FINRA Manual: Contents
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91-27 SEC Approval of Amendment to Article III, Section 28 of the Rules of Fair Practice Re: Associated Person Notifying Employer Prior to Opening Securities Account With Another Member
The Securities and Exchange Commission (SEC) has approved an amendment to Article III, Section 28 of the NASD Rules of Fair Practice requiring an associated person to notify the employer member in writing prior to opening an account or placing an initial order with the executing member and to notify the executing member in writing of the employment relationship that exists with the employer member. The text of the amendment, which takes effect June 1, 1991, follows this notice.
Prior to the approval of this amendment by the SEC, Article III, Section 28(c) required a registered representative, before opening an account or executing trades at a firm other than his or her employer, to inform the executing member firm of his or her status as an associated person. This provision did not, however, require the notice to be in writing. In addition, there was no specific provision in the Association's Rules of Fair Practice that required the registered representative to inform his or her employer member that he or she was executing trades through another firm.1 Section 28(c) placed the burden on the executing member to notify the employer member and to provide duplicate confirmations or such other information as is required by the employer member.
The NASD believes that requiring such notification by the associated person will provide additional assurances that the registered representative, the employer member firm, and the executing member firm have satisfied their respective obligations under the federal securities laws and the Rules of Fair Practice. Furthermore, the NASD believes that placing the burden of notification on the employee will prevent the likelihood that the notification inadvertently will be overlooked by the executing member in light of other existing regulatory obligations. The NASD acknowledges that there may be circumstances dictating that an associated person hold an account with someone other than his or her employer member, and this amendment would not serve to prevent that. On the contrary, it would merely require notification of the existence of such an account.
The amendment requires an associated person to provide notice in writing (1) to his or her employer prior to opening or placing an initial order in a securities account with another member, and (2) to the executing member of his or her association with the employer member. This amendment will require notice only prior to the opening of an account and the execution of the initial order. Written notification will not be required for any subsequent trades.
The NASD believes that the amendment will prevent instances in which trades may be made by associated persons on inside information because the employer member was not aware of the existence of the account with another member. The amendment will assist in lessening the occurrence of insider trading by providing the employer member with more complete knowledge of its associated persons' trading activities and consequently an enhanced ability to protect material nonpublic information. The amended notification requirement will assist employer members in creating and enforcing internal compliance procedures and will facilitate more direct and early detection of the existence of potential rule violations.
The SEC approved the amendment on March 6, 1991, in SEC Release No. 34-28945. However, in order to provide sufficient time for members to establish internal procedures to process the information provided in the written notification, the NASD is delaying implementation of the amended notification requirement. Therefore, an associated person's obligation to comply with the amended notification requirement will not start until June 1, 1991. Any accounts opened prior to that date will be subject to the requirements of Section 28(c) prior to this amendment.
Questions concerning this notice may be directed to P. William Hotchkiss, Director, Surveillance, at (202) 728-8235.
SECTION 28 TO ARTICLE III OF THE NASD RULES OF FAIR PRACTICE
(Note: New text is underlined; deleted text is in brackets.)
Transactions for or by Associated Persons Sec. 28
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Obligations of Associated Persons Concerning an Account with a Member.
1 The transactions subject to Section 28 are not considered to be private securities transactions that need to be approved by the employing member pursuant to Article III, Section 40 of the Rules of Fair Practice.