NASD Regulatory & Compliance ALERT National Association of Securities Dealers, Inc. Volume 11, Number 2 June 1997 NASD Spring Securities Conference Calls REGULATION, For Building Investor Confidence INC. NASD Regulation, Inc. (NASD remarks, Robinson echoed this year’s 1997 SPRING RegulationSM) held its annual Spring theme by saying that the goal of the con- SECURITIES Securities Conference from May 21–23, ference was to help compliance person- 1997, in Washington, D.C. This year’s nel help their firms. Following his CONFERENCE theme was “Building Investor welcome, NASD Regulation President Confidence Through Member Mary Schapiro addressed the audience. Compliance.” The conference provided BUILDING INVESTOR securities professionals with practical, Schapiro addressed several initiatives CONFIDENCE up-to-date information to comply with that occurred during her first year as THROUGH MEMBER industry rules and regulations. NASD Regulation President. COMPLIANCE Specifically, Schapiro commented that The conference opened with remarks by the organization’s obligations to the Todd Robinson, Chairman, NASD public are three-fold: to ensure market Regulation, Board of Directors, and integrity through effective market sur- Chairman and Chief Executive Officer of Linsco/Private Ledger Corp. In his (Continued on page 2) SEC Approves Move To Nasdaq Quotes In 1/16s On May 28, 1997, the SEC approved a Nasdaq believes the narrower quote proposal by The Nasdaq Stock MarketSM increment will enhance market to reduce the minimum quotation incre- transparency and provide investors with ment from 1/8 of a dollar (12.5 cents) to improved opportunity for best 1/16 of a dollar (6.25 cents) for all secu- execution. The change also makes it rities listed on Nasdaq® whose bid price possible for Nasdaq to accommodate is $10 or above. Stocks under $10 are and reflect orders entered into Electronic already quoted in increments as small as Communication Networks (ECNs) that 1/32. The new quoting system was are priced narrower than the minimum implemented for all Nasdaq stocks on quotation increment currently allowed Monday, June 2. (Continued on page 3) CONTENTS 1 Cover Stories Issues Firm Element Advisory Non-Member Names In Spring Securities Conference Regulatory And Firm Element Members’ Communications Calls For Building Investor Examinations Confidence Firms Need Heightened 16 Arbitration SEC Approves Move To Supervision Of Aggressive NASD Board Acts To Improve Nasdaq Quotes In 1/16s Cold-Calling And Service And Submit Task Telemarketing Activities Force Proposals To SEC 3 Regulation Supervision Of Off-Site Series 8 Or 24 Qualified Sweep Report Memorandum Salespersons 18 Violations Provides Guidance On Compliance Short Takes Smith Barney And Lehman Heightened Supervision Brothers Censured And Fined Proposed Changes Would $250,000 Each; Customers Allow Firms To Use Electronic 12 Municipal Securities Receive $5.6 Million Refund Mail NASD Regulation Appoints NASD Regulation Fines And Members Alerted To Bogus Municipal Securities Censures First Albany Treasury Securities Compliance Regulator Compliance Questions & NASD Regulation Exams 19 Corporate News Answers Focus On Yield Burning NASD Board Of Governors NASD Regulation Reminds Elects Frank G. Zarb Chairman Members Of Margin 14 Advertising Requirements New Rule Applies to 19 NASD Disciplinary Actions SEC Issues No-Action Letter Telemarketing Scripts On Haircuts For Mortgage- Actions from December 1996, Backed Securities “Ask The Analyst” and January, February, and Continuing Education Council NASD Permits Broader Use Of March 1997 Spring Securities Conference, from page 1 veillance, to ensure that members are in She mentioned that, during NASD Zarb commented on issues from the per- full compliance with rules and regula- Regulation’s examination process, some spective of both a regulator and an tions through a thorough examination of areas that will receive special emphasis industry professional. His comments their business practices and dealings include sales practice activity in centered around the word “trust.” Zarb with customers, and to equip investors SmallCapSM securities, suitability said that trust drives the markets, and with the means to make informed deci- requirements for speculative and low- that what’s good for the investor sions. priced securities, telemarketing activi- ultimately results in being good for the ties, and compliance with continuing industry. In speaking about the redesign of the education rules. Central Registration Depository He noted that the quality of the markets (CRDSM) system, Schapiro said that, by Schapiro then introduced Frank Zarb, has grown and that the percentage of year-end, the system will be enhanced NASD Chairman, CEO, and President. “bad guys” is small. However, he further to give the public even easier Zarb joined the NASD after a notable emphasized that there can be no relax- access to disclosure information. Instead career in both the private and public sec- ation in getting these individuals out of of waiting for a written response, the tors, including senior leadership the industry. Regarding the question of public will have the information avail- positions with several major financial de-regulation, Zarb stressed that any able to them electronically through the services firms. changes should be founded on investor NASD Regulation Web site. protection. National Association of Securities Dealers, Inc. June 1997 2 The morning session continued with Finance and Hazardous Materials. panel of knowledgeable and two panel discussions. NASD Congressman Oxley, who is a proponent experienced industry leaders moderated Regulation Executive Vice President of common sense stock pricing and the by senior NASD Regulation staff. and Chief Operating Officer, Elisse switch from fractions to decimals, Walter, led the first panel on the inner praised the NASD for its proposed The panelists provided straightforward workings of the NASD enforcement and move to quote prices in 1/16s rather information and practical examples on disciplinary process, which included a than 1/8s. such topics as advertising regulation, discussion of the role of the new hearing bank broker/dealer regulatory issues, officers. Oxley noted that the U.S. markets are handling customer complaints, indepen- the only significant world markets that dent contractors and financial planners, The second panel was “Capital still trade in fractions. He believes and MSRB Rules. Formation on the Internet: Challenges & strongly that decimal pricing will result Pitfalls.” It included a lively, multi- in savings for the individual investor. To The next national conference will be the media slide presentation on the quell industry concerns, Oxley pointed 1997 Fall Securities Conference from Securities and Exchange Commission’s out that proposed legislation calls for November 5-7 in Phoenix, AZ. For (SEC) enforcement efforts by John R. allowing the SEC to decide how to more information on the conference or Stark, Special Counsel at the SEC for implement the change and the time other future programs, please visit Internet Projects. frame to accomplish it. NASD Regulation’s Web site (www.nasdr.com), or contact Susan The keynote speaker at luncheon was Following the general session, the con- Fallon, Manager, NASD Public the Honorable Michael G. Oxley, ference offered a total of 18 workshops Relations & Conferences, at United States House of Representatives, addressing key issues in the area of (202) 728-6900. ❐ Chairman of the Subcommittee on compliance. Each workshop featured a SEC Approves Quotes in 1/16s, from page 1 for Nasdaq securities quoted at or and price discovery by allowing orders Questions concerning this action may be above $10. and quotes in smaller increments to be directed to Cameron Brown, NASD displayed publicly to the market,” said Media Relations, at (202) 728-8379, or “We’re delighted the SEC moved Frank G. Zarb, Chairman, CEO and Reid Walker, NASD Media Relations, quickly to approve our proposal to quote President of the NASD, parent corpora- at (202) 728-8243. ❐ in 1/16. This will enhance transparency tion of The Nasdaq Stock Market. Regulation Sweep Report Memorandum Provides Guidance On Heightened Supervision As a follow-up to the Joint Regulatory and describes actions that could consti- findings and recommendations Sales Practice Sweep (Sweep)1, NASD tute heightened supervision. published in the Sweep report. (See Regulation and the New York Stock related story on the Sweep in April Exchange (NYSE) issued a joint memo- Sweep Report 1996, NASD Regulatory & Compliance randum. The memorandum discusses NASD Notice to Members 97-19 Alert.) A significant Sweep report firms’ responsibilities to supervise contains the joint NASD Regulation/ recommendation concerns firms that closely certain registered representatives NYSE memorandum, describing the hire registered representatives with a NASD Regulatory & Compliance Alert June 1997 3 history of repeated customer complaints, Registered Representative Activities: Customer Account Activity disciplinary actions, or arbitrations. It is If the registered representative’s Monitoring: A firm should consider recommended that firms develop and misconduct involved a particular securi- generating special exception reports to implement special supervisory ties product, customer type, or activity, detect unusual trading activity in a cus- procedures for these registered represen- the firm should tailor supervision to tomer account or reviewing a problem tatives. limit the risk of similar