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87-47 Request for Comments on a Proposed New Level of Registration, Designated Assistant Representative-Order Processing, Under Schedule C to the NASD By-Laws

TO: All NASD Members and Other Interested Persons

LAST DATE FOR COMMENT: AUGUST 22, 1987.

EXECUTIVE SUMMARY

The NASD requests comments on a proposed amendment to Schedule C to the By-Laws that would establish a new level of registration — below the level of "Representative" — for persons in member firms whose activities are limited to providing current securities quotations and accepting unsolicited customer orders and unsolicited new accounts.

The text of the proposed amendment is attached.

BACKGROUND

The growth of discount brokerage operations in recent years has raised questions regarding the appropriate level of qualification for persons who accept orders and provide certain related information services on behalf of public customers. Typically, such persons do not solicit transactions or new accounts, render investment advice, or make recommendations to customers regarding the appropriateness of securities transactions. The NASD Board of Governors is concerned that members may be allowing persons to accept customer orders who are not properly registered pursuant to Schedule C to the NASD By-Laws.

The NASD currently requires that persons engaged in accepting customer orders be registered as General Securities Representatives and pass the Series 7 examination. This is the most comprehensive representative examination the NASD administers. The appropriateness of this requirement has been challenged at the SEC and in the courts and, while the NASD's position has been upheld, both the SEC and a federal court have suggested that a more narrow qualification standard may be appropriate for persons in member firms who accept unsolicited customer orders and provide certain related information services.

SUMMARY OF PROPOSED AMENDMENT

The Qualifications Committee of the NASD Board of Governors has proposed a new level of registration, below the level of "Representative," that is designated "Assistant Representative-Order Processing." A new Part IV to Schedule C to the NASD By-Laws would establish this new registration level. This registration level would continue the requirement that persons who accept customer orders be registered and subject to the statutory disqualification and fingerprint screening processes, while establishing a qualification requirement commensurate with their job responsibilities.

Persons registered at this new level would be limited to accepting unsolicited customer orders or accounts and providing current market quotations to the public. Under no circumstances would they be permitted to solicit transactions or new accounts, render investment advice, make recommendations regarding the appropriateness of securities transactions, or function as market makers or traders in securities markets. Members would be required to compensate such persons on an hourly wage or salaried basis only and to directly supervise their activities on the members' premises. Persons registered as Assistant Representatives-Order Processing would not be eligible to register as Representatives or Principals pursuant to Parts I and II of Schedule C to the By-Laws.

The Assistant Representative-Order Processing level of registration is intended to apply to persons employed by members for the sole or primary purpose of accepting unsolicited customer orders — typically, in a discount brokerage operation. The proposed registration level would not affect the "ministerial" exemption from registration contained in existing Part V of Schedule C for certain administrative personnel in member firms. In keeping with long-standing NASD policy and rule interpretations of other self-regulatory organizations, the "ministerial" exemption would continue to apply to administrative personnel who occasionally receive communications from the public at a time when appropriately qualified representatives or principals are unavailable. In these circumstances, unregistered administrative personnel may record and transmit unsolicited customer orders to the firm's normal order-processing channels, provided such orders are subsequently reviewed by a registered principal of the firm and the unregistered personnel do not routinely accept customer orders as part of their normal duties.

* * * * *

The NASD encourages members to comment on these proposals. The NASD Board of Governors requests that commentators specifically address whether this new level of registration would lower the qualification standards for the industry and whether it would be burdensome for firms to supervise their associated persons' activities.

Comments should be directed to:

Mr. Lynn Nellius
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506

All comments and suggestions must be received no later than August 22, 1987. Comments and suggestions received by this date will be considered by the NASD Qualifications Committee and the NASD Board of Governors. If the proposed amendments are approved by the Board, they must be filed with and approved by the Securities and Exchange Commission before they become effective.

Questions concerning this notice may be directed to either Frank J. McAuliffe, Vice President, NASD Qualifications, at (301) 738-6694, or Carole Hartzog, Senior Qualifications Analyst, at (301) 738-6696.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Attachment

AMENDMENT TO SCHEDULE C TO THE NASD BY-LAWS

NEW PART IV

IV

REGISTRATION OF ASSISTANT REPRESENTATIVE-ORDER PROCESSING

(1) All Assistant Representatives-Order Processing Must Be Registered—All persons associated with a member who are to function as Assistant Representatives-Order Processing shall be registered with the Corporation and shall pass a Qualification Examination for Assistant Representatives-Order Processing specified by the Board of Governors before such registrations may take effect.
(2) Definition of Assistant Representative-Order Processing—The term "Assistant Representative-Order Processing" shall apply to persons associated with a member who accept telephone or other communications from the public for the purposes of providing current securities quotations, accepting unsolicited customer orders for submission to the normal execution operations of the member, and/or accepting unsolicited new accounts for submission to the normal account-approval operations of the member.
(3) Prohibitions—Under no circumstances may an Assistant Representative-Order Processing solicit transactions or new accounts on behalf of members, render investment advice, or make recommendations to customers regarding the appropriateness of securities transactions, or effect transactions in securities markets on behalf of members.
(4) Compensation—Members may only compensate Assistant Representatives-Order Processing on an hourly wage or salaried basis and may not in any way directly or indirectly relate their compensation to the number or size of transactions effected for customers or to the number of accounts submitted to the member's account-approval operations.
(5) Supervision—The activities of Assistant Representative-Order Processing must be conducted on the premises of a member under the direct supervision of an appropriately registered principal.
(6) Requirement for Examination on Lapse of Registration—Any person whose most recent registration as an Assistant Representative-Order Processing has been terminated for a period of two (2) or more years immediately preceding the date of receipt by the Corporation of a new application shall be required to pass a Qualification Examination for Assistant Representative-Order Processing.

July 27, 1987

TO: Selected NASD Members and Other Interested Persons

RE: Communications With the public

The purpose of this notice is to express the concern of the NASD Advisory Council regarding the advertising developed by some NASD members that are subsidiaries or affiliates of banks, insurance companies, and other financial institutions (hereinafter referred to as "financial institutions") and to remind NASD members of their responsibilities under the NASD's advertising rule.

The Advisory Council, which is comprised of the Chairman of each District Business Conduct Committee in the 14 NASD District Offices, meets twice a year to consider major issues and problems in the districts and to make recommendations to the NASD Board of Governors as to those issues that are important to the industry.

Article III, Section 35 of the NASD Rules of Fair Practice governs members' communications with the public. In addition to the filing requirements for such communications, the rule sets forth standards that basically require accuracy, balance, and substantiation of information presented in members' advertising and sales literature. The Advisory Council recognizes that certain standards for securities advertising differ from those applicable to financial institutions' advertising and believes that these differences may cause confusion for financial institutions preparing material subject to Article III, Section 35.

The following are the major areas in which the Advisory Council noted problems:

1. Prominent Disclosure of the NASD Member's Name

Article III, Section 35(d)(2)(A) requires that advertising and sales literature contain the name of the member. Such material should clarify which products and services are offered by the NASD broker-dealer member and which are offered by the financial institution or other subsidiary. If the material solely concerns business of the broker-dealer, the financial institution may be referred to in order to identify the location of the broker-dealer's services, but such reference should not appear prominently. The potential client should be able to determine which company is the broker-dealer and there must be a clear distinction between the services and products offered by the broker-dealer and those offered by the financial institution. There should be no implication that the financial institution offers securities products or services.

2. Discount Commission Advertising

Many NASD member financial institutions offer discount brokerage services to their clients. The NASD Board of Governors has long recognized the importance of adequate disclosure in written materials promoting commission discounts. Recommendations were developed to assist members in preparing material that is accurate, fair, not misleading, and consistent with the standards set forth in NASD rules. It is not intended that all the recommended disclosures be included in every public communication. However, if the content of the communication dictates specific disclosure, such disclosure must be made. A copy of these recommendations is attached as Exhibit A.

3. Investment Company Advertising

Another area in which a significant number of financial institutions are involved is the sale of investment company securities. In addition to the standards in the NASD advertising rule, such communications, depending on their content, are subject to SEC Rule 156 and also may be subject to either SEC Rules 134, 482, or 135a. The SEC rules set forth specific conditions under which investment company securities may be advertised and are contained in the Investment Company Securities section of the NASD Manual, beginning on page 5041.

Communications concerning investment company securities can be complicated and technical, particularly when related to investment results or comparisons. To assist members in preparing investment company sales material and in complying with the NASD's general rules, the NASD Investment Companies Committee developed and the Board of Governors approved the "Guidelines Regarding Communications With the Public About Investment Companies and Variable Contracts."

These guidelines apply to sales literature as well as to communications subject to the above-mentioned SEC rules. They are also contained in the Investment Company Securities section of the NASD Manual, beginning on page 5101.

The NASD distributed two additional notices to provide guidance to members in this area. The first (Notice to Selected Members, dated December 29, 1983) concerns the advertising of mutual fund performance over short time periods. The second (Notice to Members 86-41, dated May 27, 1986) concerns the presentation of yield quotations for investment company securities. Both of these notices strongly emphasize the importance of disclosing all material information. The general principles outlined apply to such communications of all members. The notices are attached as Exhibits B and C, respectively.

* * * * *

Some financial institutions utilize a consolidated facility to prepare and distribute advertising and sales literature. Financial institutions are urged to familiarize their staff with the above information, particularly personnel involved in preparing communications with the public. Members are also urged to ensure that their advertising and sales literature meet the conditions set forth in Article III, Section 35 of the NASD Rules of Fair Practice and to ensure that customers have no basis for claiming that they were misled by the content of such communications.

Questions concerning this notice may be directed to Ms. R. Clark Hooper, Director, NASD Advertising, at (202) 728-8330.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

Attachments

Exhibit A

RECOMMENDATIONS CONCERNING ADVERTISING AND PROMOTION OF COMMISSION DISCOUNTS

NASD rules require that members' communications with the public be accurate, fair and not misleading. An investor considering the services of a broker-dealer, including a "discount" broker, should be informed of all factors material to his use of such broker-dealer's services. There are many variables in the charges and services offered by broker-dealers and it isn't reasonable to expect their every variation be included in media advertising, given the expense of such advertising. Relevant factors not included in advertisements should be communicated to persons responding, however. Certain items should be included in the advertisement itself, when the advertisement would be misleading in the absence of their disclosure.

Generally, any communication with the public concerning "discount" brokerage should reflect recognition of the following factors:

  • Stocks are not the only types of securities available. Commission rates may vary markedly for other types of products (e.g., options, bonds).
  • Certain types of securities offered by prospectus cannot normally be sold at prices reflecting discounts from the commission or sales charge stated in the prospectus (e.g., mutual funds and certain other registered offerings).
  • Generalized, unqualified statements concerning a commission or discount rate will be inherently inaccurate and misleading if there are any undisclosed factors which would cause that rate to be unavailable (e.g., minimum commissions, volume requirements, separate service charges, etc.).

Importance of Full Disclosure

The public will have a much better understanding of a member's services, and future disputes will be minimized if certain disclosures are made, preferably in writing. The most common method of disclosing these items is through use of a brochure or mailer. Examples of important basic disclosures include:

1. The basic commission rate schedule of the member, including variations in the rates applicable to larger transactions or to transactions in options, bonds, or other products.
2. Any applicable minimum commission, minimum transaction size, registration fee or initial deposit requirement.
3. Any special service charges applicable to limit orders, safekeeping of securities, transfer or issue of certificates, odd lot transactions, research, or other services.
4. If applicable, the services not offered by the firm which might be expected by an investor. The most common services eliminated by discount brokers are personalized recommendations and research.
5. If mutual funds or fixed-price products are specifically mentioned in advertising or sales literature, the fact that discounts on such products are not available. If such products are not offered by the member, consideration should be given to so stating.
6. If the member ever acts as principal, as a market maker or otherwise, the policies of the member in this regard and the relevance to such transactions, or lack thereof, of the member's agency commission rates.
7. Any other factor which might be necessary to any understanding of the member's rates or services. Where a member's rates may be difficult to determine due to the combined impact of minimum commissions, separate registration or service charges, etc., use of specific examples should be considered.

Discount Advertising

While, as noted, including all of the above disclosures in every advertisement or public communication may be neither necessary nor practical, advertisements which omit such items should include an offer to furnish further information. Also, the content of a particular advertisement may dictate specific disclosures in order to make it accurate and not misleading, and there are certain unwarranted implications which can be contained in advertisements which are not carefully prepared. For example, advertisements and promotional material should disclose:

  • any time limitations or material conditions applicable to a rate or discount advertised, especially the conditions under which an advertised maximum savings would be achieved. For example, if a minimum transaction amount is required, or the savings applies only to OTC trades, such should be disclosed.
  • what an advertised discount is based upon, e.g., the member's normal commission rates, formerly existing fixed rates, recent survey of competitors, etc. If the discount is based upon a survey of competitors, the date and nature of such survey should be disclosed, and consideration should be given to disclosing the details of the survey, or at least offering such details.
  • any factor which would alter an advertised discount which is stated or implied to be a minimum or across-the-board discount. A minimum commission, volume requirement, special service charge, etc., would fall into this category. Even where the context of a particular advertisement doesn't require it, disclosure of a minimum commission charge will reduce both misunderstandings and inquiries from unqualified respondents.

Implications to be avoided in discount advertising include:

  • that a single discount or rate is applicable to all transactions in all types of securities.
  • that all products and services typically offered by broker-dealers are available when such is not the case.
  • that a particular service offered (or exchange membership) is that of the advertising member when it is provided by a correspondent or clearing firm.
  • that a survey of competitors' commission rates is current when such is not the case. (It may be misleading to base an advertised discount on a survey which isn't current.)

Adherence to principles of full disclosure to clients will reduce troublesome and potentially costly misunderstandings about rates or services. The Association stands ready to assist members in applying its standards with respect to advertising and sales literature (primarily Article III, Section 35 of the Rules of Fair Practice). Inquiries should be directed to:

NASD Advertising Department
1735 K Street, N.W.
Washington, D.C. 20006
(202) 728-8330


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