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87-44 Proposed Amendment to Article III, Section 26(m) of the NASD Rules of Fair Practice Governing Prompt Payment for Investment Company Shares
IMPORTANT MAIL VOTE
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members
LAST VOTING DATE IS AUGUST 6, 1987.
NASD members are invited to vote on a proposal to amend recently adopted Article III, Section 26(m) of the NASD Rules of Fair Practice. (See Notice to Members 86-54, dated July 30, 1986.) The proposed amendment to Section 26(m) would limit the circumstances under which members are required to transmit payments for investment company shares purchased by customers to mutual funds or their agents to those instances in which payments for those shares have actually been received from the customers.
The text of the proposed amendment is attached.
BACKGROUND AND SUMMARY OF PROPOSED AMENDMENT
Article III, Section 26(m) of the NASD Rules of Fair Practice as originally approved by the membership would require members, including underwriters, that engage in direct retail transactions with customers to transmit payments to mutual funds or their agents by the later of trade date plus five business days or by the end of one business day following receipt of a customer's payment for such shares. The rule would also require members to transmit to the mutual fund or its agent payments by the end of the seventh business day following receipt of the customer's order whether or not payment has been received from the customer.
The NASD was advised by the staff of the SEC's Division of Market Regulation that the provision in the rule requiring transmittal, irrespective of receipt of payment, was an impermissible requirement which would violate the provisions of Section 11(d)(l) of the Securities Exchange Act of 1934 (1934 Act). This section prohibits a person that acts as both a broker and a dealer from effecting transactions in which the broker-dealer extends to or maintains credit for a customer on a security that is part of a new issue in which it participated as a member of the selling group or syndicate within thirty days prior to the transaction. Since investment company shares are continuously in registration and members normally offer these shares pursuant to a sales agreement with a principal underwriter, the SEC believes that members that are both brokers and dealers and that offer investment company shares are subject to the provisions of Section 11(d)(l) of the 1934 Act.
The NASD Investment Companies Committee considered various courses of action including limiting the scope of the NASD's rule to members that do not function both as brokers and dealers and petitioning the SEC for a rule exempting such payments from the provisions of Section 11(d)(l). The Committee concluded, however, and the Board of Governors concurred, that the appropriate course of action is to amend the proposal to require that members transmit payments for investment company shares received from customers by the end of trade date plus five business days or within 24 hours after the receipt of a customer's payment, whichever is the later date. Both the Committee and the Board of Governors believe that such an approach will fulfill the primary purposes of the NASD's rule by requiring prompt turnaround of customer funds and by establishing definitive time frames for such action. The amendment would remove the requirement that payments be transmitted in instances in which customer payments have not been received by the member.
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The Board believes that the proposed amendment is appropriate and recommends that members vote their approval.
Please mark the attached ballot according your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than August 6, 1987.
Questions concerning this notice may be directed to A. John Taylor, Vice President, NASD Investment Companies/Variable Contracts, at (202) 728-8328.
Frank J. Wilson
Executive Vice President
and General Counsel
PROPOSED AMENDMENT TO NASD RULES OF FAIR PRACTICE*
Prompt Payment for Investment Company Shares
* New language is underlined; deleted language is bracketed.