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91-26 SEC Approval of Amendment Re: Use and Disclosure of Member Names

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EXECUTIVE SUMMARY

The Securities and Exchange Commission (SEC or "Commission") has approved an amendment to Article 111, Section 35 of the NASD Rules of Fair Practice that establishes standards regarding the use and disclosure of member names in public communications, including business cards and letterhead. The amendment reflects the NASD's concern that members of the public may be confused by public communications that either fail to refer to an NASD member firm by its registered name or include unclear references to both NASD member firms and entities that are not NASD members. Unless the identity of and the products offered by an NASD member firm are made clear in such communications, there is a possibility that the public will be confused or misled regarding which entity is, in fact, offering securities. The amendment seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public. The text of the amendment follows this notice.

BACKGROUND AND SUMMARY

The amendment establishes standards regarding the use and disclosure of member names in public communications, including business cards and letterhead. The change reflects the concern of the Board of Governors that members of the public may be confused by public communications that either fail to refer to an NASD member firm by its registered name or include unclear references to both NASD member firms and entities that are not NASD members. The amendment is based on the premise that, unless the identity of and the products offered by an NASD member firm are made clear in such communications, there is a possibility that the public will be confused or misled regarding which entity is, in fact, offering securities. The revision seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public.

The proposed amendment was submitted to the membership for comment in 1988. In response to the comment letters received, significant modifications were made to the proposed amendment. Consult Notice to Members 88-65 and 89-22 regarding the differences between the amendment as originally proposed and as approved by the membership. The proposed amendment was filed with the SEC April 25, 1990, and was published for comment in the Federal Register. In response to comment letters received by the SEC, the NASD made further modifications to the amendment that were approved by the membership. Consult Notice to Members 90-62 regarding these modifications. The revised version of the amendment was filed with the SEC January 28, 1991. The SEC approved the amendment March 27, 1991, in Exchange Act Release No. 34-29016.

The general standards contained in the amendment require, among other things, that the names of NASD members be disclosed clearly and prominently; that when multiple entities are named in one communication, the nature of the relationships, if any, between the NASD member and the named entities, and the products offered by each entity be clear; and that when an individual and multiple entities are named in one communication, the nature of the individual's relationship with the NASD member be clearly identified. The general standards also prohibit communications from including references to nonexistent degrees or designations, and bar the use of bona fide degrees or designations in a misleading manner when referring to individuals.

SPECIFIC STANDARDS

In addition to general standards, the amendment sets forth a number of specific standards to address certain recurring problem areas.

  • Fictional Names — Under the amendment, members may voluntarily use fictional or DBA designations in communications when the DBA name has been filed with the NASD and the SEC on the Form BD and is the only name under which the member is recognized. In cases in which a state or other regulatory authority requires a member to use a DBA (e.g., because the member's NASD-approved name was deemed too similar to that of another corporation registered in the state), the amendment permits the member to use the DBA only in the jurisdiction that requires its use. With respect to required use of DBA names, the amendment also requires that, whenever possible, the member use the same DBA name in every jurisdiction that requires the use of a DBA. In addition, the amendment requires, with respect to a required DBA, that members clearly disclose both the name of the member as set forth on the Form BD and the fact that the firm is using a DBA designation in the particular state or jurisdiction.

  • Generic Names — Under certain circumstances, the amendment permits members to use altered versions of the firm name to promote certain areas of a member firm's business or to use an "umbrella" tag line to promote name recognition. The amendment allows the use of generic names so long as the member name is clearly and prominently disclosed, the relationship between the generic name and the member is clear, and there is no implication that the generic is the name of the registered broker-dealer.

  • "Division of" Designations — With respect to use of "division of" and similar designations, the amendment permits members to designate a portion of their business in this manner only when the designation is used with respect to a bona fide division of the member (i.e., a division that results from a merger or acquisition, or a functional division that conducts a specialized aspect of the member's business). The amendment also requires that the member name be clearly and prominently disclosed, and that the division be clearly identified as a division of the member.

  • "Service of" and "Securities Offered Through" —With respect to the use by financial planners or other nonmember entities of phrases such as "service of" or "securities offered through" followed by the name of a member firm, the amendment requires that the name of the member be clearly and prominently disclosed. In addition, it mandates that the securities function be clearly identified as a function of the member rather than of the financial planning or other entity that also is named in the communication.

  • Derivative Names — Under certain limited circumstances, the amendment permits a member to use a "derivative" of its name, without also including the member's full name, if: (1) the derivative name is used to promote a specific area of the firm's business, and (2) use of the derivative would not be misleading in context. Thus, for example, if a member firm uses a "derivative" name to promote its investment banking business, the firm might be permitted to omit the full firm name from typical "tombstone" advertisements on the ground that the use of a derivative would not be misleading in the context of advertisements that are primarily directed to an institutional, nonretail audience that will not be confused by the absence of the full broker-dealer name.

EFFECTIVE DATE

In order to provide members with sufficient time to consume existing supplies of such business stationery as letterhead, business cards, confirmation forms, and similar printed material, the amendment will not take effect with respect to such printed business stationery until November 1, 1991. In all other respects, the amendment becomes effective June 1, 1991.

Questions concerning this notice can be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330, or Anne H. Wright, Senior Attorney, NASD Office the of General Counsel, at (202) 728-8815.

TEXT OF AMENDED ARTICLE III, SECTION 35 OF NASD RULES OF FAIR PRACTICE

(Note: New language is underlined; deleted language is in brackets.)

COMMUNICATIONS WITH THE PUBLIC

Sec. 35.

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(d) Standards Applicable to Communications with the Public
(1) General Standards

* * *
(C) When sponsoring or participating in a seminar, forum, radio or television interview, or when otherwise engaged in public appearances or speaking activities which may not constitute advertisements, members and persons associated with members shall nevertheless follow the standards of [paragraph] subsections (d) and (g) of this [s]Section.
(2) Specific Standards

In addition to the foregoing general standards, the following specific standards apply:
(A) Necessary Data: Advertisements and sales literature shall contain the name of the member, unless such advertisements and sales literature comply with subsection (g) of this Section. Sales literature shall contain the name of the person or firm preparing the material, if other than the member, and the date on which it is first published, circulated or distributed [(except that, in advertisements, only the name of the member need be stated and except also that, in any so-called "blind" advertisement used for recruiting personnel, the name of the member may be omitted)]. If the information in the material is not current, this fact should be stated.

* * *

(g) Standards Applicable to the Use and Disclosure of the NASD Member's Name
(1) In addition to the provisions of subsection (d) of this Section, members' public communications shall conform to the following provisions concerning the use and disclosure of member names. The term "communication" as used herein shall include any item defined as either "advertising" or "sales literature" in subsection (a) of this Section. The term "communication" shall also include, among other things, business cards and letterhead.
(2) General Standards
(A) Any communication used in the promotion of a member's securities business must clearly and prominently set forth the name of the NASD member. This requirement shall not apply to so-called "blind" advertisements used for recruiting personnel or to those communications meeting the provisions of subsection (g)(3) of this Section.
(B) If a nonmember entity is named in a communication in addition to the member, the relation ship, or lack of relationship, between the member and the entity shall be clear.
(C) If a nonmember entity is named in a communication in addition to the member and products or services are identified, no confusion shall be created as to which entity is offering which products and services. Securities products and services shall be clearly identified as being offered by the member.
(D) If an individual is named in a communication containing the names of the member and a non-member entity, the nature of the affiliation or relationship of the individual with the member shall be clear.
(E) Communications that refer to individuals may not include, with respect to such individuals, references to nonexistent or self-conferred degrees or designations, nor may such communications make reference to bona fide degrees or designations in a misleading manner.
(F) If a communication identifies a single company, the communication shall not be used in a manner which implies the offering of a product or service not available from the company named.
(G) The positioning of disclosure can create confusion even if the disclosures or references are entirely accurate. To avoid confusion, a reference to an affiliation (e.g., registered representative) shall not be placed in proximity to the wrong entity.
(H) Any reference to memberships (e.g., NASD, SIPC, etc.) shall be clearly identified as be-longing to the entity that is the actual member of the organization.
(3) Specific Standards

The foregoing standards set forth in subsections (g)(1) and (g)(2) shall apply to all communications unless at least one of the following special circumstances exists, in which case the standards set forth herein would supersede the standards in subsections (g)(1) and (g)(2).
(A) Doing Business As: An NASD member may use a fictional name in communications provided that the following conditions are met:
(i) Non-Required Fictional Name: A member may voluntarily use a fictional name provided that the name has been filed with the NASD and the SEC, all business is conducted under that name and it is the only name by which the firm is recognized.
(ii) Required Fictional Name: If a state or other regulatory authority requires a member to use a fictional name, the following conditions shall be met:
(1) The fictional name shall be used to conduct business only within the state or jurisdiction requiring its use.
(2) If more than one state or jurisdiction requires a firm to use a fictional name, the same name shall be used in each, wherever possible.
(3) Any communication shall disclose the name of the member and the fact that the firm is doing business in that state or jurisdiction under the fictional name, unless the regulatory authority prohibits such disclosure.
(B) Generic Names: An NASD member may use an "umbrella" designation to promote name recognition, provided that the following conditions are met:
(i) The name of the member shall be clearly and prominently disclosed;
(ii) The relationship between the generic name and the member shall be clear; and
(iii) There shall be no implication that the generic name is the name of a registered broker/dealer.
(C) Derivative Names: An NASD member may use a derivative of the firm name to promote certain areas of the firm's business, provided that the name of the member is clearly and prominently disclosed. Absent such disclosure, the following conditions must be met:
(i) The name used to promote a specific area of the firm's business shall be a derivative of the member name; and,
(ii) The derivative name shall not be misleading in the context in which it is being used.
(D) "Division of": An NASD member firm may designate an aspect of its business as a division of the firm, provided that the following conditions are met:
(i) The designation shall only be used by a bona fide division of the member. This shall include:
(1) a division resulting from a merger or acquisition that will continue the previous firm's business; or
(2) a functional division that conducts or will conduct one specialized aspect of the firm's business.
(ii) The name of the member shall be clearly and prominently disclosed. (iii) The division shall be clearly identified as a division of the member firm.
(E) "Service of/Securities Offered Through": An NASD member firm may identify its brokerage service being offered through other institutions as a service of the member, provided that the following conditions are met:
(i) The name of the member shall be clearly and prominently disclosed, (ii) The service shall be clearly identified as a service of the member firm.
(F) Telephone Directory Line Listings, Business Cards and Letterhead: All such listings, cards or letterhead shall conform to the provisions of Article III, Section 27(g)(2) of the Rules of Fair Practice.

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