NASD Notice to Members 98-47

Executive Summary Interpretive Material 2310-3 (IM-2310- NASD On May 29, 1998, the Securities and 3) describes members’ suitability obli- Exchange Commission (SEC) gation in making recommendations to approved amendments to National institutional customers. The primary Notice to Association of Securities Dealers, considerations under IM-2310-3 Inc. (NASD¨) Rule 3110 (the Books include the customer’s capability to and Records Rule) that (i) change evaluate risk independently and the Members the definition of “institutional account” extent to which individual judgment is to include the accounts of investment exercised when making investment 98-47 advisers that are now required to decisions. register with the states pursuant to the National Securities Markets Accounts Of Registered Improvement Act of 1996 (NSMIA), Investment Advisers and (ii) exclude certain customer SEC Approves Changes accounts from the requirement to NSMIA and new rules recently To Books And Records obtain certain tax and employment adopted by the SEC under the Requirements information from the customer. Investment Advisers Act of 1940 (Advisers Act) reallocated regulatory Questions concerning this Notice oversight of investment advisers may be directed to Joseph E. Price, between the SEC and the states. Counsel, Advertising/Investment Under the new rules, advisers to reg- Suggested Routing Companies Regulation, NASD Regu- istered investment companies and Senior Management lation, Inc., at (202) 728-8877 or those with assets under manage- Robert J. Smith, Assistant General ment of at least $25 million generally Advertising Counsel, Office of General Counsel, will register exclusively with the SEC. Continuing Education NASD RegulationSM, at (202) 728- Most others will register exclusively 8176. with the states. Corporate Finance Executive Representatives The Books and Records Rule pro- Government Securities Discussion vides that, for purposes of both the The Books and Records Rule Books and Records Rule and the Institutional requires that members obtain certain Suitability Rule, the term “institutional Insurance information for all accounts. The account” includes the account of an Internal Audit Rule requires that, for accounts other investment adviser registered with than institutional accounts and the SEC. Consequently, advisory Legal & Compliance accounts limited to money market accounts that were considered to be Municipal funds, members must make reason- “institutional accounts” when the able attempts to obtain: (i) a cus- Retail Customer Information provi- Mutual Fund tomer’s tax identification or social sion in the Books and Records Rule Operations security number; (ii) a customer’s was adopted became excluded from Options occupation and the name and the definition because they migrated address of the employer; and to state regulation under NSMIA. Registered Representatives (iii) information about whether the Registration customer is an associated person of The amendments take into account Research another member (Retail Customer the bifurcation of investment adviser Information). regulation between the SEC and the Syndicate states by changing the definition of Systems Similarly, NASD Conduct Rule 2310 “institutional account” in subpara- (Suitability Rule) requires members graph (c)(4) of the Books and Trading to make reasonable efforts to obtain Records Rule to include both invest- Training certain information, such as the cus- ment advisers required to register Variable Contracts tomer’s financial status and invest- with the SEC and those required to ment objectives, from retail customers register with the states. The amend- prior to the execution of a transaction. ments treat the state-regulated advi-

NASD Notice to Members 98-47 July 1998 353 sory accounts as “institutional in order to meet any other regulatory shares that are not recommended by accounts” for purposes of the Books obligations that may exist. the member or its associated per- and Records Rule and the Suitability sons, each member shall also make Rule. reasonable efforts to obtain, prior to Text Of New Rule the settlement of the initial transac- Accounts Limited To Mutual (Note: New language is underlined; deletions tion in the account, the following Fund Shares are bracketed.) information to the extent it is applicable to the account: A primary purpose of obtaining Retail 3100. Books and Records, and Customer Information is to help a Financial Condition (A) customer’s tax identification or member evaluate the suitability of a Social Security number; recommendation. NASD Regulation 3110. Books and Records has determined that the requirement (B) occupation of customer and to obtain Retail Customer Informa- (a) Requirements name and address of employer; and tion is burdensome and largely unnecessary as it applies to mem- Each member shall keep and pre- (C) whether customer is an associat- bers who distribute directly marketed serve books, accounts, records, ed person of another member; and mutual funds and other unsolicited memoranda, and correspondence in accounts that are limited to mutual conformity with all applicable laws, (3) for discretionary accounts, in fund shares and for which no recom- rules, regulations and statements of addition to compliance with subpara- mendations are made. With regard policy promulgated thereunder and graphs (1) and (2) above, and Rule to the requirement in the Books and with the Rules of this Association. 2510(b) of these Rules, the member Records Rule to obtain a customer’s shall: tax identification or social security (c) Customer Account Information number, the tax laws already impose (A) obtain the signature of each per- obligations on funds to obtain this Each member shall maintain son authorized to exercise discretion information.1 The requirement in the accounts opened after January 1, in the account; Books and Records Rule to deter- 1991 as follows: mine whether a customer is an asso- (B) record the date such discretion is ciated person of another member (1) for each account, each member granted; and also is unnecessary because NASD shall maintain the following informa- Conduct Rule 3050, which provides tion: (C) in connection with exempted the obligations of executing mem- securities other than municipals, bers when the member knows that a (A) customer’s name and residence; record the age or approximate age of person associated with an employing the customer. member has an interest in an (B) whether customer is of legal age; account, expressly excludes (4) For purposes of this Rule and accounts that are limited to transac- (C) signature of the registered repre- Rule 2310 the term “institutional tions in mutual fund shares. sentative introducing the account account” shall mean the account of: and signature of the member or part- The amendments thus revise sub- ner, officer, or manager who accepts (A) a bank, savings and loan associ- paragraph (c)(2) of the Books and the account; and ation, insurance company, or regis- Records Rule to exclude mutual tered investment company; funds that are not recommended by (D) if the customer is a corporation, the member or its associated per- partnership, or other legal entity, the (B) an investment adviser registered sons from the obligation to obtain names of any persons authorized to either with the Securities and Retail Customer Information. Mem- transact business on behalf of the Exchange Commission under Sec- bers are still required to make rea- entity; tion 203 of the Investment Advisers sonable efforts to obtain Retail Act of 1940 or with a state securities Customer Information for retail (2) for each account, other than an commission (or any agency or office accounts that are not subject to institutional account, and accounts in performing like functions); or these limitations. This change will which investments are limited to not affect the need to obtain any transactions in [money market funds] (C) any other entity (whether a natu- information from customers or others open-end investment company ral person, corporation, partnership,

NASD Notice to Members 98-47 July 1998 354 trust or otherwise) with total assets of at least $50 million.

Endnote 1 If a customer refuses to provide tax identiﬁ- cation, Internal Revenue Service rules require a fund to withhold 31 percent of all redemptions or distributions.

NASD Notice to Members 98-47 July 1998 355 Executive Summary pants in the securities industry do not NASD On May 18, 1998, the Securities and take unfair advantage of their “insider Exchange Commission (SEC) position” in the industry to the detri- approved amendments to National ment of public investors. Notice to Association of Securities Dealers, Inc. (NASD¨) Interpretive Material The Interpretation prohibits members 2110-1 (IM-2110-1) and Rule 2720, from retaining the securities of hot Members revising certain provisions of the issues in their own accounts and pro- Free-Riding and Withholding Inter- hibits members from allocating such 98-48 pretation (Interpretation). These securities to directors, officers, amendments address direct and indi- employees, and associated persons rect owners of broker/dealers, invest- of such members and other ment grade debt offerings, foreign broker/dealers. It also restricts mem- investment companies, secondary ber sales of hot issue securities to SEC Approves offerings, issuer directed share pro- the accounts of specified categories Amendments To Free- grams, and accounts under the of persons, including, among others, Riding And Withholding Employment Retirement Income senior officers of banks, insurance Interpretation; Effective Security Act. The amendments also companies, investment companies, provide NASD Regulation, Inc., staff investment advisory firms, or any August 17, 1998 with general exemptive authority. other institutional type account, and These rule amendments will be any other person with such organiza- Suggested Routing effective on August 17, 1998. The tions whose activities influence or Senior Management text of the amended rules and the include the buying and selling of Federal Register version of the SEC securities. These basic prohibitions Advertising approval order are attached. This and restrictions are also made appli- Continuing Education Notice is being issued to alert mem- cable to sales by members to bers of their revised compliance accounts in which any such persons Corporate Finance responsibilities under the Interpreta- may have a beneficial interest and, Executive Representatives tion. with some exceptions, to members of Government Securities the immediate family of those per- Questions concerning this Notice sons restricted by the Interpretation. Institutional should be directed to Gary L. Gold- Insurance sholle, Assistant General Counsel, Internal Audit Office of General Counsel, NASD Amended Rules RegulationSM, at (202) 728-8104. NASD Regulation has received SEC Legal & Compliance approval of amendments to IM-2110- Municipal 1 and Rule 2720. See 63 FR 28535 Background (May 26, 1998). These amendments Mutual Fund The purpose of the Interpretation is provide for the following: Operations to protect the integrity of the public Options offering system by ensuring that Exemptive Authority members make a bona fide public Registered Representatives distribution of “hot issue” securities New paragraph (a)(5) of the Interpre- Registration and do not withhold such securities tation provides NASD Regulation Research for their own benefit or use such staff with general exemptive authori- securities to reward persons who are ty. As revised, the Interpretation Syndicate in a position to direct future business authorizes NASD Regulation staff, Systems to the member. Hot issue securities upon written request made by a are defined by the Interpretation as member, pursuant to the Rule 9600 Trading securities of a public offering that Series, to provide an exemption Training trade at a premium in the secondary unconditionally or on specified terms Variable Contracts market whenever such trading com- from any or all provisions, consistent mences. The Interpretation also with the purposes of the Interpreta- assures that members and partici- tion, the protection of investors, and

NASD Notice to Members 98-48 July 1998 357 the public interest. Persons requesting, among others, insurance com- issue securities being offered; and ing an exemption from the Interpreta- pany general, separate, and invest- (4) any person owning more than 5 tion should submit a detailed written ment accounts, and bank trust percent of the shares of the fund is statement of the grounds for granting accounts. Members should be not a restricted person as described the exemption to: NASD Regulation, aware that this exemption applies in paragraph (b)(1), (2), (3), (4), or (9) Inc., Attn: Office of General Counsel, solely to the accounts of persons of the Interpretation. In order for a 1735 K Street, N.W., Washington, restricted pursuant to paragraph member to sell hot issues to a for- DC 20006. (b)(9). It should be noted that para- eign investment company, as graph (b)(9) does not restrict pur- defined above, the member must Treatment Of Direct chases of hot issues by any entity receive a written certification pre- And Indirect Owners owned in part or whole by the person pared by counsel admitted to prac- Of Broker/Dealers restricted by paragraph (b)(9), but tice law before the highest court of instead reaches only the “accounts” any state of the United States or the New paragraph (b)(9) addresses in which restricted owners have a foreign jurisdiction where the invest- persons who directly or indirectly beneficial interest. ment company is organized, or by an have an ownership interest in a bro- independent certified public accoun- ker/dealer, other than a limited busi- Rated Investment Grade Debt tant licensed in any state of the Unit- ness broker/dealer as defined in ed States or the foreign jurisdiction paragraph (c) of the Interpretation. The amendments to the Interpreta- where the investment company is The subparagraph creates a new tion exempt certain classes of debt organized. category of restricted person, provid- securities. Specifically, the amending generally that members shall not ments exempt debt securities (other The written certification made pur- sell hot issue securities to a person, than debt securities convertible into suant to paragraph (l)(6) shall be or a member of the immediate family common or preferred stock) and deemed current for the same period of such person who is supported financing instrument-backed securi- as certifications furnished pursuant directly or indirectly to a material ties that are rated by a nationally rec- to paragraph (f)(1)(B). Specifically, a extent by such person, who has con- ognized statistical rating organization written certification by counsel or an tributed capital to a broker/dealer, in one of its four highest generic rat- independent certified public accoun- other than solely a limited business ing categories. Members should be tant shall be deemed current if it is broker/dealer, or the account in aware that debt securities and based upon the status of the account which any such person has a benefi- financing instrument-backed securi- as of a date not more than 18 cial interest. The amendments pro- ties must both be rated by a national- months prior to the date of the hot vide an exemption from this new ly recognized statistical rating issue transaction. category for persons whose owner- organization in one of its four highest ship interest is passive and less than generic rating categories. NASD For purposes of paragraph (l)(6), 10 percent, and where either: (1) Regulation reminds members that NASD Regulation interprets the pro- such person purchases hot issues the Interpretation will continue to vision that there be 100 or more from a person other than the mem- apply to all other types of debt instru- investors to require that 100 or more ber in which it has a passive owner- ments, except those expressly persons have direct investments in ship and such person is not in a excluded. the foreign investment company. position to direct the allocation of hot NASD Regulation would not permit issues; or (2) the member in which Foreign Investment Companies investors of an entity that in turn such person has a passive owner- invests in the foreign investment ship interest or the parent of such The amendments to paragraphs (f) company to be included in the total member is publicly traded on an and (l)(6) of the Interpretation exempt number of investors for purposes of exchange or The Nasdaq Stock Mar- sales of hot issues to foreign invest- paragraph (l)(6). ketSM (Nasdaq¨). ment companies that meet the following criteria: (1) the fund has 100 Secondary Distributions The provisions in new paragraph or more investors; (2) the fund is list- (b)(9) also provide an exemption for ed on a foreign exchange or autho- The amendments also exempt cer- sales to the account of any person rized for sale to the public by a tain secondary offerings from the restricted under subparagraph (b)(9) foreign regulatory authority; (3) no Interpretation. The amendments to that is established for the benefit of more than 5 percent of the fund the definition of the term “public offer- bona fide public customers, includ- assets are to be invested in the hot ing”1 in paragraph (l)(1) exempt hot

NASD Notice to Members 98-48 July 1998 358 issues in a secondary distribution by Members should note that the issuer- nated paragraph (d)(2) from the an issuer, or any security holder of directed share program is no longer Interpretation. Members may the issuer, of “actively-traded securi- limited to persons restricted in para- request an exemption for the sale of ties.” New paragraph (l)(7)(A) graphs (b)(3) through (8) of the Inter- issuer-directed securities to a defines “actively-traded securities” as pretation. NASD Regulation’s restricted person who is neither an securities that have an average daily amendments permit employees and employee nor director of the issuer trading volume (ADTV) of at least $1 directors of an issuer to purchase hot under the general exemptive proce- million and are issued by an issuer issues from such issuer’s directed dures described above. While whose common equity securities share program even if such employ- NASD Regulation staff will be able to have a public float of at least $150 ees and directors are materially sup- exercise greater flexibility than cur- million. New paragraph (l)(7)(B) ported by persons associated with a rently permitted under the Interpreta- defines the term “ADTV.” The defini- member restricted under paragraph tion, members should articulate a tions of “actively-traded securities” (b)(2) of the Interpretation. valid business reason for such sales. and “ADTV” were modeled after the In addition, members should repre- SEC’s Regulation M. 62 FR 520 The amendments also consolidate sent that such securities shall not be (January 3, 1997). the issuer-directed share provisions subject to the same “lock-up” provi- in paragraph (d). Separate provisions as securities directed by an Issuer-Directed Share sions addressing issuer-directed issuer pursuant to paragraph (d). Exemptions share programs of members and parents of members were contained Accounts For Qualified Plans Issuer-directed share programs have in Rule 2720(m). The new provi- Under The Employment become an increasingly valuable and sions standardize the “lock-up” peri- Retirement Income Security popular tool for employee develop- od for issuer-directed securities to Act (ERISA) ment and retention. The amend- three months. ments to paragraph (d) of the New paragraph (f)(3) addresses the Interpretation are designed to simpli- NASD Regulation reminds members status of qualified employee benefit fy the application of the issuer-direct- that the Interpretation is designed to plans under ERISA. Generally, the ed share exemption to employees ensure that members make a bona amendments provide that an and directors of an issuer. The fide public distribution of hot issue employee benefits plan qualified amendments permit an issuer specif- securities of a public offering that under ERISA shall not be deemed ically to direct its own shares to trade at a premium in the secondary restricted. The amendments in new employees and directors, or employ- market regardless of whether such paragraph (b)(3) provide guidance in ees and directors of a parent or sub- securities are acquired by the mem- determining the factual circum- sidiary of the issuer, or any other ber as an underwriter, as a selling stances in which a qualified ERISA entity which controls or is controlled group member, or from a member plan would be deemed restricted. by the issuer, or potential employees participating in the distribution as an and directors resulting from an underwriter or a selling group mem- intended merger, acquisition, or ber, or otherwise. These provisions Questionnaire other business combination of the ensure that the Interpretation applies In its review for compliance with the issuer. For purposes of this para- to securities that are part of a public Interpretation, NASD Regulation reg- graph, a parent-subsidiary or other offering notwithstanding that some of ularly issues a Free-Riding Question- control relationship would be those securities are specifically naire through the Compliance Desk deemed to include an entity that directed by the issuer on a non- software service to the managing holds 50 percent or more of any underwritten basis. NASD Regula- underwriter and other members par- class of equity securities of another tion will continue its practice of ticipating in the distribution of hot entity. Employees and directors of requiring the managing underwriter issue securities. NASD Regulation sister corporations to the issuer are of the offering to be responsible for has revised the questionnaire to not subject to an exemption for ensuring that the distribution of non- reflect the amendments to the Inter- issuer-directed securities, however, underwritten securities is made in pretation. A copy of the new Ques- members may request an exemption compliance with the Interpretation. tionnaire follows this Notice. for such persons under paragraph Additional information about the (a)(5) as discussed above. As a result of the plenary exemptive Compliance Desk and the Question- authority granted in new paragraph naire is contained in Notice to Mem- (a)(5), NASD Regulation has elimi- bers 96-18.

NASD Notice to Members 98-48 July 1998 359 Text Of Rule Amendments (b) Violations of Rule 2110 a percentage interest in the member (Note: Next text is underlined; deletions are equal to the percentage interest of bracketed.) (1)-(8) No Change the entity in the member multiplied by the percentage interest of such IM-2110-1. Free-Riding and (9) Sell any of the securities to any person in such entity. Withholding person, or to a member of the immediate family of such person who is (c) No Change (a) Introduction supported directly or indirectly to a material extent by such person, who (d) Issuer-Directed Securities (1) No change. owns or has contributed capital to a broker/dealer, other than solely a lim- [(1) This interpretation shall apply to (2) As in the case of any other inter- ited business broker/dealer as securities which are part of a public pretation issued by the [Board of defined in paragraph (c) of this inter- offering notwithstanding that some or Governors of the] Association, the pretation, or the account in which all of those securities are specifically implementation thereof is a function any such person has a beneficial directed by the issuer to accounts of the NASD Regulation staff [District interest, provided, however, that: which are included within the scope Business Conduct Committee] and of paragraph (b)(3) through (8) the [Board of Governors] NASD Reg- (A) The prohibition shall not apply to above. Therefore, if a person within ulation Board of Directors. Thus, the any person who directly or indirectly the scope of those subparagraphs to interpretation will be applied to a owns any class of equity securities whom securities were directed did given factual situation by NASD Reg- of, or who has made a contribution of not have the required investment his- ulation staff, subject to oversight by capital to, a member, and whose tory, the member would not be per- the Board, with staff soliciting input ownership or capital interest is pas- mitted to sell him such securities. from individuals active in the invest- sive and is less than 10% of the Also, the “disproportionate” and ment banking and securities busi- equity or capital of a member, as “insubstantial” tests would apply as in ness [who are serving on these long as: all other situations. Thus, the direct- committees or on the Board. They]. ing of a substantial number of securi- In making such interpretations, staff (i) such person purchases hot issues ties to any one person would be and the Board will construe this inter- from a person other than the mem- prohibited as would the directing of pretation to effectuate its overall pur- ber in which it has such passive own- securities to such accounts in pose to assure a public distribution of ership and such person is not in a amounts which would be dispropor- securities for which there is a public position by virtue of its passive own- tionate as compared to sales to demand. ership interest to direct the allocation members of the public. If such of hot issues, or issuer-directed securities are sold to (3)-(4) No change. the issuer's employees or directors (ii) such member’s shares or shares or potential employees or directors (5) The NASD Regulation staff, upon of a parent of such member are pub- resulting from an intended merger, written request, may, taking into con- licly traded on an exchange or Nas- acquisition, or other business combi- sideration all relevant factors, provide daq. nation, such securities may be sold an exemption either unconditionally without limitation as to amount and or on specified terms from any or all (B) This prohibition shall not apply to regardless of whether such employ- of the provisions of this interpretation sales to the account of any person ees have an investment history as upon a determination that such restricted under this subparagraph required by the interpretation; provid- exemption is consistent with the pur- (9) established for the benefit of ed, however, that in the case of an poses of the interpretation, the pro- bona fide public customers, including offering of securities for which a bona tection of investors, and the public insurance company general, sepa- fide independent market does not interest. A member may appeal a rate and investment accounts, and exist, such securities shall not be decision issued by NASD Regulation bank trust accounts. sold, transferred, assigned, pledged, staff to the National Adjudicatory or hypothecated for a period of three Council pursuant to the Code of Pro- (C) For purposes of this subpara- months following the effective date of cedure. graph (9), any person with an equity the offering. This interpretation shall ownership or capital interest in an also apply to securities which are entity that maintains an investment in part of a public offering notwithstand- a member shall be deemed to have ing that some of those securities are

NASD Notice to Members 98-48 July 1998 360 specifically directed by the issuer on following the effective date of the vices activities is not restricted a non-underwritten basis. In such offering. whether or not any plan participants cases, the managing underwriter of may be restricted; the offering shall be responsible for (e) No Change insuring compliance with this inter- (C) Any plan sponsored by an entity pretation in respect to those securi- (f) Investment Partnerships and that is engaged in financial services ties.] Corporations activities, including but not limited to, banks, insurance companies, invest- [(2) Notwithstanding the above, sales (1) A member may not sell a hot ment advisers, or other money man- of issuer-directed securities may be issue to the account of any invest- agers, is not restricted, provided that made to non-employee/director ment partnership or corporation, the plan permits participation by a restricted persons without the domestic or foreign (except compa- broad class of participants and is not required investment history after nies registered under the Investment designed primarily for the benefit of receiving permission from the Board Company Act of 1940 or foreign restricted persons. of Governors. Permission will be investment companies as defined given only if there is a demonstration herein) including but not limited to (g)-(k) No Change of valid business reasons for such hedge funds, investment clubs, and sales (such as sales to distributors other like accounts unless the mem- (l) Explanation of Terms and suppliers, who are in each case ber complies with either of the follow- incidentally restricted persons), and ing alternatives: The following explanation of terms is the member seeking permission is provided for the assistance of mem- prepared to demonstrate that the (A)-(B) No Change bers. Other words which are defined aggregate amount of securities so in the By-Laws and Rules shall, sold is insubstantial and not dispro- (2) The member shall maintain a unless the context otherwise portionate as compared to sales to copy of the names and business requires, have the meaning as members of the public, and that the connections of all persons having defined therein. amount sold to any one of such per- any beneficial interest in the account sons is insubstantial in amount; pro- or a copy of the current written repre- [(1) Associated Person vided, however, that such securities sentation in its files for at least three shall not be sold, transferred, years following the member's last A person associated with a member assigned, pledged, or hypothecated sale of a new issue to the account, or any other broker/dealer, as for a period of three months following depending upon which of the above defined in Article I of the Associa- the effective date of the offering.] requirements the member elects to tion's By-Laws, shall not include a follow. For purposes of this para- person whose association with the Employees and directors of an graph (f) and the certification member is limited to a passive own- issuer, a parent of an issuer, a sub- required pursuant to paragraph (l)(6), ership interest in the member of 10% sidiary of an issuer, or any other enti- a list or written representation shall or less, and who does not receive ty which controls or is controlled by be deemed to be current if it is based hot issues from the member in which an issuer, or potential employees upon the status of the account as of he or she has the ownership interest; and directors resulting from an a date not more than 18 months prior and that such member is not in a intended merger, acquisition, or to the date of the transaction. position to direct hot issues to such other business combination of an person.] issuer otherwise subject to this inter- (3) An employee benefits plan quali- pretation in paragraphs (b)(2) fied under the Employee Retirement ([2]1) Public Offering through (9) may purchase securities Income Security Act shall be that are part of a public offering that deemed restricted under this inter- The term public offering shall mean are specifically directed by the issuer pretation in accordance with the fol- any primary or secondary distribution to such persons; provided, however, lowing provisions: of securities made pursuant to a reg- that in the case of an offering of istration statement or offering circular securities for which a bona fide inde- (A) Any plan sponsored by a bro- including exchange offers, rights pendent market does not exist, such ker/dealer is restricted; offerings, offerings made pursuant to securities shall not be sold, trans- a merger or acquisition, straight debt ferred, assigned, pledged, or hypoth- (B) Any plan sponsored by an entity offerings, and all other securities dis- ecated for a period of three months that is not involved in financial ser- tributions of any kind whatsoever

NASD Notice to Members 98-48 July 1998 361 except any offering made pursuant to by the registered representative or (ii) the offering price of the issue; an exemption under Section 4(l), 4(2) the member may be utilized to or 4(6) of the Securities Act of 1933, demonstrate prior investment activi- (iii) the amount of securities sold to as amended. The term public offer- ty. In analyzing a restricted person's restricted accounts; and ing shall exclude exempted securi- investment history the Association ties as defined in Section 3(a)(12) of believes the following factors should (iv) the price of the securities in the the Act, and debt securities (other be considered: aftermarket. than debt securities convertible into common or preferred stock) and (A) The frequency of transactions in (B) It should be noted that disci- financing instrument-backed securi- the account or accounts during that plinary action has been taken against ties that are rated by a nationally rec- period of time. Relevant in this members for violations of the inter- ognized statistical rating organization respect are the nature and size of pretation where the allocations made in one of its four highest generic rat- investments. to restricted accounts were less than ing categories. The term public offer- 10% of the member's participation. ing shall exclude secondary offerings (B) A comparison of the dollar The 10% guideline is applied as to by an issuer, or any security holder amount of previous transactions with the aggregate of the allocations. of the issuer, of actively-traded secu- the dollar amount of the hot-issue rities. purchase. If a restricted person pur- (C) Notwithstanding the above, a chases $1,000 of a hot issue and his normal unit of trading (100 shares or ([3]2) Immediate Family account revealed a series of pur- 10 bonds) will in most cases not be chases and sales in $100 amounts, considered a disproportionate alloca- The term immediate family shall the $1,000 purchase would not tion regardless of the amount of the include parents, mother-in-law or appear to be consistent with the member's participation. This means father-in-law, husband or wife, broth- restricted person's normal invest- that if the aggregate number of er or sister, brother-in-law or sister- ment practice. shares of a member's participation in-law, son-in-law or daughter-in-law, which is allocated to restricted and children. In addition, the term (C) The practice of purchasing main- accounts does not exceed a normal shall include any other person who is ly hot issues would not constitute a unit of trading, such allocation will in supported, directly or indirectly, to a normal investment practice. The most cases not be considered dis- material extent by the member, per- Association does, however, consider proportionate. For example, if a son associated with the member or as contributing to the establishment member receives 500 shares of a other person specified in paragraph of a normal investment practice, the hot issue, he may allocate 100 (b)(2) above. purchase of new issues which are shares to a restricted account even not hot issues as well as secondary though such allocation represents ([4]3) Normal Investment Practice market transactions. 20% of the member's participation. Of course, all of the remaining Normal investment practice shall ([5]4) Disproportionate shares would have to be allocated to mean the history of investment of a unrestricted accounts and all other restricted person in an account or (A) In respect to the determination of provisions of the interpretation would accounts maintained by the restrict- what constitutes a disproportionate have to be satisfied. Specifically, the ed person. Usually the previous one- allocation, the Association uses a allocation would have to be consis- year period of securities activity is guideline of 10% of the member's tent with the normal investment prac- the basis for determining the ade- participation in the issue, however tice of the account to which it was quacy of a restricted person's invest- acquired. It should be noted, howev- allocated and the member would not ment history. Where warranted, er, that the 10% factor is merely a be permitted to sell to restricted per- however, a longer or shorter period guideline and is one of a number of sons who were totally prohibited from may be reviewed. It is the responsi- factors which are considered in receiving hot issues. bility of the registered representative reaching determinations of violations effecting the allocation, as well as the of the interpretation on the basis of ([6]5) Insubstantiality member, to demonstrate that the disproportionate allocations. These restricted person's investment history other factors include, among other This requirement is separate and dis- justifies the allocation of hot issues. things: tinct from the requirements relating to Copies of customer account state- disproportionate allocations and nor- ments or other records maintained (i) the size of the participation; mal investment practice. In addition,

NASD Notice to Members 98-48 July 1998 362

Free-Riding Questionnaire 1 of 6 Pages 6/98

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

Firm: Address:

Re: Offering Date:

INSTRUCTIONS: Each member is required to complete either Section I or Section II based upon the capacity in which they acted in the distribution of the new issue. Sections III and IV must be completed by all ﬁrms for their “conﬁrmed”* securities. It is the executing broker/dealer’s responsibility to ensure that securities were distributed in compliance with the Free-Riding and Withholding Interpretation, IM-2110-1.

SECTION I. TO BE COMPLETED BY THE MANAGING UNDERWRITER ONLY

A. Total number of securities offered for public distribution: (Include any additional shares sold as part of any over-allotment provision and any shares sold short for the account of the syndicate.)

B. Total number of securities allocated for sale to other underwriters and selling group members:

C. Total number of securities conﬁrmed* by your ﬁrm to retail and institutional customers, including all shares billed and delivered on behalf of others, designated orders, group sales, directed sales, etc.:

SECTION II. TO BE COMPLETED BY ALL UNDERWRITERS, SELLING GROUP MEMBERS AND OTHER PARTICIPANTS IN THE DISTRIBUTION

A. Total number of securities conﬁrmed* by your ﬁrm to retail and institutional customers. (Do not include shares billed and delivered on your behalf by the managing underwriter, designated orders, group sales, directed sales, etc.):

B. Indicate capacity in which your ﬁrm participated in the offering: ❏ Underwriter ❏ Selling Group ❏ Other (deﬁne)

* For purposes of this questionnaire, “confirmed” means the number of new issue securities allocated to the firm for distribution purposes and for which the firm has issued a confirmation/comparison reflecting the full detail of such sale to retail customers, institutional accounts, or other broker/dealers. When participating in a distribution of new issue securities, broker/dealers are responsible for ensuring compliance with the Free-Riding and Withholding Interpretation for all securities allocated and confirmed by that broker/dealer.

NASD Notice to Members 98-48 July 1998 370 Free-Riding Questionnaire 2 of 6 Pages 6/98

SECTION III. BREAKDOWN OF SECURITIES DISTRIBUTED BY YOUR FIRM

INSTRUCTIONS: Indicate total number of securities distributed in each category and, unless otherwise noted, provide detailed information in Section IV, “Sales to Restricted Accounts.” This breakdown should contain the ﬁnal ﬁgures after giving effect to all cancellations and reallocations. For additional information regarding categories, please refer to the Free-Riding and Withholding Interpretation, IM 2110-1.

1. Securities held in a ﬁrm account.

2. Sales to any ofﬁcer, director, general partner, employee or agent of the member or any other broker/dealer, or to person associated with the member or with any other broker/dealer, or to a member of the immediate family of such a person.

Indicate the number of shares/units that were sold pursuant to the following provisions:

(A) Sales to persons associated with broker/dealers whose business is limited to investment company/variable contract securities or direct participation programs. Number of shares/units

(B) Sales to a member of the immediate family of a person associated with a member who is not supported directly or indirectly by that 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. Number of shares/units

It is not necessary to complete Section IV for items 2 (A) and (B).

3. Sales to a person who is a finder with 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 paragraph.

4. Sales 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 and selling securities for any bank, savings and loan institution, insurance company, investment company, investment advisory firm, or other institutional type account, domestic or

NASD Notice to Members 98-48 July 1998 371 Free-Riding Questionnaire 3 of 6 Pages 6/98

foreign, or to any other person who is supported directly or indirectly, to a material extent, by any person speciﬁed in this paragraph.

5. Sales to any account in which any person speciﬁed under paragraphs (2), (3), or (4) has a beneﬁcial interest.

6. Sales to other domestic broker/dealers for bona ﬁde public customers, other than those enumerated in paragraphs (2), (3), (4), or (5) above.

No. of Written Representation Received Name of Broker/Dealer Shares/Units (pursuant to paragraph 6)

Yes No Yes No Yes No

It is not necessary to complete Section IV for item 6.

7. Sales to any domestic bank, domestic branch of a foreign bank, trust company or other conduit for an undisclosed principal.

(A) Indicate the number of shares/units that were sold based upon assurances obtained that ultimate purchasers were not restricted persons. Number of shares/units

It is not necessary to complete Section IV for item 7(A).

8. Sales to a foreign broker/dealer or bank.

Indicate the number of shares/units that were sold pursuant to the following conditions.

(A) Sales by a foreign broker/dealer or bank participating in the distribution as an underwriter that were made in accordance with provisions of underwriting agreement. Number of shares/units (B) Afﬁrmative inquiry was obtained that ultimate purchasers were not restricted persons. Number of shares/units

It is not necessary to complete Section IV for items 8(A) and (B).

NASD Notice to Members 98-48 July 1998 372 Free-Riding Questionnaire 4 of 6 Pages 6/98

9. Sales to direct and indirect owners of a broker/dealer.

Indicate the number of shares/units that were sold pursuant to the following provisions.

(A) Sales to direct and indirect owners whose passive ownership interest amounts to less than 10% of the broker/dealer, and:

(1) the owner purchases hot issues from a person other than the member in which it has a passive ownership interest, and such owner is not in a position to direct the allocation of hot issues, or Number of shares/units

(2) the shares of the member or parent of the member in which the passive owner has an ownership interest are traded on an exchange or Nasdaq. Number of shares/units

(B) Sales to the account of any person restricted under paragraph (b)(9) of the Interpretation established for the beneﬁt of bona ﬁde public customers. Number of shares/units

It is not necessary to complete Section IV for items 9(A) and (B).

10. Sales to an investment partnership or corporation, domestic or foreign (except companies registered under the Investment Company Act of 1940 or exempt foreign investment company as deﬁned in the Free-Riding and Withholding Interpretation) including but not limited to hedge funds, investment clubs, and other like accounts.

Indicate the number of shares/units that were sold pursuant to the following conditions:

(A) “Carve out” mechanism was utilized. Number of shares/units

(B) Determination was made based upon ﬁle containing information on all persons having a beneﬁcial interest, or the opinion of counsel or accountants was obtained. Number of shares/units

It is not necessary to complete Section IV for items 10(A) and (B).

NASD Notice to Members 98-48 July 1998 373 Free-Riding Questionnaire 5 of 6 Pages 6/98

11. Sales to public customers.

It is not necessary to complete Section IV for item 11.

TOTAL (1 through 11)

Please note that the total should be equal to total securities conﬁrmed by your ﬁrm as noted in Section I or II.

Indicate the number of shares/units that were originally sold to a restricted account and were subsequently canceled prior to the end of the ﬁrst business day after the date on which secondary market trading begins and were reallocated to an unrestricted account.

❏ Not Applicable

Signature of Principal Title

NOTE: Questionnaires should be returned to the Corporate Financing Department by the date speciﬁed.

NASD Notice to Members 98-48 July 1998 374 Free-Riding Questionnaire 6 of 6 Pages 6/98

NASD Notice to Members 98-48 July 1998 375 Executive Summary Background And Discussion NASD On June 12, 1998, the Securities and NASD Rule 2860 governs members’ Exchange Commission (SEC) activities in standardized, convention- approved amendments to National al, and FLEX equity options. Stan- Notice to Association of Securities Dealers, dardized options are exchange-traded Inc. (NASD¨) Rule 2860 and Inter- options issued by the Options Clear- pretive Material 2860-1 (IM-2860-1). ing Corporation (OCC) that have Members The amendments to Rule 2860 make standardized terms for strike prices, three basic changes. First, the expiration dates, and the amount of 98-49 amendments increase the position the underlying security. Convention- limits on conventional equity options al options are any other options con- to the greater of three times the basic tracts not issued, or subject to limit of 4,500 contracts, or three issuance, by the OCC. Conventional times any standardized equity options are also frequently referred to SEC Approves options position limit for which the as over-the-counter (OTC) options. Amendments To Rule underlying security qualifies or would FLEX equity options are exchange- Regarding Options be able to qualify. Second, the traded options issued by the OCC Position Limits; Effective amendments disaggregate conven- that give investors the ability, within tional equity options from standard- specified limits, to designate certain June 12, 1998 ized equity options and FLEX equity terms of the option (i.e., the exercise options for position limit purposes, price, exercise style, expiration date, i.e., standardized and FLEX equity or option type). option positions do not count towards Suggested Routing the position limits for conventional NASD Rule 2860(b)(3) imposes a Senior Management equity options on the same underly- ceiling or position limit on the number ing security. Third, the amendments of conventional and standardized Advertising provide that the OTC Collar Aggrega- equity options contracts in each class Continuing Education tion Exemption shall be available on the same side of the market (i.e., with respect to an entire conventional aggregating long calls and short puts Corporate Finance equity options position, not just that or long puts and short calls) that can Executive Representatives portion of the position that is estab- be held or written by a member, a Government Securities lished pursuant to the NASD’s Equity person associated with a member, a Option Hedge Exemption (Hedge customer, or a group of customers Institutional Exemption). In addition, the amend- acting in concert. The position limits Insurance ments to IM-2860-1 clarify and for equity options are established Internal Audit update the illustrative examples to be according to a five-tiered system consistent with the new amendments whereby more actively traded securi- Legal & Compliance and prior increases in the Hedge ties with larger public floats are sub- Municipal Exemption. The amendments ject to higher position limits and less became effective on June 12, 1998. actively traded stocks are subject to Mutual Fund The text of the amended rules and lower limits. The current tiers for Operations the Federal Register version of the standardized equity options are Options SEC Release are attached. See 63 4,500, 7,500, 10,500, 20,000, and FR 33746 (June 19, 1998). 25,000 options contracts.1 The Registered Representatives NASD rules do not specifically gov- Registration Questions concerning this Notice ern whether a particular equity option Research should be directed to Gary L. Gold- falls within one of the position-limit sholle, Assistant General Counsel, tiers. Rather, the NASD position limit Syndicate Office of General Counsel, NASD rule generally provides that the posi- Systems Regulation, Inc., at (202) 728-8104. tion limit established by an options exchange(s) for a particular equity Trading option is the applicable position limit Training for purposes of the NASD rule. Variable Contracts

NASD Notice to Members 98-49 July 1998 377 On September 9, 1997, the Commis- To illustrate how these new limits OTC Collar Aggregation Exemption, sion approved a two-year pilot pro- work, consider the following example i.e., that if the terms of the exemption gram to eliminate position and of stock ABCD, which is subject to a are met, the segments of an OTC exercise limits for FLEX equity position limit of 25,000 standardized collar will never both be in-the- options, which are traded on the vari- equity option contracts. In this exam- money at the same time or exer- ous options exchanges.2 In light of ple, a market participant could estab- cised. the pilot program, NASD RegulationSM lish a position of 25,000 standardized amended its rules governing position option contracts on ABCD and an To illustrate how these new provi- and exercise limits for conventional additional 75,000 conventional option sions work, consider the following equity options to foster competition contracts on ABCD on the same side example of stock ABCD that is sub- between the OTC market and the of the market, since conventional ject to a standardized equity option options exchanges. and standardized option positions position limit of 25,000 contracts and would be disaggregated. In addition, a conventional equity option position NASD Regulation believes that the market participant also may have limit of 75,000 contracts. If the mar- FLEX equity options closely resem- a position of any size in FLEX Equity ket participant had increased the size ble and are economically equivalent Options overlying ABCD, since such of its conventional equity options to conventional equity options. FLEX equity options would not be position to 225,000 pursuant to the Accordingly, the amendments to aggregated with either the conven- Hedge Exemption (based upon a Rule 2860(b)(3) seek to more closely tional equity options or standardized limit of three times the 75,000 con- align the NASD’s position limit rules equity options overlying ABCD. ventional equity options position for conventional equity options with limit), the market participant could those for FLEX equity options. In The NASD’s Hedge Exemption3 pro- then establish an OTC collar on fact, the new limits on conventional vides for an automatic exemption ABCD involving 225,000 long (short) equity options correspond to the from equity option position limits for calls and 225,000 short (long) puts, position limits that were in effect for accounts that have established for a total of 450,000 contracts. FLEX equity options prior to the elim- hedged positions on a limited one- ination of such limits in the pilot pro- for-one basis (i.e., 100 shares of Finally, members are reminded that gram. Under the new amendments, stock for one option contract). Under Rule 2860(b)(5) imposes reporting the position limits for conventional the Hedge Exemption, the largest obligations on “each account in equity options have increased to the options position that may be estab- which the member has an interest . . . greater of three times the basic limit lished (combining hedged and and each customer account, which of 4,500 contracts, or three times any unhedged positions) may not exceed has established an aggregate posi- higher standardized equity options three times the basic position limits tion of 200 or more option contracts position limit for which the underlying for either standardized or conven- (whether long or short) of the put security qualiﬁes or would be able to tional equity options. The OTC Col- class and the call class on the same qualify. lar Aggregation Exemption4 provides side of the market covering the same that positions in conventional put and underlying security.” Information The new amendments also provide call options establishing OTC collars reported to the NASD is used by that conventional equity options posi- need not be aggregated for position NASD Regulation Market Regulation tions shall not be aggregated with limit purposes. An OTC collar trans- staff as part of their ongoing market standardized and FLEX equity action involves the purchase (sale) of surveillance operations. Additional options positions overlying the same a put and the sale (purchase) of a information concerning members’ security for position limit purposes. call on the same underlying security options reporting obligations may be Disaggregation of conventional and to hedge a long (short) stock posi- found in Notice to Members 94-46. other options is necessary to give full tion. effect to the increase in position limits for conventional equity options. The new amendments modify the Without disaggregation, positions in terms of the OTC Collar Aggregation FLEX equity options or standardized Exemption to apply to an entire con- equity options would reduce or ventional equity option position, not potentially even eliminate (in the just the portion that is established case of FLEX equity options) the pursuant to the Hedge Exemption. available position limits for conven- This amendment is consistent with tional equity options. the economic logic underlying the

NASD Notice to Members 98-49 July 1998 378 Text Of Rule Amendments class and the call class on the same applicable rules for a position limit of (Note: New text is underlined; deletions are side of the market covering the same 25,000 option contracts; or bracketed.) underlying security, combining for purposes of this position limit long (vi) such other number of stock Rule 2860. Options positions in put options with short options contracts as may be fixed positions in call options, and short from time to time by the Association (a) No Change positions in put options with long as the position limit for one or more positions in call options; or classes or series of options provided (b) Requirements that reasonable notice shall be given (ii) 7,500 options contracts of the put of each new position limit fixed by (2) Definitions class and the call class on the same the Association. side of the market covering the same The following terms shall, unless the underlying security, providing that the (vii) Equity Option Hedge Exemption context otherwise requires, have the 7,500 contract position limit shall only stated meanings: be available for option contracts on a. The following positions, where securities which underlie [or qualify each option contract is “hedged” by (A) - (UU) No Change to underlie] Nasdaq or exchange- 100 shares of stock or securities traded options qualifying under appli- readily convertible into or economi- (VV) Standardized Equity Option— cable rules for a position limit of cally equivalent to such stock, or, in The term “standardized equity option” 7,500 option contracts; or the case of an adjusted option con- means any equity options contract tract, the same number of shares issued, or subject to issuance by, The (iii) 10,500 option contracts of the put represented by the adjusted contract, Options Clearing Corporation that is class and the call class on the same shall be exempted from established not a FLEX Equity Option. side of the market covering the same limits contained in subparagraph underlying security providing that the (b)(3)(A)(i) through (vi) above: (WW) - (AAA) Redesignated accord- 10,500 contract position limit shall ingly. only be available for option contracts 1. long call and short stock; on securities which underlie [or quali- (3) Position Limits fy to underlie] Nasdaq or exchange- 2. short call and long stock; traded options qualifying under (A) Stock Options—Except in highly applicable rules for a position limit of 3. long put and long stock; unusual circumstances and with the 10,500 option contracts; or prior written approval of the Associa- 4. short put and short stock. tion in each instance, no member (iv) 20,000 options contracts of the shall effect for any account in which put and the call class on the same b. Except as provided [under] in such member has an interest, or for side of the market covering the same paragraph (b)(3)(A)(ix) and in the the account of any partner, officer, underlying security, providing that the OTC Collar Exemption contained in director or employee thereof, or for 20,000 contract position limit shall paragraph (b)(3)(A)(viii), in no event the account of any customer, an only be available for option contracts may the maximum allowable posi- opening transaction through Nasdaq, on securities which underlie [or quali- tion, inclusive of options contracts the over-the-counter market or on fy to underlie] Nasdaq or exchange- hedged pursuant to the equity option any exchange in a stock option con- traded options qualifying under position limit hedge exemption in tract of any class of stock options if applicable rules for a position limit of subparagraph a. above, exceed the member has reason to believe 20,000 option contracts; or three times the applicable position that as a result of such transaction limit established in subparagraphs the member or partner, officer, direc- (v) 25,000 options contracts of the (b)(3)(A)(i)[-] through (v) with respect tor or employee thereof, or customer put and the call class on the same to standardized equity options, or would, acting alone or in concert with side of the market covering the same paragraph (b)(3)(A)(ix) with respect others, directly or indirectly, hold or underlying security, providing that the to conventional equity options. control or be obligated in respect of 25,000 contract position limit shall an aggregate equity options position only be available for option contracts c. The Equity Option Hedge Exemp- in excess of: on securities which underlie [or quali- tion is a pilot program authorized by fy to underlie] Nasdaq or exchange- the Commission through December (i) 4,500 option contracts of the put traded options qualifying under 31, 1998.

NASD Notice to Members 98-49 July 1998 379 (viii) OTC Collar Aggregation Exemp- the requisite long or short stock posi- 2. three times any standardized equi- tion tion for the duration of the collar, ty options position limit as set forth in although the same long or short subparagraphs (b)(3)(A)(ii) through a. For purposes of this paragraph stock position can be used to hedge (v) for which the underlying security (b), the term OTC collar shall mean a both legs of the collar. qualifies or would be able to qualify. conventional equity option position comprised of short (long) calls and c. For multiple OTC collars on the b. In order for a security not subject long (short) puts overlying the same same security meeting the conditions to standardized equity options trad- security that hedge a corresponding set forth in subparagraph b. above, ing to qualify for an options position long (short) position in that security. all of the short (long) call options that limit of more than 4,500 contracts, a are part of such collars must be member must first demonstrate to b. Notwithstanding the aggregation aggregated and all of the long (short) the Association’s Market Regulation provisions for short (long) call posi- put options that are part of such col- Department that the underlying secu- tions and long (short) put positions lars must be aggregated, but the rity meets the standards for such contained in subparagraphs short (long) calls need not be aggre- higher options position limit and the (b)(3)(A)(i) through (v) above, the gated with the long (short) puts. initial listing standards for standard- conventional options positions ized options trading. involved in a particular OTC collar d. Except as provided above in sub- transaction [established pursuant to paragraphs b. and c., in no event (footnotes deleted) the position limit hedge exemption in may a member fail to aggregate any subparagraph (vii)] need not be conventional [or standardized] IM-2860-1. Position Limits aggregated for position limit purpos- options contract of the put class and es, provided the following conditions the call class overlying the same The following examples illustrate the are satisfied: equity security on the same side of operation of position limits estab- the market with conventional option lished by Rule 2860(b)(3) (all exam- 1. the conventional options can only positions established in connection ples assume a position limit of 4,500 be exercised if they are in-the- with an OTC collar. contracts and that the options are money; standardized options): e. Nothing in this paragraph 2. neither conventional option can be (b)(3)(A)(viii) changes the applicable (a) Customer A, who is long 4,500 sold, assigned, or transferred by the position limit for a particular equity XYZ calls, may at the same time be holder without the prior written con- security. short 4,500 XYZ calls, since long and sent of the writer; short positions in the same class of (ix) Conventional Equity Options options (i.e., in calls only, or in puts 3. the conventional options must be only) are on opposite sides of the European-style (i.e., only exercisable a. For purposes of this paragraph market and are not aggregated for upon expiration) and expire on the (b), standardized equity options con- purposes of paragraph (b)(3). same date; tracts of the put class and call class on the same side of the market over- (b) Customer B, who is long 4,500 4. the strike price of the short call can lying the same security shall not be XYZ calls, may at the same time be never be less than the strike price of aggregated with conventional equity long 4,500 XYZ puts. Paragraph the long put; and options contracts or FLEX Equity (b)(3) does not require the aggrega- Options contracts overlying the same tion of long call and long put (or short 5. neither side of any particular OTC security on the same side of the mar- call and short put) positions, since collar transaction can be in-the- ket. Conventional equity options they are on opposite sides of the money when that particular OTC col- contracts of the put class and call market. lar is established. class on the same side of the market overlying the same security shall be (c) Customer C, who is long 1,700 6. the size of the conventional subject to a position limit equal to the XYZ calls, may not at the same time options in excess of the applicable greater of: be short more than 2,800 XYZ puts, basic position limit for the options since the 4,500 contract limit applies established pursuant to paragraph 1. three times the basic limit of 4,500 to the aggregation of long call and (b)(3)(A)(ix) [(A)(i)-(v) above] must be contracts, or short put positions in options cover- hedged on a one-to-one basis with ing the same underlying security.

NASD Notice to Members 98-49 July 1998 380

Executive Summary nationals of the sanctioned countries. NASD As requested by the Department of Also, these regulations prohibit unli- Treasury (Treasury), the National censed trade and financial transac- Association of Securities Dealers, tions with such countries. Notice to Inc. (NASD¨) provides members with information from the Office of Foreign Under these regulations, financial Assets Control (OFAC) about per- institutions must block identified Members sons and entities identified as “Spe- assets and accounts when such cially Designated Nationals and property is located in the United 98-50 Blocked1 Persons.” Effective May 26, States, is held by U.S. individuals or 1998, OFAC updated its master list, entities, or comes into the posses- adding the names of six individuals sion or control of U.S. individuals or and 21 entities who have been deter- entities. The definition of assets and mined to play a significant role in property is very broad and covers Treasury Updates List Of international narcotics trafficking cen- direct, indirect, present, future, and Specially Designated tered in Colombia, or who have been contingent interests. In addition, Persons And Entities determined to act for or on behalf of, Treasury identifies certain individuals or to be owned or controlled by other and entities located worldwide that specially designated narcotics traf- are acting on behalf of sanctioned fickers; adding the names of 62 enti- governments, and that must be treat- ties which have been determined to ed as if they are part of the sanc- Suggested Routing act for or on behalf of, or to be owned tioned governments. Senior Management or controlled by the Government of Sudan; and removing the names of OFAC may impose criminal or civil Advertising two individuals previously designated penalties for violations of these regu- Continuing Education as specially designated narcotics lations. Criminal violations may result traffickers. In addition, OFAC issued in corporate and personal fines of up Corporate Finance Burmese Sanctions Regulations that to $1 million and 12 years in jail; civil Executive Representatives prohibit new investment in Burma by penalties of up to $275,000 per viola- Government Securities U.S. persons effective May 21, 1998. tion may also be imposed. To ensure compliance, OFAC enlists the coop- Institutional Questions concerning this Notice eration of various regulatory organi- Insurance may be directed to OFAC’s Compli- zations and asks the NASD to Internal Audit ance Hotline for financial institutions, remind its members about these reg- at (800) 540-6322. ulations. Legal & Compliance Municipal Background Foreign Assets Control Mutual Fund The U.S. government mandates that Regulations Operations all financial institutions located in the OFAC currently administers sanc- Options United States, overseas branches of tions and embargo programs against these institutions and, in certain Libya, Iran, Iraq, the Federal Repub- Registered Representatives instances, overseas subsidiaries of lic of Yugoslavia (Serbia and Mon- Registration the institutions comply with OFAC tenegro), Serb-controlled areas of Research regulations governing economic Bosnia and Herzegovina, Bosnian sanctions and embargo programs Serb military and civilian leaders, Syndicate regarding the accounts and other North Korea, Sudan, Syria, and Cuba. Systems assets of countries identified as In addition, OFAC prohibits certain threats to national security by the exports to the UNITA faction in Ango- Trading President of the United States. This la; new investment in Burma (Myan- Training always involves accounts and assets mar); and transactions with Variable Contracts of the sanctioned countries’ govern- designated terrorists, foreign terrorist ments, and may also involve the organizations, and narcotics traffick- accounts and assets of individual ers.

NASD Notice to Members 98-50 July 1998 387 Broker/dealers cannot deal in securi- OFAC has issued general licenses In addition, members can use the ties issued from these target coun- authorizing continued trading on the NASD Regulation, Inc., Web Site tries and governments and must national securities exchanges on (www.nasdr.com) to link to OFAC’s block or freeze accounts, assets, and behalf of blocked Cuban and North list of individuals and companies obligations of blocked entities and Korean customer accounts under subject to economic or trade sanc- individuals when this property is in conditions preserving the blocking of tions. OFAC’s Web Site contains their possession or control. resulting assets and proceeds. Sec- additional information that may be ondary market trading with respect to helpful to members and may be According to OFAC, broker/dealers certain Yugoslav debt securities accessed directly (www.ustreas.gov/ need to establish internal compliance issued pursuant to the “New Financ- treasury/services/fac/fac.html). programs to monitor these regula- ing Agreement” of September 20, Members also may refer to NASD tions. OFAC urges broker/dealers to 1988, is also authorized; however, Notices to Members 98-20, 98-8, 97- review their existing customer certain restrictions and reporting 87, 97-35, 97-4, 96-23, and 95-97. accounts and the securities in their requirements apply. custody to ensure that any accounts NASD members are urged to review or securities blocked by existing their procedures to ensure compli- sanctions are being treated properly. List Of Sanctioned ance with OFAC regulations. Broker/dealers also should review Governments And Individuals any other securities that may repre- Whenever there is an update to its sent obligations of, or ownership regulations, an addition or removal of Endnote interests in, entities owned or con- a speciﬁcally designated national, or 1 Blocking, which also may be called freez- trolled by blocked commercial or any other pertinent announcement, ing, is a form of controlling assets under U.S. government entities identiﬁed by OFAC makes the information avail- jurisdiction. While title to blocked property OFAC. able electronically on the U.S. Coun- remains with the designated country or cil on International Banking’s national, the exercise of the powers and priv- Broker/dealers must report blockings INTERCOM Bulletin Board in New ileges normally associated with ownership is within 10 days by fax to OFAC’s York and the International Banking prohibited without authorization from OFAC. Compliance Division at (202) 622- Operations Association’s Bulletin Blocking immediately imposes an across- 1657. Firms are prohibited from mak- Board in Miami. The information also the-board prohibition against transfers or ing debits to blocked customer is immediately uploaded onto Trea- transactions of any kind with respect to the accounts, although credits are autho- sury’s Electronic Library (TEL) on the property. rized. Blocked securities may not be FedWorld Bulletin Board network paid, withdrawn, transferred (even by and is available through several © 1998, National Association of Securities Dealers, book transfer), endorsed, guaran- other government services provided Inc. (NASD). All rights reserved. teed, or otherwise dealt in. free of charge to the general public.

NASD Notice to Members 98-50 July 1998 388 Executive Summary understand the rationale for such NASD On May 28, 1998, the National Adju- decisions. The policy will encourage dicatory Council (NAC) considered firms to continue to maintain strict two requests for exemptive relief supervisory and screening proce- Notice to under Municipal Securities Rulemak- dures relating to political contribu- ing Board (MSRB) Rule G-37(i). The tions by firm employees. NAC’s decisions are published below Members in redacted form, pursuant to a publi- The first two decisions of the NAC cation policy that the NAC adopted, regarding MSRB Rule G-37 and sub- 98-51 described below. ject to this policy are set forth below. The NAC denied exemptive relief to Questions regarding this Notice Firm A, referenced in Letter 1, which should be directed to Sharon Zackula, was subject to a ban due to a $25 Assistant General Counsel, Office of contribution. However, based on the Exemptive Relief Under General Counsel, NASD Regulation, factors identified below, the NAC lift- MSRB Rule G-37(i) Inc., at (202) 728-8985. ed the remaining term of the ban for Firm X, referenced in Letter 2. In Firm X’s case, the ban was triggered Publication Policy by a $100 contribution. The NAC has decided to publish each final NAC decision regarding © 1998, National Association of Securities Dealers, Suggested Routing MSRB Rule G-37(i) in a redacted Inc. (NASD). All rights reserved. Senior Management form in a Notice. Key identifying information will be redacted (e.g., the Advertising name of the municipal finance pro- Continuing Education fessional (MFP); the name of the member firm; the name of the recipi- Corporate Finance ent of the contribution; the name of Executive Representatives the city, state, or governmental entity Government Securities that is the issuer; and other legal names that would allow a reader to Institutional identify the parties involved). Insurance Internal Audit The publication policy will be subject to exceptions on a case-by-case Legal & Compliance basis. If the National Association of ¨ Municipal Securities Dealers, Inc. (NASD ) is apprised of particularly egregious Mutual Fund conduct, including, for example, Operations intentional conduct to evade the Rule Options by the contributor/MFP or the firm’s management, the NASD may decide Registered Representatives to identify fully some or all of the par- Registration ties and other specifics. Research The NASD believes that its obligation Syndicate to further investor protection is ful- Systems filled by the publication of such decisions, which will inform both the Trading public and the broker/dealer commu- Training nity of the NASD’s enforcement of Variable Contracts MSRB Rule G-37. By publishing the decisions, the investing public and the broker/dealer community will

NASD Notice to Members 98-51 July 1998 389 Recent NAC Decisions Regarding MSRB Rule G-37(i) Exemptive Relief

Letter 1: Exemptive Relief Denied

Firm A Address

Re: Firm A MSRB Rule G-37 Exemption Request

Dear Mr. M:

The National Adjudicatory Council (“NAC”) of NASD Regulation, Inc. (“NASD Regulation”) reviewed Firm A’s appeal for exemptive relief on Date, and denied the request.

In reaching this determination, the NAC was particularly concerned that the timing of the contribution and other circumstances surrounding the contribution created the appearance of a link between the contribution and the potential award of municipal securities business. Specifically, the Municipal Finance Professional (“MFP”) had personal knowledge of a proposed Project, was aware as a member of the Project Board that implementation of the proposed improvements included plans to issue a substantial amount of municipal bonds, based upon several public projections for the proposed project, and had signed Firm A documentation that made him eligible to receive a finder’s fee for the award of such business. In addition, the contribution was made to a City Council member who was one of a very small number of City Council members who sat on the City Council’s subcommittee exercising jurisdiction over the Project and who apparently was in a position to influence the award of business pertaining to a substantial municipal securities offering for which Firm A was a candidate.

In these circumstances, the NAC concluded that it would be inconsistent with the purposes of Rule G-37 to grant the requested exemption. Accordingly, the NAC denied the requested exemption. We note that the exemption request suggested that the contribution in question should not be deemed to have been made by an MFP to an “official of an issuer” as those terms are defined in Rule G-37. For purposes of this action, we assumed that the contribution would trigger the prohibitions of the rule. Any interpretive questions concerning the application of Rule G-37, including those identified in the request, should be addressed to the Municipal Securities Rulemaking Board.

The NAC granted the request for conﬁdential treatment regarding the record generally, except that the decision of the NAC will be published in redacted form in the NASD’s Notices to Members, and otherwise provided in redacted form as requested. Key identifying information that may identify the actual parties or the issuer will be redacted (e.g., the name of the MFP; the name of the member ﬁrm; the name of the recipient of the contribution; the name of the city, state, or governmental entity that is the issuer; and other legal names that may allow a reader to identify the parties involved).

NASD Notice to Members 98-51 July 1998 390 Letter 2: Exemptive Relief Conditionally Granted

Firm X Address

Re: Firm X MSRB Rule G-37 Exemption Request

Dear Mr. N:

The National Adjudicatory Council (“NAC”) of NASD Regulation, Inc. (“NASD Regulation”) reviewed Firm X’s appeal for exemptive relief on Date, and granted it.

The contribution that was made by the Firm X Municipal Finance Professional (“MFP”) on Date, appears to have been made inadvertently, was small, and was immediately returned. Moreover, there appears to have been no quid pro quo sought by the making of the contribution by either the MFP or Firm X. Firm X acted both within the letter and intent of the rule when confronted with the knowledge of the inadvertent contribution. When the contribution was made, Firm X had very detailed policies in place regarding MSRB Rule G-37 and related rules. Upon discovering the contribution had been made, Firm X voluntarily avoided initiation of any prohibited activity with the municipality in question and took additional proactive steps to avoid any recurrence of any conduct that could trigger the MSRB Rule G-37 ban on business.

Based upon the facts and circumstances set forth above, the NAC granted conditional exemptive relief to Firm X by removing the ban on the municipal securities business activities described in MSRB Rule G-37(b) effective as of NAC Meeting Date. The NAC concluded that exemptive relief from the two-year ban on municipal securities business was consistent with the public interest, the protection of investors, and the purposes of the rule. In granting the relief, the NAC did not conclude that a one-year and one-month ban was appropriate in the circumstances. Rather, the NAC concluded that having the ban continue for any additional period beyond that period already served by Firm X would be disproportionate to the conduct of Firm X and its MFP.

The NAC granted the request for conﬁdential treatment regarding the record generally, except that the decision of the NAC will be published in redacted form in the NASD’s Notices to Members, and otherwise provided in redacted form as requested. Key identifying information that may identify the actual parties or the issuer will be redacted (e.g., the name of the MFP; the name of the member ﬁrm; the name of the recipient of the contribution; the name of the city, state or governmental entity that is the issuer; and other legal names that may allow a reader to identify the parties involved).

NASD Notice to Members 98-51 July 1998 391 Executive Summary revoked and where they were inade- NASD On April 17, 1998, in Release No. quately supervised and trained. 34-39883, the Securities and Exchange Commission (SEC) The NASD initially published the Notice to approved an amendment to National Taping Rule for comment in Notice to Association of Securities Dealers, Members 96-59. NASD Regulation Inc. (NASD¨) Rule 3010 to require revised the proposal in response to Members members to establish special super- the 42 comment letters that were visory procedures, including the tape received, and filed the proposed Tap- 98-52 recording of conversations, when ing Rule with the SEC for approval in they have hired more than a speci- September 1997. fied percentage of registered persons from certain firms that have been The SEC published notice of the pro- expelled or that have had their bro- posed Taping Rule and one amend- SEC Approves Taping ker/dealer registrations revoked for ment to the Rule in the Federal Rule; Effective August 17, violations of sales practice rules (the Register in December 1997. The 1998 Taping Rule or Rule).1 The new SEC received one comment letter on Rule will be effective on August 17, the proposed Rule. The SEC 1998. The text of the new Rule and approved the proposed Rule, as the Federal Register version of the amended, and Amendment No. 2 to SEC release are attached. the proposed Rule on April 17, 1998. Suggested Routing Senior Management Interpretive questions concerning the The text of the new Taping Rule is new Rule should be directed to Mary set forth below. For a complete Advertising Revell, Associate General Counsel, description of the history of the Rule, Continuing Education NASD Regulation, Inc., at (202) 728- members should review in detail the 8203. Questions concerning compli- attached Federal Register version of Corporate Finance ance with the new Rule should be the SEC release. Executive Representatives directed to Susan Lang, Senior Government Securities Research Analyst, Department of Member Regulation, NASD Regula- Taping Rule Institutional tionSM, at (202) 728-6969. Members The Taping Rule will apply whenever Insurance should submit reports required by the a specified percentage of a member Internal Audit Taping Rule to Compliance, Depart- firm’s sales force is comprised of reg- ment of Member Regulation, NASD istered persons who were employed Legal & Compliance Regulation, 1735 K Street, N.W., within the last three years by a firm Municipal Washington, D.C. 20006. that has been expelled from membership in a securities industry self- Mutual Fund regulatory organization or has had its Operations Background registration as a broker/dealer Options The Taping Rule was developed to revoked by the SEC (a Disciplined respond to two issues. First, it Firm). The requisite percentage Registered Representatives responds to concerns expressed in varies depending on the size of the Registration the Joint Regulatory Sales Practice firm, from 40 percent for a small firm 2 Research Sweep (Sweep) Report regarding to 20 percent for a larger firm. The the need for heightened supervision firm must establish the required Syndicate of certain registered representatives supervisory procedures within 30 Systems with troubled regulatory and compli- days of receiving notice from NASD ance records. The Rule also Regulation, or obtaining actual Trading addresses the particular problems knowledge, that it is subject to the Training that occur when a firm hires a large provisions of the Rule. Variable Contracts number of individuals who formerly worked at a firm that has been Under the Taping Rule, if the requi- expelled or has had its registration site percentage of a member’s sales

NASD Notice to Members 98-52 July 1998 393 force previously was employed by a tape recordings that must be statutes).5 Three issues arise from Disciplined Firm, the member will be reviewed and how the review will the proposed Rule: what is neces- required to adopt special written pro- be conducted, or, if a random sary to comply with one-party cedures to supervise the telemarket- review is utilized, specify how the statutes; what is necessary to coming activities of all of its registered random review will be conducted; ply with two-party statutes; and how persons. The procedures require, at to comply where a conversation a minimum, that the member tape ¥ identify one or more senior persons occurs between a person in a one- record all telephone conversations at the firm with appropriate knowl- party state and a person in a two- between all of its registered persons edge and training to review the party state. and both existing and potential cus- tape recordings; tomers for a period of two years. The The question of which state law measures required by the Rule are ¥ identify how the supervisory review applies when a conversation occurs designed to prevent a reoccurrence will be conducted and documented; between a person in a one-party of sales practice abuse or other cus- statute state and a person in a two- tomer harm that caused the Disci- ¥ consider the complaint and overall party statute state is an open issue plined Firm to be expelled or have its disciplinary history, if any, of regis- that depends on the individual laws registration revoked. tered persons whose telephone of each state and the individual facts. conversations are being recorded Firms would be required to indepen- The Rule requires that firms ensure in establishing the review proce- dently determine that state laws are that they tape record any means of dures and specifying the minimum satisfied. The best practice in each telecommunications that is regularly percentage of tape recordings that case would be for member firms to used by registered persons to com- must be reviewed (with particular notify their registered persons and municate with customers. In connec- emphasis on complaints regarding customers that their telephone calls tion with this requirement, firms telemarketing); are being tape recorded. should ensure that the means of telecommunications used is capable ¥ maintain records documenting how While each firm is responsible for of being taped. If, for example, regis- and when tape recordings are complying with the Taping Rule, tered persons use cellular phones on reviewed; and NASD Regulation will provide firms a regular basis to call customers, with all of the information they need and it is not possible to tape record ¥ monitor to ensure that the proce- to determine if they are subject to the cellular telephone conversations, a dures are being implemented and requirements of the Rule. NASD firm should prohibit the use of cellular complied with. Regulation will make a monthly telephones for communicating with determination of which firms are sub- customers. On the other hand, the The factors above are not exclusive ject to the Rule. NASD Regulation occasional use of a cellular tele- and members must consider all will then notify each firm that is sub- phone where warranted for other appropriate factors when developing ject to the Rule and that it has 30 business reasons would not be pro- their review procedures and imple- days to establish the supervisory hibited. menting their supervisory reviews. procedures required by the Rule. NASD Regulation also will compile The Rule also requires firms subject In complying with the Taping Rule, and maintain a list of firms that met to the taping requirement to establish members must comply with federal the definition of “Disciplined Firm” reasonable procedures for reviewing and state civil and criminal statutes within the last three years that will be tape recordings to ensure compli- governing the tape recording of con- placed on the NASD Regulation Web ance with securities laws and NASD versations. Each state has a statute Site (www.nasdr.com). A copy of the rules, to submit reports to the NASD governing wiretapping; there also is initial list is attached to this Notice. on their supervision of telemarketing, a federal statute governing wiretap- and to retain and catalog the tapes. ping and electronic surveillance.3 NASD Regulation believes that firms NASD Regulation believes that, in The federal statute and the majority should be able to rely on the accura- adopting review procedures reason- of the state statutes permit taping of cy of the information provided to ably designed to comply with this telephone conversations with the them. Firms that are notified by requirement, members generally consent of one party (one-party NASD Regulation that they are sub- would be expected to: statutes);4 a minority of state statutes ject to the Rule must establish the require the consent of all parties to procedures required by the Rule. ¥ specify the minimum percentage of the conversation (two-party Firms that do not receive this notifi-

NASD Notice to Members 98-52 July 1998 394 cation are not required to establish this paragraph within 30 days of ¥ A firm with at least five but fewer the special supervisory procedures. receiving notice from NASD Regula- than ten registered persons, where However, if a firm has actual knowl- tion or obtaining actual knowledge 40% or more of its registered per- edge, inconsistent with the informa- that it is subject to the provisions of sons have been employed by one tion relied upon by NASD this paragraph. or more Disciplined Firms within Regulation, that it is subject to the the last three years; Rule, NASD Regulation anticipates (iii) The procedures required by this that the firm will be disciplined for fail- paragraph shall include tape-record- ¥ A firm with at least ten but fewer ure to comply with the Rule. ing all telephone conversations than twenty registered persons, between the member’s registered where four or more of its registered Finally, any member required to persons and both existing and poten- persons have been employed by adopt these procedures may seek an tial customers. one or more Disciplined Firms with- exemption from the requirement. in the last three years; NASD Regulation may grant an (iv) The member shall establish rea- exemption upon a satisfactory show- sonable procedures for reviewing the ¥ A firm with at least twenty regis- ing that the member’s supervisory tape recordings made pursuant to tered persons, where 20% or more procedures ensure compliance with the requirements of this paragraph to of its registered persons have been applicable securities laws and regu- ensure compliance with applicable employed by one or more Disci- lations and NASD rules. Members securities laws and regulations and plined Firms within the last three should follow the procedures detailed applicable rules of this Association. years. in the Rule 9600 Series when seek- The procedures must be appropriate ing an exemption. for the member’s business, size, (ix) For purposes of this Rule, the structure, and customers. term “registered person” means any person registered with the Associa- Text Of Amendments To Rule (v) All tape recordings made pur- tion as a representative, principal, or 3010 suant to the requirements of this assistant representative pursuant to (Note: New language is underlined; deletions paragraph shall be retained for a the Rule 1020, 1030, 1040, and are bracketed.) period of not less than three years 1110 Series or pursuant to Municipal from the date the tape was created, Securities Rulemaking Board Rule 3010. Supervision the first two years in an easily acces- (“MSRB”) Rule G-3. sible place. Each member shall cat- (a) No change alog the retained tapes by registered (x) For purposes of this Rule, the person and date. term “disciplined firm” means a mem- (b) Written Procedures ber that, in connection with sales (vi) Such procedures shall be main- practices involving the offer, pur- (1) No change tained for a period of two years from chase, or sale of any security, has the date that the member establishes been expelled from membership or (2) Tape recording of conversations the procedures required by the provi- participation in any securities indus- sions of this paragraph. try self-regulatory organization or is (i) Each member that either is noti- subject to an order of the Securities fied by NASD Regulation or other- (vii) By the 30th day of the month fol- and Exchange Commission revoking wise has actual knowledge that it lowing the end of each calendar its registration as a broker/dealer. meets one of the criteria in para- quarter, each member firm subject to graph (b)(2)(viii) relating to the the requirements of this paragraph (xi) Pursuant to the Rule 9600 employment history of its registered shall submit to the Association a Series, the Association may exempt persons at a Disciplined Firm as report on the member’s supervision any member unconditionally or on defined in paragraph (b)(2)(x) shall of the telemarketing activities of its specified terms and conditions from establish, maintain, and enforce spe- registered persons. the requirements of this paragraph cial written procedures for supervis- upon a satisfactory showing that the ing the telemarketing activities of all (viii) The following members shall be member’s supervisory procedures of its registered persons. required to adopt special supervisory ensure compliance with applicable procedures over the telemarketing securities laws and regulations and (ii) The member must establish the activities of their registered persons: applicable rules of the Association. supervisory procedures required by

NASD Notice to Members 98-52 July 1998 395 (3)[(2)]No change to text Hibbard Brown & Co., Inc. identify possible problem registered repre- Jaron Equities Corp. sentatives, review their sales practices, and (4)[(3)] No change to text Johnston Kent Securities, Inc. assess whether adequate hiring, retention, Kinlaw Securities Corporation and supervisory mechanisms were in place. (c) through (g) No change L. C. Wegard & Co., Inc. The Sweep Report was released on March M. H. Novick & Co., Inc. 18, 1996. M. Rimson & Co., Inc. Text Of Amendments To Rule M.G.S.I. Securities, Inc. 3 18 U.S.C. ¤ 2519 et seq. 9610 Penn Capital Financial Services, Inc. (Note: New language is underlined.) Prime Investors, Inc. 4 In one-party statute states, the only issue Retirement Investment Group is whether the registered person knows of Rule 9600. Procedures for Selheimer & Co. and consents to the tape recording. The Exemptions Shaner & Company, Inc. recording requirement would run to the firm, Stratton Oakmont Inc. and the equipment would be the firm’s. Rule 9610. Application Townsley Associates & Company, Therefore, it would be necessary for the firm Inc. to ensure that the person has notice and (a) File With General Counsel U.S. Securities Corporation of consents to the tape recording of his or her Washington, D.C. telephone conversations. This could be A member seeking an exemption Westcap Securities, L.P. accomplished through a clause in an from Rule 1021, 1022, 1070, 2210, employment agreement or employee hand- 2340, 2520, 2710, 2720, 2810, 2850, book or other written notice to the registered 2851, 2860. Interpretive Material person. 2860-1, 3010(b)(2), 3350, 11870, or Endnotes 11900, Interpretive Material 2110-1, 1 63 FR 20232 (April 23, 1998). See also 5 In two-party statute states, it would be nec- or Rule G-37 shall file a written appli- correction in Release No. 34-39883A (April essary to insert on the firm’s telephone line a cation with the appropriate depart- 23, 1998), 63 FR 24202 (May 1, 1998). recording stating that all telephone conver- ment or staff of the Association and sations are being taped, similar to customer provide a copy of the application to 2 Staffs of the NASD, New York Stock service lines in other industries. Some the Office of General Counsel of Exchange (NYSE), North American Securi- states require a system of beeps or buzzers NASD Regulation. ties Administrators Association (NASAA), that sound throughout the conversation. and the Office of Compliance Inspections Some states also have a “business use and Examinations, SEC, Joint Regulatory exception” to the two-party statute consent Sales Practice Sweep: A Review of the requirement, but it is worded and applied dif- Disciplined Firms6 Sales Practice Activities of Selected Regis- ferently in each state. A. R. Baron & Co., Inc. tered Representatives and the Hiring, Reten- Banc Street Securities, Inc. tion, and Supervisory Practices of the 6 This list is comprised of firms that were dis- Beacon Securities, Inc. Brokerage Firms Employing Them (March ciplined within the last three years and was Capital Investment Managers, Inc. 1996). The Sweep was an initiative involv- compiled based on information available as Coastline Financial, Inc. ing the staffs of the NASD, the SEC, the of June 15, 1998. Escalator Securities, Inc. NYSE, and representatives of NASAA to Euro-Atlantic Securities Inc. review the sales practice activities of select- © 1998, National Association of Securities Dealers, F.N. Wolf & Co., Inc. ed registered representatives and the hiring, Inc. (NASD). All rights reserved. Feltman & Co. retention, and supervisory practices of the H. L. Camp & Company, Inc. brokerage firms employing them in order to

NASD Notice to Members 98-52 July 1998 396

Executive Summary NASD The Ofﬁce of the Corporate Secre- tary would like to remind members of the importance of keeping the names Notice to of Executive Representatives, as well as mailing addresses for branch ofﬁces, up-to-date. Making certain Members that the Central Registration Deposi- tory (CRDSM) is updated with changes 98-53 in address and contact people, ensures that regular Notices and special mailings will be directed properly.

The National Association of Securi- Members Reminded To ties Dealers, Inc. (NASD¨) By-Laws Report Executive require each member to appoint and Representative And certify to the NASD one “executive Address Changes representative.” The Executive Rep- resentative of your firm must be a registered principal and a senior manager within the firm. The individual designated as the Executive Rep- Suggested Routing resentative will represent, vote, and Senior Management act in all NASD affairs. Advertising To change the Executive Repre- Continuing Education sentative of your firm, you must submit written notification to the Corporate Finance NASD Corporate Secretary. The Executive Representatives form to use for this purpose is Government Securities included with this Notice. You may submit the original or a photocopy Institutional to: Insurance Internal Audit Joan Conley, Corporate Secretary Executive Representative Program Legal & Compliance c/o CRD/PD Department Municipal National Association of Securities Dealers, Inc. Mutual Fund 1390 Piccard Drive Operations Rockville, MD 20850 Options or fax to (202) 728-8075.

Registered Representatives To change the address for mailings Registration sent to both main offices and branch Research offices, or to update the contact name, a properly executed Schedule Syndicate E of Form BD must be sent to CRD. Systems Notifications submitted on U.S. Post Office address change cards cannot Trading be processed. Training Variable Contracts © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved.

NASD Notice to Members 98-53 July 1998 403 EXECUTIVE REPRESENTATIVE FORM

Date: ______

NASD Member Firm:______

Firm CRD #:______

The NASD Member Firm referenced above designates (name)______, CRD #______, as Executive Representative to the NASD as of (date)______. This person is a member of the ﬁrm’s senior management and is a registered principal with the ﬁrm.

Name of person preparing this form:______

Telephone number:______

Return this form to:

Joan Conley, Corporate Secretary Executive Representative Program c/o CRD/PD Department National Association of Securities Dealers, Inc. 1390 Piccard Drive Rockville, MD 20850 or fax to (202) 728-8075

NASD Notice to Members 98-53 July 1998 404 Executive Summary In order to become a supervisory NASD On June 22, 1998, the Securities and analyst under NYSE Rule 344, an Exchange Commission (SEC) applicant may present evidence of approved amendments to National appropriate experience and either Notice to Association of Securities Dealers, (i) pass an NYSE Supervisory Ana- Inc. (NASD¨) Rule 2210 (Communi- lysts Qualification Examination or cations with the Public) that permit (ii) successfully complete a specified Members the approval of research reports by a level of the Chartered Financial Ana- supervisory analyst approved by the lysts Examination prescribed by the 98-54 New York Stock Exchange (NYSE) NYSE and pass only that portion of to satisfy NASD requirements that the NYSE Supervisory Analysts research reports be approved by a Qualification Examination dealing registered principal. The amend- with Exchange rules on research ments are effective immediately. standards and related matters.2 SEC Approves Rule Change Regarding Questions concerning this Notice The NYSE designation of “superviso- Approval Of Research may be directed to Frank J. McAuliffe, ry analyst” does not constitute a reg- Reports Vice President, Member Regulation, istration category for NASD NASD Regulation, Inc., at (301) 590- principals. However, NASD Regula- 6694; Thomas A. Pappas, Associate tion reviewed the NYSE content out- Director, Advertising Regulation line for the NYSE’s Supervisory Department, NASD RegulationSM, at Analysts Qualification Examination Suggested Routing (202) 728-8330, or Robert J. Smith, and concluded that the coverage in Senior Management Assistant General Counsel, Office of the examination of the NYSE com- General Counsel, NASD Regulation, munication rules is comparable to the Advertising at (202) 728-8176. communication rules covered in the Continuing Education NASD general principal examination. In addition, the particular categories Corporate Finance Discussion of securities addressed in the “securi- Executive Representatives NASD Rule 2210 regarding Commu- ties analysis” section of the NYSE Government Securities nications with the Public requires content outline are fixed income each item of advertising and sales lit- securities and equity securities. Institutional erature to be approved by signature Insurance or initial by a registered principal of Accordingly, NASD Regulation Internal Audit an NASD member prior to use or fil- believes that, with respect to the level ing with NASD Regulation. The defi- of training and experience necessary Legal & Compliance nition of “sales literature” in Rule for the review of research reports on Municipal 2210 includes research reports. debt and equity, the level of supervi- Paragraph (b) of NYSE Rule 472 sory analyst registration is compara- Mutual Fund regarding Communications with the ble to the level of NASD general Operations Public requires that research reports principal registration. Given that the Options be prepared or approved by a super- scope of approval authority is limited visory analyst acceptable to the to research reports on debt and equi- Registered Representatives NYSE under NYSE Rule 344.1 A ty and that the material in the super- Registration joint NASD/NYSE member raised the visory analyst and general principal Research issue of whether the approval of examinations is comparable, the research reports by a supervisory investor protection goals intended by Syndicate analyst approved by the NYSE under the NASD’s current general principal Systems NYSE Rule 344 could satisfy the review requirement can be satisfied NASD requirement under NASD by NYSE requirements in this area, Trading Rule 2210 that a registered principal thereby eliminating duplicative regu- Training approve research reports prior to use latory requirements. Variable Contracts or filing with NASD Regulation.

NASD Notice to Members 98-54 July 1998 405 The rule change amends subpara- Text Of New Rule Stock Exchange, by the signature or graph (b)(1) of Rule 2210 to state (Note: New language is underlined.) initial of a supervisory analyst that the requirement that advertise- approved pursuant to Rule 344 of the ments and sales literature be 2200. Communications with New York Stock Exchange. approved by a registered principal of Customers and the Public an NASD member firm may be met, with respect to corporate debt and 2210. Communications with Endnotes equity securities that are the subject the Public 1 “Research reports” are defined by the of research reports as that term is NYSE in Rule 472 as “...an analysis of indi- defined in NYSE Rule 472, by the (b) Approval and Recordkeeping vidual companies, industries, market condi- signature or initial of a supervisory tions, securities or other investment vehicles analyst approved pursuant to NYSE (1) Each item of advertising and which provide information reasonably suffi- Rule 344. Any other advertisements sales literature shall be approved by cient upon which to base an investment or sales literature requiring internal signature or initial, prior to use or fil- decision.” approval, such as Investment Com- ing with the Association, by a regis- pany sales material, would continue tered principal of the member. This 2 See NYSE Rule 344, Supplementary to require approval by an NASD reg- requirement may be met, only with Material .10. istered principal. respect to corporate debt and equity securities that are the subject of © 1998, National Association of Securities Dealers, research reports as that term is Inc. (NASD). All rights reserved. defined in Rule 472 of the New York

NASD Notice to Members 98-54 July 1998 406 Executive Summary reports the trade. NASD On April 11, 1994, The Nasdaq Stock Market, Inc., began operation of the Fixed Income Pricing SystemSM Quotation Obligations (Market Notice to (FIPS¨) for members trading high- Place Rule 6230) yield bonds. FIPS was created to If you are actively trading in one or facilitate the over-the-counter (OTC) more FIPS mandatory bond(s) as a Members trading of high-yield, corporate debt FIPS dealer as described in Market securities rated BB+ or lower by Place Rule 6230, you may be obli- 98-55 Standard & Poor’s Corporation. The gated to enter and maintain firm goals in the creation of FIPS were quotations into the FIPS system. similar to those which led to the cre- The failure to quote in accordance ation of The Nasdaq Stock with the FIPS rules may result in dis- Market¨—to increase information ciplinary action. Transaction Reporting and transparency in the marketplace, And Quotation thereby encouraging investment and FIPS participants must continuously Obligations Under The growth. As the list of bonds requiring display firm bids/offers in the FIPS Fixed Income Pricing FIPS reporting continues to expand, mandatory bonds in which they are members are reminded of their actively trading. Quotations may be System (FIPS) reporting and quotation obligations. one- or two-sided and must be reasonably related to the prevailing market in each bond. Quotes must reflect Reporting Transactions a minimum size of 100 bonds Suggested Routing (Market Place Rules 6240A ($100,000 par value) and be in incre- Senior Management And 6240B) ments of 1/8 of a point. FIPS dealers FIPS securities may be classified into may enter firm quotations into FIPS Advertising two categories: under their own names or through a Continuing Education FIPS broker. Quotes entered under a 1. Mandatory Bonds consist of the dealer’s own name will be identified Corporate Finance most active top-tier FIPS securities as such; all others will bear the name Executive Representatives (currently totaling 50 bonds). of the broker with the dealer remain- Government Securities These bonds must be reported within ing anonymous. five minutes after trade execution. Institutional A FIPS broker must transmit all Insurance 2. Non-Mandatory Bonds are all quotes received from FIPS dealers to Internal Audit other FIPS securities. There are the FIPS system for dissemination to approximately 2,000 bonds that all FIPS participants and to the public Legal & Compliance must be reported anytime during through market data vendors (via the Municipal the trading day. Bond Quotation Dissemination Ser- vice (BQDS) data feed). Mutual Fund The obligation to report transactions Operations on FIPS securities depends on the Please Note: If you are not actively Options role of each party in the trade. In trading in a particular FIPS security transactions between: and only execute trades to accom- Registered Representatives modate customer orders, you still Registration • A FIPS dealer and a FIPS broker’s have an obligation to report these Research broker—only the broker’s broker trades to the National Association of reports the trade. Securities Dealers, Inc. (NASD¨). Syndicate Systems • Two FIPS dealers—only the sell- side dealer reports the trade. Common Questions Trading The following questions may arise Training ¥ A FIPS participant and non-partici- regarding the reporting of FIPS Variable Contracts pant—only the FIPS participant trades:

NASD Notice to Members 98-55 July 1998 407 Question: If I believe that my firm is their firm is reporting FIPS trades. the primary source of FIPS system not a FIPS dealer or broker’s broker, Many traders assume that, in a nor- changes. The fax system is both do I have to report a trade in a mal course of business, the high- cumbersome and expensive, so we FIPS security to the NASD? yield trading desk is reporting all of will be moving toward a paper-free, the firm’s FIPS transactions and the timely method of contacting FIPS par- Answer: Yes, all transactions in firm’s obligations to the rules are ticipants via the Web Site, hopefully FIPS securities must be reported, being fulfilled. This may not be before the end of the summer. Once subject to limited exceptions. The completely accurate. For example, the new method is in place, those of reporting guidelines are set forth there are high grade desks that you who require contact through the according to mandatory or non- trade crossover bonds and utility fax system may continue to have that mandatory bond categories. This desks that trade bonds that are option at a fee to be determined. would include all firms that trade rated BB+ or lower. These desks high-yield bonds for their own (inven- may be located in different areas If a daily e-mail subscription contain- tory) account and/or that execute and/or different floors in a particular ing the complete list of FIPS manda- trades on behalf of customers. Any firm. The firm is obligated to report all tory and non-mandatory issues trade executed by a firm in a FIPS of its FIPS transactions, regardless would be of interest to your firm at bond must be reported to the NASD. of the desk that trades the bonds. this time, please send us an e-mail at fi[email protected]. Question: What securities are eligi- It is imperative that all Compliance ble for quoting in FIPS? Officers, Head Traders, and all As always, if you have any questions corporate traders be aware of the or concerns regarding FIPS, please Answer: FIPS securities are OTC reporting obligation, regardless of contact: high-yield, fixed-income corporate which desk trades a FIPS bond, so debt securities rated BB+ or lower by that the firm remains in compli- Nasdaq¨ Standard & Poor’s Corporation. It is ance. Failure to report FIPS General Questions also possible that a non-rated issue trades as required may be Justin Tubiolo may be a FIPS-eligible security. grounds for disciplinary action by (212) 858-4419 NASD Regulation, Inc. Question: If I am a broker/dealer Technology Questions who is a correspondent of a clearing Attached is a reprint of the letter that Jim Schroder firm, will my clearing firm report the went out to all FIPS participants on (212) 858-4321 trades on my behalf? June 3, 1998, concerning the recent increase in the number of bonds in FIPS Service Desk Answer: Not necessarily. The obliga- our database. Cheryl Glowacki tion to report falls on the shoulders of (203) 385-6373 the firm that executes the trade, The list of additions referenced in the whether it be for inventory or to accom- letter below is attached in this Notice. FIPS Subscriber Services modate a customer order. Most clear- This list of additions, as well as the Stacey Galullo ing firms will not assume the entire list of FIPS bonds, can be (800) 777-5606 responsibility to report trades they did obtained by calling Joanie Rizzo at not execute on behalf of their corre- (212) 858-3975. The entire list can FIPS Literature/Fax List Inquiries spondents. It should not be assumed also be accessed through our Joanie Rizzo that the clearing firm is reporting your FIPS Web Site located at (212) 858-3975 trades in FIPS securities. www.nasdaqfips.com. In order to ensure that you are in compliance MarketWatch and TradeWatch Question: As a compliance officer, with the reporting of all FIPS bonds, (800) 211-4953 am I required to monitor the reporting you must review the entire list. Many or (301) 590-6890 of all FIPS transactions—especially of these bonds may be traded by on those desks that, in the normal other trading desks within your firm. NASD RegulationSM course of business, may not consis- Regulatory Questions tently trade high-yield bonds? Please familiarize yourself with Stephen Simmes the FIPS Web Site and utilize it for (301) 590-6451 Answer: Yes, all compliance officers obtaining lists and other informa- © 1998, National Association of Securities Dealers, should be certain that every part of tion, as it will eventually become Inc. (NASD). All rights reserved.

NASD Notice to Members 98-55 July 1998 408 June 3, 1998

Dear FIPS Participant:

I want to alert you to an upcoming signiﬁcant increase in the number of bonds subject to trade reporting on the Fixed Income Pricing SystemSM (FIPS¨).

As you know, a very large percentage of high-yield bonds have come to market as 144A issues. When these private placements are exchanged for like publicly traded securities, they become subject to FIPS reporting and National Association of Securities Dealers, Inc. (NASD¨) oversight. Please be aware that approximately 450 such issues will be added to the FIPS database and faxed to you in increments over the next several weeks.

We have made every effort to contact every FIPS Participant Firm for a current fax number and the name of at least one designated FIPS responsible party, but it is the obligation of each Participant Firm to advise us of any changes in fax number or contact person. If you do not receive any faxes over the next several days, please call Joan Rizzo at (212) 858-3975 to verify your fax number.

Enclosed is a complete list of the exchanged 144A issues that will become eligible for reporting on FIPS. The entire list of FIPS bonds can be viewed and printed from the FIPS Web Site at www.nasdaqﬁps.com. From the homepage, click on “Issue Data,” then enter your FIPS Workstation user ID and password. (Service Desk Participants can obtain a FIPS Web Site user ID/password by contacting Subscriber Services at (800) 777-5606.) For the full list, select one of the “Full List” ﬁles in the “Download” section of the Issue Data page. If you do not have Internet access, the full list can be obtained in hard copy by calling Joan Rizzo at (212) 858-3975.

Members are again speciﬁcally reminded of their reporting obligations under NASD Market Place Rules 6240A, 6240B, and 6230, which mandate timely reporting of all trades in FIPS listed bonds. Failure to report FIPS trades as required may be grounds for disciplinary action by NASD Regulation, Inc.

As always, members with questions regarding FIPS reporting or quotation obligations are urged to contact me at (212) 858-4419, Jim Schroder, Assistant Director, at (212) 858-4321, or Stephen Simmes, Market Regulation, at (301) 590-6451.

Sincerely ,

Justin Tubiolo Director, Fixed-Income Trading and Market Services

NASD Notice to Members 98-55 July 1998 409 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

AES CORP Senior Sub Notes 00130HAG0 8.375 08/15/07 09/19/97 AES CORP Senior Sub Notes 00130HAK1 8.500 11/01/07 03/16/98 AES CORP Senior Sub Debs 00130HAL9 8.875 11/01/27 03/16/98 AFC ENTERPRISES Senior Sub Notes 00104QAB3 10.250 05/15/07 09/08/97 APS INC. Company Guarantee 002030AC8 11.875 01/15/06 07/18/96 ABRAXAS PETRO/CN ABRAXAS SERIES B Senior Notes 003831AC8 11.500 11/01/04 03/14/97 ACKERLY COMM INC. SERIES B Senior Notes 004527AD9 10.750 10/01/03 01/15/94 ACME BOOT CO. SERIES B Senior Notes 004622AD8 11.500 12/15/00 08/02/94 ADAMS OUTDOOR ADVERTISING Senior Notes 006348AB2 10.750 03/15/06 08/16/96 ADELPHIA COMMUNICATIONS SERIES B Senior Notes 006848AS4 9.250 10/01/02 12/03/97 ADELPHIA COMMUNICATIONS SERIES B Senior Notes 006848AK1 9.500 02/15/04 05/04/94 ADELPHIA COMMUNICATIONS SERIES B Senior Notes 006848AH8 10.250 07/15/00 02/10/94 AFFINITY GROUP HOLDING Senior Notes 00826WAC5 11.000 04/01/07 09/15/97 AFTERMARKET TECHNOLOGY SERIES D Senior Sub Notes 008318AD9 12.000 08/01/04 09/11/95 AIRTRAN AIRLINES INC. SERIES B Company Guarantee 00949KAA7 10.500 04/15/01 02/06/98 ALARIS MEDICAL SYSTEMS Company Guarantee 011638AA1 9.750 12/01/06 10/21/97 ALL-AMERICAN BOTTLING Senior Notes 016431AB4 13.000 08/15/01 01/07/94 ALLBRITTON COMMUNICATIONS SERIES B Senior Sub Debs 016745AD3 9.750 11/30/07 06/05/96 ALLIANCE GAMING CORP. SERIES B Company Guarantee 01859PAG9 10.000 08/01/07 01/05/98 ALLIED WASTE NORTH AMERICA Company Guarantee 01958XAC1 10.250 12/01/06 07/23/97 ALLIED WASTE INDUSTRIES Senior Discount Nts 019589AC4 0/11.300 06/01/07 12/16/97 ALLISON ENGINE INC. Senior Sub Notes 019686AB0 10.000 12/01/03 07/01/94 ALPINE GROUP INC. SERIES B Senior Notes 020825AD7 12.250 07/15/03 01/19/96 ALVEY SYSTEMS INC. Senior Sub Notes 022380AB5 11.375 01/31/03 06/11/96 AMER COMMUNICATION SVCS Senior Discount Nts 02520BAE2 0/12.750 04/01/06 06/25/96 AMER COMMUNICATION SVCS Senior Discount Nts 02520BAC6 0/13.000 11/01/05 03/27/95 AM GENERAL CORPORATION SERIES B Senior Notes 001702AB5 12.875 05/01/02 10/17/95 AMERICAN PAD & PAPER-DEL SERIES B Senior Sub Notes 028821AA4 13.000 11/15/05 07/24/96 AMERICAN RESTAURANT SERIES * Notes 029309AB7 12.000 09/15/98 10/13/92 AMER RESTAURANT SERIES 92 Senior Notes 029309AE1 13.000 09/15/98 08/28/96 AMER RESTAURANT SERIES 93 Senior Notes 029309AF8 13.000 09/15/98 08/28/96 AMER RESTAURANT GROUP Senior Notes 029305AC3 0/14.000 12/15/05 03/14/94 AMERICAN SKIING CO. SERIES B Senior Sub Notes 029654AG5 12.000 07/15/06 01/15/97 AMERICAN SKIING CO. SERIES B Discount Notes 029654AH3 0/13.750 01/15/07 01/15/97 AMERICO LIFE INC. Senior Sub Notes 03060NAB6 9.250 06/01/05 10/26/93 AMERIGAS PARTNERS, L.P. SERIES B Senior Notes 030981AB0 10.125 04/15/07 07/14/95 AMERITRUCK DISTRIBUTION SERIES B Senior Sub Notes 03071XAC9 12.250 11/15/05 02/22/98 AMTRAN INC. Company Guarantee 03234GAC0 10.500 08/01/04 01/09/98 AMTROL INC. Senior Sub Notes 03234AAC3 10.625 12/31/06 02/18/97 ANCHOR ADVANCED PRODUCTS Senior Notes 032816AC4 11.750 04/01/04 10/00/97 ANKER COAL GROUP INC. SERIES B Senior Notes 035396AB6 9.750 10/01/07 03/11/98 ANVIL KNITWEAR INC. SERIES B Senior Notes 03734PAC5 10.875 03/15/07 08/22/97 ARCHIBALD CANDY CORP. Company Guarantee 039525AC4 10.250 07/01/04 11/12/97 ASCENT ENTERTAINMENT GROUP Senior Discount Nts 043628AC0 0/11.875 12/15/04 03/02/98 ATLAS AIR INC. Senior Notes 049164AC0 10.750 08/01/05 12/04/97 ATRIUM COMPANIES INC. Senior Sub Notes 04962VAC3 10.500 11/15/06 05/09/97 AUTOTOTE CORP. SERIES B Company Guarantee 053323AF8 10.875 08/01/04 10/27/97 AVONDALE MILLS INC. Company Guarantee 054393AB9 10.250 05/01/06 10/23/96 AXIA INC. SERIES B Senior Sub Notes 054596AC5 11.000 03/15/01 08/24/94 BE AEROSPACE INC. SERIES B Senior Sub Notes 055381AD9 9.875 02/01/06 05/14/96 B&G FOODS INC. Company Guarantee 055088AC2 9.625 08/01/07 03/11/98 BPC HOLDING CORP. SERIES B Senior Notes 055930AB7 12.500 06/15/06 09/27/96 BTI TELECOM CORP. Senior Notes 05577BAC1 10.500 09/15/07 03/10/98

NASD Notice to Members 98-55 July 1998 410 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

BANKNORTH CAPITAL TRUST I SERIES B Company Guarantee 06646QAC3 10.520 05/01/27 11/13/97 BAR TECHNOLOGIES Company Guarantee 067016AE5 13.500 04/01/01 08/28/96 BELCO OIL & GAS CORP. SERIES B Senior Sub Notes 077410AC2 8.875 09/15/07 11/00/97 BELCO OIL & GAS CORP. SERIES B Company Guarantee 191886AC4 10.500 04/01/06 07/12/96 BELDEN & BLAKE CORP. SERIES B Company Guarantee 077447AC4 9.875 06/15/07 11/00/97 BENEDEK BROADCASTING Senior Notes 081904AC8 11.875 03/01/05 12/11/95 BENTON OIL & GAS Senior Notes 083288AE0 9.375 11/01/07 02/20/98 BENTON OIL & GAS Senior Notes 083288AC4 11.625 05/01/03 08/23/96 BIG 5 CORP. SERIES B Senior Notes 089150AB2 10.875 11/15/07 02/18/98 BIG FLOWER PRESS Senior Sub Notes 089160AC9 8.875 07/01/07 09/25/97 BOOTH CREEK SKI HOLDINGS SERIES B Senior Notes 099408AC0 12.500 03/15/07 08/13/97 BUILDING MATERIALS CORP. SERIES B Senior Notes 120111AJ8 8.000 10/15/07 03/20/98 BUILDING MATERIALS CORP. SERIES B Senior Notes 120111AF6 8.625 12/15/06 03/12/97 BUILDING MATERIALS CORP. SERIES B Senior Notes 120111AC3 11.750 07/01/04 12/15/94 BURKE INDUSTRIES INC. Company Guarantee 121360AB7 10.000 08/15/07 01/28/98 BUSSE BROADCASTING CORP. Senior Notes 123309AD8 11.625 10/15/00 03/08/96 BWAY CORP. SERIES B Company Guarantee 056039AC4 10.250 04/15/07 03/11/98 CCPR SERVICES INC. Company Guarantee 12489XAD4 10.000 02/01/07 07/29/97 CFP HOLDINGS INC .SERIES B Senior Notes 12526FAB2 11.625 01/15/04 08/11/97 CLN HOLDINGS INC. 2nd PRIORITY DISCOUNT NTS Senior Discount Nts 125638AB2 0.000 05/15/01 11/14/97 CMS ENERGY SERIES B Senior Notes 125896AG5 7.375 11/15/00 02/13/97 CP FUNDING CORP. SERIES CL B Disc 1st Mtge Nts 125923AC6 0/12.500 06/15/04 11/15/94 CS WIRELESS SYSTEMS INC. SERIES B Senior Discount Nts 22942TAE1 0/11.375 03/01/06 12/09/96 CSK AUTO INC. SERIES A Company Guarantee 12637KAB7 11.000 11/01/06 06/17/97 CABOT SAFETY CORP. Senior Sub Notes 127098AB7 12.500 07/15/05 12/01/95 CALMAR INC. SERIES B Senior Sub Notes 13126BAD9 11.500 08/15/05 01/10/96 CALPINE CORP. Senior Notes 131347AF3 8.750 07/15/07 12/30/97 CALPINE CORP. Senior Notes 131347AD8 10.500 05/15/06 11/05/96 CAMBRIDGE INDUSTRIES INC. SERIES B Company Guarantee 132201AE4 10.250 07/15/07 01/14/98 CANANDAIGUA BRANDS SERIES C Senior Sub Notes 137219AE1 8.750 12/15/03 03/07/97 CAPSTAR BROADCASTING Senior Sub Notes 14066PAD8 9.250 07/01/07 09/15/97 CAPSTAR BROADCASTING Senior Discount Nts 14066PAC0 0/12.750 02/01/09 09/11/97 CARSON INC. SERIES B Company Guarantee 145845AB9 10.375 11/01/07 02/19/98 CASINO MAGIC-LOUISIANA SERIES B Company Guarantee 147907AD1 13.000 08/15/03 08/28/97 CELLNET DATA SYSTEMS INC. SERIES B Senior Discount Nts 15115MAF8 0/13.000 06/15/05 02/14/97 CELLNET DATA SYSTEMS INC. Senior Discount Nts 15115MAL5 0/14.000 10/01/07 01/22/98 CENTRAL RENTS INC. SERIES B Senior Notes 154900AE4 12.875 12/15/03 10/28/94 CHANCELLOR MEDIA CORP.-LA SERIES B Company Guarantee 158916AC0 8.750 06/15/07 11/17/97 CHANCELLOR MEDIA CORP. SERIES B Company Guarantee 158916AD8 10.500 01/15/07 05/15/97 CHARTER COMM SO. EAST L.P. SERIES B Senior Notes 160907AC5 11.250 03/15/06 08/26/96 CHARTER COMM SO. EAST HLD. SERIES B Discount Notes 161170AC9 0/14.000 03/15/07 08/26/96 CHATTEM INC. SERIES B Senior Sub Notes 162456AE7 12.75 06/15/04 09/19/94 CHATWINS GROUP INC. Senior Notes 162468AE2 13.000 05/01/03 09/01/93 CHEMICAL LEAMAN CORP. Senior Notes 163749AC8 10.375 06/15/05 11/10/97 CHESAPEAKE ENERGY CORP. Senior Notes 165167AF4 10.500 06/01/02 09/25/95 CINEMARK USA INC. SERIES B Senior Sub Notes 172441AL1 8.500 08/01/08 03/09/98 CINEMARK USA INC. SERIES B Senior Sub Notes 172441AF4 9.625 08/01/08 11/22/96 CINEMARK USA INC. SERIES D Senior Sub Notes 172441AJ6 9.625 08/01/08 10/30/97 CITADEL BROADCASTING CO. Senior Sub Notes 17285EAC3 10.250 07/01/07 01/28/98 CLARK MATERIALS HANDLING Company Guarantee 181475AC8 10.750 11/15/06 03/17/97 CLARK REFINING & MARKETING INC. Senior Sub Notes 181900AE1 8.875 11/15/07 02/23/98 CLARK-SCHWEBEL INC. SERIES B Debentures 181515AB3 12.500 07/15/07 12/00/97 CLEVELAND ELEC/TOLEDO EDISON SERIES B Notes 186118AG0 7.190 07/01/00 10/27/97

NASD Notice to Members 98-55 July 1998 411 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

CLEVELAND ELEC/TOLEDO EDISON SERIES B Notes 186118AH8 7.670 07/01/04 10/27/97 CLIFFS DRILLING CO. SERIES D Company Guarantee 18682CAF7 10.250 05/15/03 12/16/97 COACH USA INC. SERIES B Company Guarantee 18975LAC0 9.375 07/01/07 11/12/97 COAST HOTELS & CASINO SERIES B Company Guarantee 19035CAC6 13.000 12/15/02 08/22/96 COBBLESTONE GOLF GROUP SERIES B Senior Notes 190885AC7 11.500 06/01/03 11/05/96 COINMACH CORP. SERIES D Senior Notes 192596AE4 11.750 11/15/05 02/06/98 COLE NATIONAL GROUP INC. Senior Sub Notes 193292AG4 8.625 08/15/07 01/27/98 COLLINS & AIKMAN FLOORCOVER. SERIES B Senior Sub Notes 19483NAC9 10.000 01/15/07 07/07/97 COLORADO GAMING & ENT. Senior Notes 196469AA8 12.000 06/01/03 06/07/96 COLORADO PRIME CORP. Company Guarantee 196902AD2 12.500 05/01/04 10/10/97 COMCAST CELLULAR HOLDINGS SERIES B Senior Notes 20029YAC4 9.500 05/01/07 11/07/97 COMFORCE OPERATING INC. SERIES B Senior Notes 20038MAC9 12.000 12/01/07 03/30/98 COMMUNICATIONS INSTRUMEN. SERIES B Company Guarantee 203406AC7 10.000 09/15/04 03/05/98 COMMUNICATIONS & POWER IND. SERIES B Senior Sub Notes 20338CAC8 12.000 08/01/05 12/20/95 COMMUNITY DISTRIBUTORS SERIES B Company Guarantee 203646AB0 10.250 10/15/04 03/13/98 CONNECTICUT LIGHT & POWER SERIES C 1st Mortgage 207597DQ5 7.750 06/01/02 10/00/97 CONSECO INC. SERIES B Senior Sub Notes 066229AB1 13.000 11/01/02 05/14/93 CONTIFINANCIAL CORP. Senior Notes 21075VAC1 7.500 03/15/02 06/11/97 CONTINENTAL AIRLINES INC. SERIES 962D Pass-thru Certiﬁcate 210805AU1 11.500 04/02/08 11/01/96 CORE-MARK INTERNATIONAL Senior Sub Notes 218682AD4 11.375 09/15/03 02/07/97 CORPORATE EXPRESS SERIES B Senior Sub Notes 219888AB0 9.125 03/15/04 03/20/95 COURTYARD BY MARRIOTT SERIES B Senior Notes 222746AC3 10.750 02/01/08 06/17/96 CROSS TIMBERS OIL CO. SERIES B Senior Sub Notes 227573AG7 8.750 11/01/09 12/19/97 CROSS TIMBERS OIL CO. SERIES B Senior Sub Notes 227573AD4 9.250 04/01/07 06/16/97 CURTICE-BURNS FOODS INC. Senior Sub Notes 231382AA0 12.250 02/01/05 01/19/95 DADE INTERNATIONAL INC. SERIES B Senior Sub Notes 233663AE3 11.125 05/01/06 12/04/96 DAY INTERNATIONAL GROUP INC. SERIES B Senior Notes 239536AB1 11.125 06/01/05 12/05/95 DECORATIVE HOME ACCENTS SERIES B Senior Notes 243626AE8 13.000 06/30/02 12/13/95 DEL MONTE CORP./FOODS CO. SERIES B Senior Sub Notes 245217AH7 12.250 04/15/07 08/21/97 DELCO REMY INTERNATIONAL INC. Company Guarantee 246626AE5 10.625 08/01/06 01/00/98 DELL COMPUTER Senior Notes 247025AC3 11.000 08/15/00 01/30/94 DELTA BEVERAGE GROUP Senior Notes 247389AB5 9.750 12/15/03 04/04/97 DELTA MILLS INC. SERIES B Company Guarantee 247701AB1 9.625 09/01/07 02/12/98 DETAILS INC. SERIES B Senior Sub Notes 25063WAC4 10.000 11/15/05 03/16/98 DETAILS HOLDINGS CORP. SERIES B Senior Discount Nts 25063TAA5 0/12.500 11/15/07 03/16/98 DI GIORGIO CORP. SERIES B Senior Notes 252435AF9 10.000 06/15/07 10/10/97 DII GROUP INC. Senior Sub Notes 232949AC1 8.500 09/15/07 01/22/98 DIAL CALL COMMUNICATIONS SERIES B Senior Discount Nts 25246PAE5 10.250 12/15/05 05/23/94 DIGITAL TV SVC./DTS CAPTL SERIES B Company Guarantee 25387XAC1 12.500 08/01/07 01/30/98 DISCOVERY ZONE Company Guarantee 25468BAF4 13.500 08/01/02 03/06/98 DOBSON COMMUNICATIONS CORP. Senior Notes 256069AC9 11.750 04/15/07 06/17/97 DOLLAR FINANCIAL GROUP SERIES A Senior Notes 256666AB4 10.875 11/15/06 04/10/97 DRYPERS CORP. SERIES B Senior Notes 262497AG5 10.250 06/15/07 10/15/97 DRYPERS CORP. SERIES B Senior Notes 262497AC4 12.500 11/01/02 08/12/93 DYNCORP INC. Senior Sub Notes 268162AD6 9.500 03/01/07 07/28/97 E&S H0LDINGS CORP. SERIES B Senior Sub Notes 26822QAC7 10.375 10/01/06 02/12/97 EV INTERNATIONAL INC. SERIES A Company Guarantee 269263AC3 11.000 03/15/07 09/05/97 EASCO CORP. SERIES B Senior Notes 270330AG8 10.000 03/15/01 08/19/94 ECHOSTAR DBS CORP. Company Guarantee 27876GAC2 12.500 07/01/02 11/28/97 ECHOSTAR SATELLITE BROADCAST. Senior Discount Nts 27876DAB1 0/13.125 03/15/04 07/26/96 ELECTRONIC RETAILING SYS. Senior Discount Nts 285825AC9 0/13.250 02/01/04 07/07/97 ENVIRODYNE INDUSTRIES SERIES B Senior Notes 294037AJ5 12.000 06/15/00 12/08/95 EXIDE ELECTRONICS GROUP SERIES B Senior Sub Notes 302052AC9 11.500 03/15/06 07/19/96

NASD Notice to Members 98-55 July 1998 412 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

EYE CARE CENTERS Senior Notes 302294AC7 12.000 10/01/03 06/09/94 FM HOLDINGS INC. SERIES B Debentures 301933AB3 13.125 09/15/05 01/18/94 FAIRCHILD SEMICONDUCTOR Senior Sub Notes 303727AC5 10.125 03/15/07 08/13/97 FALCON DRILLING CO. INC. SERIES B Senior Notes 305914AB9 9.750 01/15/01 08/30/94 FALCON HOLDING GROUP, L.P. Senior Sub Notes 306064AB2 11.000 09/15/03 10/29/93 FARM FRESH INC. SERIES A Senior Notes 307669AE1 12.250 10/01/00 05/20/94 FEDERAL DATA CORP. Company Guarantee 313252AC2 10.125 08/01/05 01/22/98 FELCOR SUITES, L.P. Company Guarantee 313917AE6 7.375 10/01/04 03/20/98 FELCOR SUITES, L.P. Company Guarantee 313917AF3 7.625 10/01/07 03/20/98 FINGERHUT CO. Senior Notes 317867AC3 7.375 09/15/99 02/03/97 FIRST PALM BEACH BANCORP SERIES B Debentures 33589BAC9 10.350 06/30/02 12/23/97 FLEMING COMPANIES INC. SERIES B Company Guarantee 339130AK2 10.500 12/01/04 02/10/98 FLEMING COMPANIES INC. SERIES B Company Guarantee 339130AL0 10.625 07/31/07 02/10/98 FLORIDA COAST PAPER LLC SERIES B 1st Mortgage 340606AC6 12.750 06/01/03 11/13/96 FONDA GROUP INC. SERIES B Senior Sub Notes 344555AC1 9.500 03/01/07 07/31/97 FORMAN PETROLEUM CORP. SERIES B Company Guarantee 346361AE8 13.500 06/01/04 10/31/97 FOUR M CORP. SERIES B Senior Notes 350870AC5 12.000 06/01/06 11/13/96 FOX/LIBERTY NETWORKS LLC Senior Notes 351437AC2 8.875 08/15/07 01/23/98 FOX/LIBERTY NETWORKS LLC Senior Discount Nts 351437AD0 0/9.750 08/15/07 01/23/98 FREEDOM CHEMICALS INC. Senior Sub Notes 356371AC8 10.625 10/15/06 03/17/97 GFSI HOLDINGS INC. SERIES B Senior Discount Nts 36169LAC8 0/11.375 09/15/09 01/30/98 GENERAL MEDIA Senior Notes 370295AD9 10.625 12/31/00 07/15/94 GENESIS HEALTH VENTURES Senior Sub Notes 371912AF3 9.250 10/01/06 02/28/97 GENMAR HOLDINGS SERIES A Senior Sub Notes 372305AB8 13.500 07/15/01 11/30/94 GEOTEK COMMUNICATION INC. SERIES B Senior Discount Nts 373654AG7 0/15.000 07/15/05 12/05/95 GIANT INDUSTRIES Company Guarantee 374508AD1 9.000 09/01/07 12/26/97 GLASSTECH INC. SERIES B Senior Notes 377265AG8 12.750 07/01/04 12/01/97 GLOBALSTAR L.P./CAPITAL SERIES * Senior Notes 379363AK0 11.375 02/15/04 08/15/97 GORGES/QUIK TO FIX FOOD SERIES B Senior Sub Notes 382883AB2 11.500 12/01/06 04/28/97 GOTHIC ENERGY CORP. SERIES B Company Guarantee 383482AE6 12.250 09/01/04 12/01/97 GRAHAM FIELD HEALTH PDS SERIES A Senior Sub Notes 384632AB1 9.750 08/15/07 02/09/98 GRAND CASINOS INC. SERIES B Company Guarantee 385269AC9 9.000 10/15/04 02/17/98 GRANITE DEVELOPMENT PARTNERS Senior Notes 387347AB3 10.830 11/15/03 12/05/94 GREENPOINT CAPITAL TRUST I Company Guarantee 39538PAC7 9.100 06/01/27 10/14/97 GREYHOUND LINES SERIES B Company Guarantee 398048AH1 11.500 04/15/07 08/01/97 GREYSTONE HOMES INC. Senior Notes 398068AB2 10.750 03/01/04 07/29/94 HCC INDUSTRIES Company Guarantee 404125AE6 10.750 05/15/07 12/03/97 HAMMONS, JOHN Q., HOTELS L.P. 1st Mortgage 408628AC9 9.750 10/01/05 12/16/96 HARRAHS OPER. INC. SERIES B Senior Sub Notes 413627AB6 8.750 03/15/00 08/23/93 HAYES LEMMERZ INTL. INC. SERIES B Company Guarantee 420804AG1 9.125 07/15/07 10/28/97 HAYES LEMMERZ INTL. INC. SERIES B* Company Guarantee 420804AH9 9.125 07/15/07 10/28/97 HEALTHSOUTH CORP. SERIES B Senior Sub Notes 211642AD5 10.375 04/01/03 05/26/93 HEARTLAND WIRELESS COMM. Senior Notes 42235WAC2 13.000 04/15/03 03/13/96 HEARTLAND WIRELESS SERIES D Senior Notes 42235WAG3 13.000 04/15/03 01/22/97 HEARTLAND WIRELESS SERIES B Senior Notes 42235WAH1 14.000 10/15/04 04/10/97 HEDSTROM CORP. Company Guarantee 42279QAC2 10.000 06/01/07 12/11/97 HEDSTROM HOLDINGS INC. Senior Discount Nts 422914AE1 0/12.000 06/01/09 12/04/97 HERFF JONES INC. Senior Sub Notes 42718EAB0 11.000 08/15/05 12/04/95 HINES HORTICULTURE INC. SERIES B Senior Sub Notes 433245AB3 11.750 10/15/05 02/16/96 HOLLYWOOD PARK/OPERATING SERIES B Senior Sub Notes 43625PAB5 9.500 08/01/07 03/17/98 HOLLYWOOD ENTERTAINMENT SERIES B Senior Sub Notes 436141AC9 10.625 08/15/04 10/31/97 HORSESHOE GAMING LLC SERIES B Company Guarantee 44075LAF8 9.375 06/15/07 11/07/97 HORSESHOE GAMING LLC SERIES B Senior Notes 44075LAC5 12.750 09/30/00 06/12/96

NASD Notice to Members 98-55 July 1998 413 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

HUBCO INC. Sub Debentures 404382AC7 7.750 01/15/04 07/02/94 HUBCO INC. Sub Debentures 404382AF0 8.200 09/15/06 12/13/96 HYDROCHEM INDUSTRIAL SVC. SERIES B Company Guarantee 448850AB3 10.375 08/01/07 11/12/97 HYPERION TELECOMMUNICATIONS SERIES B Senior Notes 44914KAH1 12.250 09/01/04 11/20/97 ICG HOLDINGS INC. Company Guarantee 449247AE5 0/11.625 03/15/07 07/16/97 ICG HOLDINGS INC. Senior Discount Nts 449247AA3 0/13.500 09/15/05 01/08/96 ICN PHARMACEUTICALS INC. SERIES B Senior Notes 448924AD2 9.250 08/15/05 11/11/97 ICO INC. SERIES B Senior Notes 449294AE7 10.375 06/01/07 11/18/97 IHF HOLDINGS INC. SERIES B Senior Discount Nts 449619AC9 0/15.000 11/15/04 05/17/95 IMC GLOBAL INC. SERIES B Notes 449669AG5 10.750 06/15/03 10/11/93 ISP HOLDINGS INC. SERIES B Senior Notes 450302AE4 9.000 10/15/03 04/09/97 ISP HOLDINGS INC. SERIES B Senior Notes 450302AF1 9.750 02/15/02 04/09/97 ITC DELTACOM INC. Senior Notes 45031TAC8 11.000 06/01/07 11/12/97 IXC COMMUNICATIONS INC. SERIES B Company Guarantee 450713AC6 12.500 10/01/05 08/02/96 ICON HEALTH & FITMESS SERIES B Senior Sub Notes 44929HAB4 13.000 07/15/02 05/17/95 IMAGYN MEDICAL TECHNOLOGIES Company Guarantee 45244EAA8 12.500 04/01/04 11/05/97 IMPERIAL HOLLY CORP. Company Guarantee 452835AD3 9.750 12/15/07 03/12/98 INDSPEC CHEMICAL SERIES B Senior Sub Notes 455781AC8 0/11.500 12/01/03 03/14/93 INSILCO CORP. Senior Sub Notes 457659AH3 10.250 08/15/07 11/14/97 INTELCOM GROUP (USA) INC.(see also ICG) Company Guarantee 449247AB1 0/12.500 05/01/06 08/09/96 INTERMEDIA COMMUNICATION SERIES B Senior Notes 458801AR8 8.500 01/15/08 03/11/98 INTERMEDIA COMMUNICATION SERIES B Senior Notes 458801AS6 8.875 11/01/07 02/12/98 INTERMEDIA COMMUNICATION OF FL SERIES B Senior Notes 458801AE7 13.500 06/01/05 09/06/95 INTERNATIONAL KNIFE & SAW INC. Senior Sub Notes 459733AC5 11.375 11/15/06 03/17/97 INTERNATIONAL WIRELESS COMMUNICATIONS Senior Discount Nts 46058GAE8 0.000 08/15/01 12/20/96 IRIDIUM LLC/CAPITAL CORP. SERIES B Company Guarantee 46268KAK1 14.000 07/15/05 10/07/97 IRON MOUNTAIN INC. Company Guarantee 46284PAD6 8.750 09/30/09 01/13/98 ISLE OF CAPRI/CAP. CORP. SERIES B 1st Mortgage 464587AC8 13.000 08/31/04 01/21/98 IVEX HOLDINGS CORP. SERIES B Debentures 465851AB9 13.250 03/15/05 06/30/93 JOHNSTOWN AMERICA INDUSTRIES SERIES C Company Guarantee 479477AD3 11.750 08/15/05 12/18/97 JORDAN INDUSTRIES INC. SERIES B Senior Notes 480695AJ4 10.375 08/01/07 09/29/97 JORDAN INDUSTRIES INC. SERIES B Senior Sub Notes 480695AK1 0/11.750 04/01/09 09/29/97 JORDAN TELECOM PRODUCTS SERIES B Senior Discount Nts 480767AH5 0/11.750 08/01/07 12/11/97 K&F INDUSTRIES SERIES B Senior Sub Notes 482240AG3 9.250 10/15/07 03/06/98 KSL RECREATION GROUP INC. SERIES B Senior Sub Notes 482683AC3 10.250 05/01/07 10/13/97 KEEBLER CORP. Senior Sub Notes 487251AC4 10.750 07/01/06 11/25/96 KELLEY OIL & GAS CORP. SERIES B Senior Sub Notes 487906AD1 10.375 10/15/06 02/10/97 KINETIC CONCEPTS INC. SERIES B Company Guarantee 49460WAC3 9.625 11/01/07 03/03/98 KITTY HAWK INC. Company Guarantee 498326AC1 9.950 11/15/04 03/20/98 KNOLL INC. Senior Sub Notes 498904AB7 10.875 03/15/06 07/15/96 KNOLOGY HOLDINGS INC. Senior Discount Nts 499179AE9 0/11.875 10/15/07 03/24/98 LDM TECHNOLOGIES INC. SERIES B Company Guarantee 50182PAC3 10.750 01/15/07 05/28/97 LADY LUCK GAMING SERIES QTR 1st Mortgage 505903AC8 11.875 03/01/01 03/29/96 LADY LUCK GAMING SERIES SA 1st Mortgage 505903AD6 11.875 03/01/01 03/29/96 LEINER HEALTH PRODUCTS Senior Sub Notes 52536PAC2 9.625 07/01/07 12/15/97 LENFEST COMMUNICATIONS Senior Sub Notes 526055AD0 10.500 06/15/06 10/09/96 LESLIE'S POOLMART Senior Notes 527069AC2 10.375 07/15/04 11/28/97 LILLY INDUSTRIES INC. Senior Notes 532491AC1 7.750 12/01/07 01/00/98 LODGENET ENTERTAINMENT Senior Notes 540211AC3 10.250 12/15/06 05/15/97 LOOMIS FARGO & CO. Company Guarantee 543462AC9 10.000 01/15/04 07/22/97 MMI PRODUCTS INC. SERIES B Senior Sub Notes 553090AC5 11.250 04/15/07 10/01/97 MAJESTIC STAR CASINO LLC Senior Notes 56075NAC5 12.750 05/15/03 11/13/96 MARK IV INDUSTRIES INC. Senior Sub Notes 570387AQ3 7.500 09/01/07 12/15/97

NASD Notice to Members 98-55 July 1998 414 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

MARSH SUPERMARKET INC. SERIES B Company Guarantee 571783AD1 8.875 08/01/07 12/03/97 MAXXIM MEDICAL Company Guarantee 57777GAC9 10.500 08/01/06 11/25/96 MCCAW INTERNATIONAL LTD. Senior Discount Nts 579472AE1 0/13.000 04/15/07 09/05/97 MEGO MORTGAGE CORP. Company Guarantee 585165AA1 12.500 12/01/01 11/22/96 MERIT BEHAVIORAL CARE Senior Sub Notes 589867AB6 11.500 11/15/05 04/18/96 METALLURG INC. Notes 591261AA0 12.000 04/14/07 04/14/97 METRIS COMPANIES INC. Company Guarantee 591598AC1 10.000 11/01/04 03/09/98 METROCALL INC. Senior Sub Notes 591647AD4 9.750 11/01/07 03/17/98 METROCALL INC. Senior Sub Notes 74342CAC9 11.875 06/15/05 11/06/95 METRONET COMMUNICATIONS Senior Notes 59169YAE8 12.000 08/15/07 01/20/98 MOHEGAN TRIBAL GAMING SERIES B Senior Notes 608329AC2 13.500 11/15/02 07/18/96 MORAN TRANSPORTATION CO. Notes 616506AB7 11.750 07/15/04 11/18/94 MOTHERS WORK INC. Senior Notes 619903AB3 12.625 08/01/05 11/29/95 MOTORS AND GEARS INC. SERIES D Senior Notes 620103AE1 10.750 11/15/06 02/18/98 NTL INCORPORATED SERIES B Senior Notes 459216AG2 0/11.500 02/01/06 05/23/96 NTL INCORPORATED SERIES A Senior Notes 459216AD9 0/12.750 04/15/05 08/18/95 NATIONAL FIBERSTOCK CORP. Senior Notes 636049AC2 11.625 06/15/02 11/20/96 NAVISTAR FINANCIAL CORP. SERIES B Senior Sub Notes 638902AK2 9.000 06/01/02 08/26/97 NEENAH CORPORATION SERIES D Senior Sub Notes 640071AF3 11.125 05/01/07 09/11/97 NEWFIELD EXPLORATION CO. SERIES B Senior Notes 651290AC2 7.450 10/15/07 12/19/97 NEWS CORP. LTD. SERIES B Senior Discount Nts 62944VAB6 0.000 06/15/99 12/08/94 NEWFLO CORP. SERIES B Sub Notes 651305AB0 13.250 11/15/02 05/28/93 NEXTLINK COMMUNICATIONS Senior Notes 65333AAC2 12.500 04/15/06 08/05/96 NORMEX TECHNOLOGIES CORP. SERIES B Senior Discount Nts 45322KAC5 14.000 05/15/02 12/20/95 NORTEK INC. SERIES B Senior Notes 656559AW1 9.125 09/01/07 11/18/97 OLYMPUS COMM. L.P./CAP. CORP. SERIES B Senior Notes 68162YAC0 10.625 11/15/06 06/09/97 OMEGA CABINETS Senior Sub Notes 682070AB3 10.500 06/15/07 01/21/98 OMNIPOINT CORP. Senior Notes 68212DAE2 11.625 08/15/06 12/17/96 OMNIPOINT CORP. SERIES A Senior Notes 68212DAF9 11.625 08/15/06 03/21/97 ORBCOMM GLOBAL L.P./CAPITAL SERIES B Senior Notes 68555RAC0 14.000 08/15/04 01/16/97 OUTSOURCING SOLUTIONS SERIES B Senior Sub Notes 690132AC9 11.000 11/01/06 05/29/97 OXFORD AUTOMOTIVE INC. Company Guarantee 690903AC3 10.125 06/15/07 11/21/97 PM HOLDINGS CORP. Debentures 69344KAC9 0/11.500 09/01/05 01/21/94 PACKAGED ICE INC. SERIES B Company Guarantee DD0121960 12.000 04/15/04 10/15/97 PACKAGING RESOURCES INC. Senior Notes 695168AC8 11.625 05/01/03 09/20/96 PAGEMART INC. Senior Discount Nts 695534AC1 12.250 11/01/03 09/14/94 PAGEMART NATIONWIDE Senior Discount Nts 69553QAC2 0/15.000 02/01/05 07/12/95 PANDA FUNDING CORP. SERIES A-1 Bonds 69833DAC3 11.625 08/20/12 03/20/97 PANDA GLOBAL ENERGY CO. Company Guarantee 69833HAE0 12.500 04/15/04 10/15/97 PANTRY INC. Company Guarantee 698657AE3 10.250 10/15/07 02/09/98 PARAGON HEALTH NETWORKS SERIES B Senior Sub Notes 698940AF0 0/10.500 11/01/07 03/13/98 PARK-OHIO INDUSTRIES Senior Sub Notes 700677AE7 9.250 12/01/07 02/24/98 PEGASUS COMMUNICATIONS SERIES B Senior Notes 705904AD2 9.625 10/15/05 02/25/98 PEGASUS MEDIA & COMMUNICATIONS SERIES B Notes 70557GAC8 12.500 07/01/05 11/13/95 PETERS (J.M.) CO. Senior Notes 716035AC4 12.750 05/01/02 11/10/94 PETRO SHOPPING CENTER/FINANCIAL Senior Notes 715911AB9 10.500 02/01/07 07/18/97 PETSEC ENERGY INC. SERIES B Senior Sub Notes 71676MAC9 9.500 06/15/07 11/20/97 PILLOWTEX CORPORATION SERIES B Company Guarantee 721501AE4 9.000 12/15/07 03/25/98 PIONEER AMERICAS ACQUISITION SERIES B Company Guarantee 723551AF4 9.250 06/15/07 10/29/97 PLAINS RESOURCES INC. SERIES B Senior Sub Notes 726540AE7 10.250 03/15/06 08/08/96 PLAINS RESOURCES INC. SERIES D Company Guarantee 726540AH0 10.250 03/15/06 10/30/97 PLASTIC CONTAINERS INC. SERIES B Senior Notes 727547AC5 10.000 12/15/06 05/22/97 PLAYTEX PRODUCTS INC. SERIES B Company Guarantee 72813PAD2 8.875 07/15/04 10/07/97

NASD Notice to Members 98-55 July 1998 415 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

POGO PRODUCING CO. SERIES B Senior Sub Notes 730448AH0 8.750 05/15/07 10/16/97 POLAND COMMUNICATION INC. SERIES B Senior Notes 730873AC0 9.875 11/01/03 06/16/97 PORT ROYAL HOLDINGS INC. Company Guarantee 501148AC4 10.250 10/01/07 01/23/98 POTASH CORP.-SASKATCHEWAN SERIES B Senior Notes 039230AB3 10.750 05/01/05 07/21/93 PRECISE TECHNOLOGY INC. SERIES B Company Guarantee 74018PAC3 11.125 06/15/07 11/19/97 PREMIER PARKS SERIES A Senior Notes 740540AB5 12.000 08/15/03 12/11/95 PRIMEDIA INC. SERIES B Company Guarantee 482727AE4 8.500 02/01/06 08/21/96 PRINTPACK INC. SERIES B Senior Notes 74257PAE9 9.875 08/15/04 02/07/97 PRINTPACK INC. SERIES B Senior Sub Notes 74257PAF6 10.625 08/15/06 02/07/97 PROTECTION ONE ALARM MON Senior Discount Nts 743659AK0 13.625 06/30/05 11/17/95 QWEST COMMUNICATIONS INTL SERIES B Senior Notes 749121AE9 10.875 04/01/07 08/25/97 RBX CORPORATION SERIES B Company Guarantee 749280AB9 11.250 10/15/05 05/31/96 RXI HOLDINGS INC. SERIES B Senior Notes 749922AC4 14.000 07/15/02 11/13/95 RADNOR HOLDINGS INC. Senior Notes 750495AC7 10.000 12/01/03 05/08/97 RAYOVAC CORP. SERIES B Senior Sub Notes 755081AB2 10.250 11/01/06 03/19/97 RED ROOF INNS Senior Notes 757005AB9 9.625 12/15/03 06/30/94 REGAL CINEMAS INC. Senior Sub Notes 758754AB1 8.500 10/01/07 12/19/97 REGAL CINEMAS INC. Company Guarantee 19088KAC4 10.625 03/01/03 09/12/96 RELIANT BUILDING PRODUCT SERIES B Senior Sub Notes 75952GAC8 10.875 05/01/04 10/14/97 RENAISSANCE COSMETICS Company Guarantee 759664AH8 11.750 02/15/04 06/17/97 RENCO METALS INC. Senior Notes 759677AB3 12.000 07/15/00 01/12/94 RESOURCE AMERICA INC. Senior Notes 761195AC0 12.000 08/01/04 03/13/98 RIDDELL SPORTS INC. Company Guarantee 765670AC8 10.500 07/15/07 09/16/97 RIFKIN ACQ. PARTNERS L.P. Senior Sub Notes 766520AC4 11.125 01/15/06 06/19/96 RIGGS CAPITAL TRUST SERIES A Company Guarantee 766560AC0 8.625 12/31/26 03/28/97 RIGGS CAPITAL TRUST II SERIES C Company Guarantee 76656RAB3 8.875 03/15/27 08/29/97 RIO HOTEL & CASINO INC. Company Guarantee 767147AF8 9.500 04/15/07 05/30/97 RIVIERA HOLDINGS CORP. Company Guarantee 769627AD2 10.000 08/15/04 01/08/98 ROSE HILLS CO. Senior Sub Notes 777110AC1 9.500 11/15/04 09/11/97 RUTHERFORD-MORAN OIL Company Guarantee 783286AB3 10.750 10/01/04 02/06/98 RYDER TRS INCORPORATED Senior Sub Notes 783551AC8 10.000 12/01/06 05/09/97 STC BROADCASTING INC. Senior Sub Notes 784752AC1 11.000 03/15/07 10/02/97 SABRELINER CORP. SERIES B Senior Notes 78571LAA6 12.500 04/15/03 11/18/93 SAFETY COMPONENTS INTL SERIES B Senior Sub Notes 78647AC0 10.125 07/15/07 10/01/97 SALEM COMMUNICATIONS CORP. SERIES B Company Guarantee 794089AC6 9.500 10/01/07 03/11/98 SAUL, B.F., REIT Senior Notes 804396AL3 11.625 04/01/02 06/09/94 SCOVILL FASTENERS INC. SERIES B Company Guarantee 810909AC5 11.250 11/30/07 03/23/98 SELMER CO. INC. Senior Sub Notes 816591AE1 11.000 05/15/05 09/08/95 SHEFFIELD STEEL CORP. SERIES B 1st Mortgage 821266AE3 11.500 12/01/05 03/18/98 SHOP VAC CORP. Senior Notes 825085AC7 10.625 09/01/03 03/04/97 SILGAN HOLDINGS INC. Senior Sub Debs 827048AF6 9.000 06/01/09 09/05/97 SIMMONS CO. Senior Sub Notes 828709AB1 10.750 04/15/06 09/04/96 SINCLAIR BROADCAST GROUP Company Guarantee 829226AE9 9.000 07/15/07 11/07/97 SIX FLAGS ENTERTAINMENT Senior Notes 829903AB9 0.000 12/15/99 08/17/93 SIX FLAGS THEME PARKS SERIES A Senior Sub Notes 83001WAB0 12.250 06/15/05 12/18/95 SOUTHDOWN INC. SERIES B Senior Sub Notes 841297AJ3 10.000 03/01/06 07/05/96 SOUTHWEST ROYALTIES INC. SERIES B Company Guarantee 84522BAC2 10.500 10/15/04 03/11/98 SOVEREIGN CAPITAL TRUST I Company Guarantee 84603KAC4 9.000 04/01/27 11/25/97 SPANISH BROADCASTING SYSTEM Senior Notes 846425AC0 12.500 06/15/02 12/01/94 SPECIALTY FOODS CORP. SERIES B Senior Notes 847499AF7 11.125 10/01/02 10/27/95 SPECIALTY FOODS ACQ. SERIES B Senior Notes 847499AC4 10.250 08/15/01 12/15/93 SPECIALTY FOODS ACQ. SERIES B Debentures 847498AC6 0/13.000 08/15/05 12/15/93 SPEEDWAY MOTORSPORTS INC. Company Guarantee 847788AF3 8.500 08/15/07 10/28/97 STAR MARKETS CO. Senior Sub Notes 855151AB2 13.000 11/01/04 04/10/95 NASD Notice to Members 98-55 July 1998 416 ISSUER NAME COLLATERAL TYPE CUSIP Coupon Maturity Exchanged

STONE ENERGY CORP. Company Guarantee 861642AC0 8.750 09/15/07 12/10/97 SULLIVAN GRAPHICS INC. Senior Sub Notes 865301AD7 12.750 08/01/05 01/04/96 SUN WORLD INTERNATIONAL SERIES B Company Guarantee 867015AC3 11.250 04/15/04 11/13/97 SYNTHETIC INDUSTRIES INC. SERIES B Senior Sub Notes 871914AE7 9.250 02/15/07 07/14/97 TALTON HOLDINGS INC. SERIES B Company Guarantee 87483BAC2 11.000 06/30/07 02/10/98 TEKNI-PLEX INC. SERIES B Senior Sub Notes 87910PAB6 11.250 04/01/07 10/03/97 TELEGROUP INC. Senior Discount Nts 879422AE3 0/10.500 11/01/04 03/04/98 TELETRAC INC. SERIES B Senior Notes 87951CAC3 14.000 08/01/07 12/18/97 TELEX COMMUNICATIONS INC. Company Guarantee 879569AD3 10.500 05/01/07 10/10/97 TERRA INDUSTRIES SERIES B Senior Notes 880915AE3 10.500 06/15/05 09/14/95 THERMA-WAVE INC. SERIES B Senior Notes 88343AAC2 10.625 05/15/04 10/13/97 TOKHEIM CORP. SERIES B Senior Sub Notes 889073AC6 11.500 08/01/06 01/14/97 TOM'S FOODS INC. Senior Notes 890124AB6 10.500 11/01/04 03/17/98 TOWN SPORTS INTERNATIONAL SERIES B Senior Notes 892134AC1 9.750 10/15/04 02/23/98 TRANS WORLD AIRLINES Senior Notes 893349BG4 12.000 04/01/02 09/03/97 TRANSAMERICAN ENERGY SERIES B Senior Notes 89351LAE1 11.500 06/15/02 01/13/98 TRANSAMERICAN ENERGY SERIES B Senior Discount Nts 89351LAF8 0/13.000 06/15/02 01/13/98 TRANSTAR HOLDINGS L.P. SERIES B Senior Discount Nts 89388QAB3 0/13.375 12/15/03 06/01/94 TRAVELCENTERS OF AMERICA Company Guarantee 894172AC9 10.250 04/01/07 08/22/97 TRIANGLE CAPITAL TRUST Company Guarantee 895849AB3 9.375 06/01/27 12/29/97 TRICO MARINE SERVICES SERIES D Company Guarantee 896106AH4 8.500 08/01/05 03/24/98 TRIZEC HAHN CORP. SERIES B(see also Clark USA) Senior Notes 181581AD1 10.875 12/01/05 04/15/96 TULTEX CORP. Company Guarantee 899900AC8 9.625 04/15/07 09/04/97 TWIN LABORATORIES INC. Company Guarantee 901645AC5 10.250 05/15/06 10/25/96 UIH AUSTRALIA/PACIFIC SERIES B Senior Discount Nts 902745AC2 0/14.000 05/15/06 09/11/96 UIH AUSTRALIA/PACIFIC SERIES D Senior Discount Nts 902745AE8 0/14.000 05/15/06 01/08/98 UNICCO SERVICE/FINANCE SERIES B Company Guarantee 90460KAC3 9.875 10/15/07 03/12/98 UNIFI COMMUNICATIONS INC. Senior Notes 90467NAE6 14.000 03/01/04 09/02/97 UNISYS CORP. SERIES B Senior Notes 909214BD9 12.000 04/15/03 07/22/96 UNITED ARTISTS Senior Notes 909408AB2 11.500 05/01/02 11/06/92 UNITED DEFENSE INDUSTRIES INC. Company Guarantee 91018BAC8 8.750 11/15/07 03/24/98 UNITED STATIONER SUPPLY Senior Sub Notes 913008AB4 12.750 05/01/05 09/29/95 UNIVERSAL OUTDOOR INC. SERIES B Senior Sub Notes 913777AJ7 9.750 10/15/06 05/07/97 VAN DE KAMPS INC. Senior Sub Notes 920891AB4 12.000 09/15/05 12/14/95 VENTURE HOLDINGS TRUST SERIES B Senior Notes 92326YAD1 9.500 07/01/05 12/08/97 VIALOG CORP. Company Guarantee 92552XAE6 12.750 11/15/01 03/26/98 VIATEL INC. Senior Discount Nts 925529AC3 15.000 01/15/05 09/29/95 WATERFORD GAMING LLC Senior Notes 941388AC4 12.750 11/15/03 06/20/97 WAVETEK CORP. Company Guarantee 944020AC0 10.125 06/15/07 10/29/97 WELLS ALUMINUM CORP. SERIES B Senior Notes 94973NAE5 10.125 06/01/05 11/07/97 WILLIAM CARTER SERIES A Senior Sub Notes 146303AC6 10.375 12/01/06 05/08/97 WILLIAMHOUSE REGENCY DEL. Senior Sub Notes 969307AF4 11.500 06/15/05 09/14/93 WILLIAMS, J.B., HOLDINGS Senior Notes 465919AB4 12.000 03/01/04 11/30/94 WILLIAMS SCOTSMAN INC. Company Guarantee 96949VAC7 9.875 06/01/07 11/04/97 WILSHIRE FINANCIALSERVICES SERIES B Notes 971867AE6 13.000 08/15/04 03/04/98 WILSONS THE LEATHER EXPERT SERIES B Company Guarantee 972463AC7 11.250 08/15/04 01/09/98 WINDY HILL PET FOOD CO. Senior Sub Notes 973818AC1 9.750 05/15/07 10/10/97 WINSTAR COMMUNICATIONS INC. Company Guarantee 975515AL1 14.500 10/15/05 09/27/97 WINSTAR EQUIPMENT II CORP SERIES * Company Guarantee 975518AB7 12.500 03/15/04 01/27/98 WISER OIL CO. Company Guarantee 977284AC2 9.500 05/15/07 10/15/97 WRIGHT MEDICAL TECHNOLOGY SERIES D Senior Notes 982351AE8 11.750 07/01/00 11/03/97 YOUNG BROADCASTING INC. SERIES B Company Guarantee 987434AJ6 8.750 06/15/07 09/12/97 YOUNG BROADCASTING INC. SERIES B Company Guarantee 987434AF4 9.000 01/15/06 05/29/96 ZALE CORP. SERIES B Senior Notes 988858AB2 8.500 10/01/07 02/27/98 NASD Notice to Members 98-55 July 1998 417 Executive Summary associated person, and disputes aris- NASD On June 22, 1998, the Securities and ing out of the employment or termi- Exchange Commission (SEC) nation of employment of associated approved an amendment to National persons with a member. These dis- Notice to Association of Securities Dealers, putes must be arbitrated at the Inc. (NASD¨) Rule 10201 to modify request of any member or associated the current requirement that associ- person. Members ated persons arbitrate all disputes arising out of their employment or ter- As described in the SEC release, mination of employment with a mem- courts generally have upheld the 98-56 1 ber broker/dealer. The amended arbitration requirement, including rule provides that associated persons cases in which there were allegations no longer will be required, solely by of statutory employment discrimina- virtue of their association or their reg- tion.2 Nevertheless, registered per- SEC Approves Rule istration with the NASD, to arbitrate sons and others have continued to Change Regarding claims of statutory employment dis- question the policy of requiring the Arbitration Of Statutory crimination. Associated persons still arbitration of statutory discrimination Employment Disputes; will be required to arbitrate other claims. The NASD formed the Arbi- employment-related claims, as well tration Policy Task Force (Task Effective January 1, 1999 as any business-related claims Force) in September 1994 for the involving investors or other persons. purposes of studying the securities The amended rule will be effective arbitration process administered by on January 1, 1999, for claims the NASD and of making sugges- Suggested Routing filed on or after that date. The text tions for reform. The Task Force, Senior Management of the amended rule is attached. chaired by David S. Ruder, former SEC Chairman, delivered its report to Advertising Interpretive questions concerning the the NASD Board of Governors Continuing Education amended rule should be directed to (NASD Board) in January 1996. The Jean I. Feeney, Assistant General Task Force found that employment Corporate Finance Counsel, NASD Regulation, Inc. arbitration offers the advantages of Executive Representatives (NASD RegulationSM), at (202) 728- speed and cost that are identified Government Securities 6959. with customer arbitration, and observed that statutory discrimination Institutional claims are almost always interwoven Insurance Background with industry-specific issues. More- Internal Audit The NASD, other self-regulatory over, the Task Force believed that organizations (SROs), and state reg- arbitration's equitable approach to Legal & Compliance ulatory authorities require all appli- dispute resolution is fully capable of Municipal cants for registration as persons vindicating the important public rights associated with a broker/dealer to expressed in the anti-discrimination Mutual Fund complete and sign the Form U-4, the statutes. The Task Force, therefore, Operations “Uniform Application for Securities found compelling reasons to keep Options Industry Registration or Transfer.” employment-related disputes within Form U-4 requires registered per- NASD arbitration. The Task Force Registered Representatives sons to submit any claim to arbitra- report recommended that employ- Registration tion that is eligible under the rules of ment-related disputes, including Research the organizations with which they statutory discrimination claims, register. Thus, the Form U-4 incor- remain eligible for arbitration with Syndicate porates by reference the rules of the certain enhancements, many of Systems SRO with which the individual is to which had been recommended else- be registered. NASD Rule 10201 where in the report in the context of Trading requires arbitration of disputes aris- customer arbitration. Training ing in connection with the business of Variable Contracts a member or the activities of an In May 1997, NASD Regulation

NASD Notice to Members 98-56 July 1998 419 formed an Advisory Committee to Description Of Rule the category of statutory employment assist it in considering the suggested Paragraph (a) of the rule adds an discrimination. Paragraph (b) does enhancements to the employment introductory phrase indicating that not apply to causes of action created arbitration process. The Advisory the general requirement to arbitrate solely by judicial precedents or to Committee, which consisted of six employment disputes contains an other causes of action under state or persons of varying and distinguished exception, set forth in paragraph (b). federal law, which remain subject to backgrounds, held meetings in June mandatory arbitration under para- 1997 and heard from representatives New paragraph (b) provides that graph (a). Such judicially created of civil rights organizations, the Equal claims alleging employment discrimi- causes of action might include, for Employment Opportunity Commis- nation, including sexual harassment example, claims alleging “wrongful sion, general counsels of member claims, in violation of a statute are discharge” without any accompany- firms, attorneys who represent not required to be arbitrated by ing claim of discrimination on employees, employee organizations, NASD rules. This means that such account of age, sex, race, or other attorneys who represent member claims may be filed in the appropri- status protected by a specific law. firms, and arbitration experts. After ate court, if the employee chooses to consideration of all the views pre- do so and is not under an enforce- Paragraph (c) of the proposed rule is sented, and in light of the public per- able predispute obligation to arbitrate former paragraph (b), which is ception that civil rights claims may the dispute. An employee also may unchanged except for the renumber- present important legal issues better agree to arbitrate after a dispute arising. dealt with in a judicial setting, the es. Some member firms use private NASD determined that the appropri- arbitration agreements that require ate action was to remove the arbitra- employees to arbitrate employment Effective Date tion requirement for such claims, but disputes apart from any arbitration The NASD originally requested that to further improve the forum so that it requirement in SRO rules, and such the proposed rule become effective is viewed by both registered employ- agreements would not be affected by one year from the date of SEC ees and firms as the fairest and most this rule change. Because arbitration approval. In light of comments efficient forum for resolving all offers many advantages to parties, received in response to the SEC’s employment disputes. In August the NASD expects that many publication of the proposed rule and 1997, proposals were presented to employees will continue to file their in consultation with SEC staff, the the NASD Regulation Board of discrimination claims in arbitration, NASD subsequently asked that the Directors and the NASD Board, particularly in light of planned proposed rule change become effec- which authorized the rule change. enhancements to make the arbitra- tive on January 1, 1999. According- The text of the proposed rule was tion forum even more attractive to ly, the rule change will apply to provided to the Boards at their meet- parties. claims filed on or after the effective ings in September and October date of the rule change. The practi- 1997. Paragraph (b) applies only to claims cal effect is that the rule will apply to alleging employment discrimination, all claims filed on or after the effec- The NASD filed the rule proposal including a sexual harassment claim, tive date without regard to the date with the SEC for approval on Octo- in violation of a statute. The term the alleged discrimination occurred ber 17, 1997. The SEC published “statute” is to be interpreted broadly, or the date that the employee signed notice of the proposed rule in the to include any formal written enact- a Form U-4, but subject to the usual Federal Register on December 17, ment of a legislative body, whether time limitations for bringing such 1997.3 The SEC received nine com- federal, state, city, or county. The claims. ment letters on the proposed rule. Supreme Court has held that sexual The NASD filed a response to the harassment is a form of sex discrimi- comments and a minor amendment nation and thus a violation of laws to the rule proposal on April 14, prohibiting discrimination on the Text Of Amendments 1998. The SEC approved the pro- basis of sex. However, since the (Note: New language is underlined; deletions posed rule, as amended, on June term “sexual harassment” may not are bracketed.) 22, 1998. For a more complete dis- be found in some statutes dealing cussion of the history of the rule, with sex discrimination, the phrase members and associated persons “including a sexual harassment 10201. Required Submission should review the SEC release. claim” was added to clarify that such claims are meant to be included in (a) Except as provided in paragraph

NASD Notice to Members 98-56 July 1998 420 (b), [Any] a dispute, claim, or contro- Endnotes versy eligible for submission under 1 See Exchange Act Release No. 40109 the Rule 10100 Series between or (June 22, 1998) 63 FR 35299 (June 29, among members and/or associated 1998) (“SEC Release”). The text of the SEC persons, and/or certain others, aris- Release may be viewed on the NASD Regu- ing in connection with the business lation Web Site at www.nasdr.com. of such member(s) or in connection with the activities of such associated 2 As described in the June Notices to Mem- person(s), or arising out of the bers, one federal circuit court has recently employment or termination of held that the Form U-4 arbitration agreement employment of such associated per- is unenforceable with regard to claims under son(s) with such member, shall be certain federal and state anti-discrimination arbitrated under this Code, at the laws. Dufﬁeld v. Robertson Stephens & Co., instance of: No. 97-15698 (9th Cir. May 8, 1998).

(1) a member against another mem- 3 Exchange Act Release No. 39421 ber; (December 10, 1997), 62 FR 66164 (Decem- ber 17, 1997). (2) a member against a person associated with a member or a person © 1998, National Association of Securities Dealers, associated with a member against a Inc. (NASD). All rights reserved. member; and

(3) a person associated with a member against a person associated with a member.

(b) A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose.

[(b)] (c) Any dispute, claim or controversy involving an act or failure to act by a clearing member; a registered clearing agency; or participants, pledgees, or other persons using the facilities of a registered clearing agency, under the rules of any registered clearing agency with which the Association has entered into an agreement to utilize the Association’s arbitration facilities and procedures shall be arbitrated in accordance with such agreement and the rules of such registered clearing agency.

NASD Notice to Members 98-56 July 1998 421 As of June 24, 1998, the following bonds were added to the Fixed Income NASD Pricing SystemSM (FIPS¨). Notice to Symbol Name Coupon Maturity ABN.GA American Bank Note Corp 11.250 12/01/07 AXCL.GA Airxcel Inc 11.000 11/15/07 Members BZH.GB Beazer Homes USA Inc 8.875 04/01/08 CDGY.GA Coda Energy Inc 10.500 04/01/06 98-57 CEXH.GA CEX Holdings Inc 9.625 06/01/08 CHSE.GA CHS Electronics Inc 0.000 04/15/05 CVXP.GL Cleveland Elec Illum Co 7.430 11/01/09 CWNI.GA Crown Castle Int’l Corp 10.625 11/15/07 FTL.GA Fruit/Loom Inc 7.000 03/15/11 Fixed Income Pricing FTL.GB Fruit/Loom Inc 7.875 10/15/99 System Additions, FTL.GC Fruit/Loom Inc 6.500 11/15/03 Changes, And Deletions FTL.GD Fruit/Loom Inc 7.375 11/15/23 As Of June 24, 1998 GNL.GA Galey & Lord Inc 9.125 03/01/08 GYSL.GA Grant Geophysical Inc 9.750 02/15/08 HMAR.GB Hvide Marine Inc 8.375 02/15/08 IROP.GA Iridium Oper LLC/Cap Corp 10.875 07/15/05 IROP.GB Iridium Oper LLC/Iridium Cap 11.250 07/15/05 Suggested Routing KCC.GC K-III Communications Corp 8.500 02/01/06 Senior Management LBGP.GA Liberty Group Operating Inc 9.375 02/01/08 LKNS.GA Lukens Inc 7.625 08/01/04 Advertising LTHR.GB L-3 Communications Corp 8.500 05/15/08 Continuing Education MARI.GA Marriott Int’l Inc 6.750 12/01/09 MCLD.GC McLeod USA Inc 8.375 03/15/08 Corporate Finance MUZK.GB Musicland Group Inc 9.875 03/15/08 Government Securities OI.GK Owens-Illinois Inc 7.350 05/15/08 Institutional OI.GL Owens-Illinois Inc 7.500 05/15/10 OI.GM Owens-Illinois Inc 7.150 05/15/04 Insurance OI.GN Owens-Illinois Inc 7.800 05/15/18 Internal Audit OLOG.GA Offshore Logistics Inc 7.875 01/15/08 Legal & Compliance PGSU.GA Pegasus Shipping Hellas LTD 11.875 11/15/04 PNET.GB ProNet Inc 11.875 06/15/05 Municipal REVL.GD Revlon Consumer Products Corp 8.125 02/01/06 Mutual Fund SKLE.GA Safety-Kleen Corp 9.250 09/15/99 TATO.GA Trident Automotive PLC 10.000 12/15/05 Operations THX.GA Houston Exploration Co 8.625 01/01/08 Options TSXC.GA Transco Energy Co 11.250 07/01/99 Registered Representatives WBB.GE Webb (DEL) Corp 9.375 05/01/09 Registration Research Syndicate Systems Trading Training Variable Contracts

NASD Notice to Members 98-57 July 1998 423 As of June 24, 1998, the following bonds were deleted from FIPS.

Symbol Name Coupon Maturity

ADLA.GB Adelphia Communications Corp 12.500 05/15/02 DGAS.GA Delta Natural Gas Inc 9.000 04/30/11 DIGO.GA Di Giorgio Corp 12.000 02/15/03 DRBT.GA Dr. Pepper Bottling Co Tex 10.250 02/15/00 ESXG.GA Essex Group Inc 10.000 05/01/03 IV.GB Mark IV Inds Inc 8.750 04/01/03 OLYM.GA Olympic Finl Ltd 13.000 05/01/00 PNM.GB Public Service Co N Mex 7.250 04/01/99 SGNT.GA Signet Banking Corp 9.625 06/01/99 SMGS.GD Southeast’n Mich Gas Co 8.625 04/15/17

All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, NASD Regulation, Inc., Market Regulation, at (301) 590-6451.

Any questions regarding the FIPS master ﬁle should be directed to Cheryl Glowacki, Nasdaq¨ Market Operations, at (203) 385-6310.

NASD Notice to Members 98-57 July 1998 424 Executive Summary The Manual is being made available NASD Through this Notice, NASD Regula- as a service to members and the tion, Inc., is announcing that the elec- public. It is provided by Compliance tronic version of the NASD Manual is International, Inc., publisher of books Notice to now accessible on the NASD Regu- on screenª . Visitors to the NASD lationSM Web Site (www.nasdr.com). Regulation Web Site may access the With the advent of Internet availabili- on-line NASD Manual via links found Members ty, the primary method to comply with on the Home Page, as well as under the requirement found in NASD Rule the “Members Check Here” and 98-58 8110—that the Manual be available “Press Room” Web Pages. in each member office—is through on-line Internet access. The National In anticipation of an on-line Manual, Association of Securities Dealers, the NASD approved discontinuing Inc. (NASD¨) has discontinued the the free distribution of the annually NASD Manual Now free distribution of the annually updated paperback version of the On-Line updated paperback version of the Manual. NASD Rule 8110 requires Manual. Those desiring hard copies that each office of a member have of the Manual may purchase them at available the NASD Manual, and in cost by contacting NASD Media- prior years, complimentary paper- Suggested Routing SourceSM. back copies were sent to each Senior Management branch office by the NASD to aid in Questions regarding this Notice may compliance with this requirement. Advertising be directed to Jay Cummings, Direc- Therefore, there are now two meth- Continuing Education tor, Internet and Investor Education, ods to comply with NASD Rule 8110: NASD Regulation, at (301) 590-6070. (1) Internet access or (2) a hard copy Corporate Finance version of the Manual. If a member Executive Representatives or branch office relies on Internet Government Securities Background And Discussion access in order to remain compliant, In May, NASD Regulation posted the it must have access to the NASD Institutional NASD Manual on the NASD Regula- Regulation Web Site at the office Insurance tion Web Site. The on-line Manual: location. Internal Audit ¥ contains the complete text of NASD To purchase a copy of the annually Legal & Compliance rules; updated paperback Manual—at a Municipal cost of $10 each for members ¥ is free and easy to navigate; ($29.95 for non-members)—contact Mutual Fund NASD MediaSource at (301) 590- Operations ¥ provides a key word index; 6142. (Note: The annual paperback Options Manual is not to be confused with the ¥ offers complete word search capa- Manual that is updated quarterly by Registered Representatives bility; Commerce Clearinghouse, better Registration known as CCH. This service will con- Research ¥ includes links from rules to selected tinue as usual.) NASD Notices to Members; Syndicate © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. Systems ¥ allows for convenient printing of entire sections; Trading Training ¥ includes an on-line help function; Variable Contracts and

¥ will be updated monthly (more frequently than current hard copy methods).

NASD Notice to Members 98-58 July 1998 425 Executive Summary thereafter (i.e., the fifth, eighth, 11th, NASD The Securities and Exchange Com- 14th, etc., anniversaries), with no mission (SEC) recently approved graduation from the program. Incur- amendments to National Association ring a significant disciplinary action Notice to of Securities Dealers, Inc. (NASD¨) will result in an immediate require- Rule 1120 relating to Continuing ment to complete the Regulatory Ele- Education requirements (see SEC ment within 120 days of the effective Members Release No. 34-39712, dated March date of the significant disciplinary 3, 1998, and File No. SR-NASD-98- action. The cycle for participation in 98-59 03). The text of amended Rule 1120 the Regulatory Element will then be is included in this Notice. The rule reset based on the effective date of changes are effective as of July 1, the significant disciplinary action 1998. rather than on the initial securities registration date. SEC Approves Any questions relating to this Notice Amendments To NASD should be directed to John Linnehan, Formerly, the Rule required regis- Rule 1120 (Continuing Director, Continuing Education, tered persons to complete the Regu- Education Requirements) NASD Regulation, Inc., at (301) 208- latory Element computer-based 2932 or Daniel M. Sibears, Vice training on just three occasions, i.e., President, District Oversight, NASD within 120 days of their second, fifth, RegulationSM at (202) 728-6911. and 10th anniversaries of initial registration (and also when they were the Suggested Routing subject of significant disciplinary Senior Management Background action), with graduation once per- NASD Rule 1120 (the Rule) provides sons were registered for more than Advertising for a Continuing Education Program 10 years. Continuing Education for registered persons of NASD members. The Program, which is Corporate Finance uniform within the industry, consists Graduates From The Executive Representatives of two parts - a Regulatory Element Regulatory Element And Government Securities and a Firm Element. The Regulatory Persons Registered In A Element requires all registered per- Principal Category Institutional sons to periodically complete a com- The Rule allows an exception from Insurance puter-based training program on the Regulatory Element participation Internal Audit compliance, ethical, sales practice, for persons currently graduated from and regulatory matters. The Firm the Program. Those persons who Legal & Compliance Element requires members to pro- have been registered for more than Municipal vide ongoing training specifically tai- 10 years as of the effective date of lored to their business. the rule amendments (i.e., July 1, Mutual Fund 1998), and who have not been the Operations subject of significant disciplinary Options New Cycle For Participation In action during the preceding 10 years, The Regulatory Element will be excluded from the mandatory Registered Representatives The time frames for registered per- participation in the Regulatory Ele- Registration sons to participate in the Regulatory ment. However, in order for persons Research Element training have been revised. registered in a principal capacity to The Rule now requires ongoing par- be excluded from the Regulatory Ele- Syndicate ticipation in the Program by regis- ment, they must have been regis- Systems tered persons throughout their tered in a principal capacity for more securities industry careers. Specifi- than 10 years. Therefore, those prin- Trading cally, participation in the Regulatory cipals who have graduated from the Training Element is required within 120 days Regulatory Element based on their Variable Contracts of the second anniversary of initial initial registration date, but who have registration and every three years not completed 10 years as a princi-

NASD Notice to Members 98-59 July 1998 427 pal, are required to re-enter the Pro- cover topics specifically related to son's registration anniversary date. A gram. their business, such as new prod- person's initial registration date shall ucts, sales practices, risk disclosure, establish the cycle of anniversary and new regulatory requirements dates for purposes of this Rule. The New Program For Principals and concerns. content of the Regulatory Element The Regulatory Element program shall be [prescribed by the Associa- applies generally to all registered The Rule requires members to focus tion] determined by the Association persons and, as originally adopted, specifically on supervisory needs in and shall be appropriate to either the did not discern between registration their analysis and, if it is determined registered representative or principal types or categories. The Rule now that supervisory training is necessary, status of person subject to the Rule. allows the NASD, when appropriate, it must be addressed in the Firm Ele- to designate specific Regulatory Ele- ment training plan. (B) Persons Exempted from the ment programs for various registra- Rule - [Registered persons] Persons tion categories, thereby providing who have been continuously regis- customized training for such cate- Amended NASD Membership tered for more than 10 years [as of gories. The first initiative will be a and Registration Rule 1120 the effective date of this Rule] on principal’s program which will be (Note: New text is underlined; deletions are July 1, 1998, shall be exempt from announced and implemented in the bracketed.) participation in the Regulatory Ele- near future. Principals must continue ment programs for registered repre- to take the current Regulatory Ele- 1120. Continuing Education sentatives, provided such persons ment program until implementation of Requirements have not been subject within the last the new principal’s program. In the ten years to any disciplinary action future, specific programs may be This Rule prescribes requirements [within the last 10 years] as enumer- implemented for other registration regarding the continuing education of ated in paragraph (a)(3). A person categories. certain registered persons subse- who has been continuously regis- quent to their initial qualification and tered as a principal for more than ten For purposes of NASD rules, the fol- registration with the Association. The years on July 1, 1998, shall be lowing registrations will be included requirements shall consist of a Regu- exempt from participation in the Reg- in the principal category: Series 4 latory Element and a Firm Element ulatory Element programs for regis- (Registered Options Principal); as set forth below. tered principals, provided such Series 8 (General Securities Sales person has not been subject within Supervisor); Series 26 (Investment (a) Regulatory Element the last ten years to any disciplinary Company Products/Variable Con- action as enumerated in paragraph tracts Limited Principal); Series 27 (1) Requirements (a)(3). In the event [of such disci- (Financial and Operations Principal); plinary action,] that a [person] regis- Series 28 (Introducing Broker-Dealer No member shall permit any registered representative or principal who Financial and Operational Principal); tered person to continue to, and no was exempt from participation in Series 39 (Direct Participation Pro- registered person shall continue to, Regulatory Element programs sub- grams Principal); Series 53 (Munici- perform duties as a registered per- sequently becomes the subject of a pal Securities Principal Qualification); son unless such person has com- disciplinary action as enumerated in and the Government Securities Prin- plied with the requirements of paragraph (a)(3), such person shall cipal (no series number). paragraph (a) hereof. [will] be required to satisfy the requirements of the Regulatory Ele- (A) Each registered person shall ment [by participation for the period Firm Element complete the Regulatory Element on from the effective date of this Rule to The Firm Element requires that each [three occasions, after] the occur- 10 years after the occurrence of the member conduct an annual analysis rence of their second[, fifth and tenth] disciplinary action] as if the date of of their training needs. Members registration anniversary [dates] date such disciplinary action is such per- must also administer appropriate and every three years thereafter, or son's initial registration date with the training to their registered persons as otherwise prescribed by the Asso- Association. who have direct contact with cus- ciation. On each [of three occasions] tomers and the immediate supervi- occasion, the Regulatory Element (C) Persons who have been current- sors of such registered persons, on must be completed within [one hun- ly registered for 10 years or less as an ongoing basis. The training must dred twenty] 120 days after the per- of [the effective date of this Rule]

NASD Notice to Members 98-59 July 1998 428 July 1, 1998, shall [initially] partici- Unless otherwise determined by the and who has, within two years of the pate in the Regulatory Element with- Association, a registered person will date of termination, become reasso- in 120 days after the occurrence of be required to re-enter the Regulato- ciated in a registered capacity with a the second[, fifth or tenth] registration ry Element and satisfy all of its member shall participate in the Reg- anniversary date, or every third year requirements in the event such per- ulatory Element at such intervals thereafter, whichever anniversary son: [(two, five and 10 years)] that may date first applies[, and on the appli- apply (second anniversary and every cable registration anniversary date(s) (A) is subject to any statutory dis- three years thereafter) based on the thereafter. Such persons will have qualification as defined in Section initial registration anniversary date satisfied the requirements of the 3(a)(39) of the Act; rather than based on the date of Regulatory Element after participa- reassociation in a registered capacity. tion on the tenth registration anniver- (B) is subject to suspension or to the sary]. imposition of a fine of $5,000 or more (5) Definition of Registered Person for violation of any provision of any [(D) All registered persons who have securities law or regulation, or any For purposes of this Rule, the term satisfied the requirements of the agreement with or rule or standard of "registered person" means any per- Regulatory Element shall be exempt conduct of any securities govern- son registered with the Association from further participation in the Regu- mental agency, securities self-regu- as a representative, principal, or latory Element subject to re-entry into latory organization, or as imposed by assistant representative pursuant to the program as set forth in paragraph any such regulatory or self-regulatory the Rule 1020, 1030, 1040, and (a)(3).] organization in connection with a dis- 1110 Series. ciplinary proceeding; or (2) Failure to Complete (b) Firm Element (C) is ordered as a sanction in a dis- Unless otherwise determined by the ciplinary action to re-enter the contin- (1) Persons Subject to the Firm Ele- Association, any registered persons uing education program by any ment who have not completed the Regula- securities governmental agency or tory Element within the prescribed self- regulatory organization. The requirements of this subpara- time frames will have their registra- graph shall apply to any person reg- tions deemed inactive until such time Re-entry shall commence with initial istered with a member who has as the requirements of the program participation within 120 days of the direct contact with customers in the have been satisfied. Any person registered person becoming subject conduct of the member's securities whose registration has been deemed to the statutory disqualification, in the sales, trading and investment bank- inactive under this Rule shall cease case of (A) above, or the disciplinary ing activities, and to the immediate all activities as a registered person action becoming final, in the case of supervisors of such persons (collec- and is prohibited from performing (B) and (C) above[, and on three tively, "covered registered persons"). any duties and functioning in any additional occasions thereafter, at "Customer" shall mean any natural capacity requiring registration. A reg- intervals of two, five and 10 years person and any organization, other istration that is inactive for a period of after re-entry, notwithstanding that than another broker or dealer, exe- two years will be administratively ter- such person has completed all or cuting securities transactions with or minated. A person whose registration part of the program requirements through or receiving investment is so terminated may reactivate the based on length of time as a regis- banking services from a member. registration only by reapplying for tered person or completion of ten registration and meeting the qualifi- years of participation in the program]. (2) Standards for the Firm Element cation requirements of the applicable The date of the disciplinary action provisions of the Rule 1020 Series shall be treated as such person's ini- (A) Each member must maintain a and the Rule 1030 Series. The Asso- tial registration date with the Associa- continuing and current education ciation may, upon application and a tion. program for its covered registered showing of good cause, allow for persons to enhance their securities additional time for a registered per- (4) Reassociation in a Registered knowledge, skill, and professional- son to satisfy the program require- Capacity ism. At a minimum, each member ments. shall at least annually evaluate and Any registered person who has ter- prioritize its training needs and devel- (3) Re-entry into Program minated association with a member op a written training plan. The plan

NASD Notice to Members 98-59 July 1998 429 must take into consideration the associated risk factors; participate in continuing education member's size, organizational struc- programs as required by the mem- ture, and scope of business activi- (ii) Suitability and sales practice con- ber. ties, as well as regulatory siderations; and developments and the performance (4) Specific Training Requirements of covered registered persons in the (iii) Applicable regulatory require- Regulatory Element. If a member's ments. The Association may require a mem- analysis establishes the need for ber, individually or as part of a larger supervisory training for persons with (C) Administration of Continuing group, to provide specific training to supervisory responsibilities, such Education Program - A member its covered registered persons in training must be included in the must administer its continuing educa- such areas as the Association member's training plan. tion programs in accordance with its deems appropriate. Such a require- annual evaluation and written plan ment may stipulate the class of cov- (B) Minimum Standards for Training and must maintain records docu- ered registered persons for which it Programs - Programs used to implementing the content of the programs is applicable, the time period in which ment a member's training plan must and completion of the programs by the requirement must be satisfied, be appropriate for the business of covered registered persons. and, where appropriate, the actual the member and, at a minimum must training content. cover the following matters concern- (3) Participation in the Firm Element ing securities products, services, and © 1998, National Association of Securities Dealers, strategies offered by the member: Covered registered persons included Inc. (NASD). All rights reserved. in a member's plan must take all (i) General investment features and appropriate and reasonable steps to

NASD Notice to Members 98-59 July 1998 430 Executive Summary traders must pass (or have passed) NASD On April 1, 1998, NASD Regulation, either the General Securities Regis- Inc., implemented amendments to tered Representative Examination the National Association of Securities (Series 7) or the Corporate Securities Notice to Dealers, Inc. (NASD¨) Registration Limited Representative Examination Rules regulating the qualification of (Series 62). representatives who trade equity Members securities in The Nasdaq Stock The new qualification requirement for Market¨ (Nasdaq¨) and/or over-the- equity traders does not have a 98-60 counter (OTC) (see Notice to “grandfather” provision. Individuals Members 98-17 for full details on the have until May 1, 2000, to pass the amendments to the Registration Series 55 Examination if they were NASD Extends Filing Rules). There is no grandfather functioning as equity traders before Period For New Equity provision in the amended rules for May 1, 1998, and filed their applica- persons who functioned as equity tions for the Series 55 Examination Trader Examination And traders before April 1, 1998. Such by that date. The period was extend- Responds To Questions persons may continue functioning as ed administratively by NASD Regula- Regarding New Equity equity traders but must pass the new tion through May 15, 1998, to Trader Qualification Rule Equity Trader Examination (Series accommodate a very heavy volume 55) by May 1, 2000. To be eligible of filings received immediately before for this extended qualification period, May 1, 1998. equity traders had to submit Suggested Routing applications to NASD RegulationSM Senior Management before May 1, 1998. The NASD now Extended Filing Period has amended its Registration Rules The NASD now has amended its Advertising to extend the filing period to August Registration Rules to extend the filing Continuing Education 31, 1998, for persons who were deadline for the two-year qualification functioning as equity traders before period to August 31, 1998. The Corporate Finance May 1, 1998, and who missed that extended filing period is available Executive Representatives cut-off date for filing their applications only for persons who were Government Securities for the Series 55 Examination. functioning as equity traders for members before May 1, 1998, and Institutional who missed the earlier deadline. Insurance Qualification Requirements Members must submit an application Internal Audit The amendments to the Registration with a letter that states the applicant Rules establish a registration catego- was functioning as an equity trader Legal & Compliance ry (ET) and qualification examination before May 1, 1998, to: Municipal (Series 55) for equity traders. In the context of this new qualification NASD Regulation Mutual Fund requirement, the term “equity trader” Qualification Examinations Operations includes Market Makers, agency 1390 Piccard Drive, 2nd Floor Options traders, and proprietary traders in Rockville, MD 20850 equity or convertible debt securities Registered Representatives and persons who directly supervise Persons availing themselves of the Registration these activities. The amendments extended filing period may continue Research provide a single exemption for to function as equity traders until May traders whose primary activities are 1, 2000, but must pass the Series 55 Syndicate executing orders on behalf of an affil- Examination by that date. Systems iated investment company that is registered with the Securities and Equity traders who are eligible for the Trading Exchange Commission (SEC) under extended filing period, but who fail to Training the Investment Company Act of file their applications by the August Variable Contracts 1940. In addition to the required 31, 1998, deadline must cease trading examination (Series 55), equity in the Nasdaq or OTC markets until

NASD Notice to Members 98-60 July 1998 431 they satisfy the qualification require- sons’ customers to the Automated ed for traders executing transactions ments. Market Makers and other Confirmation Transaction ServiceSM in covered securities in the Nasdaq proprietary traders who fail to file by (ACTSM) included in the definition of or domestic OTC market. that date may continue to effect liqui- equity trader? dating transactions to the market or Question: Are bond traders who to retail and/or institutional cus- Answer: No. The mere reporting of effect a small number of transactions tomers, but may not establish new trades to ACT does not bring institu- in convertible securities included in long or short positions after August tional salespersons within the scope the definition of equity trader? 31, 1998. After this date, agency of the rule. If, however, institutional traders must cease effecting transac- salespersons effect transactions on Answer: Yes. There is no de min- tions as agent for customers in the behalf of their institutional customers imis exemption for bond traders who Nasdaq or OTC markets until they in the Nasdaq or OTC markets, then do an occasional small dollar volume satisfy the qualification requirements. they are acting as agency traders business in convertible securities. and must qualify on the Series 55 examination. Question: Are “buy side” traders in Questions Submitted By a member acting solely on behalf of Members Question: Are “order processors” advisory accounts under manage- Following are responses from NASD who receive and transmit orders to a ment by the member included in the Regulation to a number of members’ trading desk, either in their own firms definition of equity trader? questions regarding the scope of the or at another dealer, included in the new equity trader registration catego- definition of equity trader? Answer: Yes. Rule 1032(f) only ry. exempts traders whose activities are Answer: No. Such persons are not conducted in behalf of an affiliated Question: Are listed stock traders effecting trades in the Nasdaq or investment company that is regis- who sometimes execute transactions OTC markets. Such persons would tered under the Investment Compa- in 19c-3 securities in the Nasdaq be subject to the Series 55 require- ny Act of 1940. This exemption does market included in the definition of ment only if they themselves execut- not apply to traders for advisory equity trader? ed a principal or agency transaction accounts managed by a member. for their firms to fill the orders. Answer: Yes. The definition of equity trader in Rule 1032(f) includes Question: Are a firm’s proprietary Contact Persons all traders who effect any transac- traders included in the definition of The following persons in NASD Reg- tions in equity, preferred or convert- equity trader, especially proprietary ulation’s Testing and Continuing ible debt securities in the Nasdaq or traders whose primary activities are Education Department may be con- OTC markets. No exemption is pro- in exchange-listed securities? tacted for additional information con- vided to traders whose primary trad- cerning the new qualification ing activities take place on a Answer: Yes. Rule 1032(f) explicit- requirements and the Series 55 securities exchange and who only ly covers without exception propri- Examination: occasionally effect transactions in etary traders who effect any Nasdaq or OTC. transactions in equity, preferred or Carole B. Hartzog, Lead Qualifica- convertible debt securities in the tions Analyst, at (301) 590-6696. Question: Are listed stock traders Nasdaq or OTC markets. For pur- who effect after-hours transactions in poses of this rule, “program” or “bas- Elaine P. Warren, Senior Qualifica- foreign markets engaged in OTC ket” traders would be considered tions Analyst, at (301) 590-6135. trading and, therefore, subject to the proprietary traders. Series 55 requirement? Eva E. Cichy, Qualifications Analyst, Question: Does the definition of at (301) 208-2789. Answer: No. The new rule is not equity trader include persons in for- intended to include trading activity eign offices who effect transactions conducted in foreign markets. in non-U.S. securities in non-U.S. markets that are reported to a non- © 1998, National Association of Securities Dealers, Question: Are institutional salesper- U.S. exchange or regulatory body? Inc. (NASD). All rights reserved. sons who report trades executed by their firms’ traders for the salesper- Answer: No. Rule 1032(f) is intend-

NASD Notice to Members 98-60 July 1998 432 NASD Regulation, Inc. (NASD tal and failed to maintain complete, Disciplinary RegulationSM) has taken disciplinary current, and accurate books and actions against the following firms records. In addition, the firm filed and individuals for violations of false and inaccurate FOCUS Reports Actions National Association of Securities Part I and Part IIA that materially Dealers, Inc. (NASD¨) rules; federal overstated the firm’s net capital. securities laws, rules, and regulations; and the rules of the Municipal Securities Rulemaking Board. Unless Firms Expelled, Individuals Disciplinary Actions otherwise indicated, suspensions will Sanctioned Reported For July begin with the opening of business Questron Securities, Inc. (Sher- on Monday, July 20, 1998. The infor- man Oaks, California) and Sam E. mation relating to matters contained Harris (Registered Principal, Thou- in this Notice is current as of the end sand Oaks, California). The firm of June 24. was censured, fined $20,000, and expelled from NASD membership and Harris was censured, fined Firms Expelled $20,000, and barred from association Burnett Grey & Co., Inc. (Atlanta, with any NASD member in any Georgia). The firm was censured, capacity. The sanctions were based fined $100,000, and expelled from on findings that the firm and Harris NASD membership. The sanctions failed to respond to NASD requests were based on findings that the firm for information. accepted consideration from, or on behalf of, issuers for filing Form 211s with the NASD to list each issuer’s Firms And Individuals Fined securities on the OTC Bulletin Hornor, Townsend & Kent, Inc. Board¨. The firm also received unfair (Horsham, Pennsylvania) and and unreasonable compensation in Michael D. Sweeney (Registered connection with public offerings. In Principal, Philadelphia, Pennsylva- addition, the firm failed to establish, nia) submitted a Letter of Accep- implement, and enforce reasonable tance, Waiver and Consent pursuant supervisory procedures designed to to which they were censured and assure compliance with NASD rules fined $12,000, jointly and severally. and policies and federal securities Without admitting or denying the alle- laws involving public underwriting gations, the respondents consented and investment banking activities to the described sanctions and to the even though it engaged in such activ- entry of findings that the firm, acting ities. through Sweeney, failed to provide the Firm Element training required by Joseph Roberts & Co., Inc. (Pom- the NASD’s Continuing Education pano Beach, Florida) was cen- Program to some of its registered sured, fined $100,000, and expelled representatives. from NASD membership. The sanctions were based on findings that the firm violated its restrictive agreement Firms Fined by carrying an inventory position, the Dean Witter Reynolds, Inc. (New value of which was greater than 50 York, New York) submitted a Letter percent of the firm’s previous month’s of Acceptance, Waiver and Consent excess net capital by amounts rang- pursuant to which the firm was cen- ing from $1.5 to $10.8 million. Fur- sured and fined $10,000. Without thermore, the firm conducted a admitting or denying the allegations, securities business while failing to the firm consented to the described maintain minimum required net capi- sanctions and to the entry of findings

NASD Notices to Members—Disciplinary Actions July 1998 433 that it failed to respond to NASD and enforce adequate supervisory denying the allegations, Badinelli requests for documents and informa- systems as well as written superviso- consented to the described sanctions tion in connection with an NASD arbi- ry procedures reasonably designed and to the entry of findings that, in his tration. to ensure its compliance with report- capacity as his member firm’s coming and continuing education require- pliance director, Badinelli failed to NationsBanc Investments, Inc. ments. establish, maintain, and enforce ade- (Charlotte, North Carolina) submit- quate supervisory procedures rea- ted a Letter of Acceptance, Waiver sonably designed to prevent and Consent pursuant to which the Individuals Barred Or excessive markups. firm was censured and fined $5,000, Suspended jointly and severally with an individu- Alan L. Alexander (Registered Edward F. Escamilla (Registered al, and fined an additional $11,000. Representative, Coconut Grove, Representative, Long Beach, Cali- Without admitting or denying the alle- Florida) was censured, fined fornia) was censured, fined $25,000, gations, the firm consented to the $20,000, and barred from association barred from association with any described sanctions and to the entry with any NASD member in any NASD member in any capacity, and of findings that it allowed an individu- capacity. The sanctions were based ordered to reimburse his member al to continue performing duties as a on findings that Alexander failed to firm $1,000. The sanctions were principal although he had not satis- respond to NASD requests for infor- based on findings that Escamilla con- fied the Regulatory Element of his mation. verted money orders totaling $1,000 continuing education requirement. that he received from a public cus- The findings also stated that the firm Gary W. Atwood (Registered Prin- tomer by endorsing and depositing failed to have an individual perform- cipal, Tampa, Florida) submitted a them in his personal bank account. ing duties requiring principal registra- Letter of Acceptance, Waiver and Escamilla also failed to respond to tion properly qualified and registered Consent pursuant to which he was NASD requests for information. as such, failed to provide an ade- censured, fined $150,000, barred quate supervisory system with from association with any NASD Ilya Fisher (a/k/a Ilya Fikher, Elliot respect to principal registrations, and member in any capacity, and Fisher and Elliot Fikher, Regis- failed to prepare and maintain written required to pay $80,000 in restitution tered Representative, Rego Park, procedures reasonably designed to to a public customer. Without admit- New York) submitted a Letter of achieve compliance with all applica- ting or denying the allegations, Acceptance, Waiver and Consent ble rules and regulations. Atwood consented to the described pursuant to which he was censured, sanctions and to the entry of findings fined $70,000, barred from associa- R.D. White & Co., Inc. (New York, that he induced a public customer to tion with any NASD member in any New York) submitted an Offer of invest $80,000 in promissory notes capacity and ordered to disgorge Settlement pursuant to which the firm issued by a fictitious entity that $38,789.55 to the NASD. Without was censured and fined $20,000, Atwood created. According to the admitting or denying the allegations, and fined $5,000, jointly and several- findings, Atwood prepared the notes Fisher consented to the described ly with an individual. Without admit- and signed them on behalf of this fic- sanctions and to the entry of findings ting or denying the allegations, the titious entity, converted the proceeds that he executed transactions in the firm consented to the described of the $80,000 in checks he received account of a public customer without sanctions and to the entry of findings from the customer, and used the the customer’s prior knowledge, that it failed to report to the NASD on funds for his own benefit. authorization, or consent. The find- a timely basis statistical and summa- ings also stated that Fisher had an ry information regarding customer William B. Badinelli, Jr. (Regis- impostor take the Series 7 and 63 complaints and a securities consent tered Principal, West Nyack, New exams on his behalf and gave false judgment entered into with the State York) submitted a Letter of Accep- and misleading testimony to the of New Jersey Bureau of Securities. tance, Waiver and Consent pursuant NASD during an on-the-record inter- The findings also stated that the firm to which he was censured, fined view. failed to develop and maintain a con- $25,000, suspended from associa- tinuing and current education pro- tion with any NASD member in any Maureen E. Galligan (Registered gram for its registered persons and capacity for 20 days, and required to Representative, San Diego, Cali- to develop a written training plan. In requalify by exam for the Series 24 fornia) was censured, fined $20,000, addition, the NASD determined that registration before again acting in and barred from association with any the firm failed to establish, maintain, that capacity. Without admitting or NASD member in any capacity. The

NASD Notices to Members—Disciplinary Actions July 1998 434 sanctions were based on findings any capacity. Without admitting or establish and maintain a system to that Galligan failed to respond to denying the allegations, Hart con- supervise the activities of registered NASD requests for information. sented to the described sanctions representatives and associated per- and to the entry of findings that she sons in the OSJ that was reasonably James A. Goetz (Registered Rep- failed to respond to NASD requests designed to achieve compliance with resentative, Dickinson, North to appear for testimony. NASD rules. Specifically, Jones Dakota) was censured, fined $2,500, failed to establish and maintain a and barred from association with any David Richard Hasler (Registered system for handling customer com- NASD member in any capacity, with Principal, West Des Moines, Iowa) plaints. the right to reapply after one year to was censured, fined $20,000, and become associated with an NASD barred from association with any Nicholas L. Keating, III (Registered member. The Securities and NASD member in any capacity. The Principal, Toms River, New Jer- Exchange Commission (SEC) sanctions were based on findings sey) submitted a Letter of Accep- imposed the sanctions following that Hasler failed to respond to tance, Waiver and Consent pursuant appeal of a November 1996 National NASD requests for information. to which he was censured, fined Business Conduct Committee $12,500, suspended from associa- (NBCC) decision. The sanctions Forrest Gahl Jackson (Registered tion with any NASD member in any were based on findings that Goetz Principal, Marina Del Rey, Califor- capacity for 15 days, and required to submitted applications to his member nia) was censured, fined $20,000, requalify by taking the Series 26 firm's matching gifts program request- and barred from association with any exam. Without admitting or denying ing that $1,600 be donated to his NASD member in any capacity. The the allegations, Keating consented to daughter’s school, misrepresenting sanctions were based on findings the described sanctions and to the that he had contributed personal that Jackson failed to respond to entry of findings that he signed the funds in that amount, a requirement NASD requests for information. names of public customers on of the program. Goetz knew or account applications after the cus- should have known that the funds John Robert Jones, Jr. (Regis- tomers had signed similar forms were used to offset the tuition of his tered Principal, Santa Monica, Cal- acknowledging their transaction. The daughter at the designated school, in ifornia) submitted a Letter of findings also stated that Keating further violation of the matching gifts Acceptance, Waiver and Consent signed the name of a licensed agent program. pursuant to which he was censured, on life insurance applications after fined $10,000, suspended from asso- the customers had signed the appli- Arthur R. Hall (Registered Repre- ciation with any NASD member as a cations. sentative, Amston, Connecticut) general securities principal for 30 submitted a Letter of Acceptance, days, and ordered to requalify by Lawrence M. Knapp (Registered Waiver and Consent pursuant to exam as a general securities princi- Representative, Lakewood, Col- which he was censured, fined pal. Without admitting or denying the orado) was censured, fined $50,000, and barred from association allegations, Jones consented to the $170,000, ordered to reimburse his with any NASD member in any described sanctions and to the entry member firm $30,069.47, and barred capacity. Without admitting or deny- of findings that he permitted an indi- from association with any NASD ing the allegations, Hall consented to vidual to engage actively in the man- member in any capacity. The sanc- the described sanctions and to the agement of the securities business of tions were based on findings that entry of findings that he commingled his member firm without being regis- Knapp received checks totaling funds of a public customer totaling tered in a principal capacity. The find- $30,069.47 from a public customer $10,617.34 with those of his book- ings also stated that Jones permitted for investment purposes. Knapp keeping and advisory business, inde- individuals to execute corporate instructed the customer to make the pendent of his member firm. securities transactions for the checks payable to him. Instead of accounts of public customers when investing the funds, Knapp converted Mary Margaret Hart (Registered they were not licensed to sell corpo- the money to his own use and bene- Representative, Scranton, Penn- rate securities. fit. Knapp also failed to respond to sylvania) submitted a Letter of NASD requests for information. Acceptance, Waiver and Consent Furthermore, the NASD determined pursuant to which she was censured, that Jones, as the branch manager of Robert E. Ligowski (Registered fined $20,000, and barred from asso- his member firm’s Office of Supervi- Representative, Matawan, New ciation with any NASD member in sory Jurisdiction (OSJ), failed to Jersey) and Louis C. Marchione,

NASD Notices to Members—Disciplinary Actions July 1998 435 Jr. (Registered Representative, N. censured, fined $1,000, and sus- Offer of Settlement pursuant to which Massapequa, New York) submitted pended from association with any he was censured, fined $20,000, and an Offer of Settlement pursuant to NASD member in any capacity for barred from association with any which they were each censured, five days. In addition, Marchand must NASD member in any capacity. With- fined $2,500, suspended from asso- submit to additional supervision by out admitting or denying the allega- ciation with any NASD member in his member firm for one year follow- tions, Maton consented to the any capacity for two weeks, and ing the suspension, and at the end of described sanctions and to the entry required to requalify by exam as a the one-year period of additional of findings that he failed to respond general securities representative. If supervision, Marchand or his mem- to NASD requests for information. the respondents fail to requalify, they ber firm must submit a report to the will be suspended from association NASD detailing the additional super- Duane Lee McBride (Registered with any NASD member until they vision over his activities. Nelson was Principal, Escondido, California) have requalified. Without admitting or censured, fined $75,000, and barred submitted an Offer of Settlement pur- denying the allegations, the respon- from association with any NASD suant to which he was censured, dents consented to the described member in any capacity. Without fined $1,950,685, and barred from sanctions and to the entry of findings admitting or denying the allegations, association with any NASD member that they charged public customers the respondents consented to the in any capacity. Without admitting or unfair prices in connection with the described sanctions and to the entry denying the allegations, McBride sale of warrants. Furthermore, of findings that Marchand employed consented to the described sanctions Ligowski and Marchione failed to devices to defraud public customers and to the entry of findings that he make a reasonable inquiry as to the by recommending and urging cus- received funds totaling $653,594.17 fairness of the prices charged and tomers to buy speculative and from public customers for investment had discretion in the pricing of these unseasoned securities through base- purposes. The NASD determined transactions. Ligowski and Mar- less price predictions and predictions that McBride failed to execute the chione also charged gross commis- of returns in transactions. Further- purchase of partnership interests on sions ranging from 12 to 30 percent more, Marchand omitted or misstated the customers’ behalf, and instead, of the total dollar amount paid by the to customers material information in converted approximately $390,137.12 customers in transactions in the sub- sales of recommended securities of these funds to his own use and ject securities. and failed to have a reasonable basis benefit without the customers’ knowl- for his recommendations. edge or consent. Anthony C. Louvaris (Registered Principal, Tallahassee, Florida) The findings also stated that Nelson Leonard D. Moore (Registered submitted a Letter of Acceptance, failed to supervise several registered Representative, Spartanburg, Waiver and Consent pursuant to representatives adequately and prop- South Carolina) submitted an Offer which he was censured, suspended erly, encouraged them to participate of Settlement pursuant to which he from association with any NASD in a boiler room to market specula- was censured, fined $5,000, and member in any capacity for one year, tive and unseasoned companies to barred from association with any and required to requalify as a general public customers, and to engage in NASD member in any capacity. With- securities principal by taking and aggressive and high-pressure sales out admitting or denying the allega- passing the Series 24 exam. Without tactics without concern for suitability tions, Moore consented to the admitting or denying the allegations, and without having a reasonable described sanctions and to the entry Louvaris consented to the described basis for the recommendations to of findings that he forged the signa- sanctions and to the entry of findings customers. In addition, the NASD ture of a public customer on a dis- that he induced public customers to determined that Nelson distributed, bursement request form. participate in private securities trans- instructed, or permitted associated actions without the authority or persons to utilize telemarketing Scott T. Nichol (Registered Repre- knowledge of his member firm. scripts in making sales presentations sentative, Brookfield, Wisconsin) to the public that did not conform to was censured, fined $20,000, and Curtis Lewis Marchand, III (Regis- the NASD advertising rules. Nelson barred from association with any tered Principal, Denver, Colorado) also failed to respond completely to NASD member in any capacity. The and David Keith Nelson (Regis- NASD requests for information. sanctions were based on findings tered Principal, Pleasantville, New that Nichol failed to respond to NASD York) submitted Offers of Settlement Paul J. Maton (Associated Person, requests for information. pursuant to which Marchand was Northbrook, Illinois) submitted an

NASD Notices to Members—Disciplinary Actions July 1998 436 Thomas Niemczyk (Registered stock, previously sold from the cus- bank account. According to the find- Principal, Syosset, New York) sub- tomer’s account to cover a debit bal- ings, the customer was misled into mitted an Offer of Settlement pur- ance, would be replaced. believing he was a customer of Tay- suant to which he was censured, lor’s firm and that the funds were suspended from association with any Michael William Riley (Registered being used to purchase securities. NASD member in any capacity for Representative, Mt. Vernon, Illi- The findings also stated that Taylor two years, and required to requalify nois) submitted a Letter of Accep- failed to respond to an NASD request by exam prior to becoming associat- tance, Waiver and Consent pursuant for information. ed with any member firm. Without to which he was censured, fined admitting or denying the allegations, $50,000, and barred from association Scott I. Torres (Registered Repre- Niemczyk consented to the with any NASD member in any sentative, Holbrook, New York) described sanctions and to the entry capacity. Without admitting or deny- submitted a Letter of Acceptance, of findings that he made baseless ing the allegations, Riley consented Waiver and Consent pursuant to and improper price predictions per- to the described sanctions and to the which he was censured, fined taining to highly speculative securi- entry of findings that he signed a $125,000, barred from association ties. The findings also stated that public customer’s name to a variable with any NASD member in any Niemczyk engaged in unauthorized life insurance application and a capacity, and ordered to pay trading in the accounts of public cus- request for liquidation of mutual fund $168,302 in restitution to public customers and discouraged, and refused shares with instructions that the tomers. Without admitting or denying to accept, sell orders from customers $7,446 proceeds of the liquidation be the allegations, Torres consented to on several occasions. applied to the insurance policy and the described sanctions and to the another variable life policy, without entry of findings that he made materi- Alfred Salvatore Palagonia (Regis- the customer’s knowledge or con- al misrepresentations and omitted to tered Representative, Quogue, sent. disclose material facts in connection New York) submitted a Letter of with his recommendation of securi- Acceptance, Waiver and Consent Janice D. Russo (Registered Rep- ties to public customers. The findings pursuant to which he was censured, resentative, Van Nuys, California) also stated that Torres made fraudu- fined $20,000, and barred from asso- was censured, fined $20,000, sus- lent price predictions to customers in ciation with any NASD member in pended from association with any connection with his recommendation any capacity. Without admitting or NASD member in any capacity for 18 of these securities. Furthermore, the denying the allegations, Palagonia months, ordered to pay $4,871 in NASD determined that Torres pur- consented to the described sanctions restitution, and ordered to requalify chased and sold shares of stock in a and to the entry of findings that he by exam before re-associating with public customer’s account without failed to respond to NASD requests any member firm. The sanctions first obtaining the customer’s autho- for information. were based on findings that Russo rization and failed to testify truthfully executed transactions in the account to the NASD during an on-the-record Michael T. Pinto (Registered Rep- of a public customer without the cus- interview. resentative, Margate, Florida) sub- tomer’s consent or authorization. mitted an Offer of Settlement Abdul H. Umer (Registered Princi- pursuant to which he was censured, Terence Taylor (Registered Repre- pal, Chicago, Illinois) submitted a fined $6,000, and suspended from sentative, Locust Valley, New Letter of Acceptance, Waiver and association with any NASD member York) submitted a Letter of Accep- Consent pursuant to which he was in any capacity for five business tance, Waiver and Consent pursuant censured, fined $11,000, and sus- days. Without admitting or denying to which he was censured, fined pended from association with any the allegations, Pinto consented to $40,000, barred from association NASD member in any capacity for 30 the described sanctions and to the with any NASD member in any days. Without admitting or denying entry of findings that he effected capacity, and ordered to pay $21,500 the allegations, Umer consented to transactions in the account of a pub- in restitution to a public customer. the described sanctions and to the lic customer without the customer’s Without admitting or denying the alle- entry of findings that he exercised knowledge or authorization. The find- gations, Taylor consented to the discretion in the account of a public ings also stated that, without his described sanctions and to the entry customer without obtaining prior writ- member firm’s knowledge, Pinto of findings that he misused the funds ten authorization from the customer entered into a written agreement with of a public customer through a wire and prior written acceptance of the the customer wherein shares of transfer of $21,500 into his personal account as discretionary by his mem-

NASD Notices to Members—Disciplinary Actions July 1998 437 ber firm. The findings also stated that sanctions and to the entry of findings (NAC) as of May 29, 1998. The find- Umer guaranteed to cover a cus- that he solicited and sold invest- ings and sanctions imposed in the tomer against losses in the cus- ments to public customers without decisions may be increased, tomer’s account. providing prior written notification to decreased, modified, or reversed by his member firm. the NAC. Initial decisions whose time Michael S. Wachs (Registered for appeal has not yet expired will be Principal, New York, New York) reported in the next Notice to Mem- submitted a Letter of Acceptance, Individuals Fined bers. Waiver and Consent pursuant to Jacques V. Pessah (Registered which he was censured, fined Representative, Staten Island, Brian D. Angiuli (Registered Rep- $250,000, barred from association New York) submitted a Letter of resentative, Port Washington, New with any NASD member in any Acceptance, Waiver and Consent York) was censured, fined $16,694, capacity and required to make full pursuant to which he was censured suspended from association with any restitution to his member firm. With- and fined $10,000. Without admitting NASD member in any capacity for 30 out admitting or denying the allega- or denying the allegations, Pessah days, and required to requalify by tions, Wachs consented to the consented to the described sanctions exam as a general securities repre- described sanctions and to the entry and to the entry of findings that he sentative. The sanctions were based of findings that he misappropriated permitted an individual to purchase on findings that Anguili effected $20,800,000 in proceeds by means shares of stock and warrants that securities transactions in the account of false and fraudulent pretenses, rep- traded at a premium in the immedi- of a public customer without the cus- resentations, and promises for the ate aftermarket, in contravention of tomer’s authorization. sale of certain of his member firm’s the Board of Governors’ Free-Riding assets and then diverted the pro- and Withholding Interpretation. Angiuli has appealed this action to ceeds to himself and others. the NAC and the sanctions are not in Henry L. Sullivan, Jr. (Registered effect pending consideration of the John Mark Wallach (Registered Representative, New Orleans, appeal. Representative, Lakeworth, Flori- Louisiana) submitted a Letter of da) was censured, fined $10,000, Acceptance, Waiver and Consent Donald Clyde Bozzi, Jr. (Regis- and suspended from association with pursuant to which he was censured tered Representative, Basking any NASD member in any capacity and fined $15,000. In addition, Sulli- Ridge, New Jersey) was censured, for 30 days. The sanctions were van must attend an advanced train- fined $30,000, and barred from asso- based on findings that Wallach exer- ing program conducted by his ciation with any NASD member in cised discretion in the accounts of member firm and undergo an annual any capacity. The sanctions were public customers without having the private compliance session with a based on findings that Bozzi submit- discretionary authority reduced to firm compliance officer for the next ted false insurance applications con- writing and without having the two years. Without admitting or deny- taining numerous misstatements of accounts accepted as discretionary ing the allegations, Sullivan consent- fact that he knew or should have accounts by his member firm. ed to the described sanctions and to known were false. Bozzi also provid- the entry of findings that he prepared ed false information in written and Sheldon Gary Zimmerman (Regis- and allowed a public customer to testimonial form during the course of tered Principal, San Diego, Califor- take from his office documents con- an NASD investigation. nia) submitted a Letter of taining a list of the customer’s assets Acceptance, Waiver and Consent maintained at Sullivan’s member firm Bozzi has appealed this action to the pursuant to which he was censured, that inaccurately reflected the value NAC and the sanctions are not in suspended from association with any of the customer’s investments. effect pending consideration of the NASD member in any capacity for appeal. six months, and ordered after the suspension to requalify by exam in Decisions Issued Michael Bruzzese (Registered any capacity in which he wishes to The following decisions have been Representative, Brooklyn, New become associated or be suspended issued by the District Business Con- York) and Nicholas J. Mormando, in those capacities until the time of duct Committee (DBCC) or the Jr. (Registered Representative, such requalification. Without admit- Office of Hearing Officers and have Brooklyn, New York) were each ting or denying the allegations, Zim- been appealed to or called for review censured, fined $5,000, suspended merman consented to the described by the National Adjudicatory Council from association with any NASD

NASD Notices to Members—Disciplinary Actions July 1998 438 member in any capacity for one customer. sent of the customer. month, and required to requalify by taking and passing the Series 7 This action has been called for Maggipinto has appealed this action exam. In addition, Bruzzese was review by the NAC and the sanctions to the NAC and the sanctions are not required to disgorge to public cus- are not in effect pending considera- in effect pending consideration of the tomers his excessive commissions tion of the review. appeal. totaling $5,407.70, and Mormando was required to disgorge $227,587.45 Institutional Investor Services, Inc. in excessive commissions to public (Chicago, Illinois), Eugene V. Rin- Complaints Filed customers. The sanctions were tels (Registered Principal, High- The following complaints were based on findings that Bruzzese and land Park, Illinois), Joel Chestler issued by the NASD. Issuance of a Mormando received commissions on (Registered Representative, Glen- disciplinary complaint represents the their sales of securities to public cus- coe, Illinois), and Dennis G. Guy initiation of a formal proceeding by tomers that were excessive and (Registered Principal, Delray the NASD in which findings as to the unfair. Beach, Florida). The firm, Rintels, allegations in the complaint have not Guy, and Chestler were censured been made, and does not represent The action was called for review by and fined $170,000, jointly and sev- a decision as to any of the allega- the NAC and the sanctions are not in erally. Rintels, Guy, and Chestler tions contained in the complaint. effect pending consideration of the were each suspended from associa- Because these complaints are unad- review. tion with any NASD member in any judicated, you may wish to contact capacity for 90 days and required to the respondents before drawing any Jawahar K. Doshi (Registered Prin- take and pass all exams required for conclusions regarding the allegations cipal, Bayside, New York) was cen- the capacities in which they wish to in the complaint. sured, fined $30,000, and barred from function with an NASD member or association with any NASD member cease to function in any such capaci- Derick Adamson (Registered Rep- in any capacity. The sanctions were ty until they requalify. The sanctions resentative, Glassboro, New Jer- based on findings that Doshi entered were based on findings that the firm, sey) was named as a respondent in into an oral agreement with a public Rintels, Guy, and Chestler, acting an NASD complaint alleging that he customer whereby he agreed to reim- through partnerships they created, forged a public customer’s signature burse the customer for any and all purchased stocks through dividend to establish both a life insurance poli- future losses incurred in the cus- reinvestment and stock purchase cy and an insurance service account, tomer’s account in return for a share plan programs (DRIP Plans), permitting the funding of the insur- of any profits generated. Doshi also received a total discount of $122,162, ance service account via electronic failed to respond truthfully to the and exceeded the limits that each fund transfers from the customer’s NASD during an on-the-record inter- issuer placed on each purchaser personal bank account, and falsified view. contained in the DRIP Plans. records by changing the customer’s address to Adamson’s own address. Doshi has appealed this action to the The firm, Rintels, Guy, and Chestler The complaint alleges that Adamson NAC and the sanctions are not in have appealed this action to the NAC forged the customer’s signature on effect pending consideration of the and the sanctions are not in effect the policy record audit letter and the appeal. pending consideration of the appeal. accompanying statistics document and advised the insurance company Henry A. Hale (Registered Princi- Gregory Paul Maggipinto (Regis- to surrender the policy. In addition, pal, Marietta, Georgia) was cen- tered Representative, San Jose, the complaint alleges that Adamson sured, fined $10,000, and California) was censured, fined caused a $1,600 loan to be taken suspended from association with any $25,000, suspended from associa- against the policy without the cus- NASD member in any principal or tion with any NASD member in any tomer’s knowledge, forged the cus- supervisory capacity for 10 business capacity for 60 days, and required to tomer’s name on the back of the loan days. The sanctions were based on requalify by exam as a general secu- check, and then converted the loan findings that Hale failed to supervise rities representative. The sanctions check to his personal use and benefit reasonably the sales activities of an were based on findings that Maggip- by depositing it into his personal individual in order to prevent and/or into effected securities transactions bank account. detect the unsuitable trading that in the account of a public customer occurred in the account of a public without the prior knowledge or con- The complaint also alleges that

NASD Notices to Members—Disciplinary Actions July 1998 439 Adamson deposited approximately ed to deliver the refund checks to pose of investing in a growth and $16,045.60 into a life access fund these customers. The complaint income fund. The complaint alleges account on behalf of a public cus- alleges that Holloway converted that Plucinski did not apply the funds tomer, caused the address for the these funds to his own use and ben- as directed by the customer, and account to be changed from the cus- efit by forging endorsements on each instead, converted the funds to his tomer’s address to Adamson’s own of the checks. The complaint also personal use and benefit by deposit- address, wrote checks totaling alleges that Holloway failed to ing the funds into his bank account $25,700 against the account, forged respond to NASD requests for infor- and writing personal and business the customer’s name on each check, mation. checks on the funds. converted the checks to his personal use and benefit by depositing the Steven T. Mayes (Registered Rep- Donald E. Radle (Registered Prin- checks into his bank account, and resentative, Oak Ridge, Ten- cipal, Springfield, Missouri) was forged the customer’s name to a flex- nessee) was named as a named as a respondent in an NASD ible premium annuity application. In respondent in an NASD complaint complaint alleging that he made addition, the complaint alleges that alleging that he received approxi- unsuitable recommendations to cus- Adamson failed to respond to NASD mately $1,700 from a public customers in the purchase, liquidation, requests for information. tomer to be invested in a mutual and subsequent repurchase of the fund, but failed and neglected to sub- same mutual fund, resulting in Kurt Fethke (Registered Repre- mit these funds on the customer’s unnecessary sales and commission sentative, Los Angeles, California) behalf. The complaint alleges that charges totaling $86,375. was named as a respondent in an Mayes instead maintained posses- NASD complaint alleging that he sion of the funds for his own use and Milson Carroll Raver, Jr. (Regis- made unauthorized transactions in benefit. The complaint also alleges tered Representative, Sea Girt, the accounts of public customers. that Mayes failed to respond to New Jersey) was named as a The complaint also alleges that NASD requests to provide informa- respondent in an NASD complaint Fethke failed to respond to NASD tion. alleging that he misused customer requests for information. funds and schemed to defraud by Steven J. Napoli (Registered Rep- soliciting public customers to invest Robert Anthony Gatto (Associated resentative, Belle Mead, New Jer- in a purported “Regulation D, Rule Person, Brooklyn, New York) was sey) was named as a respondent in 504 Offering” for a company that he named as a respondent in an NASD an NASD complaint alleging that he represented to be incorporated in complaint alleging that he came into received $10,000 in cash from a pub- New York, but which in actuality was possession of a check drawn on his lic customer for the purpose of pay- never incorporated in New York employer firm’s account. The coming insurance premiums, remitted a State. The complaint alleges that, plaint alleges that Gatto proceeded total of $7,300 on the insurance poli- although Raver represented to the to have the check in the sum of cy, and failed to remit the remaining customers that their funds would be $1,093.84 made payable to himself, $2,700 to the insurance company. deposited into an escrow account affixed the signatures of the firm’s The complaint alleges that Napoli and would be refundable, he instead authorized signatories on the check commingled the remaining $2,700 deposited $14,000 in customer funds without their knowledge, authoriza- received from the customer with his into a corporate account which he tion or consent, and converted the own personal funds and converted established and used the account to proceeds of the check to his own the funds to his own personal use pay for personal expenses. personal use and benefit. The com- and benefit without the customer’s plaint also alleges that Gatto failed to knowledge, authorization, or con- The complaint also alleges that respond to NASD requests for infor- sent. The complaint also alleges that Raver received an additional $1,000 mation. Napoli failed to respond to NASD from a public customer that was requests for information. never deposited into the corporate Richard D. Holloway (Registered account. The complaint alleges that Representative, Tulsa, Oklahoma) Christopher John Plucinski (Reg- the public customers requested that was named as a respondent in an istered Representative, Stevenson Raver return the investment, but no NASD complaint alleging that he Ranch, California) was named as a reimbursement was ever made, nor received insurance refund checks respondent in an NASD complaint were shares ever delivered to them. totaling $1,991.65 for delivery to pub- alleging that he received $35,000 The complaint also alleges that lic customers, but failed and neglect- from a public customer for the pur- Raver failed to give his employer firm

NASD Notices to Members—Disciplinary Actions July 1998 440 notice of his participation in, and TBD Capital Markets Trust, Miami, State Street Capital Markets Corp., compensation received from, the Florida (May 29, 1998) New York, New York (June 1, 1998) alleged private securities transaction. Finally, the complaint alleges that TSG B/D, Inc., New York, New York Sterling Foster & Company, Inc., Raver failed to respond to NASD (April 30, 1998) Uniondale, New York requests for information. (June 17, 1998) Unified Investments, Inc., Jackson, Mississippi (April 30, 1998) T.L. Group, Inc., Fort Worth, Texas Firm Expelled For Failure To (June 11, 1998) Pay Fines, Costs, And/Or Wall Street Markets Group, Provide Proof Of Restitution In New York, New York (April 30, 1998) Connection With Violations Suspensions Lifted Andover Securities, Inc., Kansas Winston Rodgers & Otalvaro, Inc., The NASD has lifted the suspension City, Missouri (May 26, 1998) New York, New York (April 30, 1998) from membership on the dates shown for the following firms Wise Choice Discount, New York, because they have complied with for- Firms Suspended New York (May 20, 1998) mal written requests to submit finan- The following firms were suspended cial information. from membership in the NASD for WR Lazard, Laidlaw, Inc., failure to comply with formal written New York, New York (May 20, 1998) Avex Investments, Inc., Dallas, requests to submit financial informa- Texas (June 3, 1998) tion to the NASD. The actions were based on the provisions of NASD Firms Whose Registrations Clemente Fund Management, Inc., Rule 8210 and Article VII, Section 2 Were Suspended Pursuant To New York, New York (May 20, 1998) of the NASD By-Laws. The date the NASD Rule 9622 For Failure suspensions commenced is listed To Pay Arbitration Award Euromax Financial Services, Inc., after the entry. If the firm has com- Andover Securities Inc., Daly City, California (May 20, 1998) plied with the requests for informa- Kansas City, Missouri tion, the listing also includes the date (June 17, 1998) Plumwood Securities Corporation, the suspension concluded. Libertyville, Illinois (May 26, 1998) Bishop Allen, Inc., New York, Avatar Financial Group, LTD, New York (June 4, 1998) Blue Bell, Pennsylvania Individuals Whose Registrations (May 20, 1998) Euro-Atlantic Securities, Inc., Were Revoked For Failure To Boca Raton, Florida (June 1, 1998) Pay Fines, Costs And/Or Carlisle Investment Group, Provide Proof Of Restitution In Chicago, Illinois (April 30, 1998) First Cambridge Securities Corp., Connection With Violations New York, New York (June 4, 1998) Casady, Gregory A., Kansas City, Duke & Co., Inc., New York, Missouri (May 26, 1998) New York (May 29, 1998) Global Strategies, Inc., New York, New York (June 12, 1998) Khan, Mohammed L., Marsh, Block & Co., Inc., Altamonte Springs, Florida New York, New York (April 30, 1998) Greenway Capital Corp., n/k/a (June 9, 1998) Cortlandt Capital Corp., New York, Meyers Pollock Robbins, Inc., New York (June 4, 1998) Sun, Zhen J., Brookline, New York, New York (April 30, 1998) Massachusetts (May 26, 1998) LaCroix Alexander Financial Schuparra Securities Corporation, Corp., Newport Beach, California Szymanski, Frank R., New Lenox, San Antonio, Texas (May 20, 1998) (May 26, 1998) Illinois (May 26, 1998)

Sierra Paciﬁc Capital, Meyers Pollock Robbins, Inc., Olympic Valley, California New York, New York Individuals Whose Registrations (April 30, 1998) (June 11, 1998) Were Suspended Pursuant To NASD Rule 9622 For Failure To

NASD Notices to Members—Disciplinary Actions July 1998 441 Pay Arbitration Award December 1996. $50,000 fine; Corbett, Timothy, Havertown, Pennsylvania (June 4, 1998) Jordan Shamah of North Hills, New ¥ Howard Gelfand of Roslyn, New York, a general securities principal York, general securities principal: Forfia, Robert P., Ridgewood, and former managing director and censure, six-month suspension, New Jersey (June 9, 1998 to partner in the firm, and Irving Stitsky $20,000 fine, and requirement to June 16, 1998) of Brookville, New York, a general requalify by examination; securities principal and former man- Hauke, Thomas, West Orange, aging director and junior partner in ¥ Patrick Hayes of Valley Stream, New Jersey (June 18, 1998) the firm, have consented to be cen- New York, general securities princi- sured and permanently barred from pal: censure, six-month suspen- Hiers, John, Corona, California the industry. In addition, Stitsky has sion, $10,000 fine, and requirement (June 17, 1998) been ordered to pay a fine of to requalify by examination; $100,000. The allegations against Hosang, Ian Richard, Brooklyn, them, which they neither admit nor ¥ David Heredia of Long Beach, New New York (June 17, 1998) deny, include engaging in fraudulent York, general securities represen- sales practices and failing to super- tative: censure, bar, and $100,000 Ihm, Jeffrey Peter, Farmingdale, vise others who engaged in such fine; New York (June 11, 1998) practices; fraudulently failing to make a bona fide public distribution during ¥ Lauren Lessard of Northport, New Knight, Michael E., Addison, Illinois an offering; and violating a lock-up York, general securities represen- (May 27, 1998) requirement in connection with a tative: censure, three-month sus- public offering. These findings result pension, $5,335 in restitution, McGavern, Terry J., Lee’s Summit, from three separate NASD Regula- $15,000 fine, and requirement to Missouri (June 17, 1998) tion disciplinary actions. requalify by examination;

Mellul, Elie, Great Neck, New York This brings to 13 the number of for- ¥ Richard Ringel of Roslyn, New (June 4, 1998) mer principals and employees of York, general securities represen- Stratton Oakmont who have recently tative: censure, bar, and $50,000 Mormando, Christopher, Staten settled sales practice actions brought fine; Island, New York (June 17, 1998) against them by NASD Regulation. The settlements are the result of an ¥ Peter Rubenstein of Melville, New Roach, Donna, Murrieta, California ongoing, stepped-up effort by NASD York, general securities represen- (May 26, 1998) Regulation to hold not only broker- tative: censure, three-year suspen- age firms accountable for sales prac- sion, $20,000 fine, and requirement Rotgers, Richard, Jr., tice violations, but also the individual to requalify by examination; West Babylon, New York brokers who commit them. Sanctions (June 4, 1998) against these individuals range from ¥ Mark Slakter of Upper Saddle suspensions of three months to per- River, N.J., general securities rep- manent bars from the securities resentative: censure, 11-month NASD Regulation Sanctions industry, and fines of up to $100,000. suspension, and $15,000 fine; 13 Former Stratton Oakmont Principals And Registered Former Stratton Oakmont employees ¥ Bonnie Vandenberg of Roslyn, Representatives For Sales sanctioned in conjunction with their New York, general securities repre- Practice Violations actions while at the firm include: sentative: censure, six-month sus- NASD Regulation announced that 13 pension, $10,000 fine, and individuals, including two former ¥ Chad Beanland of North Babylon, requirement to requalify by exami- managing directors and principals New York, general securities repre- nation; and previously associated with Stratton sentative: censure, bar, and Oakmont, Inc., have been censured, $10,000 fine; ¥ Samuel Weber of Dix Hills, New fined, and suspended or permanent- York, general securities represen- ly barred from the securities industry. ¥ Andrew Steven Friedman of Plain- tative: censure and bar. Stratton Oakmont Inc., a broker/deal- view, New York, general securities er, was expelled from the NASD in principal: censure, bar, and In addition, disciplinary proceedings

NASD Notices to Members—Disciplinary Actions July 1998 442 are still pending against 25 individu- consultant hired by Maidstone (and disclose: the private transactions with als formerly associated with Stratton approved by NASD Regulation) the selling shareholders, the firms’ Oakmont. shortly. Maidstone and the four indi- plans to distribute the selling share- viduals all neither admitted nor holders’ securities to the public, and denied NASD Regulation’s findings. the receipt of excessive underwriting Maidstone Financial Fined, compensation. Expelled; Four Brokers Settle The complaint in this case, filed by Fraud Charges NASD Regulation in December HGI, according to the complaint, NASD Regulation expelled Maid- 1997, alleges that, as underwriters of made $12 million in excessive and stone Financial Inc., from the NASD three securities (Sims Communica- undisclosed underwriting compensa- and sanctioned two of its senior tions, Inc., Natural Health Trends tion, and Maidstone Financial, Inc., executives—along with two more Corp., and International Cutlery, received more than $4.2 million in senior executives of HGI Inc. (for- Ltd.), HGI and Maidstone made excessive and undisclosed under- merly known as the Harriman Group) more than $16.2 million in illicit prof- writing compensation. —in connection with fraud in the its, defrauding investors in the pro- underwriting of three securities. cess. The two firms, working through This case was brought by NASD Maidstone and the four individuals, the four individuals, illegally profited Regulation’s District 10 office in New all of whom were barred, were fined by purchasing stock at below-market York with assistance from the Corpo- a total of $14.8 million. prices to cover large short positions rate Financing Department in Wash- each firm had intentionally created in ington, D.C. Neither HGI, Inc., nor Nearly $1 million has already been their inventories. In each offering, the Maidstone currently operates a secu- deposited by the four executives into firms purchased the covering shares rities business. In September 1997, an escrow account for disbursement from shareholders who had received HGI, which was then based in Jeri- to hundreds of defrauded investors their securities prior to the initial pub- cho, N.Y., withdrew from the NASD. from 15 states and three countries. lic offerings (IPOs) through private Maidstone, formerly based in New Maidstone’s Chief Executive Officer placements and bridge financing York City, also withdrew from the and Chairman, Marshall Bernstein, arrangements. In registration state- NASD in November 1997. was barred, fined $1.9 million, and ments and amendments filed by the censured; and its President, Stuart two firms with the SEC, the shares of Investors can obtain the disciplinary Litman, was barred, fined $1.9 mil- these “selling shareholders” were record of any NASD-registered bro- lion, and censured. HGI’s Vice Presi- restricted and therefore could not be ker or brokerage firm by calling (800) dent and Director, Brian Douglas sold for up to two years after the IPO, 289-9999, or by sending an e-mail Scanlon, was barred, fined $5 mil- unless the lead underwriter granted through NASD Regulation’s Web lion, and censured; and Secretary permission. Site (www.nasdr.com). and Chairman Mark Arthur Hanna was barred, fined $5 million, and The complaint also alleges that both © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. censured. Maidstone was fined $1 firms entered into private transac- million and censured. The case tions with the “selling shareholders” against HGI remains pending. to purchase their shares to cover the short positions in their inventories. In Investors entitled to restitution need addition, it is alleged that, acting not contact the NASD directly, as through the four principals, the two they will be contacted in writing by a firms engaged in fraud by failing to

NASD Notices to Members—Disciplinary Actions July 1998 443 Members Reminded To Update tact NASD Regulation to cancel the For PC FOCUS PINs PIN for that principal. Members are reminded of their obligation to keep their PC FOCUS Per- ¥ A member that uses a service Your sonal Identification Number (PIN) bureau, accounting firm, or some information current. FOCUS filings other entity to file FOCUS Reports Information that are submitted with the PIN of an on its behalf must provide written individual who is no longer registered notification to NASD Regulation as a principal of the submitting firm that authorizes the designated enti- are not considered complete filings. ty to use the member’s PIN. How- ever, the PIN remains the Background principal’s signature and the member is responsible for the filing. Each member designated to the National Association of Securities Updating PIN Information Dealers, Inc. (NASD¨) for financial regulation is required to have at least FOCUS filings that are submitted one of its principals establish and with an invalid or inactive PIN will be register a PIN with NASD Regulation, deemed incomplete. Members must Inc. (NASD RegulationSM). It might be then refile their reports with a valid advisable to have more than one. PIN before NASD Regulation consid- When the member prepares to trans- ers the reports as received. If an mit its FOCUS Report, it is prompted individual with a PIN leaves the firm by the PC FOCUS application to input or changes duties, it is the member's a PIN to effect the transmission of the responsibility to notify the Business data. The PIN constitutes the princi- Program Support Help Desk so that pal’s signature and certifies that all accurate PIN information can be kept information contained in the report is on file. Members may call the Help true, correct, and complete. The PIN Desk at (800) 321-NASD, or write to is validated when the FOCUS Report the address given below, on compa- is received by NASD Regulation. ny letterhead, advising of the status change and requesting that the indi- PIN Requirements vidual’s PIN be removed.

The following are the terms and con- To register the replacement, mem- ditions for a valid PIN. bers then must complete a new PIN registration form, which must be ¥ Each principal whom the firm has signed and notarized. Members may authorized to approve and submit fax the form to NASD Regulation at FOCUS filings must select his/her (301) 590-6312, but also must send PIN consisting of four alphanumeric the original by mail to: characters. NASD Regulation, Inc. ¥ Each PIN must be filed on a PIN Business Program Support registration form with NASD Regu- Attention: PIN Coordinator lation. 15201 Diamondback Drive Rockville, MD 20850-3389 ¥ A PIN must be assigned to a licensed, active principal with the Questions concerning PIN informa- submitting member. If a principal tion may be directed to the Business ceases to be employed with the Program Support Help Desk at (800) member, or is no longer qualified or 321-6273. authorized to sign FOCUS Reports, the member must immediately con-

NASD Notice to Members—For Your Information July 1998 445 SEC Issues No-Action Letter capital, GSCC members that use its ensure the integrity of the data and On Repos And Reverse Repos netting system are not required to programs on your PC’s hard disks. On April 1, 1998, in response to a deduct from their net worth deficits The test script presented here will request from the Government Secu- arising from repo and reverse repo check your PC’s ability to transition rities Clearing Corporation (GSCC), agreements, outstanding one busi- to the year 2000 and recognize it as the SEC Division of Market Regula- ness day or less, that are netted and a leap year. tion issued a no-action letter con- guaranteed by GSCC. cerning the appropriate net capital Step 1: Create a bootable test treatment for repurchase and reverse Questions concerning the letter may diskette: repurchase agreement transactions be directed to Diane Waller at (212) (repos) that have been netted and 412-8693 or [email protected], or Insert a blank floppy diskette into the guaranteed through GSCC’s netting Jeffrey Ingber at (212) 412-8637 or PC’s A: drive. From a DOS prompt, system. [email protected] at the GSCC. type FORMAT A:/S. Or from Win- dows File Manager, click on In its request letter, GSCC noted that DISK/FORMAT and check MAKE its netting system totals and nets, on Agent Fees Increase SYSTEM DISK. a daily basis, each netting member’s All Central Registration Depository buy and sell cash activity, Treasury (CRDSM) participants, please be Step 2: Shut down the PC: auction purchases, and repos in a advised that the State of Pennsylva- security to establish a single net nia Securities Commission has With the bootable diskette created in position as long, short, or flat. After recently informed CRD that agent Step 1 still in your PC’s floppy drive, determining the netting member’s net registration, transfer, and renewal shut down your system (close Win- settlement positions, corresponding fees will increase effective Wednes- dows) and power off your PC. DO receive and deliver obligations are day, July 1, 1998. Agent registration NOT use the reset button or warm- established, and GSCC becomes and transfer fees will increase from boot (CTL-ALT-DEL). primarily obligated as the new coun- $77 to $80. Agent renewal fees will terparty for each transaction and increase from $62 to $65. There will Step 3: Power on the PC: guarantees settlement of all repos be no change in broker/dealer regis- that enter its netting system. tration or renewal fees. Turn the power on your PC and allow the PC to boot from the GSCC also discussed its risk man- diskette. After bootup, type DATE agement procedures that require a Year 2000 Tips For Members and press enter. DOS automatically daily mark-to-the-market and settle- As the Year 2000 grows near, each shows the current date. Current date ment process, which eliminates each NASD member firm should check its should be displayed. netting member’s deficits on repo systems and facilities to be ready for contracts on a daily basis. Since the coming millennium. Important Step 4: Enter new date and time: these deficits are never outstanding among these systems is checking an for more than one business day, item you use and depend on every At the Enter New Date (mm-dd-yy) GSCC made its no-action request day—your personal computer (PC). prompt, type 12-31-1999. After under paragraph (c)(2)(iv)(F) of SEC changing the date, the new date will Rule 15c3-1, which requires a bro- The following steps are suggested to be displayed. Type TIME and press ker/dealer, when calculating its net determine if a PC will roll over to the enter. At the Enter New Time capital, to deduct from its net worth year 2000 correctly. prompt, type 23:55:00. certain deficits arising from repo activities. The rule provides that repo The test presented here requires a Step 5: Shut down the PC: and reverse repo deficits may be bootable DOS floppy diskette. This is reduced by “calls for margin, marks a safer method to test your PC’s sys- Turn the power off on your PC and to the market, or other required tem clock because it leaves the data wait at least 10 minutes. If you don’t, deposits which are outstanding one and programs on the PC’s hard disk DOS will appear to transition correct- business day or less.” unaffected. If you boot to your C: ly to the year 2000 but your system drive, you may end up loading Win- may not be Year 2000 compliant. Based on GSCC’s representations, dows¨ or Windows¨ 95 and other the SEC issued a no-action letter applications from your startup rou- stating that, when computing net tine. Using a bootable diskette will

NASD Notice to Members—For Your Information July 1998 446 Step 6: Power on the PC: Step 9: Power off your PC: diskette from the ﬂoppy and power off your PC. Turn the power back on and wait for Turn the power off on your PC and the boot process to complete. wait at least 10 minutes. (Source: Based on information obtained from the Small Business Step 7: Check the system date: Step 10: Power on the PC: Administration’s Web Site— www.sba.gov.) Type in Date at the Ready prompt. If Turn the power on the PC. Type in Sat 01-01-2000 is displayed, your DATE at the Ready prompt. If Tue PC’s BIOS passes the test. 02-29-2000 is displayed, your PC’s Clariﬁcation To May Notice To BIOS passes the leap year test. Members Step 8: Test your system’s ability to The Andrew Friedman listed in the recognize the year 2000 as a leap Step 11: Conclude Testing: May Notice to Members is not the year: Andrew J. Friedman of New York, To conclude testing, repeat steps 3 New York, employed by Prime Capi- Repeat steps 3 and 4 using 02-28- and 4 to reset your PC to the current tal Services. 2000 as the date and set the time to date and time. Enter the current 23:55:00. date, e.g. 07-04-1997, and time, e.g. © 1998, National Association of Securities Dealers, 06-:00:00. Remove the bootable Inc. (NASD). All rights reserved.

NASD Notice to Members—For Your Information July 1998 447 Executive Summary Questions regarding this Notice may Special Effective upon publication of this be directed to Linda Fienberg, Exec- Notice, the National Association of utive Vice President, Office of Dis- Securities Dealers, Inc. (NASD¨) will pute Resolution, NASD Regulation NASD extend the practice of deducting Inc. at (212) 858-4400; Todd Diganci, delinquent (i.e., greater than 90 days Vice President and Corporate Con- outstanding) arbitration fees from troller, Finance Department, NASD at Notice to funds maintained in a member’s (301) 590-6203; or Elliott R Curzon, Central Registration Depository Assistant General Counsel, Office of Members (CRDSM) account to include fees origi- General Counsel, NASD RegulationSM, nating prior to January 1, 1998. at (202) 728-8451. Notice to Members 97-71 estab- 98-61 lished the practice of deducting delinquent arbitration fees from member Background CRD accounts. However, this prac- The Office of Dispute Resolution has, NASD Members Face tice was limited to balances originat- and continues to have, a substantial CRD Account Deduction ing after January 1, 1998. and growing problem with unpaid Or Membership member and associated person fees, Cancellation For Non- As previously outlined in Notice to such as member surcharges and Members 97-71, members will forum fees, resulting from arbitration payment Of Arbitration receive a final written notice that out- proceedings. Member surcharges Fees standing arbitration fees are due and are assessed to member firms when payable. This notice will be sent as they are named in an arbitration pro- Suggested Routing part of the normal billing and collec- ceeding or when an associated per- Senior Management tions process after the balance has son employed by the firm is named been outstanding for 30 days. If pay- in an arbitration proceeding. Forum Advertising ment is received prior to the estab- fees are the fees assessed to a party Continuing Education lished deadline (i.e., 60 days after by the arbitrators based on the num- final notice), the NASD will not ber of hearing sessions that occurred Corporate Finance deduct funds from the member’s in an arbitration case. Executive Representatives CRD account. Members are respon- Government Securities sible for replenishing the funds on Member surcharge fees are deposit in their respective CRD assessed and become due and Institutional accounts to ensure that no delays payable when an arbitration claim is Insurance are experienced in processing regis- served on the member. Forum fees Internal Audit tration applications or any other are assessed by the Arbitration CRD-related obligation. Panel and become payable when a Legal & Compliance case is completed and the statement Municipal If after the 60-day period specified in of account is issued. When there is the final notice, there are insufficient an arbitration award, the award spec- Mutual Fund funds on deposit to cover the unpaid ifies how much of the total forum fees Operations fees, the NASD will pursue the sus- must be paid by each party to the Options pension or cancellation of the mem- case. ber’s membership pursuant to Article Registered Representatives VI, Section 3 of the NASD By-Laws. Under the current invoicing and dun- Registration NASD, after a 15-day notice in writ- ning procedures, NASD believes that Research ing, may suspend or cancel the members are given sufficient notice membership of any member that is of their obligations in order for them Syndicate delinquent in the payment of arbitra- to pay the resulting charge prior to Systems tion fees in cases where a party has deduction of funds from their CRD not filed a motion to vacate or to account. NASD will continue to pro- Trading modify an award pursuant to applica- vide written confirmation of each Training ble law, or where a court has denied reallocation to the member’s compli- Variable Contracts such a motion. ance officer.

Special NASD Notice to Members 98-61 July 1998 451 Deduction From Member’s NASD will deduct the fees from the Suspension/Cancellation Of CRD Account member’s CRD account. Membership Or Registration Many members maintain funds on Members whose CRD account bal- deposit with the NASD in order to ances are insufficient to cover an expedite processing of employee Joint And Several Cases unpaid debt, and who do not make registrations, examinations, and fin- All parties against whom arbitration other payment arrangements, may gerprint card processing. Increasing- fees have been assessed jointly and have their membership suspended ly, however, members are asking severally are equally liable for the or cancelled pursuant to Article VI, that on-deposit funds be reallocated satisfaction of the entire obligation. Section 3 of the NASD By-Laws. for payment of other NASD and Satisfaction of the fee releases all Associated persons who do not pay NASD Regulation obligations such parties from the outstanding liability arbitration fees also are subject to as advertising fees, gross income without any apportionment. Through suspension or termination of their assessment fees, and NASD Media- its normal billing and collections pro- registration pursuant to Article VI, SourceSM materials (e.g., fingerprint cess, the NASD will continue to Section 3 of the NASD By-Laws. cards or other reference materials). expend significant efforts to collect For these reasons, the use of mem- the fees from all parties. If despite The NASD, after a 15-day notice in ber on-deposit funds to cover other those efforts, the balance remains writing, may suspend or cancel the obligations owed to the NASD is unpaid 90 days after the case has membership of any member that is appropriate. been closed, NASD will deduct funds delinquent in the payment of arbitra- from the CRD accounts of active tion fees in cases where a party has Accordingly, for delinquent arbitration member firms against which arbitra- not filed a motion to vacate or to fees, the NASD will provide a final tors have assessed fees jointly and modify an award pursuant to applica- written notice that will give mem- severally. ble law, or where a court has denied bers 60 days from the date of the such motion. notice to pay the outstanding obligations. If payment is not received by © 1998, National Association of Securities Dealers, the end of that 60-day period, the Inc. (NASD). All rights reserved.

Special Notices To Members are published on an accelerated basis and distributed independently of monthly Notices to Members newsletters. Numerical sequencing may thus appear to contain gaps during a given monthly publication cycle. Such temporary gaps reﬂect a priority in the production process and will disappear at the conclusion of monthly electronic posting and print distribution.

© 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD is a registered service mark of the National Association of Securities Dealers, Inc. MediaSource is a service mark of the NASD. Central Registration Depository (CRD) is a service mark of the NASD and the North American Securities Administrators Association, Inc. (NASAA). NASD Regulation is a service mark of NASD Regulation, Inc. NASD Notices to Members is published monthly by NASD Corporate Communications, Kim Dineen, Editor, NASD Editorial Services Department, 1735 K Street, NW, Washington, DC 20006-1500, (202) 728-8370. No portion of this publication may be copied, photocopied, or duplicated in any form or by any means, except as described below, without prior written consent of the NASD. Members of the NASD are authorized to photocopy or otherwise duplicate any part of this publication without charge only for internal use by the member and its associated persons. Nonmembers of the NASD may obtain permission to photocopy for internal use through the Copyright Clearance Center (CCC) for a $3-per-page fee to be paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Annual subscriptions cost $225; single issues cost $25. Send a check or money order (payable to the National Association of Securities Dealers, Inc.) to NASD MediaSource, P.O. Box 9403, Gaithersburg, MD 20898-9403, or to phone in an order using American Express, MasterCard, or Visa charge, call (301) 590-6142, Monday to Friday, 9 a.m. to 5 p.m., Eastern Time. Back issues may be ordered by writing NASD, Support Services Department, 1735 K Street, NW, Washington, DC 20006-1500 or by calling (202) 728-8061. NASD Notices to Members (December 1996 to current) are also available on the Internet at www.nasdr.com.

Special NASD Notice to Members 98-61 July 1998 452 Executive Summary Members of the District Committee Special The purpose of this Notice is to serve as hearing panelists in disci- advise members of the impending plinary proceedings and the Commit- election to fill forthcoming vacan- tee serves as a policy advisor to the NASD cies on the District Committee and Board of Directors with respect to next year's District Nominating regulatory trends, issues, and con- Committee and to communicate cerns, including matters such as Notice to with all members the procedures Sanction Guidelines, new rule initia- to fill these vacancies. The proce- tives, and preventive compliance. In Members dures are described in detail in selecting a slate of candidates for the Exhibit A: 1998 District Election District Committee, the Nominating Procedures. Committee endeavors, as nearly as 98-62 practicable, to secure appropriate This Notice also serves to advise and fair representation of the various members of the nomination pro- sections of the District, and of all District Committee And cess for industry members to classes and types of firms engaged District Nominating serve on the National Adjudicatory in the investment banking and securi- Committee Election Council (NAC) next year. The pro- ties business within the District. Procedures And National cedures are described in detail in Exhibit B: 1998 Regional Nominat- Adjudicatory Council ing Committee Nomination Proce- National Adjudicatory Council Nomination Procedures dures. In 1999, the NAC will be a 12-member committee with half of the mem- Suggested Routing Questions concerning these proce- bers representing industry and half Senior Management dures may be directed to the mem- representing non-industry. The ber’s District Director or Alden S. industry members serve as volun- Advertising Adkins, General Counsel, NASD Reg- teers, and five of the six industry Continuing Education ulation, Inc. (NASD RegulationSM), at members will be nominated by region (202) 728-8332, Joan C. Conley, Cor- (a map of the five regions is Corporate Finance porate Secretary, National Association attached) and approved by the Executive Representatives of Securities Dealers, Inc. (NASD¨), at NASD’s National Nominating Com- Government Securities (202) 728-8381, or Mary Dunbar, mittee (NNC). One industry member Assistant General Counsel, NASD will be nominated by the NNC as an Institutional Regulation, at (202) 728-8252. at-large member. In 1999, half of the Insurance industry and non-industry members Internal Audit will be appointed for one-year terms, District Nominating Committee with the remaining members appoint- Legal & Compliance And District Committee ed for two-year terms. These one- Municipal The District Nominating Committee is and two-year term appointments will comprised of five members who be determined by the NNC after the Mutual Fund serve a one-year term of office. The regional nomination and the at-large Operations function of the District Nominating selection have been approved by the Options Committee is to nominate a slate of NNC. After 1999, all terms will be candidates to fill the vacancies that two-year terms, and service of two Registered Representatives occur annually on the District Com- consecutive terms is permissible. Registration mittee and to replace the District The Chairman of the NAC will be Research Nominating Committee itself. In the elected by the incoming NAC mem- past, the practice has been to allow bers, and, in accordance with rele- Syndicate one or two of the current members to vant By-Laws, has a seat on the Systems succeed themselves; this practice NASD Regulation Board of Directors provides some continuity from one and NASD Board of Governors. Trading year to the next. Training The NAC is the successor to the Variable Contracts National Business Conduct Commit-

Special NASD Notice to Members 98-62 July 27, 1998 453 tee (NBCC). As such, it is responsi- tional business through supplemen- operational limitation cases, as well ble for the oversight of the disci- tary telephone meetings. In prepara- as on Hearing Panels designated to plinary program of NASD Regulation, tion for these meetings, NAC conduct initial hearings in summary the most active of all securities members receive “kits” consisting of and non-summary suspension, eligi- industry self-regulatory programs. draft decisions on appellate cases bility, and statutory qualification The NAC also is responsible for the and memoranda discussing pro- cases. In addition, two to four NAC development of regulatory and posed rules and other matters. The members also serve as members of enforcement policy and rule changes draft decisions range in number from the Review Subcommittee, which relating to the business and sales 5 to 20 per kit, and in length up to 20 meets from one to four hours weekly practices of NASD members. pages each. Required preparation by telephone to discuss and accept time for each meeting is extensive, or reject proposed settlements in dis- The NAC’s mission is to assure fair- and is in addition to time required to ciplinary actions, to review all non- ness, expedition, and consistency in travel to the meetings and the meet- default initial decisions in disciplinary the disciplinary and regulatory ings’ time. Most meetings are held in and membership cases, and to rule actions for which it is responsible; to Washington D.C. or New York City, on miscellaneous motions or identify and address potential regula- but this year the NAC also met in requests. The members of the NAC tory issues; and to enforce current Denver and San Francisco in order are supported by the staff of the and establish new disciplinary policy. to meet with District Committees to NASD Regulation Office of General discuss issues of common interest. Counsel in connection with the fore- The NAC meets at least six times a going adjudicatory and policymaking year. It always meets every other NAC members also serve about responsibilities. month for a full day to decide appel- every other month on two-person late cases, rule on applications and Hearing Panels designated to hear © 1998, National Association of Securities Dealers, exemption requests, and to address appeals or calls for review in disci- Inc. (NASD). All rights reserved. policy matters. It may transact addi- plinary, membership, or financial and

© 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD is a registered service mark of the National Association of Securities Dealers, Inc. Central Registration Depository (CRD) is a service mark of the NASD and the North American Securities Administrators Association, Inc. (NASAA). NASD Regulation is a service mark of NASD Regulation, Inc. NASD Notices to Members is published monthly by NASD Corporate Communications, Kim Dineen, Editor, NASD Editorial Services Department, 1735 K Street, NW, Washington, DC 20006-1500, (202) 728-8370. No portion of this publication may be copied, photocopied, or duplicated in any form or by any means, except as described below, without prior written consent of the NASD. Members of the NASD are authorized to photocopy or otherwise duplicate any part of this publication without charge only for internal use by the member and its associated persons. Nonmembers of the NASD may obtain permission to photocopy for internal use through the Copyright Clearance Center (CCC) for a $3-per-page fee to be paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Annual subscriptions cost $225; single issues cost $25. Send a check or money order (payable to the National Association of Securities Dealers, Inc.) to NASD MediaSource, P.O. Box 9403, Gaithersburg, MD 20898-9403, or to phone in an order using American Express, MasterCard, or Visa charge, call (301) 590-6142, Monday to Friday, 9 a.m. to 5 p.m., Eastern Time. Back issues may be ordered by writing NASD, Support Services Department, 1735 K Street, NW, Washington, DC 20006-1500 or by calling (202) 728-8061. NASD Notices to Members (December 1996 to current) are also available on the Internet at www.nasdr.com.

Special NASD Notice to Members 98-62 July 27, 1998 454 Exhibit A

1998 DISTRICT ELECTION PROCEDURES

REGULAR ELECTION

1. Each NASD Regulation, Inc. (NASD RegulationSM) District shall maintain a District Nominating Committee in the manner speciﬁed in Article VIII of the By-Laws of NASD Regulation.

2. The Secretary of NASD Regulation (the Corporation) will notify in writing the Chairman of each District Committee of the upcoming vacancies on both the District Committee and the District Nominating Committee, and the procedures to follow to ﬁll the vacancies.

3. The Chairman of the District Committee will advise the District Nominating Committee to proceed with its work of soliciting, identifying, and nominating candidates to ﬁll open positions on the District Committee. The District Nominat- ing Committee will be provided by Corporation staff with information considered relevant to the nominating process, including proﬁles of the NASD members in each District (the member).

4. The Secretary of NASD Regulation and the CRD/Public Disclosure Department will prepare a Notice to Members (NtM) reminding all members of their obligation to keep current and accurate the information in the Central Registra- tion Depository (CRDSM) system pertaining to Executive Representatives and branch ofﬁce addresses. This NtM will note that failure to keep this information accurate may jeopardize the member’s ability to participate in District elections as well as other member votes.

5. Each member having a headquarters or branch ofﬁce in a District will be eligible to cast one vote in a District election through its Executive Representative.

6. The District Committee Chairman will send notiﬁcation of the forthcoming elections to the Executive Representative and each branch ofﬁce of all members eligible to vote in that District. Members will be requested to submit names of candidates to the District Nominating Committee or the District Director.

7. The District Nominating Committee will review the background and qualiﬁcations of the proposed candidate and the proﬁle information provided by Corporation staff, and will determine its slate of candidates for the election.

8. The District Nominating Committee will certify to the District Committee each candidate nominated by the District Nominating Committee.

9. Within five (5) calendar days after this certification, the District Committee will send to the Executive Representa- tive, who will be eligible to cast one vote in the District, and each branch office in the District a copy of the certified District Nominating Committee document.

10. If an ofﬁcer, director, or employee of an NASD member is interested in being considered as an additional candidate, he/she must indicate his/her interest to the District Director within fourteen (14) calendar days of the date of the District Nominating Committee document. The District Director will make a written record of the time and date of such notiﬁcation.

11. A list of all the members eligible to vote in the District (the Executive Representatives) will be mailed to the additional candidate immediately following his/her notiﬁcation of interest to the District Director.

Special NASD Notice to Members 98-62 July 27, 1998 455 12. Additional candidate(s) may be nominated if a petition signed by the Executive Representative of at least 10 percent of the members eligible to vote in the District is ﬁled with the District Nominating Committee within 30 calendar days from the mailing date of the list of members eligible to vote (the Executive Representatives - see procedure #11), unless the Secretary of NASD Regulation grants additional time for good cause shown.

13. If no additional candidate(s) are nominated within the 30-calendar-day period then the candidate or candidates nominated by the District Nominating Committee shall be considered duly elected, and the District Committee shall certify the election to the Board of Directors of NASD Regulation.

14. If any additional candidate(s) are nominated, the procedures outlined in the Contested Election Procedures will apply.

CONTESTED ELECTION PROCEDURES If any additional candidate or candidates are nominated by petition or by the District Nominating Committee, the election will be considered a contested election and the following procedures will apply:

1. The District Committee will send a notice to the Executive Representatives of the members eligible to vote in the District, announcing the contested election and outlining the procedures for such election.

2. The District Committee shall send notice to the Executive Representatives of the members eligible to vote, a reminder to review, and if needed, update their Executive Representative designation and address. Each member will be eligible to cast one vote through its designated Executive Representative.

3. The District Nominating Committee will prepare a ballot with the names of the District Nominating Committee's candidate(s) and the additional nominated candidate(s) for any contested position, which shall be sent to the Executive Representatives of all members eligible to vote in the District. A date before which ballots must be returned will be indicated on the ballot. Instructions will be included with the ballot requesting that the completed ballot be returned to an independent agent of the Corporation.

4. Eligibility for receipt of the ballot will be based upon the Corporation’s membership records as of a date determined by the Secretary of NASD Regulation, which will be on a date not more than 30 days from which the ballots are mailed. This membership list will be used for vote qualiﬁcation purposes. The list will be provided to all candidates.

5. The Corporation’s independent agent will receive all of the ballots for the election.

6. The Corporation’s independent agent will open all of the envelopes returned undelivered and will determine whether they were sent to the member’s address of record. If incorrectly addressed, the agent will send the ballot to the address of record.

7. Following the election period, on a date or dates designated by the Secretary of NASD Regulation, the qualiﬁcation and accounting of ballots will take place. Representatives of the candidates will be allowed to be in attendance. Rep- resentation for each candidate will be limited to two individuals.

8. Under the direction of the Secretary of NASD Regulation or an ofﬁcer or employee of the Corporation chosen by the Secretary, an independent agent chosen by the Secretary of NASD Regulation will open and count the ballots, pursuant to the procedures described below in paragraph nine.

9. On the date designated by the Secretary of NASD Regulation, the representative of the independent agent will bring to the District Office all of the ballots received prior to the close of the election period and, in the presence of the candidates and/or their representative, will open the election ballots. For ballot qualification purposes, the representative will identify to the candidates each member firm ballot that has been received (including the name of the Execu- tive Representative) and inform each candidate of the representatives determination of whether or not the ballot is

Special NASD Notice to Members 98-62 July 27, 1998 456 qualified for voting purposes. (Determination shall be based upon a comparison of ballots received against the list of members and their Executive Representatives eligible to vote.) The Secretary of NASD Regulation or his/her designee will make the final determination of the qualification. Upon the qualification of each ballot, the representative will then record the vote indicated on the ballot. (Neither the candidate nor his/her representative will be allowed to see the actual vote of any member firm).

10. Only ballots signed by the Executive Representative of a member eligible to vote shall be counted. The only exception is where a ballot has been received from a member eligible to vote and the member has noted on the ballot a change in Executive Representative and the reasons for such a change. All ballots received in this manner will be set aside, and if these ballots are determined to be material to the outcome of the election, the Secretary of NASD Regulation will contact the ﬁrm to conﬁrm the reasons noted. Upon a determination by the Secretary of NASD Regu- lation that such an exception would be appropriate, the representative will then be asked to contact the new Executive Representative for his/her vote.

11. The following circumstances will each result in an invalid ballot, and therefore will not be counted:

¥ If a ballot is not signed by the Executive Representative.

¥ If a vote is not indicated on a ballot.

¥ If a vote for multiple candidates is indicated on the same ballot.

12. If two or more properly executed ballots are received from the same member firm, these ballots will be set aside. If these ballots are determined to be material to the outcome of the election, the representative will contact the Execu- tive Representative at the member firm to obtain the firm’s vote. (A list of firms that indicated their ballots were lost or not received and were provided with duplicate ballots will be provided to the independent agent.)

13. The independent agent will count the votes received for each candidate under the direction of the designated ofﬁ- cer or employee. The candidate receiving the largest number of votes cast shall be declared elected. Certiﬁcation of the election results will be made to the Board of Directors of NASD Regulation.

14. The roles of the parties involved in the contested election are deﬁned as follows:

¥ The Corporation will provide a list of members eligible to vote as of the date of record to each candidate. Except as provided below, the Corporation will not provide other logistical or administrative support to candidates in the election.

¥ The Board of Directors of NASD Regulation, the District Nominating Committee, or any other committee acting in its ofﬁcial capacity may not openly communicate its support of any candidate(s) to the members of the Corpo- ration eligible to vote. However, members of the Board, the District Nominating Committee, or any other committee members acting solely in their individual capacity may openly communicate support of any candidate(s) to the members of the Corporation eligible to vote.

¥ Any additional candidate and his/her representatives and supporters may openly communicate to the members of the Corporation in support of the additional candidate’s candidacy.

¥ The District staff will provide administrative support to the candidates with the preparation of up to two mailings to the members eligible to vote. The Corporation will pay the postage for these mailings. The mailings will be prepared on the personal stationery provided by each candidate, and will state that the mailings represent the opinions of the candidates. The District Nominating Committee Candidate may identify himself/herself as such in his/her mailings. Additional mailings may be made by the candidates, but at their own expense.

Special NASD Notice to Members 98-62 July 27, 1998 457 ¥ The District staff and Corporation staff will not take any position publicly, or with the membership, indicating a preference for a speciﬁc candidate during the contested election period.

¥ The administration of the contested election, other than as provided for in these Election Procedures, shall be as directed by the Secretary of NASD Regulation.

Additional information pertaining to the District Election Procedures can be found in Article VIII of the NASD Regula- tion By-Laws. The By-Laws can be found in the NASD Manual on-line at www.nasdr.com.

Special NASD Notice to Members 98-62 July 27, 1998 458 Exhibit B

1998 REGIONAL NOMINATING COMMITTEE NOMINATION PROCEDURES

REGULAR NOMINATIONS

1. Each NASD Regulation, Inc. (NASD RegulationSM) District shall maintain a District Nominating Committee in the manner speciﬁed in Article VIII of the By-Laws of NASD Regulation.

2. The Secretary of NASD Regulation (the Corporation) will notify in writing the Chairman of each District Nominating Committee and the District Director of the need to establish a Regional Nominating Committee for purposes of nominating industry members to serve on the National Adjudicatory Council (NAC), and the procedures to follow to ﬁll the vacancies.

3. The District Director and the Chair of the District Nominating Committee will advise the District Nominating Commit- tee to proceed with its work of electing two members from the District Committee to serve as members of the Region- al Nominating Committee. Two members from each District Committee will serve for a two-year term on the Regional Nominating Committee. (If the region consists of one District, then the District Nominating Committee must elect four District Committee members to serve on the Regional Nominating Committee.) At the ﬁrst meeting of the Regional Nominating Committee, a Chairman will be selected from among the members. The District Directors in the speciﬁed regions will work together to establish meeting dates, places, and agendas.

4. On or before August 1, 1998, the Secretary of NASD Regulation shall send written notice to the Chairman of the Regional Nominating Committee to advise the Regional Nominating Committee to initiate the process for nominating individuals to represent the region on the NAC for a period of one or two years. The Regional Nominating Committee will be provided by NASD Regulation staff with information considered relevant to the nominating process, including proﬁles of the NASD members in each region.

5. The Secretary of NASD Regulation and the CRD/Public Disclosure Department will prepare a Notice to Members (NtM) describing the nomination procedures and reminding all members of their obligation to keep current and accurate the information in the Central Registration Depository (CRDSM) system pertaining to Executive Representatives and branch ofﬁce addresses. This NtM will note that failure to keep this information accurate may jeopardize the member’s ability to participate in regional nominations as well as other member votes.

6. Each member having a headquarters or branch ofﬁce in a speciﬁed region will be eligible to cast one vote in the NAC nominations through its Executive Representative.

7. The Regional Nominating Committee Chairman will send written notice of the upcoming nomination to the Execu- tive Representative and each branch ofﬁce of all members in the region eligible to vote in that region. Members will be requested to submit names of candidates to the Regional Nominating Committee or the Secretary of NASD Regula- tion.

8. The Regional Nominating Committee will review the background and qualiﬁcations of the proposed candidate and the description of the NASD membership provided by NASD Regulation staff, and shall propose one or more candidates for nomination to the National Nominating Committee for the election to the NAC from the region.

9. The Regional Nominating Committee will certify to the National Nominating Committee each candidate nominated by the Regional Nominating Committee.

Special NASD Notice to Members 98-62 July 27, 1998 459 10. Within five (5) calendar days after this certification, the NASD will send to the Executive Representative, who will be eligible to cast one vote in the region, and each branch office a notice of the Regional Nominating Committee’s nominations.

11. If an ofﬁcer, director, or employee of an NASD member is interested in being considered as an additional candidate, he/she must indicate his/her interest to the Secretary of NASD Regulation or the Regional Nominating Commit- tee Chairman in the Region within fourteen (14) calendar days of the date of the Regional Nominating Committee document. The Secretary of NASD Regulation or the Regional Nominating Committee Chairman shall make a written record of the time and date of such notiﬁcation.

12. A list of all the members and their speciﬁed Executive Representative eligible to vote in the region will be mailed to the additional candidate by the Secretary of NASD Regulation immediately following his/her notiﬁcation of interest to the Secretary of NASD Regulation or the Regional Nominating Committee Chairman.

13. Additional candidate(s) may be nominated if a petition signed by the Executive Representative of at least 10 percent of the members eligible to vote in the region is ﬁled with the Corporate Secretary of NASD Regulation within 30 calendar days from the mailing date of the list of members eligible to vote (the Executive Representatives - see procedure #11), unless the Corporate Secretary of NASD Regulation grants additional time for good cause shown.

14. If no additional candidate(s) are nominated within the 30-calendar-day period, then the candidate nominated by the Regional Nominating Committee shall be considered ofﬁcially nominated, and the Regional Nominating Commit- tee shall certify the nomination to the National Nominating Committee.

15. If any additional candidate(s) are nominated or the Regional Nominating Committee nominates more than one candidate, the procedures outlined in the Contested Nomination Procedures will apply.

CONTESTED NOMINATION PROCEDURES If more than one candidate is nominated, the election will be considered a contested nomination and the following procedures will apply:

1. The Regional Nominating Committee will send a notice to the Executive Representatives of the members eligible to vote in the region, announcing the contested nomination and outlining the procedures for such nomination.

2. The Regional Nominating Committee will send notice to the Executive Representatives of the members eligible to vote, a reminder to review, and if needed, update their Executive Representative designation and address. Each member will be eligible to cast one vote through its designated Executive Representative.

3. The Regional Nominating Committee will prepare a ballot with the names of the Regional Nominating Committee's candidate(s) and the additional nominated candidate(s) for any contested position, which shall be sent to the Execu- tive Representatives of all members eligible to vote in the District. A date before which ballots must be returned to be counted will be indicated on the ballot. Instructions will be included with the ballot requesting that the completed ballot be returned to an independent agent of the Corporation.

4. Eligibility for receipt of the ballot will be based upon the Corporation’s membership records as of a date determined by the Secretary of NASD Regulation not more than 30 calendar days before the mailing of the ballot. This membership list will be used for vote qualiﬁcation purposes. The list will be provided to all candidates.

5. The Corporation’s independent agent will receive all of the ballots for the election.

Special NASD Notice to Members 98-62 July 27, 1998 460 7. Following the election period, on a date or dates designated by the Secretary of the Corporation, the qualiﬁcation and accounting of ballots will take place. Representatives of the candidates will be allowed to be in attendance. Rep- resentation for each candidate will be limited to two individuals.

8. Under the direction of the Secretary of NASD Regulation or an ofﬁcer or employee of the Corporation chosen by the Secretary of NASD Regulation, an independent agent chosen by the Secretary of the Corporation will open and count the ballots, pursuant to the procedures described below in paragraph nine.

9. On the date designated by the Secretary of NASD Regulation, the representative of the independent agent will bring to the designated District Office all of the ballots received prior to the close of the election period and, in the presence of the candidates and/or their representative, will open the election ballots. A District Office will be designated by agreement between the Secretary of NASD Regulation and the additional candidate(s). For ballot qualification purposes, the representative will identify to the candidates each member firm ballot that has been received (including the name of the Executive Representative) and inform each candidate of the representatives determination of whether or not the ballot is qualified for voting purposes. (Determination shall be based upon a comparison of ballots received against the list of members and their Executive Representatives eligible to vote.) The Secretary of NASD Regulation or his/her designee will make the final determination of the qualification. Upon the qualification of each ballot, the representative will then record the vote indicated on the ballot. (Neither the candidate nor his/her representative will be allowed to see the actual vote of any member firm.)

11. The following circumstances will each result in an invalid ballot, and therefore will not be counted:

¥ If a ballot is not signed by the Executive Representative.

¥ If a vote is not indicated on a ballot.

¥ If a vote for multiple candidates is indicated on the same ballot.

13. The independent agent will count the votes received for each candidate under the direction of the designated ofﬁ- cer or employee. The candidate receiving the largest number of votes cast shall be declared the nominee. Certiﬁca- tion of the nomination results will be made to the National Nominating Committee.

14. The roles of the parties involved in the contested election are deﬁned as follows:

¥ The Board of Directors of NASD Regulation, the Regional Nominating Committee, or any other committee acting in its ofﬁcial NASD capacity may not openly communicate its support of any candidate(s) to the members of the Corporation eligible to vote. However, members of the Board, the Regional Nominating Committee, or any

Special NASD Notice to Members 98-62 July 27, 1998 461 other committee members acting solely in their individual capacity may openly communicate support of any candidate(s) to the members of the Corporation eligible to vote.

¥ Any additional candidate and his/her representatives and supporters may openly communicate to the members of the Corporation in support of the additional candidate’s candidacy.

¥ The District staff will provide administrative support to the candidates with the preparation of up to two mailings to the members eligible to vote. The Corporation will pay the postage for these mailings. The mailings will be prepared on the personal stationery provided by each candidate, and will state that the mailings represent the opinions of the candidates. The Regional Nominating Committee Candidate may identify himself/herself as such in his/her mailings. Additional mailings may be made by the candidates, but at their own expense.

¥ The District staff and Corporation staff will not take any position publicly, or with the membership, indicating a preference for a speciﬁc candidate during the contested election period.

¥ The administration of the contested election, other than as provided for in these Election Procedures, shall be as directed by the Secretary of NASD Regulation.

Additional information pertaining to the Regional Nominating procedures can be found in Article VI of the NASD Reg- ulation By-Laws. The By-Laws and can be found in the NASD Manual on-line at www.nasdr.com.

Special NASD Notice to Members 98-62 July 27, 1998 462 Regional Map for National Adjudicatory Council Nominations NYC

Region Districts No. Of Members

West 1, 2, 3a, 3b 1019

South 5, 6, 7 1117

Central 4, 8a, 8b 1040

North 9, 11 1182

New York City 10 1172 Executive Summary on or before August 31, 1998. The Special On July 2, 1998, the Securities and second report is due April 30, 1999. Exchange Commission (SEC or Commission) amended SEC Rule The SEC states that these reports NASD 17a-5 to require broker/dealers to will increase broker/dealer aware- complete reports regarding their ness to take specific steps now to readiness and activities to prepare prepare for the Year 2000; facilitate Notice to their businesses to address Year coordination with self-regulatory 2000 challenges and risks. The Rule organizations of industry-wide test- Members amendment was published in the ing, implementation, and contingency Federal Register—63 FR 37667 on planning; supplement the Commis- July 13, 1998. Complete Rule infor- sion’s examination module for Year 98-63 mation is also available on the SEC 2000 issues and identify potential Web Site (www.sec.gov). This Notice Year 2000 problems; and provide discusses the specifics of the SEC’s information regarding the securities NASD Alerts Members Year 2000 amendment. industry’s preparedness for the Year About SEC Rule 2000. The reports will be available to Amendment Requiring Furthermore, this Notice highlights the public and will enable Broker/Dealers To File Year survey results from the National broker/dealer counterparties and oth- Association of Securities Dealers, ers to assess the risks of doing busi- 2000 Reports And Releases Inc. (NASD¨) December 1997 Year ness with a broker/dealer that may Year 2000 Survey Results 2000 Compliance Survey. The pur- not be Year 2000 compliant. pose of that survey was to assist the NASD in determining the status of its Summary Details For Report Suggested Routing members’ Year 2000 initiatives, and Submission to ensure that member firms are Senior Management moving forward in making their busi- Each NASD member firm with a Advertising nesses and systems Year 2000 com- $5,000 or greater net capital require- Continuing Education pliant. As of June 30, 1998, 99.9 ment is required to file reports to the percent of the membership had SEC and DEA at specified times Corporate Finance responded to the survey. regarding its efforts to address Year Executive Representatives 2000 problems. Important Note: Government Securities Questions or comments regarding Member firms that fail to provide this Notice may be directed to Lyn required Year 2000 reports will be Institutional Kelly, NASD Year 2000 Program subject to disciplinary action for viola- Insurance Director, via the Program Office toll- tion of NASD Rule 8210. Internal Audit free number, (888) 227-1330, or via e-mail at [email protected]. Also, visit Each report contains two parts. Part I Legal & Compliance the NASD Web Site (www.nasd.com) must be completed by all NASD Municipal and NASD Regulation, Inc. (NASD members with a $5,000 or greater SM Mutual Fund Regulation ) Web Site net capital requirement. Part I is a (www.nasdr.com) for further Year check-box format. Part II, which Operations 2000 information. requires narrative answers, must be Options completed in addition to Part I if the Registered Representatives NASD member firm has a $100,000 SEC Year 2000 Amendment or greater net capital requirement. Registration The amendment to SEC Rule 17a-5 SEC Form BD-Y2K and detailed fil- Research requires all NASD members with ing instructions are enclosed with this Syndicate FOCUS capital requirements on or Notice. after December 31, 1997 of $5,000 Systems or greater to file two reports with the Generally, the report requires each Trading SEC and the firm’s designated NASD member firm to discuss the Training examining authority (DEA). The first steps it has taken to address Year report is due to the SEC and DEA 2000 problems. Each member, Variable Contracts

Special NASD Notice to Members 98-63 July 1998 465 among other things, is required to: 1) the Year 2000 issue on a regular NASD Survey Results indicate whether its board of direc- basis. The NASD Regulation Year In December 1997, the NASD pub- tors, or similar body, has approved 2000 Program has, and will continue lished Special Notice to Members and funded written Year 2000 reme- to, developed publications and work- 97-96 requiring NASD member firms diation plans that address all mis- shops to help prepare and educate to complete a Year 2000 Compliance sion-critical computer systems; 2) members on how to address the Survey. The purpose of the survey describe its Year 2000 staffing problem and to make members was to assist in determining the sta- efforts; 3) discuss its progress on aware of their responsibility to ana- tus of NASD members’ Year 2000 each stage of preparation for the lyze the readiness of their own busi- initiatives, and to ensure that mem- Year 2000; 4) indicate if it has written ness and computer systems, as well ber firms are on a course to make contingency plans to deal with Year as other services and computer sys- their businesses and systems Year 2000 problems that may occur; and tems that each member relies upon. 2000 compliant. The NASD Year 5) identify what levels of manage- 2000 Program Office will be perform- ment are responsible for Year 2000 In order to facilitate complete and ing risk-based analysis using infor- remediation efforts. accurate report submission, the mation gathered on member firms’ NASD and SEC will be offering free Year 2000 readiness from the NASD Attestation Comment Period question and answer sessions to survey; information from SEC Rule assist members with their individual 17a-5 amendment reports due The SEC is reopening the comment reports mandated by the recent SEC August 31, 1998, and April 30, 1999; period with respect to its proposal Year 2000 rule amendment. Two- and NASD analyst discussions with that would have required hour long sessions have been members. broker/dealers to engage an inde- scheduled for the following cities: pendent public accountant to attest The SEC requested a report from the to specific assertions in these City Date NASD summarizing results from the reports. The SEC should receive Chicago July 31 member survey to use in preparation comments on or before 30 days Dallas Aug. 3 of the June SEC “Report to the after the Rule amendment was New York City Aug. 3 Congress on the Readiness of the published in the Federal Register Kansas City Aug. 4 United States Securities Industry and (July 13, 1998) or August 12, 1998. Atlanta Aug. 5 Public Companies to Meet the Infor- Boston Aug. 5 mation Processing Challenges of the Comment letters should refer to Los Angeles Aug. 10 Year 2000.” This report is available File No. S7-7-98 and be submitted New York City Aug. 10 on the SEC Web Site at in triplicate to: Denver Aug. 11 www.sec.gov. It presents the SEC San Francisco Aug. 12 staff’s findings as to the current state Jonathan G. Katz, Secretary Seattle Aug. 13 of readiness, their position with Securities and Exchange respect to corporate disclosure as it Commission Call the NASD Year 2000 Program relates to the Year 2000 issue, 450 Fifth Street, NW Office at (888) 227-1330 for details actions they intend to continue to Washington DC 20549 and to make a reservation. Details take to reduce the risk associated on these sessions are available on with the Year 2000 problem, and the Comments may also be submitted the NASD Regulation Web Site Year staff’s plans to meet future reporting electronically to the following e-mail 2000 Web Page (www.nasdr.com). requirements. An SEC representa- address: [email protected]. tive will discuss the SEC’s report to File No. S7-7-98 should be included Books And Records Advisory Congress in an article appearing in on the subject line if e-mail is used. the September issue of the NASD’s The SEC advises that a broker/deal- Regulatory & Compliance Alert. Report Submission Question er with Year 2000 computer prob- & Answer Sessions With The lems may be deemed not to have SEC accurate and current records and be in violation of SEC Rule 17a-3. Also, In response to the challenge present- any broker/dealer that fails to make ed by the coming millennium and keep current books and records change, the NASD has been com- would be required to notify the SEC municating to NASD members about under SEC Rule 17a-11.

Special NASD Notice to Members 98-63 July 1998 466 Survey Processing And Defi- NASD membership is composed of findings of their recent analysis. They nitions 62 percent “Introducing,” 9 percent found that public organizations are “Clearing,” and 29 percent “Other not adequately disclosing the poten- The initial survey was mailed to the Firms.” Other Firms include Limited tial risk Year 2000 poses to their NASD Executive Representative Partnerships (DPP), Insurance Com- organizations. They also found that contact at each member firm. The panies, Investment Companies, the percentage of companies dis- mailing list for active NASD members Mergers and Acquisitions Compa- closing in the financial industry is contained approximately 5,500 firms nies, and other firms not specifically less than in other sectors. As a result as of December 15, 1997. The sur- designated as Introducing or Clear- of this, they are enlisting the NASD, vey was sent as an NASD Special ing. A graphic breakdown of the SIA, and other exchanges to help Notice To Members on December results appear on the following them communicate the importance of 17, 1997. pages. disclosure to the public issuers.

The survey was designed so that Every member firm relies upon exter- responses could be provided in a Update On SEC Staff Legal nal organizations for continued suc- check-box format or by filling in blank Bulletin No. 5 cessful business operation. Whether spaces. If a firm did not complete a The SEC will release an interpretive a firm relies on services from utility section, the response was consid- memo to the Staff Legal Bulletin No. companies or other business service ered to be “blank” rather than “not 5 describing the results of a recent providers, their Year 2000 readiness applicable.” If the response was analysis of company 10Q disclosure impacts the member firm. Because “blank,” the data for that question is reports on Year 2000. The Bulletin, of this, it is imperative that every not included in the NASD’s reporting originally issued on October 8, 1997, member firm check the disclosure of the total of firms responding to that and revised on January 12, 1998, statements of public companies with question. reminds public operating companies, which it deals. And, if the member investment advisers, and investment firm is a public company, it should be As of June 30, 1998, the NASD companies to consider their disclo- providing full disclosure on its own received responses from 99.9 per- sure obligations relating to anticipat- Year 2000 readiness. Members cent or 5,160 member firms. Member ed costs, problems, and should also examine disclosure firms are categorized based on self- uncertainties associated with the statements made by the issuers they reported classifications contained in Year 2000 issue. At a recent Securi- trade. the FOCUS Schedule 1 Filing in ties Industry Association (SIA) meet- 1997. Based on the filing data, ing, the SEC discussed general

Special NASD Notice to Members 98-63 July 1998 467 NASD Year 2000 Member Survey Results (January 31, 1998 - June 30, 1998) SURVEY RESPONDENTS A representation of ﬁrm classiﬁcation and survey response percentages is shown here:

Classiﬁcation NASD Percent of Joint NYSE NASD Members NASD (DM) Percent NASD Members Total Members Designated Survey (DM) (DM) Responses Responses Received Received Introducing 3,365 62% 145 3,220 3,214 99.8%

Clearing 505 9% 132 373 373 100.0%

Others 1,573 29% 0 1,573 1,573 100.0%

Total 5,443 100% 277 5,166 5,160 99.9%

SURVEY RESPONSES

Question #1 - Is your firm an introducing or clearing firm? Eighty-four percent (84%) of the firms surveyed responded to this question.

446 Total 830 1,420 2,464

399 Other 549 210 415 N/A Blank 3 36 Clearing Type of Firm Clearing 211 Introducing 123

Introducing 245 999 1,926

0 500 1,000 1,500 2,000 2,500

Number of Responses

Special NASD Notice to Members 98-63 July 1998 468 Question #2 - Does your ﬁrm use a service bureau for computer processing? Ninety-seven percent (97%) of the ﬁrms surveyed responded to this question.

145 48 Total 978 3,989

45 36 Other 195

1,297 Blank 7 N/A 0 Yes

Type of Firm Clearing 147 No 219

93 12 Introducing 636 2,473

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Number of Responses

Question #3 - Has your ﬁrm prepared a Year 2000 Plan? Ninety-seven percent (97%) of the ﬁrms surveyed responded to this question.

107 174 Total 1,104 3,775

46 46 Other 310 1,171 N/A 1 Blank 9 No

Type of Firm Clearing 41 Yes

322

60 119 Introducing 753 2,282

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Number of Responses

Special NASD Notice to Members 98-63 July 1998 469 Question #4a. - Is this a full-time position for your Year 2000 Project Coordinator? Ninety-six percent (96%) of the ﬁrms surveyed responded to this question. Q

135 230 Total 4,466 328

46 81 Other 1,340 106 N/A 6 Blank 6 No

Type of Firm Clearing Yes 313 48

83 143 Introducing 2,813 174

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Number of Responses

Question #4b. - If this is not a full-time position, what percentage of time is spent on the Year 2000 Project? Eighty percent (80%) of the ﬁrms surveyed responded to this question.

29 36 Total 78 3,974

10 11 Other 16 1,185 Greater than 75% 7 51% - 75% 4 26% - 50%

Type of Firm Clearing 11 Less than 25% 281

12 21 Introducing 51 2,508

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Number of Responses

Special NASD Notice to Members 98-63 July 1998 470 Question #5 - Does your ﬁrm plan to use an outside consultant? Ninety-seven percent (97%) of the ﬁrms surveyed responded to this question.

82 155 Total 3,352 1,571

32 43 Other 1,029 469 N/A 3 Blank 9 No

Type of Firm Clearing Yes 228 133

47 103 Introducing 2,095 969

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Number of Responses

Question #5a. - If you are using an outside consultant, has the consultant been retained? Fifty-four percent (54%) of the ﬁrms surveyed responded to this question.

2,399 Total 326 1,282 1,153

739 Other 122 358 354 Blank 171 N/A No

Type of Firm 25 Clearing Yes 64 113

1,489 Introducing 179 860 686

0 500 1,000 1,500 2,000 2,500

Number of Responses

Special NASD Notice to Members 98-63 July 1998 471 Question #6 - At what level of corporate management is your Year 2000 Project sponsored? Ninety-one percent (91%) of the ﬁrms surveyed responded to this question.

474 571 1,722 Total 567 191 207 1,428

557 163 169 Other 144 President 54 55 Blank 431 Chairman 92 CFO 19 52 CIO Clearing 47 25 Director 13 125 Other

1,073 292 350 Introducing 376 112 139 872 0 200 400 600 800 1000 1200 1400 1600 1800

Question #7 - Are progress reports provided to the project sponsor and management? Ninety-one percent (91%) of the ﬁrms surveyed responded to this question.

2,340 Total 2,096 279 444

683 Other 637 105 147 Yes No 248 N/A

Type of Firm Clearing 92 Blank 10 23

1,409 Introducing 1,367 164 274

0 500 1,000 1,500 2,000 2,500

Nb f R Special NASD Notice to Members 98-63 July 1998 472 Question #7a. - If progress reports are provided, how frequently? Fifty-one percent (51%) of the ﬁrms surveyed responded to this question.

2,541 275 Total 775 867 702

781 78 Other 226 263 Blank 225 Weekly 116 Monthly 33 Quarterly Clearing 108 Other 71 45

1,644 164 Introducing 441 533 432 0 500 1,000 1,500 2,000 2,500 3,000

Question #8 - Does your firm’s Year 2000 Project include an assessment phase to measure the scope and risk of the Year 2000 problem at your firm? Ninety-four percent (94%) of the firms surveyed responded to this question.

Number of Responses Q8

3,071 Total 1,493 263 333

922 Other 456 102 93 Yes No 278 N/A 69 Blank Clearing 10 16

1,871 Introducing 968 151 224

0 500 1000 1500 2000 2500 3000 3500

Special NASD Notice to Members 98-63 July 1998 473 Question #9 - Does the assessment phase include: A. An inventory of all technology systems? Eighty-seven percent (87%) of the ﬁrms surveyed responded to this question.

2,983 Total 255 1,264 658

874 Other 64 444 191 Yes No 1,826 N/A Clearing 183 Blank 771 434

283 Introducing 8 49 33

0 500 1000 1500 2000 2500 3000

B. If an inventory is included, how many systems have been identiﬁed? Eighty-seven percent (87%) of the ﬁrms surveyed responded to this question.

85,201

26,165 Total Number of Total Systems Other 35,173 Clearing Introducing 23,863

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Special NASD Notice to Members 98-63 July 1998 474 C. An analysis of all-third party vendor software and hardware products? Eighty-seven percent (87%) of the ﬁrms surveyed responded to this question.

Q9c

2,944 Total 333 1,214 669

846 Other 85 453 189 Yes No 278 N/A 11 Blank Clearing 49 35

1,820 Introducing 237 712 445

0 500 1,000 1,500 2,000 2,500 3,000

D. An analysis of all internal systems? Eighty-seven percent (87%) of the ﬁrms surveyed responded to this question.

Q9d

3,026 Total 202 1,240 662

874 Other 40 441 188 Yes No 282 N/A 6 Blank Clearing 51 34

1,870 Introducing 156 748 440

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Special NASD Notice to Members 98-63 July 1998 475 E. An analysis of facilities and communication systems? Eighty-six percent (86%) of the ﬁrms surveyed responded to this question.

2,460 Total 558 1,439 702

713 Other 136 522 202 Yes No 229 N/A 41 Blank Clearing 63 40

1,518 Introducing 381 854 460

0 500 1,000 1,500 2,000 2,500

Question #10 - Has your ﬁrm determined the corrective action necessary to ensure the technology systems will be Year 2000 compliant? Ninety-two percent (92%) of the ﬁrms surveyed responded to this question.

3,111 Total 1,369 247 433

961 Other 384 99 129 Yes No 256 N/A 80 Blank Clearing 10 27

1,894 Introducing 905 138 277

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Special NASD Notice to Members 98-63 July 1998 476 Question #10 (A-D) - If corrective action has been determined, how many systems will be (A) Remediated, (B) Retired, (C) Replaced and (D) Other? Ninety-nine percent (99%) of the ﬁrms surveyed responded to this question.

Q10

37,006 Total 3,231 5,793 549

6,314 Other 1,062 1,344 Systems Remediated - 10a 168 Systems Retired - 10b Systems Replaced - 10c 7,431 Other Responses - 10d Clearing 563 1,070 45

23,261 Introducing 1,606 3,379 336

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

Question #11 - What is the completion status of your ﬁrm’s Year 2000 Project? Eighty-six percent (86%) of the ﬁrms surveyed responded to this question.

742 959 Total 1,238 Intro 936 1,285

213 129 Other 575 Blank 283 373 91% or More 41 61%-90% 32 Clearing 109 31%-60% 95 96 30 % or Less

488 798 Introducing 554 558 816

0 200 400 600 800 1,000 1,200 1,400

Special NASD Notice to Members 98-63 July 1998 477 Question #12 - When is your firm scheduled to complete the following major milestones: A. Remediation of firm systems. Fifty-two percent (52%) of the firms surveyed responded to this question.

12A

2,467 2,500

2,000 1,583 1,017 1,500 203 316 281 312 112 264 69 111 1,000 581 8 Total 758 65 113 185 180 208 Number of Firms 175 44 75 5 Introducing 500 38 72 91 76 332 84 69 20 30 126 3 Other 9 18 40 25 0 104 20 20 5 6 0 Clearing

Blank

98 Q1

98 Q2

98 Q3

98 Q4

99 Q1

99 Q2 2000

99 Q3

99 Q4

B. Verification that other systems used by the firm are Year 2000 compliant. Fifty-five percent (55%) of the firms surveyed responded to this question.

2,339

2,500

1,472 1,168 2,000

1,500 318 258 312 103 200 662 275 73 103 1,000 753 205 56 122 173 223 179 11 Total Number of Firms 45 69 500 42 67 79 369 8 Introducing 59 72 79 114 24 27 2 Other 5 11 34 137 0 26 17 17 4 7 1 Clearing

97 Blank

98 Q1

98 Q2

98 Q3

98 Q4

99 Q1

99 Q2 2000

99 Q3

99 Q4

Special NASD Notice to Members 98-63 July 1998 478 C. Testing of ﬁrm and other systems with other party systems. Forty-nine percent (49%) of the ﬁrms surveyed responded to this question.

12C

3,000 2,612

2,500

2,000 1,630 1,001

390 385 136 1,500 61 165 181 90 132 601 1,000 854 7 Total 35 87 107 254 250

Number of Firms 114 55 76 295 5 Introducing 500 25 42 42 47 95 98 29 44 128 2 Other 1 7 16 0 20 105 41 37 6 12 0 Clearing

Blank

98 Q1

98 Q2

98 Q3

98 Q4

99 Q1

99 Q2 2000

99 Q3

99 Q4

D. Industry-wide testing of ﬁrm and other systems. Forty-two percent (42%) of the ﬁrms surveyed responded to this question.

12D 2,990

3,000 1,862 2,500

2,000 734 366 436 1,500 49 104 110 116 155 89 11 970 447 Total 1,000 30 69 65 77 241 264 Number of Firms 94 57 8 Introducing 18 34 33 500 28 210 81 123 158 27 47 2 Other 1 1 12 77 0 11 44 49 5 14 1 Clearing

Blank

98 Q1

98 Q2

98 Q3

98 Q4

99 Q1

99 Q2 2000

99 Q3

99 Q4

Special NASD Notice to Members 98-63 July 1998 479 Question #13 - Has your ﬁrm dedicated a separate budget for your Year 2000 project? Ninety-three percent (93%) of the ﬁrms surveyed responded to this question.

693 3,939 Total 172 356

224 Other 1,163 66 120 Yes No 77 N/A 277 Blank Clearing 3 16

392 Introducing 2,499 103 220

0 500 1000 1500 2000 2500 3000 3500 4000

Question #14 - What is the estimated total cost of your ﬁrm’s Year 2000 Project? Eighty-seven percent (87%) of the ﬁrms surveyed responded to this question.

2,694 954 Total 359 108 382 663

850 271 Other 77 29 Less than $1K 127 $1K - $10K 219 $10K - $50K 171 $50K - $100K 42 49 Over $100K Clearing 11 64 Blank or N/A 36

1,673 641 233 Introducing 68 191 408

0 500 1000 1500 2000 2500 3000

Special NASD Notice to Members 98-63 July 1998 480 Special Notices To Members are published on an accelerated basis and distributed independently of monthly Notices to Members newsletters. Numerical sequencing may thus appear to contain gaps during a given monthly publication cycle. Such temporary gaps reﬂect a priority in the production process and will disappear at the conclusion of monthly electronic posting and print distribution.

© 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD is a registered service mark of the National Association of Securities Dealers, Inc. Central Registration Depository (CRD) is a service mark of the NASD and the North American Securities Administrators Association, Inc. (NASAA). NASD Regulation is a service mark of NASD Regulation, Inc. NASD Notices to Members is published monthly by NASD Corporate Communications, Kim Dineen, Editor, NASD Editorial Services Department, 1735 K Street, NW, Washington, DC 20006-1500, (202) 728-8370. No portion of this publication may be copied, photocopied, or duplicated in any form or by any means, except as described below, without prior written consent of the NASD. Members of the NASD are authorized to photocopy or otherwise duplicate any part of this publication without charge only for internal use by the member and its associated persons. Nonmembers of the NASD may obtain permission to photocopy for internal use through the Copyright Clearance Center (CCC) for a $3-per-page fee to be paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Annual subscriptions cost $225; single issues cost $25. Send a check or money order (payable to the National Association of Securities Dealers, Inc.) to NASD MediaSource, P.O. Box 9403, Gaithersburg, MD 20898-9403, or to phone in an order using American Express, MasterCard, or Visa charge, call (301) 590-6142, Monday to Friday, 9 a.m. to 5 p.m., Eastern Time. Back issues may be ordered by writing NASD, Support Services Department, 1735 K Street, NW, Washington, DC 20006-1500 or by calling (202) 728-8061. NASD Notices to Members (December 1996 to current) are also available on the Internet at www.nasdr.com.

Special NASD Notice to Members 98-63 July 1998 481 Executive Summary the establishment of the Small Firm Special The National Association of Advisory Board earlier this year. This Securities Dealers, Inc. (NASD¨ or Advisory Board acts to ensure that Association) invites members to vote issues of particular interest and NASD to approve the following concern to smaller member firms, amendments to the NASD By-Laws: and the potential impact on smaller reserve one NASD Board of firms of regulatory and market Notice to Governors (Board) position for a structure initiatives, will be effectively person representing an NASD communicated to and considered by Members member firm having not more than the Board of Governors. To improve 150 registered persons; reserve two further the participation of smaller Board positions for the Chief member firms in the governance of 98-64 Executive Officer and one Floor the NASD, the Board has approved a Governor of New Amex LLC (the proposal to reserve a position on the operating successor organization to Board for a person representing a Mail VoteÐNASD Solicits the American Stock Exchange firm with not more than 150 Member Vote On [Amex]); and other clarifying registered persons. Amendments To NASD By- amendments. The last voting date is Laws To Reconfigure NASD September 14, 1998. The text of the Another purpose of the amendments proposed amendments follows this is to add the Chief Executive Officer Board; Revised Last Voting Notice. and one Floor Governor of New Date: September 14, 1998 Amex LLC to the Board, as required Questions concerning this Notice by the Transaction Agreement that Suggested Routing may be directed to T. Grant Callery, will bring the Amex into the NASD Senior Management Senior Vice President and General family of companies. That agreement Counsel, Office of General Counsel, was approved by the Amex Advertising NASD, at (202) 728-8285. seatholders on June 25, 1998, and it Continuing Education is now necessary for the Background membership to approve the By-Law Corporate Finance The proposed amendments have two changes required for the Executive Representatives purposes. The first purpose is the implementation of the agreement. Government Securities reservation of a seat on the Board for a person representing a member firm The proposed By-Law changes are Institutional having not more than 150 registered briefly described below, and the text Insurance persons. In November 1997, the of the proposed changes is attached Internal Audit membership approved a substantial as Exhibit A. In Exhibit A, proposed revision to the NASD By-Laws, which new language is underlined; Legal & Compliance was part of a comprehensive revision proposed deletions are in brackets. Municipal of the Association’s corporate structure. Those revisions were Amendments To The NASD Mutual Fund intended to streamline the decision- By-Laws Operations making process; to improve Article I. Definitions Options communication among Board members and the staff; and to enable New definitions have been added, Registered Representatives the Association to act quickly and and the terms Industry and Non- Registration decisively when appropriate. While Industry “Director” “Governor” and Research the restructuring has been effective “committee member” have been in meeting these goals, there is still a amended, to incorporate the inclu- Syndicate need to provide NASD’s smaller sion of New Amex LLC within the Systems members (i.e., firms with 150 or family of companies. fewer registered persons) a more Trading effective voice in matters affecting Training their business and their customers. Variable Contracts To achieve this, the Board approved

Special NASD Notice to Members 98-64 August 10, 1998 485 Article VII. Board of Governors Term of Office of Governors Article IX. Committees Composition and Qualifications of Executive Committee the Board This section has been amended to provide term lengths for the New This section has been amended to This section has been amended to Amex Chief Executive Officer and include a Governor of New Amex provide that the NASD Board include Floor Governor, consistent with the LLC on the Executive Committee. the Chief Executive Officer and one Transaction Agreement and the Con- Floor Governor of New Amex LLC stitution of New Amex LLC. Article XV. Limitation of Powers and a representative of an NASD Conflicts of Interest member firm having not more than Disqualification 150 registered persons, and, in order This section has been amended to to ensure some flexibility and mainte- A clarifying amendment has been incorporate the inclusion of the Chief nance of a majority Non-Industry made to this section to provide for Executive Officer and one Floor Gov- Board, the maximum size of the the inclusion of the New Amex Chief ernor of New Amex LLC. Board has been increased to 35 Executive Officer and one Floor Gov- Governors. ernor on the Board.

Special NASD Notice to Members 98-64 August 10, 1998 486 Exhibit A Proposed Changes to NASD By-Laws (Note: New language is underlined; deletions are bracketed.)

Article I

Deﬁnitions

(n) “Industry Director” means a Director of the NASD Regulation Board or Nasdaq Board (excluding the Presidents) who: (1) is or has served in the prior three years as an officer, director, or employee of a broker or dealer, excluding an outside director or a director not engaged in the day-to-day management of a broker or dealer; (2) is an officer, director (excluding an outside director), or employee of an entity that owns more than ten percent of the equity of a broker or dealer, and the broker or dealer accounts for more than five percent of the gross revenues received by the consolidated entity; (3) owns more than five percent of the equity securities of any broker or dealer, whose investments in brokers or dealers exceed ten percent of his or her net worth, or whose ownership interest otherwise permits him or her to be engaged in the day-to-day management of a broker or dealer; (4) provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the Director or 20 percent or more of the gross revenues received by the Director’s firm or partnership; (5) provides professional services to a director, officer, or employee of a broker, dealer, or corporation that owns 50 percent or more of the voting stock of a broker or dealer, and such services relate to the director's, officer's, or employee’s professional capacity and constitute 20 percent or more of the professional revenues received by the Director or 20 percent or more of the gross revenues received by the Director's firm or partnership; or (6) has a consulting or employment relationship with or provides professional services to the NASD, NASD Regulation, [or] Nasdaq, or New Amex (and any predecessor), or has had any such relationship or provided any such services at any time within the prior three years;

(o) “Industry Governor” or “Industry committee member” means a Governor (excluding the Chief Executive Officer and Chief Operating Officer of the NASD,[ and] the Presidents of NASD Regulation and Nasdaq, and the Chief Exec- utive Officer of New Amex) or committee member who: (1) is or has served in the prior three years as an officer, director, or employee of a broker or dealer, excluding an outside director or a director not engaged in the day-to-day management of a broker or dealer; (2) is an officer, director (excluding an outside director), or employee of an entity that owns more than ten percent of the equity of a broker or dealer, and the broker or dealer accounts for more than five percent of the gross revenues received by the consolidated entity; (3) owns more than five percent of the equity securities of any broker or dealer, whose investments in brokers or dealers exceed ten percent of his or her net worth, or whose ownership interest otherwise permits him or her to be engaged in the day-to-day management of a broker or dealer; (4) provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the Governor or committee member or 20 percent or more of the gross revenues received by the Governor’s or committee member’s firm or partnership; (5) provides professional services to a director, officer, or employee of a broker, dealer, or corporation that owns 50 percent or more of the voting stock of a broker or dealer, and such services relate to the director’s, officer’s, or employee’s professional capacity and constitute 20 percent or more of the professional revenues received by the Governor or committee member or 20 percent or more of the gross revenues received by the Governor’s or committee member’s firm or partnership; [or] (6) is a Floor Governor; or [(6)] (7) has a consulting or employment relationship with or provides professional services to the NASD, NASD Regulation, [ or] Nasdaq, or New Amex (and any predecessor), or has had any such relationship or provided any such services at any time within the prior three years;

(cc) “Non-Industry Director” means a Director of the NASD Regulation Board or Nasdaq Board (excluding the Presi- dents of NASD Regulation and Nasdaq) who is: (1) a Public Director; (2) an ofﬁcer or employee of an issuer of securities listed on Nasdaq or New Amex, or traded in the over-the-counter market; or (3) any other individual who would not be an Industry Director;

(dd) “Non-Industry Governor” or “Non-Industry committee member” means a Governor (excluding the Chief Executive Officer and Chief Operating Officer of the NASD, [and] the Presidents of NASD Regulation and Nasdaq, and any Floor Governor and the Chief Executive Officer of New Amex) or committee member who is: (1) a Public Governor or

Special NASD Notice to Members 98-64 August 10, 1998 487 committee member; (2) an ofﬁcer or employee of an issuer of securities listed on Nasdaq or New Amex, or traded in the over-the-counter market; or (3) any other individual who would not be an Industry Governor or committee member;

(jj) “Floor Governor” or “New Amex Floor Governor” means a Floor Governor of New Amex elected pursuant to Article II, Section .01(a) of the New Amex By-Laws;

(kk) “Holdco” means NASD Market Holding Company;

(ll) “New Amex” means New Amex LLC;

(mm) “New Amex Board” means the Board of Governors of New Amex;

Article VII

Board of Governors

Composition and Qualiﬁcations of the Board

Sec. 4. (a) The Board shall consist of the Chief Executive Officer and the Chief Operating Officer of the NASD, the Presidents of NASD Regulation and Nasdaq, the Chair of the National Adjudicatory Council, the Chief Executive Offi- cer of New Amex, and one Floor Governor, and no fewer than 16 and no more than [22] 28 Governors elected by the members of the NASD. The Governors elected by the members of the NASD shall include a representative of an issuer of investment company shares or an affiliate of such an issuer, a representative of an insurance company, [and ]a representative of a Nasdaq issuer, and a representative of an NASD member firm having not more than 150 registered persons. A majority of the Governors shall be Non-Industry Governors. If the Board consists of [21 to] 23 Governors, at least five shall be Public Governors. If the Board consists of 24 to 27 Governors, at least six shall be Public Governors. If the Board consists of 28 to 31 Governors, at least seven shall be Public Governors. If the Board consists of 32 to 35 Governors, at least eight shall be Public Governors.

Term of Ofﬁce of Governors

Sec. 5. (a) The Chief Executive Officer and the Chief Operating Officer of the NASD, [and ] the Presidents of NASD Regulation and Nasdaq, and the Chief Executive Officer of New Amex shall serve as Governors until a successor is elected, or until death, resignation, or removal.

(b) The Chair of the National Adjudicatory Council shall serve as a Governor for a term of one year, or until a successor is duly elected and qualified, or until death, resignation, disqualification, or removal. A Chair of the National Adju- dicatory Council may not serve more than two consecutive one-year terms as a Governor, unless a Chair of the National Adjudicatory Council is appointed to fill a term of less than one year for such office. In such case, the Chair of the National Adjudicatory Council may serve that initial term as a Governor and up to two consecutive one-year terms as a Governor following the expiration of such initial term. After serving as a Chair of the National Adjudicatory Council, an individual may serve as a Governor elected by the members of the NASD.

(c) The New Amex Floor Governor shall serve as a Governor for a term of two years, or until a successor is duly elected and qualified, or until death, resignation, disqualification, or removal. A New Amex Floor Governor may not serve more than three consecutive two-year terms as a Governor, unless such New Amex Floor Governor is appointed to fill a term of less than one year for such office. In such case, the New Amex Floor Governor may serve that initial term as a Governor and up to three consecutive two-year terms as a Governor following the expiration of the initial term.

Special NASD Notice to Members 98-64 August 10, 1998 488 (d) The Governors elected by the members of the NASD shall be divided into three classes and hold office for a term of no more than three years, such term to be fixed by the Board at the time of the nomination or certification of such Governor, or until a successor is duly elected and qualified, or until death, resignation, disqualification, or removal. A Governor elected by the members of the NASD may not serve more than two consecutive terms. If a Governor is elected by the Board to fill a term of less than one year, the Governor may serve up to two consecutive terms following the expiration of the Governor's initial term. The term of office of Governors of the first class shall expire at the January 1999 Board meeting, of the second class one year thereafter, and of the third class two years thereafter. At each annual election, commencing January 1999, Governors shall be elected for a term of three years to replace those whose terms expire.

Disqualiﬁcation

Sec. 6. Notwithstanding Section 5, the term of office of a Governor shall terminate immediately upon a determination by the Board, by a majority vote of the remaining Governors, that: (a) the Governor no longer satisfies the classification [(Industry, Non-Industry, or Public Governor)] for which the Governor was elected; and (b) the Governor’s continued service as such would violate the compositional requirements of the Board set forth in Section 4. If the term of office of a Governor terminates under this Section, and the remaining term of office of such Governor at the time of termination is not more than six months, during the period of vacancy the Board shall not be deemed to be in violation of Section 4 by virtue of such vacancy.

Article IX

Committees

Executive Committee

Sec. 4. (b) The Executive Committee shall consist of no fewer than [ﬁve] six and no more than nine Governors. The Executive Committee shall include the Chief Executive Ofﬁcer of the NASD, at least one Director of NASD Regula- tion, at least one Director of Nasdaq, at least one Governor of New Amex, and at least two Governors who are not members of either the NASD Regulation Board, the Nasdaq Board, or the New Amex Board. The number of Direc- tors of the NASD Regulation Board and the number of Directors of the Nasdaq Board serving on the Executive Com- mittee shall be equal at all times. The Executive Committee shall have a percentage of Non-Industry committee members at least as great as the percentage of Non-Industry Governors on the whole Board and a percentage of Public committee members at least as great as the percentage of Public Governors on the whole Board.

Special NASD Notice to Members 98-64 August 10, 1998 489 Article XV

Limitation of Powers

Conﬂicts of Interest

Sec. 4. (a) A Governor or a member of a committee shall not directly or indirectly participate in any adjudication of the interests of any party if such Governor or committee member has a conﬂict of interest or bias, or if circumstances otherwise exist where his or her fairness might reasonably be questioned. In any such case, the Governor or committee member shall recuse himself or herself or shall be disqualiﬁed in accordance with the Rules of the Association.

(b) No contract or transaction between the NASD and one or more of its Governors or officers, or between the NASD and any other corporation, partnership, association, or other organization in which one or more of its Governors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason if: (i) the material facts pertaining to such Governor's or officer's relationship or interest and the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested Governors; or (ii) the material facts are disclosed or become known to the Board or committee after the contract or transaction is entered into, and the Board or committee in good faith ratifies the contract or transaction by the affirmative vote of a majority of the disinterested Governors. Only disinterested Governors may be counted in determining the presence of a quorum at the portion of a meeting of the Board or of a committee that authorizes the contract or transaction. This subsection shall not apply to any contract or transaction between the NASD and: NASD Regulation, Holdco, Nasdaq, or New Amex.

Special NASD Notice to Members 98-64 August 10, 1998 490 Special Notices To Members are published on an accelerated basis and distributed independently of monthly Notices to Members newsletters. Numerical sequencing may thus appear to contain gaps during a given monthly publication cycle. Such temporary gaps reﬂect a priority in the production process and will disappear at the conclusion of monthly electronic posting and print distribution.

© 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD is a registered service mark of the National Association of Securities Dealers, Inc. MediaSource is a service mark of the NASD. NASD Notices to Members is published monthly by NASD Corporate Communications, Kim Dineen, Editor, NASD Editorial Services Department, 1735 K Street, NW, Washington, DC 20006-1500, (202) 728-8370. No portion of this publication may be copied, photocopied, or duplicated in any form or by any means, except as described below, without prior written consent of the NASD. Members of the NASD are authorized to photocopy or otherwise duplicate any part of this publication without charge only for internal use by the member and its associated persons. Nonmembers of the NASD may obtain permission to photocopy for internal use through the Copyright Clearance Center (CCC) for a $3-per-page fee to be paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Annual subscriptions cost $225; single issues cost $25. Send a check or money order (payable to the National Association of Securities Dealers, Inc.) to NASD MediaSourceSM, P.O. Box 9403, Gaithersburg, MD 20898-9403, or to phone in an order using American Express, MasterCard, or Visa charge, call (301) 590-6142, Monday to Friday, 9 a.m. to 5 p.m., Eastern Time. Back issues may be ordered by writing NASD, Support Services Department, 1735 K Street, NW, Washington, DC 20006-1500 or by calling (202) 728-8061. NASD Notices to Members (December 1996 to current) are also available on the Internet at www.nasdr.com.

Special NASD Notice to Members 98-64 August 10, 1998 491 Executive Summary Overview NASD In 1994, the National Association of The NASD adopted the Short-Sale Securities Dealers, Inc. (NASD¨) Rule to prevent speculative short Rule 3350 (Short-Sale Rule) was selling in NNM securities from accel- Notice to adopted to stop market-destabilizing erating a decline in the price of a speculative short sales in Nasdaq security and to stop a form of manip- National Market¨ (NNM) securities. ulation known as “bear raiding” or Members To prevent this conduct, the Short- “piling on.” Piling on occurs when Sale Rule prohibits member firms short sellers exert pressure on a 98-65 from executing customer short sales stock’s price, forcing the price to drop and non-Market Maker proprietary precipitously, frequently within a sin- short sales in an NNM security at or gle trading day. The Short-Sale Rule NASD Reminds below the current inside bid when the prohibits member firms from execut- Members Of Obligations current inside bid is lower than the ing customer short sales and non- previous inside bid. Market Maker proprietary short sales Relating To The Short- in an NNM security at or below the Sale Rule It has come to the attention of NASD current inside bid when the current Regulation, Inc. (NASD RegulationSM) inside bid is lower than the previous that certain NASD members may be inside bid.1 assisting customers in the Suggested Routing circumvention of this Rule. To determine whether a sale is long Senior Management Specifically, these members are or short, members must adhere to failing to net security positions of the definition of a “short sale” con- Advertising related accounts for customers who tained in the Securities and Continuing Education maintain accounts in their name and Exchange Commission (SEC) Rule exercise control over a second 3b-3, which is incorporated into the Corporate Finance related account, usually held in a NASD’s Short-Sale Rule. Under SEC Executive Representatives family member’s name. The failure to Rule 3b-3 and NASD Rule 3350, the Government Securities net these positions has permitted term “short sale” means any sale of a these customers, which operate the security that the seller does not own Institutional two accounts with a single or any sale that is consummated by Insurance investment strategy, to avoid the delivery of a security borrowed Internal Audit application of the Short-Sale Rule. by, or for the account of, the seller. To determine whether the seller is Legal & Compliance Members are required to net all long or short overall, the seller must Municipal positions for accounts that are net all positions in the security. This related or under common control in includes netting positions held in Mutual Fund order to determine whether a sale is accounts that are related or under Operations long or short and subject to the common control. Options Short-Sale Rule requirements. NASD Regulation is committed to ensuring Registered Representatives strict adherence to the Short-Sale Rule Prohibits Circumvention Registration Rule and will carefully review The Short-Sale Rule also prohibits Research whether firms have engaged in the a member from knowingly, or with conduct described in this Notice in reason to know, effecting sales for Syndicate examinations and investigations. the account of a customer or for its Systems Violations of the Short-Sale Rule will own account for the purpose of be vigorously pursued. avoiding the rule.2 With this Notice, Trading the NASD wishes to clarify that a Training Questions concerning this Notice member would be deemed to be in Variable Contracts should be directed to David Katz, violation of the Short-Sale Rule if Assistant Chief Counsel, Market the member or an associated per- Regulation, NASD Regulation, at son knowingly assists customers in (301) 208-3074.

NASD Notice to Members 98-65 August 1998 495 the following scheme: day, the customer buys and sells tion will also consider other facts and securities out of the long circumstances such as whether the ¥ A customer maintains one account, creating the false account belongs to a family member account (a “long account”) that is appearance of alternating long or related person and whether a sim- used to buy and sell various and flat positions in the securi- ilar pattern of activity is occurring in securities several times in a sin- ties in the long account. When other customer accounts. gle day. The long account typi- the two accounts are appropri- cally begins and ends each day ately combined and treated as NASD Regulation will closely watch with a long position of 1,000 one, short sales occur on a regu- for the above described conduct and shares in each security held in lar basis and often result in for similar schemes that attempt to that account. The customer also transactions occurring on down- circumvent application of the Rule. cross guarantees for Regulation bids in violation of the NASD’s Members should instruct their asso- T and margin purposes a second Short-Sale Rule. ciated persons not to accept orders account (a “short account”), usu- for execution where customers are ally held by a family member or NASD Regulation will view trades in operating two accounts in order to related person. That account accounts like those described above avoid the Rule. A finding of such holds offsetting short positions of as occurring in related or controlled abuses will result in possible disci- 1,000 shares in the same securi- accounts and must be netted for pur- plinary action. ties that are held in the long poses of compliance with the Short- account. In contrast to the long Sale Rule. Accounts will be deemed account, the short account gen- to be related or controlled if the cus- Endnotes erally does not change positions tomer exercises discretion over the 1 NASD Rule 3350(a). in the securities. At the begin- account, cross guarantees the 2 NASD Rule 3350(e). ning and end of each day, the account for Regulation T or margin combined positions in both purposes, or has been granted a © 1998, National Association of Securities Dealers, accounts for each of the securi- power of attorney to execute transac- Inc. (NASD). All rights reserved. ties is flat. During the trading tions in the account. NASD Regula-

NASD Notice to Members 98-65 August 1998 496 Executive Summary of last sale reports after execution of NASD In response to several inquiries from SelectNet orders. Trades executed National Association of Securities through SelectNet are submitted for Dealers, Inc. (NASD¨) members clearing as locked-in trades. Notice to regarding their ability to provide SelectNet is available for execution electronic access to The Nasdaq of orders from 9 a.m. until 5:15 p.m., Stock Market’s¨ (Nasdaq¨) Eastern Time. Members SelectNetSM to non-member broker/dealers or customers, Nasdaq Nasdaq allows Nasdaq Workstation 98-66 clarifies that, in the circumstances II subscribers to enter SelectNet described below, members that are orders from a Nasdaq Workstation or Nasdaq Workstation II¨ subscribers through an electronic means known NASD Clarifies may choose to provide an electronic as an Application Programming Acceptable Customer transmission of a non-member’s Interface (API). As mentioned above, order through their own system into there are two types of SelectNet Access To SelectNet And SelectNet. orders: (1) directed orders; or (2) SOES broadcast orders. SelectNet orders In addition, members have also may be directed to a particular raised questions regarding the ability market participant displaying a of a Small Order Execution SystemSM quotation in the Nasdaq quote Suggested Routing (SOESSM) order entry firm to provide montage or the SelectNet order may Senior Management public customers electronic access to be generally broadcast to all Nasdaq’s SOES system. This Notice participants. Orders entered into Advertising clarifies that, in the circumstances SelectNet have a minimum life of 10 Continuing Education described below, members that are seconds; in other words, they cannot SOES order entry firms may choose be canceled by the order entry firm Corporate Finance to provide an electronic interface for until 10 seconds have elapsed. In the Executive Representatives public customer orders through their case of directed orders, the Government Securities own SOES order entry system. participant reviewing the order has up to three minutes to respond to the Institutional Questions regarding this Notice order, unless the party entering the Insurance should be directed to Thomas Gira, order specified a longer time period. Internal Audit Vice President, Market Regulation, While directed orders generally have NASD Regulation, Inc. (NASD a lifespan of three minutes, directed Legal & Compliance RegulationSM), at (301) 590-6895 or orders sent to a participant at or up to Municipal Gene Lopez, Vice President, Trading the participant’s quoted price and and Market Services, Nasdaq, at size impose liability on the recipient’s Mutual Fund (202) 728-6998. part on receipt of the SelectNet order Operations pursuant to the Securities and Options Background - SelectNet And Exchange Commission’s (SEC) firm SOES quote rule, unless an exception to Registered Representatives Nasdaq provides a service known as the rule applies.1 Traditionally, Registration SelectNet that permits NASD SelectNet has been used by Research member firms to enter buy or sell members, Market Makers, and order orders in Nasdaq securities into the entry firms alike, to access the Syndicate system, directing those orders to a quotations of other Market Makers Systems single Market Maker (directed and electronic communication orders) or broadcasting the order to networks (ECNs). Trading market participants (broadcast Training orders). SelectNet facilitates the Nasdaq also provides a service Variable Contracts communication of trading interest known as SOES that enables order between members, the negotiation of entry firms and Market Makers to orders with the possibility of price execute size-limited orders (agency improvement, and the dissemination and risk-less principal) in Nasdaq

NASD Notice to Members 98-66 August 1998 497 securities on behalf of public Customer Access To order through SelectNet will know customers. SOES enables SelectNet only that another member has participants, among other things, to attempted to access its Nasdaq-pub- lock in their trades with designated Recently, several members have lished price. clearance and settlement inquired about the permissibility instructions, thereby providing an under NASD rules and the Nasdaq Further, the member should provide automated execution system to Workstation II Subscriber Agreement a system description of its facility that public customers. (NWII Agreement) for a member to allows non-members access to permit its customers to enter orders SelectNet. Such a system descrip- Only agency orders from public into the member’s own electronic tion must provide details on the man- customers no larger than the system and to re-transmit those ner in which orders are received and maximum order size, as defined in orders directly and electronically, re-transmitted, including the security NASD Rule 4710(g), may be entered without the manual entry of such and capacity of the member’s sys- by a SOES order entry firm into order by a person associated with tem, the manner in which the mem- SOES for execution against an the member, into the SelectNet sys- ber’s system connects to Nasdaq’s SOES Market Maker. Agency orders tem through an API arrangement. In service, and any internal system pro- in excess of the maximum order size other words, certain members that tocols designed to fulfill a member’s may not be divided into smaller parts connect to Nasdaq through an API “know your customer” obligations for purposes of meeting the size want to be able to build an electronic and other regulatory obligations. The requirements for SOES orders. The access link that the member provides letter and system description should SOES rules currently contain a to certain customers. The customer be submitted to: specific provision, NASD Rule is then able to enter orders through Market Regulation 4770(c)(4), that requires SOES order this member-provided electronic NASD Regulation, Inc. entry firms to maintain the physical entry point that flow through the 9513 Key West Ave. security of Nasdaq equipment member’s network that electronically Rockville, MD 20850 located on the premises of the firm to connects through the Nasdaq API to prevent unauthorized entry of the Nasdaq SelectNet application. 2. Compliance With NASD Rules: information into SOES. The NASD This Notice clarifies that such activity Any member that chooses to offer has, to date, interpreted this is permissible under NASD rules and this service to a customer must provision as barring firms from the NWII Agreement, provided that ensure that orders submitted through providing direct electronic entry to the member undertakes measures to this member-provided service com- public customers. ensure that all relevant NASD rules ply with SEC and NASD rules. For and system protections are followed, example, the member must ensure Electronic Access To Nasdaq as described below. that rules related to the Short-Sale Systems Rule, including the Affirmative Deter- With the advent of enhanced soft- 1. Notice to Nasdaq Acknowledg- mination Rule, are complied with. ware and telecommunications capa- ing Responsibility for Orders: Similarly, the member must ensure bilities, members are able to provide Members providing a SelectNet elec- that any obligations regarding limit their customers with efficient electronic pass-through service to cus- order protection and display and the tronic access to Nasdaq’s execution tomers must provide a letter to ECN Rule are met. In particular, if services, SelectNet and SOES. This Nasdaq that acknowledges that they customers use this mechanism to Notice clarifies the NASD’s interpre- are acting as agents for the non- broadcast SelectNet orders, a Mar- tation of its rules and its contract and member in submitting the order ket Maker allowing customers to do outlines the issues that members through their facilities and that they so must be cognizant that SelectNet must be aware of in offering their are responsible for the order sent broadcast is an ECN that is not customers electronic access to Nas- through SelectNet. Any member pro- linked to Nasdaq’s quote montage, daq’s execution services. Because viding this service must submit all and accordingly requires the Market each service is different, we have such orders as an agent on behalf of Maker to reflect such price in its provided two separate discussions the customer inputting the order. All quote. for each execution service, SelectNet orders submitted by customers into and SOES. SelectNet will have the member’s 3. Internal System Controls Market Participant Identifier (MPID) Regarding a Member’s Proce- attached to them, and the member dures for Supervision of Submis- (Market Maker or ECN) receiving the sion of Orders: Members that

NASD Notice to Members 98-66 August 1998 498 provide non-members with SelectNet potential prosecution under the fed- connection must be a member of a access should have in place ade- eral securities laws for illegal activity clearing agency registered with the quate written procedures and con- conducted and that the NASD will SEC through which system- trols that permit the member to monitor all such trading activity so as compared trades may be settled; or effectively monitor and supervise the to detect any such improper activity. the member must have a entry of electronic orders. Among the Further, the member should inform correspondent clearing arrangement items that should be found in such the customer that if the NASD with a member that can do so. The written controls and procedures are: detects improper activity through the member providing access must (1) the entry of unauthorized orders; customer’s use of SelectNet, the accept and settle each trade (2) orders that exceed or attempt to member’s link to Nasdaq may be ter- executed through this connection or, exceed credit and other parameters, minated if at any time, activity harm- if settlement is to be made through such as order size, that the member ful to the integrity of The Nasdaq another clearing member, the has established for a particular cus- Stock Market or its system is detect- clearing member must guarantee the tomer; (3) activity by a customer that ed. acceptance and settlement of such could be considered manipulative or trades. an attempt to improperly affect the price of the security or related prod- 5. Nasdaq’s Liability: In allowing 9. Fees for Execution of SelectNet ucts; (4) violations of the afﬁrmative members to provide their customers Orders: All orders entered by determination and Short-Sale Rules. access to SelectNet, Nasdaq— customers into SelectNet are subject Whenever possible, these controls pursuant to its NWII Agreement— to the same fee schedule that should be automated and system assumes no liability for any order Nasdaq has established for the entry driven. entered into the member’s system, or of orders by members. For example, through the API, into Nasdaq’s Nasdaq currently charges a member A member providing SelectNet system. $1 for each execution of a SelectNet access to non-members should have order. As long as that fee is in place, a signed agreement with the non- 6. Nasdaq’s Right to Terminate: In Nasdaq will bill the member entering member customer that outlines the the event that the member’s use of the customer pass-through order that responsibilities of the member and the API to allow the entry of amount for an execution that the the customer with respect to the use SelectNet orders by non-members customer receives. Similarly, if a of this means of access. threatens the integrity of Nasdaq’s customer using a member’s pass- systems, Nasdaq continues to through service enters a broadcast 4. Acknowledgment of Responsi- reserve the right under the NWII order that is executed, Nasdaq will bility for Orders: Any member that Agreement to unilaterally and bill the member $2.50 for the provides its customers with access to immediately terminate the member’s execution. Under the SEC’s Order SelectNet should understand that the access. Handling Rules, the SEC has member remains responsible for permitted ECNs the right to charge honoring all executions that may 7. Right to Examine: The member members that use SelectNet to occur. Consequently, any member acknowledges that, as a self- access the ECN’s priced orders that chooses to provide such service regulatory organization (SRO) displayed in Nasdaq. Members must make appropriate determina- responsible for examining the activity should be aware that if they provide tions under NASD rules prior to proof a member, NASD Regulation may customers with SelectNet access viding the service that the customer examine the member’s books, and a customer accesses the order is capable of using the means of records, and facilities to determine of an ECN that charges for such access being provided by the ﬁrm. In whether a violation of NASD rules access, the ECN will bill the member particular, the “know your customer and/or federal securities laws, rules, for such access. rule” embedded in the NASD Con- and regulations may have occurred. duct Rules requires that the member Such examination may include an 10. System Setup: Members providing customer electronic access examination of the electronic system providing an electronic pass-through to SelectNet assess the ability of the itself, as well as the member’s of SelectNet orders must use the customer to use such access. Fur- records regarding its customers and Nasdaq API between the member’s ther, a member’s customer agree- their activity. system and Nasdaq’s system. ment that permits the customer to Members may use service bureaus access SelectNet should inform the 8. Clearing Responsibility: The to develop and operate the electronic customer that he or she is subject to member providing the electronic access capability. All such API

NASD Notice to Members 98-66 August 1998 499 connections must be set up on an decision in excess of the maximum ongoing technical support and main- eight presentation device to one order size may not be divided into tenance. If such site does not qualify service delivery platform ratio. If a smaller parts for purposes of meeting as a branch office or office of super- member chooses to use a service the size requirements for orders visory jurisdiction (OSJ) of the mem- bureau to develop the service, the entered into SOES. Thus, any trades ber under NASD rules, a member member is nonetheless responsible entered within any five-minute period must still supervise such activity by for ensuring that all NASD rules and in accounts controlled by an associ- providing for periodic visits to such NWII Agreement requirements are ated person or customer will be pre- locations to ensure that certain complied with. No service bureau is sumed to be based on a single restrictions on activities are in place permitted to operate a service on investment decision. Furthermore, and that the site is not conducting a behalf of a member unless the members must ensure that rules securities business at such locations. service bureau has entered into an related to the Short-Sale Rule, For guidance on what constitutes a agreement with Nasdaq. including the Affirmative Determina- branch office or OSJ in member off- tion Rule, are complied with. Finally, site locations, please see the inter- members must also be able to con- pretive letter dated March 17, 1998, Public Customer Access To tinue to meet their obligations to and listed under NASD Rule 3010 on SOES comply with the SEC’s Confirmation the NASD Regulation Web Site Rule, Rule 10b-10. (www.nasdr.com - from the Home Members have inquired about the Page, click on “Members Check permissibility under NASD rules for 2. Internal System Controls Here,” then click on “Interpretive Let- an NASD SOES order entry firm to Regarding a Member’s Proce- ters”). permit public customers to enter dures for Supervision of Submis- SOES agency orders into the mem- sion of SOES Orders: NASD SOES 3. Acknowledgment of Responsi- ber's electronic system that provides order entry firms that provide public bility for Orders: Any member that an electronic SOES interface. Such customers with SOES access should provides its public customers with facilities allow the public customer to have in place at the time they offer access to SOES should understand enter orders into a member-provided such access to public customers that the member is responsible for electronic entry device, which flows adequate written procedures and honoring all executions that may through the member’s network into controls that permit the member to occur. Consequently, any member the member’s own computer system effectively monitor and supervise the that chooses to provide such service and then, without manual interven- entry of electronic orders. Among the must make appropriate determination, into SOES. This Notice clarifies items that should be found in such tions under NASD rules, including that such activity is permissible under written controls and procedures are the SOES rules, prior to providing the NASD rules, provided that the controls to monitor for: (1) the entry the service to a particular public cus- member undertakes measures to of unauthorized orders; (2) orders tomer that the public customer is ensure that all relevant NASD rules that exceed or attempt to exceed capable of using the means of and system protections are followed, credit or SOES order size and other access being provided by the firm. In as described below. parameters that the member has particular, the “know your customer established for a particular public rule” embedded in the NASD Con- 1. Compliance With NASD Rules, customer; (3) activity by a public cus- duct Rules requires that the member Including SOES Rules (NASD tomer that could be considered providing customer electronic access Rules 4710-4770): Any member that manipulative or an attempt to to SOES assess the ability of the chooses to offer SOES access to a improperly affect the price of the customer to use such access. public customer must ensure that security or related products; (4) viola- orders submitted through this mem- tions of the Affirmative Determination 4. Right to Examine: The member ber-provided service comply with and Short-Sale Rules. Wherever acknowledges that, as an SRO SEC and NASD rules, including the possible, such controls should be responsible for examining the activity SOES rules and its interpretations.2 automated and system driven. of a member, NASD Regulation may For example, the member must examine the member’s books, ensure that agency orders for public In addition, the firm’s procedures records, and facilities to determine customers are within the maximum must provide for the identification of whether a violation of NASD rules order size as required by NASD Rule locations where the firm makes and/or the federal securities laws, 4730(c)(3). In addition, agency SOES order entry devices available rules, and regulations may have orders involving a single investment to its public customers and provides occurred. Such examination may

NASD Notice to Members 98-66 August 1998 500 include an examination of the elec- orders by members. For example, Endnotes tronic system itself, as well as the Nasdaq currently charges 50 cents 1 SEC Rule 11Ac1-1(c). member’s records regarding its pub- per order executed by the member 2 NASD Notice to Members 88-61. lic customers and their activity. entering a SOES order for a public customer. As long as that fee is in © 1998, National Association of Securities Dealers, 5. Fees for Execution of SOES place, Nasdaq will bill the member Inc. (NASD). All rights reserved. Orders: All orders entered by public entering the public customer pass- customers into SOES are subject to through order that amount for an the same fee schedule that Nasdaq execution that the public customer has established for the entry of receives.

NASD Notice to Members 98-66 August 1998 501 Executive Summary maintain bond coverage at the level NASD On July 14, 1998, the Securities and that applied during the preceding Exchange Commission (SEC) year. approved an amendment to the Notice to National Association of Securities The amendment to the Rule will per- Dealers, Inc. (NASD¨) Rule 3020 mit the staff of NASD Regulation to (the Rule) governing member fidelity adjust the fidelity bond requirements Members bonding requirements. The to reflect changes in a member's amendment grants authority to business and will allow members to 98-67 NASD staff to adjust a member’s be relieved from maintaining unnec- fidelity bonding requirement under essarily high fidelity bond coverage certain circumstances. The without compromising investor pro- amendment will take effect on tection. Requests for exemption September 15, 1998. would be considered under recently SEC Approves adopted Procedures for Exemption in Amendment To Rule On Questions regarding this Notice may the 9600 Series of Rules in the Fidelity Bonding be directed to John M. Ramsay, Vice NASD Code of Procedure. Under the Requirements; Effective President and Deputy General Procedures, NASD Regulation staff Counsel, Office of General Counsel, will issue a written determination that September 15, 1998 NASD Regulation, Inc. (NASD is subject to review by the National RegulationSM), (202) 728-8159, or Adjudicatory Council. Elliott R. Curzon, Assistant General Counsel, Office of General Counsel, In considering an application, NASD Suggested Routing NASD Regulation, at (202) 728- Regulation will apply a “good cause” Senior Management 8451. standard that will require a member to demonstrate that a modification Advertising Background from the bonding requirement is justi- Continuing Education The Rule specifies that members are fied by the level of loss exposure that required to maintain fidelity bonds to may be expected from the member. Corporate Finance insure against certain losses and the In addition, NASD Regulation will Executive Representatives potential effect of such losses on firm apply this authority only when it is Government Securities capital. The Rule applies to all mem- clear that an exemption will not have bers with employees who are any unintended impact on the insur- Institutional required to join the Securities ance pool, and the modified cover- Insurance Investor Protection Corporation and age will adequately protect the Internal Audit who are not covered by the fidelity member against potential losses. bond requirements of a national (The premiums for the insurance Legal & Compliance securities exchange. The required pool are changed from time to time to Municipal amount of a member’s coverage is reflect changes in loss experience linked to the member's required net and to ensure that sufficient funds Mutual Fund capital under SEC Rule 15c3-1. are available to pay any losses Operations Paragraph (c) of the Rule requires reported to the insurer.) In addition, Options each member to review the adequa- NASD Regulation will include condi- cy of its fidelity bond coverage annu- tions in any exemption to ensure that Registered Representatives ally and maintain coverage that is any subsequent increase in capital Registration adequate to cover its highest net requirements is accompanied by a Research capital requirement during the pre- corresponding increase in coverage. ceding 12 months. For example, if a Syndicate self-clearing member changes its Systems business to become a correspondent firm clearing through another mem- Trading ber so that it no longer holds cus- Training tomer funds or securities, the Rule Variable Contracts would still require the member to

NASD Notice to Members 98-67 August 1998 503 Text of Amendment to Rule (4) Any member subject to the ment. The NASD may issue an 3020 requirements of this paragraph (c) exemption subject to any condition or (Note: New language is underlined.) may apply for an exemption from the limitation upon a member's bonding requirements of this paragraph (c). coverage that is deemed necessary 3020. Fidelity Bonds The application shall be made pur- to protect the public and serve the suant to Rule 9610 of the Code of purposes of this Rule. (a) - (b) No Change Procedure. The exemption may be granted upon a showing of good (d) - (e) No Change (c) Annual Review of Coverage cause, including a substantial change in the circumstances or © 1998, National Association of Securities Dealers, (1) - (3) No Change nature of the member's business that Inc. (NASD). All rights reserved. results in a lower net capital require-

NASD Notice to Members 98-67 August 1998 504 Executive Summary Regulation, at (301) 208-2932, or NASD The Securities Industry/Regulatory Daniel M. Sibears, Vice President, Council on Continuing Education (the District Oversight, NASD Regulation, Council) includes 13 members at (202) 728-6911. Notice to representing a cross section of securities firms and six members Endnote from self-regulatory organizations.1 1 The American Stock Exchange, Inc., the Members Both the Securities and Exchange Chicago Board Options Exchange, Inc., the Commission and the North American Municipal Securities Rulemaking Board, the 98-68 Securities Administrators Association National Association of Securities Dealers, have appointed liaisons to the Inc., the New York Stock Exchange, Inc., Council. and the Philadelphia Stock Exchange, Inc. Update On The Securities Industry The Council’s purpose is to facilitate © 1998, National Association of Securities Dealers, cooperative industry/regulatory Inc. (NASD). All rights reserved. Continuing Education coordination of the administration Program and future development of the Continuing Education Program (Program) in keeping with applicable industry regulations and changing Suggested Routing industry needs. Its roles include Senior Management recommending and helping develop specific content and questions for the Advertising Regulatory Element, defining Continuing Education minimum core curricula for the Firm Element, and developing and Corporate Finance updating information about the Executive Representatives Program for industry-wide Government Securities dissemination. The first Status Report was issued by the Council in Institutional March 1995 (see NASD Special Insurance Notice To Members 95-13), followed Internal Audit by a second Status Report in October 1996 (see NASD Notice To Legal & Compliance Members 96-69). Following this Municipal Status Report is a section devoted to frequently asked questions and Mutual Fund answers about the Program. Operations Members are advised that additional Options information about Continuing Education and copies of the Council Registered Representatives publications Guidelines For Firm Registration Element Training, the Regulatory Research Element Content Outline, and Examples of Firm Element Practices Syndicate and Council Commentary are Systems available on the Continuing Education Web Page of the NASD Trading SM Regulation, Inc. (NASD Regulation ) Training Web Site (www.nasdr.com). Variable Contracts Questions about this Notice may be directed to John Linnehan, Director, Continuing Education, NASD

NASD Notice to Members 98-68 August 1998 505 CEP

The Securities Industry Continuing Education Program Status Report On The Securities Industry Continuing Education Program

On behalf of the Securities Indus- saries), with no graduation from the nate specific Regulatory Element try/Regulatory Council on Continuing Regulatory Element. Incurring a sig- Programs for specific registration Education1 (Council), I am pleased to nificant disciplinary action still results categories. The first such specialized provide this Status Report on the in a requirement to complete the training will be the Supervisor Pro- Securities Industry Continuing Edu- Regulatory Element within 120 days gram. It is anticipated that this new cation Program (Program) and on of the effective date of the significant Supervisor Program will commence the activities of the Council. The Pro- disciplinary action. The cycle for par- later this year. More information gram began its fourth year of opera- ticipation in the Regulatory Element regarding the Supervisor Program tion on July 1, 1998, with some will then be adjusted to reflect the will be disseminated prior to introduc- important changes and develop- effective date of the significant disci- tion. Persons registered as princi- ments. First and foremost were the plinary action rather than the initial pals/supervisors will continue to take changes brought about by the revi- securities registration date. the current Regulatory Element Pro- sions to the continuing education gram until implementation of the new rules of the industry’s self-regulatory The revised SRO rules also allowed Supervisor Program. In the future, organizations (SROs). a one-time exemption from the Reg- additional specific training programs ulatory Element by providing for con- may be developed for other registra- Revisions To The Regulatory Ele- tinued graduation of those persons tion categories. ment Cycle who have been registered for more than 10 years as of July 1, 1998, and Changes To The Firm Element The time frames for registered per- who have not been the subject of a sons to participate in the Regulatory significant disciplinary action. How- The Firm Element was also revised. Element have been revised to ever, graduated persons registered As you know, the Firm Element require ongoing participation in the in a principal/supervisor capacity for requires that each firm conduct an Regulatory Element computer-based less than 10 years as of July 1, 1998, annual analysis of its business and training by registered persons and those graduates who acquire related training needs. Firms must throughout their securities careers. their first principal/supervisor regis- administer appropriate training to Formerly, registered persons were tration after July 1, 1998, re-enter the their registered persons who have required to complete the Regulatory Regulatory Element regardless of the direct contact with customers, and Element on three occasions Ð within number of years they have been reg- their immediate supervisors on an 120 days of the second, fifth, and istered. ongoing basis. The training must 10th anniversaries of their initial cover topics specifically related to securities registration (and also when New Computer-Based Training their business, such as new prod- they were the subject of a significant Program For Principals/Supervi- ucts, sales practices, risk disclosure, disciplinary action), with graduation sors and new regulatory requirements from the Regulatory Element after and concerns. The amended SRO completion of the 10th anniversary Another major change deals with the rules require firms to focus specifical- Regulatory Element session. Under content of the Regulatory Element ly on supervisory training needs the revised uniform SRO rules, regis- computer-based training. As original- when conducting their Needs Analy- tered persons must participate in the ly adopted, the Regulatory Element sis, and if it is determined that there Regulatory Element within 120 days program did not discern between is a specific need for such training, to of the second anniversary of their ini- registration categories. All registered address these needs in their training tial securities registration and every persons took the same Regulatory plans. three years thereafter (i.e., the fifth, Element program. The amended eighth, 11th, 14th, etc., anniver- SRO rules allow the SROs to desig- Status Report 1 Attached to this Status Report are a • How firms handle registered repre- Endnotes number of frequently asked ques- sentatives who refuse to participate 1The Council consists of 19 representatives: tions about both the Regulatory and in Firm Element training. six from self-regulatory organizations (The Firm Elements of the Program. ¥ Whether ethics should be included American Stock Exchange, Inc., the Chicago in continuing education. Board Options Exchange, Inc., the Municipal Other Activities Of The Council • How helpful firms find Council publi- Securities Rulemaking Board, the National cations.2 Association of Securities Dealers, Inc., the The Council conducted its first open ¥ Compliance examinations by the New York Stock Exchange, Inc., and the meeting with broker/dealers on SROs. Philadelphia Stock Exchange, Inc.) and 13 March 26, 1998, in New Orleans, from the industry. The industry representa- Louisiana. The open meeting provid- Firms were offered the opportunity to tives serve three-year terms and are selected a forum for the Council and the meet Council members and express ed through a nominating committee process firms to discuss various issues relat- their views. Many of the firms also designed to maintain representation from a ed to the Firm Element. benefited from hearing others’ expe- broad cross section of broker/dealers. riences and sharing their own. The Liaisons from the Securities and Exchange The open meeting allowed for posi- Council benefited from discussing Commission (SEC) and the North American tive interaction between the Council with firms ways to make the Continu- Securities Administrators Association and firms on the subject of continuing Education Program more mean- (NASAA) also participate in Council activi- ing education. Twenty-seven Nation- ingful. The next open meeting will be ties. The Council’s purpose is to facilitate al Association of Securities Dealers, held on Thursday, August 20, 1998, cooperative industry/regulatory coordination ¨ Inc. (NASD ), New York Stock in Denver, Colorado. of the administration and future development Exchange, and/or Municipal Securi- of the Program in keeping with applicable ties Rulemaking Board members What Lies Ahead industry regulations and changing industry based in and around New Orleans, needs. Its roles include recommending and attended the session. The compa- The Securities Industry Continuing helping develop specific content and ques- nies, which employ anywhere Education Program has made great tions for the Regulatory Element, defining between three and 300 registered strides in the past three years, and minimum core curricula for the Firm Ele- representatives, represented various the Council looks forward to enhanc- ment, and developing and updating informa- types of firms including bank bro- ing the Program further. I would tion about the Program for industry-wide ker/dealers, investment bankers, encourage all participants in the dissemination. investment advisers who were also securities industry to engage in this 2Chief among the Council publications dis- broker/dealers, introducing and car- improvement process by communi- cussed at the meeting were Guidelines For rying broker/dealers, retail-oriented cating their observations and ideas Firm Element Training (1996), Examples of firms, and municipal bond firms. on continuing education to the Coun- Firm Element Practices and Council Com- cil members listed in this Update. mentary (1997), and the annual Firm Ele- Topics discussed included: ment Advisory. • How firms measure the effective- Robert H. Watts, Council Chairman ness of their Firm Element training. Senior Vice President & Chief Com- ¥ The value of the quarterly Regula- pliance Officer tory Element Performance Reports John Hancock Mutual Life Insurance Co. sent by the Continuing Education Boston, MA Program.

2 Status Report Members Of The Securities Industry/Regulatory Council On Continuing Education

Chairperson Leslie C. Quick III Mary L. Bender President Senior Vice President, Division of Robert H. Watts U.S. Clearing Corp. Regulatory Services Senior Vice President & Chief Com- New York, NY Chicago Board Options Exchange pliance Officer Chicago, IL John Hancock Mutual Life Insurance Co. Jerry Roberts Boston, MA Managing Director Frank J. McAuliffe Sterne, Agee & Leach, Inc. Vice President, Testing & Continuing Little Rock, AR Education NASD Regulation, Inc. Industry Representatives Jim Settel Rockville, MD Senior Vice President & Corporate Richard A. Austin Ethics Officer (Retired) Claire P. McGrath Branch Manager and Partner Prudential Securities, Inc. Vice President and Special Counsel, J.C. Bradford Co. New York, NY Derivative Securities Division Charlotte, NC American Stock Exchange Ruth E. Smith New York, NY Cheryl Cook-Schneider Senior Vice President General Partner, Compliance Chase Securities of Texas, Inc. Loretta J. Rollins Edward Jones Houston, TX Director of Professional Qualifications St. Louis, MO Municipal Securities Rulemaking John Weingart Board John L. Dixon Senior Vice President & Branch Alexandria, VA President & CEO Manager (Retired) Mutual Service Corporation Smith Barney Donald van Weezel West Palm Beach, FL Kentfield, CA Managing Director, Regulatory Affairs Dennis C. Hensley Gail T. P. Wickes New York Stock Exchange Managing Director, Associate Gener- Senior Vice President & Director New York, NY al Counsel & Head of Compliance PaineWebber Incorporated J.P. Morgan & Co, Inc. Weehawken, NJ New York, NY NASAA Liaisons Richard L. Hinton President SRO Representatives Ralph A. Lambiase Campbell, Waterman Inc. Director Seattle, WA Diane Anderson Connecticut Department of Banking Vice President of Examination Division of Securities Sarah McCafferty Philadelphia Stock Exchange Hartford, CT Vice President Investment Services Philadelphia, PA & Associate General Counsel Don B. Saxon T. Rowe Price Investment Services, Inc. Director, Division of Securities Baltimore, MD Florida Office of Comptroller Department of Banking & Finance Tallahassee, FL Status Report 3 SEC Liaisons SRO Liaisons John Linnehan Director, Continuing Education Katherine England Christian Billet NASD Regulation, Inc. Assistant Director, Market Regulation Continuing Education Coordinator Rockville, MD Securities and Exchange Commission New York Stock Exchange Washington, DC New York, NY Salvatore Pallante Senior Vice President Gail Marshall Mary Alice Brophy New York Stock Exchange Special Counsel, Division of Market Executive Vice President, Member New York, NY Regulation Regulation Securities and Exchange Commission NASD Regulation, Inc. Daniel M. Sibears Washington, DC Washington, DC Vice President, District Oversight NASD Regulation, Inc. Patricia DeVita Washington, DC Continuing Education Coordinator New York Stock Exchange New York, NY

4 Status Report Questions And Answers Regarding The Securities Industry Continuing Education Program

Background And General dination of the administration and Regulatory Element Description future development of the Program in The Regulatory Element— keeping with applicable industry reg- Who is Required to Partici- ulations and changing industry pate? 1. needs. Its roles include recommending and helping develop specific con- 4. Q. What is the Securities Industry tent and questions for the Regulatory Continuing Education Program? Element, defining minimum core cur- Q. Who is required to participate in ricula for the Firm Element, and the Regulatory Element? A. The Securities Industry Continu- developing and updating information ing Education Program (Program) is about the Program for industry-wide A. The following registered persons a two-part program. The Regulatory dissemination. are required to participate in the Reg- Element consists of periodic comput- ulatory Element: er-based training on regulatory, com- 3. 1. persons registered 10 years or pliance, ethical, and supervisory less as of July 1, 1998, as calculated subjects. The Firm Element consists Q. What are the most recent from their initial securities registration of annual, firm-developed and changes to the Continuing Education date; administered training programs Program? 2. persons registered as a principal designed to keep specified regis- or supervisor 10 years or less as of tered employees current regarding A. On July 1, 1998, changes to the July 1, 1998, regardless of the job- and product-related subjects. Continuing Education Rules of the amount of time they have been a SROs became effective. The registered person; and 2. changes state that: 3. persons who weren’t previously ¥ Registered persons are required to required to participate in the Regula- Q. What is the Securities participate in an appropriate Regula- tory Element, but who become the Industry/Regulatory Council on Con- tory Element on the second anniver- subject of a significant disciplinary tinuing Education (Council) and what sary of their initial securities action (see Question 16). role does it play? registration and every three years thereafter throughout their careers. 5. A. The Council consists of 19 repre- Registered persons will no longer sentatives, six from self-regulatory graduate from the program after their Q. What registration categories are organizations (SROs)1 and 13 from 10th registration anniversary. covered by the Regulatory Element? the industry. The industry represen- ¥ Persons registered for 10 years or tatives serve three-year terms and more in their respective registrations A. Those who hold the following reg- are selected through a nominating as of July 1, 1998, will be grandfa- istrations are subject to the Regulato- committee process designed to thered from the Regulatory Element. ry Element requirements: maintain representation from a broad • Member firms are required to 4 Registered Options Principal * cross section of broker/dealers. specifically identify supervisory 6 Investment Company Liaisons from the Securities and needs in conducting their annual Products/Variable Contracts Exchange Commission (SEC) and Firm Element Needs Analysis and to Limited Representative the North American Securities address any identified needs in the 7 General Securities Administrators Association (NASAA) annual training plan. Representative also participate in Council matters. 7 Securities Trader (New York The Council’s purpose is to facilitate Stock Exchange [NYSE]) cooperative industry/regulatory coor- 7 Trading Supervisor (NYSE)

* Persons with these Principal/Supervisor registrations will receive the Principal/Supervisor Regulatory Element computer-based training module (the Supervisor Program).

Questions And Answers 5 7A Floor Members Engaged in ¥ are originally registered as a repre- Public Business with 6. sentative, then subsequently register Professional Customers (NYSE) as a principal/supervisor. 7B Floor Clerks of Members Q. Is anyone exempt from the Regu- Engaged in Public Business with latory Element of the Program? 8. Professional Customers (NYSE) 8 General Securities Sales Supervisor * A. Exempt from the Regulatory Ele- Q. Is it possible for a person to be 8 Branch Office Manager (NYSE) * ment are: covered under the Regulatory Ele- 11 Assistant Representative—Order 1. those registered persons whose ment as a principal/supervisor yet be Processing activities are limited solely to the exempted at a later date? 12 General Securities Sales transaction of business with mem- Supervisor (NYSE) * bers or registered broker/dealers on A. Yes; in certain circumstances a 13 Allied Member (NYSE) an exchange trading floor; person covered under the Regulato- 14 Compliance Official (NYSE) * 2. persons approved by the NYSE ry Element as a principal/supervisor 15 Foreign Currency Options with the sole status of officer of a could be graduated should such a 16 Supervisory Analyst (NYSE) * member or member organization, person revert to non-principal/super- 17 Limited Registered pursuant to the requirements of visor-only registration category. For Representative (United Kingdom) Exchange Rule 345(b); example, a person who had been 22 Direct Participation Programs 3. persons approved by the NYSE registered for 15 years as of July 1, Limited Representative with the sole status of approved per- 1998, would be grandfathered from 24 General Securities Principal * son; the Regulatory Element if registered 26 Investment Company 4. persons holding only a commodi- only as a registered representative, Products/Variable Contracts ties registration with the National but would be covered in a Limited Principal * Futures Association or state invest- principal/supervisor capacity if such 27 Financial and Operations Principal * ment adviser registrations; principal/supervisor registration 28 Introducing Broker/Dealer 5. persons registered with the NASD occurred during the past 10 years. Financial and Operations Principal * solely as Foreign Associates; and By surrendering the principal/super- 37 Canada Module of the General 6. persons who have been grandfa- visor registration, the person would Securities Representative thered from the Regulatory Element revert to grandfathered status in a Examination (Options included) of the Program (see Question 7). registered representative capacity. 38 Canada Module of the General Securities Representative 7. Note that if the person in this exam- Examination (Options not included) ple decides to reactivate his or her 39 Direct Participation Programs Q. Who has been grandfathered principal/supervisor registration with- Limited Principal * from the Regulatory Element? in two years of surrendering it, he or 47 Japan Module of the General she would be covered by the Regu- Securities Representative A. On July 1, 1998, all persons cur- latory Element and would have to Examination rently graduated from the Regulatory satisfy any outstanding Regulatory 52 Municipal Securities Element were reviewed by the Cen- Element requirement that occurred Representative tral Registration Depository (CRDSM). during the period when the princi- 53 Municipal Securities Principal * All “graduates” who had been regis- pal/supervisor registration had been 55 Equity Trader tered as principal/supervisors for less surrendered. To reactivate a princi- 62 Corporate Securities Limited than 10 years as of July 1, 1998, pal/supervisor registration that had Representative were required to re-enter the Regula- been surrendered for over two years, 72 ¥ Government Securities tory Element. All other “graduates” a person must requalify for that regis- Representative were grandfathered. They will re- tration by examination. ¥ Government Securities enter the Regulatory Element only if Principal * they: 9. ¥ Securities Lending • become the subject of a significant Representative (NYSE) disciplinary action (see Question 16), Q. What is the initial securities regis- ¥ Securities Lending Supervisor or tration date? (NYSE)

* Persons with these Principal/Supervisor registrations will receive the Principal/Supervisor Regulatory Element computer-based training module (the Supervisor Program). 6 Questions And Answers A. The initial securities registration participate in any Regulatory Ele- date is the first date a person 12. ment program that he or she may became registered (i.e., approved) have missed during the lapsed peri- with an SRO. The initial registration Q. Certain municipal securities rep- od. For example, if a person’s regis- date is not the date the person com- resentatives and principals were reg- tration lapses at seven and a half pleted and passed the registration istered with one or more bank years, and that person wishes to qualification examination. The CRD regulators pursuant to Municipal reactivate registration at what would uses the initial securities registration Securities Rulemaking Board be his or her nine-year anniversary, date as a base date from which to (MSRB) rules before becoming he or she must complete the eight- determine a person’s Regulatory Ele- associated with an NASD member. year Regulatory Element requirement anniversaries (2nd, 5th, 8th, What is their initial registration date ment before the registration can be 11th, etc.). and how do you measure the period reactivated. 10. of their continuous registration? 14. A. The initial registration date is the Q. What if an individual has multiple date the person was first registered Q. What if the person ceases to be registrations obtained in different with the bank regulator. The period registered for two or more years? years, such as a Series 6 in 1990 of continuous registration begins with and a Series 7 in 1991? Which date this date and includes the period of A. A person who is not registered for determines when that person must bank registration. Because CRD two or more years begins the entire participate in the Regulatory Ele- does not contain the bank registra- registration and qualification process ment? tion information, the CRD may reflect anew. He or she must take the such persons as being registered appropriate qualification examina- A. The date of the initial registration less than 10 years. However, if in tion(s) and begins the Regulatory (in this case 1990) applies, provided combination with the bank registra- Element as if entering the Program that the person has remained contin- tion, the person has been continu- for the first time. uously registered since that time and ously registered for more than 10 has had no significant disciplinary years, he or she is not required to 15. action (see Question 16). participate in the Regulatory Ele- ment. If a firm receives a Continuing Q. What is the initial registration date 11. Education Advisory Message for of the person whose registration such a person, it should advise the lapsed and who re-enters the securi- Q. What if an individual had a Series NASD Regulation Continuing Educa- ties business by waiver rather than 65 (State Investment Adviser) regis- tion Department in writing that the by examination? tration in 1992 and a Series 6 person has a registration history with (Investment Representative) in a bank regulator. The letter must A. For the purposes of the Continu- 1993? Which date determines when include the amount of time registered ing Education Rule, the initial regis- that person must participate in the with a bank regulator before becom- tration date of that person is the Regulatory Element? ing associated with an NASD firm waiver approval date. and the bank regulatory organiza- A. The date of the Series 6 registration(s) with which the person was Significant Disciplinary tion (1993) is the determining date, registered so that this information Actions provided that the person has can be verified. remained continuously registered 16. since that time and has had no sig- 13. nificant disciplinary action (see Q. What is a significant disciplinary Question 16). The Series 65 State Q. What if a person’s registration action and what is its impact? Investment Adviser registration temporarily lapses? would not cause a person to be cov- A. A significant disciplinary action is ered by the Program because it is a A. If a person ceases to be regis- defined in the SRO rules as: state, not an SRO registration cate- tered for less than two years, he or • any statutory disqualification as gory. she will maintain the original registra- defined in Section 3(a)(39) of the tion date as the initial securities reg- Securities Exchange Act of 1934; istration date, but will have to ¥ a suspension, or the imposition of a

Questions And Answers 7 fine of $5,000 or more for violation of plinary action is sustained on appeal, includes the beginning and ending any provision of any securities law or the effective date would become the dates of the 120-day window, as well regulation, or any agreement with or 45th day after the action was sus- as notice of authorization to schedule rule or standard of conduct of any tained. The person must participate a training session for any available securities self-regulatory organiza- in an immediate session within 120 date in that window. The registered tion, or as imposed by any such reg- days of this new base date, then on person must then make an appoint- ulatory or self-regulatory organization the second anniversary of the base ment and take the computer-based in connection with a disciplinary pro- date and every third year thereafter. training at any Sylvan Technology ceeding; or Center before the end of the 120-day ¥ an order imposed as a sanction in a Notifications And Reports period (see Scheduling And Adminis- disciplinary action to re-enter the Issued By CRD To Firms tration Of Computer-Based Training Continuing Education Program by Sessions At Sylvan Technology Cen- any securities governmental agency or 18. ters). securities self-regulatory organization. ¥ A Second Notice is sent when 30 Q. What types of notifications and days remain in the 120-day window. A significant disciplinary action caus- reports does CRD provide firms to This Notice advises the firm of the es those who are grandfathered from help them track the status of their registered person’s status and the Program to re-enter the Regula- registered employees who are sub- includes a reminder of the conse- tory Element with an immediate ses- ject to the Regulatory Element? quences of not complying with the sion due within 120 days of the Regulatory Element requirements. effective date of the significant disci- A. CRD issues Continuing Education ¥ A Notice of Session Completion is plinary action, then on the second Advisory Messages in the form of sent when the registered person sat- anniversary of this base date and individual notifications and summary isfies the Regulatory Element every third year thereafter. The effec- reports to firms whose registration requirement by completing a com- tive date is the 45th day after the records are maintained in the CRD. puter-based training session. Date of Action specified in the official Firms whose registration records are ¥ A Notice of Inactive Status is sent disciplinary decision document. not maintained on the CRD (e.g., to inform the firm of any registered NYSE-only members) and persons person who fails to complete the A person who incurs a significant dis- registered in registration categories Regulatory Element computer-based ciplinary action and is currently sub- not recorded in CRD (e.g., certain training within the required period. ject to the Regulatory Element will categories only recognized by the The notification states that the per- have the base date changed to the NYSE such as Series 7a or 7b) son’s registration is no longer active effective date of the significant disci- maintain responsibility for tracking and he or she may not perform, or be plinary action. That person must par- their Regulatory Element Program paid for, any activity that requires a ticipate in an immediate session requirements and completions. This securities registration. Such person within 120 days of this new base may be supplemented by notices remains inactive until the required date, then on the second anniversary from the SROs with which such firms Regulatory Element session is com- of the base date and every third year maintain membership and where pleted. thereafter. such registration categories are car- ¥ A Directed Sequence/Session Dis- ried. ciplinary Notice is sent to inform the 17. firm of a registered person who has Individual Notifications become the subject of a significant Q. If a significant disciplinary action is ¥ An Initial Notice is sent to the firm disciplinary action. The Directed appealed, what will be that person’s 30 days before a registered person’s Sequence Disciplinary Notice is Regulatory Element requirement sta- anniversary date to advise the firm of issued when a significant disciplinary tus? the registered person’s approaching action causes the person to either re- registration or disciplinary anniver- enter the Regulatory Element or A. If an appeal is filed, the Regulato- sary, and to inform the firm of the begin participation utilizing a new ry Element requirement associated associated Program requirement base date (see Question 16). The with that disciplinary action will be (i.e., the General Program for regis- Directed Session Disciplinary Notice deferred, and the individual will retain tered persons who are not principals is also issued if the person has been the Regulatory Element status he or or supervisors, and the Supervisor ordered by a regulator to take a sin- she had before the disciplinary action Program for registered principals and gle Regulatory Element session. was taken. If the significant disci- supervisors). The notification

8 Questions And Answers ¥ A CE Two Year Termination Warn- Other summary reports show regis- When calling to make an appointing Notice is sent to the firm of any tered persons who have: ment at either location, be prepared registered person who is approach- to provide: ing two years of inactive status for ¥ completed their requirement within • the candidate’s name and Social not completing the Regulatory Ele- the past 40 days (Completion Sum- Security number; ment computer-based training within mary); • the firm’s name; and the required period. The Warning ¥ had their registration changed to ¥ a telephone number where Sylvan Notice advises that the person’s reg- inactive within the past 40 days can reach the candidate or the candi- istration will be administratively termi- (Inactive Summary); date’s firm. nated in 60 days unless the required ¥ remained inactive for more than 30 Regulatory Element session is satis- days (Previously Inactive Summary); Individuals are strongly encouraged fied. and/or to schedule their appointments as ¥ A CE Two Year Termination Notice ¥ had their registration status soon as possible within their 120-day is sent to the firm of any registered changed from inactive to another sta- window. person who has been inactive for two tus within the past 40 days (Previ- years. It advises that the person’s ously Inactive/Satisfied Summary). 21. registration has been administratively terminated and that the person must Scheduling And Administra- Q. How long does the training ses- reapply for registration and requalify tion Of CBT Sessions At Syl- sion last? for registration by examination. van Technology Centers A. A participant will have up to three Summary Reports 19. and a half hours to complete the In the middle of each month, CRD training session. Persons with dis- sends firms summary status reports. Q. Where can a person take the abilities may be given additional time The Requirement Summary report Regulatory Element computer-based to complete the training if a request shows registered persons who are in training? is made when scheduling the open 120-day windows, grouped as appointment. If a Regulatory Element follows: A. The Regulatory Element must be session is not completed within the ¥ persons who have begun their 120- taken at any of the approximately appointment time, the participant day window; 250 Sylvan Technology Centers must retake the entire session at ¥ persons who have 90 days remain- located throughout the United States another appointment. ing in their 120-day window; and Canada. Outside of North Amer- ¥ persons who have 60 days remain- ica, NASD RegulationSM operates a 22. ing in their 120-day window; and/or Certification and Training Center in ¥ persons who have 30 days remain- London, for the benefit of registered Q. What does it cost to take the ing in their 120-day window. persons located in England, Scot- computer-based training and how land, or Wales. will firms be charged? Firms must carefully review the names on the Requirement Summa- 20. A. The cost is $75 for each comput- ry to identify any individual for whom er-based training session taken at a the firm did not record or receive an Q. How does a person make an Sylvan Technology Center which is Initial Notification. This will most appointment to take the Regulatory charged to the firm’s CRD account often happen with individuals who Element computer-based training? after the session is taken. “No- have been hired by a firm when they shows” and those who cancel within are in an open window, or for individ- A. For appointments at a Sylvan 48 hours of a scheduled appointment uals who have incurred a significant Technology Center in the United will be charged $75. If a firm disciplinary action and must re-enter States or Canada, call Sylvan’s requests a session for an employee the Regulatory Element. Significant National Registration Center at (800) who has not received a notification disciplinary actions are often report- 578-6273. For appointments in Lon- from CRD that he or she is required ed to the CRD after the effective date don, please phone the NASD at to satisfy the Regulatory Element, of the action and an Initial Notifica- (0171) 374 2666 in the U.K., or 44 the $75 will be deducted from the fir- tion would not be sent to the firm. 171 374 2666 outside the U.K. m’s CRD account at the time the request is made, not after the session is completed.

Questions And Answers 9 a Sylvan Technology Center for up to 23. two years after the close of the 120- 28. day window. Remember, however, Q. May a firm request a Regulatory that the person whose 120-day win- Q. How can a registered person who Element computer-based training dow closes without satisfying the resides outside North America satis- session for a registered person who Regulatory Element requirement is fy his or her Regulatory Element is not otherwise required to complete deemed inactive. This means that requirement? a Regulatory Element session? the person may not conduct, or be paid for, any activities that require a A. Registered persons outside North A. Yes, to request a computer-based securities registration. Furthermore, America are still subject to the training session for a registered per- a person whose registration remains requirements of the Regulatory Ele- son not otherwise required to partici- inactive for more than two years ment. With the exception of persons pate in the Regulatory Element, a must requalify for his or her registra- residing in England, Scotland, or firm 1) submits a request through the tion by examination and begin a new Wales, who must use the NASD Firm Access Query System (FAQS) Regulatory Element cycle. Regulation Certification and Training using the EXAMREQ command, or Center in London, persons outside 2) sends page one of Form U-4 26. the United States and Canada can- using the “Other” line to request a not currently participate in the com- session. The firm’s CRD account will Q. Are there any provisions to accom- puter-based training. These be charged for the training session modate people with disabilities at the individuals may have their Regulato- when the appointment is requested, Sylvan Technology Centers? ry Element requirement deferred until rather than after the session is taken. facilities are available. To obtain a A. Yes. Persons with disabilities or deferral, a registered principal or 24. their firms should contact NASD supervisor of the firm must make the Regulation’s Field Support Services request in writing to the Continuing Q. If a person does not complete the at (800) 999-6647 to make special Education Department of NASD Regulatory Element computer-based arrangements for their Regulatory Regulation. The letter should contain training within the three and a half Element appointment at the Sylvan the person’s name, Social Security hours allotted time, how long must Technology Center. or CRD number, and the city and he or she wait before rescheduling country in which the person resides. another appointment? 27. The CRD will defer that person’s Regulatory Element requirement and A. The person must wait 48 hours to Q. Are there any plans to enable notify the firm when delivery of the reschedule another appointment. To delivery of the Regulatory Element computer-based training is available. avoid becoming inactive for failing to computer-based training at sites pro- Of course, any registered person satisfy the Regulatory Element train- vided by member firms? with a Regulatory Element deferral ing on the last day of the 120-day may satisfy his or her requirement at window, it is important that registered A. The subject of “in-house delivery,” any Sylvan Technology Center in the persons do not wait until the last or delivery of the Regulatory Element United States and Canada, or the minute to schedule an appointment. on-site by industry firms, remains NASD Regulation Certification and There will be another $75 charge for under review by the Council. The Training Center in London, and is the rescheduled session. Council’s concerns include the secu- encouraged to do so. rity of the content material, the 25. integrity of the process (i.e., positive- Types Of Regulatory Element ly identifying the person taking the Training Programs Q. Can a person schedule or training and verifying independent reschedule the Regulatory Element performance), and public perception 29. computer-based training after his or as to the effectiveness of the pro- her 120-day window closes? gram. The ultimate determination as Q. How many different Regulatory to whether internal delivery will be Element computer-based training A. Yes. A person who is required to possible depends to a large extent programs are there? satisfy the Regulatory Element com- on the development of technology to puter-based training can schedule an satisfy these concerns at a reason- A. There are currently two different appointment in the normal manner at able cost. Regulatory Element computer-based

10 Questions And Answers training programs. The General Pro- Example 2 Example 5 gram is for persons who are not reg- Registered Person Registered Person istered as principals or supervisors. Pat John The other is specifically for registered Registration History Registration History principals or supervisors. CRD tracks Series 7 Rep 9/1/86 Series 6 Rep 7/20/84 registered persons’ registrations and Series 8 Sales Supervisor 4/1/90 Incurs a significant disciplinary action anniversary dates and determines Required to Participate in the Regu- effective 12/1/99 when and which training program the latory Element? Required to Participate in the Regu- registered person must take (see Yes, because she is a registered latory Element? Question 5). supervisor less than 10 years as of Not covered on 7/1/98 because he 7/1/98. was registered over 10 years. Will be Note: Until the Supervisor Program is Base Date subsequently covered as of 12/1/99 available later this year, registered 9/1/86 due to significant disciplinary action. principals and supervisors will contin- Next Anniversary/Required Regula- Base Date ue to satisfy their requirement by tak- tory Element Program 12/1/99 ing the General Program. 9/1/2000. The Supervisor Program. Next Anniversary/Required Regula- tory Element Program 30. Example 3 12/1/99. The General Program. Registered Person Reentry of a grandfathered or gradu- Q. Does a registered principal or Heather ated person into the Regulatory Ele- supervisor take one or two Regulato- Registration History ment immediately creates a ry Element training sessions? Series 6 Rep 10/1/85 Regulatory Element requirement. Series 26 Principal 8/3/87 A. Registered principals and supervi- Required to Participate in the Regu- The Training Content And sors take only one Regulatory Ele- latory Element? No. She has been Method Of The Regulatory ment computer-based training registered as a principal for more Element For Non- session — the Supervisor Program. than 10 years as of 7/1/98 and is Principal/Supervisor Registra- grandfathered from the Regulatory tions - The General Program The following examples clarify the Element. Regulatory Element training a regis- Base Date 31. tered person is required to take and 10/1/85 when the training will occur. An “as of Next Anniversary/Required Regula- Q. What topics does the General date” of July 1, 1998, is assumed in tory Element Program Program cover? each example. Not applicable. A. The General Program comprises Example 1 Example 4 seven modules. The subject areas Registered Person Registered Person covered in each module are: Christian Lee 1. registration and reporting; Registration History Registration History 2. communications with the public; Series 6 Rep 8/18/88 Series 7 Rep 8/1/84 3. suitability; Series 7 Rep 9/1/90 Financial/Ops Principal 11/1/99 4. handling customer accounts; Required to Participate in the Regu- Required to Participate in the Regu- 5. business conduct; latory Element? latory Element? 6. customer accounts, trade and set- Yes, because she has been regis- Not covered on 7/1/98 because he tlement practices; and tered less than 10 years as of 7/1/98. was registered over 10 years. Will be 7. new and secondary offerings. Base Date subsequently covered as of 11/1/99 8/18/88 upon registration as a principal. The General Program focuses on Next Anniversary/Required Regula- Base Date compliance, regulatory, ethical, and tory Element Program 8/1/84 sales-practice standards as they 8/18/99. The General Program. Next Anniversary/Required Regula- apply in the context of the dealings tory Element Program registered persons have with 8/1/2001. The Supervisor Program. investors. The content of the program has been recommended by participants in the industry, reviewed

Questions And Answers 11 by the Council, and approved by the Regulation. This may be obtained by Element training plan. Material differ- SROs. phoning Christian Billet (212) 656- ences from industry performance in 2156, or Patricia DeVita (212) 656- those areas that are pertinent to the 32. 2746 at the NYSE, or John Linnehan firm’s business, and incomplete ses- (301) 208-2932 at NASD Regulation. sions which exceed industry aver- Q. How is the training presented in ages should be addressed in Firm each module? Individual Feedback on the Element training (see the Firm Ele- General Program Regulatory ment). A. Participants are led by an interac- Element Computer-Based tive computer program through “real- Training The Training Content And life” scenarios depicting situations Method Of The Regulatory faced by registered persons in the 34. Element For Principal And course of business. After reading the Supervisor Registrations - scenario, the participant must Q. Does the participant receive a The Supervisor Program demonstrate his or her understand- grade or any other kind of feedback ing of the issues by choosing the from the General Program? 36. most appropriate response(s) to questions concerning the facts in the A. There is no grade provided for the Q. What topics does the Regulatory scenario. The participant must also General Program. However, the Element Supervisor Program train- answer general questions about the training program provides immediate ing cover? module topic by choosing the feedback as the participant works answer(s) from a list following the through the scenario questions. Also, A. The Regulatory Element Supervi- questions. The computer software as discussed above, the General sor Program addresses issues such then assesses the individual’s under- Program administers remedial subject as suitability, hiring and interviewing, standing of the topic. If the partici- matter tutorials as the need arises. insider trading, market manipulation, pant does not answer a sufficient money laundering, and other general number of questions correctly, the 35. supervisory topics. The Supervisor program delivers tutorials about the Program incorporates multimedia topics in the module, and the partici- Q. What type of feedback do firms features which enable the participant must try again with another sce- receive about their registered pants to observe live situations, and nario on the same general topic. employees? view various documents such as Before the participant is permitted to account statements, portfolios, and move to the next module, one sce- A. Firms receive performance reports industry forms, in order to solve the nario with its associated “List Ques- for the General Program quarterly and problems presented in the exercise. tions” must be successfully annually. The reports show the firm: completed. As the person works 1. the number of Regulatory Element 37. through each subject, the computer sessions taken by the firm’s employ- program provides immediate feed- ees during the period; Q. How should an individual prepare back about each response made. 2. the number of complete and incom- for the Supervisor Program? plete sessions; 33. 3. aggregate percentage performance A. Because of the high degree of and standard deviations by registra- interactivity and subjectivity involved, Q. How should an individual prepare tion type (Series 6, Series 7, Princi- specific preparation is not necessary. for the General Program? pals [if any], and a grouping of all other registrations combined) for each Individual And Firm Feedback A. The General Program does not of the seven subject modules; and On The Supervisor Program necessarily require advance prepara- 4. comparative industry information. Regulatory Element Comput- tion. However, because the General er-Based Training Program is designed to evaluate the Firms must use this feedback to sat- registered person’s overall under- isfy the Firm Element requirements 38. standing, it is beneficial for the regis- of the Securities Industry Continuing tered person to be familiar with the Education Program, in conducting Q. Will the participant receive a Regulatory Element Content Outline, the annual Needs Analysis which is grade or any other kind of feedback available from the NYSE or NASD the basis for the firm’s written Firm from the Supervisor Program?

12 Questions And Answers A. The Supervisor Program is not tions Principal or in any other capaci- ter without taking a registration graded. However, the interactive ty that requires registration, nor examination. However, if the person training provides immediate feed- receive compensation for activities is inactive for two years for failing to back as the participant works requiring any registration. satisfy a Regulatory Element require- through the scenario questions. In ment, his or her registration will be addition, summaries of pertinent Thus, it is important to schedule all administratively terminated regard- information from each subject area Regulatory Element computer-based less of the time elapsed since the are presented at the conclusion of training appointments early in the person was terminated by his or her each scenario. 120-day window in the event that the previous firm. person does not complete the 39. required training on the first attempt Example and has to reschedule. Joan is registered with Firm A. She Q. Will firms receive feedback about does not satisfy the Regulatory Ele- their employees who take the Super- 42. ment requirement due for her fifth visor Program training? anniversary and she becomes inac- Q. For how long may a registered tive on September 1, 1999. On A. The Supervisor Program is not person remain inactive before he or November 1, 1999, Joan’s firm files designed to provide quantifiable she must requalify for registration by a Form U-5 to terminate her registra- information from participants, there- examination? tion. Joan reapplies for registration fore no quarterly or annual perfor- with Firm B on October 1, 2001, but mance reports will be available. A. A registered person can remain her registration had been administra- inactive for up to two years. A regis- tively terminated on September 1, Failure To Comply With Regu- tration that is inactive for a period of 2001, because she had been inac- latory Element Requirements two years will be administratively ter- tive in the Continuing Education Pro- minated, and the person must requali- gram for two years. Joan must 40. fy for registration by examination. requalify by examination even though it has been less than two Q. Is each session of the computer- 43. years between the time when her based training of the Regulatory Ele- Form U-5 was filed by Firm A and ment recorded in CRD? Q. Must the firm submit a Termina- her Form U-4 was filed by Firm B. tion Notice (Form U-5) to report that A. Yes. a person’s registration is inactive for 45. failure to meet the Regulatory Ele- 41. ment requirements? Q. If a registered person has both a principal/supervisor and non-princi- Q. What are the consequences of A. No. However, if the person is sub- pal/supervisor registration and not complying with the Regulatory sequently terminated by the firm for becomes inactive for failing to satisfy Element? any reason, including refusal to com- the Regulatory Element require- ply with the Continuing Education ments, does only one or all of his or A. The registration of any person requirements, a Form U-5 must be her registrations become inactive? who does not satisfy the Regulatory filed. Element requirements will be A. All registrations are deemed inac- deemed inactive. This means that he 44. tive when that person does not satis- or she may not engage in, or be paid fy the Regulatory Element for activities that require a securities Q. When a person who is inactive for requirements. registration. For example, a General failing to satisfy the Regulatory Ele- Securities Registered Representative ment requirements is later terminat- 46. (Series 7) may not engage in any ed by his or her firm, how long does activities involving the solicitation and the person have to become re-regis- Q. May a registered salesperson who handling of securities transactions. tered with another firm without hav- is deemed inactive continue to Likewise, if a person is registered as ing to requalify by examination? receive trail or residual commissions? a Financial and Operations Principal, the person may neither act in the A. It depends. Ordinarily, a person A. Yes. Trail or residual commissions capacity of a Financial and Opera- has a period of two years to re-regis- that are permitted under applicable

Questions And Answers 13 SRO rules for business completed A. It will vary. Each firm is required to before the inactive period com- 50. analyze and evaluate its training menced may be paid, if that is the needs at least annually. The firm’s policy of the person’s firm. Q. Does the Program require specif- size, organizational structure, scope ic review of Firm Element training of business, types of products and Firm Element needs for managers or supervisors? services it offers, as well as regulatory developments and the Regulatory 47. A. Yes. Effective July 1, 1998, firms Element performance of its regis- are required to specifically address tered persons, will all need to be con- Q. Who is required to participate in supervisory training needs in the sidered in determining training the Firm Element? annual analysis. Training for supervi- needs. Particular emphasis should sors must be provided as determined be placed on changes to firm or A. The Firm Element requirements by the firm to be necessary. In ana- industry demographics from the prior apply to all covered persons (cov- lyzing their Firm Element training year. New products, new rules relat- ered persons include all registered needs for supervisors, firms should ed to firm business, and problems persons that deal with customers pay particular attention to the impor- the firm has experienced (such as including, but not limited to, regis- tance of supervisory responsibilities complaints, regulatory or legal tered salespersons, traders, sales imposed by industry laws and regula- actions) are particularly important assistants, investment company tions. Firms should include a review considerations. Once its needs are shareholder servicing agents, invest- of the firm’s internal supervisory poli- identified, the firm must devise a writ- ment bankers, and others who have cies, the effective use of internal ten training plan to address those direct contact with customers in the monitoring or supervisory systems, needs and create training programs conduct of a securities sales, trading, and the sources of information or appropriate to its business. or investment banking business), assistance available within the firm. and their immediate supervisors. Each firm must then administer its 51. Continuing Education Program in The term “customer” applies to retail, accordance with its annual Needs institutional, and investment banking Q. Are registered research analysts Analysis and written plan, and must customers, but does not apply to covered persons within the Firm Ele- maintain records documenting the other broker/dealers. ment? content of the Continuing Education Program and completion of it by cov- 48. A. Yes, if they participate in sales-ori- ered persons. ented presentations to customers. Q. Can anyone be grandfathered or 54. exempt? 52. Q. What is the required schedule for A. No covered person is grandfa- Q. Are registered sales assistants or the Needs Analysis and written train- thered or exempt from the Firm Ele- registered investment company share- ing plan? ment. holder servicing agents, who handle service calls from customers, covered A. For most firms, the Firm Element 49. persons within the Firm Element? will be a multi-tiered process. Each year, firms must complete/update an Q. Are branch managers and super- A. Yes, if their activities involve the analysis of their training needs and visors/principals covered persons conduct of a securities business in a revise or modify their annual written within the Firm Element? sales context. The fact that the firm training plan accordingly. Because has decided to register such persons the plan must cover training to be A. Yes, if they directly supervise reg- often suggests that there is likely to conducted during the following calen- istered covered persons. If a branch be customer contact of the type that dar or fiscal year and must take into manager or supervisor/principal also requires registration. account matters such as budgeting, has customer accounts, then his or scheduling, and developing or secur- her immediate supervisor is a cov- 53. ing the necessary educational mate- ered person as well. rials, the Needs Analysis and the Q. What should be the content of the plan must be completed (and avail- Firm Element? able for regulatory inspection) by the

14 Questions And Answers end of each calendar or fiscal year. A. There is no single date on which such as that required for insurance- This does not suggest that work on training must begin. Firms must con- licensed personnel, or of a profes- either should be done only at year- duct training in keeping with their sional designation program in a field end; in fact, a firm should remain written training plans at various times related to the securities industry flexible enough to modify its Needs throughout the calendar or fiscal meets all or part of an individual’s or Analysis and training plan throughout year, depending on their own deter- group of individuals’ Firm Element the year as circumstances dictate. mination of needs and scheduling. requirements. Whether additional For firms with limited products or training is necessary for a specific 55. small numbers of covered persons, it individual or group will depend on might be appropriate and sufficient to whether the coverage of the training Q. If a firm utilizes a survey in its conduct training on only one or two received through the other program Needs Analysis, must the survey be occasions during the year. The pri- is consistent with the firm’s Needs retaken in its entirety every year? mary responsibility that firms have is Analysis and the scope of the individ- to ensure that coverage be ade- ual’s sales-related activities. A. Although surveys are one way in quate, and that information is trans- which a Needs Analysis can be con- mitted in a timely manner. For example, if a covered person’s ducted, there are a variety of other sales-related activities are limited to techniques that can also be used 57. insurance and insurance-related either in place of, or in conjunction securities, training received through with surveys. The Council expected Q. If new training is added after com- insurance industry continuing educa- that a survey connected with a firm’s pletion of a specific year’s training tion might be sufficient. On the other initial Needs Analysis may by neces- plan, must training originally speci- hand, if the individual sells a wider sity be wide-ranging and therefore fied be completed? range of securities products, partici- relatively more time consuming than pation in additional training would surveys connected in conjunction A. No, not if the change is appropri- probably be necessary. For individu- with subsequent Needs Analysis. ate and in keeping with the firm’s als participating in the initial or on- Subsequent surveys could be tai- changing needs and circumstances. going training related to a lored and conducted with audiences A change would be logical if the new professional designation program, a within those areas of the firm where training improved on or replaced that firm might determine that the materi- there had been changes. For exam- originally planned, or if it were al adequately covered subjects ple, a retail firm doing its first Needs deemed necessary because planned for its own Firm Element. If Analysis survey might consider sur- changed circumstances suggested not, the firm may require the individu- veying each, or a representative new training priorities. The annual al to participate in segments of its sample of its retail representatives in training plan should be viewed as an own program. addition to the compliance, market- evolving document that can be modi- ing, and the other groups suggested fied if circumstances warrant, and If an external educational or Continu- in the Guidelines for Firm Element allow for deviation if experience or ing Education Program is used to Training (see Question 64). In subse- unanticipated developments suggest meet an individual’s Firm Element quent years, this firm might only sur- that changes are appropriate. training requirement, the firm must vey new representatives or those demonstrate the applicability of that retail representatives who had com- 58. program to the training plan. pliance problems, whose product lines changed, or who were involved Q. May insurance industry continu- 59. in areas where there were changes ing education or training taken in to industry rules or company policies. conjunction with professional desig- Q. How should firms use the quarter- A sample of the remaining retail pop- nation programs such as the Certi- ly report on Regulatory Element per- ulation would generally suffice to vali- fied Financial Planner Program formance in planning the content of date what had been determined the satisfy Firm Element requirements? their Firm Element training pro- year before. grams? A. A firm may determine that partici- 56. pation in a program designed to A. The quarterly reports provided to meet the requirements of an educa- firms reflect the aggregate perfor- Q. When must training begin each tional or Continuing Education Pro- mance of the firm’s registered year? gram of another related industry, employees who participated in the

Questions And Answers 15 general Regulatory Element program training? For example, does a cov- training during the most recent quar- 61. ered person hired in September ter, rather than the performance of need to receive training already specific individuals. Accordingly, the Q. Does a firm that is a sole propri- delivered earlier in the year? data may be of greater benefit to etorship have to prepare a Needs firms having a significant number of Analysis and written training plan, A. The answer depends on an evalu- employees participating in the Regu- and how detailed does it have to be? ation of the individual’s experience, latory Element training than to firms training, and areas of business rela- with only a few. The purpose of the A. Every firm must conduct a Needs tive to what the individual will do at data is simply to highlight areas of Analysis and prepare a written train- the new firm. Firms should consider emphasis to firms whose personnel ing plan that is reasonable for its size having an “orientation” period or pro- show performance that is below the and type of business it conducts or gram for registered persons hired industry norm in a specific module. plans to conduct. The Needs Analy- from other firms to familiarize them For example, if a firm’s aggregate sis of a sole proprietorship should with their own policies, products, and performance is below average in the contain a brief description of the expectations—and to determine “New and Secondary Offerings” firm’s products and services and the whether the new employees would module, and the firm participates in sole proprietor’s background and benefit from additional training, this type of business, it should evalu- industry experience. The Needs including material previously covered ate the adequacy of coverage in this Analysis and written training plan in the new firm’s Firm Element train- area in its Firm Element training. should address any pertinent recom- ing. mendations from the Firm Element 60. Advisory which is published annually In general, firms will probably be bet- by the Council, and should briefly ter served by addressing their train- Q. Must a firm’s Needs Analysis be describe the sole proprietor’s training ing needs in terms of products or documented in writing as a part of its plans for the upcoming year. services offered by groups or cate- written training plan? gories of employees. In fact, appro- 62. priate training may vary widely A. Yes. A firm should describe the between individuals or groups. methodology it uses in conducting its Q. Is there a minimum or maximum Exceptions or unique circumstances Needs Analysis. It should identify the number of hours of continuing edu- may apply to small or specialized factors considered by the firm, the cation that each covered person firms or to individuals with business kinds of information reviewed, and must take in the Firm Element? limited to narrowly defined areas. the conclusions reached from the analysis. A. There are no set schedules or 64. required number of hours prescribed The firm’s documentation, however, for the Firm Element, but coverage Q. How can firms obtain guidance does not necessarily have to include must be sufficient to meet the “rea- on designing and implementing inter- duplications of records or source sonableness” criteria established by nal training plans and programs to documents otherwise reasonably SRO rules. For example, it may or meet Firm Element requirements? available. It would be appropriate may not be necessary to include and helpful to include items such as every covered person within each A. The Council has publications samples of any formats used in con- calendar year if the firm can demon- available to provide guidance on ducting surveys or past training eval- strate a reasonable allocation of complying with the Firm Element. uations, disclosures of areas or resources in a well-conceived and Guidelines for Firm Element Training business units surveyed for input, executed plan. Firms may need to offers direction to help firms devise consideration of planned introduc- give priority for specific time periods to appropriate programs consistent with tions of new products or services, those areas of their business in which their own unique needs, characteris- assessments of the effectiveness of the identified needs are greatest. tics, and businesses. The Guidelines past training efforts, and other docu- also addresses comments and ques- mentation of specific consideration. 63. tions brought to the attention of the Council from sources throughout the Q. Must a firm make special provi- industry, including the observations sions for employees newly hired of the SROs on their examination from other firms in its Firm Element findings of firms.

16 Questions And Answers The annual Firm Element Advisory things: lists pertinent topics that the Council 67. • designate an appropriate officer or identifies from a review of industry principal to oversee compliance with performance on the Regulatory Ele- Q. Is the annual compliance meeting the Program; ment and regulatory advisories required under Rule 3010(a)(7) of ¥ ensure no improper activities are issued by industry regulators. Firms the NASD Conduct Rules (previous- undertaken by persons with inactive should review the Advisory to deter- ly Article III, Section 27(a)(7) of the registrations; and mine whether the topics are relevant NASD Rules of Fair Practice) ade- ¥ develop processes for creating and to their training needs. quate to demonstrate compliance implementing Firm Element pro- with the requirements of the Firm grams. Examples of Firm Element Practices Element? and Council Commentary provides 70. observations from the Council A. Probably not. Although it can cer- through its comments on the Needs tainly be used as an occasion to Q. If a firm prescribes that a particu- Analysis and training plans of seven transmit information or conduct train- lar covered person take part in the securities firms of various sizes and ing, firms must address their own Firm Element training, must the cov- client orientations. needs for sales practice and product ered person do so? training and carry out effective pro- 65. grams. In most instances, a signifi- A. Yes. The SRO rules require firms cant expansion of material otherwise to implement a training program and Q. May firms use training materials covered at the annual compliance to maintain records that clearly or presentations provided by outside meeting probably will be necessary. demonstrate its content and its com- entities? What sources are avail- Also, it may be appropriate to con- pletion by each person or groups of able? duct some training before the sched- persons identified in the firm’s train- uled annual compliance meetings. ing plan. The rules also require cov- A. Training materials and presenta- ered persons to participate in training tions available through outside ven- 68. as prescribed by their firms. Failure dors may be used if they meet the to do so could result in disciplinary standards of the Firm Element and Q. Must each covered person meet action against the registered person are appropriate for a firm’s needs as personally with his or her supervisor by his or her firm or by a regulatory determined in the Needs Analysis to determine annual training require- authority. process. Materials may also be avail- ments for that person? able through regulators and industry 71. trade and professional associations. A. No. However, some firms may In any event, firms that elect to use decide to meet to determine an indi- Q. Can a firm arrange for a person to materials or presentations developed vidual’s needs, or to discuss training take the Regulatory Element com- or provided by others maintain the needs during regular performance puter-based training on a voluntary ultimate responsibility for the content reviews. basis or as part of an internal disci- and the adequacy of their overall plinary action? programs. Internal Policies And Documentation A. Yes. In addition to meeting the 66. rule requirements, a firm may elect to 69. use the Regulatory and/or Firm Ele- Q. Will SROs or the Council pre- ment on a voluntary basis, or as a approve training materials and/or Q. Must a firm develop supervisory sanction in its own internal disci- programs developed by members or procedures that address compliance plinary actions. To request a special providers? with the Regulatory and Firm Ele- administration of the Regulatory Ele- ments of the Program? ment, whether for internal disciplinary A. Neither the SROs nor the Council or training purposes, the firm should will pre-approve training materials or A. Yes. Firms must develop written submit a request through FAQS training programs. supervisory procedures designed to using the EXAMREQ command or reasonably ensure compliance with send page one of Form U-4 to the the SRO rules governing the Pro- CRD/PD Department using the gram. Firms should, among other “Other” line to request a session. The

Questions And Answers 17 firm’s CRD account will be charged verbatim transcripts of all classroom inexact process, firms are required to for the training session when the sessions, conference calls, or pre- document the particulars of who par- appointment is requested. sentations. In such cases, an outline ticipated in what training, and when. or summary may be sufficient to sat- To the extent that it can be done, an SROs may also prescribe the Regula- isfy document retention require- evaluation of prior training programs tory Element or special training under ments. Documenting participation in and materials can be beneficial to the Firm Element for individuals or such activities as conference calls firms in identifying appropriate modi- firms as part of the sanctions or settle- and “squawk box” meetings may not fications to improve current programs ment terms in a formal disciplinary be readily accomplished other than and plan future programs. Methods action. by participant sign-off or attestation. used can range from administering In addition, often written materials post-training tests to obtaining sug- Overall, the Program provides new are disseminated such as internal gestions and feedback on programs, flexibility to firms and regulatory orga- memoranda, compliance alerts, reg- presentations, and materials from nizations in taking both corrective and ulatory bulletins, etc., which must be participants and presenters as well preventive compliance actions. read as part of Firm Element training. as from comments or findings in peri- Participant sign-off or attestation may odic regulatory examinations. Any 72. be an acceptable method for demon- good program can benefit from a strating completion. Such items may feedback mechanism to evaluate its Q. What records will be needed to be retained with respect to a specific effectiveness and from efforts to document Needs Analysis, training presentation or retained centrally and learn from past experiences in order plans, program content, and regis- identified as material used in multiple to identify needed modifications and tered person participation for regula- presentations. Unique materials or enhancements. tory examinations? presentation methods can be documented in descriptive memoranda. 74. A. See Question 60 for the docu- Various methods are acceptable so mentation required for the Needs long as they provide readily accessi- Q. Are firms that are members of two Analysis. The written training plan ble and reasonable evidence as to or more SROs subject to redundant must be maintained, and it must the material covered, with whom, by inspections for compliance with the accurately and adequately present whom, and when. The records are continuing education requirements? the subject matter of the training, required to be maintained under who will be trained, and where and SEC Rule 17a-4, which requires A. No. The SROs coordinate their how the training will take place. Writ- every broker or dealer to preserve field inspection efforts to avoid any ten training plans and other applica- records related to the conduct of their unnecessary regulatory overlap for ble documentation (e.g., training business for at least three years, with joint members. The SROs have results, feedback, and attendance the first two years in an easily acces- developed a consistent approach to records) must be retained for regula- sible place. examining and enforcing both the tory examination during routine SRO Regulatory Element and the Firm examinations or upon request. The 73. Element requirements. subject matter covered in training presentations can be documented by Q. Are firms required to measure retaining copies of any written mate- and document the effectiveness of Endnote rials used (i.e., texts, handouts, case their training programs? Will this be 1The American Stock Exchange, Inc., the studies, discussion points, outlines, expected in regulatory examina- Chicago Board Options Exchange, Inc., the notes, or check-off sheets for items tions? Municipal Securities Rulemaking Board, the covered) as well as any non-written National Association of Securities Dealers, material such as audio-visual tapes. A. While evaluation of the effective- Inc., the New York Stock Exchange, Inc., It may not be possible to maintain ness of training is recognized as an and the Philadelphia Stock Exchange, Inc.

18 Questions And Answers Labor Day: Trade Date-Settlement Date Schedule NASD The Nasdaq Stock Market¨ and the securities exchanges will be closed on Monday, September 7, 1998, in observance of Labor Day. “Regular way” transactions made on the business days noted below will be subject to the Notice to following schedule: Members Trade Date Settlement Date Reg. T Date* 98-69 Aug. 31 Sept. 3 Sept. 8 Sept. 1 4 9

2810

Labor Day: Trade Date- 3911 Settlement Date Schedule 41014

7 Markets Closed — Suggested Routing Senior Management 81115 Advertising Continuing Education Corporate Finance Government Securities Institutional *Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a bro- Insurance ker/dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a Internal Audit cash account if full payment is not received within ﬁve business days of the date of purchase or, Legal & Compliance pursuant to Section 220.8(d)(1), make application to extend the time period speciﬁed. The date by which members must take such action is shown in the column titled “Reg. T Date.” Municipal Mutual Fund Operations © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. Options Registered Representatives Registration Research Syndicate Systems Trading Training Variable Contracts

NASD Notice to Members 98-69 August 1998 525 As of June 24, 1998, the following bonds were added to the Fixed Income NASD Pricing SystemSM (FIPS¨). Notice to Symbol Name Coupon Maturity ABAG.GA Safety Componets Intl Inc 10.125 07/15/07 ALGX.GA Allegiance Telecom Inc 11.750 02/15/08 Members AMH.GA Amerus Life Hldgs Inc 6.950 06/15/05 BFSR.GB Saul B F Real Estate Inv Trst 11.625 04/01/02 98-70 CBRN.GB Canadaigua Brands Inc 8.750 12/15/03 CHCA.GC Chancellor Media Corp LA 8.125 12/15/07 CNCX.GB Concentric Network Corp Del 12.750 12/15/07 EGFM.GA Eagle Family Foods Inc 8.750 01/23/98 EX.GC Exide Corp 10.000 04/15/05 Fixed Income Pricing FMO.GB Federal Mogul Corp 7.500 07/01/04 System Additions, FMO.GC Federal Mogul Corp 7.750 07/01/06 Changes, And Deletions FMO.GD Federal Mogul Corp 7.875 07/01/10 As Of June 24, 1998 FTO.GA Frontier Oil Corp 9.125 02/15/06 FXFW.GA Fox Family Worldwide Inc 9.250 11/01/07 GND.GB Grand Casinos Inc 9.000 10/15/04 IGRP.GB ICG Holdings Inc 13.500 09/15/05 MARS.GA Marsh Super Markets Inc 8.875 08/01/07 Suggested Routing NIN.GA Nine West Group Inc 8.375 08/15/05 Senior Management NIN.GB Nine West Group Inc 9.000 08/15/07 PANR.GB Pantry Inc 10.250 10/15/07 Advertising PCKI.GA Printpack Inc 9.875 08/15/04 Continuing Education PDAG.GA Panda Global Energy Co 12.500 04/15/04 PDCU.GA Poland Communications Inc 9.875 11/01/03 Corporate Finance PGN.GA Paragon Health Network Inc 10.500 11/01/07 Government Securities PGTN.GA Pagemart Nationwide Inc 12.250 02/01/05 Institutional PJMC.GA Peters (J.M.) Co 12.750 05/01/02 PKD.GC Parker Drilling Co 9.750 11/15/06 Insurance PKOH.GA Park-Ohio Industries Inc 9.250 12/01/07 Internal Audit PKS.GD Premier Parks Inc 12.000 08/15/03 Legal & Compliance PLTC.GB Plastic Containers Inc 10.000 12/15/06 PLX.GA Plain Resources Inc 10.250 03/15/06 Municipal PLX.GB Plains Resources Inc 10.250 03/15/06 Mutual Fund PNDF.GA Panda Funding Corp 11.625 08/20/12 PNRA.GA Pioneer Americas Acq. Corp 9.250 06/15/07 Operations POAN.GA Protection One Alarm Inc 13.625 06/30/05 Options PPP.GA Pogo Producing Co 8.875 05/15/07 Registered Representatives PRCG.GA Prescise Technology Inc 11.125 06/16/07 PRGY.GA Petsec Energy Inc 9.500 06/15/07 Registration PTX.GB Pillowtex Corp 9.000 12/15/07 Research PYX.GA Playtex Products Inc 8.875 07/15/04 Syndicate QWST.GB Qwest Communications Intl Inc 10.875 04/01/07 RBXC.GA RXC Corp 11.250 10/15/05 Systems RCNC.GA RCN Corp 9.8 02/15/08 Trading RCNC.GB RCN Corp 11.000 07/01/08 RDNH.GA Radnor Holdings Inc 10.000 12/01/03 Training REGL.GA Regal Cinemas Inc 8.500 10/01/07 Variable Contracts RENC.GB Renco Metals Inc 12.000 07/15/00 REXI.GA Resource America Inc 12.000 08/01/04 RFPN.GA Rifkin Acq Partners L.P. 11.125 01/15/06 RGCT.GA Riggs Capital Trust 7.625 12/31/26 NASD Notice to Members 98-70 August 1998 527 Symbol Name Coupon Maturity

RHC.GA Rio Hotel & Casino Inc 9.500 04/15/07 RIDL.GA Riddell Sports Inc 10.500 07/15/07 RIV.GA Riviera Holdings Corp 10.000 08/15/04 RLBD.GA Reliant Building Product Inc 10.875 05/01/04 RMOC.GA Rutherford-Moran Oil Corp 10.750 10/01/04 RNCC.GA Renaissance Cosmetics Inc 11.750 02/15/04 ROV.GA Rayovac Corp 10.250 11/01/06 RRI.GA Red Roof Inns Inc 9.625 12/15/03 RSEH.GA Rose Hills Co 9.500 11/15/04 RVSU.GF Revlon Consumer Products Corp 8.625 02/01/08 RXIH.GA RXI Holdings Inc 14.000 07/15/02 SACU.GA Salem Communications Corp 9.500 10/01/07 SBGI.GD Sinclair Broadcast Grp Inc 9.000 07/15/07 SCPR.GA Sovereign Capital Trust I 9.000 04/01/27 SDW.GA Southdown Inc 9.500 04/15/07 SELO.GA Selmer Co 11.000 05/15/05 SFDS.GA Smithﬁeld Foods Inc 7.625 02/15/08 SGY.GA Stone Energy Corp 8.750 09/15/07 SHST.GA Shefﬁeld Steel Corp 11.500 12/01/05 SHVC.GA Shop Vac Corp 10.625 09/01/03 SLGC.GB Sterling Chemicals Inc 11.75 08/15/06 SLGN.GC Silgan Holdings Inc 9.000 06/01/09 SLNC.GA Sabreliner Corp 12.500 04/15/03 SLTA.GA Specialty Foods Acq Corp 13.000 08/15/05 SLTF.GA Specialty Foods Corp 11.125 10/01/02 SLTF.GB Specialty Foods Corp 10.250 08/15/01 SMMC.GA Simmons Co 10.750 04/15/06 SPBR.GB Spanish Broadcasting Inc 12.500 06/15/02 SRKT.GA Star Markets Co 13.000 11/01/04 SROY.GA Southwest Royalties 10.500 10/15/04 SUGR.GA Sullivan Graphics Inc 12.750 08/01/05 SUWD.GA Sun World Int’l Inc 11.250 04/15/04 SXFE.GA Six Flags Theme Parks Inc 12.250 06/15/05 TEGY.GA Transamer Energy Corp 11.500 06/15/02 TEGY.GB Transamer Energy Corp 13.000 06/15/02 TETI.GA Teletrac Inc 14.000 08/01/07 TGCP.GA Triangle Capital Trust 9.375 06/01/27 TGRP.GA Telegroup Inc 10.500 11/01/04 THWV.GA Therma-Wave Inc 10.625 05/15/04 TKPX.GA Tekni-Plex Inc 11.250 04/01/07 TLTH.GA Talton Hldgs Inc 11.000 06/30/07 TLXU.GA Telex Communications Inc 10.500 05/01/07 TMFD.GA Tom’s Foods Inc 10.500 11/01/04 TMWR.GA Time Warner Telecom LLC/Inc 9.375 07/15/08 TOK.GB Tokheim Corp 11.500 08/01/06 TRA.GA Terra Indus Inc 10.500 06/15/05 TRHD.GA Transtar Hldg L.P. 13.375 12/15/03 TRK.GA Speedway Motor Sports Inc 8.500 08/15/07 TTX.GB Tultex Corp 9.625 04/15/07 TVLC.GA Travel Centers of America Inc 10.250 04/01/07 TWA.GB Trans World Airlines Inc 12.000 04/01/02 TWNB.GA Twin Laboratories Inc 10.250 05/15/06 TWSP.GA Town Sports Int’l Inc 9.750 10/15/04 NASD Notice to Members 98-70 August 1998 528 Symbol Name Coupon Maturity

UDFS.GA United Defense Indus Inc 8.750 11/15/07 UFIC.GA Unifi Communications Inc 14.000 03/01/04 UIHA.GA UIH Australia/Pacific Inc 14.000 05/15/06 UIHA.GB UIH Australia/Pacific Inc 14.000 05/15/06 UIS.GI Unisys Corp 12.000 04/15/03 UNCO.GA Unicco Service Co 9.875 10/15/07 USMR.GA United Stationers Supply Co 12.750 05/01/05 VDKP.GA Van De Kamps Inc 12.000 09/15/05 VHT.GB Venture Holdings Trust 9.500 07/01/05 VILG.GA Vialog Corp 12.750 11/15/01 VOUT.GD Universal Outdoor Inc 9.750 10/15/06 WALB.GB Walbro Corp 10.125 12/15/07 WCII.GB Winstar Communications Inc 14.500 10/15/05 WCII.GC Winstar Communications Inc 15.000 03/01/07 WCTI.GA Williams Scotsman Inc 9.875 06/01/07 WEQC.GA Winstar Equip II Corp 12.500 03/15/04 WFGM.GA Waterford Gaming LLC 12.750 11/15/03 WHLP.GA Windy Hill Pet Foods Co 9.750 05/15/07 WHX.GA WHX Corp 10.500 04/15/05 WLAL.GA Wells Aluminum Corp 10.125 06/01/05 WLSN.GA Wilson Leather Inc 11.250 08/15/04 WMHO.GA Williamhouse Regency (Del) Inc 11.500 06/15/05 WRMD.GA Wright Medical Tech Inc 11.750 07/01/00 WVTK.GA Wavetek Corp 10.125 06/15/07 WZR.GA Wiser Oil Co 9.500 05/15/07 YBTV.GC Young Broadcasting Inc 8.750 06/15/07 YBTV.GD Young Broadcasting Inc 9.000 01/15/06 YFM.GA Big City Radio Inc 11.250 03/15/05 ZLC.GA Zale Corp 8.500 10/01/07

As of June 24, 1998, the following bonds were deleted from FIPS. Symbol Name Coupon Maturity

ABKR.GA Anchor Bancorp Inc 8.937 07/09/03 ADT.GA ADT Operations Inc 8.250 08/01/00 ADT.GB ADT Operations Inc 9.250 08/01/03 AFIN.GD American Financial Corp 9.750 04/20/04 ALG.GA Arkla Inc 8.9 12/15/06 ALG.GF Arkla Inc 10.000 11/15/19 ALG.GG Arkla Inc 8.875 07/15/99 ALIS.GA Allied Supermarkets Inc 6.625 05/15/98 AME.GA Ametek Inc 9.750 03/15/04 AMLH.GA American Life Holdings Co 11.250 09/15/04 AMSD.GE American Standard Inc 9.875 06/01/01 AMSD.GF American Standard Inc 10.500 06/01/05 ARAG.GC ARA Group 8.500 06/01/03 ARAS.GA Ara Services Inc 10.625 08/01/00 ARTL.GB Amer Continental Corp 14.750 04/15/95 ASRP.GA Astor Corp 10.500 10/15/06 AVTR.GA Avatar Holdings Inc 9.000 10/01/00 BKI.GA Buckeye Cellulose Corp 10.250 05/15/01 BKSO.GA Bank South Corp 10.200 06/01/99 NASD Notice to Members 98-70 August 1998 529 Symbol Name Coupon Maturity

BLT.GA Blount Inc 9.000 06/15/03 BLYG.GA Bally’s Casino Holding 10.500 06/15/98 BOR.GA Borg-Warner Security Corp 9.125 05/01/03 CAW.GA Caesars World Inc 8.875 08/15/02 CBLV.GB Cablevision Inds Corp 9.250 04/01/08 CCG.GA Chelsea GCA Rlty Partnership L.P. 7.750 01/26/01 CCVS.GD Contl Cablevision Inc 8.625 08/15/03 CCVS.GE Contl Cablevision Inc 9.000 09/01/08 CCVS.GF Contl Cablevision Inc 8.500 09/15/01 CCVS.GG Contl Cablevision Inc 8.875 09/15/05 CCVS.GH Contl Cablevision Inc 9.500 08/01/03 CFCB.GA CF Cable TV Inc 11.625 02/15/05 CFDB.GA Citfed Bancorp Inc 8.250 09/01/03 CGP.GC Coastal Corp 10.250 10/15/04 CGP.GD Coastal Corp 10.375 10/01/00 CGP.GE Coastal Corp 10.750 10/01/10 CGP.GF Coastal Corp 10.000 02/01/01 CGP.GG Coastal Corp 9.750 08/01/03 CGP.GH Coastal Corp 8.750 05/15/99 CGP.GI Coastal Corp 9.625 05/15/12 CGP.GJ Coastal Corp 8.125 09/15/02 CLNH.GB CLN Holdings Inc 0.000 05/15/01 CNEW.GA Community Newspaper Inc 13.000 07/01/97 CTP.GC Central Maine Power Co 7.375 01/01/99 CTP.GD Central Maine Power Co 7.05 03/01/08 CTP.GF Central Maine Power Co 6.25 11/01/98 CVXP.GA Cleveland Elec Illum Co 8.750 11/15/05 CVXP.GD Cleveland Elec Illum Co 8.375 08/01/12 CWL.GA Chartwell Re Corp 10.250 03/01/04 DAL.GD Delta Air Lines Inc Del 10.125 05/15/10 DLFI.GA Delphi Financial Group 8.000 10/01/03 ECK.GB Eckerd Corp Del 9.250 02/15/04 EFGP.GA Equitec Fin’l Group Inc 12.000 12/15/93 ENRG.GB Dekalb Energy Co 9.875 07/15/00 EVI.GA Energ Venture Inc 10.250 03/15/04 EWRL.GA Evans Withycombe Res LP 7.500 04/15/04 FCMM.GA 1st Carolina Communications Inc 13.500 12/01/96 FD.GA Federated Dept Stores Inc Del 10.000 02/15/01 FD.GB Federated Dept Stores Inc Del 8.125 10/15/02 FD.GC Federated Dept Stores Inc Del 8.500 06/15/03 FERL.GB Ferrellgas LP/Finance Corp 8.625 08/01/01 FGGI.GB Figgie Intl Inc Del 10.375 04/01/98 FLCN.GA Falcon Drilling Co 8.875 03/15/03 FM.GA Foodmaker Inc 4.250 05/15/98 FM.GC Foodmaker Inc 9.250 03/01/99 FM.GD Foodmaker Inc 9.750 06/01/02 FMO.GA Federal-Mogul Co 7.500 01/15/98 FORT.GD Fort Howard Corp 9.250 03/01/01 FORT.GF Fort Howard Corp 9.000 02/01/06 FORT.GG Fort Howard Corp 8.250 02/01/02 FUSA.GA First USA Bank Wilmington Del 7.650 08/01/03 GAP.GA Great Atlantic & Paciﬁc Tea Inc 9.125 01/15/98 GAP.GB Great Atlantic & Paciﬁc Tea Inc 7.700 01/15/04 NASD Notice to Members 98-70 August 1998 530 Symbol Name Coupon Maturity

GASI.GA Greenwich Air Service 10.500 06/01/06 GCR.GB Gaylord Container Group 12.750 05/15/05 GLD.GA Santa Fe Paciﬁc Gold Corp 8.375 07/01/05 GRHD.GA Greyhound Dial Corp 10.500 05/15/06 GSTS.GA Gulf Sts Utils Co 9.720 07/01/98 HARC.GA Harcor Energy Inc 14.875 07/15/02 HEMS.GA Heritage Media Services Inc 11.000 06/15/02 HOME.GA Homeside Inc 11.250 05/15/03 HRRA.GA Harrahs Oper Inc 8.375 04/15/96 HSRB.GA Health South Rehabilitation Co 9.500 04/01/01 IGL.GA IMC Global Inc 9.450 12/15/11 IGL.GB IMC Global Inc 9.250 10/01/00 IPR.GA Inter-City Prods Corp 9.750 03/01/00 IPX.GA Interpool Capital Trust 9.875 02/15/27 JCP.GA Penny (JC) Inc 6.950 04/01/00 JOY.GA Joy Technologies Inc 10.250 09/01/03 KR.GH Kroger Co 8.500 06/15/03 KR.GI Kroger Co 9.250 01/01/05 KR.GJ Kroger Co 8.500 07/15/06 LD.GB Louis Dreyfus Natural Gas 6.875 12/01/07 LIL.GE Long Island Ltg Co 7.3 07/15/99 LIL.GF Long Island Ltg Co 8.9 07/15/19 LIL.GG Long Island Ltg Co 9.0 11/01/22 LIL.GH Long Island Ltg Co 7.3 01/15/00 LIL.GI Long Island Ltg Co 7.5 03/01/07 LIL.GJ Long Island Ltg Co 7 03/01/04 LIL.GK Long Island Ltg Co 7.05 03/15/03 LIL.GL Long Island Ltg Co 8.2 03/15/23 LIL.GM Long Island Ltg Co 7.125 06/01/05 LIL.GN Long Island Ltg Co 6.25 07/15/01 LNES.GA Lanesborough Corp 12.375 03/15/97 MCPN.GB MCorp 11.500 12/15/89 MCPN.GC MCorp 11.500 11/15/92 MCPN.GD MCorp 10.625 05/01/93 MCU.GB Magma Cooper Co 11.500 01/15/02 MCU.GC Magma Cooper Co 8.700 05/15/05 MDEP.GA McDermott Inc 9.375 03/15/02 MESA.GC Mesa Capital Corp 12.750 06/30/98 MGAW.GA McGaw Inc 10.375 04/01/99 MRO.GB USX-Marathon Group 9.8 07/01/01 MRO.GC USX-Marathon Group 9.625 08/15/03 MRO.GE USX-Marathon Group 9.375 02/15/12 MRO.GF USX-Marathon Group 9.375 05/15/22 MRO.GG USX-Marathon Group 9.125 01/15/13 MRO.GH USX-Marathon Group 8.500 03/01/23 MRO.GI USX-Marathon Group 6.375 07/15/98 MRO.GJ USX-Marathon Group 8.125 07/15/23 MRO.GK USX-Marathon Group 7.200 02/15/04 MSEA.GA Metropolitan Bancorp 8.500 07/31/03 MXS.GD Maxus Energy Corp 9.875 10/15/02 MXS.GE Maxus Energy Corp 9.500 02/15/03 MXS.GF Maxus Energy Corp 9.375 11/01/03 MXS.GG Maxus Energy Corp 9.375 11/01/03 NASD Notice to Members 98-70 August 1998 531 Symbol Name Coupon Maturity

NAE.GA Noram Energy Corp 7.500 08/01/00 NCTY.GA Newcity Communications Inc 11.375 11/01/03 NDCO.GB Noble Drilling Corp 9.125 07/01/06 NGL.GA Trident NGL Inc 10.250 04/15/03 NOWC.GA Motor Wheel Corp 11.500 03/01/00 NXTL.GA Nextel Communications Inc 11.500 09/01/03 OH.GA Oakwood Homes Corp 9.125 06/01/07 OH.GB Oakwood Homes Corp 9.000 06/01/07 OPII.GA OPI International Inc 12.875 07/15/02 ORND.GA Ornda Health Corp 12.250 05/15/02 ORSP.GA Orchard Supply Hardware Corp 9.375 02/15/02 PAGE.GA Paging Network Inc 11.750 05/15/02 PAPK.GA Pay n Pak Stores Inc 13.500 06/01/98 PARI.GA Parisian Inc 9.875 07/15/03 PCCO.GA Penn Central Corp 9.750 08/01/99 PCCO.GB Penn Central Corp 10.625 04/15/00 PCCO.GC Penn Central Corp 10.875 05/01/11 PLTT.GA Plitt Theaters Inc 10.875 06/15/04 PNET.GA Pronet Inc 10.875 09/15/06 PNT.GA Pennsylvania Enterprises Inc 10.125 06/15/99 PUL.GA Publicker Inds Inc 13.000 12/15/96 PXRE.GA Phoenix RE Corp 9.750 08/15/03 REVL.GA Revlon Consumer Prod 10.875 07/15/10 RPCD.GA Rap-American Corp 10.750 12/01/03 RPWI.GA Repap Wisconsin Inc 9.250 02/01/02 RPWI.GB Repap Wisconsin Inc 9.875 05/01/06 RSP.GA Southern Paciﬁc Rail Corp 9.375 08/15/05 RULE.GA Rule Indust Inc 12.500 06/01/97 RVW.GD Riverwood Intl Corp 11.250 06/15/02 SGO.GA Seagull Energy Corp 7.875 08/01/03 SPK.GA Spieker Properties LP 7.125 12/01/06 SPLS.GA Staples Inc 7.125 08/15/07 SROM.GA Storer Communications Inc Del 10.000 05/15/03 STLV.GD SCI Television Inc 11.000 06/30/05 STO.GB Stone Container Corp 11.500 09/01/99 STO.GG Stone Container Corp 12.625 07/15/98 STO.GK Stone Container Corp 12.125 09/15/01 SUMT.GA Summit Comm Group Inc 10.500 04/15/05 SVN.GA Spectravision Inc 11.500 10/01/01 SVN.GB Spectravision Inc 11.65 12/01/02 SWY.GA Safeway Inc 10.000 12/01/01 SWY.GB Safeway Inc 9.650 01/15/04 SWY.GC Safeway Inc 9.350 03/15/99 SWY.GE Safeway Inc 9.875 03/15/07 SWY.GF Safeway Inc 10.000 11/01/02 TALY.GA Talley Mfg & Technology Inc 10.750 10/15/03 TBS.GB Turner Broadcasting Sys Inc 8.375 07/01/13 TBS.GC Turner Broadcasting Sys Inc 7.4 02/01/04 TBS.GD Turner Broadcasting Sys Inc 8.4 02/01/24 TEDP.GB Toledo Edison Co 7.500 08/01/02 TFYP.GB Thrifty Payless Inc 12.250 04/15/04 TIPK.GA Tiphook Financial Corp 7.125 05/01/98 TOS.GC Tosco Corp 7.000 07/15/00 NASD Notice to Members 98-70 August 1998 532 Symbol Name Coupon Maturity

TOS.GD Tosco Corp 7.625 05/15/06 TROC.GA Trans Ocean Container Corp 12.25 07/01/04 TRTX.GB Transtexas Gas Corp 11.500 06/15/02 TTJP.GB Trump Plaza Funding Inc 10.875 06/15/01 TTJP.GC Trump Plaza Funding Inc 11.35 11/15/99 TTRR.GC Tracor Inc New 10.875 08/15/01 TWGI.GA Westwood Group Inc 14.250 08/15/97 UAL.GF United Airlines Inc 10.11 01/05/06 UAL.GG United Airlines Inc 9.76 05/20/06 UAL.GH United Airlines Inc 10.11 02/19/06 UAL.GI United Airlines Inc 10.85 07/05/14 UAL.GJ United Airlines Inc 10.85 02/19/15 UAL.GK United Airlines Inc 9.76 05/13/06 UAL.GL United Airlines Inc 9.76 05/27/06 UAL.GM United Airlines Inc 10.36 11/27/12 UAL.GP United Airlines Inc 10.36 11/13/12 UAL.GQ United Airlines Inc 10.36 11/20/12 UC.GC United Cos Finl Corp 7.000 07/15/98 UCIV.GB UCC Investors Hldgs Inc 11.000 05/01/03 UCIV.GC UCC Investors Holdings Inc 12.000 05/01/05 UHS.GA Universal Health Svcs 8.750 08/15/05 UNC.GA UNC Inc 9.125 07/15/03 USG.GB USG Corp 8.750 03/01/17 USG.GH USG Corp 9.250 09/15/01 USG.GI USG Corp 8.500 08/01/05 UVTV.GA Univision Television Group Inc 11.750 01/15/01 UVTV.GB Univision Television Group Inc 11.750 01/15/01 VAGA.GB VagaBond Hotels Inc 8.375 09/15/95 VDOH.GA Videotron Holdings Plc 11.125 07/01/04 VOUT.GA Universal Outdoor Inc 9.750 10/15/06 WAX.GB Waxman Indust Inc 12.250 09/01/98 WHPC.GB Wheeling-Pittsburgh Corp 9.375 11/15/03

As of June 24, 1998, changes were made to the symbols of the following FIPS bonds: New Symbol Old Symbol Name Coupon Maturity

CBRN.GA WINE.GA Canandaigua Brands Inc 8.750 12/15/03 OSI.GA OSIA.GA Outdoor Systems Inc 9.375 10/15/06 OSI.GB OSIA.GB Outdoor Systems Inc 8.875 06/15/07 QWST.GA QSTC.GA Qwest Communications Intl Inc 9.470 10/15/07 RVSU.GB REVL.GE Revlon Consumer Products Corp 8.125 02/01/06 RVSU.GC REVL.GC Revlon Consumer Products Corp 9.500 06/01/99 SLGN.GB SIAN.GB Silgan Holdings Corp 13.250 06/15/02 TUES.GB TUES.GA Tuesday Morning Corp 11.000 12/15/07 WHPC.G B WHX.GB Wheeling-Pittsburgh Corp 9.375 11/15/03 WHPC.GA WHX.GA Wheeling-Pittsburgh Corp 12.250 11/15/00 WHPC.GC WHX.GC Wheeling-Pittsburgh Corp 9.250 11/15/07

All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, Market Regulation, NASD Regulation, Inc. (NASD RegulationSM), at (301) 590-6451. Any questions regarding the FIPS master file should be directed to Cheryl Glowacki, Nasdaq¨ Market Operations, at (203) 385-6310. © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD Notice to Members 98-70 August 1998 533 NASD Regulation, Inc. (NASD Firms Fined, Individuals Disciplinary RegulationSM) has taken disciplinary Sanctioned actions against the following firms Sunpoint Securities, Inc. and individuals for violations of (Longview, Texas) and Mary Ellen Actions National Association of Securities Wilder (Registered Principal, Dealers, Inc. (NASD¨) rules; federal Longview, Texas) submitted a Let- securities laws, rules, and regula- ter of Acceptance, Waiver and Con- tions; and the rules of the Municipal sent pursuant to which they were Securities Rulemaking Board censured and fined $50,000, jointly Disciplinary Actions (MSRB). Unless otherwise indicated, and severally. In addition, Wilder Reported For August suspensions will begin with the open- was suspended from association with ing of business on Monday, August any NASD member in the capacity of 17, 1998. The information relating to a financial and operations principal matters contained in this Notice is for 10 days and must requalify by current as of the end of July 24. examination prior to future association with any NASD member in the capacity of a financial and operations Firms Expelled principal. Further, Sunpoint must Stratton Oakmont, Inc. (Lake Suc- engage for at least six months an cess, New York) submitted an Offer independent consultant to review of Settlement pursuant to which the financial and operational matters, firm was expelled from membership including but not limited to, matters in the NASD. Without admitting or involving internal controls, net capital denying the allegations, the firm con- computations, and reserve computa- sented to the described sanction and tions. Such consultant must be to the entry of findings that, acting acceptable to the NASD and must through its registered principals and provide the NASD with its analysis registered representatives, the firm and findings on a quarterly basis, engaged in a practice of executing with such consultant being made unauthorized transactions in the available for discussions with NASD accounts of its customers when it did staff members in the event such not have discretionary trading author- request is made. Without admitting ity for any of these accounts. The or denying the allegations, the findings also stated that the firm respondents consented to the attempted to convince public cus- described sanctions and to the entry tomers to enter into transactions, and of findings that the firm, acting executed the transactions despite the through Wilder, effected transactions customers’ refusal to do so. Further- in securities when it failed to have more, the NASD determined that the and maintain sufficient net capital firm executed trades without any and failed to make a required deposit communication with the customers to its Reserve Bank Account in con- and at times when its registered rep- nection with its reserve computa- resentatives knew that the customers tions. were on vacation or were otherwise unavailable, and exceeded the authorized dollar or share amount in Firms and Individuals Fined transactions authorized by the cus- J. B. Oxford & Co. (Beverly Hills, tomers. In addition, the NASD found California) and Kevin Michael Bea- that the firm executed authorized sell dles (Registered Principal, Long orders but used the proceeds to buy Beach, California) submitted a Let- other securities without, or contrary ter of Acceptance, Waiver and Con- to, the customers’ authorization or sent pursuant to which they were instructions. censured and fined $20,000, jointly and severally. Without admitting or

NASD Notices to Members—Disciplinary Actions August 1998 535 denying the allegations, the respon- written record of the affirmative deter- Gerard Joseph Arrigale, Jr. (Regis- dents consented to the described mination made for such orders. The tered Representative, Middle Vil- sanctions and to the entry of findings findings also stated that the firm lage, New York) was censured, that the firm, acting through Beadles, failed to establish, maintain, and fined $20,000, suspended from asso- failed to disclose the difference in the enforce adequate written supervisory ciation with any NASD member in price securities were purchased from procedures reasonably designed to any capacity for six months, ordered and sold to customers and the firm's achieve compliance with Short-Sale to requalify by exam as a corporate contemporaneous offsetting pur- Rules. securities limited representative, and chase or sale price to or from a Mar- ordered to complete the Regulatory ket Maker in contravention of Parker/Hunter Incorporated (Pitts- Element of the NASD’s Continuing Securities and Exchange Commis- burgh, Pennsylvania) submitted a Education Program as a condition to sion (SEC) Rule 10b-10(a)(2)(ii)(A). Letter of Acceptance, Waiver and his return to the securities industry Specifically, the firm failed to send Consent pursuant to which the firm following completion of the suspen- public customers the requisite written was censured and fined $29,707 and sion. The sanctions were based on notification or confirmation in securi- fined an additional $1,000, jointly and findings that Arrigale falsely repre- ties transactions that it was not a severally, with an individual. Without sented himself to be another broker, Market Maker in these securities. admitting or denying the allegations, and requested the execution of secu- the firm consented to the described rities transactions under the account PIM Financial Services, Inc. (San sanctions and to the entry of findings number of a public customer, without Diego, California), Jack Kendrick that it acted as a junior co-managing the customer’s knowledge, authoriza- Heilbron (Registered Principal, underwriter in a negotiated offering of tion, or consent. Poway, California) and Mary Rose securities by an issuer with which it Limoges (Registered Principal, was precluded from engaging in a Walter Vance Bailey (Registered Poway, California) submitted a Let- municipal securities business. The Principal, Brantley, Alabama) sub- ter of Acceptance, Waiver and Con- findings also stated that the firm mitted a Letter of Acceptance, Waiv- sent pursuant to which they were failed to file quarterly reports timely er and Consent pursuant to which he censured and fined $10,000, jointly and failed to include certain informa- was censured and barred from asso- and severally. Without admitting or tion on quarterly reports filed with the ciation with any NASD member in denying the allegations, the respon- MSRB. Furthermore, the NASD any capacity. Without admitting or dents consented to the described determined that the firm failed to pre- denying the allegations, Bailey con- sanctions and to the entry of findings pare and/or maintain the listing and sented to the described sanctions that the firm, acting through Heilbron records in the proper format and and to the entry of findings that he and Limoges, failed to transmit failed to implement certain of its failed to timely update his Form U-4 promptly $285,000 in investor funds established written policies and pro- to reflect findings by the U.S. District received in connection with a contin- cedures to achieve compliance with Court, Northern District of Florida, gent offering of securities to a proper- MSRB Rules G-8(a)(xvi) and G-37. that he had made a false statement ly established bank escrow account. to the Department of Agriculture, whose findings subjected him to Individuals Barred or statutory disqualification. Firms Fined Suspended International Correspondent Trad- Alicia Allen (Registered Represen- Avin E. Bakal (Registered Repre- ing, Inc. (Jersey City, New Jersey) tative, Laurel, Maryland) submitted sentative, Brooklyn, New York) submitted a Letter of Acceptance, an Offer of Settlement pursuant to was censured, fined $25,000, and Waiver and Consent pursuant to which she was censured, fined barred from association with any which the firm was censured and $20,000, and barred from association NASD member in any capacity. The fined $10,000. In addition, the firm with any NASD member in any sanctions were based on findings must undertake to revise immediately capacity. Without admitting or deny- that Bakal failed to respond to NASD its written supervisory procedures ing the allegations, Allen consented requests for information concerning a regarding short-sale rules. Without to the described sanctions and to the customer complaint. admitting or denying the allegations, entry of findings that she failed to the firm consented to the described respond to NASD requests for infor- Donald J. Berg (Registered Repre- sanctions and to the entry of findings mation. sentative, Broomall, Pennsylvania) that it executed short-sale orders in was censured and barred from asso- securities and failed to maintain a ciation with any NASD member in

NASD Notices to Members—Disciplinary Actions August 1998 536 any capacity. The sanctions were without giving prior notification to his requalify as a general securities rep- based on findings that Berg made member firm or receiving the firm’s resentative by taking and passing the unsuitable recommendations to pub- prior written approval. Series 7 exam. Without admitting or lic customers and engaged in exces- denying the allegations, Brumagin sive trading in their accounts, and Matthew L. Bloom (Registered consented to the described sanctions presented one customer a document Representative, New York, New and to the entry of findings that he that purported to show that his secu- York) submitted an Offer of Settle- participated in private securities rities account was worth substantially ment pursuant to which he was cen- transactions and failed to request or less than it was actually worth in sured, suspended from association receive permission to engage in order to deceive the customer. In with any NASD member in any these transactions from his member numerous instances involving sever- capacity for two years, and ordered firm. al customers without the respective to requalify by exam prior to becom- customer’s knowledge or authoriza- ing associated with any NASD mem- Samuel George Busada (Regis- tion, Berg requested his member firm ber. Without admitting or denying the tered Principal, Saddle Brook, to issue a check to the customer, allegations, Bloom consented to the New Jersey) submitted an Offer of obtained possession of the check, described sanctions and to the entry Settlement pursuant to which he was and either caused the check to be of findings that he failed to execute, censured, fined $620,000, and deposited to the securities account of refused to accept, or aggressively barred from association with any another customer or converted the discouraged sell orders from public NASD member in any capacity. With- funds to his own benefit. In several customers and engaged in unautho- out admitting or denying the allega- instances, Berg caused a check rized trading in customer accounts. tions, Busada consented to the payable to a customer by a third The findings also stated that Bloom described sanctions and to the entry party to be credited to the securities made baseless and improper price of findings that he misappropriated account of another customer without predictions pertaining to highly spec- customer funds totaling $123,853.83 the knowledge or authorization of the ulative securities and falsely for his own use. The findings also customer to whom the check was promised to limit a customer’s poten- stated that Busada aided in the payable. Moreover, Berg obtained tial loss. Furthermore, Bloom fraudulent assignment of a deceased possession of blank checks issued to promised to make up prior losses public customer’s partnership interest a customer for writing checks against with new trading. and allowed a $1,500 check to be her money market fund, wrote deposited into his account even checks payable to himself, and con- Kenneth Alan Brown (Registered though he knew it was an asset of verted the funds to his own benefit. Representative, Murrysville, Penn- the customer’s estate. Berg also failed to respond to NASD sylvania) submitted an Offer of Set- requests for information. tlement pursuant to which he was Arthur A. Bykonen (Registered censured, fined $2,500, and sus- Representative, Charlottesville, Steven E. Blonde (Registered Prin- pended from association with any Virginia) submitted a Letter of cipal, Ft. Lauderdale, Florida) sub- NASD member in any capacity for six Acceptance, Waiver and Consent mitted a Letter of Acceptance, months. Without admitting or denying pursuant to which he was censured, Waiver and Consent pursuant to the allegations, Brown consented to fined $15,000, and suspended from which he was censured, fined the described sanctions and to the association with any NASD member $15,000, barred from association entry of findings that he failed to in any capacity for one month. With- with any NASD member in any respond to NASD requests for infor- out admitting or denying the allega- capacity, required to pay $38,000 mation. tions, Bykonen consented to the plus interest in restitution to a public described sanctions and to the entry customer, and also required to pay Eric D. Brumagin (Registered Rep- of findings that he established a joint restitution to another customer in resentative, Winston-Salem, North securities account in the name of a accordance with a previous settle- Carolina) submitted a Letter of public customer and the customer’s ment agreement. Without admitting Acceptance, Waiver and Consent son, signed the customers’ names on or denying the allegations, Blonde pursuant to which he was censured, the account form, initialed the form consented to the described sanctions fined $25,000, suspended from asso- with both their initials, falsely stated and to the entry of findings that he ciation with any NASD member in the son’s birth date in order to con- sold securities to public customers any capacity for two years, ordered ceal the fact that the son was a outside the scope of his regular to disgorge $37,138 in commissions minor, and submitted the form with- employment with his member firm to public customers, and required to out disclosing either that the signa-

NASD Notices to Members—Disciplinary Actions August 1998 537 ture and initials of the son were not ciation with any NASD member in NASD member in any capacity for 10 authentic or that the date of birth was any capacity for 18 months. Without days. Without admitting or denying false. The findings also stated that admitting or denying the allegations, the allegations, Frias consented to Bykonen’s signature guaranteed Dobbs consented to the described the described sanctions and to the stock powers signed by the customer sanctions and to the entry of findings entry of findings that he executed with his own name and that of his that he participated in private securi- securities transactions in the account son while knowing that the purported ties transactions and failed to provide of a public customer without the cus- signatures of the son were not prior written notice to his member tomer’s knowledge, authorization, or authentic. firm describing in detail the proposed consent. transactions and his proposed role B. Alicia Campos (Associated Per- therein, and stating whether he Darren Ginas (Registered Princi- son, Northbrook, Illinois) was cen- would receive selling compensation pal, Medford, New York) submitted sured, fined $40,000, and barred in connection with the transactions. an Offer of Settlement pursuant to from association with any NASD which he was censured, suspended member in any capacity. The sanc- Debbie Ann Fairley (Registered from association with any NASD tions were based on findings that a Representative, Jackson, Missis- member in any capacity for four member firm acting through Campos sippi) submitted a Letter of Accep- months, required to requalify by effected transactions in securities tance, Waiver and Consent pursuant exam as a general securities repre- when it failed to maintain its mini- to which she was censured and sentative, and required to pay mum required net capital, prepared barred from association with any $70,735 in restitution to public cus- inaccurate trial balances and net NASD member in any capacity. With- tomers. Without admitting or denying capital computations, and filed inac- out admitting or denying the allega- the allegations, Ginas consented to curate FOCUS Part I and IIA reports. tions, Fairley consented to the the described sanctions and to the In addition, Campos was associated described sanctions and to the entry entry of findings that he made materi- with a member firm while failing to of findings that she established a al misrepresentations, omitted mate- qualify and/or register in the appropri- credit card account by using the rial information, and made fraudulent ate capacity prior to engaging in such name and social security number of price predictions in the offer and sale capacity. Campos also failed to a co-worker’s spouse, and charged of securities. respond fully to NASD requests for approximately $14,000 to the credit information. card for her own benefit without the Donald Cletus Girard (Registered co-worker’s knowledge or consent. Principal, Federal Way, Washing- John Melvin Davis (Registered ton) submitted a Letter of Accep- Representative, Bellwood, Illinois) Michael J. Falco (Registered Rep- tance, Waiver and Consent pursuant submitted a Letter of Acceptance, resentative, Marshfield, Mas- to which he was censured, fined Waiver and Consent pursuant to sachusetts) was censured, fined $30,000, and barred from association which he was censured and sus- $6,000, suspended from association with any NASD member in any pended from association with any with any NASD member in any capacity. Without admitting or deny- NASD member in any capacity for capacity for six months, and required ing the allegations, Girard consented two years. Without admitting or deny- to requalify by exam as an invest- to the described sanctions and to the ing the allegations, Davis consented ment company and variable con- entry of findings that he participated to the described sanctions and to the tracts products representative. The in private securities transactions and entry of findings that he participated sanctions were based on findings failed to provide prior written notice to in private securities transactions and that Falco forged a public customer’s his member firm, describing in detail failed to give prior written notice or signature on an insurance document the proposed transactions, his pro- receive approval from his member without the customer’s knowledge or posed role therein, and stating firm of his intention to engage in such consent. Falco also failed to respond whether he had received or might activities. to NASD requests for information. receive selling compensation.

Glenn Mitchell Dobbs (Registered Raymond Andrew Frias (Regis- Robert Walter Gleiche (Registered Principal, Chelan, Washington) tered Representative, Merrick, Principal, Timonium, Maryland) submitted a Letter of Acceptance, New York) submitted an Offer of submitted a Letter of Acceptance, Waiver and Consent pursuant to Settlement pursuant to which he was Waiver and Consent pursuant to which he was censured, fined censured, fined $10,000, and sus- which he was censured, fined $42,700, and suspended from asso- pended from association with any $37,500, suspended from associa-

NASD Notices to Members—Disciplinary Actions August 1998 538 tion with any NASD member in any Mark Arthur Hanna (Registered Dale Fuller Jackson (Registered capacity for 10 business days, and Representative, Manhasset, New Principal, Wall, New Jersey) sub- required to requalify by exam as a York) submitted an Offer of Settle- mitted an Offer of Settlement pur- general securities representative. ment pursuant to which he was cen- suant to which he was censured, Without admitting or denying the alle- sured, fined $20,000, and barred fined $15,000, and suspended from gations, Gleiche consented to the from association with any NASD association with any NASD member described sanctions and to the entry member in any capacity. Without in any capacity for six months. With- of findings that, on numerous occa- admitting or denying the allegations, out admitting or denying the allega- sions, he purchased shares of stock Hanna consented to the described tions, Jackson consented to the that traded at a premium in the sanctions and to the entry of findings described sanctions and to the entry immediate aftermarket, in contraven- that he failed to respond completely of findings that he recommended and tion of the Board of Governors’ Inter- to NASD requests for information. effected purchases of limited partner- pretation on Free-Riding and ship units and/or shares by public Withholding. The findings also stated Akiko L. Hasegawa (Registered customers without having a reason- that Gleiche failed to give written Representative, Westminster, Cali- able basis for believing the recom- notice to his member firm that he fornia) was censured, fined $82,500, mendations were suitable for these opened accounts with other firms, and barred from association with any customers in light of their investment and failed to provide written notifica- NASD member in any capacity. The objectives, financial situations, and tion to the executing firms of his sanctions were based on findings needs. The findings also stated that association with the member firm. that Hasegawa converted public cus- Jackson participated in private secu- tomers’ funds totaling $16,500. rities transactions without prior writ- Eliezer Gurfel (Registered Repre- Specifically, Hasegawa received per- ten notice to and acknowledgment sentative, San Mateo, California) sonal checks from the customers for from his member firm. According to was censured and barred from asso- investment purposes. Instead of the findings, Jackson breached his ciation with any NASD member in making the investments, Hasegawa fiduciary duty with a public customer any capacity. The National Adjudica- deposited the checks in a bank by behaving in a manipulative, tory Council (NAC) affirmed the account controlled by her, gave false deceptive, and intimidating manner sanctions following appeal of a confirmation statements indicating during settlement discussions with Washington D.C. District Business that the money had been invested, the customer which was heightened Conduct Committee decision. The and used the funds for personal by his superior knowledge of the sanctions were based on findings expenses. Hasegawa made no effort securities industry and the cus- that Gurfel forged the endorsement to make restitution until her firm dis- tomer’s relative lack of knowledge, of the president of his member firm covered the conversion of a public her age, and her reliance on and on checks, negotiated each check, customer’s funds, and then, did not trust in Jackson. and converted the proceeds to his disclose the conversion of other cus- own use and benefit. tomers’ funds. Paul George Karkenny (Registered Representative, Amityville, New Gurfel has appealed this action to the Frederick B. Hornick, Jr. (Regis- York) submitted a Letter of Accep- SEC and the sanctions, other than tered Principal, Englewood, Col- tance, Waiver and Consent pursuant the bar, are not in effect pending con- orado) submitted a Letter of to which he was censured, fined sideration of the appeal. Acceptance, Waiver and Consent $283,008.13, and barred from asso- pursuant to which he was censured, ciation with any NASD member in Henry A. Hale (Registered Princi- fined $30,000, and barred from asso- any capacity. Without admitting or pal, Marietta, Georgia) was cen- ciation with any NASD member in denying the allegations, Karkenny sured, fined $10,000 and suspended any capacity. Without admitting or consented to the described sanctions from association with any NASD denying the allegations, Hornick con- and to the entry of findings that he member in any principal or supervi- sented to the described sanctions had an impostor take the Series 7 sory capacity for 10 business days. and to the entry of findings that he exam on his behalf. The findings also The sanctions were based on find- participated in private securities stated that Karkenny solicited an ings that Hale failed to supervise rea- transactions without giving his mem- aftermarket purchase for shares of sonably the sales activities of an ber firm prior written notice of his stock from a public customer prior to individual in order to prevent and/or activities. Hornick also failed to the effective registration date of the detect the unsuitable trading that respond to NASD requests for infor- security by the SEC and failed to fol- occurred in the account of a public mation. low the customer’s instructions customer. regarding the purchase. Karkenny NASD Notices to Members—Disciplinary Actions August 1998 539 also executed securities transactions Joseph Oscar Mader (Registered William John Mooney (Registered in the account of public customers Representative, Lewiston, Idaho) Principal, Bayside, New York) was without the customers’ prior knowl- was censured, fined $10,000, sus- censured, fined $20,000 and sus- edge, authorization, or consent. pended from association with any pended from association with any NASD member in any capacity for NASD member in any capacity for Reynold Bradford Kern (Registered two years, and required to requalify two years. The sanctions were Representative, Scottsdale, Ari- as a general securities representa- based on findings that Mooney failed zona) was censured, fined $5,000, tive following the completion of the to timely respond to NASD requests and suspended from association with suspension. The sanctions were for information. any NASD member in any capacity based on findings that Mader failed for 10 business days. The sanctions to respond fully to NASD requests for James M. Ortiz (Associated Per- were based on findings that Kern par- information. son, Chicago, Illinois) was cen- ticipated in private securities transac- sured, fined $20,000, and barred tions without providing prior written Joseph Paul Malyszek (Registered from association with any NASD notification to his member firm. Representative, Clarks Summit, member in any capacity. The sanc- Pennsylvania) submitted a Letter of tions were based on findings that Alan M. Kletchka (Registered Rep- Acceptance, Waiver and Consent Ortiz failed to respond to NASD resentative, Port Jefferson, New pursuant to which he was censured, requests for information. York) submitted a Letter of Accep- fined $3,000,000, and barred from tance, Waiver and Consent pursuant association with any NASD member Rafael Pinchas (Registered Repre- to which he was censured, fined in any capacity. Without admitting or sentative, Hillcrest, New York) was $50,000, barred from association denying the allegations, Malyszek censured, fined $219,821, and barred with any NASD member in any consented to the described sanctions from association with any NASD capacity, and ordered to pay and to the entry of findings that he member in any capacity. The NAC $327,180 in restitution to public cus- received approximately $600,000 imposed the sanctions following tomers. Without admitting or denying from public customers intended for appeal of a New York District Busi- the allegations, Kletchka consented investment purposes, failed to invest ness Conduct Committee (DBCC) to the described sanctions and to the the funds as represented, and decision. The sanctions were based entry of findings that he made mate- instead, converted the funds to his on findings that Pinchas made recom- rial misrepresentations and omitted own use and benefit without the cus- mendations to and effected securities to disclose material facts in connec- tomers’ knowledge or consent. and options transactions in public cus- tion with his recommendations of tomers’ accounts including margin securities to public customers. The Michael McCormick (Registered transactions that were excessive and findings also stated that in connec- Representative, Bethel, Connecti- unsuitable without having reasonable tion with his recommendations of cut) was censured, fined $125,000, grounds to believe that the transac- securities to public customers, and barred from association with any tions were appropriate for the cus- Kletchka made fraudulent price pre- NASD member in any capacity. The tomers in light of their investment dictions. sanctions were based on findings objectives, other security holdings, that McCormick withheld and misap- and financial situation and needs. In Paul Kevin Knutson (Registered propriated at least $23,052.35 from addition, Pinchas engaged in a Representative, Carmichael, Cali- public customers and converted the scheme to misappropriate funds from fornia) submitted an Offer of Settle- funds to his own use and benefit. the same customer’s account by giv- ment pursuant to which he is McCormick also failed to respond to ing his member firm a letter of autho- censured, fined $1,500, and barred NASD requests for information. rization purportedly signed by the from association with any NASD customer authorizing the transfer of member in any capacity. Without Paul Joseph Montessoro (Regis- $6,000 to the account of another cus- admitting or denying the allegations, tered Representative, Boerne, tomer. The funds were subsequently Knutson consented to the described Texas) was censured, fined given to Pinchas without the cus- sanctions and to the entry of findings $20,000, and barred from associa- tomer’s authorization. that he submitted a Form U-4 to a tion with any NASD member in any member firm that failed to disclose capacity. The sanctions were based This action has been appealed to the that he had been convicted of a on findings that Montessoro failed to SEC and the sanctions, other than felony. respond to NASD requests for infor- the bar, are not in effect pending mation and to provide testimony. consideration of the appeal.

NASD Notices to Members—Disciplinary Actions August 1998 540 Mark A. Reilly (Associated Person, Benito Sauceda (Registered Prin- Anthony Dennis Schiano (Regis- Doylestown, Pennsylvania) was cipal, Denver, Colorado) and tered Representative, Franklin censured, fined $20,000, and barred Glenn Pellone (Registered Repre- Square, New York) was censured, from association with any NASD sentative, Denver, Colorado) sub- fined $7,500, suspended from asso- member in any capacity. The sanc- mitted a Letter of Acceptance, ciation with any NASD member in tions were based on findings that Waiver and Consent pursuant to any capacity for 30 days, and Reilly failed to respond to NASD which Sauceda was censured, fined required to requalify in all capacities requests for information. $15,000, suspended from associa- prior to functioning again in any tion with any NASD member in any capacity that requires requalification. Reaynaden Denina Relatores capacity for 15 business days, sus- The sanctions were based on find- (Registered Representative, Hunt- pended from association with any ings that Schiano failed to comply ington Beach, California) submitted NASD member in any principal with Regulation T of the Federal an Offer of Settlement pursuant to capacity for an additional 15 busi- Reserve Board in that he purchased which she was censured, and sus- ness days, and required to requalify shares of stock in his own cash pended from association with any as a registered principal by passing account at his member firm when he NASD member in any capacity for the Series 24 exam. Pellone was knew or should have known that he five years, and ordered to requalify censured, fined $2,500, suspended did not have sufficient funds in his by exam in all capacities. The sanc- from association with any NASD account to pay for the purchase. tions were based on findings that member in any capacity for 30 busi- Moreover, Schiano never had the Relatores participated in private ness days, and required to requalify intent to make full cash payment for securities transactions without pro- as a registered representative by the stocks in a prompt fashion or oth- viding prior written notification to her passing the Series 7 exam. In addi- erwise before selling them. In addi- member firm and without receiving tion, Pellone was required to make tion, Schiano wrote purchase order prior written approval from her firm. recision or restitution to public cus- tickets and entered orders via com- tomers of stock purchases, jointly puter or telephone for his personal Robert Rondinella (Registered and severally, with a member firm. securities account at a time when he Representative, Brooklyn, New Without admitting or denying the alle- knew he was not qualified to do so. York) was censured, fined $20,000, gations, the respondents consented and barred from association with any to the described sanctions and to the Larry R. Schlappi (Registered NASD member in any capacity. The entry of findings that Pellone solicited Representative, Orem, Utah) sub- sanctions were based on findings public customers and made recom- mitted a Letter of Acceptance, Waiv- that Rondinella failed to respond to mendations to purchase securities er and Consent pursuant to which he NASD requests for information and without having reasonable grounds was censured, fined $12,000, and to appear for an on-the-record inter- for believing that his recommenda- suspended from association with any view. tions were suitable for the customers NASD member in any capacity for 15 based upon the facts disclosed by business days. Without admitting or Joseph Russo III (Registered Rep- the customers as to their other secu- denying the allegations, Schlappi resentative, Staten Island, New rity holdings, their financial situation, consented to the described sanctions York) submitted a Letter of Accep- and needs. The findings also stated and to the entry of findings that he tance, Waiver and Consent pursuant that Sauceda failed to supervise Pel- participated in private securities to which he was censured, fined lone’s activities properly by allowing transactions without giving his mem- $50,000, barred from association him to make unsuitable recommen- ber firm prior written notice of his with any NASD member in any dations and to effect unsuitable activities and his role therein. capacity, and ordered to disgorge securities transactions. Furthermore, $202,990.97 to the NASD. Without the NASD determined that Sauceda Aleksandr Shvarts (Registered admitting or denying the allegations, prepared new account forms, order Principal, Brooklyn, New York) Russo consented to the described tickets, and confirmations of sale that submitted an Offer of Settlement pur- sanctions and to the entry of findings falsely reflected that he was the rep- suant to which he was censured, that he arranged to have an impostor resentative of record handling cus- fined $25,000, suspended from take the Series 7 exam on his behalf. tomers’ accounts when, in reality, he association with any NASD member Russo also failed to respond truthful- had had no prior contact with the in any capacity for 10 business days, ly to the NASD during an on-the- customers and it was Pellone who and suspended from association with record interview. was actually the representative of any NASD member in any principal record for such accounts. capacity for 30 business days. In

NASD Notices to Members—Disciplinary Actions August 1998 541 addition, Shvarts must requalify by security was not risky. Furthermore, of the contingency were not met and exam as a general securities princi- the NASD determined that Smith failed to supervise an individual prop- pal and will be suspended until he failed to execute a customer sell erly. requalifies. Without admitting or order, made false representations to denying the allegations, Shvarts con- a customer as to an issuer’s busi- Darryl Leon Strom (Registered sented to the described sanctions ness prospects, and falsified the new Representative, Mill Creek, Wash- and to the entry of findings that he account documentation of a cus- ington) and Irvin Nels Strom (Reg- failed to timely execute customers tomer to create the appearance that istered Representative, Auburn, orders to sell stock on either a princi- the customer could and wanted to Washington) submitted Offers of pal or agency basis. invest in speculative securities. Smith Settlement pursuant to which Darryl also failed to testify truthfully to the Strom was censured, fined $69,994, Josh I. Sisler (Registered Repre- NASD regarding its investigation of and barred from association with any sentative, Rocky Point, New York) the matter. NASD member in any capacity; Irvin submitted a Letter of Acceptance, Strom was censured, fined $45,489, Waiver and Consent pursuant to Steven Edward Smith (Registered and barred from association with any which he was censured, fined Representative, Bakersfield, Cali- NASD member in any capacity. $18,850, suspended from associa- fornia) submitted an Offer of Settle- Without admitting or denying the alle- tion with any NASD member in any ment pursuant to which he was gations, the respondents consented capacity for 18 months, and required censured, fined $10,000, barred from to the described sanctions and to the to pay $33,148 in restitution to public association with any NASD member entry of findings that they participat- customers. Without admitting or in any capacity, and required to pay ed in private securities transactions denying the allegations, Sisler con- $45,000 in restitution to a member and failed to provide their member sented to the described sanctions firm. Without admitting or denying firm prior written notice describing in and to the entry of findings that, in the allegations, Smith consented to detail the proposed transactions and connection with the solicitation of the described sanctions and to the their roles therein, and stating securities transactions, he made entry of findings that he participated whether they would receive selling material misrepresentations and in private securities transactions compensation in connection with the omitted to disclose material informa- without providing prior written notice transactions. The findings also stated tion concerning securities to public to his member firm. The findings also that Darryl Strom failed to respond to customers. stated that in order to induce public an NASD request for information. customers to invest in stock, Smith Lawrence Todd Smith (Registered made untrue statements of material Chichiang Tang (Registered Rep- Representative, Jericho, New facts and omitted to state material resentative, Hollywood, Florida) York) submitted an Offer of Settle- facts necessary in order to make the was censured, fined $20,000, and ment pursuant to which he was cen- statement not misleading. barred from association with any sured, fined $20,000, suspended NASD member in any capacity. The from association with any NASD Kevin Lee Spencer (Registered sanctions were based on findings member in any capacity for two Principal, Castle Rock, Colorado) that Tang attempted to share in a years, and required to requalify by submitted a Letter of Acceptance, customer account. Tang also failed exam prior to becoming associated Waiver and Consent pursuant to to respond to NASD requests for with any NASD member firm. With- which he was censured, fined information. out admitting or denying the allega- $20,000, and suspended from asso- tions, Smith consented to the ciation with any NASD member in Wyder L. Tutiven (Registered Rep- described sanctions and to the entry any principal capacity for three resentative, Patchogue, New York) of findings that he made unautho- months. Without admitting or denying was censured, fined $75,000, barred rized trades in the account of a public the allegations, Spencer consented from association with any NASD customer and made baseless and to the described sanctions and to the member in any capacity, and improper price predictions as to entry of findings that he participated ordered to pay $102,322.57 in resti- speculative securities to customers. in a private placement offering sub- tution to public customers. The sanc- The findings also stated that Smith ject to a minimum sales contingency tions were based on findings that, in falsely promised to limit customer and failed to deposit investor funds soliciting customers to purchase losses, induced a customer to pur- into an escrow account. The findings securities, Tutiven misrepresented chase an unsuitably risky security, also stated that Spencer failed to and failed to disclose material facts and falsely told the customer that the return funds to investors when terms concerning securities and fraudulent-

NASD Notices to Members—Disciplinary Actions August 1998 542 ly predicted significant price increas- Weese Roosevelt Alex Watson Individuals Fined es for securities to induce public cus- (Registered Representative, King- Dale Buddington Dir (Registered tomers to purchase them. Tutiven wood, Texas) was censured, fined Representative, Visalia, California) also effected an unauthorized trade $20,000, and barred from associa- submitted a Letter of Acceptance, in a customer’s account and failed to tion with any NASD member in any Waiver and Consent pursuant to follow the customer’s instructions to capacity. The sanctions were based which he was censured and fined sell stock. on findings that Watson failed to $21,500. Without admitting or deny- respond to NASD requests for infor- ing the allegations, Dir consented to Emilio Fernando Valdes (Regis- mation. the described sanctions and to the tered Representative, Holmdel, entry of findings that he opened a New Jersey) submitted an Offer of Edward Lee Willis Sr. (Registered securities account at a member firm Settlement pursuant to which he was Principal, Southhampton, New and failed to provide written notice to censured, fined $20,000, and sus- Jersey) submitted a Letter of Accep- the firm of his registration status and pended from association with any tance, Waiver and Consent pursuant failed to provide written notice to his NASD member in any capacity for to which he was censured, fined employer member firm that he had a two years. Without admitting or deny- $300,000, barred from association beneficial interest in this securities ing the allegations, Valdes consent- with any NASD member in any account at the time he opened the ed to the described sanctions and to capacity, and ordered to pay account. The findings also stated the entry of findings that he falsified $143,500 in restitution to public cus- that Dir purchased shares of stock records by signing transfer authoriza- tomers. Without admitting or denying that traded at a premium in the tion forms causing the transfer of the allegations, Willis consented to immediate aftermarket in contraven- funds between public customers’ the described sanctions and to the tion of the Board of Governors Free- accounts in order to win a sales con- entry of findings that he received riding and Withholding Interpretation. test sponsored by his member firm. checks totaling $143,500 from public The findings also stated that Valdes customers for the purpose of pur- failed to respond fully to NASD chasing franchises. The NASD Decisions Issued requests for information. determined that Willis never complet- The following decisions have been ed the purchases, and instead, con- issued by the DBCC or the Office of Ronald L. Wallen (Registered Prin- verted the funds to his own use and Hearing Officers and have been cipal, Farmington, Michigan) sub- benefit without the customers’ knowl- appealed to or called for review by mitted a Letter of Acceptance, edge or consent. the NAC as of June 30, 1998. The Waiver and Consent pursuant to findings and sanctions imposed in which he was censured, fined Michael Lee Yancey (Registered the decision may be increased, $500,000, and barred from associa- Representative, Lake Park, Geor- decreased, modified, or reversed by tion with any NASD member in any gia) was censured, fined $1,000, the NAC. Initial decisions whose time capacity. Without admitting or deny- suspended from association with any for appeal has not yet expired will be ing the allegations, Wallen consent- NASD member in any capacity for reported in the next Notice to Mem- ed to the described sanctions and to six months, and further suspended bers. the entry of findings that he obtained until he requalifies by exam as an a total of $201,673.85 from public investment company and variable Edward Golick (Registered Princi- customers with instructions to use contracts product representative. pal, Del Mar, California) was cen- the funds to purchase mutual funds The NAC imposed the sanctions fol- sured, fined $20,000 and barred and high interest mortgage loans. lowing appeal of an Atlanta DBCC from association with any NASD The findings stated that Wallen failed decision. The sanctions were based member in any capacity. The sanc- to follow the customers’ instructions on findings that Yancey received tions were based on findings that and used the funds for investments $100 from a public customer in part Golick failed to respond to NASD in other companies, to pay his firm’s to pay premiums due on insurance requests to appear for an on-the- office expenses, to pay himself, and policies and to apply to an outstand- record interview. for purposes other than the benefit of ing loan. Yancey deposited $80 of the customers. Wallen also failed to those funds in his personal checking Golick has appealed this action to respond fully to NASD requests for account. the NAC and the sanctions are not in information. effect pending consideration of the appeal.

NASD Notices to Members—Disciplinary Actions August 1998 543 Complaints Filed complaint alleges that Anderson amount of $15,000 be issued against The following complaints were falsely stated to the customer that he the securities account of a public issued by the NASD. Issuance of a was going to invest $82,516.72 of customer, physically obtained the disciplinary complaint represents the the customer’s funds, falsely repre- check, endorsed it with the purported initiation of a formal proceeding by sented himself in a telephone con- endorsement of the customer and the NASD in which findings as to the versation with the customer as a his own endorsement, and deposited allegations in the complaint have not fictitious representative of a firm in an it in his own bank account, all without been made, and does not represent attempt to discover what the cus- the authorization of the customer. a decision as to any of the allega- tomer had told the compliance The complaint also alleges that tions contained in the complaint. department of the firm, and falsely Cohen caused $14,000 to be trans- Because these complaints are unad- told the customer and the compli- ferred from the securities account of judicated, you may wish to contact ance department of the firm that he one public customer to the bank the respondents before drawing any had invested the customer’s funds account of another, without the prior conclusions regarding the allegations with a fictitious representative of authorization or consent of the first in the complaint. another firm. The complaint also customer. alleges that Anderson failed to Stanley Alan Anderson, Jr. (Regis- respond to NASD requests for infor- Robert Vance Manuel English tered Representative, Cartersville, mation. (Registered Principal, San Diego, Georgia) was named as a respon- California) was named as a respondent in an NASD complaint alleging Mark S. Balbirer (Registered Rep- dent in an NASD complaint alleging that he received a proceeds check resentative, Sunrise, Florida) was that he received a check in the from the redemption of a public cus- named as a respondent in an NASD amount of $20,571.69 from a public tomer’s savings bonds in the amount complaint alleging that he effected customer to be used for investment of $8,732.04 and converted securities transactions in the account purposes and, without the cus- $5,709.00 of the funds to his own of a public customer without the customer’s knowledge or consent, con- use and benefit. The complaint tomer’s prior knowledge or authoriza- verted the funds to his own use and alleges that Anderson withdrew tion. benefit by depositing the check in his $2,029.66 from the customer’s sav- firm’s general operating bank ings account, sold the customer’s Biltmore Securities, Inc., (n/k/a account and writing checks on the securities for $34,219.71, and used Midas Investment Group, Inc., Fort account payable to himself and cash. the funds and proceeds totaling Lauderdale, Florida), Elliott Akiva The complaint also alleges that $36,249.37 to purchase shares of a Loewenstern, (Registered Princi- English provided the customer with government fund, all without the cus- pal, Boca Raton, Florida) and fabricated statements to mislead the tomer’s knowledge or authorization. Richard Bruce Bronson (Regis- customer into believing that her The complaint also alleges that tered Principal, Golden Beach, funds had been safely invested and Anderson effected unauthorized Florida) were named as respon- were accumulating interest, when in sales totaling $15,224.61, made mis- dents in an NASD complaint alleging fact, no investments had been made representations that the redemption that Biltmore Securities, Inc., acting on the customer’s behalf and the checks were sent in error and that through Loewenstern and Bronson, accumulating interest never existed. the funds were intended to be invest- recommended and sold to public The complaint also alleges that ed in another fund, asked the cus- customers units of an initial public English failed to respond to NASD tomer to endorse the checks, or offering and failed to disclose to the requests to provide information. forged the customer’s endorsement customers during the review period in one instance, and converted the of the offering material facts that Raymond D. Eisenberg (Regis- total amount by depositing it in his should have been disclosed by the tered Representative, Bridgeton, bank account. Additionally, the com- firm to its customers, including the New Jersey) was named as a plaint alleges that Anderson fact that the respondents had an respondent in an NASD complaint redeemed the customer’s Certificate adverse interest in the offering. alleging that he received $23,803.71 of Deposit without her knowledge or from public customers as payment of authorization, forged the customer’s Arthur E. Cohen (Registered Rep- insurance premiums, failed to submit endorsement on $94,332.14 pro- resentative, Pittsburgh, Pennsyl- these funds on the customers’ ceeds checks, of which $48,983.14 vania) was named as a respondent behalf, and instead converted the he converted by cashing or deposit- in an NASD complaint alleging that funds to his own use and benefit, ing at his bank. Furthermore, the he requested that a check in the without the customers’ knowledge or

NASD Notices to Members—Disciplinary Actions August 1998 544 consent. The complaint also alleges John Vernon Hiers (Registered customers a fictitious account state- that Eisenberg failed to respond to Representative, Canyon Lake, Cal- ment that did not reflect the liquida- NASD requests to provide informa- ifornia) was named as a respondent tion of certain stock, nor his tion. in an NASD complaint alleging that withdrawal of funds in the amount of he received $7,500 from a public $29,972.71. In addition, the com- Carl J. Hagmaier (Registered Rep- customer for deposit in a new trading plaint alleges that Hutton effected resentative, San Luis Obisbo, Cali- account in the customer’s name and securities transactions totaling fornia) was named as a respondent authorization to execute in the cus- $96,552.40 in a joint account of other in an NASD complaint alleging that tomer’s account a single day trade public customers, without their prior he received $70,000 from public cus- involving shares of securities. Hiers written or oral authorization, and con- tomers for investment in mutual converted the funds to his own use verted these funds to his own use funds and, instead of investing the and benefit by depositing the check and benefit by forging the customers’ funds as instructed, deposited the into his own securities account with- signatures on checks and maintain- checks into a bank account and mis- out the customer’s knowledge or ing possession of the funds, without used the funds himself and/or permit- consent. The complaint alleges that the customers’ knowledge or con- ted others to misuse the funds. The Hiers dissipated all but $1,393.23 of sent. Finally, the complaint alleges complaint alleges that in order to the customer’s funds through reck- that Hutton failed to respond to conceal the misconduct, Hagmaier less and risky trading in the account. NASD requests for information. prepared and sent a fabricated The complaint also alleges that in account statement to a public cus- order to conceal the misconduct and James Andrew Hyde (Registered tomer which falsely stated that her to lull the customer into believing that Principal, Niwot, Colorado) was funds had been invested in a cash a trading account existed in the cus- named as a respondent in an NASD and stock fund as instructed. The tomer’s name, Hiers falsely repre- complaint alleging that he effected complaint also alleges that Hagmaier sented to the customer that account the purchase of securities transac- sold a pension plan to a company to statements reflecting the trade that tions in the account of a public cus- provide retirement benefits for its the customer had authorized in his tomer without the prior authorization employees, represented that the account would be forthcoming, of the customer. The complaint also periodic contributions to the plan by when, contrary to these representa- alleges that Hyde failed to respond to the company would be placed in life tions, no such statements were ever NASD requests to provide informa- insurance policies, bonds, notes, and provided to the customer because no tion. money market funds, then misused account was ever established in the approximately $110,951.91 of the customer’s name. Harold Lee Jenkins (Registered plan’s funds for unrelated business Representative, Bronx, New York) and personal expenses which did not Frank J. Hutton (Registered Rep- was named as a respondent in an benefit the plan. The complaint resentative, Raymond, Mississip- NASD complaint alleging that he alleges that Hagmaier sold life insur- pi) was named as a respondent in received tellers checks from public ance policies to public customers an NASD complaint alleging that he customers for investment in mutual and a general partnership, had effected securities transactions in the funds and/or insurance products, and $160,000.00 worth of loans taken on joint account of public customers instead of investing the funds on their the value of the policies without the without prior authorization from the behalf, converted $30,171.61 of knowledge or consent of the cus- customers. The complaint alleges those funds to his own use and ben- tomers or partnership, forged or that Hutton caused a check in the efit. The complaint also alleges that caused to be forged the signatures of amount of $29,972.71 to be issued Jenkins failed to appear for an on- a customer and one of the general from the joint account, which repre- the-record interview requested by the partners, and deposited the funds in sented the proceeds from the unau- NASD. an account. Neither the customers thorized transactions, and converted nor the partnership received any the funds to his own use and benefit Robert J. Kendzierski (Registered benefit from the $160,000.00, which by forging the customers’ signatures Representative, Erie, Pennsylva- was never repaid. The complaint to the check and depositing the nia) was named as a respondent in also alleges that Hagmaier failed to check into a bank account under his an NASD complaint alleging that he produce documents requested by control. The complaint also alleges converted $6,000 in funds given to the NASD. that, in an effort to conceal the trans- him by a public customer. The com- actions from the customers’ account, plaint alleges that Kendzierski Hutton prepared and mailed to the received checks from the customer

NASD Notices to Members—Disciplinary Actions August 1998 545 to deposit in the customer’s interest- Robert Joseph Kernweis (Regis- that Mancuso made fraudulent price bearing insurance policy, altered tered Representative, Burbank, predictions to public customers in these checks by drawing a line California), Glenn Peter Kernweis connection with his recommenda- through the payee’s name and writ- (Registered Representative, Deer- tions. ing his name instead on the payee field Beach, Florida) and Greg line of the checks, endorsed the Steven Sklar (Registered Repre- John Joseph Viscogliosi (Regis- checks in an attempt to conceal his sentative, Los Angeles, California) tered Representative, Chicago, Illi- conversion and deposited them in his were named as respondents in an nois) was named as a respondent in personal bank account. The com- NASD complaint alleging that Robert an NASD complaint alleging that he plaint further alleges that in an Kernweis recommended purchase executed discretion in the accounts attempt to conceal his conversion, and sale securities transactions to a of public customers and purchased Kendzierski backdated a repayment public customer without having rea- securities without the knowledge or check. sonable grounds for believing that consent of the customers. they were suitable for the customer Keogler, Morgan & Co., Inc. and the account in view of the size, (Atlanta, Georgia), Craig R. Smith frequency and nature of the recom- Firm Expelled For Failure To (Registered Principal, Duluth, mended transactions and the facts Pay Fines, Costs, And/Or Georgia), Chris S. Guerin (Regis- disclosed by the customer as to his Provide Proof Of Restitution In tered Principal, Marietta, Georgia), financial situation, objectives, circum- Connection With Violations and Douglas A. Dyer (Registered stances and needs. The complaint Murphey, Marseilles, Smith & Representative, Chattanooga, alleges that the recommended Nammack, Inc., New York, New Tennessee) were named as respon- trades constituted unsuitably exces- York (June 29, 1998) dents in an NASD complaint alleging sive trading and that Robert Kern- that the firm, acting through Smith weis induced the transactions by and Dyer, effected principal purchas- means of manipulative, deceptive or Firms Suspended/Canceled es of common stock from public cus- other fraudulent devices or con- The following firms were suspended tomers of the firm with excessive trivances. The complaint also from membership in the NASD for mark-downs and at prices which alleges that Robert Kernweis, Glenn failure to comply with formal written were not fair taking into consideration Kernweis and Sklar conducted busi- requests to submit financial informa- all relevant circumstances. The ness as a group under one invest- tion to the NASD. The actions were complaint also alleges that the firm, ment executive number, and, as based on the provisions of NASD acting through Smith, failed to report members of the group, Glenn Kern- Rule 8210 and Article VII, Section 2 trades Smith effected on behalf of weis and Sklar knew or should have of the NASD By-Laws. The date the the firm, including a majority of the known that the recommendations suspensions commenced is listed trades at issue in the mark-downs, were unsuitable for the customer and after the entry. If the firm has com- failed to report trades within 90 sec- that the account was excessively plied with the requests for informa- onds of execution without employing traded. The complaint alleges that tion, the listing also includes the date the requisite “.SLD” modifier, incor- Glenn Kernweis and Sklar failed to the suspension concluded. rectly reported wholesale trades as take appropriate action to prevent retail trades, and incorrectly reported the violative activity and that they Carlisle Investment Group, Chica- the price on trades. The complaint substantially benefited from the viola- go, Illinois (June 29, 1998) alleges that Guerin failed to ade- tive trading activity as equal partici- quately supervise Smith’s trading in pants who shared commissions Duke & Co., Inc., New York, New common stock and, as a result, failed equally from all activity of the group. York (July 2, 1998) to detect that Smith and Dyer were purchasing stock from public cus- James Richard Mancuso (Regis- TBD Capital Markets Trust, Miami, tomers subject to excessive mark- tered Principal, Patchogue, New Florida (July 2, 1998) downs. The complaint alleges that York) was named as a respondent in Dyer effected securities transactions an NASD complaint alleging that he in the accounts of his public cus- made material misrepresentations to tomers without the customers’ prior public customers and failed to dis- knowledge or authorization. close material facts to the customers in order to induce them to purchase securities. The complaint alleges

NASD Notices to Members—Disciplinary Actions August 1998 546 Firms Suspended Pursuant To Individuals Suspended Seymour, Patricia Ann, Sandy NASD Rule Series 9510 For Pursuant To NASD Rule Series Hook, Connecticut (June 29, 1998) Failure To Pay Arbitration 9510 For Failure To Pay Award Arbitration Award Sigfrid, Daniel, Champlin, Minneso- Euro-Atlantic Securities, Inc., Boca Barnes, Milton R., Phoenix, Arizona ta (July 8, 1998) Raton, Florida (June 26 , 1998) (June 26, 1998) Szur, Jeffrey S., Sea Bright, New Investors Associates, Inc., Hack- Basile, Jack Robert, Brooklyn, New Jersey (June 25, 1998) ensack, New Jersey (July 14, 1998) York (June 29, 1998) Van Blarcom, Jeffrey, Mahwah, Jonathan Alan & Co., Inc., Katon- Bent, Radcliff St. Aubyn, Colts New Jersey (June 26, 1998) ah, New York (June 29, 1998) Neck, New Jersey (July 16, 1998 - July 22, 1998) Verola, Victor, Vero Beach, Florida J.S. Securities, Inc., Point Pleasant (July 20, 1998) Beach, New Jersey (June 25, 1998) Bronzino, Michael A., Princeton, New Jersey (June 29, 1998) Maidstone Financial, Inc., New NASD Regulation Sanctions York, New York (June 26, 1998) Caso, Michael, Brooklyn, New York Colorado Broker; Restitution (July 21, 1998) Ordered Marsh Block & Co., Inc., New York, NASD Regulation announced that it New York (July 14, 1998) Densing, Keith, Melville, New York barred Winston Carroll Dennis from (June 29, 1998 - July 13, 1998) the securities industry and ﬁned him Printon, Kane Group, Inc., Wall $525,000 in connection with the theft Township, New Jersey (June 29, Donovan, Gale R., New York, New of $75,000 from a customer, and for 1998) York (June 26, 1998) other violations. Dennis, who was also censured, was ordered to make State Street Capital Markets Corp., Hosang, Ian, Brooklyn, New York full restitution to the customer. New York, New York (July 15, 1998) (June 26, 1998) NASD Regulation found that Dennis Klotsman, Eugene a/k/a Gennady twice forged the signature of his cus- Individuals Whose Ilya Klotsman, Brooklyn, New York tomer on an insurance policy loan Registration Were Revoked (July 21, 1998) application in September and Octo- For Failure To Pay Fines, ber 1997. The insurance company Costs And/Or Provide Proof Of Kohlhass, Neal, Novato, California subsequently issued the funds Ð Restitution In Connection With (June 24, 1998) which Dennis then converted to his Violations own use. Cooper, Theodore F., New Langer, Thomas Mark, Congers, Scabury, Massachusetts (June 29, New York (July 16, 1998) Following a referral by the Colorado 1998) Division of Insurance, NASD Regula- Mahon, Kevin Michael, Manalapan tion found that Dennis had borrowed Frederick, Douglas Glen, Miami, New Jersey (July 14, 1998) $735,000 from 12 customers by issu- Florida (July 16, 1998) ing Promissory Notes to the Mandile, Kenneth Alan, Staten investors. NASD rules forbid brokers Roach, Donna R., Murrieta, Califor- Island, New York (June 26, 1998 - from engaging in private securities nia (June 29, 1998) July 14, 1998) transactions Ð such as issuing these types of Promissory Notes Ð without Shah, Ashvin, R., Elmhurst, Illinois McCartney, Peter Bernard, Middle ﬁrst notifying their employer. (June 29, 1998) Village, New York (July 14, 1998) NASD Regulation also found that in Wallace, Robert L., Naples, Florida McKay, Jr., Edward Arthur, New April 1998, Dennis told one investor (June 29, 1998) York, New York (July 14, 1998) that in order to collect a loan that had come due, an additional $5,000 was Winchester, James E., Metairie, Philip, Robert Colin, Baldwin, New required. Dennis later converted Louisiana (June 29, 1998) York (June 29, 1998) these funds to his own use as well.

NASD Notices to Members—Disciplinary Actions August 1998 547 Dennis also maintained personal Deliberately delaying trade reporting • John Quigley, trader, was fined brokerage accounts at 10 different allows a brokerage firm to cover its $20,000, and censured. brokerage firms and failed to dis- positions while at a significant infor- ¥ Lisa Bozzi Albanese, institutional close the existence of these mational advantage over other mar- sales representative, was fined accounts in violation of NASD rules. ket participants. NASD Regulation $10,000, and censured. found that Troster Singer Ð knowing ¥ Charles Esposito, institutional sales At the time of these violations, Den- of these large unreported trades representative, was fined $10,000, nis maintained an office under the while the market did not Ð bought and censured. name of “Dennis Insurance and and sold shares from other dealers ¥ Steve Cline, institutional sales rep- Investments” in Grand Junction, CO. and customers in deceptive propri- resentative, was fined $10,000, and He had clients across the state’s etary trading. censured. Western Slope, in Grand Junction, Montrose, Austin, Naturita, Nucla, Troster Singer also was sanctioned NASD Regulation thanked the SEC Leadville, Clifton, and Eckert. for unintentionally reporting 18 other for its substantial assistance in this trades as late. When these 46 late case. This case was brought by NASD trades were eventually reported, they Regulation’s District 3 Office in Den- were marked with an incorrect exe- Over the last few years, NASD Regu- ver. Dennis neither admitted nor cution time, did not include the prop- lation has developed and implement- denied NASD Regulation’s findings. er late designation, or both. In total, ed a series of initiatives to protect 16 securities were involved. Troster investors and enhance compliance NASD Regulation Fines Singer’s intentional late trade report- with market rules. These include: Troster Singer For Intentional ing practices were evidenced in con- • Order Audit Trail System - The first Late Trade Reporting; Six Bro- versations taped by the firm. phase of the Order Audit Trail Sys- kers Also Sanctioned tem (OATS) will begin collecting NASD Regulation found that Troster information on all electronic orders NASD Regulation fined Troster Singer’s traders directed the firm’s received by market makers and Singer $950,000 and censured the institutional sales representatives Electronic Communication Networks firm for fraud in connection with a (who were assigned to specific insti- (ECNs) on March 1, 1999. This sys- series of 28 intentional trade report- tutional customers, and acted as tem will track orders from the time ing violations. Six Troster Singer liaisons between the institutional cus- they are entered until final execution. employees were also sanctioned and tomers and the traders) to delay ¥ Exam Program - Beginning in 1996, fined a total of $100,000. trade reports, or to falsely document NASD Regulation’s Market Regula- that certain trades were stopped tion Department initiated a compre- Troster Singer, which neither admitted orders. In a stopped order, a broker- hensive program to examine Nasdaq nor denied NASD Regulation’s find- age firm agrees to execute the trade Market Makers for compliance with ings, was sanctioned for intentionally at a specific, or better, price. trading and reporting rules. failing to report within 90 seconds ¥ Advanced Detection System - The Nasdaq Stock Market trades Ð many NASD Regulation also found that Advanced Detection System (ADS) of which were made with large institu- while Troster Singer knew about and began operation in July 1997. Using tional customers. This conduct cautioned its traders to stop these sophisticated data mining, artificial occurred between April and October late trade reporting practices, they intelligence, statistical analysis, and 1994. nevertheless continued. As part of its visualization technologies, ADS agreement with NASD Regulation, detects and evaluates patterns in NASD rules require that every secu- Troster Singer will hire an indepen- trading data to search for potential rity’s price – and the amount sold – dent consultant to review its trade violations of NASD trade reporting, be promptly displayed to the market- reporting practices. market integrity, and best execution place so that all market participants rules. ADS processes about 800,000 have equal access to the informa- Six Troster Singer employees were quotes every day. tion. Troster Singer deliberately sanctioned: ¥ Hot Lines - NASD Regulation’s Mar- delayed reporting its trades in order • Lowell Millar, trader, was fined ket Regulation Department instituted to gain a competitive advantage by $25,000, suspended in all capacities toll-free hot lines for the reporting of depriving other market participants of for 25 days, and censured. potential market harassment and information regarding purchases and • Michael Ling, trader, was fined potential backing away violations. sales made by institutional and other $25,000, suspended in all capacities © 1998, National Association of Securities Dealers, investors. for 25 days, and censured. Inc. (NASD). All rights reserved. NASD Notices to Members—Disciplinary Actions August 1998 548 Year 2000 Tips For Members Year 2000 Checklist For Will Your Fax Machine Work? Following is an inventory list of areas As the millennium approaches, one businesses should be checking for Your of the areas all businesses should Year 2000 readiness. assess for Year 2000 readiness is Information their internal office equipment. Last Internal: month, Notices to Members provided • Hardware—workstations, servers, information on how to check a PC other computer systems. (personal computer), and this mon- • Software—general ledgers, th’s tip for members involves prepar- accounts payable, spreadsheets, ing your fax machine for 2000. word processing, macros. • Automated/embedded systems— Firms should first contact the manu- modems, fax machines, copiers. facturer of the fax machine. Most ¥ Interfaces between items. manufacturers should be able to furnish a list of fax machines that they External: consider to be Year 2000 compliant. ¥ Customers/clients. If the fax machine was purchased • Suppliers—delivery methods, sup- through a local dealer, the dealer plies, utilities, computer/Internet ser- should either provide the phone num- vices providers. ber of the manufacturer or the manufacturer’s documentation detailing Third Party: the specific machines considered ¥ Information providers and process- Year 2000 compliant. ing facilities—data vendors, banks, accountants, clearing firms, payroll However, firms may also attempt to vendors, insurance vendors. conduct a “self test” of the fax. By setting the fax machine to January 1, Infrastructure: 2000, firms can test in advance of • Physical access—elevators, sprin- the coming century and see how the kler systems, security systems, card machine would operate on that date. readers, telephone systems. First set the date on the fax machine • Environmental—air conditioning to 12/31/99 and the time to 11:57 controls, power generators, heating p.m. (if the machine works on military systems, back-up power supplies. time, set it to 23:57). After setting the ¥ General equipment—clocks, calen- date and time and letting the date flip dars, payroll time clocks, time/date to 1/1/2000, turn off the fax machine stamps, copiers, bar code equipment. for five minutes. After waiting five minutes, turn the fax machine back End-User: on. Then try to send and receive a ¥ Desktop applications, macros, etc., fax. If firms are able to perform these developed by end-users. two tasks successfully, that fax machine is probably ready for 2000. Amendments To Rule Although tests like these are likely to Regarding Equity Trader Exam uncover most problems, it is still a On April 1, 1998, NASD Regulation, good idea to check with the manufac- Inc. (NASD RegulationSM) implement- turer. Manufacturers should have the ed amendments to the NASD Regis- most accurate information on how tration Rules requiring their particular machines will operate representatives who trade equity in 2000. securities in The Nasdaq Stock Mar- ket¨ (Nasdaq¨) and/or over-the- counter (OTC) to register and pass

NASD Notice to Members—For Your Information August 1998 549 the Equity Trader Examination Questions regarding these require- cipal Qualification); and the Govern- (Series 55). Persons functioning as ments may be directed to Carole B. ment Securities Principal (no series equity traders on or before April 1, Hartzog at (301) 590-6696, Elaine P. number). 1998, were allowed to continue to Warren at (301) 590-6315, or Eva E. function as equity traders but were Cichy at (301) 208-2789. Correction To July Disciplinary required to pass the Series 55 by Actions Regarding Jacques May 1, 2000. To be eligible for this Pessah extended qualification period, equity Announcement - Upcoming traders had to submit their applica- District 4 Seminar The July 1998 Notices to Members tions to NASD Regulation before District 4 is hosting an upcoming Disciplinary Actions regarding May 1, 1998. Compliance/Continuing Education Jacques V. Pessah erroneously stat- seminar on September 29, 1998. ed that Pessah submitted a Letter of The NASD now has amended its The “Preventive Compliance/Contin- Acceptance, Waiver, and Consent Registration Rules to extend the fil- uing Education Membership Semi- (AWC) pursuant to which he was ing period to August 31, 1998, for nar,” will feature discussions on censured and fined $10,000. In fact, persons who were functioning as Internet supervisory and compliance Pessah submitted an AWC pursuant equity traders before May 1, 1998, issues; current enforcement and reg- to which he was censured and fined and who missed that cut-off date for ulatory topics; and a continuing edu- $2,500. filing their applications for the Series cation update. 55 examination. The conference will be held at the Correction To December Members must submit a page one of Radisson Plaza Hotel in Minneapolis, Disciplinary Actions the Form U-4 and a letter that states Minnesota and the registration dead- Regarding Michael Jawitz the applicant was functioning as an line is September 14, 1998. To regis- The December 1997 issue of equity trader before May 1, 1998 to: ter or for more information, call Notices to Members erroneously NASD Regulation Cheryl Hackathorn, NASD Regula- stated information relating to findings Qualifications Department tion, at (816) 421-5700. on which the sanctions against 1390 Piccard Drive, 2nd Floor Michael B. Jawitz (Registered Rockville, MD 20850 Representative, North Miami Beach, Correction To Notice To Florida) were based. The sanctions Persons who request this registration Members 98-59 against Jawitz were based on during this extended filing period In the July 1998 issue of Notices to findings that he: (1) engaged in may continue to function as equity Members, on page 428, the second serious misconduct which involved traders until May 1, 2000, but must paragraph under subhead New Pro- the entry of numerous fictitious non- pass the Series 55 examination by gram For Principals should read: bona-fide orders into his employer’s that date. order execution system over a For purposes of NASD rules, the fol- significant period of time; (2) caused Equity traders who are eligible for the lowing registrations will be included the execution of numerous fictitious extended filing period, but who fail to in the principal category: Series 4 transactions which were reported file their applications by the August (Registered Options Principal); through ACT to Nasdaq and which 31, 1998, deadline must cease trad- Series 8 (General Securities Sales prevented the execution of customer ing in the Nasdaq or OTC markets Supervisor); Series 24 (General limit orders; and (3) violated NASD until they satisfy the qualification Securities Principal); Series 26 Conduct Rules 2110 and 3310, and requirements. (Investment Company Products/Vari- IM-2110-2. All allegations against able Contracts Limited Principal); Jawitz that he violated NASD For more information regarding the Series 27 (Financial and Operations Conduct Rule 2120 or acted with registration and qualification require- Principal); Series 28 (Introducing intent to manipulate or defraud were ments for Nasdaq or OTC equity Broker-Dealer Financial and Opera- dismissed. traders, refer to Notices to Members tional Principal); Series 39 (Direct © 1998, National Association of Securities Dealers, 98-17 and 98-60 as well as Head Participation Programs Principal); Inc. (NASD). All rights reserved. Trader Alert 1998-32. Series 53 (Municipal Securities Prin-

NASD Notice to Members—For Your Information August 1998 550 Executive Summary CRD/Public Disclosure, NASD Regu- Special Under the current interpretation gov- lation, at (301) 590-6389; Mary M. erning the Public Disclosure Program, Dunbar, Assistant General Counsel, information on all felony offenses is Office of General Counsel, NASD NASD disclosed indefinitely. NASD Regula- Regulation, at (202) 728-8252; or tion, Inc. (NASD Regulation) requests Richard E. Pullano, Counsel, comment from members and other CRD/Public Disclosure, NASD Regu- Notice to interested persons on whether to: (1) lation, at (301) 212-3789. maintain the current interpretation; or (2) amend the interpretation to dis- Members close indefinitely information concern- Request For Comment ing “investment-related” offenses, as NASD Regulation encourages all 98-71 described below, but limit to 10 years interested parties to comment on the disclosure of information concerning proposal. Comments should be all other felonies. Any such change mailed to: NASD Regulation Requests would not affect the information Comment On Whether To required to be reported on Form U-4 Joan Conley Modify The Public Disclosure and permanently made available to Office of the Corporate Secretary Program To Limit The Period federal and state regulators, self-regu- NASD Regulation, Inc. For Disclosure Of Certain latory organizations (SROs), and 1735 K Street, NW Criminal Information; prospective employers in the securi- Washington, D.C. 20006-1500 Comment Period Expires ties industry. In other words, such September 30, 1998 information would remain on an indi- or e-mailed to: vidual’s record, but as proposed [email protected] would not be disclosed publicly after Suggested Routing 10 years. Important Note: The only comments Senior Management that will be considered are those sub- NASD Regulation is seeking committed via e-mail or in writing. Advertising ment on this issue at this time for two Continuing Education principal reasons. First, associated Comments must be received by Corporate Finance persons have expressed the view September 30, 1998. Before becom- that some aged felony charges or ing effective, any rule change devel- Executive Representatives convictions do not bear any relation- oped as a result of comments Government Securities ship to the securities industry or received must be adopted by the Institutional reflect on their capacity for fair deal- NASD Regulation Board of Directors, Insurance ing. Second, information disclosed may be reviewed by the National under the Public Disclosure Program Association of Securities Dealers, Internal Audit will soon be more easily and widely Inc. (NASD¨) Board of Governors, Legal & Compliance accessible via the NASD Regulation and must be approved by the Securi- Municipal Web Site (www.nasdr.com). NASD ties and Exchange Commission Regulation will weigh the comments it (SEC). Mutual Fund receives in determining whether or not Operations continued public disclosure of certain Options aged felony offenses through this Registered Representatives widely accessible medium strikes the most appropriate balance between a Registration public investor’s interest in knowing Research relevant information about an associ- Syndicate ated person and such person’s privacy and reputational interests. Systems Trading Questions concerning this Request Training For Comment may be directed to Variable Contracts Ann E. Bushey, Assistant Director, Special NASD Notice to Members 98-71 August 1998 553 Executive Summary CRD/Public Disclosure, NASD Regu- NASD Under the current interpretation gov- lation, at (301) 590-6389; Mary M. erning the Public Disclosure Program, Dunbar, Assistant General Counsel, information on all felony offenses is Office of General Counsel, NASD Regulation disclosed indefinitely. NASD Regula- Regulation, at (202) 728-8252; or tion, Inc. (NASD Regulation) requests Richard E. Pullano, Counsel, comment from members and other CRD/Public Disclosure, NASD Regu- Request interested persons on whether to: (1) lation, at (301) 212-3789. maintain the current interpretation; or For (2) amend the interpretation to disclose indefinitely information concern- Background And Discussion ing “investment-related” offenses, as Current Interpretation On Comment described below, but limit to 10 years Disclosure disclosure of information concerning all other felonies. Any such change The securities industry and its regu- 98-71 would not affect the information lators have established exceptionally required to be reported on Form U-4 stringent licensing and qualification and permanently made available to requirements. Among other things, federal and state regulators, self-regu- persons seeking registration to sell latory organizations (SROs), and securities are required to file a Form prospective employers in the securi- U-4 with Central Registration Deposi- ties industry. In other words, such tory (CRD) that describes their information would remain on an indi- employment and disciplinary history, vidual’s record, but as proposed including whether they have been would not be disclosed publicly after charged with or convicted of any 10 years. felony or certain misdemeanors. Form U-4 requires reporting of any NASD Regulation is seeking com- charge or conviction of, or guilty and ment on this issue at this time for two no contest plea to: (1) any felony or principal reasons. First, associated misdemeanor involving investments persons have expressed the view or investment-related business, that some aged felony charges or fraud, false statements or omissions, convictions do not bear any relation- wrongful taking of property, bribery, ship to the securities industry or perjury, forgery, counterfeiting, extor- reflect on their capacity for fair deal- tion, or a conspiracy to commit any ing. Second, information disclosed of these offenses (hereinafter collec- under the Public Disclosure Program tively referred to as “investment-relat- will soon be more easily and widely ed” offenses); and (2) any other accessible via the NASD Regulation felony (hereinafter referred to as Web Site (www.nasdr.com). NASD “other felony” offenses).1 Regulation will weigh the comments it receives in determining whether or not Under NASD Regulation’s current continued public disclosure of certain Public Disclosure Program (Pro- aged felony offenses through this gram), all of this criminal history, as widely accessible medium strikes the well as other employment and disci- most appropriate balance between a plinary information reported to the public investor’s interest in knowing CRDSM system, is disclosed to the relevant information about an associ- public in response to a written, tele- ated person and such person’s priva- phonic, or electronic inquiry. The cy and reputational interests. Program is governed by Interpretive Material 8310-2 of the NASD rules Questions concerning this Request (Interpretation). The principal pur- For Comment may be directed to pose of the Program is to help Ann E. Bushey, Assistant Director, investors make informed choices

Special NASD Notice to Members 98-71 August 1998 555 about the persons and firms with Some associated persons and oth- ensure public disclosure of the “other whom they may wish to do business. ers have argued that aged informa- felony” convictions that cause some- The securities industry is unique in tion on “other felony” offenses is one to be subject to a statutory dis- providing this level of information unrelated to the securities business qualification under the provisions of about its licensed persons to the or to the person’s capacity for fair the Exchange Act during the period public.2 dealing, and therefore such informa- that they are subject to disqualification is not relevant to an investor’s tion. Such individuals may not apply The NASD established the Program decision to do business with a partic- to work or, if registered, continue to in 1988. At that time, investors were ular person. According to this view, work in the securities industry without required to make their inquiries in writ- public disclosure of such information first seeking and obtaining appropri- ing. In 1990, Congress amended the through the Web Site for an indefinite ate regulatory approvals.5 A 10-year Securities Exchange Act of 1934 period of time subjects associated disclosure period for “other felony” (Exchange Act) to expand access to persons to a continuing penalty that offenses also is consistent with the the Program by requiring the NASD to serves no remedial purpose, particu- 10-year time limitation for the report- establish and maintain a toll-free tele- larly if the criminal charge or convic- ing of all criminal events for member phone number to receive investor tion occurred many years ago and firms and their control affiliates on inquiries.3 Until 1998, the NASD the person’s disciplinary record is Form BD.6 Further, Rule 206(4) responded to all inquiries by mailing a otherwise unsullied. In addition, there under the Investment Advisers Act of summary of the public disclosure is some concern that the ease of 1940, which specifies which financial information to the requester. In 1998, Web access and the instantaneous and disciplinary information an the Program was expanded to pro- provision of information will encour- investment adviser must disclose to vide administrative data (e.g., employ- age persons other than investors a client, requires disclosure of con- ment history, registration statuses, (e.g., neighbors or competitors) to victions for specified offenses for a etc.) via the Internet and to accept investigate the associated person’s period of 10 years from the time of electronic mail requests for any background and misuse the informa- the event. Finally, the Federal Rules remaining public disclosure information. This concern extends not only of Evidence place a low probative tion; NASD Regulation responds to to business and personal reputa- value on convictions that are more such requests by electronic mail. In tions, but also to the reputations of than 10 years old in determinations 1999, NASD Regulation will expand children, spouses, and other family of admissibility for purposes of disclosure via the Internet further to members, particularly where the impeaching the credibility of a wit- provide any requester with on-line associated person and his or her ness.7 These provisions of law sug- access to all information disclosed family live in a small community. gest that the proposed 10-year limit under the Program, including criminal on disclosure of certain felonies may history. The proposed policy change would be appropriate. address these concerns by limiting to Proposed Change To 10 years the public disclosure of While some NASD Regulation dis- Interpretation “other felony” offenses, which would trict and standing committees include, among others, driving while expressed support for this proposal In response to a variety of concerns intoxicated, possession or sale of for the reasons set forth above, other raised by a number of associated controlled substances, and certain committees expressed opposition to persons, NASD Regulation is seek- violent crimes. For example, if a 50- the proposal. Some committees ing comment on a policy change that year-old registered person had been expressed concern that non-disclo- would establish a 10-year time limit charged with, or convicted of, driving sure of even aged criminal informa- on disclosure of information on “other while intoxicated at age 25, and the tion could undercut the investor felonies.”4 NASD Regulation believes offense in that particular state was a education and protection purposes of it is appropriate to seek comment at felony, then NASD Regulation could the Program. Some investors may this time because of the unique discontinue disclosure under the pro- believe any information concerning nature of the Program and the signifi- posed policy change. an associated person’s ability to cant issues implicated by the current obey the law is relevant, even after Interpretation. NASD Regulation pre- The 10-year time limit is consistent 10 years; for such investors, criminal sented this proposed policy change with other provisions of the law that behavior may reflect on the associat- to a number of NASD Regulation dis- concern the disclosure or probative ed person’s moral character, which trict and standing committees and value of criminal history information. may affect the investor’s ability to received mixed responses. For example, the 10-year limit would develop a trusting business relation-

Special NASD Notice to Members 98-71 August 1998 556 ship.8 Some committees expressed Conclusion Endnotes concern that the proposal could have 1 Form U-4 has elicited information about all felony incongruous results, i.e., indefinite The Public Disclosure Program offenses since 1981. In 1990, with the passage of disclosure of insignificant misde- serves an important investor protec- the International Securities Enforcement Coopera- meanor offenses but time-limited dis- tion purpose and has been endorsed tion Act of 1990, convictions less than 10 years old closure of serious felonies. To avoid by Congress and the Securities and for any felony offense (not just those relating to such results, some committees sug- Exchange Commission (SEC). investments, fraud, or theft) became the basis for a gested that violent crimes against a NASD Regulation believes that care- statutory disqualification under Section 3(a)(39) of person, certain crimes against the ful consideration should be given to the Exchange Act. government (including tax evasion), balancing the interests of both the and offenses involving drug traffick- investing public and associated per- 2 NASD Regulation is not aware of any other profes- ing should always be disclosed, but sons, particularly given the personal sion that discloses on-line such comprehensive disci- that disclosure of certain misde- privacy interests implicated by per- plinary and criminal history, even if such information meanor convictions and criminal mitting the public to obtain criminal is required to be reported for licensing purposes. charges could be time-limited. Such information anonymously over the Currently, 14 states provide information on-line misdemeanors could include, for Internet, when such information oth- about medical professionals, including physicians, example, a shoplifting offense involv- erwise would not be available to the physician's assistants, and nurses. See ing an item of little value or an public without considerable effort.9 www.docboard.org. Like the current Public Disclo- offense that could be characterized Accordingly, NASD Regulation seeks sure Program on the Internet for brokers, most as a “youthful indiscretion.” comment from interested parties on states provide the medical professional's name, what standard of disclosure strikes an status, work address, birth date, date of license In light of these concerns, NASD appropriate balance between an and license expiration, education, and specialty. Regulation seeks comment as to investor’s interest in relevant informa- Twelve of the 14 states also include whether “disci- whether an alternative proposal to tion and an associated person’s priva- plinary” information exists; if so, the Web sites do that described in the Executive Sum- cy interest. not provide details on-line but rather direct the per- mary would be appropriate. For son to contact the state medical board. Two states, example, the classes of aged felony California and Massachusetts, provide disciplinary offenses that would not be disclosed Request For Comment information on-line. California releases certain hos- could be narrowed to specified cate- NASD Regulation encourages all pital disciplinary actions, malpractice judgments, gories, or the period of disclosure interested parties to comment on the and arbitration awards. Massachusetts releases could be lengthened to 15 or 20 proposal. Comments should be any of the following that occurred in the last 10 years, rather than 10 years. In pro- mailed to: years: felony or serious misdemeanor convictions, viding comments about any alterna- malpractice actions, and disciplinary actions by a tive proposal, NASD Regulation asks Joan Conley hospital or the state medical board. that commenters keep in mind the Office of the Corporate Secretary technical and administrative limita- NASD Regulation, Inc. 3 Section 15A(i) of the Exchange Act provides, in tions of the Public Disclosure Pro- 1735 K Street, NW pertinent part, “[a] registered securities association gram. While the computer systems Washington, D.C. 20006-1500 shall . . . establish and maintain a toll-free tele- that support the Program could be phone listing to receive inquiries regarding disci- programmed to limit disclosure by or e-mailed to: plinary actions involving its members and their date of occurrence or general cate- [email protected] associated persons, and . . . promptly respond to gory of offense (i.e., “investment- such inquiries in writing.” The legislative history related” felony, “investment-related” Important Note: The only comments indicates that the appropriate scope of disciplinary misdemeanor, or “other felony”), any that will be considered are those actions should be developed by the NASD, working further refinements would require the submitted via e-mail or in writing. with the SEC and state securities regulators. The review of individual criminal histories toll-free number is (800) 289-9999. The NASD and manual settings to the computer Comments must be received by received over 137,000 requests for public disclo- system, which would be costly, time- September 30, 1998. Before becom- sure summaries in 1997 via the toll-free number. consuming, and necessarily more ing effective, any rule change devel- 4 As under the current Interpretation, the “invest- subjective. oped as a result of comments ment-related” offenses listed above would continue received must be adopted by the to be disclosed to the public indefinitely. NASD Regulation Board of Directors, may be reviewed by the NASD 5 Under Section 3(a)(39)(F) of the Exchange Act, Board of Governors, and must be criminal convictions of felonies and certain enumer- approved by the SEC. ated misdemeanors that are more than 10 years Special NASD Notice to Members 98-71 August 1998 557 old do not cause a person to be subject to a statu- required to file a Form U-4 as well, which, as ty of such information to the general public is usu- tory disqualification. The disqualification provisions described above, requires reporting of criminal his- ally limited or is difficult to access. NASD Regula- in the Investment Company Act of 1940 (Section tory without time limitation. tion is not aware of any other organization or 9(a)(1)) and the Investment Advisers Act of 1940 medium that would provide the general public with (Section 203(e)) also contain 10-year limits for 7 Fed. R. Evid. 609. immediate access to this broad a range of criminal criminal convictions. information in one centralized place. 8 Compare Jeffrey P. Donohue, Developing Issues 6 Form BD is the uniform form used by broker- Under the Massachusetts Physician Profile Act, 23 © 1998, National Association of Securities Dealers, dealers to apply for registration with the SEC, Am. J. Law & Medicine, 115, 120 (1997). Inc. (NASD). All rights reserved. states, and SROs. The term “control affiliates” generally refers to owners, officers, and directors of the 9 Although the criminal information at issue here broker/dealer. A control affiliate is sometimes generally is a matter of public record, the availabili-

Special NASD Notice to Members 98-71 August 1998 558 Special Notices To Members are published on an accelerated basis and distributed independently of monthly Notices to Members newsletters. Numerical sequencing may thus appear to contain gaps during a given monthly publication cycle. Such temporary gaps reﬂect a priority in the production process and will disappear at the conclusion of monthly electronic posting and print distribution.

Special NASD Notice to Members 98-71 August 1998 559 Executive Summary with the remaining members appoint- Special The purpose of this Notice is to advise ed for two-year terms. These one- members of the Regional Nominating and two-year term appointments will Committee Nominees for the 1999 be determined by the NNC after the NASD National Adjudicatory Council (NAC). regional nomination and the at-large Pursuant to nomination procedures selection have been approved by the outlined in Special Notice to Members NNC. After 1999, all terms will be Notice to 98-62, nominees for NAC are present- two-year terms, and service of two ed to the membership. If an officer, consecutive terms is permissible. Members director, or employee of a National The Chairman of the NAC will be Association of Securities Dealers, Inc. elected by the incoming NAC mem- (NASD¨) member is interested in bers, and, in accordance with rele- 98-72 being considered as an additional vant By-Laws, has a seat on the candidate, he/she must indicate NASD Regulation Board of Directors his/her interest to the Secretary of and NASD Board of Governors. Regional Nominating NASD Regulation, Inc. (NASD Regu- Committee Nominees For lationSM) or the Regional Nominating The NAC is the successor to the The National Committee Chairman in the region (a National Business Conduct Commit- Adjudicatory Council map of the five regions is attached) tee (NBCC). As such, it is responsi- within 14 calendar days of the date of ble for the oversight of the the Regional Nominating Committee disciplinary program of NASD Regu- document. The Secretary of NASD lation, the most active of all securities Regulation or the Regional Nominat- industry self-regulatory programs. Suggested Routing ing Committee Chairman shall make The NAC also is responsible for the Senior Management a written record of the time and date development of regulatory and of such notification. enforcement policy and rule changes Advertising relating to the business and sales Continuing Education Questions concerning this procedure practices of NASD members. may be directed to the member’s Dis- Corporate Finance trict Director or Alden S. Adkins, Gen- The NAC’s mission is to assure fair- Executive Representatives eral Counsel, NASD Regulation, at ness, expedition, and consistency in Government Securities (202) 728-8332; Joan C. Conley, Cor- the disciplinary and regulatory porate Secretary, NASD, at (202) actions for which it is responsible; to Institutional 728-8381; or Norman Sue, Jr., Asso- identify and address potential regula- Insurance ciate General Counsel, NASD Regu- tory issues; and to enforce current Internal Audit lation, at (202) 728-8117. and establish new disciplinary policy. Legal & Compliance The NAC meets at least six times a Municipal National Adjudicatory Council year. It always meets every other In 1999, the NAC will be a 12-mem- month for a full day to decide appel- Mutual Fund ber committee with half of the mem- late cases, rule on applications and Operations bers representing industry and half exemption requests, and to address Options representing non-industry. The policy matters. It may transact addi- industry members serve as volun- tional business through supplemen- Registered Representatives teers, and five of the six industry tary telephone meetings. In Registration members will be nominated by region preparation for these meetings, NAC Research (a map of the five regions is members receive “kits” consisting of attached) and approved by the draft decisions on appellate cases Syndicate NASD’s National Nominating Com- and memoranda discussing pro- Systems mittee (NNC). One industry member posed rules and other matters. The will be nominated by the NNC as an draft decisions range in number from Trading at-large member. In 1999, half of the 5 to 20 per kit, and in length up to 20 Training industry and non-industry members pages each. Required preparation Variable Contracts will be appointed for one-year terms, time for each meeting is extensive,

Special NASD Notice to Members 98-72 September 8, 1998 561 and is in addition to time required to plinary, membership, or financial and default initial decisions in disciplinary travel to the meetings and the meet- operational limitation cases, as well and membership cases, and to rule ings’ time. Most meetings are held in as on Hearing Panels designated to on miscellaneous motions or Washington D.C. or New York City, conduct initial hearings in summary requests. The members of the NAC but this year the NAC also met in and non-summary suspension, eligi- are supported by the staff of the Denver and San Francisco in order bility, and statutory qualification NASD Regulation Office of General to meet with District Committees to cases. In addition, two to four NAC Counsel in connection with the fore- discuss issues of common interest. members also serve as members of going adjudicatory and policymaking the Review Subcommittee, which responsibilities. NAC members also serve about meets from one to four hours weekly every other month on two-person by telephone to discuss and accept © 1998, National Association of Securities Dealers, Hearing Panels designated to hear or reject proposed settlements in dis- Inc. (NASD). All rights reserved. appeals or calls for review in disci- ciplinary actions, to review all non-

Special Notices to Members are published on an accelerated basis and distributed independently of monthly Notices to Members newsletters. Numerical sequencing may thus appear to contain gaps during a given monthly publication cycle. Such temporary gaps reﬂect a priority in the production process and will disappear at the conclusion of monthly electronic posting and print distribution.

© 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD is a registered service mark of the National Association of Securities Dealers, Inc. Central Registration Depository (CRD) is a service mark of the NASD and the North American Securities Administrators Association, Inc. (NASAA). NASD Regulation is a service mark of NASD Regulation, Inc. NASD Notices to Members is published monthly by NASD Corporate Communications, Kim Dineen, Editor, NASD Editorial Services Department, 1735 K Street, NW, Washington, DC 20006-1500, (202) 728-8370. No portion of this publication may be copied, photocopied, or duplicated in any form or by any means, except as described below, without prior written consent of the NASD. Members of the NASD are authorized to photocopy or otherwise duplicate any part of this publication without charge only for internal use by the member and its associated persons. Nonmembers of the NASD may obtain permission to photocopy for internal use through the Copyright Clearance Center (CCC) for a $3-per-page fee to be paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Annual subscriptions cost $225; single issues cost $25. Send a check or money order (payable to the National Association of Securities Dealers, Inc.) to NASD MediaSource, P.O. Box 9403, Gaithersburg, MD 20898-9403, or to phone in an order using American Express, MasterCard, or Visa charge, call (301) 590-6142, Monday to Friday, 9 a.m. to 5 p.m., Eastern Time. Back issues may be ordered by writing NASD, Support Services Department, 1735 K Street, NW, Washington, DC 20006-1500 or by calling (202) 728-8061. NASD Notices to Members (December 1996 to current) are also available on the Internet at www.nasdr.com.

Special NASD Notice to Members 98-72 September 8, 1998 562 1999 National Adjudicatory Council Nominees

West Region (Districts 1, 2, 3a, and 3b) Nominee: Nicholas C. Cochran American Investors Company Hayward, California Nicholas C. Cochran is Chairman of American Investors Company in Hayward, California. He started that ﬁrm in 1992. Prior to that time, he was with Foothill Securities, Inc. and Equity Engineering, Inc. Mr. Cochran is a former member of the NASD District 1 Committee (1994 to 1996) and a current member of the National Adjudicatory Council.

South Region (Districts 5, 6, and 7) Nominee: Raymond E. Wooldridge Southwest Securities Dallas, Texas Raymond E. Wooldridge is Vice Chairman of Southwest Securities, Inc.; having joined the firm in 1986. Prior to that time, he held various positions at the firm of Eppler, Guerin & Turner, Inc., including Chief Executive Officer. Mr. Wooldridge is a former member of the NASD Board of Governors (1994 to 1996) and the NASD District 6 Committee (1974 to 1976). He holds a B.A. in Economics from Washington & Lee University. Central Region (Districts 4, 8a, and 8b) Nominee: Ronald D. Brooks Banc One Capital Markets Columbus, Ohio Ronald D. Brooks is Chairman and Chief Executive Officer of Banc One Capital Corporation in Columbus, Ohio. He joined Banc One Capital in 1984. Prior to that time, he was with The Ohio Company. Mr. Brooks is a former member of the NASD District 8 Committee (1994 to 1996) and has served on several disciplinary panels. He holds a B.A. in International Studies from Ohio State University. North Region (Districts 9 and 11) Nominee: Richard J. DeAgazio Boston Capital Services Boston, Massachusetts Richard J. DeAgazio is President of Boston Capital Services, Inc., and Executive Vice President of Boston Capital Corporation in Boston, Massachusetts. Mr. DeAgazio joined Boston Capital in 1982. Prior to that time, he was a Senior Vice President and Director of Exchange Securities, Inc. Mr. DeAgazio has served on several NASD committees and is a former member of the NASD Board of Governors (1992 to 1995). He holds a B.S./B.A. in Finance from Northeastern University. New York (District 10) Nominee: David A. DeMuro Lehman Brothers New York, New York David A. DeMuro is Senior Vice President and Senior Counsel at Lehman Brothers, Inc. Mr. DeMuro joined Lehman Brothers in 1984. Prior to that time, he held various positions with the Securities and Exchange Commission in Detroit, Chicago, Los Angeles, and Washington, D.C. Mr. DeMuro is a current member of the NASD Membership Committee. He holds a B.A. from the University of Michigan and a J.D. from the University of Notre Dame.

Special NASD Notice to Members 98-72 September 8, 1998 563 Regional Map for National Adjudicatory Council Nominations NYC

Region Districts No. Of Members

West 1, 2, 3a, 3b 1019

South 5, 6, 7 1117

Central 4, 8a, 8b 1040

North 9, 11 1182

New York City 10 1172 Executive Summary The Form should be mailed to: NASD In March 1998, the Securities and NASD Regulation, Inc. Exchange Commission (SEC) Business Program Support approved new National Association 15201 Diamondback Drive Notice to of Securities Dealers, Inc. (NASD¨) Rockville, MD 20850 Rules 6950 through 6957—the Order Audit Trail System (OATSSM) Rules. Or faxed to: (888) 345-6275 or (301) Members The effective dates for the OATS 590-6504. Rules vary according to the following 98-73 schedule: Questions regarding OATS or the Form may be directed to the NASD ¥ Phase 1: By March 1, 1999, elec- via phone at (888) 700-OATS or Firms Required To tronic orders received by Market (301) 590-6503, or via e-mail at Register For Order Audit Makers and Electronic Communica- [email protected]. Information tion Networks (ECNs) must be about OATS is available on the Trail System; reported. NASD RegulationSM Web Site Amendments To OATS (www.nasdr.com). Rules ¥ Phase 2: By August 1, 1999, all electronic orders must be reported. Also, on July 31, 1998, the SEC approved amendments to OATS ¥ Phase 3: By July 31, 2000, all non- Rules 6954 and 6957 and NASD Suggested Routing electronic, or manual, orders must be Rule 3110 (the Books and Records 2 Senior Management reported. Rule). The amendments clarify the recording and recordkeeping require- Advertising (See Notice to Members 98-33 for a ments associated with the OATS Continuing Education complete description of the OATS Rules. Rules.) Corporate Finance Executive Representatives In accordance with the OATS Rules, Discussion Government Securities the NASD is now requiring all NASD Registration For OATS member firms that make markets in Reporting Institutional Nasdaq¨ securities and ECNs to reg- Information requested on the Form is Insurance ister for OATS using the newly devel- necessary to register members and Internal Audit oped Subscriber Initiation and non-member third parties to report Registration Form (see the following order information to OATS. The Form Legal & Compliance Form). Market Makers and ECNs requires member firms and non- Municipal that are required to record and report member third parties to identify con- order information to OATS under the tacts for administrative, technical, Mutual Fund OATS Rules must complete and and compliance issues; organiza- Operations return this Form to the NASD by tions that will be reporting OATS Options September 14, 1998, regardless of information on their behalf; organiza- whether they are scheduled to report tions on whose behalf they are Registered Representatives in Phase 1 or by Phase 3 (July 31, reporting; and the transport method Registration 2000).1 Members that fail to com- that they will use for reporting, such Research plete and return the Form will be as file transfer protocol (FTP) or e- unable to report OATS data to the mail. Syndicate NASD; failure to report order infor- Systems mation is a violation of NASD Rules The NASD will use the information 6955 and 2110. furnished on the Form to schedule Trading the installation of network circuits for Training In addition, all third parties that intend firms reporting via FTP and provide Variable Contracts to submit data on a member’s behalf Subscriber Packets. These Sub- during Phase 1 also must submit a scriber Packets will supply instruc- copy of the Form by September 14, tions about requesting a circuit from 1998. the network provider; deadlines for NASD Notice to Members 98-73 September 1998 567 circuit installation; user IDs and pass- broker/dealer or to a foreign The effective dates for compliance words for accessing OATS; assigned exchange. NASD members will be with the amended rules are: reporting dates within the phase; and required to report this information to a Subscriber Manual describing pro- OATS pursuant to OATS Rule 6955. ¥ Rule 3110(h)(1)(A) and (B): cedures for transmitting data to March 1, 1999 OATS, performing self-administra- OATS Rule 6954(a)(4) and the tion, and using OATS applications on Books and Records Rule, which ¥ Rule 3110(h)(1)(C): the Web. require members to record and July 31, 2000 maintain specified information relat- All firms that handle or execute ed to OATS, have been revised to ¥ Rule 3110(h)(2) and (3): orders for Nasdaq securities will be set forth specific recordkeeping March 1, 1999 required to complete a Form before requirements. In particular, both rules they can begin reporting to OATS. In have been amended to specifically ¥ Rule 6954(a)(4): January 1999, a version of the Form reference the period of time for March 1, 1999 and the Subscriber Manual will be retaining records specified in SEC available for firms and third parties Rule 17a-4(b) and the conditions set ¥ Rule 6954(c)(6): that will begin reporting in Phase 2 forth in SEC Rule 17a-4(f) for repro- August 1, 1999, for electronic orders; (August 1, 1999) or Phase 3. Firms ducing records on micrographic July 31, 2000, for manual orders. will be able to download the Form media or by means of electronic stor- and the Manual from the OATS Web age media. Pages or request them from the Endnotes NASD. The Books and Records Rule also 1 Members previously received notice of this has been amended to require mem- requirement through a posting on the NASD Amendments To OATS bers to record and maintain informa- Regulation Web Site on September 2, 1998. Rules tion relevant to the OATS data Firms that make markets in Nasdaq securi- recording and reporting requirements ties and ECNs received this Form via mail in OATS Rule 6954(c) sets forth the only with respect to an “order” in early September. order information that must be Nasdaq equity securities, as defined recorded when an order is transmit- by OATS Rule 6951(j). Finally, 2 Securities Exchange Act Release No. ted, either from one department to OATS Rule 6957(d) has been 40286 (July 31, 1998), 63 FR 42088 (August another within a member firm or to revised to indicate the effective dates 6, 1998). another member. This Rule has for compliance with the amendments been amended by adding a new to the Books and Records Rule. The © 1998, National Association of Securities Dealers, paragraph that will now require mem- OATS Rules, revised to reflect these Inc. (NASD). All rights reserved. bers to record certain information amendments, can be found on the when an order is transmitted to a NASD Regulation Web Site non-member, such as to a foreign (www.nasdr.com).

NASD Notice to Members 98-73 September 1998 568 OATS Subscriber Initiation And Registration Form

Please complete and return this Order Audit Trail SystemSM (OATSSM) Subscriber Initiation and Registration Form to the National Association of Securities Dealers, Inc. (NASD¨). Completion of this Form by September 14, 1998 is mandatory if you are an Electronic Communication Network (ECN) or market maker and are required to record and report order data to OATS. NASD member firms that fail to complete and return this Form will not be able to report OATS data to the NASD; failure to report order information by the specified OATS implementation date is in violation of NASD Rules 6955 and 2110.

If you have any questions regarding OATS or this Form, please contact the NASD via phone at (888) 700-OATS or (301) 590-6503, or via e-mail at [email protected]. Information about OATS and copies of this Form is also available via the NASD Regulation Web Site at www.nasdr.com.

This Form may be mailed or faxed to:

NASD Regulation, Inc. Business Program Support 15201 Diamondback Dr. Rockville, MD 20850 Fax: 888-345-6275 or 301-590-6504

Section 1: Organization Data

Section 1 Organization Information

If you are an NASD member firm please provide or update the preprinted information below. If you are not an NASD member firm, only provide or update your organizationÕs name.

Organization Name:

Market Participant ID: OATS Subscriber Initiation and Registration Form Page 2 of 5

Section 2: OATS Reporting Phase

Section 2-A OATS Reporting Phase of Member Firms

If you are an NASD member firm, indicate the phase your organization is required to begin reporting OATS data, based on Rule 6957. If you are not a member, skip this section.

Phase 1: All Market Makers and ECNs must report electronic orders by March 1, 1999 Phase 2: All member firms must report electronic orders by August 1, 1999 Phase 3: All member firms must report all manual orders by July 31, 2000.

Select one: Phase 1 Phase 2 Phase 3

If your organization is not required to report OATS data in Phase 1, do not complete the remainder of the Form. Regardless, please return this form to the NASD by September 14, 1998.

Section 2-B OATS Reporting Phase of Non-Member Firms

If you are not a member firm and are transmitting order data to the NASD, indicate the Phase during which you will begin reporting.

Select one: Phase 1 Phase 2 Phase 3

If your organization will not begin reporting OATS data in Phase 1, do not complete the remainder of the Form. Regardless, please return this Form to the NASD by September 14, 1998. OATS Subscriber Initiation and Registration Form Page 3 of 5

Section 3: Contacts

Section 3 OATS Contacts

Please provide the following contact information or update any preprinted information that is incorrect. The contact roles are defined below.

Order Will be the primary contact for the OATS program. This Sending contact will receive all OATS-related mailings directed Organization to the organization. Additionally, this contact will Administrator: manage User IDs and Passwords, update organization data, and disseminate OATS information throughout the organization.

Technical: Will assist the NASD in resolving OATS-related technical difficulties.

Compliance: Will assist the NASD in resolving OATS-related compliance issues.

Order Sending Organization Administrator

Name:

Title:

Telephone Number:

Fax Number:

E-mail Address:

Mail Address 1:

Mail Address 2:

City, State, Zip:

Technical Contact

Name:

Title:

Telephone Number:

Fax Number:

E-mail Address: OATS Subscriber Initiation and Registration Form Page 4 of 5

Section 3 (cont.) OATS Contacts

Compliance Contact

Name:

Title:

Telephone Number:

Fax Number:

E-mail Address:

Section 4: Reporting Relationships

Check All That Apply: Other organizations will report order data to OATS on my organizationÕs behalf. (Complete Section 4-A and skip to Section 6.)

My organization will send order data directly to OATS. (Complete Section 4- B.)

Section 4-A Information About Organizations Transmitting on Your Behalf

If other organizations will be reporting order data to OATS on your behalf, please identify them by name, below. Include Market Participant Identifier (MPID), if available.

______MPID (if known) Organization Name

______MPID (if known) Organization Name OATS Subscriber Initiation and Registration Form Page 5 of 5

Section 4-B Information About Organizations for Which You Are Transmitting

If your organization is transmitting order data on behalf of NASD member firms, please identify by name, below. Include Market Participant Identifier (MPID), if available. Attach additional sheets if necessary.

______MPID (if known) Organization Name

Section 5: Reporting Mechanism

This section should only be completed by organizations that will transmit data to OATS.

Check All That Apply My organization will report via File Transfer Protocol (FTP). Because FTP requires a private network, please provide area code and prefix of circuit locations for use in installation scheduling:

Area Code ______and Prefix ______

Area Code ______and Prefix ______.

My organization will report via e-mail.

Section 6: Submitter Information

______(____)______Printed Name of Submitter SubmitterÕs Phone Number Date

Please return this Form to the NASD via mail or fax by September 14, 1998 to NASD Regulation, Inc., Business Program Support, 15201 Diamondback Dr., Rockville, MD 20850 Fax: 888-345-6275 or 301-590-6504 Executive Summary Regulation whose purpose is to NASD On May 26, 1998, the Securities and provide a group of independent and Exchange Commission (SEC) professional hearing officers approved an amendment to National (comprised of attorneys with Notice to Association of Securities Dealers, appropriate experience and training) Inc. (NASD¨) Rule 9514 authorizing to preside over formal NASD hearing officers from the NASD Reg- disciplinary proceedings under the Members ulation, Inc. (NASD RegulationSM) NASD Rule 9200 Series. Office of Hearing Officers to preside 98-74 over non-summary proceedings NASD Regulation determined that involving cancellations and suspen- board members were not required for sions related to failure to comply with these non-summary proceedings SEC Approves Rule an NASD-imposed arbitration award because the issues involved are Amendment Relating To or settlement agreement. The narrow and largely administrative. amendment became effective on Designating a single hearing officer Hearings On Suspensions May 26, 1998. to preside over these non-summary And Cancellations For proceedings also provides Failure To Comply With Questions regarding this Notice may administrative efficiencies in Arbitration Awards be directed to Joseph Furey, Vice conducting the hearings and President, Office of Hearing Officers, rendering decisions. The amendment NASD Regulation, at (202) 728- does not alter the ability of member 8008, or Mary Dunbar, Assistant firms and their associated persons to Suggested Routing General Counsel, Office of General request a hearing concerning a Senior Management Counsel, NASD Regulation, at (202) failure to pay an arbitration award; it 728-8252. merely alters the composition of the Advertising hearing panel. The members of the Continuing Education Office of Hearing Officers are well- Background And Description suited to resolve the issues Corporate Finance Of Amendment presented in these types of hearings Executive Representatives This amendment changes the due to the training and experience Government Securities composition of the hearing panels gained in oversight of the NASD’s used for non-summary proceedings disciplinary proceedings. Institutional in which the NASD seeks to suspend Insurance or cancel the membership of a Text Of Amendment Internal Audit member firm or the registration of an (Note: New text is underlined; deletions are associated person for failure to bracketed.) Legal & Compliance comply with an arbitration award or a Municipal settlement agreement related to an Rule 9514. Hearing and Deci- NASD arbitration or mediation. sion Mutual Fund Previously, a hearing panel Operations composed of one current NASD (a) and (c)-(f) No Change Options Regulation director plus at least one other current or former NASD or (b) Designation of Party for the Registered Representatives NASD Regulation board member Association and Appointment of Registration heard these non-summary Hearing Panel Research suspension proceedings. Pursuant to the amendment, a single member of If a member, associated person, or Syndicate the Office of Hearing Officers, other person subject to a notice Systems appointed by the Chief Hearing under Rule 9512 or 9513 files a writ- Officer, will preside over these non- ten request for a hearing, an appro- Trading summary proceedings. priate department or office of the Training Association shall be designated as a Variable Contracts The Office of Hearing Officers is an Party in the proceeding, and a Hear- independent office within NASD ing Panel shall be appointed.

NASD Notice to Members 98-74 September 1998 575 (1) If the President of NASD Regula- 9513(a) concerning failure to comply of two or more members; [One] one tion or NASD Regulation staff issued with an arbitration award or a settle- member shall be a Director of NASD the notice initiating the proceeding ment agreement related to an NASD Regulation, and the remaining mem- under Rule 9512(a) or 9513(a), the arbitration or mediation, the Chief ber or members shall be current or President of NASD Regulation shall Hearing Officer shall appoint a Hear- former Directors of NASD Regulation designate an appropriate NASD ing Panel composed of a Hearing or Governors. The President of Regulation department or office as a Officer. For any other proceedings NASD Regulation may not serve on Party [, and the NASD Regulation initiated under Rule 9512(a) or [the] a Hearing Panel. Board shall appoint a Hearing Panel. 9513(a) by the President of NASD The Hearing Panel shall be com- Regulation or NASD Regulation staff, © 1998, National Association of Securities Dealers, posed of two or more members]. For the NASD Regulation Board shall Inc. (NASD). All rights reserved. proceedings initiated under Rule appoint a Hearing Panel composed

NASD Notice to Members 98-74 September 1998 576 Executive Summary the amendments, the staff and NASD On July 15, 1998, the Securities and NASD Regulation’s Investment Com- Exchange Commission (SEC) panies Committee, the Independent approved amendments to National Dealer/Insurance Affiliate Committee, Notice to Association of Securities Dealers, and the Variable Insurance Products Inc. (NASD¨) Rules 2820 (Variable Committee considered the current Contracts Rule) and 2830 (Invest- environment in which investment Members ment Company Rule) that regulate company and variable contract secu- non-cash compensation arrange- rities are sold. 98-75 ments for the sale and distribution of variable contracts and investment NASD Regulation believes that the company securities. Generally, the increased use of non-cash compen- amendments adopt new definitions, sation for the sale of variable con- impose recordkeeping requirements, tracts and investment company SEC Approves Rule and limit the manner in which mem- securities heightens the potential for Change Relating To Non- bers can pay or accept non-cash loss of supervisory control over sales Cash Compensation For compensation. The amendments are practices and increases the percep- Mutual Funds And effective January 1, 1999, under the tion of inappropriate practices, which implementation plan described may result in a loss of investor confi- Variable Products below. dence. NASD Regulation also believes that the increased use of Questions concerning this Notice may non-cash compensation creates sig- be directed to R. Clark Hooper, Exec- nificant point-of-sale incentives that Suggested Routing utive Vice President, Office of Disclo- may compromise the requirement to Senior Management sure and Investor Protection, NASD match the investment needs of the Regulation, Inc. (NASD RegulationSM), customer with the most appropriate Advertising at (202) 728-8325, and Robert J. investment product. NASD is contin- Continuing Education Smith, Assistant General Counsel, uing to examine and develop an Office of General Counsel, NASD approach to the payment of certain Corporate Finance Regulation, at (202) 728-8176. types of cash compensation that may Executive Representatives raise similar issues.1 Government Securities Discussion Description Institutional Background Insurance Prior to the amendments, the Vari- Internal Audit The amendments are the latest in a able Contracts Rule did not contain series of NASD Regulation proposals provisions regarding non-cash com- Legal & Compliance designed to control the use of non- pensation and the Investment Com- Municipal cash compensation in connection pany Rule generally required with a public offering of securities. disclosure in the prospectus of non- Mutual Fund Previous rule amendments estab- cash compensation arrangements. Operations lished restrictions on non-cash com- Thus, the amendments establish Options pensation in connection with new requirements in the Variable transactions in direct participation Contracts Rule and modify current Registered Representatives program securities (DPPs), real Investment Company Rule require- Registration estate investment trusts (REITs), and ments. Research corporate debt and equity offerings. Definitions Syndicate The amendments are the final prod- Systems uct of a process that began over 10 Affiliated Member: The term “affili- years ago and involved several ver- ated member” has been adopted for Trading sions of the rules published in vari- both the Variable Contracts and Training ous Notices to Members and Investment Company Rules to Variable Contracts submitted to the SEC. In developing include a member that, directly or

NASD Notice to Members 98-75 September 1998 577 indirectly, controls, is controlled by, Offeror: The term “offeror” in the and Exception from Limitations: or is under common control with a Variable Contracts Rule is defined as Subparagraph (h)(1) of the Variable non-member company. The term an insurance company, a separate Contracts Rule and (l)(1) of the reflects a common type of relation- account of an insurance company, Investment Company Rule prohibit a ship existing in the variable contracts an investment company that funds a person associated with a member and investment company industries separate account, any adviser to a from accepting any compensation whereby a non-member is affiliated separate account of an insurance from any person other than the through ownership or control with company or an investment company member with which the person is one or more broker/dealer member that funds a separate account, a fund associated. firms used for underwriting and/or administrator, an underwriter and wholesale and retail distribution ser- any affiliated person of such entities, An exception from this general prohi- vices. and in the Investment Company Rule bition permits the receipt of compen- as an investment company, an sation by an associated person from Compensation: For ease of refer- adviser to an investment company, a a non-member company if the mem- ence in appropriate paragraphs of fund administrator, an underwriter ber agrees to the arrangement, the the amendments, a new definition of and any affiliated person of such receipt is treated as compensation “compensation” has been included to entities. The term “affiliated person” received by the member for purpos- mean “cash compensation and non- in the definition of “offeror” is defined es of NASD rules, the recordkeeping cash compensation.” in accordance with Section 2(a)(3) of requirement in the proposed rule the Investment Company Act of 1940 change is satisfied, and, the member Cash Compensation: For both the (1940 Act). The term “underwriter” is relies on an appropriate rule, regula- Variable Contracts and Investment defined in Section 2(a)(40) of the tion, interpretive release, interpretive Company Rules, this term is defined 1940 Act and is intended to refer- letter, or applicable “no-action” letter to include any discount, concession, ence the underwriter through which issued by the SEC or its staff that fee, service fee, commission, asset- the investment or insurance compa- applies to the specific fact situation of based sales charge, loan, override or ny distributes securities to participat- the arrangement. cash employee benefit received in ing dealers for sale to the investor. connection with the sale and distribu- The exception reflects the view of the tion of investment company and vari- Regulation Of Cash And SEC as expressed in Securities able contract securities. The new Non-Cash Compensation Exchange Act Rel. No. 34-8389 term also includes cash employee Arrangements (August 29, 1968) that, under certain benefits to make clear that certain circumstances, such commission payments of ordinary employee ben- Introduction: The amendments payments to associated persons efits as part of an overall compensa- adopt as paragraph (h) of the Vari- may be made by a life insurance tion package are not included in the able Contracts Rule and paragraph company acting on behalf of a sub- definition of non-cash compensation (l) of the Investment Company Rule sidiary broker/dealer.2 The SEC has or governed under the non-cash pro- (replacing the current provisions of issued a number of “no-action” let- visions. that section) new provisions govern- ters permitting, among other things, ing the payment and receipt of non- associated persons of members to Non-Cash Compensation: This cash compensation by members and receive compensation for the sale of term is identical in applicability in associated persons of members. variable contract products from a both the Variable Contracts and Under the Variable Contracts Rule, licensed corporate insurance agent Investment Company Rules and the amendments apply to the sale acting on behalf of one or more encompasses any form of compen- and distribution of both variable insurance companies.3 The Invest- sation received by a member in con- annuity and variable life products; ment Company Rule includes the nection with the sale and distribution under the Investment Company Rule same exception in order to recognize of variable contracts and investment the amendments apply to the sale SEC no-action letters that permit an company securities that is not cash and distribution of investment com- insurance company to establish a compensation, including, but not lim- pany securities registered under the commission account as a ministerial ited to, merchandise, gifts and prizes, 1940 Act. service to make payments of com- travel expenses, meals, and lodging. mission overrides for sales of insur- Subparagraphs (h)(1) and (l)(1): ance and investment company Limitation on Receipt of Compen- securities products.4 sation by Associated Persons,

NASD Notice to Members 98-75 September 1998 578 Subparagraphs (h)(2) and (l)(2): (B) of the Variable Contracts Rule ny Rule generally prohibit, with cer- Securities as Compensation: New and (l)(5)(A) and (B) of the Invest- tain exceptions, a member or person subparagraphs (h)(2) of the Variable ment Company Rule, discussed associated with a member from Contracts Rule and (l)(2) of the more fully below under the excep- directly or indirectly accepting or Investment Company Rule prohibit tions to the prohibition on non-cash making payments or offers of pay- members and associated persons of compensation. ments of any non-cash compensa- members from receiving compensation. There are several exceptions to tion in the form of securities of any Subparagraph (l)(4): Prospectus the general prohibition that permit kind. This prohibition is similar to a Disclosure of Cash Compensa- certain non-cash arrangements. prior requirement in the Investment tion: New subparagraph (l)(4) in the Company Rule. Investment Company Rule prohibits Subparagraphs (h)(4)(A) and (B) members from accepting cash com- and (l)(5)(A) and (B): These provi- Subparagraphs (h)(3) and (l)(3): pensation from offerors unless such sions permit the payment and accep- Recordkeeping Requirement: New compensation is disclosed in a tance of gifts that do not exceed an subparagraphs (h)(3) of the Variable prospectus. In the case where spe- annual amount, currently $100 per Contracts Rule and (l)(3) of the cial cash compensation arrange- person, and an occasional meal, tick- Investment Company Rule require ments are made available by an et to a sporting event or the theater, that members maintain records of all offeror to a member, which arrange- or comparable entertainment for per- compensation, cash and non-cash, ments are not made available on the sons associated with a member and, received from offerors. The records same terms to all members to dis- if appropriate, their guests, which is must include the names of the offer- tribute the securities, the disclosure neither so frequent nor so extensive ors, the names of the associated per- must include the name of the recipi- as to raise any question of propriety. sons, and the amount of cash and ent member and the details of the Since such gifts and entertainment the nature and, if known, the value of special arrangements. This require- are considered non-cash items, they non-cash compensation received. ment is similar to the prior require- are not required to be disclosed in ment in subparagraph (l)(1)(C) of the the prospectus. In addition, these NASD Regulation expects records Investment Company Rule to dis- two forms of non-cash compensation regarding the “nature” of non-cash close all compensation in the are specifically excepted from the compensation received to disclose prospectus, but has been modified to recordkeeping requirement of the whether the non-cash compensation reference only “cash compensation” proposed rules. was received in connection with a because non-cash compensation is sales incentive program or a training prohibited in a manner that would The provisions also require that the and education meeting. Thus, for obviate the need for disclosure of acceptance or payment of such non- example, records for a training and any such non-cash compensation. cash items not be preconditioned on education meeting should include the achievement of a sales target. information demonstrating that the Subparagraphs (l)(4)(A) and (B) pro- Thus, gifts and entertainment are requirements of a training and edu- vide an exception from disclosure for permitted to be provided as recogni- cation meeting were complied with, compensation arrangements tion for past sales or as encourage- including the date and location of the between: (1) principal underwriters of ment for future sales, but not as part meeting, the fact that attendance at the same security; and (2) the princi- of an incentive program or plan the meeting is not conditioned on the pal underwriter of a security and the which requires that the recipient achievement of a previously speci- sponsor of a unit investment trust reach a specific sales goal as a prior fied sales target, the fact that the which utilizes such security as its condition to receive the entertain- payment is not applied to the underlying investment. By their ment or gift. These exceptions per- expenses of guests of associated terms, these provisions describe mit the continuation of long- persons of the member, and any arrangements that would not trigger established, normal business prac- other information required to enable the proposed recordkeeping require- tices, involving benefits with relatively NASD Regulation to determine comments. small value such that they are unlike- pliance with the rule. ly to impact overall compensation Subparagraphs (h)(4) and (l)(5): incentives. The recordkeeping requirement does Prohibition on Non-Cash Com- not apply to two types of de minimis pensation: New subparagraphs Subparagraphs (h)(4)(C) and non-cash compensation allowable (h)(4) of the Variable Contracts Rule (l)(5)(C): These exceptions permit, under subparagraphs (h)(4)(A) and and (l)(5) of the Investment Compa- under certain conditions, payment or

NASD Notice to Members 98-75 September 1998 579 reimbursement by offerors in con- The location of the meeting must be The permissible non-cash arrange- nection with meetings held by the appropriate to its purpose. A show- ments are subject to four conditions: offeror or by a member for the pur- ing of appropriate purpose is demon- (1) the non-cash compensation pose of training or education of asso- strated where the location is the arrangement must be based on the ciated persons of a member. It is not office of the offeror or the member, total production of associated per- unusual for offerors to pay for such or a facility located in the vicinity of sons with respect to all investment meetings in order to discuss their such office. In order to address company or variable product securi- products and to reimburse certain meetings where the attendees are ties distributed by that member, (2) expenses related to meetings held from a number of offices in a region the credit received for each invest- by members in exchange for the of the country, the meeting location ment company or variable contract opportunity to make a presentation to may be in a regional location. security must be equally weighted, the associated persons of the mem- (3) no unaffiliated non-member com- ber on a particular training or educa- The payment or reimbursement by an pany or other unaffiliated member tion topic. Since investment offeror must not be applied to the may directly or indirectly participate company and variable contract prod- expenses of guests of the associated in the member’s or non-member’s ucts are continuously offered, it is person. organization of a permissible non- particularly important that associated cash compensation arrangement, persons receive education opportuni- Finally, the payment or reimburse- and (4) the recordkeeping require- ties, updates on any portfolio ment by the offeror must not be con- ments must be satisfied. changes or structural changes to a ditioned by the offeror on the current product, and explanations of achievement of a sales target or any The total production and equal new products. other incentive. This requirement is weighting requirements address the intended to ensure that the offeror danger that non-cash incentive pro- Payments for training or education making the payment or reimburse- grams may motivate salespersons at meetings are subject to the record- ment does not participate in any the point-of-sale to recommend a spe- keeping requirement in subparagraph manner in a member’s decision as to cific product on the basis of the incen- (h)(3) of the Variable Contracts Rule which associated persons will attend tive rather than a desire to meet the and subparagraph (l)(3) of the Invest- a member’s or offeror’s meeting. investment needs of the customer. ment Company Rule. This provision The total production and equal ensures that information on such pay- Subparagraphs (h)(4)(D) and weighting requirements are intended ments and reimbursements is main- (l)(5)(D): These provisions permit to limit the impact of non-cash sales tained in the records of the member non-cash compensation arrange- incentives at point-of-sale. and, therefore, capable of examina- ments between a member and its tion and regulatory oversight by associated persons, and between a Regarding the condition for equal NASD Regulation. non-member company and its sales weighting, NASD Regulation recog- personnel who are associated per- nizes that methods for determining Associated persons must obtain the sons of an affiliated member. In per- compensation credits could vary, member’s prior approval to attend the mitting such arrangements, NASD including measurements based on meeting and the member may not Regulation recognizes that in the life gross production to the firm or net base attendance on the achievement insurance industry, for example, non- commissions to the associated per- of a sales target or other incentives. member insurance companies may son. Either practice, as well as other Members should establish a proce- hold non-cash sales incentive pro- arrangements, such as new dure so that their records reflect that grams for their sales personnel who accounts opened or assets under appropriate approval has been provid- are also associated persons of the management, would be acceptable ed to associated persons in connec- non-member’s affiliated broker/dealer so long as the concept of “equal tion with such meetings. Although a and are licensed to sell both variable weighting” is met and not skewed by member may not condition atten- contract securities and non-securities disparate commission, payout, or dance at the meeting on the achieve- insurance products. As a practical reallowance structures for individual ment of a sales target, this is not matter, an insurance company or products. intended to prevent a member from investment company affiliated with a designating persons to attend a meet- broker/dealer is in a position to con- Because of the substantial differ- ing to recognize past performance or tribute to and affect the structure of its ences in design, purpose, cost struc- encourage future performance. affiliated broker/dealer’s in-house ture, commission payouts, and target incentive compensation program. audience for variable annuity and

NASD Notice to Members 98-75 September 1998 580 variable life products, NASD Regula- member involving variable contracts (1) - (2) No change tion has determined that the total or investment company securities in production and equal weighting order to benefit the associated per- (3) The terms “affiliated member,” requirements may apply separately sons of the member that sell the “compensation,” “cash compensa- to variable annuity and variable life securities. These provisions also tion,” “non-cash compensation” and products, and they do not need to be permit members to contribute to non- “offeror” as used in paragraph (h) of combined in the same incentive cash compensation programs of this Section shall have the following arrangement. non-members, such as banks, for meanings: example, involving variable contracts Regarding the third condition, NASD or investment company securities. “Affiliated Member” shall mean a Regulation recognizes that non-cash member which, directly or indirectly, arrangements are sometimes struc- Proposed Implementation Of controls, is controlled by, or is under tured directly between offerors and New Rules common control with a non-member salespersons, away from the super- company. visory purview of the broker/dealer. The amendments to the Variable Thus, under the third condition, the Contracts and Investment Company “Compensation” shall mean cash non-cash compensation arrange- Rules are implemented in the follow- compensation and non-cash comment is subject to the restriction that ing manner. The amendments are pensation. no unaffiliated non-member entity effective on January 1, 1999. As of (usually an offeror) or another mem- that date, members’ new sales “Cash compensation” shall mean ber can participate directly or indi- incentive programs must comply with any discount, concession, fee, ser- rectly in the member’s or its affiliate’s the amendments. Existing sales vice fee, commission, asset-based organization of a permissible non- incentive programs that are ongoing sales charge, loan, override, or cash cash sales incentive program. This as of January 1, 1999, may continue employee benefit received in con- provision is intended to ensure that under previous rules for a period not nection with the sale and distribution third-party offerors or other to exceed six months following Jan- of variable contracts. broker/dealers do not influence, or in uary 1, 1999. Thus, during the six- effect control, the organization of a month implementation period, sales “Non-cash compensation” shall permissible non-cash sales incentive could be applied to existing incentive mean any form of compensation program. This restriction is not, how- programs under previous rules, and received in connection with the sale ever, intended to prevent third-party new incentive programs as limited by and distribution of variable contracts offerors or other members from mak- the new amendments could com- that is not cash compensation, ing a presentation on its products at mence. Finally, non-cash sales including but not limited to merchan- a member’s or its affiliate’s in-house incentives or awards earned by reg- dise, gifts and prizes, travel expens- sales incentive meeting. istered representatives under exist- es, meals and lodging. ing programs would be permitted to Finally, under the fourth condition, be received by the registered repre- “Offeror” shall mean an insurance payments or non-cash sales incen- sentative for a period not to exceed company, a separate account of an tives are subject to the recordkeep- 12 months following the expiration of insurance company, an investment ing requirements. the six-month implementation period. company that funds a separate account, any adviser to a separate Subparagraphs (l)(5)(E) and account of an insurance company or (h)(4)(E): These provisions permit a Text Of Amendments To Rules an investment company that funds a non-member entity (usually an offer- 2820 And 2830 separate account, a fund administra- or) or another member to contribute (Note: New language is underlined; deletions tor, an underwriter and any affiliated to a member’s in-house non-cash are bracketed.) person (as defined in Section 2(a)(3) sales incentive program, and a mem- of the Investment Company Act of ber to contribute to a non-cash Rule 2820. Variable Contracts 1940) of such entities. arrangement of a non-member, sub- of an Insurance Company ject to the same four conditions iden- (c) - (g) No change tified above. These provisions are (a) No change intended to permit third-party offerors and other members to contribute to (b) Definitions the non-cash incentive program of a

NASD Notice to Members 98-75 September 1998 581 (h) Member Compensation (4) No member or person associated (iv) the payment or reimbursement is with a member shall directly or indi- not applied to the expenses of In connection with the sale and distri- rectly accept or make payments or guests of the associated person; and bution of variable contracts: offers of payments of any non-cash compensation, except as provided in (v) the payment or reimbursement by (1) Except as described below, no this provision. Notwithstanding the the offeror is not preconditioned by associated person of a member shall provisions of subparagraph (h)(1), the offeror on the achievement of a accept any compensation from any- the following non-cash compensation sales target or any other non-cash one other than the member with arrangements are permitted: compensation arrangement permit- which the person is associated. This ted by subparagraph (h)(4)(D). requirement will not prohibit arrange- (A) Gifts that do not exceed an annu- ments where a non-member compa- al amount per person fixed periodi- (D) Non-cash compensation ny pays compensation directly to cally by the Board of Governors* and arrangements between a member associated persons of the member, are not preconditioned on achieve- and its associated persons or a non- provided that: ment of a sales target. member company and its sales personnel who are associated persons (A) the arrangement is agreed to by (B) An occasional meal, a ticket to a of an affiliated member, provided the member; sporting event or the theater, or com- that: parable entertainment which is nei- (B) the member relies on an appro- ther so frequent nor so extensive as (i) the member's or non-member's priate rule, regulation, interpretive to raise any question of propriety and non-cash compensation arrange- release, interpretive letter, or "nois not preconditioned on achievement, if it includes variable contracts, action" letter issued by the Securities ment of a sales target. is based on the total production of and Exchange Commission that associated persons with respect to applies to the specific fact situation of (C) Payment or reimbursement by all variable contracts distributed by the arrangement; offerors in connection with meetings the member; held by an offeror or by a member for (C) the receipt by associated per- the purpose of training or education (ii) the non-cash compensation sons of such compensation is treated of associated persons of a member, arrangement requires that the credit as compensation received by the provided that: received for each variable contract is member for purposes of NASD rules; equally weighted; and (i) the recordkeeping requirement in subparagraph (h)(3) is satisfied; (iii) no unaffiliated non-member com- (D) the recordkeeping requirement in pany or other unaffiliated member subparagraph (h)(3) is satisfied. (ii) associated persons obtain the directly or indirectly participates in the member's prior approval to attend the member's or non-member's organiza- (2) No member or person associated meeting and attendance by a mem- tion of a permissible non-cash com- with a member shall accept any ber's associated persons is not pre- pensation arrangement; and compensation from an offeror which conditioned by the member on the is in the form of securities of any achievement of a sales target or any (iv) the recordkeeping requirement in kind. other incentives pursuant to a non- subparagraph (h)(3) is satisfied. cash compensation arrangement per- (3) Except for items as described in mitted by subparagraph (h)(4)(D); (E) Contributions by a non-member subparagraphs (h)(4)(A) and (B), a company or other member to a non- member shall maintain records of all (iii) the location is appropriate to the cash compensation arrangement compensation received by the mem- purpose of the meeting, which shall between a member and its associat- ber or its associated persons from mean an office of the offeror or the ed persons, or contributions by a offerors. The records shall include member, or a facility located in the member to a non-cash compensa- the names of the offerors, the names vicinity of such office, or a regional tion arrangement of a non-member, of the associated persons, the location with respect to regional provided that the arrangement meets amount of cash, the nature and, if meetings; the criteria in subparagraph (h)(4)(D). known, the value of non-cash compensation received. *The current annual amount fixed by the Board of Governors is $100.

NASD Notice to Members 98-75 September 1998 582 2830. Investment Company son (as defined in Section 2(a)(3) of shall make such payment only to the Securities the Investment Company Act of member.] 1940) of such entities. (a) No change [(3)(A) In connection with retail sales (2)- (10) No change or distribution of investment compa- (b) Definitions ny shares, no underwriter or associ- (c) - (k) No change ated person of an underwriter shall (1) [“Associated person of an under- offer or pay to any member or asso- writer," as used in paragraph (1), (l) [Dealer Concessions] Member ciated person, anything of material shall include an issuer for which an Compensation value, and no member or associated underwriter is the sponsor or a princi- person shall solicit or accept any- pal underwriter, any investment [(1) No underwriter or associated thing of material value, in addition to adviser to such issuer, or any affiliat- person of an underwriter shall offer, the concessions disclosed in the ed person (as defined in Section pay or arrange for the offer or pay- prospectus.] 2(a)(3) of the Investment Company ment to any other member in con- Act of 1940) of such underwriter, nection with retail sales or [(B) For purposes of this paragraph issuer, or investment adviser.] The distribution of investment company (1)(3), items of material value shall terms “affiliated member,” “compen- securities, any discount, concession, include but not be limited to:] sation,” “cash compensation,” “non- fee or commission (hereinafter cash compensation” and “offeror” as referred to as “concession”) which:] [(i) gifts amounting in value to more used in paragraph (l) of this section than $50 per person per year.] shall have the following meanings: [(A) is in the form of securities of any kind, including stock, warrants or [(ii) gifts or payments of any kind “Affiliated Member” shall mean a options;] which are conditioned on the sale of member which, directly or indirectly, investment company securities.] controls, is controlled by, or is under [(B) is in a form other than cash (e.g.. common control with a non-member merchandise or trips), unless the [(iii) loans made or guaranteed to a company. member earning the concession may non-controlled member or person elect to receive cash at the equiva- associated with a member.] “Compensation” shall mean cash lent of no less than the underwriter's compensation and non-cash com- cost of providing the non-cash con- [(iv) wholesale overrides (commis- pensation. cession: or] sions) granted to a member on its own retail sales unless the arrange- “Cash compensation” shall mean [(C) is not disclosed in the prospec- ment, as well as the identity of the any discount, concession, fee, ser- tus of the investment company. If the member, is set forth in the prospec- vice fee, commission, asset-based concessions are not uniformly paid to tus of the investment company.] sales charge, loan, override or cash all dealers purchasing the same dol- employee benefit received in con- lar amounts of securities from the [(v) payment or reimbursement of nection with the sale and distribution underwriter, the disclosure shall travel expenses, including overnight of investment company securities. include a description of the circum- lodging, in excess of $50 per person stances of any general variations per year unless such payment or “Non-cash compensation” shall from the standard schedule of con- reimbursement is in connection with a mean any form of compensation cessions. If special compensation business meeting, conference or received in connection with the sale arrangements have been made with seminar held by an underwriter for and distribution of investment com- individual dealers, which arrange- informational purposes relative to the pany securities that is not cash comments are not generally available to fund or funds of its sponsorship and is pensation, including but not limited to all dealers, the details of the arrange- not conditioned on sales of shares of merchandise, gifts and prizes, travel ments, and the identities of the deal- an investment company. A meeting, expenses, meals and lodging. ers, shall also be disclosed.] conference or seminar shall not be deemed to be of a business nature “Offeror” shall mean an investment [(2) No underwriter or associated unless: the person to whom payment company, an adviser to an invest- person of an underwriter shall offer or reimbursement is made is person- ment company, a fund administrator, or pay any concession to an associ- ally present at, or is en route to or an underwriter and any affiliated per- ated person of another member, but from, such meeting in each of the

NASD Notice to Members 98-75 September 1998 583 days for which payment or reimburse- In connection with the sale and distri- unless such compensation is ment is made; the person on whose bution of investment company securi- described in a current prospectus of behalf payment or reimbursement is ties: the investment company. When spe- made is engaged in the securities cial cash compensation arrange- business; and the location and facili- (1) Except as described below, no ments are made available by an ties provided are appropriate to the associated person of a member shall offeror to a member, which arrange- purpose, which would ordinarily mean accept any compensation from any- ments are not made available on the the sponsor's office.] one other than the member with same terms to all members who dis- which the person is associated. This tribute the investment company [(C) For purposes of this paragraph requirement will not prohibit arrange- securities of the offeror, a member (l)(3), items of material value shall ments where a non-member compa- shall not enter into such arrange- not include:] ny pays compensation directly to ments unless the name of the mem- associated persons of the member, ber and the details of the [(i) an occasional dinner, a ticket to a provided that: arrangements are disclosed in the sporting event or the theater, or com- prospectus. Prospectus disclosure parable entertainment of one or more (A) the arrangement is agreed to by requirements shall not apply to cash registered representatives which is the member; compensation arrangements not conditioned on sales of shares of between: an investment company and is nei- (B) the member relies on an appro- ther so frequent nor so extensive as priate rule, regulation, interpretive (A) principal underwriters of the to raise any question of propriety.] release, interpretive letter, or “no- same security; and action” letter issued by the Securities [(ii) a breakfast, luncheon, dinner, and Exchange Commission or its (B) the principal underwriter of a reception or cocktail party given for a staff that applies to the specific fact security and the sponsor of a unit group of registered representatives situation of the arrangement; investment trust which utilizes such in conjunction with a bona fide busi- security as its underlying investment. ness or sales meeting, whether at (C) the receipt by associated per- the headquarters of a fund or its sons of such compensation is treated (5) No member or person associated underwriter or in some other city.] as compensation received by the with a member shall directly or indi- member for purposes of NASD rules; rectly accept or make payments or [(iii) an unconditional gift of a typical and offers of payments of any non-cash item of reminder advertising such as a compensation, except as provided in ballpoint pen with the name of the (D) the recordkeeping requirement in this provision. Notwithstanding the advertiser inscribed, a calendar pad, subparagraph (l)(3) is satisfied. provisions of subparagraph (l)(1), the or other gifts amounting in value to not following non-cash compensation more than $50 per person per year.] (2) No member or person associated arrangements are permitted: with a member shall accept any com- [(4) The provisions of this subsection pensation from an offeror which is in (A) Gifts that do not exceed an annu- (1) shall not apply to:] the form of securities of any kind. al amount per person fixed periodically by the Board of Governors* and [(A) Contracts between principal (3) Except for items described in are not preconditioned on achieve- underwriters of the same security.] subparagraphs (l)(5)(A) and (B), a ment of a sales target. member shall maintain records of all [(B) Contracts between the principal compensation received by the mem- (B) An occasional meal, a ticket to a underwriter of a security and the ber or its associated persons from sporting event or the theater, or com- sponsor of a unit investment trust offerors. The records shall include parable entertainment which is nei- which utilizes such security as its the names of the offerors, the names ther so frequent nor so extensive as underlying investment.] of the associated persons, the to raise any question of propriety and amount of cash, the nature and, if is not preconditioned on achieve- [(C) Compensation arrangements of known, the value of non-cash comment of a sales target. an underwriter or sponsor with its pensation received. own sales personnel.] (4) No member shall accept any *The current annual amount fixed by the Board of cash compensation from an offeror Governors is $100.

NASD Notice to Members 98-75 September 1998 584 (C) Payment or reimbursement by (D) Non-cash compensation Endnotes offerors in connection with meetings arrangements between a member 1 See NASD Notice to Members 97-50 (August held by an offeror or by a member for and its associated persons or a non- 1997). the purpose of training or education member company and its sales per- of associated persons of a member, sonnel who are associated persons 2 In Securities Exchange Act Rel. No. 34-8389, the provided that: of an affiliated member, provided SEC stated that no question will be raised by the that: staff regarding an arrangement where a life insur- (i) the recordkeeping requirement in ance company makes commission payments subparagraph (l)(3) is satisfied; (i) the member’s or non-member’s directly to its life insurance agents who are also non-cash compensation arrange- persons associated with the insurance company's (ii) associated persons obtain the ment, if it includes investment com- subsidiary broker/dealer, so long as: (1) such pay- member's prior approval to attend pany securities, is based on the total ments are made as a purely ministerial service and the meeting and attendance by a production of associated persons properly reflected on the books and records of the member’s associated persons is not with respect to all investment compa- broker/dealer; (2) a binding agreement exists preconditioned by the member on ny securities distributed by the mem- between the insurance company and the the achievement of a sales target or ber; broker/dealer that all books and records are main- any other incentives pursuant to a tained by the insurance company as agent on non-cash compensation arrange- (ii) the non-cash compensation behalf of the broker/dealer and are preserved in ment permitted by subparagraph arrangement requires that the credit conformity with the requirements of Rules 17a-3 (l)(5)(D); received for each investment compa- and 17a-4 under the Securities Exchange Act of ny security is equally weighted; 1934; (3) all such books and records are subject to (iii) the location is appropriate to the inspection by the Commission in accordance with purpose of the meeting, which shall (iii) no unaffiliated non-member com- Section 17(a) of the Exchange Act; and (4) the mean an office of the offeror or the pany or other unaffiliated member subsidiary broker/dealer has assumed full respon- member, or a facility located in the directly or indirectly participates in sibility for the securities activities of all persons vicinity of such office, or a regional the member’s or non-member’s engaged directly or indirectly in the variable annuity location with respect to regional organization of a permissible non- operation. meetings; cash compensation arrangement; and 3 See Traditional Equinet (Pub. Avail. January 8, (iv) the payment or reimbursement is 1992); and Mariner Financial Services (Pub. Avail. not applied to the expenses of (iv) the recordkeeping requirement in December 16, 1988), which include references to guests of the associated person; and subparagraph (l)(3) is satisfied. other SEC no-action letters in the in-coming letters requesting the SEC no-action position. (v) the payment or reimbursement (E) Contributions by a non-member by the offeror is not preconditioned company or other member to a non- 4 See The Mutual Benefit Life Insurance Company by the offeror on the achievement of cash compensation arrangement (Pub. Avail. January 21, 1985) and other SEC no- a sales target or any other non-cash between a member and its associat- action letters cited therein. compensation arrangement permit- ed persons, or contributions by a ted by subparagraph (l)(5)(D). member to a non-cash compensa- © 1998, National Association of Securities Dealers, tion arrangement of a non-member, Inc. (NASD). All rights reserved. provided that the arrangement meets the criteria in subparagraph (l)(5)(D).

NASD Notice to Members 98-75 September 1998 585 Executive Summary $250, and two or more Market NASD Effective October 1, 1998, the maxi- Makers. mum Small Order Execution Sys- temSM (SOESSM) order sizes for 488 In accordance with Rule 4710, Nas- Notice to Nasdaq National Market¨ (NNM) daq periodically reviews the maxi- securities will be revised in accor- mum SOES order size applicable to dance with National Association of each NNM security to determine if Members Securities Dealers, Inc. (NASD¨) the trading characteristics of the Rule 4710(g). issue have changed so as to warrant 98-76 an adjustment. Such a review was For more information, please contact conducted using data as of June 30, Nasdaq¨ Market Operations at (203) 1998, pursuant to the aforemen- Maximum SOES Order 378-0284. tioned standards. The maximum Sizes Set To Change SOES order-size changes called for by this review are being implemented October 1, 1998 Description with three exceptions. Under Rule 4710, the maximum SOES order size for an NNM security ¥ First, issues were not permitted to is 1,000, 500, or 200 shares, move more than one size level. For Suggested Routing depending on the trading characteris- example, if an issue was previously Senior Management tics of the security. The Nasdaq categorized in the 1,000-share Workstation II¨ (NWII) indicates the level, it would not be permitted to Advertising maximum SOES order size for each move to the 200-share level, even if Continuing Education NNM security. The indicator “NM10,” the formula calculated that such a “NM5,” or “NM2” displayed in NWII move was warranted. The issue Corporate Finance corresponds to a maximum SOES could move only one level to the Executive Representatives order size of 1,000, 500, or 200 500-share level as a result of any 1 Government Securities shares, respectively. single review.

Institutional The criteria for establishing maxi- ¥ Second, for securities priced below Insurance mum SOES order sizes are as fol- $1 where the reranking called for a Internal Audit lows: reduction in the level, the maximum SOES order size was not reduced. Legal & Compliance (1) a 1,000-share maximum order Municipal size shall apply to NNM securities ¥ Third, for the top 50 Nasdaq securi- on SOES with an average daily ties based on market capitalization, Mutual Fund non-block volume of 3,000 shares the maximum SOES order sizes Operations or more a day, a bid price of less were not reduced, regardless of Options than or equal to $100, and three or whether the reranking called for a more Market Makers; reduction. Registered Representatives Registration (2) a 500-share maximum order size In addition, with respect to initial pub- Research shall apply to NNM securities on lic offerings (IPOs), the SOES order- SOES with an average daily non- size reranking procedures provide Syndicate block volume of 1,000 shares or that a security must ﬁrst be traded on Systems more a day, a bid price of less than Nasdaq for at least 45 days before it or equal to $150, and two or more is eligible to be reclassiﬁed. Trading Market Makers; and Training Thus, IPOs listed on Nasdaq within Variable Contracts (3) a 200-share maximum order size the 45 days prior to June 30, 1998, shall apply to NNM securities with were not subject to SOES order-size an average daily non-block volume reranking procedures. of less than 1,000 shares a day, a bid price of less than or equal to

NASD Notice to Members 98-76 September 1998 587 Following is a listing of the 488 NNM size for an NNM security in an amount equal ing unit when a Market Maker is not display- issues that will have the maximum to the maximum SOES order size for that ing a limit order, and which thus eliminated SOES order size changed on Octo- security. See generally, NASD Rule the requirement that Market Makers quote a ber 1, 1998. 4613(a)(1) - (2). On July 15, 1998, the Secu- size equal to the maximum SOES order size. rities and Exchange Commission approved Endnote an amendment to NASD Rule 4613(a)(1)(C), © 1998, National Association of Securities Dealers, 1 Previously, Nasdaq Market Makers were which reduced the minimum quotation size Inc. (NASD). All rights reserved. required to maintain a minimum quotation for all Nasdaq securities to one normal trad-

Maximum SOES Order Size Changes In NNM Securities All Issues In Alphabetical Order By Security Name (Effective October 1, 1998)

Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level

CTAC 1-800 CONTACTS INC 500 1000 ARTI ARTISAN COMPONENTS 500 1000 ASAM ASAHI/AMERICA INC 1000 500 ASPC ASPEC TECH INC 200 500 A SIDE ASSOC MATERIALS 200 500 ACMTA A C M A T CP CL A 500 200 APWR ASTROPOWER INC 500 1000 ABRI ABRAMS INDS INC 500 200 ATGC ATG INC 200 500 ACSY ACSYS INC 500 1000 ATPC ATHEY PRODUCTS CP 500 1000 ADECY ADECCO SA ADR 1000 500 AIII AUTOLOGIC INFO INT 1000 500 DINE ADVANTICA RES 500 1000 AXHM AXIOHM TRANS SOL 500 200 DINEW ADVANTICA WTS 500 1000 AFED AFSALA BANCORP INC 500 1000 ASII AIRPORT SYS INTL I 500 1000 B ASTI ALLERGAN SPEC WI 200 500 BTBTY B T SHIP SPONSOR ADR 500 200 ALYD ALYDAAR SOFTWARE 500 1000 BPAO BALDWIN PIANO ORGA 500 1000 AMBC AMER BNCP OHIO 500 1000 BLDPF BALLARD POWER SYST 500 1000 AMCE AMER CLAIMS EVALUA 500 1000 BFOH BANCFIRST OHIO CP 500 1000 ALGI AMER LOCKER GROUP 500 1000 BARI BANK RHODE ISLAND 200 500 ANAT AMER NATL INS CO 1000 500 BWFC BANK WEST FIN CORP 1000 500 ABFI AMERICAN BUS FIN S 1000 500 BKUNZ BANKUNITED CAP II 1000 500 ADPI AMERICAN DENTAL 200 500 BBHF BARBERS HAIRSTYLIN 1000 500 APPM AMERICAN PHYS PART 500 1000 BFSB BEDFORD BCSHS INC 1000 500 AMSFF AMERICAN SAFETY 500 1000 BASI BIOANALYTICAL SYST 500 1000 AMESW AMES DEPT ST WT C 1000 500 BIORY BIORA AB ADR 500 1000 AMKR AMKOR TECHNOLOGY 200 500 BDMS BIRNER DENTAL 500 1000 AMCT AMRESCO CAP TRUST 200 500 BONS BMJ MEDICAL MGMT 500 1000 AMSGA AMSURG CORP CL A 500 1000 BNCM BNC MORTGAGE INC 200 500 AMSGB AMSURG CORP CL B 500 1000 BEYE BOLLE INC 200 500 ANCOW ANACOMP INC WTS 200 500 XTRM BRASS EAGLE INC 500 1000 ANDR ANDERSEN GROUP INC 500 1000 BRZS BRAZOS SPORTSWEAR 500 1000 ALREF ANNUITY AND LIFE 200 500 BRID BRIDGFORD FOODS CP 1000 500 APSOP APPLE SOUTH FIN PFD 500 200 BTSR BRIGHTSTAR INFO 200 500 ACTC APPLIED CELLULAR T 500 1000 BRYO BRIO TECHNOLOGY 200 500 AFCO APPLIED FILMS CORP 500 1000 BRCM BROADCOM CORP CL A 200 500 AMCC APPLIED MICRO 500 1000 BRKL BROOKLINE BANCORP 200 500 ARMHY ARM HLDGS ADS 200 500 MILK BROUGHTON FOODS 500 1000 ARTW ART S WAY MFG CO I 500 200 BRGP BUSINESS RESOURCE 1000 500

NASD Notice to Members 98-76 September 1998 588 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level C D COLTY C O L T TELECOM AD 1000 500 DNFCP D & N CAP CORP PFD 500 200 CLBR CALIBER LEARN NTWK 200 500 DACG DA CONSULTING GRP 200 500 CIBN CALIFORNIA IND BNC 200 500 DECAF DECOMA CL A 200 500 CNTBY CANTAB PHARM 200 500 HERBL DECS TRUST III 200 500 CARS CAPITAL AUTO SBI 500 1000 DCBI DELPHOS CITIZENS B 1000 500 CSWC CAPITAL SOUTHWEST 200 500 DNLI DENALI INC 500 1000 CASA CASA OLE' RESTRS I 1000 500 DCBK DESERT COMMUNITY B 500 200 CASS CASS COMMERCIAL CO 1000 500 DTRX DETREX CP 1000 500 CAVB CAVALRY BANCORP 200 500 DEVC DEVCON INTL CP 500 1000 CWCOF CAYMAN WATER ORD 500 1000 DCPI DICK CLARK PROD IN 200 500 CDNW CDNOW INC 500 1000 DMSC DISPATCH MGMT SVCS 500 1000 CNDSP CELLNET FNDG PFD 200 500 DOCC DOCUCORP INTL 200 500 CEBK CENTRAL CO OP BANK 1000 500 DIIBF DOREL INDS CL B 200 500 CFAC CENTRAL FIN ACCEPT 1000 500 DCLK DOUBLECLICK INC 200 500 CVBK CENTRAL VA BKSHS I 500 200 DRRAP DURA AUTO CAP TR 200 500 CHANF CHANDLER INS CO LTD 1000 500 DXPE DXP ENTERPRISE 500 200 CRAI CHARLES RIVER 200 500 CHAS CHASTAIN CAP CORP 200 500 CNBA CHESTER BANCORP IN 1000 500 E CINS CIRCLE INCOME SHAR 500 1000 ESREF E S G RE LTD 500 1000 CTBP COAST BANCORP 1000 500 ERTH EARTHSHELL CORP 200 500 CCPRZ COAST FED LIT CPR 200 500 EDBR EDISON BROS STORES 500 1000 CBMD COLUMBIA BANCORP M 1000 500 ECTLW ELCOTEL INC WTS 500 1000 CFKY COLUMBIA FIN KY 200 500 EBSC ELDER-BEERMAN ST 200 500 COLM COLUMBIA SPRTSWR 200 500 ELIX ELECTRIC LIGHTWAV 500 1000 CCHM COMBICHEM INC 200 500 EPIQ ELECTRONIC PROCESS 500 1000 CCBP COMM BANCORP INC 500 200 ESCP ELECTROSCOPE INC 500 1000 CMND COMMAND SYSTEMS 200 500 ELRWF ELRON ELEC INDS WTS 200 500 CLBK COMMERCIAL BANKSHR 500 1000 EMLD EMERALD FINANCIAL 500 1000 CNAF COMMERCIAL NATL FI 200 500 ENGSY ENERGIS ADS 500 1000 CELS COMMNET CELL 500 1000 ENSI ENERGYSOUTH INC 1000 500 CBIV COMMUNITY BANCSHAR 1000 500 ETRC EQUITRAC CP 1000 500 CFGI COMMUNITY FIN GP INC 500 1000 ECGC ESSEX COUNTY GAS C 1000 500 CFBC COMMUNITY FIRST BN 1000 500 EVOL EVOLVING SYSTEMS 200 500 CMPS COMPASS INTL SVCS 200 500 EXDS EXODUS COMMUN 200 500 CLTDF COMPUTALOG LTD 500 200 XTND EXTENDED SYSTEMS 200 500 CNDR CONDOR TECH SOLU 500 1000 CNNG CONNING CORP 500 1000 BUYR CONS CAPITAL CORP 500 1000 F CNGL CONTL NATURAL GAS 500 1000 FCNB F C N B CP 1000 500 COOP COOPERATIVE BKSHS 1000 500 FMCO F M S FINANCIAL CP 200 500 CSCQW CORRECTIONAL SVCS 500 1000 FTMTF FANTOM TECHS INC 1000 500 CRRC COURIER CP 500 1000 FAMCK FEDERAL AGRIC MORT C 500 1000 CVOL COVOL TECHS INC 200 500 FFFLP FIDELITY CAP TR I 500 1000 CWLZ COWLITZ BANCORPN 200 500 FFOH FIDELITY FIN OF OH 1000 500 CKEYF CROSSKEYS SYS 500 1000 FBNC FIRST BANCP TROY N 500 200 CRSB CRUSADER HLDG CORP 500 1000 FBCG FIRST BKG CO SE GA 500 200 CAWW CULTURALACCESS WW 500 1000 FCTR FIRST CHARTER CP 500 1000 CGII CUNNINGHAM GRAPHIC 200 500 FCNCA FIRST CITIZENS A 500 1000 CRGN CURAGEN CORP 200 500 FCFCP FIRST CITY FINL PFD 500 200 CYSP CYBERSHOP INTL 500 1000 FTCG FIRST COLONIAL GP 200 500 NASD Notice to Members 98-76 September 1998 589 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level FCGI FIRST CONSULTING 500 1000 H THFF FIRST FIN CP (IN) 500 1000 HACH HACH CO 500 1000 FFIN FIRST FINL BKSHS I 500 1000 HKID HAPPY KIDS INC 200 500 FFHS FIRST FRANKLIN CP 200 500 HFGI HARRINGTON FIN GRP 1000 500 FKFS FIRST KEYSTONE FIN 1000 500 HFFB HARRODSBURG FIRST 1000 500 FOBBA FIRST OAK BROOK CL A 1000 500 HPAC HAWKER PACIFC AERO 500 1000 FSTH FIRST SO BCSHS INC 500 200 HAYZ HAYES CORP 500 1000 FSLB FIRST STERLING BKS 1000 500 HDLD HEADLANDS MTG CO 500 1000 FVCX FIRST VIRTUAL CP 200 500 HSDC HEALTH SYS DESIGN 500 1000 FCFCO FIRSTCITY SPCL PFD 500 200 HWLD HEALTHWORLD CORP 500 1000 FLGSP FLAGSTAR CAP PFD A 200 500 ARCAF HEIDEMIJ N.V. 1000 500 FAME FLAMEMASTER CP THE 1000 500 HBSC HERITAGE BNCP (DE) 200 500 FLCHF FLETCHER'S FINE FOOD 500 200 HFWA HERITAGE FINL CP 500 1000 FLXI FLEXIINTL SOFTWARE 500 1000 HRLYW HERLEY INDS WTS 500 1000 FNBF FNB FINANCIAL SVC 500 1000 HIFS HINGHAM INSTI SAVI 500 200 FOCL FOCAL INC 500 1000 HOLT HOLT'S CIGAR HLDGS 500 1000 FMAX FRANCHISE MORTGAGE 500 1000 HLFC HOME LOAN FINL CP 200 500 FKKY FRANKFORT FRST 500 1000 HPBC HOME PORT BNCP INC 1000 500 FELE FRANKLIN ELEC INC 500 1000 HFBC HOPFED BANCORP INC 500 1000 FREEY FREEPAGES GR PLC ADR 200 500 HZWV HORIZON BNCP INC 500 1000 FTBK FRONTIER FIN CORP 200 500 HOFF HORIZON OFFSHORE 200 500 FFHH FSF FINANCIAL CP 500 1000 HHLAF HURRICANE HYDROCAR 500 1000 FNDTF FUNDTECH LTD 200 500 HYPT HYPERION TELECOMM 200 500

G I GZEA G Z A GEOENVIRON 1000 500 IPPIF I P L ENERGY INC 500 200 GMTC GAMETECH INTL INC 500 1000 ISSX I S S GROUP INC 200 500 GRTS GART SPORTS CO 500 1000 ISAC IC ISAACS & CO 500 1000 GBNK GASTON FED BANCP 200 500 ICLRY ICON PLC ADS 200 500 GBBKP GBB CAP I CUM TR PFD 500 200 IVISF ICOS VISION SYST 500 1000 GMCC GEN MAGNAPLATE CP 1000 500 IMAG IMAGEMAX INC 500 1000 GLGC GENE LOGIC INC 500 1000 IGPFF IMPERIAL GINSENG PRO 1000 500 GEND GENESIS DIRECT INC 200 500 INDBP INDEP CAP TR I PFD 500 200 GNSSF GENESIS MICROCHIP 200 500 ICBC INDEPENDENCE COMM 200 500 GABC GERMAN AMER BANCOR 500 200 IAABY INDIGO AVIATIO ADS 200 500 GETY GETTY IMAGES INC 500 1000 IHIIZ INDUSTRIAL HLDG WT 1000 500 GICOF GILAT COMMUN LTD 500 1000 IHIIW INDUSTRIAL WTS D 500 1000 GTSG GLOBAL TELESYSTEMS 500 1000 IAIC INFO ANALYSIS INC 500 1000 GSBNZ GOLDEN LIT WTS 200 500 IACO INFORMATION ADVANT 500 1000 GNCNF GORAN CAPITAL INC 1000 500 INOC INNOTRAC CORP 200 500 GCLI GRAND COURT LIFE 200 500 IDEA INNOVASIVE DEVICES 1000 500 GBTVP GRANITE BRDCT CP PFD 1000 500 ISNR INTEGRATED SENS SL 200 500 PEDE GREAT PEE DEE BCP 500 1000 IVBK INTERVISUAL BOOKS 1000 500 GSBC GREAT SOUTHERN BNC 500 1000 ITVU INTERVU INC 500 1000 GBCOB GREIF BROS CP CL B 500 200 INTT INTEST CORPORATION 1000 500 GRIF GRIFFIN LAND NURS 200 500 IBOC INTL BANCSHS CP 200 500 GSOF GROUP I SOFTWARE 200 500 IROQ IROQUOIS BNCP 500 1000 GSTX GST TELECOMMUN INC 200 500 IRWNP IRWIN FIN CUM TR P 1000 500 GSLC GUARANTY FIN CP 1000 500 IYCOY ITO YOKADO CO ADR 200 500 GWBK GULF WEST BANKS 200 500 IUBCP IUB CAP TRUST PFD 500 1000

NASD Notice to Members 98-76 September 1998 590 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level J METFP METROPOLITAN CAP 200 500 JEFFP J B I CAPITAL TR PFD 200 500 MGCX MGC COMMUN INC 200 500 JAMSP JAMESON INNS PFD 200 500 MUSE MICROMUSE INC 500 1000 JPST JPS TEXTILE GRP 500 1000 MSEX MIDDLESEX WATER CO 500 1000 MDWY MIDWAY AIRLINES CP 500 1000 MBHI MIDWEST BANC HLDG 200 500 K MBSI MILLER BUILDING SY 500 1000 KTII K TRON INTL INC 500 1000 MEXP MILLER EXPLORATION 500 1000 KTIC KAYNAR TECHS INC 500 1000 MFFC MILTON FED FINL CP 1000 500 KEQU KEWAUNEE SCIENTIFI 500 1000 MSPG MINDSPRING ENTER I 1000 500 KOSS KOSS CP 500 1000 MNES MINE SAFETY APPLS 500 1000 MOBI MOBIUS MGMT SYST 200 500 MCRI MONARCH CASINO 1000 500 L MBBC MONTEREY BAY BANCO 1000 500 LCLD LACLEDE STEEL CO 1000 500 MHCO MOORE HANDLEY INC 500 1000 LKFNP LAKELAND FINL TR PFD 1000 500 MWRK MOTHERS WORK INC 500 1000 LARK LANDMARK BSCHS INC 200 500 CRGO MOTOR CARGO INDS 500 1000 LDMK LANDMARK SYSTEMS 500 1000 MOTR MOTOR CLUB OF AMER 500 1000 LFED LEEDS FED SAV BANK 200 500 MPWG MPW INDUSTRIAL SVS 500 1000 LTCW LET'S TALK CELL 500 1000 LABL MULTI COLOR CP 1000 500 LVLT LEVEL 3 COMM INC 200 500 MYST MYSTIC FINANCIAL 500 1000 LIHRY LIHIR GOLD LTD ADR 500 1000 LNDL LINDAL CEDAR HOMES 500 1000 MALT LION BREWERY INC T 500 1000 N JADEF LJ INTL INC 200 500 NTAWF NAM TAI ELEC WTS 500 1000 JADWF LJ INTL WTS 4/2002 200 500 NGEN NANOGEN INC 200 500 LJLB LJL BIOSYSTEMS 200 500 NANX NANOPHASE TECHS CP 500 1000 LGCB LONG ISLAND COMM 500 1000 NARA NARA BANK N A 500 1000 LOILY LUNDIN OIL GDS 500 1000 NBAK NATL BNCP ALASKA 200 500 LYNX LYNX THERAPEUTICS 500 1000 NHHC NATL HOME HLTH CAR 1000 500 NIRTS NATL INC RLTY TR 500 1000 NCBEP NCBE CAP TR I PFD 200 500 M NERAY NERA AS ADR 1000 500 MBLF M B L A FINL CORP 500 200 NECSY NETCOM SYSTEMS ADR 500 1000 MFBC M F B CORP 500 200 NHTB NEW HAMPSHIRE THRI 1000 500 MKFCF MACKENZIE FIN CP 200 500 NHCH NEWMARK HOMES CORP 200 500 MTMS MADE2MANAGE SYS 500 1000 NSBC NEWSOUTH BANCORP I 1000 500 MGNB MAHONING NATL BCP 500 1000 NBCP NIAGARA BANCORP 200 500 MBNK MAIN STREET BNCP 200 500 NOLD NOLAND CO 500 200 MANH MANHATTAN ASSOC 200 500 NRTI NOONEY REALTY TRUS 200 500 MARN MARION CAP HLDGS I 500 1000 NASI NORTH AMERN SCI 500 1000 MARSB MARSH SUPERMARKETS B 1000 500 NBSI NORTH BSCHS INC 1000 500 MSDX MASON-DIXON BCSHS 1000 500 NOVB NORTH VALLEY BNCP 200 500 MSDXO MASON-DIXON TR II 200 500 NRIM NORTHRIM BANK 500 1000 MOIL MAYNARD OIL CO 1000 500 NSCF NORTHSTAR COMPUTER 500 1000 MCCL MCCLAIN INDUSTRIES 1000 500 NWFL NORWOOD FIN CORP 200 500 MBIA MERCHANTS BNCP IL 1000 500 NOVI NOVITRON INTL INC 1000 500 MRCY MERCURY COMP SYS 500 1000 NUTR NUTRACEUTICAL INTL 200 500 MIGI MERIDIAN INS GP IN 500 1000 NYMXF NYMOX PHARM CORP 500 1000 MRET MERIT HOLDING CP 1000 500 METNF METRONET NON-VTG B 500 1000

NASD Notice to Members 98-76 September 1998 591 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level O R OCENY OCE ADR 200 500 RDGE READING ENT INC 500 1000 ODFL OLD DOMINION FREIG 1000 500 RLCO REALCO INC 500 200 OWWI OMEGA WORLDWIDE 200 500 RNWK REALNETWORKS INC 500 1000 OMNI OMNI ENERGY SVCS 500 1000 REFN REGENCY BANCORP 200 500 OXGNW OXIGENE INC WTS 500 1000 RBCF REPUBLIC BKG CP FL 500 1000 OYOG OYO GEOPSPACE CP 500 1000 RESR RESEARCH INC 500 1000 RTROW RETROSPETTIVA WTS 1000 500 RCBK RICHMOND COUNTY 200 500 P RIDG RIDGEVIEW INC 500 1000 PVCC P V C CONTAINER CP 500 1000 RTST RIGHT START INC 1000 500 PBSF PACIFIC BANK NATL 500 1000 RGCO ROANOKE GAS CO 1000 500 PWHS PAPER WAREHOUSE 500 1000 RCCK ROCK FINANCIAL CP 200 500 PBOC PBOC HOLDINGS INC 200 500 ROCLF ROYAL OLYMPIC CRU 500 1000 PCCC PC CONNECTION INC 200 500 PDSFW PDS FINANCIAL WTS 200 500 PMFRA PENNSYLVANIA MAN 500 1000 S PSFC PEOPLES-SIDNEY FIN 500 1000 SJNB S J N B FINANCIAL 500 1000 PFDC PEOPLES BANCORP 200 500 STVI S T V GROUP INC 500 1000 PEBK PEOPLES BANK 200 500 SNDS SANDS REGENT THE 1000 500 PPLS PEOPLES BK CP OF I 200 500 SABB SANTA BARBARA BCP 500 1000 PBKBP PEOPLES CAP TR PFD 500 200 SCNYA SAUCONY INC 1000 500 SBAN PERPETUAL BK FSB 500 1000 OKSBO SBI CAP TR PFD 500 200 PETR PETROCORP INC 1000 500 SCHR SCHERER HEALTHCARE 500 1000 PHLYL PHIL CONS GR PRIDE 200 500 STIZ SCIENTIFIC TECH IN 1000 500 PHLYZ PHIL CONS IN PRIDE 200 500 SENEB SENECA FOODS CP B 500 200 PGLD PHOENIX GOLD INTL 500 1000 SEVN SEVENSON ENVIRONME 500 1000 PTRN PHOTRAN CORP 200 500 SFXE SFX ENT CL A 200 500 PHFC PITTSBURGH HOME FI 1000 500 SHPGY SHIRE PHARM 200 500 PFSL POCAHONTAS BNCP 500 1000 SHOE SHOE PAVILION INC 200 500 BPOPP POPULAR INC PFD A 1000 500 SHBK SHORE BANK 500 200 POWI POWER INTEGRATN 500 1000 SGNS SIGNATURE INNS INC 1000 500 PRFN PRESTIGE FIN CP 1000 500 SBGIP SINCLAIR BRD PFD SE 1000 500 PTVL PREVIEW TRAVEL INC 500 1000 SKAN SKANEATELES BANCP 1000 500 PNBC PRINCETON NATL BNC 500 1000 SMEDF SMED INTL INC 500 1000 PVII PRINCETON VIDEO 500 1000 SOMR SOMERSET GP INC TH 500 200 PRTW PRINTWARE INC 1000 500 SONO SONOSIGHT INC 200 500 PGNX PROGENICS PHARM 500 1000 SORC SOURCE INFO S2S3 500 1000 PGENW PROGENITOR INC WTS 500 1000 UMPQ SOUTH UMPQUA BANK 200 500 POVT PROVANT INC 200 500 SFFB SOUTHERN FIN BNCP 1000 500 PRHC PROVINCE HEALTHCR 500 1000 SMBC SOUTHERN MO BNCP I 1000 500 PRTG PRT GROUP 500 1000 SBSI SOUTHSIDE BANCSHS 200 500 SBSIP SOUTHSIDE CAP TR 200 500 SPLI SPECTRA-PHYSICS 500 1000 Q SDCOZ SPIROS DEV CP UTS 500 1000 QCFB Q C F BANCORP INC 200 500 SGDE SPORTSMEN'S GUIDE 500 1000 QGLY QUIGLEY CORP THE 500 1000 STMT STARMET CORP 500 1000 SFSW STATE FINL SVCS CL 1000 500 SLFI STERLING FINL CP 500 1000 WINS STEVEN MYERS ASSOC 500 1000 SCBHF STIRLING COOKE BRN 500 1000

NASD Notice to Members 98-76 September 1998 592 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level

SXNBP SUCCESS CAP TR I 200 500 CLEC US L E C CP 200 500 SUBK SUFFOLK BNCP 500 1000 USWB US WEB CORPORATION 500 1000 SBGA SUMMIT BANK CORP 1000 500 UBANP USBANCORP CAP TR 200 500 SRDX SURMODICS INC 200 500 SMPX SYMPHONIX DEVICES 500 1000 SYBBF SYNSORB BIOTCH INC 200 500 V VIBC V I B CORP 500 1000 VSEC V S E CP 200 500 T VALN VALLEN CP 500 1000 TAVA T A V A TECH 500 1000 VALU VALUE LINE INC 500 1000 TPNZ TAPPAN ZEE FIN 1000 500 VTRAO VBC CAPITAL I CAP 500 200 TGNT TELIGENT INC 500 1000 VENT VENTURIAN CP 500 1000 TSCP TELSCAPE INTL INC 500 1000 VRIO VERIO INC 200 500 THRNY THORN PLC ADR 500 1000 VRSN VERISIGN INC 500 1000 TIER TIER TECHS CL B 500 1000 VIAX VIAGRAFIX CORP 200 500 TSBK TIMBERLAND BANCORP 500 1000 VBNJ VISTA BANCORP INC 1000 500 TRNI TRANS INDS INC 1000 500 VNWK VISUAL NETWORKS 500 1000 TRGNY TRANSGENE SA ADR 200 500 VTNAF VITRAN CP INC 500 200 TRED TREADCO INC 1000 500 VYSI VYSIS INC 500 1000 TREVW TREEV INC WTS 500 200 TSSS TRIPLE S PLASTICS 500 1000 TFCO TUFCO TECHS INC 1000 500 W WSBI WARWICK COMMUN 500 1000 WSCI WASHINGTON SCI INDS 500 1000 U WASH WASHINGTON TRUST 500 1000 UFPT U F P TECH INC 500 1000 WBSTP WEBSTER PFD CAP B 1000 500 USHG U S HOME & GRDN IN 500 1000 WEFC WELLS FINANCIAL CP 500 1000 USNC U S N COMM INC 500 1000 WEYS WEYCO GP INC 200 500 USVI U S VISION INC 500 1000 WMSI WILLIAMS INDS INC 200 500 UCBC UNION COMM BANCORP 500 1000 WREI WILSHIRE R E INV 200 500 UBCD UNIONBANCORP INC 500 1000 WMFG WMF GROUP LTD 500 1000 UTCIW UNIROYAL TECH CP WTS 200 500 WYNT WYANT CORP 1000 500 UIRT UNITED INVST RLTY 200 500 UPFC UNITED PANAM FIN 200 500 URSI UNITED ROAD SVCS 200 500 Y UTCC URSUS TELECOM CP 200 500 YDNT YOUNG INNOVATIONS 500 1000

NASD Notice to Members 98-76 September 1998 593 Executive Summary By-Laws to require each Executive NASD The National Association of Securi- Representative, beginning no later ties Dealers, Inc. (NASD¨) By-Laws than January 1, 1999, to maintain an were recently amended to require Internet e-mail account for communi- Notice to members’ Executive Representatives cation with the NASD and to update to maintain electronic mail accounts firm contact information via the for the purpose of updating firm con- NASD Regulation Web Site Members tact information electronically by no (www.nasdr.com). later than January 1, 1999. 98-77 Pursuant to Special NASD Notice to Once established, member Internet Members 97-97, the NASD member- access and e-mail will open up many ship approved an amendment to the Executive Representatives options for timely communications NASD By-Laws to require members Must Maintain Internet with members and associated cost to update information electronically savings. It also will assist members and maintain e-mail accounts begin- Electronic Mail Account By with timely internal distribution of ning no later than January 1, 1999. January 1, 1999; NASD information, notices, and pub- This amendment was subsequently Complimentary Hard Copy lications. Thus, effective January 1, approved by the NASD Board of Distribution Of Key 1999, the primary distribution method Governors (Board) and the Securities Publications To End for NASD Notices to Members and and Exchange Commission (SEC). January 1, 1999 Regulatory & Compliance Alert will be via the NASD Regulation, Inc. (NASD RegulationSM) Web Site The NASD must have current and Suggested Routing (www.nasdr.com). Members that accurate records of the names of Senior Management elect not to use the Web Site ver- members’ Executive Representatives sions will have the option of subscrib- and other individuals who hold Advertising ing to hard-copy versions at cost. positions of significant responsibility Continuing Education within member firms. This Questions regarding this Notice may information is used by the Corporate Corporate Finance be directed to Jay Cummings, Direc- Secretary for member balloting, by Executive Representatives tor, Internet and Investor Education, NASD Regulation’s Member Government Securities NASD Regulation, at (301) 590-6070. Regulation Department for compliance purposes, and by Institutional Corporate Communications in Insurance Background And Discussion identifying key individuals for use in Internal Audit Amendment To Article IIV, targeted mailings. The current Section 3 method for acquiring this information Legal & Compliance is through the filing of an NASD form Municipal NASD Regulation established a Web entitled “NASD Member Firm Site that has been operating since Contact Questionnaire” Mutual Fund August 1996. A significant effort is (Questionnaire). Operations being made to provide meaningful Options content for the benefit of member The recent By-Law change will firms and the investing public. Devel- improve the data collection process Registered Representatives opment of Internet technology pre- by requiring each Executive Registration sents an alternative method to Representative to access his/her Research distribute information of interest to firm’s Questionnaire via the NASD industry participants, as well as to Regulation Web Site and update it on Syndicate collect and update member firm infor- a periodic basis. (Each Executive Systems mation. Representative will be able to access only his/her own firm’s Trading On August 5, 1997, the Membership Questionnaire; the information will be Training Committee recommended the adop- password-protected to prevent any Variable Contracts tion of an amendment to the NASD public access.) The information then

NASD Notice to Members 98-77 September 1998 595 will be linked to the internal NASD Representative and his/her of having to check the NASD Regu- Regulation systems that require this designee, as appropriate. Receipt of lation Web Site periodically to deter- data. Further, the By-Law change a password and user identification mine if new information had been requires each member to maintain will enable the Executive posted. In response to this concern, an Internet e-mail address on behalf Representative and his/her designee the Board and the NASD Regulation of its Executive Representative. This to access the NASD Regulation Web Board of Directors approved the dis- e-mail address will be used Site, to update the firm’s continuation of the complimentary proactively to send messages Questionnaire, and to receive e-mail hard-copy distribution of Notices to reminding the Executive from NASD Regulation concerning Members and Regulatory & Compli- Representative to review and update new information or publications that ance Alert with the understanding his/her firm’s contact information and have been posted to its Web Site. that NASD Regulation will proactively to provide notification of important alert Executive Representatives via publications and information that Complimentary Hard Copy their e-mail addresses of the posting have been added to the NASD Distribution Of Key of new Notices to Members and Regulation Web Site. Firms that do Publications To End Regulatory & Compliance Alerts to not wish to acquire e-mail capability Effective January 1, 1999, compli- the NASD Regulation Web Site. solely for their purposes may choose mentary distribution of hard-copy to designate an address in care of a NASD Notices to Members and Reg- Members that elect not to use the vendor that would be responsible for ulatory & Compliance Alert will be Web Site as the source for Notices forwarding information delivered discontinued. The January 1, 1999, to Members and Regulatory & Com- electronically. implementation date was selected to pliance Alert will have the option of coincide with the requirement that subscribing to hard-copy versions. As part of the process to implement each Executive Representative, Each Executive Representative will password protection for each beginning not later than January 1, be eligible for one subscription to Executive Representative, and in 1999, maintain an Internet e-mail Notices to Members at cost, i.e., $15 order to issue user identifications account for communication with the per year. Each branch office will be and passwords, NASD Regulation NASD and to update firm contact eligible for one subscription to Regu- will send a simple information access information via the NASD Regulation latory & Compliance Alert at cost, contract to each firm’s Executive Web Site. NASD Regulation believes also $15 per year. Additional sub- Representative in November. Each that it is sensible to link the imple- scriptions will be available at the cur- Executive Representative will be mentation dates of these two propos- rent charge of $225 per year for each asked to sign the contract on behalf als so that members that currently do additional Notices to Members sub- of his/her firm and to verify his/her not have an e-mail account and scription and $80 per year for each status as the firm’s Executive Internet access can arrange to obtain additional subscription to Regulatory Representative and his/her Internet them at the same time and have time & Compliance Alert. e-mail address. Each firm will have to do so. the option to designate a second Subscriptions may be placed through individual who would be able to In NASD Notice to Members 97-92, NASD MediaSourceSM at (301) 590- access the Questionnaire on behalf NASD Regulation requested mem- 6142. of the Executive Representative. ber comment on the proposal to discontinue complimentary hard-copy © 1998, National Association of Securities Dealers, Once the information access contract distribution of Notices to Members Inc. (NASD). All rights reserved. is signed and returned, NASD and Regulatory & Compliance Alert. Regulation will issue a password and The chief concern expressed by user identification to the Executive commenters was the inconvenience

NASD Notice to Members 98-77 September 1998 596 Executive Summary security for its own market- NASD The National Association of Securi- making account at prices that ties Dealers, Inc. (NASD¨ or Associa- would satisfy the customer’s limit tion) is issuing this Notice to clarify order, without executing that limit Notice to the application of the Association’s order shall be deemed to have Limit Order Protection Rule (Conduct acted in a manner inconsistent Rule IM-2110-2) in instances where with just and equitable principles Members the market for a given security is of trade, in violation of Rule experiencing “abnormal” market con- 2110[.] 98-78 ditions. Specifically, consistent with pronouncements by the Securities In Notice to Members 95-67, the and Exchange Commission (SEC) Association provided guidance as to NASD Clarifies Operation concerning the obligations of Market the obligation of member firms that Of The Limit Order Makers to display customer limit execute a transaction at a price that orders during unusual market condi- would satisfy a customer’s limit order Protection Rule During tions, the NASD is modifying its inter- (i.e., at a price equal to or better than Unusual Market pretation of the Limit Order that of the customer limit order). Conditions Protection Rule that was previously Specifically, in Question 5, the set forth in Notice to Members 95-67, Association stated the following: to provide that, under appropriate circumstances, limit orders need not be Q5: Once a member is obligated Suggested Routing filled within one minute if activated to execute a limit order, how Senior Management during unusual market conditions quickly must it execute the limit and if all reasonable steps are taken order? Advertising to execute the transaction as soon as Continuing Education possible following activation. In such A: If a member trades through a instances, which often occur at the limit order that it has accepted, Corporate Finance opening or upon the commencement the Interpretation provides that it Executive Representatives of trading following a trading halt or must contemporaneously Government Securities an initial public offering (IPO), mem- execute such limit order. To bers are required to execute cus- meet this obligation, a member Institutional tomer limit orders as soon as must execute the limit order as Insurance possible under the circumstances. quickly as possible. Absent Internal Audit reasonable justification that is Questions concerning this Notice adequately documented by the Legal & Compliance may be directed to the Office of Gen- member firm, a limit order must Municipal eral Counsel, The Nasdaq Stock at least be executed within a Market, Inc., at (202) 728-8294, or general time parameter of one Mutual Fund the Market Regulation Department minute after it has been Operations Legal Section, at (301) 590-6410. activated. Options Subsequent to the issuance of this Registered Representatives Discussion one-minute requirement to fill Registration The Limit Order Protection activated limit orders, the SEC Research Interpretation, IM-2110-2, provides adopted its Order Handling Rules in that: August 1996. Specifically, among Syndicate other things, the SEC amended the Systems A member firm that accepts and Firm Quote Rule (SEC Rule 11Ac1- holds an unexecuted limit order 1) and adopted a new rule governing Trading from its customer (whether its the public display of customer limit Training own customer or the customer of orders, the Display Rule (SEC Rule Variable Contracts another member firm) in a 11Ac1-4). The Display Rule requires Nasdaq security and that Market Makers to display the full continues to trade the subject price and size of qualifying customer

NASD Notice to Members 98-78 September 1998 597 limit orders in their quotes, subject to 30 seconds of receipt, the Division conditions, the NASD has likewise certain enumerated exceptions. also stated in the November 22 letter determined to apply this same Once a customer limit order is that “OTC market openings should rationale to the application of the obligated to be publicly displayed in not currently be viewed as ‘normal one-minute reasonableness accordance with the Display Rule, market conditions’ for purposes of parameter in the context of the Display Rule requires that such the Limit Order Display Rule.” In obligations under the Limit Order customer limit order be displayed such cases, during OTC market Protection Interpretation. “immediately,” unless a specific openings, the Division stated that Accordingly, to the extent that exception to the rule applies. In the “limit orders held at the opening must unusual market conditions exist for a release accompanying the adoption be displayed as soon as practicable particular Nasdaq¨ security (i.e., “not of the Order Handling Rules, the under the circumstances.” normal”) and a member executes a SEC gave the following guidance as transaction that activates a limit order to what it meant by “immediately In its January 3, 1997 letter to the during this time period, such member display”: NASD, the Division stated that would not be presumptively deemed “normal market conditions” do not in violation of the Limit Order Assuming that a specialist or exist for the purposes of strict Protection Rule if it failed to execute OTC market maker does not rely compliance with the Display Rule’s the limit order within a one-minute on one of the exceptions to the “30 seconds after receipt” period, provided the member Display Rule, . . . such specialist requirement in an additional two executed the order as soon as or OTC market maker must situations: reopening of trading after possible under the circumstances. In display the order as soon as a trading halt; and the this connection, as fully consistent practicable after receipt which, commencement of trading in an IPO. with the SEC’s interpretation of the under normal market conditions, In this letter, the Division also gave Display Rule, “normal market would require display no later guidance on how a Market Maker is conditions” potentially do not include than 30 seconds after receipt. to determine when market conditions OTC market openings for specific have returned to “normal,” such that securities, the resumption of trading Subsequent to the adoption of the customer limit orders are required to after a trading halt, and the Order Handling Rules, the SEC’s be publicly displayed within 30 commencement of trading after an Division of Market Regulation (the seconds: “The Division believes that IPO. In every case where normal Division) clarified in two letters to the market makers must make an market conditions do not exist, NASD, dated November 22, 1996, independent assessment, based on Market Makers must make an and January 3, 1997, what the SEC the trading conditions of the stock, as independent assessment, based on meant by “30 seconds after receipt” to when trading and quoting in the the trading conditions of the specific and “normal market conditions.” In stock has returned to normal market security, as to when trading and the November 22, 1996 letter, the conditions. This time frame could be quoting in the stock has returned to Division stated that the “30 second one minute for some stocks and normal market conditions. This time time period [for the display of a longer for others; moreover, the time frame could be one minute for some customer limit order] begins when frame for a stock to return to normal stocks and longer for others; the order is received by the specialist market conditions could vary from moreover, the time frame for a stock or trader that will display the order (or day to day.” to return to normal market conditions the firm’s automated display could vary from day to day. system).” As for when market In light of the Division’s statements conditions are not “normal,” such that regarding the application of the © 1998, National Association of Securities Dealers, OTC Market Makers would not be Display Rule in the circumstance Inc. (NASD). All rights reserved. required to display limit orders within where there are not normal market

NASD Notice to Members 98-78 September 1998 598 As of July 23, 1998, the following bonds were added to the Fixed Income NASD Pricing SystemSM (FIPS¨). Notice to Symbol Name Coupon Maturity ACCC.GA Advanced Accessory Corp 9.750 10/01/07 ACF.GB Amercredit Corp 9.250 02/01/04 Members ACHD.GA Amscan Holdings Inc 9.875 12/15/07 ACHT.GA Amer Architectural Prods Corp 11.750 12/01/07 98-79 ADLA.GK Adelphia Communications Corp 8.375 02/01/08 AEPI.GB AEP Industries Inc. 9.875 11/15/07 AGLS.GB Anchor Glass Container Corp 9.875 03/15/08 AGLS.GC Anchor Glass Container Corp 11.250 04/01/05 ALYM.GA Amer Lawyer Media Hldgs Inc 12.250 12/15/08 Fixed Income Pricing ALYW.GA Amer Lawyer Media Inc 9.750 12/15/07 System Additions, AMAQ.GA AMSC Acquisition Co Inc 10.250 04/01/08 Changes, And Deletions AMI.GC Acme Metals Inc 10.000 12/15/07 As Of July 23, 1998 AOR.GC Aurora Foods Inc 8.750 07/01/08 BEC.GD Beckman Instruments Inc 7.100 03/04/03 BEC.GE Beckman Instruments Inc 7.450 03/04/08 BKEI.GB Burke Industries Inc 9.687 08/15/07 BKI.GA Buckeye Technologies Inc 8.000 10/15/10 Suggested Routing BVCC.GA Bay View Capital Corp 9.125 08/15/07 Senior Management BXG.GA Bluegreen Corp 10.500 04/01/08 CBS.GA CBS Corp 7.150 05/20/05 Advertising CDIG.GH CSC Holdings Inc 7.250 07/15/08 Continuing Education CDIG.GI CSC Holdings Inc 7.625 07/15/18 CFS.GA Comforce Corp 15.000 12/01/09 Corporate Finance CGXE.GA Cogentrix Energy Inc 8.100 03/15/04 Government Securities COF.GA Capital One Financial Corp 7.125 08/01/08 Institutional COSE.GB Costilla Energy Inc 10.250 10/01/06 CREQ.GA Crescent Real Estate Equities Ltd 6.625 09/15/02 Insurance CREQ.GB Crescent Real Estate Equities Ltd 7.125 09/15/07 Internal Audit CVXP.GM Cleveland Electric Illum Co 7.880 11/01/17 Legal & Compliance CWAL.GA Commonwealth Aluminum Corp 10.750 10/01/06 DAYI.GB Day Intl Group Inc 9.500 03/15/08 Municipal DKCL.GA Doskocil Mfg Co Inc 10.125 09/15/07 Mutual Fund DSIN.GA Desa International Inc 9.875 12/15/07 EGFM.GA Eagle Family Foods Inc 8.750 01/23/98 Operations EPHO.GB Econophone Inc 11.000 02/15/08 Options EPIH.GC Eagle-Picher Industries Inc 9.000 11/29/99 Registered Representatives ESA.GA Extended Stay Amer Inc 9.150 03/15/08 FCLT.GA Facilicom Intl Inc 10.500 01/15/08 Registration FERP.GA Ferrellgas Partners L.P. 9.375 06/15/06 Research FJ.GA Fort James Corp 9.000 02/01/06 Syndicate FM.GA Foodmaker Inc 8.375 04/15/08 FMNI.GA FM 1993A Corp 9.750 11/01/03 Systems FOMX.GE Foamex LP/Foamexcap Corp 13.500 08/15/05 Trading FRAG.GA French Fragrance Inc 10.375 05/15/07 FWTN.GA FWT Inc 9.875 11/15/07 Training FXFW.GB Fox Family Worldwide Inc 10.250 11/01/07 Variable Contracts GBTV.GC Granite Broadcasting Corp 8.875 05/15/08 GCR.GF Gaylord Container Corp 9.375 06/15/07 GCR.GG Gaylord Container Corp 9.875 02/15/08

NASD Notice to Members 98-79 September 1998 599 Symbol Name Coupon Maturity

GOTH.GB Gothic Energy Corp 14.125 05/01/06 HMHP.GC HMH Properties Inc 7.875 08/01/05 HMHP.GD HMH Properties Inc 7.875 08/01/08 HVCP.GA Haven Capital Trust I 10.46 02/01/27 ICFC.GA Icon Fitness Corp 14.000 11/15/06 ICOG.GA ICO Global Communication Hldgs 15.00 08/01/05 IGL.GA IMC Global Inc 9.450 12/12/11 IGRP.GC ICG Holding Inc 11.625 03/15/07 IKN.GA Ikon Ofﬁce Solutions Inc 7.300 11/01/27 ITCD.GB ITC Delta Com Inc 8.875 03/01/08 KES.GA Keystone Consolidated Ind Inc 9.625 08/01/07 KMCP.GA Kmart Corp 9.78 01/05/20 KMCP.GB Kmart Corp 9.35 01/02/20 KMCP.GC Kmart Corp 8.99 07/05/10 KMFD.GA Kmart Funding Corp 9.44 07/01/18 KMFD.GB Kmart Funding Corp 8.80 07/01/10 KMFD.GC Kmart Funding Corp 7.56 01/01/99 LAAC.GA La Petite Academy Inc 10.00 05/15/08 LBPB.GA Liberty Group Pub Inc 11.625 02/01/09 LVLT.GA Level 3 Communications Inc 9.125 05/01/08 MCNC.GA MCMS Inc 9.750 03/01/08 MPTR.GA ML Cap Tr I 9.875 03/01/27 NAFC.GA Nash Finch Co 8.500 05/01/08 NOPT.GA Northeast Optic Network Inc 12.75 08/15/08 NUMA.GA Numatics Inc 9.625 04/01/08 NXTL.GG NexTel Communication Inc 11.500 09/01/03 OLYM.GC Olympic Financial Ltd 10.125 03/15/01 PENN.GA Penn National Gaming Inc 10.625 12/15/04 PNM.GH Public Service Co New Mex 7.50 08/01/18 PNM.GI Public Service Co New Mex 7.1 08/01/05 PRLU.GA Price Communications Cellular Hldg 11.25 08/15/08 PUCR.GA Production Resources Group LLC 11.500 01/15/08 SFHP.GA SF Holdings Group Inc 12.750 03/15/08 TDHC.GA Thermadyne Holdings Corp 12.500 06/01/98 TMWR.GA Time Warner Telecom LLC/Inc 9.750 07/15/08 TWA.GC Trans World Airlines Inc 11.375 04/15/03 WDMR.GA Windmer-Durable Hldgs Inc 10.000 07/31/08

As of July 23, 1998, the following bonds were deleted from FIPS.

Symbol Name Coupon Maturity

ACNI.GD American Medical Intl Inc 13.500 08/15/01 AMI.GB American Medical Intl Inc 11.375 02/01/95 AXAI.GA Axia Inc 11.000 03/15/01 BYX.GA Bayou Steel Corp LA Place 10.250 03/01/01 CLNH.GA CLN Holdings Inc 0.00 05/15/01 DOSK.GA Doskocit Cos Inc 9.750 07/15/00 ENGL.GA Engle Homes Inc 11.750 12/15/00 FITZ.GA Fitzgerald Gaming Corp New 13.000 12/31/02 FLM.GC Fleming Cos Inc 9.500 04/01/16

NASD Notice to Members 98-79 September 1998 600 Symbol Name Coupon Maturity

FOMX.GC Foamex L.P./Cap Corp 9.500 06/01/00 GOTH.GA Gothic Energy Corp 12.250 09/01/04 IKN.GA Ikon Ofﬁce Solutions Inc 7.300 11/01/27 MMG.GB Metromedia Intl Group Inc 9.5 08/01/98 NXTL.GG Nextel Communications Inc 11.500 09/01/03 PKBR.GA Park Broadcasting Inc 11.750 05/15/04 RYDR.GA Ryder Trust Inc 10.000 12/01/06 STVN.GA Stevens J P & Co Inc 9.000 03/01/17 U.GB U.S. Air Inc 10.000 07/01/03 UTCI.GA Uniroyal Tech Corp 11.750 06/01/03

As of July 23, 1998, changes were made to the symbols of the following FIPS bonds:

New Symbol Old Symbol Name Coupon Maturity

ACNI.GD AMI.GD American Medical Intl Inc 13.500 08/15/01 ACNI.GE AMI.GE American Medical Intl Inc 11.000 10/15/00 AMI.GA ACME.GA Acme Metals Inc 12.500 08/01/02 AMI.GB ACME.GB Acme Metals Inc 13.500 08/01/04 AOR.GA AURO.GA Aurora Foods Inc 9.875 02/15/07 AOR.GB AURO.GB Aurora Foods Inc 9.875 02/15/07 BUCL.GB BKI.GB Buckeye Cellulose Inc 8.500 12/15/05 BUCL.GC BKI.GC Buckeye Cellulose Inc 9.250 09/15/08 CYYS.GA CTYS.GA Cityscape Financial Corp 12.750 06/01/04 MPN.GA PGN.GA Mariner Post-Acute Network Inc 10.50 11/01/07

All bonds listed above are subject to trade-reporting requirements. Questions pertaining to FIPS trade-reporting rules should be directed to Stephen Simmes, NASDR Market Regulation, at (301) 590-6451.

Any questions regarding the FIPS master ﬁle should be directed to Cheryl Glowacki, Nasdaq¨ Market Operations, at (203) 385-6310.

NASD Notice to Members 98-79 September 1998 601 NASD Regulation, Inc. (NASD Firm Fined, Individual Disciplinary RegulationSM) has taken disciplinary Sanctioned actions against the following firms Investors Associates, Inc. (Hack- and individuals for violations of ensack, New Jersey) and Herman Actions National Association of Securities Epstein (Registered Principal, Dealers, Inc. (NASD¨) rules; federal Franklin Lakes, New Jersey) sub- securities laws, rules, and regula- mitted an Offer of Settlement pur- tions; and the rules of the Municipal suant to which they were censured Securities Rulemaking Board and fined $20,000, jointly and sever- Disciplinary Actions (MSRB). Unless otherwise indicated, ally, and Epstein was suspended Reported For September suspensions will begin with the open- from association with any NASD ing of business on Monday, Septem- member as a general securities prin- ber 21, 1998. The information cipal for six months. Without admit- relating to matters contained in this ting or denying the allegations, the Notice is current as of the end of respondents consented to the August 24. described sanctions and to the entry of findings that the firm, acting through Epstein, failed to file cus- Firm Expelled tomer complaint statistics and failed Stratton Oakmont, Inc. (Lake Suc- to establish written procedures to cess, New York) submitted an Offer supervise the activities of its associ- of Settlement pursuant to which the ated persons reasonably designed to firm was expelled from NASD mem- achieve compliance with the NASD bership. Without admitting or denying reporting requirements. the allegations, the firm consented to the described sanction and to the entry of findings that it arranged sales Firms and Individuals Fined of large quantities of securities in ini- Atlanta-One, Inc. n/k/a K. Michael tial public offerings (IPOs) with pre- & Company (Irvine, California), arrangement that the purchasers of Kevin Michael McCarthy (Regis- the securities would sell or “flip” the tered Principal, Irvine, California), securities back to the firm at a prede- and Thomas William Blodgett termined price in the immediate after- (Registered Principal, Irvine, Cali- market. The findings also stated that fornia). The firm was fined $25,000 the firm bid for or purchased securi- and ordered to reimburse customers ties for its own account prior to its for commissions charged in excess completion of a public distribution and of eight percent on a principal pre-sold securities in the aftermarket amount in excess of $500 for restitu- prior to the close of certain offerings. tions totaling $291,546.02. In addi- Furthermore, the NASD determined tion, the firm was ordered to that the firm required customers to reimburse a customer for a commis- buy securities in the aftermarket as a sion in excess of 20 percent on a condition of obtaining securities in principal amount less than $500. IPOs, manipulated the price of a McCarthy was censured and fined security, and charged excessive $10,000, and Blodgett was censured markups. Moreover, the firm violated and fined $10,000. The Los Angeles the NASD’s Free-Riding and With- District Business Conduct Committee holding Interpretation and failed to (DBCC) imposed the sanctions fol- supervise its trading activities. lowing a remand of a National Adju- dicatory Council (NAC) decision. The sanctions were based on findings that the firm, acting through McCarthy and Blodgett, charged public customers excessive and

NASD Notices to Members—Disciplinary Actions September 1998 603 unfair commissions on transactions achieve compliance with the applica- and with NASD rules concerning in foreign currency options. ble securities laws and regulations front running. The findings also stat- regarding trade reporting, best exe- ed that the firm failed to enforce its Mischler Financial Group, Inc. cution, the Limit Order Protection written supervisory procedures con- (Corona Del Mar, California) and Interpretation, firm quote obligations, cerning transactions for or by associ- Walter Michael Mischler (Regis- and the reporting of options positions ated persons that required an tered Principal, Huntington Beach, to the NASD. associated person to obtain prior California) submitted a Letter of written approval of the manager Acceptance, Waiver and Consent CFS Brokerage Corporation (Min- before purchasing or selling any pursuant to which they were cen- netonka, Minnesota) submitted a securities for his or her account. sured and fined $12,500, jointly and Letter of Acceptance, Waiver and severally, with two other individuals. Consent pursuant to which the firm Mayer & Schweitzer, Inc. (Jersey Without admitting or denying the alle- was censured and fined $69,622. City, New Jersey) submitted a Letter gations, the respondents consented Without admitting or denying the alle- of Acceptance, Waiver and Consent to the described sanctions and to the gations, the firm consented to the pursuant to which the firm was cen- entry of findings that the firm, acting described sanctions and to the entry sured and fined $10,000. Without through Mischler, participated in a of findings that it permitted individu- admitting or denying the allegations, private placement contingency offer- als to conduct a securities business the firm consented to the described ing and failed to forward investor and to act in a registered capacity sanctions and to the entry of findings funds to a properly established bank when each individual’s registration that it failed to execute orders and escrow account. Instead, these funds had lapsed for non-compliance with thereby failed to honor its published were deposited into a bank account the Regulatory Element of the Con- quotation. maintained by a non-bank agent and tinuing Education requirements. commingled with other funds entrust- M. H. Meyerson & Co., Inc. (Jersey ed to the agent until the contingency Herzog, Heine, Geduld, Inc. (Jer- City, New Jersey) submitted a Letter was met. The findings also stated sey City, New Jersey) submitted a of Acceptance, Waiver and Consent that the firm, acting under the direc- Letter of Acceptance, Waiver and pursuant to which the firm was cen- tion and control of Mischler, failed to Consent pursuant to which the firm sured and fined $12,500. Without have and maintain sufficient mini- was censured and fined $10,000. admitting or denying the allegations, mum net capital in contravention of The firm must also undertake to the firm consented to the described the Securities and Exchange Com- revise its written supervisory proce- sanctions and to the entry of findings mission (SEC) Rule 15c3-1. dures relating to firm quote compli- that it failed to execute orders and ance. Without admitting or denying thereby failed to honor its published Firms Fined the allegations, the firm consented to quotation. The findings also stated Bear, Stearns & Company, Inc. the described sanctions and to the that the firm failed to establish, main- (New York, New York) submitted a entry of findings that it failed to exe- tain, and enforce written supervisory Letter of Acceptance, Waiver and cute orders and thereby failed to procedures reasonably designed to Consent pursuant to which the firm honor its published quotation. achieve compliance with the applica- was censured, fined $33,500, and ble securities laws and regulations required to pay restitution and inter- Johnson Rice & Company, L.L.C. concerning the SEC’s Firm Quote est totaling $1,084 to public cus- (New Orleans, Louisiana) submit- Rule and other related rules of the tomers. Without admitting or denying ted a Letter of Acceptance, Waiver NASD. the allegations, the firm consented to and Consent pursuant to which the the described sanctions and to the firm was censured and fined Piper Jaffray, Inc. (Minneapolis, entry of findings that it reported trans- $10,000. The firm also consented to Minnesota) submitted a Letter of actions to Automated Confirmation a compliance conference. Without Acceptance, Waiver and Consent Transaction Service (ACT) in viola- admitting or denying the allegations, pursuant to which the firm was cen- tion of applicable securities laws and the firm consented to the described sured and fined $12,500. Without regulations regarding trade reporting sanctions and to the entry of findings admitting or denying the allegations, and customer limit orders. Further- that it failed to establish, maintain, the firm consented to the described more, the NASD determined that the and enforce written supervisory pro- sanctions and to the entry of findings firm failed to establish, maintain, and cedures reasonably designed to that it failed to execute orders and enforce adequate written supervisory achieve compliance with the applica- thereby failed to honor its published procedures reasonably designed to ble securities laws and regulations, quotation. The findings also stated

NASD Notices to Members—Disciplinary Actions September 1998 604 that the firm failed to establish, main- jections to customers, and made Scott David Bobrow (Registered tain, and enforce written supervisory unsuitable recommendations to a Representative, New York, New procedures reasonably designed to public customer. York) submitted a Letter of Accep- achieve compliance with the applica- tance, Waiver and Consent pursuant ble securities laws and regulations James A. Bahl (Registered Repre- to which he was censured, fined concerning the SEC’s Firm Quote sentative, Moline, Illinois) submit- $15,000, and suspended from asso- Rule and other related rules. ted a Letter of Acceptance, Waiver ciation with any NASD member in and Consent pursuant to which he any capacity for 45 days. Without Robertson, Stephens & Company was censured, fined $12,646, barred admitting or denying the allegations, (San Francisco, California) submit- from association with any NASD Bobrow consented to the described ted a Letter of Acceptance, Waiver member in any capacity, and ordered sanctions and to the entry of findings and Consent pursuant to which the to pay $2,529.22 in restitution to cus- that, in order to reach his sales firm was censured and fined tomers. Without admitting or denying quota, Bobrow altered the records of $12,500. Without admitting or deny- the allegations, Bahl consented to public customers, enrolled them in a ing the allegations, the firm consent- the described sanctions and to the financial planning service program, ed to the described sanctions and to entry of findings that he took cash and changed their mailing addresses the entry of findings that it failed to payments for insurance from public in order to conceal the charges to be execute orders and thereby failed to customers and used the proceeds for assessed against their accounts, all honor its published quotation. The some purpose other than for the ben- without the customers’ knowledge or findings also stated that the firm efit of the customers, without their authorization. failed to establish, maintain, and knowledge or consent. Furthermore, enforce written supervisory proce- the NASD found that Bahl then made Bobrow’s suspension commenced dures reasonably designed to the payments those customers with the opening of business on achieve compliance with the applica- intended be made with the cash pay- August 12, 1998, and concludes at ble securities laws and regulations ments from checks he received from the close of business September 25, concerning the SEC’s Firm Quote other customers who had given him 1998. Rule and other related rules. the checks to make insurance premium payments and to pay back a loan Thomas Franklin Bridgman (Reg- they had taken on one of their insur- istered Representative, Staten Individuals Barred or ance policies. The NASD determined Island, New York) submitted an Suspended that Bahl took a total of $2,529.22 Offer of Settlement pursuant to which Robert C. Abrahamson, Jr. (Regis- from these customers’ checks in this he was censured, suspended from tered Representative, Hicksville, manner without their knowledge or association with any NASD member New York) submitted a Letter of consent. in any capacity for eight months, and Acceptance, Waiver and Consent required to undertake a three-year pursuant to which he was censured, Donald James Blumer (Registered period of enhanced supervision upon fined $42,775, suspended from asso- Representative, Sioux Falls, South completion of the suspension. With- ciation with any NASD member in Dakota) submitted a Letter of Accep- out admitting or denying the allega- any capacity for 80 business days, tance, Waiver and Consent pursuant tions, Bridgman consented to the and required to pay $46,646 in resti- to which he was censured, fined described sanctions and to the entry tution to public customers. Without $49,000, and barred from association of findings that, in an effort to conceal admitting or denying the allegations, with any NASD member in any a net short position he incurred in his Abrahamson consented to the capacity. Without admitting or deny- member firm’s proprietary account, described sanctions and to the entry ing the allegations, Blumer consent- he entered a fictitious buy order for of findings that he made material ed to the described sanctions and to treasury notes in his firm’s computer- misrepresentations and omissions to the entry of findings that he deposit- ized trading blotter. In an effort to public customers in connection with ed a $9,800 check from public cus- conceal unrealized trading losses he the purchase of stock and executed tomers into a bank account he incurred from the previous day’s trad- unauthorized transactions in a cus- controlled, and converted the funds ing activities, he entered fictitious tomer’s account. The findings also to his own use and benefit without profitable trades on his firm’s books stated that Abrahamson failed to the knowledge or consent of the cus- and records to offset the losses. execute a sell order or failed to exe- tomers. cute it in a timely manner, made Bridgman’s suspension commenced fraudulent and/or negligent price pro- with the opening of business on

NASD Notices to Members—Disciplinary Actions September 1998 605 September 1, 1997, and concluded tion concerning the financial circum- Waiver and Consent pursuant to at the close of business April 30, stances of purchasers in a private which he was censured, fined 1998, and is deemed served. placement offering thereby causing $20,000, and barred from association his member firm’s records to be inac- with any NASD member in any Lawrence Paul Bruno, Jr. (Regis- curate. Moreover, the NASD deter- capacity. Without admitting or deny- tered Representative, Brooklyn, mined that Clark negligently made ing the allegations, Cox consented to New York) was censured, fined certain representations regarding the the described sanctions and to the $25,000, barred from association merits and potential appreciation of entry of findings that he received a with any NASD member in any the debt securities being offered that blank check in the amount of $2,000 capacity, and ordered to disgorge were inaccurate and misleading, from a public customer and blank $678,067 in commissions. The NAC omitted to disclose certain informa- money orders totaling $2,000 from affirmed the sanctions following tion that was material to the decision another customer intended for appeal of a New York DBCC deci- to invest in these securities, and did deposit into each of the customer’s sion. The sanctions were based on not provide a private placement money market accounts. Instead, findings that Bruno arranged to have memorandum to unaccredited Cox cashed the checks and money an impostor take the Series 7 exam investors in advance of their pur- orders, and converted the funds to on his behalf. chases. In addition, Clark effected his own use and benefit, without the the purchase of bonds in a customer customers’ knowledge or consent. Santino A. Carnemolla (Registered account without the customer’s prior Representative, Brooklyn, New authorization and consent. Paul Joseph Digangi (Registered York) submitted a Letter of Accep- Representative, Cheshire, Con- tance, Waiver and Consent pursuant Guy Weiland Courtney (Registered necticut) submitted a Letter of to which he was censured, fined Principal, Barrington, Illinois) sub- Acceptance, Waiver and Consent $51,400, barred from association mitted a Letter of Acceptance, Waiv- pursuant to which he was censured, with any NASD member in any er and Consent pursuant to which he fined $50,000, and barred from asso- capacity, and ordered to pay was censured, fined $25,000, and ciation with any NASD member in $13,471.89 in restitution to cus- barred from association with any any capacity. Without admitting or tomers. Without admitting or denying NASD member in any capacity. With- denying the allegations, Digangi con- the allegations, Carnemolla consent- out admitting or denying the allega- sented to the described sanctions ed to the described sanctions and to tions, Courtney consented to the and to the entry of findings that he the entry of findings that he executed described sanctions and to the entry misappropriated to his own use and securities transactions in the of findings that he failed to respond benefit a total of $7,850 from a public accounts of public customers without fully to NASD requests for informa- customer in connection with a life the knowledge, consent, or autho- tion. insurance policy and a variable rization of the customers. The find- investment plan. In connection with ings also stated that Carnemolla Charles G. Cowden (Registered the misappropriations, Digangi failed to respond to NASD requests Principal, Sanford, Florida) was forged the signature of the customer for information. censured, fined $10,000, suspended on checks, a disbursement request, from association with any NASD and fund withdrawal forms. Jeffrey Elmer Clark (Registered member in any capacity for 90 days, Representative, Mesa, Arizona) and required to requalify by exam Jeffrey Lynn Elliott (Registered submitted a Letter of Acceptance, before acting in any capacity requir- Representative, Jacksonville, Waiver and Consent pursuant to ing registration. The sanctions were Florida) was censured, fined $7,500, which he was censured, fined based on findings that Cowden par- suspended from association with any $10,000, suspended from associa- ticipated in private securities transac- NASD member in any capacity for tion with any NASD member in any tions with investors without giving two years, and ordered to requalify capacity for 15 days, ordered to dis- prior written notice to or receiving before again associating with a mem- gorge $2,500 in commissions, and written approval from his member ber of the NASD. The sanctions were required to requalify by exam as a firm of his proposed participation in based on findings that Elliott registered representative. Without said transactions. obtained $452.60 from a public cus- admitting or denying the allegations, tomer intended as insurance policy Clark consented to the described Daniel Frederick Cox (Registered premium payments and failed to pro- sanctions and to the entry of findings Representative, Burlington, Iowa) cess them through his office where that he entered inaccurate informa- submitted a Letter of Acceptance, they could have been tracked.

NASD Notices to Members—Disciplinary Actions September 1998 606 Instead, Elliott mishandled the funds Russell D. Goldner (Registered Michael Andrew Harrington (Reg- and took no steps to ensure that they Representative, Cincinnati, Ohio) istered Representative, Brooklyn, were applied as requested. The find- submitted a Letter of Acceptance, New York) submitted an Offer of ings also stated that Elliott failed to Waiver and Consent pursuant to Settlement pursuant to which he was respond to NASD requests for infor- which he was censured, fined censured and suspended from asso- mation in a timely manner. $5,633.16, suspended from associa- ciation with any NASD member in tion with any NASD member in any any capacity for one year. Without James Patrick Felton, Jr. (Regis- capacity for two weeks, and required admitting or denying the allegations, tered Representative, Random to requalify as a general securities Harrington consented to the Lake, Wisconsin) was censured, representative by taking the Series 7 described sanctions and to the entry fined $40,000, and barred from asso- exam. If Goldner fails to complete of findings that he failed to appear for ciation with any NASD member in and pass the exam, he shall be sus- testimony before the NASD. any capacity. The sanctions were pended from acting in any capacity based on finding that Felton failed to until such time as he does complete Gary John Kircher (Registered respond to NASD requests for infor- and pass the exam. Without admit- Representative, Dallas, Texas) mation. ting or denying the allegations, Gold- submitted an Offer of Settlement pur- ner consented to the described suant to which he was censured, Adam Craig Friedland (Registered sanctions and to the entry of findings fined $50,000, and suspended from Principal, Woodbury, New York) that he induced a public customer to association with any NASD member submitted a Letter of Acceptance, purchase securities by misrepresent- in any capacity for 18 months. With- Waiver and Consent pursuant to ing to the customer that he pos- out admitting or denying the allega- which he was censured, fined sessed insider information. The tions, Kircher consented to the $15,000, and suspended from asso- findings also stated that Goldner pro- described sanctions and to the entry ciation with any NASD member in vided a public customer with sales of findings that he exercised discre- any capacity for 15 business days. materials marked “for internal use tion to effect transactions in the Without admitting or denying the alle- only” without obtaining prior approval accounts of public customers without gations, Friedland consented to the to distribute the materials from his obtaining prior written authorization described sanctions and to the entry member firm. from the customers. The findings of findings that he induced a public also stated that Kircher recommend- customer to purchase a speculative Richard Timothy Greene (Regis- ed and effected unsuitable option security by extolling the merits and tered Representative, Pittsboro, transactions for a customer and potential investment performance of North Carolina) was censured, fined made false and misleading state- the security without discussing the $10,000, and barred from association ments to customers in connection risks and predicting that the market with any NASD member in any with index option transactions. price of the security would experi- capacity. The NAC imposed the ence a substantial increase in value sanctions following its call for review Duane Joseph Koerner (Regis- within a specific period of time with- of an Atlanta DBCC decision. The tered Representative, Denver, Col- out an adequate or reasonable basis sanctions were based on findings orado) submitted an Offer of in fact. Friedland also aggressively that Greene forged the signature of a Settlement pursuant to which he was discouraged a customer’s unsolicited public customer on annuity-related censured, fined $15,600, suspended sell order without a reasonable basis documents. from association with any NASD for doing so and without regard to the member in any capacity for 15 busi- best interests of the customer, there- Kevin Joseph Guarino (Registered ness days, and required to pay by causing the customer to incur Representative, Garden City, New $1,150 in restitution to a public cus- additional monetary losses. In addi- York) was censured, fined $30,000, tomer. Without admitting or denying tion, the findings stated that Fried- and barred from association with any the allegations, Koerner consented to land predicted that the market price NASD member in any capacity. The the described sanctions and to the of a speculative security would expe- sanctions were based on findings entry of findings that he entered rience a substantial price increase that Guarino failed to respond to orders to effect securities transac- without having an adequate, accu- NASD requests to appear for an on- tions in the account of a public cus- rate, or reasonable basis for such the-record interview. tomer without the customer’s prior prediction. authorization. The findings also stated that Koerner made false and misleading statements to a customer

NASD Notices to Members—Disciplinary Actions September 1998 607 that were related to the status of the ties, Lagpacan actually used their Michael Joseph Markowski (Reg- customer’s account. funds to purchase real estate in the istered Principal, Miami Beach, name of a corporation he controlled Florida) and Joseph F. Riccio Ernest O. Kraemer, Jr. (Registered and to pay the corporation’s expens- (Registered Representative, Palm Representative, New Orleans, es. The findings also stated that Lag- Harbor, Florida). Markowski was Louisiana) submitted a Letter of pacan sold for $40,000 to a public censured, fined $300,000, and Acceptance, Waiver and Consent customer fictitious certificates of barred from association with any pursuant to which he was censured, deposit purportedly issued by a firm NASD member in any capacity, and fined $15,000, and suspended from and misappropriated the proceeds to Riccio was censured, fined association with any NASD member other uses. Lagpacan also failed to $250,000, and barred from associa- in any capacity for 10 days. Without respond to NASD requests for infor- tion with any NASD member in any admitting or denying the allegations, mation. capacity. The NAC imposed the Kraemer consented to the described sanctions following appeal of a Mar- sanctions and to the entry of findings Edward Bartlett Leach (Registered ket Regulation Committee decision. that he recommended and engaged Representative, Austin, Texas) The sanctions were based on find- in a strategy of trading options and submitted a Letter of Acceptance, ings that Markowski and Riccio the purchase of a commodities pool Waiver and Consent pursuant to effected numerous transactions in an limited partnership in the joint which he was censured, fined underwritten security and induced accounts of public customers, when $25,000, and barred from associa- others to purchase and sell such he did not have reasonable grounds tion with any NASD member in any securities at artificial prices by means for believing that these recommenda- capacity. Without admitting or deny- of manipulative, deceptive, and other tions and resultant transactions were ing the allegations, Leach consented fraudulent devices and contrivances. suitable for the customers on the to the described sanctions and to the In addition, the respondents pub- basis of their age, financial situation, entry of findings that he recommend- lished quoted prices for the security investment objectives, and needs. ed and effected the purchase and which they knew or should have The findings also stated that Krae- sale of stock options for the accounts known were not bona fide and were mer provided inaccurate information of public customers without having a published for manipulative, decep- regarding the investment experience reasonable basis for believing that tive, and fraudulent purposes. Fur- of public customers on the new the recommendations were suitable thermore, Markowski was account documents and options for the customers based upon the responsible for not taking appropriate agreements relating to their joint facts known to him concerning the action to address his member firm’s account held at his member firm. nature of the securities purchases for violations of certain terms in its the customers’ accounts, their invest- restriction agreement with the NASD Emmanuel Alexander Lagpacan ment objectives, financial situation and failed to respond timely to NASD (Registered Representative, and needs. requests to appear for an on-the- Lafayette, California) submitted an record interview. Offer of Settlement pursuant to which Robert Lee Lent (Registered Rep- he was censured, fined $350,000, resentative, Brownsville, Pennsyl- Markowski and Riccio have and barred from association with any vania) was censured, fined $35,000, appealed this action to the SEC and NASD member in any capacity. and barred from association with any the sanctions, other than the bar, are Without admitting or denying the alle- NASD member in any capacity. The not in effect pending consideration of gations, Lagpacan consented to the sanctions were based on findings the appeal. described sanctions and to the entry that Lent failed to respond to NASD of findings that he engaged in fraud- requests for information. John M. Martello (Registered Rep- ulent acts, practices, or courses of resentative, Staten Island, New business by which he solicited public Anthony Littles (Registered Rep- York) was censured, fined $30,000, customers to invest funds totaling resentative, Sanford, Florida) was and barred from association with any $254,310.79 in securities offered in a censured, fined $40,000, and barred NASD member in any capacity. The firm he held out to be his own advi- from association with any NASD sanctions were based on findings sory business. According to the find- member in any capacity. The sanc- that Martello executed an unautho- ings, while representing to the tions were based on findings that Lit- rized transaction in the account of a customers that they were investing in tles failed to respond to NASD public customer. Martello then made mutual funds, annuities, government requests for information. threats and misrepresentations to the securities, and other low risk securi- customer to force the customer to

NASD Notices to Members—Disciplinary Actions September 1998 608 agree to and to pay for a trade he did restitution to the appropriate parties. $2,700 received from the customer not want. Martello also failed to Without admitting or denying the alle- with his personal funds, and convert- respond to NASD requests to appear gations, Mitchell consented to the ed the funds to his own use and ben- for an on-the-record interview. described sanctions and to the entry efit without the customer’s of findings that he received checks knowledge, authorization, or con- Frank Rocky Mazzei (Registered totaling $14,150 from public cus- sent. Napoli also failed to respond to Representative, Oceanport, New tomers for the purpose of investing in NASD requests for information. Jersey) was censured, fined securities, failed and neglected to $24,087, suspended from associa- purchase the securities, and instead, Gary Lee Niebling (Registered tion with any NASD member in any converted the funds to his own use Representative, Florissant, Mis- capacity for two to six months, and benefit by endorsing the checks souri) submitted a Letter of Accep- ordered to pay $41,974.89, plus and either depositing them into his tance, Waiver and Consent pursuant interest in restitution to a public cus- personal bank account or cashing to which he was censured and tomer, and required to requalify by them, without the customers’ knowl- barred from association with any exam before acting in any capacity edge or consent. The findings also NASD member in any capacity. that requires qualification. If Mazzei stated that Mitchell settled a cus- Without admitting or denying the alle- pays the full amount of restitution to tomer complaint away from his mem- gations, Niebling consented to the the customer within the first two ber firm by executing a promissory described sanctions and to the entry months of his suspension then his note in favor of a public customer to of findings that he effected with- six-month suspension will deemed to settle a dispute regarding monies drawals from annuities for a public be satisfied. However, if he fails to converted from the customer. Fur- customer totaling $96,518.06 without make full restitution within this two- thermore, the NASD determined that the knowledge or consent of the cus- month period, then he must serve Mitchell received $3,000 cash from a tomer and deposited all withdrawn the complete six-month suspension. public customer intended for invest- funds into financial accounts under The sanctions were based on find- ment purposes and failed to apply his control and converted the funds ings that Mazzei made unsuitable the funds as directed by such cus- to his own use and benefit. recommendations to a public customer. Moreover, Mitchell received a tomer without having a reasonable $13,000 check from a public cus- Barrington Lloyd Nugent (Regis- basis to believe that his recommen- tomer for investment purposes, failed tered Representative, Houston, dations were suitable for the cus- to execute the purchase of securities Texas) was censured, fined tomer in light of the customer’s age, on the customer's behalf, and $60,000, and barred from associa- financial situation and needs, and instead, misused the funds by tion with any NASD member in any stated investment objectives. Mazzei depositing the funds into the account capacity. The sanctions were based also churned the customer’s account of other public customers. Mitchell on findings that Nugent made by engaging in excessive trading for also failed to fully and completely improper use of a customer’s funds the purpose of generating commis- respond to NASD requests for infor- by receiving a $4,310 check from a sions and in disregard of the cus- mation. public customer intended for the pur- tomer’s interest. In addition, Mazzei chase of stock. Contrary to represen- made misrepresentations and omis- Steven J. Napoli (Registered Rep- tations he made to the customer, sions as to the nature and meaning resentative, Belle Mead, New Jer- Nugent caused the customer to write of an activity letter sent to the cus- sey) submitted an Offer of a check made payable to him for the tomer by Mazzei’s member firm, Settlement pursuant to which he was purchase, subsequently endorsed induced the customer to sign it, and censured and barred from associa- and cashed the check, and failed to never informed the customer of the tion with any NASD member in any purchase the stock. Nugent also losses sustained in his account. capacity. Without admitting or deny- failed to respond to NASD requests ing the allegations, Napoli consented for information. Garey Neil Mitchell (Registered to the described sanctions and to the Representative, Sturgis, Ken- entry of findings that he received David M. Pesso (Registered Repre- tucky) submitted a Letter of Accep- $10,000 in cash from a public cus- sentative, Brooklyn, New York) tance, Waiver and Consent pursuant tomer intended for paying premiums submitted an Offer of Settlement pur- to which he was censured, fined on an individual variable life insur- suant to which he was censured, $125,000, barred from association ance policy. The NASD determined fined $75,000, barred from associa- with any NASD member in any that Napoli remitted $7,300 of the tion with any NASD member in any capacity, and required to pay full funds, commingled the remaining capacity, and ordered to disgorge

NASD Notices to Members—Disciplinary Actions September 1998 609 $919,459.10 in commissions. Without Darryl W. Platt (Registered Princi- censured, fined $20,000, suspended admitting or denying the allegations, pal, Biloxi, Mississippi) submitted a from association with any NASD Pesso consented to the described Letter of Acceptance, Waiver and member in any capacity for two sanctions and to the entry of findings Consent pursuant to which he was years, and required to requalify by that he caused units of stock to be censured, fined $350,000, barred exam prior to becoming associated purchased in the account of a public from association with any NASD with any member firm. Riccuiti was customer without the customer’s member in any capacity, and censured, fined $20,000, suspended knowledge, authorization, or consent. ordered to pay restitution to the from association with any NASD The findings also stated that Pesso appropriate parties. Without admit- member in any capacity for two arranged to have an impostor take the ting or denying the allegations, Platt years, and ordered to requalify by Series 7 exam on his behalf and failed consented to the described sanctions taking the Series 7 exam before to respond to NASD requests for and to the entry of findings that he again acting in that capacity, and information and to appear for an on- received $23,000 in funds from pub- Olshaker was censured, fined the-record interview. lic customers for the purpose of $2,500, suspended from association investing in securities and mutual with any NASD member in any Thomas Petropoulos (Registered funds, failed to execute the purchas- capacity for two months, and Principal, Forest Hills, New York) es on the customers’ behalf, and required to requalify by exam prior to submitted a Letter of Acceptance, instead converted the funds to his becoming associated with any mem- Waiver and Consent pursuant to own use and benefit without the cus- ber firm. Without admitting or deny- which he was censured, fined tomers’ knowledge or consent. The ing the allegations, the respondents $58,650, suspended from associa- findings also stated that Platt issued consented to the described sanctions tion with any NASD member in any checks to himself in the total amount and to the entry of findings that capacity for 12 months, and required of $18,700 out of the checking Porush failed to exercise his supervi- to pay $44,150 in restitution to cus- account of a public customer and sory responsibilities by allowing reg- tomers. Without admitting or denying cashed these checks by forging the istered representatives under his the allegations, Petropoulos consent- customer’s endorsement, thereby supervision to engage in widespread ed to the described sanctions and to converting the $18,700 to his own fraudulent sales practices and other the entry of findings that he effected use and benefit without the cus- egregious misconduct. The findings unauthorized transactions in the tomer’s knowledge or consent. Fur- also stated that Greco and Riccuiti, accounts of public customers and thermore, the NASD determined that engaged in baseless and improper failed to follow a customer’s order to Platt received $9,989.99 in the form price predictions as to speculative sell securities. The findings also stat- of a loan proceeds check made securities and engaged in unautho- ed that Petropoulos made material payable to a public customer, forged rized trading in customer accounts. misrepresentations and omitted to the customer’s endorsement and Riccuiti made false promises to limit disclose material information con- converted the funds to his own use customers’ losses, made a misrepre- cerning securities purchased by a and benefit by placing the funds in sentation as to a specific issuer, and customer on his recommendation. an account that he controlled, with- mislead customers as to the risk of Petropoulos also predicted the future out the customer’s knowledge or investing in specific securities. Also, price of a security to customers with- consent. the NASD determined that Greco out a basis for such prediction. required at least one customer to Daniel Mark Porush (Registered purchase aftermarket stock in order Francisco A. Pimentel (Registered Principal, Oyster Bay Cove, New to receive units in an IPO, and Representative, Brentwood, New York), Paul Joseph Greco (Regis- induced a customer to purchase a York) was censured, fined $100,000, tered Representative, Syosset, security by promising that it would and barred from association with any New York), Frank Riccuiti, Jr. make up for prior losses. The NASD NASD member in any capacity. The (Registered Representative, Long also found that Olshaker created sanctions were based on findings Beach, New York), and Clifford sales scripts for use by his firm’s that Pimentel made material misrep- Bryan Olshaker (Registered Rep- retail sales force that were not fair, resentations and fraudulent price resentative, Brooklyn, New York) complete, and balanced presenta- predictions in an attempt to induce a submitted Offers of Settlement pur- tions because they included only customer to purchase warrants. suant to which Porush was cen- positive information about the issuers Pimentel also failed to provide truth- sured, fined $500,000, and barred and securities and failed to present ful testimony to the NASD during an from association with any NASD any risk factors or negative informa- on-the-record interview. member in any capacity. Greco was tion.

NASD Notices to Members—Disciplinary Actions September 1998 610 Glen McKinley Richars, III (Regis- John Gregory Schaefer, Jr. (Reg- failed to appear for an on-the-record tered Representative, Delray istered Principal, Fountain Hills, interview. Beach, Florida) was censured, fined Arizona) submitted a Letter of $1,500, and suspended from associ- Acceptance, Waiver and Consent Kimberly Ann Souza (Registered ation with any NASD member in any pursuant to which he was censured, Representative, Malakoff, Texas) capacity for five business days. The fined $10,000, suspended from was censured, fined $50,000, and NAC affirmed the sanctions following association with any NASD member barred from association with any its call for review of a San Francisco in any capacity for three months, and NASD member in any capacity. The DBCC decision. The sanctions were ordered to disgorge $2,400 in com- sanctions were based on findings based on findings that Richars failed missions. Without admitting or deny- that Souza failed to respond to to pay a $5,500 arbitration award in a ing the allegations, Schaefer NASD requests for information. timely manner. consented to the described sanctions and to the entry of findings that he Robert Louis Stevens (Registered Bryant W. Robertson (Registered engaged in private securities trans- Principal, Denver, Colorado) was Representative, Littleton, Col- actions and outside business activi- censured, fined $25,565, suspended orado) was censured, fined $35,000, ties without giving prior written from association with any NASD and barred from association with any notification to his member firm. member in any capacity for 60 busi- NASD member in any capacity. The ness days, and ordered to pay sanctions were based on findings Randall J. Schultz (Registered Prin- $12,308 plus interest in restitution to a that Robertson failed to respond to cipal, Lowell, Michigan) submitted a public customer. The NAC affirmed NASD requests to provide testimony Letter of Acceptance, Waiver and the sanction following its call for in connection with an investigation Consent pursuant to which he was review of a Denver DBCC decision. regarding his conduct while he was censured, fined $475,000, barred The sanctions were based on findings associated with NASD member from association with any NASD that Stevens recommended to public firms. member in any capacity, and required customers the purchase of securities to pay $95,000 in restitution to a that were unsuitable for the cus- Jim Richard Rogers (Registered member firm. Without admitting or tomers. Stevens also prepared and Principal, Gilbert, Arizona) submit- denying the allegations, Schultz con- submitted to his member firm a new ted an Offer of Settlement pursuant sented to the described sanctions and account card for the trust account in to which he was censured and sus- to the entry of findings that he which certain information concerning pended from association with any obtained a total of $95,000 from pub- the customer was stated inaccurately NASD member in any capacity for 60 lic customers by making representa- causing his member firm’s books and days and ordered to requalify by tions about the use of the funds, failed records to be inaccurate with respect exam in any capacity for which regis- to follow said representations, and to this account. tration is required before functioning used the funds for a corporation that in such capacity in the future. With- he owned or for some purposes other Brian Thomas Stone (Registered out admitting or denying the allega- than for the benefit of the customers. Representative, Bedford, Texas) tions, Rogers consented to the submitted a Letter of Acceptance, described sanctions and to the entry Richard Vandervoort Singer, II Waiver and Consent pursuant to of findings that he recommended (Registered Principal, Roslyn, which he was censured, fined and effected transactions in accounts New York) submitted a Letter of $5,000, and barred from association of public customers that were exces- Acceptance, Waiver and Consent with any NASD member in any sive in size and number. The findings pursuant to which he was censured, capacity. Without admitting or deny- also stated that Rogers made recom- fined $20,000, and barred from asso- ing the allegations, Stone consented mendations, on margin, to customers ciation with any NASD member in to the described sanctions and to the that were unsuitable because the any capacity. Without admitting or entry of findings that he made entries security was unduly speculative, the denying the allegations, Singer con- to the general ledger of his member accounts were unduly concentrated sented to the described sanctions firm totaling $750 when he had no in a speculative security after the and to the entry of findings that he basis for making these entries in transactions and the use of margin executed the purchases of warrants order to effect the transfer of these exposed the customers to excessive and shares of preferred stock in the funds to a public customer’s account. risk of loss. account of a public customer without According to the findings, Stone the customer’s knowledge, autho- effected these transfers to pay a per- rization, or consent. Singer also sonal debt he owed to the customer.

NASD Notices to Members—Disciplinary Actions September 1998 611 James P. Tarone (Registered Rep- having reasonable grounds for bank escrow account during the con- resentative, Whitehall, Pennsylva- believing that the recommendations tingency period, and held the funds nia) was censured, fined $30,000, and transactions were suitable for on the firm’s premises even after the and barred from association with any the customer on the basis of her contingency was met. NASD member in any capacity. The financial situation, investment objec- sanctions were based on findings tives, and needs. Furthermore, With- that Tarone failed to respond to row engaged in outside business Decisions Issued NASD requests for information. activities while employed by a mem- The following decisions have been ber firm without prior written notice to issued by the DBCC or the Office of Deanna Lee Williams (Registered his member firm. Hearing Officers and have been Representative, North Wales, appealed to or called for review by Pennsylvania) submitted a Letter of Aaron Jones Yorke, IV (Registered the NAC as of August 14, 1998. The Acceptance, Waiver and Consent Principal, New York, New York) findings and sanctions imposed in pursuant to which she was censured, submitted an Offer of Settlement pur- the decision may be increased, fined $25,000, and barred from asso- suant to which he was censured, decreased, modified, or reversed by ciation with any NASD member in fined $30,000, and suspended from the NAC. Initial decisions whose time any capacity. Without admitting or association with any NASD member for appeal has not yet expired will be denying the allegations, Williams in any capacity for 60 days. Without reported in the next Notice to Mem- consented to the described sanctions admitting or denying the allegations, bers. and to the entry of findings that she Yorke consented to the described impersonated another individual and sanctions and to the entry of findings Maximo Justo Guevara (Regis- took the Pennsylvania Life Insurance that he terminated without justifica- tered Representative, Philadel- Agent Exam for her. The findings tion an IPO after five days of after- phia, Pennsylvania) was censured, also stated that Williams failed to market trading on the Nasdaq fined $33,992, barred from associa- timely respond to NASD requests for SmallCapSM Market. tion with any NASD member in any information. capacity, and ordered to pay restitu- Yorke’s suspension commenced with tion of $78,000, plus interest. The Bobby J. Withrow (Registered the opening of business on August sanctions were based on findings Representative, Livermore, Ken- 10, 1998, and will conclude at the that Guevara recommended the pur- tucky) submitted a Letter of Accep- close of business October 8, 1998. chase of securities when he had no tance, Waiver and Consent pursuant reasonable basis to believe that such to which he was censured, fined recommendations were suitable for $300,000, barred from association Individuals Fined the customers based upon the infor- with any NASD member in any Donald James Jackson (Regis- mation disclosed to him by the cus- capacity, and required to pay tered Principal, New York, New tomers about their personal $60,000 in restitution. Without admit- York) and George Peter Lucaci situations, financial circumstances, ting or denying the allegations, With- (Registered Principal, Summit, investment objectives, and other row consented to the described New Jersey) submitted a Letter of matters. Guevara also participated in sanctions and to the entry of findings Acceptance, Waiver and Consent private securities transactions with- that he received approximately pursuant to which they were cen- out providing his member firm $60,000 from public customers for sured and fined $101,775, jointly and prompt written notice of his participa- the purpose of investment in a busi- severally. Without admitting or deny- tion in such activities. ness venture, failed and neglected to ing the allegations, the respondents properly account for these funds, and consented to the described sanctions Guevara has appealed this action to converted at least a portion of the and to the entry of findings that a for- the NAC and the sanctions are not in funds by endorsing checks and mer member firm, acting through effect pending consideration of the depositing them into his personal Jackson and Lucaci, solicited and appeal. checking account, without the indi- sold interests in a contingency offer- viduals’ knowledge or consent. The ing before the firm was registered Robin Bruce McNabb (Registered findings also stated that Withrow with the NASD. The findings also Principal, San Jose, California) made a recommendation to a public stated that Jackson and Lucaci was censured, fined $100,000, and customer that the customer liquidate received investor funds in connection barred from association with any a variable annuity and invest the pro- with the offering and failed to forward NASD member in any capacity. The ceeds in a business venture without the funds to a properly established sanctions were based on findings

NASD Notices to Members—Disciplinary Actions September 1998 612 that McNabb participated in private effect pending consideration of the tomers’ knowledge or consent. The securities transactions without giving appeal. complaint also alleges that Barr prior written notification to his mem- failed to respond and to timely ber firm. McNabb also recommended respond to NASD requests for infor- to public customers the purchase of Complaints Filed mation. securities without having reasonable The following complaints were grounds for believing that such rec- issued by the NASD. Issuance of a J. Barrett Bryant (Registered Rep- ommendations were suitable in light disciplinary complaint represents the resentative, Collierville, Ten- of the facts disclosed by the cus- initiation of a formal proceeding by nessee) was named as a tomers as to their other security hold- the NASD in which findings as to the respondent in an NASD complaint ings and as to their financial situation allegations in the complaint have not alleging that he received cash in the and needs. been made, and does not represent amount of $1,000 from a public cus- a decision as to any of the allega- tomer for the purpose of investing in McNabb has appealed this action to tions contained in the complaint. the customer’s variable universal life the NAC and the sanctions are not in Because these complaints are unad- policy account, failed, and neglected effect pending consideration of the judicated, you may wish to contact to invest the funds in the account appeal. the respondents before drawing any and, instead, retained possession of conclusions regarding the allegations the funds until a later date, without Kevin Lee Otto (Registered Repre- in the complaint. the customer’s knowledge or con- sentative, Milwaukee, Wisconsin) sent. The complaint also alleges that was censured, fined $110,000, and Michael William Adams (Regis- Bryant sent correspondence to the barred from association with any tered Representative, Rowland customer that was misleading in that NASD member in any capacity. The Heights, California) was named as it overstated the funds maintained by sanctions were based on findings a respondent in an NASD complaint the customer in the variable univer- that Otto received $22,000 from a alleging that he recommended pur- sal life insurance account. public customer for investment purchase and sales transactions to pub- poses and, without the customer’s lic customers without having Eugene Joseph Cordano (Regis- knowledge or consent, invested the reasonable grounds for believing tered Principal, Brooklyn, New funds in corporations or business they were suitable for the customers York) was named as a respondent in entities which Otto operated and/or and accounts in view of the size, fre- an NASD complaint alleging that he controlled and deposited the funds in quency, and nature of the recom- executed transactions in the a bank account or bank accounts mended transactions and the facts accounts of public customers without which he controlled or had an inter- disclosed by the customers as to the customers’ prior knowledge, est, and used the funds for some their financial situation, objectives, authorization or consent. The com- purpose other than for the benefit of circumstances, and needs. The complaint also alleges that Cordano pro- the customer until he returned the plaint also alleges that Adams vided false information to the NASD customer’s funds at a later date. induced these purchase and sales during the course of its investigation. transactions by means of manipula- Otto has appealed this action to the tive, deceptive, or other fraudulent Robert Lee Davis, Jr. (Registered NAC and the sanctions are not in devices or contrivances. Representative, Sacramento, Cali- effect pending consideration of the fornia) was named as a respondent appeal. Percy Barr (Registered Represen- in an NASD complaint alleging that tative, Greenwood, Mississippi) he received $8,500 from a public William Francis Palla (Registered was named as a respondent in an customer to purchase real property Principal, Haverford, Pennsylva- NASD complaint alleging that he for investment purposes, failed to nia) was censured, fined $20,000, received checks totaling $49,700 place the funds in an escrow and barred from association with any from public customers for the pur- account, did not use the funds to pur- NASD member in any capacity. The chase of, and as payment on, annu- chase real property, and did not sanctions were based on findings ities and mutual funds. The return the funds to the customer. The that he failed to respond to NASD complaint alleges that Barr failed to complaint alleges that Davis used requests for information. submit these funds to his member the $8,500 to pay his business and firm on the customers’ behalf, and personal living expenses without the Palla has appealed this action to the instead converted the funds to his knowledge or consent of the cus- NAC and the sanctions are not in own use and benefit, without the customer. The complaint also alleges

NASD Notices to Members—Disciplinary Actions September 1998 613 that Davis failed to respond to NASD information concerning solicitations with such funds used to cover, requests for information. and recommendations to purchase among other things, operating costs securities made to public customers. of the affiliates and interest pay- John Philip DiGiacomo (Regis- The complaint alleges that McGilly ments to investors of other private tered Representative, New York, projected the future price of securi- placements. New York) was named as a respon- ties to public customers without a dent in an NASD complaint alleging reasonable basis for these represen- Jeffrey M. Schuler (Registered that he created and submitted ficti- tations. The complaint also alleges Principal, Delray Beach, Florida) tious buy order tickets in an effort to that McGilly effected transactions in was named as a respondent in an conceal substantial net short posi- the accounts of public customers, NASD complaint alleging that he tions in his trading account as a pro- without the prior authorization and made unsuitable recommendations prietary trader for his member firm. consent of the customers. to public customers, based on the facts the customers disclosed as to Peter Lawrence Greenberg (Regis- Timothy E. McKeon (Registered their tax status, investment objective, tered Representative, Princeton, Principal, Holbrook, New York) and financial situation and needs. New Jersey) was named as a was named as a respondent in an respondent in an NASD complaint NASD complaint alleging that he Luis Rafael Torres (Registered alleging that he executed securities made material misrepresentations Representative, Miami, Florida) transactions in the account of a pub- and failed to disclose material facts was named as a respondent in an lic customer without the customer’s to public customers in order to NASD complaint alleging that he prior knowledge, authorization, or induce them to purchase securities. made false representations to public consent. The complaint also alleges The complaint alleges that McKeon customers concerning investment that Greenberg failed to respond to made fraudulent price predictions to opportunities that, in fact, did not NASD requests for information. public customers in connection with exist. The complaint alleges that Tor- his recommendations to purchase res received $63,450 from the cus- Michael Wayne Hawkins (Regis- securities. The complaint also tomers for investment purposes, tered Representative, Atlanta, alleges that McKeon effected trans- failed to invest these funds, and con- Georgia) was named as a respon- actions in a public customer’s verted the customers’ funds to his dent in an NASD complaint alleging account without the prior authoriza- own use. The complaint also alleges that he executed written guarantees tion of the customer. The complaint that Torres failed to respond to that he would indemnify and reim- alleges that McKeon also failed to NASD requests for information. burse a public customer for any loss- follow customer instructions to sell all es sustained on investments, plus the positions in the customer’s interest, should losses occur in order account, send him the proceeds, and Firms Expelled For Failure To to induce the customer to make close the account. Pay Fines, Costs, And/Or those purchases. The complaint also Provide Proof Of Restitution In alleges that the aforementioned Russell Wayne Millard (Registered Connection With Violations investments were made outside of Representative, Hemet, California) Global Equities Group, Inc., New the regular course or scope of and Gregory G. Livingston (Regis- York, New York (August 5, 1998) Hawkins’ employment with his mem- tered Representative, Laguna ber firm and that he failed to provide Hills, California) were named as Greenway Capital Corp. n/k/a the firm with written notice of these respondents in an NASD complaint Cortlandt Capital Corp., New York, private securities transactions or to alleging that they offered and sold New York (August 5, 1998) obtain approval from the firm, while investments in contingent offerings to receiving compensation for his public customers and failed to Landmark International Equities, involvement in these private securi- deposit and retain customer funds in Inc., Syosset, New York (July 31, ties transactions. separate escrow accounts until the 1998) minimum number of units had been Edward A. McGilly, Jr. (Registered sold. The complaint alleges that Mil- Meyers Pollock Robbins, Inc., New Principal, Saint James, New York) lard and Livingston intentionally York, New York (August 5, 1998) was named as a respondent in an transmitted the funds directly to bank NASD complaint alleging that he accounts and commingled with funds Murphey, Marseilles, Smith & made material misrepresentations from other sources before the mini- Nammack, Inc., New York, New and omitted to disclose material mum number of units had been sold, York (August 5, 1998)

NASD Notices to Members—Disciplinary Actions September 1998 614 Rickel & Associates, Inc., New DeLuca, Glen E., Staten Island, Individuals Suspended York, New York (July 31, 1998) New York (August 5, 1998) Pursuant To NASD Rule Series 9510 For Failure To Pay Firms Suspended Pursuant To DiMarco, Jr., Robert B., Boca Arbitration Award NASD Rule Series 9510 For Raton, Florida (August 5, 1998) Aiello, Andrew S., Saratoga Failure To Pay Arbitration Springs, New York (August 13, Award Dorsi, Gary J., Marlboro, New Jer- 1998) Cortlandt Capital Corp. f/k/a sey (August 5, 1998) Greenway Capital Corp., New York, Denton, Donald Jay, Columbus, New York (July 21, 1998) Epstein, Herman, Franklin Lakes, Ohio (August 13, 1998) New Jersey (August 5, 1998) Investors Associates, Inc., Hack- Guchone, John Victor, Rochester, ensack, New Jersey (July 21, 1998) Flanagan, Sean T., Bellaire, Ohio New York (July 21, 1998) (August 5, 1998) Sterling Foster & Company, Inc., Jurdine, Wilber C., Tampa, Florida Uniondale, New York (July 21, 1998) Fulcher, Richard J., Moseley, Vir- (August 10, 1998) ginia (August 5, 1998) Taj Global Equities, Inc., Tampa, Lieberman, Adam Richard, Roslyn Florida (August 10, 1998) Gosney, Tarlton S., Ridgeﬁeld, Heights, New York (July 21, 1998) Washington (August 5, 1998) Matthews, Timothy J., Nisse- Individuals Whose Green, James L., Oldsmar, Florida quogue, New York (August 3, 1998) Registration Were Revoked (August 5, 1998) For Failure To Pay Fines, McMurray, Rusty W., Tulsa, Okla- Costs And/Or Provide Proof Of Hadaway, Stephen C., South Lake homa (August 3, 1998) Restitution In Connection With Tahoe, California (August 5, 1998) Violations Molnar, Charles Francis, Roswell, Baginski, Brian E., Boca Raton, Jacobs, Thomas, Dyer, Indiana Georgia (July 21, 1998) Florida (August 5, 1998) (August 5, 1998) Murray, Michael Patrick, Long Baquero, Jr., Jairo A., Staten MacRunnels, James A., Elburn, Illi- Beach, New York (July 21, 1998) Island, New York (August 5, 1998) nois (August 5, 1998) Payne, Michael Joseph, Staten Basani, Vijay R., Nashua, New Padulo, Jr., Vincent A., New York, Island, New York (August 17, 1998) Hampshire (August 5, 1998) New York (August 5, 1998) Posculli, Jr., Gil Michael, E. North- Bruzzese, John, Manalapan, New Perkins, Thomas J., Union City, port, New York (July 24, 1998) Jersey (August 5, 1998) California (August 5, 1998) Salice, Lawrence Joseph, Green- Calkins, Jr., Timothy R., Tobyhan- Rufﬂer, Keith P., Spotswood, New lawn, New York (July 24, 1998) na, Pennsylvania (August 5, 1998) Jersey (August 5, 1998) Sposato, Michael Degnan, Pur- Curry, Jr., Patrick E., Staten Island, Russo, Janice D., Van Nuys, Cali- chase, New York (August 17, 1998) New York (August 5, 1998) fornia (August 5, 1998) Trocchio, Michael S., Staten Island, Daniels, Paul A., Las Cruces, New Schaler, Joseph S., Lafayette, Indi- New York (August 6, 1998) Mexico (August 5, 1998) ana (August 5, 1998) Van Blarcom, Jeffrey Allen, Mah- DeCola, Frank, J., Brooklyn, New Tuzzolino, Jr., Fred J., Brooklyn, wah, New Jersey (August 6, 1998) York (August 5, 1998) New York (August 5, 1998) © 1998, National Association of Securities Dealers, Delliquanti, James L., Laguna Hills, Vogel, Paul L., Suwanee, Georgia Inc. (NASD). All rights reserved. California (August 5, 1998) (August 5, 1998)

NASD Notices to Members—Disciplinary Actions September 1998 615 Year 2000 Update cial NASD Notice to Members 98-63, For Reminder To Members About Attachment 2, on the Notices to SEC Filing Requirements Members Web Page.

Your The Securities and Exchange Com- Industry Beta Test mission (SEC) recently amended its Information Rule 17a-5 to require all broker/deal- The Securities Industry Association ers to file two reports concerning (SIA) indicated that its first beta test- Year 2000, using Form BD-Y2K ing effort within the securities industry (Form). All members received this was a successful endeavor. During information available through NASD this test securities firms and mar- Special Notice to Members 98-63. kets—including The Nasdaq Stock Market¨—were able to operate in a The new reports relate to each mem- simulated Year 2000 environment. ber’s readiness and activities to pre- Testing began on July 13, 1998, and pare its businesses to address Year was completed on July 22, 1998. 2000 challenges and risks. The amendment requires all National As part of the overall industry effort, Association of Securities Dealers, Inc. the NASD and Nasdaq¨ Test Cen- (NASD¨) members with FOCUS cap- ters successfully operated to support ital requirements of $5,000 or greater this beta test. These test centers are on or after December 31, 1997 to file available to test with external con- the two reports with the SEC and the stituents. Members should call (888) firm's designated examining authority 227-1330 to schedule Year 2000 (DEA). The first report was due to the testing. SEC and DEA on or before August 31, 1998. The second report will be due April 30, 1999. The results of Announcement - Upcoming these reports will be made public. District 2 Compliance Seminars Each of the two reports has two District 2 will host “Compliance parts. Part I must be completed by Check-Up” seminars this fall that will each NASD member with a $5,000 feature panel discussions on branch or greater net capital requirement. A office supervision and compliance member must also complete Part II issues; continuing education; new (in addition to Part I) if it has a Forms U-4 and U-5; and recent regu- $100,000 or greater net capital latory developments. There will also requirement. be an on-line demonstration of the NASD Regulation Web Site NASD Regulation, Inc. (NASD Regu- (www.nasdr.com). lationSM) examiners will be determining whether the reports are completed in The seminars will be held in the three accordance with SEC Rule 17a-5; if following areas: they are not, NASD Regulation will ¥ Los Angeles on September 17 begin disciplinary actions and ensure ¥ San Diego on September 24 that the reports are obtained during ¥ Orange County on October 1 any routine exam. To register or for more information, Any questions or comments may be call Ianthe Philips, NASD Regulation, directed to the NASD Year 2000 Pro- at (213) 627-2122. The registration gram Office at (888) 227-1330. To form and additional information about obtain a copy of the Form, please go the seminars are also available from to the NASD Regulation Web Site the NASD Regulation Web Site (www.nasdr.com) and look for Spe- (www.nasdr.com).

NASD Notice to Members—For Your Information September 1998 617 Correction To Notice to Misrepresentation Of the only step. Furthermore, registra- Members 98-66 Certificates tion status may change; a registra- In the August 1998 issue of Notices It has come to the attention of NASD tion may be suspended, canceled, or to Members, on page 497, the third Regulation that private vendors may voluntarily terminated, but the pres- sentence in the last paragraph under be offering commemorative certifi- ence of a certificate commemorating subhead Background - SelectNet cates to persons who pass NASD- the passage of a qualification exami- And SOES should read: offered qualification examinations. nation may erroneously suggest oth- NASD Regulation is concerned that erwise. For these reasons, the staff The SOES rules currently contain a these certificates could be misused believes that display of such certifi- specific provision, NASD Rule by registered persons or may be mis- cates at any business location may 4720(c)(4), that requires SOES order interpreted by customers and cause violate NASD Rule 2110. entry firms to maintain the physical general confusion about what the security of Nasdaq equipment locat- certificates may represent. Passing a © 1998, National Association of Securities Dealers, ed on the premises of the firm to pre- qualification exam is just one step in Inc. (NASD). All rights reserved. vent unauthorized entry of the registration process; customers information into SOES. may erroneously assume that it is

NASD Notice to Members—For Your Information September 1998 618 National Association of Securities Dealers, Inc. Special Notice Of Nominees The Annual Meeting of members of the National Association of Securities Dealers, Inc. (NASD¨) will be held on December 21, 1998. A notice of meet- NASD ing, including the precise date, time, and location of the Annual Meeting, will follow on or about November 16, 1998.

Notice to The individuals nominated by the NASD National Nominating Committee for election on the NASD Board of Governors are identified in this document. Members Pursuant to Section 10 of Article VII of the NASD By-Laws, a person who has not been so nominated for election to the Board of Governors may be included on the ballot for the election of Governors if (a) within 45 days of the date 98-80 of this Notice such person presents to the Secretary of the NASD petitions in support of such nomination duly executed by at least three percent of the members of the NASD (as of the date of this Notice the NASD has 5,575 Nominees For NASD members, the applicable three percent threshold is therefore 167 members), Board Of Governors and (b) the Secretary certifies that such petitions have been duly executed by the Executive Representatives of the requisite number of members of the NASD and the person being nominated satisfies the classification of the gov- ernorship to be filled based on the information provided by the person as is Suggested Routing reasonably necessary for the Secretary to make the certification. Senior Management Questions regarding this Notice may be directed to: Advertising Continuing Education Joan C. Conley Corporate Secretary Corporate Finance National Association of Securities Dealers, Inc. Executive Representatives 1735 K Street, N.W. Government Securities Washington, D.C. 20006-1500 (202) 728-8381 Institutional Insurance or Internal Audit T. Grant Callery Legal & Compliance Senior Vice President and General Counsel Municipal National Association of Securities Dealers, Inc. 1735 K Street, N.W. Mutual Fund Washington, D.C. 20006-1500 Operations (202) 728-8285 Options Registered Representatives Registration Research Syndicate Systems Trading Training Variable Contracts

Special NASD Notice to Members 98-80 September 29, 1998 621 The following persons (see attached profiles) have been nominated by the National Nominating Committee1 to serve on the Board of Governors of the NASD for a term noted or until their successors are duly elected or qualified. Terms of office run from January to January.

INDUSTRY

Name Term

E. David Coolidge, III 1999-2002 Chief Executive Ofﬁcer William Blair & Company, L.L.C.

James Dimon 1999-2002 President, COO and Director of Travelers Group Chairman & Co-Chief Executive Ofﬁcer of Salomon Smith Barney

Richard C. Romano2 1999-2002 President Romano Brothers & Company

NON-INDUSTRY

H. Furlong Baldwin 1999-2002 Chairman Mercantile Bankshares Corporation

Eugene M. Isenberg 1999-2002 Chairman and Chief Executive Ofﬁcer Nabors Industries, Inc.

Arthur Rock 1999-2002 Principal Arthur Rock & Co.

James F. Rothenberg 1999-2002 President Capital Research and Management Company

Footnotes 1 NASD National Nominating Committee—Committee Chair: Daniel P. Tully, Merrill Lynch & Co. Members: H. Furlong Baldwin, Mercantile Bankshares Corporation, Thomas Hale Boggs, Jr., Patton Boggs, L.L.P., John S. Chalsty, Donaldson, Lufkin & Jenrette, Inc., Alfred E. Osborne, Jr., UCLA, Richard C. Romano, Romano Brothers & Company. Committee members Romano and Baldwin did not participate in the committee deliberations concerning their nominations.

2 An amendment to the NASD By-Laws reserving a position on the NASD Board of Governors (the Board) for a person associated with a ﬁrm having not more than 150 registered persons was approved by the members on September 14, 1998. That amendment is now pending approval by the Securities and Exchange Commission (SEC). The nomination of Mr. Romano to the Small Firm position on the Board anticipates but is not dependent on the SEC's approval. The NASD National Nominating Committee has determined that in the event SEC approval is not obtained by the time the proxy must be mailed to the membership, Mr. Romano will remain on the ballot as a candidate for one of the vacant Industry positions on the Board.

Special NASD Notice to Members 98-80 September 29, 1998 622 PUBLIC

Gerald R. Ford 1999-2000 38th President of the United States

Elaine L. Chao 1999-2002 Distinguished Fellow The Heritage Foundation

Kenneth M. Duberstein 1999-2002 Chairman and Chief Executive Ofﬁcer The Duberstein Group

Donald J. Kirk 1999-2002 Executive-in-Residence Columbia University

John D. Markese 1999-2002 President American Assoc. of Individual Investors

* * * *

Special NASD Notice to Members 98-80 September 29, 1998 623 National Association of Securities Dealers, Inc. Proﬁles Of Board Nominees

Nominees For Industry Governors

E. David Coolidge, III is Chief Executive Officer of William Blair & Company, L.L.C. Mr. Coolidge joined William Blair & Company in 1969 and was elected Chief Executive Officer of the firm in 1995. Mr. Coolidge currently serves on the Board of the Pittway Corporation, the Kellogg Graduate School of Management at Northwestern University, the Uni- versity of Chicago, the Rush-Presbyterian-St. Luke’s Medical Center, the Rush North Shore Medical Center, and the Better Government Association. Mr. Coolidge holds a B.A. from Williams College and an M.B.A. from the Harvard Graduate School of Business. Mr. Coolidge currently serves on the NASD Board of Governors (1996 to present) and is a member of the NASD Audit Committee.

James (Jamie) Dimon is President, Chief Operating Officer and Director of Travelers Group, and Chairman and Co-Chief Executive Officer of Salomon Smith Barney. Mr. Dimon joined the firm in 1986. He was appointed President of Travelers Group in 1991 and became Chief Operating Officer in 1993. He was named Chairman and Chief Execu- tive Officer of Smith Barney in 1996. Mr. Dimon is on the Board of Trustees of New York University Medical Center, the Board of Directors of the Center on Addiction and Substance Abuse, the Board of Directors of Tricon Global Restaurants, Inc., and the Board of Directors of the Welfare to Work Partnership. Mr. Dimon holds a B.A. from Tufts University and an M.B.A. from Harvard University Graduate School of Business. He currently serves on the NASD Board of Governors (1996 to present) and is Chairman of the NASD Management Compensation Committee.

Richard C. Romano is President, Romano Brothers & Company, having joined the ﬁrm in 1964. Mr. Romano has served on the Industry/Regulatory Council for Continuing Education, the NASD District Committee and the NASD Board of Governors (1985 to 1988). Mr. Romano currently serves on the NASD National Nominating Committee and is Vice Chairman of the NASD Small Firm Advisory Board. He holds a B.S. from the University of Illinois and an M.S. and Ph.D. from the University of Delaware.

Special NASD Notice to Members 98-80 September 29, 1998 624 National Association of Securities Dealers, Inc. Proﬁles Of Board Nominees

Nominees For Non-Industry Governors

H. Furlong Baldwin is Chairman of the Mercantile Bankshares Corporation; he was elected as Chairman in 1984. Mr. Baldwin joined Mercantile-Safe Deposit & Trust Company in 1956 and was elected President in 1970 of Mercan- tile-Safe Deposit & Trust Company and Mercantile Bankshares Corporation. Mr. Baldwin serves on the Boards of Baltimore Gas & Electric Company, Constellation Holdings, Inc., GRC International, Inc., Ofﬁtbank, Wills Group, and The St. Paul Companies. Mr. Baldwin graduated from Princeton University and served on active duty with the U.S. Marine Corps. Mr. Baldwin currently serves on the NASD National Nominating Committee (1998 to present).

Eugene M. Isenberg is Chairman and Chief Executive Ofﬁcer of Nabors Industries, Inc., a position he has held since 1987. He serves as a Director of the American Stock Exchange and also Danielson Holding Corporation, an insurance holding company. From 1969 to 1982, Mr. Isenberg was Chairman of the Board and principal shareholder of Genimar, Inc., a steel trading and building products manufacturing company, which was sold in 1982. From 1955 to 1968, Mr. Isenberg was employed in various management capacities with the Exxon Corporation. Mr. Isenberg is the founder and principal sponsor of the Parkside School for children with learning disabilities and has established the Eugene M. Isenberg Scholarships at the University of Massachusetts where the School of Management is named after him. He was an instructor at Princeton University from 1951 to 1952 and served as an ofﬁcer in the U.S. Navy from 1952 to 1955. Mr. Isenberg holds a B.A. from the University of Massachusetts and an M.A. from Princeton Uni- versity in 1952. Mr. Isenberg completed the program for Senior Executives at M.I.T.

Arthur Rock is Principal of Arthur Rock & Co., a venture capital firm in San Francisco, California. Mr. Rock founded the firm in 1969. Prior to that time, he spent seven years as a general partner at Davis & Rock. He served as Chair- man of the Board of Directors of Scientific Data Systems, Inc. from 1962 to 1969 (when they merged with Xerox Cor- poration); he was a Director of Xerox Corporation from 1969 to 1972; a member of the Executive Committee and Director of Teledyne, Inc. from 1961 to 1994; a Director of Apple Computer, Inc. from 1980 to 1993; and he is Founder, Past Chairman of the Board of Directors, Chairman of the Executive Committee and Lead Director of Intel Corporation. Mr. Rock serves on the Boards for Echelon and Air Touch Communications. He has been a member of the visiting committee at Harvard Business School and is a member of the Board of Trustees of the California Institute of Technology. Mr. Rock is involved in many cultural and civic organizations in the San Francisco area. He holds a B.S. from Syracuse University and an M.B.A. from Harvard University. Mr. Rock currently serves on the NASD Board of Governors (1998 to present).

James F. Rothenberg is President of Capital Research and Management Company. Mr. Rothenberg assumed the position of President and Director of Capital Research and Management Company in 1994, having joined the company in 1970. Mr. Rothenberg serves on the Boards of the Huntington Memorial Hospital, KCET (Public Television for Southern and Central California), and the Westridge School. Mr. Rothenberg holds a B.A. in English from Harvard College and an M.B.A. from Harvard Graduate School of Business. He currently serves on the NASD Board of Gover- nors (1996 to present), The Nasdaq Stock Market¨ Board of Directors, the Nasdaq Listing Subcommittee, and the Management Compensation and Finance Committee.

Special NASD Notice to Members 98-80 September 29, 1998 625 National Association of Securities Dealers, Inc. Proﬁles Of Board Nominees

Nominees For Public Governors

Gerald R. Ford served as 38th President of the United States. Before entering the Presidency in 1974, President Ford served as Vice President for nine months under President Richard Nixon. Prior to this, President Ford served in the U.S. House of Representatives for 25 and one-half years. Since leaving the White House in 1977, President Ford has lectured at many colleges and universities and participated in public policy forums and conferences. President Ford serves as an Advisor to the Board of the American Express Company and is a member of the Board of The Travelers Group. President Ford holds a B.A. from the University of Michigan and an LL.B. from Yale University Law School.

Elaine L. Chao was appointed a Distinguished Fellow at The Heritage Foundation in 1996. Prior to this, she was President and Chief Executive Ofﬁcer of the United Way of America, Director of the Peace Corps, and Deputy Secre- tary of the U.S. Department of Transportation. She was also Vice President, Syndications, at Bank America Capital Markets Group. Ms. Chao is currently a Director of Dole Food Company, Inc., Vencor, Inc., and Protective Life Corpo- ration. Ms. Chao holds an A.B. from Mt. Holyoke College and an M.B.A. from Harvard University Business School. Ms. Chao currently serves on the NASD Board of Governors (1996 to present) and the NASD Audit Committee.

Kenneth M. Duberstein is Chairman and Chief Executive Ofﬁcer of The Duberstein Group. Prior to this, Mr. Duber- stein served as Chief of Staff to President Ronald Reagan from 1988 to 1989. During President Reagan’s two terms in ofﬁce, Mr. Duberstein also served in the White House as Deputy Chief of Staff (1987), as well as both the Assistant and the Deputy Assistant to the President for Legislative Affairs (1981 to 1983). Mr. Duberstein currently serves on the Board of Governors of the American Stock Exchange and on the Board of Directors at the Boeing Company, Cin- ergy Corporation, Federal National Mortgage Association, and The St. Paul Companies, Inc. He is Vice Chairman of the Kennedy Center for the Performing Arts. Mr. Duberstein holds an A.B. from Franklin and Marshall College and an M.A. from American University.

Donald J. Kirk is Executive-in-Residence at Columbia University, Graduate School of Business. Mr. Kirk became a Professor of Accounting at Columbia University in 1987 and served in that capacity until 1995 when he became an Executive-in-Residence at the school. Mr. Kirk served as a member of the Financial Accounting Standards Board from 1973 to 1987, serving as Chairman from 1978 to 1987. Mr. Kirk currently serves as a Director of General Re Corporation, as a Trustee of the Fidelity Group of Mutual Funds, and is a member of the Public Oversight Board of the American Institute of CPAs. Mr. Kirk is Chairman of the Board of Trustees of Greenwich Hospital and a Director of Yale-New Haven Health Services Corp. Mr. Kirk holds a B.A. from Yale University and an M.B.A. from New York Uni- versity. Mr. Kirk currently serves on the NASD Board of Governors (1996 to present) and as the Chairman of the NASD Audit Committee.

John D. Markese is President of the American Association of Individual Investors. Mr. Markese holds a doctorate in Finance from the University of Illinois. Mr. Markese currently serves on the NASD Board of Governors (1996 to present), The Nasdaq Stock Market Board of Directors, and the Nasdaq Listing Subcommittee.

Special NASD Notice to Members 98-80 September 29, 1998 626 Members of NASD Board of Governors with Terms Not Expiring in January 1999

Governors with Terms Expiring January 2000

Industry Non-Industry Public

Jon S. Corzine Arvind Sodhani Nancy Kassebaum Baker Chairman and Chief Executive Ofﬁcer Vice President and Treasurer Retired United States Senator Goldman, Sachs & Co. Intel Corporation Robert R. Glauber Kenneth J. Wessels Adjunct Lecturer Senior Executive Vice President John F. Kennedy School Dain Rauscher Incorporated of Government Harvard University

Governors with Terms Expiring January 2001

Industry Non-Industry Public

Herbert M. Allison Michael W. Brown Paul H. O’Neill President and Chief Operating Officer Retired Chief Financial Officer Chairman and Chief Executive Merrill Lynch & Co., Inc Microsoft Corporation Officer . ALCOA Frank E. Baxter Harry P. Kamen Chairman and Chief Executive Officer Retired Chairman of the Board and Jefferies Group, Inc. Chief Executive Officer Metropolitan Life Insurance Donald B. Marron Company Chairman and Chief Executive Officer PaineWebber Group, Inc. James S. Riepe Vice Chairman Todd A. Robinson T. Rowe Price Associates, Inc. Chairman and Chief Executive Officer LPL Financial Services Howard Schultz Chairman and Chief Executive Officer Starbucks Coffee Company

Special NASD Notice to Members 98-80 September 29, 1998 627 Special Notices to Members are published on an accelerated basis and distributed independently of monthly Notices to Members newsletters. Numerical sequencing may thus appear to contain gaps during a given monthly publication cycle. Such temporary gaps reﬂect a priority in the production process and will disappear at the conclusion of monthly electronic posting and print distribution.

© 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD is a registered service mark of the National Association of Securities Dealers, Inc. Central Registration Depository (CRD) is a service mark of the NASD and the North American Securities Administrators Association, Inc. (NASAA). NASD Regulation is a service mark of NASD Regulation, Inc. NASD Notices to Members is published monthly by NASD Corporate Communications, Kim Dineen, Editor, NASD Editorial Services Department, 1735 K Street, NW, Washington, DC 20006-1500, (202) 728-8370. No portion of this publication may be copied, photocopied, or duplicated in any form or by any means, except as described below, without prior written consent of the NASD. Members of the NASD are authorized to photocopy or otherwise duplicate any part of this publication without charge only for internal use by the member and its associated persons. Nonmembers of the NASD may obtain permission to photocopy for internal use through the Copyright Clearance Center (CCC) for a $3-per-page fee to be paid directly to CCC, 222 Rosewood Drive, Danvers, MA 01923. Annual subscriptions cost $225; single issues cost $25. Send a check or money order (payable to the National Association of Securities Dealers, Inc.) to NASD MediaSource, P.O. Box 9403, Gaithersburg, MD 20898-9403, or to phone in an order using American Express, MasterCard, or Visa charge, call (301) 590-6142, Monday to Friday, 9 a.m. to 5 p.m., Eastern Time. Back issues may be ordered by writing NASD, Support Services Department, 1735 K Street, NW, Washington, DC 20006-1500 or by calling (202) 728-8061. NASD Notices to Members (December 1996 to current) are also available on the Internet at www.nasdr.com.

Special NASD Notice to Members 98-80 September 29, 1998 628

Executive Summary Request For Comment NASD Regulation, Inc. (NASD Reg- NASD Regulation encourages all NASD SM ulation ) is requesting comment interested parties to comment on the from members and other interested proposal. Comments should be Notice to persons as to whether any National mailed to: Association of Securities Dealers, Inc. (NASD¨) rules or By-Laws Joan Conley Members should be repealed because they Office of the Corporate Secretary are now obsolete or whether partic- NASD Regulation, Inc. 98-81 ular rules should distinguish 1735 K Street, NW between retail and institutional cus- Washington, D.C. 20006-1500 tomers in their application. NASD Regulation Requests or e-mailed to: Comment On Whether Some Questions concerning this Request [email protected] Rules Should Be Repealed As For Comment may be directed to Obsolete Or Amended To Mary M. Dunbar, Assistant General Important Note: The only comments Provide Institutional Customer Counsel, Office of General Coun- that will be considered are those sub- sel, NASD Regulation, at (202) 728- mitted via e-mail or in writing. Exception; Comment Period 8252; or Eric Moss, Assistant Expires November 30, 1998 General Counsel, Office of General Comments must be received by Counsel, NASD Regulation, at November 30, 1998. Before becom- (202) 728-8982. ing effective, any rule change devel- Suggested Routing oped as a result of comments Senior Management received must be adopted by the NASD Regulation Board of Directors, Advertising may be reviewed by the NASD Continuing Education Board of Governors, and must be Corporate Finance approved by the Securities and Exchange Commission. Executive Representatives Government Securities Institutional Insurance Internal Audit Legal & Compliance Municipal Mutual Fund Operations Options Registered Representatives Registration Research Syndicate Systems Trading Training Variable Contracts

NASD Notice to Members 98-81 October 1998 631 Executive Summary costs and technological advances. NASD NASD Regulation, Inc. (NASD Regu- NASD Regulation invites members lationSM) is requesting comment from and other interested parties to submit members and other interested per- suggestions for its review. Members Regulation sons as to whether any National will be notified of any rule changes Association of Securities Dealers, Inc. that are proposed as a result of this (NASD¨) rules or By-Laws should be review. Request repealed because they are now obsolete or whether particular rules should Request For Comment For distinguish between retail and institu- NASD Regulation encourages all tional customers in their application. interested parties to comment on the proposal. Comments should be Comment Questions concerning this Request mailed to: For Comment may be directed to Mary M. Dunbar, Assistant General Joan Conley 98-81 Counsel, Office of General Counsel, Office of the Corporate Secretary NASD Regulation, at (202) 728-8252; NASD Regulation, Inc. or Eric Moss, Assistant General 1735 K Street, NW Counsel, Office of General Counsel, Washington, D.C. 20006-1500 NASD Regulation, at (202) 728-8982. or e-mailed to: Background And Discussion [email protected] The NASD Regulation Office of Gen- eral Counsel is undertaking a review Important Note: The only comments of the NASD rules and By-Laws for that will be considered are those the following purposes: (1) to deter- submitted via e-mail or in writing. mine if there are obsolete or otherwise unnecessary rules that could be Comments must be received by repealed or that should be modern- November 30, 1998. Before becom- ized in light of technological or indus- ing effective, any rule change devel- try developments; or (2) to determine oped as a result of comments if particular rules should distinguish received must be adopted by the between retail and institutional cus- NASD Regulation Board of Directors, tomers in their application. The over- may be reviewed by the NASD arching principles in this review will Board of Governors, and must be be to ensure that NASD rules pro- approved by the Securities and mote balanced and effective self-reg- Exchange Commission. ulation of the securities industry in order to protect investors and ensure © 1998, National Association of Securities Dealers, market integrity, taking into account Inc. (NASD). All rights reserved.

NASD Notice to Members 98-81 October 1998 633 Executive Summary SmallCapSM, and Nasdaq Convertible NASD On September 14, 1998, the Securi- Debt Securities. The ACT trade data ties and Exchange Commission and the OATS order information will (SEC) approved rule amendments be used to construct an integrated Notice to that are designed to integrate trans- audit trail. Under the amended rules, action information reported to the all trade reports for OATS-eligible Automated Confirmation Transaction securities entered into Nasdaq’s ACT Members ServiceSM (ACTSM) operated by The system will be required to have a Nasdaq Stock Market, Inc. time of execution expressed in hours, (Nasdaq¨) with order information minutes, and seconds. The trade 98-82 reported to the newly approved reports also will be required to have a Order Audit Trail SystemSM (OATSSM).1 unique order identifier sufficient to SEC Approves allow a comparison of the information Amendments To Questions regarding the rule contained in the trade report with changes may be directed to the data submitted to OATS. In addition, Automated Confirmation National Association of Securities the rule amendments codify the Transaction Service And Dealers, Inc. (NASD¨) via phone at requirement that all ACT participants, Transaction Reporting (888) 700-OATS or (301) 590-6503, including those that use third parties Rules or via e-mail at [email protected]. to submit trade report information to Nasdaq, must obtain and use a unique Market Participant Symbol for Suggested Routing Discussion trade reporting and audit trail Senior Management In March 1998, the SEC approved purposes. new NASD Rules 6950 through 6957 Advertising (the OATS Rules2). OATS is The rule amendments will be Continuing Education designed to provide NASD implemented in tandem with the Regulation, Inc. (NASD RegulationSM) effective dates for implementation of Corporate Finance with the ability to reconstruct markets the OATS Rules. The OATS Rules Executive Representatives promptly, conduct efficient will become effective according to the Government Securities surveillance, and enforce NASD and following schedule: SEC rules. The SEC has directed Institutional that OATS must provide an accurate, ¥ Phase 1: By March 1, 1999, Insurance time-sequenced record of orders and electronic orders received by Market Internal Audit transactions from the receipt of an Makers and Electronic order through its execution.3 To Communication Networks (ECNs) Legal & Compliance accomplish this, NASD Regulation must be reported. Municipal will combine information submitted to OATS with transaction data reported ¥ Phase 2: By August 1, 1999, all Mutual Fund by members through ACT and electronic orders must be reported. Operations quotation information disseminated 4 Options by Nasdaq. ¥ Phase 3: By July 31, 2000, all non- electronic, or manual, orders must be Registered Representatives The SEC has approved amendments reported. Registration to the NASD transaction reporting Research and ACT rules to require members to The text of the rule changes as well submit transaction data to ACT that as other information about OATS is Syndicate will be integrated with order available on the NASD Regulation Systems information reported to OATS.5 The Web Site (www.nasdr.com). amended rules affect Nasdaq Trading National Market¨, Nasdaq Training Variable Contracts

NASD Notice to Members 98-82 October 1998 635 Endnotes 3See In the Matter of National Association of 5The amended rules are Marketplace Rules 1See Securities Exchange Act Release No. Securities Dealers, Inc., Securities 4632, 4642, 4652, 6120, and 6130. 40437 (September 14, 1998), 63 FR 50272 Exchange Act Release No. 37538 (August 8, (September 21, 1998) (File No. SR-NASD- 1996); Administrative Proceeding File No. 3- © 1998, National Association of Securities Dealers, 98-60). 905, at 7-8. Inc. (NASD). All rights reserved.

2See Notice to Members 98-33 for a com- 4ACT is an automated system owned and plete description of the OATS Rules. operated by Nasdaq that captures transaction information in real-time.

NASD Notice to Members 98-82 October 1998 636 Executive Summary appropriate and would enable the NASD On August 26, 1998, the Securities staff to bring enforcement actions on and Exchange Commission (SEC) the basis of clear violations of certain approved amendments to the Nation- proscribed behavior. Notice to al Association of Securities Dealers, Inc. (NASD¨) Rule 2210 to require that written or electronic communica- Discussion Members tions prepared for a single customer NASD Regulation believes that cer- be subject to the general standards tain statements pose similar dangers 98-83 and those specific standards of regardless of whether they are com- NASD Rule 2210 that prohibit mis- municated to one person or many leading statements, but not to the persons. NASD Regulation recog- SEC Approves Rule specific standards of the rule that nizes that correspondence is highly Change Relating To prescribe specific disclosure nor the individualized in nature and that filing and review requirements. The much correspondence (unlike adver- Standards For Individual amendments will take effect on tising and sales literature) is directed Correspondence; Effective November 16, 1998. by registered representatives (RRs) November 16, 1998 to customers with whom RRs already Questions concerning this Notice have an established relationship. At may be directed to Thomas A. Pap- the same time, NASD Regulation pas, Director, Advertising Regulation, believes that clarifying how Rule Suggested Routing NASD Regulation, Inc. (NASD Regu- 2210 applies to correspondence SM Senior Management lation ), at (202) 728-8330, and would provide better guidance to the Robert J. Smith, Assistant General membership and help to assure that Advertising Counsel, Office of General Counsel, investors are adequately protected Continuing Education NASD Regulation, at (202) 728-8176. with respect to the communications they receive individually. The amend- Corporate Finance ments therefore subject correspon- Executive Representatives Discussion dence to the general standards and Government Securities Background those specific standards of Rule NASD Rule 2210 imposes various 2210 that prohibit misleading state- Institutional requirements on member communi- ments, but not to the standards of the Insurance cations with the public, designed to rule that prescribe specific disclo- Internal Audit ensure that those communications sure. Members will not have to file are fair, balanced, and not mislead- correspondence with the NASD for Legal & Compliance ing. Rule 2210 does not expressly review. Municipal apply to the content of correspondence (i.e., a communication to only The amendments create a category Mutual Fund one person). In addition, there is no defined as “communications with the Operations definition of correspondence in the public” to include the current defini- Options NASD rules, even though members tions of “advertisement” and “sales are required to supervise the use of literature,” and a new definition of Registered Representatives correspondence by their associated “correspondence.” “Correspondence” Registration persons under Rule 3010. is defined as “...any written or elec- Research tronic communication prepared for NASD Regulation has taken the delivery to a single current or Syndicate position that a document prepared prospective customer, and not for Systems for use with a single customer, and dissemination to multiple customers not for dissemination to the general or the general public.” In determining Trading public, is not “sales literature” as that when a written or electronic commu- Training term is defined in NASD Rule 2210. nication is prepared for delivery to a Variable Contracts However, NASD Regulation believes single current or prospective cus- that applying particular standards in tomer, members should consider, Rule 2210 to correspondence is and the staff of NASD Regulation will

NASD Notice to Members 98-83 October 1998 637 examine, among other things, the statements that are misleading or Finally, the amendments also incor- form and content of the communica- without a reasonable basis in fact. porate several minor technical tion. Thus, a written or electronic changes that are non-substantive in communication addressed to a sin- Individual correspondence will not nature. gle current or prospective customer, be subject to the following specific the content of which is substantially standards of Rule 2210: identical to that of written or electron- Text Of Amendments ic communications sent to one or ¥ subparagraph (d)(2)(A), which (Note: New text is underlined; deletions are more other current or prospective requires the inclusion of certain infor- bracketed.) customers, is a form letter, not “cor- mation regarding members' names; respondence.” Because form letters Rule 2210. Communications are considered “sales literature” ¥ subparagraph (d)(2)(B), which with the Public under Rule 2210, they would be sub- requires that a member disclose ject to all of the general and specific specified information to the customer (a) Definitions - Communications standards of Rule 2210. when making a recommendation; with the public shall include:

The amendments subject individual ¥ subparagraph (d)(2)(D), which (1) Advertisement--For purposes of correspondence to the general stan- requires the inclusion of certain this Rule and any interpretation dards under subparagraph (d)(1) and statements regarding testimonials; thereof, “advertisement” means the following speciﬁc standards material published, or designed for under subparagraph (d)(2) of Rule ¥ subparagraph (d)(2)(H), which use in, a newspaper, magazine or 2210: applies to advertisements for the other periodical, radio, television, recruitment of sales personnel; telephone or tape recording, video- ¥ subparagraph (d)(2)(C), which pro- tape display, signs or billboards, hibits exaggerated, unwarranted, or ¥ subparagraph (d)(2)(I), which motion pictures, telephone directo- certain other speciﬁc claims or opin- requires certain disclosures regard- ries (other than routine listings), elec- ions; ing periodic investment plans; tronic or other public media.

¥ subparagraph (d)(2)(E), which pro- ¥ subparagraph (d)(2)(K), which (2) Sales Literature--For purposes of hibits certain offers of free services; requires the identification and disclo- this Rule and any interpretation sure of sources other than the mem- thereof, “sales literature” means any ¥ subparagraph (d)(2)(F), which pro- ber for certain statistical tables, written or electronic communication hibits certain claims for research ser- charts, graphs, or other illustrations; distributed or made generally avail- vices; able to customers or the public, ¥ the provisions of subparagraph which communication does not meet ¥ subparagraph (d)(2)(G), which pro- (d)(2)(L) that require the inclusion of the foregoing definition of “advertise- hibits certain hedge clauses; clarifying information regarding ment.” Sales literature includes, but claims of tax free or tax exempt is not limited to, circulars, research ¥ subparagraph (d)(2)(J), which pro- returns; and reports, market letters, performance hibits the implication of endorsement reports or summaries, form letters, or approval by regulatory organiza- ¥ subparagraph (d)(2)(M), which telemarketing scripts, seminar texts, tions; requires the inclusion of certain infor- and reprints or excerpts of any other mation when making comparisons of advertisement, sales literature or ¥ the provision of subparagraph investment alternatives. published article. (d)(2)(L) that prohibits the characteri- zation of income or investment The amendments do not change the (3) Correspondence--For purposes returns as tax exempt or tax free in current application of Rule IM-2210- of this Rule and any interpretation certain circumstances; and 1. Therefore paragraph (a) of that thereof, “correspondence” means rule (interpretation regarding collater- any written or electronic communica- ¥ subparagraph (d)(2)(N), which pro- alized mortgage obligations) has tion prepared for delivery to a single hibits predictions and projections of been amended to clarify that only current or prospective customer, and investment results. All of these spe- advertisements and sales literature not for dissemination to multiple cus- cific provisions derive from members’ are covered by the interpretation. tomers or the general public. general obligations not to make

NASD Notice to Members 98-83 October 1998 638 Cross Reference - Rules Concerning (2) Advertisements concerning collat- (B) Except for advertisements related Review and Endorsement of Corre- eralized mortgage obligations regis- to exempted securities (as defined in spondence are Found in paragraph tered under the Securities Act of Section 3(a)(12) of the Act), munici- (d) to Conduct Rule 3010. 1933, and advertisements and sales pal securities, direct participation pro- literature concerning registered grams or investment company (b) Approval and Recordkeeping investment companies (including securities, members subject to the mutual funds, variable contracts and requirements of paragraph (c)(3)(A) (1) Each item of advertising and unit investment trusts) that include or [or (B)] of this Rule may, in lieu of fil- sales literature shall be approved by incorporate rankings or comparisons ing with the Association, file adver- signature or initial, prior to use or fil- of the investment company with tisements on the same basis, and for ing with the Association, by a regis- other investment companies where the same time periods specified in tered principal of the member. the ranking or comparison category [those] that subparagraph[s], with is not generally published or is the any registered securities exchange (2) A separate file of all advertise- creation, either directly or indirectly, having standards comparable to ments and sales literature, including of the investment company, its those contained in this Rule. the name(s) of the person(s) who underwriter or an affiliate, shall be prepared them and/or approved their filed with the Department for review (4)(A) Notwithstanding the foregoing use, shall be maintained for a period at least 10 days prior to use (or such provisions, any District Business of three years from the date of each shorter period as the Department Conduct Committee of the Associa- use. may allow in particular circum- tion, upon review of a member's stances) for approval and, if changed advertising and/or sales literature, (c) Filing Requirements and by the Association, shall be withheld and after determining that the mem- Review Procedures from publication or circulation until ber has departed and there is a rea- any changes specified by the Associ- sonable likelihood that the member (1) Advertisements and sales litera- ation have been made or, if express- will again depart from the standards ture concerning registered invest- ly disapproved, until the of this Rule, may require that such ment companies (including mutual advertisement has been refiled for, member file all advertising and/or funds, variable contracts and unit and has received, Association sales literature, or the portion of such investment trusts) not included within approval. The member must provide member's material which is related to the requirements of paragraph (c)(2), with each filing the actual or antici- any specific types or classes of secu- and public direct participation pro- pated date of first use. Any member rities or services, with the Depart- grams (as defined in Rule 2810) filing any investment company ment and/or the District Committee, shall be filed with the Association's advertisement or sales literature pur- at least ten days prior to use. The Advertising/Investment Companies suant to this paragraph shall include member must provide with each fil- Regulation Department (Department) a copy of the data, ranking or coming the actual or anticipated date of within 10 days of first use or publica- parison on which the ranking or com- first use. tion by any member. The member parison is based. must provide with each filing the (B) The Committee shall notify the actual or anticipated date of first use. (3)(A) Each member of the Associa- member in writing of the types of Filing in advance of use is recom- tion which has not previously filed material to be filed and the length of mended. Members are not required advertisements with the Association time such requirement is to be in to file advertising and sales literature (or with a registered securities effect. The requirement shall not which have previously been filed and exchange having standards compa- exceed one year, however, and shall which are used without change. Any rable to those contained in this Rule) not take effect until 30 days after the member filing any investment com- shall file its initial advertisement with member receives the written notice, pany advertisement or sales litera- the Department at least ten days during which time the member may ture pursuant to this paragraph (c) prior to use and shall continue to file request a hearing before the District that includes or incorporates rank- its advertisements at least ten days Business Conduct Committee, and ings or comparisons of the invest- prior to use for a period of one year. any such hearing shall be held in ment company with other investment The member must provide with each reasonable conformity with the hear- companies shall include a copy of filing the actual or anticipated date of ing and appeal procedures of the the ranking or comparison used in first use. Code of Procedure as contained in the advertisement or sales literature. the Rule 9000 Series.

NASD Notice to Members 98-83 October 1998 639 (5) In addition to the foregoing (D) Material sent to branch offices or the [advertising or sales literature] requirements, every member’s other internal material that is not dis- communication to be misleading. [advertising] advertisements and tributed to the public; sales literature shall be subject to a (B) Exaggerated, unwarranted or routine spot-check procedure. Upon (E) Prospectuses, preliminary misleading statements or claims are written request from the Department, prospectuses, offering circulars and prohibited in all public communica- each member shall promptly submit similar documents used in connections of members. In preparing such the material requested. Members will tion with an offering of securities [literature] communications, mem- not be required to submit material which has been registered or filed bers must bear in mind that inherent under this procedure which has been with the Commission or any state, or in investments are the risks of fluctu- previously submitted pursuant to one which is exempt from such registra- ating prices and the uncertainty of of the foregoing requirements and, tion, except that an investment com- dividends, rates of return and yield, except for material related to pany prospectus published pursuant and no member shall, directly or indi- exempted securities (as defined in to SEC Rule 482 under the Securi- rectly, publish, circulate or distribute Section 3(a)(12) of the Act), munici- ties Act of 1933 shall not be consid- any public communication that the pal securities, direct participation pro- ered a prospectus for purposes of member knows or has reason to grams or investment company this exclusion; know contains any untrue statement securities, the procedure will not be of a material fact or is otherwise false applied to members who have been, (F) Advertisements prepared in or misleading. within the Association’s current accordance with Section 2(10)(b) of examination cycle subjected to a the Securities Act of 1933, as (C) When sponsoring or participating spot-check by a registered securities amended, or any rule thereunder, in a seminar, forum, radio or televi- exchange or other self-regulatory such as SEC Rule 134, unless such sion interview, or when otherwise organization using procedures com- advertisements are related to direct engaged in public appearances or parable to those used by the Associ- participation programs or securities speaking activities which may not ation. issued by registered investment constitute advertisements, members companies. and persons associated with mem- (6) The following types of material bers shall nevertheless follow the are excluded from the foregoing filing (7) Material which refers to invest- standards of paragraphs (d) and (f) requirements and spot-check proce- ment company securities or direct of this Rule. dures: participation programs, or exempted securities (as defined in Section (D) In judging whether a communica- (A) Advertisements or sales literature 3(a)(12) of the Act) solely as part of a tion or a particular element of a com- solely related to changes in a mem- listing of products and/or services munication may be misleading, ber's name, personnel, location, offered by the member, is excluded several factors should be consid- ownership, offices, business struc- from the requirements of subpara- ered, including but not limited to: ture, officers or partners, telephone graphs (1) and (2). or teletype numbers, or concerning a (i) the overall context in which the merger with, or acquisition by, anoth- (d) Standards Applicable to Com- statement or statements are made. A er member; munications with the Public statement made in one context may be misleading even though such a (B) Advertisements or sales literature (1) General Standards statement could be [perfectly] appro- which do no more than identify the priate in another context. An essen- Nasdaq symbol of the member (A) All member communications with tial test in this regard is the balance and/or of a security in which the the public shall be based on princi- of treatment of risks and potential member is a Nasdaq registered mar- ples of fair dealing and good faith benefits. ket maker; and should provide a sound basis for evaluating the facts in regard to any (ii) the audience to which the com- (C) Advertisements or sales literature particular security or securities or munication is directed. Different lev- which do no more than identify the type of security, industry discussed, els of explanation or detail may be member and/or offer a specific secu- or service offered. No material fact or necessary depending on the audi- rity at a stated price; qualification may be omitted if the ence to which a communication is omission, in the light of the context of directed, and the ability of the mem- the material presented, would cause ber given the nature of the media

NASD Notice to Members 98-83 October 1998 640 used, to restrict the audience appro- mended, or in the underlying security mation specified in subparagraph priately. If the statements made in a if the recommended security is an (iii). Neither the list of recommenda- communication would be applicable option, [and/]or that the member or tions, nor material offering such list, only to a limited audience or if addi- associated persons will sell to or buy shall imply comparable future perfor- tional information might be neces- from customers on a principal basis; mance. Reference to the results of a sary for other audiences, it should be previous specific recommendation, kept in mind that it is not always pos- b. that the member and/or its officers including such a reference in a fol- sible to restrict the readership of a or partners own options, rights or low-up research report or market let- particular communication. warrants to purchase any of the ter, is prohibited if the intent or the securities of the issuer whose securi- effect is to show the success of a (iii) the overall clarity of the communi- ties are recommended, unless the past recommendation, unless all of cation. A statement or disclosure extent of such ownership is nominal; the foregoing requirements with made in an unclear manner [obvi- respect to past recommendations ously] can result in a lack of under- c. that the member was manager or are met. standing of the statement, or in a co-manager of a public offering of serious misunderstanding. A com- any securities of the recommended (C) Claims and Opinions. Communi- plex or overly technical explanation issuer within the last three years. cations with the public must not con- may be [worse] more confusing than tain promises of specific results, too little information. Likewise, mate- (ii) The member shall also provide, or exaggerated or unwarranted claims rial disclosure relegated to legends offer to furnish upon request, avail- or unwarranted superlatives, opin- or footnotes [realistically] may not able investment information support- ions for which there is no reasonable enhance the reader's understanding ing the recommendation. basis, or forecasts of future events of the communication. Recommendations on behalf of cor- which are unwarranted, or which are porate equities must provide the not clearly labeled as forecasts. (2) Specific Standards price at the time the recommendation is made. (D) Testimonials. In testimonials con- In addition to the foregoing general cerning the quality of a firm's invest- standards, the following specific (iii) A member may use material ment advice, the following points standards apply: referring to past recommendations if must be clearly stated in [the] adver- it sets forth all recommendations as tisements or sales literature [commu- (A) Necessary Data. Advertisements to the same type, kind, grade or clas- nication]: and sales literature shall contain the sification of securities made by a name of the member, unless such member within the last year. Longer (i) The testimonial may not be repre- advertisements and sales literature periods of years may be covered if sentative of the experience of other comply with paragraph (f). Sales liter- they are consecutive and include the clients. ature shall contain the name of the most recent year. Such material person or firm preparing the material, must also name each security rec- (ii) The testimonial is not indicative of if other than the member, and the ommended and give the date and future performance or success. date on which it is first published, cir- nature of each recommendation culated or distributed. If the informa- (e.g., whether to buy or sell), the (iii) If more than a nominal sum is tion in the material is not current, this price at the time of the recommenda- paid, the fact that it is a paid testimo- fact should be stated. tion, the price at which or the price nial must be indicated. range within which the recommenda- (B) Recommendations. tion was to be acted upon, and indi- (iv) If the testimonial concerns a cate the general market conditions technical aspect of investing, the per- (i) In making a recommendation in during the period covered. son making the testimonial must advertisements and sales literature, have knowledge and experience to whether or not labeled as such, a (iv) Also permitted is material which form a valid opinion. member must have a reasonable does not make any specific recom- basis for the recommendation and mendation but which offers to furnish (E) Offers of Free Service. Any state- must disclose any of the following sit- a list of all recommendations made ment in communications with the uations which are applicable: by a member within the past year or public to the effect that any report, over longer periods of consecutive analysis, or other service will be fur- a. that the member usually makes a years, including the most recent nished free or without any charge market in the securities being recom- year, if this list contains all the infor- must not be made unless such NASD Notice to Members 98-83 October 1998 641 report, analysis or other service actu- securities being offered, or of the ance, fluctuation of principal and/or ally is or will be furnished entirely free underwriter, sponsor, or any member return, tax features, and any other and without condition or obligation. or associated person, which refer- factors necessary to make such ence could imply endorsement or comparisons fair and not misleading. (F) Claims for Research Facilities. approval by the Association or any No claim or implication in communi- federal or state regulatory body. Ref- (N) Predictions and Projections. In cations with the public may be made erences to membership in the Asso- communications with the public, for research or other facilities beyond ciation or Securities Investors i[I]nvestment results cannot be pre- those which the member actually Protection Corporation shall comply dicted or projected. Investment per- possesses or has reasonable capac- with all applicable By-Laws and formance illustrations may not imply ity to provide. Rules pertaining thereto. that gain or income realized in the past will be repeated in the future. (G) Hedge Clauses. No cautionary (K) Identification of Sources. Statisti- However, for purposes of this Rule, statements or caveats, often called cal tables, charts, graphs or other hypothetical illustrations of mathe- hedge clauses, may be used in com- illustrations used by members in matical principles are not considered munications with the public if they advertising or sales literature should projections of performance; e.g., are misleading or are inconsistent disclose the source of the informa- illustrations designed to show the with the content of the material. tion if not prepared by the member. effects of dollar cost averaging, tax- free compounding, or the mechanics (H) Recruiting Advertising. Advertise- (L) Claims of Tax Free/Tax Exempt of variable annuity contracts or vari- ments in connection with the recruit- Returns. Income or investment able life policies. ment of sales personnel must not returns may not be characterized in contain exaggerated or unwarranted communications with the public as claims or statements about opportu- tax free or exempt from income tax nities in the investment banking or where tax liability is merely post- IM-2210-1. Communications securities business and should not poned or deferred. If taxes are with the Public About Collat- refer to specific earnings figures or payable upon redemption, that fact eralized Mortgage Obligations ranges which are not reasonable must be disclosed in advertisements (CMOs) under the circumstances. and sales literature. References in advertisements and sales literature (a) General Considerations (I) Periodic Investment Plans. Adver- to tax free/tax exempt current income tisements and sales literature [Com- must indicate which income taxes For purposes of the following guide- munications with the public] should apply or which do not unless income lines, the term “collateralized mort- not discuss or portray any type of is free from all applicable taxes. For gage obligation” (CMO) refers to a continuous or periodic investment example, if income from an invest- multiclass bond backed by a pool of plan without disclosing that such a ment company investing in municipal mortgage pass-through securities or plan does not assure a profit and bonds may be subject to state or mortgage loans. CMOs are also does not protect against loss in local income taxes, this should be known as “real estate mortgage declining markets. In addition, if the stated, or the illustration should oth- investment conduits” (REMICs). As a material deals specifically with the erwise make it clear that income is result of the 1986 Tax Reform Act, principles of dollar-cost averaging, it free from federal income tax. most CMOs are issued in REMIC should point out that since such a form to create certain tax advantages plan involves continuous investment (M) Comparisons. In making a com- for the issuer. The term CMO and in securities regardless of fluctuating parison in advertisements or sales lit- REMIC are now used interchange- price levels of such securities, the erature, either directly or indirectly, ably. In order to prevent [a communi- investor should consider his financial the member must make certain that cation about] advertisements and ability to continue his purchases the purpose of the comparison is sales literature regarding CMOs from through periods of low price levels. clear and must provide a fair and bal- being false or misleading, there are anced presentation, including any certain factors to be considered, (J) References to Regulatory Organi- material differences between the including, but not limited to, the fol- zations. Communications with the subjects of comparison. Such differ- lowing: public shall not make any reference ences may include investment objec- to membership in the Association or tives, sales and management fees, to registration or regulation of the liquidity, safety, guarantees or insur-

NASD Notice to Members 98-83 October 1998 642 (1) Product Identification rates), tax considerations, minimum (B) If the CMO is offered at a premi- investments, transactions costs and um, the communication should clear- In order to assure that investors liquidity; ly indicate that the government understand exactly what security is agency backing applies only to the being discussed, all communications (E) Questions an investor should ask face value of the CMO, and not to concerning CMOs should clearly before investing; and any premium paid. Furthermore, describe the product as a "collateral- communications should not imply ized mortgage obligation." Member (F) A glossary of terms that may be that either the market value or the firms should not use the proprietary helpful to an investor considering an anticipated yield of the CMO is guar- names for CMOs as they do not ade- investment. anteed. quately identify the product. To prevent confusion and the possibility of (3) Safety Claims (5) Simplicity Claims misleading the reader, communications should not contain comparisons A communication should not over- CMOs are complex securities and between CMOs and any other state the relative safety offered by require full, fair and clear disclosure investment vehicle, including Certifi- the CMO. Although CMOs generally in order to be understood by the cates of Deposit. offer low investment risk, they are investor. A communication should subject to market risk like all invest- not imply that these are simple secu- (2) Educational Material ment securities and there should be rities that may be suitable for any no implication otherwise. According- investor seeking high yields. All In order to ensure that customers are ly, references to liquidity should be CMOs do not have the same charac- adequately informed about CMOs balanced with disclosure that, upon teristics and it is misleading to indi- members are required to offer to cus- resale, an investor may receive more cate otherwise. Even though two tomers educational material which or less than his original investment. CMOs may have the same underly- covers the following matters: ing collateral, they may differ greatly (4) Claims About Government in their prepayment speed and (A) A discussion of CMO characteris- Guarantees volatility. tics as investments and their attendant risks; (A) Communications should accu- (6) Claims About Predictability rately depict the guarantees associ- (B) An explanation of the structure of ated with CMO securities. For A communication would be mislead- a CMO, including the various types example, in most cases it would be ing if it indicated that the anticipated of tranches; misleading to state that CMOs are yield and average life of a CMO were "government guaranteed" securities. assured. It should disclose that the (C) A discussion of mortgage loans A government agency issue could yield and average life will fluctuate and mortgage securities; instead be characterized as govern- depending on the actual prepayment ment agency backed. Of course, pri- experience and changes in current (D) Features of CMOs, including: vate- issue CMO advertisements interest rates. credit quality, prepayment rates and should not contain references to average lives, interest rates (includ- guarantees or backing, but may dis- © 1998, National Association of Securities Dealers, ing effect on value and prepayment close the rating. Inc. (NASD). All rights reserved.

NASD Notice to Members 98-83 October 1998 643 Executive Summary license on or before December 31, NASD The 1999 National Association of 1998. That personnel assessment is Securities Dealers, Inc. (NASD¨) currently $10.00 per person. The broker/dealer and agent registration NASD branch office assessment fee Notice to renewal cycle begins in early is $75.00 per branch based on the November. This program simplifies number of active branches as of the registration renewal process December 31, 1998. Members through the payment of one invoiced amount that will include fees for Agent renewal fees for NYSE, Amex, 98-84 NASD personnel assessments, CBOE, PSE, PHLX, and state affilia- NASD branch offices, New York tions are listed in a matrix enclosed Stock Exchange (NYSE), American with each invoice. The matrix Broker/Dealer And Agent Stock Exchange (Amex), Chicago includes a list of broker/dealer renew- Renewals For 1999 Board Options Exchange (CBOE), al fees for states that participate in Pacific Exchange (PSE), and the broker/dealer renewal program. Philadelphia Stock Exchange (PHLX) NYSE, Amex, CBOE, PSE, and maintenance fees. The invoice also PHLX maintenance fees—collected includes state agent renewal fees by the NASD for firms that are regis- Suggested Routing and state broker/dealer renewal fees. tered with those exchanges as well Senior Management Members should read this Notice as the NASD—are based on the and the instruction materials to be number of NYSE-, Amex-, CBOE-, Advertising sent with the November invoice PSE-, and PHLX-registered person- Continuing Education package to ensure continued nel employed by the member. eligibility to do business in the states Corporate Finance effective January 1, 1999. Any If a state does not participate in this Executive Representatives renewal processing changes year’s broker/dealer renewal pro- Government Securities subsequent to the publishing of this gram, members registered in that Notice to Members will be provided state must contact the state directly Institutional to you in a Special Notice to to ensure compliance with renewal Insurance Members. requirements. In addition, some par- Internal Audit ticipating states may require steps Questions concerning this Notice beyond the payment of renewal fees Legal & Compliance may be directed to the CRD/PD to complete the broker/dealer renew- Municipal Gateway Call Center at (301) 869- al process. Members should contact 6699. states directly for further information Mutual Fund on state renewal requirements. Operations Initial Renewal Invoices Options On or around November 9, 1998, ini- Payment of the initial invoice should tial renewal invoices will be mailed to be either in the form of a check made Registered Representatives all member firms. The invoices will payable to NASD Regulation, Inc. Registration include fees for NASD personnel (NASD RegulationSM) or by bank wire Research assessments, NASD branch-office transfer. The check should be drawn fees, NYSE, Amex, CBOE, PSE, and on the member firm’s account, with Syndicate PHLX maintenance fees, state agent the firm’s Central Registration Systems renewal fees, and state broker/dealer Depository (CRDSM) number included renewal fees. The NASD must on the check. Submit the check, Trading receive full payment of the November along with the top portion of the Training invoice no later than December 11, invoice, and mail in the return enve- Variable Contracts 1998. lope to:

NASD personnel assessments for NASD Regulation, Inc. 1999 will be based on the number of Finance Department - Renewals registered personnel with an 15201 Diamondback Drive approved or conditional NASD Rockville, MD 20850

NASD Notice to Members 98-84 October 1998 645 To ensure prompt processing, the Forms U-5 and Page 1s of Form U- The deadline for receipt of Forms renewal invoice payment should not 4. FAQS offers several advantages BDW by the CRD for firms desiring be included with other forms or fee to firms in this regard, including the to terminate an affiliation before year- submissions. Members are advised ability to immediately process termi- end 1998 is December 11, 1998. that failure to return full payment to nations, ensure in-house control over This same date applies to the filing of the NASD by the December 11, agent registrations, and reduce nor- Forms BDW with the jurisdictions 1998, deadline could cause a mem- mal and express mailing costs, as that are not participating in Phase II. ber to immediately become ineligible well as long-distance telephone Post-dated Forms BDW filed with the to do business in the states effective charges. FAQS also allows members CRD will be accepted and pro- January 1, 1999. to quickly and efficiently handle the cessed in the same manner as post- large filing volumes that typically dated Forms U-5. occur at this time every year. Filing Forms U-5 Because of that, the NASD will pro- Members may avoid paying unneces- vide an additional service to FAQS Removing Open Registrations sary renewal fees by filing Forms U-5 users by expanding the on-line user The initial invoice package will for agents terminating in one or more hours for November and December include a roster of firm agents whose jurisdiction affiliations. Due to the posi- 1998. The system will be operational NASD registration is either terminat- tive feedback received by the NASD from 7 a.m. to 11 p.m., Eastern Time ed or purged due to the existence of by its member firms that used post- (ET), Monday through Friday, and a deficient condition for more than dated Forms U-5 for renewals, the will also be available on Saturdays 180 days, but who have an NASD will again accept post-dated from 9 a.m. to 5 p.m., ET, during approved registration with a state. agent termination notices on the these months. This roster should aid in the reconcili- Forms U-5. From November 2 to ation of personnel registrations prior December 11, the NASD will accept to year’s end. Firms may terminate and process Forms U-5 (both partial Filing Forms BDW obsolete state registrations through and full terminations) with post-dated The CRD Phase II program, now in the submission of Forms U-5 or rein- dates of termination. Under this pro- its ninth year, allows firms requesting state the NASD licenses through the cedure, if the Form U-5 indicates a terminations (either full or state only) filing of Page 1s of Forms U-4. No termination date of December 31, to file their Forms BDW with the roster will be included if a firm does 1998, an agent may continue doing CRD to avoid the assessment of not have agents within this category. business in a jurisdiction until the end renewal fees in those jurisdictions of the calendar year without being that are designated on the Form assessed renewal fees for that juris- BDW, provided that the jurisdic- Final Adjusted Invoices diction. Please ensure that Forms U-5 tion is a CRD Phase II participant. On or about January 11, 1999, the are filed by the renewal deadline date Currently, there are six jurisdictions NASD will mail final adjusted invoic- of December 11, 1998. Also, post- that are not participating in Phase II. es to its members. These invoices dated Forms U-5 cannot be pro- They are: will reflect the final status of firm and cessed if the date of termination is agent registrations as of December after December 31, 1998. ¥ Michigan 31, 1998. Any adjustments in fees owed as a result of registration termi- Members should exercise care when ¥ Puerto Rico nations or approvals subsequent to submitting post-dated Forms U-5. The the initial invoice mailing will be NASD will process these forms as ¥ American Stock Exchange made in this final reconciled invoice. they are received but cannot withdraw If a member has more agents and/or a post-dated termination once pro- ¥ Chicago Board Options Exchange branch offices registered at year’s cessed. To withdraw a post-dated ter- end than it did on the November mination, a member would have to file ¥ New York Stock Exchange invoice date, additional fees will be a new Form U-4 after the termination assessed. If a member has fewer date indicated on the Form U-5. • Pacific Exchange agents and/or branch offices registered at year’s end than it did in The NASD encourages members Firms requesting termination in any November, a credit/refund will be having access to the Firm Access of the above-listed jurisdictions must issued. Query System (FAQS) to use elec- submit a Form BDW directly to the tronic filings for the submission of all jurisdiction as well as to the CRD.

NASD Notice to Members 98-84 October 1998 646 Included with this adjusted invoice branches for which they have been ters. All jurisdictions should be con- will be the member renewal rosters assessed. tacted directly in writing. Specific that will list all renewed personnel information and instructions concern- with the NASD, NYSE, Amex, This year’s final invoice package will ing the final adjusted invoice pack- CBOE, PSE, PHLX, and each state. also include a breakdown of fees by age will appear in the January 1999 Persons whose registrations are billing code for firms that use billing issue of Notices to Members, as well approved in any of these jurisdictions codes in the registration process. as on the inside cover of the renewal during November and December will This breakdown will aid firms in their roster. Firms may also refer to their be included in this roster, while regis- internal research and allocation of renewal edition of the CRD/PD Bul- trations that are pending approval or fees. letin for details concerning the are deficient at year’s end will not renewal process. be included in the renewal process. Firms then will have approximately Firms will also receive an NASD two months in which to reconcile any © 1998, National Association of Securities Dealers, branch-office roster that lists all discrepancies on the renewal ros- Inc. (NASD). All rights reserved.

NASD Notice to Members 98-84 October 1998 647 Executive Summary ¥ established a link to Nasdaq by dis- NASD On September 22, 1998, the Securi- playing the best ECN prices in Nas- ties and Exchange Commission daq’s quote montage; and (SEC) approved amendments to the Notice to National Association of Securities ¥ provided access through Nasdaq to Dealers, Inc. (NASD¨ or Association) such publicly displayed prices. rules regarding Electronic Communi- Members cations Networks (ECNs) and locked To accommodate this alternative, and crossed markets. The SEC also Nasdaq created the “SelectNet Link- approved a new rule regarding infor- age” that allows: 1) ECNs to display 98-85 ¨ mation requests made by Nasdaq to their best prices from Market Makers NASD members. Specifically, the rule and other ECN subscribers in the SEC Approves Rule changes: (1) amend NASD Rule 4623 Nasdaq quote montage, including the Changes Regarding to specify the manner in which ECN inside market display; and 2) market orders that have a reserved size must participants to access those prices by Electronic Communication interact with incoming SelectNetSM sending orders to an ECN through Networks, Locked And messages; (2) amend Rule 4613(e) to SelectNet. The NASD is adopting the Crossed Markets, And specify the manner in which quota- following rule changes in light of Nas- Members’ Obligation To tions that are entered into Nasdaq at daq’s experience with the integration Provide Nasdaq With or after 9:25 a.m. and that lock or of ECNs into the market. Certain Information cross the market on the opening, must be resolved at the market’s opening; and (3) add Rule 4625, Reserved Size Suggested Routing which will require members that par- The NASD is adopting amendments ¨ Senior Management ticipate in The Nasdaq Stock Market to NASD Rule 4623 to establish the to provide information to Nasdaq manner in which orders that have a Advertising departments and staff when informa- reserved size and that are entered Continuing Education tion is so requested. The rule changes into an ECN must interact with Select- are effective November 1, 1998. Net orders that are sent to an ECN. Corporate Finance Executive Representatives Questions concerning this Notice Subsequent to the inclusion of ECNs Government Securities may be directed to John Malitzis, into the market, Nasdaq has Senior Attorney, Office of General observed locked and crossed mar- Institutional Counsel, The Nasdaq Stock Market, kets1 occurring in connection with the Insurance Inc., at (202) 728-8245. use of “reserved” size orders in Internal Audit ECNs. Specifically, an ECN may display a portion of a customer order Legal & Compliance Background (e.g., 1,000 shares) while maintain- Municipal With the implementation of the SEC’s ing a significantly larger portion of the Order Handling Rules in early 1997, order in reserve (e.g., 10,000 Mutual Fund a number of ECNs have been inte- shares). It is Nasdaq’s experience Operations grated into the Nasdaq market. that often a Market Maker will send a Options Under SEC Rule 11Ac1-1(c)(5) (the large SelectNet order (e.g., 20,000 ECN Rule) which was adopted as shares) to the ECN to take out the Registered Representatives part of the SEC’s Order Handling displayed and reserved portion of the Registration Rules, a Nasdaq Market Maker must ECN order so that the Market Maker Research reflect in its public quotes any superi- may move its quote without or prices that the Market Maker pri- locking/crossing the market. The Syndicate vately quotes in an ECN. The ECN ECN’s system may be programmed, Systems Rule provides an alternative to this however, so that the incoming public quote display requirement, SelectNet order interacts only with Trading under which a Market Maker may the displayed portion of the ECN Training comply with the ECN Rule if the ECN order, not the reserved and displayed Variable Contracts in which the Market Maker is private- portions of such order (i.e., the ly quoting has: 20,000 share SelectNet message will NASD Notice to Members 98-85 October 1998 649 execute against the displayed 1,000 are not firm) that lock/cross the mar- ing, the amended rule: (1) provides a shares only, not the full 11,000 ket and then leaving these orders in benchmark of 9:25:00 a.m., at which shares). Thus, a Market Maker often place at 9:30 a.m. when the quota- time market participants must start is unable to take out the entire ECN tions become firm and the market monitoring their quotations to deter- order -- except in pieces and through opens. Often times the Market Maker mine whether they are entering lock- multiple executions. After using rea- or ECN will not take action to attempt ing/crossing quotations; (2) sonable means to avoid to resolve the lock/cross when the delineates which party must take locking/crossing the market by—for market opens. This effectively action to resolve the lock/cross when example—sending SelectNet mes- locks/crosses the market on the the market opens; and (3) provides a sages to the ECN to take out the opening and disrupts the opening benchmark of 9:30:30 a.m., by which quotation, the Market Maker often process. time the market participant must take will enter a quotation that action to resolve the locked/crossed locks/crosses the market. These In light of this situation, the NASD is market situation. locked/crossed markets may last for amending Rule 4613(e). Amended a significant period and disrupt the Rule 4613(e) provides that if a Mar- marketplace. ket Maker or ECN enters a quotation Nasdaq Information Requests at or after 9:25:00 a.m. Eastern Time Finally, the NASD is adopting Rule The NASD is amending NASD Rule and the quotation locks or crosses 4625 regarding members’ obligation 4623 to address this issue. Under the market on the opening, it is the to supply Nasdaq with certain infor- the amendment, if an ECN displays obligation of that Market Maker or mation when so requested. Nasdaq’s in Nasdaq a customer order having a ECN to take action immediately MarketWatch and Market Operations reserved size and a market partici- when the market opens to avoid the departments have day-to-day pant attempts to access the ECN’s lock or cross. The rule specifies that responsibilities for administering vari- Nasdaq-displayed order by sending the Market Maker or ECN must take ous NASD and SEC rules, as well as (via a Nasdaq-provided means) an such take action (e.g., by sending a carrying out duties delegated to them order that is larger than the ECN’s SelectNet order to the quotation it will by the Association. For example, Nasdaq-displayed size, the ECN lock/cross, or by taking down its quo- Nasdaq’s MarketWatch Department must execute the Nasdaq-delivered tation, if appropriate) when the mar- is responsible for initiating trading order: 1) up to the size of the Nas- ket opens at 9:30:00 a.m., but in no halts and monitoring locked and daq-delivered order, if the ECN order case later than 30 seconds thereafter crossed market situations, while (including the reserved size and dis- (i.e., 9:30:30 a.m.). The 30-second Nasdaq’s Market Operations Depart- played portions) is the same size or period is intended to give a Market ment is responsible for reviewing ITS larger than the Nasdaq-delivered Maker or ECN an opportunity to trade-through complaints, clearly order; or 2) up to the size of the ECN send a SelectNet message to the erroneous transactions, and requests order (including the reserved size party that it will lock/cross at a point for excused withdrawals or reinstate- and displayed portions), if the Nas- in time when quotations are firm (i.e., ments from unexcused withdrawals. daq-delivered order is the same size at or after 9:30:00 a.m.). In order to properly administer a par- or larger than the ECN order (includ- ticular rule or to carry out a depart- ing the reserved size and displayed For example, at 9:28:35 a.m., the mental function, Nasdaq staff often portions). Thus, in the above exam- market in Stock QRST is 20 x must obtain information on a real- ple where the ECN is displaying 20 3/16, and MMAB is displaying an time basis from market participants. 1,000 shares and holding 10,000 offer of 20 3/16. At 9:29:45 a.m., For example, when monitoring for shares in reserve and the Market MMCD enters a bid of 20 3/16 there- locked and crossed markets, Nasdaq Maker sends the ECN a SelectNet by locking the market. MMCD is obli- MarketWatch routinely will contact order for 20,000 shares, the ECN gated to attempt to resolve the lock the parties to the lock or cross (e.g., would be required to execute 11,000 as soon as the market opens (but no a Market Maker and/or ECN) to shares—the full size of the order in later than by 9:30:30 a.m.) by, for request relevant information.2 Staff the ECN. example, sending a SelectNet mes- then will review this information on a sage to MMAB. real-time basis and assist in resolving the locked or crossed market sit- Locked/Crossed Markets Although market participants should uation.3 Nasdaq has observed instances of always monitor their pre-opening Market Makers and ECNs entering quotations to ensure that they do not Currently there is no explicit authority orders at 9:29 a.m. (when quotations lock/cross the market on the open- in the NASD’s rules that allow Nas-

NASD Notice to Members 98-85 October 1998 650 daq staff to request information from ability to effect a transaction with displayed size and the ECN is dis- members, although members gener- such priced orders that is equivalent playing the order in Nasdaq on a ally have voluntarily complied with to the ability to effect a transaction reserved size basis, the NASD mem- such requests in the past. Thus, the with a Nasdaq market maker quota- ber that operates the ECN shall exe- NASD is adopting Rule 4625, which tion in Nasdaq operated systems. cute such Nasdaq-delivered order: authorizes Nasdaq staff to request information in specific circumstances (b) An [electronic communications (1) up to the size of the Nasdaq- and obligates members to comply network] ECN that seeks to utilize delivered order, if the ECN order with such requests. Under Rule the Nasdaq-provided means to com- (including the reserved size and dis- 4625, Nasdaq staff may request from ply with the [electronic communica- played portions) is the same size or a member information directly related tions network] ECN display larger than the Nasdaq-delivered to: a SEC or NASD rule that the Nas- alternative shall: order; or daq department is responsible for administering; or to other (1) demonstrate to the Association (2) up to the size of the ECN order duties/responsibilities imposed on that it qualifies as an [electronic com- (including the reserved size and dis- the Nasdaq department by the “Plan munications network] ECN meeting played portions), if the Nasdaq-deliv- of Allocation and Delegation of Func- the definition in the SEC Rule; ered order is the same size or larger tion by the NASD to Subsidiaries” or than the ECN order (including the otherwise delegated by the Associa- (2) be registered as a[n] NASD reserved size and displayed portion to such department. Members member; tions). should note that, under Rule 4625, a failure to provide information in a (3) enter into and comply with the No ECN operating in Nasdaq pur- timely, truthful, and/or complete man- terms of a Nasdaq WorkStation Sub- suant to this rule is permitted to pro- ner, could subject the member to dis- scriber Agreement, as amended for vide a reserved-size function unless ciplinary action. ECNs; the size of the order displayed in Nasdaq is 100 shares or greater. For (4) agree to provide for Nasdaq's dis- purposes of this rule, the term Text Of Amendments semination in the quotation data “reserved size” shall mean that a (Note: New text is underlined; deletions are made available to quotation vendors customer entering an order into an bracketed.) the prices and sizes of Nasdaq mar- ECN has authorized the ECN to dis- ket maker orders (and other entities, play publicly part of the full size of the Rule 4623. Electronic Commu- if the [electronic communications net- customer’s order with the remainder nications Networks work] ECN so chooses) at the high- held in reserve on an undisplayed est buy price and the lowest sell basis to be displayed in whole or in (a) The Association may provide a price for each Nasdaq security part as the displayed part is execut- means to permit electronic communi- entered in and widely disseminated ed. cations networks (“ECN”), as such by the [electronic communications term is defined in SEC Rule 11Ac1- network] ECN, and prior to entering Rule 4613. Character of Quo- 1(a)(8), to meet the terms of the such prices and sizes, register with tations [electronic communications network] Nasdaq Market Operations as an ECN display alternative provided for ECN; and (a) - (d) No Change in SEC Rule 11Ac1-1(c)(5)(ii)(A) and (B) (“ECN display alternative”). In (5) provide an automated execution, (e) Locked and Crossed Markets providing any such means, the Asso- or if the price is no longer available, ciation shall establish a mechanism an automated rejection of any order (1) A market maker shall not, except that permits the [electronic communi- routed to the [electronic communica- under extraordinary circumstances, cations network] ECN to display the tions network] ECN through the Nas- enter or maintain quotations in Nas- best prices and sizes of orders daq-provided display alternative. daq during normal business hours if: entered by Nasdaq market makers (and other entities, if the [electronic (c) When a NASD member attempts (A) the bid quotation entered is equal communications network] ECN so to electronically access through a to or greater than the asked quota- chooses) into the [electronic commu- Nasdaq-provided system an ECN- tion of another market maker enter- nications network] ECN, and allows displayed order by sending an order ing quotations in the same security; any NASD member the electronic that is larger than the ECN's Nasdaq- or

NASD Notice to Members 98-85 October 1998 651 (B) the asked quotation is equal to or Rule 4625. Obligation to Pro- and CQA) (as promulgated and less than the bid quotation of another vide Information amended from time-to- time) that market maker entering quotations in Nasdaq Market Operations is the same security. (1) A NASD member operating in or responsible for administering or to participating in the third market, The other duties and/or obligations The prohibitions of this rule include Nasdaq Stock Market, or other Nas- imposed on Nasdaq Market Opera- the entry of a locking or crossing daq-operated system, shall provide tions by the Association under the quotation at or after 9:25:00 a.m. information orally, in writing, or elec- Plan of Allocation and Delegation of Eastern Time if such quotation con- tronically (if such information is, or is Function by the NASD to Sub- tinues to lock or cross the market at required to be, maintained in elec- sidiaries or otherwise; this shall the market’s opening, and requires a tronic form) to the staff of Nasdaq include, but not be limited to, infor- market maker or ECN that enters a when: mation relating to: locking or crossing quotation at or after 9:25:00 a.m. Eastern Time to (a) Nasdaq MarketWatch staff (i) a clearly erroneous transaction, take action to avoid the lock or cross makes an oral, written, or electroni- pursuant to NASD Rule 11890; at the market’s open or immediately cally communicated request for infor- thereafter, but in no case more than mation relating to a specific NASD (ii) a request to reconsider a determi- 30 seconds after 9:30:00 a.m. rule, SEC rule, or provision of a joint nation to withhold a primary market industry plan (e.g., ITS, UTP, CTA, maker designation, pursuant to (2) A market maker shall, prior to and CQA) (as promulgated and NASD Rule 4612; entering a quotation that locks or amended from time-to-time) that crosses another quotation, make Nasdaq MarketWatch is responsible (iii) a request for an excused with- reasonable efforts to avoid such for administering or to other duties drawal or reinstatement, pursuant to locked or crossed market by execut- and/or obligations imposed on Nas- NASD Rules 4619, 4620, 4730, 5106 ing transactions with all market mak- daq MarketWatch by the Association and 6350; ers whose quotations would be under the Plan of Allocation and Del- locked or crossed. Pursuant to the egation of Function by the NASD to (iv) the resolution of a trade-through provisions of paragraph (b) of this Subsidiaries or otherwise; this shall complaint, pursuant to NASD Rules Rule 4613, a market maker whose include, but not be limited to, infor- 5262, 5265, and 11890; quotations are causing a locked or mation relating to: crossed market is required to exe- (v) an ACT input error; cute transactions at its quotations as (i) a locked or crossed market; displayed through Nasdaq at the (vi) an equipment failure; or time of receipt of any order. (ii) a trade reported by a member or ECN to the Automated Transaction (vii) a request to submit a stabilizing (3) For purposes of this [paragraph] Confirmation Service (“ACT”); or bid, pursuant to NASD Rules 4614 rule, the term “market maker” shall and 5106, or a request to have a include: (iii) trading activity, rumors, or infor- quotation identified as a penalty bid mation that a member may possess on Nasdaq, pursuant to NASD Rule (i) any NASD member that enters that may assist in determining 4624. into an [electronic communications whether there is a basis to initiate a network] ECN, as defined in SEC trading halt, pursuant to NASD Rule (2) A failure to comply in a timely, Rule 11Ac1-1(a)(8), a priced order 4120 and IM-4120-1; or truthful, and/or complete manner with that is displayed in The Nasdaq a request for information made pur- Stock Market; and (iv) a quotation that appears not to suant to this rule may be deemed be reasonably related to the prevail- conduct inconsistent with just and (ii) [Such term also shall include] any ing market. equitable principles of trade. NASD member that operates the [electronic communication network] (b) Nasdaq Market Operations staff ECN when the priced order being makes an oral, written, or electroni- displayed has been entered by a per- cally communicated request for infor- son or entity that is not a[n] NASD mation relating to a specific NASD member. rule, SEC rule, provision of a joint industry plan (e.g., ITS, UTP, CTA,

NASD Notice to Members 98-85 October 1998 652 Endnotes error), and other information related to the ing to be aberrations, were caused by a mal- 1A locked market occurs when the quoted locked or crossed market situation. function of a computer system (which could bid price is the same as the quoted ask pose a threat to the integrity of Nasdaq from price. A crossed market occurs when the 3In addition to the locks and crosses, there a technological perspective) or by some quoted bid price is greater than the quoted are other instances when staff must gather other source. ask price. information from Market Makers and ECNs on a real-time basis. For example, Nasdaq 2Staff may request information on the identi- MarketWatch may need to contact a Market © 1998, National Association of Securities Dealers, ty of the customers, trade information, the Maker or ECN to determine quickly if a Inc. (NASD). All rights reserved. reason for the lock or cross (e.g., system trade, quotation, or series of trades appear-

NASD Notice to Members 98-85 October 1998 653 Columbus Day: Trade Date-Settlement Date Schedule NASD The schedule of trade dates-settlement dates below reﬂects the observance by the ﬁnancial community of Columbus Day, Monday, October 12, 1998. On this day, The Nasdaq Stock Market¨ and the securities exchanges will be Notice to open for trading. However, it will not be a settlement date because many of the nation’s banking institutions will be closed.

Members Trade Date Settlement Date Reg. T Date* 98-86 Oct. 2 Oct. 7 Oct. 9 5812

6913 Columbus Day, Veterans Day, And 71314 Thanksgiving Day: Trade DateÐSettlement 81415 Date Schedule 91516

12 15 19

Suggested Routing 13 16 20 Senior Management Advertising Note: October 12, 1998, is considered a business day for receiving cus- Continuing Education tomers’ payments under Regulation T of the Federal Reserve Board. Corporate Finance Transactions made on Monday, October 12, will be combined with transac- Government Securities tions made on the previous business day, October 9, for settlement on Octo- Institutional ber 15. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uni- Insurance form Practice Code, will not be made and/or exercised on October 12. Internal Audit Legal & Compliance Municipal Mutual Fund Operations Options Registered Representatives Registration Research Syndicate Systems Trading Training Variable Contracts

NASD Notice to Members 98-8798-86 October 1998 655 Veterans Day And Thanksgiving Day: Trade Date-Settlement Date Schedule The schedule of trade dates-settlement dates below reﬂects the observance by the ﬁnancial community of Veterans Day, Wednesday, November 11, 1998, and Thanksgiving Day, Thursday, November 26, 1998. On Wednesday, November 11, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation’s banking institutions will be closed in observance of Veterans Day. All securities markets will be closed on Thursday, November 26, in observance of Thanksgiving Day.

Trade Date Settlement Date Reg. T Date*

Nov. 4 Nov. 9 Nov. 11

51012

61213

9 13 16

10 16 17

11 16 18

12 17 19

19 24 27

20 25 30

23 27 Dec. 1

24 30 2

25 Dec. 1 3

26 Markets Closed —

27 2 4

Note: November 11, 1998, is considered a business day for receiving customers’ payments under Regulation T of the Federal Reserve Board.

Transactions made on November 11 will be combined with transactions made on the previous business day, Novem- ber 10, for settlement on November 16. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on November 11.

*Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a broker/dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within ﬁve business days of the date of purchase or, pursuant to Section 220.8(d)(1), make application to extend the time period speciﬁed. The date by which members must take such action is shown in the column titled “Reg. T Date.”

NASD Notice to Members 98-86 October 1998 656 As of August 24, 1998, the following bonds were added to the Fixed Income NASD Pricing SystemSM (FIPS¨). Notice to Symbol Name Coupon Maturity ABLC.GA American Builders & Contractors Inc10.625 05/15/07 AFGH.GA Affinity Group Holding Inc. 11.000 04/01/07 Members ALAI.GA Aladdin Gaming/Cap Corp. 13.500 03/01/10 APFC.GA American Pacific Corp. 9.250 03/01/05 98-87 APFC.GA American Pacific Corp. 9.250 03/01/05 APLO.GA AP Holdings Inc. 11.250 03/15/08 APLO.GA AP Holdings Inc. 11.250 03/15/08 ARGI.GD American Restaurant Group Inc. 11.500 02/15/03 ARSL.GA Ameristeel Corp. 8.750 04/15/08 Fixed Income Pricing ARUC.GA Accuride Corp. 9.250 02/01/08 System Additions, AVS.GA Avistion Sales Co. 8.125 02/15/08 Changes, And Deletions BCC.GA Boise Cascade Corp. 9.875 02/15/01 As Of August 24, 1998 BCC.GB Boise Cascade Corp. 9.450 11/01/09 BCC.GC Boise Cascade Corp. 9.900 03/15/00 BCC.GD Boise Cascade Corp. 9.850 06/15/02 BCC.GE Boise Cascade Corp. 7.350 02/01/16 BOP.GA Boise Cascade Office Products Corp.7.050 05/15/05 Suggested Routing CE.GE CalEnergy Co. 6.960 09/15/03 Senior Management CE.GF CalEnergy Co. 7.230 09/15/05 CHK.GG Chesapeake Energy Corp. 9.625 05/01/05 Advertising CIOF.GA Chiles Offshore LLC/Fin Corp. 10.000 05/01/08 Continuing Education CMCO.GA Columbus McKinnon Corp. 8.500 04/01/08 CR.GG CalEnergy Co. 7.520 09/15/08 Corporate Finance CR.GH CalEnergy Co. 8.480 09/15/28 Government Securities EGHI.GA Elgar Holdings Inc. 9.875 02/01/08 Institutional ENGL.GD Engle Homes Inc. 9.250 02/01/08 FKNC.GA Frank’s Nursery & Crafts Inc. 10.250 03/01/08 Insurance FOHO.GA Fort Howard Corp. 9.000 02/01/06 Internal Audit FTZH.GA Fitzgerald Gaming 12.250 12/15/04 Legal & Compliance GBND.GA General Binding Corp. 9.375 06/01/08 GTAR.GD Globalstar LP/Cap Corp. 11.500 06/01/05 Municipal GW.GA Grey Wolf Inc. 8.875 07/01/07 Mutual Fund HPII.GA Home Products Intl Inc. 9.625 05/15/08 HTHR.GA Hawthorne Financial Corp. 12.50 12/31/04 Operations ICGS.GA ICG Services 10.000 02/15/08 Options ICIX.GD Intermedia Communications Inc. 8.500 01/15/08 Registered Representatives IHK.GB Imperial Holly Corp. 9.750 12/15/07 IIXC.GB IXC Communications Inc. 9.000 04/15/08 Registration KMCT.GA KMC Telecom Holdings Inc. 12.500 02/15/08 Research LIEV.GA LIN Television Corp. 8.375 03/01/08 Syndicate LNGS.GA LIN Holdings Corp. 10.000 03/01/08 LNR.GA LNR Property Corp. 9.375 03/15/08 Systems LNR.GA LNR Property Corp. 9.375 03/15/08 Trading LO.GA Local Financial Corp. 11.000 09/08/04 LWN.GC Loewen Group Intl. Inc. 7.500 04/15/01 Training MEAL.GB Metallurg Inc. 11.000 12/01/07 Variable Contracts MEDA.GA Medaphis Corp. 9.500 02/15/05 MKHU.GA Market Hub Partners Inc. 8.250 03/01/08 MPN.GB Mariner Post-Acute Network Inc. 9.500 04/01/06

NASD Notice to Members 98-87 October 1998 657 Symbol Name Coupon Maturity

MRNR.GA Mariner Health Group 9.500 04/01/06 MTUM.GA Mentus Media Corp. 12.000 02/01/03 MUI.GA Metals USA 8.625 02/15/08 NTHC.GA Northland Cable Television Inc. 10.250 11/15/07 NXLK.GB Nextlink Communications Inc. 9.000 03/15/08 NXTL.GG Nextel Communications Inc. 11.500 09/01/03 PMSI.GA Prime Medical Services Inc. 8.750 04/01/08 PMWI.GB Pagemart Wireless Inc. 11.250 02/01/08 PRRJ.GA Perry-Judds Inc. 10.625 12/15/07 PSAI.GA Pediatric Services of America Inc. 10.00 04/15/08 PSIX.GA PSINet Inc. 10.00 02/15/05 QWST.GC Qwest Communications Intl. Inc. 8.290 02/01/08 RSLU.GA RSL Communications PLC 9.125 03/01/08 SFXE.GA SFX Entertainment Inc. 9.125 02/01/08 SILA.GA Silver Cinemas Intl. Inc. 10.500 04/15/05 SPF.GC Standard Paciﬁc Corp. 8.000 02/15/08 SPVI.GA Spectra Vision Inc. 11.500 10/01/01 SYAU.GA Stanadyne Automotive Corp. 10.250 12/15/07 SYPT.GA Syratech Corp. 11.000 04/15/07 TSO.GA Tesoro Petroleum Corp. 9.000 07/01/08 TWA.GD Trans World Airlines Inc. 11.375 03/01/06 TWA.GE Trans World Airlines Inc. 10.250 06/15/03 UNTA.GA United Artists Theaters Co. 9.750 04/15/08 UNTA.GB United Artists Theaters Co. 10.062 10/15/07 WPSN.GC Westpoint Stevens Inc. 7.875 06/15/08

As of August 24, 1998, the following bonds were deleted from FIPS.

Symbol Name Coupon Maturity

ACCP.GA American Cap Corp. 8.400 06/15/93 AMIC.GC Americold Corp. 11.500 03/01/05 ARGI.GA American Restaurant Group Inc. 12.000 09/15/98 ARGI.GB American Restaurant Group Inc. 13.000 09/15/98 ARGI.GC American Restaurant Group Inc. 13.000 09/15/98 CHK.GF Chesapeake Energy Corp. 10.500 06/01/02 FERL.GC Ferrellgas LP/Finance Corp. 10.000 08/01/01 JORE.GA Jorgensen Earle M Co. Del New 10.750 03/01/00 LIEV.GA LIN Television Corp. 8.375 03/01/08 LNGS.GA Lin Holdings Corp. 10.000 03/01/08 LPET.GA La Petite Holdings Corp. 9.625 08/01/01 LQI.GA La Quinta Inns Inc. 9.250 05/15/03 MRNR.GA Mariner Health Group 9.500 04/01/06 NXTL.GG Nextel Communications Inc. 11.500 09/01/03 OEH.GA Orient Express Hotels Inc. 10.250 09/01/98 RYL.GA Ryland Group Inc. 10.500 07/15/02 SPVI.GA Spectra Vision Inc. 11.500 10/01/01 SPVI.GA Spectra Vision Inc. 11.500 10/01/01 TEP.GB Tucson Electric Power Co. 8.125 09/01/01 TEP.GC Tucson Electric Power Co. 7.550 03/01/02 TEP.GC Tucson Electric Power Co. 7.550 03/01/02

NASD Notice to Members 98-87 October 1998 658 Symbol Name Coupon Maturity

TEP.GD Tucson Electric Power Co. 7.650 05/01/03 TEP.GD Tucson Electric Power Co. 7.650 05/01/03 TRIP.GA Trangle Paciﬁc Corp. Del 10.500 08/01/03 VNCI.GA Vencor Inc. 10.125 09/01/01 VNCI.GA Vencor Inc. 10.125 09/01/01 WYDM.GA Wyndam Banking Inc. 13.625 09/15/98

As of August 24, 1998, changes were made to the symbols of the following FIPS bonds:

New Symbol Old Symbol Name Coupon Maturity

CHCA.GD CRBR.GA Chancellor Radio Broadcasting Co. 9.375 10/01/04 VNCI.GA HIL.GA Hill Haven Corp. New 10.125 09/01/08

Any questions regarding the FIPS master ﬁle should be directed to Cheryl Glowacki, Nasdaq¨ Market Operations, at (203) 385-6310.

NASD Notice to Members 98-87 October 1998 659 Executive Summary reviewed and a determination is NASD Regulation, Inc. (NASD Regu- made as to whether the NASD SM lation ) is issuing this Notice to compensation is fair and reasonable. Members to remind members that Notice to compensation received by members The pricing of underwriting in public offerings of securities is to compensation, including the gross be determined through negotiation spread on offerings, is determined by Members with the issuer offering the securities. the issuer and the underwriter Consistent with long-standing policy, through negotiation, subject to NASD it is conduct inconsistent with just Regulation’s review to ensure that it 98-88 and equitable principles of trade for is fair and reasonable. NASD any member or person associated Regulation has noted a high degree Underwriting with a member to engage, directly or of price uniformity in gross spreads Compensation In indirectly, in any conduct that dis- charged by underwriters in initial courages the competitive activities of public offerings of corporate equity Public Offerings other member firms. This includes, securities. NASD Regulation but is not limited to, directly or indi- considers it important to remind rectly engaging in any conduct that members that there is no standard inhibits competition in the pricing of level of underwriting compensation. services offered by members includ- Prices should be determined through ing conduct that threatens, harasses, competition and the level of Suggested Routing coerces, intimidates, or otherwise underwriter compensation on a given Senior Management attempts improperly to influence, transaction should be the product of constrain, or inhibit the freedom of a negotiation between the issuer and Advertising member or person associated with a the underwriter. The exchange of Continuing Education member to price its services competi- current price information among tively. competitors in this context may raise Corporate Finance serious anti-competitive concerns. Executive Representatives Questions regarding this Notice may Any attempt improperly to influence Government Securities be directed to Gary Goldsholle, another member in its pricing is a Assistant General Counsel, Office of violation of NASD Rule 2110. Institutional General Counsel, NASD Regulation, Insurance at (202) 728-8104. As set forth in IM-2110-5, it is NASD Internal Audit Regulation’s long-standing policy that it is conduct inconsistent with just Legal & Compliance Discussion and equitable principles of trade for Municipal The National Association of any member or person associated Securities Dealers, Inc. (NASD¨) with a member to coordinate the Mutual Fund Rule 2710(c) prohibits a member or prices of such member with any Operations person associated with a member other member or associated person; Options from receiving compensation or to direct or request another member participating in a public offering of to alter a price; or to engage, directly Registered Representatives securities if the underwriting or indirectly, in any conduct that Registration compensation in connection with the threatens, harasses, coerces, Research public offering is unfair or intimidates, or otherwise attempts unreasonable. NASD Regulation’s improperly to influence another Syndicate Corporate Financing Department member or person associated with a Systems (Department) has direct responsibility member. This includes, but is not for the review of underwriting limited to, any attempt to influence Trading compensation. The Department another member or person Training reviews public offerings before their associated with a member to adjust Variable Contracts effective dates and aggregates all or maintain a price or other conduct items of value proposed to be that retaliates against or discourages received by underwriters and related the competitive activities of another persons. Total compensation is then market participant. While IM-2110- NASD Notice to Members 98-88 October 1998 661 5(5) specifically permits member Member firms should review their procedures regarding underwriting firms to engage in any underwriting practices and procedures regarding compensation to ensure that the (or any syndicate for the the pricing of their services in public requirement for free negotiation of underwriting) of securities to the offerings to ensure that such pricing fees is emphasized to all relevant extent permitted by the federal results from appropriate negotiation employees and that procedures exist securities laws, this exclusion does with the issuer, and that conduct of to identify any questionable activity. not permit member firms to engage the type noted above is prohibited. A in conduct that discourages the finding of such conduct will result in © 1998, National Association of Securities Dealers, competitive activities of other firms. disciplinary action. Member firms Inc. (NASD). All rights reserved. should also review their supervisory

NASD Notice to Members 98-88 October 1998 662 NASD Regulation, Inc. (NASD was fined $5,000, jointly and several- Disciplinary RegulationSM) has taken disciplinary ly, with another individual. Without actions against the following firms and admitting or denying the allegations, individuals for violations of National the respondents consented to the Actions Association of Securities Dealers, Inc. described sanctions and to the entry (NASD¨) rules; federal securities of findings that the firm, acting under laws, rules, and regulations; and the the direction and control of Ruben- rules of the Municipal Securities Rule- stein, failed to maintain margin making Board (MSRB). Unless other- requirements in certain customer Disciplinary Actions wise indicated, suspensions will begin accounts of its day traders. The find- Reported For October with the opening of business on Mon- ings also stated that the firm, acting day, October 19, 1998. The informa- under the direction and control of tion relating to matters contained in another individual, failed to compute this Notice is current as of the end of accurately the amount required to be September 23. deposited into the Special Reserve Bank Account for the Exclusive Ben- efit of Customers and failed to Firms and Individuals Fined deposit the amount required to be B. Riley & Company, Inc. (Los deposited into the account no later Angeles, California) and Bryant R. than one hour after the opening of Riley (Registered Principal, Pacific banking business on the second fol- Palisades, California) submitted a lowing business day. Letter of Acceptance, Waiver and Consent pursuant to which they were Olsen Payne and Company (Salt censured and fined $12,000, jointly Lake City, Utah) and James Dean and severally. Without admitting or Payne (Registered Principal, Salt denying the allegations, the respon- Lake City, Utah) submitted an Offer dents consented to the described of Settlement pursuant to which they sanctions and to the entry of findings were censured and fined $16,000, that the firm, acting through Riley, jointly and severally. Without admit- reported transactions to the Automat- ting or denying the allegations, the ed Confirmation Transaction Ser- respondents consented to the viceSM (ACTSM) in violation of described sanctions and to the entry applicable securities laws and regula- of findings that the firm, acting tions regarding trade reporting. The through Payne, reported transactions findings also stated that the firm through ACT in violation of applicable failed to establish, maintain, and securities laws and regulations enforce written supervisory proce- regarding trade reporting. The find- dures reasonably designed to ings also stated that the firm, acting achieve compliance with the applica- through Payne, failed to establish, ble securities laws and regulations, maintain, and enforce written super- and with applicable NASD rules relat- visory procedures reasonably ing to the designation of supervisory designed to achieve compliance with personnel, trade reporting, and the applicable securities laws and recordkeeping. regulations and NASD rules regarding trading ahead of customer limit J. B. Oxford & Company (Beverly orders, and short-sale rules. Hills, California) and Stephen M. Rubenstein (Registered Principal, Portfolio Management, Inc. (Little Chatsworth, California) submitted a Rock, Arkansas) and Samuel L. Letter of Acceptance, Waiver and Bowman, III (Registered Principal, Consent pursuant to which they were Little Rock, Arkansas) submitted an censured and fined $20,000, jointly Offer of Settlement pursuant to which and severally. In addition, the firm they were censured and fined

NASD Notices to Members—Disciplinary Actions October 1998 663 $14,500, jointly and severally. With- William J. Schurmann (Registered tion of applicable securities laws and out admitting or denying the allega- Principal, Escondido, California) regulations regarding trade reporting. tions, the respondents consented to submitted a Letter of Acceptance, The findings also stated that the firm the described sanctions and to the Waiver and Consent pursuant to failed to establish, maintain, and entry of findings that the firm, acting which they were censured and fined enforce written supervisory proce- through Bowman, allowed the entry $10,625, jointly and severally. With- dures reasonably designed to of proprietary trades through the out admitting or denying the allega- achieve compliance with the applica- Small Order Execution System tions, the respondents consented to ble securities laws and regulations (SOES) into an account controlled by the described sanctions and to the regarding trade reporting and record- Bowman. The findings also stated entry of findings that the firm, acting keeping. that the firm, acting through Bow- under the direction and control of man, failed and neglected to estab- Atkinson, Scalzo, and Schurmann, Interstate/Johnson Lane Corpora- lish, maintain, and enforce proper participated in a contingency offering tion (Charlotte, North Carolina) supervisory procedures governing of securities and withdrew funds submitted an Offer of Settlement pur- the entry of trades through SOES. received from public customers from suant to which the firm was cen- the bank escrow account to which sured, fined $10,000 and ordered to Securities America, Inc. (Omaha, they had been deposited before the disgorge $62,640 to the NASD. With- Nebraska) and Thomas Gerard terms of the contingency were met. out admitting or denying the allega- Zielinski (Registered Principal, tions, the firm consented to the Omaha, Nebraska) submitted an Firms Fined described sanctions and to the entry Offer of Settlement pursuant to which Columbia Hospital Securities Cor- of findings that it failed to make and they were each censured and fined poration (Nashville, Tennessee) keep current a list of political contri- $10,000. Without admitting or deny- submitted a Letter of Acceptance, butions to officials of issuers. The ing the allegations, the respondents Waiver and Consent pursuant to findings also stated that the firm consented to the described sanctions which the firm was censured and failed to list political contributions and to the entry of findings that fined $15,000. Without admitting or made by a registered representative Zielinski failed to take steps reason- denying the allegations, the firm con- and engaged in prohibited municipal ably designed to ensure that a sented to the described sanctions securities business with the city of branch manager carried out his and to the entry of findings that it Charlotte, North Carolina. supervisory responsibilities over reg- allowed individuals to maintain their istered persons in a reasonable man- representative registrations with the Needham & Company, Inc. (New ner under the attendant firm, although they were not at all York, New York) submitted a Letter circumstances, or that the registered times actively engaged in the securi- of Acceptance, Waiver and Consent persons ceased their participation in ties business of the firm. The findings pursuant to which the firm was cen- unsupervised sales of unapproved also stated that the firm failed and sured and fined $12,000. Without promissory notes away from the neglected to achieve compliance with admitting or denying the allegations, member firm. The findings also stat- the Firm Element of the Continuing the firm consented to the described ed that the firm failed to establish Education Requirements in that the sanctions and to the entry of findings adequate written procedures or firm failed to prepare adequate writ- that it received customer limit orders unwritten procedures to ensure the ten training plans and failed to main- to buy and to sell stock, and failed to reasonable supervision of a regis- tain adequate records documenting execute contemporaneously the cus- tered representative to ensure that the content and completion of train- tomer orders after it bought or sold he was reasonably performing his ing programs by registered persons. shares for its own market-making supervisory duties over the activities account. The findings also stated that of registered persons in regard to Empire Securities Incorporated of the firm failed to use reasonable dili- their compliance with the applicable Washington (Spokane, Washing- gence to ascertain the best inter- NASD rules. ton) submitted a Letter of Accep- dealer market and failed to buy or tance, Waiver and Consent pursuant sell in such market so that the resul- Sy Leavitt Company, Inc. (Escon- to which the firm was censured and tant price to the customer was as dido, California), William L. Atkin- fined $12,000. Without admitting or favorable as possible under prevail- son (Registered Principal, denying the allegations, the firm con- ing market conditions. Furthermore, Carlsbad, California), Thomas G. sented to the described sanctions the NASD determined that when the Scalzo, Jr. (Registered Principal, and to the entry of findings that it firm acted as principal for its own Loma Linda, California), and reported transactions to ACT in viola- account, it failed to provide written

NASD Notices to Members—Disciplinary Actions October 1998 664 notification to a customer that the ing the allegations, Alk consented to (DBCC) imposed the sanctions fol- price to the customer was an aver- the described sanctions and to the lowing an order of remand by the age of the trade prices reported by entry of findings that he wrote checks National Business Conduct Commit- the firm to ACT. In addition, the drawn on a nonprofit social organiza- tee (NBCC). Without admitting or NASD found that the firm failed to tion totaling $4,203 and, without denying the allegations, Birkelo con- establish, maintain, and enforce writ- authorization, used $4,000 of the sented to the described sanctions ten supervisory procedures reason- funds for his personal benefit. and to the entry of findings that he ably designed to achieve compliance engaged in a private security trans- with applicable securities laws and Vincent Au (Registered Represen- action and failed to provide prior writ- regulations, and NASD rules regard- tative, New York, New York) sub- ten notice to his member firm. ing trade reporting, Securities and mitted a Letter of Acceptance, Exchange Commission (SEC) Order Waiver and Consent pursuant to Nicholas Robert Borissoff (Regis- Execution Rules, Best Execution, which he was censured, fined tered Representative, Concord, Anti-Competitive Practices, and $5,000, suspended from association California) submitted an Offer of SOES. with any NASD member in any Settlement pursuant to which he was capacity for 10 business days, and censured, fined $70,000, and barred Normandy Securities, Inc. (Scars- required to requalify as a general from association with any NASD dale, New York) submitted a Letter securities representative by taking member in any capacity. Without of Acceptance, Waiver and Consent the Series 7 exam prior to again act- admitting or denying the allegations, pursuant to which the firm was cen- ing in any registered capacity with Borissoff consented to the described sured, fined $10,000, and required to the NASD. Without admitting or sanctions and to the entry of findings undertake revision of the firm’s writ- denying the allegations, Au consent- that he recommended to public cus- ten supervisory procedures relating ed to the described sanctions and to tomers and effected in their accounts to firm quote compliance in a manner the entry of findings that he wired the purchase and sale of securities not unacceptable to the NASD. With- funds to a public customer in an which transactions were unsuitable out admitting or denying the allega- attempt to settle a customer com- for the customers in light of their size tions, the firm consented to the plaint away from the firm, without the and frequency and in light of the facts described sanctions and to the entry knowledge and consent of his mem- disclosed by customers as to their of findings that, as a registered Mar- ber firm. other security holdings and their ket Maker, the firm was presented an financial situations and needs. The order at the firm’s published bid or Vincent Alan Beck (Registered findings also stated that Borissoff published offer in an amount up to its Representative, Wayne, New Jer- participated in private securities published quotation size and failed to sey) was censured, fined $35,000 transactions while failing to give prior execute the orders thereby failing to and barred from association with any written notification of these transac- honor its published quotation. The NASD member in any capacity. The tions to his member firm. findings also stated that the firm sanctions were based on findings failed to establish, maintain, and that Beck received a $118 check Paul Francis Byrne (Registered enforce written supervisory proce- from a public customer for insurance Principal, Red Bank, New Jersey) dures reasonably designed to premium payments, failed to apply submitted an Offer of Settlement pur- achieve compliance with the applica- the funds toward the insurance pre- suant to which he was censured, ble securities laws and regulations miums, endorsed the check, and suspended from association with any concerning the SEC and NASD firm converted the monies to his own per- NASD member in any capacity for quote rules. sonal use. Beck also failed to five months, and required to comply respond to NASD requests for infor- with the regulatory computer-based Individuals Barred or mation. training of the Regulatory Element of Suspended the Continuing Education Require- Jeremy David Alk (Registered Dean K. Birkelo (Registered Rep- ments beginning within two months Representative, Seattle, Washing- resentative, Colorado Springs, of his reentry into the securities ton) submitted a Letter of Accep- Colorado) submitted an Offer of Set- industry. Without admitting or deny- tance, Waiver and Consent pursuant tlement pursuant to which he was ing the allegations, Byrne consented to which he was censured, fined censured and suspended from asso- to the described sanctions and to the $31,000, and barred from association ciation with any NASD member in entry of findings that he failed to with any NASD member in any any capacity for 30 days. The Denver exercise his supervisory obligations capacity. Without admitting or deny- District Business Conduct Committee adequately. According to the find-

NASD Notices to Members—Disciplinary Actions October 1998 665 ings, Byrne allowed the use of scripts purchase of limited partnership inter- capacity, and ordered to pay or sales presentations by registered ests without providing prior written $57,029.98 in restitution. Without representatives at his member firm notification to his member firm. admitting or denying the allegations, that were materially false and mis- Elkins consented to the described leading in that, among other things, James Michael Dean (Registered sanctions and to the entry of findings they did not contain disclosure of risk Representative, Atlanta, Georgia) that he obtained a total of $57,029.98 factors or negative factor information, was censured, fined $185,245.50, in checks drawn on bank accounts of and created a wholly optimistic pic- barred from association with any public customers, which funds repre- ture as to the likely success of an NASD member in any capacity, and sented the proceeds of mutual fund investment. In addition, the NASD ordered to pay $14,549.10, plus liquidations for the customers. The found that some of the scripts includ- interest in restitution to a public cus- NASD determined that Elkins, with- ed inaccurate or materially incom- tomer. The sanctions were based on out the knowledge or consent of the plete information about the issuers of findings that Dean forged the signa- customers, caused the checks to be the securities being sold, and some ture of a public customer on a letter deposited in bank accounts and/or provided for improper price predic- of authorization in order to convert mutual fund accounts maintained in tions or comparisons among unrelat- the public customer's funds to his his name, and used the funds for ed securities. own use and benefit; without the cus- some purpose other than for the ben- tomer's knowledge or authorization, efit of the customers. Elkins also Arthur Emil Cohen (Registered Dean deposited the checks into an failed to respond to NASD requests Representative, Pittsburgh, Penn- unauthorized account, had checks for information. sylvania) submitted an Offer of Set- drawn against the unauthorized tlement pursuant to which he was account, and converted the proceeds Michael Peter Finn (Registered censured, fined $100,000, barred of those checks to his own use and Representative, Babylon, New from association with any NASD benefit. York) submitted a Letter of Accep- member in any capacity, and ordered tance, Waiver and Consent pursuant to pay $15,000 plus interest in restitu- In addition, Dean deposited a public to which he was censured and tion. Without admitting or denying the customer’s checks in an undisclosed barred from association with any allegations, Cohen consented to the securities account at another mem- NASD member in any capacity. With- described sanctions and to the entry ber firm and did not provide written out admitting or denying the allega- of findings that he requested that a notification to his member firm nor tions, Finn consented to the check in the amount of $15,000 be did he advise the executing firm of described sanctions and to the entry issued against the securities account his association with another, caused of findings that he made material of a public customer, obtained the checks made payable to himself and misrepresentations and omitted check, endorsed it with the purported others in the amount of $14,549.10 material facts in connection with his endorsement of the customer and his to be drawn against the account. recommendations of securities to own endorsement, and deposited the Dean also failed to respond to NASD public customers. The findings also check into his bank account, without requests for information. stated that Finn made fraudulent the customer’s prior authorization. price predictions to customers in con- The findings also stated that Cohen Peter F. Drewek (Registered Rep- nection with his recommendations caused $14,000 to be transferred resentative, Baltimore, Maryland) and made an unauthorized transac- from the securities account of one was censured, fined $25,000, and tion in the account of a public cus- customer to the bank account of barred from association with any tomer. another customer without the prior NASD member in any capacity. The authorization of the first customer. sanctions were based on findings Edward Golick (Registered Princi- that Drewek failed to respond to pal, Del Mar, California) was cen- Mitchell John Dabo, Jr. (Regis- NASD requests for information. sured, fined $20,000, and barred tered Principal, Hollister, Califor- from association with any NASD nia) submitted an Offer of Settlement Eric Scott Elkins (Registered Rep- member in any capacity. The sanc- pursuant to which he was censured, resentative, Vincennes, Indiana) tions were based on findings that fined $10,000, and suspended from submitted a Letter of Acceptance, Golick failed to respond to NASD association with any NASD member Waiver and Consent pursuant to requests to appear for an on-the- in any capacity for 10 business days. which he was censured, fined record interview. The sanctions were based on find- $360,000, barred from association ings that Dabo participated in the with any NASD member in any

NASD Notices to Members—Disciplinary Actions October 1998 666 George Glen Hartberg (Registered $40,000, barred from association different insurance policy with a Principal, Los Angeles, California) with any NASD member in any money order for $1,483.44 to her and John Wesley Hartberg (Regis- capacity, and required to offer proof member firm and misused the tered Principal, Los Angeles, Cali- to the NASD that recession totaling remainder of the funds received from fornia) were each censured, fined $345,000 was made to public cus- the customer for her own use and $25,000, and barred from association tomers. Without admitting or denying benefit. In addition, Jones submitted with any NASD member in any the allegations, Jedda consented to a Form U-4 to her member firm that capacity. The sanctions were based the described sanctions and to the contained false and misleading infor- on findings that they failed to entry of findings that he effected pri- mation. respond to NASD requests for infor- vate securities transactions for public mation. customers without prior written notifi- Gloria Anita Jordan (Registered cation to his member firm. The find- Representative, Brooklyn, New Donald Martin Hogan, Jr. (Regis- ings also stated that not only did York) was censured, fined $25,000, tered Representative, St. Louis, Jedda fail to notify his member firm of and barred from association with any Missouri) submitted an Offer of Set- his own personal investment of NASD member in any capacity. The tlement pursuant to which he was $75,000 in a private securities trans- sanctions were based on findings censured, fined $25,000, and barred action, but he also actively attempted that Jordan failed to respond to from association with any NASD to conceal this information from the NASD requests for information. member in any capacity. Without firm. admitting or denying the allegations, Ian Tamer Kideys (Registered Hogan consented to the described Ronald Mills Johnston (Registered Representative, Los Angeles, Cali- sanctions and to the entry of findings Representative, Rockford, Illinois) fornia) was censured, fined that he failed to respond to NASD submitted an Offer of Settlement pur- $84,811.37, and suspended from requests for information. suant to which he was censured, association with any NASD member fined $50,000, barred from associa- in any capacity for two years. The Christopher Edward Jann (Regis- tion with any NASD member in any sanctions were based on findings tered Representative, Centereach, capacity, and required to pay that Kideys participated in private New York) was censured, fined $346,110.40 in restitution. Without securities transactions, for which he $5,000, suspended from association admitting or denying the allegations, received compensation, and failed to with any NASD member in any Johnston consented to the described provide prior written notification to, or capacity for 60 days, and ordered to sanctions and to the entry of findings obtain written approval from, his retake the Regulatory Element of the that he participated in private securi- member firm. Continuing Education Requirements ties transactions and failed and before reassociating with an NASD neglected to give written notice of his Mark Kevin Lammers (Registered member. The sanctions were based intention to engage in such activities Representative, Tucson, Arizona) on findings that Jann solicited mem- to his member firms and to receive submitted a Letter of Acceptance, bers of the public to become cus- written approval from the firms to Waiver and Consent pursuant to tomers of his member firm and engage in such activities. which he was censured, fined purchase stock offered by the firm, $25,000, and suspended from asso- and in connection with such solicita- Bernadette Jones (Registered ciation with any NASD member in tion, made certain representations Representative, Pomona, Califor- any capacity for one year. Without about the securities and the offering nia) was censured, fined $3,500, admitting or denying the allegations, that he knew, or should have known, barred from association with any Lammers consented to the described to be false and misleading and omit- NASD member in any capacity, and sanctions and to the entry of findings ted information that he knew, or ordered to pay $2,516.56 in restitu- that he participated in private securi- should have known, to be material to tion to a member firm. The National ties transactions without giving prior the investment decision of the per- Adjudicatory Council (NAC) imposed written notice to his member firm and sons he solicited. the sanctions following the review of therefore failed to receive written a Los Angeles DBCC decision. The approval from his firm. The findings Maurice Henry Jedda (Registered sanctions were based on findings also stated that Lammers made mis- Representative, Great Neck, New that Jones received $6,000 from a representations and omissions in his York) submitted a Letter of Accep- public customer for the purpose of solicitation of securities to public cus- tance, Waiver and Consent pursuant purchasing a life insurance policy. tomers. to which he was censured, fined Jones submitted an application for a

NASD Notices to Members—Disciplinary Actions October 1998 667 Donald Clewell Maier (Registered David C. McLaurin (Registered required to demonstrate that full Principal, Monte Sereno, Califor- Representative, Birmingham, restitution has been made to the nia) was censured, fined $39,750, Alabama) submitted a Letter of appropriate parties. Without admit- suspended from association with any Acceptance, Waiver and Consent ting or denying the allegations, Nolan NASD member in any capacity for 30 pursuant to which he was censured, consented to the described sanctions business days, and ordered to fined $2,500, and suspended from and to the entry of findings that he requalify by exam before reassociat- association with any NASD member received checks and cash totaling ing with an NASD member firm. The in any capacity for one week. With- $116,550 from public customers for sanctions were based on findings out admitting or denying the allega- the purpose of investing in medical that Maier participated in private tions, McLaurin consented to the receivables, failed and neglected to securities transactions without pro- described sanctions and to the entry invest these funds on the customers’ viding prior written notification to his of findings that he completed and behalf, and instead converted the member firm and filed an annual signed a Form U-4 that contained funds to his own use and benefit, questionnaire with his firm that con- inaccurate information. The findings without the customers’ knowledge or tained false information concerning also stated that McLaurin provided consent. The findings also stated private placements and unregistered his member firm with a false college that Nolan failed to respond to NASD securities. diploma that he had created on his requests for information. personal computer. Douglas John Mangan (Regis- Allen R. Prewitt (Registered Rep- tered Representative, Massape- Arlesta Mae Meyers (Registered resentative, Bradenton, Florida) qua, New York) was censured, fined Representative, Wichita, Kansas) was censured, fined $10,000, and $120,000, and barred from associa- submitted a Letter of Acceptance, barred from association with any tion with any NASD member in any Waiver and Consent pursuant to NASD member in any capacity. The capacity. The NAC affirmed the which she was censured, fined NAC imposed the sanctions follow- sanctions following appeal of a New $25,000, and barred from associa- ing its review of an Atlanta DBCC York DBCC decision. The sanctions tion with any NASD member in any decision. The sanctions were based were based on findings that Mangan capacity. Without admitting or deny- on findings that Prewitt provided created a false and inaccurate cus- ing the allegations, Meyers consent- false information on a Form U-4. tomer securities account statement ed to the described sanctions and to and caused his member firms’ the entry of findings that she provid- Anthony Eugene Priolo (Regis- records to indicate falsely the cus- ed materially incomplete information tered Representative, Brooklyn, tomer’s address as his own without to the NASD in response to requests New York) submitted a Letter of the knowledge, consent, or autho- for information. Acceptance, Waiver and Consent rization of the customer. Mangan pursuant to which he was censured, also failed to respond to NASD Jose Reynaldo Moreno (Regis- fined $5,000, suspended from asso- requests to appear for an on-the- tered Representative, Phoenix, ciation with any NASD member in record interview. Arizona) was censured, fined any capacity for 10 business days $20,000, suspended from associa- and required to requalify as a gener- Wayne Albert McIntosh (Regis- tion with any NASD member in any al securities representative by taking tered Representative, Phoenix, capacity for three years, and ordered the Series 7 exam before ever func- Arizona) submitted an Offer of Set- to requalify by exam before reassoci- tioning again in that capacity. Without tlement pursuant to which he was ating with any NASD member firm. admitting or denying the allegations, censured, fined $7,500, and sus- The sanctions were based on find- Priolo consented to the described pended from association with any ings that Moreno failed to respond sanctions and to the entry of findings NASD member in any capacity for completely to NASD requests for that he prepared documentation for five days. Without admitting or deny- information. the accounts of public customers ing the allegations, McIntosh con- containing information which he sented to the described sanctions Mike D. Nolan (Registered Repre- knew or should have known to be and to the entry of findings that he sentative, Denham Springs, Cali- inaccurate. participated in private securities fornia) submitted an Offer of transactions for compensation and Settlement pursuant to which he was Ivan A. Radowitz (Registered Rep- failed to provide prior written notice censured, fined $700,000, barred resentative, Jamesburg, New Jer- to, or receive prior authorization from association with any NASD sey) submitted a Letter of from, his member firm. member in any capacity, and Acceptance, Waiver and Consent

NASD Notices to Members—Disciplinary Actions October 1998 668 pursuant to which he was censured, knowledge, authorization, or consent Joseph Anthony Simonell (Regis- fined $20,000, and barred from asso- that the transactions were done on tered Representative, Rancho ciation with any NASD member in margin rather than in the customers’ Palos Verdes, California) submitted any capacity. Without admitting or cash account. a Letter of Acceptance, Waiver and denying the allegations, Radowitz Consent pursuant to which he was consented to the described sanctions Cheryl Ann Rodgers (Registered censured, fined $5,000, and sus- and to the entry of findings that he Representative, Dallas, Texas) was pended from association with any endorsed and deposited a public censured, fined $25,000, and barred NASD member in any capacity for customer’s rollover check in the from association with any NASD two years. Without admitting or deny- amount of $7,780.05 into his person- member in any capacity. The sanc- ing the allegations, Simonell con- al bank account, without the consent tions were based on findings that sented to the described sanctions or knowledge of the customer. The Rodgers failed to respond to an and to the entry of findings that he findings also stated that Radowitz NASD request for testimony. sent letters to investment product misappropriated $200 in cash from companies stating that he had another public customer, which rep- Jeffrey L. Salzwedel (Registered recently conducted an investor semi- resented a partial premium payment Principal, Tualatin, Oregon) sub- nar at which the companies’ products from the customer for a new policy. mitted a Letter of Acceptance, Waiv- were mentioned. The letters offered er and Consent pursuant to which he the companies the opportunity to Joel Jacob Reznick (Registered was censured, fined $107,000, and participate in the seminars and refer- Representative, Wheeling, Illinois) suspended from association with any enced receipt from a local restaurant submitted an Offer of Settlement pur- NASD member in any capacity for 30 itemizing purported expenses he suant to which he was censured, days. Without admitting or denying incurred. The NASD found that fined $5,000, and suspended from the allegations, Salzwedel consented Simonell had not conducted a semi- association with any NASD member to the described sanctions and to the nar nor had he incurred any expens- in any capacity for 10 days. Without entry of findings that he made unsuit- es. Simonell received checks from admitting or denying the allegations, able recommendations for the pur- two of the firms for $100 and $200, Reznick consented to the described chase and/or sale of various cashed the checks, and deposited sanctions and to the entry of findings securities in the accounts of public the funds into his bank account. that he purchased shares of stocks customers without having reason- for the account of a public customer able grounds for believing that such John S. Smoot, Jr. (Registered without the knowledge or consent of recommendations were suitable for Representative, Jackson, Ten- the customer and in the absence of these customers in view of the num- nessee) submitted an Offer of Settle- written or oral authorization to exer- ber of shares purchased and held, ment pursuant to which he was cise discretion in the account. the nature of the recommended censured, fined $75,000, barred from securities, the concentration of secu- association with any NASD member Christopher Lee Rice (Registered rities held in the accounts, and the in any capacity, and ordered to pay Representative, Buffalo Grove, Illi- customers’ specific financial situa- $6,300 in restitution to the appropri- nois) submitted a Letter of Accep- tions, circumstances, and needs. ate parties. Without admitting or tance, Waiver and Consent pursuant denying the allegations, Smoot con- to which he was censured, fined Michael Dennis Shaw (Registered sented to the described sanctions $15,506.83, and suspended from Principal, Atlanta, Georgia) submit- and to the entry of findings that he association with any NASD member ted an Offer of Settlement pursuant received payments from public cus- in any capacity for two years. With- to which he was censured, fined tomers for the purchase of, and as out admitting or denying the allega- $10,000 and suspended from associ- payment on, various homeowner’s tions, Rice consented to the ation with any NASD member in any insurance policies, automobile insur- described sanctions and to the entry capacity for five business days. With- ance premiums and a life insurance of findings that he executed unautho- out admitting or denying the allega- policy, failed and neglected to submit rized transactions in the accounts of tions, Shaw consented to the these funds to his member firm on public customers without the cus- described sanctions and to the entry the customers’ behalf, and instead tomers’ prior knowledge, authoriza- of findings that he effected the pur- converted the funds to his own use tion, or consent. In addition, Rice chase of units in an initial public and benefit, without the customers’ executed unauthorized margin trans- offering (IPO) for the account of a knowledge or consent. Smoot also actions in the account of public cus- public customer without the cus- failed to respond to NASD requests tomers without the customers’ tomer’s knowledge or consent. for information.

NASD Notices to Members—Disciplinary Actions October 1998 669 John J. Squeri, Jr. (Registered ted Offers of Settlement pursuant to security, and engaged in unsuitable Representative, Atlantic Beach, which Taliercio was censured, fined trading in a customer’s account. Fur- New York) submitted an Offer of $50,000, and barred from associa- thermore, the NASD determined that Settlement pursuant to which he was tion with any NASD member in any Garofalo and Wiener made false censured, fined $10,000, suspended capacity. Garofalo was censured, promises to limit losses to cus- from association with any NASD fined $20,000, suspended from tomers, and Wiener and Sparacio member in any capacity for 18 association with any NASD member promised to make up losses with months, and required to requalify by in any capacity for 18 months, and new trading. Garofalo and Smith exam in all capacities. Without admit- required to requalify by exam prior to failed to execute a sell order. Garofa- ting or denying the allegations, becoming associated with any NASD lo, Smith, and Sparacio provided Squeri consented to the described member, and Smith was censured, false testimony to the NASD. Spara- sanctions and to the entry of findings fined $10,000, suspended from cio told a public customer to disre- that he executed the sale of shares association with any NASD member gard information in prospectuses and of securities in the account of a pub- in any capacity for one year, and falsified records as to customers’ lic customer without the customer’s required to requalify by exam prior to financial conditions. prior knowledge, authorization, or becoming associated with any NASD consent. The findings also stated member. Wiener was censured, Ada Lai Yin Tam (Registered Prin- that Squeri contacted another cus- fined $10,000, suspended from cipal, Brooklyn, New York) submit- tomer, a resident of the state of association with any NASD member ted a Letter of Acceptance, Waiver Georgia, and identified himself as in any capacity for 18 months, and and Consent pursuant to which she another registered representative in required to requalify by exam prior to was censured, fined $15,000, and an attempt to obtain information from becoming associated with any NASD barred from association with any the customer for his new account member firm, and Sparacio was cen- NASD member in any capacity. form. The NASD determined that sured, suspended from association Without admitting or denying the alle- Squeri contacted this person when with any NASD member in any gations, Tam consented to the his registration to conduct business capacity for three years, and described sanctions and to the entry within and from the state of Georgia required to requalify by exam prior to of findings that she falsified her Form was suspended. becoming associated with any NASD U-4 applications by failing to include member firm. Without admitting or her prior association with a member William Kevin Stewart (Registered denying the allegations, the respon- firm and by stating that she was Principal, Cape Girardeau, Mis- dents consented to the described employed for over two years at a souri) submitted a Letter of Accep- sanctions and to the entry of findings member firm where she had never tance, Waiver and Consent pursuant that Taliercio, Garofalo, Smith, been employed. The findings also to which he was censured, fined Wiener, and Sparacio made base- stated that Tam impersonated anoth- $25,000, and barred from associa- less and improper price predictions er representative in order to obtain tion with any NASD member in any to public customers regarding specu- privileged and confidential informa- capacity. Without admitting or deny- lative securities, and Taliercio, Garo- tion about an investigation and, pro- ing the allegations, Stewart consent- falo, and Smith made materially false vided false information to the NASD ed to the described sanctions and to and misleading statements. The find- concerning her prior employment the entry of findings that he failed to ings also stated that Taliercio, Garo- and securities industry compensation respond completely to an NASD falo, Smith, and Sparacio made in response to a written request for request for information. misrepresentations as to specific information. issuers, and Taliercio and Garofalo Michael Taliercio (Registered Rep- claimed to have access to inside Rooney Thomas (Registered Rep- resentative, Brooklyn, New York), information. Moreover, the NASD resentative, Coral Springs, Flori- James Garofalo, Jr. (Registered found that Taliercio, Wiener, and da) submitted an Offer of Settlement Representative, Flushing, New Sparacio engaged in unauthorized pursuant to which he was censured, York), Robert Francis Smith (Reg- trading, Taliercio and Sparacio made fined $50,000, and barred from asso- istered Representative, Gaithers- unfounded comparisons between ciation with any NASD member in burg, Maryland), April Wiener unrelated securities, and Taliercio any capacity. Without admitting or (Registered Representative, Plain- improperly failed to execute or dis- denying the allegations, Thomas view, New York), and Edward couraged sell orders, made false and consented to the described sanctions Sparacio (Registered Representa- misleading representations as to the and to the entry of findings that he tive, Brooklyn, New York) submit- risk of investing in a speculative failed to enter sell orders per public

NASD Notices to Members—Disciplinary Actions October 1998 670 customers’ instructions and guaran- Jeffrey Mark Vassallo (Registered findings that Wells effected the sale teed the customers against losses in Representative, Munster, Indiana) of warrants for the account of a pub- their account. The findings also stat- submitted a Letter of Acceptance, lic customer without the customer’s ed that Thomas received $21,000 Waiver and Consent pursuant to prior knowledge or authorization. from a public customer for invest- which he was censured, fined ment purposes and never invested $15,000, and barred from associa- Jere Thomas Wickert (Registered the money as instructed, and tion with any NASD member in any Principal, Chicago, Illinois) was instead, deposited the check in his capacity. Without admitting or deny- censured, fined $9,000, and sus- personal bank account. Thomas also ing the allegations, Vassallo consent- pended from association with any failed to respond to NASD requests ed to the described sanctions and to NASD member in any capacity for 10 for information. the entry of findings that, without the business days. The sanctions were knowledge or consent of a public based on findings that Wickert rec- Spiro George Tsotsos (Registered customer, he submitted disburse- ommended and effected index Principal, Upper Brookville, New ment request forms to his member options transactions in customers’ York) submitted an Offer of Settle- firm for the purpose of causing policy accounts without the knowledge, ment pursuant to which he was cen- loans and/or the surrender of paid-up consent, or authorization of the cus- sured and suspended from additional insurance to be made tomers and in the absence of a rea- association with any NASD member against insurance policies owned by sonable basis for believing that the in any capacity for two years. With- the customer with the proceeds to be recommendations were suitable for out admitting or denying the allega- used in payment of the premiums for the customers in light of their invest- tions, Tsotsos consented to the the second insurance policy owned ment objectives, experience, finan- described sanctions and to the entry by the customer. cial situations, or needs. of findings that he failed to appear for testimony before the NASD. Kelly Ray Webb (Registered Rep- Bryan Scott Zimmerman (Regis- resentative, Gilbert, Arizona) sub- tered Representative, Land Richard Leroy Valentine (Regis- mitted a Letter of Acceptance, O’Lakes, Florida) submitted a Letter tered Representative, Goddard, Waiver and Consent pursuant to of Acceptance, Waiver and Consent Kansas) submitted a Letter of which he was censured, fined pursuant to which he was censured, Acceptance, Waiver and Consent $25,000, and suspended from asso- fined $5,000, and suspended from pursuant to which he was censured, ciation with any NASD member in association with any NASD member fined $10,000, and suspended from any capacity for six months. Without in any capacity for five business association with any NASD member admitting or denying the allegations, days. Without admitting or denying in any capacity for 30 days. Without Webb consented to the described the allegations, Zimmerman consent- admitting or denying the allegations, sanctions and to the entry of findings ed to the described sanctions and to Valentine consented to the described that he placed inaccurate information the entry of findings that he faxed a sanctions and to the entry of findings on order tickets that were submitted letter to a public customer that failed that he participated in private securi- to an NASD member in connection to conform to NASD prospectus ties transactions without prior written with securities transactions. The find- requirements and included informa- notice to and written approval and/or ings also stated that Webb effected tion regarding an IPO in which he acknowledgment from his member an unauthorized transaction in public made an unwarranted price predic- firm. customer accounts and effected tion. mutual fund purchases for a public Christiaan P. Van Der Put (Regis- customer in amounts that, if aggre- tered Representative, Pittsburgh, gated, would have caused the Individuals Fined Pennsylvania) submitted an Offer of account to be eligible for reduced Graciela Armendariz (Registered Settlement pursuant to which he was sales charges. Principal, El Paso, Texas) submit- censured, fined $2,500, and sus- ted a Letter of Acceptance, Waiver pended from association with any Ted Daniel Wells (Registered Rep- and Consent pursuant to which she NASD member in any capacity for resentative, Kennesaw, Georgia) was censured, fined $25,000, and one month. Without admitting or was censured, fined $5,000, and ordered to requalify as an investment denying the allegations, Van Der Put barred from association with any company and variable contracts consented to the described sanctions NASD member in any capacity. The products representative by taking and to the entry of findings that he NAC imposed the sanction following and passing the Series 6 exam prior failed to respond to NASD requests its review of an Atlanta DBCC deci- to acting again in any registered for information. sion. The sanctions were based on capacity. Without admitting or deny- NASD Notices to Members—Disciplinary Actions October 1998 671 ing the allegations, Armendariz con- Hattier, Sanford & Reynoir, L.L.P. Joel Dean Moore (Registered sented to the described sanctions (New Orleans, Louisiana) and Gus Principal, Redding, California) was and to the entry of findings that, while A. Reynoir (Registered Principal, censured and fined $11,900. The associated with a member firm, New Orleans, Louisiana) were sanctions were based on finding that Armendariz made payments of com- censured and fined $10,000, jointly Moore recommended to public missions received in connection with and severally. The sanctions were customers and effected for the the sale of variable annuity products based on findings that the firm, customers' account the purchase of to an individual who was registered acting through Reynoir, participated securities without having reasonable with another member firm that was in the sale of municipal bonds and grounds for believing that such not authorized to sell variable annuity provided public customers with recommendations were suitable for products in the state where the sales confirmations that failed to meet the the customers based upon the facts took place. These payments were requirements of MSRB Rule G-15. disclosed by the customers as to made without prior oral or written The firm, acting through Reynoir, their other securities holdings and authorization from the member firm. issued confirmations that failed to their financial situation and needs. disclose the lower of the yield to call Kevin Michael Dunnigan (Regis- or yield to maturity, the fact that the This action has been called for tered Representative, Kalispell, securities were initially offered at an review by the NAC and the sanctions Montana) submitted a Letter of “original issue discount”, failed to are not in effect pending Acceptance, Waiver and Consent disclose the fact that the securities consideration of the review. pursuant to which he was censured were subject to the alternative and fined $10,000. Without admitting minimum tax, and the fact that the Philip J. Schiller (Registered or denying the allegations, Kalispell securities were unrated. In addition, Principal, Highland Park, Illinois) consented to the described sanctions this decision serves as a Letter of was censured and fined $57,747.30. and to the entry of findings that he Caution as to the firm, acting through The sanctions were based on recommended investments to public Reynoir, for engaging in municipal findings that Schiller purchased customers without having reason- securities sales transactions with securities in IPOs that traded at a able grounds for believing that such public customers at prices that were premium in the immediate recommendations were suitable for unfair and unreasonable, taking into aftermarket in violation of the these customers in view of the consideration all relevant factors. NASD’s Free-Riding and Withholding nature of the recommended invest- Interpretation. ments, the facts disclosed by these The firm and Reynoir have appealed customers as to their other security to the NAC and the sanctions are not Schiller has appealed this action to holdings, their financial situations, in effect pending consideration of the the NAC and the sanctions are not in circumstances, objectives, and appeal. effect pending consideration of the needs. appeal. Robert Charles Madrid (Registered Representative, Blue Kevin Harrison Stricklin Decisions Issued Island, Illinois) was censured and (Registered Principal, Cranston, The following decisions have been fined $10,000. The sanctions were Rhode Island) was censured, fined issued by the DBCC or the Office of based on findings that Madrid $10,000, and suspended from Hearing Officers and have been executed securities transactions in association with any NASD member appealed to or called for review by the account of a public customer in any capacity for two years. The the NAC as of September 23, 1998. without the customer’s knowledge, sanctions were based on findings The findings and sanctions imposed authorization, or consent and in the that Stricklin, in recommending and in the decision may be increased, absence of written or oral urging public customers to buy decreased, modified, or reversed by authorization discretion in the speculative and/or unseasoned the NAC. Initial decisions whose time account. securities, made baseless price for appeal has not yet expired will be predictions and/or predictions of reported in the next Notices to Mem- This action has been called for returns. In addition, Stricklin, in bers. review by the NAC and the sanctions connection with the purchases of are not in effect pending securities, made untrue statements consideration of the review. of material facts and/or omitted to state material facts necessary to make the statements by them, in

NASD Notices to Members—Disciplinary Actions October 1998 672 light of the circumstances in which his employer firm has reimbursed the complaint alleges that McNamara they were made, not misleading. customers all but $44,531.32 for the failed to contact a public customer in funds misappropriated by DiPoalo. order to permit the customer to give Stricklin has appealed this action to The complaint also alleges that instructions regarding his account, the NAC and the sanctions are not in DiPoalo failed to respond to NASD and failed to follow customer instruc- effect pending consideration of the requests for information. tions to sell securities. appeal. Kai Fang (Registered Representa- Rocco Anthony Vignola (Regis- Complaints Filed tive, Flushing, New York) was tered Representative, Bohemia, The following complaints were named as a respondent in an NASD New York) was named as a respon- issued by the NASD. Issuance of a complaint alleging that he guaran- dent in an NASD complaint alleging disciplinary complaint represents the teed a public customer against loss. that he forged a public customer’s initiation of a formal proceeding by The complaint alleges that Fang paid signature on an application for an the NASD in which findings as to the $2,798.40 in a personal check to the insurance policy in the customer’s allegations in the complaint have not customer as reimbursement for the name and submitted the application, been made, and does not represent loss incurred in the customer’s without the customer’s knowledge or a decision as to any of the allega- account. authorization. The complaint alleges tions contained in the complaint. that Vignola also forged the cus- Because these complaints are unad- Deborah W. Henke (Registered tomer’s signature on a check for judicated, you may wish to contact Representative, Newbury Park, $908, which reflected the customer’s the respondents before drawing any California) was named as a respon- credit resulting from the cash surren- conclusions regarding the allegations dent in an NASD complaint alleging der of a separate insurance policy, in the complaint. that she met with public customers to and used a portion of the proceeds discuss opening an investment of that check to pay for the afore- Gregory Alan Casady (Registered account and preparing an investment mentioned unauthorized insurance Principal, Kansas City, Missouri) plan, requested and received policy. was named as a respondent in an approximately $4,900 in U.S. Trea- NASD complaint alleging that he sury Bonds from the customers, and James Thomas Walsh (Registered executed unauthorized transactions was never heard from again, despite Representative, Commack, New in customer accounts without the repeated attempts by the customers York) was named as a respondent in customers’ prior knowledge, autho- and others to contact her. The com- an NASD complaint alleging that he rization, or consent. The complaint plaint alleges that Henke never made material misrepresentations alleges that Casady utilized the pro- returned the U.S. Treasury Bonds to and failed to disclose material facts ceeds from the sale of a stock to the customers. The complaint also to public customers, in order to cover the purchase of the same alleges that Henke failed to respond induce the customers to purchase stock. The complaint also alleges to NASD requests for information. securities. The complaint alleges that that Casady failed to respond to Walsh made fraudulent price predic- NASD requests for information. Christopher Thomas McNamara tions in connection with his recom- (Registered Representative, Dix mendations to public customers to Daniel Joseph DiPoalo (Regis- Hills, New York) was named as a purchase securities. The complaint tered Representative, Matawan, respondent in an NASD complaint also alleges that Walsh effected a New Jersey) was named as a alleging that he made material mis- transaction in the account of a public respondent in an NASD complaint representations and omitted material customer, without the prior authoriza- alleging that he received information in the course of soliciting tion of the customer. $144,850.58 in funds from public public customers to purchase securi- customers for investment purposes ties. The complaint alleges that Joseph A. Watters (Registered and, contrary to the customer’s McNamara effected transactions in Representative, Monroeville, instructions and without their knowl- public customer accounts without the Pennsylvania) was named as a edge, failed to invest the funds and, prior authorization and consent of the respondent in an NASD complaint instead, converted the funds by customers. The complaint also alleging that he conducted private depositing them in his own personal alleges that McNamara predicted the securities transactions without giving accounts. The complaint alleges that future price of securities to public prior written notice to, or receiving DiPoalo has repaid two of the cus- customers without having a reason- approval from, his member firm. The tomers a total of $26,000, and that able basis for his predictions. The complaint alleges that Watters rec-

NASD Notices to Members—Disciplinary Actions October 1998 673 ommended that a public customer Rule 8210 and Article VII, Section 2 Matrix Securities Corporation, purchase a promissory note, without of the NASD By-Laws. The date the Garden City, New York (August 20, having reasonable grounds for suspensions commenced is listed 1998) believing that this recommendation after the entry. If the ﬁrm has com- and resulting transaction was suit- plied with the requests for informa- Meyers Pollock Robbins, Inc., New able for the customer on the basis of tion, the listing also includes the date York, New York (August 24, 1998) her ﬁnancial situation, investment the suspension concluded. objectives, and needs. The complaint also alleges that, in connection with Aequus Equities, Inc., New York, Individuals Suspended the offer and sale of the aforemen- New York (August 31, 1998) Pursuant To NASD Rule Series tioned promissory note, Watters 9510 For Failure To Pay made misrepresentations to the pub- Alliance Asset Group, Inc., Engle- Arbitration Award lic customer. wood Cliffs, New Jersey (August 31, Alonzo, Arthur Andrew, Boca 1998) Raton, Florida (August 21, 1998) James Clark Williams (Registered Representative, Bloomsburg, Biscayne Capital LLC, New York, Bonetti, Guiseppe, Brooklyn, New Pennsylvania) was named as a New York (August 31, 1998) York (September 3, 1998) respondent in an NASD complaint alleging that he received checks Fedick & Company, Inc., Easton, Briganti, Nicholas Anthony, totaling $166,560 from a public cus- Connecticut (August 31, 1998) Brooklyn, New York (August 24, tomer for the purpose of paying an 1998) insurance premium and purchasing Great Lakes Capital, Inc., Vero securities. The complaint alleges that Beach, Florida (August 31, 1998) Cohen, Jason Alan, Searingtown, each of the checks was drawn to the New York (September 3, 1998) order of James C. Williams at his McCormick-O’Mara Securities Co., request, that he negotiated each of New York, New York (August 31, Corso, Mark A., Brooklyn, New York the checks, and that he did not remit 1998) (September 22, 1998) the proceeds of the checks to the customer’s insurance company, nor Nationwide Asset Management Domin, Michael, Forest Hills, New did he otherwise cause the proceeds Corporation, Laguna Hills, Califor- York (September 15, 1998) to be applied to the purposes for nia (August 31, 1998) which the customer intended. The Mahon, Kevin Michael, Manalapan, complaint also alleges that Williams Firms Suspended Pursuant To New Jersey (August 21, 1998) mailed documents to the customer NASD Rule Series 9510 For purporting to be account statements Failure To Pay Arbitration Smith, Brian Mark, Douglasville, issued by the insurance company for Award Georgia (September 18, 1998) the customer’s investments, when in First Cambridge Securities Corp., fact, the statements were false in that New York, New York (September 15, Steel, Todd Coleman, Coral they were not issued by the insur- 1998) Springs, Florida (August 24, 1998) ance company and the customer did not have such accounts with the First United Equities Corp., New Swayzee, Jerry, Boulder, Colorado insurance company. York, New York (September 3, 1998) (September 15, 1998)

J.S. Securities, Inc. (a/k/a First Traynor, Douglas K., Pound Ridge, Firms Suspended National Equity Corp.), Point Pleas- New York (September 3, 1998) The following ﬁrms were suspended ant Beach, New Jersey (August 10, from membership in the NASD for 1998) Weinstein, Howard, Port failure to comply with formal written Washington, New York (September requests to submit ﬁnancial informa- Marsh, Block & Company, Inc., 3, 1998) tion to the NASD. The actions were New York, New York (August 21, based on the provisions of NASD 1998)

NASD Notices to Members—Disciplinary Actions October 1998 674 NASD Regulation Fines Olde brochure further explained that the sanctioned Olde Discount and Discount Corp. $1.35 Million; firm would absorb the costs of these Ernest Olde for this conduct and Founder Ernest Olde Also commission-less trades in the hope required the firm to waive statute of Fined $500,000 and that customers would use the firm’s limitations defenses for certain Suspended other services, such as margin arbitration claims by its customers. NASD Regulation fined Olde accounts. Discount Corporation $1.35 million Furthermore, NASD Regulation and censured it in connection with In fact, although not disclosed in the found that Ernest Olde failed to the firm’s sales practices, including advertising, Olde Discount and its establish supervisory systems that the distribution and use of improper registered representatives derived could have prevented this conduct advertising and promotional economic benefits from this and was a cause of the firm’s literature. Ernest J. Olde, the firm’s "commission-free" trading. For violations. former President and Chairman, was example, the firm often derived fined an additional $500,000, revenue by capturing the spread Ernest Olde was also separately suspended from the securities between a stock’s bid and ask price sanctioned for failing to cooperate industry for 18 months, and Ð and the broker was paid a portion with an NASD Regulation’s censured. Both Olde Discount and of the spread in the form of sales investigation, as all registered Ernest Olde neither admitted nor credits. NASD Regulation found that brokers and brokerage firms are denied NASD Regulation’s findings. Olde Discount’s brokers failed to tell required to do. NASD Regulation many investors that the firm actually found that Ernest Olde failed to As part of a coordinated regulatory made money on "commission-free" produce documents and information effort, the Securities and Exchange trades, even when they asked. in a timely fashion and improperly Commission (SEC) also announced refused to complete his on-the- settlements with Ernest Olde and NASD Regulation found that both record testimony after NASD Olde Discount. In April 1993, Olde Olde Discount and Ernest Olde Ð Regulation declined to limit its Discount began a major national who was involved in, and oversaw questioning of him to one questioner print, radio, and television advertising the adoption of most of the firm’s per topic. campaign to promote "commission- advertising and compensation free" trading. The first program policies Ð violated the National Twelve months of Ernest Olde’s 18- featured the firm’s "Smart Trade Association of Securities Dealers’ month NASD Regulation suspension Account." Olde Discount advertised advertising rules because the firm will run concurrently with his SEC that through this account, investors and "its brokers’ communications suspension, and the remaining six with at least $500,000 in cash or with the public failed to provide a months will be served thereafter. He securities could buy or sell 1,000 or sound basis for evaluating the facts is also required to take certain more shares of common stock worth in regard to the services requalification examinations before at least $5 a share, without being characterized as ‘commission-free’ he can re-enter the securities charged "markups, markdowns, or or ‘commission-less’ offered by the industry. commission fees of any kind." firm." As part of the settlement, Olde Later, in June 1994, Olde Discount NASD Regulation also found that Discount must, for the next 12 began advertising a second program beginning in the fall of 1992, through months, pre-file all of its Ð SmartTrading Ð saying that any August 1995, Olde Discount’s advertisements that relate to purchase of 1,000 or more shares of registered representatives engaged commissions or charges to an Olde Discount recommended in a series of fraudulent practices, customers, markups, or broker/firm stock would be "commission-free Ð including: churning, unauthorized compensation with NASD without markups of any kind." At the trading, misrepresentations, Regulation. time, Olde Discount wrote and omissions of material facts, and distributed a brochure, SmartTrade, unsuitable recommendations. A This action resulted from an Commission-less Trading Account, consequence of Olde Discount’s investigation by NASD Regulation’s which explained how it could afford compensation, production, hiring, Enforcement and Advertising to offer this advantage. The firm and training practices created an Regulation Departments. NASD answered its own question Ð "So, environment in which these Regulation also thanked the SEC for what is the catch?" Ð by stating: violations occurred, NASD its assistance in this case. "Quite simply, there is none." The Regulation found. The SEC

NASD Notices to Members—Disciplinary Actions October 1998 675 NASD Regulation Fines DLJ NASD Regulation Sanctions The decision also found that all three $100,000 For Trading Halted Hibbard, Brown Branch committed egregious sales practices Stock Managers abuses, including: providing NASD Regulation announced that it NASD Regulation today announced baseless price predictions, has fined Donaldson, Lufkin & a decision by its District 9 Business misrepresentations, and Jenrette Securities $100,000 for Conduct Committee (DBCC) barring unwarranted hyperbole about the executing a trade of a New York three former Hibbard, Brown & Co. securities they were selling. Ford Stock Exchange (NYSE) listed branch managers from the securities also engaged in a pattern of security during a trading halt industry and fining them a total of unauthorized trading in the accounts imposed by The Nasdaq Stock $245,000 for operating a boiler room of three customers. Market¨ and the NYSE. The firm was and for committing numerous sales also censured. practice violations. Hibbard was To date, NASD Regulation’s reviews expelled from the NASD in 1994. of Hibbard’s sales practices in its The security in question was traded Pennsylvania, New Jersey, Kansas, in the third market. Over-the-counter After a 14-day hearing, the DBCC and Missouri branch offices have trading of exchange-listed securities found that Hibbard was a "classic resulted in a total of 41 formal is commonly known as third-market boiler room operation" and that the disciplinary actions, including: 20 trading. Third-market transactions three branch managers of Hibbard’s individuals who were barred from the are effected by NASD member Pittsburgh, Wayne, and Lancaster, securities industry, 3 individuals who brokerage firms and are reported to PA offices were "integral cogs" in the were barred from acting as Nasdaq¨. fraudulent sales system. According supervisors, 18 individuals who were to the decision, Hibbard’s boiler room suspended, and fines of more than On January 29, 1997, Nasdaq and evolved directly from one set-up by $2.3 million. the NYSE halted trading in the its predecessor, the now defunct security at 9:31 a.m., based on news First Jersey Securities. Initial actions, such as this, by NASD that the company planned to restate Regulation disciplinary committees its earnings. Trading did not resume The three branch managers are: are final after 45 days, unless they until 2:02 p.m. on January 31, 1997. are appealed to NASD Regulation’s ¥ Steven D. Goodman Ð Barred, National Adjudicatory Council (NAC), NASD Regulation found that DLJ fined $75,000 for his role in operating or called for review by the NAC. The arranged buy and sell orders for a Hibbard’s Pittsburgh, PA branch, and sanctions are not effective during this total of 6,511,900 shares of the censured. period. If the decision in this case is company’s stock on behalf of 29 appealed or called for review, the separate customer accounts during • Albert J. Ford – Barred, fined findings may be increased, the trading halt. The firm transmitted $95,000 for his role in operating decreased, modified, or reversed. the orders Ð which had already been Hibbard’s Wayne, PA branch, and matched together Ð to an offshore, censured. NASD Regulation Continues non-NASD member brokerage firm Microcap Market Focus; that completed them as a crossing • Douglas F. Andrews – Barred, fined Complaints Name Brokers At transaction. $75,000 for his role in operating the Greenway Capital and Lancaster, PA branch, and Kensington Wells Offshore brokerage firms are located censured. NASD Regulation today announced outside of the United States and, that it has filed complaints in two therefore, are not required to be The DBCC found Goodman, Ford, microcap fraud cases. A total of 23 members of the NASD. and Andrews perpetuated the fraud brokers at Greenway Capital and by recruiting young, inexperienced Kensington Wells, Inc., were named DLJ, which neither admitted nor brokers and training them to use in the two separate complaints. denied NASD Regulation’s findings, highly aggressive, cold calling was sanctioned for violating the techniques to sell low-priced, In both cases, NASD Regulation’s NASD’s rule that states no broker or speculative securities. All three were complaints allege a series of brokerage firm "shall, directly or found to have encouraged Hibbard’s fraudulent practices and the indirectly, effect any transaction in a brokers to use misleading sales extensive use of abusive and high- security as to which a trading halt is literature and scripts during sales pressure "boiler room" sales tactics currently in effect." presentations to customers. to sell low-priced speculative securities to retail investors. NASD Notices to Members—Disciplinary Actions October 1998 676 Greenway Capital Corp. customers were not required to Previously, seven other Greenway purchase DCA shares in the brokers were barred from the At Greenway Capital Corp., a now aftermarket. securities industry and agreed to pay defunct New York, NY, brokerage a total of $1.2 million in fines as a firm that was also known as The complaint alleges that in the result of NASD Regulation’s Cortlandt Capital Corp., 11 brokers Ð DCA offering Greenway used young, investigation. Three of the seven Ð including the firm’s President, John inexperienced brokers to sell low- Jack Basile, Joseph Lanni, and J. Margiotta; and one of its owners, priced, highly speculative securities Giuseppe Temperino Ð also Fred R. Luthy Ð were charged with a to retail customers through boiler consented to findings that they variety of sales practice and room sales tactics such as: trading arranged for impostors to take their supervisory violations. Also named in without customer authorization; Series 7 qualification exams. The the complaint are: Alan J. Mandel, making material misrepresentations remaining four were: Rocco Basile, Jason A. Prussing, James J. Crimi, including making baseless price Peter DelBalso, Giuseppe Bonetti, Jeffrey S. Geoghegan, Javier predictions; omitting material and Salvatore Panetta. Hernandez, James Morrill, Joseph A. information; guaranteeing future Ricci, Cosmo Scali, and Joseph S. stock performance; failing to execute The Greenway complaint was issued Tarulli. customer orders; and not executing by NASD Regulation’s District 10 orders promptly. Office in New York. NASD Regulation charged seven of the 11 brokers with fraud in NASD Regulation also charged six of Kensington Wells, Inc. connection with the April 1996 the 11 brokers with unauthorized underwriting of Dialysis Corporation trading in connection with In a separate complaint, NASD of America (DCA). Based on Greenway’s dealings in several Regulation charged 12 former interviews with investors across the "house stocks," including: Hariston brokers of the now defunct Long country, and after investigating Corporation, Consolidated Western Island brokerage firm Kensington customer complaints against the firm & Pacific Resources, Smartel Wells, Inc. with a wide range of sales and its brokers, NASD Regulation Communications Corp., and J.B. practice abuses. The complaint uncovered evidence of numerous Oxford Holdings, Inc. House stocks alleges that the 12 brokers, who instances of unauthorized trading, are generally viewed as those that were based at Kensington Wells’ misrepresentations, and the use of have been underwritten by a single Mineola, NY headquarters, illegal boiler room sales tactics. For brokerage firm in circumstances participated in or facilitated a boiler example, many investors complained where that firm is in control of much room operation through a series of that Greenway’s brokers threatened of the company’s outstanding shares fraudulent sales practices and other to cancel their purchases of the initial and dominates the aftermarket misconduct from April 1994 through public offering (IPO) if the investors trading. The complaint alleges a October 1996. refused to make additional series of violations with respect to investments in DCA. these stocks, including: unauthorized Named in the complaint are: Joel trading; material misrepresentations Grant, Steven Orandello, James The complaint also charges that and omissions; baseless price McInerney, Steven Stecklow, Victor many investors had their purchases predictions; falsifying firm records; Difrisco, Steven Jaross, Edwin canceled when they refused to buy failing to follow customer instructions Lawrence, Kevin Loomis, Edward additional DCA shares in the to sell securities; misusing customer Stock, Craig Redding, Gary Redding, aftermarket. funds; and violating state Blue Sky and Michael Newman. laws. In addition, NASD Regulation According to the complaint, the sales charged that the owners of certain Greenway is not named in the practice violations occurred in favored accounts Ð such as former complaint because the Securities connection with Kensington Wells’ Greenway brokers, a relative of a and Exchange Commission (SEC) underwriting of the IPOs of Xechem current Greenway broker, and a revoked its securities industry International, Inc.; Universal former girlfriend of a Greenway registration on June 19, 1998. The Automotive Inc.; and VideoLan broker Ð were permitted to purchase complaint does not allege any Technologies, Inc. The brokers are securities (both stock and warrants) wrongdoing on the part of the alleged to have engaged in in the IPO, and then sell them back issuers. unauthorized trading; baseless or to Greenway for a quick profit. These improper price predictions; making

NASD Notices to Members—Disciplinary Actions October 1998 677 improper comparisons to other were illegally obtained and make regarding the allegations in the stocks; tying the purchase of IPOs to restitution to defrauded investors. complaint. a commitment to buy stock in the The complaint does not allege any aftermarket; guaranteeing customers wrongdoing on the part of the Under NASD rules, the individuals against loss; promising to make up issuers. and the firms named in the complaint losses with new trades; and refusing can file a response and request a to execute or aggressively The issuance of a disciplinary hearing before an NASD Regulation discouraging orders to sell stocks, complaint represents the initiation of disciplinary panel. Possible sanctions immediately before and after the a formal proceeding by the NASD in include a fine, suspension, bar, or IPOs. which findings as to the allegations in expulsion from the NASD. the complaint have not been made At least 60 investors were victimized and does not represent a decision as © 1998, National Association of Securities Dealers, through fraudulent practices, the to any of the allegations contained in Inc. (NASD). All rights reserved. complaint said. the complaint. Because this complaint is unadjudicated, you may Both complaints demand that the wish to contact the respondents respondents forfeit the profits that before drawing any conclusion

NASD Notices to Members—Disciplinary Actions October 1998 678 OATS Update For IMPORTANT! Non-Market Makers in Nasdaq securities are NOT required to submit an Order Audit Trail Sys- Your temSM (OATSSM) Subscriber Initiation and Registration Form to the NASD Information until after January 1999. Only Market Makers in Nasdaq securities and ECNs were required to submit the Form by September 14, 1998.

NASD Notice to Members—For Your Information October 1998 679 Executive Summary plus the FBI fee); and eliminating a The National Association of Securi- reduced fee for registrations with Special ¨ ties Dealers, Inc. (NASD ) Board of more than one member firm that are Governors has approved changes to not filed simultaneously. NASD Schedule A of the NASD By-Laws affecting the Central Registration ¥ Eliminating the Firm Access Query Depository (CRDSM) fee structure. System (FAQS) charges and CRD Notice to The changes set registration fees at license and maintenance fees (effec- a level that will recover the costs of tive upon deployment of the modern- Members the CRD and Public Disclosure Pro- ized CRD system). grams, and more closely align the fees charged for specific transactions Appropriate amendments to Sched- 98-89 to the costs of the activities related to ule A of the By-Laws have been filed processing those transactions. For a with the Securities and Exchange detailed list of the fee changes and Commission (SEC). Pursuant to Sec- NASD Announces their respective effective dates, tion 19(b)(3)(A)(ii) of the Securities Changes In CRD Filing please refer to the NASD Regulation Exchange Act of 1934, the fee Fees Web Site, www.nasdr.com. changes became effective upon filing. Questions about this Notice may be Suggested Routing directed to the NASD Call Center at Most member firms will pay more for Senior Management (301) 869-6699. registration and other filing activity under the new fee structure. The Advertising benefits to the industry of the mod- Continuing Education Summary ernized CRD system, scheduled for On October 8, 1998, the NASD deployment in the third quarter of Corporate Finance Board of Governors approved 1999, will outweigh these additional Executive Representatives changes to Schedule A of the NASD costs. Government Securities By-Laws affecting the CRD fee structure. The changes set registration The modernized CRD will significant- Institutional fees at a level that will recover the ly streamline the “one-stop” filing sys- Insurance costs of the CRD and Public Disclo- tem for broker/dealers and their Internal Audit sure Programs, and more closely associated persons, and will deliver align the fees charged for specific the following substantial financial, Legal & Compliance transactions to the costs of the activi- operational, and technological bene- Municipal ties related to processing those fits to member firms: transactions. The changes involve: Mutual Fund ¥ Expedited processing of initial regis- Operations ¥ Implementing an annual renewal trations and transfers, which will Options processing fee ($15.00 per regis- reduce the number of days associat- tered representative or principal) and ed persons are restricted from con- Registered Representatives a fee for amendments ($20.00 per ducting business (e.g., registration Registration amendment filing). (Note: The filings that have no new disclosure Research renewal processing fee for 1999 will be processed by the NASD in 24 will be collected as part of the hours or less); Syndicate overall registration renewal pro- Systems cess that begins in November ¥ Reduced registration processing 1998.) costs by replacing paper filing with Trading electronic form filing through the Training ¥ Applying the existing fee for disclo- Web; and Variable Contracts sure review ($95.00) to all new or amended disclosures of reportable • Improved member firm access to events; increasing the fee for pro- registration information by providing cessing fingerprint cards (to $10.00 each member firm with a compre-

Special NASD Notice to Members 98-89 October 1998 683 hensive, on-line registration process- because the information and ser- For a detailed list of the fee changes ing and information system available vices provided today by FAQS will be and their respective effective dates, directly through the Web. available through the Internet without please refer to the NASD Regulation a usage charge in the modernized Web Site, www.nasdr.com, or tele- As discussed above, upon deploy- CRD system. The date of the elimi- phone the NASD Call Center at ment of the modernized CRD sys- nation of FAQS charges will be (301) 869-6699. tem, the NASD will eliminate FAQS announced 45 days in advance in a charges (see Section 9 of Schedule Notice to Members. © 1998, National Association of Securities Dealers, A) incurred by subscribing members Inc. (NASD). All rights reserved.

Special NASD Notice to Members 98-89 October 1998 684 Year 2000 contingency plans should YEAR 2000 UPDATE include: 1 The objective of the plan (e.g., continue normal operations, continue in a degraded mode, abort the function SEC Reporting Requirement as quickly and safely possible, etc.) In July of this year, the National Association of Securities Dealers, Inc. (NASD¨) 2 Criteria for invoking the plan (e.g., issued Special Notice to Members 98-63 alerting members to a new reporting missing a renovation milestone, requirement imposed by an amendment to Securities and Exchange Commission reaching a Year 2000-related failure (SEC) Rule 17a-5. The SEC rule amendment requires broker/dealers to file two date, experiencing serious system Year 2000 reports using the new BD-Y2K Form. The first report was due to the failures, inability of a vendor to SEC and designated examining authority (DEA) on or before August 31, 1998. provide required service, etc.). The second report is due April 30, 1999. 3 Schedule of activities, dependencies, The SEC and the NASD are working closely with all the self-regulatory organizations and resources required from as well as the Securities Industry Association (SIA) to improve their ability to identify triggering events. potential Year 2000 failures. Much of this work will be accomplished through careful 4 Expected life of the events (How analysis of the two reports required by the SEC of both broker/dealers and transfer long can operations continue in agents. contingency operating mode?). The NASD strongly encourages those member firms that did not meet the August 5 Roles, responsibilities, and authority. 31 deadline to submit the Year 2000 report immediately. The NASD sent out over 6 Procedures for invoking contingency 1,500 letters notifying NASD member firms that failed to comply with the SEC Year mode. 2000 reporting requirement that the NASD and SEC will file disciplinary actions as appropriate. As of September 22, 195 firms were still delinquent in filing the Form 7 Procedures for operating in BD-Y2K. The NASD and the SEC will be taking appropriate disciplinary action contingency mode. against these firms. 8 Resource plan for operating in contingency mode (e.g., staffing, scheduling, materials, supplies, Broker/Dealer Contingency Plans facilities, temporary hardware and software, communications, etc.). As the NASD and its member firms prepare their systems and applications to 9 Criteria for returning to normal operate successfully in the face of the Year 2000 challenge, contingency planning is operating mode. an essential step that should not be neglected. Contingency planning for Year 2000 occurs at different levels for member firms. Each broker/dealer is responsible for 10 Procedures for returning to normal developing a written plan that ensures business continuity through the Year 2000. operating mode. Currently, contingency plans are being developed by industry associations like 11 Procedures for recovering lost the Federal Reserve Board and SIA. The SIA has formed a policy-level contingency business events or data. planning committee of experts to examine contingencies that might arise should computer programs and other automated systems not correctly recognize the century date change. The committee will focus on (1) developing steps to cushion To find out more about contingency the pressures on financial markets, financial institutions, and clearance and planning and legal issues surrounding the settlement systems that arise the last couple of weeks leading up to 2000 and first Year 2000 challenge, attend the Year couple of weeks into 2000, and (2) developing contingency arrangements for 2000 Legal Seminars being held October maintaining business continuity during the century date change. 13 (Chicago), October 20 (Atlanta), and According to industry guidelines, organizations should begin constructing their November 3 (New York City). This Year contingency plans by the end of 1998 and spend 1999 detailing results and 2000 legal seminar will also be featured preparing business operations where needed. If you are not sure what a contingency at the annual NASD Regulation Fall plan is or when it would be useful, it is similar to Murphy’s Law—be prepared for Securities Conference being held anything that could go wrong. For example, what will you do if you rely on public November 4-6 in San Francisco. transportation, and it doesn’t work on January 1, 2000? Or, if you rely on satellite feeds for clock synchronization, and they don’t operate? Or, if your local telecommunications company were unable to function, how would you notify your customers? Lastly, how would you manage an orderly shutdown of your business? For more information on required Year 2000 reporting, help in developing a member firm Year 2000 contingency The following column displays a high-level outline of the contents of a sample planning, and/ or details about Year contingency plan. We share this with NASD member firms solely as an 2000workshops, contact the NASD example. Year 2000 Program Office by e-mail at [email protected] or by calling its toll-free number, at (888) 227-1330.

Executive Summary accordance with the rankings. NLSS NASD On October 14, 1998, the Securities will also perform many other adminis- and Exchange Commission (SEC) trative functions in the arbitrator approved rule changes proposed by selection process. Notice to the National Association of Securities Dealers, Inc. (NASD¨) relating to the The text of these rules and other selection of arbitrators.1 The arbitra- related amendments that go into Members tor list selection rules and related effect on November 17, 1998, is set amendments to the Code of Arbitra- forth at the end of this Notice. 98-90 tion Procedure will be effective on November 17, 1998. The list selection rules will allow the parties to an New Thresholds For Simplified arbitration to have a significant role in Arbitration selecting the arbitrators that will hear The new thresholds for simplified and New Arbitrator List their dispute. single arbitration cases will also take Selection Rules And effect simultaneously with the effec- Monetary Thresholds For The NASD is also declaring effective tiveness of the list selection proce- Simplified And Single previously approved increases in the dures announced in this Notice. ceilings for simplified arbitration Cases involving claims of no more Arbitration Cases Take cases and for cases eligible for reso- than $25,000 (up from $10,000) will Effect lution by a single arbitrator from be eligible for resolution under the $10,000 to $25,000, and from procedures specified in Rules 10203 Suggested Routing $30,000 to $50,000, respectively.2 and 10302, which provide for the res- Senior Management olution of such cases on the paper Questions concerning this Notice record (or after a hearing if demand- Advertising should be directed to Sharon Zacku- ed by the claimant) by a single arbi- Continuing Education la, Assistant General Counsel, NASD trator. Cases involving claims of no Regulation, Inc. (NASD RegulationSM), more than $50,000 (up from Corporate Finance (202) 728-8985 (customer disputes) $30,000) may be resolved after a Executive Representatives or Jean I. Feeney, Assistant General hearing by a single arbitrator. In both Government Securities Counsel, NASD Regulation, (202) instances, the single arbitrator will be 728-6959 (intra-industry disputes). selected in accordance with the new Institutional list selection rules. Insurance New Arbitration Procedures Internal Audit For The Selection Of Effectiveness Of The New Legal & Compliance Arbitrators In Customer Procedures Municipal Disputes And Intra-Industry The NASD intends to make the rule Disputes change effective on November 17, Mutual Fund The list selection rules will allow the 1998. Operations parties to an arbitration to have a sig- Options nificant role in selecting the arbitra- A case will be subject to revised tors who will hear their dispute. The Rules 10202, 10203, and 10308 if, Registered Representatives new procedures will incorporate as of November 17, 1998, NASD Registration newly developed software, the Neu- Regulation has not mailed or other- Research tral List Selection System (NLSS), wise transmitted a letter or other writ- which can generate lists of arbitrators ten communication to the parties Syndicate in a neutral fashion. Using the lists, notifying the parties of the names of Systems the parties may state preferences the arbitrators appointed to hear the among the listed arbitrators by arbitration. In addition, as of Novem- Trading numerically ranking them. After par- ber 17, 1998, the newly adopted Training ties rank the listed arbitrators, NLSS changes to Rule 10104, Rules 10309 Variable Contracts will consolidate the parties’ rankings through 10313, and Rule 10315 will of the listed arbitrators, and the arbi- apply to this group of cases. tration panel will be selected in NASD Notice to Members 98-90 November 1998 687 A case will be subject to current (c)(5), the Director must appoint a to such parties. NASD Regulation Rules 10202, 10203, and 10308 for chairperson subject to three limita- does not believe that any party will the purpose of selecting an arbitra- tions, one of which is how the parties suffer an unfair surprise if the list tion panel, if, before the effective ranked the arbitrators. Since the selection rule and the other rule date of the rule change, NASD Reg- Director will not have party rankings changes are applied to an arbitration ulation identifies the arbitrator (in a of arbitrators, the Director will appoint case filed prior to November 17, case having one arbitrator) or the a chairperson subject to the two 1998. Finally, in order to implement three-arbitrator panel (in a case hav- other limitations set forth in amended the proposed rule change, NASD ing three arbitrators) and mails or Rule 10308(c)(5), pursuant to the Regulation must make a number of otherwise transmits a letter or other general authority in paragraph (e). operational changes. The administra- written communication to the parties tive burdens of fully implementing the notifying the parties of the names of ¥ Right to Receive Arbitrator Informa- list selection process nationwide are the arbitrators. However, as of tion and Request Additional Informa- many, and NASD Regulation November 17, 1998, such cases also tion - A party will retain the right believes that the benefits of imple- will be subject to all provisions of under current Rule 10310 to receive menting the new procedures rapidly amended Rule 10308, except those employment information and infor- and system-wide outweigh the bene- relating to the initial process of mation disclosed pursuant to Rule fits, if any, obtainable from continued selecting an arbitration panel. In 10312 about the arbitrators that have use of the old system. addition, the newly adopted changes been appointed for his or her case to Rule 10104, Rules 10309 through and to make additional inquiries 10313, and Rule 10315 will apply to about an arbitrator. A party’s right to Text Of Amendments this group of cases. Below are four receive such information is included (Note: New text is underlined; deletions are examples of how the old rules and in amended Rule 10308; the NASD bracketed.) the amended rules intersect and will is simply clarifying that such informa- be applied to the group of cases for tion about arbitrators shall be provid- Rule 10104. Composition and which a panel is appointed initially ed to a party either pursuant to Appointment of Panels under current Rule 10308. current Rule 10310 in cases where the arbitrators are appointed under Except as otherwise specifically pro- ¥ Peremptory Challenge - In such current Rule 10308 or pursuant to vided in Rule 10308, t[T]he Director cases, a party retains the right provid- amended Rule 10308(b)(6) in cases [of Arbitration] shall compose and ed under current Rule 10311 to one where arbitrators are appointed appoint panels of arbitrators from the peremptory challenge of an appointed under amended Rule 10308. existing pool of arbitrators of the arbitrator, because the party has not Association to conduct the arbitration been able to exercise the parallel right ¥ Right to Challenge a Replacement of any matter which shall be eligible of striking an undesirable arbitrator in Arbitrator - A party will not retain the for submission under this Code. [The the pre-appointment phase that is pro- right in Rule 10310 to challenge a Director of Arbitration may request vided under amended Rule 10308. replacement arbitrator for cases that the Executive Committee of the The party choosing to exercise this where the arbitrators are appointed National Arbitration Committee right should follow the procedure set under current Rule 10308. Instead, a undertake the composition and forth in Rule 10311. party may exercise the right to object appointment of a panel or undertake to a replacement arbitrator under consultation with the Executive Com- ¥ Chairperson - The provisions of amended Rule 10308(d). mittee regarding the composition and amended Rule 10308 will apply to appointment of a panel in any cir- such cases if the Director of Arbitra- NASD Regulation believes that this cumstance where he determines tion has not already selected the is the most appropriate approach to such action to be appropriate.] chairperson. Amended Rule 10308 provide the benefits of list selection (c)(5) grants the parties the right to to the greatest number of parties as Rule 10202. Composition of select a chairperson. If the parties fail quickly as possible. List selection Panels to act within the specified time, the provides the parties additional input Director must select a chairperson. into the arbitration proceeding, and (a) In disputes subject to arbitration The Director’s authority to act is applying the new process for the that arise out of the employment or specifically stated in amended Rule appointment of arbitrators to certain termination of employment of an 10308(c)(5) and generally stated in cases filed shortly before the date of associated person, and that relate paragraph (e). Under paragraph effectiveness will provide the benefits exclusively to disputes involving

NASD Notice to Members 98-90 November 1998 688 employment contracts, promissory requests that a panel of three arbitra- with the Office of the Director of Arbi- notes or receipt of commissions, the tors be appointed, the Director shall tration within ten (10) business days panel of arbitrators shall be appoint- appoint an arbitration panel com- following the filing of the last pleading ed as provided by paragraph (b)(1) posed of three non-public arbitrators, a request for a hearing of the matter. or (2) or Rule 10203, whichever is unless the parties agree to a different applicable. In all other disputes aris- panel composition. (1) In any proceeding pursuant to ing out of the employment or termi- this Rule, an arbitration panel shall nation of employment of an (B) Claims of More than $50,000 consist of [no fewer than one (1) but associated person, the panel of arbi- no more than three (3) arbitrators, all trators shall be appointed as provid- If the amount of a claim is more than of whom shall be from the securities ed by Rule 10302 or Rule 10308, $50,000, the Director shall appoint industry] a single non-public arbitra- whichever is applicable. an arbitration panel composed of tor. three non-public arbitrators, unless (b) [(1) Except as otherwise provided the parties agree to a different panel (2) No Change in paragraph (a) or Rule 10203, in all composition. arbitration matters between or (b) No Change among members and/or persons (2) Except as otherwise provided in associated with members, and paragraph (a), in all arbitration mat- Rule 10302. Simplified where the amount in controversy ters between or among members Arbitration does not exceed $30,000, the Direc- and/or persons associated with tor of Arbitration shall appoint a sin- members and where the amount in (a) Any dispute, claim, or controversy gle arbitrator to decide the matter in controversy exceeds [$30,000] arising between a public customer(s) controversy. The arbitrator chosen $50,000, exclusive of attendant costs and an associated person or a mem- shall be from the securities industry. and interest, a panel shall consist of ber subject to arbitration under this Upon the request of a party in its ini- three arbitrators, all of whom shall be Code involving a dollar amount not tial filing or the arbitrator, the Director [from the securities industry] non- exceeding [$10,000] $25,000, exclu- of Arbitration shall appoint a panel of public arbitrators. sive of attendant costs and interest, three (3) arbitrators, all of whom shall shall be arbitrated as hereinafter pro- be from the securities industry.] (c) In proceedings relating to injunc- vided. tions under Rule 10335, the provi- (1) Composition of Arbitration Panel sions of Rule 10335 shall supersede (b) No Change the provisions of this Rule. (A) Claims of $50,000 or Less (c) The Claimant shall pay a non- (d) Except as otherwise provided in refundable filing fee and shall remit a If the amount of a claim is $50,000 or this Rule or Rule 10203, the provi- hearing session deposit as specified less, the Director shall appoint an sions of Rule 10308 shall apply to in Rule 10332 of this Code upon the arbitration panel composed of one intra-industry disputes. filing of the Submission Agreement. non-public arbitrator, unless the par- The final disposition of the fee or ties agree to the appointment of a Rule 10203. Simplified deposit shall be determined by the public arbitrator. Industry Arbitration arbitrator.

(i) If the amount of a claim is $25,000 (a) Any dispute, claim, or controversy (d) The Director of Arbitration shall or less and an arbitrator appointed to arising between or among members endeavor to serve promptly by mail the case requests that a panel of or associated persons submitted to or otherwise on the Respondent(s) three arbitrators be appointed, the arbitration under this Code involving one (1) copy of the Submission Director shall appoint an arbitration a dollar amount not exceeding Agreement and one (1) copy of the panel composed of three non-public [$10,000] $25,000, exclusive of Statement of Claim. Within twenty arbitrators, unless the parties agree attendant costs and interest, shall be (20) calendar days from receipt of to a different panel composition. resolved by an arbitration panel con- the Statement of Claim, Respon- stituted pursuant to the provisions of dent(s) shall serve each party with (ii) If the amount of a claim is greater subparagraph (1) hereof solely upon an executed Submission Agreement than $25,000 and not more than the pleadings and documentary evi- and a copy of Respondent’s Answer. $50,000 and a party in its initial filing dence filed by the parties, unless one Respondent’s executed Submission or an arbitrator appointed to the case of the parties to the proceeding files Agreement and Answer shall also be

NASD Notice to Members 98-90 November 1998 689 filed with the Director of Arbitration hearing is necessary, such hearing For purposes of this Rule, the term with sufficient additional copies for shall be held as soon as practicable “day” means calendar day. the arbitrator(s) along with any at a locale selected by the Director of deposit required under the schedule Arbitration. (2) “claimant” of fees for customer disputes. The Answer shall designate all available (g) No Change For purposes of this Rule, the term defenses to the Claim and may set “claimant” means one or more per- forth any related Counterclaim and/or (h)(1) The arbitrator shall be autho- sons who file a single claim. related Third-Party Claim the rized to require the submission of fur- Respondent(s) may have against the ther documentary evidence as he, in (3) “Neutral List Selection System” Claimant or any other person. If the his sole discretion, deems advisable. Respondent(s) has interposed a The term “Neutral List Selection Sys- Third-Party Claim, the (2) If a hearing is demanded or con- tem” means the software that main- Respondent(s) shall serve the Third- sented to in accordance with para- tains the roster of arbitrators and Party Respondent with an executed graph (f), the General Provisions performs various functions relating to Submission Agreement, a copy of Governing Pre-Hearing Proceedings the selection of arbitrators. the Respondent's Answer containing under Rule 10321 shall apply. the Third-Party Claim, and a copy of (4) “non-public arbitrator” the original Claim filed by the (3) If no hearing is demanded or con- Claimant. The Third-Party Respon- sented to, all requests for document The term “non-public arbitrator” dent shall respond in the manner production shall be submitted in writ- means a person who is otherwise herein provided for response to the ing to the Director of Arbitration with- qualified to serve as an arbitrator Claim. If the Respondent(s) files a in ten (10) business days of and: related Counterclaim exceeding notification of the identity of the arbi- [$10,000] $25,000 exclusive of atten- trator selected to decide the case. (A) is, or within the past three years, dant costs and interest, the arbitrator The requesting party shall serve was: may refer the Claim, Counterclaim simultaneously its request for docu- and/or Third-Party Claim, if any, to a ment production on all parties. Any (i) associated with a broker or a deal- panel of three (3) [or five (5)] arbitra- response or objections to the er (including a government securities tors in accordance with Rule 10308 requested document production shall broker or dealer or a municipal secu- or, he may dismiss the Counterclaim be served on all parties and filed with rities dealer); and/or Third-Party Claim without the Director of Arbitration within five prejudice to the Counterclaimant(s) (5) business days of receipt of the (ii) registered under the Commodity and/or Third Party Claimant(s) pursu- requests for production. The [select- Exchange Act; ing the Counterclaim and/or Third ed] appointed arbitrator shall resolve Party Claim in a separate proceed- all requests under this Rule on the (iii) a member of a commodities ing. The costs to the Claimant under papers submitted. exchange or a registered futures either proceeding shall in no event association; or exceed the total amount specified in (i) - (l) No Change Rule 10332. (iv) associated with a person or firm Rule 10308. [Designation of registered under the Commodity (e) No Change Number of Arbitrators]Selec- Exchange Act; tion of Arbitrators (f) The dispute, claim or controversy (B) is retired from engaging in any of shall be submitted to a single public This Rule specifies how parties may the business activities listed in sub- arbitrator knowledgeable in the secu- select or reject arbitrators, and who paragraph (4)(A); rities industry [selected] appointed by can be a public arbitrator. the Director of Arbitration. Unless the (C) is an attorney, accountant, or public customer demands or con- [Rule text replaced in its entirety.] other professional who has devoted sents to a hearing, or the arbitrator 20 percent or more of his or her pro- calls a hearing, the arbitrator shall (a) Definitions fessional work, in the last two years, decide the dispute, claim or contro- to clients who are engaged in any of versy solely upon the pleadings and (1) “day” the business activities listed in sub- evidence filed by the parties. If a paragraph (4)(A); or

NASD Notice to Members 98-90 November 1998 690 (D) is an employee of a bank or other (7) “send” (2) One List for Panel of One Arbitrator financial institution and effects transactions in securities, including gov- For purposes of this Rule, the term If one arbitrator will serve as the arbi- ernment or municipal securities, and “send” means to send by first class tration panel, the Director shall send commodities futures or options or mail, facsimile, or any other method to the parties one list of public arbi- supervises or monitors the compli- available and convenient to the par- trators, unless the parties agree oth- ance with the securities and com- ties and the Director. erwise. modities laws of employees who engage in such activities. (b) Composition of Arbitration Panel; (3) Two Lists for Panel of Three Arbi- Preparation of Lists for Mailing to trators (5) “public arbitrator” Parties If three arbitrators will serve as the (A) The term “public arbitrator” (1) Composition of Arbitration Panel arbitration panel, the Director shall means a person who is otherwise send two lists to the parties, one with qualified to serve as an arbitrator and (A) Claims of $50,000 or Less the names of public arbitrators and is not: one with the names of non-public If the amount of a claim is $50,000 or arbitrators. The lists shall contain (i) engaged in the conduct or activi- less, the Director shall appoint an numbers of public and non-public ties described in paragraphs arbitration panel composed of one arbitrators, in a ratio of approximately (a)(4)(A) through (D); or public arbitrator, unless the parties two to one, respectively, to the extent agree to the appointment of a non- possible, based on the roster of (ii) the spouse or an immediate fami- public arbitrator. available arbitrators. ly member of a person who is engaged in the conduct or activities (i) If the amount of a claim is $25,000 (4) Preparation of Lists described in paragraphs (a)(4)(A) or less and an arbitrator appointed to through (D). the case requests that a panel of (A) Except as provided in subpara- three arbitrators be appointed, the graph (B) below, the Neutral List (B) For the purpose of this Rule, the Director shall appoint an arbitration Selection System shall generate the term “immediate family member” panel composed of one non-public lists of public and non-public arbitra- means: arbitrator and two public arbitrators, tors on a rotating basis within a des- unless the parties agree to a different ignated geographic hearing site and (i) a family member who shares a panel composition. shall exclude arbitrators based upon home with a person engaged in the conflicts of interest identified within conduct or activities described in (ii) If the amount of a claim is greater the Neutral List Selection System paragraphs (a)(4)(A) through (D); than $25,000 and not more than database. $50,000 and a party in its initial filing (ii) a person who receives financial or an arbitrator appointed to the case (B) If a party requests that the lists support of more than 50 percent of requests that a panel of three arbitra- include arbitrators with expertise his or her annual income from a per- tors be appointed, the Director shall classified in the Neutral List Selection son engaged in the conduct or activi- appoint an arbitration panel com- System, the lists may include some ties described in paragraphs posed of one non-public arbitrator arbitrators having the designated (a)(4)(A) through (D); or and two public arbitrators, unless the expertise. parties agree to a different panel (iii) a person who is claimed as a composition. (5) Sending of Lists to Parties dependent for federal income tax purposes by a person engaged in (B) Claims of More Than $50,000 The Director shall send the lists of the conduct or activities described in arbitrators to all parties at the same paragraphs (a)(4)(A) through (D). If the amount of a claim is more than time approximately 30 days after the $50,000, the Director shall appoint last answer is due. (6) “respondent” an arbitration panel composed of one non-public arbitrator and two public (6) Information About Arbitrators For purposes of this Rule, the term arbitrators, unless the parties agree “respondent” means one or more to a different panel composition. The Director shall send to the parties persons who individually or jointly file employment history for each listed an answer to a complaint. arbitrator for the past 10 years and NASD Notice to Members 98-90 November 1998 691 other background information. If a the Director has extended the period. about the arbitrator as provided in party requests additional information If a party does not timely return the paragraph (b)(6), and the parties about an arbitrator, the Director shall list or lists, the Director shall treat the shall have the right to object to the send such request to the arbitrator, party as having retained all the arbi- arbitrator as provided in paragraph and shall send the arbitrator’s trators on the list or lists and as hav- (d)(1). response to all parties at the same ing no preferences. time. When a party requests addi- (5) Selecting a Chairperson for the tional information, the Director may, (3) Process of Consolidating Parties’ Panel but is not required to, toll the time for Rankings the parties to return the ranked lists The parties shall have 15 days from under paragraph (c)(2). The Director shall prepare one or two the date the Director sends notice of consolidated lists of arbitrators, as the names of the arbitrators to select (c) Striking, Ranking, and Appointing appropriate under paragraph (b)(2) a chairperson. If the parties cannot Arbitrators on Lists or (b)(3), based upon the parties’ agree, the Director shall appoint a numerical rankings. The arbitrators chairperson from the panel as follows: (1) Striking and Ranking Arbitrators shall be ranked by adding the rankings of all claimants together and all (A) The Director shall appoint as the (A) Striking An Arbitrator respondents together, including third- chairperson the public arbitrator who party respondents, to produce sepa- is the most highly ranked by the par- A party may strike one or more of the rate consolidated rankings of the ties as long as the person is not an arbitrators from each list for any rea- claimants and the respondents. The attorney, accountant, or other profes- son. Director shall then rank the arbitra- sional who has devoted 50% or more tors by adding the consolidated rank- of his or her professional or business (B) Ranking - Panel of One Arbitrator ings of the claimants, the activities, within the last two years, to respondents, including third- party representing or advising public cus- Each party shall rank all of the arbi- respondents, and any other party tomers in matters relating to disputed trators remaining on the list by together, to produce a single consoli- securities or commodities transac- assigning each arbitrator a different, dated ranking number, excluding tions or similar matters. sequential, numerical ranking, with a arbitrators who were stricken by any “1” rank indicating the party’s first party. (B) If the most highly ranked public choice, a “2” indicating the party’s arbitrator is subject to the exclusion second choice, and so on. (4) Appointment of Arbitrators set forth in subparagraph (A), the Director shall appoint as the chair- (C) Ranking - Panel of Three Arbitra- (A) Appointment of Listed Arbitrators person the other public arbitrator, as tors long as the person also is not subject The Director shall appoint arbitrators to the exclusion set forth in subpara- Each party shall rank all of the public to serve on the arbitration panel graph (A). arbitrators remaining on the list by based on the order of rankings on assigning each arbitrator a different, the consolidated list or lists, subject (C) If both public arbitrators are sub- sequential, numerical ranking, with a to availability and disqualification. ject to the exclusion set forth in sub- “1” rank indicating the party’s first paragraph (A), the Director shall choice, a “2” indicating the party’s (B) Discretion to Appoint Arbitrators appoint as the chairperson the public second choice, and so on. Each Not on List arbitrator who is the most highly party separately shall rank all of the ranked by the parties. non-public arbitrators remaining on If the number of arbitrators available the list, using the same procedure. to serve from the consolidated list is (6) Additional Parties not sufficient to fill a panel, the Direc- (2) Period for Ranking Arbitrators; tor shall appoint one or more Arbitra- If a party is added to an arbitration Failure to Timely Strike and Rank tors to complete the arbitration panel. proceeding before the Director has Unless the parties agree otherwise, consolidated the other parties’ rank- A party must return to the Director the Director may not appoint a non- ings, the Director shall send to that the list or lists with the rankings not public arbitrator under paragraphs party the list or lists of arbitrators and later than 20 days after the Director (a)(4)(B) or (a)(4)(C). The Director permit the party to strike and rank the sent the lists to the parties, unless shall provide the parties information arbitrators. The party must return to

NASD Notice to Members 98-90 November 1998 692 the Director the list or lists with there are no available arbitrators of shall appoint a replacement arbitrator numerical rankings not later than 20 the proper classification on the con- to fill the vacancy on the panel. The days after the Director sent the lists solidated list, the Director shall Director shall inform the parties as to the party. The Director shall then appoint an arbitrator of the proper soon as possible of the name and consolidate the rankings as specified classification subject to the limitation employment history of the replace- in this paragraph (c). set forth in paragraph (c)(4)(B). The ment arbitrator for the past 10 years, Director shall provide the parties as well as information disclosed pur- (d) Disqualification and Removal of information about the arbitrator as suant to Rule 10312. A party may Arbitrator Due to Conflict of Interest provided in paragraph (b)(6), and the make further inquiry of the Director or Bias parties shall have the right to object [of Arbitration] concerning the to the arbitrator as provided in para- replacement arbitrator’s background (1) Disqualification By Director graph (d)(1). and within the time remaining prior to the first hearing session or the 10 After the appointment of an arbitrator (e) Discretionary Authority day period provided under Rule and prior to the commencement of 10311, whichever is shorter, may the earlier of (A) the first pre-hearing The Director may exercise discre- exercise its right to challenge the conference or (B) the first hearing, if tionary authority and make any deci- replacement arbitrator as provided in the Director or a party objects to the sion that is consistent with the Rule 10311. continued service of the arbitrator, purposes of this Rule and the Rule the Director shall determine if the 10000 Series to facilitate the appoint- (b) This Rule shall not apply to arbi- arbitrator should be disqualified. If ment of arbitration panels and the tration proceedings that are subject the Director sends a notice to the resolution of arbitration disputes. to Rule 10308. parties that the arbitrator shall be disqualified, the arbitrator will be dis- Rule 10309. Composition of Rule 10311. Peremptory qualified unless the parties Panels Challenge unanimously agree otherwise in writing and notify the Director not later Except as otherwise specifically pro- (a) In an[y] arbitration proceeding, than 15 days after the Director sent vided in Rule 10308, t[T]he individu- each party shall have the right to one the notice. als who shall serve on a particular [(1)] peremptory challenge. In arbitra- arbitration panel shall be determined tions where there are multiple (2) Authority of Director to Disqualify by the Director [of Arbitration]. Claimants, Respondents, and/or Ceases Except as otherwise specifically pro- Third-Party Respondents, the vided in Rule 10308, t[T]he Director Claimants shall have one [(1)] After the commencement of the earli- [of Arbitration] may name the chair- peremptory challenge, the Respon- er of (A) the first pre-hearing confer- man of the panel. dents shall have one [(1)] perempto- ence or (B) the first hearing, the ry challenge, and the Third-Party Director’s authority to remove an Rule 10310. Notice of Selec- Respondents shall have one [(1)] arbitrator from an arbitration panel tion of Arbitrators peremptory challenge. The Director ceases. [of Arbitration] may in the interests of (a) The Director shall inform the par- justice award additional peremptory (3) Vacancies Created by Disqualifi- ties of the arbitrators’ names and challenges to any party to an arbitra- cation or Resignation employment histories for the past 10 tion proceeding. Unless extended by years, as well as information dis- the Director [of Arbitration], a party Prior to the commencement of the closed pursuant to Rule 10312, at wishing to exercise a peremptory earlier of (A) the first pre-hearing least 15 business days prior to the challenge must do so by notifying the conference or (B) the first hearing, if date fixed for the first hearing ses- Director [of Arbitration] in writing with- an arbitrator appointed to an arbitra- sion. A party may make further in 10 business days of notification of tion panel is disqualified or is other- inquiry of the Director [of Arbitration] the identity of the person(s) named wise unable or unwilling to serve, the concerning an arbitrator’s back- under Rule 10310 or Rule 10321(d) Director shall appoint from the con- ground. In the event that, prior to the or (e), whichever comes first. There solidated list of arbitrators the arbitra- first hearing session, any arbitrator shall be unlimited challenges for tor who is the most highly ranked should become disqualified, resign, cause. available arbitrator of the proper clas- die, refuse or otherwise be unable to sification remaining on the list. If perform as an arbitrator, the Director

NASD Notice to Members 98-90 November 1998 693 (b) This Rule shall not apply to arbi- Rule 10313. Disqualification or Rule 10315. Designation of tration proceedings that are subject Other Disability of Arbitrators Time and Place of First Meet- to Rule 10308. ing [Hearing] In the event that any arbitrator, after Rule 10312. Disclosures the commencement of the earlier of The Director shall determine t[T]he Required of Arbitrators and (a) the first pre-hearing conference or time and place of the first meeting of Director’s Authority To Dis- (b) the first hearing but prior to the the arbitration panel and the parties, qualify rendition of the award, should whether the first meeting is a pre- become disqualified, resign, die, hearing conference or a hearing, [ini- (a) - (c) No Change refuse or otherwise be unable to per- tial hearing shall be determined by form as an arbitrator, the remaining the Director of Arbitration and each (d) Prior to the commencement of the arbitrator(s) shall continue with the hearing thereafter by the arbitrators.] earlier of (1) the first pre-hearing con- hearing and determination of the and shall give n[N]otice of the time ference or (2) the first hearing, the controversy, unless such continua- and place [for the initial hearing shall Director may remove an arbitrator tion is objected to by any party within be given] at least [eight (8)] 15 busi- based on information disclosed pur- 5 days of notification of the vacancy ness days prior to the date fixed for suant to this Rule. on the panel. Upon objection, the the first meeting [hearing] by person- Director [of Arbitration] shall appoint al service, registered or certified mail ([d]e) Prior to the commencement of a replacement arbitrator to fill the to each of the parties unless the par- the [first hearing session,] earlier of vacancy and the hearing shall contin- ties shall, by their mutual consent, (1) the first pre-hearing conference or ue. The Director [of Arbitration] shall waive the notice provisions under this (2) the first hearing, [the Director of inform the parties as soon as possi- Rule. The arbitrators shall determine Arbitration may remove an arbitrator ble of the name and employment his- the time and place for all subsequent based on information disclosed pur- tory of the replacement arbitrator for meetings, whether the meetings are suant to this Rule.] t[T]he Director [of the past 10 years, as well as informa- pre-hearing conferences, hearings, Arbitration] shall [also] inform the par- tion disclosed pursuant to Rule or any other type of meetings, and ties to an arbitration proceeding of 10312. A party may make further shall give n[N]otice [for each hearing any information disclosed to the inquiry of the Director [of Arbitration] thereafter shall be given] as the arbi- Director under this Rule unless either concerning the replacement arbitra- trators may determine. Attendance at the arbitrator who disclosed the infor- tor’s background. If the arbitration a meeting [hearing] waives notice mation withdraws voluntarily as soon proceeding is subject to Rule 10308, thereof. as the arbitrator learns of any interest the party may exercise his or her or relationship described in para- right to challenge the replacement graph (a) that might preclude the arbitrator within the time remaining Endnotes arbitrator from rendering an objective prior to the next scheduled hearing 1Securities Exchange Act Rel. No. 40555 and impartial determination in the session by notifying the Director in (October 14, 1998) (File No. SR-NASD-98- proceeding, or the Director removes writing of the name of the arbitrator 48) and Securities Exchange Act Rel. No. the arbitrator [pursuant to this Rule if challenged and the basis for such 40556 (October 14, 1998) (File No. SR- the arbitrator is not removed]. challenge. If the arbitration proceed- NASD-98-64). ing is not subject to Rule 10308, (f) After the commencement of the [and] within the time remaining prior 2Securities Exchange Act Rel. No. 38635 earlier of (1) the first pre-hearing con- to the next scheduled hearing ses- (May 14, 1997) (File No. SR-NASD-97-22). ference or (2) the first hearing, the sion or the 5 day period provided Director’s authority to remove an under Rule 10311, whichever is © 1998, National Association of Securities Dealers, arbitrator from an arbitration panel shorter, a party may exercise the par- Inc. (NASD). All rights reserved. ceases. During this period, the Direc- ty’s [its] right to challenge the tor shall inform the parties of any replacement arbitrator as provided in information disclosed by an arbitrator Rule 10311. under this Rule.

NASD Notice to Members 98-90 November 1998 694 Executive Summary Unsolicited Or Cold Calls NASD The Financial Services Authority Section 56 of the Act generally pro- (FSA) in the United Kingdom (U.K.) hibits cold calling by providing that no has detected an increase in the fre- person shall make an unsolicited call Notice to quency with which National Associa- (i.e., any call without an express invi- tion of Securities Dealers, Inc. tation) in an attempt to make an (NASD¨) member firms have been investment agreement with a person Members soliciting U.K. citizens. In response to in the U.K. Members should be this activity, the FSA has asked aware that this general prohibition in NASD Regulation, Inc. (NASD Regu- the U.K. applies to U.S. member 98-91 SM lation ) to alert its members to the firms and their associated persons standards governing the solicitation notwithstanding the fact that such NASD Alerts Members To of U.K. citizens generally and impli- persons may be permitted to make Their Obligations cations of cold calling and advertising cold calls under the NASD rules. to persons in the U.K. in particular. Concerning Cold Calling This Notice briefly summarizes the The FSA’s Common Unsolicited And Advertising To legal and regulatory framework in the Calls Regulations (CUC Regulations) Persons In The United U.K. regarding cold calling and provide exemptions from the general Kingdom advertising. NASD Regulation prohibition against cold calling. Under reminds members proposing to cold the CUC Regulations, an “overseas call or advertise into the U.K., or any person” may make unsolicited calls Suggested Routing foreign country, to ensure that any only to: Senior Management such activities comply with all applicable laws. • (1) “existing customers,” defined as Advertising persons with whom the overseas Continuing Education Questions concerning this Notice person has an existing customer should be directed to Gary L. Gold- relationship that was established Corporate Finance sholle, Assistant General Counsel, while the customer was resident out- Executive Representatives Office of General Counsel, NASD side the U.K.; and Government Securities Regulation, at (202) 728-8104, or The Authorization Enquiries Depart- • (2) “non-private customers,” or busi- Institutional ment, Financial Services Authority, at ness investors, such as government Insurance (011) 44-171-676-4704. or public authorities, corporations, or Internal Audit partnerships with substantial assets Conduct Of Investment and trustees of trusts holding sub- Legal & Compliance Business In The U.K. stantial assets. Municipal Any person who carries on investment business in the U.K. must be autho- Investment Advertisements Mutual Fund rized or exempt under the Financial Section 57 of the Act generally pro- Operations Services Act of 1986 (the Act). Invest- hibits an overseas person, as defined Options ment business includes dealing and above, from issuing or causing the arranging deals in investments and issue of an investment advertisement Registered Representatives giving investment advice. “Invest- in the U.K. unless its contents have Registration ments” include stocks, shares, and been approved by an authorized per- Research derivatives. Persons who operate son under the Act. An investment from outside the U.K. are “overseas advertisement includes any adver- Syndicate persons” under the Act and enjoy the tisement containing information cal- Systems benefit of an exclusion from the need culated to lead directly or indirectly to for authorization but only if they carry a person entering into an investment Trading on their business in such a way that agreement. Foreign advertisements Training they do not breach the provisions of are treated as issued in the U.K. if Variable Contracts Section 56 (unsolicited or cold calls) they are directed to persons in the and Section 57 (investment advertise- U.K. or made available to them other ments) of the Act. than through a newspaper or other

NASD Notice to Members 98-91 November 1998 695 journal that is published and circu- be committing a criminal offense and U.K. NASD Regulation urges mem- lates mainly outside of the U.K. be liable to prosecution. Also, any bers considering soliciting U.K. citi- agreement made by or through an zens to review the U.K. laws Consequences Of Breaching unauthorized person may be unen- speciﬁcally to ensure that their con- U.K. Legislation forceable against the other party. duct complies with all applicable Any person who conducts invest- laws. ment business in the U.K. without The information provided in this authorization under the Act, or any Notice does not describe in detail the © 1998, National Association of Securities Dealers, person who issues an investment laws applicable to solicitation in the Inc. (NASD). All rights reserved. advertisement without approval may

NASD Notice to Members 98-91 November 1998 696 Executive Summary institutional investor or major U.S. Through this Notice, NASD Regula- institutional investor if the resulting NASD SM tion, Inc. (NASD Regulation ) is transactions are effected through a establishing an interpretation that registered broker/dealer as specified Notice to National Association of Securities in Rule 15a-6(a)(3). Among the Dealers, Inc. (NASD¨) Rule requirements of Rule 15a-6(a)(3) are 2860(b)(3) options position limits that the U.S. broker/dealer issues all Members apply with respect to options transac- required confirmations and tions that are intermediated by mem- statements to the institutional ber firms pursuant to Exchange Act investors and maintains the required 98-92 Rule 15a-6(a)(3). Members are also books and records relating to the reminded of the reporting obligations transaction. NASD Regulation under Rule 2860(b)(5) with respect to Articulates Position On such Rule 15a-6(a)(3) transactions. Member firms have expressed uncertainty as to the application of The Application Of NASD Questions concerning this Notice Rule 2860(b)(3) to Rule 15a-6(a)(3) Rule 2680 To U.S. may be directed to Gary L. Gold- transactions. Some members have Broker/Dealers That sholle, Assistant General Counsel, taken the position that options Intermediate Transactions NASD Regulation, at (202) 728- transactions that are intermediated Pursuant To Exchange Act 8104. by U.S. member firms pursuant to Rule 15a-6(a)(3) Rule 15a-6(a)(3), but are not carried on their books for capital purposes, Discussion are not subject to the limits of Rule Suggested Routing NASD Rule 2860(b)(3) imposes a 2860(b)(3). Other members have Senior Management ceiling or position limit on the number taken the position that Rule of conventional and standardized 2860(b)(3) would apply to such Advertising equity options contracts in each class transactions. Continuing Education on the same side of the market (i.e., aggregating long calls and short puts Through this Notice, NASD Corporate Finance or long puts and short calls) that can Regulation is issuing an Executive Representatives be held or written by a member, a interpretation to establish consistent Government Securities person associated with a member, a application of Rule 2860(b)(3). NASD customer, or a group of customers Regulation staff believes that NASD Institutional acting in concert. Specifically, Rule member firms that intermediate Insurance 2860(b)(3) provides that “no member transactions under Rule 15a-6(a)(3) Internal Audit shall effect for any account in which are “effecting” such transactions such member has an interest, . . . or within the meaning of Rule Legal & Compliance for the account of any customer, an 2860(b)(3) and that position limits Municipal opening transaction through . . . the should apply. We believe that the over-the-counter market or on any use of the term “effect” in this Mutual Fund exchange in a stock option contract context, given its ordinary meaning, Operations of any class of stock options if the would apply to the functions that U.S. Options member . . . or customer would . . . registered broker/dealers are hold or control or be obligated in required to perform under Rule 15a- Registered Representatives respect of an aggregate equity 6(a)(3). In this regard, subparagraph Registration options position in excess of [certain (iii)(A) of Rule 15a-6(a)(3) provides Research prescribed limits].” that the registered broker/dealer must be responsible for “effecting the Syndicate Exchange Act Rule 15a-6(a)(3) transactions conducted under Systems permits a foreign broker/dealer, paragraph (a)(3) . . . .” We note that without registering as a broker/dealer this interpretation is consistent with Trading in the United States, to induce or the overall purpose of Rule Training attempt to induce the purchase or 2860(b)(3), which is to prevent the Variable Contracts sale of any security by a U.S. establishment of options positions

NASD Notice to Members 98-92 November 1998 697 that can, or may provide incentive to, transactions under Rule 15a-6(a)(3) aggregate position of 200 or more manipulate or disrupt the underlying that would cause them to exceed the option contracts (whether long or market. These concerns exist with position limits of Rule 2860(b)(3) short) of the put class and the call respect to options positions that are should restructure their positions as class on the same side of the market maintained at both NASD member soon as practicable to meet the covering the same underlying firms and their foreign affiliates. applicable limits. In restructuring security or index . . . .” Consistent Further, because the NASD member options positions, members should with the interpretation described firm is required to record each be mindful of the exercise limits above, this requirement applies to options transaction that is effected imposed by Rule 2860(b)(4). intermediated transactions pursuant under Rule 15a-6(a)(3), the member to 15a-6(a)(3). has the practical ability to enforce Finally, members are reminded of compliance with limits for positions their reporting obligations under Rule © 1998, National Association of Securities Dealers, that are maintained on its books. 2860(b)(5), which apply to “each Inc. (NASD). All rights reserved. account in which the member has an NASD Regulation expects that interest . . . and each customer member firms that are parties to account, which has established an

NASD Notice to Members 98-92 November 1998 698 Executive Summary Through this Notice, the National Association of Securities Dealers, Inc. NASD ¨ (NASD ) is informing NASD members of the 1999 District Committee Notice to members and the District Nominating Committee members. Questions concerning this Notice may be directed to the District Director Members noted or to Joan Conley, Corporate Secretary, NASD, at (202) 728-8381. District Committee Members And District Nominating 98-93 Committee Members Members of the 1999 District Committees and District Nominating Commit- tees are as follows: NASD Informs Members Of District Committee Members And District Nominating Committee DISTRICT 1 Members District Committee

To Serve Until January 2000 Suggested Routing Senior Management Glenn M. Colacurci Salomon Smith Barney, Inc., San Francisco, CA Jerry D. Phillips Sutro & Co., San Francisco, CA Advertising William A. Svoboda Morgan Stanley Dean Witter, San Francisco, CA Continuing Education To Serve Until January 2001 Corporate Finance Executive Representatives Steven R. Aaron Hambrecht & Quist LLC, San Francisco, CA Government Securities Janet W. Campbell Protected Investors of America, San Francisco, CA Douglas C. Heske Piper Jaffray, Inc., San Francisco, CA Institutional Insurance To Serve Until January 2002 Internal Audit John H. Chung Van Kasper & Company, Inc., San Francisco, CA Legal & Compliance Steven D. Piper Volpe Brown Whelan & Company LLC, Municipal San Francisco, CA Mutual Fund Nominating Committee Operations Options Deborah R. Gatzek Franklin/Templeton Distributors, San Mateo, CA John C. Helmer Caldwell Securities, Danville, CA Registered Representatives Lawrence R. McKulla Prudential Securities, San Francisco, CA Registration John J. Sanders BancBoston Robertson Stephens, Inc., Research San Francisco, CA John E. Schmidt Credit Suisse First Boston, San Francisco, CA Syndicate Systems District Director Elisabeth P. Owens Trading 525 Market Street, Suite 300 Training San Francisco, CA 94105 Variable Contracts (415) 882-1200

NASD Notice to Members 98-93 November 1998 699 DISTRICT 2 District Committee

To Serve Until January 2000

Terry L. Chase EVEREN Securities, Inc., Pasadena, CA Rodney D. Hagenbuch Merrill Lynch, Pierce Fenner & Smith, Inc., Los Angeles, CA William J. Porter, III The Seidler Companies, Inc., Los Angeles, CA Joan B. Seidel Morton Seidel & Company, Inc., Beverly Hills, CA

To Serve Until January 2001

James B. Guillou, Sr. Sutro & Co., Incorporated, LaJolla, CA Andrew E. Haas Bear Stearns & Co., Inc., Los Angeles, CA Richard E. Wiseley CIBC Oppenheimer & Co., Los Angeles, CA Richard P. Woltman Spelman & Co., Inc., San Diego, CA

To Serve Until January 2002

Margaret M. Black Morgan Stanley Dean Witter, Beverly Hills, CA Diane P. Blakeslee Blakeslee & Blakeslee, Inc., San Luis Obispo, CA Jack R. Handy, Jr. Financial Network Investment Corporation, Torrance, CA Dean A. Holmes Gateway Investment Services, Inc., Glendale, CA

Nominating Committee

George H. Casey Crowell Weedon & Co., Los Angeles, CA William A. Hawkins Grifﬁn Financial Services, City of Industry, CA Carl E. Lindros Santa Barbara Securities, Inc., Santa Barbara, CA Fredric M. Roberts F. M. Roberts & Company, Los Angeles, CA Robert L. Winston American Funds Distributors, Inc., Los Angeles, CA

District Director Lani M. Sen Woltmann 300 South Grand Avenue, Suite 1600 Los Angeles, CA 90071 (213) 627-2122

NASD Notice to Members 98-93 November 1998 700 DISTRICT 3 District Committee

To Serve Until January 2000

Timothy H. Ganahl Ragen MacKenzie, Inc., Seattle, WA Thomas A. Petrie Petrie Parkman & Co., Inc., Denver, CO Patrick C. Rile EVEREN Securities, Inc., Phoenix, AZ Douglas E. Strand Strand, Atkinson, Williams & York, Inc., Portland, OR

To Serve Until January 2001

Thomas R. Hislop Peacock, Hislop, Staley & Given, Inc., Phoenix, AZ Gerald Meyer D. A. Davidson & Co., Great Falls, MT John Morton Morton Clarke Fu & Metcalf, Inc., Seattle, WA Terry Lee Richards PaineWebber, Inc., Salt Lake City, UT

To Serve Until January 2002

James Barnyak Salomon Smith Barney, Inc., Seattle, WA David Griswold Frank Russell Securities, Inc., Tacoma, WA James E. Stark Charles Schwab & Co., Phoenix, AZ Thomas Williams TIAA/CREF, Denver, CO

Nominating Committee

Vincent Asaro SunAmerica Securities, Inc., Phoenix, AZ James Kerr Dain Rauscher Incorporated, Seattle, WA William Papesh WM Funds Distributor, Inc., Spokane, WA Anthony Petrelli Neidiger Tucker Bruner, Inc., Denver, CO Richard Royse Salomon Smith Barney, Inc., Portland, OR

District Director Frank J. Birgfeld Republic Plaza Building 370 17th Street, Suite 2900 Denver, CO 80202-5629 (303) 446-3100

James G. Dawson, Associate Director Two Union Square 601 Union Street, Suite 1616 Seattle, WA 98101-2327 (206) 624-0790

NASD Notice to Members 98-93 November 1998 701 DISTRICT 4 District Committee

To Serve Until January 2000

Colleen Curran American Express Financial Advisors, Inc., Minneapolis, MN Arthur J. Kearney John G. Kinnard & Company Inc., Minneapolis, MN John R. Kuddes Merrill Lynch, Pierce, Smith Incorporated, Overland Park, KS Wayne H. Peterson Washington Square Securities, Inc., Minneapolis, MN

To Serve Until January 2001

Antonio J. Cecin Piper Jaffray Inc., Minneapolis, MN Cheryl Cook-Schneider Edward Jones, St. Louis, MO Robert J. Goodmanson Robert W. Baird & Co., Inc., St. Paul, MN Brent M. Weisenborn Security Investment Company of Kansas City, Kansas City, MO

To Serve Until January 2002

Robert M. Chambers Chambers Martin & Co., Des Moines, IA John R. Lepley Princor Financial Services Corp., Des Moines, IA William M. Lyons American Century Investment Services, Inc., Kansas City, MO Nancy E. Varner Mercantile Investment Services, Inc., St. Louis, MO

Nominating Committee

Patricia S. Bartholomew Craig-Hallum Capital Group, Inc., Minneapolis, MN Edward J. Berkson Locust Street Securities, Inc., Des Moines, IA Norman Frager Walnut Street Securities, St. Louis, MO Albert W. Lauth First St. Louis Securities, Inc., St. Louis, MO Todd W. Miller Miller, Johnson & Kuehn, Inc., Minneapolis, MN

District Director Jack Rosenﬁeld 120 W. 12th Street, Suite 900 Kansas City, MO 64105 (816) 421-5700

NASD Notice to Members 98-93 November 1998 702 DISTRICT 5 District Committee

To Serve Until January 2000

R. Neal Culver Culver Financial Management, Inc., Knoxville, TN J. French Hill First Commercial Investments, Inc., Little Rock, AR Walter H. Johnson Leo Oppenheim & Co., Inc., Oklahoma City, OK

To Serve Until January 2001

Benjamin D. Capshaw, III Morgan Stanley Dean Witter, New Orleans, LA James S. Jones Crews & Associates, Inc., Little Rock, AR Dene R. Shipp SunTrust Equitable Securities, Nashville, TN John C. West Prudential Securities, Inc., Memphis, TN

To Serve Until January 2002

James D. Hudgins SouthTrust Securities, Inc., Birmingham, AL Leroy H. Paris, II Mississippi Securities Company, Jackson, MS Duncan F. Williams Duncan-Williams, Inc., Memphis, TN

Nominating Committee

H. Kenneth Bennett Stephens, Inc., Little Rock, AR James C. Bradford, Jr. J.C. Bradford & Co., Nashville, TN Bill Carty Carty & Company, Inc., Memphis, TN William T. Patterson Morgan Keegan & Company, Inc., Jackson, MS Kenneth L. Wagner J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, KY

District Director Warren A. Butler, Jr. 1100 Poydras Street Energy Centre, Suite 850 New Orleans, LA 70163-0802 (504) 522-6527

NASD Notice to Members 98-93 November 1998 703 DISTRICT 6 District Committee

To Serve Until January 2000

William D. Connally Greenman Parker Connally Greenman, Inc., Ft. Worth, TX Titus H. Harris Harris Webb & Garrison, Inc., Houston, TX Edward M. Milkie Milkie Ferguson Investments, Inc., Dallas, TX

To Serve Until January 2001

Daniel C. Dooley May Financial, Inc., Dallas, TX Ronald J. Gard Salomon Smith Barney, Inc., Dallas, TX Jim G. Rhodes Rhodes Securities, Inc., Ft. Worth, TX

To Serve Until January 2002

Fred McGinnis PaineWebber, Houston, TX Sue Peden Brokers Transaction Services, Inc., Dallas, TX Joseph Storthz Transamerica Financial Resources, Houston, TX

Nominating Committee

John W. Ferguson May Financial Corp., Dallas, TX Robert Gunn, III Gunn & Company Incorporated, San Antonio, TX Bill Madden Madden Securities Corporation, Dallas, TX Gary Murray Murray Traff Securities, Inc., Tyler, TX George Stark Burnham Securities, Inc., Houston, TX

District Director Bernerd Young, Associate Director 12801 N. Central Expressway, Suite 1050 Dallas, TX 75243 (972) 701-8554

NASD Notice to Members 98-93 November 1998 704 DISTRICT 7 District Committee

To Serve Until January 2000

Robert J. Brietz Marion Bass Securities Corporation, Charlotte, NC William H. Carter J.C. Bradford & Co., Raleigh, NC Dan B. Franks Scott & Stringfellow, Inc., Richmond, VA George K. Jennison Wheat First Union, Richmond, VA David G. Pittinos Morgan Stanley Dean Witter, Tallahassee, FL R. Charles Shufeldt SunTrust Equitable Securities Corporation, Atlanta, GA

To Serve Until January 2001

Mary Jae Abbitt Anderson & Strudwick, Incorporated, Richmond, VA Robert M. Balentine Balentine & Company, Atlanta, GA James J. Buddle Capital Brokerage Corporation, Richmond, VA M. Anthony Greene Investment Management & Research, Inc., Atlanta, GA J. Lee Keiger III Davenport & Company LLC, Richmond, VA Raymond W. Snow BT Alex. Brown Incorporated, Palm Beach, FL

To Serve Until January 2002

Perrin Q. Dargan, Jr. A.G. Edwards & Sons, Inc., Pawleys Island, SC James W. Hamilton, Jr. Prudential Securities Incorporated, Atlanta, GA Edward R. Hipp, III Centura Securities, Inc., Rocky Mount, NC Roark A. Young Young, Stovall and Company, Miami, FL

Nominating Committee

John L. Dixom Mutual Service Corporation, West Palm Beach, FL Franklin C. Golden James M. Myers and Co., Charlotte, NC W. Robb Hough, Jr. William R. Hough & Co., St. Petersburg, FL Stuart J. Knobel Edgar M. Norris & Co., Inc., Anderson, SC Richard V. McGalliard Interstate/Johnson Lane Corporation, Atlanta, GA

District Director Marilyn B. Davis One Securities Centre, Suite 500 3490 Piedmont Road, NE Atlanta, GA 30305 (404) 239-6100

NASD Notice to Members 98-93 November 1998 705 DISTRICT 8 District Committee

To Serve Until January 2000

James A. Bowen Nike Securities, Inc., Lisle, IL William L. Faulkner Continental Capital Securities, Inc., Sylvania, OH Peter C. McCabe, Jr. Securities Corporation of Iowa, Chicago, IL Anthony M. Sanﬁlippo Trimark Securities, L.P., Chicago, IL John L. Schlifer McDonald Investments, Inc., Cleveland, OH

To Serve Until January 2001

William C. Alsover Centennial Securities Company, Inc., Grand Rapids, MI Wallen L. Crane Salomon Smith Barney, Inc., Farmington Hills, MI Kenneth R. Ehinger Lincoln Financial Advisors Corp., Fort Wayne, IN Alan H. Newman J.J.B. Hilliard, W.L. Lyons, Inc., Evansville, IN Bruce J. Young Mesirow Financial, Inc., Chicago, IL

To Serve Until January 2002

R. Jack Conley VESTAX Securities Corporation, Hudson, OH Mary D. Esser Cressman Esser Securities, Inc., Naperville, IL Glen Hackmann Robert W. Baird & Co., Inc., Milwaukee, WI Robert A. Perrier Butler, Wick & Co., Inc., Cleveland, OH Kathleen A. Wieland William Blair & Company, L.L.C., Chicago, IL

Nominating Committee

Kathy J. Birk Morgan Stanley Dean Witter, Carmel, IN Lewis H. Echlin Roney & Co., L.L.C., Detroit, MI Paul Murin David A. Noyes & Co., Chicago, IL Earl Clifford Oberlin, III MFI Investments Corp., Bryan, OH William H. Richardson Trubee, Collins & Co., Inc., Buffalo, NY

District Director Carlotta A. Romano 10 South LaSalle, 20th Floor Chicago, IL 60603-1002 (312) 899-4400

William H. Jackson, Jr. Renaissance on Playhouse Square 1350 Euclid Avenue, Suite 650 Cleveland, OH 44115 (216) 694-4545

NASD Notice to Members 98-93 November 1998 706 DISTRICT 9 District Committee

To Serve Until January 2000

Irving A. Faigen Prudential Securities Incorporated, Pittsburgh, PA Allen S. Jacobson Gibraltar Securities Co., Florham Park, NJ James Malespina Herzog, Heine, Geduld, Inc., Jersey City, NJ William F. Rienhoff IV BT Alex. Brown Incorporated, Baltimore, MD

To Serve Until January 2001

Victor M. Frye The Advisors Group, Inc., Bethesda, MD Phillip C. Graham Legg Mason Wood Walker, Incorporated, Philadelphia, PA Jerome J. Murphy Janney Montgomery Scott Inc., Philadelphia, PA

To Serve Until January 2002

A. Louis Denton Philadelphia Corporation for Investment Services, Philadelphia, PA Thomas W. Neumann Sherwood Securities Corp., Jersey City, NJ Joseph S. Rizzello Vanguard Marketing Corporation, Valley Forge, PA Gregory R. Zappala RRZ Public Markets, Inc., Cranberry Township, PA

Nominating Committee

Mark W. Cresap Cresap, Inc., Radnor, PA John J. Gray Janney Montgomery Scott Inc., Philadelphia, PA Dennis V. Marino Sherwood Securities Corp., Jersey City, NJ Eric H. Pookrum Innova Securities, Inc., Suitland, MD Robert A. Woeber Arthurs, Lestrange & Company Incorporated, Pittsburgh, PA

District Director John P. Nocella 11 Penn Center 1835 Market Street, Suite 1900 Philadelphia, PA 19103 (215) 665-1180

NASD Notice to Members 98-93 November 1998 707 DISTRICT 10 District Committee

To Serve Until January 2000

Joan Caridi Salomon Smith Barney, Inc., New York, NY Harold G. Ognelodh M. R. Beal & Company, New York, NY Brian T. Shea Pershing, Division of Donaldson, Lufkin & Jenrette Securities Corporation, Jersey City, NJ

To Serve Until January 2001

Herbert Ackerman Neuberger & Berman, LLC, New York, NY Arthur S. Ainsberg Brahman Securities Inc., New York, NY Williams P. Behrens Ernst & Co., New York, NY Laurence H. Bertan Sanford C. Bernstein & Co., Inc., New York, NY Mark D. Madoff Bernard L. Madoff Investment Securities, New York, NY Stuart L. Sindell Dillon, Read & Co., Inc., New York, NY

To Serve Until January 2002

John Iachello Ing Baring Furman Selz, New York, NY Philip V. Oppenheimer Oppenheimer & Close Inc., New York, NY Gary Salamone Schroder & Co. Inc., New York, NY Eugene A. Schlanger Nomura Securities International, Inc., New York, NY Lawrence F. Sherman Mony Securities Corp., New York, NY Tom M. Wirtshafter Nathan & Lewis Securities Inc., New York, NY

Nominating Committee

Michael F. Dura Schroder & Co., Inc., New York, NY Joseph A. Gottlieb Bear, Stearns & Co. Inc., New York, NY Joan S. Green BT Brokerage Corporation, New York, NY Norman H. Pessin Neuberger & Berman, LLC, New York, NY Stuart J. Voisin Stuart, Coleman & Co., Inc., New York, NY

District Director Barbara Cody, Deputy Director Gary Liebowitz, Deputy Director NASD Financial Center 33 Whitehall Street New York, NY 10004 (212) 858-4000

NASD Notice to Members 98-93 November 1998 708 DISTRICT 11 District Committee

To Serve Until January 2000

Harry H. Branning Advest, Inc., Hartford, CT Stephanie Brown Linsco/Private Ledger Corp., Boston, MA David C. Gowell Gowell Securities Corp., Boston, MA William N. Shiebler Putnam Mutual Funds Corp., Boston, MA

To Serve Until January 2001

Michael J. Dell’Olio Investment Management and Research, Inc., South Portland, ME Frank V. Knox, Jr. Fidelity Distributors Corporation, Boston, MA Laurie Lennox SunLife of Canada (U.S.) Distributors, Inc., Boston, MA Kenneth Unger Boston Capital Services, Inc., Boston, MA

To Serve Until January 2002

Stephen O. Buff BancBoston Robertson Stephens, Inc., Boston, MA Gerard A. Rocchi W.S. Grifﬁth & Co., Inc., Hartford, CT James P. Rybeck The RYBECK, Division of Fechtor, Detwiler & Co., Inc., Meriden, CT Dennis R. Surprenant Cantella & Co., Inc., Boston, MA

Nominating Committee

John A. Goc Boston Institutional Services, Boston, MA Grant Kurtz Advest, Inc., Hartford, CT Wilson G. Saville Barrett & Company, Providence, RI Edward L. Sherr Carl P. Sherr & Company, Worcester, MA Mary Toumpas American Skandia Marketing, Inc., Shelton, CT

District Director Willis H. Riccio 260 Franklin Street, 16th Floor Boston, MA 02110 (617) 261-0800

NASD Notice to Members 98-93 November 1998 709 Christmas Day And New Year’s Day: Trade Date-Settlement Date Schedule NASD ¨ The Nasdaq Stock Market and the securities exchanges will be closed on Friday, December 25, 1998, in observance of Christmas Day, and Friday, Notice to January 1, 1999, in observance of New Year’s Day. “Regular way” transactions made on the business days noted below will be subject to the following Members schedule: 98-94 Trade Date Settlement Date Reg. T Date* Dec. 17 Dec. 22 Dec. 24

18 23 28

Christmas Day And New 21 24 29 Year’s Day: Trade DateÐSettlement Date 22 28 30 Schedule 23 29 31

24 30 Jan. 4, 1999

Suggested Routing 25 Markets Closed — Senior Management 28 31 5 Advertising Continuing Education 29 Jan. 4, 1999 6 Corporate Finance 30 5 7 Government Securities Institutional 31 6 8

Insurance Jan. 1, 1999 Markets Closed — Internal Audit Legal & Compliance 4711 Municipal Mutual Fund Operations *Pursuant to Sections 220.8(b)(1) and (4) of Regulation T of the Federal Reserve Board, a bro- Options ker/dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a Registered Representatives cash account if full payment is not received within ﬁve business days of the date of purchase or, pursuant to Section 220.8(d)(1), make application to extend the time period speciﬁed. The date Registration by which members must take such action is shown in the column titled “Reg. T Date.” Research Syndicate © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. Systems Trading Training Variable Contracts

NASD Notice to Members 98-94 November 1998 711 As of September 23, 1998, the following bonds were added to the Fixed NASD Income Pricing SystemSM (FIPS¨). Notice to Symbol Name Coupon Maturity AMZN.GA Amazon Com Inc. 10.000 05/01/08 ATCV.GA ATC Group Services Inc. 12.000 01/15/08 Members AXTO.GB Abraxas Petro Corp. 11.500 11/01/04 BDGM.GD Building Materials Corp. 7.750 07/15/05 98-95 BUS.GC Greyhound Lines Inc. 11.500 04/15/07 CBEA.GA Cobb Theatres LLC/Cobb Fin Corp. 10.625 03/01/03 CEAW.GA Caesars World Inc. 8.875 08/15/02 DIGO.GB DiGiorgio Corp. 10.000 06/15/07 DOSE.GA PharMerica Inc. 8.375 04/01/08 Fixed Income Pricing GI.GB Giant Industries Inc. 9.000 09/01/07 System Additions, GMRK.GA Gulfmark Offshore Inc. 8.750 06/01/08 Changes, And Deletions HAY.GD Hayes Wheels Intl Inc. 9.125 07/15/07 As Of September 23, 1998 HWG.GB Hallwood Group Inc. 10.000 07/31/05 ICIX.GE Intermedia Communications Corp. 8.875 11/01/07 ICIX.GF Intermedia Comm Inc. 8.600 06/01/08 ICN.GA ICN Pharmaceuticals Inc. 9.250 08/15/05 IKNF.GA Int’l Knife & Saw Inc. 11.375 11/15/06 Suggested Routing IMTI.GA Imagyn Medical Tech 12.500 04/01/04 Senior Management INSL.GA Insilco Corp. 10.25 08/15/07 ISLP.GA Isle of Capri/Cap Corp. 13.000 08/31/04 Advertising ITTD.GA ITT Industry Inc. 6.750 11/15/03 Continuing Education ITTO.GA ITT Corp. (New) 6.250 11/15/00 ITTO.GB ITT Corp. (New) 6.750 11/15/05 Corporate Finance ITTO.GC ITT Corp. (New) 7.375 11/15/15 Government Securities ITTO.GD ITT Corp. (New) 7.750 11/15/25 Institutional IV.GD Mark IV Industries Inc. 7.500 09/01/07 KBLR.GA Keebler Foods Corp. 10.750 07/01/06 Insurance KNTC.GA Kinetic Concepts Inc. 9.625 11/01/07 Internal Audit KRYS.GA Krystal Co. 10.250 10/01/07 Legal & Compliance KSLG.GA KSL Recreation Group Inc. 10.250 05/01/07 LENF.GB Lenfest Communications Inc. 10.500 06/15/06 Municipal LPMT.GA Leslie’s Poolmart Inc. 10.375 07/15/04 Mutual Fund MECU.GA Mediacom LLC/Cap Corp. 8.500 04/15/08 NBCQ.GA NBC Acquisition Corp. 10.750 02/15/09 Operations NBKA.GA Nebraska Book Co. 8.750 02/15/08 Options NTK.GE Nortek Inc. 9.125 09/01/07 Registered Representatives NWCG.GA NWCG Holdings Corp. 13.500 06/15/99 OBTI.GA Orbital Imaging Corp. 11.625 03/01/05 Registration PCKI.GB PrintPack Inc. 10.625 08/15/06 Research PGCU.GA Pegasus Media & Comm Inc. 12.500 07/01/05 Syndicate PGI.GB Polymer Group Inc. 8.750 03/01/08 PGTV.GA Pegasus Communications Corp. 9.625 10/15/05 Systems PKED.GA Package Ice 9.750 02/01/05 Trading PRGC.GA Paragon Corp. Holdings 9.625 04/01/08 PRTL.GB Primus Telecomm Group Inc. 9.875 05/15/08 Training PSHF.GA Petro Shopping Ctrs/Fin Corp. 10.500 02/01/07 Variable Contracts PSTC.GA Prestolite Electric Inc. 9.625 02/01/08 PUML.GA Purina Mills Inc. 9.000 03/15/10 RCCC.GA Rural Cellular 9.625 05/15/08

NASD Notice to Members 98-95 November 1998 713 Symbol Name Coupon Maturity

RCNC.GC RCN Corp. 10.000 10/15/07 RSLU.GB RSL Communications Plc 10.125 03/01/08 RSTS.GA Raintree Resorts Intl. Inc. 13.000 12/01/04 RSUR.GA Resort at Summerlin 13.00 12/15/07 SHLR.GA Schuler Homes Inc. 9.00 04/15/08 SIND.GB Synthetic Industries Inc. 9.250 02/15/07 SLYM.GA Sealy Mattress 9.875 12/15/07 SLYM.GB Sealy Mattress 10.875 12/15/07 SMLA.GA Simcala Inc. 9.625 04/15/06 SUTG.GA South’n Foods/SFG Cap Corp. 9.875 09/01/07 SVIS.GA Spectra Vision Inc. 11.500 10/01/01 TCEN.GA 21st Century Telecom Gr Inc. 12.250 02/15/08 TGNT.GB Teligant Inc. 11.500 03/01/08 TRNR.GB Trans-Resources Inc. 10.750 03/15/08 TRUA.GA Trump Atlantic City Assoc Inc. 11.250 05/01/06 TRUG.GA Trump Atlantic City Assoc Inc. 11.250 05/01/06 UIHI.GC United Int’l Holdings Inc. 10.750 02/15/08 USMR.GB United Stationers Supply Co. 8.375 04/15/08 VCRO.GA Vencor Operating Inc. 9.875 05/01/05 VNCA.GA Venetian Casino/LV Sands Inc. 10.000 11/15/05 VNCA.GB Venetian Casino/LV Sands Inc. 10.250 11/15/04 VRIO.GA Verio Inc. 10.375 04/01/05 VRIO.GB Verio Inc. 13.500 06/15/04 VSYS.GB Viasystems Inc. 9.750 06/01/07 WMNT.GA Wam Net Inc. 13.250 03/01/05 WRNH.GA Werner Holdings Co. 10.000 11/15/07 WXMN.GA Waxman USA Inc. 11.125 09/01/01 ZLOG.GA Zilog Inc. 9.500 03/01/05

As of September 23, 1998, the following bonds were deleted from FIPS.

Symbol Name Coupon Maturity

ASCM.GA Associated Materials Inc. 11.500 08/15/03 BBY.GB Best Buy Inc. 8.625 10/01/00 BEPT.GA Brooks Fiber Properties Inc. 11.875 11/01/06 BRDO.GA Bridge Oil USA Inc. 9.500 08/15/00 BYLP.GA Bryland LP/Brylane Cap Corp. 10.000 09/01/03 CGGI.GA Carbide/Graphite Group Inc. 11.500 09/01/03 CLNG.GA Cole National Group Inc. 11.250 10/01/01 CONG.GA Congoleum Corp. 9.000 02/01/01 CTF.GA Cort Furniture Rental Corp. 12.000 09/01/00 DELL.GA Dell Computer Corp. 11.000 08/15/00 FLIA.GA Florida Steel Corp. 11.500 12/15/00 FNPH.GA First Nationwide Parent Holdings Inc 12.500 04/15/03 GLCM.GB General Chem Corp. 9.250 08/15/03 JORD.GC Jordan Ind Inc. 10.375 08/01/03 LFI.GC Levitz Furniture Corp. 13.375 10/15/98 MLTI.GA Multicare Cos Inc. 12.500 07/01/02 MXMG.GA Maxxam Group Inc. 12.250 08/01/03

NASD Notice to Members 98-95 November 1998 714 Symbol Name Coupon Maturity

MXMG.GB Maxxam Group Inc. 11.250 08/01/03 PLUM.GA Paciﬁc Lumber Co. 10.500 03/01/03 RGRO.GE Ralphs Grocery Co. New 13.750 06/15/05 SIDE.GA Assoc Materials Inc. 11.500 08/15/03 SVIS.GA Spectra Vision Inc. 11.500 10/01/01 TEP.GA Tuscon Electric Power Co. 8.500 11/01/99 TOWV.GA Stratosphere Corp. 14.25 05/15/02

As of September 23, 1998, changes were made to the symbols of the following FIPS bonds:

New Symbol Old Symbol Name Coupon Maturity

PGI.GA PGH.GA Polymer Group Inc. 9.00 07/01/07

Any questions regarding the FIPS master ﬁle should be directed to Cheryl Glowacki, Nasdaq¨ Market Operations, at (203) 385-6310.

NASD Notice to Members 98-95 November 1998 715 NASD Regulation, Inc. (NASD Firm Fined, Individuals Disciplinary RegulationSM) has taken disciplinary Sanctioned actions against the following firms and Lexington Capital Corporation individuals for violations of National (New York, New York), Alan Actions Association of Securities Dealers, Inc. Michael Berkun (Registered Prin- (NASD¨) rules; federal securities laws, cipal, East Rockaway, New York), rules, and regulations; and the rules of and Joseph Marc Blumenthal the Municipal Securities Rulemaking (Registered Representative, North Board (MSRB). Unless otherwise indi- Woodmere, New York) submitted Disciplinary Actions cated, suspensions will begin with the an Offer of Settlement pursuant to Reported For November opening of business on Monday, which the firm was censured, fined November 16, 1998. The information $100,000, required to disgorge relating to matters contained in this $236,247.89, jointly and severally, Notice is current as of the end of with Berkun. In addition, the firm and October 23. Berkun are ordered to undertake to ensure that Berkun is not employed, affiliated, or otherwise associated Firm Expelled, Individuals with the firm and does not participate, Sanctioned directly or indirectly, in the manage- Hampton Capital Management ment and/or operation of the firm Corp., (Stamford, Connecticut), after December 31, 1998. However, Marquis Barnes Quetant (Regis- Berkun shall be permitted to retain a tered Principal, Rosedale, New passive ownership interest in the firm York), and Rhett McIntosh (Associ- until April 1, 1999, and shall have no ated Person, Brooklyn, New York). direct or indirect ownership interest in The firm was censured, fined the firm after April 1, 1999. The firm $40,000, and expelled from NASD is also ordered to undertake to membership. Quetant was censured, ensure that between September 16, fined $75,000, and barred from asso- 1998, and January 1, 1999, Berkun ciation with any NASD member in does not function in any supervisory any capacity, and McIntosh was or managerial capacity, and further, censured, fined $65,000, and barred will ensure that he is only permitted from association with any NASD to perform those duties specifically member in any capacity. The sanc- stated in the firm’s Letter of Mitiga- tions were based on findings that tion. Furthermore, the firm was Quetant and McIntosh refused to ordered to undertake to review, mod- allow the NASD staff to enter the ify, and improve its compliance and firm’s branch office to examine the supervisory procedures so as to firm’s books and records and to address the allegations (particularly otherwise conduct an on-site exami- those relating to penny stocks and nation. Furthermore, Quetant and markups) and to be immediately and McIntosh falsely advised the staff permanently expelled from NASD that there was no one present at membership if it fails to comply with the branch office at the time of the any of the terms set forth in its Offer NASD’s visit and McIntosh also of Settlement. Berkun was censured, falsely advised the NASD that he fined $150,000, required to disgorge was not employed by the firm. The $236,247.89, jointly and severally, firm, Quetant, and McIntosh also with the firm, barred from association failed to appear at NASD pre-hearing with any NASD member in the conferences. capacity of a general securities principal effective January 1, 1999, and barred from association with any NASD member as a general securities representative, with a right to

NASD Notices to Members—Disciplinary Actions November 1998 717 reapply in two years, effective Jan- securities to the investing public The findings also stated that the firm, uary 1, 1999. Berkun will be eligible improperly, and in connection with acting through Miller, participated in a to reapply as a general securities such sales, charged its customers contingency offering and failed to dis- representative on January 1, 2001. fraudulently excessive markups, close to purchasers that the mini- Berkun will be immediately and per- failed to disclose that the firm was mum would be reached through manently barred from association acting as principal, and failed to dis- sales to affiliates of the issuer and with any NASD member in any close the amount of remuneration since the sale to an affiliate repre- capacity if he fails to comply with any received by the firm. Additionally, the sented a significant and material of the terms set forth in his Offer of NASD found that the firm, acting amount, the offering memorandum Settlement (including, but not limited through Berkun, allowed Blumenthal failed to disclose such purchase as a to, that he only engage in those activ- to conduct a securities business at risk factor. ities set forth in the firm’s Letter of the firm while his registration was Mitigation). Blumenthal was cen- inactive; falsified firm records, confir- Paragon Capital Corporation (New sured, fined $100,000, and barred mations, orders tickets, and cus- York, New York) and Danny Jay from association with any NASD tomer account statements; and Levine (Registered Principal, West member in any capacity. engaged in a scheme to circumvent Caldwell, New Jersey) submitted a the NASD and various state registra- Letter of Acceptance, Waiver, and Without admitting or denying the alle- tion requirements by deliberately pro- Consent pursuant to which they were gations, the respondents consented cessing transactions effected by censured and fined $40,000, jointly to the described sanctions and to the Blumenthal under Berkun’s regis- and severally. The firm was also entry of findings that the firm, acting tered representative number. The fined $95,000. Without admitting or through Berkun and others, allowed firm failed to adopt, maintain, and denying the allegations, the respon- a statutorily disqualified individual to enforce a system to supervise the dents consented to the described be associated with and conduct activities of the firm’s registered rep- sanctions and to the entry of findings activities on behalf of the firm without resentatives and associated persons that the firm and Levine reported first receiving the proper regulatory that was reasonably designed to transactions to the Automated Confir- approvals. The firm failed to disclose achieve compliance with applicable mation Transaction ServiceSM (ACTSM) on said individual’s application for securities laws, regulations, and in violation of applicable securities employment with the firm that he was NASD rules. laws and regulations regarding trade the present and sole owner of a non- reporting and recordkeeping. The member firm and paid a commission firm also permitted an individual to to the non-member firm owned by Firms And Individuals Fined engage in the investment banking or the aforementioned statutorily dis- Dillon-Gage Securities, Inc. (Dal- securities business of the firm when qualified person. The firm also failed las, Texas) and Stephen Watterson he was not registered with NASD. to report to the NASD that it had con- Miller (Registered Principal, Dal- The findings also stated that the firm ducted business with a firm owned las, Texas) submitted a Letter of and Levine failed to establish, main- by a person subject to a statutory dis- Acceptance, Waiver, and Consent tain, and enforce written supervisory qualification. The findings also stated pursuant to which they were cen- procedures reasonably designed to that the firm, acting through Berkun sured and fined $12,500, jointly and achieve compliance with applicable and others, executed sales of penny severally. Without admitting or deny- securities laws and regulations stocks to public customers while failing the allegations, the respondents regarding trade reporting, the limit ing to make both the appropriate suit- consented to the described sanctions order protection interpretation, the ability determinations and and to the entry of findings that the Small Order Execution SystemSM disclosures required by the penny firm, acting through Miller, participat- (SOESSM), best execution, the regis- stock rules, and violated the firm’s ed in a public offering prior to filing tration of persons with the NASD, restriction agreement with the NASD the documents and information to be and recordkeeping. by effecting penny stock transac- reviewed by the NASD, and receiv- tions. Berkun failed to adequately ing an opinion from the NASD that it Providential Securities, Inc. (Foun- supervise the firm’s sales staff to has no objections to the proposed tain Valley, California) and Henry ensure adherence to the aforesaid underwriting; and failed to enforce its Dack Fahman (Registered Princi- suitability and disclosure require- own written supervisory procedures pal, Huntington Beach, California) ments. Furthermore, the NASD in that it failed to obtain a no-objec- submitted a Letter of Acceptance, determined that the firm, acting tion letter from the NASD prior to par- Waiver, and Consent pursuant to through Berkun, sold unregistered ticipating in an offering of securities. which they were censured and fined

NASD Notices to Members—Disciplinary Actions November 1998 718 $28,500, jointly and severally. In International Securities Corpora- sanctions and to the entry of findings addition, Fahman was ordered to tion (New York, New York) submit- that it failed to report transactions in requalify by exam as a financial and ted a Letter of Acceptance, Waiver, Nasdaq National Market¨, Nasdaq operations principal. Without admit- and Consent pursuant to which the SmallCapSM, over-the-counter, and ting or denying the allegations, the firm was censured, fined $10,000, listed securities in which it had respondents consented to the and ordered to undertake to revise its reporting responsibility. The findings described sanctions and to the entry written supervisory procedures relat- also stated that the firm reported of findings that the firm, acting under ing to firm quote compliance in a transactions to ACT in violation of the direction and control of Fahman, manner not unacceptable to the applicable securities laws and regula- effected transactions in securities NASD. Without admitting or denying tions regarding trade reporting, and and/or induced or attempted to the allegations, the firm consented to failed to provide written notification induce the purchase or sale of secu- the described sanctions and to the accurately disclosing the firm’s rities when the firm failed to have and entry of findings that the firm failed to reported price and the difference maintain sufficient net capital. The execute orders presented to it and between the price to the customer findings also stated that the firm, act- thereby failed to honor its published and the reported trade price. Further- ing through Fahman, failed to send quotation. The findings also stated more, the NASD determined that the public customers the requisite written that the firm failed to establish, main- firm failed to consistently and accu- notification or confirmation in securi- tain, and enforce written supervisory rately reflect the time of entry and ties transactions in that it did not dis- procedures reasonably designed to time of execution on order tickets and close the difference in the price achieve compliance with applicable failed to implement and enforce ade- securities were purchased from and securities laws and regulations con- quate supervisory procedures rea- sold to customers and the firm’s concerning the Securities and Exchange sonably designed to achieve temporaneous offsetting purchase or Commission (SEC) and NASD firm compliance with applicable securities sale price to or from a Market Maker. quote rules. laws and regulations relating to trade reporting. Firms Fined John Hancock Distributors, Inc. GFI Group Inc. (New York, New (Boston, Massachusetts) submitted Individuals Barred Or York) submitted a Letter of Accep- a Letter of Acceptance, Waiver, and Suspended tance, Waiver, and Consent pursuant Consent pursuant to which the firm Stanley Alan Anderson, Jr. (Regis- to which the firm was censured and was censured and fined $100,000. tered Representative, Cartersville, fined $20,000. Without admitting or Without admitting or denying the alle- Georgia) submitted an Offer of Settle- denying the allegations, the firm con- gations, the firm consented to the ment pursuant to which he was cen- sented to the described sanctions described sanctions and to the entry sured, fined $379,583.75, barred from and to the entry of findings that it of findings that, in connection with association with any NASD member reported transactions to ACT in viola- the offer and sale of interests in vari- in any capacity, and ordered to pay tion of applicable securities laws and ous limited partnerships, the firm dis- $69,916.75 in restitution to a public regulations regarding trade reporting tributed certain “internal use only” customer. Without admitting or deny- and recordkeeping. The findings also sales communications to its regis- ing the allegations, Anderson consent- stated that the firm failed to accept or tered representatives and also pro- ed to the described sanctions and to decline a transaction in an eligible vided certain sales communications the entry of findings that he received a security within 20 minutes after exe- to the public that omitted material savings bond redemption check cution, and failed to show on the information and included exaggerat- payable to a public customer in the memoranda of brokerage orders the ed, unwarranted, or misleading state- amount of $8,732.04. Rather than time of execution or the correct time ments or claims regarding depositing the check in a government of execution. Furthermore, the NASD investments in certain limited partner- fund account as instructed by the cus- determined that the firm failed to ships. tomer, Anderson deposited it in his establish, maintain, and enforce writ- personal bank account, purchased ten supervisory procedures reason- Paribas Corporation (New York, only $3,023.04 worth of the govern- ably designed to achieve compliance New York) submitted a Letter of ment fund, and converted the remain- with applicable securities laws and Acceptance, Waiver, and Consent ing $5,709.00 to his own use and regulations regarding trade reporting pursuant to which the firm was cen- benefit. The findings also stated that and registration of persons with the sured and fined $20,000. Without Anderson withdrew $2,029.66 from NASD. admitting or denying the allegations, the customer’s savings account and the firm consented to the described sold shares of stock totaling

NASD Notices to Members—Disciplinary Actions November 1998 719 $34,219.71, without the customer’s Acceptance, Waiver, and Consent she was censured, fined $10,000, knowledge or authorization, and used pursuant to which he was censured, suspended from association with any the funds to purchase shares of the fined $7,280, and suspended from NASD member in any principal government fund for the customer. association with any NASD member capacity for 10 business days which Furthermore, the NASD determined in any capacity for one year. Without shall be served in two five-business- that Anderson made unauthorized admitting or denying the allegations, day periods in successive months. sales from the customer's government Bursinger consented to the described Without admitting or denying the alle- fund, forged the customer's endorse- sanctions and to the entry of findings gations, Desilets consented to the ment on redemption checks totaling that he participated in private securi- described sanctions and to the entry $15,224.61, and converted the pro- ties transactions but failed to provide of findings that she failed to establish ceeds and deposited the funds in his prior written notification to and a supervisory system that was rea- bank account and converted a $4,750 receive permission from his member sonably designed to achieve compli- check and additional funds totaling firm. ance with applicable SEC and NASD $44,233.14 from the bank account of laws, rules, and regulations. the customer without the customer's Ming Cheng (Registered Repre- knowledge or consent. In addition, the sentative, Ridgewood, New York) Desilets’ second suspension for five findings stated that Anderson made was censured, fined $78,745, and business days will begin December numerous misrepresentations to the barred from association with any 21, 1998, and will conclude at the customer regarding her investments, NASD member in any capacity. The close of business on December 28, falsely represented himself as another sanctions were based on findings 1998. employee of his member firm, submit- that Cheng caused his member firm ted new accounts applications that to issue a check for $749 to him on Ernesto Diaz (Associated Person, contained false information regarding behalf of an insurance customer, Corona, New York) submitted a Let- the accounts, and failed to respond to forged the customer’s signature on ter of Acceptance, Waiver, and Con- NASD requests for information. the check, and converted the funds sent pursuant to which he was to his own use and benefit. Cheng censured, fined $25,000, and barred Mark Scott Blonder (Registered also failed to respond to NASD from association with any NASD Principal, Plainview, New York) requests for information. member in any capacity. Without was censured, fined $25,000, and admitting or denying the allegations, barred from association with any Darcie Coy (Registered Principal, Diaz consented to the described NASD member in any capacity. The Lakewood, Colorado) submitted a sanctions and to the entry of findings sanctions were based on findings Letter of Acceptance, Waiver, and that he failed to respond to NASD that Blonder failed to respond to Consent pursuant to which she was requests for information. NASD requests for information. censured, fined $2,500, suspended from association with any NASD Sidney C. Eng (Registered Princi- Thomas J. Brown (Registered member in any capacity as a financial pal, Mill Valley, California) was Representative, Nanuet, New and operations principal for 30 days, censured, fined $75,000, and barred York) was censured, fined $160,000, and required to requalify by exam from association with any NASD and barred from association with any before functioning again in that capac- member in any capacity. The SEC NASD member in any capacity. The ity. Without admitting or denying the affirmed the sanctions following sanctions were based on findings allegations, Coy consented to the appeal of an April 1997 National that Brown misappropriated funds in described sanctions and to the entry Business Conduct Committee the amount of $24,000 that he of findings that her member firm act- (NBCC) decision. The sanctions received from a public customer as a ing through Coy failed to deposit were based on findings that Eng premium payment on the customer’s promptly to an escrow account checks engaged in insider trading by pur- life insurance policy. Brown also received from public customers of her chasing shares of stock while in pos- failed to respond to NASD requests firm in connection with the offer and session of material, non-public to appear for an on-the-record inter- sale of securities subject to a mini- information. view and to respond to NASD mum sales contingency. requests for information. Robert Vance Manuel English Michele Ann Desilets (Registered (Registered Principal, San Diego, Frank John Bursinger, III (Regis- Principal, Littleton, Colorado) sub- California) submitted an Offer of tered Representative, Seal Beach, mitted a Letter of Acceptance, Waiv- Settlement pursuant to which he was California) submitted a Letter of er, and Consent pursuant to which censured, fined $232,858.45, and

NASD Notices to Members—Disciplinary Actions November 1998 720 barred from association with any that he failed to respond completely Without admitting or denying the alle- NASD member in any capacity. With- to NASD requests for information. gations, the respondents consented out admitting or denying the allega- to the described sanctions and to the tions, English consented to the Brad B. Fletcher (Registered entry of findings that Friedman, described sanctions and to the entry Representative, Aventura, Flori- Fuina, Patsis, Teseo, and Tsadilas of findings that he received da) was censured, fined $25,000, made baseless and improper price $20,571.69 from a public customer and barred from association with predictions pertaining to highly spec- intended for investment purposes any NASD member in any capacity. ulative securities and engaged in and without the customer’s knowl- The sanctions were based on find- unauthorized trading in the accounts edge or consent, converted the funds ings that Fletcher failed to respond of public customers. The findings to his own use and benefit by to an NASD request for information. also stated that Friedman, Fuina, depositing the checks into his mem- Teseo, and Tsadilas discouraged or ber firm’s general operating bank Dean Scott Friedman (Registered failed to execute customer sell account and wrote checks on the Principal, Glen Head, New York), orders, and Patsis discouraged or account payable to himself and to Kenneth James Fuina (Registered failed to execute sell orders on a cash. In order to conceal his miscon- Principal, White Plains, New timely basis. Furthermore, the NASD duct, English provided the customer York), George Patsis (Registered determined that Friedman, Patsis, with fabricated statements to mislead Representative, Brooklyn, New and Teseo made false promises to the customer into believing that her York), Joseph Teseo (Registered customers to limit their losses, Fried- funds had been safely invested and Representative, Atlantic Beach, man made improper comparisons were accumulating interest. English New York), and Peter T. Tsadilas between unrelated securities, and also failed to respond to NASD (Registered Representative, North Patsis misled a customer as to risk requests for information and to pro- Hills, New York) submitted Offers and falsely led a customer to believe vide testimony. of Settlement pursuant to which he had access to inside information Friedman was censured, fined as to an issuer whose securities he Gary Wayne Fenster (Registered $15,000, suspended from associa- was selling. The NASD also deter- Representative, Council Bluffs, tion with any NASD member in any mined that Teseo and Tsadilas pro- Iowa) submitted a Letter of Accep- capacity for six months, and vided false testimony during an tance, Waiver, and Consent pursuant required to requalify by taking the NASD investigation and Tsadilas to which he was censured, fined Series 7 exam prior to acting in that improperly promised to make up $10,000, and suspended from asso- capacity. Fuina was censured, fined losses with new trading, and falsified ciation with any NASD member in $10,000, suspended from associa- a customer’s account records as to any capacity for 10 business days. tion with any NASD member in any the customer’s state of residence Without admitting or denying the alle- capacity for six months, and and financial condition. gations, Fenster consented to the required to requalify by exam for the described sanctions and to the entry Series 7 or Series 62 prior to Jay J. Gelfenbaum (Registered of findings that he exercised discre- becoming associated with any Representative, Coral Springs, tion in the accounts of public cus- NASD member firm. Patsis was Florida) was censured, fined tomers without having obtained prior censured, fined $50,000, and barred $25,000, and barred from association written authorization from the cus- from association with any NASD with any NASD member in any tomers and prior written acceptance member in any capacity. Teseo was capacity. The sanctions were based of the accounts as discretionary by censured, fined $20,000, suspended on findings that Gelfenbaum failed to his member firm. from association with any NASD respond to NASD requests for infor- member in any capacity for two mation. John Kevin Finn (Registered Prin- years, and required to requalify by cipal, Dubuque, Iowa) submitted a exam prior to becoming associated Henry C. Glogowski (Registered Letter of Acceptance, Waiver, and with any NASD member firm, and Representative, Butler, Pennsylva- Consent pursuant to which he was Tsadilas was censured, suspended nia) submitted a Letter of Accep- censured, fined $25,000, and barred from association with any NASD tance, Waiver, and Consent pursuant from association with any NASD member in any capacity for two to which he was censured, fined member in any capacity. Without years, and required to requalify by $25,000, and barred from association admitting or denying the allegations, exam prior to becoming associated with any NASD member in any Finn consented to the described with any NASD member firm. capacity. Without admitting or deny- sanctions and to the entry of findings ing the allegations, Glogowski con-

NASD Notices to Members—Disciplinary Actions November 1998 721 sented to the described sanctions Michael Richard MacCaull (Regis- pursuant to which he was censured, and to the entry of findings that he tered Representative, Commack, fined $10,000, and barred from asso- failed to respond to NASD requests New York) submitted a Letter of ciation with any NASD member in for information. Acceptance, Waiver, and Consent any capacity. Without admitting or pursuant to which he was censured, denying the allegations, McMahon John Edward Guerriero, Jr. (Reg- fined $185,673, barred from associa- consented to the described sanctions istered Representative, Rockville tion with any NASD member in any and to the entry of findings that he Centre, New York) submitted a Let- capacity with the right to reapply after received checks totaling $8,500 from ter of Acceptance, Waiver, and Con- five years, and ordered to pay a public customer made payable to sent pursuant to which he was $23,672 in restitution to a public cus- McMahon for deposit in a non-quali- censured, fined $30,000, and barred tomer or demonstrate that he has fied tax deferred annuity account, from association with any NASD paid the customer such amount as negotiated and cashed the checks, member in any capacity. Without has been determined in an arbitra- and used the funds for some pur- admitting or denying the allegations, tion or other proceeding or settle- pose other than for the benefit of the Guerriero consented to the described ment to be owed to the customer. customer. sanctions and to the entry of findings Without admitting or denying the alle- that he failed to appear to testify on gations, MacCaull consented to the Michael Joseph Minnehan (Regis- the record before the NASD. The described sanctions and to the entry tered Representative, Milford, findings also stated that without his of findings that he made material Massachusetts) submitted a Letter member firm’s knowledge or autho- misrepresentations and omitted to of Acceptance, Waiver, and Consent rization, Guerriero entered into a disclose material facts in connection pursuant to which he was censured, separate agreement with public cus- with his recommendations of securi- fined $40,930.80, and barred from tomers under which he agreed to ties to public customers. The findings association with any NASD member make monetary payments to the also stated that MacCaull guaran- in any capacity. Without admitting or respective customers and thereafter teed a public customer against loss denying the allegations, Minnehan paid money to them in settlement of in the customer’s account; entered a consented to the described sanctions a claim or complaint against him by purchase order in the account of a and to the entry of findings that, with- the customers. public customer without obtaining the out the knowledge or consent of pub- customer’s authorization; and made lic customers, he endorsed and Kenneth Michael Kinzler (Regis- fraudulent, baseless, and unreason- cashed policyholder cash surrender tered Representative, Chicago, Illi- able price predictions to customers. checks totaling $6,186.16, which nois) was censured, fined $25,000, Furthermore, the NASD determined were payable to the customers and and barred from association with any that MacCaull failed to follow a cus- converted the funds to his own use NASD member in any capacity. The tomer’s instructions to sell securities and benefit. sanctions were based on findings in the customer’s account. that Kinzler failed to respond to Kent Davis Peterson (Registered NASD requests for information. Timothy Francis Manning, Jr. Representative, St. George, Utah) (Registered Representative, submitted a Letter of Acceptance, Steven Albert Kirschbaum (Regis- Spring Lake Heights, New Jersey) Waiver, and Consent pursuant to tered Representative, Coral submitted an Offer of Settlement pur- which he was censured, fined Springs, Florida) was censured, suant to which he was censured, $15,000, suspended from associa- fined $50,000, and barred from asso- fined $25,000, and barred from asso- tion with any NASD member in any ciation with any NASD member in ciation with any NASD member in capacity for one month, and required any capacity. The National Adjudica- any capacity. Without admitting or to re-take the Series 63 exam within tory Council (NAC) imposed the denying the allegations, Manning 90 days of the conclusion of the sus- sanctions following appeal and call consented to the described sanctions pension. Without admitting or deny- for review of an Atlanta District Busi- and to the entry of findings that he ing the allegations, Peterson ness Conduct Committee (DBCC) failed to respond to NASD requests consented to the described sanctions decision. The sanctions were based for information. and to the entry of findings that he on findings that Kirschbaum forged made cash payments totaling $900 the signatures of public customers Scott Thomas McMahon (Regis- to an individual who made a public on change of dealer forms or new tered Representative, South Bend, customer referral to him. The find- account forms. Indiana) submitted a Letter of ings also stated that Peterson affixed Acceptance, Waiver, and Consent the signatures of public customers to

NASD Notices to Members—Disciplinary Actions November 1998 722 various documents required by his horn consented to the described Richard Ray Vaillant (Registered member firm to be signed by the sanctions and to the entry of findings Representative, Tacoma, Wash- customers, with the knowledge and that he received insurance premium ington) submitted a Letter of Accep- consent of the customers, but failed payments from a public customer tance, Waiver, and Consent to disclose to his firm that he, not the totaling $8,344.54, forwarded only pursuant to which he was censured, customers, had affixed the signa- $2,192 of the customer’s funds to the fined $35,000, and barred from asso- tures. insurance company, and converted ciation with any NASD member in the remaining funds for his personal any capacity. Without admitting or Mark Eugene Rowe (Registered benefit. denying the allegations, Vaillant con- Representative, Wexford, Pennsyl- sented to the described sanctions vania) submitted a Letter of Accep- Kevin Eric Shaughnessy (Regis- and to the entry of findings that he tance, Waiver, and Consent tered Principal, Pittsburgh, Penn- failed to respond to NASD requests pursuant to which he was censured, sylvania) was censured, fined for information. fined $5,800, suspended from asso- $11,675, barred from association ciation with any NASD member in with any NASD member in any Wayne E. Warren-Young (Regis- any capacity for 15 business days, capacity, required to pay $390 in tered Representative, Atlanta, and required to requalify by exam as losses to customers, and required to Georgia) was censured, fined a general securities representative. pay $1,526.37 in commissions to $85,000, and barred from associa- Without admitting or denying the alle- customers. The SEC affirmed the tion with any NASD member in any gations, Rowe consented to the sanctions following appeal of a Mar- capacity. The sanctions were based described sanctions and to the entry ket Regulation Committee decision. on findings that Warren-Young of findings that he recommended to The sanctions were based on find- accepted a $50,000 check from a a public customer and effected in the ings that Shaughnessy entered into public customer for investment in customer’s securities accounts, the an arrangement with a non-regis- mutual funds, deposited the check in purchase of securities without having tered individual whereby he agreed a bank account of a private company reasonable grounds for believing the to sell shares of stock to his retail contrary to the customer’s instruction respective securities were suitable customers in exchange for compen- and, without his member firm’s for the customer. sation, without disclosing the knowledge, failed to comply with the arrangement with the customers or customer’s demand for return of the Bernice Anne Sanders (Registered his member firm. money. Warren-Young also failed to Principal, Clinton, Maine) submit- respond to NASD requests for infor- ted a Letter of Acceptance, Waiver, Evan Russell Stoopler (Registered mation. and Consent pursuant to which she Principal, Jericho, New York) sub- was censured and barred from asso- mitted a Letter of Acceptance, Waiv- Gerald Mark Wilkinson (Regis- ciation with any NASD member in er, and Consent pursuant to which tered Representative, York, any capacity. Without admitting or he was censured, fined $10,000, and Nebraska) submitted a Letter of denying the allegations, Sanders suspended from association with any Acceptance, Waiver, and Consent consented to the described sanctions NASD member in any capacity for pursuant to which he was censured, and to the entry of findings that she one week. Without admitting or deny- fined $2,500, and suspended from engaged in private securities trans- ing the allegations, Stoopler consent- association with any NASD member actions by selling $184,000 in ed to the described sanctions and to in any capacity for 30 business days. promissory notes to public customers the entry of findings that he exer- Without admitting or denying the alle- without prior written notice to and cised discretion in the accounts of gations, Wilkinson consented to the approval from her member firm. public customers without having described sanctions and to the entry obtained prior written authorization of findings that he functioned as an James Leonard Schermerhorn from the customers and prior written investment company and variable (Registered Representative, Santa acceptance of the accounts as dis- contract products representative and Maria, California) submitted a Letter cretionary by his member firm. The engaged in a securities business by of Acceptance, Waiver, and Consent findings also stated that Stoopler preparing a variable annuity applica- pursuant to which he was censured, failed to indicate on the order tickets tion and accepting a customer check fined $40,762.70, and barred from for these transactions that such for such investment before his regis- association with any NASD member trades were discretionary, and incor- tration in such capacity was effective. in any capacity. Without admitting or rectly indicated on the order tickets denying the allegations, Schermer- that such trades were unsolicited.

NASD Notices to Members—Disciplinary Actions November 1998 723 Individuals Fined member in any capacity. The suspended from association with any Steven Morris Goldsmith (Associ- sanctions were based on findings NASD member in any capacity for ated Person, Wayzata, Minnesota) that the respondents, in their three business days. The sanctions submitted a Letter of Acceptance, capacities as branch managers, were based on findings that Morgan Waiver, and Consent pursuant to through their supervisions of the exercised discretion in a public which he was censured and fined activities of the registered customer’s account without having a $16,621. Without admitting or deny- representatives assigned to them, signed discretionary agreement ing the allegations, Goldsmith con- encouraged, directed, participated in giving him such authorization and sented to the described sanctions and/or facilitated a “boiler room” effected unauthorized securities and to the entry of findings that he operation featuring high pressure transactions in the account. Also, failed to advise his member firm that sales tactics, material Morgan guaranteed the customer he opened an account with another misrepresentations and omissions, against loss in that he purchased firm, and failed to provide written unfounded price predictions, the use additional shares of stock for the notification to the executing firm of of false and misleading scripts and customer without the customer’s his association with the member firm. research summaries, and knowledge in order to cover the drop The findings also stated that Gold- unauthorized transactions, among in value of the first shares. smith purchased shares of stock that other things, and, in their individual traded at a premium in the sec- capacities as registered This action was called for review by ondary market in violation of the representatives, engaged in the the NAC and the sanctions are not in NASD Board of Governors’ Free- same violative activities in their effect pending consideration of the Riding and Withholding Interpreta- dealings with their own customers. In review. tion. addition, Ford effected unauthorized securities transactions in customer Complaints Filed accounts. The following complaints were Decisions Issued issued by the NASD. Issuance of a The following decisions have been Goodman, Ford, and Andrews have disciplinary complaint represents the issued by the DBCC or the Office of appealed this action to the NAC and initiation of a formal proceeding by Hearing Officers and have been the sanctions are not in effect the NASD in which findings as to the appealed to or called for review by pending consideration of the appeal. allegations in the complaint have not the NAC as of October 23, 1998. been made, and does not represent The findings and sanctions imposed Stuart Gordon Horowitz a decision as to any of the allega- in the decision may be increased, (Registered Representative, Boca tions contained in the complaint. decreased, modified, or reversed by Raton, Florida) was censured, fined Because these complaints are unad- the NAC. Initial decisions whose time $90,000, and barred from judicated, you may wish to contact for appeal has not yet expired will be association with any NASD member the respondents before drawing any reported in the next Notices to in any capacity. The sanctions were conclusions regarding the allegations Members. based on findings that Horowitz in the complaint. failed to amend a Form U-4 to Steven Douglas Goodman disclose that his license to practice Nicholas Mario Antonelli (Regis- (Registered Principal, Allison law had been suspended by the tered Representative, Hauppague, Park, Pennsylvania), Albert Supreme Court of Florida and that he New York) and Alexander Velez Joseph Ford (Registered was the subject of an investigation (Registered Representative, Brent- Representative, Oakton, Virginia), by the Florida Bar. Horowitz also wood, New York) were named as and Douglas Francis Andrews failed to respond to NASD requests respondents in an NASD complaint (Registered Principal, Ashburn, for information. alleging that they failed to obey pub- Virginia). Goodman was censured, lic customers’ instructions to sell fined $75,000, and barred from Horowitz has appealed this action to securities in the customers’ association with any NASD member the NAC and the sanctions are not in accounts. The complaint alleges that in any capacity. Ford was censured, effect pending consideration of the Antonelli effected a securities trans- fined $95,000, and barred from appeal. action in a public customer’s account association with any NASD member without the prior knowledge or autho- in any capacity, and Andrews was John David Morgan (Registered rization of the customer. The com- censured, fined $75,000, and barred Representative, Dunedin, Florida) plaint also alleges that Antonelli from association with any NASD was censured, fined $10,000, and knowingly completed a public cus-

NASD Notices to Members—Disciplinary Actions November 1998 724 tomer’s new account application with bonds to public customers. The com- Brian Joseph Lichtlin (Registered a false address in an effort to avoid plaint alleges that Hamsher used Representative, Secaucus, New the effect of the suspension of his public customers’ funds in an amount Jersey) was named as a respondent member firm in the customer’s state totaling approximately $71,000, for in an NASD complaint alleging that of residence. The complaint also some purpose other than for the ben- he effected securities transactions in alleges that Velez failed to complete efit of the customers, without their the accounts of public customers, his Form U-4 accurately in failing to consent or authority. The complaint without the customers’ knowledge or disclose that he was the subject of also alleges that Hamsher engaged consent, and in the absence of writ- complaints and investigations. in private securities transactions ten or oral authorization to exercise without prior written notice to and discretion in the customers’ Delio Pereira DaSilva (Registered approval from his member firm. The accounts. The complaint alleges that Representative, Campbell, Califor- complaint also alleges that Hamsher in connection with these unautho- nia) was named as a respondent in failed to respond to NASD requests rized transactions, Lichtlin affixed the an NASD complaint alleging that he for information. customers’ signatures on documents effected transactions in the account purporting to state that the transac- of public customers without the Frank James Hutton (Registered tions were unsolicited. The complaint knowledge and consent of the cus- Representative, Brandon, Missis- also alleges that Lichtlin failed to tomers. The complaint alleges that sippi) was named as a respondent respond to NASD requests for infor- DaSilva received and misused in an NASD complaint alleging that mation. $11,813.95 belonging to the cus- he executed securities transactions tomers. The complaint also alleges in the accounts of public customers Robert Charles Madrid (Regis- that DaSilva provided a business without prior authorization from the tered Representative, Blue Island, card to a public customer which customers. The complaint alleges Illinois) was named as a respondent falsely represented that DaSilva was that Hutton caused a check in the in an NASD complaint alleging that a principal of an NASD member firm. amount of $29,972.71 to be issued he executed securities transactions The complaint also alleges that from the joint account of public cus- in the account of a public customer DaSilva failed to provide documents tomers which represented the pro- without the knowledge or consent of requested by the NASD. ceeds from the unauthorized sale of the customer and exercised discre- securities, and converted the tion in the account without the cus- Jasen Michael Devlin (Registered $29,972.71 to his own use and bene- tomer’s written or oral authorization. Principal, Bayshore, New York) fit by forging the customers’ signa- The complaint alleges that Madrid was named as a respondent in an tures to the check and depositing the failed to respond to NASD requests NASD complaint alleging that he check into a bank account under his for information. made material misrepresentations control, without the customers’ and failed to disclose material facts knowledge or consent. The com- Jeffrey David Miller (Registered to public customers in connection plaint alleges that in an effort to con- Representative, Moody, Alabama) with his recommendations to pur- ceal the unauthorized transactions, was named as a respondent in an chase securities. The complaint Hutton prepared and mailed to the NASD complaint alleging that he alleges that Devlin predicted the customers a fictitious monthly received a check in the amount of future prices of securities without a account statement that did not reflect $2,558 from a public customer for reasonable basis to public customers the unauthorized transactions and the purchase of insurance policies, in order to induce the customers to that did not reflect his withdrawal of failed and neglected to execute the purchase securities. The complaint funds. The complaint also alleges purchase of these insurance policies, also alleges that Devlin failed to exe- that Hutton effected withdrawals and instead misappropriated or con- cute a public customer’s orders to totaling $96,552.40 from the joint verted the $2,558 to his own use sell securities. account of other public customers, without the customer’s consent. The and converted the $96,552.40 to his complaint alleges that Miller failed to Jeffrey Harold Hamsher (Regis- own use and benefit by forging the amend his Form U-4 to disclose a tered Representative, Sinking customers’ signatures on checks and civil judgment against him in the Spring, Pennsylvania) was named maintaining possession of the funds, amount of $11,293.85 and to dis- as a respondent in an NASD com- without the customers’ knowledge or close the filing of a federal tax lien plaint alleging that he made material consent. The complaint also alleges against him by the Internal Revenue misrepresentations and omissions of that Hutton failed to respond to Service for payroll taxes in the material fact in connection with his NASD requests for information. amount of $47,329.94. The com- purported offer and sale of Treasury plaint also alleges that Miller failed to NASD Notices to Members—Disciplinary Actions November 1998 725 respond to NASD requests for infor- Victoria Jean Williams (Registered Nationwide Asset Management mation. Representative, Sunset Beach, Cali- Corporation, Laguna Hills, Califor- fornia) was named as a respondent in nia (October 5, 1998) Luis Jaime Ramirez (Registered an NASD complaint alleging that she Representative, Manhasset Hills, received $1,000 from a public cus- New York) was named as a respon- tomer for investment in securities and Firms Suspended Pursuant To dent in an NASD complaint alleging instead, improperly caused the cus- NASD Rule Series 9510 For that he requested his member firm tomer’s funds to be deposited into the Failure To Pay Arbitration issue checks totaling $17,124.50 that account of Williams’ landlord without Award represented dividend disbursements the customer’s knowledge or consent. Capital World Securities Corpora- from public customers’ life insurance tion, City of Industry, California policies, then deposited proceeds (October 13, 1998) from these checks into his own Firms Suspended/Canceled account without the knowledge, per- The following firms were suspend- First Cambridge Securities Corp., mission, or authority of the cus- ed/canceled from membership in the New York, New York (September 23, tomers. The complaint alleges that NASD for failure to comply with for- 1998) Ramirez engaged in forgery in that mal written requests to submit finan- he caused his member firm to issue cial information to the NASD. The State Capital Markets Corp., New a disbursement check in the amount actions were based on the provisions York, New York (September 23, of $5,759.45 to a public customer at of NASD Rule 8210 and Article VII, 1998) Ramirez’s post office box, when the Section 2 of the NASD By-Laws. The customer had not given Ramirez per- date the suspensions/cancellations mission or authority to issue the commenced is listed after the entry. Individuals Whose check and had not provided the firm If the firm has complied with the Registrations Were Revoked with a change of address notification requests for information, the listing For Failure To Pay Fines, that listed Ramirez’s post office box also includes the date the suspen- Costs And/Or Provide Proof Of as her “current” address. The com- sion concluded. Restitution In Connection With plaint also alleges that Ramirez failed Violations to provide documents and/or infor- Aequus Equities, Inc., New York, Buonocore, Louis T., Staten, mation requested by the NASD. New York (October 5, 1998) Island, New York (October 16, 1998) Darrin Patrick Sullivan (Registered Alliance Asset Group, Inc., Engle- Representative, Holbrook, New wood Cliffs, New Jersey (October 5, Donart, Donald C., Tucson, Arizona York) was named as a respondent in 1998) (September 18, 1998) an NASD complaint alleging that he made material misrepresentations Biscayne Capital LLC, New York, Elgindy, Amr I., Colleyville, Texas and failed to disclose material facts New York (October 5, 1998) (September 18, 1998) to public customers in connection with his recommendations to pur- Block Trading, Inc., Houston, Falco, Michael J., Marshfield, Mas- chase securities. The complaint Texas (October 5, 1998) sachusetts (October 16, 1998) alleges that Sullivan made baseless, fraudulent price predictions to public First International Capital LTD., Mooney, William J., Bayside, New customers in connection with his rec- Hamilton, Bermuda (October 5, York (October 16, 1998) ommendations to purchase securi- 1998) ties. The complaint also alleges that Portier, Frank J., Columbus, Ohio Sullivan insulted and berated a pub- Great American Financial Net- (October 16, 1998) lic customer when the customer work, Inc., Norcross, Georgia (Octo- refused to purchase securities. The ber 5, 1998) Schiano, Anthony D., Franklin complaint also alleges that Sullivan Square, New York (October 16, failed to respond to an NASD Great Lakes Capital, Inc., Vero 1998) request to appear for an on-the- Beach, Florida (October 5, 1998) record interview. Wallach, John M., Lakeworth, Flori- Hemisphere Capital Corp., New da (October 16, 1998) York, New York (October 5, 1998)

NASD Notices to Members—Disciplinary Actions November 1998 726 Individuals Suspended According to the complaint, LT the firms entered into settlements Pursuant To NASD Rule Series Lawrence, after acting as the manag- agreeing to be censured and pay 9510 For Failure To Pay ing underwriter of EcoTyre’s initial fines ranging from $2,300 to $3,200. Arbitration Awards public offering, dominated and con- Complaints have been issued Feintuch, Ira, Englewood, New Jer- trolled the trading in the company’s against the remaining 22 firms. sey (October 9, 1998) common stock and warrants from Today’s actions are part of a coordi- February 6, 1996 through March 29, nated effort with the SEC. Fleyschmakher, Isaac, Chicago, Illi- 1996. During this time, LT Lawrence nois (September 9, 1998) charged its customers, residing in 35 According to a rule adopted by the states, excessive markups and SEC earlier this year, every broker- Gaer, Jason Robert, Paramus, New markdowns totaling $487,642.58 in age firm with a minimum net capital Jersey (September 25, 1998 - Octo- 474 separate transactions. As many requirement of $5,000 or more, was ber 1, 1998) as 58 percent of these transactions required to inform the NASD and the were at prices that were fraudulently SEC, no later than August 31, 1998, Lantieri, John Charles, Edison, excessive, in that they charged their of its Year 2000 readiness by filing a New Jersey (October 2, 1998) customers markups and markdowns Form BD-Y2K. The form required more than 10 percent totaling firms to detail the efforts they are tak- Leffel, Jasen E., Maineville, Ohio $306,277.39 in 275 transactions. ing to identify and remedy their (October 2, 1998) potential technical problems arising In the complaint, NASD Regulation from the transition to the year 2000. Liounis, Peter, Brooklyn, New York does not allege any wrongdoing on All of the firms included in today’s (September 23, 1998) the part of EcoTyre. actions failed to file either the form or a significant portion of the form within Richardson, Michael J., Astoria, The issuance of a disciplinary com- a "grace period" which expired New York (September 23, 1998 - plaint represents the initiation of a September 21, 1998. Firms will again September 29, 1998) formal proceeding by the Association be required to file this report in April in which findings as to the allegations 1999. Ruffler, Kirk, Perrineville, New Jer- in the complaint have not been made sey (September 9, 1998) and does not represent a decision as "Today’s actions reflect NASD Regu- to any of the allegations contained in lation’s commitment to ensuring that Smith, Tony Raynard, New York, the complaint. Because this com- all brokerage firms recognize and New York (October 9, 1998) plaint is unadjudicated, you may wish address the potential problems of the to contact the respondents before year 2000 before it is too late. It is drawing any conclusion regarding crucial for investor protection that NASD Regulation Charges LT the allegations in the complaint. firms not delay in readying their sys- Lawrence & Co., Inc. And tems," said Mary L. Schapiro, Presi- Principals With Fraud Under NASD Regulation rules, the dent, NASD Regulation. NASD Regulation announced that it individuals and the firms named in issued a complaint charging LT the complaint can file a response NASD Regulation’s actions were Lawrence & Co., Inc., New York, NY; and request a hearing before an coordinated with 37 separate disci- its Chief Executive Officer, Lawrence NASD Regulation disciplinary panel. plinary proceedings instituted today Principato, Staten Island, NY; and its Possible sanctions include a fine, by the SEC against firms that failed President, Todd E. Roberti, Florham suspension, bar, or expulsion from to file the required reports by Octo- Park, NJ, with excessive and fraudu- the NASD. ber 2, 1998. NASD Regulation lent markups and markdowns in the acknowledges the valuable assis- trading of EcoTyre Technologies, tance provided by the SEC staff in Inc. Common Stock and Class A NASD Regulation Institutes these matters. Warrants. The firm, along with Princi- Proceedings Against 59 Firms pato and Roberti, was also charged for Late Y2K Filings © 1998, National Association of Securities Dealers, with failing to establish, implement, NASD Regulation announced disci- Inc. (NASD). All rights reserved. and enforce adequate supervisory plinary actions against 59 brokerage procedures designed to prevent the firms for late filing of required "Year alleged conduct. 2000" status reports. Thirty-seven of

NASD Notices to Members—Disciplinary Actions November 1998 727

Executive Summary As markets evolve and become more During the last two years, NASD complex, it is essential that firms NASD SM Regulation, Inc. (NASD Regulation ) have in place effective supervisory has imposed numerous and signifi- systems and written supervisory pro- Notice to cant disciplinary actions against cedures. At most member firms front- member firms for supervisory defi- line supervisors have responsibilities ciencies, particularly in the areas of for firm revenues in addition to their Members trade reporting and market-making supervisory responsibilities with activities. Indeed, much of the recent regard to applicable laws, rules, and 98-96 focus in the area of written superviso- regulations. Appreciating both the ry procedures has been in the con- significance and the compatibility of text of NASD Regulation’s Trading these dual responsibilities, NASD NASD Elaborates On and Market Maker Surveillance Regulation believes that an effective Member Firms’ (TMMS) examination process. supervisory system contemplated by Accordingly, the purpose of this Rule 3010 includes a strong overall Supervision Notice is to reiterate for members in commitment on the part of supervi- Responsibilities For the context of trading and market- sors to establish and maintain clearly Trade Reporting And making activities the requirements of defined procedures for compliance Market-Making Activities National Association of Securities with applicable laws, rules, and regu- Dealers, Inc. (NASD¨) Rule 3010, the lations, and a climate of intolerance supervision rule, concerning a mem- for lax compliance by the persons Suggested Routing ber firm’s obligation to establish, they supervise. Senior Management maintain, and enforce a supervisory system and written supervisory pro- NASD Rule 3010 requires each Advertising cedures which reflect that system.1 member to establish, maintain, and Continuing Education enforce written supervisory proce- Establishing, maintaining, and dures with respect to the types of Corporate Finance enforcing written supervisory proce- business in which it engages, which Executive Representatives dures is a cornerstone of self-regula- “are reasonably designed to achieve Government Securities tion within the securities industry. compliance with applicable securities Supervisory procedures reasonably laws and regulations, and with appli- Institutional designed to achieve compliance with cable NASD Rules . . . .”3 Because Insurance applicable rules, and to detect and many of the failure to supervise Internal Audit deter rule violations by a member charges recently imposed on mem- firm and its associated persons, bers have been for inadequacies Legal & Compliance enable the firm to identify and revealed in the TMMS examination Municipal respond to regulatory concerns in a process, in the trade reporting, mar- manner that can reduce the risk of ket making, and equity order han- Mutual Fund disciplinary action by NASD Regula- dling areas, this Notice focuses on Operations tion.2 Moreover, appropriately elements of adequate supervisory Options designed and implemented supervi- procedures and systems in these sory systems and written supervisory areas. Given the differences among Registered Representatives procedures serve as a “frontline” member firms in terms of their busi- Registration defense to protect investors from ness mixes, and the fact that compli- Research fraudulent trading practices and help ance with NASD Rule 3010 can be to ensure that members are comply- achieved through a variety of proce- Syndicate ing with rules designed to promote dures and systems, this Notice only Systems the transparency and integrity of the addresses some of the general ele- market. As a result, effective supervi- ments that member firms should con- Trading sory systems within member firms sider in assessing their supervisory Training enhance investor confidence and, in systems and written procedures. Variable Contracts turn, promote the fairness, liquidity, NASD Regulation is not mandating and efficiency of the market for all any particular type or method of market participants. supervision. Nor is the Notice designed to provide a checklist of NASD Notice to Members 98-96 December 1998 731 steps guaranteed to constitute ade- pliance and written supervisory pro- such as regular reviews of specific quate written supervisory proce- cedures. Guidelines for compliance areas of activity—and subjective, dures. NASD Regulation will generally set forth the applicable including placing competent, quali- continue to examine closely member rules and describe prohibited prac- fied, and experienced individuals in firms’ supervisory systems and writ- tices.6 While such compliance guide- supervisory roles. In addition, a tone ten procedures and, where appropri- lines certainly serve a valuable should be set from the top of the firm ate, initiate disciplinary action against regulatory purpose, and can repre- that lax compliance with Ð and delib- both firms and their supervisory per- sent an important element of an erate violation of Ð laws, rules, and sonnel for failure to adopt, imple- effective supervisory system, compli- regulations will not be tolerated. ment, and enforce appropriate ance guidelines in and of themselves supervisory procedures. do not constitute an adequate super- The supervisory system should be visory system or procedures. Beyond designed to ensure that delegated If you have any questions about this compliance guidelines, member responsibilities are diligently exer- Notice, please call the Legal Section firms must also adopt written super- cised. Policies and procedures are of the Market Regulation Depart- visory procedures that describe the not sufficient if there are no auditing ment, NASD Regulation, at actual supervisory system estab- systems to determine whether they (301) 590-6410. lished by the firm to achieve compli- are being followed as described. ance with applicable rules and Discussion regulations. Specifically, the firm’s Accordingly, written supervisory pro- written supervisory procedures cedures should describe the follow- Requirements Of NASD should include a description of the ing: Rule 3010 controls and procedures used by the firm to deter and detect misconduct a) specific identification of the NASD Rule 3010 provides that each and improper activity. The written individual(s) responsible for NASD member must “establish and supervisory procedures should also supervision Ð either by name or by maintain a system to supervise the identify the specific personnel who title and position; activities of each registered repre- perform the various supervisory func- sentative and associated person that tions. b) the supervisory steps and is reasonably designed to achieve reviews to be taken by the appro- compliance with applicable securities A firm’s supervisory system may priate supervisor Ð this need not be laws and regulations, and with the include a range of techniques and a detailed description, but it should rules of this Association.”4 In addition controls in addition to formal reviews identify any exception reports and/or to the creation of supervisory sys- and examinations of exception other documents being reviewed and tems, Rule 3010 also requires mem- reports, which always should be the substantive area being reviewed ber firms to establish, maintain, and included. For example, an effective (e.g., Limit Order Protection, trade enforce companion written supervi- supervisory system can include the reporting, etc.). If a member firm sory procedures.5 Thus, a member maintenance of a comprehensive employs automated systems as part and/or individual can violate NASD training and continuing education of its supervisory system, those sys- Rule 3010 in several different ways. program that promotes a thorough tems should also be generally Specifically, it is a violation if the understanding by associated per- described. member and/or individual fails to sons of the applicable laws, rules, establish and maintain a supervisory and regulations. In addition, ele- c) the frequency of such reviews Ð system and/or fails to describe the ments of an effective supervisory this should be more specific than operation of that system in written system can include internal and simply providing for “a review” or “a supervisory procedures. In addition, external audits, and periodic reviews review from time to time.” The fre- it is a violation if the member and/or by “audit committees” or similar bod- quency of reviews should be individual fails to enforce a supervi- ies constituted to evaluate a firm’s described, e.g., daily, weekly, month- sory system and/or written supervi- controls. It can also include less for- ly, quarterly, or annually (how fre- sory procedures. Either type of mal monitoring and oversight by a quently a firm conducts any such violation can occur in the absence of qualified supervisor, or designee, reviews will depend upon the nature, an underlying rule violation. actively involved in the business. Ulti- type, or level of firm activity in that mately, an effective supervisory sys- particular area); and There is an important distinction tem may be comprised of many between written guidelines for com- different elements, both objective-—

NASD Notice to Members 98-96 December 1998 732 d) how such reviews shall be Regulation has been examining Obligation To Update And documented – the firm should carefully member firm policies, Amend Written Supervisory describe how the review will be practices, and procedures that Procedures And Supervisory documented, for example, initialing encompass all of the areas Systems Upon The order tickets, initialing blotters, or referenced in the Section 21(a) Implementation Of Rule filling out review logs. The Report. In particular, NASD Changes; Awareness Of procedures should also provide for Regulation has been looking closely Market Practices the documentation of steps taken as at whether a firm’s written a result of supervisory reviews (e.g., supervisory procedures address the Members must keep abreast of trades broken, restitution for best following subject areas: changes in laws, rules and execution violations, etc.). The staff regulations, market practices, and recognizes that there are a variety of ¥ pricing conventions; indicated patterns of non-compliance ways, in addition to those noted, that and must modify their supervisory reviews can be documented as ¥ size conventions; procedures and systems as having been conducted, particularly necessary. In this connection, NASD where the review is conducted on- ¥ coordination of quotations, trades, Rule 3010(b)(3) provides that “each line. Firms should document reviews and trade reports; member shall amend its written in a manner sufficient to demonstrate supervisory procedures as to firm management and regulators ¥ exchange of proprietary and appropriate within a reasonable time that a review has been conducted. customer information; after changes occur in applicable securities laws and regulations, Subject Areas Typically ¥ improper collaboration and including the Rules of this Addressed In The Written coordination of Market Maker Association.” What constitutes a Supervisory Procedures Of activities; “reasonable time” depends on, Firms Engaged In Market- among other things, the complexity Making Activity ¥ failure to honor quotations; of the rule change and the changes (if any) required to be made in the As the staff has pointed out during ¥ harassment; supervisory system, the magnitude the course of TMMS examinations, of any such changes, the extent to the written supervisory procedures ¥ late and inaccurate trade reporting; which the rule change imposes new and supervisory systems of firms and requirements or modifies pre-existing engaged in market-making activities requirements, and the amount of must address, at a minimum, trading ¥ other trading rules and regulations advance notice provided about the practice rules (i.e., passive market that relate to market-making effective date of the rule change. In making, best execution, firm quote activities. this connection, NASD Regulation rule compliance, limit order believes that significant rule changes protection, short-sale rules, markups In addition, both the NASD and the generally are promulgated and and markdowns, and the Securities SEC have recently emphasized the approved in a manner that affords and Exchange Commission’s [SEC] importance of a broker/dealer’s best members sufficient time to prepare Order Handling Rules), trading execution obligations. Whether a firm for implementation of the rule systems such as Small Order has fulfilled these obligations change. Execution SystemSM (SOESSM) and depends upon the different facts and SelectNetSM, trade reporting, circumstances present at each When rule changes necessitate a Automated Confirmation Transaction member firm. Nevertheless, as the modification of a member firm’s SystemSM (ACTSM) Rules compliance, SEC has repeatedly stated, to supervisory system and written and any other material aspect of the comply with the supervisory supervisory procedures, a firm can firm’s market-making business. obligations that flow from best comply with NASD Rule 3010(b)(3) execution, a supervisory system by preparing and distributing a In August 1996, the SEC issued a must provide a mechanism for supplemental memorandum or other Report of Investigation that detailed regularly and rigorously comparing similar document describing the deficiencies in the NASD’s execution quality likely to be obtained modification or amendment being performance of its duty to oversee from different markets or Market made and updating in some manner The Nasdaq Stock Market¨ (Section Makers, and for determining that relevant supervisory materials. 21(a) Report). As a result, NASD such analyses are performed.

NASD Notice to Members 98-96 December 1998 733 Supervisory Responsibilities outside source. Additionally, when and the member’s direct peers. The Of Firms That Enter Into purchasing or designing a system, “report card” also provides similar Give-up Or Other the firm should determine that such a information with respect to the firm’s Arrangements system can reasonably assist the compliance with the firm quote rule member firm in meeting its and the best execution rule. Through Many member firms enter into give- supervisory obligations. A system this Web Site, members also have up or other arrangements that allow programming error or the failure of access to daily share volume reports another firm to report trades on their software need not result in a charge for a broker/dealer, daily share behalf. Although a firm may allow of failure to supervise if the firm has volume reports for a security, another firm to perform its trade in place an effective supervisory monthly summaries, and historical reporting responsibilities, the firm has procedure reasonably designed to research reports such as Market the ultimate obligation to report detect such errors or failures. Indeed, Maker Price Movement Reports and trades in compliance with the rules the existence of an appropriate Equity Trade Journals. and to supervise its activities to supervisory system that detects a detect and deter violations of the particular error or failure and permits The provision of such reports and trade reporting and ACT rules. These the firm to take appropriate remedial trade information by NASD obligations cannot be contracted action may in certain instances be a Regulation and Nasdaq do not away. Thus, any firm that agrees to mitigating factor in determining the obviate the need for member firm allow another firm to report trades on necessity and severity of disciplinary supervision. Nevertheless, member its behalf must establish, maintain, action. Despite the means or firms may appropriately incorporate and enforce supervisory procedures procedures to detect system errors such resources into the overall which allow it to determine that the or failures, however, repeated design and implementation of their other firm is reporting those system failures or errors without written supervisory procedures and transactions in compliance with the corrective action would weigh heavily systems. rules. In this connection, NASD against any mitigation that such Regulation notes that executing procedures may provide. Common Supervisory “Attachment 2” to the ACT Deficiencies Noted During agreement does not relieve a Automated Assistance From TMMS Examinations member firm of any of its obligations NASD Regulation And Nasdaq in this area. To assist the membership in In a number of areas, resources are developing adequate written Use Of Automation As Part Of provided by NASD Regulation and supervisory procedures, the following A Firm’s Supervisory System Nasdaq to assist member firms in are examples of supervisory meeting their supervisory procedures most frequently found to Written supervisory procedures may responsibilities. For example, NASD be deficient by the staff during the incorporate the use of automated Regulation presently seeks to course of TMMS examinations. systems to assist in determining contact member firms engaged in Merely avoiding these bad practices compliance with applicable rules. As underwriting activities on a real-time in no way ensures that a firm’s part of its supervisory system, a firm basis if it detects trading or quotation written procedures will be found to must test and monitor such systems activity that may be inconsistent with be adequate. Avoiding these periodically to determine that they the SEC’s “passive market-making” particular practices, however, could are operating properly. In addition, rule, Rule 103 under Regulation M. assist member firms significantly in personnel using the systems should developing adequate written be trained so that they understand Additionally, NASD Regulation and supervisory procedures. how the systems work. For example, Nasdaq provide the membership programmers should be advised of with transaction and market data that 1. The Written Supervisory the regulatory requirements the may be accessed through the Procedures Merely Recite the system is being designed to address. Nasdaq TraderSM Web Site Applicable Rules: The staff has Supervisory and compliance (www.nasdaqtrader.com) on the observed many instances where the personnel should understand the Proprietary Trading Data Web page. written supervisory procedures system’s capabilities and limitations. Information currently available merely recite applicable NASD and These principles apply whether or includes monthly “report cards” that SEC rules without any description of not the system software is designed compare a firm’s level of late trade a procedure that will achieve by the firm or purchased from an reporting to industry-wide averages compliance with those rules. While

NASD Notice to Members 98-96 December 1998 734 such documents can be an important and maintain the documentation that 9. Failure to Describe the Steps component of a member firm’s reflects the fact that particular the Firm Will Take when Potential supervisory system, duplicating or supervisory reviews have been Deficiencies are Identified: The restating the rules and identifying conducted. staff has reviewed written prohibited activities, without supervisory procedures that fail to describing a procedure to determine 5. Failure to Denote Specifically describe the steps a supervisor whether there is compliance with the Frequency of Reviews: The should take when deficiencies are those rules, is not sufficient to serve staff has observed instances where found. Because each situation may as the firm’s written supervisory firms have failed to designate the have aggravating or mitigating procedures. frequency with which particular factors, general procedures, versus supervisory reviews are conducted.8 specific steps to be taken, will be 2. Failure to Designate adequate for purposes of the written Responsible Supervisory 6. Failure to Monitor Adequately supervisory procedures. For Personnel in the Procedures: The the Performance of Automated example, the procedures may staff has observed instances where Compliance Systems: The staff has indicate that the supervisor will firms have failed to designate the observed instances where firms discuss the matter with the person or persons responsible for have failed to test periodically the compliance, audit, or legal conducting supervision in each type performance of automated trade department and the supervisor of business. The specific person execution, reporting, and other and/or representatives from one or charged with conducting a particular automated compliance systems that more of these other areas will follow review or procedure should be assist the firm in complying with up with the registered person or identified Ð either by name or by applicable rules. persons involved to determine the title.7 Merely stating that the reason for a deficiency, the possible “Compliance Department,” “Trading 7. Failure to Monitor Adequately need for further training, etc. Department,” or a “principal” will the Performance of Service conduct the review is not sufficient. Bureaus and Other Members to 10. Failure to Update Procedures The procedures should state, for Which the Firm has Delegated its Within a Reasonable Period to example, that “John Doe will review” Trade Reporting Responsibility: Reflect New Regulatory or “the Head Trader will review.” The staff has observed instances Requirements or Firm Additionally, the person designated where firms have failed to implement Procedures: The staff has observed to carry out the review should be procedures to review periodically the numerous instances where members adequately experienced and accuracy and timeliness of trade have failed to establish and maintain qualified to do so. reporting conducted by another written supervisory procedures by member or service bureau on the the effective date of a new rule. 3. Failure to Describe the Review firm’s behalf. Process Adequately: As stated 11. Failure to Preserve and above, the supervisory steps and 8. Failure to Reflect Supervisory Maintain Written Supervisory reviews do not necessarily have to be Systems in the Firm’s Written Procedures That Were in Effect set forth in a detailed description. Supervisory Procedures: The staff During Past Time Periods in Nevertheless, the staff has observed has observed instances where firms Accordance with SEC Rules 17a-3 instances where the description of the that in fact have effective supervisory and 17a-4: The staff has reviewed supervisory procedure or review has systems in place fail to describe instances where members allege been so vague that firm management, them in the firm’s written supervisory that written supervisory procedures firm supervisory personnel, and procedures. It has also been the were in effect for a specified regulators cannot determine what the staff’s experience that firms which business line during a specified time review entails. For example, it is not conduct effective supervisory period, but were unable to document sufficient to provide that “John Doe reviews sometimes fail to describe that the procedures actually existed will review for compliance with all them in their written supervisory at that time. NASD trade reporting rules, limit order procedures. This is particularly true protection, etc.” for firms that use automated systems Firms should review their existing to ensure compliance with applicable supervisory systems and written 4. Failure to Document Reviews: rules. Such systems should be supervisory procedures in light of the The staff has observed instances generally described in the firm’s guidance provided in this Notice. where firms have failed to preserve written supervisory procedures. Deficiencies in supervisory systems should be addressed immediately. NASD Notice to Members 98-96 December 1998 735 Endnotes 4NASD Rule 3010(a). applicable rules. In these instances, the fol- 1For additional guidance concerning NASD lowing have been found insufficient: Rule 3010, see Notices to Members 88-84 5See NASD Rule 3010(b) (1) and (2). a) reviews will be conducted as warrant- and 89-34. ed or as needed; 6See In Re Bryant, Securities Exchange Act b) reviews will be conducted from time to 2Self-imposed disciplinary action at the firm Release No. 32357, 54 SEC Docket 345. time; level is an integral part of the self-regulatory c) reviews will be conducted regularly; process Ð one that often constitutes a miti- 7It should be noted that NASD Rule and gating factor with respect to sanctions. How- 3010(b)(2) provides that a member firm shall d) reviews will be conducted on a “spot ever, self-imposed disciplinary action does maintain on an internal record the names of check” basis. not necessarily preclude the imposition of all persons who are designated as supervi- appropriate sanctions by NASD Regulation sory personnel and the dates for which such © 1998, National Association of Securities Dealers, where it is deemed warranted after review of designation is or was effective. Inc. (NASD). All rights reserved. the facts and circumstances regarding a particular matter. 8NASD Rule 3010 clearly does not require, however, that a member firm must review all 3NASD Rule 3010(b)(1). of its trading activity for compliance with

NASD Notice to Members 98-96 December 1998 736 Executive Summary spot check programs increased 43 On November 2, 1998, NASD percent, from 42,681 to 61,096. The NASD SM Regulation, Inc. (NASD Regulation ) Department expects filing volume to filed amendments for immediate continue to increase in subsequent Notice to effectiveness with the Securities and years. Exchange Commission (SEC) that will amend Section 13 of Schedule A In order to enhance its operations Members to the By-Laws of the National and to continue to provide timely, Association of Securities Dealers, high-quality reviews, NASD Regula- 98-97 Inc. (NASD¨) to increase the review tion intends to dedicate additional charge for advertisements, sales staff and resources to the Depart- literature, and other such material ment, as well as to other depart- filed or submitted to the NASD ments whose programs are related Advertising Regulation Department. to the regulation of member commu- Notice Of Increase In The increase is effective on January nications with the public. The cost of Advertising Review Fees 1, 1999. the additional staff and resources will be covered by an increase in the Questions regarding this No t i c e ma y basic charge for reviewing submitted be directed to Thomas A. Pappas, material from $50 to $75. Director, Advertising Regulation Suggested Routing Department, NASD Regulation, at Text Of Amendments Senior Management (202) 728-8330, or Robert J. Smith, (Note: New text is underlined; deletions are Assistant General Counsel, Office of br a c k e t e d . ) Ad v e r t i s i n g General Counsel, NASD Regulation, Continuing Education at (202) 728-8176. Schedule A to the NASD By-Laws Corporate Finance Discussion Executive Representatives The Advertising/Investment Compa- Section 13—[Service] Review Government Securities nies Regulation Department (the Charge for Advertisement, Department) evaluates member Sales Literature, and Other In s t i t u t i o n a l firms’ advertisements and sales liter- Such Material Filed or In s u r a n c e ature for compliance with applicable Submitted Internal Audit rules of the NASD, SEC, Municipal Securities Rulemaking Board, and There shall be a [service] re v i e w Legal & Compliance Securities Investors Protection Cor- charge for each and every item of Mu n i c i p a l poration. These public communica- advertisement, sales literature, and tions include print, television, and other such material, whether in print- Mutual Fund radio advertisements, or electronic ed, video, electronic or other form, Op e r a t i o n s communications such as Web sites. filed with or submitted to the Associa- Op t i o n s They also include brochures, form tion, except for items that are filed or letters, direct mail, and telemarketing submitted in response to a written Registered Representatives sc r i p t s . request from the Association’s Re g i s t r a t i o n Advertising Regulation Department Re s e a r c h Approximately 1,450 member firm s issued pursuant to the spot check submitted sales material last year, procedures set forth in the Associa- Sy n d i c a t e either voluntarily or pursuant to a rule tion’s Rules as follows: (1) for printed Sy s t e m s requirement. Significant increases in material reviewed, [$50.00] $7 5 . 0 0 , filing volume and workload have plus $10.00 for each page reviewed Tr a d i n g made ever increasing demands on in excess of 10 pages; and (2) for Tr a i n i n g the Department’s operations. For video or audio media, [$50.00] Variable Contracts example, between 1994 (the last $7 5 . 0 0 , plus $10.00 per minute for time advertising fees were amended) each minute of tape reviewed in and 1997, the number of communi- excess of 10 minutes. cations reviewed in the filings and

NASD Notice to Members 98-97 December 1998 737 Where a member requests expedited completed within three business ment may, in its sole discretion, review of material submitted to the days, not including the date the item refuse requests for expedited review. Advertising Regulation department is received by the Advertising Regu- there shall be a [service] re v i e w lation Department, unless a shorter © 1998, National Association of Securities Dealers, charge of $500.00 per item plus $25 or longer period is agreed to by the Inc. (NASD). All rights reserved. for each page reviewed in excess of Advertising Regulation Department. 10 pages. Expedited review shall be The Advertising Regulation Depart-

NASD Notice to Members 98-97 December 1998 738 Executive Summary NASD Regulation believes that, NASD On November 10, 1998, the Securi- under most circumstances, sales ties and Exchange Commission under a breakpoint pursuant to a (SEC) approved amendments to the bona fide asset allocation program Notice to National Association of Securities would not constitute a breakpoint vio- Dealers, Inc. (NASD®) Interpretive lation. Because investors generally Memorandum 2830-1 (IM-2830-1) to can benefit from asset-based invest- Members clarify the application of the mutual ment strategies, such strategies fund breakpoint sales rule to modern should not be discouraged. The 98-98 portfolio investment strategies. The amendments provide that, for pur- amendments are effective immedi- poses of determining whether a sale ately. was made in a dollar amount below a breakpoint in order to share in a high- Questions regarding this Notice may er commission, the NASD will con- SEC Approves Rule be directed to Joseph E. Price, Direc- sider the facts and circumstances of Change Relating To tor, Corporate Financing, NASD Reg- the sale, including whether the mem- Mutual Fund Breakpoint ulation, Inc. (NASD RegulationSM), at ber has retained records that demon- Sales (202) 728-8877, or Robert J. Smith, strate that the trade was executed in Assistant General Counsel, Office of accordance with a bona fide asset General Counsel, NASD Regulation, allocation program and that cus- at (202) 728-8176. tomers were informed that they may not receive breakpoint reductions Suggested Routing that otherwise would be available. Senior Management Discussion In the context of mutual fund sales, a Advertising “breakpoint” is that point at which the Text Of Amendments Continuing Education sales charge is reduced for quantity (Note: New text is underlined.) purchases of fund shares. NASD Corporate Finance Rule IM-2830-1 prohibits sales of IM-2830-1 “Breakpoint” Sales Executive Representatives mutual fund shares in amounts Government Securities below breakpoints, if such sales are The sale of investment company made “so as to share in higher sales shares in dollar amounts just below Institutional charges.” The application of this the point at which the sales charge is Insurance standard depends on the purpose, or reduced on quantity transactions so Internal Audit intent, of the member recommending as to share in the higher sales the transaction. Accordingly, whether charges applicable on sales below Legal & Compliance a breakpoint sales violation has the breakpoint is contrary to just and Municipal occurred must depend on facts and equitable principles of trade. circumstances that provide evidence Mutual Fund of intent. Investment company underwriters Operations and sponsors, as well as dealers, Options Recently, NASD Regulation consid- have a definite responsibility in such ered the application of IM-2830-1 to matters and failure to discourage and Registered Representatives modern portfolio investment strate- to discontinue such practices shall Registration gies that utilize many different mutual not be countenanced. Research funds with varying investment objectives. The amendments specify more For purposes of determining whether Syndicate precisely those facts and circum- a sale in dollar amounts just below a Systems stances the staff will consider when breakpoint was made in order to examining whether trades that miss share in a higher sales charge, the Trading breakpoints, but are made pursuant Association will consider the facts Training to bona fide asset allocation pro- and circumstances, including, for Variable Contracts grams, may have violated NASD example, whether a member has rules. retained records that demonstrate

NASD Notice to Members 98-98 December 1998 739 that the trade was executed in accor- diversiﬁcation needs and investment qualify for breakpoint reductions that dance with a bona ﬁde asset alloca- goals; and are otherwise available. tion program that the member offers to its customers: • under which the member discloses © 1998, National Association of Securities Dealers, to its customers that they may not Inc. (NASD). All rights reserved. • which is designed to meet their

NASD Notice to Members 98-98 December 1998 740 Executive Summary physical possession or control of all NASD On November 3, 1998, the Securities customer fully paid and excess mar- and Exchange Commission (SEC) gin securities, and periodically to issued a No-Action Letter to clarify its compute and set aside in a special Notice to position under SEC Rule 15c3-1 (Net reserve bank account a certain Capital Rule) regarding the capital amount of money that is customer treatment of assets in the proprietary money or money obtained from using Members account of an introducing customer securities. broker/dealer (PAIB) held by a clear- 98-99 ing broker/dealer. The letter allows Introducing broker/dealers typically introducing broker/dealers to include include their proprietary cash and PAIB assets as allowable assets in securities held by their clearing firms their net capital computations, provid- as allowable assets in calculating their SEC Issues No-Action ed the clearing broker/dealer estab- net capital. However, clearing bro- Letter On Proprietary lishes a separate reserve account for ker/dealers are not required to main- Accounts Of Introducing PAIB assets in accordance with SEC tain physical possession or control of Broker/Dealers Rule 15c3-3 (Customer Protection these PAIB assets, or include them as Rule) and both the introducing bro- customer credits in their customer ker/dealer and the clearing reserve formula calculation, because broker/dealer enter into a written the Customer Protection Rule specifi- agreement whereby the clearing bro- cally excludes broker/dealers from the Suggested Routing ker/dealer will perform the PAIB cal- definition of “customer.” Therefore, Senior Management culation in accordance with the since clearing broker/dealers are free provisions, procedures, and interpre- of these customer-protection restric- Advertising tations set forth in the letter. Firms tions, it is possible for them to treat Continuing Education must begin adhering to the require- PAIB assets as their own. In fact, ments stated in the No-Action Letter clearing broker/dealers have never Corporate Finance on June 1, 1999; until then introduc- been precluded from using PAIB Executive Representatives ing broker/dealers may continue their assets in the normal course of their Government Securities current practice of treating PAIB business. However, this means that assets as allowable. introducing broker/dealers may have Institutional assets that are not always readily Insurance A copy of the No-Action Letter is available to them. Under the Net Capi- Internal Audit attached. Questions concerning this tal Rule, any assets “not readily con- Notice may be directed to Samuel vertible into cash” must be deducted Legal & Compliance Luque, Jr., Associate Director, Mem- from net worth and should be classi- Municipal ber Regulation, NASD Regulation, fied as non-allowable assets when Inc. (NASD RegulationSM), (202) 728- calculating net capital. Mutual Fund 8472, or Susan DeMando, Regional Operations Compliance Supervisor, Member This situation prompted concerns by Options Regulation, NASD Regulation, NASD Regulation and the New York (202) 728-8411. Stock Exchange (NYSE) that both an Registered Representatives introducing broker/dealer and a Registration Background clearing broker/dealer may be using Research The Net Capital Rule requires bro- the same proprietary assets in con- ker/dealers to have sufficient liquid ducting their individual businesses. Syndicate capital to protect the assets of cus- NASD Regulation and the NYSE Systems tomers and to meet their obligations requested the SEC to clarify its posi- to other broker/dealers. In calculating tion regarding PAIBs. Trading net capital, broker/dealers begin with Training their net worth and then make vari- Treatment Of Assets Held In A Variable Contracts ous positive and negative adjust- PAIB ments. The Customer Protection Rule requires broker/dealers that In order for an introducing broker/deal- carry customer accounts to maintain er to treat its PAIB assets as allowable NASD Notice to Members 98-99 December 1998 741 assets in calculating its net capital, the the Customer Protection Rule for the clearing broker/dealer (i.e., guaran- introducing firm and its clearing bro- customer reserve formula. tees all liabilities and obligations) is ker/dealer must enter into a written to be excluded from the PAIB agreement providing that the clearing 4.The clearing broker/dealer must reserve computation. broker/dealer will perform the PAIB establish and maintain a separate calculation in accordance with the fol- “Special Reserve Account for the 9. Upon discovery that any deposit lowing provisions: Exclusive Benefit of Customers” with made to the PAIB Reserve Account a bank in conformity with the stan- did not satisfy its deposit require- 1. A clearing broker/dealer must per- dards of paragraph (f) of the Cus- ment, a clearing broker/dealer shall form a computation for PAIB assets tomer Protection Rule (PAIB by facsimile or telegram immediately (PAIB reserve computation) of all its Reserve Account). Cash and/or qual- notify its DEA and the SEC. Unless a introducing broker/dealers in accor- ified securities as defined in the cus- corrective plan is found to be accept- dance with the customer reserve tomer reserve formula must be able by the SEC and the DEA, the computation set forth in the Cus- maintained in the PAIB Reserve clearing broker/dealer must provide tomer Protection Rule (customer Account in an amount equal to the written notification within five busi- reserve formula) with the following PAIB reserve requirement. ness days of the date of discovery to modifications: its introducing broker/dealers that 5. If the PAIB reserve computation PAIB assets held by the clearing bro- A. Any credit (including a credit results in a deposit requirement, the ker/dealer will not be deemed allow- applied to reduce a debit) that is requirement can be satisfied to the able assets for net capital purposes. included in the customer reserve extent of any excess debit in the cus- The letter should also state that if the formula cannot be included as a tomer reserve formula of the same introducing broker/dealer wishes to credit in the PAIB reserve compu- date. However, a deposit require- continue to count its PAIB assets as tation; ment resulting from the customer allowable, it has until the last busi- reserve formula cannot be satisfied ness day of the month following the B. Note E(3) to Rule 15c3-3a with excess debits from the PAIB month in which the notification was which reduces debit balances by reserve computation. made to transfer all PAIB assets to one percent under the basic another clearing broker/dealer. How- method and subparagraph 6. Within two business days of enter- ever, if the deposit deficiency is (a)(1)(ii)(A) of the Net Capital Rule ing into any PAIB Agreement, an remedied before the time at which which reduces debit balances by introducing broker/dealer must notify the introducing broker/dealer must three percent under the alternative its designated examining authority transfer its PAIB assets to another method will not apply; and (DEA) in writing that it has entered clearing broker/dealer, the introduc- into such an agreement with a clearing broker/dealer may choose to C. Neither Note E(1) to Rule ing broker/dealer. keep its assets at the original clear- 15c3-3a nor NYSE Interpretation ing broker/dealer. /04 to Item 10 of Rule 15c3-3a 7. Commissions receivable and other regarding securities concentration receivables of an introducing bro- Interpretations charges is applicable to the PAIB ker/dealer from its correspondent reserve computation. clearing broker/dealer (excluding In addition, the No-Action Letter stip- clearing deposits) that are otherwise ulates that certain interpretations are 2. The PAIB reserve computation allowable assets under the Net Capi- applicable to PAIBs. These interpre- must include all the proprietary tal Rule are not to be included in the tations were developed in conjunc- accounts of all introducing PAIB reserve computation, provided tion with representatives from the broker/dealers covered by the PAIB the amounts have been clearly iden- Capital and Clearing Firm Commit- Agreement. All PAIB assets must be tified as receivables on the books tees of the Securities Industry Asso- kept separate and distinct from cus- and records of the introducing bro- ciation. See the attached No-Action tomer assets under the customer ker/dealer and as payables on the Letter for details. reserve formula in the Customer Pro- books of the clearing broker/dealer. tection Rule. © 1998, National Association of Securities Dealers, 8. The proprietary account of an Inc. (NASD). All rights reserved 3. The PAIB reserve computation introducing broker/dealer that is a must be prepared within the same guaranteed subsidiary of a clearing time frames as those prescribed by broker/dealer or that guarantees a

NASD Notice to Members 98-99 December 1998 742

NASD Regulation, Inc. (NASD RegulationSM) would like to remind members of NASD their obligation to file the appropriate FOCUS reports by their due dates. The following schedule outlines due dates for 1999. Notice to In particular, members are reminded that Schedule I of Form X-17A-5 for the 1998 calendar year must be filed electronically via PC FOCUSSM by Wednes- day, January 27, 1999. This due date applies to members regardless of their Members fiscal year end. Those firms that engage in municipal securities activities must disclose income from such activity under the NASD Miscellaneous Informa- 98-100 tion section of the Schedule I form as it appears in PC FOCUS. Anyone having difficulty filing FOCUS reports electronically can refer to Appendix A - Error Messages and Appendix B - Troubleshooting in the PC FOCUS User Guide (Version 2.01). In addition, Appendix E - Schedule I FOCUS Filing Due Dates Informational Guide contains information on common errors and error resolu- For 1999 tion for Schedule I specifically.

Questions regarding the information to be filed can be directed to the appropriate District Office. Questions concerning software, hardware, or the transmission of the FOCUS filing can be directed to the NASD toll-free hotline at Suggested Routing (800) 321-NASD. Senior Management Advertising Continuing Education Corporate Finance Executive Representatives Government Securities Institutional Insurance Internal Audit Legal & Compliance Municipal Mutual Fund Operations Options Registered Representatives Registration Research Syndicate Systems Trading Training Variable Contracts

NASD Notice to Members 98-100 December 1998 751 FOCUS Reports Schedule For 1999 Schedule I for 1998 Year End Due Date

1998 FOCUS Schedule I January 27, 1999

Quarterly FOCUS Part II/IIA for 1998 Period Ending Due Date

December 31, 1998 January 27, 1999

Monthly And Fifth* FOCUS II/IIA Filings for 1999 Period Ending Due Date

January 31, 1999 February 24, 1999

February 28,1999 March 23, 1999

April 30, 1999 May 25, 1999

May 31, 1999 June 23, 1999

July 31, 1999 August 24, 1999

August 31, 1999 September 24, 1999

October 31, 1999 November 23, 1999

November 30, 1999 December 23, 1999

Quarterly FOCUS Part II/IIA Filings For 1999 Quarter Ending Due Date

March 31, 1999 April 26, 1999

June 30, 1999 July 26, 1999

September 30, 1999 October 25, 1999

December 31, 1999 January 27, 2000

Schedule I for 1999 Year End Due Date

1999 FOCUS Schedule I January 27, 2000

* A Fifth FOCUS report is an additional report that is due from a member whose fiscal year end is a date other than the calendar quarter. © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. NASD Notice to Members 98-100 December 1998 752 Executive Summary sure questions with the amend- NASD Regulation, Inc. (NASD Regu- ments follows this Request For NASD SM lation ) is proposing to amend disclo- Comment. sure questions on the Form U-4 and Notice to Form U-5 that were approved by the The North American Securities Securities and Exchange Commis- Administrators Association (NASAA) sion (SEC) in July 1996, but have not approved all of the amendments to Members been made effective pending the full the Forms U-4 and U-5 at its October implementation of the modernized 1998 membership meeting. Central Registration Depository 98-101 SM (CRD ), and is soliciting comment on Questions concerning this Request the proposed amendments. First, For Comment may be directed to NASD Regulation proposes to Ann E. Bushey, Assistant Director, amend Question 22I(2) on the 1996 CRD/Public Disclosure, NASD Regu- NASD Requests Comment On Form U-4 and Question 17B on the lation, at (301) 590-6389; Mary M. Proposed Amendments To 1996 Form U-5 to require the report- Dunbar, Assistant General Counsel, Disclosure Questions On ing of any settlement for $10,000 or Office of General Counsel, NASD Forms U-4 And U-5; more of an oral or written customer Regulation, at (202) 728-8252; or Comment Period Expires complaint alleging sales practice vio- Richard E. Pullano, Associate Direc- January 15, 1999 lations. The 1996 Forms U-4 and U-5 tor and Counsel, CRD/Public Disclo- questions require such settlements to sure, NASD Regulation, at (301) be reported only if the customer sub- 212-3789. Suggested Routing mits such a complaint in writing. Sec- Senior Management ond, NASD Regulation proposes to amend Questions 14 and 15 on the Request For Comment Advertising 1996 Form U-5 to require a terminat- NASD Regulation encourages all Continuing Education ing firm to report certain criminal and interested parties to comment on the Corporate Finance regulatory actions on a former regis- proposal. Comments should be tered person that are initiated after mailed to: Executive Representatives that person is terminated if the action Government Securities is in connection with events that Joan Conley Institutional occurred while the person was Office of the Corporate Secretary Insurance employed by or associated with the NASD Regulation, Inc. firm. The 1996 Form U-5 questions 1735 K Street, NW Internal Audit require a firm to report such actions Washington, D.C. 20006-1500 Legal & Compliance only if the actions occurred while a Municipal person was employed by or associat- or e-mailed to: ed with the firm. Finally, NASD Regu- [email protected] Mutual Fund lation proposes to amend Question Operations 17 on the 1996 Form U-5, which Important Note: The only comments Options requires a firm to report customer that will be considered are those sub- Registered Representatives complaints filed against former regis- mitted via e-mail or in writing. tered persons, to harmonize it with Registration the parallel question on the 1996 Comments must be received by Jan- Research Form U-4 (i.e., Question 22I). This uary 15, 1999. Before becoming Syndicate proposed change is designed to per- effective, any rule change developed mit the archiving of customer com- as a result of comments received Systems plaints that are more than 24 months must be adopted by the NASD Regu- Trading old and no longer reportable, regard- lation Board of Directors, may be Training less of whether the customer com- reviewed by the NASD Board of Variable Contracts plaint is reported on Form U-4 or Governors, and must be approved by Form U-5. The text of these disclo- the SEC.

NASD Notice to Members 98-101 December 1998 753 Executive Summary The North American Securities NASD NASD Regulation, Inc. (NASD Regu- Administrators Association (NASAA) lationSM) is proposing to amend disclo- approved all of the amendments to sure questions on the Form U-4 and the Forms U-4 and U-5 at its October Regulation Form U-5 that were approved by the 1998 membership meeting. Securities and Exchange Commission (SEC) in July 1996, but have not been Background And Discussion Request made effective pending the full imple- NASD Regulation is proposing mentation of the modernized Central amendments to four disclosure ques- For Registration Depository (CRDSM), and tions on the Forms U-4 and U-5 that is soliciting comment on the proposed were approved by SEC in July 1996, amendments. First, NASD Regulation but have not been made effective Comment proposes to amend Question 22I(2) pending the full implementation of on the 1996 Form U-4 and Question the modernized CRD.1 As discussed 17B on the 1996 Form U-5 to require below, these amendments involve 98-101 the reporting of any settlement for changes to Question 22I(2) on the $10,000 or more of an oral or written 1996 Form U-4, and Questions 14, customer complaint alleging sales 15, and 17 on the 1996 Form U-5. practice violations. The 1996 Forms The text of these questions with the U-4 and U-5 questions require such amendments marked follows this settlements to be reported only if the Request For Comment. customer submits such a complaint in writing. Second, NASD Regulation First, NASD Regulation proposes to proposes to amend Questions 14 and amend Question 22I(2) on the 1996 15 on the 1996 Form U-5 to require a Form U-4 and Question 17B on the terminating firm to report certain crimi- 1996 Form U-5 regarding the report- nal and regulatory actions on a former ing of settled customer complaints. registered person that are initiated The 1996 questions require the after that person is terminated if the reporting of any settlement for action is in connection with events $10,000 or more of a written cus- that occurred while the person was tomer complaint alleging sales prac- employed by or associated with the tice violations. NASD Regulation firm. The 1996 Form U-5 questions believes that a settlement of $10,000 require a firm to report such actions or more should be reported, regard- only if the actions occurred while a less of whether the complaint that led person was employed by or associat- to the settlement was written or oral. ed with the firm. Finally, NASD Regu- Thus, NASD Regulation proposes lation proposes to amend Question 17 that the 1996 Form U-4 Question on the 1996 Form U-5, which requires 22I(2) be amended to read as fol- a firm to report customer complaints lows: “Have you even been the sub- filed against former registered per- ject of an investment-related, sons, to harmonize it with the parallel consumer-initiated complaint, not question on the 1996 Form U-4 (i.e., otherwise reported under question Question 22I). This proposed change 22I(1) above, which alleged that you is designed to permit the archiving of were involved in one or more sales customer complaints that are more practice violations, and which com- than 24 months old and no longer plaint was settled for an amount of reportable, regardless of whether the $10,000 or more?” The question, as customer complaint is reported on amended, would not require the Form U-4 or Form U-5. The text of reporting of all oral customer com- these disclosure questions with the plaints alleging sales practice viola- amendments follows this Request tions, just those that are settled for For Comment. $10,000 or more. A corresponding change to Question 17B on the 1996 Form U-5 also is proposed. NASD Notice to Members 98-101 December 1998 755 Second, NASD Regulation proposes reportable, regardless of whether the 1996 Form U-5 Question 15:4 to amend Questions 14 and 15 on customer complaint is reported on the 1996 Form U-5, which require a Form U-4 or Form U-5. While employed by or associated terminating firm to report certain with your firm, or in connection with criminal actions and regulatory events that occurred while the indi- actions, respectively. The 1996 ver- Proposed Revisions vidual was employed by or associat- sions of these questions require a (Note: New text is underlined; deletions are ed with your firm, was the individual terminating firm to report criminal or bracketed.) involved in any disciplinary action by regulatory actions involving an indi- a domestic or foreign governmental vidual that occur while the individual 1996 Form U-4 Question body or self regulatory organization was employed by or associated with 22I(2):2 (other than those designated as a the firm. NASD Regulation proposes “minor rule violation” under a plan to amend these questions by extend- Have you ever been the subject of approved by the U.S. Securities and ing a firm’s reporting obligation to an investment-related, consumer-ini- Exchange Commission) with jurisdic- include criminal and regulatory tiated [written] complaint, not other- tion over the investment–related actions that are initiated after termi- wise reported under question 22I(1) businesses? nation if the action is in connection above, which alleged that you were with events that occurred while the involved in one or more sales prac- 1996 Form U-5 Question 17:5 individual was employed by or asso- tice violations, and which complaint ciated with the firm. This proposed was settled for an amount of $10,000 A: In connection with events that amendment is intended to address or more? occurred while the individual was those instances where a firm may employed by or associated with your have actual notice of the initiation of 1996 Form U-5 Question 14:3 firm, was the individual: a criminal or regulatory action involving an individual after he or she has While employed by or associated (1) named as a been terminated. Notwithstanding with your firm, or in connection with respondent/defendant in an the proposed change, firms would events that occurred while the indi- investment-related, consumer- not be required to report criminal or vidual was employed by or associat- initiated arbitration or civil litiga- regulatory events that occur after an ed with your firm, was the individual: tion which alleged that the individual's termination if the firm has individual was involved in one or no notice of the event. In this regard, A. convicted of or did the individ- more sales practice violations NASD Regulation is working with ual plead guilty or nolo con- and which: NASAA and other regulators to issue tendere (“no contest”) in a an interpretation that provides guid- domestic, or foreign or military (a) is still pending, or; ance on what constitutes actual court to any felony? notice. Generally speaking, firms (b) resulted in an arbitration would receive actual notice of the ini- B. charged with any felony? award or civil judgment tiation of a criminal or regulatory against the individual, regard- action against a terminated person C. convicted of or did the individ- less of amount, or; only if that action is based on events ual plead guilty or nolo con- that occurred in connection with the tendere (“no contest”) in a (c) was settled for an amount former associated person’s employ- domestic, foreign or military of $10,000 or more?[, or;] ment. court to a misdemeanor involving: investments or an invest- (2) the subject of an investment- Finally, NASD Regulation proposes ment-related business, or any related, consumer-initiated [writ- amending Question 17 on the 1996 fraud, false statements or omis- ten] complaint, not otherwise Form U-5, which requires the report- sions, wrongful taking of proper- reported under question17(A)(1) ing of certain customer complaints, ty, bribery, perjury, forgery, above, which alleged that the to harmonize it with the parallel ques- counterfeiting, extortion, or a individual was involved in one or tion on the 1996 Form U-4 (i.e., conspiracy to commit any of more sales practice violations, Question 22I). The proposed change these offenses? and which complaint was settled is designed to permit the archiving of for an amount of $10,000 or customer complaints that are more D. charged with a misdemeanor more? than 24 months old and no longer specified in 14(C)?

NASD Notice to Members 98-101 December 1998 756 B. In connection with events that (2) would be reportable under Endnotes occurred while the individual was question 22I(3)(b) on Form U-4, 1The NASD is currently using the Interim employed by or associated with your if the individual were still Forms U-4 and U-5 that were approved by firm, [but for a period not to exceed employed by your firm, but which the SEC in January 1998 for use until the the most recent twenty-four (24) has not previously been reported modernized CRD is completed. The Interim months of employment,] was the on the individual’s Form U-4 by Forms include all of the substantive changes individual the subject of an invest- your firm. and some of the changes to the instructions ment-related, consumer-initiated writ- that were approved in 1996 and reformatted ten complaint, not otherwise reported Request For Comment them in a manner that is compatible with the under question 17(A) above, which: NASD Regulation encourages all current CRD system. interested parties to comment on the [(1) alleged that the individual proposal. Comments should be 2This Question appears as Question 22H(2) was involved in one or more mailed to: on the Interim Form U-4 (Rev. 11/97). sales practice violations and contained a claim for compen- Joan Conley 3This Question appears as Question 13C on satory damages of $5,000 or Office of the Corporate Secretary the Interim Form U-5 (Rev. 11/97). more (if no damage amount is NASD Regulation, Inc. alleged, the complaint must be 1735 K Street, NW 4This Question appears as Question 13A on reported unless the firm has Washington, D.C. 20006-1500 the Interim Form U-5 (Rev. 11/97). made a good faith determination that the damages from the or e-mailed to: 5This Question appears as Question 13B on alleged conduct would be less [email protected] the Interim Form U-5 (Rev. 11/97). than $5,000), or]; Important Note: The only comments © 1998, National Association of Securities Dealers, (1) would be reportable under that will be considered are those Inc. (NASD). All rights reserved. question 22I(3)(a) on Form U-4, submitted via e-mail or in writing. if the individual were still employed by your firm, but which Comments must be received by Jan- has not previously been reported uary 15, 1999. Before becoming on the individual’s Form U-4 by effective, any rule change developed your firm; or as a result of comments received must be adopted by the NASD Reg- [(2) alleged that the individual ulation Board of Directors, may be was involved in forgery, theft, reviewed by the NASD Board of misappropriation or conversion Governors, and must be approved of funds or securities?] by the SEC.

NASD Notice to Members 98-101 December 1998 757 Executive Summary margin and net capital requirements NASD Federal Reserve Board Regulation T is of paramount importance and governs the extension of credit to intends to examine member firms for customers by broker/dealers. Among compliance with these rules. Notice to the provisions of Regulation T are requirements governing the initial Questions concerning this Notice margin requirements for certain may be directed to Samuel Luque, Members securities transactions. In addition, Associate Director, Member Regula- National Association of Securities tion, NASD Regulation, Inc. (NASD 98-102 Dealers, Inc. (NASD®) Rule 2520 RegulationSM), at (202) 728-8472, or requires NASD members to impose Susan DeMando, Regional Compli- additional margin requirements on ance Supervisor, Member Regula- customer accounts.1 The purpose of tion, NASD Regulation, at this Notice is to communicate the (202) 728-8411. Calculating Margin For opinion of the NASD on the margin Day-Trading And Cross- requirements under Regulation T Discussion Guaranteed Accounts and Rule 2520 for day-trading and This Notice addresses some of the cross-guaranteed accounts with the most frequently asked questions expectation that members will calcu- regarding the application of Regula- late margin for such accounts in a tion T and Rule 2520 to day-trading manner that is consistent with Regu- and cross-guaranteed accounts. In Suggested Routing lation T and Rule 2520. addition, this Notice addresses only Senior Management common scenarios and questions The NASD believes that some mem- relating to marginable equity securi- Advertising bers are calculating margin for day- ties and is not meant to be a com- Continuing Education traders and cross-guaranteed plete discussion of the application of accounts in a manner that is not con- Regulation T and Rule 2520 to all Corporate Finance sistent with the requirements of Reg- possible trading strategies utilized by Executive Representatives ulation T and Rule 2520. Accordingly, day-trading and/or cross-guaranteed Government Securities members are advised to review their accounts. margin calculation practices to ensure Institutional that they conform to the requirements In order to clarify member under- Insurance of these rules. Adherence to the mar- standing of the requirements relating Internal Audit gin requirements is in the best inter- to day-trading and cross-guaranteed est of the investing public and serves accounts, highlighted below in plain Legal & Compliance to protect the financial security of English are some of the fundamental Municipal members that extend credit. requirements and provisions of these rules. Mutual Fund Finally, the NASD believes that some Operations members may be failing to take cer- General Options tain account-related charges when computing their net capital pursuant • Members must perform two sepa- Registered Representatives to Securities and Exchange Commis- rate margin calculations for each Registration sion (SEC) Rule 15c3-1. These account each day; one for Regulation Research charges include those specified in T and one for Rule 2520. The calcu- Rule 2520(f)(4) for certain guaran- lations should be performed at the Syndicate teed accounts. Members should end of each trade date; intra-day cal- Systems review the requirements of SEC Rule culations are not permitted. Members 15c3-1 and Rule 2520 to determine must comply with the requirements of Trading whether they are in compliance with both rules at all times. Training these rules. Variable Contracts • “Day-trading” means buying and Members should be aware that the selling the same security on the NASD believes compliance with the same day. A “day-trader” is any cus-

NASD Notice to Members 98-102 December 1998 759 tomer whose trading shows a pattern • When calculating Regulation T the Special Memorandum Account of day-trading (see Rule margin, cross guarantees have no (SMA), or by a deposit of cash, mar- 2520(f)(8)(B)). (See also the Securi- effect (see Regulation T, Section gin securities, or exempted securities Industry Association’s Credit 3(d)). Therefore, members must ties, in any combination (see Division Manual’s definition of “day- apply Regulation T to each account Regulation T, Section 4(c)(2)). trading” as “selling first and then separately, notwithstanding the fact repurchasing” the same security on that Rule 2520 permits certain spe- • Regulation T treats a short sale the same day.) cial maintenance margin treatment “against the box” as a long sale (see for transactions in cross-guaranteed Regulation T, Section 4(b)(2)). As a • Day-trades should occur only in accounts. result, there is no Regulation T margin accounts. Day-trading in a requirement on the transaction; how- cash account may amount to free rid- • Rule 2520(f)(4) permits cross guar- ever, Rule 2520(e)(1) imposes a five ing (i.e., purchasing a security and antees for maintenance margin pur- percent margin requirement on the then selling it without having paid for poses so that the amount of market value of the long position and the purchase). maintenance margin excess in one requires the short position to be account may be used to offset a marked to the market. • Regulation T requires initial margin maintenance margin deficit in the of 50 percent for new purchases and other cross-guaranteed account. In • A sale cannot be treated as a short 150 percent for short sales (of which any given situation, the account with sale “against the box,” nor can it be 100 percent can come from the pro- the maintenance margin excess is treated as a long sale, if the account ceeds of the short sale, with the cus- considered the guaranteeing account making the sale is not long the same tomer depositing the remaining 50 and the account with the mainte- number of shares of the same secu- percent). (See Regulation T, Sec- nance margin deficit is considered rity, even if another cross-guarantee- tions 220.12(a) and (c)(1).) the guaranteed account. ing account is long the security. Because cross guarantees have no • Rule 2520 requires maintenance • The fact that Regulation T margin is effect under Regulation T, the fact margin of 25 percent of the current calculated at the end of the business that another cross-guaranteeing market value for all long positions, day only does not mean that account is long the security is mean- and $5 per share or 30 percent of the broker/dealers can disregard intra- ingless for Regulation T purposes current market value, whichever day risk. Reliance on the proceeds of and the sale must be regarded as a amount is greater, of each stock anticipated sales to pay for purchas- short sale subject to a margin “short” in the account selling at $5 es exposes the broker/dealer to risk. requirement of 150 percent (see per share or above (see Rule Regulation T, Section 12(c)(1)). 2520(c)(1) and (c)(3)). If a cus- Regulation T tomer’s account is both “long” and • Regulation T has no margin “short” the same security, Rule • Margin is required for each long or requirements for day-trading per se. 2520(e)(1) requires five percent short securities position unless an Regulation T margin is calculated on maintenance margin of the current exception or special provision is the position in the account at the end market value of the long security. available (see Regulation T, Section of the day. Therefore, if a day-trader The short position must be marked 4(b)). The required margin is set forth engages in numerous day-trades to the market. in Section 12 (the Supplement). throughout the day, but ends the day with no securities position, Regula- • If two accounts are cross-guaran- • Regulation T margin is calculated at tion T requires margin equal to the teed and one is long the same secu- the end of the business day. All net loss in the account at the end of rity that the other is short the same transactions on the same day are the day. A Regulation T call must be number of securities, the mainte- combined to determine the Regula- issued for the entire amount of the nance margin requirement on the tion T requirement. Therefore, Regu- loss. The call may be met by a combined positions is five percent. lation T does not distinguish between deposit of cash or securities (margin This five percent maintenance mar- day-trading and other forms of trad- or exempted), a transfer from SMA, gin requirement in no way eliminates ing (see Regulation T, Section or any combination (see Regulation the requirement to comply with the 4(c)(1)). T, Section 4(c)(2)). initial margin requirements of Regu- lation T on the original purchase and • A Regulation T margin requirement short sale. may be satisfied by a transfer from

NASD Notice to Members 98-102 December 1998 760 Rule 2520 requirements specified in Rule 2520 $1,000,000 of different securities on (f)(8)(B). The paragraph states: Day 1 and is short the securities at • While often thought of as a “mainte- the end of the day. What are the nance” margin rule, Rule 2520 also Whenever day-trading occurs in Regulation T and maintenance mar- contains initial margin requirements a customer’s margin account the gin requirements for each customer? (see paragraph (b)). Initial margin is margin to be maintained shall be always the greater of the amount the margin on the “long” or A. Since Regulation T does not specified in Regulation T or the “short” transaction, whichever acknowledge the existence of the maintenance margin specified in occurred first, as required pur- cross guarantee, Regulation T would paragraph (c). This requirement suant to the other provisions of require Customer A to put up margin applies to both non day-traders (see this Rule. When day-trading of 50 percent or $500,000 in pay- paragraph (B)) and day-traders (see occurs in the account of a “day- ment for the securities purchased in paragraph (f)(8)(B)). trader” the margin to be main- Customer A’s account (see Regula- tained shall be the margin on the tion T, Section 220.12(a)). Regula- • Rule 2520 was created to work in “long” or “short” transaction, tion T would require Customer B to tandem with Regulation T. Therefore, whichever occurred first, as put up margin of 150 percent or because Regulation T calculations required by Regulation T of the $1,500,000 in payment for the secu- are made only at the end of the day, Board of Governors of the Fed- rities sold short in Customer B’s Rule 2520 maintenance margin cal- eral Reserve System or as account, of which $1,000,000 could culations must be made only at the required pursuant to the other come from the proceeds of the short end of the day. provisions of this Rule, whichev- sale (see Regulation T, Section er amount is greater. 220.12(c)(1)). Although firms may calculate margin intra-day for risk assessment and risk Questions And Answers Rule 2520 requires maintenance avoidance purposes, and may Relating To The Calculation Of margin for Customer A of $250,000 impose margin calls based on such Initial And Maintenance (25 percent of the market value long) intra-day calculations, members may Margin On Day-Trading And and maintenance margin for Cus- not grant additional buying power2 to Cross-Guaranteed Accounts tomer B of $300,000 (30 percent of a customer on the basis of such intra- the market value short). (See Rule day calculations. Buying power may For the purpose of the illustra- 2520, paragraphs (c)(1) and (c)(3) only be based on the preceding day’s tions contained in this Notice, the respectively.) end-of-the-day margin calculations. examples assume: 1) that the securities discussed are margin- 2. • A maintenance margin call may be able equity securities; 2) that satisfied by a deposit of cash, margin unless otherwise noted the main- Q. Considering the facts in Question securities, or exempted securities, in tenance margin requirement on 1 again, would the answer be differ- any combination. A maintenance short transactions is 30 percent of ent if the securities bought by Cus- margin call may not be satisfied by a the current market value of the tomer A and sold short by Customer transfer from the SMA. security; 3) the customer intends B were the same securities, i.e., to meet his/her requirement with a because of the cross guarantee the • Rule 2520(f)(4) permits special deposit of cash; and 4) that each accounts were fully hedged? margin treatment for transactions in of the customers has a history of cross-guaranteed accounts if certain day-trading, whether or not the A. Again, since Regulation T does conditions are met. Since Regulation trades in a specific example are not acknowledge the existence of the T does not recognize cross guaran- day-trades. cross guarantee, Regulation T would tees, nothing in Rule 2520 is intend- require Customer A to put up margin ed to grant guaranteed accounts any 1. of 50 percent or $500,000 in pay- benefit that would circumvent the ment for the securities purchased in provisions of Regulation T. Q. Customer A and Customer B Customer A’s account (see Regula- cross guarantee each other’s tion T, Section 220.12(a)). Regula- • Day-trading is recognized by Rule accounts. Customer A buys tion T would require Customer B to 2520 through the definitions of “day- $1,000,000 of securities on Day 1 put up margin of 150 percent or trading,” “day-trader” and the margin and is long the securities at the end $1,500,000 in payment for the secu- of the day. Customer B sells short rities sold short in Customer B’s

NASD Notice to Members 98-102 December 1998 761 account, of which $1,000,000 could $100,000 without incurring a Regula- a Regulation T call) since it is Rule come from the proceeds of the short tion T call. Buying power is calculat- 2520 (b) that sets the margin for the sale (see Regulation T, Section ed as follows: ($250,000 - ($400,000 trade. 220.12(c)(1)). x 50%)) x 2 = $100,000. 5. Rule 2520 (e)(1) permits mainte- Going into Day 2, the customer has nance margin of five percent of the day-trading buying power of Q. On Day 1, Customer E buys 100 current market value of the long $300,000 because the maintenance ABCD at $88 in an existing margin securities for “Offsetting ‘Long’ and margin excess of $150,000 provides account that has no SMA, and ‘Short’ Positions” where the same day-trading buying power of deposits $4,400, which is the Regu- security is carried long and short for $300,000. If Customer C purchases lation T requirement, into the the same customer. Given the exis- securities on Day 2 which he subse- account. She carries the position tence of the cross guarantee, Rule quently sells on Day 2, i.e., he over into Day 2. On Day 2, she sells 2520(f)(4) allows any account guar- engages in day-trading, he can make 100 ABCD at $89 at 11 a.m. What is anteed by another account to be such purchases up to $300,000 with- impact of the sale on the customer’s consolidated with the other account, out incurring a day-trading call. This Regulation T buying power or day- and the margin to be maintained is calculated as follows: ($250,000 - trading buying power for the remain- may be determined on the net posi- ($400,000 x 25%)) x 2 = $300,000. der of Day 2? tions on both accounts. In this case, since Customer A and Customer B The above answer presumes Cus- A. Going into Day 2, the customer are long and short the same securi- tomer C did not incur a loss on the has zero Regulation T buying power ties, and since they cross guarantee day-trades (i.e., made a profit or since she deposited the exact each other’s accounts, they may uti- broke even). If Customer C were to amount of the Regulation T require- lize the five percent maintenance buy $300,000 of securities and sell ment into her account on Day 1, i.e., margin requirement outlined in para- them the same day for $280,000, he $8,800 x 50% = $4,400. Per Regula- graph (e)(1) on the offsetting posi- would have a Regulation T call for tion T, Section 220.4(c)(1), buying tions. Therefore, the required $20,000, or 100 percent of the loss. power for Day 2 is based on the sta- maintenance margin for the com- Regulation T requires additional mar- tus of the account at the end of Day bined position would be $50,000. gin when a transaction creates or 1. Intra-day sales on Day 2 cannot increases a margin deficiency in an be used to increase Regulation T 3. amount equal to the deficiency creat- buying power for Day 2. Therefore, ed or increased (see Regulation T, Customer E’s Regulation T buying Q. On Day 1, Customer C purchases Section 220.4(c)(1)). power for Day 2 remains at zero, $400,000 of securities. The Regula- irrespective of the sale on Day 2. tion T margin required is $200,000. 4. The customer deposits $250,000 Going into Day 2, the customer has cash in the account and, as a result, Q. Customer D makes one purchase day-trading buying power of $4,400. has received a margin loan of for $2,000,000 in the morning of Day If Customer E chooses to purchases $150,000 from the broker/dealer to 1 and then sells the securities at a securities on Day 2 that she subse- complete the transaction. What is the profit in the afternoon of Day 1 for quently sells on Day 2, i.e., she customer’s Regulation T buying the same account ending the day engages in day-trading, she can power for Day 2? What is the cus- with no securities position. What is make such purchases up to $4,400 tomer’s day-trading buying power for the customer’s margin requirement? without incurring a day-trading call. Day 2? This is calculated as follows: ($4,400 A. Regulation T margin is calculated - ($8,800 x 25%)) x 2 = $4,400. The A. Going into Day 2, Customer C on the end of the day position. customer’s day-trading buying power has Regulation T buying power of Because the customer has no secu- is set at $4,400 for Day 2. It can not $100,000 because the previous rities position at the end of the day, be adjusted by intra-day activity. day’s Regulation T excess of and did not incur a loss, there is no $50,000 would provide $100,000 in Regulation T requirement. However, 6. buying power. Thus, if Customer C there is a required day-trading main- purchases securities on Day 2 that tenance margin requirement of Q. On Day 1, Customer F has an he does not sell on Day 2, he can $1,000,000. The margin call would account containing equity securities make such purchases up to be classified as a Rule 2520 Call (not with a market value of $100,000, a

NASD Notice to Members 98-102 December 1998 762 debit balance of $70,000, equity of Customer F has a maintenance mar- 431, including paragraph numbering. Thus, $30,000, and maintenance margin gin excess of $5,000 ($30,000 - for example, paragraph 2520(f)(4) is the excess of $5,000. On Day 2, the cus- ($100,000 x 25%)). She could use same as NYSE Rule 431(f)(4). The NASD tomer purchases $100,000 in equity this excess to day-trade $10,000 has also customized Rule 2520 in a few securities and later in the same day ($5,000 x 2) in equity securities on places in recognition of certain differences sells them for $105,000. What is the Day 2 without having to deposit any between the NASD and NYSE in rules, juris- Regulation T requirement for Day 2? additional margin as long as she diction, and market structure. Members incurs no loss (i.e., she makes a should be familiar with the requirements of A. Regulation T margin is calculated proﬁt or breaks even) on the Day 2 either NASD Rule 2520 or NYSE Rule 431, on the end of the day position. Since day-trades. Taking the above into depending upon which one applies to them. the customer has no securities posi- account, the customer should tion at the end of Day 2 resulting receive a Rule 2520 day-trading mar- 2Buying power - either Regulation T or day- from Day 2 transactions and earned gin call of $45,000 representing half trading - represents the dollar value of secu- a proﬁt on the sale, there is no Regu- of the purchase price not covered by rities that can be purchased with a given lation T requirement for Day 2. the day-trading buying power. amount of Regulation T or maintenance margin excess respectively (usually twice the However, there is a Rule 2520 amount of the excess). requirement. Going into Day 2, the Endnotes customer may use the maintenance 1Several years ago, the NASD amended © 1998, National Association of Securities Dealers, margin excess carried over from Day Rule 2520 to make it substantially the same Inc. (NASD). All rights reserved. 1 to day-trade additional securities. as New York Stock Exchange (NYSE) Rule

NASD Notice to Members 98-102 December 1998 763 Executive Summary $250, and two or more Market NASD Effective January 1, 1999, the maxi- Makers. mum Small Order Execution Sys- temSM (SOESSM) order sizes for 476 In accordance with Rule 4710, Nas- Notice to Nasdaq National Market® (NNM) daq periodically reviews the maxi- securities will be revised in accor- mum SOES order size applicable to dance with National Association of each NNM security to determine if Members Securities Dealers, Inc. (NASD®) the trading characteristics of the Rule 4710(g). issue have changed so as to warrant 98-103 an adjustment. Such a review was For more information, please contact conducted using data as of Septem- Nasdaq® Market Operations at (203) ber 30, 1998, pursuant to the afore- Maximum SOES Order 378-0284. mentioned standards. The maximum Sizes Set To Change SOES order-size changes called for by this review are being implemented January 1, 1999 Description with three exceptions. Under Rule 4710, the maximum SOES order size for an NNM security • First, issues were not permitted to is 1,000, 500, or 200 shares, move more than one size level. For Suggested Routing depending on the trading characteris- example, if an issue was previously Senior Management tics of the security. The Nasdaq categorized in the 1,000-share Workstation II® (NWII) indicates the level, it would not be permitted to Advertising maximum SOES order size for each move to the 200-share level, even if Continuing Education NNM security. The indicator “NM10,” the formula calculated that such a “NM5,” or “NM2” displayed in NWII move was warranted. The issue Corporate Finance corresponds to a maximum SOES could move only one level to the Executive Representatives order size of 1,000, 500, or 200 500-share level as a result of any 1 Government Securities shares, respectively. single review.

Institutional The criteria for establishing maxi- • Second, for securities priced below Insurance mum SOES order sizes are as fol- $1 where the reranking called for a Internal Audit lows: reduction in the level, the maximum SOES order size was not reduced. Legal & Compliance (1) a 1,000-share maximum order Municipal size shall apply to NNM securities • Third, for the top 50 Nasdaq securi- on SOES with an average daily ties based on market capitalization, Mutual Fund non-block volume of 3,000 shares the maximum SOES order sizes Operations or more a day, a bid price of less were not reduced, regardless of Options than or equal to $100, and three or whether the reranking called for a more Market Makers; reduction. Registered Representatives Registration (2) a 500-share maximum order size In addition, with respect to initial pub- Research shall apply to NNM securities on lic offerings (IPOs), the SOES order- SOES with an average daily non- size reranking procedures provide Syndicate block volume of 1,000 shares or that a security must ﬁrst be traded on Systems more a day, a bid price of less than Nasdaq for at least 45 days before it or equal to $150, and two or more is eligible to be reclassiﬁed. Trading Market Makers; and Training Thus, IPOs listed on Nasdaq within Variable Contracts (3) a 200-share maximum order size the 45 days prior to September 30, shall apply to NNM securities with 1998, were not subject to SOES an average daily non-block volume order-size reranking procedures. of less than 1,000 shares a day, a bid price of less than or equal to

NASD Notice to Members 98-103 December 1998 765 Following is a listing of the 476 NNM size for an NNM security in an amount equal ing unit when a Market Maker is not display- issues that will have the maximum to the maximum SOES order size for that ing a limit order, and which thus eliminated SOES order size changed on Jan- security. See generally, NASD Rule the requirement that Market Makers quote a uary 1, 1999. 4613(a)(1) - (2). On July 15, 1998, the Secu- size equal to the maximum SOES order size. rities and Exchange Commission approved Endnote an amendment to NASD Rule 4613(a)(1)(C), © 1998, National Association of Securities Dealers, 1 Previously, Nasdaq Market Makers were which reduced the minimum quotation size Inc. (NASD). All rights reserved. required to maintain a minimum quotation for all Nasdaq securities to one normal trad-

Maximum SOES Order Size Changes In NNM Securities All Issues In Alphabetical Order By Security Name (Effective January 1, 1999)

Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level

A AXTI AMERICAN XTAL TECH 200 500 ABANP ABI CAP TRUST PFD 200 500 AZTC AZTEC TECH PTNRS 200 500 ABBKP ABINGTON TR PFD 200 500 ABFI AMERICAN BUS FIN S 500 1000 B ABFSP ARKANSAS BEST CV P 200 500 ABGX ABGENIX INC 200 500 BARI BANK RHODE ISLAND 500 1000 ACLE ACCEL INTL CP 1000 500 BAYB BAY BANCSHARES 500 1000 ACLNF A C L N LIMITED 200 500 BBAR BALANCE BAR CO 200 500 ACMTA A C M A T CP CL A 200 500 BCORY BIACORE INTL AB ADR 500 200 ACTU ACTUATE SOFTWARE 200 500 BCSB BCSB BANKCORP 200 500 ADGO ADAMS GOLF INC 200 500 BCST BROADCAST.COM 200 500 ADPI AMERICAN DENTAL 500 1000 BEBE BEBE STORES INC 200 500 ADSC ATLANTIC DATA SVCS 200 500 BEERF BIG ROCK BREWERY LTD 500 200 AHAA ALPHA INDS INC 200 500 BESIF B E SEMICON ORD SHRS 500 200 AIRS AMERICAN AIRCARRIE 200 500 BEYE BOLLE INC 500 1000 AKZOY AKZO NOBEL NV ADR 500 1000 BHAG B H A GP HLDGS 1000 500 ALGX ALLEGIANCE TELECOM 200 500 BIORY BIORA AB ADR 1000 500 ALREF ANNUITY AND LIFE 500 1000 BKCT BANCORP CONN INC 1000 500 AMBC AMER BNCP OHIO 1000 500 BKUNZ BANKUNITED CAP II 500 1000 AMBCP AMER BNCP CAP TR 200 500 BLCA BOREL BK & TR (CA) 500 200 AMCT AMRESCO CAP TRUST 500 1000 BNBC BROAD NATL BNCP 1000 500 AMKR AMKOR TECHNOLOGY 500 1000 BNCM BNC MORTGAGE INC 500 1000 ANAT AMER NATL INS CO 500 1000 BNSC BANK OF SANTA CLAR 500 200 ANCOW ANACOMP INC WTS 500 200 BOGN BOGEN COMMUN INT 200 500 ANDR ANDERSEN GROUP INC 1000 500 BOGNW BOGEN COMMUN WT 200 500 ANSR ANSWERTHINK CONS 200 500 BOKF B O K FINL CP 500 1000 ARDNA ARDEN GROUP CL A 200 500 BORAY BORAL LTD ADS 200 500 ARGX ARGUSS HOLDINGS INC 500 1000 BOYD BOYD BROS TRANS IN 500 1000 ARMHY ARM HLDGS ADS 500 1000 BPAO BALDWIN PIANO ORGA 1000 500 ARSCW ARIS CORP WTS 200 500 BPFH BOSTON PVT FIN 500 1000 ARTW ART S WAY MFG CO I 200 500 BRCM BROADCOM CORP CL A 500 1000 ASAM ASAHI/AMERICA INC 500 1000 BRGP BUSINESS RESOURCE 500 1000 ASPCE ASPEC TECH INC 500 1000 BRID BRIDGFORD FOODS CP 500 1000 ASTI ALLERGAN SPEC WI 500 1000 BRKL BROOKLINE BANCORP 500 1000 ASYCF ARCHITEL SYST CORP 200 500 BRYO BRIO TECHNOLOGY 500 1000 ASYM ASYMETRIX LEARNING 200 500 BTBTY B T SHIP SPONSOR ADR 200 500 ATGC ATG INC 500 1000 BTSR BRIGHTSTAR INFO 500 1000 ATPX ADV TEC PROD 500 1000 BUCK BUCKHEAD AMERICA C 1000 500

NASD Notice to Members 98-103 December 1998 766 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level BVEW BINDVIEW DEV CORP 200 500 COLTY C O L T TELECOM AD 500 1000 BWCF BWC FINANCIAL CORP 200 500 COOL CYBERIAN OUTPOST 200 500 BYND SOFTWARE.NET CP 200 500 CRAI CHARLES RIVER 500 1000 CRDT CREDITRUST CORP 200 500 C CRGN CURAGEN CORP 500 1000 CRHCY C R H PLC ADR 200 500 CANI CARREKER-ANTINORI 200 500 CRSB CRUSADER HLDG CORP 1000 500 CASA CASA OLE' RESTRS I 500 1000 CSCQW CORRECTIONAL SVCS 1000 500 CAVB CAVALRY BANCORP 500 1000 CSON COHESION TECHS 200 500 CBBI C B BANCSHARES 500 1000 CSTL CASTELLE 1000 500 CBCI CALUMET BANCORP IN 500 1000 CTSH COGNIZANT TECH SOL 200 500 CBMD COLUMBIA BANCORP M 500 1000 CTWS CONN WATER SVCS IN 500 1000 CBNY COMMERCIAL BK OF N 1000 500 CULS COST-U-LESS INC 200 500 CBRNB CANANDAIGUA BRANDS 500 200 CVBK CENTRAL VA BKSHS I 200 500 CCBG CAPITAL CITY BANK 500 1000 CVOL COVOL TECHS INC 500 1000 CCBN CENTRAL COAST BCP 200 500 CWCOF CAYMAN WATER ORD 1000 500 CCHE CLINICHEM A 200 500 CWLZ COWLITZ BANCORPN 500 1000 CCHM COMBICHEM INC 500 1000 CCPRZ COAST FED LIT CPR 500 1000 CDIR CONCEPTS DIRECT IN 1000 500 D CEBK CENTRAL CO OP BANK 500 1000 CERB C E R B C O INC 500 1000 DACG DA CONSULTING GRP 500 1000 CFBC COMMUNITY FIRST BN 500 1000 DCBI DELPHOS CITIZENS B 500 1000 CFIC COMMUNITY FIN CP 1000 500 DCBK DESERT COMMUNITY B 200 500 CFKY COLUMBIA FIN KY 500 1000 DCLK DOUBLECLICK INC 500 1000 CGII CUNNINGHAM GRAPHIC 500 1000 DCPI DICK CLARK PROD IN 500 200 CHANF CHANDLER INS CO LTD 500 1000 DCRNW DIACRIN INC WT 500 1000 CHAS CHASTAIN CAP CORP 500 1000 DECO DECORA INDS 500 1000 CHKE CHEROKEE INC 500 1000 DGIC DONEGAL GROUP INC 500 1000 CIBN CALIFORNIA IND BNC 500 200 DIIBF DOREL INDS CL B 500 1000 CITC CITADEL COMMUN CP 200 500 DLVRY CORTECS INTL SPO ADR 1000 500 CITZ CFS BANCORP INC 200 500 DNFCP D & N CAP CORP PFD 200 500 CLBR CALIBER LEARN NTWK 500 1000 DOCC DOCUCORP INTL 500 1000 CLEC US L E C CP 500 1000 DOCDF DOCDATA NV 1000 500 CLRS CLARUS CORPORATION 200 500 DRAI DATA RESEARCH ASSO 1000 500 CLTDF COMPUTALOG LTD 200 500 DRIV DIGITAL RIVER INC 200 500 CLTX COLLATERAL THERAP 200 500 DROV DROVERS BANCSHARES 200 500 CMIV IVI CHECKMATE CORP 200 500 DRRAP DURA AUTO CAP TR 500 1000 CMLS CUMULUS MEDIA INC 200 500 DXCPO DYNEX CAPITAL PFD B 1000 500 CMND COMMAND SYSTEMS 500 1000 CMPS COMPASS INTL SVCS 500 1000 E CMTO COM21 INC 200 500 CNAF COMMERCIAL NATL FI 500 200 EBSC ELDER-BEERMAN ST 500 1000 CNBA CHESTER BANCORP IN 500 1000 ECLP ECLIPSYS CORP 200 500 CNBF C N B FINANCIAL CP 500 1000 EDCO EDISON CONTROL CP 500 200 CNBKP CENTURY BCP CAP TR 200 500 EDEL EDELBROCK CP 1000 500 CNDSP CELLNET FNDG PFD 500 1000 EDIN EDUCATIONAL INSIGH 500 1000 CNRD CONRAD INDS INC 200 500 EFBI ENTERPRISE FED BNC 500 1000 CNTBY CANTAB PHARM 500 200 ELBO ELECTRONICS BOUT 200 500 COBZ COLORADO BUS BCSHS 200 500 ELON ECHELON CORP 200 500 COLM COLUMBIA SPRTSWR 500 1000 EMCC EUROPEAN MICRO HLD 200 500

NASD Notice to Members 98-103 December 1998 767 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level ENBRF ENBRIDGE INC 200 500 GCLI GRAND COURT LIFE 500 1000 ENGEF ENGEL GNRL DEV SE 1000 500 GCTY GEOCITIES 200 500 ENGSY ENERGIS ADS 1000 500 GEND GENESIS DIRECT INC 500 1000 ENSR ENSTAR INC 500 1000 GIGX GIGA INFO GROUP 200 500 ERTH EARTHSHELL CORP 500 1000 GISX GLOBAL IMAGING SYS 200 500 ETRC EQUITRAC CP 500 1000 GLDBP GBCI CAP TR PFD 500 200 EVOL EVOLVING SYSTEMS 500 1000 GNET GO2NET INC 500 1000 EXDS EXODUS COMMUN 500 1000 GNSSF GENESIS MICROCHIP 500 1000 GNTY GUARANTY BANCSHARE 200 500 F GSBNZ GOLDEN LIT WTS 500 1000 GSOF GROUP 1 SOFTWR 500 1000 FACT FIRST ALBANY COS I 1000 500 GSTX GST TELECOMMUN INC 500 1000 FBCI FIDELITY BANCORP D 500 1000 GTAX GILMAN & CIOCIA INC 500 1000 FCFCO FIRSTCITY SPCL PFD 200 500 GTPS GREAT AMER BNCP IN 500 1000 FCIN FLOUR CITY INTL 200 500 GWBK GULF WEST BANKS 500 1000 FCNB F C N B CP 500 1000 FCNBP FCNB CAP TR PFD 200 500 FFES FIRST FED S L E.HT 1000 500 H FFFLP FIDELITY CAP TR I 1000 500 FFIN FIRST FINL BKSHS I 1000 500 HABC HABERSHAM BANCORP 500 200 FFKY FIRST FED FIN KENT 500 200 HACHA HACH COMPANY CL A 1000 500 FFLC FFLC BNCP INC 500 1000 HAMP HAMPSHIRE GROUP LT 500 200 FFOH FIDELITY FIN OF OH 500 1000 HAST HASTINGS ENT INC 200 500 FGHC FIRST GEORG HLDGS 500 1000 HAUP HAUPPAUGE DIGITAL 500 1000 FKAN FIRST KANSAS FIN 200 500 HBSC HERITAGE BNCP (DE) 500 1000 FLAG F L A G FINANCIAL 1000 500 HCAR HOMETOWN AUTO CL A 200 500 FLBK FLORIDA BANKS INC 200 500 HCOW HORIZON ORGANIC HD 200 500 FLGSP FLAGSTAR CAP PFD A 500 1000 HDVS H. D. VEST INC 1000 500 FLYAF C H C HELICO CL A 200 500 HDWY HEADWAY CORPORATE 500 1000 FLYR NAVIGANT INTL INC 200 500 HERBL DECS TRUST III 500 1000 FMARP MARINER CAP TR PFD 200 500 HFBC HOPFED BANCORP INC 1000 500 FMCO F M S FINANCIAL CP 500 1000 HFGI HARRINGTON FIN GRP 500 1000 FNBN F N B CORPORATION 500 200 HIFS HINGHAM INSTI SAVI 200 500 FNDTF FUNDTECH LTD 500 1000 HKID HAPPY KIDS INC 500 1000 FOBBA FIRST OAK BROOK CL A 500 1000 HNBC HARLEYSVILLE NATL 1000 500 FREEY FREEPAGES GR PLC ADR 500 200 HOFF HORIZON OFFSHORE 500 1000 FRPP F R P PROPERTIES I 500 200 HOLO HOLOPAK TECHS INC 1000 500 FSTH FIRST SO BCSHS INC 200 500 HORT HINES HORTICULTURE 200 500 FSVBP FRANKLIN FIN PD A 500 1000 HPBC HOME PORT BNCP INC 500 1000 FTBK FRONTIER FIN CORP 500 1000 HPSC H P S C INC 500 1000 FTCG FIRST COLONIAL GP 500 200 HRBT HUDSON RVR BNCP 200 500 FTFN FIRST FIN CP (RI) 500 200 HTBK HERITAGE COMMERCE 200 500 FUNC FIRST UNITED CORP 500 1000 HTCO HICKORY TECH CP 500 1000 FVCX FVC.COM INN 500 1000 HYBRE HYBRID NETWORKS 1000 500 HYPT HYPERION TELECOMM 500 1000 G

GABC GERMAN AMER BANCOR 200 500 I GBBKP GBB CAP I CUM TR PFD 200 500 GBLX GLOBAL CROSSING 200 500 IAABY INDIGO AVIATIO ADS 500 1000 GBNK GASTON FED BANCP 500 1000 IBOC INTL BANCSHS CP 500 1000

NASD Notice to Members 98-103 December 1998 768 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level ICBC INDEPENDENCE COMM 500 1000 LKFN LAKELAND FINL CP 500 1000 ICLRY ICON PLC ADS 500 1000 LMIA LMI AEROSPACE INC 200 500 ICOGF ICO GLOBAL COMM 200 500 LNDL LINDAL CEDAR HOMES 1000 500 ICUB INTL INTEGRATION 200 500 LSBI LSB FINANCIAL CP 200 500 IDEA INNOVASIVE DEVICES 500 1000 LVLT LEVEL 3 COMM INC 500 1000 IDGB IDG BOOKS WRLDWIDE 200 500 IFCI INTL FIBERCOM INC 500 1000 M IGPFF IMPERIAL GINSENG PRO 500 1000 IHIIZ INDUSTRIAL HLDG WT 500 200 MAGR MASTER GRAPICS INC 200 500 IMGK INTERACTIVE MAGIC 200 500 MANH MANHATTAN ASSOC 500 1000 INDYY INDEP ENERGY ADS 200 500 MARN MARION CAP HLDGS I 1000 500 INKT INKTOMI CORP 200 500 MAXC MAXCO INC 1000 500 INOC INNOTRAC CORP 500 1000 MBBC MONTEREY BAY BANCO 500 1000 INTT INTEST CORPORATION 500 1000 MBHI MIDWEST BANC HLDG 500 1000 IPLY INTERPLAY ENT CORP 200 500 MBIA MERCHANTS BNCP IL 500 1000 IROQ IROQUOIS BNCP 1000 500 MBNK MAIN STREET BNCP 500 1000 ISKO ISCO INC 1000 500 MDST MID-STATE BCSH 200 500 ISNR INTEGRATED SENS SL 500 1000 MERB MERRILL MERCHANT 200 500 ISSX I S S GROUP INC 500 1000 METF METROPOLITAN FIN C 1000 500 ISYS INTEGRAL SYSTEMS INC 500 1000 METFP METROPOLITAN CAP 500 1000 IUBCP IUB CAP TRUST PFD 1000 500 MFBC M F B CORP 200 500 MFRI M F R I INC 1000 500 MGCX MGC COMMUN INC 500 1000 J MHCO MOORE HANDLEY INC 1000 500 MIGI MERIDIAN INS GP IN 1000 500 JADEF LJ INTL INC 500 1000 MIPS MIPS TECHS INC 200 500 JADWF LJ INTL WTS 4/2002 500 1000 MNES MINE SAFETY APPLS 1000 500 JPSP JPS PACKAGING CO 200 500 MNOC MONOCACY BANCSHARE 200 500 JPST JPS TEXTILE GRP 1000 500 MOBI MOBIUS MGMT SYST 500 1000 JVLN JAVELIN SYS INC 500 1000 MOTR MOTOR CLUB OF AMER 1000 500 MRET MERIT HOLDING CP 500 1000 MSPG MINDSPRING ENTER I 500 1000 K MSTR MICROSTRATEGY INC 200 500 MTLX MARINE TRANSPORT 200 500 KASP KASPER ASL LTD 200 500 MUEL MUELLER PAUL CO 200 500 KAYE KAYE GROUP INC 500 1000 MVII MARK VII INC 500 1000 KEQU KEWAUNEE SCIENTIFI 1000 500 MXTR MAXTOR CORP 200 500 KESI KENTUCKY ELEC STEE 1000 500 KLLM K L L M TRANSPORT 500 1000 N KTII K TRON INTL INC 1000 500 NADX NATL DENTEX CP 1000 500 NBAK NATL BNCP ALASKA 500 1000 L NBCP NIAGARA BANCORP 500 1000 NCBH NORTH COUNTY BANCO 1000 500 LFBI LITTLE FALLS BNCP 500 1000 NEIB NORTHEAST IND BNCP 500 1000 LGCB LONG ISLAND COMM 1000 500 NETG NETGRAVITY INC 200 500 LIBB LIBERTY BANCORP 200 500 NGEN NANOGEN INC 500 1000 LIBHA LIBERTY HOMES INC A 500 200 NHCH NEWMARK HOMES CORP 500 1000 LIHRY LIHIR GOLD LTD ADR 1000 500 NHHC NATL HOME HLTH CAR 500 1000 LIQB LIQUI BOX CP 1000 500 NITE KNIGHT/TRIMARK GR 200 500 LJLB LJL BIOSYSTEMS 500 1000 NSBC NEWSOUTH BANCORP I 500 1000

NASD Notice to Members 98-103 December 1998 769 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level NSCF NORTHSTAR COMPUTER 1000 500 RBCAA REPUBLIC BCP CL A 200 500 NSDB N S D BANCORP INC 500 200 RBOW RAINBOW RENTALS 200 500 NTOL NATROL INC 200 500 RCBK RICHMOND COUNTY 500 1000 NUTR NUTRACEUTICAL INTL 500 1000 RCCK ROCK FINANCIAL CP 500 1000 NWFL NORWOOD FIN CORP 500 200 RDGE READING ENT INC 1000 500 RIGX REALTY INFO GROUP 200 500 RINO BLUE RHINO CORP 200 500 O RLCO REALCO INC 200 500 RSTO RESTORATION HARDWR 200 500 OAKF OAK HILL FIN INC 500 1000 RWKS RAILWORKS CORP 200 500 ODFL OLD DOMINION FREIG 500 1000 OKSB SOUTHWEST BNCP INC 500 1000 OLCWF OLICOM A/S WTS 1000 500 S OLGR OILGEAR CO 500 200 OTRX O T R EXPRESS INC 1000 500 SAVB SAVANNAH BNCP INC 200 500 OWWI OMEGA WORLDWIDE 500 1000 SBGIP SINCLAIR BRD PFD SE 500 1000 SBIBP STERLING CAP TR PF 500 200 SCCX SCC COMMUNICATIONS 200 500 P SCHR SCHERER HEALTHCARE 1000 500 SCNYA SAUCONY INC 500 1000 PABN PACIFIC CAP BNCP 500 1000 SCOT SCOTT AND STRINGF 500 1000 PACK GIBRALTAR PKG GP I 500 1000 SCSAY STOLT COMEX ADS 200 500 PAZZF PACALTA RES LTD 200 500 SENEB SENECA FOODS CP B 200 500 PBOC PBOC HOLDINGS INC 500 1000 SFED S F S BANCORP INC 500 1000 PCCC PC CONNECTION INC 500 1000 SFSW STATE FINL SVCS CL 500 1000 PCCIP PCC CAPITAL I PFD 500 200 SFXE SFX ENT CL A 500 1000 PDII PROF DETAILING INC 200 500 SHBK SHORE FINANCIAL PEBK PEOPLES BANK 500 200 CORPORATION 200 500 PGEOF PARADIGM GEOPHYS 200 500 SHOE SHOE PAVILION INC 500 1000 PHFCP PITT HOME CAP TR 500 200 SHPGY SHIRE PHARM 500 1000 PHLYZ PHIL CONS IN PRIDE 500 1000 SIDE ASSOC MATERIALS 500 1000 PILT PILOT NETWORK SVC 200 500 SIVBP SVB CAPITAL I PFD 200 500 PLFC PULASKI FURNITURE 1000 500 SJNB S J N B FINANCIAL 1000 500 PLSIA PREMIER LASER SY 1000 500 SKYEY SKYEPHARMA PLC 200 500 PMFG PEERLESS MFG CO 500 1000 SLFI STERLING FINL CP 1000 500 PNBC PRINCETON NATL BNC 1000 500 SMBC SOUTHERN MO BNCP I 500 1000 PNBF PNB FINCL GROUP 200 500 SNDS SANDS REGENT THE 500 1000 PNTE POINTE FINCL CORP 200 500 SNFCA SECURITY NATL FINL A 500 200 POSIF POINT OF SALE LTD 200 500 SNRS SUNRISE TECHNOLOGIES 200 500 POVT PROVANT INC 500 1000 SONO SONOSITE INC 500 1000 PPCCP PEOPLE'S PFD CAP C 1000 500 SPCH SPORT CHALET INC 1000 500 PPCO PENWEST PHARM 200 500 SPPR SUPERTEL HOSPITALI 1000 500 PRTW PRINTWARE INC 500 1000 SRDX SURMODICS INC 500 1000 PSBI PSB BANCORP INC 200 500 STHLY STET HELL ADS 200 500 PTRN PHOTRAN CORP 500 1000 STVI S T V GROUP INC 1000 500 PULS PULSE BANCORP INC 500 1000 SUBK SUFFOLK BNCP 1000 500 PWCC POINT WEST CAP CP 1000 500 SUBSC MIAMI SUBS CP 500 1000 SUNH SUNDANCE HOMES INC 1000 500 R SVBF SVB FIN SVCS INC 200 500 SWMAY SWEDISH MATCH AB ADR 1000 500 RARB RARITAN BANCORP IN 200 500

NASD Notice to Members 98-103 December 1998 770 Old New Old New Symbol Security Name Level Level Symbol Security Name Level Level

SWPA SOUTHWEST NATL CP 500 1000 UPFC UNITED PANAM FIN 500 1000 SWRX SOFTWORKS INC 200 500 URSI UNITED ROAD SVCS 500 1000 SYBBF SYNSORB BIOTCH INC 500 1000 UTCC URSUS TELECOM CP 500 1000 SYNM SYNTROLEUM CORP 200 500 UTCIW UNIROYAL TECH CP WTS 500 200 SYPR SYPRIS SOLU 1000 500

T V

TBCOL TRIATHALON BD DEP SH 200 500 VALN VALLEN CP 1000 500 TBFC TELEBANC FIN CP 200 500 VALU VALUE LINE INC 1000 500 TBFCP TELEBANC CAP TR 200 500 VBNJ VISTA BANCORP INC 500 1000 TFSM 24/7 MEDIA INC 200 500 VDRY VACU DRY CO 500 200 THRD T F FINANCIAL CP 1000 500 VENT VENTURIAN CP 1000 500 THRNY THORN PLC ADR 1000 500 VIAX VIAGRAFIX CORP 500 1000 THTL THISTLE GROUP HLDG 200 500 VINT GOLDEN ST VINT B 200 500 TIWIF TELESYSTEM INTL 200 500 VITX VI TECHNOLOGIES 200 500 TMSTA THOMASTON MILLS A 500 1000 VLGEA VILLAGE SUPER MKT A 500 1000 TONSF NOVAMERICAN STEEL 1000 500 VNGI VALLEY NATL GASES 500 1000 TRGNY TRANSGENE SA ADR 500 1000 VRIO VERIO INC 500 1000 TRKA TRAK AUTO CP 200 500 VSEC V S E CP 500 200 TRNI TRANS INDS INC 500 1000 VSLF SEMELE GROUP 1000 500 TSRC TECHNISOURCE INC 200 500 VTRAO VBC CAPITAL I CAP 200 500 TSSS TRIPLE S PLASTICS 1000 500 TTWO TAKE-TWO INTERACTI 500 1000 W TWNE TOWNE SVCS INC 200 500 TWTR TWEETER HOME ENT 200 500 WBCO WASHINGTON BKG CO 200 500 WCBI WESTCO BANCORP 500 1000 WCNX WASTE CONNECTIONS 200 500 U WMSI WILLIAMS INDS INC 500 1000 WORK WORKFLOW MGMT INC 200 500 UBCD UNIONBANCORP INC 1000 500 WREI WILSHIRE R E INV 500 1000 UCFC UNITED COMM FIN CP 200 500 WVFC W V S FINANCIAL CP 500 1000 UFPT U F P TECH INC 1000 500 UIRT UNITED INVST RLTY 500 1000 X ULTI ULTIMATE SOFTWARE 200 500 UMPQ SOUTH UMPQUA BANK 500 1000 XTND EXTENDED SYSTEMS #1 500 1000

NASD Notice to Members 98-103 December 1998 771 As of October 23, 1998, the following bonds were added to the Fixed Income NASD Pricing SystemSM (FIPS®). Notice to Symbol Name Coupon Maturity ACFL.GA ACC Consumer Finl Corp. 10.250 12/01/03 ANCP.GB Anacomp Inc 10.875 04/01/04 Members CSUD.GA Corning Consumer Prod. Co. 9.625 05/01/08 DDBD.GA Diamond Brands Inc. 12.875 04/15/09 98-104 DMBD.GA Diamond Brands Oper Corp. 10.125 04/15/08 DSUO.GA Doe Run Resources Corp. 0.000 03/15/03 DSUO.GB Doe Run Resources Corp. 11.250 03/15/05 FNVW.GA Fountain View Inc. 11.250 04/15/08 ICIX.GC Intermedia Communication Inc. 13.500 06/01/05 Fixed Income Pricing IMTN.GB Iron Mountain Inc. 8.750 09/30/09 System Additions, JAII.GB Johnstown America Industries Inc. 11.750 08/15/05 Changes, And Deletions JKPD.GA Jackson Products Inc. 9.500 04/15/05 As Of October 23, 1998 KTTY.GA Kitty Hawk Inc. 9.950 11/15/04 LAQU.GA La Quintas Inns Inc. 7.400 09/15/05 LAQU.GB La Quintas Inns Inc. 7.250 03/15/04 LI.GA Lilly Industries Inc. 7.750 12/01/07 MAM.GA Maxxim Medical Inc. 10.500 08/01/06 Suggested Routing MCLL.GB Metrocall Inc. 9.750 11/01/07 Senior Management MNRH.GA Mariner Health Group Inc. 9.500 04/01/06 MT.GA Meditrust Corp. 7.375 07/15/00 Advertising MT.GB Meditrust Corp. 7.600 07/15/01 Continuing Education MT.GC Meditrust Corp. 7.820 09/10/26 MT.GD Meditrust Corp. 7.000 08/15/07 Corporate Finance NFX.GA Newﬁeld Exploration Co. 7.450 10/15/07 Government Securities OEI.GC Ocean Energy Inc. 8.375 07/01/08 Institutional OEI.GD Ocean Energy Inc. 7.625 07/01/05 OEI.GE Ocean Energy Inc. 8.250 07/01/18 Insurance SKS.GA Saks Inc. 8.250 11/15/08 Internal Audit SUAS.GA South Seas Prop L.P. 10.000 04/15/03 Legal & Compliance SVIS.GA Spectra Vision Inc. 11.650 12/01/02 Municipal Mutual Fund As of October 23, 1998, the following bonds were deleted from FIPS. Operations Symbol Name Coupon Maturity Options Registered Representatives AVLM.GA Avalon Marketing Inc. 14.000 11/01/98 AXTO.GA Abraxas Petro Corp./Cn Abraxas 11.500 11/01/04 Registration DOPD.GA Doane Products Co. 10.625 03/01/06 Research GTCO.GA Great American Cookie 10.875 01/15/01 Syndicate HRJZ.GA Harrahs Jazz Co. 14.250 11/15/01 MAG.GA Magnetek Inc. 10.750 11/15/98 Systems MDCA.GA Maryland Cable Corp. 15.375 11/15/98 Trading NAV.GA Navistar Financial Corp. 8.875 11/15/98 PMIA.GA PMI Acquisition Corp. 10.250 09/01/03 Training SMU.GA Simula Inc. 12.000 11/15/98 Variable Contracts SVIS.GA Spectra Vision Inc. 11.650 12/01/02 UIS.GF Unisys Corp. 10.625 10/01/99 VDKP.GA Van de Kamps Inc. 12.000 09/15/05

NASD Notice to Members 98-104 December 1998 773 Symbol Name Coupon Maturity

VIA.GB Viacom Inc. 7.750 06/01/05 VIA.GC Viacom Inc. 6.750 05/15/03 VIA.GD Viacom Inc. 7.625 01/15/16 WHLP.GA Windy Hill Pet Food Co. 9.750 05/15/07

Any questions regarding the FIPS master ﬁle should be directed to Cheryl Glowacki, Nasdaq® Market Operations, at (203) 385-6310.

NASD Notice to Members 98-104 December 1998 774 The National Association of Securities Dealers, Inc. (NASD®) will observe the NASD following holiday schedule for 1999:

Notice to January 1 New Years Day January 18 Birthday of Martin Luther King, Jr. Members (Observed) 98-105 February 15 Presidents Day April 2 Good Friday NASD 1999 Holiday Schedule May 31 Memorial Day July 5 Independence Day (Observed) Suggested Routing Senior Management September 6 Labor Day Advertising November 25 Thanksgiving Day Continuing Education December 24 Christmas Day (Observed) Corporate Finance Executive Representatives Government Securities Questions regarding this holiday schedule may be directed to NASD Human Institutional Resources, at (301) 590-6821. Insurance Internal Audit © 1998, National Association of Securities Dealers, Inc. (NASD). All rights reserved. Legal & Compliance Municipal Mutual Fund Operations Options Registered Representatives Registration Research Syndicate Systems Trading Training Variable Contracts

NASD Notice to Members 98-105 December 1998 775 Martin Luther King, Jr., Day: Trade Date-Settlement Date Schedule NASD The Nasdaq Stock Market® and the securities exchanges will be closed on Monday, January 18, 1999, in observance of Martin Luther King, Jr., Day. “Regular way” transactions made on the business days noted below will be Notice to subject to the following schedule: Members Trade Date Settlement Date Reg. T Date* 98-106 Jan. 12 Jan. 15 Jan. 20 13 19 21

14 20 22

Trade Date–Settlement 15 21 25 Date Schedule For 1999 18 Markets Closed —

19 22 26 Suggested Routing Senior Management Advertising Continuing Education Corporate Finance Presidents Day: Trade Date-Settlement Date Schedule Government Securities The Nasdaq Stock Market and the securities exchanges will be closed on Institutional Monday, February 15, 1999, in observance of Presidents Day. “Regular way” transactions made on the business days noted below will be subject to the Insurance following schedule: Internal Audit Legal & Compliance Trade Date Settlement Date Reg. T Date* Municipal Feb. 9 Feb. 12 Feb. 17 Mutual Fund 10 16 18 Operations Options 11 17 19 Registered Representatives 12 18 22 Registration Research 15 Markets Closed — Syndicate 16 19 23 Systems Trading Training Variable Contracts

NASD Notice to Members 98-106 December 1998 777 Good Friday: Trade Date-Settlement Date Schedule The Nasdaq Stock Market and the securities exchanges will be closed on Good Friday, April 2, 1999. “Regular way” transactions made on the business days noted below will be subject to the following schedule:

Trade Date Settlement Date Reg. T Date*

March 29 April 1 April 6

30 5 7

31 6 8

April 1 7 9

2 Markets Closed —

5812

Memorial Day: Trade Date-Settlement Date Schedule The Nasdaq Stock Market and the securities exchanges will be closed on Monday, May 31, 1999, in observance of Memorial Day. “Regular way” transactions made on the business days noted below will be subject to the following schedule:

Trade Date Settlement Date Reg. T Date*

May 25 May 28 June 2

26 June 1 3

27 2 4

28 3 7

31 Markets Closed —

June 1 4 8

NASD Notice to Members 98-106 December 1998 778 Independence Day: Trade Date-Settlement Date Schedule The Nasdaq Stock Market and the securities exchanges will be closed on Monday, July 5, 1999, in observance of Independence Day. “Regular way” transactions made on the business days noted below will be subject to the following schedule:

Trade Date Settlement Date Reg. T Date*

June 29 July 2 July 7

30 6 8

July 1 7 9

2812

5 Markets Closed —

6913

Labor Day: Trade Date-Settlement Date Schedule The Nasdaq Stock Market and the securities exchanges will be closed on Monday, September 6, 1999, in observance of Labor Day. “Regular way” transactions made on the business days noted below will be subject to the following schedule:

Trade Date Settlement Date Reg. T Date*

Aug. 31 Sept. 3 Sept. 8

Sept. 1 7 9

2810

3913

6 Markets Closed —

71014

NASD Notice to Members 98-106 December 1998 779 Columbus Day: Trade Date-Settlement Date Schedule The schedule of trade dates-settlement dates below reﬂects the observance by the ﬁnancial community of Columbus Day, Monday, October 11, 1999. On this day, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation’s banking institutions will be closed.

Trade Date Settlement Date Reg. T Date*

Oct. 5 Oct. 8 Oct. 12

61213

71314

81415

11 14 18

12 15 19

Note: October 11, 1999, is considered a business day for receiving customers’ payments under Regulation T of the Federal Reserve Board.

Transactions made on Monday, October 11, will be combined with transactions made on the previous business day, October 8, for settlement on October 14. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 11.

NASD Notice to Members 98-106 December 1998 780 Veterans Day And Thanksgiving Day: Trade Date-Settlement Date Schedule The schedule of trade dates-settlement dates below reﬂects the observance by the ﬁnancial community of Veterans Day, Thursday, November 11, 1999, and Thanksgiving Day, Thursday, November 25, 1999. On Thursday, November 11, The Nasdaq Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation’s banking institutions will be closed in observance of Veterans Day. All securities markets will be closed on Thursday, November 25, in observance of Thanksgiving Day.

Trade Date Settlement Date Reg. T Date*

Nov. 5 Nov. 10 Nov. 12

81215

9 15 16

10 16 17

11 16 18

12 17 19

19 24 29

22 26 30

23 29 Dec. 1

24 30 2

25 Markets Closed —

26 Dec. 1 3

Note: November 11, 1999, is considered a business day for receiving customers’ payments under Regulation T of the Federal Reserve Board.

NASD Notice to Members 98-106 December 1998 781 Christmas Day: Trade Date-Settlement Date Schedule The Nasdaq Stock Market and the securities exchanges will be closed on Friday, December 24, 1999, in observance of Christmas Day. “Regular way” transactions made on the business days noted below will be subject to the following schedule:

Trade Date Settlement Date Reg. T Date*

Dec. 20 Dec. 23 Dec. 28

21 27 29

22 28 30

23 29 31

24 Markets Closed —

27 30 Jan. 3, 2000

Note: The Nasdaq Stock Market and the securities exchanges will be open on December 31, 1999, and January 3, 2000.

Brokers, dealers, and municipal securities dealers should use the foregoing settlement dates for purposes of clearing and settling transactions pursuant to the National Association of Securities Dealers, Inc. (NASD®) Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

Questions regarding the application of those settlement dates to a particular situation may be directed to the NASD Uniform Practice Department at (203) 375-9609.

NASD Notice to Members 98-106 December 1998 782 Executive Summary specific fees that do not apply, without NASD This Notice reminds National Associ- discussing the fees or expenses that ation of Securities Dealers, Inc. do apply. Such presentations raise (NASD®) members of their obligation investor protection concerns because Notice to to ensure that discussions concern- of the possibility that the presentations ing fees and expenses in mutual fund may confuse investors about the advertisements and sales literature range of fees and expenses that the Members as defined in NASD Rule 2210(a) are investors must pay when they pur- fair, balanced, and not misleading. chase and own particular products. 98-107 This Notice also provides guidance concerning fee and expense disclo- NASD Regulation reminds members sure in certain types of mutual fund that all of their mutual fund sales sales material, and announces an material must similarly comply with NASD initiative to review this issue NASD rules. Discussions of factors NASD Reminds further. such as fees and expenses should be Members Of Their fair and balanced, whether the invest- Obligations To Disclose Questions concerning this Notice may ment decision concerns the purchase Mutual Fund Fees be directed to Thomas M. Selman, of mutual funds or other investment Vice President, Investment Compa- products. In order to ensure greater nies/Corporate Financing, NASD consistency in the application of the Regulation, Inc. (NASD RegulationSM), principles concerning disclosure of at (202) 728-8068, or Robert J. Smith, fees and expenses, NASD Regulation Suggested Routing Assistant General Counsel, NASD now takes the interpretive position that Senior Management Regulation, at (202) 728-8176. if an item of sales material lists specific mutual fund fees and expenses that Advertising Requirements Concerning Dis- do not apply to the purchase, redemp- Continuing Education closure Of Fees And Expenses tion, or ownership of the fund’s shares, then this sales material ordi- Corporate Finance Lists Of Fees And Expenses narily must list specific fees and Executive Representatives That Do Not Apply expenses that do apply (e.g., applica- Government Securities ble maximum front-end and deferred NASD Rule 2210(d)(1) generally sales charges and redemption fees, Institutional requires that all member communica- and operating expenses). As always, Insurance tions with the public provide a sound NASD Regulation staff will respond to Internal Audit basis for evaluating the facts regard- questions from members who file ing a particular security or service and such sales material, concerning the Legal & Compliance that they include material qualifica- practical application of this interpretive Municipal tions necessary to ensure that the position. communications are fair, balanced, Mutual Fund and not misleading.1 Rule 2210 also Disclosure Of Sales Loads Operations prohibits the use of exaggerated, Under SEC Rule 482 Options unwarranted, or misleading statements or claims. NASD Regulation Members also are reminded that Registered Representatives has long interpreted Rule 2210 to pro- Securities and Exchange Commis- Registration hibit members from making mislead- sion (SEC) Rule 482 under the Secu- Research ing or confusing presentations in their rities Act of 1933 and SEC Rule sales material concerning the fees 34b-1 under the Investment Compa- Syndicate and expenses associated with a vari- ny Act of 1940 require that sales Systems ety of investment products and ser- material presenting data about the vices, including discount brokerage, performance of an advertised mutual Trading wrap accounts, and variable products. fund, also disclose the maximum Training amount of any sales load or other Variable Contracts In particular, NASD Regulation strong- nonrecurring fee. In addition, SEC ly objects to presentations that list Rule 156 under the Securities Act of

NASD Notice to Members 98-107 December 1998 783 1933, which provides guidance on ly, sales material that discloses the addressed through new NASD stan- when sales material may be mislead- load charged by a mutual fund also dards; ing, indicates that statements about must disclose that other expenses investment expenses may be rele- apply to a continued investment in • NASD Regulation should impose vant to whether an implicit represen- the fund and are described in the specific requirements concerning the tation about future performance has fund's current prospectus, to ensure prominence of fee and expense dis- been made. that investors are not confused about closure in sales material; and whether the load represents the only Use Of The Term “No-Load” fee or expense associated with the • other types of sales material should purchase or continued investment in describe the fees and expenses that NASD Regulation does not currently the mutual fund. an investor could expect to incur interpret the SEC and NASD rules to when purchasing and holding an require disclosure of total fund oper- Future Initiatives advertised mutual fund, including the ating expenses or other applicable NASD Regulation and its Investment fund’s expense ratio, maximum sales fees when sales material merely Companies Committee (the Commit- charge, redemption fee, and maxi- refers to the advertised mutual fund tee) recognize the importance of mum deferred sales load. as “no-load” or part of a “no-load” ensuring that presentations in mem- family of funds. In addition, this type ber sales material concerning mutual During its evaluation of these issues, of disclosure is not currently required fund fees and expenses are fair, bal- NASD Regulation intends to seek when, in discussing how to invest in anced, and not misleading. Conse- the views of NASD members and the the fund, the sales material states quently, the Committee has investing public. merely that the mutual fund imposes recommended that the NASD Regu- no sales charge. lation staff comprehensively evaluate the standards applicable to the dis- Endnote Members are on notice, however, closure of fees and expenses in 1Rule 2210(d)(2)(E) specifically prohibits any that NASD Regulation now takes the mutual fund sales material. The staff statement that a service is furnished without position that in all such cases, the intends to consider, among other any charge unless the service is furnished sales material must disclose the fact issues, whether: free without condition or obligation. that other fees and expenses do apply to a continued investment in • the existing NASD standards are © 1998, National Association of Securities Dealers, the fund and are described in the adequate; Inc. (NASD). All rights reserved. fund’s current prospectus. (This disclosure could accompany the disclo- • certain types of sales material pre- sure telling investors to read the sent specific concerns that should be prospectus before investing.) Similar-

NASD Notice to Members 98-107 December 1998 784 NASD Regulation, Inc. (NASD Premier Capital Management, Inc. Di s c i p l i n a r y Re g u l a t i o n SM ) has taken disciplinary (Dallas, Texas) and Bryan James actions against the following firms and O’Leary (Registered Principal, individuals for violations of National Dallas, Texas) submitted a Letter of Actions Association of Securities Dealers, Inc. Acceptance, Waiver, and Consent (N A S D ¨) rules; federal securities laws, pursuant to which they were rules, and regulations; and the rules of censured and fined $10,000, jointly the Municipal Securities Rulemaking and severally. In addition, O’Leary Board (MSRB). Unless otherwise indi- was suspended as an introducing Di s c i p l i n a r y Actions cated, suspensions will begin with the broker/dealer FINOP for 10 business Re p o r ted For December opening of business on Monday, days. Without admitting or denying December 21, 1998. The information the allegations, the respondents relating to matters contained in this consented to the described sanctions No t i c e is current as of the end of and to the entry of findings that the November 23. firm, acting through O’Leary, failed to post accurately on its general ledger and trial balance liabilities incurred Firms Fined, Individuals for advertising expense. The find i n g s Sanctioned also stated that the firm, acting Hunter International Securities, through O’Leary, effected securities Inc. (Ft. Lauderdale, Florida) an d transactions while failing to maintain Louis Nick Nizza, Jr. (Registered required minimum net capital. Principal, Deerfield Beach, Fl o r i d a ) . The firm was censured and Firms And Individuals Fined fined $40,000 and Nizza was E-W Investments, Inc. (San censured, fined $20,000, barred Gabriel, California) and Jo h n from acting in the capacity of Arthur Pong (Registered Principal, financial and operations principal San Gabriel, California) submitted a (FINOP), suspended from Letter of Acceptance, Waiver, and association with any NASD member Consent pursuant to which they were in any capacity for 60 days, and censured, fined $10,000, jointly and required to requalify by exam before severally, and ordered to reimburse acting in any capacity requiring public customers the total amount of registration. The National commissions in excess of five per- Adjudicatory Council (NAC) imposed cent ($2,411.78). In addition, the firm the sanctions after review of an was ordered to hire a new FINOP, Atlanta District Business Conduct other than Pong, and retain the new Committee (DBCC) decision. The principal for one year or until Pong sanctions were based on find i n g s successfully requalified as a FINOP that the firm, acting through Nizza, should he elect to do so. Without conducted a securities business admitting or denying the allegations, while it maintained insufficient net the respondents consented to the capital and failed to maintain described sanctions, and to the entry accurate books and records. In of findings that the firm, acting under addition, the firm, acting through the direction and control of Pong, Nizza, filed materially inaccurate acted as an agent for public cus- FOCUS Part I and IIA reports. tomers in securities transactions and Hunter International reported charged the customers more than a Na s d a q ¨ transactions erroneously, fair commission, taking into consider- failed to disclose its Market Maker ation all relevant circumstances status on confirmations, and failed to including market conditions with disclose the markup or markdown it respect to such securities at the time charged on confirmations. of the transactions, the expense of executing the orders, and the value

NASD Notices to Members—Disciplinary Actions December 1998 785 of any services they may have ren- of findings that it was named as a Consent pursuant to which the firm dered by reason of experience in and respondent in certain arbitration pro- was censured and fined $15,000. knowledge of such securities and the ceedings filed with the NASD by vari- Without admitting or denying the alle- markets. The findings also stated ous public customers who included gations, the firm consented to the that the firm, acting under the direc- demands for punitive damages, attor- described sanctions and to the entry tion and control of Pong, failed to neys’ fees, as well as other relief. of findings that the firm reported have and maintain sufficient net capi- According to the findings, each of the transactions to ACT in violation of tal. customers signed an agreement with applicable securities laws and regu- the firm stating that the terms of the lations regarding trade reporting. The Securities & Investment Planning agreement would be governed by the findings also stated that the firm Company (Chatham, New Jersey) laws of the state of New York. The failed to reflect accurately the time of and Daryl Scott Hersch (Regis- NASD determined that in some of execution on order tickets for trans- tered Principal, Chatham, New Jer- these proceedings, Bear Stearns actions in OTC equity securities, in sey) submitted a Letter of asserted that New York law applied Nasdaq National Market¨ se c u r i t i e s , Acceptance, Waiver, and Consent to the proceeding by virtue of the and a transaction in a Nasdaq Small- pursuant to which they were cen- governing law clause in the customer Ca p SM Market security. In addition, the sured, fined $10,000, jointly and sev- agreement and therefore precluded NASD determined that the firm failed erally, and the firm was fined an an award of punitive damages or to provide to a public customer the additional $17,500. Without admitting attorneys’ fees, in violation of IM- requisite written disclosures or confir- or denying the allegations, the 3110(f)(4). mations concerning securities trans- respondents consented to the actions variously executed in two described sanctions and to the entry Biltmore Securities, Inc. (Fort brokerage accounts, and that the firm of findings that the firm, acting Lauderdale, Florida) submitted a conducted a general securities busi- through Hersch, failed to file reports Letter of Acceptance, Waiver, and ness while failing to have and main- in a timely manner pursuant to the Consent pursuant to which the firm tain sufficient net capital. The firm NASD reporting rule. The find i n g s was censured, fined $20,000, and also failed to establish, maintain, and also stated that the firm, acting required to undertake additional cor- enforce written supervisory proce- through Hersch, reported transac- rective actions to prevent future viola- dures reasonably designed to tions to the Automated Confirm a t i o n tions. Without admitting or denying achieve compliance with the applica- Transaction ServiceSM (A C T SM ) in vio- the allegations, the firm consented to ble securities laws pertaining to trade lation of applicable securities laws the described sanctions and to the reporting. and regulations regarding trade entry of findings that it was named as reporting and failed to develop writ- a respondent in certain arbitration Gaines, Berland Inc. (Bethpage, ten supervisory procedures to proceedings filed with the NASD by New York) submitted a Letter of address the NASD reporting require- public customers who sought puni- Acceptance, Waiver, and Consent ments and trade reporting/ACT sub- tive damages or attorneys’ fees. pursuant to which the firm was cen- missions. The NASD also According to the findings, each of the sured, fined $31,000, and required to determined that the firm, acting customers signed an agreement with pay $9,617.62 in restitution and inter- through Hersch, failed to enforce the the firm stating that the proceeding est to public customers. Without written procedures it had established would be governed by the laws of the admitting or denying the allegations, to better ensure compliance with state of New York. The NASD deter- the firm consented to the described applicable rules and regulations. mined that in a number of these arbi- sanctions and to the entry of find i n g s tration proceedings, Biltmore that the firm failed to use reasonable Firms Fined Securities asserted that New York diligence to ascertain the best inter- Bear, Stearns & Co., Inc. (New law applied to the proceeding by dealer market, and failed to buy or York, New York) submitted a Letter virtue of the governing law clause in sell in such market so that the resul- of Acceptance, Waiver, and Consent the customer agreement and there- tant price to the customer was as pursuant to which the firm was cen- fore precluded an award of punitive favorable as possible under prevail- sured, fined $15,000, and required to damages or attorneys’ fees, in viola- ing market conditions. The find i n g s undertake additional corrective tion of IM-3110(f)(4). also stated that the firm reported actions to prevent future violations. transactions to ACT in violation of Without admitting or denying the alle- Equitrade Securities Corporation applicable securities laws and regu- gations, the firm consented to the (Lake Forest, California) su b m i t t e d lations regarding trade reporting, and described sanctions and to the entry a Letter of Acceptance, Waiver, and failed to establish and maintain writ-

NASD Notices to Members—Disciplinary Actions December 1998 786 ten supervisory procedures reason- ings. According to the findings, each account. Adamson also signed the ably designed to achieve compliance of the customers signed an agree- customer’s name to a Flexible Premi- with ACT rules, the Securities and ment with the firm stating that the um Annuity application without the Exchange Commission (SEC) Order terms of the agreement would be customer’s knowledge, authorization, Execution Rules, the Small Order governed by the laws of the state of or consent. Adamson also failed to Execution SystemSM (S O E S SM ) rules, New York. The NASD determined respond to NASD requests for infor- and the trade reporting rules. that in some of these proceedings, mation. Merrill Lynch asserted that New York H. J. Meyers & Co., Inc. law applied to the proceeding by Dale Richard Altman (Registered (Rochester, New York) submitted a virtue of the governing law clause in Representative, Pittsburgh, Penn- Letter of Acceptance, Waiver, and the customer agreement and there- sylvania) submitted a Letter of Consent pursuant to which the firm fore precluded an award of punitive Acceptance, Waiver, and Consent was censured and fined $12,500. damages or attorneys’ fees, in viola- pursuant to which he was censured, Without admitting or denying the alle- tion of IM-3110(f)(4). fined $50,000, and barred from asso- gations, the firm consented to the ciation with any NASD member in any described sanctions and to the entry Individuals Barred Or capacity. The sanctions were based of findings that the firm failed to dis- Su s p e n d e d on findings that Altman signed the play immediately customer limit Derick Raymond Adamson (Regis- name of a public customer to an orders to ACT when orders were at a tered Representative, Glassboro, Authorization to Liquidate, Exchange price that would have improved the New Jersey) submitted an Offer of and/or Change Broker/Dealer Form, firm’s bid or offer in each security Settlement pursuant to which he was without her knowledge or consent, related to those orders, or when the censured, fined $50,000, barred from causing the transfer of her IRA full size of the orders was priced association with any NASD member account to his member firm . equal to the firm’s bid or offer and the in any capacity, and required to make national best bid or offer and the restitution in the amount of Michael Edward Anniuk (Regis- orders represented more than a de $14,576.46 to a public customer. tered Representative, Racine, Wis- mi n i m i s charge in relation to the size Without admitting or denying the alle- consin) submitted a Letter of associated with the firm’s bid or offer gations, Adamson consented to the Acceptance, Waiver, and Consent in each security. The findings also described sanctions and to the entry pursuant to which he was censured, stated that the firm failed to establish, of findings that, without the prior fined $335,000, and barred from maintain, and enforce written super- knowledge, authorization, or consent association with any NASD member visory procedures reasonably of a public customer, he signed the in any capacity. Without admitting or designed to achieve compliance with customer’s name on insurance appli- denying the allegations, Anniuk con- the applicable rules regarding trade cation forms which permitted the sented to the described sanctions and reporting, anti-competitive practices, issuance of $93,451 in the name of to the entry of findings that he accept- and order handling. the customer’s son and electronic ed personal checks for the purchase fund transfers from the customer’s of annuity contracts from public cus- Merrill Lynch, Pierce, Fenner & personal bank account. Adamson tomers that he deposited in his per- Smith Incorporated (New York, also caused the customer’s address sonal account and converted to his New York) submitted a Letter of to be changed to his address. More- own use. Anniuk also failed to Acceptance, Waiver, and Consent over, the findings stated that Adam- respond to NASD requests for infor- pursuant to which the firm was cen- son signed the customer’s signature mation. sured, fined $25,000, and required to on a Policy Record Audit Letter, with- undertake additional corrective out the customer’s knowledge or con- Percy Barr (Registered Representa- actions to prevent future violations. sent, caused a $1,600 loan to taken tive, Greenwood, Mississippi) su b - Without admitting or denying the alle- against the policy and mailed to his mitted an Offer of Settlement pursuant gations, the firm consented to the home address, and converted the to which he was censured, fine d described sanctions and to the entry check to his personal use and benefit. $373,500, barred from association of findings that it was named as a In addition, Adamson caused another with any NASD member in any capac- respondent in certain arbitration pro- customer’s address to be changed, ity, and required to pay $49,700 in ceedings filed with the NASD by vari- wrote checks totaling $25,700 against restitution to the appropriate parties. ous public customers who included the customer’s account and converted Without admitting or denying the alle- demands for punitive damages the checks to his own use by deposit- gations, Barr consented to the and/or attorneys’ fees in the proceeding the checks into his personal bank described sanctions and to the entry

NASD Notices to Members—Disciplinary Actions December 1998 787 of findings that he received payments compensation in connection with the payments made to the customer. totaling $49,700 from public cus- transactions. However, the fine shall not be tomers for the purchase of, and as reduced less than $10,000. Without payment on, annuities and mutual Jack Charles Biondolillo (Regis- admitting or denying the allegations, funds. The NASD found that Barr tered Representative, Scottsdale, Brunner consented to the described failed and neglected to submit these Ar i z o n a ) submitted a Letter of Accep- sanctions and to the entry of find i n g s funds to his member firm on the cus- tance, Waiver, and Consent pursuant that he made material misrepresenta- tomers’ behalf, and instead converted to which he was censured, fine d tions and omitted to disclose material the funds to his own use and benefit, $142,686,94, and barred from associ- facts in connection with his recom- without the customers’ knowledge or ation with any NASD member in any mendations of securities to public cus- consent. The findings also stated that capacity. Without admitting or denying tomers. The findings also stated that Barr failed to timely respond to NASD the allegations, Biondolillo consented Brunner made fraudulent price predic- requests for information. to the described sanctions and to the tions in connection with his recom- entry of findings that he arranged to mendation of securities and failed to Jere Mease Bender (Registered have an impostor take the Series 7 execute the sell order of a public cus- Representative, Elizabethtown, and 63 exams on his behalf. to m e r . Pennsylvania) submitted a Letter of Acceptance, Waiver, and Consent Charles Douglas Brown (Regis- Robert Francis Carlton (Registered pursuant to which he was censured, tered Representative, Apache Representative, Aberdeen, New fined $5,000, and barred from associ- Junction, Arizona) submitted a Let- Jersey) submitted a Letter of Accep- ation with any NASD member in any ter of Acceptance, Waiver, and Con- tance, Waiver, and Consent pursuant capacity. Without admitting or denying sent pursuant to which he was to which he was censured, fine d the allegations, Bender consented to censured, fined $25,000, suspended $39,575, and barred from association the described sanctions and to the from association with any NASD with any NASD member in any capac- entry of findings that he collected member in any capacity for 90 days, ity. Without admitting or denying the funds from a public customer to be and required to pay $50,000 in restitu- allegations, Carlton consented to the remitted in the payment of premiums tion to public customers. Without described sanctions and to the entry on the customer’s life insurance poli- admitting or denying the allegations, of findings that he converted dividend cy, but failed to remit the full amount Brown consented to the described withdrawal and refund checks totaling received from the customer. The find - sanctions and to the entry of find i n g s $7,915 received from insurance cus- ings also stated that Bender made that he engaged in outside business tomers for his own use by endorsing material misstatements and omitted activities and private securities trans- checks given to him for reinvestment material facts concerning his dealings actions, without giving prior written or by forging customers’ signatures on with the customer during an internal notice to his member firms. checks never delivered to the cus- inquiry conducted by his member tomers and depositing them into his firms. William George Brunner (Regis- personal bank account. tered Representative, Huntington, Alan Barrie Best (Registered Rep- New York) submitted a Letter of James Maurice Cassidy (Regis- resentative, Vancouver, Washing- Acceptance, Waiver, and Consent tered Representative, East Hamp- ton) submitted a Letter of pursuant to which he was censured, ton, New York) was censured, fine d Acceptance, Waiver, and Consent fined $20,000, suspended from asso- $35,000, and barred from association pursuant to which he was censured, ciation with any NASD member in any with any NASD member in any capac- fined $75,000, and barred from asso- capacity for 30 days, required to ity. The sanctions were based on find - ciation with any NASD member in any requalify as a general securities repre- ings that Cassidy failed to respond to capacity. Without admitting or denying sentative, and ordered to demonstrate NASD requests for information. the allegations, Best consented to the that restitution in the amount of described sanctions and to the entry $24,781.25 has been made to a pub- Jerry Enrique Chaverri (Registered of findings that he participated in pri- lic customer or that he has paid the Principal, DeSoto, Texas) su b m i t t e d vate securities transactions and failed customer such amount as has been a Letter of Acceptance, Waiver, and to provide written notification to his determined by an arbitration or other Consent pursuant to which he was member firm describing in detail the proceeding or settlement to be owed censured, fined $2,500, suspended proposed transactions, his proposed to the customer by Brunner. The fine from association with any NASD role therein, and stating whether he of $20,000 shall be reduced, dollar for member in any capacity for one year, had received or might receive selling dollar, by the amount of any restitution and required to requalify by exam in

NASD Notices to Members—Disciplinary Actions December 1998 788 all capacities. Without admitting or with any NASD member in any capac- other securities holdings and as to denying the allegations, Chaverri con- ity. Without admitting or denying the their financial situation, objectives, sented to the described sanctions and allegations, Dancoes consented to the and needs. to the entry of findings that he made described sanctions and to the entry improper use of customer funds by of findings that he failed to respond to Christopher B. Dolan (Registered taking possession of a customer’s NASD requests for information and Representative, Palm Beach Gar- check in the amount of $900, deposit- documents. dens, Florida) submitted a Letter of ing the funds into his personal bank Acceptance, Waiver, and Consent account, and failing to forward the Michael Walesby Davis (Registered pursuant to which he was censured, customer’s funds to his member firm Principal, Plano, Texas) submitted a fined $10,000, and suspended from until a later date. Letter of Acceptance, Waiver, and association with any NASD member Consent pursuant to which he was in any capacity for 90 days. The John Michael Columbia (Regis- censured, fined $125,000, barred $10,000 fine and the 90-day suspen- tered Principal, Staten Island, New from association with any NASD sion shall be deemed paid and served York) was censured, fined $5,000, member in any capacity, and required by virtue of the $10,000 fine and suspended from association with any to pay restitution in the amount of 90-day suspension imposed against NASD member in any capacity for 10 $1,049,792. Without admitting or Dolan by his member firm. Without business days, and required to requal- denying the allegations, Davis con- admitting or denying the allegations, ify by exam in any capacity in which sented to the described sanctions and Dolan consented to the described he seeks to participate in the securi- to the entry of findings that he partici- sanctions and to the entry of find i n g s ties industry. The NAC affirmed the pated in private securities transactions that he effected unauthorized transac- sanctions following appeal of a New without providing prior written notice to tions in the account of public cus- York DBCC decision. The sanctions his member firm, and participated in to m e r s . were based on findings that Columbia the operation of an unregistered bro- executed an unauthorized transaction ker/dealer. The findings also stated Dolan’s suspension began October in the account of a public customer. that Davis received funds from 23, 1997, and concluded January 21, investors when no disclosure had 19 9 8 . John Corona (Registered Repre- been made to the investors that their sentative, Howard Beach, New funds would be used to pay Barry Alan Druschel (Registered York) submitted an Offer of Settle- broker/dealer expenses including pay- Representative, Ellicott City, Mary- ment pursuant to which he was cen- ments to Davis. land) submitted a Letter of Accep- sured, fined $50,000, barred from tance, Waiver, and Consent pursuant association with any NASD member Richard Kentner DeFreez (Regis- to which he was censured, suspend- in any capacity, and required to dis- tered Representative, Anchorage, ed from association with any NASD gorge all monies earned by him while Alaska) submitted a Letter of Accep- member in any capacity for six associated or otherwise employed in tance, Waiver, and Consent pursuant months, and required to requalify by the securities industry after March 3, to which he was censured, fine d exam as an investment company and 1995, in the amount of at least $7,000, suspended from association variable contracts products represen- $5,000. Without admitting or denying with any NASD member in any capac- tative. Without admitting or denying the allegations, Corona consented to ity for seven business days, and the allegations, Druschel consented to the described sanctions and to the required to requalify by exam as a the described sanctions and to the entry of findings that he arranged to general securities representative. entry of findings that he sold an annu- have an impostor take the Series 7 Without admitting or denying the alle- ity issued by his member firm to insur- and 63 exams on his behalf. Corona gations, DeFreez consented to the ance customers which was to replace also failed to respond to NASD described sanctions and to the entry and be funded with the proceeds from requests for information and to appear of findings that he recommended pur- two annuities the customers owned for an on-the-record interview. chases and sales of securities to pub- that were issued by another company. lic customers without having The NASD found that thereafter, act- Denis C. J. Dancoes (Registered reasonable grounds for believing such ing under a mistaken belief of implied Principal, South Portland, Maine) transactions were suitable for them in authority, but without express autho- submitted a Letter of Acceptance, view of the nature, size, and concen- rization from the customers and with- Waiver, and Consent pursuant to tration of the recommended transac- out their knowledge, Druschel signed which he was censured, fine d tions and upon the basis of the facts their names to a document and sub- $25,000, and barred from association disclosed by the customers as to their mitted it to the other insurance com-

NASD Notices to Members—Disciplinary Actions December 1998 789 pany, directing it to transfer the funds their written approval. Dunlap also securities transactions and failed to from the existing annuities to his failed to respond to NASD requests give prior notice to and receive con- member firm. for information. sent from his member firm to engage in such activities. The findings also Paul Alderic Dufresne (Registered Mark Thomas Ennis (Registered stated that Ferone engaged in the Representative, West Buxton, Representative, Littleton, Mas- sale of unregistered securities. Fur- Maine) submitted an Offer of Settle- sachusetts) submitted a Letter of thermore, the NASD determined that ment pursuant to which he was cen- Acceptance, Waiver, and Consent Ferone recommended the purchase sured, fined $25,000, and barred from pursuant to which he was censured of securities to public customers with- association with any NASD member and barred from association with any out having reasonable grounds for in any capacity. Without admitting or NASD member in any capacity. With- believing that such recommendations denying the allegations, Dufresne out admitting or denying the allega- were suitable for the customers based consented to the described sanctions tions, Ennis consented to the upon the customers’ financial situa- and to the entry of findings that he described sanctions and to the entry tions, needs, and stated investment failed to respond to NASD requests of findings that he signed a public objectives, and induced public cus- for documents and information. customer’s name to a Request for tomers to purchase securities by Partial Withdrawal of $16,000 from means of misrepresentations and Robert Eric Dunlap (Registered the customer’s fixed annuity contract, omissions of material facts. Also, the Representative, Columbus, Indi- arranged for the negotiation of the NASD found that Ferone failed to reg- ana) submitted a Letter of Accep- withdrawal check, and converted the ister as a broker or dealer with the tance, Waiver, and Consent pursuant proceeds to his own use and benefit, SEC and functioned in the capacity of to which he was censured, fine d without the knowledge or consent of a general securities representative $1,000,000, barred from association the customer. without the benefit of proper registra- with any NASD member in any tion with the NASD. capacity, and required to provide John Roger Faherty (Registered proof of restitution to customers with Principal, Spring Lake, New Jer- John Loras Finn (Registered Prin- any future application for association sey) was censured, fined $150,000, cipal, Dubuque, Iowa) submitted an with a member firm. Without admitting and barred from association with any Offer of Settlement pursuant to which or denying the allegations, Dunlap NASD member in any capacity. The he was censured, fined $25,000, and consented to the described sanctions NAC imposed the sanctions follow- barred from association with any and to the entry of findings that he ing appeal of a Market Regulation NASD member in any capacity. With- received funds totaling $79,788.93 Committee decision. The sanctions out admitting or denying the allega- from insurance customers with were based on findings that Faherty tions, Finn consented to the described instructions to use the funds as pay- aided and abetted his member firm ’ s sanctions and to the entry of find i n g s ment on an insurance policy or to pur- manipulation of securities. that he failed to respond to NASD chase insurance polices or certifica t e s requests for information. of deposit. The findings stated that Faherty has appealed this action to Dunlap failed to follow the customers’ the SEC and the sanctions, other Steven Ladd Fritz (Registered Prin- instructions, used only $400 to pay a than the bar, are not in effect pend- cipal, Tulsa, Oklahoma) su b m i t t e d customer’s insurance policy, and ing consideration of the appeal. an Offer of Settlement pursuant to used the remainder of the funds for which he was censured and barred some purpose other than the benefit Gary Michael Ferone (Registered from association with any NASD of the customers. Dunlap also Representative, Tuckahoe, New member in any capacity. Without obtained a total of $354,000 in loans York) submitted an Offer of Settle- admitting or denying the allegations, or withdrawals from insurance polices ment pursuant to which he was cen- Fritz consented to the described sanc- of a public customer, without the sured, fined $250,000, barred from tions and to the entry of findings that approval of the customer, and used association with any NASD member he effected unauthorized withdrawals the funds for some purpose other in any capacity, ordered to disgorge and/or transfers involving an estimat- than the benefit of the customer. In $14,070 in commissions, and make ed $1,785,749 from the accounts of addition, Dunlap participated in private restitution in the amount of $469,000. public customers. The NASD deter- securities transactions and failed and Without admitting or denying the alle- mined that Fritz converted approxi- neglected to give written notice of his gations, Ferone consented to the mately $598,428 of these funds to his intention to engage in such activities described sanctions and to the entry own use and benefit, without the cus- to his member firms and to receive of findings that he engaged in private tomers’ knowledge or consent, by

NASD Notices to Members—Disciplinary Actions December 1998 790 forging customers’ signatures to Let- for 10 business days. Without admit- Reginald Holifield was censured, ters of Authorization, preparing and ting or denying the allegations, Green- fined $10,000, suspended from asso- sending false account statements to berg consented to the described ciation with any NASD member in any the customers, and making false and sanctions and to the entry of find i n g s capacity for two years, and barred misleading statements in an effort to that he permitted an individual subject from association with any NASD conceal these activities. The find i n g s to a statutory disqualification to func- member in any principal capacity. also stated that Fritz failed to respond tion as an associated person of a Without admitting or denying the alle- to NASD requests for information. member firm without having sought gations, the respondents consented and obtained approval for such asso- to the described sanctions and to the Daniel James Gallagher (Regis- ciation from the NASD through its eli- entry of findings that Ronald Holifiel d tered Representative, Roslyn, New gibility proceedings. The findings also engaged in private securities transac- York) submitted an Offer of Settle- stated that a member firm, acting tions without prior written notice to ment pursuant to which he was cen- under the direction and control of and approval from his member firm . sured, fined $15,000, suspended from Greenberg, failed to have and main- The findings also stated that Reginald association with any NASD member tain sufficient net capital as a result of Ho l i fi eld failed and neglected to exer- in any capacity for six months, and Greenberg knowingly writing a bad cise reasonable and proper supervi- required to requalify by Series 7 exam check in the amount of $100,000. sion over Ronald Holifield in that he prior to acting in that capacity. Without failed to monitor or report on private admitting or denying the allegations, Debra Lynn Hart (Registered Rep- securities transactions being conduct- Gallagher consented to the described resentative, Tallahassee, Florida) ed by Ronald Holifield. sanctions and to the entry of find i n g s submitted a Letter of Acceptance, that he made baseless and improper Waiver, and Consent pursuant to Michael Hyat (Registered Principal, price predictions as to a speculative which she was censured, fine d San Diego, California) submitted a security to a public customer and $117,070, and barred from associa- Letter of Acceptance, Waiver, and made unauthorized trades in the tion with any NASD member in any Consent pursuant to which he was accounts of public customers. The capacity. Without admitting or denying censured, fined $24,308.58, and sus- findings also stated that Gallagher the allegations, Hart consented to the pended from association with any made a false statement to a customer described sanctions and to the entry NASD member in any capacity for 30 about an issuer’s securities and of findings that she received funds days. Without admitting or denying improperly discouraged or failed to totaling $23,414 from public cus- the allegations, Hyat consented to the execute sell orders. tomers for investment purposes and described sanctions and to the entry converted the funds to her own use of findings that he entered into an Ashton Noshir Gowadia (Regis- and benefit. arrangement with a registered individ- tered Representative, Newport ual employed at another broker/dealer Beach, California) was fine d Bryan Jay Herman (Registered to participate in private securities $10,000, suspended from association Principal, Kings Point, New York) transactions and to execute orders with any NASD member in any was censured, fined $50,000, and away from the outside sales repre- capacity for one year, and required to barred from association with any sentative’s firm, without notifying his requalify as a general securities repre- NASD member in any capacity. The member firm, either orally or in writing sentative. The SEC affirmed the sanc- sanctions were based on findings that of this arrangement. tions following appeal of a November Herman failed to respond to NASD 1997 National Business Conduct requests for information and to appear Morton Kirschenbaum (Registered Committee (NBCC) decision. The for an on-the-record interview. Principal, San Mateo, California) sanctions were based on findings that submitted an Offer of Settlement pur- Gowadia failed to respond to NASD Ronald Lee Holifield (Registered suant to which he was censured, requests for information. Representative, Laurel, Mississip- fined $5,000, and suspended from pi) and Reginald Glen Holifiel d association with any NASD member Stuart S. Greenberg (Registered (Registered Representative, Laurel, in any capacity for 10 days. Without Principal, Agoura Hills, California) Mississippi) submitted a Letter of admitting or denying the allegations, submitted a Letter of Acceptance, Acceptance, Waiver, and Consent Kirschenbaum consented to the Waiver, and Consent pursuant to pursuant to which Ronald Holifiel d described sanctions and to the entry which he was censured, fine d was censured, fined $50,000, and of findings that he failed to establish, $10,000, and suspended from associ- barred from association with any maintain, and enforce a system to ation as a general securities principal NASD member in any capacity, and supervise the activities of his member

NASD Notices to Members—Disciplinary Actions December 1998 791 firm’s Office of Supervisory Jurisdic- the allegations, Lemus consented to gations, LoBrutto consented to the tion that was reasonably designed to the described sanctions and to the described sanctions and to the entry achieve compliance with applicable entry of findings that he forged the of findings that he participated in pri- securities laws and regulations and signature of a public customer on doc- vate securities transactions and failed with the rules of the NASD. uments to facilitate the liquidation of a to provide prior written notice to his fixed annuity owned by the customer. member firm describing the transac- Lori Sue Koppel-Heath (Registered The findings also stated that Lemus tions and his role therein. Principal, Trabuco Canyon, Califor- forged the customer’s signature on nia) was censured, fined $59,021.31, the $24,462 annuity liquidation check Steven Terrell Mayes (Registered suspended from association with any and converted the proceeds by Representative, Oak Ridge, Ten- NASD member in any capacity for 30 depositing the check into his personal nessee) was censured, fine d days, and required to requalify by business account. Lemus also failed $53,500, and barred from association exam as a general securities repre- to respond to an NASD request for with any NASD member in any sentative before again acting in that information. capacity. The sanctions were based capacity. The NAC imposed the sanc- on findings that Mayes converted tions following appeal of a Los Ange- Gregg Robert Leslie (Registered $1,700 in customer funds, intended les DBCC decision. The sanctions Representative, La Costa, Califor- for the purchase of shares in a mutual were based on findings that Koppel- nia) submitted a Letter of Acceptance, fund. Mayes also failed to respond to Heath recommended purchases, Waiver, and Consent pursuant to NASD requests for information and sales, and redemptions of mutual which he was censured, fine d documents. funds, unit investment trust shares, $45,241.42, and suspended from and other investments in public cus- association with any NASD member Robert Gerard McAllister (Regis- tomer accounts without having rea- in any capacity for six months. With- tered Principal, Sea Girt, New Jer- sonable grounds for believing that out admitting or denying the allega- sey) submitted an Offer of Settlement they were suitable for the customers tions, Leslie consented to the pursuant to which he was censured, in view of the size, frequency, and described sanctions and to the entry fined $5,000, and suspended from nature of the recommended transac- of findings that he entered into an association with any NASD member tions, and the facts disclosed by the arrangement with a registered individ- in any capacity for 30 days. Without customers as to their other securities ual at another broker/dealer to exe- admitting or denying the allegations, holdings, financial situation, circum- cute orders away from Leslie’s McAllister consented to the described stances, and needs. member firm and participated in pri- sanctions and to the entry of find i n g s vate securities transactions through that he failed to respond to NASD Richard Raymond Langevin (Reg- the other broker/dealer, without notify- requests for information. istered Principal, Worcester, Mas- ing his member firm, either orally or in sachusetts) submitted a Letter of writing, of this arrangement. Timothy Eric McKeon (Registered Acceptance, Waiver, and Consent Principal, Holbrook, New York) su b - pursuant to which he was censured, Alan Scott Lipsky (Registered Prin- mitted an Offer of Settlement pursuant fined $5,000, and barred from associ- cipal, Kings Point, New York) wa s to which he was censured, fine d ation with any NASD member in any censured, fined $50,000, and barred $86,312, barred from association with capacity. Without admitting or denying from association with any NASD any NASD member in any capacity, the allegations, Langevin consented member in any capacity. The sanc- and ordered to pay restitution to cus- to the described sanctions and to the tions were based on findings that Lip- tomers in the amount of $35,447. entry of findings that he signed a pub- sky failed to respond to NASD Without admitting or denying the alle- lic customer’s name to an insurance requests for information and to appear gations, McKeon consented to the policy rider without the knowledge or for an on-the-record interview. described sanctions and to the entry consent of the customer. of findings that he made material mis- Dean Joseph LoBrutto (Registered representations, omitted material Jaime Enrique Lemus (Registered Representative, East Rochester, information, and made fraudulent Representative, Miami, Florida) New York) submitted a Letter of price predictions in the offer and sale submitted a Letter of Acceptance, Acceptance, Waiver, and Consent of securities. The findings also stated Waiver, and Consent pursuant to pursuant to which he was censured, that McKeon executed unauthorized which he was censured, fine d fined $10,000, and suspended from transactions and failed to follow cus- $50,000, and barred from association association with any NASD member tomer instructions. with any NASD member in any in any capacity for 10 business days. capacity. Without admitting or denying Without admitting or denying the alle- NASD Notices to Members—Disciplinary Actions December 1998 792 Russell Wayne Millard (Registered Randy Harris Narod (Registered ation with any NASD member in any Representative, Hemet, California) Representative, Oceanside, New capacity for 15 business days. With- submitted an Offer of Settlement pur- York) submitted an Offer of Settle- out admitting or denying the allega- suant to which he was censured, ment pursuant to which he was cen- tions, Noble consented to the fined $20,000, suspended from asso- sured, fined $50,000, barred from described sanctions and to the entry ciation with any NASD member in any association with any NASD member of findings that he aided and abetted capacity for two years, and ordered to in any capacity, and required to dis- his member firm and its president in offer rescission to investors, and to gorge all monies earned by him while an unlawful, unregistered distribution the extent the offer of rescission was associated or otherwise employed in of common stock by executing “wash” accepted by any investors, Millard the securities industry after Septem- and “matched” trades with two other was ordered to exchange such ber 11, 1995, in the amount of at least broker/dealers. These transactions investor’s interests in the investment $1,000. Without admitting or denying ar t i fi cially inflated the reported trading for full and complete restitution. With- the allegations, Narod consented to volume in the stock and aided and out admitting or denying the allega- the described sanctions and to the abetted his member firm and its presi- tions, Millard consented to the entry of findings that he arranged to dent in violating a provision in the described sanctions and to the entry have an impostor take the Series 7 firm’s restriction agreement that proof findings that he participated in con- and 63 exams on his behalf. Narod hibited principal retail trading. The tingent offerings and failed to deposit also failed to respond to NASD NASD also found that Noble failed to and retain customer funds in separate requests to appear for an on-there fl ect the circular nature of the trades escrow accounts until the minimum record interview. in his firm’s books and records, there- number of units had been sold. by causing them to be inaccurate and Instead the funds were intentionally Robert Edward Nicolosi (Regis- incomplete. commingled with funds from other tered Representative, Baldwin, sources and used to cover, among New York) submitted a Letter of Peter David Ottaviano (Registered other things, operating costs of affili - Acceptance, Waiver, and Consent Representative, Colchester, Con- ates and interest payments to pursuant to which he was censured, ne c t i c u t ) submitted a Letter of Accep- investors of other private placements. fined $70,000, barred from associa- tance, Waiver, and Consent pursuant tion with any NASD member in any to which he was censured, fine d Joseph J. Miniaci (Registered Rep- capacity, and required to pay $41,970 $402,000, barred from association resentative, Brooklyn, New York) in restitution to a public customer. with any NASD member in any was censured, fined $35,000, and Without admitting or denying the alle- capacity, and required to make resti- barred from association with any gations, Nicolosi consented to the tution in the amount of $46,355 to his NASD member in any capacity. The described sanctions and to the entry member firm. Without admitting or sanctions were based on findings that of findings that he made material mis- denying the allegations, Ottaviano Miniaci failed to respond to NASD representations and omitted to dis- consented to the described sanctions requests for information. close material facts in connection with and to the entry of findings that he his recommendations of securities to received funds totaling $78,355 from Richard Gabriel Murphy (Regis- public customers. The findings also public customers intended for the pur- tered Representative, Indianapolis, stated that Nicolosi made fraudulent chase of non-securities products. The Indiana) submitted a Letter of Accep- price predictions in connection with NASD found that Ottaviano failed to tance, Waiver, and Consent pursuant his recommendations of securities to use the funds as intended or in any to which he was censured, fine d public customers, entered orders to other manner for the benefit of the $18,000, and barred from association purchase securities in the accounts of customers, and instead used them for with any NASD member in any a public customer without first obtain- his own benefit. capacity. Without admitting or denying ing the authorization of the customer, the allegations, Murphy consented to and failed to testify truthfully at an Michael Anthony Pellegrino (Regis- the described sanctions and to the NASD on-the-record interview. tered Representative, Brooklyn, entry of findings that he obtained a New York) submitted an Offer of Set- total of $1,500 in cash withdrawn from David William Noble (Registered tlement pursuant to which he was the bank account of a public customer Principal, Flemington, New Jersey) censured, fined $50,000, barred from without the knowledge or consent of submitted a Letter of Acceptance, association with any NASD member the customer and used the funds for Waiver, and Consent pursuant to in any capacity, and required to dis- some purpose other than for the ben- which he was censured, fine d gorge all monies earned by him while efi t of the customer. $10,000, and suspended from associ- associated or otherwise employed in

NASD Notices to Members—Disciplinary Actions December 1998 793 the securities industry after October ation with any NASD member in any efi ciaries of the estate of a public cus- 26, 1995. Without admitting or deny- capacity for one year. Without admit- tomer, he misused funds totaling ing the allegations, Pellegrino con- ting or denying the allegations, Ren- $69,404.25 by signing the decedent’s sented to the described sanctions and don consented to the described name to a check, removing cash from to the entry of findings that he had an sanctions and to the entry of find i n g s the decedent’s safe deposit box, and impostor take the Series 7 exam on that he participated in private securi- changing the address of record for the his behalf. Pellegrino also failed to ties transactions but failed to provide estate of the decedent’s trust fund to respond to NASD requests to appear prior written notification to his member an address under his control. for an on-the-record interview. firm. Marc Walter Schulz (Registered George Perez, Jr. (Associated Per- Jean Richard (Registered Repre- Principal, Rockford, Illinois) su b m i t - son, Bronx, New York) submitted a sentative, Lake Worth, Florida) su b - ted an Offer of Settlement pursuant to Letter of Acceptance, Waiver, and mitted an Offer of Settlement pursuant which he was censured, fined $5,000, Consent pursuant to which he was to which she was censured, fine d and suspended from association with censured, fined $7,500, and suspend- $25,000, and barred from association any NASD member in any capacity ed from association with any NASD with any NASD member in any for 10 business days. Without admit- member in any capacity for six capacity. Without admitting or denying ting or denying the allegations, Schulz months. Without admitting or denying the allegations, Richard consented to consented to the described sanctions the allegations, Perez consented to the described sanctions and to the and to the entry of findings that he the described sanctions and to the entry of findings that she failed to engaged in the purchases and sales entry of findings that he submitted a respond to NASD requests for infor- of securities for the account of a pub- Form U-4 that failed to disclose a mation. lic customer without having a reason- felony conviction. able basis for believing that the Roderick James Rieman (Regis- recommendations and resultant trans- Jon David Raymond (Registered tered Representative, Naperville, actions were suitable for the customer Representative, Seattle, Washing- Illinois) submitted a Letter of Accep- based upon the facts known to him ton) submitted a Letter of Accep- tance, Waiver, and Consent pursuant concerning the nature of the securi- tance, Waiver, and Consent pursuant to which he was censured, fine d ties, the concentration of similar secu- to which he was censured, fine d $8,900, and suspended from associa- rities purchased by the customer, the $67,000, and barred from association tion with any NASD member in any customer’s age, investment history, with any NASD member in any capacity for six months. Without education, need for liquidity, invest- capacity. Without admitting or denying admitting or denying the allegations, ment objectives, and financial situa- the allegations, Raymond consented Rieman consented to the described tion and needs. to the described sanctions and to the sanctions and to the entry of find i n g s entry of findings that he exercised dis- that he participated in private securi- Russell Thomas Tansey (Regis- cretion in the accounts of a public cus- ties transactions and failed to give tered Representative, Amherst, tomer without obtaining prior written written notice of his intention to Ohio) submitted an Offer of Settle- authorization from the customer and engage in such activities to his mem- ment pursuant to which he was cen- written acceptance by his member ber firm, and to receive written sured, fined $25,000, and barred from firm of the account as discretionary. approval from the firm prior to engag- association with any NASD member The findings also stated that Ray- ing in such activities. in any capacity. Without admitting or mond recommended, and executed, denying the allegation, Tansey con- transactions on margin in the cus- Vincent Natale Scalese (Registered sented to the described sanctions and tomer’s securities accounts, without Representative, Groton, Mas- to the entry of findings that he failed to having reasonable grounds for believ- sachusetts) submitted a Letter of respond to NASD requests for infor- ing that such recommendations were Acceptance, Waiver, and Consent mation. suitable for the customer. pursuant to which he was censured, fined $360,000, and barred from Waldith George Thompson (Regis- George Alfred Rendon (Registered association with any NASD member tered Representative, Coral Principal, Laguna Niguel, Califor- in any capacity. Without admitting or Springs, Florida) was censured, nia) submitted a Letter of Acceptance, denying the allegations, Scalese con- fined $85,000, and barred from asso- Waiver, and Consent pursuant to sented to the described sanctions and ciation with any NASD member in any which he was censured, fine d to the entry of findings that, without capacity. The sanctions were based $10,000, and suspended from associ- the knowledge or consent of the ben- on findings that Thompson received

NASD Notices to Members—Disciplinary Actions December 1998 794 funds totaling $10,285 from an insur- mitted an Offer of Settlement pursuant Charles Edward Waterfall (Regis- ance customer intended for invest- to which he was censured, fine d tered Principal, Royal Oak, Michi- ment in an insurance plan. Contrary to $10,000, suspended from association gan) submitted a Letter of the misrepresentations Thompson with any NASD member in any Acceptance, Waiver, and Consent made to the customer, he never capacity for five business days, and pursuant to which he was censured, invested any of the customer’s funds required to honor an arbitration award fined $7,500, and suspended from in the plan or any other investment or by paying his member firm $15,000 association with any NASD member products offered by his member firm , and $3,000 each month thereafter in any capacity for 40 business days used the customer’s funds for another until the award is satisfied. Without (28 business days of which shall be purpose, and failed to reimburse the admitting or denying the allegations, deemed served by virtue of the customer. Thompson failed to Valle consented to the described 28-business day suspension imposed respond to NASD requests for infor- sanctions and to the entry of find i n g s against him by his member firm ) . ma t i o n . that he failed to honor a New York Without admitting or denying the alle- Stock Exchange arbitration award in gations, Waterfall consented to the Peter Robert Trapani (Registered the amount of $53,252.21. described sanctions and to the entry Representative, Oakbrook Terrace, of findings that he entered into a set- Il l i n o i s ) submitted an Offer of Settle- Richard Herbert Walls (Registered tlement agreement with a public cus- ment pursuant to which he was cen- Representative, Lubbock, Texas) tomer without informing his member sured, fined $7,500, suspended from submitted a Letter of Acceptance, firms of his actions or the customer’s association with any NASD member Waiver, and Consent pursuant to complaint and its resolution. The find - in any capacity for five business days, which he was censured, fine d ings also stated that Waterfall failed to and required to take and pass all $15,000, and suspended from associ- amend his Form U-4 to disclose the examinations for the capacities in ation with any NASD member in any settlement agreement. which he wishes to function with an capacity for six months. Without NASD member. Without admitting or admitting or denying the allegations, Waterfall’s suspension began January denying the allegations, Trapani con- Walls consented to the described 31, 1997 and concluded March 12, sented to the described sanctions and sanctions and to the entry of find i n g s 19 9 7 . to the entry of findings that he partici- that he recommended to and effected pated in private securities transactions the purchase of securities for public Larry Anthony White (Registered and failed to give written notice of his customers outside of the regular Representative, Sarasota, Florida) intention to engage in such activities course or scope of his association submitted a Letter of Acceptance, to his member firm and receive writ- with his member firm and failed to Waiver, and Consent pursuant to ten acknowledgment or approval from provide the firm with written notice which he was censured, fine d his firm prior to engaging in such detailing the transactions, his pro- $10,000, and barred from association activities. The findings also stated that posed role therein and whether he with any NASD member in any Trapani opened several brokerage had or would receive selling compen- capacity. Without admitting or denying accounts in which he had a fina n c i a l sation in connection with these securi- the allegations, White consented to interest and/or discretionary trading ties transactions. the described sanctions and to the authority at other firms, and failed to entry of findings that he signed the give written notice to his member firm Leo Douglas Walter (Registered names of public customers on new of the accounts, and failed to give Representative, Clearwater, Flori- account applications and mutual fund written notice to the other member da) submitted a Letter of Acceptance, disclosure forms without their prior firms of his association with a mem- Waiver, and Consent pursuant to knowledge or authorization. ber firm. Furthermore, the NASD which he was censured, fine d determined that Trapani purchased $75,000, and barred from association Thomas Charles Winn (Registered shares of common stock the first day with any NASD member in any Principal, Haverstraw, New York) of trading in the secondary market capacity. Without admitting or denying submitted a Letter of Acceptance, that traded at a premium in the imme- the allegations, Walter consented to Waiver, and Consent pursuant to diate aftermarket in contravention of the described sanctions and to the which he was censured, fine d the NASD Board of Governors’ Free- entry of findings that he misappropri- $30,000, and barred from association Riding and Withholding Interpretation. ated at least $14,431.29 in premium with any NASD member in any payments made by customers for capacity. Without admitting or denying Horacio Garcia Valle (Registered insurance policies. the allegations, Winn consented to the Representative, Dallas, Texas) su b - described sanctions and to the entry

NASD Notices to Members—Disciplinary Actions December 1998 795 of findings that he participated in pri- respond to NASD requests for infor- Christopher John Benz (Registered vate securities transactions and failed mation and to provide testimony. Principal, Santa Monica, California) to provide written notice to his mem- was censured, fined $7,500, and ber firm describing the proposed required to requalify by exam as a transactions. The findings also stated Individuals Fined general securities principal before act- that Winn failed to respond to NASD Michael William Adams (Regis- ing in a principal capacity. The U.S. requests for an on-the-record inter- tered Representative, Rowland Court of Appeals affirmed the sanc- view. Heights, California) submitted an tions following appeal of a March Offer of Settlement pursuant to which 1997 SEC decision. The sanctions John Nicholas Withum (Registered he was censured, fined $15,000, and were based on findings that Benz Representative, Milltown, New Jer- required to requalify by exam as a failed to supervise a registered repre- sey) submitted an Offer of Settlement general securities representative. sentative adequately and failed to pursuant to which he was censured, Without admitting or denying the alle- enforce his member firm’s supervisory fined $25,000, and barred from asso- gations, Adams consented to the pr o c e d u r e s . ciation with any NASD member in any described sanctions and to the entry capacity. Without admitting or denying of findings that he recommended the allegations, Withum consented to numerous purchase and sale transac- Decisions Issued the described sanctions and to the tions in various securities accounts of The following decisions have been entry of findings that, without the cus- public customers without having rea- issued by the DBCC or the Office of tomer’s knowledge or authorization, sonable grounds for believing that Hearing Officers and have been he forged a public customer’s signa- they were suitable for the customers appealed to or called for review by ture on Disbursement Request forms and accounts in view of the size, fre- the NAC as of November 23, 1998. pursuant to which money was bor- quency, and nature of the recom- The findings and sanctions imposed rowed from one of the customer’s mended transactions and the facts in the decision may be increased, insurance policy to pay premiums on disclosed by the customers as to their decreased, modified, or reversed by a subsequent insurance policy. financial situation, objectives, circum- the NAC. Initial decisions whose time stances, and needs. The findings also for appeal has not yet expired will be Todd Alan Zonca (Registered Prin- stated that Adams induced these pur- reported in the next Notices to cipal, Howell, Michigan) submitted a chase and sale transactions by Me m b e r s . Letter of Acceptance, Waiver, and means of manipulative, deceptive, or Consent pursuant to which he was other fraudulent devices or con- Robert Fitzpatrick (Registered censured, fined $66,000, and barred trivances. Principal, Clifton Park, New York) from association with any NASD was fined $2,500, and suspended member in any capacity. Without Kenneth Eugene Banwart, Sr. from association with any NASD admitting or denying the allegations, (Registered Principal, Newport, member in any capacity for 15 Zonca consented to the described Kentucky) submitted a Letter of business days. The sanctions were sanctions and to the entry of find i n g s Acceptance, Waiver, and Consent based on findings that Fitzpatrick that he withdrew a total of $11,200 pursuant to which he was censured failed to respond to NASD requests from the money market mutual fund of and fined $14,639. Without admitting for information in a timely manner. a public customer and used the funds or denying the allegations, Banwart for some purpose other than the ben- consented to the described sanctions Fitzpatrick has appealed this action efi t of the customer, without the and to the entry of findings that he to the NAC and the sanctions are not knowledge or consent of the cus- failed to provide written notice to his in effect pending consideration of the to m e r . member firms that he had opened a appeal. securities account with another firm Vladislav Steven Zubkis (Regis- and failed to provide written notice to Hattier, Sanford & Reynoir, L.L.P tered Representative, Bonita, Cali- the executing firm, that he was regis- (New Orleans, Louisiana) and Gu s fornia) was censured, fined $20,000, tered with other member firms. The A. Reynoir (Registered Principal, and barred from association with any findings also stated that Banwart pur- New Orleans, Louisiana). The firm NASD member in any capacity. The chased shares of units of public offer- and Renoir withdrew their appeal SEC affirmed the sanctions following ings that traded at a premium when and the NAC subsequently called the appeal of an August 1997 NBCC the secondary market commenced for case for review. The sanctions are decision. The sanctions were based each security. not in effect pending consideration of on findings that Zubkis failed to the review.

NASD Notices to Members—Disciplinary Actions December 1998 796 Complaints Filed $4,000 to his own use and benefit Lawrence Ralph Kassl (Registered The following complaints were without the customer’s knowledge or Representative, Danville, Illinois) issued by the NASD. Issuance of a consent. The complaint also alleges was named as a respondent in an disciplinary complaint represents the that Combs effected an unauthorized NASD complaint alleging that he initiation of a formal proceeding by loan transaction in the amount of received checks in the amount of the NASD in which findings as to the $3,089 against the whole life insur- $10,500 from a public customer with allegations in the complaint have not ance policy account of another public instructions to deposit the funds in an been made, and does not represent customer, then used these funds to existing variable annuity. The com- a decision as to any of the allega- establish a new variable life insur- plaint alleges that, contrary to the tions contained in the complaint. ance policy on behalf of the cus- customer’s instructions and without Because these complaints are unad- tomer, without the customer’s her knowledge or consent, Kassl judicated, you may wish to contact knowledge or consent. The com- deposited the checks in a bank the respondents before drawing any plaint also alleges that Combs failed account in which he had an interest conclusions regarding the allegations to respond to NASD requests for or controlled, and used the cus- in the complaint. in f o r m a t i o n . tomer’s funds for some purpose other than the benefit of the cus- Paul Michael Acosta (Registered Wayne Adam Garfinkel (Regis- to m e r . Representative, Naples, Florida) tered Representative, Boca Raton, was named as a respondent in an Florida) was named as a respon- Pier Luccarelli (Registered Princi- NASD complaint alleging that he dent in an NASD complaint alleging pal, Fairfax, Virginia) was named received over $1,054,000 from public that he recommended and imple- as a respondent in an NASD com- customers for investment purposes, mented a course of unsuitable and plaint alleging that he falsely told a actually invested only $150,000 of excessive trading in the account of a public customer that the value of the total funds, and converted the public customer. securities accounts as set forth on remaining funds for his own use and the customer’s monthly account be n e fi t and the benefit of a business George W. Guttman (Registered statements was incorrect, and misled with which he was associated. The Principal, Brooklyn, New York) the customer as to the true current complaint also alleges that Acosta was named as a respondent in an value of the accounts. knowingly prepared and provided a NASD complaint alleging that he public customer with account state- exercised discretion in the account of Michael Andrew Maher (Regis- ments which misrepresented that the a public customer without having tered Representative, Portland, customer held investments which did obtained prior written authorization Oregon) was named as a respon- not exist, and failed to disclose that a from the customer and prior written dent in an NASD complaint alleging portion of the customer’s funds had acceptance of the account as discre- that he withdrew at least $12,097.97 been converted and misappropriat- tionary by Guttman’s member firm . from a scholarship fund operated by ed. The complaint alleges that Acos- The complaint alleges that Guttman employees of his member firm, with- ta failed to provide prompt written settled a public customer complaint out the knowledge or approval of the no t i fi cation of his employment with without the prior knowledge or con- scholarship fund’s Board of Direc- an outside corporation to either of his sent of his member firm. The com- tors, and used the funds for his own member firms. The complaint also plaint also alleges that Guttman personal use and benefit. alleges that Acosta failed to respond falsely represented to the customer to NASD requests for information. that his firm had agreed to reimburse Roy Wayne Matheny (Registered the customer for the unauthorized Representative, Calhoun, Thomas Owen Combs (Registered trade, without the prior knowledge Louisiana) was named as a respon- Representative, Memphis, Ten- and consent of the member firm. The dent in an NASD complaint alleging nessee) was named as a respon- complaint also alleges that Guttman that he effected check withdrawals dent in an NASD complaint alleging effected unauthorized transactions in totaling approximately $143,435 from that he received $4,000 in the form the accounts of public customers the account of a public customer and of checks from a public customer for without the customers’ knowledge or converted these funds to his own use the purpose of investing in variable consent. The complaint also alleges and benefit by forging the customer’s annuities for her children, failed and that Guttman guaranteed a public endorsement on the checks and neglected to establish the variable customer against loss by promising depositing them into an account with- annuity accounts on the children’s he would reimburse the customer for out the customer’s knowledge or behalf, and instead converted the any loss. consent. The complaint also alleges

NASD Notices to Members—Disciplinary Actions December 1998 797 that Matheny received a check in the transactions, availability of the secu- Firms Suspended/Canceled amount of $50,000 from the public rities, the value of any services pro- The following firms were suspend- customer for the purpose of investing vided by the firm, and the total size of ed/canceled from membership in the in a mutual fund, failed and neglect- the transactions. NASD for failure to comply with for- ed to purchase shares in the mutual mal written requests to submit fina n - fund, and instead converted the Bruce Dean Moutaw, Jr. (Regis- cial information to the NASD. The funds to his own use and benefit by tered Representative, San Diego, actions were based on the provisions af fi xing a firm stamp on the check Ca l i f o r n i a ) was named as a respon- of NASD Rule 8210 and Article VII, and depositing it into an account dent in an NASD complaint alleging Section 2 of the NASD By-Laws. The without the customer’s knowledge or that he executed an unauthorized date the suspensions/cancellations consent. The complaint also alleges transaction in the account of a public commenced is listed after the entry. that Matheny failed to respond to customer by means of manipulative, If the firm has complied with the NASD requests for information. deceptive, or other fraudulent requests for information, the listing devices or contrivances, without oral also includes the date the suspen- Joseph Edward Mattera (Regis- or discretionary authority from the sion concluded. tered Representative, Medford, cu s t o m e r . New York) was named as a respon- Advanta OTC Securities, Philadel- dent in an NASD complaint alleging Jeremy Lee Slovik (Registered phia, Pennsylvania (November 3, that he made material misrepresen- Representative, Bayshore, New 19 9 8 ) tations and omitted to disclose mate- York) was named as a respondent in rial facts in connection with his an NASD complaint alleging that he Ash Financial Corporation, Great solicitations to induce public cus- made material misrepresentations, Neck, New York (October 26, 1998) tomers to purchase securities. The failed to disclose material facts, and complaint also alleges that Mattera made fraudulent price predictions in Great American Financial Net- predicted the future prices of securi- connection with his recommenda- work, Inc., Norcross, Georgia ties to public customers when he tions to public customers to purchase (November 23, 1998) knew that he did not have a reason- securities. The complaint also able basis for his predictions, and alleges that Slovik effected a trans- Hampton Securities, Inc., Los that his predictions were materially action in the account of a public cus- Angeles, California (October 20, misleading to the persons he was tomer without the prior authorization 19 9 8 ) soliciting. The complaint also alleges of the customer. that Mattera effected the purchase of Suspensions Lifted securities in the accounts of cus- Frederick Douglass Smith (Regis- The NASD has lifted the suspension tomers without having obtained the tered Representative, Los Ange- from membership on the dates prior authorization of the customers, les, California) was named as a shown for the following firm s then attempted to collect payment for respondent in an NASD complaint because they have complied with for- one of the unauthorized transactions alleging that he received $14,286.27 mal written requests to submit fina n - by stating or implying that the cus- from public customers for the pur- cial information. tomer’s credit rating would be dam- pose of investing in securities, failed aged if payment was not made. to invest these funds or otherwise Alexander Kale Securities, Inc. use them for any legitimate invest- (f/k/a Hemisphere Capital Corp.), McLaughlin, Piven, Vogel Securi- ment purpose, and instead, convert- New York, New York (October 29, ties, Inc. (New York, New York) ed the funds to his personal use and 19 9 8 ) and James Cecil McLaughlin (Reg- be n e fi t by depositing them into his istered Principal, New York, New firm’s account, caused checks to be Block Trading, Inc., Houston, York) were named as respondents issued from the account payable to Texas (October 29, 1998) in an NASD complaint alleging that himself, and endorsed and cashed the firm, acting through McLaughlin, the checks. The complaint also Firms Suspended Pursuant To effected principal sales and purchas- alleges that Smith signed and sub- NASD Rule Series 9510 For es in municipal bonds for public cus- mitted to his member firm a Form Failure To Pay Arbitration tomers at prices which were not fair, U-4 that contained a false and mis- Award taking into consideration all relevant leading statement. Del Mar Financial Services, Inc., factors including, but not limited to, Del Mar, California (October 26, the expense or risk incurred on the 19 9 8 )

NASD Notices to Members—Disciplinary Actions December 1998 798 Investors Associates, Inc., Hack- Dills, Kevin C., Rancho Santa Fe, Preston Langley Asset Management) ensack, New Jersey (November 16, California (October 26, 1998) and Berkun, both neither admitting 19 9 8 ) nor denying NASD Regulation’s find - Fiorini, Paul Thomas, Los Angeles, ings, were sanctioned for collaborat- Jaron Equities Corp., Hicksville, California (November 4, 1998) ing to defraud investors and New York (November 16, 1998) impeding regulatory scrutiny. Specifi- Garofalo, Jr., James William, Bay- cally, Lexington and Berkun were Smith, Benton & Hughes, Inc., Los side, New York (November 6, 1998) charged with violating the federal Angeles, California (October 22, securities laws by, among other 19 9 8 ) Hession, Steven H., Holbrook, New things, selling thousands of shares of York (October 22, 1998) a penny stock, U.S. Bridge Corp., to Toluca Pacific Securities Corp., nearly 200 investors without making Burbank, California (November 4, Lawrence, Jr., Edwin Leslie, Dix the required disclosures and deter- 19 9 8 ) Hills, New York (October 29, 1998) mining if the investors were suitable to purchase these securities. The Individuals Whose Mancusi, Michael Thomas, Brook- complaint, filed by the NASD Regu- Registrations Were Revoked lyn, New York (November 4, 1998) lation’s New York District office, also For Failure To Pay Fines, alleged that Lexington and Berkun Costs And/Or Provide Proof Of Nunziato, William, Whitestone, New also charged investors more than Restitution In Connection With York (November 16, 1998) $100,000 in fraudulently excessive Violations markups in connection with an Christ, Michael H., Lynbrook, New Reynoso, David (a/k/a Reynolds, unregistered public distribution of York (October 27, 1998) Da v i d ) , Westbury, New York 100,000 shares of Crown Laborato- (November 16, 1998) ries, Inc. common stock. The exces- DeLong, Jr., Jack E., Dunwoody, sive markups ranged from 47 Georgia (October 22, 1998) Rosen, Lee S., Boca Raton, Florida percent to over 70 percent. (October 27, 1998) Duran, Lee Thomas, Fort Laud- In addition, NASD Regulation found erdale, Florida (October 22, 1998) Vitagliano, Richard T., Levittown, that the firm and Berkun, allowed an New York (October 22, 1998) individual, who had been barred by Gelfand, Howard S., New York, NASD Regulation in 1992, to be New York (October 27, 1998) NASD Regulation Fines associated with Lexington, without Lexington Capital, President receiving proper regulatory Goldberg, Cindy M., Denver, Col- For Securities Violations; Both approvals. Individuals who have orado (October 22, 1998) Ordered To Pay Restitution To been barred and want to re-enter the Investors securities industry are required to Mader, Joseph O., Lewiston, Idaho NASD Regulation announced that it obtain approval from NASD Regula- (October 22, 1998) has censured and fined Lexington tion and the SEC. Capital Corporation, New York, NY, Oliver, James G., Grapeville, Texas $100,000 and its CEO and Presi- NASD Regulation also charged that (October 27, 1998) dent, Alan Michael Berkun, Lexington, acting through Berkun and $150,000. The firm and Berkun were others, falsified the firm’s books and Shackleton, Susan A., Woodland also ordered to pay more than records to conceal the fact that Blu- Hills, California (October 22, 1998) $200,000 in restitution and interest to menthal solicited and effected over nearly 200 investors. 300 transactions with investors while Yancey, Michael L., Lake Park, not properly registered with NASD Georgia (October 22, 1998) Berkun was also censured and Regulation and several states. barred as a general securities princi- Individuals Suspended pal. Another former employee and NASD Regulation Sanctions Pursuant To NASD Rule Series broker, Joseph Marc Blumenthal, Olde Trader For Anti-Competi- 9510 For Failure To Pay was censured, barred, and fine d tive Harassment Of A Nasdaq Arbitration Awards $100,000. Market Maker; Firm Also Fined Buxton, Stephen Glenn, Fort Lee, NASD Regulation announced that New Jersey (November 5, 1998) Lexington (formerly known as Mar- Todd Wodek, a trader with Olde Dis- lowe & Company, and now known as count Corporation, has been fine d NASD Notices to Members—Disciplinary Actions December 1998 799 $15,000 and censured for anti-com- to execute a 2,000 share order in NY, $95,000. Additionally, Paragon petitive harassment of a competing 100-share increments, Wodek forced Capital and its President, Danny Jay Market Maker who had narrowed the the Market Maker to spend signifi- Levine, were censured and fine d spread in a security traded on The cantly more time executing, report- $4 0 , 0 0 0 . Nasdaq Stock Market¨. Wodek must ing, and confirming the trades than also take and pass the NASD Equity would have been the case if Wodek Paragon Capital, while neither admit- Trader (Series 55) examination by had traded with the Market Maker at ting nor denying NASD Regulation’s December 9. its 1,000-share displayed offering. findings, was sanctioned for violating NASD and SEC rules concerning NASD Regulation also fined Olde As a result, the Market Maker was trade reporting, ACT, recordkeeping, Discount $20,000 and censured the forced to divert its attention away registration of associated persons, firm for failing to establish, maintain, from other trading opportunities and and supervision. and enforce adequate written super- responsibilities. The hearing panel visory procedures to prevent anti- concluded that Wodek called the Both Paragon Capital and Levine competitive activities. Market Maker 20 times in order "to were fined, jointly and severally, for harass [the Market Maker] for nar- failing to establish, maintain, and The decision by an NASD Regula- rowing the spread in Oak Technolo- enforce written supervisory proce- tion hearing panel found that Wodek gy." NASD rules specifically prohibit dures designed to comply with NASD retaliated against another Market a Market Maker from retaliating and SEC rules regarding trade report- Maker because that firm narrowed against or harassing another Market ing, customer limit orders, SOES, the spread (the difference between a Maker for engaging in legitimate best execution, registration of per- stock’s buy and sell price) in Oak competitive activity. sons, and recordkeeping. Technology, Inc. by quoting the stock in a finer increment than was being The decision also noted that it was The violations were discovered by quoted by Olde and other Market "particularly disturbing" that Olde had NASD Regulation’s Market Regula- Makers in the stock. Generally, the failed to instruct its trading supervisor tion Department during a Trading narrower the spread, the less profits as to his responsibilities for deterring and Market Making Examination of can be made by Market Makers on and detecting anti-competitive Paragon Capital in February 1996. the purchases and sales of an indi- be h a v i o r . The Trading and Market Making vidual security. Examination Program started in Initial actions, such as this, by NASD 1996 and is designed to ensure that The hearing panel found that Wodek Regulation disciplinary committees NASD members understand and harassed the other Market Maker by are final after 45 days, unless they comply with NASD and SEC rules calling him 20 times between 2:25 are appealed to NASD Regulation’s governing trading and market mak- p.m. and 3:58 p.m. on October 7, NAC, or called for review by the ing functions. In these examinations, 1996, and selling only 100 shares of NAC. The sanctions are not effective Market Regulation staff conducts Oak Technology each time Ð even during this period. If the decision in reviews for compliance with a num- though that Market Maker was dis- this case is appealed or called for ber of rules including trade reporting, playing (on the Nasdaq market) that review, the findings may be recordkeeping, best execution, the it would buy at least 1,000 shares in increased, decreased, modified, or display and protection of customer a single trade. The Market Maker re v e r s e d . limit orders, the use of electronic executed each of Wodek’s 20 orders communications networks, customer for 100 shares. Normally, a firm sell- NASD Regulation Fines And co n fi rmation disclosures, and super- ing 2,000 shares would offer to com- Sanctions Paragon Capital vi s i o n . plete the trade in a single transaction And President $135,000 to save time, reduce transaction NASD Regulation announced that it © 1998, National Association of Securities Dealers, costs, and minimize recordkeeping. has censured and fined Paragon Inc. (NASD). All rights reserved. By calling the Market Maker 20 times Capital Corporation of New York,

NASD Notices to Members—Disciplinary Actions December 1998 800 Treasury Makes New Mailing continue to issue a press release and For Lists Available Via The Internet a Federal Register notice, post infor- Recently, the U.S. Department of mation on its Web site, and ask Treasury (Treasury) allowed interest- industry groups and regulators to Your ed parties to sign up for the following notify their members. two new mailing list notification Information pages via the Bureau of the Public The sign-up page for these regulato- Debt’s Web site: ry issuances can be found at: www.publicdebt.treas.gov/cgi-bin/cgi • One page contains three mailing wrap/~www/signup.cgi?cat=gsrs lists related to government securities market regulation and allows individ- Currently, you can also reach this uals to receive e-mail notification of page by going to the Public Debt’s new regulatory issuances. Web site (www.publicdebt.treas.gov), select the “Government Securities • The second page contains three Market Regulation” image, then mailing lists related to the auction of choose the “Sign up for our Govern- Treasury marketable securities and ment Securities Market Regulation allows individuals to receive e-mail mailing lists” option. notification of new press releases. Treasury Securities Auction Government Securities Market Area Regulation Area Anyone who signs up for the Auction In the government securities market Announcement Press Releases, regulation area, anyone signing up Auction Results Press Releases, and for the Auction Rule (Uniform Offer- Inflation-Indexed Security CPI Press ing Circular) Amendments and Inter- Release mailing lists will receive an pretations mailing list will receive an e-mail whenever a new related press e-mail notification when Treasury release is issued. The sign-up page issues any rule amendments or inter- for these auction-related press pretations specifically related to 31 releases is located at: CFR Part 356. Those signing up for www.publicdebt.treas.gov/cgi-bin/cgi the Government Securities Act Rule wrap/~www/signup.cgi?cat=of Amendments, Interpretations and Exemptions mailing list will receive Currently, you can also reach this an e-mail whenever there are any page by going to the Public Debt’s new issuances specifically related to Web site (www.publicdebt.treas.gov), 17 CFR Chapter IV. select “auction information” in the paragraph of text relating to “T-bills, Anyone who signs up for the Notifi- Notes and Bonds,” then choose the cation of Calls for Large Position “Sign up for our Treasury Marketable Reports mailing list will be notified by Securities mailing lists” option. e-mail any time Treasury announces a call (test or actual) for large position Questions regarding the government reports. Large position notifications securities market regulation mailing are for entities that may potentially lists can be directed to the U.S. have a reportable position of $2 bil- Department of Treasury, Govern- lion or more in a particular Treasury ment Securities Regulations staff at security. Treasury advises market (202) 219-3632. Questions regarding participants not to rely solely on their the auction information mailing lists inclusion in this mailing list for notice can be directed to the U.S. Depart- of a call. As in the past, whenever ment of Treasury, Office of Financing Treasury announces a call, it will at (202) 219-3350.

NASD Notice to Members—For Your Information December 1998 801 Comment Period Extended The comment period for Notice to Members 98-81, originally scheduled to expire on November 30, 1998, was extended to January 15, 1999.

NASD Notice to Members—For Your Information December 1998 802 Executive Summary electronic form via the NASD Regu- Special As published in NASD Notice to lation Web Site. Members are Members 98-77 (September), Article advised that the schedule for posting IV, Section 3 of the National Associa- the monthly NASD Notices to Mem- NASD tion of Securities Dealers, Inc. be r s to the Web Site will be on or (N A S D ¨) By-Laws has been amend- about the 10th of each month. Once ed. This By-Law change, which Executive Representatives have Notice to takes effect January 1, 1999, updated their Contact Questionnaire requires members to: (1) obtain an to include their Internet e-mail Members Internet e-mail account and Internet address, NASD Regulation will pro- access for their Executive Represen- vide e-mail notification of new tative; and (2) update their firm ’ s Notices and other updates posted to contact information via the NASD the Web Site. 98-108 SM Regulation, Inc. (NASD Regulation ) Web Site (ww w . n a s d r . c o m ) to Since the complimentary print distri- NASD Extends Deadline include the Executive Representa- bution of these publications will ter- For Updating Firm tive’s e-mail address. minate in January, member firm s Contact Information Via that wish to continue to receive the The NASD Regulation By this time members should be in printed versions may subscribe at the process of obtaining, or have cost by contacting NASD Media- Web Site To February 1, already obtained, the required Inter- So u r c e SM at (301) 590-6142. Each 1999 net access and e-mail account for Executive Representative will be eli- their Executive Representative. gible for one subscription to No t i c e s Suggested Routing Members should have also returned to Members at cost, i. e . $15 per Senior Management the User Request Form, which was year; each branch office will be eligi- mailed to each Executive Represen- ble for one subscription to Re g u l a t o - Ad v e r t i s i n g tative on November 17, 1998, to ry and Compliance Alert at cost, also Continuing Education request a User ID and password $15 per year. required to update the firm’s Contact Corporate Finance Questionnaire. NASD Regulation is While members may choose to rely Executive Representatives currently processing requests for on the printed NASD Notices to Government Securities User IDs and passwords which Me m b e r s , it does not relieve them of should be mailed to members on or the requirement for the Executive In s t i t u t i o n a l about December 16, 1998. Since the Representative to maintain an Inter- In s u r a n c e User ID and password are required net e-mail account on behalf of the Internal Audit to gain access to the Contact Ques- firm, effective January 1, 1999, and tionnaire on the NASD Regulation to update the firm’s Contact Ques- Legal & Compliance Web Site and given the holiday sea- tionnaire via the NASD Regulation Mu n i c i p a l son with its inherent postal delays, Web Site by February 1, 1999. the deadline for updating the Ques- Mutual Fund tionnaire has been extended to For questions regarding the Contact Op e r a t i o n s February 1, 1999. Questionnaire, or to receive a copy Op t i o n s of the User Request Form, please Additionally, members are reminded call (301) 869-6699. Registered Representatives that effective January 1, 1999, the Re g i s t r a t i o n primary means of distribution of © 1998, National Association of Securities Dealers, Re s e a r c h NASD Notices to Members and the Inc. (NASD). All rights reserved. Regulatory & Compliance Alert is in Sy n d i c a t e Sy s t e m s Tr a d i n g Tr a i n i n g Variable Contracts

Special NASD Notice to Members 98-108 December 1998 805