Based on certain representations and compliance with the requirements of SEC Rule 17a-4(i), third party may provide recordkeeping services to its NASD member clients, such that the member clients would not be required to individually download and separately retain copies of documents required pursuant to Rule 2790(b).
June 1, 2004
Dana G. Fleischman
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006-1470
Re: Rule 2790(b) (Preconditions for Sale)
Dear Ms. Fleischman:
This is in response to your letter dated March 18, 2004, in which you seek interpretive guidance concerning whether the services provided by Communicator Inc ("Communicator") with respect to members' compliance with Rule 2790(b) may include recordkeeping on behalf of member clients.
Based upon your letter, as supplemented by telephone conversations, I understand the facts to be as follows. Communicator designs, builds, and operates information portals and Internet sites for securities industry participants and provides a suite of secure software and services that connect financial institutions and their clients. Among other things, Communicator has sought and obtained from the staff of the Securities and Exchange Commission ("SEC") a no-action letter with respect to the compilation and provision of "QIB lists" to clients, which such clients may then rely on to meet the "reasonable belief" standard required under SEC Rule 144A.1
Consistent with a letter from the staff to Dealogic, dated February 17, 2004,2 Communicator aids members in their compliance with the requirements of Rule 2790(b) by maintaining a database of representation letters regarding the eligibility of an account, or a conduit on behalf of such account, to purchase new issues. Communicator's NASD member clients are able to access the representation letters to determine whether an account, or conduit on behalf of such account, is eligible to purchase a new issue. The representation letters are addressed to either Communicator, to particular NASD member clients, or both, and the representation letters are submitted to Communicator electronically, via an on-line Internet site hosted by Communicator, by fax, or by regular mail. Further, by similar means, negative consent letters reaffirming the information in the representations will be sent out annually, and any updated information will be transmitted to Communicator and included in the database.
Communicator seeks interpretive guidance on whether it may provide recordkeeping services to its NASD member clients, such that they would not be required to download and separately maintain in hard copy, or in electronic form, the representation letters as currently required based on the Dealogic letter. Prior to offering this recordkeeping service, Communicator would file an undertaking with the SEC pursuant to Rule 17a-4(i) under the Securities Exchange Act of 1934 to the effect that the records in question constitute records of, and are the property of, Communicator's NASD member clients, and such records will be surrendered promptly on request of the respective NASD member client. The undertaking will further permit examination and copying of such records by NASD on the same terms as is provided to the SEC.
Rule 2790(b) provides that a member may not sell new issues to any account unless within the previous 12 months it has in good faith obtained a representation from either (1) the beneficial owners of the account, or a person authorized to represent the beneficial owners of an account, that the account is eligible to purchase new issues in accordance with the Rule, or (2) certain conduits (such as a bank, foreign bank, broker/dealer, or investment adviser) that all purchases of new issues are in compliance with the Rule. Further, the Rule states that a member may not rely upon any representation that it believes, or has reason to believe, is inaccurate. Rule 2790(b) also requires that a member maintain a copy of all records and information relating to whether an account is eligible to purchase new issues in its files for at least three years following the member's last sale of a new issue to that account.
In the Dealogic letter, the staff stated that it does not believe the provisions of Rule 2790(b) would preclude members from using a third-party service provider to aid in their compliance with the Rule's requirements. However, the staff noted that if a member uses a third party, the member retains full responsibility for complying with the Rule. In addition, the staff noted that members must make provisions to ensure that they comply with the recordkeeping requirements of Rule 2790(b), including provisions to ensure that they download and retain the documents for the necessary three-year period.
Based on the representations in your letter and to the extent that Communicator complies with the requirements of SEC Rule 17a-4(i), the staff believes that Communicator may provide recordkeeping services to its NASD member clients, and such member clients would not be required to individually download and retain copies of documents required pursuant to Rule 2790(b).
Please note that the opinions expressed herein are staff opinions and have not been reviewed or endorsed by the Board of NASD. This letter responds only to the issues you have raised based on the facts you have described and does not address any other rule or interpretation of NASD, or all the possible regulatory or legal issues involved.
Gary L. Goldsholle
cc: Hans Reich
Senior Vice President and Director, District 10
1 See Communicator Inc, SEC No-Action Letter, 2002 SEC No-Act. LEXIS 783 (avail. Sept. 20, 2002).
2 See letter from Gary Goldsholle, NASD, to Tom Fleming, Dealogic, dated Feb. 17, 2004.