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89-22 Proposed Amendment Re: Use and Disclosure of Member Names Last Voting Date: April 3, 1989

SUGGESTED ROUTING*

Senior Management
Legal & Compliance
Syndicate

*These are suggested departments only. Others may be appropriate for your firm.

IMPORTANT MAIL VOTE

EXECUTIVE SUMMARY

The NASD invites members to vote on a proposed amendment to Article III, Section 35 of the NASD Rules of Fair Practice. The amendment would establish standards regarding the use and disclosure of member names in public communications, including business cards and letterhead. The proposed 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 the identity of the entity that is, in fact, offering securities. The proposed 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

Article III, Section 35 of the NASD Rules of Fair Practice governs members' communications with the public. Among the standards set forth in the rules are requirements that all advertising and sales literature contain the name of the NASD member and that no material fact be omitted if the omission would cause the communication to be misleading. In recent years, nonmember entities, such as financial planners, insurance companies, banks, and thrift institutions, increasingly have become involved in the securities field. As a consequence, the names of both NASD member firms and nonmember entities often appear in a single advertisement or item of sales literature. Sometimes, communications that have included the names of both member and nonmember entities have done so in ways that made it difficult for members of the public to identify which entity actually was offering securities. Similar problems have arisen when an individual affiliated with member and nonmember entities is named in public communications, but the nature of the individual's relationships with named member and nonmember entities is left unclear. A related problem that also has developed during recent years stems from some members' use of fictitious names or variations on member names. Once again, this practice can make it difficult for members of the public to determine the identity of the NASD member with which they are dealing.

The recurrent problems in this area can be divided into five broad categories. Generally speaking, problems of public confusion have tended to occur when (1) NASD members conduct business under a fictional or "doing business as" (DBA) name rather than the name set forth on their Forms BD; (2) members use "generic" names that are to promote certain areas of the firm's business or to promote name recognition; (3) the term "division of" is used to distinguish those divisions of the member that conduct specialized businesses; (4) members permit certain firms, primarily financial planning firms, to use in public communications phrases such as "service of" or "securities offered through," followed by the name of the NASD member; or (5) members use confusing or misleading business cards and letterhead that incorporate one or more of the foregoing characteristics.

To address these problem areas, in September 1988 the NASD issued Notice to Members 88-65, which solicited member comment on a proposed amendment that contained both general and specific standards regarding members' public communications. The proposed amendment set forth herein is substantially similar to the proposal set forth in Notice to Members 88-65, although a number of significant revisions, discussed more fully below, were made in response to comments received.

EXPLANATION

General Standards

The general standards contained in the proposed amendment would require, among other things, that the 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 proposed general standards also would prohibit communications from including references to nonexistent degrees or designations, or the use of bona fide degrees or designations in a misleading manner when referring to individuals.

Specific Standards

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

  • Fictional Names. Under the proposed amendment members would be permitted voluntarily to use fictional or DBA designations in com munications 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 would permit the member to use the DBA only in the jurisdiction that requires its use. With respect to required use of DBA names, the proposed amendment also would require that, whenever possible, the member use the same DBA name in every jurisdiction that requires the use of a DBA. In addition, the proposed amendment would require, with respect to a required DBA, that members clearly disclose in any communication 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 proposed amendment would permit 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 proposed amendment would permit 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 name is the name of the registered broker-dealer.
  • "Division of" Designations. With respect to use of "division of" and similar designations, the amendment would permit 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 would require 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 would require that the name of the member be clearly and prominently disclosed and the securities function clearly identified as a function of the member rather than of the financial planning or other entity that also is named in the communication.

COMMENTS RECEIVED

The NASD reviewed 41 comments in response to Notice to Members 88-65. After review and discussion of the comments, the Board of Governors made certain revisions, which are reflected in the text of the amendment that follows. The most significant of these are:

(1) To clarify the scope of the proposed amendment, Subsection (g)(l) has been revised to define the term "communication" as encompassing "advertising" and "sales literature," terms already defined in Section 35(a). This Subsection also has been revised to note that the terms "advertising" and "sales literature" include, among other things, business cards and letterhead.
(2) Subsection (g)(2)(A) was revised to in clude an explicit reference to the exclusion of blind recruiting ads provided by the existing Sec tion 35(d)(2)(A).
(3) In response to a large number of negative comments, proposed Subsection (g)(l)(B), which would have required that the name of an NASD member be in type size at least as prominent as that used for any other entity named in a communication, was deleted. In addition, references throughout the balance of the proposed amend ment to such "equal prominence" requirements have been deleted and replaced with requirements that member names be "clearly and prominently" disclosed, in conformity with Subsection (g)(l)(A).
(4) Subsection (g)(2)(D) has been amended so as to require that, when an individual is named in a communication that also names member and nonmember entities, the nature of the individual's relationship to the member be made clear. The previous version would have required that the individual's relationship with each named entity be made clear.
(5) Proposed Subsection (g)(2)(B)(i), which would have required that generic names be derivative of the name of a member, has been deleted.
(6) Subsection (g)(3)(B)(iii), which requires that communications convey no implication that a generic name is the name of a registered broker- dealer, has been added to the proposal.
(7) Subsection (g)(3)(E) has been added to the proposal in response to questions concerning the manner in which the proposed amendment would coordinate with certain amendments to Section 27 that were recently approved by the SEC. The new subsection expressly incorporates the requirements set forth in Article III, Section 27(f)(2) of the Rules of Fair Practice regarding telephone directory listings, business cards, and letterhead.

EFFECTIVE DATE

If the foregoing proposal is approved by the membership and by the Securities and Exchange Commission (SEC), the Board of Governors believes that it is appropriate to provide members with sufficient time following SEC approval to use existing supplies of such business stationery as letterhead, business cards, confirmation forms, and similar printed material. Accordingly, the Board has concluded that, insofar as the proposed amendment affects printed business stationery, the amendment should not take effect until six months after publication of a Notice to Members announcing SEC approval of the amendment. The Board contemplates, however, that in all other respects the proposed amendment would become effective 30 days after the publication of a Notice to Members announcing SEC approval of the amendment.

The Board of Governors believes that the proposed amendment is necessary and appropriate and recommends that members vote their approval.

Please mark the attached 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 April 3, 1989.

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

PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE

(Note: New language is underlined.)

COMMUNICATIONS WITH THE PUBLIC

Sec. 35.

(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" shall mean any item defined as either "advertising" or "sales literature," in subsection (a) of this Section. These terms include, among other things, business cards and letterhead.
(2) General Standards
(A) Any communication used in the promo tion of a member's securities business (except those forms of advertising excluded under subsec tion (d)(2)(A) of this Section) must clearly and prominently set forth the name of the NASD mem ber.
(B) If a non-member entity is named in a communication in addition to the member, the relationship, or lack of relationship, between the member and the entity shall be clear.
(C) If a non-member entity is named in a communication in addition to the member and products or services are identified, there shall be no confusion as to which entity is offering which products and services. Securities products and ser vices 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 non-existent or self-conferred degrees or designations, nor may such communica tions make reference to bona fide degrees or desig nations 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 createconfusion 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 belonging to the entity that is the actual member of the organization.
(3) Specific Standards
In addition to the foregoing general standards, the following specific standards apply:
(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 jurisdic tion requiring its use.
(2) If more than one state or jurisdic tion requires a firm to use a fictional name, the same name shall be used in each, wherever pos sible.
(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 or use altered versions of the firm name to promote certain areas of the firm's provided 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.
(iii) There shall be no implication that the generic name is the name of a registered broker/dealer.
(C) "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 hat will continue the previous firm's business; or
(2) a functional division that 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.
(D) "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 follow ing 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.
(E) Telephone Directory Line Listings, Business Cards, and Letterhead: AH such listings, cards, or letterhead shall conform to the provisions of Article III, Section 27(f)(2) of the Association's Rules of Fair Practice.

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