On May 23, 2006, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed amendment to NASD rule 2340 (Customer Account Statements). On August 17, 2006, NASD filed Amendment No. 1 to the proposed rule change.^[3] The proposed rule change, as amended by Amendment No. 1, was published for comment in the Federal Register on October 16, 2006.^[4] The Commission received one comment on the proposal.^[5] This order approves the proposed rule change, as amended.

I. Description

The proposed amendment to NASD Rule 2340 would allow institutional customers with Delivery versus Payment/Receive versus Payment (“DVP/RVP”) accounts to elect not to receive quarterly account statements.^[6] A DVP/RVP account is an arrangement whereby payment for securities purchased is made to the selling customer's agent/and or delivery of securities sold is made to the buying customer's agent in exchange for payment at the time of settlement, usually in the form of cash.

Rule 2340, in pertinent part, requires any member that conducts a general securities business and also carries customer accounts or holds customer funds or securities to send account statements to customers at least once each calendar quarter. The statement of account must contain a description of any securities positions, money balances, or account activity, and must be sent to each customer whose account had a security position, money balance, or account activity during the time since the last statement was sent.

The proposed amendment would provide relief from this requirement with regard to customer accounts that are carried solely for the purpose of DVP/RVP transactions. NASD states that account statements for DVP/RVP accounts (chiefly institutional accounts) generally do not reflect any cash balance or security position at the end of a quarter, and that DVP/RVP customers generally rely on trade runs or customer confirmations issued pursuant to Rule 10b-10 under the Exchange Act for transaction-related information.

The proposed amendment would relieve members from the obligation to send quarterly statements to customers with DVP/RVP accounts if: (1) The customer's account is carried solely for the purpose of execution on a DVP/RVP basis; (2) all transactions in the account are handled on a DVP/RVP basis in conformity with Rule 11860;^[7] (3) there are no securities or cash positions in the account at the end of the quarter (other than positions of a temporary nature, such as those arising from fails to receive or deliver, errors, questioned trades, dividend or bond interest entries and other similar transactions); (4) the customer consents to the suspension in writing and the member maintains such consents in a manner consistent with NASD Rule 3110 and Rule 17a-4 under the Exchange Act;^[8] (5) the member undertakes to provide any particular statement or statements to the customer promptly upon request; and (6) the member undertakes to promptly reinstate the delivery of such statements to the customer upon request. The proposed rule change specifies that Rule 2340 does not qualify or condition the obligations of a member under Rule 15c3-2 under the Exchange Act concerning quarterly notices of free credit balances on statements.^[9] The proposed rule change would also define “DVP/RVP account” for purposes of Rule 2340.^[10] Finally, the proposed rule change includes a technical amendment that would replace the reference to “the Association” in paragraph (e) of Rule 2340 with “NASD.”

II. Summary of Comments

The Commission received one comment on the proposal, which was supportive, did not suggest any changes to the proposal, and did not require a response from NASD.^[11]

III. Discussion and Findings

The Commission finds that the proposed rule change is consistent with the Act, and in particular, with section 15A(b)(6) of the Act,^[12] which requires, among other things, that NASD rules be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and national market system, and in general, to protect investors and the public interest. The Commission believes that the proposed rule change, as amended, should remove impediments to and perfect the mechanisms of a free and open market and national market system by removing an unnecessary and potentially costly obligation on firms to deliver quarterly account statements to DVP/RVP customers. At the same time, the proposal maintains certain investor protections ( i.e., requiring NASD members to obtain affirmative consent to the suspension of quarterly account statements, preserving the ability of customers to obtain particular statements upon request and to resume receipt of statements promptly upon request, and precluding member organizations from unilaterally terminating delivery of such statements). The Commission therefore believes the proposal is consistent with the Exchange Act.

IV. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Act ^[13] that the proposed rule change (SR-NASD-2006-066) be, and hereby is, approved,^[14] effective immediately.^[15]