Table of Contents

Page
1.

REGULATORY OVERVIEW AND SIIPERVISORY SYSTEM................................

A. B.

Introduction .............. Federal Laws........ (1) Securities Act of 1933 (2) Securities Exchange Act of

1934 (3) Insider Trading, and Securities Fraud 1988("ITSFEA,')....... (4) Investment Advisers Act of 1940

Enforcement

Act of

............... 1 .................... I ...................... I .......................2

(5) FDIC Compliance

C. State

Laws

...............
&

D.

E.

F.

G.

..... 10 ........... 11 ....... 1l ........ l l .............12 .........12 Reporting Requirement Regarding Insiders of Japanese Public Companies .................L2

Inc............ Regulators System..... (1) Introduction......... (2) Duties of Supervisors .......... (3) Discipline........... (4) Training and Procedural Review..... (5) Branch Office Visits Registration of Personnel ............. (l) Registration and Qualification Procedures (2) Previously Registered Personne1.............. (3) Non-Registered Trainee..... (a) Fingerprints..........

Regulatory (1) Securities and Exchange (2) New York Stock Exchange Dealers, (3) State Securities Supervisory

Agencies

Commission..............
National Association of

.......................3 ......................3 .............3 ..............3 ................4 ..................4 securities .........4 ...............5 .............5 ............5 ............. 5 ...........10 ................. l0

2.

PRINCIPLES OF CONDUCT. A. General Standards B. Code of Ethics.......... C. Reportable Events D. Specific Restrictions and Guidelines (1) Marking Positions and Taking Reserves

...............13 ..................13 .............. 13 .................. 15 ....... 16 ........... 16 (2) Prohibition Against Nomura Affiliates Purchasing New ...........17 (3) Finders Fees/Foreign Comrpt Practices Act (.FCPA") Considerations ................17 (a) Soft Dollar .....................17 (5) Limitations on Transactions with Nomura Advisory ........... 18 (6) Books and Records .......... 19

Issues

Arrangements............ Retention

Affrliates

October 1998

J.

A.

B.

C.

D.

E.

October 1998

G. Research

(l)

General ............... Restrictions......... (3) Confidentiality (4) Research Restricted List Procedures (5) Monitoring...........

and the Research Restricted

List

..........

(2)

............31 ..........31 ..........31 ..............32 ................32 .........33

4.

B.

ACCOUNT PROCEDURES............... New Accounts........-.. (1) Completing Customer New Account Form........ (2) Procedures for Obtaining Documentation......... (3) Penalties ............ (4) Reassignment of Accounts ............... Client's Authority to Trade.... (l) Corporate Accounts ............ (2) Partnership Accounts... (3) Municipal and Other Government Entities.
Discretionary Accounts Account Records....

(4) ERISAPIans (5) Individual Accounts

C.

D.

.....................34 .............34 ...............34 ................37 ...........38 ...............38 ..................38 ...........38 ..................39 .....39 ................40 .....40 ..........41 ................42

5.

A. Suitability. Genera1............... Suitability B. Markups... General.... Security Maturity

D. E. F.
G.

C.

H.

I.

.......44 .............44 (1) ..........44 (2) Institutional Account .....44 .............45 (1) .....45 (2) Special Mark-Up and Mark-Down Issues Involving Mortgage Products .............47 (3) Type of ............50 (4) Price/Yield and Time to .....................50 (5) The Size of the Trade (number of units or dollar ..................50 (6) Prevailing Market .........50 (7) Mark-Up ......50 (8) Services Provided to the .................50 (9) .. .................. 51 Parking and Pre-Arranged .............51 ................51 "Adjusted Fixed Price ...................52 Free-Riding and ..................52 Front .....................54 (1) Front-Running of ..............54 (2) Self ........55 (3) Examples of Other Potential Abuses of Market Information...............................56 Positioning to Facilitate Customer ................56 Papilsky Rules/Swaps Against New .................57

SALES AT\TD TRADING PRACTICES

............

Conditions Pattern...... Customer.. Disclosure Trades................ Trading" Spreads.............. Withholding Running... Blocks.. Front-Running

amount)

Orders Issues...............
iii

October 1998

J.

Churning............... K. Guarantees of Accounts, Sharing and Rebates............... L. Rule l5a-6 (certain crossborder businesses) ..............
Prohibition on

..................57 ............5g ................5g

6.

A. Fixed Income Order Ticket Completion.............. .....5g B. RRNumbers............. .............60 C. Settlement Period...... .............61 D. Principal Letter Procedures .....................61 E. Confirmations, Unofficial Confirmations, Customer Account Statements and
F.

FDGD TNCOME ORDER

PROCEDURES...............

....... ....... s9

G.

Valuations Best Execution.......... Sales ofBearer-Form Debt Securities............

.............62 .............64 ...........65

EQUTTY ORDER PROCEDURES ............67 Equity Order Ticket .............67 Registered Representative ............67 C. Best .............6g D. Trade Reporting .....................72 (1) NASDAQ, CQS, and OTC Trade ....................72 (2) IIYSE Rule ..........74 E. Unofficial Confirmations, Customer Account Statements and Valuations....................74 Settlement ...................77 G. Short Sale ...........77 (1) 'Tick Test" for Exchange-Listed .....7g (2) NASD Short Sale ............... g1 (3) Special Provisions for Index ........... g5 (4) covering Short Sales in connection with a public ........... g5 (5) Procedures Determining the Availability of Securities for DeIivery...................86 H. Market-on-the-Close and Limit-at-the-Close ..............91 Market-on-the-close ("MOC") order Entry Requirements................................91 (2) MOC Order Procedures & Governor Lifting Authori2ations..............................91 OflBoard Trading and After-Hours Trading (I{YSE Rule 390 and Amex Rule 5) ......95 (1) NYSE Rule 390 and Amex Rule ............95 (2) Application of NYSE Rule 390 to Off-Board Stock Crosses after NYSE ..........97 (3) Trade Reporting Requirements for Trades Executed outside Normal Market .........97 J. Incentive Trading Procedures (Guaranteed Benchmarg. .................9g K. Procedures for Trade ..............99 (1) .....................99 (2) Business ..............99 (3) Procedures for ......... 100 L. Restrictions on Proprietary Trading - "G ............... l0I (1) Basic ......... 101 (2) Exemption for "G ............. 101

A. B.

.............. Completion Numbers............. Execution.......... Requirements............ Reporting. 4108 Period Restrictions Securities "Bid-Test"........... Arbitrage

F.

offering...

(l)

Orders....

I.

5......

Hours.......

Hours.......

Warehousing............. Introduction............... Issues Warehousing Orders"..... Prohibition Orders'

lv

. ..

October 1998

(3)

M.

N.

O.

.... 103 Bona Fide Hedge Transactions........... .-.... 103 Stabilizing Transactions............. .............. 103 Transactions in Error.. ............. 103 Accounts of Natural ................ 103 Use of the Small Order Execution System .............. 104 NASDAQ Trading Guidelines ............... 104 (1) Setting/Updating Quotations for Stocks. ........ 105 (2) General Trading Principles ........... 106 (3) Cooperation with Other Market Makers on Quotes/Trades .............. 107 (4) "News"AJse of "Confidential or Proprietary" Information......... ....... 108 (5) Trade Reporting .......... 109 (6) The Limit Order Display Rule ("Display Rule") .. .. ............... 110 (7) The Quote Rule (the I'ECN, Rule)........ ......... 111 (8) SEC and NASD Firm Quote Rule....... ...........112 (9) Surveillance/Compliance/Supervision with the Guidelines........... ...112 (10) Discipline......... ........... 113 (l l) Training and Procedural Review ................... 113 Married Puts ......... ...............ll4

Rule)........ 1. General..... 2. Procedures for Complyirrg............ (4) Statutory Exemptions .......... 1. CertainBlockTransactions.............. 2. Bona Fide Arbitrage Transactions 3. Risk Arbitrage Transactions
4. 5. 6.

Exemption for Executions by Unaffrliated Brokers (The "Effect vs. Execute"

.... 101 .............. 101 ............1O2

.........lO2 .........102 ............ 102

7.

Persons..... ("SOES").

(1) Overview (2) Procedures for Customer Married Put Transactions (3) Procedures for Proprietary Married Put Transactions.....

...114 ........ 115 .................. 116

8.

COMPLIA){CE............ Accounts............... ............ Writing..... ............... Accounts Statements Fi1e.......... Advertising Supervision of Accounts............... Equity/Index Option Order Entry
EQLITTY OPTIONS Opening of Documents Furnished to Customers Uncovered Options Position Limitations Discretionary Account Complaint

......... 118 .............. 118 ........... 118 .............. 119 ............... 119 ........ 119 .............. 119 ........... 119 .........120

........I20
..........120

9.

CREDIT POLICIES AND PROCEDURES

..............

..............121

October 1998

r0.

C. D. Advertisements.......... G. H.

A. B.

CoMMUNICATIONS WITH TI{E

General ...............121 Correspondence ..........121 Procedures for Outgoing Electronic Communications @-mails, Bloomberg, etc.) .....123

Principles. .........

PU8LIC..........,..

.............12t

E. Recommendations.....

F.

I. J.
11.

..........124 ...........124 Research .............125 communicationswiththePressandPublicAppearances.............. ............126 Regulatory and Legal Communications and Customer Complaints............ ................126 Phone Taping Procedures .....lZ7 Do Not Call Lists .,............... 128

NEW ISSUANCE OF PUBLIC A. Introduction B. Securities Law (l) Pre-Filing Period (2) Waiting Period

SECUNTIES......... .............. Requirements

.........,.....129

...........I2g
................12g .........129 ........... t3O ................... 131 ............. 13l ........ l3l ....134
.... 135 ........ 136 ....... l3g ........143 ...... t43

M) (l0)Extension of Credit on New Issues........

(9)
Purchases and Stabilization@egulation
C.

(a) offshore Press conferences, Meetings and press Materials (5) ResearchReports (6) Computational Materials and Term Sheets (7) Post-EffectivePeriod............... (8) ProspectusDelivery.............

(3) Press Releases..........

(12)Advertising......... Roadshow Procedures

(11)Public offerings with an over-Allotment option (Green

Shoe)

.........144 ..........144 (l) When may a roadshow be conducted? ........... ..................144 (2) What materials may be distributed at roadshows?.............. ...............144 (3) What can be discussed orally at roadshows?.............. ......145 (a) Can overhead slides and videotapes be used in roadshows?............................... 145 (5) can "forward-looking" information be discussed at roadshows?........................ 145 (6) To whom may you extend an invitation to attend a roadshow

a. b.
1,2.

presentation?............. General..... Public Offerings

145 145 145

NEW ISSUANCE OF PRIVATE A. B. Primary

SECUNTIES............... General Offerings (1) Genera1................ (2) To whom can offers and sales of securities be made..
a.

......147 ...............147 ................147

...t47
..................147

b. c. d.
October 1998

C.

..............152 Efforts a. ......... 153 Document(s).............. b ......... 153 Filings c. (4) Advertising......... ....:................ 153 ..........154 Roadshow Procedures (l) When may a roadshow be conducted?............ ............154

(3) What are the procedures to solicit clients?.....

No General Advertising or Directed Selling Delivery of Offering Federal, State and Other Regulatory

.............152

(2) What materials may be distributed at roadshows?............. ..........154 (3) What can be discussed orally at roadshows? ............. .................. 154 (4) Can overhead slides and videotapes be used in roadshows?.......................... 155 (5) Can "forward-looking" information be discussed at roadshows? .................. 155 (6) To whom may you extend an invitation to attend a roadshow

presentation?............. a. General b. Private Placements

..-................ 155 .............. 155 ............. 155

13.

A. B.
C.

D. E.

$*+k;;;;i.;;;;r;;
Rule l44A Regulation S ..............

SECONDARY SALES OF PRIVATE

SECURITIES........

.....157

............................ ................ 159 .......... 160

i;i

t4.
A. B.

MARGIN

REGULATION.......... Section ll(d) of the Exchange Act...........

(1) Cash Account (2) Margin Account....

Regulation T, NYSE Rule 431 and SEC Rule l5c-3

-3..............

..........162 .............. 163 ................ 165

C.

D.

E.

Securities.......... Securities.. b. Debt Securities Customer Option Trading..... (1) Cash Account (2) Writing (Selling) of Options in a Cash Account (3) Margin Account.... Settlement (l) OTC Options (2) Extensions ofTime............... (3) Free Riding; the 90-Day Freeze Arranging.
a. Equity
vu

......... 165 ................... 166 .........167 (3) Initial ..........167 (4) Maintenance ................ 168 (5) Transactions Subject to Margin .................. 168 2. Buy/sell back and saley'buyback transactions............... ................ 169 ....L70 (6) Marginable

Margin Margin......

l. General

Regulation

...............170 ................... 170 .................173 .........173 .........173 ...................173

"""""'174
..........175 ...175 ................176 ...........176

October 1998

15.

CURRENCY TRA}IS ACTION REPORTING AI{D SUSPICIOUS ACTIVITIES MONITORING A}{D REPORTING PROCEDURES............... .........177 A. ...........177 B. Firm ............t77 What is Money .......... 178 (2) Types of Transactions ....... 179 (3) Underlying .......178 (4) Examples ofMoney ................... l7g (s) ................. 178 (6) Money Laundering .......t79 (7) Anti-Money Laundering Policy: Three Basic .................179 (8) Everyone is ...179 (9) Know Your Customer ....... lg0 (10) Know Your Customer Analysis By Type of .......... lg0 (11) Particular Types of ......... lg3 (12) ....... lg3 (13) Questionable ............. lg4 (14) Narcotics Traffickers u.S. Department of Treasury ...... lg6 (15) Reporting Questionable .............. 196 C. Reporting of Suspicious .......... lg7

Background............... Po1icy.............. (t) Laundering?............... .......... Crimes................ Laundering Culpability Penalties principles Responsible........... .......... Customer...... Transactions.......... Documentation.... Circumstances............ Report...... Circumstances............ Activities...............

16.

ACTIVITIES............... A. Transactions............... B. ofEmployees............ C. Compensation D. VacationPolicy.......

EMPLO\aEE Employee Securities Limitations on Outside Activities Gifts, Gratuities and Payment of

.... 188 ........... 1gg .......... lgg ..... lg9 ............. 190

17.

CAMPAIGN CONTRtsUTION LIMITATIONS A}{D REPORTING REQUIREI\{ENTS

...............

................

rel

18.

A. B. Exemptions from Securities

C.

LAW Federal Preemption

BLUE SKY
State

Registrations

Registration...............

................ r93 .............. 193 ..................194

...............lg4

EX{IBITS
See

Exhibit Table of Contents

vlll

October 1998

I.

REGULATORY OVERVMW AND SUPERVISORY SYSTEM

A.

Introduction

Nomura Securities International, Inc. ('Nomura", "NSf' or the "Firm") is a brokerdealer registered with the Securities and Exchange Commission ('SEC") and with all 50 U.S. states and is a member of the National Association of Securities Dealers, Inc. ("NASD"), the New York Stock Exchange (the "NYSE') and other principal exchanges. Nomura is also registered as an investment adviser with the SEC. Nomura has ofiices in New Yorh other U.S. cities and in cities outside the U.S. Nomura is subject to regulation by the SEC, self-regulatory organizations (including the NASD and the NYSE), and the States in which it conducts business. Nomura's offices outside the U.S. are subject to regulation by the SEC and U.S. self-regulatory organizations and to local regulation by the countries in which such offices are located.
This manual is intended primarily for use by employees of Nomura. Certain parts of this manual are applicable to the 't{omura Group" generally or involve interactions between Nomura and the Nomura Group. The "Nomura Group" means Nomura Holding America Inc. and its subsidiaries, including, among others, Nomura Securities International, Inc., Nomura Research Institute America, Inc., Nomura Securities @ermuda) Ltd., Nomura Asset Capital Corporatiorq Inc., Nomura Capital Services, Inc. and Capital Company of America LLC. To the extent that there are separate, conflicting policies or procedures that apply to your Nomura Group entity, or your specific department, those policies and procedures will govern.

B. Federal Laws
In response to the economic problems that grew out of fraudulent practices in the securities industry, which culminated in the stock market crash of L929, Congress enacted the Securities Act of 1933 (the "Securities Act"), and the Securities Exchange Act of 1934 (the "Exchange Act"). Following the adoption of these statutes, Congress passed the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939 (the *1939 Act"), the *1940 Act") and the Investment Advisers Act of 1940 Investment Company Act of 1940 (the (the "Advisers Act"). Commodities are regulated pursuant to Federal rules and regulations, and rules and regulations issued by the National Futures Association and various commodity exchanges. Details of such rules and regulations are contained in the NSI Futures Commission Merchant Compliance Manual.
Certain aspects of these statutes relevant to broker-dealer and other Nomura Group; activities are briefly discussed below.

(1)

Securities Act of 1933

The Securities Act was designed

to protect investors by requiring full and fair

disclosure in offering and selling securities to the public. The Securities Act requires a security to be registered with the SEC prior to being offered or sold to the public unless the security or the transaction in which the security is offered for sale is exempt from registration under the terms of the Securities Act. Examples of exempt securities include securities issued by the United States, its agencies and instrumentality's, securities issued by state and local governments in the United States, and securities issued by banks chartered under the laws of the United States or any state. "Private placements" and intrastate offerings are examples of transactions that do
October 1998

not require registration of the security offered or sold. Whether a particular security or transaction is exempt from the registration requirements of the Securities Act is often not tlear
and advice from legal counsel should be sought in cases ofdoubt.

When registration is required, the issuer must make full and fair disclosure of all information relating to the issue of securities and itself that is necessary to permit prospective investors to make informed investment decisions. A declaration of effectirr.r.r, of a iegistration statement by the SEC does not imply that the SEC has approved an offering or has in any way expressed an opinion on the merits of the security being offered. Even

if a particular

securities. Rule 10b-5, which was promulgated by the SEC under the Exchange Act, prohibits fraudulent practices in connection with either the purchase or sale of securities whether or not those securities are exempt from registration.

Act imposes civil and criminal liabilities for various fraudulent practices (including material misstatements or omissions of material facts) in connection with the purchase and/or sale of

security or transaction is exempt from registratioq the Securities

(2)

Securities Exchange Act

of 1934

The Exchange Act was enacted to protect holders of outstanding securities and persons investing in the secondary or post-distribution market. It is intended tolegulate trading on the securities exchanges and in the over-the-counter ("OTC") market. Thus, the Exchange Act requires the registration with the SEC of all broker-dealers, securities exchanges, seJurities associations and of non-exempt securities trading in these markets. The Exchange Act:

' '

prohibits manipulative, fraudulent and deceptive practices in connection with the purchase and/or sale of securities (in particular, through Rule 10b-5); requires disclosure of material information by certain issuers (f.e., issuers whose securities are listed on a U.S. securities exchange, who had securities registered under the Securities Act, or who meet certain tests as to the number of their shareholders or amount of their assets), which must file Quarterly, Annual and Current Reports on a continuing basis;
establishes books and records requirements; penalizes unfair trading practices by insiders;

. o o o o o

regulates the extension of credit for the purpose of purchasing securities,

establishes safeguards

for customer funds and securities;

regulates tender offers and proxy solicitations.

establishes initial margin requirements for extensions of credit; and

October 1998

establishes regulatory capital requirements capital reporting obligations

for all positions and regulatory

As a broker and dealer in securities, Nomura is registered under Section 15(a) of the Exchange Act and is also a member of the NYSE, NASD and other regulatory organizations.
The Exchange Act, SEC Rules and NASD Rules, as well as rules promulgated by other self-regulatory organizations, also require broker-dealers to meet certain minimum net capital requirements, to maintain certain records, to make certain financial and operational reports, to comply with certain customer protection rules and imposes other requirements on the conduct of
business.

(3)

Insider Trading and Securities Fraud Enforcement Act of 1988 (,"ITSFEA')

in November 1988, ITSFEA was designed to prevent, deter and prosecute insider trading. Among other provisions, ITSFEA creates a specific requirement for brokerPassed
dealers to maintain procedures designed to prevent the misuse of material nonpublic information.

Additionally, ITSFEA provides that the "controlling person" of a person who has violated ITSFEA by purchasing or selling securities while in possession of material non-public information or by communicating such information in connection with a purchase or sale, is liable for up to the greater of $1,000,000 or three times the profit gained or the loss avoided. ITSFEA places an affirmative obligation on broker-dealers to establislq maintain and enforce written policies and procedures to prevent the misuse of inside information. Thus, the passage of ITSFEA greatly increased the firm's responsibilities as well as mandated the need for written
policies and procedures.

(4)

Investment Advisers Act of 1940

The Investment Advisers Act of 1940 requires registration, with certain exceptions, of persons furnishing advice with respect to securities and imposes certain reporting and other requirements on such persons. Nomura is registered as an investment adviser with the SEC.

(5) FDIC Compliance

connection with certain business dealings with federally insured depository institutions, Nomura is required to make certain certifications to the Federal Deposit Insurance Corporation ('FDIC") rwice a year. In order to monitor the Firm's compliance with the no-conflict rules of the FDIC, all Nomura Group Employees must respond to the questions set forth in Exhibit A.

In addition to obligations under federal securities laws, in

C.

State Laws

Each state has a law governing the public distribution of securities within that state. Commonly called "Blue-Sky Laws", these state statutes are similar to the Securities Act in that they require securities to be registered or otherwise qualified for sale with the local state securities commission unless the security offered or the transaction in which it is offered is exempt from registration or qualification. As a result of National Markets Improvement Act of 1996, many state Blue-Sky laws are now not applicable to many transactions because of
October 1998

superseding federal law. Questions about whether a particular transaction is exempt state's Blue-Sky laws should be directed to the Legal or Compliance Department.

from

Many state securities laws also require the registration or licensing of brokers, dealers, salespeople and certain investment advisers. Tfiese requirements remain in effect and generally have not been superseded by federal law. Failure to meet registration requirements may give rise to civil liabitity in connection with a pafticular transaclion, and in many states will give the purchaser of a security the right to rescind the transaction.

D.

Regulatory Agencies

(1) Securities

and Exchange Commission

The SEC is the principal agency responsible for enforcing the federal securities laws and has the power to promulgate rules under those laws. Those rulei expand upon and refine the statutory provisions_enacted by Congress and have the force of law themselvei. Many of those rules provide specific guidelines (or "safe harbors") for complying with the provisions of the various securities statutes. Some of the more important rules promulgated by the SEC under the Exchange Act that regulate broker-dealer activities cover the following

. o o o o o o

"."as:

Hypothecation of customers, securities (Rule__15c2-.1);

Net capital requirements for brokers and dealers Ggle l5g3:D;

Customers' free credit balances (Rule l5c3-2); CustomerprotecrionGUlC_!jS3:3.); Confirmation of securities transactions

@_!gb-lQ);

Record-keeping and retention requirements

Wa:L
for

et seq.); and

"Safe-harbor" exemption from registration

(Rule l5a-6).

foreign

broker-dealers

The SEC also oversees the various securities exchanges and other self-regulatory organizations ("SROs"), such as the NASD. This oversight responsibility includes the power to
approve or disapprove of an SRO's rules.

(2)

New York Stock Exchange and National Association of Securities Dealers. Inc.

The NYSE

is the self-regulatory

organization ("SRO") designated

regulatory responsibil ity for Nomura.

with primary

Nomura is also a member of the NASD, a registered national securities association. Nomura is also a member of other SRos and is subject to their regulations.

October 1998

(3)

State Securities Regulators

As noted above, the Blue-Sky laws of each state applicable to offerings and sales of securities are enforced by a state securities commission. While Nomura is registered as a brokerdealer with the state securities commissions of all fifty states, it is still necessary to consider the application of Blue-Sky laws to specific transactions.

E.

Supervisory System

(1)

Introduction

Individual Supervisors, senior management, Compliance and Legal are responsible, in varying ways, for the formulation, administration and continuing review of Nomura's
compliance with securities, commodities, investment advisor, and banking laws. Series 8 Supervisors are directly responsible for supervision of the sales activities of their supervisees and Series 24 Supervisors are directly responsible for supervision of the trading and investment banking activities of their supervisees. Under federal securities laws, Nomura and individuals who have supervisory duties may be subject to sanctions for failing to supervise a person with a view toward preventing violations of applicable laws, if such person commits such a violation. These sanctions generally will not be imposed, however, if (i) procedures, and a system for applying such procedures, have been established which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other persor! and (ii) the supervisor has reasonably discharged the duties and obligations incumbent upon him or her by reason of such procedures and system and has reasonable cause to believe that such procedures and system were being complied with.

In particular, federal securities laws require that all trading and sales activities broker-dealer be supervised by an appropriately registered supervisor.

of

(2)

Duties of Supervisors

The Supervisor, which is usually a registered Principal, is an important factor in ensuring compliance with this Compliance Manual and with other applicable rules and procedures. The Supervisor will perform supervisory reviews designed to ensure that employees assigned to the Supervisor are complying with their obligations and that the employee does not engage in conduct described as prohibited in this Manual. NSI has instituted a compliance education and training program. The program includes among other things, providing copies of this Compliance Manual to each employee and requiring a signed acknowledgment from the employee that the employee has received a copy of the Compliance Manual and agrees to adhere to the Manual. In additiorq the Compliance Department will also conduct annual meetings involving registered personnel to review relevant compliance topics. Also, on an as needed basis, the Compliance Department will conduct meetings to discuss compliance issues, regulatory
developments, etc.

In addition to the foregoing, the compliance duties of Supervisors include the approval

of new accounts, the review of incoming and outgoing correspondence received and sent by supervised employees, the review of transactions conducted by supervised employees and the review of customer accounts serviced by supervised employees. Supervisors are required to
maintain appropriate written records of these reviews.
October 1998

fu lfi

At a minimum, the following procedures must be followed or reviews conducted in lling these supervisory responsibilities:

Supervisors are required to initial and keep on file the computer reports or other written documents used in their daily reviews. Also, each new account must be approved by the designated supervisor and the new account form must be signed by the supervisor. In addition, on a monthly basis the designated supervisor must sign a report which indicates that he or she conducted a reasonable review oftransactions on a daily basis during the past month. This monthly report also indicates some of the types of isiues, if any, that were the focus of the supervisory process.

Supervisors responsible for reviewing the Firm's transactions on a daily basis must carefully review for unusual trading, and whether transactions that were recommended are suitable for the counterparty, trading in employees' or related accounts, trading in advance of Firm research recommendations, oflmarket prices (transactions and positions), mark-ups and other inegularities. Any unusual or irregular activity should be brought to the attention of the Compliance Department. entered by employees should be reviewable by their supervisor. tickets will suffice, but the suggested method is a computer report that contains all relevant information such as security, transaction type, counterparty, price, trade date, settlement date, processing date and time, and the name of the employee effecting the transaction. The front page of this report must be initialed by the supervisor as evidence ofhis or her review and retained for a period ofthree years. If the supervisory reports are warehoused, such warehoused records must be retrievable within one business day. The supervisor is subject to a "reasonableness" standard. Therefore, in those areas that have a high volume of transactions, a random sample review will suffice. Supervisors who rely on the review of order tickets should initial the ticket.
Cancel and correct entries must be reviewed, particularly when the correction involves price, date and counterparty.

All transactions ' Review of trade

Excessive use of suspense accounts must be reviewed. Trades that are pending in a suspense account for more than one trade date must be closely reviewed.

Trades must be reviewed for pricing. Focus should be made on securities swap transactions (simultaneous buy and sell with the same counterparty of two different securities) for executions that are above or below market price. Focus should also be on identi$ring any window dressing transactions that have no economic substance, or possible parking transactions whereby securities are hetd on a temporary basis either in the Firm's inventory on behalf of a counterparty or in the counterparty's inventory on the Firm's behalf. (See Section 5 - "Sales and Trading practicesrr)
For those areas that do not use computer trade entry order tickets, trades for which no trade ticket was written (a trade ticket must be written and processed for each trade).

October 1998

Proprietary positions should be reviewed for the accuracy of the traders' mark. Supervisors of traders must provide guidance as to the Supervisor's desired approach to valuing positions, e.g. closing or last price, bid, mid market, etc.
Transactions must be reviewed for improper financing, such as buy/sell backs, extended settlements, and unapproved deep in the money options. (See Section 14 - "Margin

Regulation")
Review should be made for trading activity that seems to be a misuse of material, nonpublic information, such as in advance of the release of a research report, or a significant customer order. (See Section 3 - 'oChinese Wall Procedures" and Section 5.G - "Front-Running")
Supervisors must be familiar with the Chinese Wall procedures described in Section 3 and should be familiar with the contents of the Restricted List (available on the intranet or in hard copy if requested). Supervisors must immediately inform the Compliance Department when they or their supervised employees come into the possession of nonpublic confidential information and must consult with the Compliance Department when they wish to share that information with another department at Nomura. Supervisors must assist to ensure that all transactions are processed on a timely basis. Trade support for desks that do not use paper order tickets (i.e., they use electronic entry) must keep a transaction report (which includes time of entry) in their day's work. For those desks that use paper tickets, the tickets must be time stamped and completed as required. For those desks that do not use paper tickets, time of entry into the system is the time stamping mechanism. Also, where appropriate, tickets must be marked "long" or "short". Supervisors must perform a periodic sample review of order tickets to veriS that they are being properly completed and time stamped. (See Section 6 "Fixed Income Order Procedures" and Section 7 - "Equity Order Procedures") Supervisors must ensure that traders are trading within their approved proprietary limits and that counterparty transactions are within approved credit limits. Such information is available from the Credit Department.

Any significant changes in proprietary trading or hedging strategies by a trader must be reviewed and approved in advance by a supervisor. A different trader or sales person should trade or cover the relevant account one or two weeks a year as a method to detect improper activities. (See Section 16.D. - "Vacation Policy")

All

incoming mail must be reviewed by the supervisor or his or her designee. The recipient's supervisor and the Compliance Department must be immediately notified of all written or oral customer complaints. Copies of all letters written by clients to salespersons must be made, with the copy given to the salesperson and the original letter being reviewed and initialed by the supervisor and kept on file for 3 years. (See Section f0.B - '(Correspondence" and Section 10.H. - ttRegulatory and Legal Communications")

October 1998

Outgoing written materials (including electronic communications that are material to an investment decision) must be reviewed by an authorized Series 8 Supervisoq initialed, and saved for a period of three years. Yield tables and term shiets must also be approved by the appropriate Supervisor. There are special procedures for providing valuations to counterparties. (See Section 6.E. and 7.E. - "Unoflicial Confiimations, Customer Account Statements and Valuations", Section 10.B. - ,,Correspondencer and Section 10.D. - 6'Advertisements'r)

The missing documentation report must be reviewed and missing documentation obtained or the account closed when appropriate, unless the documentition is waived in
conformity with the New Account procedures.

Markups and markdowns on customer transactions must be reviewed. No matter how volatile or thinly traded the security, markups or markdowns in excess of 5Yo are rarely justified Compensation on less complicated and more liquid instruments should bL significantly less than 5%o. (See Section 5.8. - ,,Markupsrrj

The sale of securities in unregistered transactions requires that an exemption from registration be available. Supervisors of desks involving such securities must insure that the securities are sold consistent with such exemptions and Firm procedures and documentation requirements. For example,l44Aeligible securities should be sold only to Qualified Institutional Buyers and appropriate documentation must be executed and/or obtained. Similarly, securities sold pursuant to Regulation S must be sold to appropriate accounts, e.g., offshore accounts of non-U.S. persons, and appropriate documentation must be obtained. (See Sectionl2 - "Niw hsuance oi private Securities" and section 13 - "Secondary salCI of private Securities,r)
Certain departments at Nomura require pre-approval of employee transactions by the employee's Supervisor. AII Supervisors are now provided with a report showing all trading activity of their employees and the Supervisor is responsible for reviewing this ltivity for, among other things, conflicts with Nomura activities, trading on inside informatiorg front running proprietary or customer transactions (to the extent that it is reasonable for the Supervisor to do so), excessive trading, and compliance with any restrictions that are particular to that department. (See Section 16.A. - .,Employee Securities Transactions,,) There are strict limits on the size of gifts and gratuities (generally $100) that can be given by Nomura employees to clients. In addition, it is Nomura'i policy to limit the acceptance of any gift or gratuity to a maximum of $100 from any client. Supervisors must insure that they have a method to supervise gifts and gratuities given or received by their personnel. (See Section 16.C. - (Gifts, Gratuities ano payment of Compensation") News media contacts, news releases and seminars must be pre-approved by the Public Relations Department. (See Section 10.G. - *Communications with the Press and Public Appearances")

October 1998

Various desks have regulatory trade reporting requirements. The Supervisor should periodically check to ensure that trades are being reported consistent with these requirements. Examples of regulatory trade reporting include exchange reporting (NASDAQ), G order reporting, SOES procedures, MOC procedures, Rule 80A limitations, FIPS (high yield) reporting, Fed reporting, U.S. Agency new issue reporting, after hours (Form T) reporting, Treasury Auction reporting and Treasury position reporting. (See Section 5 - "Fixed Income Order Procedures" and "Section 6 - ttEquity Order Procedures"). Supervisors should review for situations where sales people cross trades without approval by the trading desk, which is prohibited. The Compliance Department must be notified by Supervisors of changes in the job function of their employees so that a determination can be made as to whether any additional registrations are required.
Supervisors must ensure that their staff maintains all appropriate registrations. See Section F.(l) below Supervisors of employees in remote locations must also visit those employees at least once a year.
Sales supervisors should ensure that their employees observe any applicable suitability requirements. This requires that sales people "know their customef', which includes an understanding of their customer's sophistication, financial conditioq and tolerance and understanding of risks, as well as their investment objectives and tax status (for noninstitutional customers). Focus should include compliance with the procedure which requires pre-approval by the Compliance Department of derivative transactions, bonds borrow and reverse repos with self-managed or advised municipalities. The Compliance Department has prepared a worksheet (set forth in Exhibit B) that may be used to document the salesperson's diligence in regard to his/her institutional account suitability review. Series 8 Supervisors, in connection with their signing the new account forms, must be comfortable that the requested lines of business meet any applicable suitability requirements. (See Section 5.A. - 66suitability") Sales supervisors must immediately reassign accounts of terminated salespersons.

When supervisors are out of the ofiice for more than two days, an appropriately
registered back-up (i.e., another supervisor) should perform the review process.

Any instance where a client appears to be incurring a large loss on a trade(s) should be brought to the attention of the Compliance Department. Erratic trading by a client should also be discussed with the Compliance Department.
Supervisors should be alert to trades executed at oflmarket prices or trades executed with reduced commissions. This could possibly be a form of compensation to the client on previous losing transactions and must be investigated. (See Section s.IC "Guarantees of Accounts, Sharing and Rebates").

October 1998

which is a supervisory tool developed by the Compliance Department. The Compliance Calendar can be used as a guide by all Nomura supervisors. Supervisors should also refer to and comply with the Firm's Supervisory Manual.

Exhibit C

sets forth a Compliance Calendar,

(3) Discipline
Violations of the requirements of this Compliance Manual should be reported by the Supervisor to Compliance or Legal Department. Violation of the policies and proced,r.es outlined in this Manual as other policies or procedures may subject the Nomura Group employee to discipline, including, but not limited to: (l) reprimand; (2) loss of regular or supplemental compensation; (3) forfeiture of, or decrease in, a regular or discretionary increasJ in future compensation; (4) suspension and/or (5) termination.

(4) Training

and Procedural Review

A1l employees are required to read and abide by this Manual in addition to other Nomura Group policies and procedures. Employees will be required to sign an acknowledgment certifying that the employee has received the Manual.

All employees must participate in the compliance education and training program. The program consists of the following:

(a)

Each participant in the training program will receive a copy of the Compliance Manual. Each participant must read the Compliance Manual and must sign an acknowledgment certiSing that the participant has received the Compliance Manual and agrJes to observe the policies and procedures set forth in the Manual.

(b) At

least once each year, the Compliance Department will convene a meeting of all registered employees. During these meetings, the Compliance Department wilf review pertinent issues from the Compliance Manual, as well as other applicabte compliance procedures and those rules and regulations issued by the SEC or the NASD relevant to their area.
necessary, the Compliance Department will convene meetings compliance issues and regulatory developments.

(c) As
(d)

to

address other

Each employee

will participate in the mandated Continuing Education program.

(5)

Branch Offrce Visits

Compliance Department personnel visit every branch office at least once each year. Such visits will include thorough reviews of the branch's compliance systems and procedures, the handling of customer accounts, proper supervisory procedures and customer complaints or other problems.

The purpose of such visits is to oversee the procedures designed to ensure that the Firm's policies, the rules of theExchanges and the SROs, as well as federal and state laws, are being complied with.. The visits also provide any branch office personnel with the opportunity
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October 1998

to discuss any problems they have with the Compliance Department. The Firm encourages such
discussions.

F.

Registration of Personnel

(1)

Registration and Oualification Procedures

to be registered, through the NASD's Central Registration Depository, with the NASD, the New York Stock Exchange, other appropriate securities industry SROs and appropriate states. Employees who engage in the commodities or futures business are required to be registered with the National Futures Association. Registration requires that an individual take and pass a qualiffing examination. Employees that are involved in a sales, trading, research or investment banking function are generally required to take the Series 7 - General Securities Representative examination and the Series 63 - Uniform Securities Agent State Law examination. This includes sales/trading assistants as well. Employees who act only in a clerical capacity need not be registered. Employees who engage in the commodities or futures business (and their supervisors) are required to take the Series 3 - National Commodity Futures examination. Supervisors are also required to take the Series 24 - General Securities Principal examination (for trading supervisors) and/or the Series 8 General Securities Sales Supervisor examination (for sales supervisors) and, if supervising employees engaged in the options business, the Series 4 - Registered Options Principal examination.

Sales, trading and investment banking personnel are required

joining Nomura be aware of his or her qualification requirements. The failure of an individual to be appropriately qualified necessitates the suspension of sales, trading or investment banking activity for that individual. The continued failure to achieve the appropriate qualifications in a reasonable time period may result in termination of employment. Exhibit D sets forth a list of the major regulatory examinations and an explanation as to who (positions within Firm) should take which
exam, and a supervisory exam chart which also shows what supervisory positions require which exam qualification(s).

It is very important that each individual

When each qualified salesperson or trader commences employment with Nomura, he or she must indicate to the Registration Department the states where his or her customers or potential customers reside. Thereafter, it is the responsibility of the salesperson or trader to notify the Registration Department when additional state registrations are needed. It is of utmost importance that each Nomura salesperson or trader be registered as an agent in a state pUg[ to soliciting security transactions to residents thereof. Any violation of this policy can result potentially in large monetary losses for the Firm.

(2)

Previously Registered Personnel

Salespersons previously registered and joining Nomura must be cleared through their previous FirrrL the appropriate exchanges, the NASD, and their "home state" prior to a Registered Representative number being issued. Until a Registered Representative number is issued, salespersons may not service an account or solicit any business at Nomura.

ll

October 1998

(3)

Non-Registered Trainee

completing applicable examinations. In addition, servicing or soliciting an account or trading is forbidden until a Registered Representative number is issued.

A non-registered trainee may not solicit or service accounts or trade until successfully

(4)

Fingerprints

SEC Rule l7f-2 requires the fingerprinting of each person who is a director, oflicer or employee of a broker-dealer. Although the rule provides foi certain exceptions, every Nomura employee will be fingerprinted as a condition of employment.

If it comes to your attention that a customer is an insider (i.e. any of the persons below) of 1y rapanese public company whose shares are listed on any Japanese rto.i exchange oi traded on the Japan Securities Dealers Association's quotation system ("Japanese p-uUtic
Company'') and you reasonably believe that such customer might purcirase or sell-such Japanese Public Company's securities in the near future, a Nomura ToLvo rule requires us to report such customer to Nomura Tokyo. If any of your customers is such a person, iontact the Compliance Department.

(or anyone who resigned as a director within one year) of a Japanese public Company or his/her family member (Le. spouse, child, parent, brother, .irt"q grand-parent or grand-child);
One of the ten largest shareholders of a fapanese Public Company, or any shareholder owning more than ten percent of a Japanese public Company;

(1) A director

(2)

(3) An affrliated company

(i.e. a company which owns more thanZ0%o of a Japanese public Company, or a company in which a Japanese Public Company holds more than a 20% interest); or

(4) A general

manager (or equivalent position) of a Japanese Public Company or anyone who resigned from such a position within one year.

12

October 1998

2.

PRINCIPLES OF CONDUCT

A.

General Standards

Nomura seeks to continue to be a premier and respected broker-dealer. As such, it strives to provide top quality client service and to operate profitably for its own account.. To this end, Nomura and its employees must conduct business with the highest level of integrity and
ethics.

It is imperative that Nomura employees uphold the highest ethical standards of conduct. Honest and equitable conduct is not only necessary to avoid potential legal, regulatory or Firm-imposed sanctions, but will enhance the individual employee's, as well as the Firm's,
reputation in the securities industry.

Maintaining integrity, both personal and professional, involves more than a strict observance of the securities laws and regulations and the internal policies which relate to them. Integdty involves an awareness and active support of the ethical principles underlying the relevant regulations. Integrity also requires loyalty to the Firm and its clients, fair and honest treatment of competitors and their clients, and respect and concern for fellow employees. Integrity is not an occasional requirement but a continuing commitment.

The Firm is committed to compliance with federal and state law and the many government and self-regulatory regulations applicable to its businesses and to heighten the awareness of its employees to the ethical considerations and individual responsibilities those laws and regulations impose. Nomura expects its employees to observe fully all applicable laws, rules and regulations. It is only in this way that Nomura will maintain its reputation for integrity and professionalism in the financial community.

B.

Code of Ethics

Nomura employees are expected to abide by the highest standards of ethical conduct in their relationship with each other, the Firm, customers, competitors and the public. Below is Nomura's Code ofEthics, which every employee is expected to follow. If an employee perceives lapses in such standards, he or she is expected to report them to his or her Supervisors. Nomura will respond promptly to employee concerns about possible violations of laws, rules and regulations. Only in such an open and accountable environment can an auitude prevail by which every individual member of the Nomura community shares responsibility for the integrity of the Firm as a whole.
Code of Ethics ofNomura Securities International. Inc.

(l)
(2)

The client's protection must always come first.

Opinions, advice and recommendations to clients must always be supported by sound due diligence and good judgment.

(3) Principles of good business practice and just and equitable principles of trade must
be observed.
l3

October 1998

(4) All employees must comply with all applicable securities laws, rules and regulations and company policies must be complied Legal Department or Compliance Department.

with.

When in doubt, consult the

(5) No recommendation may be made which

requirements.

does not meet applicable suitability

(6) All employees must comply with the Firm's policies and procedures concerning
the handling and use of confidential information. See Secti,on 3 - "Chinese Wall Procedures". Employees are absolutely prohibited from using confidential information about the Firm or its clients inappropriately.

(7) Information about a customer's

account is confidential and may not be disclosed outside the Firm or its affiliates without permission of such customer and./or after consultation with the Legal Department or compliance Department.

(8)

The interests of the Firm must be safeguarded at all times. The Firm's capital and reputation are the responsibility of each individual employee.

(9) Personal investment actions must never be permitted to influence advice given to
clients.

(10) Mutual respect between employees is important to overall success. This principle applies to all relationships within the Firq whether between Supervisors and staff or between co-workers. All forms of discrimination are strictly prohibited, and any violations of this policy must be promptly reported to the Human Resources Department immediately.

(l l) Supervisors play an important role in the securities industry and have special responsibilities in connection with maintaining legal and ethical standards. Supervisors must therefore lead by example and must respond promptly to
evidence of legal or ethical violations.

(12)

is Nomura's policy to promote free and open competition in the business environment and to comply with applicable antitrust laws and regulations. Employees should be aware that discussion with industry competitors relating to such matters as pricing, costs, profits, interest or financing rates, market shire, distribution strategy, sales tenitories or treatment of customers may constitute an unlawful restraint on competition and a violation of u.S. antitrust laws.

It

(13) All corporate contributions, gifts or entertainment to political parties, campaigns or employees of governmental entities must be made in accordance with applicable law, which prohibits corporate contributions to any candidate for national oftice as well as to candidates for office in certain states. Nomura employees are free to support and/or contribute to political parties or campaigns in their individual capacities as private citizens; however, Nomura will not reimburse employees for such contributions. Such contributions must be reported to the Compliance Department. Individuals who are not citizens of the United States are restricted from making certain political contributions and should consult with counsel if they
l4
October 1998

wish to make a political contribution. See Section 17 - "Campaign Contribution Limitations and Reporting Requirements" for additional detailed procedures regarding campaign contributions.
The Firm invites each employee to contact the Management Committee when he or she believes that improper conduct is not being addressed by the Firm's management.

Each employee should report, promptly and directly to the Chief Legal Offrcer, any legal violation or ethical failure by any employee of Nomura, as well as its subsidiaries and afiiliates, which the employee believes has not been addressed by a member of management. Employees should also report any tactics intended to intimidate employees who are concerned about ethical or legal failures. Employees should understand the danger of not reporting unethical or illegal conduct since it could result in the appearance of aiding and abetting the violation.

discrimination, especially sexual or other prohibited forms of harassment, should be reported to the E.E.O. Director in the Human Resources Department. The

Allegations

of

Employee Handbook describes Nomura's policies regarding equal employment opportunity and sexual harassment. Allegations of infractions of these policies should be brought to appropriate supervisory personnel and the Human Resources Department, as described in the Employee Handbook. Employees should also feel free to come to the Legal or Compliance Departments when they believe these problems are not being quickly or adequately addressed.

C.
manager,

Reportable Events

AII

employees must notify the Legal or Compliance Departments, through their if at any time they were or become the subject of:

any investigation or proceeding by a foreign or domestic governmental agency or self-regulatory organization;

arry refusal of registratiorq injunction, censure, fine, suspension, expulsion or other disciplinary action of any securities or professional organization or other rules and regulations;

(l)

(2)

(3) written or oral client complaints;

(a) any litigation, reparation proceeding related or unrelated to their business at Nomura; (5)

or arbitratiorq including litigation or claims

any bankruptcy, unsatisfied judgment or lien;

(6) contempt proceeding or cease or desist order, (7) (8)

any subpoena, arrest, indictment, or conviction for a criminal offense; or any regulatory inquiry.

I5

October 1998

All inquiries from regulatory agencies including or related to business at Nomura must be coordinated and answered through the Compliance Department or Legal Department. A caller may indicate that he or she represents a regulatory agency, una is bn$ seeking information. In such cases, the normal practice will be for a member of the Cbmplianci Department or Legal Department to return the call, thereby confirming that the inquiry comes from a proper source, especially when inquiries are concerned with trading activitiis, ind also ensuring uniformity of the Firm's responses to any such inquiries.

D.

Specific Restrictions and Guidelines

(l)

Marking Positions and Taking Reserves

The Firm maintains a strict policy with respect to marking positions and taking reserves, as set forth below.

Traders must mark their positions to the market. Market is defined and determined by the desk supervisor in consultation with the Controller's Department and senior management. The market definition applicable to a position should be consistentty applied.
Traders must not take reserves for P&L in their position prices.

Traders must mark every position every day unless otherwise approved by senior management.
The Firm's management and Controller's Department is responsible for taking reserves when potential losses are expected. No one else in the Firm is permitted to do so. Any other person who does so violates Firm policy and undermines management's ability to evaluate effectively the Firm's positions. The fact that the controller's offtce or anyone in senior management has failed to detect a violation of this policy cannot be construed as an approval of the violation or exception. Any attempt to justify such a violation by "constructive notice" could result in disciplinary actiorq including termination.

Trading desk supervisors are responsible for the market pricing by the traders that they directly supervise and must take prudent steps to review and veri$i the accuracy and reasonableness of the valuations assigned by their
subordinates.

It is the responsibility of each employee in a position to assist compliance to enforce this policy and to notifr the Compliance Department when he or she
suspects that such policies are being violated.

The Firm may also notifu regulatory authorities of such violations.

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October 1998

(2) Prohibition Asainst Nomura Affrliates Purchasing New

Issues

Nomura policy generally prohibits the purchase of new issues of public debt or equity securities by the Nomura Group and their respective employees due to the free-riding and withholding restrictions imposed by the securities laws. See Section 5.F. -"FreeRiding and Withholding" for a detailed discussion of free-riding and withholding. Exceptions to this policy must be approved in advance by the Legal Department and the Compliance Department.

(3) Finders Fees/Foreign Comrpt Practices Act ("FCPA") Considerations

Various regulations generally prohibit paying transaction based compensation to third parties. One exception is paying compensation to a foreign finder, but significant conditions apply. For further informatiorq speak to Compliance or Legal Departments.

AII domestic and foreign "finders fee" relationships must be pre-approved by the Legal Department or Compliance Department because the Firm has specific procedures pertaining to these types of relationships. Related thereto, the FCPA makes it illegal to offer or pay money or anything of value to, or for the benefit of, foreign government officials, political parties or candidates for political offtce, for the purpose of improperly influencing them to take, or refrain from taking any action in order to assist the person making the payment in obtaining or retaining the business with respect to foreign finders. It is important that appropriate due diligence be conducted to ensure the Firm's FCPA policy is followed.

(4) Soft Dollar Arrangements

"Soft dollar arrangements" are those agreements in which NSI provides, or contracts with a third party vendor to provide research or other services to an investment advisor in
exchange for the investment advisor directing transactions to NSI.

1. The research or services must be of a type that is lawful and appropriate and that assists
the advisor in the performance of its investment decision-making responsibilities. Examples of appropriate services include researclq quotation services and on-line data services such as Bloomberg and Reuters. Examples of inappropriate services included limousines and magazine subscriptions for Sports lllustrated. Any questions regarding
acceptable services should be directed to the Legal Department.

2. 3.

Soft dollar arrangements will be reviewed and approved on a case-by-case basis.

All existing soft dollar

arrangements must be reported to the Legal Department.

No commitments, whether oral or written, may be made to an advisor or vendor and no payments may be made to a vendor on behalf of any customer or client of NSI (or the Nomura Group) unless and until all of the following steps have been completed and the soft dollar form (available from the Legal Department) is fully signed:

t7

October 1998

(a)

The salesperson (i) completes the form, (ii) signs it where appropriate, (iii) in the case of equity transactions, has the form signed by his or her Series 8 SupervisoA (iv) in the case of fixed income transactions, has the form signed by the Division Head, and (v) gives it to Equity Administratioq or Fixed Income AdministratiorL as applicable;
as applicable, forwards (i) the original copy of the Legal Department, together with the form of agreement to be entered

(b) Equity or Fixed Income Administratiorq

the form to into between NSI and the service providing vendor, and foregoing to the Compliance Department;

(ii) a photocopy of if

the

(c)

The Legal and Compliance Departments review the proposal and, Legal Department shall :

satisfactory, the

(D review and negotiate the vendor

(ii)

agreement directly with the service providing vendor (the "Vendor Agreement"); and prepare and negotiate a soft dollar agreement between NSI and the advisor (the "Soft Dollar Agreement"); are sent to Equity or Fixed Income Administration, as

(d) The form and the agreements

applicable;

(e) Equity or Fixed Income Administratioq as applicable, has (i) the original copy of the forrq and (ii) the execution copies of each of the Vendor Agreement and Soft Dollar
Agreement signed by one of the Co-Presidents;

(f) Equity or Fixed Income Administratioq as applicable, forwards (i) the original, fully
signed approval forrn, together with the execution copies of each Agreement and Soft Dollar Agreement to the LegalDepartment;

of the Vendor

(g) The Legal Department will forward the execution copies of the Vendor Agreement to
the vendor and the Soft Dollar Agreement to the advisor for their respective signatures; and

(h) Upon receipt of fully executed Vendor and Soft Dollar Agreements, the Legal Department shall: (i) retain an original of each agreement, (ii) forward copies of the
agreements to each of the Compliance Department, Systems and Facilities Department and Internal Audit Department, and (iii) advise Equity or Fixed Income Administratiorq

as applicable, that the soft dollar arrangement is approved for implementation and
payment.

At the end of each monttL Equity Administration and Fixed Income Administration shall distribute a copy of a report showing the existing soft doltar arrangements
(5) Limitations on Transactions with Nomura Advisory Affrliates
Nomura policy generally prohibits Nomura from purchasing or selling securities as principal or agent to or from a Nomura advisory affiliate. Limited exceptions to this policy must
l8
Oetober 1998

be approved by the Legal Department or Compliance Department with written consent from the advisory unit

(6) Books

and Records Retention

Rules l7a-3 and l7a-4 of the Exchange Act, and certain other rules, speciff certain books and records that must be created and/or retained. Exhibit P contains a checklist of documents that must be retained and a description of the acceptable storage methods.

o
l9
October 1998

3.

This Section sets forth the Nomura Group's policies and procedures for handling confidential information, including its "Chinese Wall" procedures. These procedures apply to aii employees, including part-time employees and consultants. Specific pohCies and procedures for individual business units may from time to time be set forth in separate Legal und Co*pliance Memoranda and shall be deemed to supplement or amend those contained in itris Section. In the normal course of business, members of the Nomura Group and their employees receive information of a confidential nature pertaining to the business of clients and of rn"*b.rs of the Nomura Group and its affiliates. Trading in securities (including securities issued by affiliates of Nomura) for the Firm's account or one's personal account on the basis of material non-public information is prohibited. Confidential information is considered an asset of the Nomura Group, and it is a fundamental duty of employment to not use such information for personal benefit. To break a confidence or to use confidential information improperly or
carelessly is a violation ofNomura Group policy and may violate SEC rules. Chinese Wall procedures are designed to prevent the flow of non-public information from one area to another within the Firm. It is essential that the Legal Dipartment and the Compliance Department be made aware of any internal communications among Investment Banking, Researctr, and Sales and Trading which may involve, or create the appiarance o{ a passage of material non-public information. The Compliance Department maintains and distributes a Restricted List which includes certain issuers *hose securities are subject to trading orpublication restrictions as a result of applicable regulation of the Firm's policils concerning non-public information; The Restricted List must be reviewed by all Supervisors to ensure that the Firrq and employees (if pre-approval of personat trading is required in your department), do not trade in the securities on the Restricted List without prior approval from the Legal or Compliance Departments. Compliance also maintains other lists of securities subjict to restrictions or review within the Firm (e.g.,the Watch List and the Research Restrictei I-isg. See the Employee Handbook for more information on employee trading procedures.

Securities of issuers are placed on the control lists when the Compliance Department or Legal Department is alerted that someone within the Firm has material non-public information. This can only happen when persons in possession of such information. contact the Legal or Compliance Departments. Employees who are in possession of material non-public information regarding a company must contact the Compliance Department or Legal Department. For example, an issuer might be placed on the control lists if a person at Nomura sat on a creditor's steering committee for a distressed issuer or if someone in Research or Investment Banking received material non-public information about
an issuer he or she covered.

The Compliance Department carefully monitors compliance with these policies and procedures, and Nomura will take action against any violators, which may include termination of employment. In certain cases, violations of these policies and procedures must be reported to the SEC or other appropriate authorities.
Questions regarding this Section should be directed to the Compliance Department or the Legal Department.

20

October 1998

A.

Definitions

The definitions used in this Section are set forth below and are an integral part of this Section. They should be reviewed carefully.
means any entity that directly or indirectly (A) is controlled by a member of the Nomura Group, @) controls a member of the Nomura Group or (C) is under common control with a member of the Nomura Crroup. Afiiliates of the Nomura Group include The Nomura Securities Co., Ltd. and all of its subsidiaries.

(1) "affiliate" of the Nomura Group

(2) "client" includes persons or entities with whom employees of the Nomura Group
transact securities or engage in advisory business, including but not limited to, sales and trading customers, companies transacting business with Investment Banking or fuset Backed Finance employees and companies contacted or covered by Research employees.
source prospective (such as a client, outside of the Nomura Group or an affiliate of the Nomura Group client or other third party, or partners, omcers or employees of, or lawyers, accountants or other professionals involved wit[ a client, prospective client or other third party) with the expectation that such information must be kept confidential and used solely for the business purposes for which it was conveyed, and includes materials that contain or are derived from such confidential information. With limited exceptions, non-public information obtained in the course of a client assignment should be considered confidential. Unless otherwise determined by the Compliance Department, confidential information includes information received directly or indirectly from insiders where the circumstances indicate that the insider may have acted improperly in disclosing the information. Information that is confidential to an afliliate of the Nomura Group should be considered confidential information by members of the Nomura Group. Any questions regarding the confidentiality of information should be directed promptly to the Compliance Department or Legal Department.

(3) "confidential informdh" means non-public information provided by a

(4) "employee accounts" include the following securities, commodities and futures accounts: an employee's personal accounts; accounts over which an employee has investment
discretion or exercises control (pursuant to formal authority, as a fiduciary or otherwise); and any other account in which an employee has a direct or indirect beneficial or financial interest. See also "related accounts" below.

(5) "Investment Bankine" employees include personnel primarily engaged ln investment banking or other advisory activities related to the origination or structuring of
securities transactions.

(6) "material information" means information (A) that a reasonable investor would consider important in making an investment decision as to a security or (B) that is likely to have a material effect on the market price of such security (including trading information). Material information may include, but is not limited to, information about: changes in dividends or dividend policy; financial forecasts, projections or valuations (especially estimates of future earnings or losses); changes in previously released earnings or earnings estimates, changes in accounting procedures or the adoption of new accounting rules; write-downs of assets; additions to reserves for bad debts; liquidity problems; to-be-announced changes of ratings; bankruptcy filings; proposed transactions such as refinancings, refundings, tender or exchange offers,
2l
October 1998

rccapitalizations, leveraged buy-outs, acquisitions, mergers, restructurings or purchases or sales of assets; expansion or curtailment of operations; increases or decreasis in orders; significant product developments; major litigation; changes in management; contests for corporatJcontrol, as yet unreleased government reports and statistics, and certain unannounc"d gou..n*ani actions; program orders; repurchase programs; anticipated offerings of securitie{ imminent block orders; and short positions. Any questions regarding the materillity of information should be directed promptly to the compliance Department or Legal Department.

(7) "non-public" information is information that has not been effectively disseminated to the general public. Effective public dissemination cannot usually be made on apreferential or selective basis but does include a press release carried over a recognized news service, an article in a major news publication, a public filing with the SEC or uroth". regulatory agency, or a mailing (such as a proxy statement or prospectus) sent to shareholders Jr potential investors. Even following a public announcement of a major transactiorq many aspects of the matter may remain non-public. Examples of effective public dissemination of unpublished research or other proprietary information by the Nomura Group include customary oral dissemination by sales personnel, mailing or other delivery of such information to the regular mailing list of recipients of such research and use of a generally available electronic transmission systenL such as the Bloomberg system. Any questions regarding whether information is non-public should be directed promptly to the compliance Department or Legal Department.
(8) "proprietary information" means non-public informatiorg analysis and./or plans that are created, developed or obtained by a member of the Nomura Group for business purposes. It

may include any of the following: unpublished research; information about the investment, trading or financial strategies or decisions of the Nomura Group or any of its affrliates; information about the securities or futures trading positions or trading intentitns of the Nomura Group or any of its affiliates; pending or contemplated orders of clients of the Nomura Group or any of its affiliates; soffware; models; personnel files; client records; advice to clients of the Nomura Group or any of its affrliates; and analysis prepared by the Nomura Group or any of its affiliates of companies or clients that are potential acquirers of other companies or their assets or companies that are possible candidates for acquisitiorL merger or sale of assets. Any questions regarding whether information constitutes proprietary information should be directed fromptly to the Compl iance Department or Legal Department.

(9) "related--accou$!" include the following securities, commodities and futures accounts: accounts of a spouse or a minor child of an employee; accounts of an employee's other children, if financially dependent on the employee; accounts of other relatives residing with the employee; and accounts designated by the Compliance Department as related accounts due to the degree of influence or financial interest of the employee.
(10) "Research" includes Nomura Group personnel primarily engaged in the research securities, issuers or markets.

of
of

(l l) "Sales and Tradins" includes personnel primarily engaged in the sales or trading securities, as well as those primarily engaged in the asset management business.

(12) "Supervisory person" means a person who has supervisory responsibility within the applicable department within the Nomura Group.

October 1998

means information contained in (A) non-public research opinions, recommendations or analysis of securities, companies or industries that are intended to be disseminated to clients of the Nomura Group or any of its affrliates, @) the investment, trading or financial strategies or decisions of the Nomura Group or any of its affiliates or (C) advice to clients of the Nomura Group or any of its affrliates. Any questions regarding whether information constitutes unpublished research should be directed promptly to the Compliance Department or Legal Department.

(13) "unpublished

reseuff'

B.

Prohibition on Misuse of Confidential or Proprietary Information

employee may misuse confidential information or proprietary information. Trading securities or other financial instruments (including securities issued by affiliates of Nomura) for the Firm's account or one's personal account on the basis of material non-public information is prohibited. Failure to abide by this policy may result in termination. In addition, trading in the securities issued by Nomura affiliates may be prohibited under applicable IJ.S. securities laws.

(l) General. No

(2) Confidential Information. Confidential information obtained directly or indirectly may be used only for the specific purpose or transaction for which it was given. client from a Any other use without the permission of the Compliance or Legal Department and, if applicable, the client that originally entrusted the Nomura Group or any affiliate with the information is a
misuse.

No employee may buy or sell for his or her own account or for the account of a relative, friend, the Nomura Group or any affrliate a security of any issuer or any futures contract (or the underlying security or index) while in possession or with knowledge of (A) in the case of securities, material confidential information relating to the issuer or the security and @) in the case of futures contracts, material confidential information regarding client transactions in the futures contract, any related futures contract or the underlying security or index. Employees are prohibited from recommending the purchase, sale or holding of securities on the basis of material confideritial information and from disclosing such information to others.
Confidentiality letters may not be signed without the prior review and approval of the LegalDepartment. If a member of the Nomura Group has signed or is subject to the provisions of a confidentiality letter, employees must adhere strictly to its provisions.

(3) Proprietary Information. Proprietary information may be used only for the specific
purpose for which it was created or obtained Any other use of such information is a misuse.

No employee may buy or sell for his or her own account or for the account of a relative, friend, the Nomura Group or any affiliate a security of any issuer or any futures contract (or the underlying security or index) while in possession or with knowledge of (A) in the case of securities, material proprietary information relating to the issuer or the security and @) in the case of futures contracts, material proprietary information regarding client transactions in the futures contrast, any related futures contract or the underlying security or index, except in either case when the transaction is consistent with the Nomura Group's business purpose for which the information was created or obtained. Without the prior consent of the Compliance or Legal Department, employees are prohibited from recommending the purchase, sale or holding of
23

October 1998

securities on the basis of proprietary information and from disclosing such information to others, regardless of whether the other person also possesses or has access to such information.

(4) Treatment of Client Orders. Unless an exception has been granted by the Compliance or Legal Department, no employee may purchasaor sell a security]commod'ity or futures contract for an employee or related account if he or she is aware that the No*u.u Gio,rp is effecting or will effect a transaction for a client account in a security of the same issuer (or, in the case of futures contracts, the related security) or the same or a related commodity. ' Any exceptions must be obtained from the Compliance or Legal Department on a trade-by+rade
basis.

(5) Material Non-Confidential Information. Research personnel who obtain new, but not confidential, information that is likely to have significance io the market may discuss such information with Sales and Trading and Investment Banking employees who have a need to know such informatiorq but only with the prior approval of it e iorptiance Department. The Compliance Department may require disclosure of such information to Nomura droup clients in
advance of any sales or trading activities with those clients.

C.

General Procedures

(1) Confidentiality. Employees must not disclose confidential or proprietary information to persons outside of the Nomura Group, except to persons (such as outside who have a valid 'oneed to know" such informatiorq unlesi, in itre case of client information, "orrr."l) he or she receives the consent of the client from whom the information was obtained or for whom it was prepared. Disclosure to persons within the Nomura Goup must be made in accordance with the Chinese Wall procedures set forth in this Section. Disclosures to persons outside of Nomura might require a confidentiality agreement and the Legal Department must be consulted in advance ofany such disclosure.
(2) Discussions. Employees should avoid discussing sensitive information relating to the affairs of the Nomura Group, affiliates of the Nomura Croup or the clients of any of tfiem witlq or in the presence of, persons who do not have a need to know the information. Extreme
caution should be taken with discussions in hallways, elevators, taxis, trains, subways, airplanes, airports, restaurants, social gatherings and other public places. Avoid discussing confidentiai information on speaker phones. Confidential matters should not be discussed on mobile telephones because such telephones are not secure.

(3) Access- Employees should limit access to areas where confidential or proprietary information may be present or discussed. Only persons with a valid business reason for being in such an area should be permitted; in this regard, meetings with non-Nomura Group persoirel should be conducted in conference rooms rather than employee offrces. Work on confidential projects, such as mergers and acquisitions, should take place in physically separate and secure areas. (4) Outside Inquiries Any person not specifically authorized to respond to press or
other outside inquiries concerning a particular matter should refer all calls relating to the matter to the Public Relations Department, the Legal Department orthe Compliance Department.

24

October 1998

and Databases. Confidential documents should not be placed in office photocopying machines, where they may be read by unauthorized persons. Such areas, such as documents should be stored in secure locations and not left exposed overnight on desks or in workrooms. Such documents should never be read where other unauthorized persons may also read them (1.e., on a crowded subway or airplane).

(5) Documents

by computer protected passwords or should be by otherwise secured against access by unauthorized persons.
Confidential databases and other confidential information accessible

(6) Faxing Procedures. Confidential documents should not be telecopied to locations where they may be read by unauthorized persons, including to offrces within the Nomura Group, unless steps have been taken to remove or redact any confidential information included in such documents. Prior to telecopying a document that includes confidential information, the sender should confirm that the recipient is attending the machine that receives such documents. (7) Code Names. Code names should be used for sensitive projects. All references, documents and information with respect to such a project should refer to the relevant companies only by their code names. Code names should not be identifiable and should not include the word "Nomura". (8) Deal Teams. No deal team member may provide any information concerning the
transaction to someone who is not a member of the deal team, unless specifically authorized by an appropriate supervisory person. Such disclosures must be made in accordance with the Chinese Wall procedures set forth in this Section.

D.

The Chinese Wall

laws, certain rules and regulations applicable to the Nomura Group and Nomura Group policies require specific procedures for handling confidential and certain proprietary information and for the separation of certain of the business activities conducted by the Nomura Group (the "Chinese Wall"). These procedures, in addition to the Securities Watch List, the Restricted List and the Research Restricted List, are intended to segment the flow and prevent the misuse of such confidential and proprietary information and to prevent (A) Sales and Trading employees from gaining access to confidential or certain proprietary information that Research employees may have acquired or developed and @) employees primarily engaged in Research or Sales and Trading from gaining access to confidential information that Investment Banking employees may have acquired.
The Chinese Wall procedures may be amended or supplemented from time to time by memoranda circulated by the Legal Department or Compliance Department.
Chinese Wall Restrictions. Except in accordance with the wall-crossing procedures described below or in accordance with such other procedures as may be applicable to a particular

(l) General. The securities

(2)

department or division.

o No person in Investment Banking should disclose confidential information to any person in Research or Sales and Trading, or give such person access to any file or database containing any such information; and no person in Research or Sales and Trading
25

October 1998

should obtain or make any effort Investment Banking.

to obtain confidential information from any person in

important that the investment bankers not disclose material, confidential information to the sales and trading personnel. If the information is not disclosed to the sales and trading personnel, then the standard procedures described below in regard to Watch and Restrictei Lists will be followed. If such information is shared with tho sales and trading personnel, than, upon consultation with the Compliance or Legal Departments, it will *ori tit b" "ty the assumed that the sales and trading personnel will have been brought over the wall and relevant securities will probably be restricted (see the Restricted List procedures below).

In regard to the Structured Finance Group, because of the close proximity of the investment bankers (the personnel involved in originating loans or structuring other possible investments iq or underwritings of, a counterparty) to the sales and irading personnel (the personnel involved in trading or marketing asset backed securities), it i;

o o

Iluman Resources Employee Handbook.

In regard to personal employee trading, see also Section 16.4 below and the

No person in Research should disclose unpublished research to any person in Sales and Trading, or give such person access to any file or database containing any such information; and no person in Sales and Trading should obtain or make any effort to obtain unpublished research from any person in Research.

o d Sales and Trading employee who for any reason obtains information

that he

or she believes may be confidential or unpublished research, or a Research employee who for any reason obtains information that he or she believes may be confidentiai, otherwise than in accordance with the Chinese Wall procedures described herein, must immediately notify an appropriate supervisory person in his or her department who, in turrq shouli consult with the Compliance Department concerning what, if any, action should be taken. Unless expressly advised to the contrary by the Compliance Department, such employee should refrain from engaging in transactions in the related securities or other securiiies of the related issuer for any account and avoid further disclosure of the information. A Research employee who receives such information will be considered "Over the Wall" and prohibited from issuing research reports concerning the issuer or, under certain circumstances, the relevant industry and from discussing the issuer and the industry with Sales and Trading employees and Nomura Group clients until the Compliance Department
notifies an appropriate supervisory person to the contrary.
The placement of a security on the Securities Watch List, the Restricted List or the Research Restricted List does not terminate the Chinese Wall procedures concerning disclosure and confidentiality as to that security or its issuer.

(3) Wall-Crossing Procedures. Disclosure of confidential information by an Investment Banking employee to a Research or Sales and Trading employee, or vice versa, should be made only if absolutely necessary in the course of obtaining advice or other assistance. In such instance, the disclosure of confidential information may be made only in accordance with the specific procedures set forth in this Section. You should note tha! in some cases, the very

26

October 1998

tact that an employee in Investment Banking is working on an assignment for a particular issuer may constitute material confidential information.
Investment Banking employees must obtain the prior written approval of an Managing Director in their department (or his delegee) before making any Executive disclosures of confidential information to an employee in Research or Sales and Trading. Approvals must be obtained on a project-by-project and person-by-person basis.

Before approval is granted, the Compliance Department must be notified in writing by an Executive Managing Director in Investment Banking (or his delegee) of (l) the identity of the Research or Sales and Trading employee who is proposed to cross the Chinese Wall, (2) the applicable issuer(s), (3) the nature of the information to be discussed and (a) the reasons for crossing the Wall. A form of notice is set forth in Exhibit E.
The Compliance Department will notify (in writing) an executive in Research or Sales and Trading of the identity of the employee who is proposed to cross the Chinese Wall. The Compliance Department may not disclose any additional information to such executive.

. If approval is obtained from an Executive Managing Director in Research or Sales and Trading (or his delegee), the Compliance Department will notify the requesting Executive Managing Director in Investment Banking (or his delegee) that the proposed Wall-crosser may be contacted. Personnel from the Compliance Department must attend all meetings where Wall-crossing communications are made. Communications permitted by these crossing procedures should be conducted in a manner not to be overheard or received by persons not authorized to receive confidential information.

A record of wall-crossings will be maintained by the Compliance Department.

Research or Sales and Trading employee who has crossed the Chinese Wall

o I

will be treated as an Investment Banking employee for purposes of the Chinese Wall and related procedures for as long as he or she knows or possesses material confidential
information, as determined by the Compliance Department. The employee must maintain the confidentiality of such information and may use it only for the business purposes for which it was disclosed. ff a Research employee receives such information, Research may be prohibited from issuing research reports concerning the issuer and, in certain circumstances, the industry and from discussing the issuer and the industry with Sales and Trading employees and Nomura Group clients until the Compliance I)epartment notifies an Executive Managing Director that the restrictions have been lifted.
Disclosures to any Research or Sales and Trading employee who crosses the Chinese Wall should be limited to information that the employee needs to know in order to assist the Investment Banking employee. Particular care should be taken to avoid communication of information (such as long-term projections) to such employee that will not become public during the course of the transaction, because the possession of such information by a Research or Sales and Trading employee may restrict the activities of that employee until and even after the transaction is completed. Sales and Trading employees who cross the Chinese Wall may be required to curtail their contact with
October 1998

of these restrictions Department and the Legal Department.

customers- The scope

will be

determined

by the

Compliance

The Compliance Department will ordinarily allow a wall-crosser to resume normal Research or Sales and Trading activities when it determines that he or she did not receive any material confidential information or that any such information is no longer material or that such information has become public.

o
will be

Compliance Department.

Any questions or issues arising in connection with these crossing procedures resolved between the appropriate Executive Managing Directo(s) and the

E.

The Watch List

General. The Watch List is a confidential list of issuers about whom the Nomura Group may have received material confidential information, usually concerning a transaction or other event for which an entity in the Nomura Group has been engaged or if it is otherwise determined that there is a reason to monitor trading activities (such aslfi, employee has crossed the Chinese Wall). Distribution of the Securities Watch List within the Firmls iestricted to the Legal Department, the Compliance Department, Series 16 analysts and a limited group of
supervisors.

(l)

trading and other activities in securities in order to check compliance with the N6mura Group,s Chinese Wall procedures. When an issuer is placed on the Warch List, all research and securities of that issuer will be monitored. In appropriate circumstances, the Compliance Department may intervene to break trades, freeze or liquidate securities positions, re,quire "paJsive,, tradini activity, halt the dissemination of research or impose other restrictions tn activities of entitiei within the Nomura Group or its employees in connection with securities of such an issuer. Trades by an employee of securities included on the Watch List will be reviewed and may be brought to the attention of the appropriate Executive Managing Director. Whenever an analyst begins preparing a research report he or she should contact the turq will check whether the issuer oisecurity is presently on the Watch List or the Restricted List. This procedure is designed to avoid situations *h.r. an analyst devotes time and resources to preparing a report which cannot be released because it involves a company on the Securities Watch List.
Series 16 analyst who, in

(2) Surveillance. The Watch List is used to facilitate the monitoring of sales and

(3) Confidentiality. The contents of the Securities Watch List and any restrictions that result from monitoring activities with respect to securities on the Securities Watch List are confidential. No one may discuss the contents of the Securities Watch List with anyone outside of the Nomura Group, and no one may discuss the contents of the Securities Watch List with employees of the Nomura Group except in accordance with the Chinese Wall procedures. Fmployees may not disclose to one another the name of any issuer known to them to be on the Securities Watch List. (4) Securities Watch List Procedures. An issuer will be placed on the Securities Watch T.ist when: (A) the Nomura Group has received material confidential information concerning that issuer in the course of being involved in a possible transaction or other event that has not
October 1998

been publicly announced; (B) the Nomura Group has been engaged (but not publicly announced) to advise a company with respect to a market-sensitive transactiorg or operations or a banker begins due diligence in connection with a possible loan to a public company; (C) a Nomura Group employee occupies a sensitive position with an issuer, such as being a member of the board of directors or sitting on a creditor's steering committee; or (D) the Chinese Wall has been crossed. Ordinarily, when an entity within the Nomura Group proposes to enter into a mandate letter or confidentiality letter or engagement agreement, the issuer (and, in a proposed merger or acquisition both the acquirer and the target) must be placed on the Securities Watch List.

It is the responsibility of employees in the department whose activities call for the addition of an issuer to the Securities Watch List to request that the Compliance Department promptly add it to the List as well as regularly update the Compliance
Department with respect to developments affecting whether the issuer should remain on the LisL ft is essential that employees be alert to circumstances that might require an issuer to be placed on the Securities Watch LisL When in doubt, the appropriate supervisory person or senior team member involved in the transaction should be consulted.

An issuer ordinarily will be removed from the Securities Watch List when the
appropriate supervisory person (with the concurrence of the Legal Department and Compliance Department) determines that it is no longer necessary to monitor Research or Sales and Trading activities with respect to the issuer. It is the responsibility of the employees whose activities called for the addition of an issuer to the Securities Watch List to promptly notify the Compliance Department when the issuer should be deleted from the Securities Watch List.

(5) Monitorine. When an issuer has been placed on the Securities Watch List, the Compliance Department will conduct a daily review of employee transactions, certain Nomura Group proprietary transactions and client transactions involving securities of issuers on the
Securities Watch List.

F.

The Restricted

List

(1) General. The Restricted List is a list of securities, distributed to or available to all NSI employees through the web (Intranet), which are subject to certain restrictions more fully described below. A security ordinarily will not be placed on the Restricted List until after a relevant transaction (and/or the Nomura Group's involvement in the relevant transaction) has been publicly announced or has otherwise become a matter of public record. In addition, a security will be placed on the Restricted List for a period up to 24 or 72 hours following the release of research to the public. (See "Research and Restricted List" below).
(2) Restrictions. Placement of a security on the Restricted List restricts trading in that
security (and securities into which the subject security may be converted, exchanged or exercised or which, under the terms of the subject security, may in whole or in significant part determine the value of the subject security), unless an exception is granted by the Compliance Department. Exceptions must be obtained on a trade-by-trade basis, unless otherwise provided by the Compliance Department. Under certain circumstances, trading in other securities of that issuer will also be restricted. Absent an exceptioq the following activities with respect to Restricted List securities will be prohibited: proprietary trading; market-making; transactions in client accounts; transactions for discretionary accounts; the recommendation of transactions, issuance
29

October 1998

research reports regarding the issuer or the securities; and trading in employee or related accounts. Unsolicited brokerage transactions initiated solely by a client are not prohibited. Repeated attempts by an employee to trade securities included on the Restricted List will be brought to the attention of the appropriate Executive Managing Director and will result, at a minimunq in a memorandum to such employee's personnel file.

of

Whenever an analyst begins preparing a research reporf he or she should contact the Series 16 analyst who, in turrq will check whether the issuer or security is presently on the Securities Watch List or the Restricted List. This procedure is designed to avoid situations where an analyst devotes time and resources to preparing a report which cannot be released because it involves a company on the Restricted List. The distribution of research covering an issuer whose securities are on the Restricted List is prohibited, unless approved by the Compliance Department. (See also "Research and the Research Restricted Lisi, below).

(3) Confidentiality. The contents of the Restricted List and any restrictions that result from a security being placed on the Restricted List are confidential. No one may discuss the contents of the Restricted List with anyone outside of the Nomura Group withlut the prior
approval of the Compliance Department.

(4) Restricted List Procedures. A security may be placed on the Restricted List after a relevant material transaction (andior the Nomura Group's involvement in the relevant material transaction) has been publicly announced or has otherwise become a matter of public record. A security will also be placed on the restricted list for 24 to 72 hours following the distribution to the public of research on such security depending on the method of distributiron of such research (See "Research and Restricted List" below). In additioq a security may be placed on the Restricted List for a number of other reasons, including: (A) reinforcingthe Chinese Wall, if one or more departments within the Nomura Crroup has received material confidential information; @) complying with Regulation M or Rule l0b-13 under the Exchange Act, when the Nomura Group participates in a distribution of securities or is involved in a tender offer; (C) satisfting other compliance, business or regulatory objectives. A security may be deleted frorn the Restricted List when the Nomura Group's involvement in the transaction relating to the security has ended, when the transaction has been concluded or when the Legal Department and th; Compliance Department otherwise determine that it is no longer necessary to restrict activities in the security.

promptly to add it to the List as well as to regularly update the Compliance Department with respect to developments affecting whether the securities should remain on thi List. It is essential that employees be alert to circumstances that might require a security to be placed on the Restricted List. When in doubt, the appropriate supewisory person oi senior team member involved in the transaction should be consurted.

It is the rCIponsibility of employees in the department whose activities call for the addition of a security to the Restricted List to request the Compliance Department

A security ordinarily will be removed from the Restricted List when the Compliance Department determines that it is no longer necessaq/ for the security to remain on the List. It is the responsibility of the employees whose activities called for the addition of an issuer to
the Restricted List to promptly notify the Compliance Department when the issuer should be deleted from the Restricted List.
30

October 1998

security has been placed on the Restricted List, the Compliance Department will conduct a daily review of employee transactions, certain Nomura Group proprietary transactions and client transactions involving securities on the Restricted List.

(5) Monitoring. When

G.

Research and the Research Restricted

List

(1) General. The Research Restricted List is a mechanism to ensure that material information contained in Research reports is not improperly used prior to public dissemination of the research. Companies are placed on the Research Restricted List prior to dissemination of
of the research, as described below. A Research analyst who obtains confidential information directly or indirectly from a client may use such information only for the specific purpose for which it was given. Any other use without the permission of the client that originally entrusted the Nomura Group or any affiliate with the information is a misuse. The receipt of material confidential information must be reported immediately to the Executive Managing Director of Research and the Compliance
research on the Company and removed shortly after dissemination

Department.

A Research analyst who obtains new, but not confidential, information that is likely to have significance to the market may discuss such information with the Sales and Trading and Investment Banking employees who have a need to know such informatiorq but only with the prior approval of the Series 16 analyst and the Compliance Department.
Research analyst who proposes to issue a new, or significantly alter an existing, recommendation may not discuss such information or his or her intentions with anyone, except an Executive Managing Director of Research (or his or her designee) and the Compliance Department, until such information has been approved by the Compliance Department for dissemination and is effectively disseminated through customary oral dissemination by sales personnel, mailing or hand delivery of such information to the regular mailing list of recipients of research or use of a generally available electronic transmission system, such as the Bloomberg system. Research analysts and other employees who become aware of another analyst's intentions regarding his or her recommendation should not disclose such information to any other person or act on it for their personal benefit. In additiorq securities or issuers with respect to which significant new or significantly changed research has been issued by the Nomura Group must be placed on the Research Restricted List, which is confidential.

Whenever an analyst begins preparing a research report he or she should contact the who, in turrq will check whether the issuer or security is presently on the Securities Watch List or the Restricted List. This procedure is designed to avoid situations where an analyst devotes time and resources to preparing a report which cannot be released because it involves a company on the Securities Watch List. In addition, the Compliance Department must be promptly notified of new or changed research opinions regarding a security or an issuerl the issuer will be placed on the Securities Restricted List and trading in the relevant securities will be restricted or described below.
Series 16 analyst

(2) Restrictions. Placement of a security on the Research Restricted List generally materially limits trading in that security (and securities that are convertible, exchangeable or exercisable into that security), as well as all of that issuer's securities, for the greater of (i) if research has been issued using a generally available electronic transmission systenq such as the Bloomberg systenq 24 hours or one full business day or (ii) in all other cases, 72 hours or tkee
3l
October 1998

business days (such periods being referred to as the "Restricted Period") following the release to the public of the researctg unless an exception is granted by the Compliance or Iegal Departments' Under certain circumstances, trading in non-convertille investment grade de-bt securities of that issuer will also be restricted. Absent an exception, the following actlvities will be prohibited during the Restricted Period: proprietary trading (with the exceptlon of marketmaking, to the extent that inventory levels are not materially ciranged, or client facilitation), transactions for discretionary accounts, and trading in employei or related accounts.

full

regarding an issuer whose securities appear on the Restricted List is prohibited, unless approved by the Compliance Department. One business day prior to release of unpublished research, Research must contact the Compliance Department to confirm that the issuer or securit5r included in such research does not appear on the Securities Watch List or the Restricted List (unless the Series 16 analyst has been granted access to such list, in which case the Series 16 analyst will do the review); expedited review by the Compliance Department may occur on a case-by-case basis.

The dissemination of research regarding an issuer appearing on the Securities Watch List may be restricted or limited by the Series 16 analyst, unO tt.tissemination of research

that result from a security being placed on the Research Restricted List are confidential. No one may discuss the contents of the Research Restricted List with anyone outside of the Nomura Group without the prior approval of the Compliance Department. Employees may not disclose to one another the name of any security known to them to be on the Researih Restricted List.

(3) Confidentiality. The contents of the Research Restricted List and any restrictions

(4) Research Restricted List Procedures. A security must be placed on the Research
Restricted List by notifuing the Compliance Department by the close of business on the business day preceding the day on which the Nomura Crroup issues significant new or significantly changed research relating to such security. I{ however, the release ofresearch on an expeditei basis has been approved by the Compliance Department, the related security must be placed on the Research Restricted List at the time of release. Prior to formal release to the putlic, such research may only be discussed between the Research analyst(s) who prepared the research and his or her department head; the contents of such researctq and the fact thaf such research is being prepared, may not be communicated, orally or in writing (including in morning meetings anl through Research Comments), to other Research employees or outside of Research until such research has been effectively disseminated through customary oral dissemination by sales personnel and mailing or hand delivery of such information to the regular mailing list of recipients of research.

Investment Banking employees may assist in arranging interviews between Research analyst(s) and an issuer. Under no circumstances, however, should material confidential information (including financial projections) be discussed at such meetings. is the responsibility of the Research analyst to clearly indicate his or her role as a Resiarch analyst at any meetings with an issuer.

It

Research to request the Compliance Department promptly to add a security to the Research Restricted List. When in doubt, the appropriate supervisory person should be consulted.

It is the responsibility of employees in

32

October 1998

I}

(5) Monitorine. When a security has been placed on the Research Restricted List, the Compliance Department will conduct a daily review of employee transactions, certain Nomura Group proprietary transactions and client transactions involving securities on the Research Restricted List.

lt

33

October 1998

4.

ACCOUNT PROCEDURES

Supervisors are required to apply the supervisory procedures in Section l.E.(2) ("Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

A.

New Accounts

(l)

Completing Customer New Account Form

Whenever a new account is opened with the Firm, the salesperson responsible for the account must obtain all necessary documentation from the customer. This entails completing a "New Account Form" (available from the New Accounts Department) which helpi errr,r." compliance with the NYSE's "Know Your Customef' Rule, as more fully discussed below. When completing the New Account Fornr, particular emphasis should be placed on the Investment Objective and Possible Transaction field of the fornr, regardless as to the type of account (e.g., Retail, Corporate, Institutional).

"Know Your Customer" NYSE Rule 405, "Diligence as to Accounts", is commonly known as the "Know Your Customer" rule. Rule 405 requires that an Account Executive use "due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization". Therefore, Salespeople must ensure that for new accounts:

o
o

The client's name and account title are accurate; The address is complete; The citizenship of the client is noted,

A Social Security number or Tax Identification number must be obtained for U.S. clients;
The type of customer is noted, e.g.bank advisor, etc.

Financial information is accurate;

Investment objectives and types oftransactions desired are accurate;

supporting documentation has been obtained (e.g., margin agreements, W-8's or W-9's, corporate resolutions, master transactions agreements, etc.);
Salespeople are registered in the client's state of residence; and
Al I recommendations are consistent

All

with stated investment obj ective(s).

34

October 1998

Documents

The procedure for opening a securities account is to complete the New Account Form (pay special attention to the shaded areas on the Form) and, if necessary the Documentation Exception Request Form, a copy of which is attached as Exhibit F. The Documentation Exception Request Form should only be used in limited circumstances, as Salespeople should strive to obtain all required documentation. If the Salespeople has an order for the new account, the order can be approved at the same time as the account unless transactional documents are necessary. The New Account Form should then be taken to the New Accounts Department. The New Accounts Department will assign an account number, give the number to the Sales Assistant and send all necessary documents to the account for their signature. Investment Advisory Accounts When opening an account for an Investment Adviser, the Account Executive must set up a master ac@unt as well as sub-accounts for all of the adviser's trading accounts. The adviser must sign an investment adviser letter which the New Accounts Department will furnish. If an investment adviser letter is not received within 30 days, all accounts listed under that adviser will be frozen from trading. In any event, authorization documents in addition to the investment adviser letter may be requested in some cases.
Tax Forms

All accounts must have certain IRS forms on file with Nomura in order to exempt them from the imposition of a 31% back-up withholding tax on all gross proceeds. For a domestic account, Nomura must be provided with a completed Form W-9
@equest for Taxpayer Identification Number and Certification) which provides Nomura with the customer's ta,x identification number and certifies that they are not currently subject to backup withholding.

For foreign accounts, Nomura is required to receive a properly executed Form W-8 (Certificate of Foreign Status), certifying that the owner of the account is a non-resident alien or a foreign entity that is not subject to U.S. information reporting or to backup withholding rules. Unlike Form W-9, which has an unlimited shelf life, Form W-8 is valid for only three calendar years and expires on December 3l of the third calendar year from receipt. Therefore, Form W-8 must be renewed promptly or the account will be considered as having an expired Form W-8 on file and will have 3lYobackup withholding imposed.
In order to avoid these potential tax charges, a Form W-8 or W-9 must be on file by the settlement date of the sale of any security (short or long). If they are not received on a timely basis, the customer's account will be automatically charged. Once the account is charged, the customer will not be able to recover the withheld ta:< from Nomura; instead, they will be required to obtain any refund directly from the IRS. Therefore, it is imperative when opening a new account that the sales representative make arrangements for these documents to be returned promptly from the customer. If necessary, these forms can be faxed to and from the customer, with the original being forwarded to the New Accounts Department.

35

October 1998

The foregoing policy will be strictly adhered to, with no exceptions, due to the possible assessment of IRS penalties and taxes upon Nomura.

Should you have any questions concerning tar forms or the withholding rules, please contact the Tax Department. Credit Sensitive Products

Certain products require the Account Executive to obtain approval from the Credit Department and to place credit limits upon each client before trading. These credit sensitive products, and documentation requirements are set forth in Exhibit G which requires, among other things, appropriate Master Transaction of Documents prior to opening the account.
Policies for Opening New Accounts

o .
.

The New Account Form must be complete or it will be rejected. If the customer refuses to provide you with any such informatiorq simply write "Customer refuses to provide" in the New Account Form.

The full legal name and address of the customer and advisorlagent must
provided.

be

The salesperson and sales manager must print their names and sign the form. Registered Representative numbers are mandatory. When signing the Fornr, the salesperson and sales manager are representing that they believe that any recommendations that they will make in connection with any of the proposed products checked on the Form will be suitable for that account. New Account forms must be received by 4:00 p.m. Any forms received after 4:00 p.m. will be accepted only in special situations (e.g., syndicate). Therefore, orders for new accounts should not be taken after 4:00 p.m. without approval from
the New Accounts Department

Accounts can be opened in advance of immediate trades, provided that all documentation has been received for those credit sensitive products which require transactional documentation before trades can be executed. If a transaction is executed without such required documentatioq the account will be frozen, the trade may be broken and the salesperson may be subject to further discipline.
Cross border business (representatives of Nomura affrliates covering NSI accounts or NSI acting as agent between an NSI customer and a Nomura affiliate) might require additional documentation. See the Rule l5a-6 Compliance Manual for details.

36

October 1998

(2) Procedures for Obtaining Documentation

The chart attached as Exhibit G lists the standard documentation required to open a new account based on the customer and the product (including credit sensitive products). The time frame for obtaining required documentation is as follows:
Time Frame Day 0

Action
Account opened.

NOTE: AII required

Day 20

transactional documents must have prior been received to this date.

Salesperson is sent written notice of missing documentation; this notice advises the salesperson of the freeze condition that may be imposed on Day 30.

Day 30

If required documents have not been provided:

a) b)

for high risk accounts, the account will be frozen to new activity until the documents are received;

for all other accounts, a written request for a 30-day extension must be received (see Exhibit H
"Documentation Extension Letter"), which must include the reason for the requested extension. Both the salesperson and the sales supervisor must sign the Documentation Extension Letter which will be logged into the documentation file. If the extension request is not received, the account will be frozen to new activity.

"High risk'l and "all other" accounts are defined below.

Between Day 0 and Day 30, the salesperson has sole responsibility for obtaining required documentation. At Day 30, the sales supervisor becomes responsible as well.
Day 60

For all other accounts, the salesperson and sales supervisor may request an exception. If required documentation has not been received or if an exception has not been granted, the account will be
frozen to new activity.

Customers are divided into "high risk" customers and "all other" customers. The decision to divide the body of customers pertains to sensitive authorization and suitability issues for "high risk" customers. "High risld' customers include: all advised/managed accounts, insurance companies, state and local governmental entities and agencies, educational institutions, non-profit charitable organizations, endowments and foundations, investment companies, and pension or profit-sharing plans.
October 1998

(3) Penalties
include.

The penalty for attempting to book a new trade in an account that has been frozen may

forfeiture of the commission for the trade by the salesperson;

possible loss of all or a portion of the annual holdback for those individuals compensated on a commission basis or an appropriate reduction to annual bonus for those individuals compensated on a subjective bonus basis, and termination.

(4) Reassienment of Accounts

Sales managers have one week to reassign an account when the currently assigned Firm. Any account not reassigned to a new salesperson within one week of the salesperson's departure will be reassigned to the sales manager.
salesperson leaves the

B. Client's Authority to Trade

Among the most important documents to be supplied by each client are those which evidence the client's legal authority to execute the specific types of transactions desired, and that the client's representative is authorized to act on its behalf.- These documents are essential to protect Nomura against litigation brought by clients that have lost money in the markets and claim that the broker/dealer is at fault for allowing it to trade. Nomura's customers are and will continue to be predominantly institutional customers. Institutional customers will typically be corporations but may include general or limited partnerships and other entities. Each type of customer account is briefly discussed below. Questions about customer accounts should be directed to the New Accounti Department. The New Accounts Department is responsible for reviewing and approving authorizatlon documents including resolutions, statutes and, if required by the New Accounts Department, legal opinions.

(1) Corporate Accounts

A corporation can only act ttrough its authorized offrcers or other agents and within the powers conferred by its certificate of incorporation and byJaws. Thus, prior to opening a customer account for a corporation, the Salespeople must obtain documentation authorizingihe opening of the account and the officer or offi.cers who may enter orders on behalf oi the corporation. A duly adopted corporate resolution may accomplish the necessary authorization. The resolution should specifr in detail the types of account activities that may bL conducted for the corporation and which offtcers ortypes of offrcers (e.g., any vice presid.nil *. authorized to enter orders on the corporation's behalf. The resolution should bs certified by the corporate secretary of the customer as being true and complete, duly adopted, not modified or supeiseded and in full force and effEect. Moreover, it should be accompanied by specimen signaturls of the authorized officers who will be acting on behalf of the corporation*ith ,.rp"ct to the account. Those signatures should likewise be certified by the corporate secretary in a certificate expressly
October 1998

entitling Nomura to rely on the signatures of such officers unless notified to the contrary. If questions arise as to whether a corporate account is duly authorized, the New Accounts Department should be consulted.
Salespeople should request their clients to submit corporate resolutions within 30 days of opening a client's account. The Salespeople should send NSI's form of resolution to a client. All documents will be controlled by and should be forwarded to the New Accounts Department.

The New Accounts Department frdy, in appropriate circumstances, waive the requirement that a corporate resolution be received where the customer is well known as an institutional investor. In such case, the Salespeople should obtain a certificate of an offrcer in charge of the corporation's securities activities certifying that the opening of an account with Nomura is authorized and that certain designated persons have authority to act for the corporation.
(2) Partnership Accounts

An account will not be opened for a customer that conducts business as a general partnership until an account agreement specifying which of the partners is authorized to place orders for the partnership's account is signed by all of the general partners. Alternatively, a copy of the partnership agreement or a letter signed by all of the partners will suffrce if it expressly authorizes the opening of an account with a broker-dealer and specifies what types of securities transactions may be effected.
Because the death of any partner may cause the partnership to be dissolved, a letter from the surviving partners authorizing the continuance of the account must be requested in the event a partner of the customer dies. Customers that are limited partnerships must open an account in the same manner as general partnerships, except that limited partners, unless the limited partnership agreement provides otherwise, need not (and typically are not authorized to) sign the account agreement or authorizing letter. The limited partnership agreement should therefore be examined for the pulpose of discovering any limitations on the general partners' ability to open an account or conduct securities activities.

(3) Municipal

and Other Government Entities

Municipalities and other governmental entities, such as local governmental entities, governmental authorities and agencies, are often restricted by statute, regulation or charter in the types of investments they may make (for example, "no speculative investments"). No municipality or other governmental entity (including any governmental pension plan) may be
accepted as a customer without the approval of the New Accounts Department.

39

October 1998

No reverse repurchase, bond borrow or derivative cash transactions will be allowed unless approved by the Compliance Department and the New Accounts Department. The Firm will generally only allow reverse repurchase and bond borrow and derivative cash transactions where the customer is not using the transaction to leverage its portfolio and such activity is authorized by statute, regulation or charter. For example, such tiansactions may be approved where the counterparty is investing the reverse repurchise or bond borrow proceeds in low risk investments with a matched maturity to the reu".sl repurchase or bond borrow transaction. The Compliance Department will also probably only approve the transaction if the counterparty is represented by a registered investment advisoq which has provided Nomura's standard investment advisor representation letter. (4) ERISA
Plans

The Firm must avoid becoming a "fiduciary" under ERISA to any employee benefit plan subject to ERISA. It is Nomura's policy not to be the sole source of investment advice for ERISA accounts- No ENSA account may be accepted as a customer without the approval of the New Accounts Department. Special ERISA account documentation is generally.equi.ea.

(5) Individual Accounts

Nomura policy generally prohibits the opening of retail accounts.
General

Individual customers should execute a cash account agreement or margin account agreement, which specifies the terms on which the customer's account will be handled. When opening an account for an individual, the Salesperson must obtain all of the information requested on the new account application. Details such as age, country of citizenship and social security number are important for purposes of satisfuing the'know Your Customer,, Rule.
Unless a prospective customer is well known to the Salesperson opening the account (or to the Supervisor reviewing the account), and his or her integrity and financial worth are beyond questiorq credit references and a deposit must be obtained.

Upon the customer's death, no further transactions may be effected until instructions are received from a validly appointed executor or administrator. Joint Accounts
There are two general types ofjoint accounts for individuals: 'Joint tenants with rights of survivorship" or "tenants-in-common". In each case, either joint tenant can give orderi or instructions binding the account. AII joint accounts must be evidenced by aloint account agreement, which must be signed by each joint account participant.

In a joint account with a right of survivorship, upon the death of a joint tenant, the decedent's interest in the account immediately and automatically vests in the other joint tenant and the estate of the deceased will have no interest in the account. If a joint tenant in such an account dies, the surviving joint tenant must present a death certificate and estate tax waiver before any securities or funds can be released. The surviving joint tenant will be considered the
October 1998

sole owner of the account only when these papers are received and approved by the New
Accounts Department.

Tenants-in-common have an undivided fractional interest in an account. If one of the tenants dies, the surviving tenant is not entitled to the decedent's interest, which becomes part of the decedent's estate. The estate continues as a tenant-in-common with the other tenant or
tenants.

Customers who raise tax or legal questions concerning which type of tenancy they should establish should be advised to consult their own tax adviser or legal counsel. All joint account agreements must be signed by each joint account participant. Powers of Attornev designate another individual as his or her agent (or attorney-in-fact) with varying degrees of authority over the customer's account. The only way a Salesperson can be certain that an agent is acting within the scope of his authority is to obtain a written power of attorney executed by the principal in whose name the account was opened. For every agency account, the name and address of the principal for whom the agent acts and evidence of the agent's authority must be obtained. No power of attorney may be accepted that provides for full trading authority with a privilege to withdraw money and securities. Trading authorizations must be limited to the purchase and sale of securities in a cash or margin account. The Salesperson's dealings with the agent must be strictly limited to the authority conferred by the principal in the power of attorney.

A customer may

In addition to signing the power of attorney, the principal should execute an account agreement unless the power of attorney gives the agent the authority to execute such document on behalf of the principal. Also, the principal should receive copies of all correspondence,
confirmations and statements relating to the account.

While it may generally be stated that the death of either the agent or the principal will terminate the power of attorney (and, thus, the agency), questions about the legal aspects of an
agency should be directed to the Legal Department.

C.

DiscretionaryAccounts Nomura Internal Procedures for Proper Supervision of Discretionary Accounts (NYSE Rules 408(b) and 342(bXl) and NASD Rule 2510)

As a matter of policy Nomura does not generally accept discretionary accounts. The following steps should be taken when a Nomura salesperson wishes to obtain an exception to
open a discretionary account.

(l)

Obtain pre-approval from the Executive Managing Director

of the applicable

business unit.

(2) Obtain written trading authorization from the customer.

4t

October 1998

(3) Provide the essential account information and documentation to the Compliance
Department for review and receive approval.

(4) Every order entered on a discretionary basis must be identified as discretionary on the order ticket at the time of entry. ('DE" indicates "Discretion Exercised" and "Di.IE,,
indicates "Discretion Not Exercised")

(5) Duplicate confirmations and monthly statements must be sent to the attention of the Compliance Department for review. (6) A leffer must be sent to the client on an annual basis asking whether discretionary authority should remain in effect.
Unauthorized Discretionary Trading

A frequent subject of customer complaints and lawsuits in this industry is the use of unauthorized discretion by a salesperson in making transactions in a customer's account. Common scenarios involve situations in which a customer asks his account executive to .,do whatever is necessary" while the customer is away, or where the customer and salesperson have had a vague conversation about a particular security or commodity that the customer likes at a certain price. If the salesperson acts on such vague oral "instructions" and makes transactions in the customer's account without obtaining a specific order from the customer beforehand, or without obtaining a written power of attorney from the customer and receiving permission from the Firm to handle orders on a discretionary basis, he or she has violated I.IYSE Rule 408 and NASD Rule2510. Moreover, the salesperson has subjected himself and the Firm to possible financial loss. Executing a transaction on this basis offers the customer a "canit lose" opporhrnity. If the market moves favorably, the customer will realize its profits and be silent. But if the market moves adversely, a complaint or lawsuit will very likely be forthcoming demanding rescission of the transactions in question and additional damages under Federal law.
The Firm may take disciplinary action against the salesperson in such situation, which could involve censure, suspension or even terminatiorq depending on the circumstances. Also, the Firm shall be permitted to charge the salesperson with all or part of the settlement costs or judgments. In additiorq such customer complaints and lawsuits may require notification to the appropriate regulatory authorities, thus subjecting the salesperson to further sanctions by one or more of the regulatory authorities. Discretion as to time and price of execution of a security order is not deemed to be a violation of the discretionary rules, but such discretion must be clearly granted and understood by the customer.

D.

Account Records

Every Account Executive must keep a portfolio record of any retail customer's holdings. This record mnsists of a page for each client including his or her fult name, home
address and phone number, business address and phone number, investment objectives, special instructions, holdings, transactions, power of attorney, if any, and other pertinent customer information. These records must be kept completely up to date as transactions occur and/or instructions are changed.
October 1998

( ;

Each Branch Offrce Manager and Sales Supervisor shall have the responsibility to review each Supervised Account Executive's records, at least quarterly, and to maintain a log of the review.

It should be noted that the records of customer holdings and securities positions belong to Nomura. When a Registered Representative leaves Nomura, he or she must obtain permission to copy the records, but the Firm will retain the original records.

[_)

(-)
43

October 1998

5.

Supervisors are required to apply the supervisory procedures in Section l.E.(2) ( Duties of Supervisors") in respect of the procedures discussed in-this section to ensure compliance by supervised employees with those procedures.

A.

Suitability

(l)

General

NASD Rule 2310 requires that a member making a recommendation to a customer as to or exchange of a security must have "reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disilosed by such customer as to his other security holdings and as to his financial situation and needs.,,
a purchase, sale

The information Nomura has learned about each customer should be utilized to assure that any recommendations made to the customer are suitable. Salespersons should refuse any transaction which, based on Nomura's knowledge of the customer, is unsuitable.

(2) Institutional Account Suitability

The NASD has issued an interpretation of its suitability rule as it applies to institutional customers. The obligation to determine that a recommendation is suitible for a particular customer is fulfilled when the member has reasonable grounds to conclude that the inJtitutional customer is (i) capable of independently evaluating investment risk and (ii) making independent investment decisions. Attached as Exhibit B is a worksheet that the salespeopl. .uo use to document relevant background information about their customers. While there is no specific re-cord-keeping requirement with respect to the NASD's suitability interpretation, the iVaSO will, nevertheless, expect the Firm to demonstrate compliance wiih its iuitability obligation. Accordingly, the worksheet was developed with that goal in mind. The worksheet should be legt by the salesperson with any other relevant information in a customer specific file. Suitability determinations generally require investigation and inquiry by the salesforce to

understand the customer's sophisticatiorq financial condition, and strategy.

The NASD specifies the following factors as relevant to determine whether a customer is capable of evaluating investment risk independently: (a) the use by the customer of one or more consultants, investment adviser or bank trust departments, (b) the institutional customer's general level of experience in financial markets and specific experience with the type of instruments under consideration; (c) the institutional customer's ability to understand the economic features of the relevant security involved; (d)the customer's ability to independently -complexity evaluate how market developments might affect the securities; and (e) the of thl security involved.

44

October 1998

The Extent to Which a Customer is Exercising Independent Judgment in Evaluating a Recommendation

The NASD specifies the following factors to determine whether a customer is making independent investment decisions: (a) any written or oral understandings regarding the nature of the relationship with the customer and the services to be rendered to the customer; (b) the presence or absence of a pattern of acceptance of recommendations; (c) the use by the customer of ideas, suggestions, market views and information obtained from sources other than the Firm, particularly those relating to the same type of securities; and (d) the extent to which Nomura has received or not received current comprehensive portfolio information or investment objectives from the customer. Documentation of Compliance with the Above Factors

The NASD has stated that there are no particular record-keeping requirements to demonstrate compliance with its suitability requirement. The Firm is, nevertheless, responsible for demonstrating compliance with the suitability obligation in examinations and otherwise. Accordingly, salespeople and their supervisors should insure that, if questioned, they have sufiicient information about their customer counterparties to be able to address questions related
to the above factors.

What is an Institutional Customer?

An institutional customer is any entity other than a natural person.

Markups
General

The NASD, and therefore Nomur4 prohibits excessive mark-ups on principal

transactions. Although there is no absolute measure of what is excessive, the NASD regards 5Yo as a guideline subject to the following considerations. The following is a list of general considerations relating to the "5% Guideline": The"SYo Guideline" is a guide and is not a "safe harbor". A mark-up of SYo or even less may be considered unfair or unreasonable under the "5Yo Guideline" based on the facts and circumstances;

For most fixed income products, the acceptable markup or markdown will be substantially less than 57o;

member may not

justify mark-ups on the basis of

expenses which are

excessive,

The mark-up over the prevailing market price (and not the cost of acquisition) is the significant spread from the point of view of fairness of dealings with customers in principal transactions. In the absence of other bona fide evidence

45

October 1998

indication of the prevailing market price of a security; and

of the prevailing market, the Firm's own contemporaneous cost is the

best

Determination of the fairness of mark-ups must be based on a consideration allthe relevant factors, and the percentage of mark-up is only one factor.

of

up:

The following factors must be taken into account in determining the fairness of a markType of security involved, The availability of the security in the market; The price of the security, The amount of money involved in a transaction;

Nomura's risk; Disclosure of mark-ups or commission to a customer; Credit-worthiness of the customer;

The pattern of mark-ups;

The nature of the member's business, as related to cost of services produced;

and

'

Markups for bonds, including zero coupon bonds, are usually less than for
stocks;

When considering the markup of any trade, it is important to remember that a markup is generally the difference between the price charged and either:

1) the current

market interdealer price (for actively traded securities as Nomura is not a market maker); or to which Nomura is a market maker).

to

which

2) the cost of a contemporaneous purchase (for thinly-traded

as

securities or for securities

Calculating markups is less precise in illiquid securities where contemporaneous market levels are subjective. For riskless principal trades, contemporaneous purrhur" price should almost always be used in calculating markups. If in the absence of quotid bid and offer prices the determination of the appropriate price for calculating markups '(i.e., an estimate of what contemporaneous purchase price would be) will be highly subjective and great care should be exercised in determining such price. Factors that may be taken into accorint in estimating the contemporaneous purchase price include: prices of any dealer transactions in the securiiy in question with institutional accounts with which any dealer regularly effects transactions in the
October 1998

same or similar securities; contemporaneous interdealer quotations in the security in question made ttrough an interdealer quotation mechanism; yields calculated from prices of interdealer transactions and with institutional accounts in "similar" securities; and yields calculated from validated interdealer quotations in similar securities. Determining a similar security may include: credit quality considerations, such as whether the security is issued by the same entity; the extent to which the security trades at a comparable spread over Treasuries of a similar term; general structural characteristics, such as coupon maturity, duratioq complexity, or uniqueness of the structure; and technical factors such as the size of the issue.

2.

Special Mark-Up and Mark-Down Issues Involving Mortgage Products

This section sets forth Nomura's policy with respect to mark-ups and mark-downs in secondary market transactions in Mortgage Backed Securities (*MBS"), including Pass-Through Securities, ARMs, CMOs, CMO Floaters, and Mortgage Derivatives (e.g.,IOs, POs, etc.). The Regulators prohibit the Firm from charging excessive mark-ups and mark-downs when it transacts with customers. The rules and Firm policy require that purchases and sales of securities be executed at prices that are fair and reasonable in light of all circumstances and relevant factors that normally affect the price at which a security is traded.

a.

Determination ofPrevailing Market Price

The trading desk is responsible for establishing the mark-up or mark-down to be charged on each MBS principal transaction. The mark-up or mark-down is measured against the "prevailing market price" for the security, which is to be determined in accordance with the procedures discussed below.

l.

RisklessPrincipal Transactions

When Nomura is acting in a riskless principal capacity, the prevailing market price for purposes of a mark-up/mark-down calculation is Nomura's contemporaneous cost. When Nomura is selling the security to a customer and charging a mark-up, Nomura's contemporaneous cost would be the actual price it paid for the security. Similarly, when Nomura is buying the security from the customer, the mark-down shall be measured against the simultaneous sale.

2.

Principal Transactions

When Nomura is acting as principal (other than as a riskless principal), the prevailing market price is presumed to be its contemporaneous cost unless one of the following can be established (through a review in the order set forth below) as a more accurate measure.

a.

Interdealer transactions are ordinarily the best evidence of the prevailing market price. Thus, traders must first look to contemporaneous interdealer sales. If such sales exist, the traders must base their mark-ups on the interdealer sales price. If a trade is a purchase instead of a sale, the traders must base their mark-downs on the interdealer purchase price.

47

October 1998

b.

are no contemporaneous interdealer transactions, traders should use recent dealer sales to sophisticated institutional customers to determine prevailing market pnce.

If there

c.

In the absence of contemporaneous institutional transactions, traders should use validated interdealer quotations in the security through a quotation mechanism to determine prevailing market prices. When based on other than an actual transactiorq the mark-up should be measured against the offer side and a markdown against the bid side. should use yields calculated from prices of interdealer transactions in "similaC' securities. Ideally, a "similar" security should be sufficiently similar to the security under review that it would serve as a reasonable alternative to an investor seeking the risk profile of an investment in the security under review. The degree to which a security is "similar" may be determined by factors that include but are not limited to: credit quality, comparable spread over treasuries, general structural characteristics of the issle and technical factors such as the size ofthe issue, size ofthe transactions, etc.

d.

If such quotations do not exist or cannot be validated, traders

e.

In the absence of such transactions, traders should use prices of "similar" securities in transactions with sophisticated institutional customers.

f.

In the

absence of such transactions, traders should use prices dealer quotations for "similar" securities.

of validated inter-

When Nomura is purchasing a security from a customer and charging a mark-down, the prevailing market price should be calculated in the same manner as described above, but should be based on the opposite side of the transaction.

b.

Maximum Permissible Mark-ups/]vlark-downs

The Firm has established maximum perrnissible mark-ups/mark-downs for MBSs. These maximums may differ depending on the nature of the security and the size of the trade. When a markup/markdown exceeds the prescribed percentage limitation, the Desk Manager shall provide written documentation, upon request of the Compliance Department, to evidence his determination of an alternative prevailing market price by which a mark-up/mark-down shall be measured. The percentage mark-up/mark-down based upon this alternative measurement must still remain within the following percentage limitations. The Compliance Department will
maintain the records of such determinations. The following percentage variation to the prevailing market price will be the maximum threshold mark-ups and mark-downs. It is important to emphasize that percentage variation, below these levels may be considered inappropriate based on the particular facts and circumstances. Any questions as to the appropriate level of mark-up in a particular circumstance should be addressed to the business manager and in turn to the Legal and Compliance Department:

48

October 1998

Size

Mark-Up/lrdark-Down
3.5Yo

Mortgage Derivatives (IOs; POs; Inverse Floaters) CMOs

2%

CMO Floaters

under $1

million

l%o

$1-5 million over $5 million

0.75% 0.s%

Agency ARMs

under $1 million $1-5 million over $5 million under $l million $1-5 million over $5 million

t%
0.7sYo
O.sYo

Agency Pass-Throughs

t%
O.7sYo

0.sYo

Note: The preceding percentage variations to the prevailing market price are not applicable to the initial distribution of issues underwritten by NSI. However. the rules and Firm policy require that purchases and sales ofsecurities be executed at prices that are fair and reasonable in light of all circumstances and relevant factors that normally affect the price at which a security is traded. The maximum mark-up/mark-down actually charged in any given transaction with a customer should depend on the nature of the transaction. It may and often should be lower than the maximum permissible mark-ups/ mark-downs set forth in this memo. Traders should carefully weigh the facts and circumstances of each trade to determine the fairness and reasonableness of the mark-up or mark-down charged in a particular trade. When determining the appropriate mark-up/mark-down, traders should consider the following factors:

1.
securities.

Industry Practice

Traders should consider industry practice with respect

to

mark-ups/mark-downs

on similar

2.

Availability of the Security in the Market

In the case of a security with an inactive market, traders should consider:

a. b.

the effort, cost and risk of buying or selling the security; and
any unusual circumstances connected with its acquisition or sale that may have a bearing on the appropriate mark-up or mark-down.

49

October 1998

3.

Type

of

Security

Some securities customarily carry a higher mark-up than others. For example, a higher percentage mark-up customarily applies to Mortgage Derivatives than to Mortgage PassThroughs.

4.

Price/Yield and Time to Maturity

Generally, higher compensation is allowed for

a. b.

low-priced securities; and

securities with an extended maturity.

The risk associated with carrying these types of securities is greater as a small move rates may result in a proportionally larger change in the doltar price of such securities.

in interest

5.

The Size of the Trade (number of units or dollar amount)

A trade or order for a small number of securities or small dollar amount may warrant a higher percentage of compensation because of such factors as inelastic fixed costs associated with handling the order and"/or the time and efficrt necessary to find a buyer or seller for an odd lot.

6.

Prevailing Market Conditions

Uncertain economic conditions and market volatility increase the amount of risk and may justify alarger mark-up.

7.

Mark-Up Pattern

The pattern of mark-ups and mark-downs that the desk has established for a particular type of security would serve as a factor in determining the fairness of any particular transaction. While each transaction must meet the test of fairness, the NASD believes that particular attention should be given to the pattern of mark-ups. Securities having substantially similar prices and other characteristics should have similar percentage mark-ups/mark-downs unless there are substantive reasons for departing from the established pattern.

8.

Services Provided to the Customer

The services and facilities that Nomura provides to certain customers and the cost of these services and facilities may be a factor in determining the appropriateness of a mark-up lmarkdown if the services are additional to the type of services Nomura ordinarily provides customers, if the same or similar services are not provided for transactions in other types of securities, or if the services are unusual in the industry.

50

October 1998

9.

Disclosure

Disclosure to the customer of the mark-up or commission charged before the transaction is effected may be a factor to be considered in determining whether a mark-up is reasonable and fair, but will not be considered to be solely suffrcient to justiff an otherwise excessive mark-up.

C.

Parking and Pre-Arranged Trades

Parking is an important issue with regulators and it deserves special attention at the approach of year-end, quarter-end and month-end. Suggesting, participating iq or facilitating parking or pre-arranged trades is prohibited. "Parking" describes transactions in which the true beneficial ownership of securities is disguised or concealed for an improper purpose such as avoiding regulatory disclosure or anti-trust filings, evading tax obligations, extending financing otherwise prohibited, or circumventing capital requirements.
Employees must not accept or execute any transaction which:

. . o

appears to cause incorrect or incomplete disclosure of beneficial ownership;

appears to involve no change

in beneficial ownership, or

results in a situation in which risk of ownership of the security does not shift from seller to buyer.

"Pre-arranged" trades (not to be confused with properly documented and confirmed repurchase agreements) are transactions in which the price, terms or contra side have been prearranged and not booked at that time. Such transactions may be illegal under both securities laws and tax laws.

Parking and pre-arranged trades differ from a repo transaction because a repo is done for legitimate financing purposes and both legs of the repo are booked in advance.

Any request to engage in trades that may be viewed

must be directed to the Compliance Department.

as

parking or pre-ilTanged trading

D.

"Adjusted Trading"

Adjusted trading, also known as tax switching, over-trading or oFmarket swaps, is a practice which generally involves the sale by a customer to a broker-dealer of a security at a price above or below the prevailing market price and the simultaneous purchase of a different security also at a price greater or less than its market price. The intention is to disguise losses by eliminating positions with unrealized losses. Adjusted trading is a violation ofNASD and NYSE rules and also a violation of NSI policy. Great care should be taken even when pricing financing transactions such as repos and reverse repos. The price at which each leg of the financing trade is executed should be a function of the cash market price of the bond and the amount of haircut taken in trade for credit purposes. The price at which either leg is executed must not be adjusted for any other purpose, for example, "the customer asked for it at his own level."

5l

October 1998

E.

Fixed Price Spreads

of indications of interest.

In connection with bond offerings, swap transactions are often agreed to in principle in advance of the offering on the basis of a fixed point spread between the security to be purcirased and the security to be taken in trade. Firm agreements of this kind are prohibited in iegistered offerings since, prior to the offering, the registered representatives are limited to the soliiitation

Where any such potential transaction is discussed, care must be taken to assure that the customer understands that the transaction will not be completed unless, at the time of the offering, the trade can be effected in the context of the prwiously discussed fixed basis point spread by the payment of a fair market price for the securities taken in trade. All swap transactions involving offerings of securities should be reviewed with the appropriate Department Head.

F.

Free-Ridine and Withholding

and comply with the NASD's "Free-Riding and Withholding Interpretation' (the "Interpretation"). The Interpretation essentially prohibiti NASD members from selling securities deemed to be a "hot" issue to various restrictei accounts, as defined in the Rule, unless certain conditions exist. Afiiliates of the broker-dealer and theii employees and family members are also restricted from buying hot issues. Generally speaking SEC registered equity and high yield debt securities are subject to the hot issue rule. investment grade corporate debt is exempt from the rule. The NASD lists hot issues, and inquiries can be made to the NASD whether a security constitutes a hot issue. issue is considered to be one which immediately trades at a premium in the secondary market, whenever such secondary market trading begins.

All registered personnel must understand

A "hot"

Restricted accounts include accounts held by persons associated in any capacity with securities dealers (other than certain limited purpose broker-dealers), the senior officeis and securities personnel of financial institutions and persons acting in a fiduci ary capacity to any underwriter participating in the distribution. It also includes uentu.e capitalists and insiitutional type accounts including, but not limited to, hedge funds, investment partnerships, investment clubs, and investment corporations. Also included are the immediate family .e-b"rs of brokerdealer employees and any person who is materially supported (whether dirlctly or indirectly) by any such restricted person. The term "immediate family:" includes spouse, parents, mother-in-law or father-in-law, brother, sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, children and any person who is materially supported (whether directly or indirectly) by a broker-dealer employee.
Salespersons must provide the Syndicate Department with all information concerning the employment and relationships of the customer, so that a determination can be made concerning whether an account is a restricted account. With respect to orders originating at the branch offices, the Branch Offrce Manager is responsible foi taking app.opriate u"tio, to determine that customers to whom securities will be sold do not fall into iateg;ries considered "restricted" by the Interpretation. Each Registered Representative must notiry his or her supervisor of those accounts which he or she believes are restricted and the suiervisor shall
52

October 1998

ensure that each account is so designated. The Syndicate Department shall also notify the Compliance Department ofNomura's involvement in any potential "hot issue".
Securities may be sold, howeveq to certain restricted accounts (excluding) broker dealer employees and, unless the broker-dealer employee does not contribute to their support, any immediate family member thereof), if all of the following procedures are followed:

Documents are prepared which are necessary to demonstrate that securities sold to such accounts are in accordance with their "normal investment practice" with NSI and other broker-dealers. The practice of purchasing "hot" issues does not constitute "normal investment practice".
The determination is made that the aggregate amount of securities sold to such person is insubstantial and not disproportionate in amount as compared to sales to members of the general public.

o o

The determination is made that the aggregate amount sold to any one such person is insubstantial in amount. There are no blanket definitions of disproportionate and insubstantial and each situation must be viewed separately with respect to these concepts.

With respect to securities sold to another broker-dealer not part of the underwriting group, or to any domestic banlq domestic branch of a foreign banh trust company or other conduit for an undisclosed principal, affirmative inquiry must be made by the Salesperson,
Syndicate Department or Branch Office Manager and assurance must be received and noted that the provisions of the Intelpretation are not violated. A sample letter by which such a purchaser confirms compliance with the Interpretation is set forth in Exhibit I.

With respect to securities sold to foreign broker-dealers or banks not part of the
underwriting group, the obligations imposed on a broker-dealer concerning their duty to make an affirmative inquiry and receive assurance that the provisions of the Interpretation will not be violated can be fulfilled by the execution of Form FR-l which can be obtained from the Compliance Department. This Form gives blanket assurance that the foreign broker-dealer or bank will abide by the provisions of the Interpretation. (See Exhibit J.)
The Interpretation also applies to investment partnerships and investment corporations and such accounts must provide Nomura with either the names and business connections of all persons having any beneficial interest in the account or an attorney's or accountant's letter that satisfies the Interpretation's requirements. If a restricted person has an interest in the account, sales to the account must be consistent with the Interpretation. (See Exhibit K.) AII such sales must be approved in advance by the Compliance Department.

The Interpretation provides exceptions for limited business broker-dealers, issuerdirected securities, stand-by purchasers and venture capital investors. The Compliance
Department or Legal Department should be consulted before relying on such exceptions.

53

October 1998

G. Front Running
and equitable principles of trade and the rules of the NASD to trade a stock option or the underlying security while in possession of material, non-public market information about the imminent execution of a transaction in the secuiity oi the option. Employees must not take advantage of a contemplated or pending client transaction Uy nrst entering or executing orders for the Firm's account or any aclount wtrictr the employee services or controls. Further, employees must not disclose information on such clieni oid".s to any person for other than bona fide legitimate business purposes. There is also a front-running prohibition concerning activity in futures and/or options on futures on the Chicago Board oT Trade, the Chicago Mercantile Exchange ("CME") or the New York Futures Exchange ("I\fYF'E"), and stock activity on the NYSE.

It is a violation ofjust

l.

Front-Running ofBlocks

The following considerations are important in assuring compliance with the prohibition against front-running of blocks:

o
o

The prohibition applies to knowledge of block-size transactions. Ordinarily, this is 10,000 or more shares.*
The prohibition may include trades which are executed based upon knowledge of less than all of the terrns of the block transactioq so long as there is knowledge that all of the material terms of the btock transaction have been
agreed upon or

will

be agreed upon imminently.

'

The prohibition also applies to knowledge of a transaction that has occurred but has not yet been reported on the consolidated tape (for listed securities), NASDAQ (for over-the-counter securities) or OPRA (for options). It is not suffrcient that the transaction is announced in the other mirket; it must be
reported.

The prohibition applies to any relevant activity in a Firm account, any other account over which the Firm or a Firm trader has trading authority and activity in a customer account if the Firm has provided the customer with the information about a block-size transaction.
The prohibition does not apply to unsolicited customer orders, where the Firm has not provided the customer with information concerning an imminent block-size transaction.

'

has been agreed upon does not lose its identity as a block by offering partial executions of the transaction in portions which are noiofblock size. The requirement that information conceming the transaction be made publicly available will not be satisfied until the entire block transaction has been compleied and publicly reported. In addition, a transaction of less than 10,000 shares may be considered a block transaction in certain cases (e-g, in a thinly traded security).

A block transaction that

October 1998

The prohibition does not apply to stock option combination transactions ('buywrite programs"). However, the prohibition does preclude the Firm from anticipatory hedging its facilitation customer stock position. "Anticipatory hedges" are handled differently in the case of stock futures arbitrage activity.

of

of a

The prohibition applies to trading in index options with knowledge of a block size transaction in securities which are components of the underlying index. This would include knowledge concerning the imminent establishment or unwinding of stock basket-type arbitrage activity.

The prohibition is based on knowledge, not participation. Thus, for example, the Firm should not trade in options when it is in possession of material nonpublic information about a block-size transaction in the underlying security in which customers are positioned to buy and sell the underlying security.

2.

SelfFront-Running

The Firm may take a proprietary position of block-size it a security and hedge the position with options. However, the transaction cannot be calculated to take advantage of options participants who were unaware of the market impact of the impending proprietary transaction. Generally, transactions would potentially be or appeil to be violative of exchange rules as "self front-running" where, for example, a firm trades stocks and/or options for its proprietary account by taking a position in a security large enough to move the market in the security and hedging its position with options prior to information regarding the execution of the block of the underlying security becoming publicly available. To help avoid this potential violation, the block must print onthe consolidated tape (in the case of listed securities) before the hedge is effected. Similarly, where the Firm effects a large transaction in options, such transactions must print on OPRA prior to the Firm's effecting a block-size transaction in the underlying security.
Whether a stock option transaction constitutes self front-running generally is a facts and circumstances determination. In that regard, in determining whether transactions in stock and options constitute self front-running, an exchange would consider, among other things, (i) the security, (ii) the amount of time between the stock and option trades, and (iii) the numbeq size and market impact of the stock transaction(s). Employees uncertain as to whether a proposed trade may constitute front-running must contact the Compliance Department.

The front-running prohibition has been extended to include inter-market activity between listed securities basket activity on the NYSE and index futures or options on index futures transactions on the NYSE or CME. That is, it is a violation of just and equitable
principles to engage in transactions in one market on the basis of material non-public information about future transactions reasonably expected to have an immediate, favorable impact in relation to such transactions in the other market. This prohibition applies to transactions in the futures markets based on information about transactions in the stock market, or vice versa.

55

October 1998

This prohibition is related to the act of trading in two separate markets; however, the prohibition is based on trading in two markets so as to take advantage of the expected impact by activity in one on trading activity in the other. Thus, this prohibition does not piecludl establishing a bona fide hedge or risk. The risk to be hedged must be the result oi having established a position or having given a firm commitment to assume a position and the offsettin! hedging transaction must be commensurate with such risk. In other words, front-running can bI carried out in several markets, such as the bond market, the stock market, the options maiket, and the futures market. A person with knowledge of an impending block transaction can deal in derivative market trades, such as options or futures, forecasting ihat prices in those markets will be affected when the block trade is executed. There are several *.thodr of cross market frontrunning, including (1) options trading prior to block trades in the underlying stock; (2) stock activity on one exchange or NASDAQ followed by btock activity in the same stock on another exchange; and (3) futures or options trading in an index with non-public material information concerning an imminent program trade or block sized transactiorq in on or several large cap component stocks of that index.
Self front-rut ring generally involves cross-market trading and occurs when a broker-dealer, prior to executing a previously arranged block trade or program trade, executes a "same-side,, futures or options transaction with the expectation thai thi futures or options trade will be beneficially affected by the execution of the trade. Information relating to a proprietary trade does not have to be obtained improperly by the broker-dealer in order for selffront-running to occur.

3.

E*u*pl"r of oth.r Pot.ntiul Abuser ofMark.t Inforration

However, a buy/write program for the Firm's proprietary account mighi raise iegulatory concerns. For example, if the Firm is solicited by another firm to participate on the buy side of an imminent block of stock at a price lower than the current market prici, and if the Firm then sells calls prior to buying the stock it could be considered in violition of the front-running prohibition, notwithstanding the buy/write position the Firm has established.

Generally, buy/write programs do not constitute violative activity where the Firm is acting as agent for its customers with respect to both the options and underlying stock purchases.

In additioq options trading designed to take advantage of the options market prior to proprietary index-related programs is covered by the front-running prohibition. An example of such trading is trading options prior to unwinding proprietary arbitrage programs that "move the market" at expiration. Agairg the key elements a.e possession -of material non-public information concerning an imminent transaction when etgugi.rg in activity to take advantage of the information in another market.

H.

Positioning to Facilitate Customer Orders

The Firm may engage in trades in which it agrees to buy/sell securities from/to the customer at the closing price(s) on the Exchange. To position itself to facilitate such a trade, the Firm may buy/sell throughout the day in its proprieiary account. Supervisors and registered representatives should be careful if they leave a portion of the position io be executed at or near the close. If such a transaction at or near the ilor" reasonably be expected to impact the closing price(s) (because it is reasonable to expect that "ur, there will not be sufficient opportunity for price discovery by other market participants), the Firm must not buy/sell any stock ritut"a to that
October 1998

position near the close. In general, transactions executed after 3:40 p.m. would be considered "near the close".

I.

Papilsky Rules/Swaps Aeainst New Issues

NASD Rule 2730 deals with selling a new issue security to a customer while simultaneously purchasing a security from that same customer. The rule states: "A member engaged in a fixed price offering, who purchases or arranges the purchase of securities taken in trade, shall purchase the securities at a fair market price at the time of purchase or shall act as agent in the sale of such securities and charge a normal commission therefore".
The question of fair market price is a factual one; however, the Rule provides a safe harbor. Purchases are deemed to be at a fair market price if the price paid is not higher than the highest independent bid at the time of purchase if bid quotations are readily available. Purchases are presumed to not be at a fair market price if the price paid is higher than the lowest independent offer. No presumption will be granted for purchases in between that range. Furthermore, no presumption will be granted if there are no independent quotes available.

For example:
_100

lor.r

f
E

If

above, presumed to not comply

No presumption

lBrd lr-

ad
96

At or below, presumed to comply

Quotations for securities other than those traded on a national securities exchange must be obtained from at least two independent dealers at the time of purchase.

Records of the independent quotations must be maintained for a period of at least twenty-four months. The contents of the records must include, among other things, the identity of the dealer from whom the quote was obtained.

J.

Prohibition on Churning

"Churning" is defined as the creation of excessive and improper activity in an account in order to generate commissions. Although there are various tests for churning, employees should be concerned any time the amount of commissions becomes relatively high in relation to the value of the customer's account. Another area of concern involving churning is the switch of mutual funds that incur large up-front commission payments. In view of the large commissions paid for such mutual funds, it is expected that these funds are intended to be held for a significant period of time. Excessive trading activity and short term trading in mutual funds are practices that will result in disciplinary action.

57

October 1998

K.

Guarantees of Accounts. Sharing and Rebates

Pursuant to NYSE Rules 346,350,352, and 353, Registered Representatives and other employees may not:

guarantee payments against loss,

in their customers' accounts or

guarantee their customers

share in the profits or losses of customers, accounts; rebate commissions;

'

provide gratuities in excess of $100.00 to any person or $50.00 to any person associated with the NYSE; or accept any compensation from a source other than Nomura unless specific approval is requested and granted by Nomura. Such activities, if approved by Nomura, may also be reportable to the NIYSE.

Certain crossborder businesses must be done in compliance with SEC Rule l5a-6. This rule exempts a foreign broker-dealer that does certain businesses in the U.S. from U.S. broker-dealer registration if certain conditions are followed. Activities that fall under the rule include, among others, a foreign broker-dealer acting as principal in a transaction with a U.S. customer or staffmembers of the foreign broker-dealei making direct contacts to a U.S. customer. Such businesses must be Jonducted in complianci with the manual entitled "Rule 15a-6 Compliance Manual,,.

58

October 1998

6.

FD(ED INCOME ORDER PROCEDIIRES

Supervisors are required to apply the supervisory procedures in Section l.E.(2) ("Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

A.

Fixed Income Order Ticket Completion

Broker/dealers are required to make and keep a record of every order received and every transaction executed (whether from a customer or another broker/dealer). The record must include several items of information, including the time the order was received, the time the orderwas executed, conditions of the trade, the identity of the counterparty, the settlement date, the security traded, the quantity and the price.
Supervisors must closely monitor cancel-and-correct entries ('CC"). Certain desks do so by requiring pre-approval for all CCs and others by using a supervisory T+l CC report.

Various fixed income desks use differeni methods of order entry. NSI's procedures for compliance with these requirements are as follows:

For trades that are executed immediately (the majority of Fixed Income's trades): Desks that rely on the time of entry which the system captures when the trade is entered into the Sun system: In order to rely on this record, it is trade support's (or the trader's if he or she enters the trade directly) responsibility to enter trades into the system within 90 seconds of execution. For customer trades, the Registered Representative or sales support must enter the customer information into the system on the trade record. Trade support must print and maintain for three years a report which shows all information which would have been contained on a paper ticket, including the time of execution. Sales may make a written record for their own purposes such as a blotter or ticket, but the Firm will rely on the records kept by the trading desk. Desks that use paper tickets or blotters: Paper tickets or blotters must be time stamped by hand immediately upon execution. AII paper tickets must be processed by the close of business on trade date, either to the customer account or to the suspense account.

For trades that are not executed immediately (limit orders, open orders):

NSI has developed a paper ticket to be used whenever Fixed Income salespeople take "open orders" from customers. "Open orders" are considered to be any firm instruction given by a customer to a salesperson to purchase or sell any instrument. The acid test in determining whether an order ticket needs to be wriuen is if the salesperson has the authority from the customer to execute the trade without first calling the customer back to see if he or she still wants to do the trade. An example of a situation requiring a ticket to be written is if ABC Money Manager calls her salesperson and tells him to buy the 3O-year Treasury Bond if the market hits 103 when the market is currently at 1021/2. She tells him that this order is good until the end of the day.

59

October 1998

The salesperson must check the "ordef' box and timestamp the ticket when the order is taken from the customer. AII terms and conditions of the order (such as limit price, time limit, etc.) must be noted on the ticket in the "special Instructions" box .t tt. bottom of the ticket. The Registered Representative should keep the yellow copy marked "RR Copy-2" before passing the rest of the ticket to the appiopriate trader. TirL trader uses the ticket to track the order until completion. Once the order is either executed or canceled, the trader (or trader's assistant) must either timestamp the ticket again and write the order number in the "trade #" box or check the "cancelled box, as appropriate, as well as fill in any other notes or fields that are normally filled in at this time. The trader's assistant must then return the pink copy (marked "RR Copy-l") to the RR for his or her records along with any other system-generated trade advice that is generally passed at the completion of a regular trade. In this example, the salesman is expected to call the customei back simply to tett her that the order is done. The ticket has been designed to be used for any of the products handled by fixed income.

As a control measure, the

Registered Representative should also timestamp and similarly mark the ticket when executed or canceled.

B.

RRNumbers

If an employee is a registered representative involved in Sales or Trading activities he or she must have a3 digitRegistered Representative number.
Two Registered Representative numbers must be entered on trades into either Sun or NTAPS (or both), regardless of whether a trade is an "open order" as described above or a typical trade that is executed immediately. The first is the '?roduction RR" number, which is the Registered Representative who is to be paid on the trade. This will generally be the Registered Representative that covers the account. The second Registered Representative numbei is the "Executing RR" number, which is the Registered Representative who actually speaks to the customer to execute the trade. Most of the time, the two Registered Representative numbers will be the same. However, this is designed to record those instances when the Production Registered Representative is away from the deslg out of the office, etc. It is imperative that these tqro Registered Representative number fields be entered correctly into NTAPS for registration and
regulatory requirements. Because some sales assistants are the ones who often execute trades on behalf of a Registered Representative who is not available, Registered Representative numbers are assigned to those sales assistants. These numbers are to be used solely for the "Executing RR" field. frote that sales assistants may not execute trades unless they have passed the Series 7 and Series 63 examinations. (See Section 1.F. -.(Registration of personnelrr).

60

October 1998

C. Settlement Period
The typical settlement period is T+3 (trade date plus tkee business days). Settlement may typically be extended to T+5 if so arranged with the customer. Extensions of settlement beyond T+5 involve an extension of credit and require the approval of the Compliance Department. (See Section 14. Legal or Compliance Departments "Margin Regulation").

D.

Principal Letter Procedures

Customers from time to time deliver to NSI principal letters which are used for credit purposes. These letters advise NSI that another broker-dealer has agreed to act as principal on behalf of the customer for trades executed with NSI. These letters include certain steps which need to be followed in order for the broker-dealer to accept the trade and honor the principal letter provisions. The most important step is a phone call to the broker-dealer that will ultimately act as principal to the trade.

This phone call is mandatora and it must be documented. Salespeople must note on the trade ticket or blotter that the call was made and the time it was made.
The Corporate Credit, New Accounts and Compliance Departments have developed the following procedures which must be followed whenever dealing with customers covered by a principal letter. Failure to follow these procedures may cause NSI severe problems, ranging from not having appropriate credit protection to bools and records violations. letters received by NSI personnel must be forwarded to the Corporate Credit Department. The salesperson must provide a credit facility request to the Corporate Credit Department speciffing the term and products the salesperson wants to trade with the entity acting as principal.

1. All principal

2. The Corporate Credit Department will examine the creditworthiness of the counterparty acting as principal and either approve or reject the credit request. Ifapproved, the letter will be forwarded to the New Accounts. 3. The New Accounts Department will prepare a memo outlining the requirements of the letter including the contact people, the expiration date if applicable, and any other conditions set forth in the letter (See-Exhibit L). The memo (with a copy of the leffer attached) will be sent to the salesperson on the account.
In addition to the letter from the principal party, NSI requires the customer to sign NSI's Principal Letter Agreement, which is a guarantee by the customer to honoq at NSI's discretion, any trades that are rejected by the Principal (See f*iU!t_L) The New Accounts Department will send a blank Principal Letter Agreement to the salesperson along with the memo outlined above. The salesperson on the account will be responsible for having the counterparty sign and return the Principal Letter Agreement. The customer is not allowed to trade until this letter is received.

4.

61

October 1998

required to sign and return the memo to the New Accounts Department. This documents that the salesperson understands and agrees to comply with the p.orision. of the principal letter in question- The New Accounts Department will then execute the principal letter and forward it to the customer.

5. Upon receipt of the memo, both the salesperson and his or her supervisor

are

After completion of steps 1 through 5, the NTAPS account may be opened. The customer account to be opened must be set up in the following manner:
"fName of Customer Firm], [Name of Principal Dealer] as principal,,
Such principal letters often are for a finite term. Expiration of the letter will be noted in the memo sent by the New Accounts Department to the salesperson. The New Accounts Department will notify salespeople two weeks prior to expiration of ,ny letter. The salesperson will then be responsib]9 for acquiring an updated principai letter, which will then go through the same procedure described above. If a new principal letter is not received by the expiratioi date and the Corporate Credit Department continues to require one, the be frozen from """otrni*ill further trading on the expiration date.
E.

6.

Broker dealers must provide written confirmation to customers of all purchases and of securities- This confirmation must contain specific information including ih" dut" of the transaction, whether the broker or dealer is acting as agent or as principal. Other information with respect to transactions involving debt securities includes, among other things, the dollar price at which the transaction was effected, yield to maturity, and, if iire transaction is effected on a yield basis, the yield at which the transaction was effected. A confirmation for asset backed securities transactions must contain additional information. Speak to the Compliance Department for details.
sales

From time to time customers may ask NSI to provide documents meant to confirm confirm. They may ask for similar documents to confirm positions before ofiicial WfefS-generated monthly statements are available. The mailing or faxing of such unofficial confirmations or customer account statements must include an affrxed sticker in bold typeface with the following language.
trades on a date prior to the production of the official NTAPS-generated

prospectus and any supplements."]

["This is not an ofiicial confirmation or customer account statement. Please refer to your official trade confirmation or customer account statement for final terms. If there u." uny discrepancies between this document and the official confirmation or customer account statement, the offrcial confrrmation or statement governs. Please consult the final

-- Form #l2l

---

Non-Derivative Valuations
customers request written valuations, NSI's reply must include an affixed sticker in bold typeface with the following language:

If

62

October 1998

["The above valuations are based on sources believed reliable, but we do not guarantee the accuracy thereof, and we are not responsible for losses or damages arising out of errors, omissions or changes in market factors, conditions or circumstances. Other factors, such as size, which were not assessed, may substantially affect the evaluations. The valuations contained herein are provided for informational purposes only, and are intended solely for your use and may not be quoted, circulated or otherwise referred without our express consent. The above valuations are not be considered an offer to purchase or sell securities at this or any other level."] --- Form #120 ---

A Series 8 supervisor must approve the use of any unofficial confirmation or written valuation. Such approval shall only be given if the applicable Form 120 or l2l langaage is on the unofiicial confirmation or valuation.
are available from the Compliance Forms can be ordered through the Facilities Department.

Forms 120 and

l2l

Department. In addition, the

Derivative Valuations Consistent with market practice, Nomura is prepared to respond to customer requests for valuations concerning certain derivative transactions for pre-existing positions entered into between Nomura and the customer. Thus, this policy does not address the requirements applicable to indicative or final term sheets (which should only be provided in connection with proposed transactions and not as an alternative mechanism for providing valuations).

Two principals are of paramount importance in providing such valuations. First, valuations must clearly and explicitly set forth the basis on which they are provided (e.g. mid-market or intrinsic value). Such valuations must include such substantive disclosures in regard to methodology and be issued pursuant to the supervisory procedures described below. In addition, greatcare should be taken to ensure the accuracy ofsuch valuations.
Valuations must be provided in writing on the appropriate letterhead and must indicate the date as of which it is provided. The basis of the valuation must clearly be indicated in a form approved by the Legal and Compliance Department. Indicated below are two descriptions for use as applicable. (Otherwise versions should be cleared prior to use.)

Mid-Market: As requested, this valuation provides our estimate of the mid-point of the bid-offer spread at approximately (indicate time) on the date indicated above.

-orIntrinsic Value: As requested, this represents our estimate of the intrinsic value (replacement value without giving effect to adjustments due to changes in interest rates).

In addition to providing an explanation of the basis for the valuation as indicated above, all valuations must include the following disclaimer:
63

October 1998

transaction and hedging costs, liquidity credit conJiderations, capital requirements, accounting treatment, regulatory requirements or other significant factors which could materially affect the actual value. The valuation provided herein may differ materially from values indicated in our books and records for such transaction(sj. By accepting this valuatioq which is provided pursuant to your request without consideratiorL you acknowledge that (i) you are not relying on us in connection with any decision you may make related to the transaction(s) or the valuation; (ii) our providing this valuation as a service to you in no way indicates a fiduciary reiationship between us; (iii) we shall not be liable for any losses or damages arising out of oi related to the valuation; and (iv) you may not make any direct usJof this valuation nor may you provide it to any other person without our prior written consent.

This valuation does not represent an indicative or firm quotation to enter into, assign or terminate the referenced transaction(s). It is based on our valuation models and assumptions (which are subject to change without notice) and no adjustments are made

for

or

In general, an area independent of sales/trading must provide valuations to customers. However, where a sales or trading area must provide a valuation, the registered supervisory person should exercise all care necessary to ensure that such valuations u.. prepared. "ppiopriately

A.

Valuations Prepared and Transmitted by Operations

Where an operations area has established procedures for supplying valuations on an approved methodology, valuations should be provided directly to customers, but preapproved by an appropriately registered Series 8 supervisor, and copies should be maintained for a minimum of three years in an easily accessible place.

B. Valuations

Prepared By Sales/Trading

It any case where valuations are being prepared by a sales/trading areE the valuation must be reviewed and initialed by an appropriately registered Series 8 supervisor. The valuations must then be forwarded to operations which will transmit them to customers (and maintain records as outlined above).
fn ail
cases involving fixed income derivatives, the Head of the Fixed fncome Division'must preapprove each specific request before a derivative valuation is provided to the customer.

F.

Best Execution

Brokers have an affrrmative duty to provide their customers with the best execution "reasonably available under the circumstances" for securities trades. Failure to provide a customer with best execution may subject a broker to liability.
Even though the duty of best execution is undisputed, there exists no clear definition of what constitutes best execution. Best execution is an evolving standard and does not necessarily mean that each order received must be handled individually to ensure customers the best available price. The SEC has provided guidance regarding those factors a broker should consider when deciding how to fulfill its best execution responsibilities. The following factors enter into any determination regarding best execution:
October 1998

t.

price is the predominant element, but a broker-dealer is not bound exclusively by price considerations in satisfying the best execution obligations;
the size of the client's order;
the trading characteristics of the security involved;

,,

4.

the availability of accurate information affecting choices as to the most favorable market in which execution might be sought;
the availability of technological aids to process such data; the availability of economic access to various market centers; and the cost and difiiculty associated with achieving an execution in a particular market center.

5. 6. 7.

G.

Sales ofBearer-Form Debt Securities

From time to time, registered representatives may be approached by NSI affiliates based outside the United States to sell bearer-form debt securities initially distributed by such affrliates. Offers and sales of these securities place the issuer, NSI's customers and NSI at risk. The U.S. federal to< laws impose sanctions on issuers of bearer-form debt securities, unless the securities
are initially distributed under arrangements that reasonably ensure their sale only to non-U.S. persons. The Nomura Group may be liable to the issuer in connection with any such sale. For these reasons, all sales personnel must follow the procedures set forth below in connection with any offers or sales of bearer-form debt securities (including convertible securities) initially underwritten by an NSI afliliate. These procedures must be followed in addition to any federal (such as Regulation S or Rule 144,{) or state securities laws that apply to the offer or sale of the securities.

Primary Procedures. The following procedures apply to all sales of bearer-form debt securities that were originally underwritten, placed or otherwise distributed by an NSI affiliate: Original Allotment. NSI may NEVER OFFER or SELL to a person who is within the United States* or to a U.S. person** bearer-form debt securities that were part of an original allotment of securities sold to an NSI affiliate based outside the United States, In general, an offer or sale is considered to be made to a person who is within the United States if the offeror or seller has a U.S. address for the offeree or purchaser.
*rF

1.

a.

A "U.S. person" is a citizen or resident of the United States, a corporatiorL partnership or other entity created or organized under the laws of the United States or of any state, and an estate or trust the income of which is subject to U.S. federal income tar regardless of its source. You should note that this definition of "U.S. person" is narrower than under Regulation S; bearer-form debt securities cannot be offered or sold to U.S. citizens who are resident abroad.
65

October 1998

except to: (a) certain supranational organizations or foreign central banks located in the United States; and (b) foreign branches of U.S. financial institutions* purchasing for their own account or for resale that provide NSI with the certification set forth in Exhibit AA.

b. Secondary Trading. NSI may NOT OFFER or SELL to a person who is within the United States or to a U.S. person bearer-form debt securities that an NSI affiliate based outside the United States underwrotq placed or otherwise distributed for 40 days following the closing of such distributiorq except to: (a) certain supranational organzations or foreigi central banks located in the United States; and (b) foreign branclies of U.S. financial institutions purchasing for their own account or for resale that provide NSI with the certification set forth in Exhibit AA.
Additiqnal Procedures Applicable to All Sales. The following additional procedures apply to all sales of bearer-form debt securities to U.S. persons or within the United Stites:

2.
a.

Definitive certificates representing bearer-form debt securities may never

delivered within the United States.

be

b. All interest on bearer-form debt securities must be payable only outside the United
States.

c. There are significant limitations on the offer and sale of bearer-form debt securities by NSI. Therefore, to the extent possible, all offerings of debt securities sold by NSI must include a registered-form tranche. This will require modification of most non-U.S. offering documentation and should be notified to NSI's non-U.S. affrliate as soon as possible NSI has developed with Mplc registered-form documentation for use in connection with sales by NSI.
AIIY QUESTTONS REGARDING A PARTICTILAR OFFER OR SALE SHOULD BE MADE TO THE LEGAL DEPARTMENT PRIOR TO MAKING SUCH OFFER OR
EFFECTING SUCH SALE.

A "financial institution" is a person that itself is, or more than 5OYo of the total combined voting power of all classes of the voting stock of which is owned by a person that is, a banh a broker or dealer in securities, an insurance company, a pension plan, an investment adviser, a mutual fund or a finance company.
October 1998

7. EOIIIY

ORDER PROCEDT]RES

Supervisors are required to apply the supervisory procedures in Section 1.E.(2) ('Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

Equity Order Ticket Completion

Broker/dealers are required to make and keep a record of every order received (whether

from a customer or another broker/dealer). The record must include several items of
information, including, among other things, the time the order was transmiued for execution (or if not so transmitted the time it was received), the time the order win executed or cancelled (if feasible), the time the execution report was received if executed on the I.IYSE the conditions of the trade, the identity of the counterpa.rty, the security, the quantity, the pricg whether the order is long, short or short-exempt, and whether the order is a proprietar5r order (or "G order"). Specific requirements for information to be recorded for short sales, market-on-close orders, limit-at-close orders, offiboard and after-hours trading, incentive trading, GTC orders, G orders and SOES orders are discussed in the relevant subsections below.
Supervisors must closely monitor cancel-and-correct entries ('CC"). Certain desks do so by requiring pre-approval for all CCs and others by using a supervisory T+1 CC report.

B.

Registered Representative Numbers

If an employee is a registered representative involved in Sales or Trading activities he or she must have a 3 digit Registered Representative number.
Two Registered Representative numbers must be entered on trades into either Sun or NTAPS (or both), regardless of whether a trade is an "open ordet'' as described above or a typical trade that is executed immediately. The first is the '?roduction RR" nurnber, which is the Registered Representative who is to be paid on the trade. This will generally be the Registered Representative that is assigned to the account. The second is the trader number, which is the trader who executed the trade if not the person assigned to the account. The third Registered Representative number is the "Executing RR" number, which is the Registered Representative who actually speaks to the customer. Most of the time, the three Registered Representative numbers will be the same. In these instances, the RR may write his number in the RR field and draw a line through the other two boxes. However, to record those instances when the Production Registered Representative is away from the deslg out of the offrce, etc., it is imperative that the additional Registered Representative number fields be entered correctly into NTAPS for registration and regulatory requirements.
Because some sales assistants are the ones who often execute trades on behalf of a Registered Representative who is not available, Registered Representative numbers are assigned to those sales assistants. These numbers are to be used solely for the 'Executing RR" field. Note that sales assistants may not execute trades unless they have passed the Series 7 and Series 63 examinations. (See Section L.F. - "Registration of Personnel')

67

October 1998

C.

Best Execution

Brokers have an affirmative duty to provide their customers with the best execution "reasonably available under the circumstan@s' for securities trades. Failure ," p;;;;;; customer with best execution may subject a broker to riability.
Even though the duty of best execution is undisputed, there exists no clear definition of what constitrtes best execution- Best execution is an evotving standard and does not necessarily mean that each order received must be handled individuilly to ensure customers the best available price. The SEC has provided guidance regarding those factors a broker should consider when deciding how to fulfill is best execution-responsibititi"r- The enter into any determination regarding best execution:

fird;; ;;;.

12-

price is the predominant elemen! but a broker{ealer is not bound exctusively by price considerations in satisfying the best execution obligations;
the size of the client,s order;

3- the trading characteristics ofthe security involved; 4.

_

the availability of accurate information affecting choices as to the most.favorable rnarket in which execution might be sought;
the availability of technological aids to process such dat4 the availability of economic access to various market centers; and the cost and diffrcutty associated with achieving an execution in a particular market center-

5-

6.
7

Historically, the SEC's position had been that a brokerdealer that always executes retail orders at the prevailing national best bid or offer (I{BBO') satisfied its duty of best execution- Dueto the SEC's recent focus on price improvemeng traders shoutd be avrie that, in this ever gvolving environmen! sending orders to a market maker or markeplace tirat automatically exectrtes all orders at the ryBBO, without eryosing the orders or giving^the orders oppo.urnity for price improvemenl may no longer satis$, a trader's duty of best exeortion. T As a precaution against claims that a firm viotated its duty of Uot executioi by not conduaing lnY {le diligence with respect to order routing decisions, firms shouta carlfuUy document (notation of events must be indicated on the ti"k"O any due dilig",,". conducted by ti.. firm with respect to order routing decisions.
The SEC has recognizd,ttateven with today's technotogy it would be impracticat for a broker to make order routing decisions at the time oireceipt ofivery singte retaii-size order it executes- The SEC has stated that broker{ealers routing orders for automated execution coutd satisfr their best execution obligations by assessing periodicatly the quality of competing markets to assure that aggregated order flow was directed to markets- providing the- most advantageous terns for their customers' orders. Thus, where trryo markets p.ovile different advantages to customers, a broker futfills its best execution if it'assesses periodically the quatity of the competing markets" and sends an aggregation oforders to a markettho".., or, that basis. October 1998

A detailed explanation of procedures to follow to comply with the limit order display rule (which generally requires the display of better priced customer limit orders) and the quote rule (which generally requires market-makers to reflect in quotes better priced orders entered into an electronic communications network) are set forth in Exhibit M.

In accordance with the Best Execution requirements discussed above, the following procedures are to be observed by the NSI trading desks in their efficrts of obtaining the best execution for our customers:
Equity Domestic Portfolio Trading
The Equity Portfolio desk performs the following three steps in the execution of their customer orders:

(i)

Pre-trade

: :
:

Liquidity Analysis
Floor broker, Instinet, DOT, or NSI broker b. Electronic - Automatically
a. Manually -

(ii) Execution
(iii) Post-trade

a. Analyze performance vs. benchmark b. Plexus Group analysis

All portfolio orders once electronically received, are first processed ttrough a liquidity
analysis system which provides the trader with a breakdown analysis of the basket. The liquidity analysis system takes into consideration the following aspects of a basket order: the order size, the market quotg and the average volume for the past 5 and 15 days. Once the analysis is completed the system provides the trader with an indication of the portfolio's degree of difficulty which the trader will have in obtaining the desired price or benchmark. Generally, the analysis will be divided into three levels Difficult, Moderate, and Easy. The Moderate and Easy executions will usually be electronically sent to the NYSE floor through the DOT system. Typically, the diffrcult orders will be manually traded (worked). Once the order is completed, it is then processed through the post execution system which will check the customer's execution to a benchmark relative to the trade type e.g., Opery Close, or WVAP. Most portfolio orders are usually received with a limit price. When dealing with difficult orders or in single name executions, the trader will use the following information to determine wherq where, and how to trade the security:

(D
(iD

Order size of each stock; Market quote

- Bloomberg, Instinet, and exchanges;

(iii) Daily trading volume;

(iv)
Check with floor broker; and News

(")

All portfolio trade results of the post-execution system are sent to the Plexus Group (a trading desk consultant) on a daily basis. The Plexus Crroup performs an analysis of NSI
October 1998

executions versus our trading benchmark. The Plexus Group review the performance with the desk on a quarterly basis.

will then compile the results

and

Equity International Portfolio Trading

The International Equity Portfolio desk performs the following three steps
execution of their customer orders:

in

the

(i)

Pre-trade

= =
:

Liquidity Analysis

(ii) Execution
(iii) Post-trade

All Executions

are done through our London affrliate

Analyze performance vs. benchmark

and dasy executions will usually be electronically sent to our London affiliate for execution. Typically, in the case of the diffrcult orders, which would also be sent to our I-ondon affiliate, the satesperson will speak with the customer informing them that it may require extra time to complete thi trade at the desired benchmark. Once the order is completed, it is then processed tkough the postexecution system which will check the customer's execution to a benchmark.
Japanese Stock Trading (single stock)

will be divided into three levels Y Diffrcult, Moderate, and Easy. The Moderate

All portfolio orders, once electronically received, are first processed through a liquidity analysis system which provides the trader with a breakdown analysis of the basket. ffre nquiaity analysis system takes into consideration the following aspects of a basket order: the order sizi the market quote, and the average volume for the past 5 and 15 days. Once the analysis is completed the system provides the trader with an indication of the portfolio's degree of diftrculty which the trader will have in obtaining the desired price or benchmark. Generilly, the analysis

Single stock orders in Japanese Securities are sent directly to Japan for execution on the Tokyo Stock Exchange. These orders are sent from New York via the Compass System to Tokyo. A market order will be done at open on the Tokyo Stock Exchange, while large trders or orders in non-liquid securities will be worked by the NSI branch office in Tokyo. The next day, NSI receives the overnight executions from Tokyo, and manually the executions "ompurls through the use of Bloomberg, Quick and Reuters to analyze whether the customer received the best execution. Customer Execution Desk CNASDAO & NYSE) Background

Approximately 95% of the orders received by our Customer Execution Desk are from Nomura Securities Corporation's egent and principal accounts. It is estimated thag of these orders, 25%o are listed andTSYo are NASDAQ stocks of which gOYo are routed through the Ready System to Troster & Singer for execution.

70

October 1998

Listed Executions
Generally, the listed securities are sent to the NYSE or AMEX through the DOT system for execution. On occasion a customer may request, prior to the open, to trade the security on Instinet or on the Bermuda Stock Exchange. Block orders or large limit orders are worked by the trader. He/she will use the following information in determining wheq where or how to execute the order at the best total price:

(l) (2) (3) (4)

Size of order;

Market quote-Bloomberg, Instinet, and exchanges;

Daily trading volume,

Check with floor broker; and

(5) News
NASDAO Executions
As mentioned above, alarge percentage ofNSI's NASDAQ orders are routed to Troster & Singer for execution. The orders are reviewed and routed by 8:45 a.m. each morning. At9:45 a.m. a trader will begin to accept the executions by Troster & Singer through the ACT system. At this time, the trader will also check the executed prices by using the Trac Data System. This system shows the trader the price that each stock traded at during specific times of the day. The trading desk can also use the Shark system for the same purpose. If the trader finds an execution by Troster & Singer outside the price traded at the time of executiorq the trader will contact Troster & Singer and have them correct the price.

NSI will not route an order to Troster & Singer if NSI is either market maker in the stock or if the order is large (a Block order). Such orders will be executed by our traders and the trader will consider the following aspects of the order in seeking the best execution for the client:

(l) (2) (3) (4)

Size of the order;

Market quotes;

Any price affecting news; and Daily trading volume

All orders executed by NSI traders are reviewed by the Sales desk to ensure best execution. The Salesperson will also check to see that the opening and MOC orders were executed at those prices. If limit orders are received, the salesperson will research all limit orders to see if the stock traded through the limit price that day. If the limit price was reached, the salesperson will do further research to determine if NSI owes the client an execution.

7l

October 1998

price.

Troster & Singer for MOC client orders. These firms are willing to guarantee the MOC

D.

Trade Reporting Requirements

1.

NASDAO. COS*. and OTC Trade Reporting

During normal trading hours all round and mixed-lot transactions in NASDAe and CQS securities must be reported within 90 seconds of executior\ except for transaCtions
executed through:

o o

o o

Computer-Assisted Execution System (CAES); SelectNet; Small Order Execution System (SOES); or Odd-lot transactions

only one

side (party) to the trade should report the transaction as follows:

Transaction Between Two market-makers A market-maker and non-market maker Two non-market makers A member and a customer
An NASD member firm and a national securities exchange

Who Reports
Sell side only

Market maker only

Sell side only The member

Only the exchange

Market-maker status applies only for NASDAQ, OTC, and CQS securities in which a broker/dealer has registered with the NASD to make markets. Note that riskless principal transactions are reported as one transaction (excluding the mark-up or mark-down) A riskliss principal transaction is one in which a member that is not a market maker in the security, after receiving a customer's order to buy, purchases the security as principal from another member or customer to satisfy the order to buy, or after receiving a customer's order to sell, sells the security as principal to another member or customer to satisS the order to sell. A risktess principal transaction in which a member purchases or sells the security on an exchange to satis$r a customer's order will be reported by the exchange and not by the member.

For dual agency transactions where customers are on both sides, the member reports one transaction as a cross exclusive of commissions. For riskless principal transactions where
CQS securities - all common stocks, prefened stocks, long-term warrants, and rights entitling the holder to acquire an eligible security, listed or admitted to unlisted trading privileges on the AMEX or the NYSE, and securities listed on regional stock exchanges.

October 1998

customers are on both sides, the member reports one transaction as a cross exclusive markup or markdown.

of

any

Listed below is a detailed explanation of how and when a trade must be reported that was executed outside normal trading hours, keeping in mind that only one side (party) to each trade is responsible for reporting as noted above:

For NASDAQ National Market, NASDAQ SmallCap, Convertible Bonds, and I)omestic OTC Equities, including Canadian issues and ADRs:

If the trade was

executed between:

Report to ACT:
Between 8 and 9:30 a.m.; enter.T modifier and include execution time.

Midnight - 8 a.m.
8 a.m. - 9:30 a.m.

Enter .T modifier and include execution time if not reported within 90 seconds. Enter .T modifier and include execution time if not reoorted within 90 seconds.

5:15 p.m. - midnight

On T+1 between 8 a.m. and and designate "as/of."

30 p.m.; enter execution time

T+l trade reporting

has been automated, but the trader must indicate on the ticket "Form T" to

ensure that Trade Support personnel properly code the trade for automated reporting.

For COS Trades:

If the trade

was executed between:

Report to ACT:
On T+l between 8 a.m. and l:30 p.m.; enter execution time and designate "as/of" On T+l between 8 a.m. and l:30 p.m.; enter execution time and designate "as/of."

Midnight - 9:30 a.m.

5:I5 p.m. - midnight For Foreign OTC Equities (Excluding Canadian issues and ADRs);

was executed between:

If the trade
Any time on trade date

Reoort to ACT
On T+1 between 8 a.m. and l:30 p.m.; enter execution time and designate "as/of,"

73

October 1998

Please note that the reporting requirements do not extend to members' transactions in foreign stocks executed on and reported to a foreign securities exchange, or transactions executed over-the-counter in a foreign country that are reported to the r"gulator of securities markets in that country. The reporting requirements do extend to ffansactions in foreign stocks executed in the U.S. regardless of the country where clearance and settlement occur. For example, the second leg of a riskless principal transaction between a NASD member and its customer would be reported, while the first leg would not be reported provided that it was executed on and reported to a securities exchange outside the U.S.

Also, trades executed tkough Instinet are not automatically trade reported. When an order is executed tkough Instinet each party will get confirmed through ihe system. An identified trade will indicate which siddarty trade reports. (INEX identifier denoies that you should not report.)

2.

NYSE Rule 4l0B

NYSE Rule 4l0B requires that member firms report all trades in NYSE listed securities which do not otherwise get reported to the Consolidated Tape. Such transactions will primarily consist of NYSE listed stocks effected outside of businesJhou.s (9:30 a.m. to 5:15 [.m.) and transactions in NYSE listed securities effected on foreign exchanges.
The electronic transmission of the trade information must take place on T+1. To ensure that such trades are properly reported it is imperative that the ticket show the time of execution to the time of our fax report to the affrliate and the marketplace where executed (must specifu the foreign exchange or the foreign OTC market), and the ticket should be marked ;4l0B,i fnl fax of the order to our affiliate must not be sent until after 5:15 and the return fax from our affiliate must indicate that the cross by the affrliate was before the open of the U.S. markets. are program trades (a group of 15 or more stocks having a total market value of $1 million or more) and any index i.Uit.uge or other strategy subject to NYSE Rule 80A(c), regardless of dollar value or number of stocks. Such transactions are required to be reported to the Exchange via the Daily Program Trading Report and are therefore exempt from reporting under Rule 4108. Trades executed away from the NYSE floor during business hours on l9c-3 Securities listed after April 26,1979 must be done in compliance with NYSE Rule 390 and will be required to be reported Oy one party to the trade as specified above) within 90 seconds of execution.

A major exception to this reporting requirement

Finally, it should be noted that trades in NYSE listed securities executed through SEAQ, a foreign interdealer quotation service, do not get reported to the Consolidated Tape aid therefore are required to be reported under Rule 410B.

E. Unofficial

Confirmations- Customer Account Statements and Valuations

From time to time customers may ask NSI to provide documents meant to confirm trades on a trade date prior to the production of the official NTAPS-generated confirm. They may ask for similar documents to confirm positions before official XfAns-g.nerated monthli statements are available. The mailing of such unoffrcial confirmations or customer account statements must include an affixed sticker in bold typeface with the following language:
October 1998

[ "This is not an official confirmation or customer account statement. Please refer to your offrcial trade confirmation or customer account statement for final terms. If there are any discrepancies between this document and the ofticial confirmation or customer account statement, the official confirmation or statement governs. Please consult the final
prospectus and any supplements."]

--

Form

#l2l

---

Non-Derivative Valuations

ff customers request written valuations for non-derivative securities, NSI's reply must include an affixed sticker in bold typeface (or download it from your system) with the following
language:

[ "The above evaluations are based on sources believed reliable, but we do not guarantee the accuracy thereof, and we are not responsible for losses or damages arising out of errors, omissions or changes in market factors, conditions or circumstances. Other factors, such as size, which were not assessed, may substantially affect the evaluations. The evaluations contained herein are provided for informational purposes only, and are intended solely for your use and may not be quoted, circulated or otherwise referred without our express consent. The above evaluations are not be considered an offer to purchase or sell securities at this or any other level."] --- Form #120 ---

use of any unollicial confirmation or account statement or a valuation sheeL Such approval shall only be given if the applicable Form 120 or l2l language is on the unoffrcial confirmation or account statement.
Series

8 supervisor must approve the

Forms 120 and l2l are available from the Compliance Department. In additiorg the Forms can be ordered through the Facilities Department. Derivative Valuations
Consistent with market practice, Nomura is prepared to respond to customer requests for valuations concerning certain derivative transactions for pre-existing positions entered into between Nomura and the customer. Thus, this policy does not address the requirements applicable to indicative or final term sheets (which should only be provided in connection with proposed transactions and not as an alternative mechanism for providing valuations).

Two principals are of paramount importance in providing such valuations. First, valuations must clearly and explicitly set forth the basis on which they are provided (e.g. mid-market or intrinsic value). Such valuations must include such substantive disclosures in regard to methodology and be issued pursuant to the supervisory procedures described below. In addition, greatcare should be taken to ensure the accuracy ofsuch valuations.
Valuations must be provided in writing on the appropriate letterhead and must indicate the date as of which it is provided. The basis of the valuation must clearly be indicated in a form approved by the Legal and Compliance Department. Indicated below are two descriptions for use as applicable. (Otherwise versions should be cleared prior to use.)

75

October 1998

Mid-Market: As requested, this valuation provides our estimate of the mid-point of the bid-offer spread at approximately (indicate time) on the date indicated above.

-orIntrinsic Value: As requested, this represents our estimate of the intrinsic value (replacement value without giving effect to adjustments due to changes in interest rates).

In addition to prwiding an explanation of the basis for the valuation as indicated above, all valuations must include the following disclaimer:
This valuation does not represent an indicative or firm quotation to enter into, assign or terminate the referenced transaction(s). It is based on our valuation models- and assumptions (which are subject to change without notice) and no adjustments are made

accepting this valuatioq which is provided pursuant to your request without consideration, you acknowledge that (i) you are not relying on ur in connection with any decision you may make related to the transaction(r) or the valuation; (ii) our providing this valuation as a service to you in no way indicates a fiduciary reiationstrip between us; (iii) we shall not be Iiable for any loJses or damages arising out of related to the valuation; and (iv) you may not make any direct use-of this valuation nor may you provide it to any other person without our prior written consent.

By

credit considerations, capital requirements, accounting treatment, regulatory requirements or other significant factors which could materially affect the actual value. The valuation proviied herein may differ materially from values indicated in our books and records for such transaction(si.

for

transaction and hedging costs, Iiquidity

or

atea independent of sales/trading must provide valuations to customers. However, where a sales or trading area must provide a valuation, the registered supervisory person should exercise all care necessary to ensure that such valuation-s *. uppiopriately
prepared.

In general, an

A.

Valuations Prepared and Transmiued by Operations

Where an operations area has established procedures for supplying valuations on an approved methodology, valuations should be provided directiy io customers, but preapproved un appropriately registered Series 8 supervisor; and copies should be _bI maintained for a minimum of three years in an easily accessible place.

B.

Valuations Prepared By Sales/Trading

case where valuations are being prepared by a sales/trading area, the valuation must be reviewed and initialed by an appropriately registered Seri& 8 supervisor. The valuations must then be forwarded to operations which will transmit them to customers (and maintain records as outlined above).

In any

In all

involving equity derivatives, the Head of the Equity Division must pre.approve each specific request before a derivative valuation is provided to the customer.
cases
October 1998

F.

Settlement Period

The typical settlement period is T+3 (trade date plus three business days). It is permissible, however, to arrange with NSI customers to settle NYSE transactions for any settlement period up to and including T+5. For example, in a transaction settling on a T+4 basis, the NYSE has advised that the second leg of the transaction (where NSI moves the position from our inventory account into the customer account with a T+4 settlement) is an actual trade. For all securities listed on the NYSE before Apil26, 1979 (non 19c-3 securities), to avoid a violation ofNYSE Rule 390, NSI must execute the trade as follows:

1. NSI receives a customer buy order for 100 shares of IBM (a non l9c-3 stock) with T+4 settlement requested.

2. NSI should purchase the 100 shares of IBM on the floor for our account with a
regular T+3 settlement (Trade #1).

3. NSI must then cross the 100 shares of IBM with the customer on the floor of the
Exchange with a T+4 settlement (Trade #2), or NSI can agree with the customer to execute the cross overseas after hours (after 5:15 p.m.).

Extensions of settlement beyond T+5 involve an extension of credit and require the approval of the Compliance Department. (See Section 14 - "Margin Regulation").

G. Short Sale Restrictions

The price restrictions applicable to short sales of certain exchangeJisted securities are specified by Rule 10a-1 of the Exchange Act and the rules of various securities exchanges. In additioq the NASD rules create a short sale "bid-test" for NASDAQ National Market System Securities. The Exchange Act and NASD rules also exempt certain transactions from the short sale restrictions and require orders to be marked "long" or "short". In additiorq the NASD and NYSE require that certain assurances regarding the ability to deliver the security exist before a short sale may be made, while the Exchange Act makes it unlawful to cover a short sale with securities obtained in connection with a public offering. Short selling restrictions apply to: transactions on a national securities exchange; and over-the-counter transactions in exchangelisted securities reported on the Consolidated Tape (collectively, "Reported Securities"). In additioq NASD rules impose a short sale "bid-test" for NASDAQ National Market System Securities based on a security's bid price.

For purposes of both the Exchange Act and NASD rules, the term "short sale" is defined to mean: (i) any sale of a security which the seller does not own; or (ii) any sale which is consummated by the delivery of borrowed securities. The definition thus includes short sales "againstthebox"; f.e., sales inwhichthe ownerowns securities of the kind and inthe amount sold shor! but intends to borrow securities for the purpose of completing the short sale. A seller is deemed to "own" a security ifl (i) the seller or its agent has title to it; (ii) the seller has purchased or has entered into an unconditional contract binding on both parties to purchase it in a transaction that has not yet settled (an agreement to cross overseas after 5:15 does not constitute an unconditional contract to purchase until after offshore execution); (iii) the seller owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange; (iv) the seller has an option to purchase or acquire it and has exercised such option; or
October 1998

(v) the seller has rights or warrants to subscribe to it and has exercised such rights or warrants. A person is deemed to own securities only to the extent that the person has a "net long position" in those securities for all accounts in which such person has an interest. Note that, if a transaction is not subject to the short sale rule because the seller "owns" the security, as described above, the order should be marked "long" not "short exempt.,,

In order to comply with applicable legal requirements and in order to carry out the "locate" procedures discussed below, the Firm must mark either "long" ('L") or ..sh6rt,, (,S,,) each order it enters for the sale of any equity security. The Exchange'Act and NASD rules provide that a broker-dealer may not mark an order for the sale of suchi security "long,, unless: (i) the security is carried in the account for which the sale is to be effected; oi 1ig tlie brokerdealer is informed that the seller owns the security to be sold and will promptly deiiver it to the account for which the sale is to be effected. In addition, short sales ihut .r. exempt from the short sale rules should be marked as such (*SSX,).
NSI's "I{TAPS" back ofiice system calculates net positions overnight. The system downloads this information at the beginning of the day, and *iintuirs real time positions during the day. This is done for all equity products, and also for individual accounts.
The system will not allow long sales unless there is a sufiicient long position. The system is programmed to re-calculate positions by deduaing sells as soon ur ttiy are staged. Buys are not added to positions until after a trade has been confrrmed. Any trades not entered through the system may be manually patched into the trading database to update the position. (Note input window color is mustard-yellow.) No approval ii necessary for manual entry. However, an e-mail will be automatically sent to the Compliance Department whenever the manual override is used. The Compliance Dlpartment will veri$, that a time stamped trade ticket has been completed.
The restrictions of the Exchange Act and NASD short sale rules do not appty to any sale effected by the Firmfor any castomer account pursucmt to an order that is marlced''iong".'

1.

"Tick Test" for Exchange-Listed Securities in exchange-listed securities:

Subject to certain exceptions, short sales

' '

May not occur at a price below the price at which the last relevant "regular way''
sale occurred.

May occur at the price at which the last relevant "regular way'' sale occurred only if that price is above the next preceding different price at which the security was sold
regular way.

Stated another way, short sales in exchangeJisted securities may not occur on a "minus tick" or a"zero minus ticlg" but may occur oi a"zero plus tick" or a "plus tick.,,

Examples.

If the last sale was at 50 and the last previous different price was 50-1/8, a short sale
may be made only at 50-l/8 or above. It may not be made at 50.
October 1998

If the last sale was at 5l-ll2 and the previous different price was 51-318, a short sale may be made at 5l-ll2 or above.
If the last sale was at 52 and the previous different price was 52-114, a short sale may be made at 52-ll4 or above.

If the last

sale was 49-314 and the previous different price was 49-112, a short sale may be made at 49-314 or above.

In the case ofexchange-listed securities that have gone ex-dividend, ex-rights or ex-any other distribution, all sales priorto the ex-date should be reduced by the value of the distribution to determine the price of the security for short sale purposes.

In the case of transactions in the OTC market in a Reported Security, or on a regional exchange in a Reported Security, short sale prices are determined with reference to the last reported sale in that security wherever it was effected. For example, a short sale transaction may not be effected at 50-1/8 on the Chicago Stock Exchange if the last reported sale was 50-1/4, even if that sale was effected OTC and the last sale effected on the Chicago was at 50. In the case of transactions effected on the NYSE, the relevant last sale prices are those for transactions occurring on the NYSE, rather than the prices of any transactions that may have occurred in another market. Similarly, in the case of transactions effected on the AMEX it is only necessary to refer to the immediately preceding AMEX transaction and the next preceding AMEX transaction at a different price; transactions in other markets are not pertinent to identifying the price at which a short sale may be effected.

In the case of exchange transactions in securities that are not Reported Securities, the pertinent last sale prices are those on the exchange on which the transaction occurs.

In the case of exchange-listed securities, the exceptions include, among others:

to the short sale restrictions

Long Sales. Any sale for the account of a seller that owns the security sold and intends to deliver it promptly without undue inconvenience or expense.
Market-Maker Sales: Any sale (except a sale to a stabilizing bid complying with Rule 104 of Regulation M) by the Firm in its capacity as a Rule l9c-3 marketmaker in a listed security: (i) for its own account effected: (a) at a price equal to or above the last regular way sale report on the Consolidated Tape, even if the transaction is on a zero-minus ticlg or (b) at a price equal to the most recent offer communicated by the Firm to the NASD, provided that the offer was equal to or above the last reported regular way sale when it was communicated; (ii) to offset customer oddJot orders; or (iii) to liquidate a long position which is less than a round lot provided the sale does not affect the Firm's position in the security by more than the unit of trading.

Certain Underwriting-Related Transactions: Any sale by an underwriter or syndicate or selling group member in connection with an over-allotment of
79 October 1998

securities or any "lay-off' sale in connection with a rights distribution or a standby underwriting commitment.

Domestic Arbitrage: Any sale for a special arbitrage account by a person that owns another security (such as a convertible right) that entitles the holdlr to acquire the securities sold short in the near future, so long as (a) the short sale, or the iurchase offset by the short sale, was for the purpose of reaiizing an arbitrage pront, and O) the acquisition right in question was originally attached to anothei security or was issued to all the holders of any such class of securities ofthe issuer. International Arbitrage: Any sales of a security traded on a U.S. exchange which are part of an international artitrage opportunity where the seller has the pirpose of profiting from the price difference between the security on a U.S. market and a foreign securities market, provided that the short sellei knows or has reasonable grounds to believe that an offer enabling him to cover the short sale is available in such foreign securities market and the seller intends to accept it immediately. For purposes of this exceptiorq a depository receipt for a security is equivaleni to the security itself.
Certain Block Positioner Transactions: Liquidation of blocks acquired by a marketmaker acting in the capacity of block positioner, even if the block positioner does not have a net long position in the security, if the block positioner's net short position in the security is the subject of one or more offsetting positions created in the course of bona fide arbitrage, risk arbitrage or bona fide hedgB activities.

nge-Approveo rra4sactrons rn Unreported Securities: short sales (except to a stabilizing bid complying with Rule 104 of Regulation vg deemea necessary by an exchange which is not the primary market for the securiiy, for the purpose of bringing the price of any security traded on that exchange into conformity with the price on the security's principal market. This wouldlnclude sales through ITS.

Ttuntu"tiort Prtt,,"rt to Orot.. Co*plyirg *ith th" R.rl": Short sales of Reported Securities pursuant to a quote whictr, when placed, was on a plus tick or a zero-plus tick. Thus, pre-existing offers to sell are exempt if the offer, when communicated to a quotation systeng would not violate the "tick test." Exemptions pursuant to this
provision would occur almost exclusively as a result of trade throughs.

makers. Certain odd-lot-related transactions by oddJot dealers also are exempted from the rule.

In additiorq the rule exempts certain transactions by specialists and exchange market-

In the case of OTC short sales, the Firm is required to indicate on its ACT reports whether a transaction is a "sell short" or a "sell short eiempt." Similarly, the NySE,s rules indicate that it is appropriate to mark as "short exempt" arry short sale ordei ihat falls within any of the above-described exemptions.

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October 1998

2.

NASD Short Sale "Bid-Test"

The NASD short sale rule or "bid-test" is applicable to NASDAQ National Market System Securities. Unless an exemption applies, the rule prohibits the Firm from effecting a short sale at or below the current inside bid, as shown on the NASDAQ screerL when that bid is lower than the previous bid. The prohibition applies equally to trades for the Firm's own account and trades for customers.* To effect a short sale when the current inside bid is lower than the preceding inside bid, the short sale must be executed at a price of at least 1/16th point above the current inside bid. (If a security goes ex-dividend, ex-right or ex-any other distribution, all quotation prices prior to the "ex" date may be reduced by the value of the distribution.)
The rule contains a number of exemptions, including exemptions for certain short sales market-makers," by "qualified options market-makers" and by registered warrant market-makers. In additiorq it contains certain exemptions that mirror those applicable to short sales of exchange-listed securities.

by "qualified NASDAQ

The rule exempts from the bid-test "bona fide market-making activity'' by "qualified NASDAQ market-makers." Note that both conditions must be met. That is, the Firm must be a "qualified NASDAQ market-maker" with respect to a security and the transactions in question must be "bona fide market-making activity."

If the Firm fails to satisfy the "qualified NASDAQ market-maker" criteria in a security in which it is a NASDAQ market-maker, it would continue to be a market-maker, but would be
subject to the short sale limitations.

Note: Separate criteria apply to attaining "qualified NASDAO market-mal{er" status in the case of secondary offerings, initial public offertngs and mergers or acquisitions.

A "qualified NASDAQ market-maker" in an existing NASDAQ security is a marketmaker who qualifies as a "Primary NASDAQ Market-Maker." To qualifu as a Primary
NASDAQ Market-Maker, the Firm must satisfy at least two of the following four standards.

(a) (b)

be at the inside bid or inside offer at least3lYo of the time;

maintain a spread no greater than lOZYo of the average dealer spread;

have its quotation updates followed by a trade execution of at least one round lot at least 50% of the time; or

(c)
(d)

account for l1/z times its proportionate share of volume in the stock (e.g., if there are ten registered market-makers, the Firm must account for atleast LSYo of the volume).

The rule is in effect during normal, domestic market hours (i.e., 9:3O a.m. to 4:00 p.m.

ESr).
8l
October 1998

The NASD will monitor market-makers for compliance on a monthly review period. compliance with the criteria will be tracked through the NASDAQ Systenr, which will enable the Firm to review its status in each criteria.

Note: If the Firm is a Primary NASDAQ Market-Malcer in 80% or more of the securities in whic! it has regtstered, it may register and immediately become primary a NASDAO Market-Maker in any existing NASDA-/ security. If the Firm is not primary a NASDAQ Market-Maker in at least 80% of its securities, it may qualify as a primary NASDAe Market-Maker in a specific stock if
(a) the Firm registers in the stock but (b) the Firm registers in the stock
does not enter quotes for five days; or
as a regular NASDAQ market-maker and satisfies the qualification criteria for the next review period.

The exemption does not @ver activity unrelated to market-making functions, such as risk arbitrage or index arbitrage that, in eithei case, are independent from-the Firm,s marketmaking functions.* Bona fide market-making also excludes speculative selling strategies that are "disproportionate to the Firm's usual marklt-making patterns" and investment decisions that are similarly disproportionate.

A market-maker executing a transaction on an agency basis would not be exempt from the rule with respect to that transaction.
The rule sets forth separate criteria for becoming a "qualified NASDAe market-makef, for securities subject to a secondary offering, an initial puUtir om.rirg or a merger or acquisition; i'e', for situations that may require new NASDAQ rnarket-maker registrations. These criteria
are:

(a)

For secondary offerings in a security with respect to which the Firm is not already a NASDAQ market-maker, the Firm may become a ..qualified NASDAQ market-make/' if (a) the Firm has satisfiedthe qualification criteria in the time period between the date on which it registered in the security and the effective date of the offering or O) the Firm hai satisfied the qualification criteria for 40 calendar days. If the firm is registered in the security prior to the time a secondary offering is publicly announced or a registration statement has been filed, it will have the same status with respert to1h. secondary offering that it has with respect to the existing security. public offerings, the Firm may immediately become a ..qualified NASDAQ market-maker" if it is a primary NASDAe Market-Maker in g0oz of the securities in which it is registered. (If the Firm subsequently withdraws

(b) For initial

The exemption is available for short sales of a company involved in a merger or acquisition if the sale is made to hedge the purchas- orp.ospective purchaie (based on communicated indications of interest) of other securities of i co*pany involved in the merger or acquisition if that purchase was made (or is to be made) in ihe course of bona fi de market-making activity.

October 1998

on an unexcused basis or fails to satisfu the qualification criteria at the end of the first review period, it will be unable to obtain a Primary NASDAQ MarketMaker designation on any subsequent initial public offering for the next l0 business days.) If the Firm does not meet the 807o test, it can independently satisfy the qualification criteria for the next review period.

(c) In the case of mergers or acquisitions, if the Firm is a "qualified NASDAQ

market-maker" in one of the two affected securities, it can immediately register as a "qualified NASDAQ market-maker" in the other security.
The Firm may execute short sales for the account of "qualified options market-makers" that would otherwise be prohibited by the rule. To receive this special treatment, the following conditions must be met:

options exchange.

The market-maker must be appointed as such pursuant to the ru[es of an

The short sale must qualiff as an "exempt hedge transaction." In the case of stock options, this means a short sale effected to hedge an existing offsetting options position or an offsetting options position that was created contemporaneously with the short sale and in which the market-maker must be eligible to receive margin under Regulation T. In the case of stock index options, this means a short sale effected to hedge an existing offsetting stock index

(iD

or an offsetting stock index options position that was created contemporaneously with the short sale, provided tlwt: (a) the security sold short is a component security of the index underlying such index option; (b) the index underlying such offsetting index options position is a "qualified stock index" (i-e., an index with respect to which at least lOYo of the weight is attributable to National Market System Securities) and (c) the dollar value of all exempt short sales effected to hedge the offsetting stock index options position does not exceed the aggregate current index value of the offsetting options position.
options position
Options market-maker short sale transactions unrelated making activity do not qualify as "exempt hedge transactions".*

to

normal options market-

The NASD short sale rule also incorporates the exemptions in the SEC's short sale rule that are relevant to the OTC market. Specifically, the rule exempts:

(D
(iD

sale that is marked long for an account in which the Firm has no interest. sale by a market-maker to offset

Any

oddlot orders of customers.

The rule also contains an exemption for the "exempt hedge transactions" of warrant market-makers that are registered as NASDAQ market-makers in the warrant. The rule defines an exempt hedge transaction as a short sale effected to hedge an existing offsetting warrant position or an offsetting warrant position that was created contemporaneously with the short sale.

83

October 1998

trading (100 shares).

(iii) Any sale by a market-maker to liquidate a long position which is less than a round lot, provided the sale does not change the dealer's position by more than one unit of

future so long as (a) the short sale (or the purchase which the sale offsets) is made for the purpose of realizing an arbitrage profit, and (b) the right of acquisition was originally attached to another security or was issued to all holders of any such class of securities of the issuer.
Transactions made as part of an international arbitrage opportunity, whereby the seller hopes to profit from the price difference between a security tr"d"a-o., a foreign market and a NASDAQ National Market System Security (for purposes of this Sectior,, ADR is deemed to be the same as the security represented by the receipt).

(iv) Any sale for a special arbitrage account by a person who owns another security (such as a convertible right) that entitles the holder to acquire the securities sold short in the neai

(r)

Short sales by an undenvriter or any member of the distribution syndicate in connection with the over-allotment of securities, or any lay-off sale in connection with a rights distribution pursuant to Rule 10b-8 or a standby underwriting commitment. (Note: fne Sp,C rescinded Rule l0b-8 and placed it along with other trading rules under Regulation M. The NASD has not yet changed its reference to 10b-g in its short Sale Rule.)

(vi)

Note: Pursuant to an NASD interpretatiorq any person can sell an ADR short at the NASDAQ inside bid at the opening, even if such opening bid is below the inside bid from the previous day's close,provided that the inside bid is equal to or above the last reported sale price (adjusted for exchange rates) of the security in the principal foreign market for ttr-e security.
Activities designed to circumvent the rule are prohibited.
Examples of transactions that would be deemed to violate the rule include:

(D

Effecting a short sale through a third party to avoid application of the rule.

(ii) Instances where the current best bid is below the preceding best bid and a market-maker alone at the inside best bid lowers its bid and then moves it back up to create an "up bid" for purposes of facilitating a short sale.
Instances where a market-maker with a long stock position raises its bid above the inside bid and then lowers it for the purpose of precluding short ritting.

(iii)

whereby the market-maker raises its bid in order to effect a short sale for another party and is protectei against loss.

(iv) Agreeing to an alrangement with another broker-dealer or a customer

(")

Entering into an arrangement with another broker-deater

pursuant to which a market-maker uses its exemption to sell short at the bid at successively lower prices, accumulating a short positiorq and subsequently offsets those sales through a transaction at a prearranged price designed to protect the market-maker against loss.

or a customer

84

October 1998

3.

Special Provisions for Index Arbitrage

An SEC interpretation specifies that stock can be sold without regard to short sale
restrictions if:

(D the Firm has a long stock position as part of an index arbitrage position involving an index futures contract or a standardized index option;
(iD
and

the stock is being sold in the course of unwinding the index arbitrage position;

as a result of the netting of the index arbitrage long position with one or more short positions created in the course of bona fide arbitrage, risk arbitrage or bona fide hedge activities.
The NASD has indicated that this

(iii) the sale would be deemed to be a short sale solely

interpretation will be equally applicable in the context

of

its

short sale "bid-test."

Short positions that are not the subject of bona fide arbitrage, risk arbitrage or bona fide hedge positions must be aggregated with the index arbitrage position the seller seeks to unwind. The SEC has indicated that, for purposes of this interpretation (and only for this purpose) fully

hedged index arbitrage positions may

purposes.

be considered bona fide arbitrage for

aggregation

This interpretation applies only to the application of Rule loa-l to the unwinding of an index arbitrage position involving a long stock position and a short index futures or index options position. It does not provide any relief from the uptick provisions of the rule when securities are sold to establish a short stocMong futures or options index arbitrage position.
The SEC also takes the view that this interpretation applies only to the unwinding of an index arbitrage position that was established in compliance with the SEC's short sale rule. The interpretation does not apply to the unwinding of an index arbitrage position that was established oflshore unless the holder of the index arbitrage long stock position purchased its securities from a seller that acted in compliance with SEC rules or comparable provisions of foreign law.
The interpretation applies only where action is taken to reverse both sides of the position it does not cover situations where an avoidable delay in reversing one side results in "legging out" of the position. However, a small portion (no more than 10%) of the subject stocks and related futures positions may be sold on the floor of the relevant exchanges at approximately the same time as the rest of the position is sold to a single customer.
as nearly simultaneously as practicable;

4.

Covering Short Sales in Connection with a Public Offering

Rule 105 of Regulation M makes it unlawful to cover short sales of any equity security with securities purchased from an underwriter or selling group member in connection with a registered public offering if those short sales take place during the period beginning five business days before the pricing of the offered security and ending with such pricing. Short sales effected
prior to or after this time period are not subject to the rule.
85

October 1998

the Offering.

If the registration statement is filed on June 9, and pricing occurs on June 12, short sales effected on June 9 - June 12 cannot be covered with securities obtained from the offering but short sales effected on June 8 can be covered with securities obtained from

wherever the transaction takes place.

Rule 105 applies wherever a security is traded (whether on an exchange or OTC) and

Rule 105 applies only to offerings that are conducted on a firm-commitment basis and that are either registered under the Securities Act or made pursuant to Regulation A thereunder.
Rule 105 does not currently apply to shelf-registered offerings. Rule 105 does not apply to short
sares

of derivative securities.

Rule 105 does not prohibit a person from covering a short position with shares that are part the offering but are purchased in the secondary market fro* u person who did not 9f participate in the offering. However, the SEC has ciutioned that preirrranged transactions designed to evade the proscriptions of the predecessor rule to Rule 105 aie unlawful.
5

NYSE Rule 440C and NASD Rule 3370 require, in part, that an order to sell short a security should not be accepted or entered unless u prio. determination ("Affirmative Determination") has been made by the registered representative and is noted on the ticket as to the availability of borrowing that security. This requirement applies to both proprietary and
customer short sale transactions.

insure that NSI is in a position to comply with these requirements, the following procedures must be followed. It is the responsibilityoiall sales and trading personnel to become familiar with these procedures and to conduct all short sale activities in aicordance with these procedures.

In order to

equities and corporate debt which are traded on a national securities exchange or in the over-thecounter market and to NASDAQ and other OTC (non-NASDAQ securitiei. Exceptions to this requirement, under NYSE and NASD rules and interpretations, a." the following:

In general, this procedure on short sale transactions pertains to all securities including

a-

requirements.

Short sales of foreisn securities transacted on a foreign securities exchange or market through a member of such exchange or market are not subject tolhese

b.

Short sales relating to market-making activities are also exempt. In particulaq bonafide market making transactions in securities for which the firm-is a registered NASDAQ market-maker and bona-fide market-maker transactions in non-NASOlq securities in which the market-maker publishes two-sided quotations in an independeni quotation medium are not subject to these requirements.
October 1998

An Afiirmative Determination as to the availability to borrow must be made except: 1) as noted in the two instances above; and2) with respect to the Available for Bonowing List described in section I below. Also, in the instances where the customer is arranging its own borrowing a notation of that fact must be recorded on the order ticket as well as the location of the security and that delivery will take place by settlement date. In the case of "Prime Broker" short sale transactions, prior to accepting the order the executing broker is responsible for reasonably assuring. that the delivery of the securities can be completed on settlement date. The executing broker must. 1) contact the Prime Broker and may rely on the assurance of the Prime Broker that it has made arrangements to borrow or that it has made other acceptable assurances that delivery wilt be made by settlement date; 2) obtain assurance from the customer that it has arranged with the Prime Broker for it to borrow the securities; or 3) contact NSI's Stock Loan Department. In the case of "Give.ups" short sale transactions, the executing broker is likewise responsible for reasonably assuring that the securities will be delivered on settlement date. The executing broker must: l) contact the clearing broker and receive their assurance that the securities will be delivered on settlement date; 2) obtain assurance from the introducing broker that it has arranged with its clearing broker for it to borrow the securities; or 3) may contact NSI's Stock Loan Department. A notation in this resard (includins the name of the ortanization and the oerson at the counterpartv that provided the assurance) must be recorded on the order ticket. This determination (afiirmation) must be made for each short sale transaction with a Prime Broker or Give-ups -- a blanket assurance is not acceptable.
The following chart is provided for further clarification of this Rule. Domestic Securities

Foreign Securities

1. Must always ask if client is selling

Long or Short and mark ticket
appropriately.

l.
2.

Must always ask if client is selling Long or Short and mark ticket appropriately.
Exempt from affrrmative determination if executed on foreign market or exchange through a member-

2. If client sells Long, the REP must

confirm with client that they will deliver by settlement date in good deliverable form. This must be documented by checking offthe box on the order ticket.

3. If client or firm CNSI) is selling short

then Affrrmative Determination must take place subject to any applicable exceptions herein and noted on the ticket.

3. If NSI buys or sells as principal

(principal transactions executed in OTC market) then NSI must make an Affirmative Determinatioq including the Long Sale determination applicable to domestic securities.

87

October 1998

Sales/

Tradine Superyision

Supervisors must review all short sales as part of their daily review of transactions. The supervisor must also periodically perform a random sampling oi the short sale order tickets to ensure that an afiirmative determination has been noted on the order ticket by the registered representative as required. The supervisor, besides noting that the affirmation has been not"d o, the order ticket will also contact the Stock Loan Desk to ensure that the registered representatives inquiry was recorded by the Stock Loan Deslg if that was the method used to perform the Affirmative Determination.

Securities Comprisine the S&p 500Index

The Stock Loan Department ('Stock Loan') will issue daily prior to the opening a list of securities which are deemed available for bonowing (the "Availabte to Bonow List,,l, based on StockLoan's daily review of the availability of such securities for borrowing for securities in the Standard & Poors 500 Index ("S&P 500-). In that the stocks that may be Ieemed available for borrowing are limited to the S&P 500, the Available to Borrow List will include a statement, rather than a listing of all the stocks in the S&P 500, that Stock Loan has determined that ..all of the stocks in the S&P 500 are available for bonowing except for the following", and will list such excepted "hard to borrow" stocks, as applicable. Ilthere are no such stocks, "None,, will be entered as hard to borrow on the Available to Borrow List. This list will be E-mailed daily to all sales and trading personnel. Regarding the S&P securities which are not deemed hard to borro*, no Afftrmative Determination is required by the salesperson. This assurance is good only for 24 hours. To obtain the list of securities that comprise the S&P 500Index from Bloo*-b..g enter 66SPX<index> MEMB < GO>, or contact the Securities Lending desk ext.1224.

that the security can be borrowed to make delivery.

In additiorq the Available to Borrow List will state that short sales in alt S&P 500 securities exceeding 100,000 shares ('Large Transactions") must first be approved by Stock Loan to ensure

If Stock Loan determines that a security cannot be borrowed the short sale may not be executed. The salesperson contacting the desk must indicate on the ticket his confirmation to the desk of their ability to borrow (Le. hard to borrow securities in the S&P 500 and all securities in the S&P 500 over 100,000 shares).
Securities Not Included in the S&p 500Index

Before accepting or executing a short sale involving a security not part of the S&P 500, the salesperson/trader must first contact Stock Loan to inquire about the availability of bonowing the security. In such case, the daily log and order ticket must be annotated as indicated in section 2 below- Stock Loan will then determine through an inquiry whether or not the security can be borrowed in the quantity desired. In the event Stock Loan indicates that the securiry cannot be borrowed the salesperson/trader may not execute the short sale.

88

October 1998

Documentation of Aflirmative Determination bv the Stock Loan Department To properly document those instances in which Stock Loan must make an inquiry to determine the availability of a security, the Stock Loan Department will maintain a daily computer log. This log must contairy at a minimum, the following information:

a. Date of inquiry. b. Name and quantity of the security needed to borrow. c. Name or other means of identifuing the NSI trader/salesperson who did the d. e.
Affrrmative Determination. The name of the organization contacted concerning borrowing availability, and the name of the person if done orally. An indication as to whether or not the security is available for borrowing.

Every morning prior to the open the Stock Loan Desk will confirm the NSI's ability to borrow all the securities in the S&P 500 by running the S&P 500 against an online availability list which connects to various banks which shows how much they have available to lend on each security. The list is then printed to evidence the stock loan desk review.

In the event the lender rescinds or fails to complete the loan transaction then NSI's Stock Loan Department must immediately attempt to borrow the securities elsewhere. These events must be fully documented as well.
Close-Out Procedures
The following are the procedures to be followed on all short sales of NASD securities appearing on the Nasdaq Workstation II (UPC 71) screerq pursuant to Rule 11830:

a.

A contract involving a short sale in Nasdaq securities described in paragraph (b) hereof, for the account of a customer or for a member's own account, which has not resulted in delivery by the broker/dealer representing the seller within 10 business days after the normal settlement date, must be closed by the broker/dealer representing the seller by purchasing for cash or guaranteed delivery securities of like kind and quantity.
This requirement shall apply to Nasdaq securities, as published by the Association on Nasdaq Workstations II (JPC 71), which have clearing short positions of 10,000 shares or more and that are equal to at least one half(l/2) ofone percent ofthe issue's total shares outstanding.

b.

c.

If NSI enters into a short sale transaction for a customer involving a security that is on the Nasdaq (UPC 71) list, NSI must inform the customer that this security is subject to the mandatory close-out requirements. Even if the security in subsequently dropped from the Nasdaq (UPC 71) list, the trade must be closed out if it fails by the close of business on the
10h day after normal settlement. The salesperson must make a notation on the order ticket

that the customer has been informed that the security is subject
procedures.

to mandatory

close-out

d. This

mandatory close-out requirement shall not apply to bona fide market making transactions and transactions that result in "bona fide" fully hedged or arbitraged positions. Bona fide fully hedged include: short positions offset by long positions in corresponding
October 1998

convertible debentures, preferred, calls or warrants which have a conversion or strike price at or in the money and which are convertible or exercisable within 90 days into the short security. An example of a bona fide fully hedged transaction is: a short security and a long convertible debenture, preferred or other security which has a conversion price at or in the money and is convertible within 90 days into the short security. Salespersons must make a notation on the order ticket indicating that although the security is subject to mandatory close-out, the transaction is exempt and the basis of exemption (e.g. fully hedged).

o o ' o ' '

'

Salespeople will handle short sales in accordance with NSI's Procedure for the Processing of Short Sale Transactions and Determining the Availability of Securities for Delivery described above. Trade Support will book all short sales ofNasdaq securities in a type 3 account. Daily the Stock Loan Department will list the securities appearing on the Nasdaq Workstation II (JPC 71) on the Daily Hard to Borrow List. On settlement datg if the counterparty fails to deliver the borrowed securities intended to cover the short sale, the Settlements Department will contact the Stock Loan Department to alert them of the fail Stock Loan will then try to locate the securities through another source to cover the delivery.

The Settlements and Stock Loan Departments will monitor all short sale fails for 9
business days after settlement date. If the securities can not be located by the 9ft business day after normal settlement, and the transaction is not exempt as explained in (d) above, the Settlements Department will then

contact the Margin Department to close out the transaction by the close of business on thelOth business day.
Please note that if a security on trade date does not appear on the Nasdaq (trPC 7l) list but after trade date the security appears on the Nasdaq (UPC 71) list, the transaction will noi be subject to the mandatory close-out rule.

Stock Loan Superuisor The Stock Loan supervisor will review daily the Firm's stock borrow log regarding: l) S&p 500 securities over 100,000 shares; 2) stocks not included in the S&P 500; and 3) stocks in the S&p 500 that are indicated as hard to borrow in the Available to Borrow List. Any questions the Stock Loan supervisor may have regarding, among other things, whether a stock should have been the subject of an Affirmative Determination, and, if so, whether the determination was properly reflected, must be promptly addressed with the Compliance Department.

The stock loan supervisor will receive a daily report indicating which securities need to be borrowed. This is a safeguard in the event the blanket limits are exceeded. The Stock Loan Desk can react to the exceeding shorts by borrowing the security on T+2. The log is used to demonstrate compliance with the regulatory requirement and is a required book and record. The log is subject to review by the regulators. ThcAvailable to Borrow List is also a required record which must be maintained daily by the Stock Loan Department.

90

October 1998

Questions concerning the following products should be directed as follows:

(x-9587) (x-9586) Foreign Preferred Stock, High Yield and Corporate

DomesticEquity-

Equity -

Debt

(x-9588)

H.

Market-on-the-Close and Limit-at-the-Close Orders

1.

Market-on-the-Close ("MOC") Order Entry Requirements

The NYSE has imposed a deadline of 3:50 p.m. on all MOC orders in all stocks on trading days other than expiration days. The deadline for entering MOC orders on monthly and quarterly expiration days is 3:40 p.m.

The exchanges will consider trades that are received by the Specialist at 3:50.01 p.m. or at 3:40.01 p.m. (on expiration days) to be violations.
Salespersons accepting MOC orders after 3:20 p.m. on monthly and quarterly expiration days must inform their clients that there is the possibility that NSI may not be able to execute the order due to the MOC order restrictions by the exchanges. On non-expiration days salespersons accepting MOC orders after 3:30 p.m. must also inform their clients that there is the possibility that NSI may not be able to execute the order due to MOC order restrictions by the exchanges.
enter MOC orders that violate the above time restrictions no matter what the size or monetary value of the order given. Salespersons that fail to adhere to the above policy may be subject to either a monetary penalty and/or termination of employment. Salespersons should

NOT

2.

MOC Order Procedures & Governor Lifting Authorizations

The following procedures have been implemented for lifting the internal 3:49.00 p.m. and 3:39.00 p.m. governor for MOC orders:
The NSI internal governor p.m. on expiration days.

will stay set at 3:49.00 p.m. on regular days and 3:39.00

Sales personnel will be instructed to enter MOC orders immediately upon receipt. If the client requests that we hold the MOC order until the close, our sales people must inform the client that we will send the order to the floor no later than 3:45.00 p.m. on regular days and 3:35.00 p.m. on expiration days. Equity Sales personnel are also reminded that when accepting MOC orders from clients on expiration days (after 3:20 p.m.) and on regular days (after 3:30 p.m.) that they must inform their clients of the possibility that NSI may not make the 3:50/3:40 p.m. MOC order deadline. This is due to the fact that basket orders are received via computer downloads and in many instances must be reformatted before they can be sent (or fired to the floor).

All Equity

9t

October 1998

The computer screen to Iift the governor will be provided to all appropriate trading personnel. If there is one of the three following occurrences the trader can seek to have the governor lifted:

1.

To correct a bona fide error. To cancel an MOC order which would violate NYSE Rule 80A(c). To offset a published MOC imbalance.

2. 3.
In the

The governor will not be lifted for any other reason.

digits of their social security number and enter the name (by clicking on the correct button on the screen) and last 4 digits of the social security number of the ofiicer-who authorized the lifting of the governor. This will leave an audit trail of who was involved. When the governor is lided, certain individuals will immediately receive an e-mail notification informing them of the faci that the governor was lifted.
Bona Fide Errors

of the three acceptable criteria occurs, the trader must first seek approval from one of the Compliance or Legal Offir.rs listed on the computer screen to lift the NSI governor. To access the table and lift thi governor, the trader must enter the last 4

instances where any one

Firms may not enter MOC cancellations or reduce MOC orders in size after the cut-off time except to correct a bona fide error (side, size, symbol, price, and/or duplication of an order).

If there is an error as to size we can only cancel a trade or reduce the amount of the trade. We cannot increase the amount of a trade or establish a new trade. The NySE has represented that all cancellations will be questioned and proof of the error will be requested by
the Exchange.

Example:

Original order

MOC Sell IBM 200 shares

The following would be deemed a violation if the original order was canceled and then re-sent as follows:

: M33 3:ll il',} i,,?'*.T.:: : HIJ::"

In the event of a bona fide elror, in which NSI needs to reduce the share amount, we are allowed to either (1) cancel the amount of shares that is in error so that the remaining amount is the correct number of shares (NSI's trading systems do not have the ability to redirce (shave) existing orders) or (2) cancel the trade and re-enter it as a market order. AIso, please ieep in mind that in cases of BONA FIDE elrors that would require increasing the posiiion or replacing the security with another or changing the order from a BUY to a SELL or vice versa, thI NYSE's position is that these types of errors must be dealt with by trading strategies other than MOC, such as market orders.

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October 1998

Again, if we send or change an order after the MOC cut-off time, the NYSE will question the facts and circumstances. NSI must evidence in writing that the MOC order sent to the floor was an error and preserve the record for 3 years. Limit Orders

Limit orders may be canceled at any time before execution; however, it may not be replaced with MOC instructions after the cut-off time. If a specialist receives such instructions after the cut-off time the specialist would cancel the limit order and may not accept the MOC order. The NYSE has expressed that the responsibility is on the member firm (not the specialist) to ensure that such an order is not sent after the cut-offtime. The specialist will not held liable for accepting the late MOC trade.
Limit-at-the-Close

Limit-at-the-Close (tOC) orders are allowed to be entered on any day on any stock during the trading day up to 3:40 p.m. on expiration days and 3:50 p.m. on non-expiration days. After those times, LOC orders may be entered up to 4:00 p.m. to offset published imbalances only if they are not related to a strategy involving expiring derivatives. LOC orders are not allowed to be canceled or reduced in size after 3:40 p.m. on expiration days or after 3:50 p.m. on non-expiration days, except to correct a bona fide error (see above) or to comply with the provisions of the "50-point collar" in IIIYSE Rule 80A.
NYSE Rule 80A

NYSE Rule 80A(c) requires that at any time when the Dow Jones Industrial Average (*DJI^{') advances 50 points or more from its previous day close, all index arbitrage and other basis related market orders to buy of stocks included in the S&P 500 Index must be entered with the instruction to "buy minus". Similarly, if the DIIA declines 50 points, all such orders to sell must be entered with the instruction to "sell plus" or "sell short", as applicable.
The foregoing restrictions remain in effect unless the DJIA reverses to within 25.00 points of the previous day's close. The restrictions will be reimposed if the DIIA is again 50.00 points above or below the previous day's close.
The Order Execution System will check the DIIA on Bridge Data and will alert traders with a large red message on their monitor when the Rule is in effect, and again when the restrictions have been removed. These alerts must be acknowledged by authorized System users. The System prevents index arbitrage market orders from being entered in violation of the Rule. However, traders must be sure to indicate index arbitrage account type ("D" or "IJ"). Non-index arbitrage programs which are basis related (account tlpe "C" or "Y') will not be identified by the Order Execution System as subject to the Rule, and must be entered by the trader with the correct tick instructions even though the trader will not see the alert described above.

The Rule applies only to NYSE listed component stocks of the SPX. Therefore, components of the MID and NDX indexes and certain narrow based indexes are not subject to the tick restrictions. Some narrow based price indexes are partially affected.

93

October 1998

The Rule applies to strategies involving basis related index trading. There are no tick restrictions on stock-only baskets or on single stock hedging of equity options.
Unexecuted limit orders entered before the collar may be left on the book. However, canceled, such orders must be replaced with instructions to be executed on the appropriate tick.

if

MOC orders may not be executed in violation of the Rule and must be canceled if entered before the collar on non-expiration dates, even after 3:50 p.m. However, on an expiration day, MOC orders may be left on the book or entered while the collar is on if related to previous( established expiring index derivative positions (see item H (2) above regarding the govlrnor).
Imbalances

identified by the Exchange as the expiration (pitot) stocks as well as other stocks that are not part ofthe expiration (pilot) stocks. After 3:40 p.m. or 3:50 p.m., MOC orders may be entered ihat offset imbalances in stocks that have been published. The entry after 3:40pm of MOC or LOC orders related to expiring derivative instruments is not permitted, even if such orders might offset MOC imbalances published after 3:40 p.m.

will publish MOC imbalances of 50,000 shares or more or no imbalance status in certain stocks

As soon as practicable after 3:40 p.m. (expiration day) or 3:50 p.m. (regular) the NySE

Circuit Breakers The downside circuit breaker limits are set at the following percentage limits. The corresponding point levels will be determined quarterly, and will be disseminated by the

Compliance Department.

Stock:

Coordinated halts will take place at the NYSE, Regional Exchanges.

AMEX NASDAe, CBOE and

l0% If the DrIA declines l0% prior to 2:00 p.m. E.T., the NysE will
declare a one-hour trading halt. If the DJIA declines 107o between 2:00 and 2:30 p.m. E.T., the NYSE will declare a half-hour trading halt. After 2:30 p.m. E.T., the l0% limit is not in effect.

20% If the DIIA declines 2oYo pior to 1:00 p.m. E.T., the NySE will
declare a two-hour trading halt. If the DJIA declines 2OYo after 2:OO p.m. E.T., the NYSE will declare a trading halt and will not reopen.

30% If the DIIA declines 30Yo, the NYSE will declare a trading halt and
will not reopen.
Futures: On the CME, these downside circuit breakers take effect when the trigger value is offered on the primary contract of the S&P 500, the E-Mni S&P 500, s&P Midcap 400, s&P 500/BARRA GrowttL s&p 500 BARRA value, MMI, NASDAQ 100, and Russell2000:

2.5yo

Trading can occur at or above this limit for 10 minutes or until 3:30 p.m. E.T. Trading will halt for two minutes if the primary futures
October 1998

contract is limit offer at the end of the 10 minutes or at 3:30 p.m. E.T. Before 3:30 p.m. E.T., trading will resume with the 5% limit in effect; after 3:30 p.m. E'.T., the llYo limit will be in effect.
5Yo

Trading can occur at or above this limit for 10 minutes or until 3:30 p.m. E.T. Trading will halt for two minutes if the primary futures contract is limit offer at the end of l0 minutes or at 3:30 p.m. E.T. Trading will resume with the 10Yo limit in effect. Prior to 2:30 p.m. 8.T., trading can occur at or above this limit. If the primary futures is limit offer and the NYSE has declared a trading halt (at 10% DIIA decline), trading will halt. Trading will resume with the 20o/o limit in effect when 50Yo (capitalization weights) of the underlying S&P 500 stocks reopen. After 2:30 p.m. E.T., trading can occur at or above this limit for l0 minutes. Trading will halt for two minutes if the primary futures is limit offer at the end of 10 minutes. Trading will resume with the20% point limit in effect.

looA

20Yo

Trading can occur at or above this limit. If the primary futures contract is limit offer and the NYSE has declared a halt (at20%o DJIA decline), trading will halt. Trading will resume with the 20% point limit in effect when 50% (capitalization weights) of the underlying S&P 500 stocks reopen.

Globex Trading will be delayed (up or down) until 7:00 p.m. E.T. if a NYSE Trading halt is in effect at 4.00 p.m. E.T. or the primary S&P 500 futures is locked limit at 4:15 p.m. E.T. ZndDay Limits

If the primary futures contract is limit offered at the 20Yo limit at the close of regular trading hours and the cash equity markets fall more than 20Yo, the next trading day will have modified price limits. The l0% limit would be in effect only for 10 minutes or until 3:30 p.m. E.T. Trading will resume with the 20Yo limit in effect. Additionally, to maintain coordinated procedures, trading will halt whenever the NYSE declares a halt, regardless of the futures price level. Futures trading will resume only after 50Yo (capitalization weights) of the
underlying S&P 500 stocks reopen.

I.

OFBoard Trading and After-Hours Trading (NYSE Rule 390 and Amex Rule 5)

1.

NYSE Rule 390 and Amex Rule

NYSE Rule 390 and AMEX Rule 5 prohibits members, member organizations and nonmember broker-dealers who control, are controlled by or are under common control with a member or member organization from effecting principal transactions in listed stock in the U.S. Over-the-Counter market. In additioq it prevents member firms from acting as agent for both the buyer and the seller, i-e. dual agency or in-house cross transactions, in any over-the-counter purchase or sale of an NYSE listed security. The rule, however, does not prevent a member firm
October 1998

from executing a one sided agency transaction in the over-the-counter market. For example, NSI is not prohibited from executing an agency order with a third market maker for any iirt.d
security.

The following transactions are exempt from this rule:

Primary distributions and registered and unregistered secondary distributions, effected offthe floor of the NYSE.
A transaction at a price unrelated to the current market price to correct an error or to enable a customer to make a gift.

A transaction pursuant to a tender offer.

The purchase or sale of securities effected on the exercise of an option pursuant to
the terms of the option.

Any transaction involving the right to acquire securities at a pre-established price

unrelated to the current market value of the securities. Transactions in listed securities where trading has been suspended pending review of the listing status of the security.

The acquisition of securities by a memb er organization as principal in anticipation of an immediate special offering or exchange distribution pursuant to NYSE Rule 391 or Rule 392.

o o t

Transactions by an issuer that do not involve a public offering. Transactions involving less than one unit of trading.

AnY other transactions that the NYSE permits under extraordinary or emergency conditions with prior approval of the IlySE.

Trades in listed stocks may be done on foreign exchanges at any time, either on a principal or agency basis, and trades in Iisted stocks may be done in foreign over-the-counter markets outside ofNYSE trading hours.

addition to the above exemptions, the NYSE publishes a list of guaranteed and preferred stocks that are exempt from the provisions of this Rule. However, member organizations are required to review the market on the floor so tha! whenever possible, the order can be executed on the floor. SEC Rule 19c3-l prohibits stock exchanges from applying ofl board trading restrictions to any securities listed after April 26, 1.g7g. For securities appJaring on the l9c-3 list you may act as either agent or principal in effecting over-the-countei-trade{ even during Exchange trading hours. Even though these trades may bi executed off-board they are still subject to the SEC fee unless the trade is executed in a foreign market after Exchange trading hours. It is also essential to realize that if these trader offiboard, they aie "*i".rted subject to the NASD's over-the-counter transaction reporting"." requirements. To ensure the

In

96

October 1998

accurate recording and reporting of all offiboard transactions, all orders should be forwarded to the trading desk for execution.

Questions regarding NYSE Rule 390 should be directed to the Compliance Department or Legal Department.

2.

Application of NYSE Rule 390 to Off-Board Stock Crosses after NYSE Hours

NSI will be in compliance with NYSE Rule 390 and AMEX Rule 5 when it crosses a securities transaction abroad, if it receives a customer order to execute a stock basket at closing prices or it is agreed by the parties that such execution will occur after the NYSE's close (5:15 p.m.) on an overseas facility.
The receipt of an unconditional customer order during the day, with an agreement that execution will take place after the NYSE's close is consistent with Rule 390 and it is irrelevant whether that stock order was solely for the purpose of executing an exchange-for-physical ("EFP") or for the purpose ofexecuting an ordinary stock cross.

NSI may cross a customer order overseas after NYSE hours based on the day's closing prices (not on the previous evening's closing prices or on an intra-day price) @FP or an ordinary stock cross) if the following procedure is followed.

l. 2. 3.

NSI receives verbal agreement from the client that the unconditional order will be crossed after NYSE hours (5:15 p.m.) overseas.

A notation is made on the order ticket verifying that NSI

have agreed to cross the order after NYSE hours overseas.

and the customer

Our confirmation to the client states that the trade(s) were crossed overseas.

agreed as a material term of the trade to cross the trade after hours overseas. Salesmen and traders must check the appropriate box on the order ticket.

It is very important that we evidence that NSI and the customer

3.

Trade Reporting Requirements for Trades Executed Outside Normal Market Hours

When NSI does a trade before 9:00 a.m. or after 5:15 p.m. in certain securities* the trade must be reported to NASDAQ. To ensure that the system "trade reports" only the required transactions it will be necessary for salesmen and traders to mark their appropriate tickets "Form T" and also time stamp every ticket accurately.

NASDAQ Trade Reporting rules govern NASDAQ NMS securities, NASDAQ SmallCap Market securities, NASDAQ Convertible debt securities, over-the-counter equity securities (foreign securities), and exchange-listed securities eligible for inclusion in the
Consolidated Quotation Service.
October 1998

The following is a list of the types of transactions that presently are reported on Form T:

l. 2. 3.

after hours crosses abroad OI-YSE, AMEX and NASDAQ securities); international baskets (e.g. Germarg French, Italian securities) executed abroad;
and

individual Canadian security transactions. (We are reporting the customer side of the trade.)

The salesmen or traders should mark "Form T" on these tickets and any other after hours trade. It is imperative that such tickets be time stamped. The time of execution must be reported
also.

Please note that there is one exception for reporting a foreign security transaction. NSI trades a security or a basket of stocks with a broker in the country where the securities are

If

primarily traded (e.g., German stocks with a German broker) then the transaction is not reportable. The NASD exempts these trades because it is felt that the executions are either reported to or executed on a foreign exchange. If such a trade was done as "riskless principal,' based upon a customer order, then NSI must report the customer side. Therefore, in riskless
principal trades, the customer order ticket would be marked "Form T,'.
Each trader or salesperson must make this determination at the time the ticket is written and mark the ticket accordingly. If the ticket is not marked "Form T", it will not be automatically reported the next day and NSI will be in violation of this requirement.

J. Incentive Trading Procedures (Guaranteed

BenchmarD

An incentive-based trade is atrade in which NSI agrees with a customer to a guaranteed benchmark price or better (e.g., Closing Price or Volume Weighted Average Price). This is done by agreeing with the customer to guarantee a particular benchmark (MOC, VWael or better, then trading the position during the day in an attempt to exceed the benchmark. If NSI does better then the benchmarlg the profits would be divided at a pre-negotiated amount between the customer and NSI. If NSI does not surpass the benchmark level in either direction buy or sell, then the customer would receive his guaranteed benchmark and NSI would absorb the loss.
The following procedures must be followed when engaging in incentive-based trading:

1.

Salespersons will properly time stamp and document on the order ticket the terms and conditions of the trade:

(l)
(2) (3)

the specific terms of the incentive trade; the agreement with the customer to cross the trade overseas after 5:15 p.m. or in the NYSE's Crossing Session II; and the negotiated split (if NSI trades betrer than the benchmark).

2.

The proprietary desk will execute the trades in an identified account (Incentive Trading - (average price account)) on a principal basis. This account (for purposes
98

October 1998

of the Merrill Lynch "no action" exemption) must not be opened as a

account. J.

hedged

Once the order is completed in the designated proprietary account, a cross must occur between NSI and the customer either overseas after 5:15 p.m. or in NYSE's Crossing Session II depending on the agreement between NSI and the customer.

4.

If NSI sulpasses the benchmarlg then the difference between the benchmark price and the execution price is divided on the pre-agreed upon basis between NSI and the client. NSI's negotiated percentage of the difference will be reflected as part of
NSI's commission.

5.

If NSI does not surpass the benchmarlg then the customer receives the benchmark and NSI absorbs the difference between the execution price and the benchmark price. This will be accomplished through the execution of a cross between NSI and
the customer at the benchmark price either on NYSE's Crossing Session hours overseas cross.

II

or after

6. DPTR reporting will reflect a proprietary trade to establish the position and the
trading strategy should be coded as Trading Long (TL) for customer buys and Trading Short (TS) when customer sells for Program Strategy. Then the cross between NSI and the customer either on an overseas exchange or on NYSE's Crossing Session II should be coded as Customer Facilitation (CF).

7.

Customer's confirmation must disclose all the pertinent facts of the trade such as.

(1)

if

crossed on BSX,

it

must indicate "Executed on BSX through

an

Affrliate"; (2) "Commissions include

profit sharing executions and

standard

(3)

commission"; and "NSI acted as principal".

K. Procedures for Trade Warehousing

1.

Introduction customers will request that we refrain from the final booking of partial executions until an entire order is completed. Where the size or other factors involved in the trade suggest that partial confirmations are uneconomic, the Supervisor for an area may approve the "warehousing" of transactions.

At times,

2.

Business Issues

The following issues should be considered by the Supervisor in determining whether or not to approve a trade warehousing request:

a. b.

Size of order compared to actual executions effected on a particular day;

Significance of economies to be achieved (e.g., qualifying for favorable thirdparty or affiliate commission level);
October 1998

c. d. e.
3.

Counterparty credit risk; Financing costs to the firm; and Authority of counterparty to warehouse trades.

Procedures for Warehousing

a. b. c. d.

e.

f g. h.

Subject to the Supervisor's review ofthe factors indicated above, executions may be warehoused for a period not to exceed 2 days. Exceptions to the 2 day limit must be approved by the Division Head and Compliance. A request to warehouse orders in excess of $2 million must be approved by the Equity Division Head prior to agreeing to warehouse the transaction The Supervisor must establish procedures for the hedging of any foreign exchange requirements to settle the transactions in light of the delay in settlement with the customer. Written notice (e.g. e-mail or fax) of each execution must be given to the customer on trade date and copies of such notices must be retained in accordance with standard recordkeeping requirements. (This doesn't require issuance offrcial confirmation but does require evidence that the counterparty has been informed of and thereby accepts each execution.) The Supervisor must conduct reasonable due diligence to determine that the counterparty may engage in such delayed confirmation of trades purSuant to its authorizatiorq compliance or other procedures. The Warehouse Transaction Request Form must be completed to evidence such due diligence. (The form is available from the Compliance Department.) Order tickets (designated each as "Sf') must be completed to indicate the customary information, including the size of the position to be warehoused (and any changes to such information). A copy of the order ticket must be given to Equities Operations on each applicable trade date reflecting the cumulative executions. A daity report reflecting all inventory positions related to trades marked as warehouse trades will be provided to the designated sales supervisor. A Warehousing Transaction Request Form must be completed and submitted. The form is available from the Compliance Department.

of

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October 1998

L. Restrictions on Proprietary Trading - "G Orders"

1.

Basic Prohibition

Unless one of the exemptions described in Subsections (2), (3) or (a) below applies, Section f f(a) of the Exchange Act prohibits NSI from itself effecting any transaction on a securities exchange of which it is a member for:
the Firm's proprietary account. the account of an associated person of the Firrn, other than a Firm employee, officer or director who is not a member of the exchange on which the transaction is executed.* (Transactions for Firm employees, officers or directors, who are members of an exchange are subject to the restriction); and 3. an account over which the Firm or an associated person of the Firm exercises investment discretion, unless the conditions described in Subsection (4) below have been satisfied.

1. 2.

One of the most significant exemptions from the restrictions of Section 11(a) is an

exemption

for dealers acting as third

"G Orders"

market-makers

Subsection (4) below.)

or block positioners.

(See

2.
for
a

Exemption for

Pursuant to Section tt(a)(l)(G) of the Exchange Act, the Firm may effect transactions Firm proprietary account (or certain associated persons of the Firm) through a Firm floor broker if the order is identified as a "G" order when sent to the floor and it yields parity, priority and precedence in execution to orders for the account of persons who are not members or associated with members of the Exchange.

3.

Exemption for Executions by Unaffiliated Brokers (The "Effect vs. Execute" Rule)

1.

General

The restriction of Section 11(a) of the Exchange Act does not apply to transactions for the Firm's proprietary account or the account of any associated person if:

(1) neither
(2)

the Firm nor its associated persons participate in the execution of the transaction; and the order is entered from offthe floor.

The term "associated person' means any employee, officer, director or branch manager of the Firrq or any person directly or indirectly controlling, controlled by, or under common control with the Firm. l0t

October 1998

2.
office:

Procedures for Complying

The "effect vs. execute" rule can be complied with if the order is sent from the Firm's

(r) to the order room of an unafiiliated member; (2) directly to the booth space of the unaffiliated member; or (3) to the floor via Dor, ABS or the NYSE oddJot execution system (or comparable systems on other exchanges). The order size limits for DOT are 30,099 shares for market orders and99,999 for limit orders.
Note that orders that exceed the above share limits may be broken up and entered into DOT. Therefore, for example, if NSI received a market order from Nomura Singapore for 50,000 shares, you could place five orders of 10,000 shares each through th; DOT
system and avoid the restrictions under the "G, order rule.

The Firm also may use its own phone to transmit orders to the floor. Eowever, while an employee of the Firm can pick up the phone, that employee cannot take the order from upstairs. The Firm employee must arrange to have the unaffrliated broker (or an individual authorized by such broker) come to the phone to take the order.

4.

Statutory Exemptions

The following transactions are exempt, by statute, from the prohibition contained in Section I l(a) of the Exchange Act:

l.

Certain Block Transactions

Transactions by a dealer acting within the capacity of a "market-maker,, (e.g., third market-makers or block positioners) are not subject to the Section 11(a) prohibition. The exemption applies to the disposition as well as the acquisition of a block or other market-making positiorq because both are part of the same transaction as to which the "dealer is acting in the capacity of a market-maker". However, the SEC has noted that the exemption is not available if a transaction liquidating part or all of the position has been delayed for tax purposes, investment purposes or other purposes unrelated to the current state of the market in the security.

ffany position in excess of the portion of the block being facilitated is acquired or disposed, that portion would have to be effected as a "G" order unless another
Section 11(a) exemption were available (e.g.,
hedge).

if

the position were intended as

2.

Bona Fide Arbitrage Transactions

Bona fide arbitrage transactions are not subject to the Section 1l(a) prohibition.

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October 1998

The criteria the NYSE considers in determining whether a transaction will be deemed to constitute bona fide arbitrage include the possibility of a profit after expenses, the presence of existing bids and the time frame.
3.

Risk Arbitrage Transactions Risk arbitrage transactions are exempt from the Section 1t(a) restrictions. To be exempt, a risk arbitrage transaction must be in connection with a merger,

acquisition, tender
recapitalization.

offer or other similar transaction involving

The SEC takes the view that the exemption applies only to positions established after the public announcement of the risk arbitrage event and
before completion or termination of the risk arbitrage event. 4 Bona Fide Hedge Transactions

Bona fide hedge transactions involving a long or short position in an equity security and a long or short position in a security entitling the holder to acquire or sell that equity security are not subject to the Section I l(a) restriction. The SEC believes this exemption implies an appreciable offset of risk for all or part of the position being hedged. To the extent that a position does more than offset the ris( the excess position is not part of a bona fide hedge. Where a bona fide hedge has been established, the exemption applies to the transactions liquidating the hedge. However, if a hedge is eliminated by liquidating only one of the positions comprising the hedge, only that liquidating transaction qualifies for the hedge exemption. Transactions liquidating the remaining positions that had formerly been part of the hedge do not so qualify.
5

Stabilizing Transactions

Transactions by a member effecting stabilizing transactions to facilitate a distribution in which the member is participating are not subject to the Section 1l(a) prohibition. Stabilizing generally consists of bids or purchases effected for the purpose of preventing or retarding a decline in the open market price of a security. Such transactions must comply with Rule 104 of Regulation M to be exempt from Section 1l(a) The SEC takes the view that a trade liquidating all or part of a position acquired under this exemption would itself be exempt from Section 1l(a).
6

Transactions in Error Transactions by a member to offset a transaction made in error are exempt from the Section 1 1(a) prohibition.
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October 1998

7.

Accounts ofNatural Persons Transactions effected for the account of a natural persorL the estate of a natural persorL or a trust created by a natural person for himselflherself or another natural person are exempt from the Section I l(a) prohibition.

M. Use of the Small Order Execution System (,.SOES,,)

Listed below are the specific rules and procedures for using the Small Order Execution ("SOES"): System

1. 23. 4. 5.

Only NSI customer orders may be entered for execution through SOES;

Only Series 7 qualified employees of the Equity Department who have been instructed as to the SOES rules and how to ,^,r" it system properly may enter " customer orders through SOES;
No short sales are permitted to be entered into SOES;*
The maximum order size in SOES varies from 200 to 1,000 shares, depending upon trading characteristics of the securities. Larger orders may not be broken into smaller-sized orders to fit under the maximum size limit;*+ a;d

The system now provides an automated quotation update capability for market makers. This is a voluntary service (on an issue ty issue basis) which will automatically refresh a market maker's quote when its exposure has been depleted and reestablish the original quote size and the minimum exposure limit of two
executions.

Any questions regarding the use of SOES should be directed to the Compliance Department.

N.

NASDAO Trading Guidelines

These Nasdaq Trading Guidelines (the "Guidelines") are for the exclusive use and benefit of employees of Nomura. The Guidelines are not intended to answer every questions or address every issue that may arise in the course of NSI's Nasdaq market-making activities. When questions or issues not addressed by the Guidelines arise, NSI employees shoJd promptly

Salespersons are required to ask customers whether sale orders are long or short, and short sale orders may not be entered into SOES. Short sales may be ex-ecuted through SelectNet or over the telephone. (See Section 7.G.-*Short Sale Restrictionsrr)

'l.*

Any orders based on a single investment decision that are entered by a SOES order-entry firm for accounts under the control of an associated person or publii customer will be deemed to constitute a single order and will be aggregated forletermining compliance with SOES order-size limits. Trades entered within any five-minute periJd in aicounts controlled by an associated person or public customer will be presr.id to be based on a
single investment decision.

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October 1998

consult with the Compliance Department prior to taking any action that may prove to be a violation of the Guidelines. These Guidelines are not intended to replace other compliance memoranda or other regulatory requirements, such as the specific Best Execution and trade
reporting requirements.

(1)

Settingy'Updating Ouotations for Stocks

.
.

Following the "pricing convention" described by the SEC is prohibited.*

Traders are prohibited against trading only in even-eighths. Traders are permitted to update stocks in any fraction (l/4, l/8, etc.), as long as the update is made:

(1)

in a manner that does not affect customers adversely;

(2) independently (i.e.,

without consulting other market-makers and without reference to the way in which other market-makers update quotes); and

(3) for sound market reasons. o

A trader must create or display the new inside quote for any size order in NASDAQ
securities.

NSI traders are prohibited from displaying quotes in order to help another market maker execute trades to its advantage.

NSI traders are prohibited from displaying quotes in order to orchestrate artificial price
movements.

. .

NSI traders are prohibited from displaying prices with no intention of trading at those
prices, to help other market makers.

Although maintaining a rigid quotation pattern in a particular stock or group of stocks over a long period of time may invite SEC or NASD inquiry, an NSI trader is permiued to adopt such a pattern so long as he or she:

In its August 8, 1996 Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and the Nasdaq Market, the SEC purported to describe a "pricing convention" in Nasdaq stocks that, the SEC believed, consisted of "rigid adherence" to a practice by which a market-maker always updates in 1/4s stocks with a dealer spread of 3/4 or more and does not quote a stock in l/8s without narrowing the spread to 1/2. The SEC's view was that this "convention" was a market-wide phenomenon that a given trader followed based on his or her understanding of the "professional" or "ethical" way to make markets. Nothing in these Guidelines should be construed to indicate that NSI agrees with the SEC's characteization of a "pricing convention" or that NSI ever participated irq adhered to, or had knowledge of such a "convention."
105

October 1998

(1) does so independently; (2) believes that following a trading pattern trader's customers, and

is consistent with the interests of

the

(3)

believes that the pattern adopted is consistent with the liquidity characteristics the stock.

of

An NSI trader is never permitted to discuss with another market-maker any aspect of the reason *hV or she quotes/updates a stoclg either in general or in reference to a specific !._ stoclg a specific quote or a specific quote update. Any inquiry or comment fronr, or conversation with, another market-maker regarding the NSI trader's quotes or quote updates must be reported to the Compliance Separtirent immediately; failure to do so will be grounds for discipline.
General Trading Principles

'
(2)

trader is never permitted to refuse an othenvise valid request to trade on the ground that the contra firm:

(1) (2) (3) (4)

does not honor its own markets; does not trade in sizelis not "real"; is a firm that performs a large segment of its trading through SOES or SelectNet; or

does not trade or make markets in a manner that an NSI trader would regard "ethical" or "courteous-"

as

A trader is never permitted to engage in a conversation with another market-maker about that market-maker's quote, the size at which that market-maker trades, etc. Specifically, a trader may not:

(l)
(2)

questiorL or comment or1 whether another market-maker makes markets "professional" manner;
ask whether another market-maker "means to be there", or words to that effect.

in

An NSI trader should not make derogatory or harassing comments to or about other trader should not call another market-maker "unprofessional"

market-makers on the telephone, through SelectNet or uny other media. For example, a or "unethical,,, or otherwise comment on the market-maker's abilities or manner of doing business.

An NSI trader is not required to hit or take stocks, or otherwise contact other marketmakers, in any particular order. However, a trader should follow the following rules with regard to the decision to contact other market-makers:

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October 1998

(1) A trader may give "first call" to a market-maker

in the stock.

that generally provides liquidity at

a price favorable to the trader's customers or who recently has been involved/active

(2)

A trader may seek to learn whether a market-maker with whom he or she recently has transacted is interested in additional size by first stating a size/price or a bid or offer and then asking a question such as "do you care?" In making such a call, however, the trader should not indicate whether -- or how -- he or she will move a quote if the market-maker indicates that he does not "care".
provide liquidity at favorable prices or have not recently been active/involved in the stock after first calling other firms that, in the trader's judgment, are better candidates to fill a customer's order.

(3) A trader may call firms that do not generally

(4)

A trader should not avoid calling any firm if that firm has the best quote, unless the trader's judgment is that transacting with another market-maker (even if that market-maker displays a quote other than the best quote) will provide the trader's customers with greater liquidity and result in a better execution for the customer.

(3)

Cooperation with Other Market Makers on Ouotes/Trades trader is never permitted to establistr, change or refuse to change a quote at the request even if the trader is not involved in the stock.

of another market-maker. This rule does not change

A trader is never permitted to ask another market-maker to establistq change or refuse to change a quote . This rule does not change even if the trader believes that the other market-maker is not involved in the stoc( that his quote is not "real", etc. Even in those instances in which the trader has just transacted with another marketmaker, and that market-maker did not fill the NSI trader's order or indicate that he had more to do in the stock at this quote, a trader should not ask the other market-maker to move his quote. Rather, the NSI trader should do the following:

(l)

bid the other market-maker for more stock or send a SelectNet order for more stock;

(2) if the other market-maker refuses to trade more stock within 30 seconds of the
transmission of a SelectNet message, the NSI trader may lock the other marketmaker's market;

(3) if the market-maker declines to transact

and the NSI trader has

to lock the market,

the trader should notify the head of trading, and the Compliance Department who should apprise the NASD of the situation. Quotes entered that result in "locked" or "crossed" markets are not reasonably related to the prevailing market and therefore are prohibited, except under extraordinary circumstances. A "locked" market is when one market maker's bid is equal to another market maker's ask in the same security. A "crossed" market is when a market maker's
October 1998

bid is greater than another market maker's ask in the same security. prior to entering a quote that would lock or cross a market, traders should make a reasonable effort to execute transactions with the market maker whose quote would be locked or crossed in an effort to cause the market maker to adjust its quotes to the market. NSI may not enter an order that would lock or cross a market.

NSI trader has his or her market locked by another market-maker, the trader may contact the other market-maker. Upon doing so, the NSI trader should ask whether the other market-maker had tried to call NSI or had sent a SelectNet message prior to locking the market. In such a conversation, the NSI trader should not make iefer"rrce to any costs imposed by the fact that the other market-maker locked the market. If the market-maker declines to un-lock the market, the trader should contact the head of trading, and the compliance Department and who should apprise the NASD ofthe situation.

NSI traders are required to honor their firm quotations when another market maker is attempting to enter an order that would lock or cross an NSI market maker quote. If the

The SEC has not taken a clear position on the question whether splitting prints with another market-maker, or otherwise working with other market-mak"rr -in putting together multi-party trades, is improper in every case. The following rules, however, are
clear:

(l) in no instance may a trader agree to split prints with another market-maker in
connection with an agreement to change either firm,s quotes;

(2) if (in the course of putting together a trade)

an NSI trader has protected another market-maker, the trader should make clear to the other market-maker the size and price on which the market-maker is protected. This may be done by telling the other market-maker that he or she is "stopped" at a stated sizelprice or that the market-maker is "good" on at least a stated size/prize. Although it e NSI trader is not required to clock a ticket prior to the completion of the entire trade, for "stops" of significant size, it is advisable to complete aticket as quickly as possible;

(3) NSI must,

as a matter of practice, disclose to customers that other market-makers in structuring complex trades.

it may negotiate with

(a) "News"Alse of "Co

* Information

In connection with bidding for or offering stoch a trader is permitted to mention the fact that there is "news out" on the stoclg so long as doing so is consistent with the interests of NSI customers and the "news" has been disseminated publicly. Under no circumstances may an NSI trader reveal confidential customer information, including the identity of a customer, to another market-maker.

As the SEC has used these terms, "confidential" information refers to information about customers, "proprietary" information refers to NSI information(e.g-,researctq private conversations with analysts, etc) not shared with the market generally.
108

October 1998

Traders are prohibited from engaging in any activity which benefits the firm or other market makers at the expense of a customer.

Any instance in which another market-maker reveals the identity of its customer to an NSI trader must be reported immediately to the Compliance Department.

An NSI trader is never permitted to share confidential or proprietary information

(including trading intentions and desired price movements) with another market-maker.

With regard to NSI research reports or research informatiorq traders:

(l)
(2)

may not reveal information that has not been disseminated publicly;

may respond to inquiries about, or discuss, NSI researctr, if doing so is consistent with the interests of NSI customers and the research has been disseminated publicly.

An NSI trader is never permitted to share confidential or proprietary information with another market-maker for the purpose of having that market-maker change its quote, or for any other reason.

An NSI trader is not permitted to share confidential or proprietary information with another market-maker in exchange for an agreement that the other market-maker will
not use that information in a manner adverse to the trader's position or interest.

An NSI trader is not permitted to agree that he or she will not use confidential or proprietary information received from another market-maker in a manner adverse to the other market-maker's position or interest. If an NSI trader receives such informatiorq it
should be immediately reported to the Compliance Department.

An NSI trader is permitted to reveal that he or she may have additional size (either generally or the specific number of shares) behind an initially agreed trade amount, provided that the following conditions are met:

(l)
(2)

the trader believes that it is in the customer's best interest to reveal information regarding additional size; the trader does not reveal information regarding size: (i) to protect or favor the other market-maker; or (ii) based on an understanding or agreement that the other marketmaker would reveal additional size to the trader, if their situations were reversed.

(5)

Trade Reporting

NSI employees may not delay the report of a Nasdaq trade or otherwise refuse to comply with the trade reporting requirements. This prohibition is absolute: trades must be reported according to NASD rules even if a customer, a broker or another market-maker requests that a report be delayed or even if a delayed report might be deemed economically or otherwise beneficial to NSI or another entity. Specifically, all trades must be reported within 90 seconds of execution. Traders are cautioned not to overuse late reporting .sld trade reports. Every effort must be
109

October 1998

made to report the trade on a timely basis. AIso, the type of trade must be report c,onectly, i.e., the applicable identiffing information of the trade.

(6)

The Limit Order Display Rule ("Display Rule,,)

The limit order display rule requires the public display of customer limit orders priced better than an exchange specialist's or market maker's quote. As a market maker you have the following options when you receive a client limit order that is priced at or better than your quote. you can: (1) Execute the order immediately.

(2) Display the order in your quote.

(3)

Send the order to another market maker to execute or display in its quote.

(4)
If you

Send the order

('ECI.r'),
alternative.

to an Electronic

communications Network

such as Instinet, that qualifies under the ECN dispray

chose to display the order (#2 above) in your quote please note the following:

rf the order is priced better than your quotg whether or not the quote is at the inside market price, you (as the market maker)
are obligated to disptay the order,s price and size.

as your quote, and the quote is at the inside market price, then you must increase quote size to reflect the client's order size. However, if the client's limit order is of de minimis size (less than or equal to l0 percent of the market maker's displayed size), the market *ake. would not have to update its quote size to reflect the size of the limit order. rf you receive a customer timit order priced at your quote and your quote is not at the inside market, you are not obligated to reflect the limit order in your quote size. Other key issues about the Limit Order Display Rule are:

rf the order is priced the same

30 Second Time Period to Disolav The 30 second time period to display a client limit order begins when the order is received by the trader, rather than when the institutional sales person fiist receives the order from the client.

Market Openinss
The SEC has acknowledged that special circumstances are involved in setting an opening price in the OTC market and the volume of orders that may accumulate at thelpening an[ therefore market makers will not be required to include limit orders in the opening quotJor to display limit orders within 30 seconds of receipt during the period shortly following the opening.

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October 1998

Full Displav of Client's Limit Order

You may not send part of a client limit order to another market maker to display. You must either display the full size of the order in your quote or send the entire orderto the other market maker who then must display.

Lock or Cross the Market

The Display Rule does not require a market maker to immediately display a client limit order that would lock or cross the market. Exceptions to the Limit Order Disnlav Reouirement
The following are exceptions to the display rule:

(1) The client expressly requests that its order not be displayed. (The request may be made
prospectively by contract, or on an order-by-order basis).

(2) Non-regular way settlement client limit orders. (3) Odd-lot orders. (4) All-or-none limits orders. (5) Client limit orders executed upon receipt. (6) Block orders (at least 10,000 shares or with a market value of at least $200,000). (7) Client limit orders delivered to another firm that complies with the Display rule. (8) Limit orders immediately delivered to an ECN which complies with the rule. (9) Limit orders immediately displayed in a NASDAQ or exchange system. (10)Norheld limit orders.
See

Exhibit M for further information regarding the SEC's Order Handling Rules.
The Quote Rule (the "ECNf'Rule) The ECN Rule requires you (as a market maker) in NASDAQ or exchangeJisted stocks to reflect in your quotes any better priced orders that you place into an ECN. An ECN is defined by the SEC to include "any electronic system that widely disseminates to third parties orders entered therein by an exchange specialist or OTC market maker, and permits such orders to be executed in whole or in part." It is important to note that the market maker is not required to display the full size of the superior priced order placed into the ECN in its quote. Rather, the market maker is only obligated to display up to the applicable minimum quote size under NASD rules.

(7)

The ECN Displav Alternative

Instead of updating your quote to reflect better priced orders entered into an ECN, you may comply with the display requirements of the rule through the ECN itself, provided the ECN has met two conditions: (l) the ECN must ensure that the best priced orders entered by Market makers into the ECN are communicated to NASDAQ for public dissemination; (2) the ECN must provide broker/dealers access to orders entered by market makers into the ECN, so that broker/dealers who do not subscribe to the ECN can trade with those orders. This access must be equivalent to the access that would have been available had the market

lll

October 1998

maker reflected their superior priced orders in their quotes. In contrast to the situation in which a market maker updates its quote to reflect a superior priced order entered into

an ECN, under this ECN Display Alternative the full size of the ECN order must be publicly displayed. Roundins Orders
ECNs frequently permit trading in minimum price increments narrower than the minimum quotation increments on NASDAQ or the exchanges, the SEC has interpreted the ECN rule to provide that a market maker would be in compliance with the rule of the ECN displaying its order (or the market receiving the order from the ECI.q were to disseminate its order rounded up on the offer and down on the bid to the nearest acceptable minimum quotation increment.
been approved under the ECN Display Alternative (although other negotiaiions between these ECNs and NASDAQ are still on-going):

You should take note that at this time (per NASDAQ) the following ECNs have

ECN
Instinet Corporation Bloomberg Trade Book
Island TerraNova Trading

MMII)
INCA#
BTRD#

ISLD#

LLC

TNTO#

Please refer to Exhibit Rules.

M for more information regarding the SEC,s Order Handling

(8)

SEC and NASD Firm Ouote Rule

NSI traders are prohibited from refusing to honor their firm quote obligations, especially in a selective and discriminatory fashion. SEC Rule I lAcl-l requiies market--makers to disseminate two-sided quotations and sizes, and requires market makers to be firm for the price and size published. In additiorl the NASD firm quote rule, Rule 4613(b), states that"a marlcet malcer that receives an ofler to buy or sell from another member of the Association shall execute a transaction for at least a normal unit of trading at its displayed quotations as disseminated in The Nasdnq Stock Market at the time of receipt of any suih oXer. If o market malcer displays a quotationfor a size greater than a normal unit of trading, it sholl, upon receipt of an ogei ti Ouy or sell from another member of the Association, execate a transaction at least it the size displayed"
(e)

The Supervisor of the Nasdaq trading desk is the NSI Principal primarily responsible for ensuring compliance with these Guidelines and with other applicable rules and proCedures. The Supervisor will, throughout the trading day, review the trader's screens, scrutinize the trader,s

tt2

October 1998

markets to ensure that traders are displaying the inside quote for any size order in Nasdaq securities, inspect selected order tickets and blotters, and monitor the trader's conversations with customers, salespeople and other brokers or dealers. In additiorq the Supervisor will, on a daily basis, review all of the previous trading day's ordertickets as well as a trade blotter report. The Supervisor from his own NASDAQ workstation will monitor the market making and quotation activities of the trader to ensure that the trader is complying with NSI's obligations as a marketmaker and also to ensure that the trader does not engage in the prohibited conduct as described in these Guidelines. At least annually, the Compliance Department will audit the trading desk for late reporting and inaccurate reporting. NSI has instituted a compliance education and training program. The program includes among other things, providing copies of the SEC's Report Pursuant to Section 2l(a) Repot ('21(a) Report') to each Nasdaq trader and requiring a signed acknowledgment from the trader certifying that the trader has received and fully reviewed a copy of the zl(a) Report and agrees to adhere to the Guidelines. In additioq the Compliance Department will also conduct annual meetings to review all topics addressed in the 21(a) Report. Also, on an as needed basis, the Compliance Department will conduct meetings to discuss compliance issues, regulatory developments, etc.

(10)Discipline Any violation of these Guidelines will be reported by the Supervisor to the head of the Equity Divisiorq to the Director of Compliance and to the General Counsel. Any violation of the Guidelines subjects the NSI employee to discipline, including, but not limited to: (1) reprimand, (2) loss of regular or supplemental compensatiorq (3) forfeiture of, or decrease irq a regular or
discretionary increase in future compensation, (4) suspensiorq and/or (5) termination.
(1 1)

Training and Procedural Review

dll traders are required to read and abide by these Guidelines in addition to other NSI
policies and procedures governing market-making activities, which collectively set forth the rules and regulations which govern all trading activities. Such review will be evidenced by a signed acknowledgment sheet certi$ing that the trader has received and agrees to abide by all such procedures.

AIl

traders must participate in the compliance education and training program. The program consists of the following:

(l)

Each participant in the training program

Report. Each participant must read the

will

zl(a) Report and must sign

receive a copy

of the SEC's 21(a)

an

acknowledgment certifying that the participant has received and fully reviewed the 21(a) Report and agrees to adhere to the Guidelines.

At least once each year, the Compliance Department will convene a meeting of all traders. During these meetings, the Compliance Department will review the
Guidelines and the principal subjects addressed in the 21(a) Report, as well as all other applicable compliance procedures and those rules and regulations issued by the SEC or the NASD relevant to Nasdaq market-making and trading.

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October 1998

(3) As necessary, the Compliance Department will

O. Married
Puts

convene meetings

compliance issues, regulatory developments and the like.

to

address

1. a.

Overview Introduction

As used in these procedures, "Married Puts" are transactions involving the simultaneous purchase of stock and short ternq deep in the money puts that have features such as barriers or knock-outs (or purchases of stock and other derivatives such as put/call combinations) which increase the likelihood of the put being exercised. The purpose of Married Put transactions is to facilitate sales on a long basis by the purchaser of ihe stock and derivative. Married put transactions present a series of complex legal, regulatory, operational and supervisory issues (e.g., margirq commodity, securities registratiorq short rui. .,rl"r, Exchange trading resirictions and broker dealer registration) and these procedures are designed to addrJss such issues and to govern the firm's participation in Married put transactions.

b.

Approved Structure

To ensure that the type of Married Put transaction meets applicable legal and regulatory requirements, Married Put transactions for a proprietary or a customer account must conform to the following restrictions (unless the Legal and./or Compliance Department pre-approve otherwise in writing).
Puts must be physically settled only;

Expiration must be within five days of trade date;

Puts must be sold only to Institutional Accredited Investors (as defined for purposes Regulation D of the Securities Act of 1933);

of

Transactions may not be solicited pursuant to written offering or marketing materials (other than the required confirmations); and Puts may not be identical to any Exchange traded options.

c.

Short Sales

with applicable regulations (e.g., short sale price restrictions and affirmative determination requirements). For example, the long position for any account must be deemed immediately

A critical aspect of Married Puts relates to the particularly important requirement that positions be carefully monitored to ensure that all related sales of stock-are coo."ily handled as Long or Short. Thus, to the extent that any person is long as a result of implementing a Married Put stratery, care must be taken to monitor the net position on a real timi basis in accordance
reduced to reflect any exercises of puts, whether by operation of an automatic exercise feature or pursuant to an affirmative decision to exercise the option.

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October 1998

2. a.

Procedures for Customer Married Put Transactions

Equity Operations must be notified to ensure that:

1. 2. 3. 4. 5. 6. 7.

customer has completed the option account documentation required by the New Accounts Department;
customer is approved for option trading;

correctly completed trade tickets are submitted;

a copy of the ticket is provided to Equity Administration;

new products (reflecting the unique options) are established on the Security
Master; any option position reporting or limit issues are addressed; and

the OTC option confirmation is prepared and faxed for execution and returned by the customer. A standard form of confirmation and exercise notice is available from the Legal Department. Alternatively, standard ISDA forms may be used.)

b. The initial sale of stock to the customer by the firm must comply with applicable short sale requirements. As a first step, the firm position reports must be reviewed by the trader engaging in any proprietary short sale to determine the starting net long or short position. In addition: 1. 2. 3.
order tickets must be properly completed to indicate, among other things, that it is a short sale and that it relates to a Married Put strategy (by designating "MP" on the ticket); applicable Listed and NASDAQ price restrictions must be observed; and applicable "locate" requirements must be satisfied.

c. Rules relating to trading on-Exchange or oFExchange trading of listed securities must be observed. For example, transactions in I.IYSE listed securities must be effected on the Exchange unless:

l. 2. 3.

the security was listed after April 26, 1979 (which securities may be freely traded over the counter pursuant to SEC Rule 19c-3); the transaction is effected on any organized exchange in a foreign country (which may be traded on such foreign exchange at any time pursuant to NYSE Rule 390.10); or the transaction is agreed to and effected outside of Exchange trading hours and, traded in a foreign country (which may be executed as principal or agent over the counter pursuant to }IYSE Rule 390.10).

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October 1998

AII other customary requirements must be satisfied (e.g., Rule l5a-6 where NSI is agent for NSB in theglde, lading reporting and prompt delivery in exercise, which may not involve a loan of stock by NSI to a custom"r *h"r" such loan is made to the customer,s "*"ept prime broker).
Equity Derivatives Sales will supervise Married Put transactions by monitoring a will record all such transactions. This is called t-he Married Fut Barrier Monitor spreadsheet. The spreadsheet will be completed and maintained by Equrty Derivatives Sales in_order to identify any situations where the associated put position is nearing automatic exercise. In any such cases, the last column will indicate that thl stock has traded at i gt1!" (1) meeting 1 ry.ed9nned early warning level relative to the potential automatic exercise ("FLAG HIT"); and (2) the reaching of the birrier and resulting automatic exercise (,BARRIER ttrT'). Equrty Derivatives Sales will be responsible for monitoiing the spreadsheet and ensuring that any sales subsequent to reaching the early warning level are carefuliy checked to veriS, thI status of any subsequent sale as Long or Short. Th,rs, as with all sale transactions, ttre salesperson must establish whether it is Long or short and, if Short, must satisfy the affrrmative determination requirements.
screen based spreadsheet which

d-

e.

In additioq Equity Operations will complete a separate spreadsheet based on the requirement that all order tickets related to such transactions be iesign;O "n*,,. At the end of each day, Equity Operations will reconcile their report (based on th; NTApS trade information) to the spreadsheet prepared by Equity Derivativei Sales. Any discrepancies will be reviewed with Equity Derivatives Sales. In the event of an omissions of positions from the Equity Derivatives Sales spreadsheet, the designated supervisory person and Compliance will also be advised. In such cases, Compliance will conducf a review io determine whither there were any sales following an automatic exercise which could raise concerns under the short sales rules. In additiorq Equrty operations will commence oversight monitoring for early warning and barrier event subsequent to trade date.
Option exercises (other than automatic exercises) require completion of the exercise notice which must be time stamped on receipt. The receipt of suih notice must be immediately communicated to Equity Derivatives sales by Equity operations.

g.

3. a.

Procedures for Proprietary Married put Transactions

Only the Risk Arbitrage Department is currently authorized to effect Married put transactions on a proprietary basis (unrelated to the facilitation of customer Married puts described above). The counterparties to these Risk Arbitrage transactions are other brokerdealers and the form of the transactions is currently lim-ited to European style put/call combinations.

_ b. In light of the structure of the Risk Arbitrage Married Puts, no special monitoring or record keeping requirements are necessary with respect to time of exercise, although iny resulting changes to positions must be immediately reflLcted in the department's (and in feepini with customary procedures, the firm's) net position report. In additio4 any revistns to the ^qp! of transactions effected on a proprietary basis must bL reviewed with'Legal and Complianceio determine the need for any revised procedures.

lt6

October 1998

\.,

No price restrictions will apply to sales to the extent that the proprietary sale (based on the position report described above and the purchase of stock pursuant to the Married Put transaction) constitutes a long sale. The trader is responsible for ensuring that the position calculation is adjusted on a real time basis to give effect to any exercises which reduce the net position for purposes of the regulations applicable to short sales (imposing price restrictions and "locate" requirements).

c.

d.

Equity Operations must be notified to ensure that:

1. 2. 3. e.
above

any needed Security Master additions are made;

option position reporting or limit issues are addressed; and

a copy

ofthe ticket is provided to Equity Administration.

Equrff Administration based on the notice (by copy of the trade ticket) described ensure that the appropriate transaction confirmation (which is typically based on standard ISDA documentation) is obtained.

will

{i

l17

October 1998

8.

EOUITY OPTIONS COMPLIANCE

Supervisors are required to apply the supervisory procedures in Section 1.E.(2) ("Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

A.

Opening of Accounts

Before any client may be considered for an options account the representative and the branch manager must determine whether options trading is suitable for the client in light of his financial needs and objectives. Branch Manager herein includes the Section Manager in the New York Office. Each Manager must be Series 8 qualified. When opening an institutional account to trade listed options (it is NSI's policy not to allow the opening of retail accounts to trade options), a corporate resolution specifically stating the institution has the authority to conduct options trading must be obtained prior to any option activity. This requirement is extremely important in the case of a banh S & L or pension fund whose charter may be restricted by state or federal law. Only after both the representative and branch manager have satisfied themselves as to the suitability and authority of options trading for that client, may an options ac@unt be opened. Each Manager should satisfy himself that the client has read and received copies of the OCC Disclosure Document and the Option Trading Agreement, specifically the Section entitled "Important Risk Factors", and that option trading is suitable for the client.

No orders will be accepted from any customer for any transaction in options until the customer's account has been approved by a Series 8 Qualified Manager or a ROP. If the account is initially approved by a Series 8 Qualified Manager who is not a ROP, then the account must be reviewed and approved by an ROP within a reasonable time period.

B.

Documents Furnished to Customers The following documents must be sent to Institutional Clients in addition to the regular account opening documents:

l. 2. 3.

OCC Risk Disclosure Document (before approval of account). Institutional Option Agreement. Special Statement for Uncovered Options @efore the First LIncovered Options Transaction).
above information

All of the

will

be sent to the customer from the New

York Office.

Institutional Option Agreement

Within fifteen (15) days after approval of a customer's option account, the Institutional Option Agreement must be received by NSI. If by that time an Institutional Option Agreement is not received, the account will be restricted to liquidating transactions onl}, until the above documents are received.

lr8

October 1998

C. Uncovered Options Writing

Uncovered Options Writing is not permitted unless each of the following guidelines are met:

1. 2. 3. 4. 5. 6. 7.

Received appropriate document, such as, the Corporation Resolution or Management Agreement, which indicates that uncovered options writing is
allowed. The customer's annual income exceeds $75,000.00. The customer's net worth exceeds $200,000.00. The customer's account must contain equity consisting of either cash or marginable securities in the amount of $25,000.00. The account must be approved for uncovered writing by the SROP or the Compliance Registered Options Principal (CROP), or a designated ROP of the SROP or CROP. A minimum of one year in Option Trading experience. The customer's investment objectives include speculation.

Items #2, #3, l*4, and #6 may be waived by the SROP or the CROP based upon information obtained about the Institutional Client. Any such exception should be noted on the Institutional Option Agreement along with the reason(s) why the exception was granted. Only NSI's SROP or CROP should grant such exceptions and this should be evidenced by their initials (or signature) on the Option Agreement next to the reason for
the exception. D. Position Limitations

The SROP and/or CROP

will

determine when

a customer may have incurred

an

excessive number of positions. E.

As a matter of policy, NSI will not accept any discretionary options accounts. Account Statements

F.

for all customers engaging in options transactions will be maintained at the New York Office on optical disc and must be saved for a period of A copy of all account
no less that six years.
G. Complaint File statements

Each offrce must maintain and keep current a separate central complaints which are related to options transactions.
The file must include:

file of all

customer

12.

Name of customer Date complaint was received

119

October 1998

3. 4. 5.

Name of Registered Representative (RR) Description of complaint Record of action taken

A copy of any written complaint, received by a branch offrce from a customer must be forwarded to the Compliance Department by the business day following the date received. If an oral complaint is received, details will also be transmitted to the
Compliance Department by the next business day. Even if a complaint situation is quickly resolved, the details must be forwarded to the Compliance Department. H. Advertising

to be sent to customers regarding options must be sent to the CROP at least ten (10) days prior to use. All material must be filed with the NASD prior to dissemination and may be required to be accompanied by an OCC Disclosure Document. Therefore, adequate time should be allowed for approval when planning publication and promotional schedules.

Any

sales material or sales literature

Supervision of Accounts The branch manager shall review every options ticket for suitability (if the transaction is recommended) and margin requirements.

The CROP, or a designated ROP of the CROP, also will review every options transactions on a daily basis. Such reviews will be performed through the use of various compliance exception reports.
The supervisory review will result in an analysis of all customer option activity in an effort to detect unusual concentrations in any option class, churning, suitability inconsistencies, problems relative to "inside" informatiorq violations of positions or exercise limits or any other potential inconsistencies.
J

Equity/Index Option Order Entry

The following information must appear on each listed option order ticket:

(l)
(2)

account name or number; the designation (underlying security) and number of option contacts;

(3)
(4) (5) (6)

strike price and expiration month and whether the options are puts or calls;
the premium, time order received and time executed;

whether the transaction is covered or uncovered; and whether the transaction is an opening or closing one.

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October 1998

9.

CREDIT POLICIES AND PROCEDURES

Sales and trading staff are responsible for following Nomura's Credit Policies and Procedures, which are available from the Credit Department. Approval of credit limits, which is based on the firm's credit risk tolerance, is not a substitute for sales and trading staffs suitability analysis of client activity. The Credit Department is available to provide information that can be used in the suitability analysis.

10. COMMUMCATIONS WITH THE PUBLTC

Supervisors are required to apply the supervisory procedures in Section 1.E.(2) ('Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

General Principles

All communications with the public, whether oral, written or electronic, are to conform to the guidelines set forth under NYSE Rule 472 and NASD Rule 2210, more fully discussed below. In general, communications must be truthful and in good taste, must not omit material
facts and must not use language that is misleading, promising or exaggerated.

Extreme care must be taken to avoid communications with customers that might be construed as legal advice. When there is any doubt as to whether advice might involve legal problems or determinations, the Legal Department should be consulted, who will decide whether the matter should be omitted, referred to the client's personal counsel, NSI's General Counsel or outside attorneys.

NSI policy requires that certain types of "Communications with the Publid' (i.e., media interviews, participation in seminars, publishing articles, radio or television appearances and advertising) receive advance written approval from a qualified Supervisor, Public Relations Department, and the Compliance Department. Please refer to the "Communications with the PubliC' Approval Form attached as s[!h!!-Q.

B. Correspondence
outgoing correspondence, including letters, memos, e-mail (if material to an investment decision) and handwritten notes (mailed, faxed or otherwise), must be approved in advance of sending by the Qualified Supervisor, who should initial a copy of the proposed correspondence as evidence of higher review. The initialed copy, which will be the only acceptable evidence of compliance with this policy, is to be retained in the supervisor's files for three years. Managers should review correspondence for accuracy and to assure that it does not include exaggerated or misleading statements or references to Restricted List securities and to assure that it includes any necessary disclaimers. Sales literature on options must be approved by the Compliance Registered Options Principal (CROP) before being mailed to clients.

All

Letters received, including form letters, which request the salesperson's signature or the signature of NSI are to be considered outgoing correspondence and must be approved as set forth above. Salespersons are not authorized to act on behalf of Nomura in connection with any agreements, settlements of disputes or other matters.
Lzl
October 1998

Similarly, personal computer printouts sent to clients require the same prior supervisory review and approval, with an initialed copy retained in the supervisor's files. In the event thl word processing capability of a personal computer is used to mass mail an item to clients or prospective clients, at least one copy of the mass-mailed letter is to be printed and initialed as evidence of supervisory review and retained in the supervisor's files along with a listing of all the recipients of the letter.

Any trade reports, printouts or lists of trades pending settlement, or other similar
documents requested by a customer in lieu of or in addition to the ofiicial Nomura confirmation or monthly statement must carry a special disclaimer. Any valuations of customer securities, typically done at month-end, must also contain a different special disclaimer. (See Section 6E and 7E "Unoflicial Confirmations, Customer Account Statements and Valuations,,). Other than these special situations described above, the general disclaimer reads as follows:

["Additional information is available upon request.

The information contained herein is based on sources which we believe to be reliable but we do not represent that it is accurate or complete. It is not to be considered as an offer to sell or solicitation of an offer to buy the securities discussed herein. All prices, yields and opinions expressed are subject to change without notice. Nomura Securities International, Inc. and its affrliates may have a position in the securities discussed herein and may make purchases from and"/or sales to customers on a principal basis, or as agent for another person. In additiorq Nomura Securities International, Inc. and certain of its affrliates may have acted as an underwriter of such securities, and may cunently be providing investment banking services to the issuers of such securities."] Some materials that are distributed to sales and trading staff are marked "For Internal Use Only", or "Do Not Distribute". These indications must be followed very carefully. Documents marked in this manner may be sensitive, illegal to send to customers, or both. Befoie it is released to the public, any document that is marked "For Internal Use Only" must be approved by a Series 8 supervisor and the "For Internal Use Only'' designation must be removed. Before releasing Confidential Information, it will probably be necessary to enter into a confi dentiality agreement. Consult with Legal before release.

TEE DISTRIBUTION OF ANY INTERNAL CORRESPOIIDENCE TO CUSTOMERS MAY RESTILT IN IMMEDIATE TERMINATION.
NYSE Rule 472 and NASD Rule 2210 govern communications made with the public. As a supplement to NYSE Rule 472, the NYSE has defined "communication" broadly to include "advertisements, market letters, research reports, sales literafure, electronic communications, communications in and with the press and wires and memoranda to branch offrces or correspondent firms which are shown or distributed to customers or the public". Prior to disseminatioq communications that are covered within the NYSE definition must be:

t.

approved (and initialed or signed) by a Series case of Research Reports; and

saved by the sender

8 supervisor, or a Series 16 in the

for at least three years in files organized by customer.

t22

October 1998

The current list

of Series 8 supervisors is available from the Compliance Department.

AII faxed communications containing information concerning securities must contain a disclaimer, or hedge clause described above. This clause can be printed on the communication
or on the fax cover page.

There is a different disclaimer for Futures related information. Please contact the
Compliance Department for a copy.

Incoming mail and faxes must be opened and./or reviewed by the registered supervisor or their designee or his delegee and all business correspondence brought to the attention of the registered supervisor for review prior to distribution to the recipient. Before distribution to the registered representative, any letters from customers regarding security transactions must be copied and kept in a central file by the registered supervisor. Any matter that resembles a customer complaint, written or oral, must be brought to the attention of the Compliance
Department. Pursuant to Rule l7a-4 under the Exchange Act, broker-dealers .!re required to preserve for a period of not less than three years, the first two years in an easily accessible place, "originals of all communications received and copies of all communications sent by [the brokerdealer] relating to [its] business as such". To achieve compliance with Rule l7a-4, originals of all incoming colrespondence relating to Nomura's business must be retained by the approving supervisor in his or her incoming correspondence file, and copies of all outgoing correspondence must be retained by the reviewing supervisor in his outgoing correspondence file, in each case for at least three years. A checklist ofdocuments to be retained and a description ofacceptable storage methods is set forth in Exhibit P.

C.

Procedures for Outgoing Electronic Communications (E-mails. Bloomberg, etc.)

Series 8 Supervisors are required, by regulatiorq to reasonably supervise their stafi which includes reasonable supervision of all types of communications. For example, the Series 8 Supenrisor must insure that: the material is clear and concise; all statements are reasonable and not exaggerated, misleading, based on rumor or based on inside information; and the securities mentioned are not on the Restricted List. Accordingly:

supervisory approval must be obtained for outgoing electromc communications that might be material to the decision of a prospective counterparty to invest or not to invest in a security or other producl For example, Nomura employees must seek pre-approval of electronic communications about securities, transactions or markets (such as yield tables, bid lists or material printed off of a generally available electronic transmission system such as the Bloomberg system). On the other hand, Nomura employees need not seek pre-approval of electronic communications that simply request return phone calls or scheduling of appointments or other matters not directly related to a prospective specific transaction. Electronic communications on behalf of Nomura-related business from home are not permiued.

Series

screen print

of

initialed by a Series

pre-approved electronic communications must be made and 8 Supervisor as evidence of his/her review and saved in
t23
October 1998

accordance with existing procedures for three years. If the same electronic communication is sent to more than one persor! only one copy need be initialed and saved, along with a list of all the recipients. [n regard to electronic communications that are sent with extremely large files (such as mortgage pool information), only the primary message need be printed (as opposed to the attached file) as long as the attached file is electronically saved and retrievable for a period ofthree years.

Any questions regarding the foregoing policy should be directed to the Compliance
Department.

D.

Advertisements

Each item of advertising must be approved, prior to use, by the Public Relations Department and the compliance officer via his or her signature or initial. Certain types of advertisements must be filed before use with the regulator.
The above-mentioned materials must be first reviewed and initialed by the appropriate Supervisor and then submitted to the Public Relations Department for approval and maintenur.. in the Firm's central file of all advertisements, along with the nu."(9 of the person(s) who prepared them and/or approved their use, and maintained in that file for a period of three years from the date ofeach use. Advertisements must contain the name of Nomur4 the person or Firm preparing the material if other than Nomura, and the date on which the material has or will be fiist publishea, -recruiting circulated, or distributed, and in any so-called "blind" advertisement used for personnel, the name ofNomura may be omitted. If the information in the material is not ",r.r"rq this fact must be stated.
Statistical tables, charts, graphs, or other illustrations in advertisements must disclose the source and date of the information.

Investment advisory and mutual fund advertisements are subject to additional regulation as discussed in the Nomura Advisor's Compliance Manual.

E.

Recommendations

It is NSI's policy that its salespeople recommend to retail accounts only those securities which are followed by any of Nomura's worldwide research affrliates, and only when the research has been approved by an NSI Series 16 Supervisor. If recommendations are made
based upon oral communications from a Nomura research entity, then the salesperson must have the ability to provide the solicited customers with an approved research report if tne customer(s) so request.

Exceptions to this policy will be made only after a salesperson has submitted background material on the subject company justiSing the basis for solicitation. This material must be reviewed and approved by the Executive Managing Director of the Equrty or Fixed Income Departments (or their qualified designees in their absence) along with a Series 16 Supervisor. A copy of this material must also be sent to the Compliance Department to be kept on file in case of a future regulatory inquiry. It is the responsibility of each salesperson to ensure
124 October 1998

that his or her recommendations are in line with his or her customers' investment objectives and suitability status. Therefore, it is also the salesperson's responsibility to have a reasonable basis for making the recommendation, including a reasonable knowledge of the security, before making a recommendation. Recommendations may be made on securities that are not covered by Nomura's research entities if the customer is an institutional customer as long as the recommendation is suitable (see Section 5. A - "Suitability") which includes, among other things, that adequate due diligence has been preformed so that there is a reasonable basis for the recommendation.

Only employees appropriately registered as Registered Representatives are permitted to recommend securities to a customer. No Registered Representative shall recommend to a customer the purchase, sale or exchange of any security without reasonable grounds for believing that the recommendation is suitable for the customer upon the basis of information furnished by the customer after such Registered Representative's reasonable inquiry concerning the customer's other security holdings, investment objectives, tax status, financial situation and any other relevant information known by such Registered Representative. (See Section 5.A -

(suitability').

The foregoing requirements of suitability and reasonable basis for recommendation do not apply to "unsolicited" and "not recommended" transactions. An "unsolicited" transaction is a transaction that has been executed for a customer without offering advice or information or making a recommendation, such as when the customer specifies a security. A "not recommended" transaction is one that has been executed at the customer's direction after the advice or recommendation of the Registered Representative has been rejected.

If

the customer wishes to make a purchase which is not within the client's listed

investment objectives, then the Registered Representative must note this change on the client's holding page (used for retail accounts) and/or create a memo to the customer's file. Any customer suffering significant losses as a result of unsolicited transactions should be brought to the attention of the Compliance Department.

F. Research
Each research report must be approved and initialed as evidence of review by a Series 16 analyst before such information is distributed to customers. Consult with Legal or Compliance to determine whether materials would be deemed research if uncertain. Market letters and sales literature must be pre-approved and initialed as evidence of review by a Series 8 Supervisor. This information must be retained for a period of three years and shall indicate the name or names of those persons who prepared the material and the name or names of those approving it.

The dissemination of research reports, marketing materials and press releases may have to be restricted when Nomura is involved in an underwriting or placement in the U.S. or elsewhere. Distribution of these materials may be considered a "general solicitation" or "directed selling effort" and could result in the delay or cancellation of the offering. If Nomura is involved in a U.S. public offering, additional guidelines apply regarding the publication of research reports. In any event, the issuer and the underwriters may be subjected to liability for the disclosures contained in such materials. Please consult the Legal Department or
t25
October 1998

Compliance Department prior to disseminating any materials regarding a securier for which Nomura is or may become an under.writer or placement agent.
Information derived from and reflected in research is compiled for Nomura's customers and employees are not permitted to gain personal benefit from their advance knowledge of such information or that such information is to be circulated. Such personal benefit maf result in severe regulatory sanctions. Third party research cannot be circulated without approval of the Compliance or Legal Departments. Certain conditions will be required, including among other things, the review alnd approval by a Series 16 analyst.
G.

Under no circumstances may an offrcer, salespersoq or any employee of NSI be interviewed by a newspaper reporter, magazinewriter, o.iny other media repiesentative without the prior approval of the Public Relations Department. Calls from the media should be
immediately referred to Public Relations.

Violations of this policy are viewed with great concern and could have serious
consequences to the violator, including termination.

Occasionally, NSI persorrnel may have the opportunity to speak before groups on the subject of investments. Such a presentation carries more possiUititiei of misundeistanding than does a conversation with just one person. Remarks may be quoted to competitors, to the Si,C, or to another client whose opinions may differ from yours. Consequently, before giving a lecture or accepting a speaking engagement, a salesperson must obtain tlie written approval of the public Relations Department. A log of the approved subject matter must be-given to the public Relations Department and kept on file for three years setting forth:

l. 2. 3. 4.

5. 6.

Name of the sponsoring group; Presiding offrcer or program chairman and mailing address, Subject discussed; Date; Approximate attendance; and Speaker's name.

It is NSI Policy that seminars be pre-approved by the Public Relations Department through the use of the Pre-Approval Form (see Exhibit O). Also, a text of the material piesented or an outline must be submitted to the Public Relations Department for approval filing, if deemed
necessary.

H.

Regulatory and Legal communications and customer complaints

regulatory inquiries, whether written or oral, must be forwarded to the Legal Department and Compliance Department, which will review each such inquiry and respoid accordingly. The Firm is required to keep detailed records of all such inquiries. Employees may not contact any regulator or regulatory body for any reason without the approval of the Legal Department or Compliance Department.

All

126

October 1998

Employees may, at times, receive a call or letter or other communication such as legal process (notice of deposition, subpoena, etc.) from a regulator, a private attorney, a reporter or someone seeking information concerning a former employee. In such a case, the Legal Department or Compliance Department should be contacted immediately.

In the unlikely event an employee receives a visit at home (generally at night) from a regulator, immediately advise that persorq in a courteous manner, that in-house counsel at Nomura must be present before being obligated to speak with a regulator. Immediately telephone the reception desk at Nomura (667-1800, 24 hours-a-day,7 days-a-week) and ask for William Maitland or Gene Schlanger or their successors. The Security Officer will then contact either Bill or Gene, and one of them will return the call. If unable to reach either Bill or Gene, immediately contact either one of them the following morning. Employees are under no
obligation to talk to that regulator without counsel present and certainly not in one's home.

Only specifred persons within Nomura are authorized to accept legal process on behalf of Nomura. The Legal Department, therefore, must be contacted immediately upon receipt of legal process and the advice of the Legal Department must be followed. If an employee receives a summons, subpoenq or other legal papers relating in any way to Nomura, he/she must immediately contact the Legal Department and act upon its advice.

A "complaint" is a written or verbal statement of a customer or any person acting on behalf of a customer alleging a grievance involving the activities of those persons associated with the customer in cormection with the solicitation or execution of any transaction or the
disposition of securities or funds.

The improper handling of customer complaints can present regulatory problems and reputational harm to Nomura, as well as financial loss. Therefore, every complaint, either verbal or written, no matter how trivial, must be reported to your supervisor, who must report it to the Compliance Department. The Branch Office Manager must retain a copy of written complaints in the complaint file at each Branch Offrce. In New Yorh the complaints file is maintained by the Compliance Department.

The Compliance Department maintains a separate file consisting

of all written

complaints and records of verbal complaints. Also, a determination will be made as to whether a report to the NYSE is required, pursuant to NYSE Rule 351 and whether Forms U-4, U-5 or RE-3 need to be amended and/or filed.

I.

Phone Tapine Procedures

It is Nomura policy to tape the telephone conversations of sales and trading staff and certain other business and support staff and retain such tapes for a period of 30 days. Any exceptions to this policy must be approved by the Compliance Department and the supervisor of the department requesting the exception. In addition, be aware that counterparties may tape their phones and save those tapes for much longer periods.
An employee consents to be taped as a term of employment with tapes are subject to review by Firm personnel and regulatory authorities.

Nomura. Telephone

t2'7

October 1998

form is signed, the Voice group (x-1000) will pick it up, make a copy of the relevant section of the tape onto a standard-size cassette and deliver the cassette and a copy ofthe approval form to the administration department of the appropriate area (Fixed Income x-1377 or Equities x-9725). The administration department will deliver the tape to the requestor and ensure ihat the tape is returned promptly. After the requestor has listened to the tape, the administration department will immediately destroy it. If it is necessary to retain the tape copy, approval musi also be obtained from the Compliance Department.

Telephone tapes can only be accessed for business-related purposes. To obtain access to a telephone recording, a Telephone Tape Request Form must be prepared by the requestor and signed by the requestor's Department Head. The Voice group has copies of the form. When the

J.

Do Not Call Lists

NYSE rule 440A requires members and member organiz.ations that engage in telephone solicitations to make and maintain a centralized list (a "do-not-call" Iist) of indivi{uals or entities who have informed the member or member organization that they do not wish to receive telephone solicitations. All departments presently engaging in "telemarketing" or "cold-calling" must contact the Compliance Department. Compliance will maintain a centralized do-not-cill list. It will be the responsibility of the department manager to assure that Compliance is aware of all individuals or entities who do not wish to receive telephone solicitations. Compliance will continuously update and disseminate the list to all managers (assuming that there ire, in fact, departments engaged in telemarketing or cold calling). The managers will be required to disseminate copies of the list to all appropriate personnel. If you have any questions regarding this policy please contact the Compliance Department.

128

October 1998

11. II-EW ISSUANCE OF PTIBLIC SECT]RITIES

Supervisors are required to apply the supervisory procedures in Section l.E.(z) (Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

A.

Introduction

The legal requirements of a new issuance are quite complicated and vary depending on whether the securities are registered with the SEC or exempt from registration. The goal of this Section is to provide basic guidance in regard to registration issues. The task of implementing and enforcing procedures to comply with the applicable requirements is the responsibility of the appropriate supervisor of the business area involved in the new issue (the 'New Issue Supervisof'). Questions concerning new issue procedures should be directed to the appropriate New Issue Supervisor, or, alternatively, to the Legal Department and Compliance Department. These guidelines do not encompass the additional procedures mandated by agreement in connection with the distribution of U.S. Treasury and agency securities, which are covered in NSI's Fixed Income Compliance Manual.

B.

Securities Law Requirements

1,

Pre-Filing Period

Whenever Nomura (i) reaches an understanding (oral or written) with an issuer or depositor to proceed with a public offering as a lead or coJead underwriter, (ii) begins the registration process in connection with a public offering (which in the case of a shelf offering means the commencement of the registration process with respect to the pricing supplement) or (iii) is invited into a selling group:

No wriften materials may be sent to prospective investors before a registration statement is filed with the SEC in connection with such securities, provided that computational materials (e.9., yield tables) and term sheets (e-9., basic outlines of
securities and loan terms and collateral descriptions) may be distributed subject to certain conditions in connection with asset-backed and privateJabel mortgagebacked securities offerings, as described in Section (5) below.

No

announcements, advertisements, press releases, research reports or other communications may be issued which could be viewed as conditioning the market for the securities (consult with deal counsel or the Legal Department or the Compliance Department if there is a question or possible issue). The holding of onshore press conferences or the engagement in discussions with the press, the publication of articles and the holding of seminars which are in any way related to the specific offering are prohibited. Even general materials and communications could be deemed unlawful pre-conditioning if they are disseminated close in time to an offering and can be viewed as related to the offering. Their use could result, at a minimunq in significant SEC-imposed delays in the offering.

129

October 1998

No oral or written offers or sales can be made until a registration statement covering the securities is filed with the SEC, provided that computational materials and term sheets may be distributed in the manner and subject to the conditions set forth in subsection 2 below in connection with asset-backed or mortgage-backed securities offerings.*

o No internal

sales memos should be distributed internally until a registration statement covering the securities is filed with the SEC. Thereafteq internal sales memos can be produced and distributed to the internal sales force only. Such sales memos must be marked "CONFIDENTIAL FOR INTERNAL USE ONLY" on each page in bold letters which are clearly legible to the reader, and must not be sent to prospective investors. Such sales memos should be approved by the New Issue Supervisor before use and maintained in an internal file for three y..rr. The name and signature of the person who approved such sales memos must be indicated on such filed documents. The information contained in internal sales memos should substantially conform to the disclosure in the applicable offering document. Internal sales memos must also be reviewed and approved by dea-i counsel.

. 2.

No roadshows are permitted. Waiting Period

After filing a registration statement with the SEC, but prior to its effectiveness, oral offers, solicitations and other communications for the purpose of locating investors and obtaining indications of interest are permitted, but written offers can only be made by "red herring; preliminary prospectuses sent to prospective investors. In connection with asset-backed or private-label mortgage-backed securities, while computational materials and term sheets may be disseminated, no other written materials can be used, including related sales materials and research reports. Actual sales of the securities including agreements to sell may not be made during this period. To avoid unlawful preconditioning, press releases (except tiror" permitted under Rule 134 and 135) and discussions with the press are prohibited as welf as the publication of related articles. With the exception of organized road shows, there should be no related seminars directed to prospective investors.

Section 2(3) of the Securities Act exempts from the definition of "offers and sales" preliminary negotiations or agreements between the issuers or other persons on whose behalf the distribution of securities is to be made and the underwriteis or among underwriters. Generic advertising related to NSI's products and services is permitted at all times. However, ads and articles which are to be published before or during the course of a public offering which in any way relate to the type of securities being offered should be reviewed in advance by deal counsel, the General Counsel's Office or the Compliance Department. Publication of these ads and articles could be found to involve unlawfu I preconditio ning.

130

October 1998

3. Press Releases
While limited "tombstone" press releases are permitted under Rule 134 under the Securities Act, it is NSI's policy to exercise great care in their publication, since they may result in regulatory complications. Press releases are permitted in compliance with Rule 134 or 135 under the Securities Act. Under Rule 134, press releases may contain the following limited
information: an identification of the issuer and the security and amount being offered, the price thereof and by whom orders will be executed, and a brief description of the issuer's business. Press releases must identiff the persons from whom Section l0 prospectuses may be obtained. They may also contain certain pricing information, the names of the managing underwriter, the approximate date of the public offering and certain other limited information. They must contain appropriate legends as prescribed by the rule. Rule 135 permits an issuer to disseminate a notice that it proposes to make a public offering provided that such notice states that the offering will be made by prospectus only and will contain no more than the following information: (i) the name of the issuer, (ii) the title, amount and basic terms of the securities, the anticipated time of the offering and a brief statement of the manner and purpose of the offering without naming the underwriters and (iii) any statement or legend required by state law or administrative authority. Press releases should be reviewed and approved by Public Relations, as well as the Legal Department, Compliance Department or deal counsel before use. This is only a brief summary of Rules 134 and 135, which should be reviewed carefully and in their entirety by counsel in conjunction with the approval of a press release.

4.

Offshore Press Conferences. Meetines and Press Materials

Rule l35e permits aforeign issuer or a selling security holder of the securities of such issuer, to provide journalists with access to its press conferences or meetings conducted outside the U.S., or to written press-related materials released outside the U.S., at or in which an offering of securities is being discussed. The offering must not be conducted solely in the IJ.S., access must be provided to both U.S. and foreign journalists, and any written press-related materials pertaining to the offering must satisfy the following conditions: (l) they must state that the materials are not an offer of securities for sale in the U.S., that securities may not be offered or sold in the U.S. absent registration or an exemptiorq that any public offering of securities to be made in the U.S. will be made by means of a prospectus that may be obtained from the issuer or selling security holder and will contain detailed information about the company and management, as well as financial statements, (2) if the issuer or selling security holder intends to register any part of the offering in the U.S., they must contain a statement regarding this intentiorl and (3) they must not include any purchase order or coupon that could be returned indicating interest in the offering as part of the materials.

5.

Research Reports

Research reports are permitted to a limited extent under certain conditions prescribed by Rules 137,138 and 139 underthe Securities Act. These rules and the established conditions set

forth in them are complicated and subject to legal interpretation. As a result, the General Counsel's Office, Compliance Department or deal counsel must be consulted with respect to
particular research reports so their distribution does not inadvertently taint an offering.

Rule 137 permits distribution of informatiorq opinions and recommendations in the regular course of business of a deal if NSI is not participating and does not propose to participate
l3l
October 1998

in the distribution of the security, as long as the information relates to a registrant which files reports under the Exchange Act. NSI may no! howeveq receive any considiratiorL directly or indirectly, in connection with the publication and distribution of the information from the registrant, an underwriter or any other entity interested in the securities to which the registration statement relates.
Rule 138 permits a dealer, even when participating or proposing to participate in an offering of a nonconvertible debt security or nonconvertible, nonpartiiipating prlferrei stock for a registrant which meets all of the conditions of Form S-2 or f-Z lmosi importantly, a l2-month reporting history under the Exchange Act) to publistr, in the dealer's regular course of business, informatiorq opinions and recommendations concerning such registrant's common stock, convertible debt or convertible preferred stock. Rule 138 also permits a dealer, when participating or proposing to participate in an offering of common stoclq or debt or pieferred stock convertible into common stoclg for a registrant that meets the same conditions, to publish, in the dealer's regular course of business, information, opinions and recommendations concerning nonconvertible debt securities or nonconvertible, nonparticipating preferred stock of such issuer. Such information may also be published in connection with (a) a rlporting company under the Exchange Act which meets the registrant requirements of Form S-3 or f-: o. (U) u company that would be eligible for Form F-3 but for the Exchange Act reporting history requirement, and meets certain minimum float or investment grud. requirement., if rr.r"i, company had securities listed or quoted on a "designated offshore iecurities market" (which are designated by the SEC) for at least 12 months.
Under Rule 139, an underwriter or dealer participating in an offering of securities of (x) a reporting company under the Exchange Act which meets the registration requirements of Foim

companies in the registrant's industry), and (c) the last prior opinion on the registrant was at least as favorable. Other provisions of Rule 139 permit information, opinions ,"ro*mendations "nd through similar, regular publications where the registrant meets thl requirements for Forms S-3 or F-3 and certain minimum float or investment grade standards are met.

S-3 or F-3 and certain minimum float or investment grade requirement. o. (y; a company that would be eligible for Form F-3 but for the Exchange Act reporting history iequiremeni, and meets certain minimum float or investment grade requirements, if such company-had securities listed or quoted on a "designated offshore securities market" (which are designated by the SEC) for at least 12 monthq may continue to publish or distribute informatiorq oiirion, oi recommendations with respect to the security to be registered provided that (a) the informatiorq opinion or re@mmendation is contained in a publication setting forttr simitar information, opinions or recommendations with respect to a substantial numbei of companies in the same industry, or containing a comprehensive list of currently recommended selurities, which has been distributed with reasonable regularity in the normal course of business, (b) the information, opinion or recommendation is given no greater space or prominence than ihat given to othei securities (if it contains projections, then the projeaions must have been published previously with regularity and the projections must be included with respect to a substantial number of

The publication of research with respect to investment grade asset-backed securities ("ABS") is permiued, whether or not the dealer is or will be a participant in the distribution of the particular issue of ABS (the *Registered Securities") if the following conditions are met:

(1) The dealer

must have previously published with reasonable regularity research relating to ABS backed directly (or, with respect to resecuritization transactions, indirectly) bt
t32
October 1998

substantially similar collateral as that directly or indirectly backing an ABS that is the subject ofthe research that is proposed to be published or distributed.

(2) If the Registered

Securities have not yet been offered or are part of an unsold allotment or subscription, the research must not identify the Registered Securities and must not give greater prominence to specific structural or collateral-related attributes of the Registered Securities than it give to the same attributes of other ABS that it mentions.

(3) Sufficient information is available from one or more public sources to provide a
reasonable basis for the view expressed by the dealer the subject ofthe research.

with respect to the ABS that

are

(a) The research must not contain any "computational material" relating to Registered Securities that have not yet been offered or that are part of an unsold allotment or
subscription.

(5) The research must refer to any relationship that may exist between the issuer of
research and any participant in the offering.

the

(6) If the material published by the dealer identifies

a specific ABS of a specific issuer and specifically recommends that such ABS be purchased, sold or held by persons receiving such material, then a recommendation as favorable or more favorable as to such ABS must have been published by the dealer in the last publication of such dealer addressing such ABS prior to the commencement of its participation in the distribution of the Registered Securities.

(7) If the material published by the dealer identifies ABS backed directly (or, with respect to resecuritization transactions, indirectly) by substantially similar collateral as that
directly or indirectly backing the Registered Securities and specifically recommends that such ABS be preferred over other ABS backed by different types of collateral, then the material must explain in reasonable detail the reasons for such preference.
AIso note that, in the case of a multi-tranche offering of ABS, each tranche shall be treated as a different Registered Security.

This is only a brief summary of Rules 137, 138 and 139, which should be reviewed carefully and in their entirety by counsel in conjunction with their approval of particular research
reports.

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October 1998

6.

Computational Materials and Term Sheets

materials to be used other than the red herring) apply to privateJabel mortgage-backed and assetbacked shelf offerings, except that computational materials and term sheets may be sent to prospective investors either prior to or after the availability of a "red herring" pricing supplement (if any) or final pricing supplement, whether or not an effective base prosp""tur i" sent-to such prospective investors. In other words, prior to the availability of the finaf prospectus, only the red herring (if provided) may be distributed and, in the case of private-label mortgage-backed and asset-backed transactions, the following additional documenti may be distributid-(with the prior approval of the New Issue Supervisor): a) computer generatei tables containing yield, average life, duration and other financial information about one or more classes of sJcurities based- o-n various prepayment, interest rate and other scenarios and the assumptions on which such information is based; b) collateral term sheets; and c) structural term sheets (collectively "Distributable Information"). Every effort must be made to ensure that such Distributabli Information is accurate and every page must contain the following disclaimer:

In the case of shelf offerings, the period between filing and effectiveness begins either with the filing of the "red herring" pricing supplement with the SEC or with th. Fir.,, determination to proceed with an issuance of securities off the shelf. AII of the rules specified above regarding what disclosure is permitted to be disseminated to investors (Le., no written

ADDITIONAL INFORMATION

information contained herein is based on sources Nomura Securities International, Inc. ('Nomura") believes to be reliable. Nomura makes no representation or warranty that such information is accurate or complete. Nothing herein should be considered an offer to sell or solicitation of an offer to buy any securities. All information is hypothetical or preliminary and subject to change. No such information should bJ viewed as projections, forecasts, predictions or opinions. The same may be based on assumptions which may or may not be accurate, and any such assumption may differ from ictual results. Prospective investors are advised to consult the final prospectus, prospectus supplement, or private placement memorandum in connection with-their investments. Nomura and its affiliates may have a position in the securities discussed herein and may purchase or sell the same on a principal basis, or as agent for another person. In additiorq Nomura and certain of its affiliates may have acted as an underwriter of such securities, and may currently be providing investment banking or other services to the issuers of such securities andlor borrowers and their affrliates.
Distributable Information must be maintained in internal files for three years and the name and signature of the New Issue Supervisor and Series 8 Supervisor who approved the release of such Distributable Information should appear on the documents. In some cases some or all of Distributable Information must be filed with the SEC. Please consult with the appropriate New Issue Supervisoq the General Counsel's Offrce, deal counsel or the Compliance bepart-ent to determine which Distributable Information must be filed with the SEC. For instance, certain yield tables and structural term sheets must be filed with the SEC after the structure is finalized. In additioq the initial collateral term sheets together with subsequent collateral term sheets reflecting material changes must be filed with the SEC within turo business days after first used. A valid Rule l0b-10 confirmation cannot be sent to any purchaser of asset-ba"k"d or mortgagebacked securities by a broker-dealer until all term sheets and computational materials requirea to be filed with the SEC have been so filed.

IS

AVAILABLE UPON REQUEST.

The

134

October 1998

Information distributed to customers with respect to private transactions must contain the above disclaimer and must be approved by the appropriate New Issue Supervisor and a Series 8 Supervisor. In addition, with respect to private transactions, if a customer is a prospective purchaser of both publicly and privately offered securities of the same offering, such customer can only receive Distributable Information with respect to such transaction. In other words, if a potential private buyer obtains information other than the Distributable Information, then such potential private buyer will not be eligible to purchase the public securities.

7.

Post-EffectivePeriod

Except as otherwise provided above, after effectiveness of the registration statement, supplemental materials may be sent to circled purchasers provided that prior to or contemporaneously with the delivery of such supplemental materials such purchasers have received the final prospectus (which in the case of NSI shelf offerings means the effective base prospectus and the final pricing supplement). Supplemental materials generally include sales literature, Distributable Information and summary term sheets. Supplemental materials consisting of sales literature and any related research reports as well as Distributable Information (for asset-backed or mortgage-backed securities) may not be distributed until such materials have been approved by the appropriate Series 8 Supervisor in coordination with the New Issue Supervisor. All approved supplemental material should contain the name and signature of the Series 8 Supervisor and New Issue Supervisor and be maintained in an appropriate internal file for three years. In some cases, supplemental materials must be filed with the SEC or NASD before used. This determination should be made by the appropriate New Issue Supervisor, the General Counsel's Office, the Compliance Department or deal counsel. Supplemental materials should be factual in nature and accurate and must not be inconsistent with the prospectus. Such materials should contain adequate disclaimers and references to the prospectus. Except for Distributable Information used in connection with structuring mortgage-backed or asset-backed securities transactions, supplemental materials must be sent to all circled purchasers and not selectively distributed. Other than those imbedded in customary yield tables and sensitivity analyses, supplemental materials should not contain forecasts, predictions, estimates, opinions or projections unless approved by the appropriate New Issue Supervisor, the General Counsel's Offrce, Compliance or deal counsel.

After effectiveness of the registration statement or finalization of the prospectus

supplement (in the case of shelf offerings), actual sales may begin. After effectiveness and at all times during the required prospectus delivery period, a final prospectus (which in the case of Nomura shelf offerings means the effective base prospectus and the final pricing supplement) must accompany or precede any written confirmation of sale or supplemental materials.

Additio nal ly, during the post-effective period

. .

While supplemental sales literature can be distributed as provided above, internal sales memoranda cannot be distributed to prospective or actual investors at any time;
Underwriters are restricted from purchasing hot issues or selling hot issues to affiliates, employees, relatives and others. Restrictions also apply to sales to unregistered (private or offshore) investment companies;
135

October 1998

The final prospectus must be delivered to all secondary market purchasers for a period ranging from 0 to 90 days (see chart below). In additiorq final prospectuses must be delivered with respect to sales of unsold allotments whenevei they occur. In some cases, (e.g. the loans backing an asset backed security are serviced by a Nomura afiiliate), a current prospectus must be delivered indefinitely;

o o 8.

With minor exceptions, Nomura may not purchase any securities in the secondary market until it has completed its distribution. The distribution is not complete if any Nomura afiiliate has an unsold allotment; and
purchases of securities being distributed in an initial public offering during the

Generally, no credit can be extended, maintained or :uranged in connection with

first

30 days.
Prospectus Delivery

Prospectuses must always be delivered in connection with sales of securities by NSI when it has acted as an underwriter or dealer to the extent such securities are part of an ongoing distribution or part of the Firm's unsold allotment. Once the distribution has been completed, NSI, as an underwriter or dealer, may still be required to deliver a prospectus to buyers (including other dealers) in connection with the sale of securities purchased by it in the secondary market if such sales occur during the periods required under the securities laws.

deliver a prospectus for longer periods. Such securities may not be resold unless in a later exempt transaction under the Securities Act (i.e., 4(l-ll2), Rule l44A or Reg S) or pursuant to an effective registration statement and by delivery of a current prospectus. The t-egit Department or Compliance Department should be consulted before sales of suih securities are made.

To the extent that NSI, while acting as a dealer in a securities distributiorq purchases such securities from the issuer for deposit into NSI's investment account, NSI may be riquired to

136

October 1998

Prospectus deliverv period for dealers*

the securities are traded otherthan on an Exchange or on NASDAQ (this will apply to debt initial public offerings) (b) the securities are listed on an Exchange or on NASDAQ as of the offering date (c) the loans underlying an asset backed** security are serviced by a Nomura affrliate

(a)

90 days

25 days

Indefinitely

2.

If the distribution involved securities of an issuer that has previously registered securities with the SEC and

the issuer is a "reporting company" under the Exchange Act (i.e., required to file 10-Qs and lOKs) immediately prior to the filing of the applicable registration statement (b) the issuer is not a reporting company under the Exchange Act but the securities are listed on an Exchange oTNASDAQ as of the offering date (this is a highly unusual situation) (c) the issuer is not a reporting company under the Exchange Act and the securities are traded other than on an Exchange or

(a)

0 days

(No prospectus required to be delivered following completion of distribution regardless of whether securities are traded on an Exchange or NASDAQ.)***
25 days

40 days

NASDAQ
Number of calendar days following the offering date during which a prospectus must be delivered by any dealer, whether or not in the syndicate, even after all the securities have been distributed. The "offering date" is the later of the effective date of the registration statement or the first date of the offering. In the case of shelf offerings, the prospectus delivery requirements apply to each individual offering offthe shelf. The offering date for each shelf offering is normally the applicable pricing date. Current prospectuses must be delivered even after the passage of the relevant prospectus delivery period as to unsold allotments.
*:t

Must deliver on "Evergreen" prospectus. The prospectus must be updated and registration statement possibly amended in order to reflect new developments.
This does not generally apply to asset-backed shelf offering vehicles as each new pooling and servicing or trust agreement is viewed as a separate "issuer" from a securities law perspective.

***

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October 1998

9.

Overview of Regulation

Regulation M consists of six rules, designated as Rules 100 through 105 under the Exchange Act. Regulation M covers the following activities during a securities offering:

(i) Rule 101 covers activities by underwriters and other persons who are participating in a distribution and their affiliated purchasers;

(ii) Rule 102 covers activities by the issuer and any selling security holders and their
afiiliated purchasers;

(iii) Rule 103 covers NASDAe

passive market making;

(iv) Rule 104 covers stabilization transactions and contains requirements relating to
syndicate aftermarket activities involving short covering and penuity bids;

(v) Rule 105 covers short selling in advance of a public offering; and

(vi) Rule 100 sets forth definitions of various terms used in Rules 101 through Activities by Distribution Participants (Rule

105.

t0l)

Rule 101 provides that in connection with a distribution* of securities, it shall be unlawful for a distribution participant or an affiliated purchaser of such person, directly or
indirectly, to bid for or purchase or attempt to induce any person to bid for or purchase a covered security during the applicable restricted period.

Persons Subject to the Rule. Rule l0l applies to distribution participants and their affiliated purchasers, other than the issuer and any selling security holder of tn iecurities being distributed and provides that the latter are subject to Rule 102. A distribution participant ii defined in Rule 1o0 as an underwriter, prospective underwriter, broker, dealer or other p".ror, who has agreed to participate or is participating in a distribution. Rule 100 defines a prosiective underwriter as a person who (i) has submitted a bid to an issuer or selling security hoder and knows or is reasonably certain that such bid will be accepted or (ii) has reached, or is reasonably certain to reacl1 an understanding with an issuer, selling security holder or managing underwriter that such person will become an underwriter. In either case, it is not necessary that the terms and conditions of the underwriting have been agreed upon.

"Distribution" is defined in Rule 100 as "an offering of securities, whether or not subject to registration under the Securities Act, that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforti and selling methods." With respect to takedowns from a shelf registration pursuant to Rule 415 under the Securities Act, each takedown will be examined individuully i, order to determine whether such offering constitutes a distribution.
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October 1998

Covered Securities. The Rule 101 trading restrictions apply to "covered securities", which include the security in distribution (the "subject security'') and "reference securities". Derivative securities related to the security in distribution are not covered by Rule 101 or 102.

A "reference security" is defined as a security into which a subject security may be converted, exchanged or exercised or whictq under the terms of the subject security, may in whole or in significant part determine the value of the subject security. The definition of
reference security encompasses a security underlying a derivative instrument (such as an equitylinked note) that does not give the holder the right to acquire such underlying security but whose value may be derived from such underlying security, even if the derivative instrument may be settled only in cash. In order to be a reference security for a subject security, the reference security (or an index of which it is a component) must be referred to in the terms of the subject security. Outstanding Debt Securities. During a distribution of non-convertible debt securities, Rule 101 will not apply to bids for or purchases of outstanding non-convertible debt securities of the same issuer unless the latter are identical in all of their terms to the securities being distributed. Rule 101 does not apply to an outstanding security if there is a single basis point difference in coupon rates or a single day's difference in maturity dates as compared to the security in distribution. *

Activel], Traded Securities. Rule 101 trading restrictions do not apply to any security having an average daily trading volume ("ADTV") with a value of $l million or more, where the issuer's common equity securities have a public float value of at least $150 million. The exception for actively traded securities will not apply the securities are issued by the distribution participant or an affiliate of the distribution participant.

if

Restricted Period. Rule 101 applies only during the period commencing on the later of (i) one business day** (for a security with an ADTV value of $100,000 or more of an issuer whose common equity securities have a public float value of $25 million or more) or five business days (for all other non-actively traded securities) immediately preceding the pricing of the offering or (ii) the date on which the person becomes a distribution participant, and ending when such person completes its participation in the distribution

Under Regulation I\d, a distribution participant will be deemed to have completed its participation when its participation has been distributed and, in the case of an underwriter, any stabilization arrangements and trading restrictions in connection with the distribution have been terminated. An underwriter's participation will not, however, be deemed to have been completed if a syndicate over allotment option is exercised in an amount that exceeds the net syndicate short position at the time of such exercise. Rule 100 provides that securities acquired in the

In a distribution of equity securities, however, outstanding classes of securities that differ only in voting rights from the subject security will be deemed to be the same security for purposes of Regulation M.

**

In determining the restricted period, "business day'' means a 24-hour period that includes an entire trading session for the security in the principal market. Under Regulation M,
the 24-hour period can begin at any time.

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October 1998

distribution for investment by any person participating affrliated purchasers, are considered to be distributed.

in the distributioq or by any of its

Investment Grade Debt. Preferred Stock and Asset-Backed Securities. Rule l0l provides an exception for non-convertible debt and preferred securities that are rated investment grade. Rule l0l also provides an exception for asset-backed securities that are rated investment
grade.

Transactions in Rule l44A-Eligible Securities. Rule 101 does not apply to certain distributions of Rule l44A-eligible securities of domestic or foreign issuers. Thi exception is available if the securities being distributed are offered and sold in the United States solely to (i) qualified institutional buyers ("QIBs"), or persons reasonably believed to be eIBs, in transactions exempt from registration under the Securities Act and (ii) persons not deemed to be 'lU.S persons" for purposes of Rule 902(o)(2) or 902(o)(7) under the Securities Act.* To qualify for this exception, the securities offered and sold to QIBs as described in (i) above must be offered and sold in transactions exempt from registration pursuant to Section 4(2) of the Securities Act or Rule l44A or Regulation D thereunder. There is no exception for U.S. distributions involving offers or sales to "institutional accredited investors" that are not QIBs, even if the distribution is made primarily to QIBs.
Research Reports. Rule 101 permits information, opinions and recommendations (i.E., research reports) to be published or disseminated by a distribution participant or an affiliated purchaser at any time during the distributioq including during the restricted period, if the conditions of Rule 138 or 139 under the Securities Act are satisfied. The conditions in Rules 138 and 139 pertaining to the filing of a registration statement need not be satisfied, so this exception will be available for distributions that are not registered under the Securities Act. Moreover, under Rule l0l, publication of research may occur even if, as permitted by Rule 139(a), the research contains a recommendation or earnings forecast more favorable than that previously disseminated by the firm.

"Directed" research (e-g., research sent by sales personnel to customers who normally would not receive it in the ordinary course of business), or the execution of orders resulting from directed researctq is not permissible during the restricted period. However, in the case of research provided to independent services that make such reports available to their subscribers electronically, the subscribers need not be customers of,, or have previously received research fronr, the distribution participant for the research to be excepted from Rule 101. Similarly, a distribution participant may add new persons to its mailing list where it is intended that they receive all future research sent to persons on the list and not just research relating to the security being distributed.
De Minimis Transactions. The SEC has adopted a de minimis exception for certain transactions whiclq although in technical violation of Rule l0l, are inadvertent and not likely to have a market impact. A de minimis transaction is defined as a bid that is not accepted, or one or

This category would include (i) a discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. person by a professional fiduciary organized, incorporated or resident in the United States and (ii) certain specified international organizations and their agencies, affrliates and pension plans.
140

October 1998

more purchases that in the aggregate total less than 2Yo of the security's ADTV. Any purchase, even if the trade is subsequently broken, is considered a purchase for purposes of this exception. NSI considers any violation of Rule l0l, inadvertent or no! a serious matter. The de minimis exception provided in Rule 101 is not a justification for failure to comply with Rule 101.

Option Exercises. Rule 101 permits distribution participants, during the restricted period, to exercise any option, warrant, right or conversion privilege set forth in the instrument governing a security, whether the security is standardized or privately negotiated. This exception applies to the exercise of options and other rights to acquire securities from third parties as well as from the issuer. Moreover, this exception permits distribution participants and their affiliated purchasers to exercise standardized call options at any time during the distribution, including during the restricted period, whether the options are acquired before or after the participant begins its participation. *
Basket Transactions. Rule 101 permits distribution participants and their affiliated purchasers to bid for and purchase covered securities in the ordinary course of business in connection with a basket of 20 or more securities, if a covered security does not comprise more than 5Yo of the value of the basket being purchased. The exception is available for both indexrelated and customized baskets, but in either case the transaction must be a bona fide basket transaction effected in the ordinary course of business (i.e.,the decision to include a covered security in the basket must be independent of the existence of the distribution). This exception also permits bids and purchases for the purpose of adjusting a basket position related to a standardized index in the ordinary course ofbusiness to the extent necessary to reflect a change in the composition of the index. However, this exception does not permit rebalancing in customized baskets where the rebalancing adjustments do not meet the 5%l2O
stock tests.

Other Exceptions. Rule 101 contains additional exceptions permitting distribution participants and their affrliated purchasers, at any time during the distributiorq to (i) bid for and purchase odd-lots, (ii) effect unsolicited brokerage transactions, (iii) make unsolicited purchases as principal that are not effected from or through a broker-dealer, on a securities exchange or through an inter-dealer quotation system or electronic communications networ( (iv) effect transactions with distribution participants, and purchases from the issuer or selling security holder, in connection with the distribution other than on a securities exchange or through an inter-dealer quotation system or electronic communications network and (v) offer to sell, and solicit offers to buy, the securities being distributed and securities offered as principal by such distribution participant. In addition, Rule 101 contains exceptions for exempted securities as defined under Section 3(a)(12) of the Exchange Act (government and municipal securities and certain trust interests), face-amount securities issued by a face-amount certificate company and redeemable securities issued by an open-end management investment company or unit
investment trust.

There may be circumstances in which the exercise of a non-standardized option or other security that is privately negotiated could be effected for the purpose of requiring the counterparty to acquire the underlying security. In such circumstances, the purchase by the counterparty may be deemed to be a purchase by the exercising party.

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October 1998

Stabilization. Rule 104 governs transactions that stabilize the price of a security to _ facilitate an offering o{Ty security. Rule 104 allows persons effecting stabilizing transact-ions to initiate a stabilizing bid with reference to prices in the principal markEt,* whethei domestic or foreign. After a stabilizing bid has been initiated in anymarket and ro iong as it has not been discontinued, Rule 104 permits that bid to be maintained in that market o1 canied over into another market, regardless of changes in the independent bids or transaction prices for the sgcurity. Rule 104 permits a stabilizing bid that has 6een placed in any market to be increased to the level of the highest independent bid in the principal market atthattime (or, if the principal market is not operL at its previous close). Rule 104 contains maximum rup. on stabilizing price levels: in no event may stabilizingbe initiated or maintained in any *uik t at a priceitrat is higher than the lower of the offering price or the stabilizing bid in itre principal market at that time (or, if the principal market is not operL at its previous close).

Rule 104 has an exception for distributions of Rule l44A-eligible securities of foreign issuers or domestic issuers. As in Rules tOl and 102, the exception r.q-rir., that offers and sales in the United States. be made in private placements solely G) eIB. (or persons reasonably believed to be QIBs) in exempt transactions of the kind descriUed- earlilr and (i) p".ror,, no-t deemed to be "{J.S. persons" for purposes of Rule902(o)(2) or 9o2(o)(7) under the Securities

t;

Act.

It should be noted that Rule 104 applies even though an exception to Rule 101, such as the exception for actively traded securities, is available. In such situations, altirough a distribution participant would be permitted under Rule 101 to bid for or purchase an actlvely traded security during the applicable restricted period, any such transactions that constitute
stabilization would have to comply with Rule 104.

Aftermarket Activities. Rule 104 requires any person effecting a syndicate covering transaction,** or imposing a penalty bid,**t to give prior notice of that Act to ihe self-regutatori organization that has direct oversight authority over ihe principal market in the United States for
Under Rule 104, the price at which stabilizing may be initiated in any market generally is to be determined by reference to the last independent transaction prite for thJsecurity in the principal market, provided that the security was traded in that market on that day or the previous day and the current asked price for such security in that market is higher than such independent transaction price. If these conditions are not met, stabil;ing generally may be initiated in any market at a price no higher than the highest independenl bid in the principal market.

**

A "syndicate covering transaction" is defined as the ptacing of any bid or the effecting of any purchase on behalf of the sole distributor or the underwriting syndicate or group to
reduce a syndicate short position. as an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member in connection wittr an offering when the securities originally sold by the syndicate member are purchased in syndicate

,F**

A "penalty bid" is defined

covering transactions.

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October 1998

the security that is the subject of such transaction or bid. Rule 104 contains a similar notice requirement regarding stabilization bids. In additioq Rule 17a-2 under the Exchange Act has been amended to require managing underwriters and sole distributors to keep records of syndicate covering transactions and penalty bids in addition to stabilization purchases. Such records must include, among other things, the name and class of securities stabilized or for which syndicate covering transactions are effected or penalty bids imposed; the price, date and time at which stabilization purchases or syndicate covering transactions are effected and whether any penalties are assessed; and the dates when any penalty bids are in effect. The records are required to be maintained for at least three years, the first two years in an easily accessible place.

In a registered offering, the description of the "plan of distribution" required to

be

included in the prospectus must contain a brief description of any prospective stabilization and aftermarket activities, including syndicate covering transactions and the imposition of a penalty bid, and their potential effects on the market price. The stabiliz-ation legend required to be set forth in the prospectus has been modified to refer more broadly to activity that may affect the offered security's price and to direct investors to the description of the "plan of distribution'.
Short Sales in Connection with an Offering (Rule 105)

Rule 105 is designed to prevent short sales made in advance of a public offering from being covered with securities obtained from an underwriter, broker or dealer who is participating in the offering. Rule 105 covers only those short sales effected during the five business day period prior to the pricing of an offering. Rule 105 does not apply to short sales of derivative securities. Rule 105 applies only to offerings that are conducted on a firm-commitment basis and that are either registered under the Securities Act or made pursuant to Regulation A thereunder. Rule 105 does not currently apply to shelf-registered offerings. Certain notifications related to stabilization activities must be provided, and certain information related to these activities must be maintained in internal files for at least tkee years, the first two years in an easily accessible place, in accordance with Exchange Act Rule I7a-2.
Please consult with the New Issue Supervisor, Compliance Department, deal counsel or the General Counsel's Offrce to discuss these requirements along with the specific application of these rules.

10. Extension of Credit on New Issues

Section 11(d)(1) of the Exchange Act prohibits a broker/dealer from extending, maintaining or alranging credit, for a period of 30 days, to or for a customer on any security (other than an exempt security) which was part of a new issue in which the broker/dealer participated as an underwriter or member of the selling group. However, securities of the same class held in margin accounts prior to the broker/dealer's participation in connection with the distribution may continue to be afforded loan value. (See Section l4.A for more details).
I

l. Public Offerings with an Over-Allotment Option (Green Shoe)

When NSI is the lead manager of a public offering, it is responsible for managing the syndicate short position. Typically, this will involve covering the syndicate short position in the after-market by allocating all NSI purchases (after the distribution is complete) to the Syndicate
r43
October 1998

Department.

Account. The Green Shoe can only be exercised to the extent the syndicate is short; as the short position is covered, the over-allotment option is reduced. Open market purchases by NSI should not be made for any account other than the Syndicate Account for as long as the syndicate is short without the prior wriuen approval of the General Counsel's Offrce or iompliance 12. Advertising

There are strict limitations on the use of advertising and sales literature in connection with placements. (See Sectionl2.B.4. below).

C. Roadshow Procedures
From time to time, employees may be required to coordinate and/or attend roadshow presentations for transactions in which NSI is acting as undenrriter or placement agent in the issuance of public registered securities. This Section sets forth guidelines that must be followed when conducting roadshow presentations* in respect of equity or debt securities in registered, public offerings ('Public Offerings") unless prior approval of the Legal Department is given. To ensure full compliance with these guidelines, it is strongly suggested that (i) ioadshow presentation rehearsals (including a mock question and answer session) be conducted and (ii) all management and officers of the issuer, as well as all NSI sales supervisors and others present.at a roadshow, be familiar with the following procedures Any questions regarding these procedures should be directed to the Legal Department.

1.

When may a roadshow be conducted?

Roadshows in Public Offerings may occur only after (i) a registration statement in respect of the Public Offering has been filed with the SEC and (ii) for Public Offerings involving an effective shelf registration statement, after the preliminary prospectus supplement relating to the offering has been prepared.

2.

What materials may be distributed at roadshows? Only the following materials may be distributed at roadshows:

The most recent preliminary or final prospectus relating to the Public Offering and, for Public Offerings involving an effective shelf registration statemenf the final basic prospectus and the preliminary and final prospectus supplement relating to the offering. If an amendment to the registration statement his been filed, or if a preliminary or final prospectus or prospectus supplement has been amended, legal counsel shall determine which documents are appropriate for distribution.

a.

b. Material incorporated by reference in the preliminary or final prospectus or prospectus supplement, so long as (a) such material has been reviewed and approved by
For purposes ofthis Sectioq roadshow presentations include one-on-one presentations, IR meetings and any other meeting with prospective purchasers where the issuer or its securities is discussed.
144

October 1998

the Legal Department or deal counsel and (b) it is preceded or accompanied by the preliminary or final prospectus or prospectus supplement, as the case may be.
Research reports (including research discussing the relevant issuer, its securities or its industry) and projections (not otherwise set forth in the preliminary or final prospectus or prospectus supplement) may not be distributed at Public Offering roadshows.

3.

What can be discussed orally at roadshows?

prospectus, prospectus supplement or offering circular that has been distributed prior to, or at the same time as, the roadshow presentation. Other information may be discussed with the approval of the Legal Department. It is a violation of NSI policy and securities laws to conduct a roadshow presentation that is inaccurate or misleading or that cause statements contained in the distributed preliminary or final prospectus, prospectus supplement or offering circular to be inaccurate or misleading.

You may discuss information contained in any preliminary or final

4.

Can overhead slides and videotapes be used in roadshows?

Overhead slides and videotapes (including recorded presentations or interviews) may be used in Public Offering roadshows only with the prior review and approval of the Legal Department. Hard copies of these materials may not be distributed without the approval of the Legal Department.

5-

Can

"forward-looking" information be discussed at roadshows?

Projections, forward-looking statements and other types of "soft" information may be discussed at Public Offering roadshows only with the prior approval of the Legal Department.

6.

To whom may you extend an invitation to attend a roadshow presentation?

a.

General

In general, only prospective investors may be invited to roadshows. Members of the press, media or any other news service may not be invited without the prior approval of the Public Relations Department and Legal Department.
Attendance must be controlled carefully. In group meetings, sign-in sheets must be used and maintained in the relevant transaction file. Consideration should also be given to using name tags and other devices to control
attendance.

b.

Public Offerinss

In general, there are no legal restrictions on the types of investors that may be invited to a Public Offering roadshow. However, it is prudent to check the
145

October 1998

prospectus or related prospectus supplement for any limitations on sale or suitability and direct any questions to the I*galDepartment.

As a general matter, NSI does not maintain retail customer accounts and
invitations to retail customers are discouraged.

so

r-)

t46

October 1998

12. NEW ISSUANCE OF PRTVATE SECURITIES

Supervisors are required to apply the supervisory procedures in Section 1.E.(2) ('Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

A.

General

Each offer and sale of a security in the United States or to U.S. persons must be registered with the U.S. Securities and Exchange Commission or exempt from registration. The penalties for failing to comply with the U.S. securities laws may be severe.

This Section sets forth procedures that must be followed in private and Regulation S securities placements, for initial distributions. Ofterq in an initial placement of securities into the United States, the issuer or placement agents establish procedures to comply with the U.S. securities laws that participating brokers must follow. The procedures in this Section are intended to supplement procedures that may be imposed in a particular offering. The task of implementing and enforcing procedures to comply with the applicable requirements is the responsibility of the business area involved in the new issue (the "New Issue Supervisor"). Questions regarding particular procedures should be directed to the LegalDepartment.

B. Primary Offerines l.
General

Set forth below are procedures that must be followed in connection with securities placements pursuant to (i) Section a(2) of the Securities Act or Regulation D thereunder ("Private Placements"), and (ii) Regulation S under the Securities Act ("Regulation S Placements"). Each employee is responsible for reviewing and understanding and complying with these procedures.*

2.

To whom can offers and sales of securities be made?

a.

Private Placements

Check the relevant offering document(s) for any restrictions on sale.** Questions regarding such restrictions should be directed to the Legal Department.

a.

As always, in addition to the procedures set forth hereirq you must consider the suitability of each investment for your clients and their authorization to enter into the contemplated
transaction.

**

The offering document(s) may require that you also obtain additional documentation for that offering. You should check the relevant offering document(s) for any such requirement.
t47

October 1998

In general, offers and sales of securities in Private Placements may be made only to institutional accredited investors and, if permitted by the offering document(s), non-U. S. persons.
Institutional accredited investors must provide satisfactory written proof to the New Accounts Department. This is usually satisfied by a certificate included with the relevant offering document(s). Written proof must be provided for each Private Placement sale to a particular client in the form of Exhibit O, or a similar document. Questions regarding certification should o the Legal Department.

b.

c.

t" o

d. Non-U.S. persons must provide satisfactory wdtten proof to the New Accounts Department. This is usually satisfied by a certificate included with the relevant offering document(s). Written proof must be provided for each sale to a particular client in accordance with this paragraph. euestions regarding certification should be directed to the Legal Department.

Administration must have been provided with written proof that your client is an institutional accredited investor before confirming any sate. Telecopied documents are acceptable, so long as they are followed promptly by originals.

e. The New Issue Supervisor must be notified of the name of,, and contact for, each prospective purchaser pllqr to telephoning them or sending them any offering materials. The New Issue Supervisor or Customei Account

f. An institutional accredited investor must be an "institution" in the state where it is located, as set forth in Exhibit R* and must fall within one of the following categories:
a.
any bank as defined in Section r(a)(z) of the Securities Act or any savings and loan association or other institution as defined in Section 3(a)(s)(A) of the Securities Act, whether acting in its individual or fiduciary capacity; any broker dealer registered pursuant to Section 15 of the Exchange Act, any insurance company as defined in Section 2(13) of the Securities Act;

b. c.

Since the definition of institution varies from state to state, the list in Exhibit R must be consulted carefully. You must also comply with any specific selling restrictions set forth in the Blue Sky memorandum (if any) prepared for the offering. tnidditioq special requirements not covered in Exhibit R- may apply in offerings by insureri or insurance holding companies and in such cases you should consult the Blue Sky memorandum (if any) or the Legal Department before making sales.

148

October 1998

d.

any investment company registered under the Investment Company *1940 Act of 1940 (the Act") or a business development company as defined in Section 2(a)(a8) of the 1940 Act;
any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;

any plan established and maintained by a statg its political

subdivisions or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000;
o

any employment benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 ("ERISA"), if the investment decision is made by a plan fiduciary as defined in Section 3(21) of ERISA which is either a banlg savings and loan association, insurance company or registered investment adviser, or if the employment benefit plan has total assets in excess of $5,000,000, or, if a self directed plaq with investment decisions made solely by persons that are institutional accredited investors;

h.

any private business development company as defined 202(a)(22) of the Investment Advisers Act of 1940;

in

Section

any organization described in Section 501(c)(3) of the Internal Revenue Code, corporatioq Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
J.

with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506O)(2)(iD under the Securities Act, or
any trust

k.

any entity in which all of the equity owners are accredited investors.

r49

October 1998

b.

Rule l44APlacements

Check the relevant offering document(s) for any restrictions on sale.* Questions regarding such restrictions should be directed to the Legal Department.

a.

In general, offers and sales of securities in Rule 144A Placements may be made only to QIBs and, if permitted by the offering document(s), institutional
accredited investors and non-U.S. persons.

b.

of QIB verification must be for.warded to the NSI Cuitomer Account Administration Department for filing. Please identify the account(s) related to the particular QIB verification. Once a client has signed a QB certification, they will not be required to sign one again for subsequent Rule l44LPlacements unless its financial condition materially changes. Check with Customer Account Administration regarding whether a certification previously has been obtained.
Questions regarding certification should be directed to the LegalDepartment.

documents should be obtained from the purchaser ofthe security or its adviser prior to settlement.** Resales of Rule 144,4' securities, from an unsold allotment of an initial issuance, should be treated as resales in an initial distribution. The Registered Representative can also rely on alternative sources to veri$ QIB status -Leiter such as reference books. rn each case, a signed copy of the eIB or a memorandum from the Registered Representative describing his/her method

For QIBs, when NSI personnel are selling Rule 144A securities in an initial distribution, either QIB Letrer (IXA) @urchase for Own Account) or eIB I,etter (1XB) @urchase for Disclosed Principal) (see Exhibit S) or similar

c.

d. Institutional accredited investors and non-U.S. persons must provide written proof that your client is an institutional accredited investor or non-U.S. persorL which is usually satisfied by a certificate included with the relevant offering document(s). Questions regarding certification should be directed to the tegit
Department.

e. The New Issue Supervisor must be notified of the name of, and contact for, each prospective purchaser pnof to telephoning them or sending them any offering materials. The New Issue Supervisor or Customei Account Administration must have been provided a fully completed certification before
The offering document(s) may require that a prospective purchaser submit additional documentation for that offering. Check the relevant offering document(s) for any such requirement.

**

QIBs are certain specified institutions which own and invest on a discretionary basis a specified amount of qualifying securities (generally, $10,000,000 for registerid broker/dealers and $100,000,000 for other specified institutions). See Exhibit U for a description of institutions that are considered QIBs. See Exhibit V for speiifrc guidance as to determining the aggregate amount of securities owned and invested on a

discretionary basis.
r50
October 1998

confirming any sale. Telecopied documents are acceptable, so long as they followed promptly by originals.

are

c.

Regulation S Placements

a. b. c.

Check the relevant offering document(s)

for any restrictions on sale.

Questions regarding such restrictions should be directed to the LegalDepartment.

In general, offers and sales of securities in Regulation S Placements may

be made outside of the United States to non-U.S. persons.

Except in the case of securities issued by foreign governments or those without a substantial U.S. market interest, no offers, solicitations or sales can be made to U.S. persons wherever they are located for at least 40 days from the later of when the securities were first offered to the market or the closing date of the offering (other than private placements that are part of the offering).

For offers and sales outside of the United States to non-U.S. persons, when NSI personnel are selling securities, pursuant to Regulation S, in connection with an initial distribution or in secondary transactions prior to the applicable seasoning period of Regulation S, either Regulation S Letter (3XA) @urchase for Own Account) or Regulation S Letter (3XB) @urchase for Disclosed Principal) (see Exhibit T) must be obtained from the purchaser of the security or its adviser prior to settlement. A Regulation S Letter should be obtained for @h sale pursuant to Regulation S unless you can g!g!y establish, based upon independent information reviewed by the NSI Legal Department, that the purchaser is not a "U.S. person" under Rule 902 of Regulation S. Telecopied certifications are acceptable, so long as they are followed promptly by originals. You should check with Customer Account Administration regarding whether a certification previously has been obtained and, if so, how recently it had been obtained. Questions regarding certification should be directed to the Legal Department.

d.

d.

,CREF"Transactions*

In certain circumstances, NSI personnel may receive permission to sell unregistered, unseasoned securities to U.S. persons in connection with an initial distribution foreign-issued securities ('Foreign Unregistered Securities"). In order to sell Foreign Unregistered Securities to a U.S. persoq the relevant salesperson must obtain: (A) permission from an Executive Managing Director, directly responsible for the particular salesperson, to execute such a transaction and @) either CREF Letter (4XA) @urchase for Own Account) or CREF Letter (4XB) @urchase for Disclosed Principal) (see Exhibit T) from the purchaser of the security or its adviser prior to settlement.

of

These transactions involve the sale of foreign-issued, unregistered and unseasoned securities to U.S. persons in connection with an initial distribution. By definitioq these

transactions do not involve either Rule l44A resales or Regulation S sales.

t5l
October 1998

A CREF Letter should be obtained for each sale authorized in accordance with the foregoing procedures.

3.
a.

t
a.
means

to:

Offers and sales of securities in Private Placements can never be made by of a general solicitation or general advertising,* including, but not limited

a. b. b.

radio**; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

any advertisement, article, notice or other communication published in any newspaper, magazine or similar media with a general circulation in the United States or broadcast over U.S. televisio., o.

Offers and sales of securities in Regulation S Placements can never be made by means of directed selling efforts, which means any activity undertaken for the purpose of, or that could be expected to have the effect o[ Londitioning the market in the United States for the securities being offered in reliancl on Regulation S.*<*+ Such activity includes those described in the preceding
paragraph.

This limitation does not preclude general advertising, in the ordinary course of business, that does not involve the offer or sale of a security. ,t* Tombstone ads announcing a completed transaction (with no unsold allotments held by Nomura) are permissible if made following the completion of the related offering wheie their impact would have no "immediate or direct bearing on subsequent sales.,, Tombstone ads should contain a legend which stipulateJthat they ire being published for informational purposes only. They should be cleared in advance by the GJneral Counsel's Ofiice, deal counsel or Compliance Department.

***

A "foreign targeted" advertisement or press release published in a publication with a general circulation in the U.S. is permitted provided that (i) the publication has less than 20Yo of its circulatioq calculated by aggregating the circulation of its U.S. and comparable non-U.S. editions, in the U.S., (ii) such ad or release contains a legend to the effect that the securities have not been registered under the Securities Act and-may not be offered or sold in the U.S. (or to a U.S. persorL if appropriate) absent registration or an applicable exemption from registratioq and (iii) such ad or release no more "ontuin, information than the issuer's name, the amount and title of securities being sold, a brief indication of the issuer's^business, the price of the securities, the names oithe managing underwriters, the dates, if any, on which sales commenced and other limited information.
t52
October 1998

b.

Delivery of Offering Document(S)

a. All offering materials and correspondence delivered to clients must be reviewed and approved in advance by the Compliance Department or deal counsel. b. AII
offering document(s) must be delivered

to

investors prior to

confirming any sale.

delivered to clients must be documented. You must notify the New Issue Supervisor promptly of what materials have been delivered and to whorq as well as deliver to the New Issue Supervisor a log of all meetings and telephone calls with potential investors (regardless of whether or not they purchase securities). The New Issue Supervisor will maintain a file of all written materials delivered to clients and to whom those
materials were delivered.

c. All offering materials and correspondence

must be reviewed and approved in advance by a Series 8 supervisor as described more fully in Section 10 above. An approved copy of the correspondence must also be provided to the New Issue Supervisor.
Clients should return to you all offering materials if the client does not purchase securities from you. This precaution assists in maintaining the non-public nature of the placement and the confidentiality of the offering materials.

d. AII correspondence e.

c.

Federal. State and Other Regulatory Filings

Federal, state or other regulatory filings may need to be made in connection with a placement of securities. Prior to contacting a client regarding a particular security, you must confirm with the New Issue Supervisor that all necessary filings have been made or that no filings are required in the particular jurisdiction where the client is located. Questions may be directed to the Legal Department.

4.

Advertising

As discussed above, there are strict limitations on the use of advertising and sales literature in connection with placements. All advertisements and sales literature must comply with the standards of the NASD and the NYSE. They must be approved by the New Issue Supervisor, the Public Relations Department and the Legal Department before each use and maintained in a separate internal file for such materials for three years after each use. The name and signature of the person who approved them must be indicated on such filed documents. All sales materials and advertisements must be based on principles of fair dealing and good faith and should provide a sound basis for evaluating the facts. They should not contain exaggerated, misleading or unwarranted statements. Advertisements and sales literature concerning registered investment companies and government securities must be filed with the NASD within l0 days of ftrst use. Advertisements concerning collateralized mortgage obligations, and advertisements and sales literature concerning registered investment companies that use certain types of rankings must be filed with the NASD at least l0 days prior to use. They should not contain predictions, forecasts, estimates, opinions or projections unless approved by the New Issue Supervisor, the General Counsel's Office, deal counsel or the Compliance Department. Advertisements for
t53
October 1998

registered investment companies are subject to additional regulations as discussed in the Nomura Investment Advisor's Compliance Manual.

C.

Roadshow Procedures

From time to time, employees may be required to coordinate and./or attend roadshow presentations for transactions in which NSI is acting as placement agent in the issuance of private umegistered securities. This Section sets forth guidelines that must be followed when conducting roadshow presentations* in respect of equity or debt securities in Private Placements. To ensure full compliance with these guidelines, it is strongly suggested that (i) roadshow presentation rehearsals (including a mock question and answer session) be conducted and (ii) all management and officers ofthe issueq as well as all NSI sales supervisors and others present at a roadshow, be familiar with the following procedures Any questions regarding these procedures should be directed to the LegalDepartment.

l. 2.

When may a roadshow be conducted?

Roadshows in Private Placements may occur at any time.

What materials may be distributed at roadshows? Unless prior approval is received from the Legal Department, only the following materials may be distributed at roadshows:

Placement, including any amendment or supplement thereto.

(1) The most recent preliminary offering circular relating to the private

incorporated by reference in the preliminary or final offering circulaq so long as (a) such material has been reviewed and approved by thi Legal Department or deal counsel and (b) it is preceded or accompanied by the preliminary or final offering circular.
Research reports (including research discussing the relevant issuer, its securities or its industry) may not be distributed at private placement roadshows.

(2) Material

3.

What can be discussed orally at roadshows?

Information contained in any preliminary prospectus, prospectus supplement or -at offering circular that has been distributed prior to, or the rurn. iir. as, the roadshow presentation may be discussed. Other information may be discussed only with the approval of the Legal Department. It is a violation of NSI policy ani securities laws to conduct a roadshow presentation that is inaccurate or misleading or that causes statements contained in the distributed preliminary or final prospectus,
prospectus supplement or offering circular to be inaccurate or misleading.

For purposes of this Sectiorq roadshow presentations include one-on-one presentations and any other meeting with prospective purchasers where the issuer or its securities is
discussed.

t54

October 1998

4.

Can overhead slides and videotapes be used in roadshows? Overhead slides and videotapes (including recorded presentations or interviews) may be used only if (i) they have been reviewed and approved by the Legal Department or deal counsel and (ii) they are consistent with information contained in the preliminary offering circular. Hard copies of these materials may not be distributed without the approval of the Legal Department.

5.

Can "forward-looking" information be discussed at roadshows?

Projections, forward-looking statements and other types of "soft" information may be discussed only (i) if (a) they are contained iq and preceded or accompanied by, the preliminary or final offering circular and (b) the caveats contained in the preliminary or final offering circular are sufficiently discussed prior to the disclosure of projections or forward-looking statements and (ii) with the prior review and approval of the Legal Department. To whom may you extend an invitation to attend a roadshow presentation?

a.

General

In general, you may not invite anyone other than prospective investors (they must be qualified, as discussed above). Members of the press, media or any other news service may not be invited without the prior approval of the Public Relations
Department and Legal Department.
Attendance must be controlled carefully. In group meetings, sign-in sheets must be used and maintained in the relevant transaction file. Consideration should also be given to using name tags and other devices to control attendance.

b.

Private Placements
Questions regarding such restrictions should be directed to the LegalDepartment.

l.

Check the offering circular

for any restrictions on sale.

solicitation. General solicitation includes, but is not limited to: (a) any advertisement, article, notice or other communication (i) published in any
newspaper, magazine or similar media, (ii) broadcast over television or radio or (iii) appearing through means of electronic data transmissiorg such as the Internet or "e-mail", or (b) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

2.

Invitations for attendance at a roadshow may not be made through general

institutional accredited investors, the invitee must have fully completed and returned to Customer Account Administration the certification attached as Exhibit O prior to attending the roadshow. It is advisable to check with Customer Account Administration to determine whether a certification has been obtained previously and, if so, how recently such certification had
been obtained.
155

3. For

October 1998

Questions regarding whether a prospective purchaser is an institutional accredited investor should be directed to the LegalDepartment.

156

October 1998

13. SECONDARY SALES OF PRTVATE SECURITIES

A.

General

Securities cannot be offered

or sold in the U.S. except pursuant to a registration

statement filed with the SEC or an exemption from such registration- Registration requirements express the SEC's concern that public markets in securities could be created without adequate

current information available to the public. The SEC recognizes, however, that adequate current information concerning an issuer sometimes exists, and therefore provides exemptions from registration for secondary sales of securities. Section a(2) of the Securities Act exempts from registration private placements of securities sold by an issuer. Regulation D under the Securities Act establishes a "safe harbor" exemption from registration for private placements conducted within the specific guidelines of that Regulation (most notably that sales generally be made to "accredited investors"). Regulation S under the Securities Act provides a safe harbor pursuant to which certain sales of securities may be made outside of the U.S. without registration.

Securities sold in a private placement are considered "restricted securities" and may only be sold to other investors pursuant to registration or an exemption therefrom. The so-called "Section 4(l-ll2) private placement of "restricted securities" is one possible exemption from registration for a secondary resale (generally opinions of counsel and other certificates are required). Rule 144,{ under the Securities Act provides a safe harbor for resale of "restricted securities" to "qualified institutional buyers" ("QIBs"). "Restricted securities" may be resold outside of the U.S. in reliance on Regulation S. Finally, "restricted securities" may be resold in reliance on Rule 144 one year after issuance subject to volume and various other limitations, or two years after issuance without limitatiorq provided such securities were not reacquired by the issuer or an afFrliate after issuanceFor any transaction, more than one exemption from the registration requirement may be available depending, among other things, upon the security, the type of issuer and the type of purchaser. For example, documentation for an offering may permit resales under Regulation S, Rule l44A and/or Rule 144. Accordingly, a determination must be made for each offer and sale of a security as to which exemption from the registration requirements would be the most appropriate, in light of applicable securities laws and documentation for such security. The selection of an exemption not only will determine the eligible offerees and purchasers but also may impose particular resale restrictions upon any purchaser.

B. Rule 144
Rule 144 under the Securities Act deals with the sale of stock that is restricted because it is being sold by an affrliate of the issuer or has not been previously registered. All such sales
must be made in brokerage transactions (which does not include riskless principal transactions). There is a special procedure for selling such stock. AIl such sales should be coordinated with the Compliance Department and General Counsel. Each Registered Representative must obtain necessary information from his or her other customer to ensure compliance with Rule 144. Most importantly, each Registered Representative should determine prior to the execution of the transaction whether the stock is restricted so that the Compliance Department and/or General Counsel may decide whether it may be sold pursuant to Rule 144. If possible, the seller should provide an opinion of counsel as to the applicability of Rule 144.

t57

October 1998

If the seller is NOT an afiiliate

Rule 144 exemptioq NSI will need:

exempts the sale from the requirements of Rule

and has held the stock for two years, Rule 144(k) 144. Otherwise, to meet the requirements of tne

l. 2. 3.
4
5.

Assurance from the issuer that its reports are timely filed.

A report of volume for the last four weeks to determine whether the amount sold is less than 1% of the outstanding shares or the average weekly trading volume for the four weeks prior to the filing of the notice. A signed Rule 144 letter and Form 144 from the seller. An opinion of counsel from the issuer.
NSI then will send the stoclg together with the Form 144, Notice of Sale, the 144 Letter and Opinion of Counsel to the transfer agent for transfer into street name for purposes of the
sale.

C. Section 4(t-2) Exemption

Prior to buying or selling any private placement securities, the following procedures must be followed:
Salespeople MUST write the following trailer on the trade ticket to ensure that the statement is reflected on the customer confirmation:

(a)

"Settlement subject to receipt and review of documents,'

secondary private placement transaction. The content

(b) Opinions of counsel and other certificates are often required in connection with

of all such documents must be discussed with and reviewed by all concerned, and no agreement to buy or sell any private placement securities should be made until all points of disagreement regarding such documents have been resolved. The seller should furnish in all cases the original purchase agreement and a representation letter to us prior to the settlement of the trade. In some casei, an opinion of seller's counsel will also be required by the issuer or its transfer agent. The buyer of private placement securities is also required to deliver to us prior to settlement a .epresentation letter. In some cases, an opinion of buyer's counsel will also be required by the issuer or its transfer agent. Transfer of such private placement will not be effected without such documentation. All
documentation must be approved by the LegalDepartment. when Nomura purchases private placement securities, it is advisable to alrange for the delivery of the securities to Nomura prior to settlement. The early receipt of the securities provides an opportunity to:

(c) In addition,

(D

Review the transfer documentation (i.e., stock powers, @rporate resolutions). Many accounts fail to furnish proper transfer papers and, accordingly, the
settlement of the trade is delayed.

158

October 1998

(ii)

Arrange for the denominational breakdown if Nomura has sold the securities to more than one account. Sales to a number of accounts (particularly in small denominations) could affect the secondary private placement exemption.

When Nomura sells private placement securities, it is advisable to arrange for the transfer of the securities on behalf of the buyers because many accounts are not equipped to handle complicated re-registrations. However, before Nomura can assist in the transfer, Nomura must be paid on the sefflement date for the security.
must deliver the securities to the buyer versus payment and the security is not registered in the name of the account, it is advisable to verify all necessary documentation required for the transfer of the security into the name of the account.

(d)

(e) If Nomura

Any questions regarding secondary private placements should be directed to the Legal
Department.

D.
as

Rule l44A

Rule 144.{ exempts from registration resales by holders, including intermediaries such Nomura, of "restricted securities".

(a)

Conditions to be

met.

Securities may be resold under l44A

if

the following

conditions are met:

(D the securities must be eligible for Rule r44A -

among other things, the securities being resold must not have beeq when originally issued, of the same class as securities already listed on a U.S. securities exchange or quoted in NASDAQ (convertible or exchangeable securities should be treated as the same class as the underlying security for this purpose); the purchaser must be a QIB. When NSI personnel are selling Rute 144A securities in ordinary, secondary transactions, a QIB Letter (see Exhibit S) or other satisfactory documentation must be obtained from the purchaser of the security or its adviser prior to settlement.* In each case, a signed copy of the QIB Letter or the satisfactory documentation must be forrvarded to the NSI Customer Account Administration Department for filing. Please identi$ the account(s) related to the particular QIB Letter.

(ii)

QIBs are certain specified institutions which own and invest on a discretionary basis a specified amount of quali$ing securities (generally, $10,000,000 for registered broker/dealers and $100,000,000 for other specified institutions). See Exhibit U for a description of institutions that are considered QIBs. See Exhibit V for specific guidance as to determining the aggregate amount of securities owned and invested on a discretionary basis.
159

October 1998

(iii) issuers (other than foreign governments) who do not file reports under the
Exchange Act must have agreed to provide Iimited information to holders and prospective buyers;* and

(iv) an offeree or purchaser must be made aware of the seller's reliance on

Rule 144A.

(b) Sales and Trading responsibilities where (i) in an initial Rule l44A offering, Nomura is acting as principal (including riskless principal); or (ii) in a Rule l44A resale, Nomura is acting as principal or agent include:

(l)

The purchaser must be a QIB. Purchasers may become qualified for Rule l44A offers and sales by completing, signing and returning to their salesperson the certification set forth as Exhibit S. Customer Account Administration maintains a list of those clients who have previously submitted such certification;
The purchaser must be informed orally (on telephone) that the Firm may rely on the exemption from registration under the Securities Act provided by Rule l44A; and

(2) (3)
If

l44A must be written on the sales ticket and on the confirm.

there is any question as to whether a particular transaction qualifies for an exemption under Rule l44d contact the Legal Department.

E.

Regulation

Resales pursuant to Regulation S are not subject to registration if the offer or sale is made in an "offshore transaction" and there are no related "directed selling efforts" in the U.S. by the Seller, an affiliate or any person acting on their behalf and

(1)

in the case of resales by dealers, the seller does not know that an offeree or buyer is a U.S. person and, if the purchaser is also a dealer or is receiving a selling concessiorq fee or other remuneratiorq the seller sends a confirmation to
the purchaser detailing restrictions on further resale; in the case of resales by affiliates of an issuer or distributor of the securities, no selling concessiorq fee or other remuneratioq other than the customary broker's commissioq is paid; and

(2) (3)

the client fully completes, signs and returns the appropriate certification attached as Exhibit T before confirming any sale. Customer Account
Administration maintains a list of those clients who have previously submitted such certification.

For foreign issuers, this requirement may be satisfied by agreeing to furnish certain information to the sEC pursuant to Rule 12 S3-2(b) under the Exchange Act.
160

October 1998

Additionally, Exhibit

provides

a summary of

Safe Harbors

with respect to

Regulation S. Please note that the Legal Department or deal counsel should be consulted before a resale pursuant to Regulation S is executed.

II

lt

r6l

October 1998

14. MARGIN REGULATION

Supervisors are required to apply the supervisory procedures in Section 1.E.(2) ('Duties of Supervisors") in respect of the procedures discussed in-this section to ensure comptiance by supervised employees with those procedures.

The securities credit activities of broker-dealers are closely monitored and scrutinized through Section 7 atd Section l1(d) of the Exchange Act, Regulation T of the Federal Reserve System and SRO regulation. Section l1(d) governs the e*t"nri,crq maintenance and arrangement of credit by broker-dealers on new issues of securities. Regulation T establishes an account structure to regulate securities credit extended by broker-dealers to customers by delineating which securities transactions may be effected or financed through such accounts. Finally, Ruli 431 of the NYSE supplements Regulation T by providing guidelines for the protection of trokerdealer financial solvency through the imposition of initiat ind maintenance margin requirements. On December 18, 1997,the Board of Governors of the Federal Reserve System (the "Board") adopted sweeping amendments to Regulations G, T, U and The amendments significantly reduce the regulatory distinctions between broker-dealers, banks and other lenders, and effect changes in the margin regulations pursuant to the National Securities Markets Improvement Act of 1996 (the "NSMA").

X.

Among other things, the amendments (1) implement provisions of the NSMIA exempting credit extended to certain broker-dealers fro* the marginregulations and eliminating statutory restrictions on the sources of credit to broker-dealers; (2) combine Regulations G and I_J into a single regulation; (3) permit broker-dealers to extend margin account iredit on a "good faith" loan value basis on any non-equity security and to effect and finance transactions in non-equity securities, as well as to extend certain other credit, in a new "good faith account,'; (4) expand the categories of margin-eligible equity securities under Regulation T to include all NasdaqJisted issues; (5) ease the restrictions on the borrowing and lending of securities by broker-dealers; and (6) clarifu and liberalize the application of Rigulation U to certain securities credit activities, including the financing of delivery-versus- payment transactions and the extension of "mixed-collateral" credit. The amendments became effective April l, 1998, except the amendment with respect to margin-eligible equrty securities under nigulaiion wnicn becomes effective January l, L999.

f,

The amendments to Regulation T do not modi$ the current margin rules of SROs, such as Rule 431 of the New York Stock Exchange or Rule 2520 of the National Association of Securities Dealers, Inc. Such rules will be required to be amended and./or interpreted to address the significant changes adopted by the Board in Regulation T, including, among others, the margin-eligibility, on a good faith loan value basis, of all non-equity securiiies, theireation of a good faith account and provisions adopted as a result of the enactment of the NSMIA. This section of the Compliance Manual will be modified and supplemented as necessary as SRO margin rules are amended and./or interpreted. In the interim, questions regarding the current status of the margin requirements applicable to Nomura should be addresied to the Margirq Legal or Compliance Departments.

Generally, in dealing following points in mind:

with margin regulation issues, employees should keep

the

t62

October 1998

1.

U.S. Treasury, agency and SMMEA eligible securities may be l00%o financed for certain instifutional accounts called "Designated Accounts"* (See "Reverse Repurchase Transactions"). Yen Bonds and certain other highly rated sovereign debt and corporate securities require 20o/o margin;
Certain sovereign debt securities (rated AA or better) are eligible, and the Federal Reserve Board periodically issues a list of marginable foreign equity securities.

Only specified foreign securities are eligible for margin and may be

shorted.

3.

A reverse repo transaction is a margin transaction. Included in this category is

buy transaction for same day settlement with a simultaneous forward sale (buy/sell) transaction. Such transactions are subject to the margin requirements discussed below.

4. 5.

Short Sales of U.S. government and agency securities require deposit of the proceeds while other securities require deposit of the proceeds plus margin up to 5OYo; and A customer cannot pay for a security either: a) by selling it; or
by selling another security after the trade date ofthe purchase.

b)

Net settlement of U.S. treasuries or agencies is generally allowed in delivery-vs.payment institutional accounts.

6.

Equrty securities can only be borrowed for certain purposes specified by the Federal Reserve Board, which generally include covering shorts or cleaning up a failure to deliver. Debt securities no longer require such a "permitted purpose" under Reg. T to be borrowed, but should be used only to deliver on a repo to avoid potential NYSE capital charges.

A.

Section 11(d) of the Exchange Act

Section ll(d) under the Exchange Act prohibits a broker-dealer from effecting any transaction in connection with which the broker-dealer extends or maintains, or arranges for the extension or maintenance of, credit to or for a customer on any security (other than an exempted security) that was apart of a new issue for which the broker-dealer participated as a member of a selling syndicate or group during such broker-dealer's participation and for thirty days thereafter. Section ll(d) is designed to prohibit a broker-dealer from extending credit to a customer to finance its purchase of a new issue security by collateralizingthe financing with such security. It
The term "Designated Account" means the account of a bank (not a savings and loaq credit union or other non-bank deposit institution), trust @mpany, insurance company, investment trust state or political subdivision thereo{ charitable or nonprofit educational institution regulated under the laws of the United States or any state, or pension or profit sharing plan subject to ERISA or of any agency of the United States or of a state or a political subdivision thereof, or any person having net tangible assets of $16 million or more.

163

October 1998

is therefore important for Firm personnel in connection with any distribution in which the Firm is participating to take reasonable steps to ensure that all sales of new issues are conducted on a cash basis. Privately placed securities, including those sold pursuant to Rule l44L are generally exgmpt from this prohibition. Questions regarding whether tt" may be indirectly eitending, maintaining or alranging for the extension or maintenance of credit ihould be dirlded to th'; compliance Deparrment. The 30 day limit is described in detail below.

fi.-

Nomura's distribution is complete on a tranche by tranche* basis when it has sold the last piece of an individual tranche to a third party investor. The 30 day clock will begin to run from the trade date of the last sale to an investor. For example, if a new issue closes on February lst and one half of a tranche is sold on February l5th and the second half of the tranche is sold on March lst, then the first day that NSI can extend credit on that tranche to any investor will be on March 3 lst.

The clock will begin to run on a particular tranche even though that security has not been sold to a third party investor if Nomura can demonstrate that w" are rro longer acting in an underwriting

capacity, but

demonstrate our investment intent:

in an investor capacity. The following proceduies strould be followed t6

o . o
If

The securities should be moved out of the trading account into an account labeled
"investment account";
The securities must remain in that account for three months, and

During that three month period the security cannot be included on the traders axe or
otherwise offered to investors.

these procedures are followed, NSI will be able to finance, or arrange for financing orL the security upon the completion of the three month period. In other words, upon the closing of the new issue, the trader will have to make a decision whether it is worthwhile to him to loc[ up the security for three months in order to get the benefit of being able to provide financing at ttre conclusion of the three month period. If the trader does not wish to lock up the position-for that time period, then NSI will not be able to provide or arrange original financing when a buyer is ultimately located. NSI will, however, be able to provide oi.rrunge fina-ncing to such an investor 30 days from the trade date of such a purchase (i.e. the investor will have to find alternative financing during that 30 day period).
Please note that this restriction does not apply to:

*Tranches that have similar characteristics might have to be treated as a single tranche. For example, tranches that have similar interest rates, maturities and subordination features might be treated as a single tranche, which means that both tranches will have to be completely sold before financing can be offered on either tranche.

tu

October 1998

Private Placements
Sales to broker-dealers Sales to banks

Securities for which we were not the undenrriter or syndicate member

Also note that this section deals only with the issue of the timing of financing a registered new issue. It does not deal with other requirements of marginability. For example, even if NSI is within the time window for which we may finance a security pursuant to the restrictions outlined here, an independent determination must be made as to the marginability of the underlining produc! e.g. SMMEA eligibility.

B.

Regnrlation T. NYSE Rule 431 and SEC Rule 15c-3-3

Payment for securities upon purchase, or delivery of securities upon a sale, are governed by Regulation T of the Federal Reserve Board, NYSE Rule 431 and SEC Rule 15c3-3. Since the market break of 1987, the SEC has expressed concern about customer awareness of what these rules require. This Section briefly explains in basic terms the Cash Account, the Margin Account, Short Sales Option transactions and Repurchase transactions. Each employee should review these summaries to insure basic awareness of them. Please remember that the basic purpose of these rules is to limit the amount of credit a broker can extend. The rules explained herein apply to NSI only. Any financing transactions outside the broker-dealer context require a different analysis and must be pre-approved by the General Counsel's office. Furthermore, these rules are applicable not only to retail and institutional accounts, but also to broker-dealer counter parties. Very often an institution will attempt to get more favorable treatment because of its sophistication. This distinctioq however, has never been recognized by either the SEC or the Federal Reserve Board.
The two basic types of accounts which a customer may open at a brokerage firm are (i) a Cash Account and (ii) a Margin Account. AII transactions between a broker-dealer and a customer must be recorded in a Margin Account unless specifically authorized for another account. Before either of these accounts can be opened a customer must furnish the broker with the information required by the New Account Form. Employees must also determine the customer's investment objectives for suitability puqposes (suitability is a concept for all accounts, including institutional accounts e.9., municipalities, savings banks, pension funds,

etc.).

1.

Cash Account

The most common type of account is the cash account. In this type of account, there is no extension of credit made in connection with the purchase of securities, and a customer must pay in full for any security purchased. Federal laws relating to credit make it necessary for the customer to settle a purchase of securities within the standard settlement cycle in the U.S. (usually 3 days). In regard to a sales transactioq if securities are not in the customer's account at the time of the transaction, prompt delivery to the broker is required to complete the transaction. Pursuant to Exchange Act Rule 15c3-3(m), if Nomura does not obtain the securities within 10
t65
October 1998

will

business days, Nomura is required to purchase the securities in the open market and the customer be responsible for any resulting loss. The above timing requirements are different for foreign securities transactions and beyond the scope ofthis seaion.

If the customer has a custody account with Nomura, the proceeds of a sale will be either credited to the customer's account on settlement day or, if requested, funds can be wired to the customer's bank or a check will be mailed. There is generally no interest paid on a credit balance in a customer's account. A customer may at any time demand payment of any free credit balance in the account.
Stock certificates are deemed to be in good deliverable form if the customer either:
Signs his or her name on the back of the certificate exactly as (both parties must sign if the certificate is registered jointly); or

l-

it

appears on the front

Signs a "Stock Power" form which may be obtained from the cashier's department. The certificate itself is not endorsed when a "Stock Powet'' is utilized. The advantage of a "Stock Power" is that it may be mailed or delivered separately from the stofk certificate, giving additional protection in the event the certificaie is loit in transit.

2.

When an account is opened, a customer should inform the broker whether to have the securities registered in the customer's name and delivered, or registered in the broker,s name and held for the customer's account. It usually takes a minimurn of two weeks for stocks to be registered, but occasionally there are longer delays in delivering certificates. The customer is entitled to sell securities, receive dividends, interest, stock splits, etc., even if there is a delay in registering the certifi cates. When securities are held for the customer's account and are registered in the broker,s to thJcustomer's account on or shortly after the payment date. The customer is also notified of any subscription rights which are received. The broker fonrards all proxy material that it receives and any other material furnished to it by the issuing entity including annual reports, quarterly reports, notices of meetings, etc- It should be noted that the broker is under no obligation to forward any material to a customer unless it is reimbursed by the issuing entity for the expenses that are incurred in mailing this material. When a customer decides to sell a security, the process is much simpler when the broker the security in the customer's account becJuse no delivery of the lold_s certificate is needed. Customer assets which remain in the broker's custody are insurei against fire, theft, etc. under mandated insurance programs and against business failure under the federally backed Securities Industry Protection Corporation 1'SIPC"1. S1pC covers assets up to $500,000, a maximum $100,000 of which can be cash. Some Firms carry private excess SpC
name, the broker collects the dividends or interest and credits them

insurance.

Securities cannot be delivered from a customer's account unless full payment has been received for the transaction. The regulations on settlement are more fully discussed below.

2.

Margin Account

A margin account is used when an extension of credit is made to a customer in connection with its purchase of a security and must comply with the provisions of Regulation T
166

October 1998

of the Federal Reserve Board. A broker-dealer may only extend this credit if the customer puts up collateral consisting of cash or margin-eligible securities. There are two basic requirements of a margin account: (i) initial and maintenance margin must be maintained and (ii) only marginable securities can be used to meet the margin requirement. Margin is the amount which a customer pays when a broker's credit is used to purchase securities. At the time a margin account is opened, a customer usually signs a margin agreement and a consent to loan securities forn\ which enables the broker to pledge or lend securities carried for the margin account. The broker is lending money to the customer to purchase securities and the margin agreement contains the terms of the loan.

3.
In most

Initial Margin

cases, the minimum amount due for initial margin purposes is established by the Federal Reserve Board in accordance with Regulation T. This requirement is expressed as a percentage of the purchase price and it may change from time to time. Assuming an instrument is marginable, the margin requirements range from 50% for equities to 0% for U.S. treasuries. For purchases, for example, if the margin requirement is 50% for an equity security and a customer purchases a stock costing $5,000.00, the customer is only required to pay 5oo/o of that amount. Under Regulation T, the customer's margin must be deposited into the account by settlement date. The balance due on the purchase will be paid by the broker and the customer's account will be debited this amount. The customer is required to pay interest on this amount, as on any other loan. The customer will receive from a broker a separate written explanation of how the interest is calculated.

The securities in a margin account are held registered in the broker's name and become collateral for the debt. Although the broker retains the securities, the customer still receives credit for all dividends or interest, and may direct the broker to sell or vote stoclg so long as the account is in good order.

In addition to the initial margin requirements of the Federal Reserve Board, the New York Stock Exchange requires a customer opening a margin account to have a minimum initial equity of $2,000 in the account. For example, if the initial purchase of stock costs $2,400, the customer will have to deposit $2,000 rather than $1,200 which would be required by the Federal
Reserve Board (assuming the Regulation T requirement for the particular security is 50%).

4.

Maintenance Margin

The New York Stock Exchange also sets minimum margin maintenance requirements. Under present Exchange rules, the margin which must be maintained in an account is 25Yo of the market value for equities and convertible securities in the account, while the margin on corporates, mortgages and U.S. government and agency securities ranges from 20Yo to 0o/o. Different margin amounts apply for short sales. If the equlty in the account falls below this amount due to a decline in the market value of the securities in the account, as a whole, it will be necessary for the customer to deposit additional marketable securities or make a cash payment to reduce the indebtedness.

broker may require higher margin maintenance requirements than the Exchange. These are known as house requirements. In accordance with the terms of the customer's agreement, the broker may, at its discretior; require higher margin if it deems it necessary, for
t67
October 1998

example, in a case where there is a concentration in a securiry or in the case securities or infrequently traded securities.

of low

priced

the equity falls below the maintenance requirement established by the broker, the customer will usually receive a margin call, informing the customer of the additional collateral required to bring the account up to the required level. If the customer fails to meet a margin call, suffrcient securities will be sold from the account to meet the customer's obligationJ to the broker. Occasionally, market conditions make it diflicult for the broker to send a margin call, since the volatility of the market may require immediate action by the broker. In such cases, the broker will not be in a position to noti$ the customer prior to taking whatever action it deems appropriate under the circumstances to protect the broker's interests, which may include selling any or all of the securities in the account, at the broker's sole discretion. Furthernore, the use oi margin calls on prior occasions should not be construed as a waiver of the broker's right to take immediate action without making a margin call in the account to protect its interests at some future date. The foregoing procedures are followed in substantially all cases; however, a decision as to whether to make a margin call and whether to sell the holdings of a customer who does not respond promptly to a margin call will be made on an individual basis, taking into account the circumstances of the individual customer, market conditions, the size of the debt and other similar factors.
As previously noted, when a customer purchases securities on margirq he must pay the amount of money required by Regulation T and the balance of the purchase price is loaned by the broker. It is this loan portion which creates the debit balance and upon which interest is charged. Each additional purchase, and any other charges which are assessed against the account (including interest charges) increase the debit balance.

If

Every security in each of the customer's accounts is collateral for any debit balance in any of his accounts with the broker. All securities which the broker may at any time be carrying for a customer or which may be in its possession are subject to a general lien for the discharge of the indebtedness and other obligations owed to the broker. This lien is equal to the amount of money that is owed to the broker. In enforcing this lieq the broker may, at its discretiorq select the securities to be sold in the customer's accounts to reduce or entirely liquidate any debit balance in the accounts.
5.

Transactions Subject to Margin Regulation

General

In addition to a purchase of a security on credit, other transactions qualify as extensions of credit and are thereby subject to regulation under Regulation T. These transactions include, among others, deferred payment or delivery arrangements, short sales, selling deep-in-the-money
options, and reverse repurchase transactions.

Deferred payment or delivery arrangements (settlement after T+5) constitute an extension of credit and are subject to margin regulations and Legal and Credit Department
approval.

A short sale is a transaction in which a customer sells a security which he does not own. The broker borrows the security on the customer's behalf for delivery to the purchaser. The
168

October 1998

credit that appears on the customer's statement resulting from a short sale (including a sale against the box) is offset by a debit of a like amount, since the broker has to borrow the security in order to deliver it to the buying broker and make a cash deposit of the market value of the security as collateral for the borrowed security. In fact, the credit is not a true credit. The credit generated by any short sale does not reduce the debit balance for the purpose of computing interest until the short position is covered by either delivery of the security or purchase of it. It should always be borne in mind that a short credit may be reduced substantially or possibly lost altogether when covering the short position by purchasing the security.
appreciates in market price over the selling price, interest will be charged on the appreciation in value. If the short security depreciates in market price, interest on any debit balance in the account is reduced in relation to the depreciation in value. The daily closing price, dropping fractions, is used to determine any appreciation or depreciation of the security sold short (this practice is known as "marking-to-the-market"). A "mark-to-the-market" does not appear as an entry on the monthly statement, but is used in computing the net daily debit for interest purposes. Reverse repurchase transactions ("reverse repos") are considered an extension ofcredit collateralized by the underlying securities. Included in the definition of a reverse repo is a buy/sell back transactiorq which involves a purchase for same day settlement coupled with a sale transaction for future settlement. Because reverse repo transactions are considered margin transactions, these transactions must be in compliance with margin regulations. Before entering into any reverse repo transaction, the repo desk must obtain an executed copy ofthe appropriate repo agreement.

If the short security

Certain other types of financing transactions, particularly involving MBS, will be permitted on the MBS trading desk. However, these trades will be limited to dollar rolls (which do not require the return of the specific collateral). MBS financing trades that do not meet this specific definition must be booked as financing transactions on the repo desk. If there is any question as to the appropriate booking desk and characteization of the transaction please consult with the Compliance Department.

b.
In

Buy/sellback and sale/buyback transactions

regard to buy/sellback and sale/buyback transactions, because of concerns for accurate regulatory reporting, counterparty approval to enge in such transactions must be
obtained by the Compliance Department and the New Accounts Department, and the transactions must be executed through the repo desk. There will be no exceptions. They will be reclassified as repo/reverse repo transactions in order to properly monitor capital, margin and haircuts applicable to financing transactions. Approval will generally be limited to U.S. Government or Agency issued securities due to margin requirements. Additionally, the transactions must be executed in a special range of accounts and a special letter (obtainable for the Compliance Department) must be sent to the counterparty. Since specific investment guidelines often prohibit customers from leveraging themselves, buy/sellback transactions may be prohibited in certain customer accounts. The decision to allow such trades will depend on the New Accounts Department review of the customer's legal authority. You should be aware that buy/sellback transactions can be used by customers to

169

October 1998

manipulate financial statements and to avoid taxes. Obviously, such transactions approved if their use by a customer appears to violate applicable law.

will not be

Accounts.

In general, certain circumstances will warrant approval. For example, if the customer is legally capable of entering repo transactions (NSI reveise repo), but not bperationally equipped to handle this type of business, we have considered this to be an acceptabli reason for ailowing buy/sellback transactions with a customer. Since certain foreign customers (Japan) may bI legally prohibited from doing reverse repo and repo transactionq but are legaliy-peimitted to enter buy/sellback and sale/buyback transactions, this would also be an acclptable reason for allowing such transactions. Documentation of review and approval will be maintained by New

6.

Marginable Securities

a.

Equitv Securities

Pursuant to Regulation T, both U.S. equity securities and foreign equity securities may be marginable. Margin-eligible securities include any security registereJ on a national securities exchange or having unlisted trading privileges on a nationai seCurities exchange, any eligible OTC margin stoclg any national market system security (NASDAQ NMS designated securilies), any securities issued_ by a registered open end-investment company or unit investment trust, any foreign margin stock and any debt security convertible into -a margin security. The Federal Reserve Board publishes a list of OTC margin stocks. To be marginable, foreign equity securities must meet delineated requirements for inclusion on the "List of Foreign Margin Stocks."

b.

Debt Securities

Without providing an exhaustive definition, marginable debt securities include debt listed on a U-S- exchange or OTC traded debt that meets certain criteria. Categories of OTC traded debt that can be margined (if certain criteria are met) include (1) unlisted, nonconvertible b-onds, (2) private pass-through securities not guaranteed by an agency of the U.S. government, (3) mortgage related securities under the Secondary Mortgage Market EnhanEement Aci ("SMMEA"), (4) foreign sovereign debt securities, (5) other foreign nonconvertible debt securities and (6) "investment grade" debt securities.

requirements (otherwise no credit may be extended):

Unlisted, non-convertible corporate debt securities must meet the following

' . o .

principal amount at the time of original issuance outstanding of at least $25 million; registered under the Securities Act; issuer is a reporting company under the Exchange Act; and issuer is not in default on principal and interest.

Private pass-through securities not guaranteed by an agency of the U.S. government must meet the following requirements (othenvise no credit may be extended):

170

October 1998

. o . o
extended):

principal amount at the time of original issuance of $25,000,000 (separate series of pass-through certificates of the same issuer may be aggregated); registered under the Securities Act; issuer is a reporting company under the Exchange Act; and issuer is not in default on principal and interest.

SMMEA securities must meet the following requirements (otherwise no credit may be

o o o

rated in one of the two highest categories by one rating agency; backed by first lien mortgages on commercial or residential real estate securing loans originated by certain financial institutions; and principal amount at the time of original issuance of at least $100,000,000.

Foreign sovereign debt securities must meet the following requirements (otherwise no credit may be extended):

o .

the securities are obligations issued or guaranteed as a general obligation by the government of a foreign country its provinces, states or cities or a supranational entity; and either (1) the issue, (2) the issuer or guarantor or (3) other outstanding unsecured long-term debt securities issued or guaranteed by the government or entity must be rated in one of the two highest categories by one rating agency.

Other foreign nonconvertible debt securities (securities issued in a jurisdiction other than the United States, regardless of the domicile of the issuer) must meet the following requirements (otherwise no credit may be e*ended):

o o o

principal amount at the time of original issuance of at least $100,000,000, issuer is not in default on principal and interest; and the issue (or a subsequent unsecured issue of at least $100,000,000 of the same issuer) is rated in one of the two highest categories by one rating agency.

"Investment grade" debt securities must meet the following requirements (otherwise no
credit may be extended):

o o

issuer is not in default on principal and interest; and rated in one of the four highest categories by one rating agency.

t7l

October 1998

Summary of Margin Requirements for SMMEA, Corporate and Asset Backed

Marginability
1) 2)

ld

lien Modgage, and

Reidenlial or cocrnraricak I and

3) 1 o( 2 top ratingE by 1 rating agencl

oompleie th disliibution of lhs treuncha wilhin lesi 3O

dqe?

1) Orlglnal iuuance of g2S rnillion or riil; and 2) Rcgislcrod undor gl Ac{ (no Fivat pa.cernoot); end 3) PriodicalV tih 1SG es lct5 or othor current repo.k; .nd rt) tlol in defauh with P&l paymenr3

ls thc eccounl a bsnk (nol S&L), trusi co.,

isurance co., inrestme.rt trust, gtale o{ polilicel

subdlvldon, rcguhted non-profit oducelional inslitntion, cherihble irEtilutbn. or prcf,it rluring plan eubject to ERIIiA?

1) 1

4 fop retlngs calogor'rrs by 1 rating organization

(rncludes privalo placrmentr); and 2) Not in defaul wth PEI peymcnts

distribdbn

of trc traurrche within hst 30 days?

Oothc bondsmeetthe requirenrnla; 1) NoFcorr.rtibb d.bl thal tradca oo a U.S. ach.nOo; or

2) unlislcd tradlng privilogcrt on a U.S.

rchsnoo

l{alrari of 20% of currenl markot

value or ?96 of principal amounl,

wtrichevcr is grealer

Net Capital Gharges

Do lhe bondt meel the

l) Fmd intrBt end 'ndurity 2) Not llal or in defauft on p&l

any

nargin deficiencl or dafrcil

. idoftngot rnrr

haw been wiginatcd by a bant, lhrift. crcdit union. imurance mmparry, slndlarly regulaled onlily or llUD<pproved morlgagee- The Logal lrlvEstlftqlt so.nion in the prcp*lu6 will geneoally address SfufUtEA cligiblllty.
The 3O day reCric'tion doos not applyto: privalely phced

2,

trenchq:

gal,ee

3. Si.{t EA only

io brotsrdealers; or salc6 to bqnks-

need one rating in lhe 1 or the lop 2 rating categorics.

C. Customer Option Trading

1.

Cash Account

requirements of Regulation T. An option purchase must be paid in full within a time period not to exceed five business days from the trade date; however, since options for the most part settle the next day, and payment must be made to the Option Clearing Corporation on the next day, it is cost efficient to the Firm to collect payment as soon as possible.

Any option may be purchased in a cash account. The purchase is subject to the

The sale of a long option that has not been paid for will result in the account being restricted for 90 days from purchasing any option or security unless the funds are in the account prior to the transaction.

2.

Writing (Selling) of Options in a Cash Account

Writing options in a cash account is permitted provided that a sufficient number of units of the underlying instrument are long in the account and fully paid for, or an escrow agreement or a third party pledge agreement is in place, which will enable NSI to obtain the underlying instrument or cash should the option get exercised.

3.

Margin Account

Naked puts or calls, spreads, straddles, combos and the like should all take place in the margin account. The margin requirements for these strategies on listed options are generally reviewed below, but the details are too complex for this Section. It should be recognized that, even for out of the money short, naked options, there are minimum margin amounts that must be maintained. The margin requirements for OTC options are different and the Margin Department or the Legal and Compliance Department should be consulted prior to entering such transactions.

In regard to spreads, a spread is a long call and short call or a long put and short put on the same number of units of the same underlying security provided the long option does not
expire before the short option.

The margin required is.

a) b) c)

in case of a call spread, the amount (if any), by which the exercise price of the long call exceeds the exercise price ofthe short call; in case of a put spread, the amount (if any), by which the exercise price of the short put exceeds the exercise price ofthe long put; or
disregard the long option and calculate the short option as a naked position. Whichever calculation is LESS, the spread or the naked, should be used as the
requirement.

In regard to straddles, a straddle is a short put and a short call on the same underlying instrument. When both a short put and a short call are in a margin account on the same number of units of the same underlying security, the required margin shall be the margin on either the short put or the short call, whichever is greater, plus the value of the other option.
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October 1998

BEFORE AI{Y OPTION TRANSACTTON TAKES PI,ACE THE, FOLLOWING IS REQTIIRED:

a)

b) c) d)
e)

0
Department.

Option Agreement on file and approved by Compliance corporate Resolutioq or other appropriate authorized documentation Margin Agreement (f applicable) W-8 or W-9 Customer Agreement $ I 5,000. 00 Minimum Equrg for Naked Option Transactions

For any questions pertaining to Option Margin Requirements, contact the Margin

Compliance Department.

For any questions pertaining to Option Trading Approval or Limits, contact the
Settlement

D. sales.

are allocated to the creditor (broker) to effect paymint fo. puichases and

Under existing-federal regulations relating to crediq specific maximum periods of time r"""ipt" of securities for E

Margin Account Federal Call

Cash Account Customer Sales Cash Account Customer

full business days (for foreign securities, use the standard settlement date if less than 35 days)
5 10 5

full

business days past setrlement date.

Pi,rrchases

fult business days (for foreign securities, use the standard settlement date if less than 35 days).

Cash Account COD Customer

Sales

l0 full

business days past settlement date.

Cash Account COD Customer Purchases

35 calendar days ifthe mechanics of settlement so require (no 35 day forwards).

Customers have a maximum of 5 business days (the standard cycle plus 2 days) to pay for cash transactions in securities; however, cash settllment of foreign s"*riti"r transactions in a foreign market must be made by the earlier of the date requirJ by the rules of the local regulatory authority or 35 days. If the forergn market's setttement p"ri"d is shorter than that of the U-S., a customer may use the settlement period required in the U.S. (i.e., 3 days). It is expected, howeveq that customers purchasing Japanese equity securities will- pay within the normal settlement period of three days.

174

October 1998

To illustrate this point, assume a customer purchases a foreign equity security on trade May lst for settlement May t5th. Assume that all equity transactions can only settle on the l5th day of each month in the foreign market for this specific security. In this case, payment is due no later than May 15th. Now assume that settlement in this market only occurs quarterly and the next settlement date is July l. In this case, payrnent must be made no later than on June 4ttq
date

35 days after trade date.

The 35 calendar day period for settlement of Cash Account COD Purchases is not automatic and not designed to give the customer additional leeway or otherwise to facilitate a forward trade, but is to provide the broker with additional time if the mechanics of the trade prevent him or her from delivering the securities.

1. OTC Options
The margin regulations affect both the long (buyer) and short (writer) of options. In regard to options where NSI is short, we must receive l0o%o of the premium amount within five business days. In regard to options where NSI is long, the margin requirements are dictated by the type of option strategy and the type of counterparty. When NSI purchases an OTC option as principal from another U.S. registered broker-dealer or from a "recognized" foreign brokerdealer, no margin need be collected. The term "recognized" foreign broker-dealer refers to a firm perceived in the market as a broker-dealer and recognized as such in its home country. OTC options purchased from any other type of counterparty require margirg unless the options involve certain U.S. government or agency securities and the counterparty is a Designated Account.
Because of the necessity for special documentation and the complexity of the margin regulations, all OTC option transactions should be reviewed by the Legal or Compliance Department before execution.

2.

Extensions of Time

necessary are not received within the periods indicated below, the trades must be canceled (or liquidated) or an extension of time requested. Extensions of time may be granted by self-regulatory organizations or associations who believe a creditor is acting in good

If the deposits

faith and that the creditor has suffrciently determined that exceptional circumstances warrant such action. An application for extension must be filed prior to the end of a specific period or
the expiration of any subsequent extension.

Exempt securities may be involved for which no extension of time is necessary. However, the creditor should not allow more time than is customarily allotted to other
transactions. Extensions of time are privileges granted to delinquent customers provided the excuse is sufficient. Under present New York Stock Exchange regulations, a customer may not be granted more than five (5) extensions in a one-year period. This ruling takes into consideration every account a customer may have at a number of different creditors- When five (5) extensions have already been granted to an account, a creditor may not request another extension until twelve (12) months from the date of the first extensiorq unless extenuating circumstances exist.

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October 1998

Good business practices dictate that a creditor should make every effort payment on or before settlement date of a transaction.

to

effect

3.

Free Riding: the 90-Day Freeze

To ensure that a customer's cash account purchase is on a non-credit basis, Regulation T prohibits the purchase of a security and its subsequent sale prior to making full piyment. Section 220-8(c) states: "If a nonexempted security in the accouni is sold or delivered to another broker or dealer without having been previously paid for in full by the customer, the privilege of delaying payment beyond the trade date shall be withdrawn for qO calendar days foilowinl the date of sale of the security."
Sometimes a creditor is a principal in a transaction. That is, it has sold the security from its inventory to the customer. If, due to non-payment, the creditor cancels the transaction and takes it back into its inventory, there will be no loss or gain in the customer's account but the 90 day freeze provision must be applied. If the cancellation of the customer's purchase is other than to correct an error, the cancellation shall constitute a sale.

E.

Arranging

Regulation T used to prohibit a U.S. broker-dealer from arranging for credit to be extended on better terms than could be extended by the broker-dealer itself. This prohibition has b,een substantially reduced. All transactions that involve the arranging of by a lender "."dit (including NSI affiliates) must be first reviewed by the Complianc" u"a igalDepartments.

t76

October 1998

15. CT]RRENCY TRANSACTION REPORTING AND SUSPICTOUS ACTIVITIES MONITORING AND REPORTING PROCEDIIRES
Supervisors are required to apply the supervisory procedures in Section l.E.(2) ('Duties of Supervisors") in respect ofthe procedures discussed in this section to ensure compliance by supervised employees with those procedures.

A.

Background

Nomura's Anti-Money Laundering Policies & Procedures (the "Policies and Procedures") are applicable to all employees of Nomura Holding Americq Inc. and its subsidiaries. The Policies and Procedures entail the use of the Due Diligence Form. This form is attached as Exhibit X. This form must be completed for all new accounts and is part of the
account opening documentation required for all new accounts. The New Accounts I)epartment

will not open any new account without the completed form accompanying the new account opening documents. If you have any questions, please call the Compliance Department.

B. Firm Policy
Anti-Money Laundering Policies & Procedures

This Section contains NSI's anti-money laundering policy and procedures. It is designed to educate the Firm's employees about money laundering and to identify procedures which will protect the Firm and its employees. Direct all inquiries concerning money laundering to the Compliance Department in New York. The suggestions contained herein are intended as
guidance in helping sales personnel and supervisors make informed decisions.

The prevention of money laundering is one part of the NYSE'S Know Your Customer Rule. Knowing your customer is the primary responsibility of each employee and his or her supervisor. While Nomura's Credit Department analyzes the creditworthiness of certain customers, they do not analyze every customer. The Credit Department investigates the background of customers who obtain credit from Nomura. However, customers who settle within a normal settlement cycle would only submit account opening documentation and would not be subject to any Credit Department review. If you are concerned about a particular customer, you should specifically ask the Credit Department to analyze that customer's financial capabilities or about such customer's credit reputation.

ANTI.MOI\"EY LAUNDERING POLICY STATEMENT

NOMURA

PERSONII"EL AND FACILMIES BY PERSONS WHO SEEK TO I,AUNDER MOIYEY. THE FIRM HAS STRICT PROCEDT]RES TO DETECT MONEY

IS COMMITTED TO PREYENT TEE MISUSE OF ITS

LAUIYDERING AND TO PREYENT TTS OCCI]RRENCE. THE FIRM REQUIRES ITS EMPLOYEES TO BRING QTIESTIONABLE CONDUCT TO TEE ATTENTION OF SUPERVISORS AND COMPLIANCE PERSONNEL. AI\'Y EMPLOYEE WHO KNOWINGLY TOSTERS ILLEGAL CONDUCT OR

WHO PT]RPOSEFULLY

IGNORES PLAINLY SUSPICIOUS CIRCUMSTANCES WILL BE SUBJECT TO INQTIIRY AND DISCPLINE, INCLI]DING TERMINATION OF EMPLOYMENT.
177

October 1998

1.

What is Money Laundering?

Generally, money laundering involves any financial transaction using funds derived from criminal activity or conducted to facilitate or conceal criminal activity.

2.

Types of Transactions

Under today's money laundering laws, a "transaction" includes essentially any movement of funds, including a single trade, investment, or deposit. Money laundering may occur in connection with all forms of electronic transfers common to the financial r.*ir.i industry, i.e., it involves more than cash transactions. Crossborder transactions pose a heightened risk of money laundering. Money laundering may occur in connection with ug"r"y or principal business.

3.

Underlying Crimes

Money laundering may be a part of a range of criminal activities, inctuding white collar crimes such as fraud, insider trading, embezzlement, bribery and environmental violations. Money laundering is not just connected to drug trafficking. Money laundering may occur in connection with crimes committed outside the united States.

4.

Examples ofMoney Launderine

An individual steals money from his employer through a mail fraud scheme, and uses the funds to invest in a hedge fund. The hedge fund, in u*rn, purchases derivatives from a broker-dealer, in a principal to principal transaction. The hedge fund investment and the purchase of derivatives may be separate instances of money laundering.

A partnership owns a shopping mall. One partner's stake was purchased with illegal insider trading profits. The mall, which passes credit review, is pledged as security foi a
$50 million

loan. The loan is money laundering.

An intermediary opens an account at a United States broker-dealer on behalf of several individuals. Unknown to the intermediary, the contribution into the account from one of the individuals is proceeds of illegal narcotics sales conducted abroad. A subsequent securities transaction for the account may be money laundering.

5.

Culpability

Anyone who assists in money laundering, such as by executing a financial transaction with criminal funds, may be culpable.

Culpability depends on the person's lmowledge of criminal activity, but it's not always that simple. Clearly, individuals who assist and know that the funds are criminally derived are culpable.

"Willful blindness" can also result in a money laundering conviction. If you turn a blind eye to plainly suspicious conduct, you may be just as guilty as a person who has been told
178 October 1998

explicitly that money laundering is being committed. "Willful blindness" occurs when an individual acts in a way so as to avoid knowledge of criminal activity intentionally.

6.

Money Laundering Penalties

Criminal Penalties: Each instance of money laundering carries a prison term of up to 20

years and fines up to $500,000 or twice the amount involved.

Civil Penalties: Include substantial fines and property forfeitures.

Reputation: Besides the criminal and civil penalties, a money laundering prosecution Y

or even an investigation Y can severely tarnish and even destroy the reputation of
employee(s) involved and the Firm.

the

Employment: Violations of the Firm's anti-money laundering policy may result in

termination of employment. Regulatory Penalties: Regulators such as the SEC, NYSE and the NASD may revoke Firm licenses, impose monetary penalties and/or fines and bar individuals from future employment in the securities industry.

7.

Anti-money Laundering Policy: Three Basic Principles

Know Your Customer -- The Firm must have confidence in the integrity of the persons with whom you transact business. When it deals with large and widely held institutions, the Firm's standard account opening and transaction procedures are the basis for this confidence. For small and lesser known entities, or individuals, additional steps may be required. U.S. accounts managed by a nonregulated entity and all foreign accounts (managed or otherwise) will require the completion of our Due Diligence Form. For all other accounts, the Due Diligence Form must be checked off as 'Not Applicable" and executed. Know Your Customer responsibilities continue throughout the life of our relationship with a customer, and apply to every transaction.
Documentation Preparing and maintaining complete and accurate account documentation is a key part of the Firm's anti-money laundering program (including the above mentioned form).

1.

2. 3.

Seek Advice/Report Your Suspicions - The anti-money laundering program is a team effort. Money laundering issues are complex; you should not attempt to handle them alone. You must watch for red flags that may be signals for improper activity. If you become aware of any suspicious circumstances, or if you have any questions, promptly consult your supervisor or the Compliance
Department.

8.

Everyone is Responsible

Every Nomura employee is responsible for implementing the Firm's anti-money laundering policy. Each employee must familiarize him/herself with the contents ofthis manual.
t79
October 1998

transactions.

1. Personnel Involved with Customers: Employees who are personally involved, directly and indirectly, with Firm customers and who manage account activity are on the "front line" of our anti-money laundering efforts. These personnel are responsible for gathering Know Your Customer information at the outset of the relationship and for periodically updating this information. They should also look for suspicious activity, such as varying trends or .rrr,s,ral

Support Personnel: AII support personnel who see the movement of money to and from the Firm should be alert to suspicious transactions. They may also notice suspicious discrepancies, omissions and inconsistencies in customer documents. Supervisors: Supervisors play an oversight role by reviewing new accounts and the propriety of transactions. They also direct inquiries to Compliance. Above all, they must take reasonable actions to ensure that every employee under their supervision follows these procedures, including carefully reviewing the Due Diligence Forms.

2.

3.

Credit Personnel: Credit personnel reviewing customer information and account activity should look for signs of money laundering.

4.

5. Legal Department and Compliance Department: These departments will respond to employees' money laundering inquiries. They should be notified immediately of any suspicious circumstances. They are also responsible for determining whether any suspicious circumstances require reporting to the relevant authority. 6.
Forms.

New Accounts Department: New Accounts will collect the Due Diligence

9.

Know Your Customer

Before accepting a new customer or engaging in a new transaction, the Firm must have completed xtficient due diligence to luve confidence in the integrity of both the customer and the proposed transacti on.
10.

Know Your Customer Analysis - By Tyoe of Customer

1. Large Public Corporations And Institutions. Publicly held corporations and institutions are easier to review because they are financially transparent: Their business is public. Generally, they are regulated by government or industry regulators. They submit to audits by reputable accounting firms. They publicly file financial reports.

In most cases, the Know Your Customer inquiry can be completed by obtaining standard customer information required to open an account and execute transactions, including
180

October 1998

authorization documents that confirm that the customer or its representatives are authorized to conduct the business.

Lesser Known Customers. Customers who are known less than public corporations may be more diffrcult to evaluate. The following is a non-exclusive list of
such customers:

2. -

Privately held institutions and corporations, particularly smaller ones. Small or private banks. Unregulated entities. Hedge accounts. High net worth individuals. Many types of offshore customers. Some possible factors to consider while conducting the Know Your Customer inquiry for lesser known customers include whether the:
Customer is private or public; foreign or domestic;

Customer has a small number (less than 10) of beneficial owners or shareholders while conducting the Know Your Customer inquiry for lesser known customers, Customer engages in an ongoing business, separate and apart from its investments. For example, does the customer provide a service or manufacture a product or is it solely an investment vehicle?; Customer appears to be the alter ego of an investor or a group of investors; Customer's address is a P.O. Box; and Customer is located in a ta>r haven or country known for money laundering activity,

the

Know Your Customer analysis of lesser known customers may require some or all of following steps:

3.

Review publicly available information about the customer, Dun and Bradstreet or TRW reports and media coverage. Ask for and contact reputable references. Visit the customers authorized representatives in person. Determine the customer's source of funds to the best of your ability. Check whether the customer is regulated, either in the United States or a foreign country and, if so, obtain copies of its registration documents. Obtain up-to-date financial statements and audit reports concerning the
customer.

Obtain legal documentation related to the customer's establishment as an institution and the authority of its representatives (e.g., articles of
incorporation, by-laws and corporate resolutions).

Intermediary Accounts and Foreign Accounts. An "intermediary" acts on behalf of a customer or a group of customers but has no (or limited) financial interest in the account or transaction in question.

l8l

October 1998

about beneficial owners.

Where the Firm has a high level of confidence in the integrity of the intermediary, an account may be opened or transaction conducted without knowing all of the individuals represented by the intermediary. When practical, the Firm should attempt to obtain information

Accounts obtained or transactions conducted through domestic accounts managed by a non-regulated entity and all foreign accounts might require special attention. Sumcilnt information must be obtained to verify the integrity of the intermed-iary or foreign account. The Due Diligence Form must be completed and executed by the Registeied Representative and his or her supervisor. For all other types of accounts simply check the "Not Applicable,, box and execute it.

Any and all of the following steps can be taken in a Know Your Customer analysis for Intermediary or Foreign Accounts:

Review any information or documentation concerning the intermediary available within Nomura. Question the history of the relationship between the intermediary and his current
clients. Ask for the intermediary's anti-money laundering policies/procedures. check whether the intermediary is a registered entrty ar,ywhere. Ask for a description of the intermediary's financial industry experience. Review publicly available information about the intermediary, such as from Dun and Bradstreet, TRW reports and media coverage. Ask for and contact reputable references for the intermediary. Meet with the intermediary at his or her place of business.

4.

Borrowers

A customer borrowing from or through Nomura presents the same potential money laundering risks as those presented by any other Firm customer. To the extent practicable, taking any or all of the following steps are useful in conducting diligence on a borrower:

Review the borrower's experience in the industry in which he participates. Use outside auditors and the like to conduct a background check. Identifr (by name) each individual with a significant interest in the borrowing entity (e.g., more than2O%). Obtain relevant documents from the individuals who have a significant interest, such as tax returns, financial statements, and resum6s. Determine whether any loan proceeds are intended for purposes other than to finance the asset in question.

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October 1998

11. Particular Types of Transactions

In all circumstances, two types of transactions merit heightened scrutiny.

1.
2.

Cash Transactions

Transactions involving cash (r.e., hard currency) are prohibited.

Third Party Transactions

Third party fund transfers pose money laundering risks, because funds flow between the account and a party who the Firm may not know. The Firm allows transfers of funds to outside accounts only if the outside accounts are held in the customer's name (e.g., the exact legal name in which the Nomura account is held). Absolutely no third party payments are permitted.
12. Documentation

To protect the Firm and yourself from accusations of improper conduct, document your due diligence. If you've done ig record it.

l.

Documentation Requirements for Well Known Customers Completing the standard new account and/or transaction documentation will ly satisfy anti-money I au ndering documentation requirements for :

usual

2.

public and widely-held domestic institutions; and accounts and transactions managed by a registered United States intermediary. Documentation Reouirements For Lesser Known Customers, Foreign Accounts and Domestic Accounts Managed by a Non-Regulated Entity

For lesser known customers, all foreign accounts and domestic accounts
managed by a non-regulated entity, you may need to record information in addition

to the standard documentation. For all foreign accounts and domestic accounts
managed by a non-regulated entity the Due Diligence Form must be completed in its entirety and executed by the Registered Representative and his or her supervisor, as described above. For all other accounts simply check the'Not Applicable" box and execute it. If you have questions about whether additional information should be obtained and documented, please contact the Compliance Department.

3.

Documentation Requirements For Borrowers

Our standard documentatioq which records diligence performed on borrowers and collateral, including a Credit Summary and reports provided by outside auditors and the like, satisfies documentation requirements for anti-money laundering purposes. If you conduct further diligence, record your efforts and
results.

183

October 1998

13. Ouestionable Circumstances

Below are examples of customer conduct, intermediary conduct, and activity that may be "red.flags" signaling the need for additional steps to veri$r the integrity of customerc uni transactions. In general, be alert to any conduct that appeirs to involv; secrecy, lack of investment strategy or business sense, sudden or strange relationships among parties, an inexperienced intermediary, and any inconsistencies or atypical activity.

customer before such customer will provide proper new account information ab-ouf itself. For example, Nomura has seen situations where unknown parties have requested that a customer account number be assigned to a customer before it will provide its new account documentatioq including its authorization documents. Other times, a purported customer may request a letter from Nomura stating its willingness to open the accouni for the customer. Sometimes, the purported customer simply wants a letter that makes no sense because the customer wants to get access to the Nomura leuerhead. Often these requests will be made in connection with a clalm that they have a large securities position and they may even send copies of a bogus security certificate. The exact manner of the scam is as varied as a person's imaginatiorL but it almost always involves situations that sound too good to be true or simply sound ,i."ng". If you receive a call like this, take the relevant information, state that you will have to call the ctunterparty baclg and contact the Compliance Department immediately.

All employees must keep their eyes open for scams by unknown parties. From time to time, broker/dealers are approached to provide certain documentation to a purported new

If yoy spot any of the redflags describedbelow, or any other questionable circumstances, do not keep your observafions to yourself, Rather, always report findings immediately to
desig naled No mura p ers o nneL
1.

The customer incurs unusual diffrculties or delays providing information. The customer lacks general knowledge of its industry. The customer refuses to identi$r or fails to establish a legitimate source for the funds and other assets it expects to be handled by Nomura. The customer tries to conduct business using more than one name. The customer has an unusual lack of concern about transaction risks, costs or investment prices. The customer wishes to engage in transactions that lack business sense or an apparent investment strategy. The customer tries to transact business in cash. The customer tries to engage in multiple or immediate transfers of funds in a short period of time when the same goal could be accomplished via a single transfer of funds. The customer cannot or will not articulate, even generally, its investment objectives and the anticipated volume, type and pattern of transactions. The customer suggests by words or conduct that he or she wishes to maintain an unusual and unjustified degree of secrecy with respect to identity, nature of business, assets or dealings with the Firm.

in

184

October 1998

The customer requests, without justifiable reasorL that mail not to be sent or that it be held until otherwise notified, or uses a P.O. Box address. The customer tries to transfer funds from its Nomura account to a third party, although the customer has no apparent relationship with the third party. The customer expects to fund the account or otherwise transact business with the Firm through offshore acrcunts, although the customer has no apparent legitimate reason for doing so. The customer lacks reputable references. The customer has a history of either civil or criminal misconduct. The customer's representative can provide only boilerplate information about its principal, rather than any evidence of legitimate ongoing business activity. The customer seeks to change account titles or open new accounts without any legitimate reason. The customer is from a country typically believed to be a haven for money laundering, drug production or bank secrecy. The customer is refened to the Firm by an individual or institution not known to the Firnq especially where the reference is from a country typically believed to be a haven for money laundering, drug production or bank secrecy.

2.

Possible Red Flags: Commercial Lending.

3.

Without any apparent legitimate reasorL the borrower desires to structure a loan transaction to give the borrower access to funds in a significant amount (e.g., liquidity), above and beyond the sum needed to finance the real estate or other asset in question. The borrower is unfamiliar with or lacks knowledge of practices and customs of the industry in which he claims to participate. The loan collateral is located offshore, especially when located in a country believed to be a haven for money laundering, drug production or
bank secrecy. The borrower is reluctant to provide information regarding its business. The borrower (or his representative) is reluctant or refuses to disclose the identities of individuals with a 2OYo or greater ownership interest in the borrowing entlty. The borrower or the property has ties to organized crime in the U.S. or elsewhere.

Possible Red Flags: Intermediary Accounts

Accounts obtained and/or conducted through an intermediary may require extra scrutiny. The goal, of course, is to avoid dealing with an intermediary who, even unwittingly, is a front for a money launderer. Be alert to the following:

The intermediary is not known to Nomura or has had little or no

experience dealing with the Firm.

t8s

October 1998

The intermediary has had few or no prior dealings with the individuals
represented.

The intermediary is not a registered financial institution or investment manager or advisoq either in the United States or elsewhere. The intermediary does not have experience in a financial industry. An unregistered or foreign intermediary is unwilling or reluctant to identify the individuals or entities it represents. The-intermediary does not know, or has not done the due diligence to verifu, the identity of the individuals or entities it represents. Although the account is handled by an intermediary, the customer is expected to make trading decisions with respect to the account. The intermediary lacks reputable references. The intermediary has a history of either civil or criminal misconduct. The intermediary is from a country typically believed to be a haven for money laundering, drug production or bank secrecy.
4.

Deviations from the customer's typical volume, type and pattern of

transactions.

Transactions with no apparent investment or economic objective or which

appear inconsistent with the customer's stated investment strategy. A sudden and unusual increase in wire transfer activity.

Transfers from third parties who have no stated relationship with the
account.

Unusual account or transaction funding, including inconsistencies with the customer's typical funding patterq business, or expectations as stated when the account was opened. Significant inflow from offshore accounts, particularly from countries typically believed to be a haven for money laundering, drug production or bank secrecy.

Accounts for politicians and/or their relatives are immediately suspect unless the politicians are from families with longtime wealth.

t4.
Compliance compares a list of individuals and entities designated by the Treasury as known narcotics traffrckers against Nomura's customer base. If an account matches an individual or entity on the Treasury's list, we take prompt appropriate action.
I 5.

Reporting Ouestionable Circumstances

Seeking advice and reporting questionable conduct or circumstances are crucial. If you anything unusual about a customer, an account, an intermediary or a transactiorq nf,pOnf 19tice IT IMMEDIATELY to the Compliance Department. Money laundering issues are extremel), serious and complex. You will serve yourself and the Firm by following these guidelines:

PROMPTLY REPORT questionable circumstances to the Compliance Department. Do not permit any furtheitransactions until you have reviewed the situation.
186

October 1998

Do not discuss the questionable circumstances or your reporting of customer. Discussing this information with an outsider might violate federal law.

it with the

C.

Reporting Circumstances

Part 103 of Title 3l of the Code of Federal Regulations- "Financial Record-keeping and Reporting of Currency and Foreign Transactions" requires Broker/Dealers to file with the TreasuryDepartment, within 15 days of the event, areport of each currencytransaction (i.e., a transaction involving the physical transfer of coin or currency, not bank checks, drafts or other written orders) which exceeds $10,000 or its equivalent. Reports of transactions with U.S.
commercial banks are not required.

incurred both civil and criminal penalties as a result of accepting cash (U.S. dollars or yen) for investments. We have determined that it is in the best interest of NSI to refuse all cash transactions and also to refuse all requests for payment of sales proceeds in cash (U.S. dollars or yen). Any exceptions to this policy require prior approval of the Legal Department and the Compliance Department.

A number of U.S. brokerage firms have recently

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October 1998

16. EMPLOYEE ACTIVTTIES

Supervisors are required to apply the supervisory procedures in Section l.E.(2) ('Duties discussed in this section to ensure compliance by supervised employees with those procedures.

of Supervisors") in respect of the procedures

A.

EmployeeSecuritiesTransactions

The details of the employee trading policies and procedures are contained in Section 7 of the Human Resources Employee Handbook. Furthermore, certain groupd have additional procedures specific to the group. Listed below are groups that have additional procedures, although this list might change from time to time:

3) 4) 5) 6) 7)

2)

1)

Equity Derivatives Special Situations Credit Department Investment Banking Department Fixed Income Structured Finance and Trading Group Primary Dealer Group Nomura Advisors Group

See the group head or the Compliance Department for details in regard to the specific policies and procedures for the above groups.

Additionally, the following procedures must be followed for all employees that wish to purchase or sell securities issued by NSC:

Pre-aPproval must be obtained from the Compliance Department using the written preapproval form contained in Section 7 of the Employee Handbook. Because communicJtion will often be necessary with Tokyo, it should be expected that approval will take 24 to 48 hours;

o o o

These procedures apply

thereon;

to

any securities in the NSC capital structure and derivatives

There will be a minimum 6 month holding period for all purchases; and

Short sales are prohibited.

For your informatioq Merrill Lynch and Fidelity Investment have the capability to execute
transaction in NSC securities.

B.

Limitations on Outside Activities of Employees

NYSE Rule 346 requires that all employees of a member Firm obtain written consent from their employer prior to engaging in any other business, being employed or compensated by any other persorL serving as an officer, director, partner or employee of another business organization, or owning any stock or having, directly or indirectly, any financial interest in any
188

October 1998

other organization engaged in any securities or any other financial business. Particularly sensitive situations arise when the outside position involves unrelated securities transactions since any business done with the outside employer may be perceived as being done with NSI. In order to comply with Rule 346, written permission of the Firm must be received prior to any NSI employee engaging in any type of outside employment. These requests will be reviewed by the Legal and Compliance Departments to determine whether the permission of the Exchange will also be required Any employee who is currently engaged in employment outside of NSI should submit a written request immediately to the Legal and Compliance Department if you have not already done so (as stated above, pre-approval is required).
The NASD also has similar requirements. Absent prior written notification to and approval from the Firrn, NASD rules prohibit a Registered Representative from engaging in "private" securities transactions, that is, securities transactions outside of a representative's regular @urse of employment with the Firm. The NASD believes that customers may be misled into believing that the transactions are sponsored by the Firm when in fact no due diligence has been undertaken. Obvious examples of such transactions would include selling limited partnership interests, acting as a "findef' for a private placement or intra-state offering, or assisting, in any capacity, people (promoters, advisors, etc.) who are attempting to raise money for any business venture.

Effecting private securities transactions which are outside the usual course of a Registered Representative's employment and which are nowhere reflected on the Firm's books and records may expose a Registered Representative and the Firm to charges of serious violations of federal securities laws, industry rules and regulations, and civil liability. The NASD has imposed severe sanctions for such activity. Registered Representatives have been barred, suspended or fined for failing to inform their employer before engaging in private
transactions in regard to these issues, see also The Employee Handbook.

C.

Gifts- Gratuities and Payment of Compensation

Employees of NSI are allowed to give gifts valued at no more than $100 per recipient per year. The limit is $50 for gifts to employees of the NYSE. It is also required that member Firms keep records for three years of all such gifts and gratuities. It is NSI policy that employees receive approval from their department supervisors prior to giving gifts to others so that appropriate records can be maintained. Each departmental supervisor must maintain a list of all gift recipients, the value of the gift given, and the date the gift given to ensure compliance with the dollar limitations. Employees should also be careful when accepting gifts. Employees should notify their supervisor when they obtain any gift valued at $100 or more. There are also strict rules regarding the payment of compensation to persons associated with another brokerdealer or the NYSE. Questions in regard to this policy should be directed to the Compliance Department. See also Section 2.D.3. for information concerning the Foreign Corrupt Practices AcL
Regarding the giving of tickets to outside events (sporting events, the circus etc.), where an NSI employee does not attend with the client, this is considered a gift and is subject to the $100.00 person per year limitation.

189

October 1998

In regard to gifts or entertainment of public officials:

o o

All gifts to or entertainment of public officials must be pre-approved using the preapproval form attached as Exhibit y.
Public officials include, among other things, federal, state or municipal employees, including public pension fund managers. It also includes foreign officials inctuaing government employees as well as employees of governmentally owned businesses. This is particularly important because the Foreign Comrpt Prictices Act prohibits the prwision of money or anything of value to foreign government -offi"iult, political parties or candidates for the purpose of influencing tlieir official actions in order to obtain business.

o ' o

In any event, in conformity with our current procedures, no gift will be allowed in excess of $100.00. The campaign contribution limitations and reporting requirements contained in Section 17 of the Compliance Manual shall continue to apply, e.g. all political contributions must be reported to the Legal Department.
When completing the Nomura Travel or Entertainment Repor! you should check the appropriate box if the gift or entertainment involved a prr-blic official.

individual or organization with which the Firm has a current or potential business relationship. The Firm feels that professional quality of service by its employees should be expected by its clients and need not be rewarded by gifts or special favors.

As to the question of accepting a gift, the NYSE Rule 350 does not discuss the of gifts but the Firm believes that it would be inconsistent with our business principles for you to accept gifts of other than a nominal value or special favors from any
acceptance

D.

Vacation Policy

Nomura requires every employee to be out of the offrce for 5 consecutive business days at least once in every 12 month period, whether it is for vacation, sickness or business. As you might know, vacation policies such as this are not unusual in the financial industry. -fot example, banks by law are required to enforce such a policy, although for 10 days instead of 5 days. Human Resources will monitor compliance with this policy, and to the extent that an employee does not have a 5 day absence during a 12 month period, the employee will be required to begin at least a 5 day vacation within 2 weeks of notification. Supervisors in particular are encouraged to ensure that their employees comply with this policy.

r90

October 1998

17.

CAMPAIGN CONTRIBUTION LIMITATIONS AND

REOUIREMENTS

REPORTING

Supervisors are required to apply the supervisory procedures in section 1.E.(2) ('Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

All corporate

contributions

to political parties or

campaigns must

be made in

accordance with applicable law, which prohibits corporate contributions to any candidate for national offrce as well as to candidates for office in certain states. Nomura employees are free to support and/or contribute to political parties or campaigns in their individual capacities as private citizens; however, Nomura will not reimburse employees for such contributions. Individuals who are not citizens of the United States are restricted from making political contributions and should consult with counsel if they wish to make a political contribution.

No payments of any kind shall be made by NHA or its subsidiaries, or by any offtcers or employees thereof, directly or indirectly, to any persorL government, corporation or other entity for the purpose of obtaining or retaining business, or for the purpose of comrptly influencing favorable consideration of applications for a business activity or other matter. The following is a brief summary of campaign contribution laws. The Compliance Department must be notified of all campaign contributions, including the name of the benefrciary, the offrce held and/or sought by the beneficiary (if applicable), the amount and the
date contributed.

FEDERAL

. . .
.

$1,000 limit per candidate per election, $5,000 per year limit to any single PAC; $20,000 per year limit to a national party committee; and $25,000 maximum per year total in federal election-related contributions

NOTE: The above ceilings do not apply to contributions made to non-federal organizations.
Thus a $50,000 individual contribution to a non-federal organization such as the Project for the Republican Future would not be limited by the above ceilings. The key before contributing to any committee would be to ascertain whether the committee is federal or not. If it is a federal committee then the above ceilings will apply.

NEW YORK
$28,000 limit for Governor, Lieutenant Governor, Attorney General general election; $13,400 limit for these offices in a primary election; $7,000 limit for State Senate in general election ($4,500 in primary); $2,800 limit for State Assembly in general and primary election, and $150,000 yearly limit for all contributions

or Comptroller in

a
a

a a

191

October 1998

Municipal securities dealers and their executive offrcers are required to report contributions to ofiicials of issuers and political parties of states and politicai subdivisions and the Firm is disqualified from acting as an underwriteq placement agent, advisor, etc. for the issuing entity for two years following a contribution by: (a) the dealer, O) a municipal securities professional associated with the dealer or (c) any PAC controlled by the dealer or any municipal finance professional. An offrcial of an issuer is defined as a candidate, incumbent or successful candidate whose offrce is directly or indirectly responsible for, or can influence the outcome of the hiring of a dealer for municipal securities business. This would include persons such as governors and candidates for governor.

192

October 1998

18. BLUE SI(Y LAW

Supervisors are required to apply the supervisory procedures in section l.E.(2) ('Duties of Supervisors") in respect of the procedures discussed in this section to ensure compliance by supervised employees with those procedures.

All states have laws governing the public distribution of securities therein and the activities of broker-dealers and sales representatives. Simitar to the Securities Act, nearly all state laws require that securities be registered or otherwise qualified for sale with the local state securities commission unless the security offered or the transaction in which it is offered is exempt from registration or qualification. In October 1996, however, Congress enacted the National Securities Markets Improvement Act of 1996 (the "1996 Act"). The 1996 Act preempted the application of the securities registration requirements of the blue sky laws in regard to certain securities offerings and/or transactions and has substantially changed the scope ofblue sky regulation.
Section A below summarizes the changes in blue sky registration requirements made by the 1996 Act. Section B summarizes the standard exemptions from registration available under most, but not all, state laws. References to the *USA" are to the Uniform Securities Act that is currently adopted in some form in 39 states.

The 1996 Act did not preempt state laws requiring the registration of broker-dealers or (subject to limited exceptions not covered herein) of sales representatives. Section C below discusses the blue sky registration requirements applicable to broker-dealers and their
employees.

A.

Federal Preemption

The 1996 Act amended Section l8 of the Securities Act to exempt "Covered Securities" from the registration requirements (but not necessarily from all filing requirements) of the blue sky laws. Any "offering document" with respect to a Covered Security is similarly exempted from state regulation if it is "prepared by or on behalf of the issuer". The 1996 Act defines
Covered Securities as:

(1)

Securities listed or authorized

for listing on the NYSE or AMEX, or listed on the

Nasdaq National Market Systenr, and securities of the same issuer that are equal or senior in rank to such securities (collectively, "Listed Covered Securities").

(2)

Securities issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act. such term is subsequently defined by the SEC the Act permits the SEC to set different purchaser criteria for different categories of securities).

(3) AnV security that is sold to a "qualified purchaser" (as

(4)

Securities offerings exempt from registration under Rule 506 of Regulation other rule adopted by the SEC under Section 4(2) of the Securities Act).

D (or any

193

October 1998

(5) Any security sold in a transaction

exempt from registration under Section 4(1) or a(3) of the Securities Act, if the issuer is a reporting company pursuant to Section tf or iS(a) ofthe Exchange Act.

(6)

Securities exempt from registration under Section3(a) of the Securities Act, with three exceptions: (i) securities of non-profit entities, (ii) intrastate offerings and (iiD municipal securities offered and sold in the state in which the issuer is located. Securities sold in brokers' transactions pursuant to Section 4(4) of the Securities Act.

(7)

Covered Securities. States may continue to require certain notice filings for offerings of other Covered Securities, and all filing or registration fees that would have been payable for offerings of other Covered Securities in the absence of preemption must continue to be paid in the same amounts, and at the same times, as they would otherwise have been paid. The states retain the authority to suspend the offer or sale of any securities for which required filings or fees have not been submitted.

No state filings or fees may be required in offerings of Listed

The 1996 Act permits the states to continue to enforce state antifraud laws.

B.

Exemptions from Securities Registration

If an offering does not involve Covered Securities under the 1996 Acq it is necessary to determine whether the securities or the transaction qualifies for an exemption from siate registration requirements. Even in preempted offerings (other than offerings of Listed Covered Securities), it is still necessary to review the availability of state exemptions to determine whether notice filings or fees must be submitted. No securities (other than stocks listed on the NYSE, AMEX or NASDAQ National Market) should be sold in any state unless appropriate confirmation has been obtained from the Legal Department, outside counsel or a Blue Sky Memorandum proposed for the offering that such securities or such transactions are exempt from registration in the relevant state(s) oi that the securities have been registered (or other filings have been made) to the extent required.

C.

State Registrations

Both the Firm and its employees are subject to various registration requirements imposed by state securities laws, rules and regulations. The Firm is registered as a broker-dealer with the SEC, all 50 states, the District of Columbia and Puerto Rico and its employees are subject to registration as representatives (agents, salespersons, etc.) and/orprincipals (supervisori) in each such jurisdiction. No employee may conduct any securities business, either directly or through others, unless he or she is appropriately registered with each state orjurisdiction in which he or she will conduct business. Most states require the employee to pass the Series 63 qualification examination as a condition to registration. An employee who is uncertain of his or her registration status in a particular state should contact the Compliance Department. Also, certain employees must separately register as "investment adviser representatives" in those states where the Firm is or becomes registered as both a broker-dealer and an investment adviser or where registration requirements otherwise apply. Most states require investment adviser representatives to pass the Series 65 examination and some states require an additional specified NASD examination.
t94
October 1998

Table of Contents

ExhibitA...
FDIC Compliance Questionnaire

.....1-2
.....3-4

ExhibitB

...

Institutional Customer Suitability Worksheet

Exhibitc...
Supervisory Compliance Calendar

.......s .......6 .....,.7 .....8

....9-13

ExhibitD...
Regulatory Examination List

ExhibitE...
Chinese Wall Crossing Notice

ExhibitF
Documentation Exception List

()

Exhibitc...
Counterparty Documentation Requirements

ExhibitH...
Documentation Extension Letter

......t4
...15-16

Exhibitl....
Fund Hot Issue Letter

Exhibit

. ...

LI-LB

National Association of Securities Dealers, Inc. - Hot Issue Letter

ExhibitK...
Beneficial Interest Hot Issue Letter

L9-ZO

ExhibitL...
Memo - Principal Letter Procedures

...2L-Zz

ExhibitM...
Integrating the SEC Order Handling Rules

- Questions & furswers

...25-Sl

ExhibitN...

......32

f,,/
Octobcr 1998

Exhibito ...
Communications with the Public Approval Form

Exhibit

. 34-38
...3g-4L
...42-Sz

Books and Records Retention Requirements

Exhibita..
Institutional "Accredited Investor" Certificate

ExhibitR...
Blue Sky Laws - Exempt Institutions

Exhibit

. 53-56 ...57-6s
...66-67

QIB Letters

ExhibitT...
Regulation S and CREF Letters

Exhibitu...
Qualified Institutional Buyer Definition

Exhibitv ...
Calculating the Amount of Securities Owned & Invested for Purposes ofRule

l44A
69

ExhibitW...
Reg S - Summary of Issuers Safe Harbor & Unregistered Foreign Security Sale

Exhibitx

...

...

70-71

Anti-Money Laundering Due Diligence Form

ExhibitY ...
Public Official Gift or Entertainment Approval Form

Exhibitz...
Bearer Debt Certification

73

October 1998

Exhibit A FDIC COMPLIANCE OUESTIONNAIRE

Have you ever been an officer or director of a savings association? where, wheq and your capacity.
2.
J.

If so, please describe

Do you have an immediate family member that is an employee of the FDIC?

Have you, in your personal capacity or as a key official of any entrty (e.g. partnership or corporation), defaulted on one or more obligations to any savings association? If so, describe the facts concerning the default. Have you in your personal capacity or as a key official of a savings associatioq been found, or alleged, to have engaged in fraudulent activity in connection with a savings association obligation? If so, please describe.

4.

5.

fu an officer or director of a savings associatioA

did you participate in a material way in

any transactions that resulted in an aggregate loss of more than $50,000 to the savings association? If so, please describe.
6.

Have you ever been removed from participating in the affairs of a savings association? so, please describe.

If

Have you ever demonstrated a pattern of defalcation regarding obligations to a savings association, such as 1) defaulting on an obligation to a savings association?) engaging in an act that was intended to cause a loss to the savings associatioq or 3) as a borrower, entered into a loan that was unsafe or unsound. Have you been classified as a "Restricted Purchasef' by any Judicial or Administrative Entity?

8.

9.

Are you involved in a transaction that involves the FDIC in any way (i.e- purchasing or providing funding, whereby Nomura acts as either a principal or agent for the purchase of inventory for a thrift under FDIC control)? If so, please inform the Compliance Department immediately.

I0.

fue you in possession of any FDIC bid packages or documentation? If so, please coordinate with the Compliance Department so that central files can be maintained.
Are you aware of any actual or potential defaults, delinquencies, or material failures to comply with the terms of a contract between Nomura and the FDIC, the RTC, the FSLIC, or any bank or ttrrift? If so, please alert the Compliance Department immediately.
October 1998

l.

1213.

Are you, or to the best of your knowledge any entity with which you were previously employed, involved in any contractual dispute or litigation with the FDIC, the RTC, the FSLIC, or any bank or thrift? If so, please describe. Are you, or are you in the process o[, hiring a former employee of a bank or a thrift that is or is likely to be subject to FDIC receivership o. ronr.*itorship? If so, please inform the Compliance Department immediately.

!l {l

Finally, all personnel should advise the Compliance Department on a continuing basis of any situations-that would require affirmative to these questions. Any transactions or issues involving the FDIC or the Resolution Trust Corptration should be directed to the Compliance Department.

*r*.ir

ll

Octobcr 1998

Exhibit B

INSTMUTIONAL CUSTOMER SUITABILMY WORKSEEET

Compliance recommends that this worksheet be used to demonstrate your compliance with the institutional suitability obligation outlined below.

A member's obligation to determine that a recommendation is suitable for a customer is fulfilled when the member has reasonable grounds to conclude that the institutional customer is:

1) 2)

capable of independently evaluating investment risk; and

making independent investment decisions.

1) Is the

institutional customer capable of independently evaluating investment risk?

A)

Does the customer use any consultants, investment advisors or bank trust departments?

B)

What is the institutional customer's general level of investment experience?

C)

How is the institutional customer able to understand the features of any securities
involved?

D)

How is the customer able to independently evaluate how market developments might
affect any trades executed?

October 1998

E)

Are the securities involved complex?

F)

Other

2) Is the institutional customer making independent investment decisions?

A)

What are the written or oral understandings with the customer concerning the nature the relationship and the services to be rendered?

of

B)

Is there a pattern of the customer accepting recommendations?

C)

Does the customer obtain ideas, suggestions, market views and information from sources other thanNomura?

D)

To what extent has the customer provided current comprehensive portfolio information or their investment objectives?

E)

Other

(-_)
October 1998

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Exhibit D
REGTILATORY EXAMINATION LIST
Please use the list below

to determine the appropriate exam requirement(s) for the different sales, trading, and supervisory positions within Nomura.
POSITIONS

EXAMINATION Series 3, National Commodities Futures Principal Series 5, Interest Rate Options
Series 4, Registered Options

All

sales, trading and supervisors of commodity, futures or options on futures.

For supervisors of debt and equity options.

All

sales, trading and supervisors of options contracts on GNMA securities and options contracts on U.S. government securities.

Series 7, General Securities

Representative

AII sales, trading, and supervisors.

municipals.

Series 8, General Securities Sales

Supervisor All sales supervisors other than options and

All
sales, trading, and supervisors of foreign

Series 15, Foreign Currency

Qualification
Series 24, General Securities

Options Principal

currency optioni contracts.

For supervisors of investment banking activities and trading desks. For all indirect supervisors of sales (where the direct
supervisor is Series 8 qualified).

Series 2T,Financial and Operations

Principal

For Chief Financial Officer and Chief Operations Officer. For supervisors of municipal securities sales and trading. For persons who are employed as equity securities traders

Series 53, Municipal Securities

Principal

Series 55, Equity

Examination Limited

Representative

Series 62, Corporate Securities

For salespersons who will transact business in the following products only: Common and Preferred stocks, corporate bonds, stock rights and warrants, foreign securities, ADRs, real estate inv. Trusts, shares of closed-end
investment companies, money market funds, privately issued mortgage-backed securities and other asset backed securities.

Series 63, Uniform Securities Agent

State

Every salesperson and trader.

Law

October 1998

Exhibit E

CHII\TESE WALL CROSSING NOTICE

i)
MEMORAI{DUM

TO:

The Compliance Department

FROM: Executive Managing Director

RE:

Chinese WaIl Crossing

t.

The following Research or Sales and Trading employee(s) are proposed to cross the Nomura Group's Chinese Wall:

Name

Title

Department

{}

2.
3.

Such employee(s)

following

issuer:_.

will

cross the Nomura Group's Chinese Wall with respect to the

The following is a description of the nature of the information to be discussed with such employee(s):

(Signature)

Date:

i)

October 1998

Exhibit F
DOCTJMENTATION EXCEPTION REOUEST
Customer Name:

Account Number:

We have been unable to obtain the following documents:

We request that an exception be granted for the documents for the following reasons:

We understand that trading will be suspended if this exception is not accepted.

Print/Salesperson

Print/Sales Supervisor

Signature/S alesp erson

Signature/Sales Supervisor

RR#

Date

RBTURN EXECUTED FORM TO NSI NEW ACCOUNTS DEPT.

October 1998

Exhibit G
COUNTERPARTY DOCUMENTATION REOUIREMENTS

HIC, TRI-PARTY, REV, REPO

1. Repo Agreement

2. Ti-P arty Repo Agreement

MARGIN 1. Terms & Conditions Statement* 2.Margn Agreement

OPTIONS 1. OTC Options Agreement 2. Standard Options Agreement 3. Information Package

SECURITY LEI{DINGIBOND BORROW 1. Securities Lending/Borrow Agreement

FD(ED INCOME FORWARD l. Separate Agreement Discretionary

FUTTTRES (U. S. RESTDENT) l. New Account Info Application

2.W-9
3. Terms & Condition Statement* 4. Corporate Resolution/Trading Authorization 5. Consent to take other side/Transfer Authorization 6. Hedging Acct Designation/Customer Instructions 7. Risk Disclosure Statements 8. Subordination Agreement (if applicable) 9. Arbitration Agreement (optional) lO.Trading Manager Documents (if applicable) l l.Procedural Agreement (if RIC)

FUTURES (NON-RESTDENT) 1. All of the above 2. W8 in place ofW9 3. Special Notice for Foreign Brokers & Foreign Traders

October 1998

FTTTTJRES (TNDTVTDUAL)

tt t,l

l. New Acct Info Application

2. W8 or W9 3. Terms & Conditions Statement* 4. Consent to take other side/Transfer Authorization 5. Risk Disclosure Statements 6. Subordination Agreement (if applicable) 7. Arbitration Agreement (optional) 8. Special Notice for Foreign Broker & Trader (if applicable) 9. Trading Manager Documents (if applicable)

l0

October 1998

ACCOUIIT TYPE

REQUIRED STA}IDARD
DOCI,UENTS

ADDITIONAI. DOCT,I,IENTS BY
TRL}ISACTION

Corlporate

1. Corporate Resolution/ Trading Authorization 2. Terms & Conditions 3. Tax Docunents (w8, w9, etc. ) 1. 3. 4.
2

EIC, TRI-PARIY, REV,

REPO

Partnership

Trading Authorization Partnerstrip Agreement Terms & Conditions Tax Documents (W8, W9, etc. )

1. Repo Agreement 2- Tri-Party R.epo Agreement

I{ARGII[

Insurance
Companies

1. Coqporate Resolution/ Trading Authorization 2- Statutory 3. Terms & Conditions 4. Tax Documents (I{8, w9, etc. ) 5. Internal Investment Policies l-. Co!'lporate Resolution/ Trading Authorization 2. Terms & Conditions 3. Tax Documents (W8, vI9 , etc. ) 4. Internal Investment Policies
.Authorization

Terms & Conditions Statement* 2 - I{argin Agreement

1.

OPTIONS

Financial

Institutions

1. OtrC Options Agreement 2. Standard Options

Agreement

3. Information

Package

SECI'RITY I,EIiIDING/BOIID

BORROYT

Investment Clubs

1. Trading Authorization 2. Investment CIub

3. Terms & Conditions 4. Tax Docunents (W8, W9 , etc. )
Agreement.

Securities Lending/ Borrow Agreement

FIXED INCO!,TE
FORWARD

Trusts

1- Trust
Agireement/Trading

2. Terms & Conditions 3. Tax Documents

(w8

.Authorization

Separate Agreement Dj-scretionary

w9, etc.

Prime Brokers

L. Prime Broker
Agreement

2. ExecuEing Broker
Acrreement

FIIT]URES

(U.S.

RESIDENT)

October 1998

ACCOUIUI TYPE

REQT'IRED STA}IDARD
DOCI'MEIITS

ADDITIO}IAIJ DOCIIMENIS BY
TR,A}ISAETION

Investment Advisors

1- Inwestment Advisor Letter/Trading Authorization 2 - Corlgorate Resolution 3. Ta.:< Documents (WB , W9 , etc. )

New

Application 2. 3W-9

Account Info

Te::urs & Condition

Statement*

Coryorate Resolution/ Trading Authorization 5- Consent to take other

Transf

side/

er Authorization
Acct Designation/

Retail Accounts

Terms c Conditions Statement* Tax Documents

6- Hedging

Customer Instructions

(w8,

w9

iloint Agreements

, etc.

Risk Disclosure
Sulcordination Agreement (if applicable) 9- Arbi trat i on A,greement (optional) 10 .Trading Manager Docrments (if applicable) 11 .Procedural Agreement (if
RIC)

Statements

Broker Dealers

1. Corporate Resolution/ Trading Authorization 2- Terms & Conditions 3. Tax Doclxnerrts (W8, W9 , etc. )

FIITURES (NON- RESIDENT)

Investment
Companies

1- Corporate Resolution/

Government Agencies

2- Fund Prospectus 3- Terms & Conditions 4. Tax Docrments (W8, N9 , etc. ) 1- Corporate Resolut,ion/ Trading Auttrorization 2. Statutory Authorization 3. Toc Docunents (If8, W9 , etc - ) 4- Terms & Conditions 5. Internal Investmerrt policies if applicable

Trading Authorization

1. A11 of the

above

2. Wg in place of W9 3 - Special Not,ice for Foreign Brokers & Foreigrn

Traders

FUTSRES (INDI\rrDUAL)

October 1998

ACEOUIII TYPE

REQUIRED STA}IDARD
DOCI

ADDITIONAI, DOCTII{ENIS BY
TRAIISAETION

UEIIIS

Educational

Institut,ions

1. Corporate Resolution/ Trading Authorizat,ion 2- Statutory Authorization 3. Terms & Conditions 4. TaJ< Document.s (W8, W9, etc. ) 1. Plan

1. New Accts Info Application 2. Wg or W9 3. Terms & Conditions 4. Conaent to take other side/Transfer Authorization 5. Risk Disclosure
Stat,ements

Statement*

Pension,/Prof it Sharing Plans

Documents

2- Terms & Conditions 3. Internal Investment Policies 4. Tax Doclments (W8, W9, etc. )

6- Subordination Agreement (if applicalcle) 7. Arbitration Agreement

(optional)

8. Special Notice for

Foreigrn Broker & Trader
9

(if applicable) - Trading Ivlanager Docunents (if applicable)

Non-Profit Charitable Organizations

1. Corporate Resolution/
3 - Articles of Association 4. Tax Docurnents

2.

Trading Authorization Te::urs & Conditions

(W8, W9, eEc.

Terms & Conditions statements is sent t.o customers. Signrature required except for margin accounts.

is

not

l3

October 1998

Exhibit H
DOCT'MENTATION EXTENSION LETTER (Not availablefor High Risk Accounts)

Customer Name:

Account Number:

Please extend the documentation due date 30 days; we are continuing to try to secure the

following documents:

We understand that trading probably will be suspended at the end of this 30 day period ifthe documents have not been received or we have not made an accepted Documentation Exception Request.

Print/Salesperson

PrinUSales Supervisor

Signature/Salesperson

Signature/Sales Supervisor

RR#

Date

RETURN EXECUTED FORM TO NSI NEW ACCOUNTS DEPT.

t4

October 1998

Exhibit
Syndicate Department Nomura Securities International, Inc. 2 World Financial Center, Building B 20th Floor New Yorlg New York 10281-1198

Re:

(Name of Security Being Issued)

Dear In regards to our proposed purchase of the Fund, we confirm that these shares will not be sold to the restricted persons listed below.

1. 2.

any officer, director, general partner, employee or agent of the member of any other broker/dealer, or to a person associated with the member or with any other broker/dealer, or to a member of the immediate family of any such person, any person who is a finder in respect of the public offering or to any person acting in a fiduciary capacity to the managing undenrriter, including, among others, attorneys, accountants and financial consultants, or to a member of the immediate family of any such person; any senior officer of a banlg savings and loan institutioq insurance company,

3.

registered investment company, registered investment advisory Firm or any other institutional type account, domestic or foreigrq or to any other person who may influence or whose activities directly or indirectly involve or are related to the function of buying or selling securities for any bant savings and loan institutioq insurance company> registered investment company, registered investment advisory Firrq or other institutional type account, domestic or foreigrq or to a member of the immediate family or any such person;

4.

any account in which any person specified under paragraphs hereofhas a beneficial interest.

(l),

(2), (3) or (a)

l5

October 1998

In additioq we confirm that if shares are sold to another broker/dealer it will be done in manner consistent with paragraph (6) of Article III, Section I of the Rules ofFair Practice of the NASD.
Sincerely,

Qoo( Corp.)

By:

Title

l6

Octobcr 1998

Exhibit J NATIONAL ASSOCIATION OF SECTIRITIES DEALERS. INC.

1735

Street N.W. Washington,

D.C. 20006

Date: Name ofNon-United States Broker/Dealer or Bank:

Address: Pursuant to paragraph 80) of the Interpretation ofthe Board of Governors with respect to "Free-riding and Wittrholding", a copy ofwhich is in its possessioq the above Firm represents to

Name of Member:
Address:

that in its disposition of shares falling with the scope of the provisions of the referred to Interpretation the purchasing Firm will not sell any of these securities to:

1.

Any broker/dealer including members of the National Association of Securities Dealers, Inc. (NASD); provided, however, a purchasing Firm may sell all or part of the securities acquired as described above to another member broker/dealer upon receipt from the latter in writing assurance that such purchase would be made to fill orders from bona fide public customers, other than those enumerated in paragraphs (2), (3), (a) or (5) below, at the public offering price as an accomrnodation to them and without compensations for such. Any officer, director, general partner, employee or agent of any broker/dealer including members of the NASD, or to a person associated with any such broker/dealer or member, or to a member of the immediate fa*ily of any such
person.

2.

3.

A person who is a finder in respect of the public offering or to any person acting in a fiduciary capacity to the managtng underwriter, including among others, attorneys, accountants and financial consultants, or to a member of the immediate family of any such person.
Any senior officer of a banlg insurance company, registered investment advisory Firm or any other institutional type account within the United States or otherwise, or to any person in the securities department of, or to any employee or any other person who may influence or whose activities directly or indirectly involve or are related to the function of buying or selling securities for any banlg insurance company, registered investment advisory Firrq or other institutional type account,

4.

l7

October 1998

within the United States or othenrise, or to

any such person.

a member

of the immediate family

of

5.

Any account in which any person specified under paragraphs hereofhas a beneficial interest.

(l),

(2) (3) or

()

It is understood by the above Firm that shares falling within scope ofthe Interpretation are those of an issue which immediately after the dist-ribution process has commenced trade in the "after market" at a premium over the offering price, l.e- share of a..hot issue."

(Signature of Executive)

(Title)

family' is defined in the Interpretation as including parent, mother-in-law or father-inJaw, husband or wife, brother orsister, brother-in-law or sister-in-law, childreq or any relative to whose support the member, person associated with the member, or other person in categories (2), (3) or (4) above contributes directly or indirectly.

*Immediate

l8

October 1998

Exhibit K

Dear Mr.

Nomura Securities lnternational, Inc. (NSI) will be acting as a lead underwriter in the public distribution of Our records indicate that your company has indicated an interest in purchasing shares of , In accordance with Article III, Section I of the NASD's Rules of Fair Practice ("Free-Riding and Withholding") our Firm is required to receive from you one of the following before execution of the transaction:

(a) (b)

A current list of the names and business connections of all persons having any
beneficial interest in this account, or

An opinion of counsel stating that counsel reasonably believes that no person with a beneficial interest in the account is a restricted person as described in the above mentioned NASD Rule.

We have attached a letter that your counsel can sign. This letter makes all the necessary statements as reqgired under the rule. Whichever of the two above alternatives you choose, one must be on file with NSI before execution of the transaction for your account. Either document should be forwarded to Nomura Securities International, Inc., 2 World Financial Center, New Yorlg N.Y. 10281-1198, ATTN: Syndicate Department, 20th floor.

Any questions regarding the above should be directed to the Syndicate Department.

Sincerely,

l9

October 1998

Exhibit

(REPLY LETTER)

Syndicate Department

Nomura Securities International, Inc. 2 World Financial Center, Building B 20th Floor New Yorlg N.Y. 10281-1198

Dear

with their IAMe reasonably believe that no person with a beneficial interest in this account is a restricted person as described in Article III, Section I of the NASD's Rules of Fair Practice.
Furthermore,Uwe confirm that the following steps were taken to enable me/us to make the above
statement:

We

am/are counsel to proposed purchase of

. In connection

(r)
(2)

VWe have reviewed and am/are familiar with Article III, Section Rules ofFair Practice regarding "Free-Riding and withholding";

of the NASD's

I/IVe have reviewed a current list of all persons with a beneficial interest in the account supplied by the account manager;
VWe have reviewed information supplied by the account manager with respect to each person with a beneficial interest in the account, including the identity,-the nature of employment, and any other business connections oisuch persons; and
have requested and reviewed other documents and other pertinent information and made inquiries of the account manager and reclived responses thereto to determine the status of any person with a beneficial interest inthe account.

(3)

(4)

vwe

Sincerely,

Nomura Securities International, Inc.

20

October 1998

Exhibit

MEMORANDTiM
DATE: TO:

FROM:
CC: RE:

Wayne Mandel
Sean Curley

Principal Letter Procedures

from The parties involvedare-(..Counterparry,,)and-(..Principal,,).Wheneveran

This is to inform you that I have received a principal letter authorized person from the Counterparty initiates a transaction with Nomura the salesperson is required to make a phone call to the contact person(s) at the Principal's office, detailing the transactioq in order to complete the trade. The phone call detailing the transaction must be made to the following person(s):

INSERT OTmR RELEVANT PROVTSTONS FROM TEE LETTER mREI

By signing this memo you are acknowledging that you understand and agree to follow the procedures as set forth above and on the attached copy of the Principal letter and authorizing me on behalf ofNSI to sign the Principal letter and return it to the Principal.
Please sigq make a copy and return original to the New Accounts Department.

Thank you.

Salesperson:

Print Name
Signature Date
Sales Supervisor:

Print Name
Signature Date

21

October 1998

[Date]

Re: Principal Letter

Dear We make reference to the attached "principal lettei' entered into at your request with (the "principaUdealef ').

dated

199_, which we have

To induce us to continue to act on your behalf pursuant to said "principal lettef'you have agreed to honor all transactions which we have executed pursuant to your instructions at any time whether or not the principaVdealer has agreed to act as principal prior to or after execution of such transactions and which the principaUdealer may decline to honor for any or no reason pursuant to the terms of such principal letter. In the event that the principaUdealer fails to honor all such transactions, you further authorize us to establish an account in your name on our books (copy enclosed for your records) and at our discretion to proceed to record and process such transactions or liquidate such transactions for your account and at your risk.

If you

agree with the above, please have an authorized individual sign the enclosed copy of this letter and return the executed copy to the undersigned using the enclosed self-addr"sla envelope, retaining the other copy for your files.

Very truly yours,

Nomura Securities International, Inc.

Accepted and Agreed to:

By: Name:

Title:

(Attachment)

))

October 1998

Exhibit M

Questions and Answers

I.

Limit Order Display Rule

Phase-In
Question

I:

How will I know when

Rule?

particularNasdaq stock becomes subject to the Display

Answer

I:

For each segment of the phase-irg Nasdaq will publish a list well in advance ofthe phase-in date.

Question 2:

What criteria will be used to rank Nasdaq securities according to their size? Market capitalization? Share Volume? Dollar Volume?
Nasdaq securities will be ranked by median daily dollar volume.

Ansrver 2:

Question

j:

Can a Firm abide by the Display Rule for a stock prior to that stock becoming subject to the Display Rule?

Ans:wer

i:

Yes. Before a Nasdaq security is phased in, compliance with the Display Rule with respect to that security is voluntary.

Timing of Display
Question Answer

4:

When must a Firm display a limit order it has received from a customer? The display rule requires the immediate display of customer limit orders. To provide clarification as to what constitutes the immediate display of a limit order, the SEC stated h its release approving the rule that "assuming that a specialist or OTC Market Maker does not rely on one of the exceptions to the Display Rule,...such specialist or OTC Market Maker must display the order as soon as is practicable after receipt which. under normal conditions. would require display no later than 30 seconds after receipt."

4:

23

October 1998

Question 5:

when is an order deemed to be "received" by a Market Maker? when a retail broker receives the order from the customer over the phone? When the order is entered into a Firm's internal system? When the Market Maker first sees the
order?

An*yer 5:

registered representative or institutional sales person. Of course, the order should be transmitted promptly to the specialist or trader.,,

has stated in an interpretive Ietter that the "3O-second time perioJbegins when the order is received by the specialist or trader that will disphylhe order (or the Firm's automated display system), rather than when the order is first received from the customer by another person at the Firm such as a

It is deemed "received" when the order is received by the trader that will display the order. Specifically, the sEC's Division oiMarket Regulation

Display Requirements
Question

6:

Do Firms have to adjust their size to reflect limit orders priced at their quote?

Answer 6:

If the Market Maker's quote is npl at the inside market, it need not update its size to reflect the limit order. If the Market Maker,s quote tn! inside market, it may have to display the limit order depending on the size of the Market Maker's quote and the size of the limit order. Specifically, if the size of the limit order or limit orders is greater than a de minimis

iu

amount of the Market Maker's quote size, the Market Maker must increase the size of its quote. The SEC has said that the size of a limit order is minimis in relation to a Market Maker's quote if it is equal to or less than 107o of the Market Maker,s quote size.

&

Question 7:

How does a Firm satisfy the Display Rule if it receives a limit order priced niurower than the minimum quotation increment? For example, if a Market Maker's quote is 20'20 l/8, 10x10, and it receives a limit order to sell at ZO l/16 or 200 shares, what should the Firm do?
The Firm should increase the size of its offer at20 1/8 to 1,200 shares. However, when the order is executed, it should be executed at the actual increment requested by the customer.

Answer 7:

Question 8:

market for stock ABCD is20-20 l/4 andFirm A, whose uia is tg 7/g, accepts customer limit orders to buy at20 1164, zo lr3z, and2o 1/16 for 1,000 shares eactq would Firm A have to update its quote size to 3,000 shares or 1,000 shares?

If a Market Maker has accepted limit orders at multiple price levels that are priced nr!.rrower than the minimum quote increment, should the,Market Maker,s quote size reflect the aggregate size of all such limit orders? In particulaq ifthe inside

24

October 1998

Answer 8:

A Market Maker who has accepted limit orders at multiple price levels narrower than the minimum quote increment should update its quote size to reflect the size of the limit order with the best price. Accordingly, in the example above, the Market Maker should update its bid to 20 for 1,000 shares to reflect the limit order at 20 1116. Of course, if the limit order to buy at 20 l/16 is executed, the market maker must immediately display the limit order priced at 2O ll32 by issuing a quote at 20 for 1,000 shares.

Question 9:

A Market Maker updates its bid in stock ABCD to 20 7/8 for 1,000 shares to reflect a customer limit order to buy 1,000 shares. Thereafter, the Market Maker updates its bid to 2l to reflect another customer limit order. While the limit order to buy priced at2l is being displayed, the Market Maker receives another limit order to buy 1,000 shares at 20 7/8. If the limit order at 2l is executed, canceled, or withdrawn, should the Market Maker update its bid to 20 718 for 1,000 shares or 2,000 shares?

Answer 9:

If a Market Maker is updating its bid or offer to reflect a customer limit order, it should reflect the aggregate size of all limit orders accepted by the
Market Maker at that specific price level. Accordingly, in the example above, in the event that the limit order to buy at 2l is executed, canceled, withdrawrU or is otherwise no longer displayed, the Market Maker should update its quote to 20 7 /8 for 2,000 shares.

Question

I0: Do Firms

have to display limit orders priced better than their quote even if they are not at the inside market?

Ans"vver

I0:

Yes. Anytime a Market Maker receives a limit order priced better than its quote it must display the limit order, absent an exemption from the rule.
receives multiple customer limit orders at the same price, can it display a "representative size" of these limit orders instead of the cumulative size

Question I

I:

If a Market Maker

of all of the limit orders?

Answer I I:

No. If a Market Maker is obligated to display a limit order, it must display

the entire size of that limit order.

Question

I2:

Can limit orders from accounts under the discretion of the same money manager be aggregated for purposes of the Display Rule? SEC staffhas stated that "orders aggregated by persons with explicit investment discretion, consistent with the expectations of customers, could be considered a block size order. For example, a money manager may aggregate orders of accounts for which it exercises investment discretion, and provide such an order to a market maker with allocations to follow. If
25

Answer 12:

Yes.

October 1998

these orders, when aggregated, meet the brock size definition of the Display Rule, the order need not be displayed pursuant to the exceptioq even though the individual account owners have not specifically inaic"t"a in their advisory agreements consent to non-dispray oitheir orders.,,

Market Open
Question

I3:

Does the Display Rule apply during market openings?

Answer 13:

The SEC's Division ofMarket Regulation has stated that "because of the special circumstances invorved in setting an opening price in the oTC market and the volume of orders that rnay accumulate at the opening,

orc

shprtly following the opening." As a result, limit o.aeri r"""ived at or prior to the opening must be displayed as soon as is practicable under the circumstances, but not necessarily within 30 seconds.

Question

I4: For how long of a period

after the opening do limit orders not have to be displayed according to the "3O-second,, standard? There is no uniform time-period for all stocks. The SEC has stated that traders must''make an independent assessment, based on the trading conditions of the stoclg as to when trading and quoting in the stockias returned to normal market conditions. This time frame could be one minute for some stocks and longer for others; moreover, the time frame for a stock to return to normal market conditions could vary from day to day.,,

An*ver 14:

Question

I5:

Does the SEC staffsinterpretive position as to the apptcability of the Display Rule at the opening also apply to reopenings after truang halts and the commencement of trading in initial public offerings (,.Ipos,,) at times other than 9.30?
Yes.

Answer 15:

Locked/Crossed Markets

Question

16:

There is an inherent conflict between the SEC's Display Rule and the NASD,s rule prohibiting locked or crossed markets. For exampte, in the case where the inside market for stock ABCD is 10 - lo l/4 and a Firnu Uiaaing the stock for less than $10, receives a customer limit order to sell ABCD at 10, would the Firm have to
Octobcr 1998

display immediately the limit order in conformance with the Display Rule or seek to execute against the Market Maker whose market would be locked in conformance with the NASD's Locked and Crossed Market Rule?

An*ver 16:

The SEC has stated that the Display Rule does not require a Market Maker

to display immediately a customer limit order that would lock or cross the market. If a limit order is marketable against another Market Maker's or ECN's quote (i.e., a limit order to sell equal to or less than the bid or a limit order to buy equal to or greater than the offer) the Market Maker should attempt to execute the limit order against the quote prior to displaying the limit order and locked or crossing the market. In such a situation, Nasdaq believes that it would be consistent with NASD regulatory requirements for Firms to seek to trade with the quote by sending a referenced SelectNet message and waiting 30 seconds until locking or crossing the market. If a Market Maker is attempting to trade with a quote that would be locked or crossed by the display of a customer limit order within 30 seconds of receipt of the limit order, that Market Maker will not be held to the 30-second display requirement. In this instance, ifthe Market Maker were to subsequently display the limit order more than 30 seconds after receipt of the limit order, it would not violate
the Display Rule's immediacy requirement.

Exemptions from the Display Rule (Firms should note that all exemptions from the Display Rule are not discussed in this Q&A for a complete list of the exemptions, see the overview of the Display Rule provided above.)

Ouestion

17:

Does the Display Rule apply to limit orders that are for "non-regular way''

transactions (e.9., seller's option, or same-day settlement)? Answer

17:

No.

Question

18: If a Market

Maker chooses to display a customer's limit order that is an al[-ornone order, would the Market Maker have to execute orders received for less than the size of the customer's limit order?

Answer 18:

Yes. Under the SEC's Firm quote rule, a Market Maker is obligated to execute orders received in "any amount up to its published quotation size." Thus, even though a customer's all-or-none limit order does not have to be displayed, if the Market Maker voluntarily displays the limit order in its
quote, such quotation is subject to the same Firm quote obligations as any other quotation displayed by the Market Maker.

Question 19: Does the Display Rule apply to "not-held" limit orders?

27

October 1998

Answer 19:

No.

Question 20: Upon implementation of the Display Rule can a Market Maker still choose not to accept customer limit orders? Answer 20:

Yes. The Display Rule does not preclude a Market Maker from declining to accept customer limit orders.
Can a Firm's procedures provide that customer limit orders will only be displayed if requested by the customer?

Question

2I:

Answer

2I:

No- The Display Rule provides that all customer limit orders must be
displayed immediately, unless a customer expressly requests that its order not be displayed or an exception to the Display Rule applies. The SEC has stated that such a request may be made prospectively by contract, or on an order-by-order basis. In this connectior! the SEC has stated that "standardized disclaimers or contractual language in broker-dealer new account agreements. ..would not be deemed to be an indMdual request by a customer that its order or orders not be displayed.,,

Interaction of the Display Rule With Other Rules

Question

22:

Will there be any changes to Rules goes into effect?

Firm's "Manning" obligations once the Display

Answer 22:

The implementation of the Display Rule does not change a Firm,s basic limit order protection obligations. That is, a member htlding an unexecuted customer limit order is required to execute such limit order, in full or in part, to the extent that the member trades at the limit order price or at a price inferior to the limit order price. In additioq it is important for members to note how the SEC's discussion of best execution affects the way that limit orders and market orders should be handled under the NASD's existing limit order protection interpretation under Rule 2320. The sEC specifically stated that when a member holds a limit order priced better than its quote, and subsequently receives a market order on the opposite side of the market from the limit order, it is no longer appropriate for the member to execute the market order at the broker/deal". q"ot" price and subsequently execute the limit order at the limit order p.i"". Now the market order must receive the benefit of the better limit order price. Accordingly, prior statements by the NASD that otherwise permit a member to execute a market order at a price inferior to a limit ordir while executing the limit order at its limit price are superseded by the SEC's interpretation. (See Note to Members 96-65,96-10, 95-67, 95-43,94-5g.)

28

October 1998

Question

23:

In Notice-to-Members 95-43, the NASD stated that. although the Interpretation speaks in terms of members trading in their market-making capacity, it would be inconsistent with a member's best execution obligations to knowingly trade ahead of a customer's limit order in any other capacity in which it may also be trading. Thus, if a Firm has a market-making deslg a risk-arbitrage desk and a derivatives deslg among others, it may be trading in a Nasdaq security in a variety of circumstances. As long as a Firm implements and utilizes an effective system of internal controls, such as appropriate Chinese walls, that operate to prevent the non-market-making desk from obtaining knowledge of customers limit orders, those other desks may continue to trade at prices the same as or inferior to the customers limit orders. Does this statement still hold true in light ofthe SEC's discussion of best execution in its order approving the Display Rule (i.e., it is no longer appropriate for Firms to execute a market order at the Firm's quote and subsequently execute the limit order at the limit order price)?

Answer 23:

Yes. In this connectioq NASDR will continue to monitor carefully Firms that develop such controls and the trading activity ofdesks subject to such controls to determine if the controls are effective.

Question 24: A Firm operates an internal automated execution system that provides executions for market orders up to a certain size at the inside market. If the Firm receives a limit order to buy at L0 1116 when the inside bid is 10, can the Firm continue to provide executions through its internal execution system at 10, the inside market price, notwithstanding the acceptance of the limit order at lO 1116? Answer 24:

No.

As long as the limit order at l0 l/16 remains unexecuted, the Firm should match incoming market orders and offsetting limit orders on the other side of the market against the limit order.

Question 25:

If a Market Maker in a Nasdaq or CQS security routes a customer limit order to

another market center, do the NASD's limit order protection obligations still apply to the Firm who routed the limit order?

Answer 25:

Yes. Under NASD Rule IM-21l0-2 and NASD Rule 6440(f), which apply to trading in Nasdaq securities and exchange-listed securities, respectively, the fact that a Market Maker has routed a limited order to another Market Maker, an EC\ or another market center does not eliminate a Firm's limit
order protection obligations.

29

October 1998

Question 26: Does the Firm quote rule apply to the entire size of a customer's limit order? Answer 26: Yes. once a limit order is displayed in a Market Maker's quote, the Firm quote rule applies to that quote just like any other Market Maker quote. Thus, if a Market Maker is displaying a quote size of 4,000 to reflect a customer limit order, it must execute orders received up to that quote size unless it is able to avail itself of an exception to the Firm quote rule. It would not be permissible for a Market Maker, upon receipt of a 4,000-share order to execute against a 4,000-share quote, to execute 1,000 shares against its quote and fill the balance of the customer limit order out of its proprietary account.

Ouestion 27: Does compliance with the Display Rule supersede compliance with the NASD,s short-sale rule or the SEC's short-sale rule? For example, if the inside market of ABCD is l0 - lo ll4 and its a down bid situatioq would a Market Maker receiving a limit order to sell short priced at 10 have to display such limit order? Answer 27: SEC staffhas stated that a "market maker or specialist should refrain from displaying a customer's short sale limit order if displaying such limit order would cause an execution on a minus or zero-minus ticlg in the case of trade to which Rule 10a-1 applies, or an execution at a price less than 1'll6th above the inside bid on Nasdaq when the bid is a down bid, in the case of a trade to which NASD Rule 3350 applies. Therefore, the Division will not recommend enforcement action if a market maker or specialist does not immediately display a customer limit order in those limited circumstances where doing so would likely result in a violation of either short sale ruIe."

No.

Question 28: Does compliance with the Display Rule supersede compliance with SEC Rule 10b6A (or Rule 101 of the Regulation M on March 3, lg97)?

Answer 28:

Yes. SEC staffhas issued a no-action position stating that staffwill not recommend enforcement action if a passive Market Maker displays bids on
behalf of customers pursuant to the Display Rule or executes customer orders as a result of displaying a customer limit order that otherwise would be in violation of SEC Rule t0b-6A.

Question

29:

Does Market Maker who has withdrawn its quote in accordance with SEC Rule 10b-6 still have to display limit orders that it has received while its own proprietary

quotes are withdrawn? Answer 29:

No.

Once a Market Maker has withdrawn its quote pursuant to Rule l0b-6, it may not reenter a quote until completion of the cooling-off period. In this connectiorq SEC staffhas stated that "the broker-dealer may refuse to accept the limit order. In additiorq where a broker-dealer is
October 1998

permitted to execute the order as principal under Rule l0b-6 or Rule 101 of Regulation M and such order is executed immediately upon receipt, there would be no conflict between the obligations of the Order Execution Rules and Rule 10b-6 or Rule 101 of Regulation M. Finally, a broker-dealer, where permitted to act as agent for the order pursuant to Rule l0b-6 or Rule 101 ofRegulation M may send the order to a market maker in the security that is not restricted from displaying the order under Rule l0b-10 or Rule 101 of Regulation M or to an ECN that complies with the ECN Display Alternative, provided that the ECN does not indicate in its dissemination of the order, either publicly or to subscribers, as coming from a market maker." (footnotes omitted)

Miscellaneous
Question Answer

30:

What are the limit order display obligations of order-entry Firms?

30:

None. The Display Rule only applies to Market Makers and exchange specialists. Of course, order execution Firms are still obligated to provide their customers best execution.

Question Answer

3I:

Will the Display Rule apply to convertible debt that is traded on Nasdaq?

3I:

No. While the Display Rule and the ECN Rule by their terms apply to debt
securities, the SEC has exempted debt securities and convertible debt securities from coverage under the Rules.

Question

j2:

Would a Market Maker have to update its quote to reflect the receipt or transmission of a preferenced SelectNet Order? No.

Answer

32:

3l

October 1998

Exhibit N

THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK

32

October 1998

COMMUMCATIONS WITH THE Approval Form

PUBLIC

Exhibit O

I wish to receive prior approval on the following type of advertising (Communications with the Public): (Please Check One)
Interview with Media Conducting a Seminar

Writing Newspaper or Magazine Article

Radio or Television Appearance Advertising
Other (explain)

I have attached an outline of the subject matter to be discussed or submitted a copy of the advertisement to be used. Furthermore, if I am submitting the material on behalf ofNSI, I have read NYSE Biule 472 and understand the General and Specific Standards for communications with the public mentioned therein. If I am submitting the material for an entity other than NSI, I acknowledge that it does not contain: 1) any untrue statements or omissions of a material fact or is otherwise false or misleading;2) promise specific results, exaggerated or unwarranted claims; 3) opinions on which there is no reasonable basis; or 4) projections or forecasts of future events which are not clearly labeled as forecasts.

Nomura Employee Submitting Material

Date

Department

I have reviewed the attached information and have signed below to evidence prior approval in compliance with NYSE Piule 472 if the material is submitted on behalf of NSI, or based on the standard described above if the material is submitted on behalf of an entity other than NSI.

Date Date

Branch Office Manager or Department Head Legal Officer Compliance Officer Public Relations Officer

Date Date

*Prior approval is valid only if all signatures are received. Also, each submitter will maintain a file of approved forms.*
October 1998

Exhibit P

**
3 YEARS

**
6 YEARS

LIF'E OFNSI

Blotters (or other records of original y) showing purchases and sales ofsecurities, receipts and deliveries of securities, receipts and disbursements ofcash and other debits and credits

*t

Ledqers

reflecting assets and liabilities, income and

expense and capital accorurts

kdgers accounts for each customer and proprietary

account showing all activity

x
x x x x x x
X

Ledgers I-edgers I-cdgers Ledgers

reflecting securities in transfer reflecting dividends and interest received reflecting secr:rities borrowed and loaned

reflectingmonies borrowed and loaned (including collateral and substitutions) reflecting fails to receive and deliver

I-edqerc

reflecting long and short securities record differences arising from required box counts

kdgers

I-edqers

reflecting all repo and reverse rqros

Stock record

**

The first two years must be held in an easily accessible place

34

October 1998

**
3 YEARS

**
6 YEARS

LIT'E
OF NSI

Order tickets and trading

entry)

blotters

(including daily

print out of tade report for desks with paperless trade Confirmations
New account

x
(name, address, and

documentation

x
(from closing
accounQ

signature for margin accounts)

Records of all oroo rietarv ontions transaction

Employeeapplication/questionnaire

(andother

x
(startingfrom terrrination)

exnployee docr:ments such as those dealingwith outside

business activilies and private securities tansactions)

Employee fingerprint documents

x
(startingfrom
termination)

Missins. lost. counterfeit or stolen securities documentation

Checkbooks. bank statements. canceled checks and cash reconciliations

x x x x

Bills - payable and receivable

Orisinals of all communications received and conies of all communications sent including research,
advertisemeats, market letters, sales literature, and interoffi.ce memoranda relating to Nomura's business as such

(this includes e-mail, Bloomberg,Intemet, etc. that are material to an investment decision). This also includes
evidence of approvals where necessary.

AII trial balances. computations of aqgregate

indebtedness and net capital (including working papers) financial statements. branch ofrice reconciliations and internal audit working paperr
Possession and control and reserwe formula

bank

account computations and related records Documents rclatins to suarantees of accounts. Dower ofattorney and other discretionar] authority. and Customer account corporate resolutions

**

The first two years must be held in an easily accessible place

35

October 1998

**
3 YEARS

**
6 YEARS

LIFE oFNSr

All contracts or written agreement

the Focus rcDorts
Possession and control written procedures

x
x

x
x
(fromtimeof
closing)

Customer account cards or other documents related to the opening and maintenance of the customerrs account

Nomura articles of incorooration. minute books and stock certificate books Rule 15a{ background information and consents to
service ofnrocess

x x

Customer complaint files Supervisor.v reports demonstratins evidence of

suoerision

x x
x

**

The first two years must be held in an easily accessible place

36

Octobcr 1998

Required Method of Retention

The documents listed above can be stored in a number of methods. First, documents can obviously be kept in their original format. Next, the documents can be reproduced on "micrographic media", which is defined to mean microfilm or microfiche or any similar medium. Last, documents can be reproduced by means of "electronic storage medid', which is defined to mean any digital storage medium or systenL including optical tape or optical disk (including CD-ROM). For micrographic media and electronic storage media the following conditions must be met:

0 O t 0 O

Nomura must have facilities for immediate, and easily readable projection or production of the stored records.
The system must have the ability to provide enlargement.

A duplicate copy of the record must be stored separately from the original.
Nomura must organize and index all information maintained on both copies of the storage media.
The indexes must be available for regulatory examination, and a duplicate copy of the index must be kept separately with the duplicate copy of the record.

In regard to electronic storage media, the following conditions must also be satisfied.

0 t I t 0 0 i O

Notification must be given to the iVYSE. If other than optical disk technology is used, the NYSE must be notified at least 90 days prior to employing such storage media.
The records have to be in a non-rewritable, non-erasable format. The system must verify automatically the quality and accuracy ofthe recording process. The media must serialize the original and, if applicable, duplicate units of storage mediq and time-date for the required period of retention the information placed on the electronic storage media. The system must have the capacity to easily download indexes and records preserved on the electronic storage media.

NSI must have an audit system providing for accountability regarding inputting of records and inputting of any changes made to the two copies. This audit system must be available for examination and those audit results must be preserved for the time required for the audited records. NSI must maintain and provide promptly upon a request by a regulator any information necessary to access records and indexes stored on the electronic storage media.
Nomura must retain a third party vendor who has access to and the ability to download stored data. The third party must file a written undertaking that it will do so upon request by the SEC.

37

October 1998

is important that, if electronic storage media is used, the data is captured not only from NTApS, but also from the front end systems if the necessary data resides only in the front end system. For example, for desks that have paperless ticket systems, daily paper reportJmust be generatedand preserved

It

containing all the information that would normally bC kept on a paper ord.r tickeq or tlie documents can be kept pursuant to the electronic storage media require*.nts described above. It is not sufficient that the information simply be stored on the front end computed system for later retrieval.

^ '--'a) \-/

38

October 1998

Exhibit O

INSTTTUTIONAL "ACCREDTTED INVESTOR" CERTIF'ICATE

To Nomura Securities International, Inc.:

The undersigned represents and warrants that it is an institutional "accredited investor", within the meaning ofRule 501 ('Rule 501") under the Securities Act of 1933 (as amended, the *Act") and applicable state securities and "blue slql laws, because it satisfies the criteria specified below. The undersigned must complete Item L below if it intends to make purchases as principal If the undersiged is purchasing for the account of others, please complete Item IL below.

*** t
The undersigned represents and warrants that it is (setect one below, and complete the requested information):
(Check one.)
a bank as defined in Section 3(a)(2)
8S

A. r

ofthe Act or any savings and loan association or other institution defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or fiduciary c,apacity;

a broker-dealer registered pursuant to Section 15 of the Securities Exchange Act

amended;
an insurance company as defined in Section 2(13)

of

1934, as

ofthe Act;

an investment company registered under the Investment Company Act of 1940 (as amended, the "Investment Company Act") or a "business development company'' as defined in Section 2(a)(a8) ofthe Investment Company Act;

a small business investment company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the small Business Investment Act of 1958, as amended;
established and maintained by a state, its political subdivisions, or any agency or insnrmentality of a state or its political subdivisions, for the benefit of its employees, if such a plan has total assets in excess of$5,000,000;

a "plan"

plan" within the meaning ofthe Employee Retirement Income Security Act of 1974,as amended ('ER[SA') and (D all investment decisions are being made by a plan fiduciary, as defuied in Section 3(21) of ERISd that is a banlq savings and loan associatiorq insurance company or registered investment adviser, or (ii) the employee benefit plan has total assets in excess of $5,000,000, or (iii) the plan is self-dAected and all investrnent decisions are made solely by persons that are accredited investors;
an "employee benefit

39

Octobcr 1998

a private "business development company'' as defined Advisers Act of 1940, as amended;

a

in Section 202(a)QZ) of the

Investment

not-for-profit organization described in Section 501(c)(3) ofthe Internal Revenue Code, not formed for the specific Purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
a corporatiorq not formed

in excess of $5,000,000;

for the specific purpose of acquiring the securities offered, with total assets

a Massachusetts or similar business trust, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
a parfrrership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

trust with total iNsets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated peison that (l) has knowledgJand experience in financial and business matters and (ii) is capable of evaluating ihe merits and risks of each particular investment;
a

a director, executive

officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of that issuer;
a natural person whose

individual net worth or joint net worth with a spouse, at the time of purchase

exceeds $1,000,000;
a natural person

years

who had an indMdual income in excess of $200,000 in each of the two most recent orjoint income with a spouse in excess of $300,0oo in each of those years and has a reasonable expectation of reaching the same income level in the current year;

ofthe equity owners are accredited investors under one or more of the foregoing categories. For this final category, please prwide a brief description of the entity 6,pe od iis j uri sdi c ti on of or gani zati on :

an entity in wtrich all

and, it is an instihrtiorq whose purchases of privately placed securities, in each instance, are exempt fronq and/or are permitted without registration under, the state securities or "blue sky'' laws of the jurisdiction(s) where it is located and under which it is organized. The representations and warranties set forth in this paragraph shall be deemed repeated as of each offer and sale of a privately placed security to the undersigned in reliance on Section ae) o\ or Regulation D under, the Act.

If the

undensigned

will be purchasing for the account of another entity: (Check below, if applicable.)

The undersigned represents and warrants that: (i) it has the authority to buy securities (including without limitation, privately placed securities) for the account or accounts of other entities set forth on tiris certification or a list attached hereto, such entities are ar.rthorized to buy the securities which it shall, from time to timg buy for such entities, and such purchases will be suitable investments for
Octobcr 1998

such entities; and G) the entities, for whose account or accounts the undersigned will be purchasing such securities, are institutional "accredited investors" within the meaning ofRule 501 and the state securities and'tlue sky" laws of the jurisdicion(s) where such entities are located and under which they are organized. The representations and warranties set forth in this paragraph shall be deemed repeated as of each offer and sale of a privately placed security to the undersigned for one or more of its accounts in reliance on Section aQ) ol or Regulation D under, the Act.

The undersigned agrees that it will notify its NSI sales representative of any circumstance that would affect the representations of the undersigned or of the undersigned on behalf of its accounts set forth on this certification or a list attached hereto.

Irr-

Name of ClienUAuth oiued Investment Advisor

Name of Authorized Officer

- Title

Signature

Account Number

Name

ofEntiw

Account Number

41

October 1998

Exhibit R
March 8, 1996

Blue Sky Laws

Alabama

Any bantq savings instiartiorU credit uniorL trust company, insurance company, investment company, pension or profit-sharing trust or other financial institution or
institutional buyer.

Alaska.

Any ban( savings institutiorl trust company,

insurance company, investment company, pension or profit-sharing trust or other financial institntion or institutional buyer.

Arizona.

Any bant savings insitution, insurance company, 4gency or instrumentality of the United States or of a State, or :rny person a principal part of whose business consists of
buymg securities.

Arkansas.

fuy

banlq savings institutiorq trust company, insurance company, invesffnent company, pension or profit-sharing

trust or other financial institution or institutional buyer.

California(1).......

Any bant savings and loan association, trust

company, insurance company, investrnent company registered under the Investment Company Act of 1940, pension or profitsharing trust (other than a pension or profit-sharing trust of the issuer, a self-employed individud retirement plan or individual retirement account), "qualified institutional buyer" as defined in Rule 1'l'1A under the Securities Act of 1933 if the sale is made pursuant to Rule l44A or any other instittrtional investor designated by rule of the California Commissioner of Corporations; pryid$ however, that the purchaser (if not a "qualified institutional investor" purchashg securities pursuant to Rule lzl4A) represents that it is purchasing for its own account (or for a trust account for which it is trustee) for investment and not with a view to or for sale in connection with any distribution ofthe securities.

The California Commissioner has by rule interpreted "instihrtional investor" to mean the following:

42

October 1998

described in Sestion 501(c)(3) of the Internal Revenue Code (Le., charities) . . . which has total assets (including endowment, annuity and life income funds), of not less than $5,OOO,OO0 according to its most recent audited financial statement;

Any organization

Any corporation which has a net worth on a consolidated basis according to its most recent audited fuiancial statement of not less than $14 million (provided that an exemption for sales to any such corporation may not be available if the securities being sold are corlmon stock of a corporatiorg or securities exchangeable for or convertible into common stoclg and either (i) the holders of Z5%o or more of the outstanding shares of such common stock have addresses in California according to the issuer,s records, or (ii) the securities sold to the corporatiorg plus
any other similar securities then held by the corporatiorq would represent more than 5% of the issuer's outstanding
conrmon stock); or

Any wholly-owned subsidiary of any exempt institutional

investor. Sales

of securities may also be made to the following public

agencies:

The Federal Government; Any agency or instrumentality of the Federal Government;

Any

corporation wholly-owned by

the

Federal

Government, Any state, city, city and county, or county; Any agenry or instrumentality of a state, city, city and county, or county; Any state university or state college; or Any retirement system for the benefit of employees of any ofthe foregoing. Colorado

Any depository institution, insurance company or separate account of an insurance company, investment company registered under the Investment Company Act of 1940, business development company, private business development company, small business investment
compan% employee pension, profit-sharing or benefit plan having total assets in excess of $5,000,000, or any enttty, other than an individual, a substantiat part of whose business activities consists of investing or trading in securities of more than one issuer and that has total assets in excess of $5,000,000 as of the end of its latest fiscal year, or any other institutional buyer.
Octobcr 1998

Connecticut.........

Any state bank and trust company, national banking

credit uniorq trust company, insurance company, investment company, pension or profit-sharing trust or
other financial institution or institutional buyer.

association, savings bank, savings and loan association,

Delaware.-

Any ban( savings institutiorq trust company,

insurance company, investrnent compan% pension or profit-sharing trust or other financial institr:tion or instiartional buyer.

District of Columbia.
Florida

Anyone.

Any bant savings institution, trust company,

company, investment company or pension or profitsharing trust, or any "qualified institutional buyef' as defined in Rule l44A under the Securities Act of 1933.

insurance

Georgia.............

Any bant savings institution, tRrst company, insurance company, investment compan% real estate investment
trust, small business investrnent corporatiorg pension or
profit-sharing plan or trust or other financial institution.

Hawaii

Any ban( savingi institutioq trust company,

insurance company, investment @mpany, pension or profit-sharing tnrst or other financid institution or institutional buyer.

Idaho.

Any banlq savings institutioq trust company,

insurance company, investment company, pension or profit-sharing trust or other financial institution or institr.rtional buyer.

Illinois.

fuiy

corporatiorq banlq savings bant savings institutioq savings and loan association, trust company, insurance company, building and loan associatioq pension fund or pension trust, employees' profit sharing fiust, other financial institution or institutional investor or any goverrunent or political zubdivision or instrumentality thereof, any partnership or other association engaged as a substantial part of its business or operations in purchasing or holding securities; any trust in respect of which a bank or trust company is trustee or co-trustee or, provided each such plan, organization, trust or partnership has total assets in excess of $5,000,000, any employee benefit plan within the meaning of Title I of the Federal ERISA Acr, any plan established and maintained by, and for the benefit of the employees oq any State or political subdivision or agency or instrumentality thereo{, or any organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, Ivlassachusetts or simitar business trust or
Octobcr 1998

partnership; or any entity in which at least 90%o equtty is owned by any of the foregoing persons.
Indiana.

of

the

Any banh savings institution, trust company, insurance company, investment company, pension or profit-sharing
trust or other financial institution or institutional buyer.

Iowa.

Any ban( savings and loan associatiorg credit union, trust company, insurance company, investment company, pension or profit-sharing trust or any person who is an "accredited investof'within the meaning ofRule 501(a) of Regulation D under the Securities Act of 1933 or other
financial institution or institutional buyer.

Kansas.

fury banh savings institutiorq trust company,

insurance company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

Kentuclcy

Any ban( savings institutioq trust company,

insurance company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

Louisiana.

Any bant savings institutiorg trust company, insurance company, investment company, real estate investment
trust, small business investment corporatiorq pension or profirsharing plan or trust or other financial institution and, in additiorg any "quetified institutional buyef, as defined in Rule 14,1A under the Securities Act of 1933 if the sale is made pursuant to Rule 144A.

Maine

Any depository institution or depository institution holding company, insurance @mpany or separate account of an insurance company, investment @mpany, business development company, employee pension and profit sharing or benefit plan (other than an employee pension and profit sharing or benefit plan of the issuer, a selfemployed individual retirement plan or individual retirement account) having total assets in excess of $5,000,000, small business invesfinent company, nonprofit entity described in Section 50l(c)(3) of the United
States Internal Revenue Code with total assets in excess of $5,000,000, or any entity, other than a natural persorL a substantial part of whose business activities consists of investing or trading in securities of more than one issuer and that has gross assets in excess of $1,000,000 at the end ofits latest fiscal year.

45

Octobq 1998

Maryland.

Any bant trust company, savings and loan

associatiorg

than $1,000,000 or governmental agenq or instrumentality; any "accredited investor" as defined in Rule 501(a)(l)-(3), (7) or (8) of Regulation D, or "qualified institutional buyer" as defined in Rule l44l\ under the Securities Act of 1933, or any other institutional investor designated by rule or order of the Maryland
Securities Commissioner.
Massachusetts.......

insurance company, investment company, investment adviser with assets under man4gement of not less than $1,000,000, employee benefit plan with assets of not less

Any banlq savings institution, trust

development company

company, insurance company, investment company, pansion or profit-sharing trust business development company, private business

or

licensed small

business

investment company; any entity with total assets in excess of $5 million which is either (i) a company (whether a corporation, a Massachusetts or similar business trust or a partnership) not formed for the specific purpose of acquiring the securities being sold and a substantial part of whose business activities consists of investing or trading in securities issued by others and whose invesfinent decisions are made by persons who are reasonably believed by the seller to have such knowledge and experience in financid and business matters as to be capable of evaluating the merits and risks of investment; or (ii) an organization described in Section 501(c)(3) of the Internal Revenue Code; any "qualified institutional buye/' as defined in Rule 144A under the Securities Act of 1933 or any other financial institution or institutional buyer.
Michigan.

Any banh savings institr:tion, tnrst

Federal Home Loan Mo4gage Corporatiorq the Government National Mortgage Association, the State
Treasurer of Mchigan or other financial institution and, in additiorq any "qualified institutional buyer" as defined in Rule l44A under the Securities Act of 1933 if the sale is made pursuant to Rule l44A Mnnesota.

company, insurance company, investrnent company, pension or profit-sharing trust the assets of which are managed by an institutional manager, the Federal National Mo4g4ge Association, the

Any ban( savings institutioq trust company, insurance company, investment company or pension or profitsharing trust; any corporation with a class of equlty
securities registered under Section l2(b) or l2(g) ofthe Securities Exchange Act of 1934 or any person who is an
October 1998

"accredited investor" within the meaning ofRule 501(a) of Regulation D under the Securities Act of 1933 or other financial institution or institutional buyer. Mssissippi

Any ban( savings institutiorq trust company, insurance

company, investment company, pension or profit-sharing trust or other financial instittrtion or institutional buyer.

Mssouri.

Any ban\

savings institutioq trust company, insurance company, investment company, pension or profit-sharing trust or endowment or trust fund of a charitable organization specified in Section t70O)(lXA) of the Internal Revenue Code; any issuer which has any class of securities registered under Section 12 of the Securities Exchange Act of 1934 and any wholly-owned subsidiary thereof; any other corporatioq partnership or association which has been in existence for ten years or whose net assets exceed $500,000 and whose principal purpose, as stated in its articles, byJaws or other organizational instrument, is investing in securities, or other financial institution or institutional buyer.

Montana.

Any banlq savings institutioq trust company, insurance

company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

Nebraska.

Any banh

savings institutiorq trust company, insurance company, hvestment company, business development company, licensed small business investment company, pension or profit-sharing trust or other financial institution or institutional buyer or any individual ..accredited investof' as defined in Rule 501(a)(a)-(6) under the Securities Act of 1933.

Nevada

Any depository institution, insurance company or sepa^rate account of an insurance company, investment company, employee pension, profit-sharing or benefit plan having total assets in excess of $5,000,000 or any other
institutional buyer.

New Hampshire(2)....

Any bant

savings institution, tRrst company, insurance company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

New Jersey

Any bant

savings institution, trust company, insurance company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

Octobcr 1998

New Mexico

Any depository institutiorq insurance company or separ,rte account of an insurance company, investment company,
employee pensioq profit-sharing or benefit plan having total assets in excess of $5,000,000, business development company, licensed small business investment company or non-profit entity described in Section 501(c)(3) of the Internal Revenue Code with total assets in excess of $5,000,000, any entity, other than a natural persorl which is directly eng4ged in the business o{, and derives at least 80% of its annual gross income fronU investing purchasing, selling or trading in securities of more than one issuer and not of its own issug and that has gross assets in excess of $5,000,000 at the end of its latest fiscal year, or any state, political subdivision of a state or an agency or corporate or otler instrumentality of a state or a political subdivision of a state.

New York(3).........

Anyone.

North Carolina......

fuiy corporation

having a net worth in excess of $1,000,000, insurance company, investment company, pension or profit-sharing trust or other financial institution or instiartional buyer-

banh savings institution, trust company,

North Dakota........

fuiy banh savings institutiorq trust

company, insurance company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

Ohio

Any corporatiorL bank, trust company, savings associatiorq insurance company, pension fund or trust, employees' profit sharing fund or trust, any association engaged, as a
substantial part of its business or operations, in purchasing or holding securities, or any trust in respect of which a banh trust company or savings association is trustee or co-trustee or any "qualified institutional buyef' as defined in Rule 144A under the Securities Act of 1933.

OHatroma.

Any depository institutiorq insurance company or separate account of an insurance company, investment company, employee pension, profit-sharing or benefit plan having
total assets in excess of $5,000,000, "qualified instiurtional buyet'' as defined in Rule l44A under the Securities Act of 1933 or any other institutional buyer.

Oregon

Any banlc, savings institutiorl trust company, insurance company, investment company, mortg4ge broker or
mortgage banker, pension or profit-sharing trust or other financial institution or institutional buyer or, provided
Octobcr 1998

there is no public advertising or general solicitation in connection with the transactiorq any person who is an "accredited investof'within the meaning ofRule 501(a) of Regulation D under the Securities Act of 1933.
Pennsylvania........

Any bantq savings ban( banking institutiorg trust company, savings and loan association or institutioq insurance company, pension or profit-sharing plan or trust, investment company or other financial institution or any entity which controls any of the foregoing, any whollyowned subsidiary of any banlc, savings ban! barking institutiorq trust company or savings and loan association or institutiorL any corporation or business trust or whollyowned subsidiary thereof which has been in existence for 18 months and which has a tangible net worth on a consolidated basis, as reflected in its most recent audited financial statements, of $10 million or more, any small business investment company having a total capital of $1 million or more or which is controlled by institutional investors, any public or private institution which has received exempt status under Section 501(c)(3) of the Internal Revenue Code and which has a total endowment or trust funds of $5 million or more according to its most recent audited financial statements furovided that the aggregate dollar amount of the securities sold may not exceed 5.0% of the endowment or trust funds), any person whose securityholders consist solely of institutional
investors or dealers, or the Federal Government, any state or any agency or political subdivision thereof

Puerto Rico

Any ban! savings insitutiorq trust company,

insurance company, investment company, pension or profit-sharing trust or other financial instinrtion or institutional buyer.

fuiy

depository institutioq insurance company or separate account of an insurance company, invesfinent company, employee pensiorq profit-sharing or benefit plan having total assets in excess of $5,000,000 or any other institutional buyer.

South Carolina......

Any ban( savings institutiorq trust company,

insurance company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

South Dakota.....-..

Any ban( savings institutiorq trust company, insurance company, investment compan% pension or profit-sharing trust or endowment or trust fund of a charitable organization specified in Secrion ITOOXIXA) of the
Octobcr 1998

Internal Revenue Code (as amended through April l, 1990); any issuer which has any class of securities registered under Section 12 of the Securities Exchange Act of 1934 (as amended througtr April l, 1990) and any
wholly-owned subsidiary thereof; any other corporation, partnership or association which has been in existence for ten years or whose net assets exceed $500,000 and whose principal purpose, as stated in its articles, by-laws or other orgarizational instnrment, is investing in securities, or other financial institution or institutional buyer.
Tennessee...........

Any ban( trust company, insurance company,

investment company registered under the Investrnent Company Act of 1940, a holding company which controls any of the foregoing, a trust or fund over which any of the foregoing has or shares investment discretiorq or any other person (other than a broker-dealer) engaged as a substantial part ofits business in investing in securities, in each case having a net worth in excess of $1,000,000.

Texas...............

Any ban( trust company, building and loan associatioq insurance company, surety or guaranty company, credit uniorg savings and loan association or other savings institutioq investment company or small business
investment company; any "accredited investor" as defined in Rule 501(a)(l)-(a), (7) and (8) under the Securities Act of 1933 (excluding, however, certain self-directed employee benefit plans) or *qualified institutional buyer" . as defined in Rule laaA(a)(I) under such Act; or any corporation, partnership, trust, estate or otler entity (excluding individuals) having a net worth of not less than $5 million or a wholly-owned subsidiary of any such entity as long as the entity was not formed for the purpose of acquiring the securities; provided that, in each such case, such institution is acting for its own account or as a bona fide trustee of a trust organized and existing other than for the purpose of acquiring the securities.

Utah.

Any bant savings institutiorq trust company,

insurance

company, investment company, pension or profit-sharing trust or other financial instittrtion or institutional buyer.
Vermont.

Any depository institutiorq insurance company or

separate

account of an insurance company, investment company or employee pensioq profit-sharing or benefit plan having total assets in excess of $5,000,000; any other financial or institutional buyer which qualifies as an "accredited investor" under Regulation D under the Securities Act of
Octobcr 1998

1933 or other in$iartional buyer designated by rule or order of the Vermont Securities Commissioner.
Virginia............

Any corporation, investment company or pension or profitsharing trust.

Washington.

Aly bant savings institr:tioq insurance company or

sharing trust any corporation, business trust or partnership, or wholly-owned subsidiary thereo{, which has been operating for at least 12 months and which has a net worth on a consolidated basis of at least $10 million as determined by its most recent audited financial statements (which shall be dated within 16 months of the date of the transaction), any entity which has been granted exempt status under Section 501(c)(3) of the Internal Revenue Code and which has a total endowment or trust funds of $5 million or more according to its most recent audited financial statements (which shall be dated within 16 months of the date of the transaction) or any other financial institution or institutional buyer.
company, insurance company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.
company,

investnnent company, any wholly-owned subsidiary of any such institution, any trust company or pension or profit-

.
West Virginia.......

Any banh savings institution, trust

Wisconsin.

Any bant savings institutio4 credit unioq trust

charitable organization specified in Section l70OXlXA) of the Internal Revenue Code, any issuer which has a class of securities registered under Section 12 of the Securities Exchange Act and any whollyowned subsidiary thereof, any "accredited investof' as defined in Rule 501(a)(1)-(S) or (7), or ..quatified institutional buyef' as defined in Rule L44A, under the Securities Act of 1933, any "venture capital company', which includes any person who (i) operates a licensed small business investment company, or (ii) is a corporatioq partnership or association whose net assets exceed $1,000,000 and whose principal purpose as stated
5l
Octobcr 1998

trust fund of a

insurer, investment adviser or savings and loan associatioq if the purchaser or prospective purchaser is acting for itself or as trustee with investment control, pension or profitsharing trust administered by a broker-dealer or one of the foregoing institutions that has investment control, investment company, the State ofWisconsin or any agency or political subdivision thereof the federal government or any agency or instnrmentality thereo{, any endowment or

in its articles, by-laws or other organizaional instruments is investing in securities or whose primary business is investing in developmental stage companies or eligible small business companies as defined by the U.S. Small Business Administration" or any entity, all of the equity owners of which are persons designated abovg or any other financial institution or instittrtional investor designated by the Commissioner of Securities.
Wyoming..

Any ban( savings institutio4 trust compan% insurance

company, investment company, pension or profit-sharing trust or other financial institution or institutional buyer.

(r)

The purchaser is not required to give the investment representation stated in the text
securities concerned are otherwise exempt from registration in California.

if

the

a)
(3)

Offering material used in connection with offers and sales in this State must contain the
appropriate legend.

In public offerings a Further State Notice must be filed with the New York Department of State unless an exemption from filing applies. A "public offering", for this purpose, may include Regulation D and similar limited offerings in which sales are made to individual investors. In additioq if NSI sells securities as agent for the issuer, the issuer must register as an Issuer-Dealer or (if available) apply for an exemption from such registration unless sales are limited to banks, corporations, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts or other financial institutions or institutional buyers as part of a private placement of securities.

52

Octobcr 1998

Exhibit

QIB LETTERS

53

October 1998

(1)(A) QIB l-etter (Initial):

Purchase for Own Account

Date:

Nomura Securities International, Inc. Two World Trade Center, Building B New Yodq New York 10281-1198

Re:
Dear Sirs:

Rule 144A' Offers and Sales of Securities

Inc.

('NSi'),

pursuant to Rule

In connection with our purchase Aom time to time of securities (the 'securities.) tom Nomura Secr:rities International, l44A rmder the Securities Act of 1933, as amended (the "sectrities Act"), we hereby confirm and agee

withNSI asfollows:

(a)
Iaws

of any state,

the Securities have not been, and will not be, registered uder the Securities Ac! or the securities or Blue Sky and the Securities are being offered and sold pursuant to an exemption Aom the registration requirements of the

Securities Acq

G) [we owu or invest on a discretionary basis over $100 millisa in securities of issuers that are not afrliated with us, audl we are a'qualified iustih.rtional buyer" within the meaning of Rule t,l'lA rrnder the Securities Act, and you may rely on the exemption Aom the registration requirements of the Secr.rities Act provided by Rule l41A rrnder the Securities Act in connection with any offer or sale ofSecurities to usl (c) we have knowledge, and sophistication in financial, buiness and investnent matters, and we are fully capable of evaluating the merits atrd risks of any inveshent in the Secnrities; (d) if, in the futrre, we should decide to dispose of any Securities, we shall not ofer, sell, assiga pledge or otherwise transfer such Securities, either directly or indirectly, excpt (i) in accordance with any rcstrictions or proce&:res set forth in any offering materials prepared in connection with such Secrnities and (ii) in a manner not subject to the registration requirements of the Securities Act and in accordance with the requirements of any apphcable state securities or Blue Sky laws; (e)
or:r

we are not relying on NSI or any person nfFliated with NSI in connection with our investigatioo of the Issuer or

invesbent decisio4 and

(D no representations or warranties have been made to us by NSI, and we have not relied upon any representation warranty or in making orn purchase of Secr:rities.
We understaud and agree that, since NSI will rely on the foregoing representations, warranties aud agreenrents in connection with its offer and sale of Secnrities to us, (i) we shall notify NSI promptly of any change in orrr ability to make the representations, warranties or agreern,Dts set forth above and (ii) each purchase by us of Securides shall constitute a reaffrmation of our
represe,lrtations, warranties and agreements set forth above, in each case as of the time of such purchase.

Very trulyyours,

Name ofPurchaser

By:
Name:

Title:

(lXB) QB Letter (Initial):

54

October 1998

Purchase for Disclosed Principal

Date:

Nomura Securities International, Inc. Two World Trade Center, BuildingB New York, New York 10281-1198

Re:
Dear Sirs:

Rule 144A Offers and Sales of Securities

connection with the pr:rchase from time to time by the undersipd for the account of (the ?urchaser'), of securities (the 'securities') fromNomura Secr:rities Intematiooal, fac. 1'NSt'ySffi =--:-:-::-:---= RuIe l44A uoder the Securities Act of 1933, as ameaded (the "securities Act"), the rmdersigned is authorized to *on and agree with
NSI, ou its own behalfl and on behalf of the purchaser, as follows:

In

(a) Pursuant to a manageme,Bt or advisory agree,m,rt with &e Pr:rchaser (a copy of which has been fr:mished to you), the undersiped has been duly authorized by the Pr:rchas." to t ke all action on its behalf to pr:rchase the Secr:rities, and the undersigned is an investment adviser registered under the Inveshent Advisers Act of 1940, as anre,nded (the 'Advisers Act'), aad is rn compliance with the requirements of the Advisers Act;
laws

of

Securities Act;

(b) the Securities have not bgea, and will uot be, registered under the Secr:rities Ac! or the secr:rities or Blue Sky atry state, and the Secr.rities are being offered and sold pursuant to an exe,mption from the registration requirements of the

(c) [the rmdersiped owns or invests on a discretionary basis over $100 million in securities of issuers that are not affiliated with the rmdersiF'd the Purchaser owns on a discretionary basis over gl00 million of securities of issuers that are not.ffitiatd with the uudersipdl each of the undersiped and the Purchaser is a "qrralified iastitutional bnyer" within the meaning of Rule l4,lA under tlre Securities Act' and you may rely on the exemption from the registration requireme,nts tf tU" So*itio ect piovidea by Rule Itt4A under the Securities Act in connection with any otrer or sale of Secr:rities to the Ptrchaser through the,ndersiped;
and

each of the undersigred and the Pnrchaser has knowledge, and sophistication in fnancial, business invesheot Eatters, and the Purchaser is firlly capable of evaluating tUeherits and risks of alr investment in the Secr:rities;

(d)

(e) rf, in the future, the Pnrchaser should decide to dispose ofaay Secnrities, the Purchaser shall not offer, sell, assign' pledge or otherwise tansfer such Securities, either directly or indirecfly, o."pt (, in accordance with any restictions or procedr:res set forth in any offering materials prepared in connection with such Secruities Oj i1 a manner not subject to the registration requireme,nts of the Secr:rities Act and in accordance with &e require,ments of any applicabte ^a stal secr:rities orBlue ity t"*r; (0 (8)
we are not relying on NSI or aoy persoo afEli216d
our inveshent decisioq aad

rrift NSI in connection with

our investigation of the Issuer or

no represeotations or warranties have been made to us by NSI, and we have not relied upon any representation or warranty in making our pr:rchase of Securities.

warranties or agremnts, including without limitation" any action sr claim that the sale of Secgrities to the undersrpj oo u"n 1g or th" Purchaser was uuauthorizod, the undersigned agrees to indemnify NSI periodically for its legal and other oeenses iioAoaiog the cost of 3nf investigatron and preparation) incurred in coonection therewith and any tosses, claimi, damages or liabilities to which NSI may become subject in connectiou with any such matter. The reimbursemeat otfigrtio;s under this paragraph shall be in -a ioa"-"ity addition to aay liability which the uodersiped may othenvise have, shall exteod upon 6" o;" terms and conditions to the directors,
55 Octobcr 1998

In the event NSI becomes rnvolved in any action, proceeding or investigation arising out of or based upon aoy false representation or warrarty herein or any breach or failure by the undersigped or the Purcha; to compty with agreerDent made herein' or in the event the Pr.uchaser brings any action or clnim against NSI allegng a breach of any of the foregoingrepreseutations,

-y *.r**t'*

'EPloyees md omtnolling Persons (if ay) of NSI aud shsll personal represcoatives ofNSI a.d any such persons.

!6 linding tpon

and innre to

&e bcoefit of the srccesson, assips, heirs and

()

The undersiped rmderstands and 4grees that siace NsI will rely on the foregoing reprcscotations, warrauties and in connection with its offer and sale of Securities to the Purchaser througi tle unaersipe4ll it rUaf notify i..tSl prompUy of ay change in the ability of the uudersigned or the Purchaser to make the representatioos, warraatii or agreements set forth above aod (ii) each purchase by the hrchaser of Securities tbrough the undersigDed sUAt constinrte a reaffrmation of the rcpresenutions, warranties and agremeots set forth above, in each case as of the time of sr,ch purchase.
agre@eots

Very trulyyours,

Name of ldanager or Adviscr

onbehalf

of

Nameofhrrchascr

By:
Name:

Title:
II

il
56 Octobcr 1998

Exhibit T

REGULATION

LETTERS

57

October 1998

(3)(A) Regulation

Irtter:

Purchase for Own Account

Date:

Nomura Secr:rities International, Inc. Two World Trade Cento, Building B New York, New York 10281-1198
Re:

(the "Issuer") (the Securities')

Dear Sirs:

In

connection with our purchase

of

authorized to confrm and agree with NSI as follows:

Securities from Nomura Secr.uities International, Inc.

(NSI), the undersiped is

the Sccurities have not been registered under ttre Secr:rities Act of 1933, as anended (the 'Secr:rities Act'), or the securities or Blue Sky laws of any state, and the Secr:rities have been otrered and are being sold pursuant to an o<emption Aom the registratioa requirements of the Sectrities Act;

(a)
(b)

we are not

a "U.S. person' within the

meaning of Rule 902 under the Securities Act;

(c) we have the loowledge, experience and sophistication in financial, br:siness and inveshent matters, in particuiar with regard to the business, operations, financial condition and prospects of the Issrer, and we arc fully capable of evaluating,
and have been give,n the opportunity to waluate, the merits and risks of an investrrent in the Securities;

(-d) we have reviewed the offering materials prepared by the Issuer m connection with the ofer aod sale of the Securities (collectively, the "Offering Materials") and such other inf,ormation as we have deeined necessary or appropriate to make an investment decision with respect to the Secr:rities, and we are fully capable of bearing (for an indcfinite p.riod) the economic risls
associated with making an invesfinent in the Securities; and

(e) if, in the future, we should decide to dispose of all or aoy portion of the Securities acquLed in connection herewith, we shall Dot offer, sell, assign, pledge or otherurise traosfer the Securities, either direotly or indirectly, o<".pt 1g in accordance with any restrictions or procedures set forth in the Offering Materials and (ii) in a manner uot subject to the registrationiequiremens of the Securities Act and in accordance with the requirements of any applicable state secr:rities or BI:e Sky laws.
with its offer and sale of Securities.
We understaod aud agree that NSI has relied on the foregoing representations, warranties and agreements in connection

Verytmlyyours,

Name ofPurchaser

By: Name:

Title:

October 1998

(3)@) Regulation S Lctter:

Purchase for Disclosed Principal

Date:

Nomura Securities International, Inc. Two World Trade Ce.nter, Building B New York New York 10281-1198
Re:

(&e

"Issrr")

(the "Securities") Dear Sirs:

ln connection wrth the puchase by Nomura secr:rities International, Inc. ("NSI'), th" rmd.rsigr.d
behalf of the Purchaser, as follows:

(the ?r:rchaser") of Securities from ir autto.izot to confirm and agree with NSi, on its oum behalf and on

(a) pursuant to a managemert or advisory agreement with the Purchaser (a copy of which has beeo furaished to you), the uodersigned has been duly authorized by the Purchaser to take all action on its behalf to pprchase the Secr:rities, and the undersiped is an inveshent adviser registered rmder the Iavesment Advisers Act of-1940, as ameoaed (the "Advisos Act"), and is
compliance with the requirements of the Advisers Act;

(b) ttre Securities have not been registered rmder the Secr:rities Act of 1933, as amended (the 'Securities Act,.), or the securities or Blue Sky laws of any state, and the Sectrrities have been offered and are being sold pursuant to an exemption from the registration re of the Securities Act;

(c)

the Pr:rchaser is not a "U.S. person" within the neaning

ofRute 902 rmder the Secruities

Ac[

(d) each of the r.mdersiped and the Purchaser has lorowledge, experience and sophistication in finaocial, business and investment Eatters,, ln garticular with regard to the business, operations, financial condition and prospects of the Issuer, and the Purchaser is firlly capable of evaluating, and has been given the opportrmity to evaluate, the merits .iitr of an inveshent in the
Securities;

-a

each of thc undersiped and the Purchaser has reviewed. the offering materials prepared by the Issuer in connection witl' the offer and sale of the Securities (collectively, the 'Offering Materials'), and such other information as it has deemed trecessarJr or appropriate to make an investment decision with respect to the Securities, and the Pr.rrchaser is fully capable of bearing (for an
indefinite period) the economic risks associated with making an investment in the Securities; and

(e)

if, in the fuu[e, t]re Purchaser should decide to diqpose of all or any portion of t]re Securities acquired in connection herewith, the Purchaser shall not offer, sell, assiga pledge or othemrise tansfer the Securities, either direcfly or indirectly, excePt (i) rn accor&nce with any resbictions or procedr:res set for& in the Offering Materials and (ii) in a manoer not subject to the registration requireme,ats of the Securities Act and in accordance with the requAeme,ntskany applicable state securities or Blue Sky laws.

(0

Ia the event NSI

becomes rnvolved

in aoy action, procceding or

investigation out

representation or warranty herein or any breach or failure by the undersigned or the Purchaser to-comply with any covenan; or agreemeot made herein or in atry otha document fiudshed to NSI in connection wittr the pr:rchase of Securities, or, in the event the pgrchasa brings any action 61 slaim against NSI aUeging a breach of any of the foregorng representations, warranties or agreemeots, isglurting, without limitation, any action or claim that the sale of Securities to the udersigned on behalf of the Purchaser was unauthorized, the ,rdersigned agrees to indernai$ NSI periodically for its legal and other expenses (including the cost ofany investigation and preparation) incurred rn connection therewith and any le55g5, slaimq, damages or liabilities to which NSI may becomesubject L conoectiln witn any sucn matter.

of or

based upon any false

The reimbursemeDt and indemnity obligations rmder this paragaph shall be in addition to

^y

tirUitity which tire rmdersigned may

59

October 1998

oth6tilise have, shall octeod upon the same tmrs and conditions to the directors, eoployees aDd c.DhoUing persons (if auy) of NSI and Sall bc bioding upon and inrre to the bnfit of the srccessors, assigns, heirs and personal rpreseotati\rcs of NSI aud any srch prsoios.
The unde,rsigned uder$rnds aod agrees thatNSI has rclied on the foregoingrepreseotations, warranties and agreemcots in coonection with its ofer and sale of Securities.

Verytnrlyyours,

Name of Manager or Adviser

onbehalf of

Name ofPtnchaser

By:
Name:

Title:

60

Octobo 1998

CREF LETTERS

6t

Octobcr 1998

(4XA) CREF

l*ttec

Purchase for Oum Account

Date:

Nomura Securities Iaternational, Inc. 2 World Trade Center, Building B New Yorlc, New York 10281-t 198

Re:

(the'Issuer")
(the 'Securities')

Dear Sirs:

In connection with our

and agree

purchase of Secr:rities Aom Nomura Secr:rities Inteoratioual, Inc.

('NSI'), we hereby confmr

with NSI

as

follows:
we are purchasing Securities with an aggregate purchase price of at least U.S.$250,000;

(a) (b)
aoe,nded (the "Securities

Act');

we are a "qualified institrtional buyer" within the meaning of Rule l,t,lA under the Securities Act of 1933,

as

(c) we have knowledge, exPerience and sophistication in financial, business and inves6reot matters, in particular with regard to the br:siness, operations, finaocial condition and proqpects of the Issuer, aud we are fully capable of evaluating, and have
been giveo ttre opportrmity to evaluate, the merits and risks

of an invesheart in the Securities;

(d) we have reviewed the ofering oaterials prepared by the Isoer in connection with the ofer and sale of the Securities, aad zuch other information as we have dee,med qecessary or appropriate to make an Invesheat decision with respect to the Securities, and we are fully capable of bearing (for an indefinite priod) the economic risla associated with making an inveshent the
Securities;

(e) (0
our investme,nt decision;

rcsale in connection witb, the

we are acquiring the Sectrrities for our oun accoun! for inveshent purposes ooly e.d not with a view to, or for distribution thereof, in whole or in parl in the United States or to U.S. persons;

we are not relying on NSI or any person ,frliated with NSI in connection with our investigation of the Issuer or

or warranty in making ourpurchase of Secr:rities;

G)

no rqrreseotations or warranties have been made to us by NSI, and we have not relied upon any representation

the Secr:rities have not been, aud will not be, registered rmder the Securities Act or the secr:rities or Blue Slcy laws of any state, and the Secr.rities are not eligible for resale pursrunt to Rule 14 4A rmder the Secruities Act and

(h)

(l)

made outside the United States

we may not sell, assigrr, pledge or otherurise transfer the Securities, in whole or in par! except in a transfer in accordance withRule 904 rmderttre SecuritiesAct.

62

October 1998

its offer and sale of Secr:rities.

We uderstand agree that NSI has relied ou the foregoing representations, warranties and agreeinents in connection with

Verytrulyyours,

Name ofPnrchaser

By:
Name:

Title:

63

October 1998

(4XB) CREFLetten
Purnchase

for Onar Account

Date:

Nomura Secuities Intemational, Iac.

2 World Trade Ce,Irter, BuildingB

New York, New York 10281-1198

Re:

(the "Issuer") (the 'Securities")

Dear Sirs:

Ia connection with the purchase by the undersiped on behalf of (the "Purchaser") of Securities from Nomura Securities Interuational, Inc. (NSI'), rmdersigned is hereby authorized to confirm and agree with NSI, on its own behalf and on behalf of the Pr:rchaser, as follows:

(a) the undersigned has been duly authorized by the Pnrchaser to take all action on its behalf to purchase the Securities, the r.rndersiped is an inveshent adviser registered rmder the Investme,nt Advisers Act of 1940, as ameoded (the 'Advisers Act.), and is in compliance with the requiremeots ofthe Advisers Act; (b) the Securities, being purchased for the Purchaser, have an aggregate pr:rchase price of at least U.S.$250,000 and are being purchased for investue,nt pxposes only and not with a view to, or for resale in connection with, the distribution thereoe in whole or io prrt, in the United States or to U.S. persons;
each of the udersiped and the Pnrchaser is a 'qualiEed institutional bnyer" within the meaning of Rule lzl4A under the Securities Act of 1933, as.asrended (the'Secr:rities Act");

(c)

(d) each of the udersigned and the Purchaser has knowledge, experie, rce and sophistication in financial, business and investmeat mattrs, in particular with regard to the busiaess, operatioos, financial condition and prospects of ttre Issuer, aod is fully capable of evaluatiog, and has beeo give.a the opportrmity to evaluate, the merits and risks of aa iaVestroent in the Securities',
of the Securities, and such information as it has
the Securities;

ofering materials prepared by the Issuer in coDnection with the ofer and sale or appropriate to make an investment decision with respect to the Securities, and the Pr:rchaser is fully capable of bearing (for aa indefinite pedod) the economic risks associated with making an inveshent
the
has reviewed the dee,med necessary

(e)

udersiped

(0 neither the rmdersiped nor the Purchaser is relying ou NSI or auy person ,trliated with NSI in counection with its investigation of the Issuer or its invesment decision; (g) no representations or waranties have bee,n made to the undersiped or the Purchaser by NSI, and neither the uudersip.ed nor the Purchaser has relied upon aoy represeotation or warranty in making the ptnchase of Securities; G) the Secrrities have not been, and will not be, registered,nder the Securities Act or the securities or Blue Sky laws of any state, and the Securities are not eligible for resale purnrant to Rule l44A under the Securities Act, aod
nei&er the undersigned nor the Purchaser may sell, assign, pledge or othenrise transfer the Securities, in whole or in part, except in a transfer made ouside the United States in accordance with Rule 904 under the Securities Act.

(i)

Ia the event NSI becomes involved in any action, proceeding or investigation arising out of or based upon any false representation or warranty or breach or faih:re by the udersigned or the Purchaser to comply with any covenant or agreement made hereb

Octobcr 1998

and preparatiou) incr:rred in connection therewith and any losses, claims, &mages or liabilities to which NSI may become suU;ect in connection with any such matter. The reimbursemeot and obligations rmder this paragraph shatl be in aaaition to any liability which the undersigned may othenrise have, shall extend upon the same terms and conditions to thJdirectors, employees and contromn! Persons (if any) of NSI and shall be binding upon and inwe to the benefit of the successors, assigns, heirs aod p*;""1 representatives of

or, in the event the Purchaser brings any action or claim against NSI allegng a breach of any of the foregoing represeatations, warranties or agreements, including wrthout limitation" any action sr staim that the sale of Secr:rities to the unaersipea on knaf of tU" purchaser was uatthorizd the rmdersigned agees to indemd$, NSI periodically for is legal and other expenses (including the cost of any investigation

NSI and any such persons.

The undersiSned under and agrees that NSI has relied on the foregoing representations, warranties and agreemeots in connection with its offer and sale of Secr:rities.

Verytnrlyyor:rs,

Narne of Manager or Adviser

on behalf

of

Name ofPurchaser

By:
Name:

Title:

65

Octobcr 1998

Exhibit U

OUALIFIED INSTITUTIONAL BIryERS

A "qualified institutional brryer" ('QIB") is:

Aay of the following eotities, acting for its own accouot or the accormts of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that 6rs aqt affilizfed with the eotity: -

(1)

(A) (B)
Company

an insurance comp,my as defined

in Section 2(13) of the Secr:rities Act'/; or

Acf') or a business developmeat company as defined in Section 2(a)(a8) ofthe Invesment

an investment company registered rmder the U.S. Invesment Company Act of 1940 (the "Iavestment Company Act; or

(C) (D) (E) (F)

a Small Br:siness Inveshent Company licensed by the U.S. Small Business Administation under
a plan established and maintained by a state of the United States, its political zubdivisions, or any poti[cal subdivisions, for ttre beoefit of its employees; or an employee benefit plan within the meaniag of Titte

Section 301(c) or (d) of the U.S. Small Business Iovesheot Act of l95g: or

ageacy or instn:meotality of such a state or its

Secr:rity Act of 1974 (*ERISA'); or

I of the U.S. Employee

Retirement Locome

A tnrst frmd whose trustee is a bank or tnr,st compatry and whose participants are exclnsively plaus of the types identified in @) or @) above, except.tnrst funds that include as participants individuat rJtiremeirt accounts on ILR. l0 plans; or

(G)

a business developme,nt compatry as defined in Section 202(a)Q2) of the U.S. Investmeirt Advisers

Act of 1940, as amended; or

GD an orgaaization dgscribed in Section 501(cX3) of the U.S. Intrtral Rsvenue Code of 19g6, as (the *Code'), corporation (other th-. a bank as defined in Secdon 3(a)(2) ofthe Act or a savings and loan association or other institution rderenced in Section 3(a)(5)(A) of the Act or a foreigrr baok or savings and loan associatiou or equivalent institution), partnership, or Massachusetts e1 similar.lusiness trust; or
ame,aded

An invesheat adviser registered r:nder the Investnrent Advisers

Ac[

(2) A registered brokerdealer, acting for its own accotmt or the accormts of other qualified institutional brryers, that in ttre aggegate owns and invests on a discretionary basis at least Sl0 million of secr:rities of issuers that are not affiIiated with the brokerdealer, except that securities conSituting the whole or a part of an unsold allotneot to or subscriptioo by a dealer as a participant in a public otrering shall not be deemed to be owned by such dealeq
(3) A registered brokerdealer acting in a riskless princlpal traosaction on behalf of
a

eIB;

A prrrchase by an insurance company for one or more of its separate accounts, which are ueither registered tmder Section 8 of the Invesbeot Company Act nor required to be so registerd is deemed to be a purchase for the accornt of an insrrance company.
66
Octobcr 1998

\)

(4)

aggregate at least $lQQ

Certain registered investueot companies that are part of a family of invesment compauies which oum in the milliqt in secqrities ofuoaffliated issuers;

(s)
and

An eotity, all of the equity owners of which are QIBs, acting for its own account or the accouts of other etss;

A baok as defined in Section 3(a)(2) of the Act, any savings aod loan association or other instihrtion refereoced Section 3(a)(5)(A) ofthg Acg or any foreip baok or savings and loan association or equivalent instihrtion, acting for its owu account or the accotmts of other qrulified institutioual buyers, that in the aggrryakoqms and invests on a discretidary basis at least $ 100 million in securities of issuers that are not affiliated with it and that has an audited uet worth of at least $25 millioa as demonstrated h its latest annual financial statements, as of a date not morre than 16 mouths preceding the date of sale,uder the Rule in the case of a U-S. bank or savings and loan association, and not more than 18 montbs pro"aiog such darc of sale for a foreip baok or savings and loan associatiou or equivalent instihrtiou.

(5)

in

i)
67

Octobfi 1998

Exhibit V

CALCT]LATING TEE AMOTTNT OF SECURITIES OWNEI) AND IIWESTED FOR PITRPOSES OF RI]LE 144A

In determining the aggregate amor:nt of secr:rities ovmed and invested on a discretionary basis by an entity, the following instn:ments and interests are excluded: bank deposit notes and certificates of deposi[ loan participations; repurchase agretreDts; securities owued but subject to a repurchase agreepent; and cqrreocy, interest rate and commodity swaps. The aggregatevalue ofsecr:rities owned and invested on adiscretionarybasis byan entityisthe cost of such secr:rities, except where the entity reports its securities holdings in its financial stateoreots on the basis of their market value, and no current information with respect to the cost of those securities has been published. In the latter even! the secgrities may be valued at market for purposes of Rule l,t4A. In deterrrining the aggregate anount of securities owned by an eotity and invested on a discretionary basis, secr:rities owned by subsidiaries of the eotity that are consolidated withthe eotity in its financial staterregts prepared in accordance with geoerally accepted accormting principles may be included ifthe investme,nts of such subsidiaries are mauaged rrnder the direction of the eotity, except tha! uless the entity is a reporting company r:nder the Exchange Ac! secgrities o*oa Uy such subsidiaries may not be included if the eotity itself is a majority-owned subsidiary that would be included in the consolidated

(l)

(3)

financial staternents of anotha enterprise.

58

Octobcr 1998

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egE,

Exhibit X

Domestic Accounts Managed by a Nou-Regulated

Entity

tr
tr

Foreign Ac.counts (Managed or

Otherrise)

Not Applicable

tr
(check one)

Answer the followiag questions, to the best of your knowledge, for all domestic accounts managed by a nonregulated entity and foreigrr accounts (managed or otherurise). For all other accounts, including foreip sub-accounts managed by a U.S. registered investuent adviser, simply check the *Not Applicable" box above aod sign below. This Due Diligeoce Form mgst be siped by the registered represeotative and his/her supervisor and will be a main factor in determining whether the acconnt is maintained. Itmrxt bi completed and attached to the new account form at the time of ope,ning ary new account AccountNumber:
Name

&

Address:

(l)

Ifamanagedaccouot,isthemanageropeniagtheaccountintheclie,nts'Dafie,i.e.,isaccor:otopeoedonafullydisclosedbasis? (e-g.' if a manager teUs you that he is acting for another party but does not provide you the names of the individual sub-accounts or
waDts to set up the sub-accouats on a "nurnber-accouot" basis thcn the answer to this question is

"no')

lGS

NO

N/A

a)

Is the manager or foreign account ao OTC market abroad)

publicly taded in its home couotry or abroad? (e.g., listed on an exchauge or actively taded on

IES
(3)

NO

N/A

foreip. accormt a regulated eotity in its home couotry? (e.g., is the manager/adviser a banh brokerdealer, adviser, etc. subject to regulation in its home cormtry)
Is the manager/adviser or

).ES

NO

N/A

(4)

1125

the managr/adviser or foreip. accormt supplied all relevant legal documeots related to the establisbment ofthe entity ant the authority of its representatives, as well as its most receotfinancials?

]IES
(s)
Is the manager or

NO

foreip. account well known within the financiat comrlmity in &e United NO

States?

YES

70

October 1998

(6)

To the best ofyour knowledge, has the e,ntity executed br:siness with any other area of Nomr:ra?

YES
O

NO

Are you familiar with the individual who represents the manager/adviser or foreign eatity? (e.g., have you persooally met with him or is his reputation well known)

YES (8)
Has the manager/adviser or

NO

foreip entity provided contact names of reputable financial industy and professional references? (e.g., banks, securities and cornurodities firrrs, attorneys, accountants or people involved in the customer's line of br:siness)
YES

NO

If Yes, please provide details:

(9)

Do you have knowledge as to the source of the firuds that will be used in the beneficial owner's accorm(s) or in this

foreip

entiry?

YES

NO

If Yes, what is the sorrrce?

(10)

Does the customer provide a service or maaufacture a product or is it solely an invesfuent vehicle?

Service/Product

Investment Vehicle

(1

l)

does it have policies and procedures that it believes allows it to become confideat in the integrity of its clients and to screeo transactions for possible money laundering? @epeading on the informatioo received it may be necessary to request a copy ofsuch policies.)

If a manager/adviser,

)ES_

NO_

N/A_

We have examined the answers to these questions and consulted v&ea oecessary with the legal aad compliance deparfueot aad its procedures on money laundering, and have made a reasooable determination ttrat we lqxow e,aough about this accotrnt to satidy the obligations stated in the Nomura Holding America, Inc. Anti-Money krmdering Policies and Procedures.

Registered Representative

Supervisor

[Print Name]

[PrintName]

Date

Date

71

October 1998

Exhibit Y
Public Olficial Gift or Entertainment Approval Form
must be pre-approved. Public officials include, among other rhings, federal, state or municipal employees, including public pension firnd runagers. It also includes foreign officials including govemment employees as well as employees of governmently owned businesses. Use this form for the approval process. Approval must be sought at least two business days in advance of the planned provision of the gift or entertainment. After the form is completed and signed by yor:r supervisor, please send it to the Compliance Depar[nent on the l8th floor for approval.

AIl gifts to, or e,ntertainment of, public officials

**************+* ****** **************+*******************:r************:t'B***************

Name ofrequesting employee
:

************ *******

Explain the t5pe of entertainment or gift to be provided:

List the titles and fi:nctions of the recipient(s) of the gift or the invited attendees of the entertainment:

What is the date you wish to give the gift or provide the entertairment:

What is the approximate value of the proposed grft or entcrtainment:

(signature to be obtained prior to submission to Compliance Dept)

Name of Supervisor: Date: Signature of approving Compliance Officer:

Compliance Officer Narne:

Date:

LU97

72

Octobcr 1998

Exhibit Z

CERTITICATION
In connection with all purchases of bearer-form debt obligations ("Bearer Debt") from The Nomura Securities Co., Ltd., and all subsidiaries thereof (together, "Nomura"), the undersigned hereby represents and warrants to Nomura as follows:

1.

will be deemed to be repeated each time that

The undersigned acknowledges that offers and sales of Bearer Debt will be made to the undersigned by Nomura during the period ending three years from the date hereof in reliance on tlle representations and warranties contained herein and that such representations and warranties
an offer

or sale of Bearer Debt is made to the under-

signed at and as of the time of such offer or sale.

2. 3.

The undersigned is a foreign branch of a U.S. "financial institution" as defined by Section 1.16512(c)(1)(v) of the U.S. Treasury Regulations. The undersigned is purchasing Bearer Debt for its own account or for resale and complies with the requirements of Section 165O(3)(A), (B) or (C) of the U.S. Internal Revenue Coie.

[Name of Company]

By: Name:

Tifle:

Date:

73

Octobcr 1998