Self-Regulatory Organizations; Notice of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to the Storage of Account Information for Options Customers for Supervisory Purposes

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34352; File No. SR-NASD-94-27]

Self-Regulatory Organizations; Notice of Proposed Rule Change by

the National Association of Securities Dealers, Inc. Relating to the

Storage of Account Information for Options Customers for Supervisory

Purposes

July 12, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 20,

1994, the National Association of Securities Dealers, Inc. (``NASD'' or

``Association'') filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') the proposed rule change as described in

Items I, II, and III below, which Items have been prepared by the

NASD.\1\ The Commission is publishing this notice to solicit comments

on the proposed rule change from interested persons.

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\1\The proposed rule change was originally filed on May 23,

1994, and was amended on June 20, 1994, in order to correct a

technical deficiency.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NASD is proposing to amend its options rules governing the

manner in which members may store account statements and other

information for options customers for supervisory purposes.

Specifically, the proposal would permit NASD members to satisfy their

record retention requirements for options accounts by storing required

options account information in locations other than the respective

principal supervisory office for the options accounts, provided such

account information is readily accessible and promptly retrievable.

Presently, NASD rules require that certain customer account information

be maintained at both the branch office servicing the customer's

account and the principal supervisory office having jurisdiction over

that office. The proposal would not change the record retention

requirements with respect to branch offices, only supervisory offices.

The text of the proposed rule change is as follows. (Additions are

italicized.)

Section 33 of the NASD Rules of Fair Practice

* * * * *

Section 33(b)(17) Maintenance of Records

(A) No change.

(B) Background and financial information of customers who have been

approved for options trading shall be maintained at both the branch

office servicing the customer's account and the principal supervisory

office having jurisdiction over that branch office. Copies of account

statements of options customers shall also be maintained at both the

branch office supervising the accounts and the principal supervisory

office having jurisdiction over that branch for the most recent six-

month period. With respect solely to the above-noted record retention

requirements applicable to principal supervisory offices, however, the

customer information and account statements may be maintained at a

location other than the principal supervisory office if such documents

and information are readily accessible and promptly retrievable. Other

records necessary to the proper supervision of accounts shall be

maintained at a place easily accessible both to the branch office

servicing the customer's account and to the principal supervisory

office having jurisdiction over that branch office.

* * * * *

Section 33(b)(20) Supervision of Accounts

(A)-(C) No change

(D) Headquarters Review of Accounts

Each member shall maintain at the principal supervisory office

having jurisdiction over the office servicing customer accounts, or

have readily accessible and promptly retrievable, information to permit

review of each customer's options account on a timely basis to

determine (i) the compatibility of options transactions with investment

objectives and with the types of transactions for which the account was

approved; (ii) the size and frequency of options transactions; (iii)

commission activity in the account; (iv) profit or loss in the account;

(v) undue concentration in any options class or classes, and (vi)

compliance with the provisions of Regulation T of the Federal Reserve

Board.

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the NASD included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The NASD has prepared summaries, set forth in Sections

(A), (B), and (C) below, of the most significant aspects of such

statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

Currently, NASD rules and the rules of the options exchanges

uniformly require that both the branch office servicing an options

customer's account and the principal supervisory office having

jurisdiction over that branch office retain account statements and

other financial and background information for the account for

supervisory purposes.\2\ With the advances in data storage and

retrieval through such means as optical disks, fax machines, computers,

and mircofiche, among others, coupled with the increased expenses of

storing records on-site in major financial centers such as New York

City, however, member firms increasingly are storing their records away

from their principal supervisory offices.

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\2\See Sections 33(b) (17) and (20) of the NASD Rules of Fair

Practice.

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In light of the record retention requirements for options accounts,

however, these new storage arrangements have necessitated action by the

options Self-Regulatory Organizations (``SROs''). Specifically, member

firms have obtained no-action positions from the Options Self-

Regulatory Council (``OSRC'') on a case-by-case basis when moving their

operational facilities off-site.\3\ In this regard, the OSRC has

determined that these arrangements are consistent with the record

retention requirement rules so long as the documents are readily

accessible and promptly retrievable. Thus, the OSRC has asked each of

the options exchanges and the NASD to consider amending their rules to

permit these types of off-site document storage arrangements. Given the

realities of today's business environment, the NASD agrees with the

OSRC and believes its options rules should be amended accordingly.

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\3\The OSRC is a committee comprised of representatives from

each of the options exchanges and the NASD that was created pursuant

to the plan submitted by the options exchanges and the NASD under

Rule 17d-2 of the Act (``17d-2 Plan''). The 17d-2 Plan was adopted

to reduce regulatory duplication relative to options-related sales

practice matters for a large number of firms which are currently

members of two or more SRO's. The purpose of the OSRC is: (1) To

administer the 17d-2 Plan; and (2) to address options-related sales

practice matters in a common forum.

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In addition, the NASD does not believe that the important

supervisory obligations imposed on member firms will be compromised by

allowing members to store options customer account statements and

information off-site. Under the proposal, member firms will continue to

have easy access to all customer account information necessary to

discharge their supervisory responsibilities. In this connection, in

order to ensure that off-site document storage arrangements will not

jeopardize or constrain members' supervisory activities with respect to

options accounts, the options SROs commit to periodically examine the

document retrieval capabilities of members using off-site document

storage arrangements.

Therefore, the NASD believes the proposed rule change is consistent

with Section 15A(b)(6) of the Act. Section 15A(b)(6) requires that the

rules of a national securities association be designed to prevent

fraudulent and manipulative acts and practices; to promote just and

equitable principles of trade; to foster cooperation and coordination

with persons engaged in regulating, clearing, settling, processing

information with respect to, and facilitating transactions in

securities; to remove impediments to and perfect the mechanism of a

free and open market and a national market system; and in general to

protect investors and the public interest. Specifically, the NASD

believes that the proposal will promote the maintenance of fair and

orderly markets because it will afford member firms with the

opportunity to discharge their supervisory responsibilities in a more

cost-effective manner, thereby improving the efficiency of member

firms, and, in turn, benefiting investors in the marketplace. Moreover,

as noted above, because the NASD does not believe that the proposal

will compromise the ability of member firms to satisfy their

supervisory obligations, the NASD believes the proposal is consistent

with the principle of investor protection.

B. Self-Regulatory Organization's Statement on Burden on Competition

The NASD believes that the proposed rule change will not result in

any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants, or Others

Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the NASD consents, the Commission will:

A. by order approve such proposed rule change, or

B. institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies

of the submission, all subsequent amendments, all written statements

with respect to the proposed rule change that are filed with the

Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying in the

Commission's Public Reference Room. Copies of such filing will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to file number SR-NASD-94-27 and

should be submitted by August 8, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-17351 Filed 7-15-94; 8:45 am]

BILLING CODE 8010-01-14