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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
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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
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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.
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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).
NASD [Rules 0100-3420] 147
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
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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