The applicability of Section 40 (Rule 3040) to situations in which a financial plan is delivered to a customer without an execution of a securities transaction.


September 27, 1994

 

This is in response to your recent letter. You requested that the staff provide an opinion as to the application of Article III, Section 40 of the NASD Rules of Fair Practice to the activities of persons registered with [Broker/dealer] as registered representatives and as registered investment advisers.

 

Background

 

Article III, Section 40 of the NASD Rules of Fair Practice provides that any person associated with a member who participates in a private securities transaction must, prior to participating in the transaction, provide written notice to the member with which he is associated. The NASD member firm must advise the individual in writing as to whether it approves or disapproves of the person's participation in a transaction in which the associated person has received or may receive selling compensation. If the member approves the transaction, the transaction must be recorded on the member firm's books and records, and the member firm must supervise the associated person's participation as if the transaction were executed by the member firm.

 

Specifically, you inquired:

 

1. would a gift certificate for a free financial plan be considered the same as cash, and

 

2. would non-securities related advice be considered investment advisory activities.

 

Discussion

 

In Notice to Member 94-44, the NASD Board of Governors stated:

In clarifying its previous position in Notice to Members 91-32, the Board focused primarily upon the RR/RIA's participation in the execution of the transaction--meaning participation that goes beyond a mere recommendation Article III, Section 40 therefore, applies to any transaction in which the dually registered person participated in the execution of the trade.

 

It appears in the situation that you presented regarding the financial plan, since the delivery of the plan itself does not result in the execution of a securities transaction, Article III, Section 43 of the Rules of Fair Practice would apply to this situation. Please be advised, however, that after the financial plan is delivered and once plan recipients begin to discuss matters with the representatives Article III Section 40 could apply to activities that the representatives conduct on behalf of those recipients. Notice to Members 94-44 contains a detailed discussion of the kinds of activities that are covered by Article III, Section 40 with respect to the issue of non-securities related advice, these activities are not covered by the NASD's Rules of Fair Practice.

 

Conclusion

 

Based on the foregoing analysis. it is the opinion of the staff that the giving of a gift certificate for a free financial plan and the subsequent delivery of this plan does not in and of itself cause the transaction to be conducted in compliance with the provisions of Article III, Section 40 of the Rules of Fair Practice.

 

Very truly yours,

 

Craig L. Landauer