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SEC Approved amendment to TRACE Rules

On March 6, 2007, the SEC approved an amendment to Rule 7030 relating to the availability of TRACE Snapshot date.  This is real-time TRACE transaction data that is available once per day, for a reduced monthly fee.

A subscriber to the Snapshot TRACE data will pay $250 per month to receive this, rather than $1500 per month to receive TRACE data continuously throughout the day.  The specific time of day that this information would be received can be selected by the subscriber.

Margin Risk Disclosure Statement

Recent amendments to NASD Rule 2520 now permit members to margin certain products according to a prescribed portfolio margin methodology.  Also amended was Rule 2860 which will require a disclosure statement and written acknowledgement for use with the proposed portfolio margin program and provided to clients using a portfolio margin account.  This will be done on a pilot basis from April 2, 2007 to July 31, 2007 – unless the SEC approves an extension of the pilot or adoption of the pilot on a permanent basis.

Members seeking approval to participate in this pilot program should refer to NtM 07-11 for further information on the program and how to submit an application and for details on the approval process.

NASD Broker Check

The Securities and Exchange Commission (SEC) approved amendments to Interpretive Material 8310-2 regarding the release of information through NASD BrokerCheck.   The BrokerCheck website has been redesigned and is more user-friendly and secure. 

With the enhancements that have been made to the BrokerCheck website, NASD believes it will allow the reader to view disclosure events in the appropriate context and give appropriate weight to all disclosure events when evaluating a particular firm or broker. 

NASD’s Trading and Quotation Halt Authority Expanded 

Under Rule 6545, NASD was given limited trading and quotation halt authority solely for securities quoted on the OTCBB. 

On December 18, 2006, the Securities and Exchange Commission (SEC) approved amendments to Rule 6545 – amended and renumbered to Rule 6660, to expand the scope of NASD authority to initiate trading and quotation halts in all OTC Equity Securities.  This includes ADRs that trade in the OTC market, securities quoted in quotation arenas other than the OTCBB – i.e. Pink Sheets, and other OTC Equity Securities.  This expansion will allow NASD to impose its trading and quotation halt authority uniformly to all OTC Equity Securities.  Effective date of the new rule was March 16, 2007.

Options Position and Exercise Limits 

The Pilot Program for increasing position and exercise limits for stock options has been extended now until September 1, 2007.  Originally, this program was set to expire on March 1, 2007.

NASD Rule 2860(b)(3)(a) imposes position limits, or ceilings, on the number of conventional and standardized equity options contracts in each class on the same side of the market that can be written or held by a member, a person associated with a member or a customer or group of customers acting in concert.  NASD’s limits on standardized equity options apply only to members who are not also members of the exchange where the option is traded; the limits on conventional options apply to all NASD members.

The limits have been increased as follows:

13,500 contracts has been increased to 25,000 contracts

22,500 contracts has been increased to 50,000 contracts

31,500 contracts has been increased to 75,000 contracts

60,000 contracts has been increased to 200,000 contracts

75,000 contracts has been increased to 250,000 contracts

Code of Arbitration Procedure 

SEC approves revision of customer and industry portions of NASD Code of Arbitration Procedures – effective April 16, 2007.  The Customer and Industry Codes reorganize the dispute resolution rules into separate procedural codes, simplify the language of the NASD Code and Arbitration Procedure (old Code) and codify current practices.    These codes can be accessed on the NASD web site – www.nasd.com/rulefilings/customercode and www.nasd.com/rulefilings/industrycode, and they become effective April 16, 2007, and will apply to claims filed on or after the effective date.

Guidance – Supervision of Recommendations after a Registered Rep Changes Firms 

When a registered representative with an established customer base terminates their association with one firm and moves to another, it is of primary interest of the newly associated firm that the representative retain as much of their client base as is possible.  When clients own mutual funds and/or variable products a dealer or servicing agreement is in place requiring the sponsor to pay “trail commissions”, which may benefit the representative.

In associating with a new firm, there could be impediments to the representative being able to continue to sell or service these investments, as well as receiving trail commissions from the sponsor.  If the products were held directly with the issuer, the product may be proprietary to the prior firm and not portable, or the product sponsor may not permit the product to be transferred to the customer’s account at the new firm.  It also would be an issue if the new firm did not have a dealer or servicing agreement with the sponsor.  It is not uncommon, that even if the new firm did have a servicing agreement in place with the sponsor, they would not be able to receive the trails on previously sold business because those trail commissions contractually belong to the prior firm that sold the product and it might not agree to relinquish them to the representative’s new firm.

When this happens, the new firm may not sell the investment or receive trail commissions from the distributor, and in some cases, may not even be able to service the investment.  The representative may be inclined to recommend the liquidation and replacement of the asset, with a similar asset with the new firm.  Such recommendations may not be made on the basis that the sale and replacement of a security will replace compensation lost from the representative no longer receiving trails or yield greater remuneration for the representative or the new firm. 

This decision must be made only after careful consideration and fully assessing the suitability of the transaction for the customer and determining that the transaction is in the customer’s best interests – in view of all considerations. The suitability analysis must also include other considerations including whether the customer’s mutual fund or variable product is subject to a contingent deferred sales charge or a required holding (surrender) period, or has other features that could affect its value or liquidity, and the fees and expenses associated with the new product being recommended.  All relevant facts and the basis for the recommendation must be fully disclosed to the customer.  

Firms are encouraged to have procedures in place, including supervisory procedures, that are specifically designed to review and evaluate investment recommendations relating to mutual funds and variable products that are made by newly associated persons to their existing customers.