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88-65 Proposed Amendment: Use and Disclosure of Member Names; Last Date for Comment: October 3, 1988
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REQUEST FOR COMMENT
The NASD requests comment on a proposed amendment to Article Ml, Section 35 of the NASD Rules of Fair Practice that would establish standards regarding the use and disclosure of member names in advertising, sales literature, business cards, arid letterhead.
The proposed amendment reflects the NASD's concern that members of the public may be confused by advertising or sales literature that either fails to refer to an NASD member firm by its registered name, or includes 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 advertising or sales literature, the public may be confused or misled as to which entity does, in fact, offer 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 AND SUMMARY OF AMENDMENT
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, non-member entities, such as financial planners, insurance companies, banks, and thrift institutions, have increasingly become in volved in the securities field. As a consequence, the names of both NASD member firms and non-member entities often appear in a single advertisement or item of sales literature. Sometimes, advertising and sales literature that have included the names of both member and non-member entities have done so in ways that made it difficult for the public to identify which entity was actually offering securities. Similar problems have arisen when an individual who is affiliated with member and non-member 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 has also developed during recent years stems from some members' use in advertising and other public communications of fictitious names or variations upon member names. Once again, this practice can make it difficult for the public to identify the NASD member with which it is 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 "doing business as" (DBA) name rather than the name set forth on their Forms BD; (2) members use "generic" names that are based upon the firm name to promote certain areas of the firm's business; (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 advertising the 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, the proposed amendment sets forth general standards that would apply to any business card, letterhead, or other communication used in the promotion of a member's securities business. These general standards would require, among other things, that the names of NASD members be disclosed as prominently as any non-member entities named in communications; that when multiple entities are named in one communication, the nature of the relationships among the named entities and the products offered by each entity be made clear; that when an individual and multiple entities are named in one communication, the nature of the individual's relationship with each entity be clearly identified. The proposed general standards would also prohibit individuals from including in communications references to non-existent degrees or designations, or the use of bona fide degrees or designations in a misleading manner.
In addition to such general standards, the proposed amendment sets forth a number of specific standards that would apply to advertising and other commercial communications with the public. The specific guidelines seek to address four recurring problems that have been seen in advertising and sales literature.
Fictional Names. Under these specific guidelines, members would be permitted voluntarily to use fictional, or DBA, designations only when the DBA name has been filed with the NASD and the SEC on the Form BD, and when it was the only name under which the member conducts business. 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 would also require that, whenever possible, the member use the same DBA name in every jurisdiction that requires the use of a DBA. The proposed amendment would further 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. As to the use of generic names to promote certain areas of a member firm's business, the amendment would permit an NASD member to use an altered version of the firm name only when the generic name is a derivative of the name of the member, the member name is disclosed as prominently as the generic name, and the relationship between the member and the generic entity is made clear.
"Division of" Designations. With respect to the use of "division of" and similar designations, the amendment would permit members to designate a portion of their businesses 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 would also require that the member name be disclosed as prominently as that of the division, 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 non-member entities of phrases such as "service of" or "securities offered through," followed by the name of a member firm, the amendment would permit the use of member names in this manner only if the name of the member were disclosed as prominently as that of the non-member entity, and the securities function were clearly identified as a function of the member rather than the financial planning or other entity that was also named in the communication.
The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:
Mr. Lynn Nellius
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506
Comments must be received no later than October 3,1988. Comments received by this date will be considered by the NASD National Business Conduct Committee and NASD Board of Governors. Any changes to the NASD Rules of Fair Practice that are approved by the Board must be voted upon by the membership and thereafter filed with and approved by the Securities and Exchange Commission before becoming effective.
Questions concerning this notice can be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330 or Anne H. Wright, NASD Office of General Counsel, at (202)728-8815.
AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE
NOTE: New language is underlined.
COMMUNICATIONS WITH THE PUBLIC
In addition to the provisions of subsection (. of this Section, members' public communications shall conform to the following provisions concerning the use and disclosure of the member's name:
In addition to the foregoing general standards, the following specific standards apply:
- The fictional name shall be used to conduct business only within the state or jurisdiction requiring its use.
- 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.
- Any communication, including business cards and letterhead, 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.
- a division resulting from a merger or acquisition that will continue the previous firm's business; or
- a functional division that will conduct one specialized aspect of the firm's business.