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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

EXECUTIVE SUMMARY

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.

GENERAL STANDARDS

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.

SPECIFIC STANDARDS

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
Secretary
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

Sec. 35.



(g) Standards Applicable to the Use and Disclo; of the NASD Member's Name
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:
(1) General Standards
(A) Any business card, letterhead or other communication used in the promotion of a member's securities business must clearly and prominently set forth the name of the NASD member.
(B) The name of the NASD member firm shall be in type size at least as prominent as that used for any other entity named in the communication.
(C) If more than one entity is named in the communication, any relationship among the entities shall be clear. However, if there is r direct relationship, the communication shall not imply that there is one.
(D) If an individual is named in the com munication, the nature of the affiliation or relationship of the individual with each entit shall be made clear.
(E) Individuals shall not create or award to themselves non-existent degrees or designa tions or use bona fide designations in a mis leading manner.
(F) If products or services are offered by companies identified in the communication, there shall be no confusion as to which entity is offering which products and/or services. Securities products and services shall be clearly identified as being offered by the registered broker/dealer.
(G) If the 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 (e.g., an insurance agency business card should not accompany an offer of securities).
(H) The positioning of disclosures can create confusion 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.
(I) Any references to memberships, (e.g.,NASD, SIPC, etc.) shall be clearly identified as belonging to the entity that is the actual member of the organization.
(2) Specific Standards
In addition to the foregoing general standards, the following specific standards apply:
(A) Doing Business As: An NASD member may conduct business under a fictional name provided the following conditions are met:
(i) Non-Required Fictional Name: A member may voluntarily conduct its business under 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:
  • 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.
(B) Generic Names: An NASD member may use altered versions of the firm name to promote certain areas of the firm's business or as an "umbrella" tag line to promote name recognition, provided the following conditions are met:
(i) The generic name shall be a derivative of the name of the member.
(ii) The name of the member shall be prominently disclosed as prominently as the generic name.
(iii) The relationship between the entities named shall be made clear.
(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:
  • 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.
(ii) The name of the member shall be disclosed as prominently as the name of the division.
(iii) The division shall be clearly identified as a division of the member firm.
(D) "Service of": An NASD member firm may identify its brokerage service being offered through other institutions as a service of the member, provided that the following conditions are met:
(i) The name of the member shall be disclosed as prominently as the name of the service.
(ii) The service shall be clearly identified as a service of the member firm.

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