FINRA Manual: Contents
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98-47 SEC Approves Changes To Books And Records Requirements
On May 29, 1998, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc.(NASD®) Rule 3110 (the Books and Records Rule) that (i) change the definition of "institutional account" to include the accounts of investment advisers that are now required to register with the states pursuant to the National Securities Markets Improvement Act of 1996 (NSMIA), and (ii) exclude certain customer accounts from the requirement to obtain certain tax and employment information from the customer.
Questions concerning this Notice may be directed to Joseph E. Price, Counsel, Advertising/Investment Companies Regulation, NASD Regulation, Inc., at (202) 728-8877 or Robert J. Smith, Assistant General Counsel, Office of General Counsel, NASD RegulationSM, at (202) 728- 8176.
The Books and Records Rule requires that members obtain certain information for all accounts. The Rule requires that, for accounts other than institutional accounts and accounts limited to money market funds, members must make reasonable attempts to obtain: (i) a customer's tax identification or social security number; (ii) a customer's occupation and the name and address of the employer; and (iii) information about whether the customer is an associated person of another member (Retail Customer Information).
Similarly, NASD Conduct Rule 2310 (Suitability Rule) requires members to make reasonable efforts to obtain certain information, such as the customer's financial status and investment objectives, from retail customers prior to the execution of a transaction. Interpretive Material 2310-3 (IM-2310-3) describes members' suitability obligation in making recommendations to institutional customers. The primary considerations under IM-2310-3 include the customer's capability to evaluate risk independently and the extent to which individual judgment is exercised when making investment decisions.
Accounts Of Registered Investment Advisers
NSMIA and new rules recently adopted by the SEC under the Investment Advisers Act of 1940 (Advisers Act) reallocated regulatory oversight of investment advisers between the SEC and the states. Under the new rules, advisers to registered investment companies and those with assets under management of at least $25 million generally will register exclusively with the SEC. Most others will register exclusively with the states.
The Books and Records Rule provides that, for purposes of both the Books and Records Rule and the Suitability Rule, the term "institutional account" includes the account of an investment adviser registered with the SEC. Consequently, advisory accounts that were considered to be "institutional accounts" when the Retail Customer Information provision in the Books and Records Rule was adopted became excluded from the definition because they migrated to state regulation under NSMIA.
The amendments take into account the bifurcation of investment adviser regulation between the SEC and the states by changing the definition of "institutional account" in subparagraph (c)(4) of the Books and Records Rule to include both investment advisers required to register with the SEC and those required to register with the states. The amendments treat the state-regulated advisory accounts as "institutional accounts" for purposes of the Books and Records Rule and the Suitability
Accounts Limited To Mutual Fund Shares
A primary purpose of obtaining Retail Customer Information is to help a member evaluate the suitability of a recommendation. NASD Regulation has determined that the requirement to obtain Retail Customer Information is burdensome and largely unnecessary as it applies to members who distribute directly marketed mutual funds and other unsolicited accounts that are limited to mutual fund shares and for which no recommendations are made. With regard to the requirement in the Books and Records Rule to obtain a customer's tax identification or social security number, the tax laws already impose obligations on funds to obtain this information.1 The requirement in the Books and Records Rule to determine whether a customer is an associated person of another member also is unnecessary because NASD Conduct Rule 3050, which provides the obligations of executing members when the member knows that a person associated with an employing member has an interest in an account, expressly excludes accounts that are limited to transactions in mutual fund shares.
The amendments thus revise subparagraph (c)(2) of the Books and Records Rule to exclude mutual funds that are not recommended by the member or its associated persons from the obligation to obtain Retail Customer Information. Members are still required to make reasonable efforts to obtain Retail Customer Information for retail accounts that are not subject to these limitations. This change will not affect the need to obtain any information from customers or others in order to meet any other regulatory obligations that may exist.
Text Of New Rule
(Note: New language is underlined; deletions are bracketed.)
3100. Books and Records, and Financial Condition
3110. Books and Records
1 If a customer refuses to provide tax identification, Internal Revenue Service rules require a fund to withhold 31 percent of all redemptions or distributions.