This rule is no longer applicable. NASD Rule IM-3130 has been superseded by FINRA Rules 4110, 4140, and 4521. Please consult the appropriate FINRA Rules.
(a) This explanation outlines and discusses some of the financial and operational deficiencies which could initiate action under
Rule 3130. Paragraphs (c)(2) and (d)(2) of Rules
3130 and
[3131] recognize that there are various unstated financial and operational reasons for which NASD may impose restrictions on a member so as to prohibit its expansion or to require a reduction in overall level of business. These provisions are deemed necessary in order to provide for the variety of situations and practices which do arise and which, if allowed to persist, could result in increased exposure to customers and to broker/dealers.
(b) In the opinion of the Board of Governors, it would be impractical and unwise to attempt to identify and list all of the situations and practices that might lead to the imposition of restrictions or the types of remedial actions NASD may direct be taken because they are numerous and cannot be totally identified or specified with any degree of precision. The Board believes, however, that it would be helpful to members' understanding to list some of the other bases upon which NASD may conclude that a member is in or approaching financial difficulty.
(c) For purposes of paragraphs (c)(2) and (d)(2) of
Rule 3130, a member may be considered to be in or approaching financial or operational difficulty in conducting its operations and therefore subject to restrictions if it is determined by NASD that any of the parameters specified therein are exceeded or one or more of the following conditions exist:
(1) The member has experienced a reduction in excess net capital of 25% in the preceding two months or 30% or more in the three-month period immediately preceding such computation.
(2) The member has experienced a substantial change in the manner in which it processes its business which, in the view of the Association, increases the potential risk of loss to customers and members.
(3) The member's books and records are not maintained in accordance with the provisions of SEC Rules 17a-3 and 17a-4.
(4) The member is not in compliance, or is unable to demonstrate compliance, with applicable net capital requirements.
(5) The member is not in compliance, or is unable to demonstrate compliance, with SEC Rule 15c3-3 (Customer Protection — Reserves and Custody of Securities).
(6) The member is unable to clear and settle transactions promptly.
(7) The member's overall business operations are in such a condition, given the nature and kind of its business that, notwithstanding the absence of any of the conditions enumerated in subparagraphs (1) through (6), a determination of financial or operational difficulty should be made; or
(8) The member is registered as a Futures Commission Merchant and its net capital is less than 7% of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder.
(d) For purposes of paragraphs (c)(2) and (d)(2) of
[Rule 3131], a member may be considered to be in or approaching financial or operational difficulty in conducting its operations and therefore subject to restrictions if it is determined by NASD that any of the parameters specified therein are exceeded or one or more of the following conditions exist:
(1) The member has experienced significant reduction in excess liquid capital in the preceding month or in the three-month period immediately preceding such computation.
(2) The member has experienced a substantial change in the manner in which it processes its business which, in NASD's view, increases the potential risk of loss to customers and members.
(3) The member's books and records are not maintained in accordance with the provisions of Section 404.2 of the Treasury Department rules.
(4) The member is not in compliance, or is unable to demonstrate compliance, with applicable capital requirements of Section 402 of the Treasury Department rules.
(5) The member is not in compliance, or is unable to demonstrate compliance, with Section 403.4 of the Treasury Department rules (Customer Protection — Reserve and Custody of Securities).
(6) The member is unable to clear and settle transactions promptly.
(7) The member's overall business operations are in such a condition, given the nature and kind of its business that, notwithstanding the absence of any of the conditions enumerated in subparagraphs (1) through (6), a determination of financial or operational difficulty should be made.
(8) The member is registered as a Futures Commission Merchant and its net capital is less than required by Section 402.1(d) of the Treasury Department rules.
(e) If NASD determines that any of the conditions specified in paragraphs (c) or (d) of this explanation exist, it may require that the member take appropriate action by effecting one or more of the following actions until such time as NASD determines they are no longer required:
(1) Promptly pay all free credit balances to customers.
(2) Promptly effect delivery to customers of all fully-paid securities in the member's possession or control.
(3) Introduce all or a portion of its business to another member on a fully-disclosed basis.
(4) Reduce the size or modify the composition of its inventory.
(5) Postpone the opening of new branch offices or require the closing of one or more existing branch offices.
(6) Promptly cease making unsecured loans, advances or other similar receivables, and, as necessary, collect all such loans, advances or receivables where practicable.
(7) Accept no new customer accounts.
(8) Undertake an immediate audit by an independent public accountant at the member's expense.
(9) Restrict the payment of salaries or other sums to partners, officers, directors, shareholders, or associated persons of the member.
(10) Effect liquidating transactions only.
(11) Accept unsolicited customer orders only.
(12) File special financial and operating reports; and/or
(13) Be subject to such other restrictions or take such other action as NASD deems appropriate under the circumstances in the public interest and for the protection of members.
