June 6, 2001
Newton B. Schott, Jr.
Executive Vice President and
Chief Administrative Officer
2187 Atlantic Street
Stamford, CT 06902
Re: Application of NASD Rules to Proposed International Sales Activities
Dear Mr. Schott:
This is in response to your letter of November 11, 1999 and subsequent telephone conversations, in which you request interpretive guidance on the application of certain NASD rules in connection with proposed international sales activities of PIMCO Funds Distributors LLC ("PFD"), a registered broker/dealer under the Securities Exchange Act of 1934 ("Exchange Act) and an NASD member.
Based on your letter and subsequent telephone conversations, I understand the facts to be as follows. PFD is a subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors"), a registered investment adviser under the Investment Advisers Act of 1940. PIMCO Advisors sponsors two investment companies (the "PIMCO Funds"), which are registered under the Investment Company Act of 1940 (the "Investment Company Act"). PFD is the distributor for the PIMCO Funds. PFD acts principally in a wholesaling capacity as most retail sales are made through major U.S. brokerage firms. Occasionally, PFD sells shares of the PIMCO Funds directly to retail and institutional customers.
In addition to the PIMCO Funds, PIMCO Advisors has created in Ireland investment companies that are not registered under the Investment Company Act (the "Dublin Funds"). Shares of the Dublin Funds currently are sold only to institutional customers outside of the U.S. through institutional channels. However, PIMCO Advisors is considering offering shares of the Dublin Funds to retail customers outside the U.S. through PFD. Accordingly, PFD would act as principal distributor of the Dublin Funds' shares and would establish an international wholesaling group for these shares. PFD would facilitate the sale of shares of the Dublin Funds to retail customers outside of the U.S. through distribution arrangements with registered broker/dealers in the U.S. that have existing international selling networks. PFD would not sell shares of the Dublin Funds directly to retail customers and would not directly solicit sales of such funds.
PFD would establish a "Foreign Funds Area" consisting of a "Marketing Support Group" and a "Servicing Support Desk" to assist broker/dealers and account executives in selling shares of the Dublin Funds. The Marketing Support Group would prepare sales literature concerning the Dublin Funds and provide the literature to broker/dealers and account executives. The Servicing Support Desk would respond to questions from account executives concerning the Dublin Funds, such as operational issues and inquiries relating to current performance information. If the Servicing Support Desk were to receive calls from customers concerning operational issues, Servicing Support Desk personnel would not respond to questions from the customers, but would refer those customers to a non-PFD offshore office. According to your letter, the Servicing Support Desk personnel would register as Limited Representatives – Investment Company and Variable Contracts Products (Series 6).
The Foreign Funds Area would operate from a PFD Office of Supervisory Jurisdiction ("OSJ"). PFD currently has an appropriately registered and qualified principal with supervisory responsibilities over PFD's investment company business. PFD's OSJ would have one or more appropriately registered and qualified principal(s) with the authority to carry out the supervisory responsibilities for that office. Sales literature relating to the Dublin Funds would be approved by a general securities principal (Series 24) in an office separate from the Foreign Funds Area.
Provided below are responses to the four questions posed in your letter:
1. Does the supervisor of the Foreign Funds Area need to have anything in addition to a Series 6 license?
To the extent that the Foreign Funds Area is comprised of registered persons, Rule 3010(a)(5) requires the assignment of each registered person to an appropriately registered principal (e.g., a Series 24 or 26 depending upon the registration and activities conducted of the person being supervised) or representative (e.g., a Series 6 or 7, depending on the registration and activities of the persons being supervised), who will be responsible for supervising that person's activities. Ultimate supervisory responsibility for the activities of registered persons in the Foreign Funds Area must be assigned to an appropriately registered principal.
2. Does anyone in the Marketing Support Group need to have any securities license?
You have not provided us with sufficient detail concerning the activities of persons preparing sales literature relating to the Dublin Funds to provide specific guidance on whether any individuals in the Marketing Support Group must be registered. However, provided below are factors you should consider in determining whether registration is required.
NASD Rule 1031 requires associated persons of a member to register as representatives if they are engaged in the investment banking or securities business for the member. NASD Rule 1060(a), however, exempts from registration associated persons who, among other things, function solely and exclusively in a clerical or ministerial capacity.
In your letter, you represent that the activities of PFD's Marketing Support Group personnel will be limited to the preparation and shipment of sales literature relating to the Dublin Funds to broker/dealers and account executives that have requested those documents. With respect to the shipment of sales literature, sending sales literature to interested parties upon their request, in and of itself, would not require registration as a representative because it is sufficiently clerical and/or ministerial in nature.
With respect to the preparation of sales literature, persons solely engaged in the preparation of sales literature generally would not be required to register as representatives. It is important to note, however, that certain activities of an associated person involving the preparation of sales literature may require registration as a representative. For example, the activities of associated persons who prepare research reports, which is a type of sales literature, could require that such persons register as representatives. While research activity, by itself, does not require registration, to the extent that research personnel are regularly involved in written or oral business communications with customers, either alone or accompanied by registered sales personnel, then such research personnel are required to be registered because their conduct is part of the general sales effort of the firm. The concept of communicating with customers extends to the issuance and distribution of research reports where the author is identified by name.
Another factor that should be considered in determining whether registration is required is the nature of the compensation received. Any compensation that depends upon the sale of securities, the volume of sales, the success of a solicitation or referral, or the execution of a transaction is an indicator that the recipient should register with the NASD.
3. Does anyone on the Servicing Support Desk need to have anything in addition to a Series 6 license?
Your letter indicates that the Servicing Support Desk staff generally would respond to incoming calls from account executives and provide them with information such as operational information and current performance data. To the extent that the Servicing Support Desk staff will be providing current performance data to account executives, such activities generally would not require registration as a representative. Further, to the extent that questions on operational issues from account executives will be limited to administrative matters concerning the Dublin Funds, such activities generally would not require registration as a representative. Your letter does not indicate what other subjects, in addition to operational issues and current performance data, the Servicing Support Desk may discuss with account executives as part of their duties, and thus we cannot provide you guidance concerning whether their other activities may require registration.
According to your letter, although PFD's Servicing Support Desk may receive calls from existing or prospective customers concerning operational issues, the staff would refer those customers to a non-PFD offshore office. In this regard, it is important to note that 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. Further, based on the information that you have provided, we cannot give you any guidance on whether registration would be required based on the activities being conducted at the non-PFD offshore office.
With respect to both Questions 2 and 3 above, to the extent that the activities of associated persons in the Servicing Support Desk or Marketing Support Group would require registration as a representative, the Series 6 would not be the appropriate registration category for such persons. The Series 6 is a limited examination that qualifies a person solely to engage in transactions involving redeemable securities of companies registered under the Investment Company Act, securities of closed-end companies registered under the Investment Company Act during the period of original distribution only, and variable contracts and insurance premium funding programs and other contracts issued by an insurance company except contracts that are exempt securities pursuant to Section 3(a)(8) of the Securities Act of 1933. (See NASD Rules 1032(b) and 1022(d)(1)). Your letter states that the Dublin Funds are not registered investment companies under the Investment Company Act. Thus, the Series 7, not the Series 6, would be the appropriate registration category for persons engaging in activities that involve the Dublin Funds, which would require registration as a representative.
In addition, notwithstanding whether the Servicing Support Desk or Marketing Support Group staff are registered, NASD rules would require that the member supervise the activities of all associated persons to ensure, among other things, that the associated persons do not conduct activities that would otherwise require registration. Activities by PFD employees that could require registration include, but are not limited to, discussing the nature or details of the Dublin Funds or other securities with customers, recommending the purchase or sale of a security, or accepting or executing orders for the purchase or sale of a security. The member should be able to demonstrate that its supervisory procedures are reasonably designed to prevent violative conduct by such persons.
4. Are there any [net] capital implications to PFD in this plan?
This question inquires about the application of Rules 15c3-1 and 15c3-3 under the Exchange Act to the activities described in your letter. The staff of the U.S. Securities and Exchange Commission (the "SEC") issues interpretations on the application of these rules. In this regard, you may want to direct your inquiry to the SEC's Division of Market Regulation, Office of Risk Management.
Finally, PFD should be aware that its proposed foreign operations may implicate the laws of foreign jurisdictions. NASD Notices to Members 00-02 (January 2000) and 98-91 (November 1998) provide further guidance on soliciting business in foreign jurisdictions.
I hope that this letter is responsive to your request. 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 you have raised based on the facts as you have described them, and does not address any other rule or interpretation of the NASD, or all the possible regulatory and legal issues involved.
Very truly yours,
|cc:||Frederick F. McDonald Jr., Director
NASD Regulation, Inc., District 11