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85-41 Request for Comments on Amendment Concerning Associated Persons' Accounts with Investment Advisers, Banks, and Other Financial Institutions
TO: All NASD Members and Other Interested Persons
LAST DATE FOR COMMENT IS JULY 10, 1985
The National Association of Securities Dealers, Inc. is soliciting comments from members and other interested persons on a proposed amendment to Article III, Section 28 of the NASD's Rules of Fair Practice ("Section 28"), 1/ which would impose certain requirements on associated persons of members in connection with their securities accounts with investment advisers, banks, and other financial institutions. The text of the proposed amendment is attached to this notice.
Section 28 presently provides that an associated person who opens an account or places an order with a member other than the person's employer member is required to notify the executing member of his or her association with the employer member if the associated person has a financial interest in or discretionary authority over the account or order. The provision also requires that the member with which such an associated person opens the account or places the order must notify the person's employer member and provide the member with duplicate confirmations and statements upon request. Section 28 is intended to assure that each associated person's employer member is provided with the necessary information to properly supervise all of the person's securities transactions. A member firm's ability to enforce compliance by its associated persons with certain important NASD rules, (e.g., the Free-Riding Interpretation) is significantly hampered unless the member is provided information on each associated person's securities transactions.
As banks and other financial institutions have come to offer a broader range of securities-related services, there is a greater likelihood that associated persons will establish securities accounts with such institutions. Banks are not required to become registered as broker-dealers with the Securities and Exchange Commission and are not eligible for membership in the NASD. Therefore, they are not subject to Section 28. Investment advisers and certain other financial institutions are likewise not members of the NASD and therefore are not subject to Section 28.
The National Business Conduct Committee and Board of Governors have become concerned that the inapplicability of Section 28 to securities accounts of associated persons with non-members may undermine members' ability to supervise their associated persons and possibly lead to abuses. Accordingly, the NASD is proposing to amend Section 28 to require any associated person to notify the person's employer member when opening a securities account with an investment adviser, bank, or other financial institution or before placing an order to buy or sell securities with such an organization. The amendment would apply to any account or transaction in which the person has a financial interest or discretionary authority. The amendment would also require associated persons to arrange for the employer member to receive duplicate confirmations and account statements upon request.
• All members and other interested persons are invited to submit comments on the proposed amendment. Comments should be received no later than July 10, 1985, and should be directed to:
James M. Cangiano
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Comments received by the indicated date will be considered by the National Business Conduct Committee and the Board of Governors. If the amendment is approved by the Board of Governors, it must thereafter be submitted to the membership for a vote. Any rule change approved by the Board and the membership must be filed with and approved by the Securities and Exchange Commission before becoming effective.
Questions concerning this notice may be directed to Dennis C. Hensley or John F. Mylod at (202) 728-8245 or (202) 728-8288.
Frank J. Wilson
Executive Vice President and General Counsel
PROPOSED AMENDMENT TO ARTICLE III, SECTION 28 OF THE NASD RULES OF FAIR PRACTICE*
Transactions for [Personnel of Another Member] or by Associated Persons
Determine Adverse Interest
Obligations of Executing Member
Obligations of Associated Persons [Associated] Concerning an Account with a Member
Obligations of Associated Persons Concerning an Account with an Investment Adviser, Bank, or Other Financial Institution
Exemption for Transactions in Investment Company Shares
Multiple Terminations (Item 8)
The Form U-5 (4/85) has been revised to incorporate a new item to facilitate a multiple termination with one or more firms under common ownership or control on a single form submission. This should be used when the individual is terminating registrations in the same self-regulatory organizations (SROs) and states with all the affiliated firms entered on the form.
Full/Partial Terminations (Item 9 & Item 10)
The new U-5 has been expanded to require terminations to be specifically identified as a full or partial termination and the complete date of termination is required for each category. To accomplish a full termination (NASD), check the appropriate box under Item 9 and do not complete Item 10. If the form is being filed as a partial termination, (selected state(s) or SROs other than NASD), check the appropriate box under Item 9 and identify only the states/SROs under Item 10 in which the individual is terminating.
Reason For Termination (Item 12)
This category has been changed to address the reason and, in certain cases, require an explanation for an individual's termination. If a box with an asterisk to its left is checked, a brief explanation for the reason must be provided on the adjacent line. Remember, this information must be provided for both full and partial terminations. Answers to Item 12 will no longer have an effect on an individual's disciplinary status in the CRD.
Items 13,14 and 15
The disciplinary questions have been reworked to correspond to Form U-4. An affirmative response to any of these questions will require a special review of the record. Details to "yes" answers must be provided on the reverse of the form, after identifying the item number in question.
Amendments to Form U-5 Disciplinary Questions
Amendments to Form U-5 disciplinary questions should be filed to report the disposition of items pending at the time of initial submission of the form. To amend, complete Items 1 through 4 for identification purposes and amend Items 13 through 15 as appropriate. Include relevant details on the reverse side of the form. Remember, when submitting a U-5 amendment, ONLY Items 13 through 15 may be amended. The CRD will not effect changes to any other item on the form. The form must be manually signed by the appropriate signatory.
IMPLEMENTATION DATES OF FORMS U-4 AND U-5
Beginning on July 1, 1985, and throughout the month of July, the CRD System will accept both Form U-4 (1/81) (the old form) as well as the revised Form U-4 (4/85). Each version of the form is identified by the effective date found in the lower left-hand corner of each page. This dual processing period has been arranged to ensure a smooth transition to the revised form. However, old (1/81) forms received by the CRD after July 31, 1985, will be returned without being processed.
The revised Form U-5 (4/85) will be processed by the CRD effective July 1, 1985. Unlike the Form U-4, the CRD will not accept the Uniform Termination Notice for Securities Industry Registration, the old Form U-5 (2/81), after June 28, 1985. Any old (1/81) forms received after this date will be returned to the firm without being processed. The forms can be identified by the effective date in the lower left-hand corner of the form.
Copies of the revised Forms U-4 and U-5 are enclosed for your information and use. Mechanical reproductions of these forms which are clear, legible and of identical type and size will be accepted. Also, additional supplies of Forms U-4 and U-5 can be ordered through CRD Information Services at (202) 728-8800.
GUIDE FOR CRD FORM FILINGS
The Guide For CRD Form Filings has been revised to incorporate the revisions to Forms U-4 and U-5 and can be ordered for a fee through the CRD Information Services (202) 728-8800.
Questions regarding this notice should be directed to Raymond Heffron at(202) 728-8367.
John T. Wall
Executive Vice President
Member and Market Services
1/ NASD Manual (CCH) ¶2178.
* Deleted language is bracketed; new language is underlined.