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88-45 Proposed New Rule: Outside Business Activities-Last Voting Date: August 1, 1988
IMPORTANT MAIL VOTE
NASD members are invited to vote on a proposed new Section 43 to Article III of the NASD Rules of Fair Practice that would prohibit all persons associated with a member in any registered capacity from accepting employment or compensation from any other-person as a result of business activity outside the scope of the employment relationship with a member unless prompt written notice to the member firm is provided. This provision will not apply to compensation from passive investments and activities subject to the requirements of Article III, Section 40 of the Rules of Fair Practice. The text of the proposed rule follows this notice.
On January 14,1988, the NASD issued Notice to Members 88-5, which solicited comments on a proposed NASD Rule of Fair Practice prohibiting any person associated with a member firni from being employed by, or accepting compensation from, any other person based on any business activity outside the scope of the employment relationship with a member firm, unless such person had provided prior written notice to that firm.
When requesting comments concerning fee proposed rule, the NASD Board of Governors observed that the expansion of the financial services industry had provided increased business opportunities for persons associated with member firms, both within the scope of their employment with a member and otherwise. The Board noted that in recent disciplinary cases, prior notice to a member firni of an associated person's outside business activities might have prevented harm to the investing public or the firm's entanglement in legal difficulties. The Board further observed that the internal rules of many member firms already included limitations on outside business activities and notification requirements, and that both the New York Stock Exchange and the American Stock Exchange require associated persons of member firms to notify their firms of outside business activities. The Board concluded that it was appropriate for member firms to receive prompt notification of all outside business activities of their associated persons so that the member's objections, if any, to such activities could be raised at a meaningful time and so that appropriate supervision could be exercised as necessary under applicable law.
SUMMARY OF COMMENTS
The NASD received 62 comments in response to Notice to Members 88-5. Of these, 13 generally supported the proposed rule, 17 supported the wle with modifications, and 29 opposed the rule on various grounds. Three commentators, while taking no position on the rule's adoption, suggested amendments.
Thirteen commentators suggested that the rule's scope be limited to cover only securities- or financial services-related outside business activities. Five commentators suggested that disclosure on Form U-4 be used either to satisfy the proposed rule's notification requirement or in lieu of the rule. Three commentators supported the establishment of a de minimis reporting threshold.
The NASD Board reviewed the comments and concluded that the proposed rule should be adopted with certain modifications limiting the rule's application to persons associated with a member in a registered capacity and exempting passive investments and activities subject to the requirements of Article HI, Section 40 of the NASD Rules of Fair Practice from the proposed rule's notice requirements. The Board determined that prompt, rather than prior notice, should be required. The Board also concluded that the form of the written notice required under the proposed rule should be determined by the employer-member and could therefore include using the Form U-4.
The NASD Board of Governors believes that the adoption of the proposed rule would serve to protect investors and the public interest by involving member firms in the review of the outside business activities of their registered personnel. Thus, the Board believes that the proposed rule is necessary and appropriate and recommends that members vote their approval.
Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than August 1,1988.
Questions concerning this notice can be directed to Norman Sue, Jr., Senior Attorney, NASD Office of General Counsel, at (202) 728-8117.
PROPOSED NASD RULE OF FAIR PRACTICE
Outside Business Activities
Sec. 42. No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Article HI, Section 40 of the Rules of Fair Practice shall be exempted from this requirement
1 New York Stock Exchange Rule 346(b), (e), and Supplementary Material .10; American Stock Exchange Rule 342(a), (b), and Commentary .20. Both organizations also require persons in supervisory positions to devote their entire time during business hours to the business of their firms and allow such persons to obtain permission from the exchange to devote less man full time to the business of their firm when it will not impair the protection of investors or the public interest