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90-73 Proposed 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; Last Voting Date: December 5, 1990
*These are suggested departments only. Others may be appropriate for your firm.
NASD members are invited to vote on a proposed amendment to Article III, Section 28 of the NASD Rules of Fair Practice that would require an associated person to notify the executing member in writing of the employment relationship that exists with the employer member, and to notify the employer member in writing prior to opening an account or placing an initial order with the executing member.
Article III, Section 28(c) currently requires a registered representative, prior to 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 does not, however, require the notice to be in writing. In addition, there is no specific provision in the Association's Rules of Fair Practice that requires the registered representative to inform his or her employer member that he or she is executing trades through another firm.1 The rule, as it stands, places the burden on the executing member to notify the employer member and to provide duplicate confirmations or such other information as the employer member may require. At present, many, but not all firms have internal compliance procedures requiring that notice be given to the employer. If such notification were required, the Board of Governors believes that it might allow member firms to more directly detect the existence of possible rule violations, including potential insider trading by associated persons.
The Board, therefore, proposes to amend Section 28 to require 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 was published for comment in Notice to Members 90-50 (August 1990), and differed slightly from the version published for vote here. The NASD received 17 comment letters on the amendment as originally proposed. Nine were generally in favor, six were generally opposed, and two were opposed due to misunderstandings.
The initial version included a provision that would have required the employer member to approve the initial trade or opening of the account. Based on comments received, the Board of Governors decided to amend the proposal to eliminate the approval requirement.
A number of comments submitted by members with limited securities businesses recommended that the proposed amendment be limited to member firms with general securities licenses and firms conducting a traditional retail brokerage business, and that exemptions be created for specialty firms such as life insurance companies and broker-dealers engaged exclusively in the sale of variable products or limited partnership interests. They argued that the amendment's impact was unduly harsh on the limited broker-dealers without the justification of a reasonable benefit to the industry.
After consideration of these comments, the NASD Board of Governors felt that the elimination of the approval requirement would reduce the responsibility of limited broker-dealers, thereby alleviating what may have been interpreted as an onerous burden. The Board decided that notification of each firm of the opening of an account should still be required, while allowing the firms to decide independently in what manner to respond. The requirement that an employer member receive notification is far less burdensome, in the Board's opinion, than the requirement that the employer member approve the opening of the account or initial trade.
Furthermore, the amendment would 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. The Board believes that the amendment would also, among other things, prevent instances in which trades may be made on inside information because the employer member was not aware of the existence of the account with another member. For these reasons, the Board believes that the rule amendment, as currently proposed for member vote, is necessary and appropriate.
Several comment letters raised the concern that all trades by an associated person through a nonemployer member would be subject to Section 28. That is not the intention of the Board of Governors. This amendment will require notice only prior to the opening of an account or, in the event an associated person makes a trade without opening an account, prior to the execution of the initial order. Written notification will not be required for any subsequent trades.
REQUEST FOR VOTE
The NASD Board of Governors therefore believes that this change to the Rules of Fair Practice is necessary and appropriate and recommends that members vote their approval. Please mark the enclosed ballot according to your convictions and return it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than December 5, 1990.
Questions concerning this notice may be directed to T. Grant Callery, Vice President and Deputy General Counsel, or Maureen Eisenberg, Attorney, Office of General Counsel, at (202) 728-8285 or (202) 728-8245, respectively.
PROPOSED 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.
1The 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.