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88-50 Registration of Persons Soliciting on Behalf of Members Under Schedule C of the NASD By-Laws.

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EXECUTIVE SUMMARY

In response to member inquiries, the NASD is publishing guidelines that apply to the employment of unregistered persons to contact prospective customers. Unregistered persons may extend invitations to firm-sponsored events and inquire whether the prospective customer wishes to discuss investments with a registered representative or receive investment literature from the firm, provided that the firm observes certain practices with regard to the qualification, training, compensation, and supervision of the unregistered persons.

BACKGROUND

Section (l)(b), Part ffl of Schedule C to the NASD By-Laws defines "representative" as:

"Persons associated with a member.... who are engaged in the investment banking or securities business for the member, including the functions of supervision, solicitation or conduct of business in securities..."

In Notice to Members 85-8, dated July 17,1985, the NASD reviewed the applicability of Schedule C to the employment of unregistered persons to solicit hew accounts on behalf of a member. The notice stated:

"This definition has been consistently interpreted by the NASD to require registration of persons who engage in activities that only constitute a portion of registered representatives' traditional dealings with public customers. Thus, for example, members are required to register persons who are hired to accept orders from public customers, even if these orders are unsolicited; persons who share in the commissions generated from customer accounts; and persons who solicit accounts on behalf of members, notwithstanding any limitation of such solicitations to prepared scripts discussing generic products and services offered by the member."

On March 30,1988, the NASD issued Notice to Members 88-24 and emphasized that the registration requirement articulated above is not intended to "restrict a member's administrative personnel, in the normal course of their duties, from contacting customers regarding routine administrative matters involving customers' accounts or from extending invitations to the public to firm-sponsored events, such as investment seminars at which any substantive presentations and account or order solicitations will be made by appropriately registered personnel."

In response to inquiries from members resulting from Notice to Members 88-24, the NASD wants to clarify the circumstances under which a member may employ unregistered persons to contact prospective customers.

PERMISSIBLE ACTIVITIES OF UNREGISTERED PERSONS

Unregistered persons may contact prospective customers for purposes of:

  • extending invitations to firm-sponsored events at which any substantive presentations and account or order solicitation will be conducted by appropriately registered personnel;
  • inquiring whether the prospective customer wishes to discuss investments with a registered person; and
  • determining whether the prospective customer wishes to receive investment literature from the firm.

Firms employing unregistered persons to perform these functions should observe the following guidelines:

(l) Pursuant to Section (l)(b), Part n of Schedule C to the By-Laws, unregistered persons may not discuss general or specific investment products or services offered by the firm, pre-qualify prospective customers as to financial status and investment history and objectives, or solicit new accounts or orders.
(2) The member should provide unregistered persons with orientation and training that specifically addresses the limitations of such persons' activities, the regulatory consequences of exceeding these limitations, and the fact that such persons are associated persons of the member, subject to the rules of the NASD and its disciplinary authority.
(3) The member should conduct a reasonable investigation of such persons' backgrounds to determine that they are not statutorily disqualified from becoming associated with the member.
(4) Unregistered persons are regarded as employees of the member and should not be compensated on any basis other than a salary or hourly wage.
(5) The member should take reasonable steps to assure that the activities of unregistered persons are consistent with applicable state statutes and rules and with the rules of other self-regulatory organizations.
(6) The member should be able, upon request, to demonstrate that its supervisory procedures include procedures reasonably designed to prevent violative conduct by unregistered persons.

As stated in Notice to Members 88-24, the registration requirements of Section (l)(b), Part n of Schedule C to the NASD By-Laws do not apply to a member's administrative personnel who, in the normal course of their duties, contact existing customers regarding clerical or ministerial matters affecting such customers' accounts.

Members are advised to review the activities of unregistered employees to ascertain that such persons are not functioning in a manner requiring registration

Questions concerning this notice can be directed to either Frank J. McAuliffe, Vice President, NASD Qualifications, at (301) 738-6694, or Jacqueline D. Whelan, Senior Attorney, NASD Office of the General Counsel, at (202) 728-8270.


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