Applicability of Rule 3230(a) to secondary or sub-clearing arrangements with foreign securities firms.
July 23, 1999
NASD Regulation is in receipt of your June 15, 1999 letter requesting advice on the application of NASD Rule 3230(a)(1) to secondary or sub-clearing arrangements. In your letter you stated that your client, Firm A, a broker-dealer and member of the NASD, clears its trades on a fully disclosed basis through a New York Stock Exchange member clearing firm. The clearing agreement between Firm A and its clearing firm allocate the account opening, approval and monitoring functions to Firm A. Firm A intends to enter into secondary or sub-clearing (also known as "piggyback clearing") arrangements with several German securities firms wherein those firms, whose clients are German nationals, will direct their customer trades to Firm A for execution and Firm A will forward the trades to its clearing firm for settlement. Firm A will have no contact with the customers of the German firms. You ask whether it is permissible for Firm A's secondary clearing agreement to allocate the identified functions to the German firms.
The obligations of the parties to a clearing agreement between broker/dealers registered in the United States arises out of the general obligations applicable to broker/dealers under the Federal securities laws and the rules of the securities self-regulatory organizations (SROs). NASD Rule 3230 requires clearing agreements to specify which party is responsible for certain functions. The purpose for this provision is to permit the SROs and the SEC to determine who is responsible for compliance with the obligations associated with those functions. In the circumstances you describe, we believe it is acceptable if the clearing arrangements allocate certain account opening, approval and monitoring functions with respect to customers of the German introducing firms to those firms.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation, Inc. This letter responds only to the issues that you have raised based on the facts as you have described them, and does not address any other rule or interpretation of the Association or all the possible regulatory and legal issues.
If you have any other questions, please contact me at (202) 728-8451.
Very truly yours,
Elliott R. Curzon,
Assistant General Counsel