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Notice To Members 83-11

Formation of Federal Task Group on Regulation of Financial Services

Published Date:

TO: All NASD Members

Recently, Norman T. Wilde, Jr., Chairman of the NASD, received a letter from Vice President George Bush advising of the Administration's formation of a Task Group to review the existing system of federal regulation of financial institutions and services.

The Vice President explained in his letter that the Task Group would very much appreciate obtaining the views of interested organizations and individuals on the issues it intends to study. He also states that the Task Group ". . .also hope(s) to obtain specific suggestions on how best to reform or streamline the federal regulatory structure, including areas in which the role and responsibilities of self-regulatory organizations could be enhanced."

In order to obtain responses from the largest number of individuals, institutions and organizations, Mr. Bush has asked the Association to inform its members of his request for public comment and urge them to reply individually or collectively.

The Board of the Association believes that the issues to be explored by the Task Group are extremely far-reaching and worthy of thoughtful reflection. As the change our industry is experiencing continues, (see the NASD's Special Report entitled The Financial Services Industry of Tomorrow, dated November 1982), it makes great sense for those who are at the focal point of this change to participate directly in the process that may shape the future framework within which they will operate. The Association therefore strongly encourages each and every member to consider the issues under study by the Task Group and to thereafter provide it with constructive comments and helpful suggestions. March 14, 1983, has been set as the comment deadline date.

To assist members in their review of the Task Group study project, a copy of the Vice President's letter and a reprint of the Federal Register announcement of the study and request for public comment are enclosed.

To assist the Association in the formulation of its long range policy planning, it would be appreciated if copies of letters to be sent to the Task Group were simultaneously provided the NASD. Kindly send them to the attention of:

S. William Broka
Corporate Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N. W.
Washington, D. C. 20006

Questions concerning this notice may be directed to Douglas F. Parrillo, Vice President, Department of Policy Research, at (202) 728-8272.


Gordon S. Macklin


Notice to members 83-11



Notice to members 83-11



Customers must also be provided with a copy of any information returns made to the IRS.


These reporting requirements are not applicable to sales effected for customers who are exempt from the withholding requirements previously noted.

Method of Reporting

In general, a member who effects sales for 250 or more customers may, in lieu of filing Forms 1099, submit the aforementioned information to the IRS on computer readable magnetic tapes or disks which have been authorized by the IRS. The IRS will consider the submission of broker returns on other media if undue hardship is shown through an application filed with it.


The provisions with respect to Original Issue Discount are perhaps the most complex in the proposed regulations. They are summarized below.

Short-Term Obligations

A "short-term obligation" is defined in the regulations as one with a fixed maturity date not exceeding one year from the date of issuance. The withholding requirements for this type of security are as follows:

  • The amount of OID will be subject to withholding only at maturity.
  • If a payment of interest is paid or credited prior to maturity, such interest will be subject to withholding at that time.
  • If the instrument is transferred before maturity, the purchaser would be subject to the amount of OID at maturity determined on the basis of his purchase price in the secondary market.

Long-Term Obligations

  • If no periodic payments of interest are made before maturity, withholding is required at maturity for only the amount of OID includable in the holder's gross income for the year in which the obligation matures.
  • On registered long-term instruments with periodic interest payments prior to maturity, withholding is required on the interest and, pursuant to the amortization procedure pre scribed, on the OID includable in the gross income of the holder for the calendar year of the payment.
  • Long-term bearer obligations with periodic interest payable before maturity requires withholding on the payment but not on any OID.
  • If a long-term obligation is transferred prior to maturity, the subsequent holder will be subject to withholding as if he were the original holder, notwithstanding his purchase price in the secondary market.

Original Issue Discount Reporting

  • Reporting requirements will apply only to instruments with a maturity date of more than one year.
  • The amount of Original Issue Discount must be reported each year under the amortization method described by the regulation which is based on a yield to maturity, compounding method.

Although reporting on Original Issue Discount obligations was scheduled to be effective January 1, 1983, the IRS has announced that penalties for failure to report will be suspended until April 1, 1983, for short-term obligations and July 1, 1983, for long-term obligations.

Because of the complexity of the regulations, the lack of reference data with respect to OIDs and the changes with respect to the computation of Original Issue Discount, the Association has gone on record with the IRS that compliance with both the reporting and withholding requirements would be difficult, if not impossible, to achieve, and has expressed the opinion that corrective legislation should be introduced to eliminate the requirements under TEFRA with respect to Original Issue Discount obligations. We hope to hear more on this subject shortly.


Effective July 1, 1983, most debt obligations will be required to be issued in registered form. The Act exempts from this registration requirement:

  • securities with maturities of one year or less;
  • securities which are not of a type offered to the public;
  • securities which are sold to non-U.S. nationals and are pay able outside the United States.

Debt obligations of the United States and those of state and local governments must also be issued in registered form. Failure of an issuer to issue its debt securities in registered form will result in a loss of tax-exempt status for interest on these obligations, a denial of the taxpayer's deductions for the related interest and a disallowance of the issuer's tax deduction for the related interest expense. Obligations may also be considered issued in registered form if transfer is effected through a book entry system. The law further directs that a book entry registration system be established by regulation which would require that the rights to principal and interest can be transferred only by means of such book entry.


The Association has taken an active role in attempting to assess the impact of the new law by identifying various areas of concern to its members. In addition to participating in a working conference on the regulations sponsored by the IRS, the proposed regulations were reviewed by the Association's Municipal and Uniform Practice Committees which made certain recommendations to the NASD Board of Governors concerning the regulations. As a result of this review, on January 14, 1983, the Association filed an extensive comment letter to the IRS expressing its opposition to the burdens posed by the regulations.

Additionally, the Association participated in public hearings which were held by the IRS on January 25, 27, and February 1, 1983, and reinforced its comments in several major areas; namely, interest and Original Issue Discount reporting; information reporting of broker-dealers; and regulations with respect to withholding on dividends and interest.

Henry C. Alexander, Vice President and Director of Operations and Systems for Merrill Lynch Capital Markets Group and Chairman of the Association's Uniform Practice Committee, acted as the Association's principal spokesman. Also representing the Association were William Jennings, Chief Financial Officer, Salomon Brothers and an officer with the Wall Street Tax Association; Roger Gerber, a partner with Fahnstock and Company also with the Wall Street Tax Association; Wendie Wachtel, Vice President, Wachtel and Company, Washington, D.C., and a member of District Committee No. 10; and Thomas McAuliffe, Director of Operations for Bellamah, Neuhauser and Barrett in Washington, D.C. These individuals provided broad based representation for the Association's membership since their firms ranged from those with a manual record keeping system to those with sophisticated automated systems.

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Since the regulations are not yet final, the purpose of this notice is simply to alert members to what is coming and to encourage them to make the necessary preparations.

The Association will disseminate the final regulations under TEFRA, complete with explanations, shortly after their publication.

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Questions concerning TEFRA or any of the applicable regulations there-under may be directed to James M. Cangiano at (202) 728-8273. Copies of the Association's comment letters and testimony presented to the IRS at the TEFRA hearings are available upon request.


John T. Wall
Executive Vice President
Member and Market Services