
       before a new Nasdaq index option transaction can be effected to establish the
       amount of loss, the member acting as or on behalf of the seller shall have a claim
       against the defaulting clearing member for the amount of the premium due
       thereon.
1356           (b) Index Option Contracts of Suspended Members — When announce-
       ment is made of the suspension from membership in the Association of a
       member, other than a clearing member of The Options Clearing Corporation (a
       “non-clearing member”), pursuant to the By-Laws of the Association, all open
       short positions in option contracts of such member and all open positions that are
       secured in full by a specific deposit or evidenced by an escrow receipt in
       accordance with the rules of The Options Clearing Corporation, shall be closed
       out without unnecessary delay by all members carrying such positions for the
       account of the suspended non-clearing member; provided, however, that upon
       any such suspension, the Association may, in its discretion and where it
       determines that such is necessary for the protection of investors, suspend the
       mandatory close-out provisions hereof and may, in its discretion and where it
       determines that such is necessary for the protection of investors, reinstate such
       provisions at such time as it may determine. No temporary suspension of the
       mandatory close-out provisions hereof shall relieve any suspended non-clearing
       member of its obligations or of any damages incurred by members carrying
       positions for the account of such suspended non-clearing member. Should an
       open short position or an open position resulting from an exercise of an option
       contract not be closed when required by this Rule, the price for the purpose of
       determining claims shall be fixed by the price current at the time when such
       position should have been closed under this Rule. When a member of The
       Options Clearing Corporation is suspended pursuant to the provisions of the By-
       Laws, the positions of such clearing member shall be closed out in accordance
       with the rules of The Options Clearing Corporation.
       [Added eff. Sept. 13, 1985.]
       NASD [Rules 0100-3420]                                                          283


       2900. RESPONSIBILITIES TO OTHER BROKERS OR DEALERS

              Cross Reference — Rule 2420, Dealing with Non-Members

       2910. Disclosure of Financial Condition to Other Members
1357           Any member of the Association who is a party to an open transaction or
       who has on deposit cash or securities of another member shall furnish upon
       written request of the other member a statement of its financial condition as
       disclosed in its most recently prepared balance sheet.

       3000. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS,
             EMPLOYEES, AND OTHERS’ EMPLOYEES

       3010. Supervision
              (a)     Supervisory System
1358            Each member shall establish and maintain a system to supervise the
       activities of each registered representative and associated person that is
       reasonably designed to achieve compliance with applicable securities laws and
       regulations, and with the Rules of this Association. Final responsibility for proper
       supervision shall rest with the member. A member’s supervisory system shall
       provide, at a minimum, for the following:
              (1) The establishment and maintenance of written procedures as required
              by paragraphs (b) and (c) of this Rule.
              (2) The designation, where applicable, of an appropriately registered
              principal(s) with authority to carry out the supervisory responsibilities of
              the member for each type of business in which it engages for which
              registration as a broker/dealer is required.
              (3) The designation as an office of supervisory jurisdiction (OSJ) of each
              location that meets the definition contained in paragraph (g) of this Rule.
              Each member shall also designate such other OSJs as it determines to
              be necessary in order to supervise its registered representatives and
              associated persons in accordance with the standards set forth in this
              Rule, taking into consideration the following factors:
                     (A) whether registered persons at the location engage in retail
              sales or other activities involving regular contact with public customers;
                      (B) Whether a substantial number of registered persons conduct
              securities activities at, or are otherwise supervised from, such location;
                    (C) whether the location is geographically distant from another
              OSJ of the firm;
                     (D) whether the member’s registered persons are geographically
              dispersed; and
                     (E) whether the securities activities at such location are diverse
              and/or complex.
       NASD [Rules 0100-3420]                                                         284


              (4) The designation of one or more appropriately registered principals in
              each OSJ, including the main office, and one or more appropriately regis-
              tered representatives or principals in each non-OSJ branch office with
              authority to carry out the supervisory responsibilities assigned to that
              office by the member.
              (5) The assignment of each registered person to an appropriately regis-
              tered representative(s) and/or principal(s) who shall be responsible for
              supervising that person’s activities.
              (6) Reasonable efforts to determine that all supervisory personnel are
              qualified by virtue of experience or training to carry out their assigned
              responsibilities.
              (7) The participation of each registered representative, either individually
              or collectively, no less than annually, in an interview or meeting
              conducted by persons designated by the member at which compliance
              matters relevant to the activities of the representative(s) are discussed.
              Such interview or meeting may occur in conjunction with the discussion of
              other matters and may be conducted at a central or regional location or at
              the representative’s(‘) place of business.
              (8) Each member shall designate and specifically identify to the Associa-
              tion one or more principals who shall review the supervisory system,
              procedures, and inspections implemented by the member as required by
              this Rule and take or recommend to senior management appropriate
              action reasonably designed to achieve the member’s compliance with
              applicable securities laws and regulations, and with the Rules of this
              Association.
              (b)     Written Procedures
1359            (1) Each member shall establish, maintain, and enforce written procedu-
       res to supervise the types of business in which it engages and to supervise the
       activities of registered representatives and associated persons that are reasona-
       bly designed to achieve compliance with applicable securities laws and regula-
       tions, and with the applicable Rules of this Association.
1360           (2)(i) Tape recording of conversations — Each member that either is
       notified by NASD Regulation or otherwise has actual knowledge that it meets one
       of the criteria in paragraph (b)(2)(viii) relating to the employment history of its
       registered persons at a Disciplined Firm as defined in paragraph (b)(2)(x) shall
       establish, maintain, and enforce special written procedures for supervising the
       telemarketing activities of all of its registered persons.
1361           (2)(ii) The member must establish the supervisory procedures required by
       this paragraph within 30 days of receiving notice from NASD Regulation or
       obtaining actual knowledge that it is subject to the provisions of this paragraph.
1362          (2)(iii) The procedures required by this paragraph shall include tape-
       recording all telephone conversations between the member’s registered persons
       and both existing and potential customers.
1363          (2)(iv) The member shall establish reasonable procedures for reviewing
       the tape recordings made pursuant to the requirements of this paragraph to
       ensure compliance with applicable securities laws and regulations and applicable
       NASD [Rules 0100-3420]                                                         285


       rules of this Association. The procedures must be appropriate for the member’s
       business, size, structure, and customers.
1364          (2)(v) All tape recordings made pursuant to the requirements of this
       paragraph shall be retained for a period of not less than three years from the
       date the tape was created, the first two years in an easily accessible place. Each
       member shall catalog the retained tapes by registered person and date.
1365            (2)(vi) Such procedures shall be maintained for a period of two years from
       the date that the member establishes the procedures required by the provisions
       of this paragraph.
1366          (2)(vii) By the 30th day of the month following the end of each calendar
       quarter, each member firm subject to the requirements of this paragraph shall
       submit to the Association a report on the member’s supervision of the tele-
       marketing activities of its registered persons.
1367          (2)(viii) The following members shall be required to adopt special supervi-
       sory procedures over the telemarketing activities of their registered persons:
              ·   A firm with at least five but fewer than ten registered persons, where
                  40% or more of its registered persons have been employed by one or
                  more Disciplined Firms within the last three years;
              ·   A firm with at least ten but fewer than twenty registered persons,
                  where four or more of its registered persons have been employed by
                  one or more Disciplined Firms within the last three years;
              ·   A firm with at least twenty registered persons, where 20% or more of
                  its registered persons have been employed by one or more
                  Disciplined Firms within the last three years.
1368          (2)(ix) For purposes of this Rule, the term “registered person” means any
       person registered with the Association as a representative, principal, or assistant
       representative pursuant to the Rule 1020, 1030, 1040, and 1110 Series or
       pursuant to Municipal Securities Rulemaking Board (“MSRB”) Rule G-3.
1369           (2)(x) For purposes of this Rule, the term “disciplined firm” means a
       member that, in connection with sales practices involving the offer, purchase, or
       sale of any security, has been expelled from membership or participation in any
       securities industry self-regulatory organization or is subject to an order of the
       Securities and Exchange Commission revoking its registration as a broker/
       dealer.
1370           (2)(xi) Pursuant to the Rule 9600 Series, the Association may exempt any
       member unconditionally or on specified terms and conditions from the require-
       ments of this paragraph upon a satisfactory showing that the member’s supervi-
       sory procedures ensure compliance with applicable securities laws and regula-
       tions and applicable rules of the Association.
1371           (3) The member’s written supervisory procedures shall set forth the
       supervisory system established by the member pursuant to paragraph (a) above,
       and shall include the titles, registration status and locations of the required
       supervisory personnel and the responsibilities of each supervisory person as
       these relate to the types of business engaged in, applicable securities laws and
       regulations, and the Rules of this Association. The member shall maintain on an
       NASD [Rules 0100-3420]                                                          286


       internal record the names of all persons who are designated as supervisory
       personnel and the dates for which such designation is or was effective. Such
       record shall be preserved by the member for a period of not less than three
       years, the first two years in an easily accessible place.
1372            (4) A copy of a member’s written supervisory procedures, or the relevant
       portions thereof, shall be kept and maintained in each OSJ and at each location
       where supervisory activities are conducted on behalf of the member. Each
       member shall amend its written supervisory procedures as appropriate within a
       reasonable time after changes occur in applicable securities laws and regula-
       tions, including the Rules of this Association, and as changes occur in its super-
       visory system, and each member shall be responsible for communicating
       amendments through its organization.
              (c)     Internal Inspections
1373           Each member shall conduct a review, at least annually, of the businesses
       in which it engages, which review shall be reasonably designed to assist in
       detecting and preventing violations of and achieving compliance with applicable
       securities laws and regulations, and with the Rules of this Association. Each
       member shall review the activities of each office, which shall include the periodic
       examination of customer accounts to detect and prevent irregularities or abuses
       and at least an annual inspection of each office of supervisory jurisdiction. Each
       branch office of the member shall be inspected according to a cycle which shall
       be set forth in the firm’s written supervisory and inspection procedures. In
       establishing such cycle, the firm shall give consideration to the nature and
       complexity of the securities activities for which the location is responsible, the
       volume of business done, and the number of associated persons assigned to the
       location. Each member shall retain a written record of the dates upon which each
       review and inspection is conducted.
              (d)     Review of Transactions and Correspondence
1374            (1) Supervision of Registered Representatives — Each member shall
       establish procedures for the review and endorsement by a registered principal in
       writing, on an internal record, of all transactions and for the review by a regis-
       tered principal of incoming and outgoing written and electronic correspondence
       of its registered representatives with the public relating to the investment banking
       or securities business of such member. Such procedures should be in writing and
       be designed to reasonably supervise each registered representative. Evidence
       that these supervisory procedures have been implemented and carried out must
       be maintained and made available to the Association upon request.
1375           (2) Review of Correspondence — Each member shall develop written
       procedures that are appropriate to its business, size, structure, and customers for
       the review of incoming and outgoing written (i.e., non-electronic) and electronic
       correspondence with the public relating to its investment banking or securities
       business, including procedures to review incoming, written correspondence
       directed to registered representatives and related to the member’s investment
       banking or securities business to properly identify and handle customer com-
       plaints and to ensure that customer funds and securities are handled in
       accordance with firm procedures. Where such procedures for the review of
       correspondence do not require review of all correspondence prior to use or distri-
       bution, they must include provision for the education and training of associated
       NASD [Rules 0100-3420]                                                         287


       persons as to the firm’s procedures governing correspondence; documentation of
       such education and training; and surveillance and follow-up to ensure that such
       procedures are implemented and adhered to.
1376           (3) Retention of correspondence — Each member shall retain corres-
       pondence of registered representatives relating to its investment banking or
       securities business in accordance with Rule 3110. The names of the persons
       who prepared outgoing correspondence and who reviewed the correspondence
       shall be ascertainable from the retained records and the retained records shall be
       readily available to the Association, upon request.
              (e)     Qualifications Investigated
1377           Each member shall have the responsibility and duty to ascertain by inves-
       tigation the good character, business repute, qualifications, and experience of
       any person prior to making such a certification in the application of such person
       for registration with this Association. Where an applicant for registration has
       previously been registered with the Association, the member shall obtain from
       the Central Registration Depository or from the applicant a copy of the Uniform
       Termination Notice of Securities Industry Registration (Form U-5) filed with the
       Association by such person’s most recent previous NASD member employer,
       together with any amendments thereto that may have been filed pursuant to
       Article V, Section 3 of the Association’s By-Laws. The member shall obtain the
       Form U-5 as required by this Rule no later than 60 days following the filing of the
       application for registration or demonstrate to the Association that it has made
       reasonable efforts to comply with the requirement. A member receiving a Form
       U-5 pursuant to this Rule shall review the Form U-5 and any amendments
       thereto and shall take such action as may be deemed appropriate.
              (f)     Applicant’s Responsibility
1378           Any applicant for registration who receives a request for a copy of his or
       her Form U-5 from a member pursuant to this Rule shall provide such copy to the
       member within two business days of the request if the Form U-5 has been
       provided to such person by his or her former employer. If a former employer has
       failed to provide the Form U-5 to the applicant for registration, such person shall
       promptly request the Form U-5, and shall provide it to the requesting member
       within two (business days of receipt thereof. The applicant shall promptly provide
       any subsequent amendments to a Form U-5 he or she receives to the requesting
       member.
              (g)     Definitions
1379          (1) “Office of Supervisory Jurisdiction” means any office of a member at
       which any one or more of the following functions take place:
              (A) order execution and/or market making;
              (B) structuring of public offerings or private placements;
              (C) maintaining custody of customers’ funds and/or securities;
              (D) final acceptance (approval) of new accounts on behalf of the member;
              (E) review and endorsement of customer orders, pursuant to paragraph
              (d) above;
       NASD [Rules 0100-3420]                                                         288


              (F) final approval of advertising or sales literature for use by persons
              associated with the member, pursuant to Rule 2210(b)(1); or
              (G) responsibility for supervising the activities of persons associated with
              the member at one or more other branch offices of the member.
1380           (2) “Branch Office” means any location identified by any means to the
       public or customers as a location at which the member conducts an investment
       banking or securities business, excluding:
              (A) any location identified in a telephone directory line listing or on a
              business card or letterhead, which listing, card, or letterhead also sets
              forth the address and telephone number of the branch office or OSJ of
              the firm from which the person(s) conducting business at the non-branch
              locations are directly supervised;
              (B) any location referred to in a member advertisement, as this term is
              defined in Rule 2210, by its local telephone number and/or local post
              office box provided that such reference may not contain the address of
              the non-branch location and, further, that such reference also sets forth
              the address and telephone number of the branch office or OSJ of the firm
              from which the person(s) conducting business at the non-branch location
              are directly supervised; or
              (C) any location identified by address in a member’s sales literature, as
              this term is defined in Rule 2210, provided that the sales literature also
              sets forth the address and telephone number of the branch office or OSJ
              of the firm from which the person(s) conducting business at the non-
              branch locations are directly supervised.
              (D) any location where a person conducts business on behalf of the
              member occasionally and exclusively by appointment for the convenience
              of customers, so long as each customer is provided with the address and
              telephone number of the branch office or OSJ of the firm from which the
              person conducting business at the non-branch location is directly
              supervised.
1381          (3) A member may substitute a central office address and telephone
       number for the supervisory branch office or OSJ locations referred to in para-
       graph (g)(2) above provided it can demonstrate to the Association’s District
       Office having jurisdiction over the member that it has in place a significant and
       geographically dispersed supervisory system appropriate to its business and that
       any investor complaint received at the central site is provided to and resolved in
       conjunction with the office or offices with responsibility over the non-branch
       business location involved in the complaint.
       [Amended eff. June 12, 1989; Apr. 30, 1992; amended by SR-NASD-97-41 eff.
       Sept. 4, 1997; amended by SR-NASD-97-24 eff. Feb. 15, 1998; amended by SR-
       NASD-98-10 postponed eff. date; amended by SR-NASD-98-31 eff. Apr. 7, 1998,
       postponed eff. date of provision in Notice to Members 98-11; amended by SR-
       NASD-98-45 postponed eff. date of provision in Notice to Members 98-11;
       amended by SR-NASD-98-86 eff. Nov. 19, 1998; amended by SR-NASD-98-52
       eff. March 15, 1999; amended by SR-NASD-98-69 eff. August 17, 1998;
       amended by SR-NASD-99-28 eff. Aug. 16, 1999.]
       NASD [Rules 0100-3420]                                                         289


       Selected Notices to Members: 86-65, 88-84, 89-34, 89-57, 92-18, 96-82, 98-11,
       99-03, 98-52.
              Selected SEC Decisions
              ·     Juan Carlos Schidlowski, SEC Rel. No. 34-23347 (1986).
              ·     Wedbush Securities, Inc. (f/k/a Wedbush Noble, Cooke, Inc.), SEC
                    Rel. No. 34-25504 (1988).
              ·     Seco Securities, Inc. and Stanley Richards, SEC Rel. No. 34-26054
                    (1988).

       3020. Fidelity Bonds
              (a)      Coverage Required
1382          Each member required to join the Securities Investor Protection Corpora-
       tion who has employees and who is not a member in good standing of the
       American Stock Exchange, Inc.; the Boston Stock Exchange; the Midwest Stock
       Exchange, Inc.; the New York Stock Exchange, Inc.; the Pacific Exchange, Inc.;
       the Philadelphia Stock Exchange, Inc.; or the Chicago Board Options Exchange
       shall:
              (1) Maintain a blanket fidelity bond, in a form substantially similar to the
              standard form of Brokers Blanket Bond promulgated by the Surety
              Association of America, covering officers and employees which provides
              against loss and has agreements covering at least the following:
                       (A) Fidelity
                       (B) On Premises
                       (C) In Transit
                       (D) Misplacement
                       (E) Forgery and Alteration (including check forgery)
                       (F) Securities Loss (including securities forgery)
                       (G) Fraudulent Trading
                     (H) Cancellation Rider providing that the insurance carrier will use
              its best efforts to promptly notify the National Association of Securities
              Dealers, Inc. in the event the bond is cancelled, terminated or
              substantially modified.
              (2) Maintain minimum coverage for all insuring agreements required in
              this paragraph (a) of not less than $25,000;
              (3) Maintain required minimum coverage for Fidelity, On Premises, In
              Transit, Misplacement and Forgery and Alteration insuring agreements of
              not less than 120% of its required net capital under SEC Rule 15c3-1 up
              to $600,000. Minimum coverage for required net capital in excess of
              $600,000 shall be determined by reference to the following table:
       NASD [Rules 0100-3420]                                                        290


                           Net Capital Requirement        Minimum Coverage
                           under SEC Rule 15c3-1
                             $600,001 - 1,000,000               750,000
                             1,000,001 - 2,000,000             1,000,000
                             2,000,001 - 3,000,000             1,500,000
                             3,000,001 - 4,000,000             2,000,000
                             4,000,001 - 6,000,000             3,000,000
                            6,000,001